Income Tax Appellate Tribunal - Ahmedabad
Lincoln Pharmaceuticals Ltd.,, ... vs Assessee on 30 March, 2004
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C" AHMEDABAD
Before S/Shri Bhavnesh Saini, JM and D.C.Agrawal, AM
ITA No. 1503/Ahd/2004(By Assessee)
AND
ITA No.1810/Ahd/2004(By Department)
Asst. Year :2000-01
Lincoln V/s. Income Tax Officer,
Pharmaceuticals Ltd., Ward-4(2),
nd
2 Floor, Nirav Ahmedabad.
Complex, Naranpura,
Ahmedabad.
PAN No.AAACL2711N
(Appellant) .. (Respondent)
Appellant by :- Shri A.C. Shah
Respondent by:- Shri M.C.Pandit,Sr.D.R.
ORDER
Per Sheri D.C.Agrawal, A.M.
These are two cross appeals one filed by the assessee and other filed by the Revenue arising from the order of the Ld. CIT (A) dated 30-3-2004. In assessee's appeal following grounds are raised :-
"1. The Ld. CIT(A) has erred in confirming the addition 20% of average rebate of Rs.85,20,873 on notional basis to the trading purchase of Rs.4,26,04,367/- and on that basis calculating profit of Rs.30,06,164 from the trading sales and thereby erred in confirming the reduction of profits by Rs.30,06,164 for the purpose of deduction u/s. 80IA.ITA.1503-1810-04 1
1.1. The Ld.CIT(A) has erred in confirming the addition of 20% of average rebate of Rs.79,32,000/- on notional basis on the purchases of Rs.396.50 lacs from Lincoln Parenterals P. Ltd. and on that basis calculating interest element @ 12% on notional basis of Rs.9,51,840/- on such rebate and thereby erred in confirming the reduction of Rs.9,51,840/- as interest element from the profits for the purpose of deduction u/s. 80IA.
1.2. The Ld.CIT(A) has erred in applying provision of Sec.
80IA(10) for the purpose of confirming the above referred two additions in as much as the provision of Sec. 80IA(10) are not applicable to the facts of the present case since the transaction between the assessee company and that of the other company having a close connection are entered into at arm's length and that the assessee company has not earned more than ordinary profits from the eligible business.
1.3. The appellant says and submits that the Ld. AO wrongly treated the rebate earned on purchases made from Lincoln Parenderals P. Ltd., as interest income and thereby reduced the same from the profits of the business. In fact, the rebate earned on purchases is under the normal business transaction which is already reduced from the purchases and thereby the profits are more to that extent and treating the same as notional interest and gain reducing this notional interest from the profits of the business for the purpose of deduction u/s. 80IA amounts to double deduction.
2. The Ld. CIT (A) has erred in confirming the reduction of income of Rs.3,50,476/- being interest on de posits with banks from margin money, from the profits for the purpose of deduction u/s. 80IA in as much as the deposits were placed out of borrowings made from the same bank and therefore the interest earned is required to be adjusted against the interest paid to the bank.
3. The Ld. CIT (A) has erred in confirming the reduction of DEPB credit of Rs.4,89,376/- from the profits for the purpose of deduction u/s.80IA in as much as the DEPB credit is required to be set-off against the raw material purchased and therefore, the ITA.1503-1810-04 2 same cannot be reduced from the profit of the business for the purpose of deduction u/s. 80IA.
3.1. The appellant says and submits that the DEPB credit amount is only an accounting entry whereby the amount of duty utilized for import of goods is debited to raw materials and credited to DEPB credit and thus the amount of DEPB credit does not affect the profits of the business.
4. The Ld. CIT (A) has erred in confirming addition of Rs.87,216/- being the foreign travel expenses of Mrs.Vishakha Buch, wife of Dr. Purnendu Buch on the ground that she is not a Doctor and therefore, she could not have played any role which may be beneficial to the business of the assessee company in as much as the entire expenditure is incurred wholly and exclusively for the purpose of business and that the commercial expediency is to be seen from the point of view of businessmen and not for the point of view of revenue."
2. Whereas in the Revenue's appeal following grounds are raised :-
1. "The Ld. CIT(A) has erred in law as well as on facts of the case in directing to exclude excise duty, sales tax and central sales tax amounting to Rs.3,82,75,812/- from the figure of total turnover while calculating the deduction u/s. 80HHC.
2. The Ld. CIT(A) has erred in law as well as on facts of the case in holding that interest of Rs.5,01,955/- is income derived from the Industrial undertaking and is eligible for deduction u/s.
80IA."
3. The facts of the case are that assessee is engaged in the business of manufacturing, marketing and export of pharmaceutical products. The first ground covered in ground No.1, 1.1., 1.2 and 1.3 relates to reduction in the claim of deduction u/s. 80IA by invoking sub section 10 thereof on the ground that assessee has purchased goods from sister concern namely M/s. Lincoln Parenterals Pvt. Ltd., at reduced price as compared to market rates ITA.1503-1810-04 3 thereby increasing profits in the assessee company and claim of higher deduction u/s. 80IA. Further, the A.O. noted that the assessee company has made interest free advances to one of the group company M/s. Lincoln Parenterals Pvt. Ltd., in short (IPPL) for a sum of Rs.2,56,00,000/- during F.Y. 1996-97. It continued even during the period under consideration. The A.O. noted that as per the agreement with LPPL assessee company is enjoying rebate at an average of 20% on purchases depending on the products. From this A.O. inferred that assessee company has deliberately got purchases at reduced rates and thus earned higher profits as against normal profits which may arise to the unit in normal circumstances. Thus, by ignoring the rebate of 20% on an average, the A.O. reduced the net profit of the manufacturing unit at Rs.80,50,258/- and accordingly reduced deduction u/s. 80IA. The Ld. C.I.T.(A) confirmed the order of the A.O. on this ground following the same reasoning.
4. Against this Ld. AR submitted that there is no agreement with LPPL for getting any discount as claimed by the A.O. The agreement to pay sum of Rs.2,56,00,000/- as interest free deposit does not refer to any discount to be received by the assessee in lieu of interest free deposits. Further, for invoking sec.80IA(10) there has to be some material which could show that assessee has purchased goods from LPPL at lower rates than the market rates and that was done with the intention of transferring the profits of LPPL to the assessee company for the purpose of claiming higher deduction u/s. 80IA. In any case, the assessee company has got only 30% deduction u/s. 80IA and rest of 70% was offered for tax and hence there is no benefit to the assessee-company.
ITA.1503-1810-04 45. Against this DR submitted that he relies on the orders of authorities below.
6. We have heard the rival submissions and perused material on record. In our considered view the stand of the authorities below cannot be sustained. Reasons are that firstly there is no agreement showing that assessee-company will get deduction in purchase price from whose average is worked out at 20% by the A.O. Hence the claim of the A.O. that reduction in purchase price is in accordance with agreement is not supported. Secondly, there has to be material on record to show that the rates on which sales were made by LPPL to assessee-company were lower than the market rate or lower rates at which similar goods were supplied by LPPL to others. In absence of such material it cannot be said that assessee-company received goods from LPPL at subsidized rates and were not at arms length price. Thirdly, for invoking provision of sec. 80IA(10) intention of the assessee- company and seller has to be looked into and it has to be shown that the parties intended to transfer profits from supplier company to assessee- company with a view to claim higher deduction u/s. 80IA. Not only that there is no material to support inferences but intention is apparently contrary in the sense that assessee-company has provided interest free deposit to the LPPL and LPPL is providing discount to assessee-company in lieu of not charging of interest. Thus, there is apparent compensation for not charging of interest on interest free deposits. Of course a case could have been made out in favour of Revenue if assessee would have received interest from LPPL, which would not have been eligible for deduction u/s. 80IA as it is not derived from business of industrial undertaking whereas deduction in purchase price would increase eligible profits, but without the comparison of ITA.1503-1810-04 5 market rates and the rates at which goods were supplied to the assessee- company, such case also cannot be made out. Therefore, we delete the addition made by the authorities below by reducing the claim of deduction u/s. 80IA. This ground of the assessee is allowed.
7. Second ground relates to claim of deduction u/s. 80IA of Rs.3,50,476/- being interest on deposits with banks from margin money. The AO disallowed the claim on the ground that interest income on which deduction u/s. 80IA was claimed was not derived from the business of Industrial Undertaking even though it might be attributable to it. The Ld. CIT(A) also did not allow the claim by observing as under :-
"The contentions raised have been considered. As per provisions of sec. 80IA the deduction under this section is allowed to an assessee for the profits and gains derived from the business of an industrial undertaking or an enterprise. The word derived has not been defined in the section or in the Act. The Hon'ble Supreme Court has held in the case of CIT vs. Sterling Foods Ltd., (237 ITR-579) that use of the word "derived" would mean that income should be directly obtained from the manufacturing activity and such manufacturing activity should be the immediate source of the income. The Hon'ble Supreme Court also held that a mere commercial connection between the income and the manufacturing activity would not be adequate for holding that the said income is derived from the manufacturing activity. In view of the decision of the Hon'ble Supreme Court it has to be examined whether the immediate source of the two incomes,. Considered by the A.O., is the manufacturing activity/industrial undertaking of the appellant company or not. The interest of Rs.5,01,955/- has been received on the late payments made by the customers and is therefore, arising from the sale proceeds of which the immediate source is industrial undertaking. The interest of Rs.5,01,955/- is therefore, derived from the industrial undertaking and is eligible for deduction u/s. 80IA. However, the interest of Rs.3,50,476/- was on the deposit with the bank for margin money.ITA.1503-1810-04 6
Therefore, the immediate source of the interest is the deposit in the bank and not the business of the industrial undertaking. Therefore, the interest of Rs./3,50,476/- is not eligible for deduction u/s. 80IA."
8. We have heard the rival submissions and perused the material on record. In our considered view, there is no case for interference in the orders of the authorities below on this point. The reasons being that the interest income on fixed deposits opened for obtaining Letter of Credit has only a distant relationship and no direct relationship, with the business of the assessee. When it comes the question of taxing such income under the head "business" u/s. 28 of the I.T.Act,1961, then the issue will certainly go in favour of the assessee as held by the Hon'ble Delhi High Court in the case of Koshik Telcom Ltd. (supra) referred to by Ld. A.R. of the assessee. But when it comes the question of considering such interest income for allowing deduction u/s. 80IB of the I.T. Act,1961, then words used in that section has to be compared with the words used in other sections under Chapter VI-A of the I.T. Act,1961 and authorities pronounced thereon has to be relied upon. In this regard, we refer to the decision of Hon'ble Kerala High Court in the case of K. Ravindranathan Nair vs. DCIT (2003) 262 ITR-669 (Ker.) wherein it has been held that deduction u/s. 80HHC of the I.T.Act,1961 would not be available on interest income earned on fixed deposits made for obtaining Letters of Credit. Interest from such 'short term deposits' received by the assessee was not the direct result of any export of any goods or merchandise. The F. Ds were made only for the purposes of obtaining Letters of Credit and for getting other benefits. The interest income received on such short term deposits could be attributed to export business but could not be treated as income derived from the export business. Even where the banks have insisted for making such deposits for obtaining Letters of Credit ITA.1503-1810-04 7 or other facilities, still it cannot be said that income was derived from export business. Similarly, view was taken by the Hon'ble Madras High Court in the case of CIT vs. The Madras Motors Ltd. (2002) 257 ITR 60 (Mad.) and in the case of CIT vs. Menon Impex (P) Ltd., (2003) 259 ITR-403 (Mad.). The language used in section 80-IB of the I.T. Act,1961 is the same as in section 80HHC of the I.T.Act,1961. It uses the words "any profit and gains derived from any business referred to in sub-section (3)....." Section 80HHC of the I.T. Act, 1961 uses words in sub-section (3) "the profits derived from such export....". Thus, interest income should have direct nexus with the business of the "Industrial Undertaking" as referred to in section 80IB of the I.T.Act,1961 The business of the assessee is manufacturing medicines and not of earning interest, then interest earned on fixed deposits made for opening Letters of Credit or for obtaining other facilities cannot be said to be derived from "business of manufacturing of medicines". The connection is remote and not proximate which is the requirement resulting from the words "derived" used in this section. In view of this, we confirm the orders of authorities below on this point. As a result this ground of the assessee is rejected.
9. Ground No.3 raised by the assessee relates to claimof deduction u/s. 80IA on DEPB credit of Rs.4,89,376/-. We heard the rival partries and carefully perused the material on record. This is covered against the assessee by the decision of Hon'ble Supreme Court in Liberty India vs. CIT (2009) 317 ITR-218 (SC) wherein Hon'ble Apex Court has held as under :-
"Sections 80-I and 80IB are to be read as having a common scheme. Sub-section(5) of section 80-IA (which is required to be read into section 80IB) provides for the manner of computation of the profits of an eligible business. Such profits are computed as if such eligible ITA.1503-1810-04 8 business is the only source of income of the assessee. Therefore, devices adopted to reduce or inflate the profits of the eligible business have to be rejected in view of the overriding provisions of section 80- IA (5).
Sections 80-I, 80-IA and 80-IB provide for incentives in the form of deductions which are linked to profits and not investment. On analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking which becomes eligible on satisfying sub-section (2) would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after the specified date. Apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking"
as against "profits attributable to an industrial undertaking". DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentive profits are not profits derived from eligible business under section 80-IB : they belong to the category of ancillary profits of such undertaking. Profits derived by way of incentives such as DEPB/Duty drawback cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression "profit derived from industrial undertaking" under section 80-IB."
10. In view of this and respectfully following above decision we decide the issue against the assessee. This ground of the assessee is accordingly rejected.
11. Ground No.4 relates to confirming the addition of Rs.87,216/- being foreign travel expenses of Mrs. Vishakha Buch wife of one Dr. Purnendu Bush. The disallowance was made on the ground that Mrs. Vishakha Buch is not a Doctor and accordingly she could not play any role which may be beneficial to the business of the assessee-company. The Ld. CIT(A) also confirmed the disallowance for the same reasons. Against this ld. A.R. ITA.1503-1810-04 9 submitted that it is not a case where wife of the Director visited abroad and therefore, was not a business expenditure for the assessee. In fact many Doctors were allowed to go for business trip along with their spouses. Some spouses were doctors and some of there were not doctors. So far as the assessee-company is concerned it will not make any difference whether a spouse of a doctor is a doctor or not. Once the appellate authority allows the claim on foreign travel of some of the doctors and their wife who are doctors, then there is no reason to disallow the claim in respect of foreign travel expenses incurred on non-doctor spouse as it does not make any difference to the assessee-company as to whether any spouse is a Doctor or not. The business purpose of the assessee is served by other Doctors when they carry their non Doctor spouse in the same way as business purpose of the assessee is served if a Doctor carries with him a Doctor spouse. There is nothing on record to suggest that Doctors for whom assessee company incurred foreign travel expenses and who carried with him their Doctor spouse had not served any business purpose of the assessee.
12. The Ld. DR on the other hand supported the orders of the authorities below.
13. We have heard the rival submissions and perused the material on record. In our considered view the claim cannot be reasonably disallowed. It is because it is no where brought on record as to how a Doctor carrying with him a Doctor spouse would serve the business purpose better as compared to a Doctor who carries with him his non doctor spouse. There is nothing on record to suggest that Doctors for whom assessee-company incurred foreign travel expenses and who carried with him their Doctor spouse had served ITA.1503-1810-04 10 any business purpose of the assessee-company. If without bringing any material on record authorities below could be satisfied that Doctors who carry with them their Doctor spouse can serve the business purpose of the assessee then without there being any material on record it cannot be inferred that doctors who are carrying with them their non-doctor spouse has not served the business purpose of the assessee. Distinction made by authorities is artificial and unreasonable and hence not sustainable. Accordingly, the claim of the assessee as allowed.
14. As a result appeal filed by the assessee is partly allowed.
ITA.No.1810/Ahd/2004.
15. In this appeal, of the Revenue the first issue is regarding exclusion of Excise Duty and Sales tax from total turnover while calculating deduction u/s. 80HHC. We have heard the parties. In our considered view the issue is not covered against the revenue by the decision of Hon'ble Supreme Court in the case of CIT vs. Laxmi Machine Works (2007) 290 ITR-667 (SC). As a result this ground of the Revenue is rejected.
16. Ground No.2 relates to deduction u/s. 80IA on interest income received by the assessee from customers and late payment of the sale proceeds. This was held to be income derived from Industrial Undertaking by Ld. CIT(A). The issue is now covered against the Revenue by the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. vs. DCIT (2006) 283 ITR-402 (Guj.). Accordingly this ground of the revenue is also rejected.
ITA.1503-1810-04 11As a result appeal filed by the Revenue is dismissed.
Order pronounced in Open Court on 31-03- 2010
Sd/- Sd/-
(Bhavnesh Saini) (D.C.Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated :31- 03- 2010
Patki.
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
ITA.1503-1810-04 12