Income Tax Appellate Tribunal - Chennai
Orchid Chemicals & Pharmaceuticals ... vs Department Of Income Tax on 29 August, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER]
I.T.A.No.2165/Mds/2010
Assessment year : 2005-06
The Dy. CIT vs M/s Orchid Chemicals &
Company Circle V(1) Pharmaceuticals Ltd
Chennai 'Orchid Towers'
313, Valluvarkottam High road
Nungambakkam
Chennai 600 034
[PAN AAACO 0402 B]
(Appellant) (Respondent)
Appellant by : Shri Shaji P. Jacob, Addl. CIT
Respondent by : Shri T. Banusekar, CA
Date of Hearing : 29-08-2013
Date of Pronouncement : 30-08-2013
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the Revenue against the order of the ld. CIT(A)-V, Chennai, dated 21.9.2010.
2. The Revenue has filed revised grounds of appeal on 4.2.2013. At the time of hearing, we asked the ld. A.R of the assessee that the Revenue has filed revised grounds of appeal and whether he :- 2 -: I.T.A.No. 2165/10 had any objection on the same. He submitted that he has no objection to the revised grounds of appeal filed by the Revenue and therefore, the appeal was heard on the revised grounds of appeal filed on 4.2.2013 and disposed of accordingly.
3. Ground No.1 & 5 of the appeal are general in nature and hence, requires no specific adjudication by us.
4. Ground No.2 of the appeal is directed against the order of the ld. CIT(A) in deleting the addition of ` 14,60,477/- made towards consultancy charges.
5. The brief facts of the case are that the assessee paid consultancy charges to Mr. Yu Ching Lee in China for the services rendered in China with regard to export of their materials to Chinese customers. The Assessing Officer held that the expenditure pertains to the joint venture company and not to the assessee and therefore, disallowed the claim.
6. Before the ld. CIT(A) the assessee submitted that the consultant was not a joint venture partner as wrongly presumed by the Assessing Officer. The services were rendered by the overseas consultant in respect of bulk pharma products and process. The :- 3 -: I.T.A.No. 2165/10 expertise of the overseas consultant had been utilized in order to protect the business interest of the assessee and to maintain the quality of its products and processes.
7. The assessee further submitted that in assessee's own case for assessment years 2003-04 and 2004-05 the issue was decided in favour of the assessee by the ld. CIT(A) and no second appeal thereagainst was preferred by the Department.
8. The ld. CIT(A) observed that the consultancy agreement which was already placed before the Assessing Officer during the course of assessment proceedings and the invoices for payment were produced for verification before him and it was found that the entire payment was made by the assessee and not on behalf of the joint venture company. He further observed that the assessee has led evidence to prove the availment of services of the consultant. The payments made are part of legitimate business expenditure of the assessee. The Assessing Officer has not controverted the same with any evidence to show that the expenditure was unjustified calling for disallowance but made the disallowance on the premise that the payment was made to the joint venture partner which is not proved. The consultant was not a joint venture partner of the assessee and the :- 4 -: I.T.A.No. 2165/10 expenditure was incurred by the assessee for the business and therefore, the apprehensions of the Assessing Officer are unfounded. The ld. CIT(A) further observed that moreover the issue has been decided in favour of the assessee in assessment years 2003-04 and 2004-05 and therefore, the ground was decided in favour of the assessee.
9. The ld.D.R relied on the order of the Assessing Officer.
10. The ld. AR of the assessee filed before us a copy of the order of this Tribunal in assessee's own case for assessment year 2004-05 initn 1468/Mds/2009, order dated 10.6.2010 and pointed out that the Tribunal restored the matter back to the file of the Assessing Officer on the ground that the Assessing Officer was never given a chance to examine the agreement and give his comments thereon. He pointed out that in the present year of appeal the agreement was filed before the Assessing Officer and therefore, the facts in the present year are different and the ld. CIT(A), on the basis of examination of the very same agreement has come to a conclusion that the payments made by the assessee were towards genuine business expenditure and that it was not made to a joint venture company. Therefore, the order fo the ld. CIT(A) deserves to be upheld.
:- 5 -: I.T.A.No. 2165/10
11. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The undisputed facts of the case are that the assessee, during the year under consideration paid ` 14,60,477/- as consultancy charges to Mr.Yu Ching Lee in China towards consultancy charges for export of its materials to China. The Assessing Officer disallowed the claim of the assessee on the ground that the expenditure pertained to the joint venture company and not to the assessee.
12. On appeal, the ld. CIT(A) allowed the claim of the assessee after examining the agreement dated 25.1.2005 with Mr. Yu Ching Lee, of China, a copy of which has also been placed before us at pages 2 to 3 of the paper book. The ld. CIT(A), after examining the agreement, held that the agreement was not with the joint venture company but was with the assessee-company and that the amount paid represented the genuine business expenditure of the assessee and the same was paid in relation to consultancy services rendered in relation to the export business of the assessee. No material was brought on record by the Revenue to show that consultancy charges paid in question does not relate to the aforesaid export business of the assessee. Further, the assessee also filed before the Assessing Officer :- 6 -: I.T.A.No. 2165/10 and the ld. CIT(A) copy of invoice for payment of consultancy charges, a copy of which has been placed before us at page 4 of the paper book, in support of the contention that the amount paid was towards business expenditure of the assessee. It is not in dispute that the assessee was engaged in the business of exporting of bulk pharma products and process during the year under consideration. Further, no specific error in the order of the ld. CIT(A) could be pointed out by the ld.D.R. We, therefore, do not find any good and justifiable reason to interfere with the order of the ld. CIT(A) which is confirmed and the ground of appeal of the Revenue is dismissed.
13. Ground No.3 of the appeal of the Revenue is directed against the order of the ld. CIT(A) in holding that losses from Non-export Oriented Units (Non-EOUs) need not be set off against profits of eligible Export Oriented Units (EOUs) before computing deduction u/s 10B relying upon the decision of the Chennai Bench of the Tribunal in the case of Scientific Atlanta India Technology P. Ltd vs ACIT, 129 TTJ 273 (SB).
14. The brief facts of the case are that the assessee has both EOU and Non-EOU units. It claimed deduction u/s 10B in respect of the profits of its EOU units. In its non-EOU units it incurred losses. :- 7 -: I.T.A.No. 2165/10 The Assessing Officer held that deduction u/s 10B was available only on total income and not on the profits of individual units. The Assessing Officer also observed that the assessee inflated its profits of the EOU units and these losses are inter-connected with the losses shown in non-EOU units.
15. Before the ld. CIT(A), the assessee submitted that the activities of the EOU and the non-EOU units are independent except to the extent where the EOU unit sources its raw materials from the non- EOU units. The EOU units then undertake number fo processing activities before sales. The non-EOU units undertake considerable Research & Development activities for which it has obtained approval from the Department of Scientific and Industrial Research. Thus, the expenditure levels in the non-EOU Units are very high and these expenditures are not comparable with the expenditure incurred by the EOU units. It was further submitted that separate books of account were maintained by both the EOU and the non-EOU units which have been subjected to audit by professional accountants. It was further submitted that section 10B clearly provides for deduction in respect of the profits of each undertaking and not in respect of the total income of an assessee. The Assessing Officer adjusted the brought forward :- 8 -: I.T.A.No. 2165/10 losses of the EOU unit against the profits of these units determined u/s 10B and has impliedly accepted the quantum of deductions determined by the assessee. In support of the assessee's contention that deduction u/s 10B should be determined independently for each undertaking before setting off of losses of non-EOU units, the assessee relied on the decision of the Chennai Bench of the Tribunal in the case of Ford Business Services. The assessee further submitted that subsequent to survey by the Department, it was seen that the method of costing of inter unit transfer of materials was wrong and therefore, the cost of transfer of materials from the non-EOU unit to the EOU unit was wrongly recorded at higher values resulting in higher loss in the non-EOU unit and corresponding profit in the EOU units. It was submitted that the assessee was allowed deduction u/s 10B in respect of its profit from EOUs. It was not the first year in which the assessee has claimed deduction. The Assessing Officer has not made out a case for denial of deduction u/s 10B since it is accepted that the assessee was having EOUs from which it has made exports eligible for deduction u/s 10B. The assessee had justified the higher expenses in its non- EOU units as being due to high Research and Development costs. It was also submitted that in the case of Scientific Atlanta India Technology Pvt. Ltd vs ACIT (supra) the Special Bench has held that :- 9 -: I.T.A.No. 2165/10 losses from non-eligible units need not be set off against profits of eligible units before computing deduction. A similar view was also held in Changepond Technologies (P) Ltd vs ACIT [2008] 119 TTJ 18 (Chn) and Enercon Wind Farms (Krishna) Ltd. vs ACIT [2208] 21 SOT 29 (Mum).
16. The ld. CIT(A) decided the issue in favour of the assessee by observing as under:
"3.10. The ground is therefore, decided in favour of the appellant. However. Since the transfer cost of materials between the EOU and the non-EOU units has been wrongly recorded the deduction u/s 10B should be restricted to the profits of the EOU units after recording the transfer cost of materials at the correct cost.
This is extracted as hereunder:
Assessment year 2005-06 Financial Year 2004-05 Difference between Transfer Price & Cost Price of Goods transferred from (in ` ) Non EOU to EOU (A10 Alathur) Products Qty Basic Transfer RMC+OH Diff./kg Diff. value Value Price SAMe 8,896 76058653 8550 9,000 -450 -4003097 Total of 8,896 76058653 Total of difference -4003097 Matl transferred Non EOU to EOU(IKKT) Products Qty Basic Rate/kg (RMC+OH) Diff./kg Diff. value value Plant doesn't exist Total of 0 0 Total difference 0 Matl :- 10 -: I.T.A.No. 2165/10 transferred Grand total 8,896 76058653 Grand total of difference IKKT & -4003097 of matl Alathur A transferred The A.O may verify the calculation before computing deduction allowable u/s 10B."
17. The ld.D.R very fairly conceded that the issue at hand is covered in favour of the assessee by the decision of the Special Bench of the Chennai Tribunal in the case of Scientific Atlanta India Technology Pvt. Ltd (supra). Therefore, this ground of appeal of the Revenue is dismissed.
18. Ground No.4 of the appeal of the Revenue is directed against the order of the ld. CIT(A) in deleting the addition of ` 39,18,508/- towards adjustment of interest income earned by the assessee from its Associated Enterprise (AE) on funds advanced to its AE.
19. The brief facts of the case are that in view of the substantial international transactions of the assessee, a reference had been made to the Transfer Pricing Officer(TPO). The TPO recommended certain adjustments in respect of interest charged by the assessee from tis AE on the funds advanced by the assessee to its AE. The assessee had :- 11 -: I.T.A.No. 2165/10 charged interest at LIBOR plus 1% on the advances made by it to its AE. The TPO while determining the Arm's Length Price (ALP) of the transaction had made adjustment by applying the PLR on the monies advanced.
20. Before the ld. CIT(A) the assessee submitted that interest in an international financial transaction could expenditure charged on par with the market rates prevalent among foreign banks, foreign institutions and business enterprises while dealing with Indian entities. For such transactions, the rates charged cannot be related to the rates prevalent in the domestic market. The assessee further submitted that while determining ALP an international transaction cannot be compared with a domestic transaction. Since the assessee has charged interest at rates prevailing in the international markets, no variation was called for on that ground.
21. The ld. CIT(A), after considering the submission of the assessee, held that it was not a case that the assessee has given an interest free loan or has fallen out of line with the practices in the international finance market. The assessee has charged interest at the rate prevailing in the international market after adding a spread of 1%. He observed that the Delhi Bench of the Tribunal in the case of Perot :- 12 -: I.T.A.No. 2165/10 Systems TSI (India) Ltd vs DCIT [2010] 130 TTJ (Del) 685, has held that in considering the ALP of a loan, the rate of interest has to be considered and income on account of interest can be attributed. He observed that in that case the Tribunal had confirmed the upward adjustment to the extent of notional interest at LIBOR since the transaction was an international transaction. Following the principle in the above case, the ld. CIT(A) held that the variation made by the Assessing Officer on this issue should be deleted and accordingly deleted the addition of ` 39,18,508/-.
22. The ld.D.R fairly conceded that the issue was decided in favour of the assessee by various Benches of the Tribunal.
23. The ld. AR of the assessee supported the order of the ld. CIT(A) and submitted that the case laws relied upon by the assessee are at Sl No.7 to 9 of the index of paper book on case laws wherein the issue was decided in favour of the assessee by various Benches of the Tribunal. They are -
Siva Industries & Holdings Ltd vs ACIT [2012] 26
Taxmann.com 96 (Chennai)
Aurionpro Solutions Ltd vs Addl. CIT in I.T.A.No.
7872/Mum/2011
:- 13 -: I.T.A.No. 2165/10
Cotton Naturals (I) Pvt. Ltd vs DCIT in I.T.A
No.5855/Del/2012.
24. In view of the above submission of the ld.D.R, we dismiss this ground of appeal of the Revenue.
25. In the result, the appeal of the Revenue is dismissed.
Order pronounced on Friday, the 30th of August, 2013, at Chennai.
Sd/- Sd/- (V. DURGA RAO) (N.S.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30th August, 2013, RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR