Income Tax Appellate Tribunal - Ahmedabad
M/S. Dishman Pharmaceuticals & ... vs The Acit, (Osd),Range-1,, Ahmedabad on 20 June, 2018
आयकर अपील य अ
धकरण, अहमदाबाद यायपीठ - अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D'
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
AND
SHRI AMARJIT SINGH, ACCOUNTANT MEMBER
Sr. ITA No. and Appellant Respondent
No. Asstt.Year
1. 955/Ahd/2012 Dishman Pharmaceuticals DCIT(OSD), Range-1
Asstt.Year 2007-08 & Chemicals Ltd. Ahmedabad
Bhadraj-Raj Chambers
Swastik Cross Road
Navrangpura,
Ahmedabad.
PAN : AAACD 4164 D
2. 1043/Ahd/2012 DCIT(OSD), Range-1 Dishman
Asstt.Year 2007-08 Ahmedabad Pharmaceuticals &
Chemicals Ltd.
Bhadraj-Raj Chambers
Swastik Cross Road
Navrangpura,
Ahmedabad.
3. 262/Ahd/2013 Dishman Pharmaceuticals DCIT(OSD), Range-1
Asstt.Year 2008-09 & Chemicals Ltd. Ahmedabad
Bhadraj-Raj Chambers
Swastik Cross Road
Navrangpura,
Ahmedabad.
4. 386/Ahd/2013 DCIT(OSD), Range-1 Dishman
Asstt.Year 2008-09 Ahmedabad Pharmaceuticals &
Chemicals Ltd.
Bhadraj-Raj Chambers
Swastik Cross Road
Navrangpura,
Ahmedabad.
5. 2958/Ahd/2013 DCIT(OSD), Range-1 Dishman
Asstt.Year 2009-10 Ahmedabad Pharmaceuticals &
Chemicals Ltd.
Bhadraj-Raj Chambers
Swastik Cross Road
Navrangpura,
Ahmedabad.
6. 3087/Ahd/2013 Dishman Pharmaceuticals DCIT(OSD), Range-1
Asstt.Year 2009-10 & Chemicals Ltd. Ahmedabad
Bhadraj-Raj Chambers
Swastik Cross Road
Navrangpura,
Ahmedabad.
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others
2
Revenue by : Shri Vasundhara Upmanyu, CIT-DR
Shri R.P. Maurya, Sr.DR
Assessee by : Shri T.P. Hemani, AR with
Shri Parimal Parmar, AR
सन
ु वाई क तार ख/Date of Hearing : 22/03/2018
घोषणा क तार ख /Date of Pronouncement: 20/06/2018
आदे श/O R D E R
PER RAJPAL YADAV, JUDICIAL MEMBER:
In this bunch of appeals, orders of the ld.CIT(A) dated 2.3.2012, 16.11.2012 and 31.10.2013 passed on the appeals of the assessee in assessment year 2007-08 to 2009-10 are being impugned by the assessee as well as Revenue in cross appeals.
2. First major common issue in all these appeals relates determination of arm's length price of international transaction undertaken by the assessee with its AE in these three years. The ld.TPO recommended upward adjustments in the value of international transactions in his orders passed under section 92CA(3) of the Income Tax Act, 1961 in all these three years. On appeal, the ld.CIT(A) partly upheld such adjustment and partly deleted. Therefore, both the parties are impugning orders of the ld.CIT(A) on this issue. We deem it appropriate to take this issue together raised in all these three years.
3. Brief facts of the case are that returns of income for the assessment years 2007-08 to 2009-10 were filed on 31.10.2007, 30.9.2008 and 29.9.2009 declaring loss at (-)46,78,40,252/-, Rs.18,53,52,406/- and Rs.2,54,05,015/- respectively for the assessment years 2007-08 to 2009-09. There is no dispute between parties that cases of the assessee for all these years were taken up for scrutiny assessment and due notice under sections 143(2)/142(1) were issued and served upon the assessee. Since there were international transactions of the assessee with its AE, therefore reference under section 92CA(1) were sent by the AO to the TPO in all these years. The ld.TPO has passed orders under section 92CA(3) of the Act on 20.10.2010, 28.10.2011 and 22.1.2013 respectively. The international transactions ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 3 undertaken by the assessee with its AE in these years were taken note by the ld.TPO, and the same reads as under:
Assessment Year : 2007-08 Sr. AE Name Nature of Value of No. Transactions transaction (Rs.)
1. Dishman Europe Sale of various 1716354499 Limited, UK products
2. Dishman Europe Machinery 23066442 Limited, UK purchased by DEL
3. Dishman Europe Procurement of 36941047 Limited, UK raw material availed to from the AE
4. Dishman FZE, Short term loan 932800 Dubai given
2. Total 177,72,94,788 Assessment Year : 2008-09 Sr. AE Name Nature of Value of No. Transactions transaction (Rs.)
1. Dishman Europe Apportionment of 79,19,759 Limited, UK Expenses
2. CAD KMiddle East Share application 3,33,08,000 Pharma Industrial monies, pending allotment of shares
3. Dishman Europe Sale of 13,55,333 1,90,12,96,933 Limited, UK kgs. of various products
4. Dishman, USA
5. Dishman Switzerland Limited
6. Carbogen Amics Ag.
7. Dishman International Trading (Shanghai) Co. Ltd.
8. Innovative Ozone Services Inc. Ltd.
9. Dishman Japan Ltd.
Total : 1,94,25,24,692
Assessment Year : 2009-10
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 4 Sr. Name of the Description of Amount paid Method used No. Associated transaction or payable as for Enterprises per books of determining account the Arm's Length Price
1. CARBOGEN AMICIS Sales of various 3,84,60,250 TNMM AG products
2. DISHMAN Sales of various 18,90,441 TNMM AUSTRALASIA PTY products LTD.
3. Dishman Europe Sales of various 2,18,76,07,93 TNMM limited products 4
4. DISHMAN INT'L Sales of various 14,81,069 TNMM TRADE products (SHANGHAI) CO.
LTD.
5. DISHMAN JAPAN Sales of various 96,95,265 TNMM LTD. products
6. DISHMAN USA, Sales of various 23,39,44,585 TNMM INC. products
7. DISHMAN Purchase of 1,40,700 TNMM NETHERLAND BV various products
8. DISHMAN Europe Purchase of 3,90,315 TNMM LTD. various products
9. CAD MIDDLE EAST Technical and 4,27,19,300 TNMM PHARMA IND. Engineering LLC.DISHMAN Services JAPAN LTD.
10. DISHMAN Europe Contract 3,64,21,109 TNMM LTD. Research Services
11. DISHMAN USA, Contract 2,06,84,000 TNMM INC Research service
12. DISHMAN EUROPE Apportionment of 11,78,932 TNMM LTD. insurance premium
13. DISHMAN EUROPE Reimbursement 1,84,13,221 TNMM LTD. of expenses
14. DISHMAN Short term loan 1,05,51,694 TNMM Australasia pty Ltd.
15. Dishman Pharma & Short term loan 10,05,10,000 TNMM Chemicals (Shanghai) Co.
Ltd.
16. Dishman Europe Short term loan 22,74,113 TNMM Limited
4. Let us first take the facts in the assessment year 2007-08 on this issue.
It is pertinent to note that in the value of international transactions of Rs.177,72,94,788/- extracted above, the ld.TPO recommended upward ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 5 adjustment of Rs.11,12,88,512/-. The adjustments were made qua four components viz. (a) adjustment in sale price of Rs.4,78,99,891/-; (b) interest on loan of Rs.87,19,932/-; (c) guarantee fees of Rs.5,18,22,200/- and insurance of Rs.28,46,489/-. The ld.CIT(A) has gone into all these transactions and deleted adjustment recommended qua sale price, guarantee fees, but upheld adjustment qua insurance and interest on loan. However, with regard to the issue of interest on loan, the ld.CIT(A) has accepted alternative contentions of the assessee that interest charged by it ought to be given set off against ultimate interest computed by the TPO, required to be charged by the assessee from its AE from international transactions. In other words, the assessee has charged interest at the rate of LIBOR plus 1%. Credit of this interest has been allowed to the assessee. The finding of the ld.CIT(A) in the assessment year 2007-08 is worth to note on this issue, because they are repetition of subsequent two years. It reads as under:
"2.3-l have considered the facts of the case: TPO's order and appellant's submission. There are four components of transfer pricing adjustments arrou6ting; to Rs.11,12,88,512/- as under:
S.No. Particulars Amount in Rs.
(a) Adjustment in sales pride 41,78,99,891/-
(b) interest on loan 87,19,932/-
(c) Guarantee fees 5,18,22,200/-
(d) insurance 28,46,489/-
All the above transfer pricing adjustments are separately discussed and adjudicated in the following paras-
(a) Adjustment in sales price Appellant had various international transactions with associated enterprises (AEs) during the year. TPO made adjustments with regard to 16 transactions. Appellant followed TNMM method for calculating arms lengthprice which was changed by the assessing officer to CUP method and then worked out Variation as adjustments, As regards change of method from TNMM to CUP, the issue is squarely covered by the orders of CIT(A) for assessment years 2002 -03, 2003-04, 2004-05,2005-06 and 2006-07 (covering all appeals prior to this assessment year) and also ITAT order for A Y 2004-05:
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 6 The arguments given by fhb TPO are similar in an the years and therefore this issue is covered by the earlier appellate decision in the appellant's own case in the similar facts and circumstances. Appellant also submitted decision of ITAT Ahmedabad In the case of Schutz Dishman biotech private Ltd (a sister concerns in the similar line of business) for assessment year 2002-03 in ITA number 554/AHD/2006 dated 15 February 2008. The relevant part of the decision is quoted below-
"We find no fault with the TNMM method adopted by the assessee on the above facts of the case. Even the honourable apex court in the case of Morgan Stanley & Co. has clearly upheld the adoption of TNMM method as most appropriate method and the relevant particular line from the judgement reads as under-
ti "as regards income attributable to the P E, we hold that the transactional net margin method was the appropriate method for determining the arm's length price in respect of transactions between Morgan Stanley & Co and MSAS".
Even the honourablespecial bench of this tribunal in the case of Aztec software and technology services Ltd has held, that the computation of arms length price is effect to exercise. Each case depends on its own facts and circumstances. In many cases where identical or almost similar uncontrolled transactions are available for comparison, determination of arms length- an easy task. But it is not so in most of the transactions rarely one is able to locate the Identical transaction. In such cases arms length price is determined by taking the comparable transaction in: comparable circumstances and make suitable adjustment for the differences. Similarly in the present case also the PBIT of the assessee company is exactly similar or nearby with that of the other uncontrolled transactions of unconnected enterprises. The PBIT of the exports is as high as 23.02% as against the overall PBIT of the assessee company at 20.04%,Even if the assessee has compared that PBIT of other independent entities with that of the assessee and demonstrated the application of TNMM method correctly. Accordingly we uphold the TNMM method adopted by the assessee and reverse the cup method adopted by the revenue."
Appellant also submit that ITAT's order in its own case for assessment year 2004-05 in ITA number 154/AHD/2007 dated 18th February 2011 in which aforesaid decision was followed in appellant's case also. Relevant extract of this order is quoted below-
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 7 "37- After going through the facts in entirety, we are of the view that the facts in the present appeals are exactly identical to the case of Schutz Dishman biotech private Ltd in ITA number 554 /AHD /2006 and this issue was answered against the revenue by this tribunal. In any case even in the case of associate concern viz Schulz Dishman (supra) this tribunal has upheld the very same reasons given by the assessee for non-application of CUP method of AMP and accordingly, following the tribunal's decision, we allow the claim of the assessee, upholding the order of CIT (A) on this common issue of the revenue's appeal."
Respectfully following the decisions of jurisdictional ITAT on the issue of change of method from TNMM to CUP in the case of appellant in earlier years having identical, facts, assessing officer is directed to accept TNMM method as against CUP method taken up by TPO. In TNMM method, appellant's margin is higher than average margin of comparable entities and therefore no adjustment can be made on the issue of safes made to associated enterprises.
(b) Interest on loan- During the year, the appellant extended foreign currency loan on which total interest charged was RS 40,93,995.TPO found that appellant charged interest at the rate of LIBOR + 1% however one of the AEs have obtained borrowings from European bank at the rate of Euribor + 3.75%. Since appellant charged interest at a low rate, transfer pricing was justified in making adjustment in respect of interest. It is only because transaction was with AE, the low rate of interest was charged. The reasons given by the appellant do not explain the charge of interest at the low rate. In view of the detailed reasons and judicial decision given by the TPO which is quoted earlier, the adjustment in respect of interest made by the TPO is confirmed. -
However, while making adjustment in respect of interest, TPO did not allow set off of interest already charged by the appellant. Since the interest worked out by the This is total interest which should've been charged at ALP, obviously Interest already charged by the appellant has to be reduced making TP adjustment. Accordingly assessing officer is directed to reduce interest already charged by the appellant from the total interest chargeable from the AEs. The adjustment of such net amount computed is confirmed,
(c) Guarantee fees- TPO made the adjustment on account of commission in respect of corporate guarantee provided by the appellant to its AE. Applicant submitted ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 8 that corporate guarantee does not come under the purview of TP adjustments. Appellant relied upon the decision of ITAT Hyderabad in which it Is held that for providing corporate guarantee in obtaining loans by AE, no adjustment can be made. ITAT in the case of Four Soft Ltd. vs. DCIT,Circle - 1(3), Hyderabad :(1TA No. 495/Hyd/10) dated 09-09-2011 held as under:
"27. We have, 'considered the rival submissions and perused the materials available on record. We find that the TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate- guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidance in respect to guarantee transactions. in absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the.TP-study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared. to a bank guarantee transaction of the Bank or financial institution. In view of this matter, we hold that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee company. Hence, we answer this question in favour of the assessee and allow the grounds raised by the assessee on this issue."
From the above it is clear that appellant's case is covered by the aforesaid decision. Therefore, the adjustment made by the TPO in respect of guarantee commission is not sustainable. Accordingly adjustment on account of Guarantee commission made by the assessing officer based on the TPO's-order is deleted.
(d)Insurance-Appellant made the payment to its AE on account of insurance however TPO found that this payment was made first time by the assessee company and previously there was no such payment. As per insurance Act, India companies cannot take and make payment to foreign insurer. But for relation with the foreign multination, the assessee would not have taken any policy with foreign insurer or any other domestic party in similar situation would not have been able to take such insurance from foreign insurer, Therefore the payment on account of insurance by the appellant to its AE is for no services or business consideration and accordingly the ALP of this transaction is Nil. Since appellant made payments to its AE, the same was clearly within the purview of pricing regulation. Appellant could not explain the business consideration and the purpose of making payment on account of insurance even when it cannot take any insurance ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 9 from foreign insurer. In view of this, the adjustment made by the TPO is justified and addition is accordingly dismissed."
5. In the assessment year 2008-09, the ld.TPO has recommended upward adjustment in the value of international transactions at Rs.11,99,88,464/-. He has recommended such adjustments on three accounts viz. (a) adjustment in sale price of Rs.5,05,24,457/-; (b) interest on loan of Rs.1,02,58,808/- and
(c) guarantee fees of Rs.5,92,05,199/-. On appeal, the ld.CIT(A) has deleted adjustment qua item no.(a) and (c) i.e. adjustment in sale price and guarantee fees. The ld.CIT(A) confirmed adjustment recommended for charging of interest on loan partly. In this year, the ld.CIT(A) has not recorded any independent finding rather followed her predecessor's order in the assessment year 2007-08. This fact has not only been noted by the ld.CIT(A) in the impugned order, rather the finding of the ld.CIT(A) recorded in the assessment year 2007-08 has been reproduced.
6. The facts in the assessment years 2009-10: In this assessment year, the ld.TPO has recommended upward adjustment of Rs.14,94,92,409/- in the value of international transactions extracted (supra). He commended adjustment on three counts viz. (a) adjustment in sale price of Rs.1,55,86,834/-; (b) interest on loan of 34,86,035/- and (c) guarantee fees of Rs.13,04,19,540/-. On appeal, the ld.CIT(A) has followed the finding of the ld.CIT(A) in the assessment years 2007-08 and 2008-09. The ld.CIT(A) has deleted the recommendation made qua adjustment in sale price and guarantee fees. With regard to the interest on loan, the ld.CIT(A) has accepted the recommendation made by the TPO in principle, but directed the TPO to give credit of the interest already charged by the assessee from the AE on the loan.
7. With the assistance of the ld.representatives, we have gone through the record carefully. First international transaction qua which upward adjustment was recommended by the TPO is in the sale price of various products made to foreign AEs. It is pertinent to observe that assessee has submitted TP report in Form No.3CEB. It has analyzed its international transactions and demonstrated such transactions at arm's length price by selecting transactional net margin method (TNMM) as most appropriate method. It has ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 10 selected itself as a tested party and worked out PLI by dividing operative margin with operating cost i.e. OP/OC. The ld.TPO did not accept the TNMM adopted by the assessee for benchmarking of its transactions with its AE. According to the ld.TPO net profit margin of enterprise as a whole has been compared by the assessee with net margin earned by organic chemical manufacturing companies. According to him the assessee has aggregated all the transactions and has not given any reason for such aggregation and computed net margin of its entire sale, whereas TNMM requires computation of net margin of each transaction or aggregation of similar transactions. The ld.TPO further observed that selection of this method and computing net profit on entire sale of the company becomes more irrelevant when internal CUP data shows that certain fine chemicals/pharmaceuticals, the assessee has charged considerably high price in domestic market as compared to export price to its AE. Thus, the ld.TPO has changed method from TNMM to CUP method and thereafter recommended adjustment. Before the ld.CIT(A) it was contended by the assesee that right from the assessment year 2003-04, it has been following TNM method. The ld.CIT(A)has accepted the TNM method in the assessment years 2003-04 to 2006-07. Orders of the ld.CIT(A) in the assessment years 2003-04 and 2004-05 have been upheld by the ITAT. The ld.CIT(A) has considered this aspects and thereafter held that in the case of assessee TNMM is the right method.
8. On due consideration of order of the ld.CIT(A), we are of the view that along with these appeals, we have heard appeals of the assessee for the assessment years 2005-06 and 2006-07, where similar issue was involved. We have taken note of the order of the ld.CIT(A) passed in the assessment year 2005-06. The assessee in its submissions has prepared a comparative table exhibiting profit, arm's length price adjustments and why comparison made by the TPO was not proper. In other words, the assessee has highlighted factors responsible for not applying CUP method on its transactions. After making analysis of such details and following the orders of earlier years, we have upheld the order of the ld.CIT(A) and the finding recorded by us in the assessment year 2005-06 in assessee's own case on this issue reads as under:
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 11
"9. We have duly considered rival contentions and gone through the record. The ld.TPO has not pointed out defects in TNMM applied by the assessee for demonstrating ALP of its international transactions. Without any reasons, he simply changed method and held that CUP method is more appropriate method for determining ALP of international transaction entered into by the assessee with its AEs. We find that in the Asstt.Years 2003-04 and 2004-05, the Tribunal has accepted that TNMM is the most appropriate method for determining ALP of assessee's transactions with its AE. In the present assessment year, the assessee has compiled the details in tabular form submitting as to why CUP is not appropriate method. Such details have been reproduced by the ld.CIT(A) and they read as under:
Sr. Product ALP Adjustment Reasons why comparison is not No. in Rs. proper 1 Ammonium 10,70,529/- The appellant has sold 9,800 Kgs Tributyle at average rate of Rs.144.51 to Ammonium Dishman USA AE. The ld. TPO Chloride has compiled the identical products sold to various customers in respective countries and has adopted their average rate of Rs.253.47. Details of which given on page no. - of Paper Book.
Reasons for non-comparable are as under :
(a) Function Performed, Risk Assumed and Assets Employed i.e FAR factors are not taken into consideration while comparing prices charged to AE with non-AE.
(b) Quantity Factor : The instances taken by the ld.
TPO so far as quantity is concerned are at all not comparable, except one, as the Appellant has sold use quantity of 9800 Kgs, whereas comparable quantity is ranging from 22 kgs to 1950 kgs.
The only comparable instance could be impugned product sold to DDC fine chemicals N.V. situated ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 12 at Belgium - quantity is 10,000 kgs is at average rate of Rs.
200.97. However, this is also not comparable for the reason of Geographical factor and Function Performed, Employment of Assets and Risk Assumption by AE.
Hence, this is also not comparable instance.
(c) Geographical Factor :Non
AEs are situated at
different Geographical
area and therefore also
they are not comparable.
Because of the different
geographical locations
even the politic risks also
vary so also the currency
fluctuation risk.
(d) Regularity of Transaction :
The appellant submits that
even when internal
comparison is applied,
what can be compared for
the purpose of determining
the ALP are the regular
transactions and not the
solitary or isolated
transaction with any other
third non-EE party.
Transaction can either the
arena of comparison only
if it's a transaction which
is a regular transaction. In
the facts of the present
case, transaction selected
by ld. TPO are such
isolated or solitary
transactions and therefore
the very comparison is
erroneous or
misconceived.
2&3 Cetrimide BP 98,250 and No comments for the smallness of
92,800 amount.
4 PhenyleTrimethyle 5,87,523/- The appellant would like to point
Ammonium out that there is a mistake on the
Chloride part of ld. TPO in taking average
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 13 price at Rs. 299.27 instead of Rs.
246.10.
Summarised table of quantity sold to Non AEs and average price thereof is given hereunder for ready reference to clarify the issue:
Country Qty. Avg.
Rate
Argentina 600 535.67
Australia 11558 272.49
Belgium 81000 242.42
Iran 16000 228.63
Japan 1600 303.52
Taiwan 24 459.30
UK 5 694.35
Total 110787 246.10
AE - 11,100 246.34
Europe
From the above given table, it is
very much clear that the appellant
has charged price at Rs. 246.34 to
the AE than the average price
charged at Rs. 246.10 to Non-AE.
Hence, there is no question of
making Transfer Pricing
Adjustments.
5 PhenyleTrimethyle 5,48,053/- The appellant would like to point
Ammonium out that there is a mistake on part
Chloride of ld. TPO in taking average price
at Rs. 299.27 instead of Rs.
246.10.
Summarise table of quantity sold
to Non-AEs and average price
thereof is given hereunder for
ready reference to clarify the issue
:
Country Qty. Avg.
Rate
Argentina 600 535.67
Australia 11558 272.49
Belgium 81000 242.42
Iran 16000 228.63
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 14 Japan 1600 303.52 Taiwan 24 459.30 UK 5 694.35 Total 110787 246.10 AE - USA 8280 233.08 In the given case, the appellant has charged average price Rs.233.08 to AE whereas average price to Non-AE work out to be to Rs. 246.10 which is certainly within limit of 5% and therefore as per 2nd Proviso S. 92C(2)of the Act no transfer pricing adjustment is required to be made.
Without prejudice to above, the appellant submits that in any case the instances are not comparable at all due to quantity and geographical factors 6 Sodium 78,713/- No comments for the smallness of Picosumlphat amount.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 15 7 Tetrabutyl 31,81,642/- (a) FAR Analysis : As Above.
Ammonium (b) Quantity factor : The
Bromide instances is taken by the ld.
TPO is summarised as
under :
Country Qty. Avg.
Rate
Isreal 28800 215.82
Japan 4300 280.63
Korea 3500 433.95
Netherland 1000 810.60
USA 10200 240.67
Total 47800 255.36
AE- 49054 190.50
Europe
All five instances are not
comparable as there is huge
difference in quantity of the
product sold to AE and Non-AE.
Even if the near quantity i.e
20,800 taken into consideration
then also average rate is Rs.
215.82, which is also for the
required to be discounted
considering the quantity factor i.e
28,800 Kgs to Non-AE against
49,054 kgs. to AE as well as
graphical factors and certainly
FAR.
(c) Geographical factors : As
Above.
(d) Regularity of transaction : As
above (1).
8 Tetra Butyle 1,05,040/- For the smallness of amount it is
Ammonium not considered.
Bromide
9 Tetra Butyle 55,21,061/ (a) Function Performed, Risk
Ammonium Assumed and Assets
Bromide Employed i.e FAR factors
are not taken into
consideration while
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 16 comparing prices charged to AE with non-AE.
Detailed FAR analysis is given below table.
(b) Quantity factors. The instances taken by the ld.
TPO is summarised as under.
Country Qty. Avg.
Rate
Isreal 16900 234.02
Japan 7040 251.84
Korea 2000 435.60
Total 25,940 254.40
AE- 1,04,625 201.63
Europe
All three instances are not
comparable as there is huge
differences in quantity of the
product sold to AE and Non-AE.
Even if the near quantity
i.e.16,900 taken into consideration
that also average rate is Rs.
234.02, which is also for the
required to be discounted
considering quantity factor
i.e.16,900kgs. to Non-AE against
1,04,625 Kgs. toAE as well as
geographical factors and certainly
FAR factors.
(c) Geographical factors.
Non- AEs aresituateat
different Geographical
area and therefore also
they are not comparable.
(d) Regularity of transaction :
As above (1).
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 17 10 Tetra Butyle 6,63,789/- (a) FAR Analysis : As Above.
Ammonium (b) Quantity Factor : Only one
Fluoride instance has been taken
Thihyderate into consideration by the
ld. TPO i.e only 10 Kgs
sold to customer in Brazil,
whereas the appellant has
sold 400 kgs. to AE.
Certainly this instance is
not comparable looking
into huge difference in
quantity as well as only
one transaction has been
entered into by the
Appellant with such Non
AE.
(c) Geographical factors : As
(1) Above.
(d) Regularity of transaction :
As (1) above.
11 Tetra Butyle 47,18,827 (a) FAR Analysis : As Above.
Ammonium (b) Quantity Factor : The
Hydrogen instances taken by the ld.
Sulphate TPO has summarised as
under :
Country Qty. Avg.
Rate
Germany 500 663.84
Japan 600 630.00
Netherland 1000 762.65
USA 100 962.50
Total 2,200 713.10
AE- 17306 440.43
Europe
All three instances are not
comparable as there is huge
difference in quantity of the
product sold to AE and Non-AEs.
(c) Geographical factors : As
Above (1).
(d) Regularity of transaction :
As above (1).
12 Tetra Butyle 24,931 For the smallness of amount it is
Ammonium not considered.
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 18 Hydrogen Sulphate 13 Tetra Ethyle 1,35,57,000/- (a) FAR Analysis : As Above.
Ammonium (b) Quantity Factor : The
Bromide instances taken by the ld.
TPO has summarised as
under :
Country Qty. Avg.
Rate
Brazil 63 608.86
Japan 100 650.70
Malaysia 25 437.80
USA 3000 252.02
Total 3,188 273.04
AE- 1,50,000 182.66
Europe
All four instances are not
comparable is there is huge
difference in quantity of the
product sold AE and Non-AEs.
Even if nearer quantity is taken
into consideration i.e 3000 at
average rate ofRs. 252.02, then
also it is for the required to be
discounted considering huge
difference of quantity sold to Non
AE and AE i.e 3000 kgs. to non-
AE against 1,50,000, as well as
geographical factors and FAR
Analysis.
(c) Geographical factors : As
Above (1).
(d) Regularity of transaction :
As above (1).
14 Tetra Ethyle 1,05,475/- For the smallness of amount it is
Ammonium not considered.
Bromide
15 Lidocain 3,22,720/- (a) FAR Analysis : As Above.
(b) Quantity Factor : The
instances taken by the ld.
TPO has summarised as
under :
Country Qty. Avg.
Rate
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 19 China 1000 594.68 800 701.24 Korea 200 688.51 Thailand 25 657.28 Total 2025 646.81 AE- 4000 566.13 Europe All four instances are not comparable is there is huge difference in quantity of the product sold AE and Non-AEs.
Even if nearer quantity is taken
into consideration i.e 1000 at
average rate of Rs. 594.68, then
also it is for the required to be
discounted considering huge
difference of quantity sold to Non
AE and AE i.e 1000 kgs. to non-
AE against 4,000 to AE, as well as
geographical factors and FAR
Analysis.
(c) Geographical factors : As
Above (1).
(d) Regularity of transaction :
As above (1).
16 Tetra ButyleAmm. 13,69,800 (a) FAR Analysis : As Above.
Hy. (b) Quantity Factor : The
instances taken by the ld.
TPO has summarised as
under :
Country Qty. Avg.
Rate
Germany 500 743.52
Japan 300 635.04
Netherland 2000 766.50
Total 2800 748.31
AE- 3000 291.71
Europe
The appellant has entered into
only one transaction with above
mentioned Non-AE and therefore
they can never be compared with
the price charged and in any case
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 20 there due to quantity, geographical difference, comparison cannot make transfer pricing adjustments.
(c) Geographical factors : As Above (1).
(d) Regularity of transaction :
As above (1).
17 Tetra ButyleAmm. 3,53,418 (a) FAR Analysis : As Above.
Hy. (b) Quantity Factor : The
instances taken by the ld.
TPO has summarised as
under :
Country Qty. Avg.
Rate
Germany 500 743.52
Japan 300 635.04
Netherland 2000 766.50
Total 2800 748.31
AE- USA 1300 291.71
The appellant has entered into
only one transaction with above
mentioned Non-AE and therefore
they can never be compared with
the price charged and in any case
there due to quantity,
geographical difference,
comparison cannot make transfer
pricing adjustments.
(c) Geographical factors : As
Above (1).
(d) Regularity of transaction :
As above (1).
18 Myristyl DBA 59,71,613 (a) FAR Analysis : As Above.
Chloride Powder (b) Quantity Factor : Only one
instance has been taken into
consideration by the ld. TPO i.e
only 25 Kgs sold to customer in
Egypt, whereas the appellant has
sold 24,494.40 kgs. to AE.
Certainly this instance is not
comparable looking into huge
difference in quantity as well as
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 21 only single transaction has been entered into by the appellant with such Non AE.
(c) Geographical factors : As (1) Above.
(d) Regularity of transaction : As (1) above.
Upward adjustment of Rs.4,68,04,255/- in respect of contract research receipts :
At the outset the appellant most respectfully submits that in respect of upward adjustment in with regards to transaction in the nature of contract research receipt from Dishman USA Inc is amounting to Rs.2,96,26,763/- is concerned, the same is not at all tenable as the total contacts research receipt with the said entity is only in the sum of Rs. 87,38,550/-. The following table would clarify this aspect :
Nature of transactions Amount in Rs. Transactions with Dishman USA Inc. in respect 23,00,00,469/- of sales of Goods (Ref. page ___ of P/B) Transactions with Dishman USA Inc. in respect 87,38,550/-
of sales of services (contract research receipts) (Ref. page ___ of P/B) Rate difference 23,87,897/-
Total transactions with Dishman USA Inc. in 24,11,26,916/- respect of sales of Goods and Services The appellant submits that when the total transactions in the respect of contract research are to the tune of Rs. 87.38 lacs, the question of making adjustment beyond this gross figure of receipt cannot rise and no adjustment in this sum of Rs.296.26 lakhs can be made. The appellant submits that ld. TPO has already made adjustments in respect of transaction of sales of goods by applying the CUP method and the same has been the subject matter of challenge in the earlier grounds. Having done that, it is not open to ld. TPO to once again apply the gross mark up method and make one more addition on this same set of sales with the same AE.If the TPO has chosen a particular method for determining ALP, the same has to be applied uniformly to all the transactions. It is then not open to the TPO to say that if a particular transaction is at ALP in the first chosen method the same has to be realigned and readjusted by applying a different method for deter mining ALP. Once the transaction is at ALP under a particular method the said transaction has to be accepted as a transaction entered into at ALP and the same cannot be disturbed thereafter by applying a different method for determining the ALP."
10. In the written submissions, the ld.TPO has reiterated observation made in the order passed under section 92CA dated 21.10.2008. Apart from the observation of the TPO, it has been contended in the written submissions that the assessee has carried out comparability under TNMM at entity level and not at transactional level. He contended that the assessee has used TNMM on entity basis for computation of ALP for ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 22 its sales to its subsidiaries. According to the ld.DR, the assessee ought to have adopted net transactional method instead of profit margin of enterprise as a whole. A reference to the order of the ITAT Mumbai in the case of UCB India P.Ltd. Vs. ACIT, 121 ITD 13 1(Mumbai) has been made.
11. We have gone through these submissions as well as finding of the ld.CIT(A). It is pertinent to observe that the ld.TPO in the order dated 21.10.2008 has not made any such analysis. He has not pointed out the alleged defect as contended in the written submissions. The analogy adopted by the TPO in the order passed under section 92CA is that CUP method is far better method than TNMM. How, TNMM is not applicable on the given set of facts has nowhere been discussed by the TPO in the impugned order. Therefore, the ld.DR cannot improve the case of the TPO at this level. More so when, consistently from the Asstt.Year 2002-03, it has been held that method adopted by the assessee is an appropriate method. In the assessee's own case, this aspect has been accepted upto the level of ITAT. There is no justification for disturbing of that method by taking different opinion from order of the ITAT passed in similar facts of the same assessees.
Taking into consideration earlier orders of ITAT passed in assessee's case for the Asstt.Year 2002-03 to 2004-05, we are of the opinion that the ld.CIT(A) has based his finding on the orders of predecessor. There is no independent discussion in this order. Thus, the findings have been upheld by the ITAT, and therefore, we do not see any reasons to deviate ourselves from those finding. Respectfully following the orders of the Tribunal in earlier years, we do not find any merit in this ground of appeal raised by the Revenue. Accordingly, first ground of appeal is rejected."
9. There is no disparity on facts from those years to these years. The list of products on which adjustments have been made by the ld.TPO are available in para 7.3 of the TPO order which has been reproduced by the ld.CIT(A) on page no.4 and 5 of the impugned order in the assessment year 2007-08. In other words, almost all the products which have been noticed in the assessment year 2005-06 have been sold in these years to different AEs in different geographical locations. If on sale of these products CUP method was not upheld in earlier years, then we do not see any reasons to apply that very method in this year as well. Therefore, respectfully following the orders of the ITAT in the assessment year 2003-04 to 2006-07 on this issue, we do not find any error in the finding of the ld.CIT(A). The benchmarking on sale price of various products to AEs is to be tested by following TNM method and if that method is being followed then, it would reveal that the assessee has rightly justified its transactions at arm's length, because the margin shown by it are ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 23 higher than the average margin shown by the comparable entities, and therefore no adjustment can be made. The ld.CIT(A) has rightly deleted such adjustment in this year, and the order of the ld.CIT(A) is upheld qua first issue.
10. Next common item in all these three years is adjustment recommended in ALP of interest rate required to be charged by the assessee from its AE on the loans given by it.
11. Brief facts of the case are that in the assessment year 2007-08, he assessee has extended foreign currency loan amounting to Rs.24,50,70,500/- to Dishman Europe Ltd., and Rs.5,36,70,000/- to Dishman Pharma Solution AG. The assessee has charged total interest of Rs.40,93,995/- at the rate of LIBOR plus 1%. The ld.TPO has observed that one of the AEs. borrowed funds from European bank at the rate of EURIBOR plus 3.75%. The ld.TPO confronted the assessee as to why this rate be not taken for benchmarking rate of interest required to be charged by the assessee. In response to the query of the AO, it was contended by the assessee that loan had been granted to the AE in order to create infrastructure facilities for the smooth operation of the AE and this is needed to sustain, survive and grow in most competitive market. The assessee further submitted that basis of charging of interest was cost of funds to the assessee, as it had raised the funds by issuing FCCB at nominal cost 0.5% to 1%. It has also stated that in any case the assessee has charged interest at the rate of LIBOR plus 1%, which is according to the market conditions. The ld.TPO rejected the contentions of the assessee and observed that it was not granted for creating infrastructure facilities. According to the ld.TPO one of the AEs. had borrowed money from European market at the rate of EURIBOR plus 3.75% which could be applied on the loans granted to its AE. Accordingly the ld.TPO has made adjustment of Rs.87,19,932/- in the assessment year 2007-08. On same principle, adjustments have been recommended in the subsequent two years. The ld.CIT(A) has appreciated the controversy but concurred by the ld.TPO. Further, the ld.CIT(A) has accepted alternative contentions of the assessee. A credit of Rs.40,93,995/- charged by the assessee as interest in the assessment year 2007-08 has been given against the adjustment ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 24 recommended by the ld.TPO. On similar lines, interest which has been charged by the assessee from its AE has been allowed as set off against ultimate interest computed by the TPO by adopting the rate of EURIBOR plus 3.75%.
12. We have heard both the parties and gone through the record carefully. It is pertinent to observe that the assessee was having cash credit account in dollar denomination with ICICI Bank, Singapore branch and BOI. It has given a loan in dollar denomination from these accounts to its AE, Dishman Europe Ltd. Similarly, it was having cash credit account with Corporation Bank and given loan from these accounts to Dishman Pharma Solution. The assessee has given loans in dollar. These loans have been given from Singapore Branch. The question before us is whether the interest rate charged by the assessee at LIBOR plus 1% is at market rate or it has given some undue benefit to its AEs and thus, its rate could not be considered as arm's length price. The ld.TPO has not made much discussion on this aspect. He harboured a belief that since one of the AEs. borrowed funds from European bank and paid higher rate of interest, thus funds given by the assessee should also carry that very rate of interest. In our opinion, the ld.TPO failed to appreciate the fact that the assessee is the tested party and not the AE. The factum of business requirement in a foreign country at what rate of interest funds are being borrowed by the AE is totally irrelevant aspects. The question before the TPO was at what rate an Indian concern should provide loans in dollar denomination to an unrelated party from India. The AE has obtained loans from European market, which is altogether a different currency and the requirement of AE could be different for that. There may be higher rate of interest prevailing for borrowing funds, but at what rate the loan could be made from India in dollar denomination ?. The assessee has pointed out that LIBOR is the prevailing rate and it has charged LIBOR plus 1%. No defect has been pointed out in this rate. Only thing is that one of the AEs has obtained loan from European market, therefore, the ld.TPO has applied that rate. To our mind this action of the ld.TPO could be justified if he has pointed out that a tested party in India has granted loan to its AE in dollar denomination at a higher rate than the LIBOR plus 1%. It is also pertinent to note the cost of the funds to the assessee. The assessee has contended that it has raised ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 25 funds by issuing of FCCB at nominal cost 0.5% to 1% and it has given these funds to its AE. Thus, the assessee has demonstrated that the rate charged by it was at a market rate and its transactions were at arm's length. No adjustment can be made in the rate of interest charged by the assessee from its AE on providing loans in dollar denomination. We allow the appeal of the assessee on this aspect, and delete adjustment recommended by the ld.TPO.
13. The next item which is common in these years relates to adjustment recommended by the AO on the guarantee provided by the assessee.
14. Brief facts of the case in the assessment year 2007-08 are that the assessee given corporate guarantee for Dishman Europe Ltd. of Rs.541.01 lakhs and Rs.2170.13 lakhs. It has further given guarantee on behalf of its AE, M/s. Dishman Pharma Solution for a sum of Rs.23199.96 lakhs. According to the ld.TPO whenever a guarantee is being extended then the bank in India used to charge guarantee fee at 2% of the guaranteed money. Since the assessee has not charged anything from its guarantee, therefore, ld.TPO has recommended an upward adjustment of Rs.5,18,22,200/- in the assessment year 2007-08 on account of guarantee fee.
15. Dissatisfied with the adjustment assessee carried the matter in appeal before the ld.CIT(A). The stand of the assessee before the ld.CIT(A) was that it has not charged any guarantee fees to its AE. It was also contended that providing corporate guarantee to the AE is not a international transactions within the purview of transfer pricing provisions, and therefore, no addition can be made in respect thereof, inasmuch as corporate guarantee was given to the AE for smooth functioning of the business of the assessee. On the strength of ITAT, Hyderabad Bench order passed in ITA No.1405/Ahd/2010 in the case of Four Soft Ltd. Vs. DCIT, the assessee has contended that following aspects are required in order to identify whether transactions within the ambit of international transactions provided in section 92B of the Income Tax Act. The ld.CIT(A) has reproduced the submissions of the assessee. The relevant part reads as under:
"5.4 The Appellant most respectfully submits that to invoke transfer pricing provisions in the hands of the assessee, three ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 26 basic conditions are required to be satisfied cumulatively, which are as under:
(a) Income arising from;
(b) International transaction and
(c) Entered into with the associate enterprise.
5.5 So far as condition (c) is concerned, if is admitted facts that the DEL and DPS are wholly owned subsidiary companies of the Appellant and therefore they are associate enterprise of the Appellant as per the provisions of S.92A of the Act.
The Appellant most respectfully submits that providing bank guarantee is admittedly (a) not a purchase of Purchase, sale or lease of tangible or intangible property; (b) not a provision of service as the Appellant is not engaged info business of providing guarantee; (c) not a lending or borrowing money; (d) not any other transaction having a bearing on the profits, income, losses or assets or (d) not an allocation or apportionment of any expenditure. Hence, the Appellant most respectfully submits that corporate guarantee is not covered by any of the transactions as defined u/s 92B of the Act and therefore it is out of the purview of the transfer pricing provisions. Once, if is established that providing corporate guarantee to the banks is not an international transaction, no transfer pricing adjustment can be made in respect thereto. Reliance is placed on the decision of the Hyderabad Tribunal in the case of Four Soft Lfd. vs. DCff" bearing ITA No.l495/H/2010. copy of which is enclosed on page nos.207 to 227 of TP P/B. 5.6 Now the third condition (a) income arising from the international transaction is concerned, the Appellant without prejudice to above submits that even if it is presumed that the corporate guarantee is an international transaction, then also, no upward adjustment can be made for the reason that there is no income element embedded in such alleged international transaction. Provisions of S.92(1) is very much clear that subject matter of international transaction can be computed with the ALP only if the income is arising from such international transaction. The word "income arising from" means the income should actually have been arisen from the international transaction. In the facts of the present case, since merely providing guarantee admittedly does not involve any profit element the very provisions of section 92 of the Act, cannot be invoked. Even the board circular as well as memorandum explaining the provisions of Finance Bill 2002, support this contention. The relevant extract of the said circulars and memorandum are reproduced hereinbelow for ready reference:
Circular No. 14/200 7 : Finance Act. 2001 - Explanatory Notes On Provisions Relating To Direct Taxes - DATE: 22-17-200 7 ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 27 Memorandum Explaining The Provisions In The Finance Bill, 2002. Provisions Relating To Direct Taxes - DATE: 28-02-2002 Circular No. 8/2002 - Finance Act. 2002 - Explanatory Notes On Provisions Relating To Direct Taxes. DATE: 27-08-2002."
16. The ld.CIT(A) has accepted this contention of the assessee and held that providing a corporate guarantee was not international transaction, hence, no adjustment on account of guarantee commission should be made. He deleted the addition. Similar arguments have been advanced in the assessment year 2008-09 and 2009-10. Because the finding of the ld.CIT(A) extracted (supra) in the assessment year 2007-08 has been followed by the ld.Revenue authorities in the assessment year 2008-09 and 2009-10.
17. With the assistance of the ld.representatives, we have gone through the record carefully. Te ld.counsel for the assessee relied upon the order of the ITAT, Ahmedabad Bench in the case of Micro Ink Ltd. Vs. ACIT, 63 taxmann.com 353 wherein it has been held that corporate guarantee given by the assessee on behalf of its subsidiary company is the nature of quasi-capital or shareholding activity and not in the nature of "provision of service", and therefore, such transactions is to be excluded from the scope of international transactions under section 92B.
18. On the other hand, the ld.DR relied upon the order of the TPO. It was further contended that the by Finance Act, 2012 a retrospective amendment has been effected in Section 92B wherein corporate guarantee is now included in the definition of international transaction.
19. On due consideration of the above facts and circumstances, we are of the view that consistently it has been held that providing of corporate guarantee does not fall within the ambit of international transactions. For buttressing ourselves, we would like to make reference to the following decisions:
i) Suzlon Energy Ltd. Vs. ACIT, 81 taxmann.com 190;
ii) Dr. Reddy's Laboratories Ltd. ACIT, 81 taxmann.com 398 (Hyd);
iii) Aban Offshore Ltd. DCIT,76 taxmann.com 147 (Chennai-Trib)
iv) Bartronics India Ltd. Vs. DCIT, 86 taxmann.com 254 (Hyd.Trib.) ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 28
v) Cadila Pharmaceuticals Ltd. Vs. DCIT, 85 taxman.com 354 (Ahd.-
Trib)
20. Respectfully following the orders of the ITAT across the country, we do not see any reasons to interfere order of the ld.CIT(A) on this issue.
21. In the assessment year 2007-08, there is one more adjustment recommended by the ld.TPO and that adjustment has been upheld by the ld.CIT(A). Assessee is in appeal. According to the TPO, the assessee has paid a sum of Rs.28,46,489/- to its AE. The assessee contended that it is reimbursement of the expenditure to the AE on the insurance taken by the AO for the entire group. The ld.TPO made addition of this amount. On appeal, the ld.CIT(A) considered it and held that as per Insurance Act, Indian companies cannot take or make payment to foreign insurers. Since the assessee had made payment to its AE, the same was clearly within the purview of transfer pricing regulations, because it could not explain the business consideration and purpose of making payment on account of insurance, an even it could not take any insurance from foreign insurer. After going through the order of the ld.CIT(A), we do not see any reasons to interference the order of the ld.CIT(A) on this issue. Hence, ground nos.4 and 5 raised by the assessee in the assessment year 2007-08 are rejected.
22. Ground no.6 and 7 (Asstt.Year 2007-08), Ground Nos.5 and 6 (Asstt.Year 2008-09) and ground nos.5 and 6 (Asstt.Year 2009-10):
23. All these grounds of appeal are inter-connected with each other. The issue involved in these grounds of appeal is whether prior period expenditure crystalised during this year could be set off against the prior period income and only net income or loss is to be given effect in the computation of income. The issue has been discussed by the ld.CIT(A) in the assessment year 2007- 08 and in other two years, the ld.CIT(A) has followed orders of the ld.CIT(A). The assessee had accounted for income of Rs.40,11,972/- pertaining to prior period in the assessment year 2007-08. It has claimed expenditure of Rs.47,34,697/- and net different amount of Rs.7,22,725/- has been debited to the profit & loss account.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 29 In the assessment year 2008-09, it has Rs.29,69,575/- prior period income and it adjusted prior period expenditure of Rs.38,93,319/-. Similarly, in the assessment year 2009-2010, the assessee has income of Rs.1,30,352/- and claimed expenditure of Rs.13,36,441/-.
24. The case of the Revenue is that the income pertaining to any period has to be accounted for either on receipt basis or accrual basis. Once the assessee has shown income, it is to be taxed. But expenditure could be allowed if the assessee is able to demonstrate that such expenditure was incurred for earning of such income. According to the ld.Revenue authorities, the assessee has failed to demonstrate that this expenditure was incurred for earning such prior period income. Accordingly, the ld.AO did not allow set off expenditure against prior period income.
25. With the assistance of ld.representatives, we have gone through the record carefully. It is pertinent to note that along with this appeal, we have heard appeals for the assessment year 2005-06 and 2006-07. In the assessment year 2006-07, the assessee has prior period income at Rs.46,50,648/- and it has debited prior period expenditure of Rs.43,11,114/-. The net differential amount of Rs.3,39,534/- has been credited to profit & loss account and offered for taxation. The AO did not allow set off prior period expenditure and taxed the gross income. The issue came up before the Tribunal. We have upheld taxability of net differential amount. The Tribunal observed that once the assessee has been offering income of prior period as an entity, then its prior period expenditure cannot be disallowed simply by observing that it is not ascertainable whether this expenditure were incurred for earning a particular receipts offered under the head "prior period income". According to the Tribunal, if an assessee is offering prior period income, then the expenditure which were incurred under different heads and crystalilised in this year ought to be set off against hat income. Considering our finding in the assessment year 2006-07, we partly allow all the grounds and direct the AO to tax only net differential amount. In other words, in any particular year, if there is a negative income, then that amount is to be debited to the profit & loss account. In other words, say, in the assessment year 2007-08, the assessee has income of Rs.41,11,972/- and expenditure of Rs.47,34,697/-;
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 30 there is a negative amount of Rs.7,22,725/-. This net amount is to be allowed as expenditure to the assessee. On same principle, the income of the assessee be computed in rest of two years. Thus, these grounds of appeal are partly allowed.
26. Ground No.8 in the assessment year 2007-08:
27. In this ground, the assessee has pleaded that the ld.CIT(A) has erred in confirming the disallowance of business expenditure amounting to Rs.9,23,882/-.
28. Brief facts of the case are that the assessee has made the following donations:
i) Surat Municipal Corporation : Rs.7,62,128/-
ii) Surat Diamond Association : Rs.1,01,618/-
iii) Iskon Ahmedabad : Rs.1,01,618/-
iv) Ahmedabad Municipal Corpn : Rs. 16,939/-
Total Rs.9,23,882/-
29. Originally, it claimed deduction under section 80G of the Income Tax Act but failed to produce relevant material, therefore, it claimed deduction under section 37(1) of the Act. The ld.AO did not allow deduction to the assessee and the order of the AO has been confirmed by the ld.CIT(A).
30. We have duly considered rival contentions and gone through the record.
This expenditure was incurred by the assessee in order to perform its corporate social responsibility. Expenditure was given to Municipal Corporation, Surat and Ahmedabad and Surat Diamond Association. According to the assessee there were heavy rains and request came from Municipal Corporation. In order to fulfill the social responsibility, it has given the amounts. On due consideration of the facts, we are of the view that there cannot be any doubt about the genuineness of the payment. The payment was made to Municipal Corporation towards corporate social responsibility. This is an essential expenditure for keeping relationship smooth and the society at large. This expenditure deserves to be allowed to the assessee. Therefore, we allow this expenditure and delete disallowance.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 31
31. Ground No.9 (Assessment Year 2007-08), ground nos.4 and 5 (Assessment Year 2008-09) and Ground No.3 (Assessment year 2007-08 :
Department's appeal).
32. Brief facts of the case are that the assessee has debited the following expenditure in the assessment year 2007-08:
a) Library books : Rs.14,84,530/-
b) Club Membership Fees : Rs. 7,20,000/-
c) R&D Expenses : Rs. 2,20,003/-
d) Deferred Revenue Exps. : Rs. 7,55,689/-
Total Rs.31,80,222/-
33. According to the AO, the assessee failed to produce any detail with regard to this expenditure, hence, he disallowed claim of the assessee. Similar claim has been made in the assessment year 2008-09, which was also dismissed. On appeal, the ld.CIT(A) restricted such disallowance at Rs.25 lakhs and deleted the remaining amount. The assessee is impugning the confirmation of disallowance of Rs.25 lakhs whereas the Revenue is impugning part deletion made by the ld.CIT(A).
34. With the assistance of the ld.representatives, we have gone through the record. Such disallowance has come up for consideration for the assessment year 2005-06 and 2006-07. The AO made disallowance of Rs.18,10,423/- in the assessment year 2006-07. On appeal, theld.CIT(A) confirmed disallowance at Rs.15 lakhs and deleted balance. While considering this issue, we have observed that the assessee failed to give any evidence demonstrating nature of expenditure etc. However, considering volume of expenditure and part details submitted by the assessee i.e. incurred towards library books, R&D, deferred revenue expenses etc. we have confirmed the expenditure on adhoc basis at Rs.10 lakhs. The ld.AO shall give necessary effect in these years also. This will meet ends of justice.
35. Ground No.10 (Assessment year 2007-08): In this ground of appeal, the assessee has pleaded that the ld.CIT(A) has erred in confirming addition of Rs.10,52,773/-.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 32
36. Brief facts of the case that the assessee has made provision for doubtful debts amounting to Rs.10,52,773/- alleged to be outstanding against three parties viz. Ranbaxy Laboratories Ltd. Rs.3,72,431/-, Perfect Protene Rs.65,245/- and Dr.Reddy's Laboratories Rs.6,15,097/-. The ld.AO disallowed claim of the assessee by observing that provision of bad and doubtful debts is not allowable. The assessee ought to have written off this amount in its books of accounts. Before the ld.CIT(A), the assessee put reliance upon the decision in the case of Vijay Bank Vs. CIT reported in 190 taxman 257 (SC). After considering the case of the assessee, the ld.CIT(A) has upheld disallowance by observing as under:
"6.3 I have considered the facts of the case; assessment order and appellant's submission. Appellant claimed provision for bad and doubtful debts as allowable deduction which was rejected by the assessing officer since section 36 (1) (vii) does not allow provisions for bad debts. The reply of the appellant was quoted in the assessment order and as per that appellant clearly stated that only provision was created in the cases of doubtful debts. Since the deduction is specifically excluded for the provision for bad and doubtful debts by amendment to this section, appellant cannot claim such deduction. Appellant relied upon the decision of Vijaya bank for which different provisions are applicable. In the case of bank, the deduction is allowable even in respect of provisions. When statute is very clear that provision for bad and doubtful debts are not allowable as deduction, there is no question of allowing such claim to the appellant. Accordingly the disallowance made by the AO is confirmed."
37. With the assistance of the ld.representatives, we have gone through the record carefully. We find that the ld.CIT(A) has considered judgment of the Hon'ble Supreme Court and observed that it is distinguishable on facts. The assessee has not actually written off debts, and therefore, its claim cannot be allowed. The ld.CIT(A) has rightly upheld the disallowance. We do not find any error in this ground of appeal, hence it is rejected.
38. Ground no.11 (Assessment Year 2007-08); Ground no.6 (Assessment year 2008-09) and ground no.7 (Assessment year 2009-10). In these grounds of appeal, the assessee has pleaded that the ld.Revenue authorities erred in confirming disallowance of depreciation amounting to Rs.56,096/-, Rs.2,27,399/- and Rs.8,502/- in the assessment years 2007-08 to 2009-10.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 33 The ld.counsel for the assessee did not press these grounds, hence, they are rejected.
39. In this ground of appeal, grievance of the assessee is that the ld.CIT(A) has erred in confirming disallowance of Rs.86,77,000/-.
40. Brief facts of the case are that the assessee has given loans to its foreign subsidiary and made investment abroad in the foreign currencies. It has debited a sum of Rs.86,77,000/- on account of fluctuations in the foreign exchange rate. The ld.AO did not allow this claim of the assessee. Dissatisfied with the action of the AO, assessee carried the matter in appeal before the ld.CIT(A). Assessee made following written submissions before the ld.CIT(A):
"The assessee has debited an amount of * 86.77,0001- as forex rate difference on advances. The assessee was asked to explain allowability of the same. The assessee has furnished its written reply dated 23/12/2010 as under-
"We give below the details of the above expenses.
01/04/06 Loan to Dishman-Dubai 1082800
01/04/06 Shankai Chemical Industries park 144000
01/04/06 China Project 14840
31/03/07 Dishman Dubai 37400
31/03/07 Dishman Pharma -Solution AG loan 2977500
31/03/07 China Project 6820
31/03/07 Loon to Dishman Europe Ltd. 4413640
Total 8677000
As con be seen from the above table/ all the entries are in respect of foreign exchange loss on translation of foreign currency on account of loans / investments.
As per the Indian Company's Act we-have to prepare our books of account as provided in the provisions of the-company's act. The company's act also makes it mandatory for all the companies to follow ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 34 the accounting standards prescribed by the Institute of Chartered Accountants of India.
As per accounting standard AS11 of the Institute of Chartered Accountants of India, every company is required to restate all its foreign exchange asset and liabilities including loans and advances given, taken, receivables, payables etc; are required to be stated at-the exchange rate prevailing as on the date of the balance sheet. The gain or loss arising on translation of foreign currency assets as on the date of the balance sheet are charged to revenue i.e. debited or credited to profit and loss account.
The above entries are the entries-of the nature stated in the paragraphs above. We hereby request you not to disallow the same as these are the expenses wholly an exclusively incurred for the purpose of business, it is not of the personal or capital nature. The entries have to be passed in order to show the true and fair view of the results of the company and the assets and "At .the outset, the Appellant submits that now this issue is covered by the series- of decisions of the Supreme Court, which are relied upon and extract- of which is reproduced hereunder for ready reference:
• Oil & Natural Gas Crop.Ltd, vs. CIT322ITR 180 (SC) • CIT vs. Woodward Governor India IP.) Ltd. 312 ITR 254 ISO It is most, respectfully submitted that the Appellant has satisfied the test laid down by the Supreme Court of India in the case of Woodward (supra), and therefore the foreign exchange loss incurred during the year under consideration is allowable to the Appellant. The Appellant demonstrates how the test laid down by the Apex Court is satisfied:
(d) whether the system of accounting followed bv the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability figs been incurred before it is actually disbursed and brings Into: credit what is due, immediately it becomes due and before it is actually received:
Admittedly, the1 Appellant is following mercantile system of accounting and that is in fact not denied by the Id. AO.
(e) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bonatide;
Again admittedly, -from the beginning the Appellant is following mercantile system of accounting and there is not changed in it.
(f) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it;
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 35 Yes. In the immediate preceding A.Y.2006-07, the Appellant has earned foreign exchange gain amounting to Rs. 12,41,640/-(comprising Of Rs. 10,82,800/- + Rs. 1,44,000/- + Rs. 14,8401- )which has been offered for taxation as income in A.Y.2006-07. (pl. refer copy of grouping of other income for A.Y.2006-07 attached herewith on page nos.67 to 72 of written submission). Similarly, the foreign exchange loss amounting to Rs.74,35,540/- (comprising of Rs.37,400 + Rs.29,77,5001- + Rs.6,820/- + RS.44, 13,640/-) claimed on 31/03/2007 has been reversed on 01/04/2007 and the same has been offered for taxation in the next year A.Y.2008-09. (pi. refer copy of grouping of other income for A.Y.0809 attached herewith on page nos.73 to 75 of written submission).
It is also to be pointed out that the said amount was reversed on 01/04/2006, which is also the subject matter of addition during the year under consideration. Hence, there is double taxation, once the same has been taxed as income in A.Y.2006-07 and twice when the same has been disallowed during the year under consideration.'
(g) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains Yes. As it is discussed in above point the Appellant has declared foreign exchange gain in A.Y.2006.-07, the Appellant is consistent and definite in making entries in the books in respect of losses and gains as the case may be.
(h) whether "the method 'adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards:
•yes. The Appellant has following Accounting Standard AS - 11 issued by the Institute of Chartered Accountants of India.
(j) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation The system adopted by the Appellant is fair and reasonable and is not adopted with a view to reduce the incidence of taxation. In fact the Rule 115 of the Income Tax Rules provides that that all the assessee should convert their foreign exchange assets into Indian Rupees-on the last .day of the previous year. In CIT vs. R. B. Construction 202JTR 222 (AP)(FB), it has been held that if rule is not considered, the decision becomes per incuram. In as much as the Appellant has following the accounting treatment which is in conformity with Accounting Standard 11 issued by the ICAI. Various authorities have held that while determining alowability of an expenditure, accounting standard has a great persuasive value. Challqpalii Sugars Ltd. Vs. CIT (1975) (98I.T.R.
167), Further following authorities have held that foreign exchange fluctuation loss suffered on account of circulating capital or revenue account should be treated as revenue expenditure in the year in which the devaluation takes place when the method of accounting followed is mercantile.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 36 116 ITR 1 (SC) 154 ITR 460(Cal) 90 ITR 323 (Ker) 97/TO 125 (Ahd) (TM) @ 151 para 8.28 Accordingly, this itself establishes that the Appellant has adopted the system of accounting which is fair and reasonable and supported by the Accounting Standard AS-11, Rule 115 and various authorities and not adopted to avoid incidence of income tax. And in any case, as submitted by the Appellant, in earlier A.Y.2006-07 the Appellant has earned foreign exchange gain which has been offered for taxation, which itself shows that the system adopted by the Appellant is consistent, fair and reasonable.
10.2 Therefore, the Appellant most respectfully submits that foreign exchange -loss incurred, by the Appellant should be allowed and disallowance made by the ld. AO is required to be deleted in view of above made submission and the Apex court decisions."
41. The ld.First Appellate Authority has gone through these submissions of the assessee but did not concur. According to the ld.CIT(A), the loans/investments in foreign subsidiaries is on capital account and loss on account of capital assets ought not to be allowed under section 37 of the Income Tax Act. Before us, the ld.counsel for the assessee contended that the issue in dispute is covered in favour of the assessee by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Woodward Governor India Pvt Limited, 312 ITR 254. On the other hand, the ld.DR relied upon the order of the ld.CIT(A).
42. We have duly considered rival contentions and gone through the record carefully. Assessment order as well as order of the ld.CIT(A) are silent on the submissions made by the assessee. The assessee has contended that being company, it is required to prepare its accounts by following accounting standard AS-11 where it is required to restate all its foreign exchange assets and liabilities including loans and advances given, taken, receivables, payables etc. Gain or loss arising on transactions of foreign currency assets as on the date of balance sheet are charged to the revenue i.e. debited or credited to the profit & loss account. It is also pertinent to mention that the assessee has pointed out that in assessment year 2006-07 it has a gain of Rs.12,41,640/- which was offered for taxation. Similarly, foreign exchange loan loss amounting to Rs.74,35,540/- determined as on 31.3.2007 and claim has been ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 37 reversed on 1.4.2007. This has been offered for taxation in the next assessment year i.e. A.Y.2008-09. If the ld.Revenue authorities are accepting the gains on account of foreign exchange fluctuations as taxable then how and why the loss could be denied to the assessee ? No specific finding has been recorded about the nature of loans and how such losses on account of fluctuations loss could be disallowed. Therefore, taking into consideration all the facts that ld.Revenue authorities have failed to examine the issue by keeping in mind taxation of gains in earlier and subsequent years on the same loans, and failed to record any specific finding as to how in such circumstances the loss could be denied, we deem it appropriate to set aside this issue to the file of the AO for re-adjudication. The ld.AO shall take into consideration the specific pleadings made by the assessee pointing out taxation of gain in the assessment year 2006-07 and 2008-09, and then decide the issue in the light of Hon'ble Supreme Court's judgment cited (supra). We set aside this issue on the ground that, about taxability of gain has not been examined by the AO. Thus, veracity of this fact needs to be verified. On account of this reason, the issue is being set aside to the file of the AO for re-adjudication afresh in accordance with law.
43. Ground no.13 (Assessment year 2007-08); ground no.8 (assessment year 2008-09) and ground no.9 (assessment year 2009-10). In this ground the assessee has prayed that the ld.CIT(A) has erred in confirming disallowance of Rs.3,93,000/-, Rs.69,552/- and Rs.1,21,423/- which were disallowed by the AO with the aid of section 14A r.w.s Rule 8D of the Income Tax Act, 1961 and Income Tax Rules, 1962.
44. Brief facts of the case in the assessment year 2007-08 are that the assessee has shown dividend income of Rs.2,44,60,691/- which has been claimed as exempt income under section 10(34) of the Act. According to the ld.AO, no expenditure was offered by the assessee being attributable to earning of such exempt income. Therefore, he issued a show cause notice inviting the explanation of the assessee as to why expenditure ought not to be disallowed with help of Rule 8D. The assessee filed detailed reply, and after considering the case of the assessee, the ld.AO has worked out administrative cost at 0.5% of average investment of Rs.1.36 lakhs and partly interest ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 38 expenditure he made an estimated disallowance in way at Rs.3,93,000/- in the assessment year 2007-08. Under similar lines, he has made disallowance in other two years.
45. Before the ld.CIT(A), it was contended that Rule 8D is not applicable in the assessment year 2007-08 because it has been brought in the statute book w.e.f. assessment year 2008-09. The ld.CIT(A) took cognizance of this fact, but made disallowance at the same amount on an adhoc basis.
46. With the assistance of the ld.representatives, we have gone through the record. It is pertinent to note that the assessee has demonstrated interest free funds available with it. It was pleaded before the ld.CIT(A) that shareholders fund is outstanding at Rs.26,960.66 lakhs as on 31.3.2007, whereas the investment was at Rs.13,129.22 lacs. It was also pointed out that the assessee has made investment in shares of CAD Middle East Pharmaceuticals Industries LLC of Rs.177.10 lakhs; Dishman Pharma Solutions AG, Switzerland of Rs.10,507.50 lakhs, Dishman Pharmaceuticals & Che. (Shanghai) Co. Ltd. of Rs.1,469.07 lakhs. The dividend income of these companies was taxable, and they cannot be considered for Rule 8D. It was also brought to our notice of the ld.CIT(A) that the assessee has net profit of Rs.6,190.974 lakhs hence, it was demonstrated that the assessee was having more funds than the investment and no interest expenditure is to be attributable for earning such dividend income. The ld.CIT(A) considered this aspect but on an estimated basis confirmed the adhoc disallowance. Before us, the ld.counsel for the assessee made reference to the following decisions:
a) CIT Vs. Torrent Power Ltd., 363 ITR 474 (Guj);
b) CIT Vs. Suzlon Energy Ltd., 354 ITR 630 (Guj)
c) CIT Vs. Gujarat Power Corporation Ltd., 352 ITR 583 (Guj)
d) CIT Vs. Hitachi Home & Life Solutions (I) Ltd., 41 taxmmann.com 540 (Guj);
e) CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom)
f) Munjal Sales Corporation Vs. CIT, 298 ITR 298 (SC);
and submitted that no disallowance under section 14A of the Act to be made.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 39
47. We have duly considered rival contentions and gone through the record carefully. An identical issue came up before us in the assessment year 2006- 07 also. No doubt the assessee is having sufficient interest free funds and according to the proposition in the decisions referred above, if an assessee has interest free funds more than the investment then no disallowance for interest expenditure in making investment, which would result in exempt income be made. However, in the assessment year 2006-07, we have confirmed the disallowance on account of administrative expenditure and other issues at Rs.3.00 lakhs. Considering of our finding in the assessment year 2006-07 and overall facts and circumstances of the case, we confirm the adhoc disallowance of Rs.3 lakhs in the assessment year 2007-08 and equivalent to the amount confirmed by the ld.CIT(A) in the assessment years 2008-09 and 2009-10. In other words, grounds of appeal of the assessee in the assessment year 2007-08 are partly allowed, whereas grounds in the assessment year 2008-09 and 2009-10 are rejected.
48. Ground Nos.14 to 21 in the Asstt.Year 2007-08; ground nos.12 to 15 in the Asstt.Year 2008-09 and ground nos.10 to 13 in the assessment year 2009- 10: In these grounds of appeal, assessee is aggrieved by the Action of the Revenue authorities in confirming disallowance of Rs.1,56,69,776 (Asstt.Year 2007-08), Rs.82,92,297/- (Asstt.Year 2008-09) and Rs.44,58,072/- (Asstt.Year 2009-10) under section 40(a)(i) of the Act and disallowance of Rs.25,78,986 out of reimbursement of administrative expenditure.
49. Though facts on vital points are common in all three years on this issue, we are taking facts from Asstt.Year 2007-08 for the purpose of reference. The AO on perusal of the details noticed that assessee has debited following expenditure Sr. Particulars Amount No.
a) Reimbursement of Administrative 1,47,37,061/-
Services to Dishman Europe Ltd.
b) Advertisement expenses 7,71,512/-
c) Conference charges 1,32,282/-
ITA No.955 /Ahd/2012 and Others
ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 40
d) List Fees 28,921/-
Total 1,56,69,776/-
50. The ld.AO was of the view that the assessee has remitted the above amount to non-resident without deducting TDS under section 195 of the Act, which according to the assessee, it was not supposed to do so in view of section 195 r.w. DTAA of those countries. The ld.AO did not accept this submissions of the assessee and disallowed an amount of Rs.1,56,69,776/- under section 40(a)(ia) of the Act, which was confirmed by the ld.CIT(A).
51. It has been brought to our notice that similar issue has already agitated in the assessment year 2006-07 before the Tribunal. Accordingly, both the parties reiterated their respective submissions as were made for the assessment year 2006-07.
52. After hearing both the sides, we find that similar issue arose in the case of assessee in the assessment year 2006-07 and the Tribunal in ITA No.773/Ahd/2011 order dated 23-5-2018 allowed the claim of the assessee. Both the parties before us agreed that facts in the present case also similar to the assessment year 2006-07. Therefore, we deem it appropriate to take note of the finding of the Tribunal in the assessment year 2006-07. It reads as under:
"80.We have duly considered rival contentions and gone through the record. A perusal of the breakup of this expenditure would indicate that expenditure incurred by the assessee could be divided into three categories viz. (a) payments towards professional service charges, (b) reimbursement of administrative services to Dishman Europe Ltd., and
(c) reimbursement of insurance and foreign ravel expenditure to Dishman Europe Ltd. Before making an analysis of this expenditure, we would like to take into consideration decision of Hon'ble Supreme Court in the case of GE India Technology (supra). Hon'ble Supreme Court has propounded in this decision that a person can be held liable to deduct TDS while making payment to a non-resident if the payments made by him consists of some element of income chargeable to tax under the provisions of Income Tax Act, 1961. The ld.Revenue authorities were of the view that if the assessee has been making payment to a non-
resident then either it should take a certificate from the AO under section 195(2) or deduct TDS on such payments. For this view, they are harping upon the decision of Hon'ble Karnataka High Court in the case of Samsung Electronics (supra). However, the Hon'ble Supreme ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 41 Court did not concur with this view of Hon'ble High Court and observed that expression "chargeable under the provisions of the Act" is being employed under section 195(1) and if element of income is involved in the payments made by the assessee only then the TDS has to be deducted. Keeping in view this decision in mind, let us examine the nature of payment made by the assessee.
81. Let us take first category of payment made towards professional charges. According to the assessee, non-resident was not having any permanent establishment in India or any business connection. Thus, such sum is not taxable in India and no question of deducting TDS would arise. Reference to circular no.786 dated 7.2.2000 is being made. The AO failed to bring on record any material showing that recipient is taxable in India. With regard to other two items i.e. reimbursement of administrative charges and reimbursement of insurance and foreign travel expenses are concerned, these expenses have been reimbursed to Dr.Henk Pluim who was responsible for procurement, chemical development and technological upgradation etc. These amounts have been calculated on the basis of services rendered and time devoted by him to three concerns viz. Dishman UK, Dishman India and Dishman USA. The AO was of the view that allocation of expenditure was on higher side. He also observed that in subsequent year such expenses have been allocated amongst these concerns in the ratio of 40:40:20 based on advice given by the group chairman. On the basis of that ratio, the ld.AO has allocated this expenditure in this year also and worked out allowance expenditure out of Rs.81,02,622/- debited under the head "Administrative services". He observed that it should be allowed at Rs.49,89,517/-. A perusal of the assessment order would indicate that the ld.AO has assigned two reasons for making disallowance, viz. (i) non-deduction of tax, and (ii) higher allocation of expenditure in the hands of the assessee which were incurred on Dr.Henk Pluim. As far as first party is concerned, these are simply reimbursement of administrative expenses incurred by Dr.Henk Pluim outside India. They did not involve any element of income and TDS was not required to be deducted. As far as second party is concerned, the ld.AO failed to bring any material on record to justify the administrative expenses required to be incurred for availing services of Dr.Henk. It is totally in the domain of the businessman and the AO cannot dictate terms how much salary and other expenses are necessary for availing the services. This disallowance made by the AO is not sustainable. The ld.CIT(A) ought to have not confirmed disallowance made by the AO. We allow this ground of appeal and delete addition of Rs.1,12,01,869/-.
53. Since no disparity of the facts have been pointed out by the ld.DR on this issue, we following the order of the Tribunal cited supra for the assessment year 2006-07, delete the impugned additions and allow the grounds of appeals of the assessee.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 42
54. Ground no.22 to 24 of the assessee's appeal is against confirmation of addition of Rs.3,10,08,567/- out of total addition of Rs.3,82,47,265/- made under section 2(22)(e) of the Income Tax Act. Similarly, in ground no.4 in the Revenue's appeal for the assessment year 2007-08, grievance of the Revenue is that the ld.CIT(A) has erred in deleting the addition of Rs.72,38,698/- added by the AO with help of section 2(22)(e) for the loan taken from the B.R. Laboratories.
55. Brief facts in this regard are that the AO noticed that the assessee has substantial interest in M/s.Bhadra Raj Holdings P.Ltd., and the B.R Laboratories Ltd. by way of shareholding. AO also noticed that assessee company has also indulged in monetary transactions in the forms of loans and advances with these two companies. The AO noticed that the assessee has taken loan of Rs.11,25,268/- on 14.12.2006 and Rs.1,19,87,744/- on 21.2.2007 from B.R. Laboratories Ltd., and the balance sheet of B.R. Laboratories Ltd. showed reserve of Rs.72,38,698/- as on 31.3.2007. Therefore, the AO treated the entire reserve fund of Rs.72,38,698/- as deemed dividend in the hands of the assessee under section 2(22)(e) of the Act. Similarly, the AO also observed that a loan of Rs.15,75,00,000/- being given to the assessee company by the B.R. Holding P.Ltd. In the balance sheet of this company showed a reserve fund of Rs.3,10,08,567/- as on 31.3.2007, which the AO treated as deemed dividend in the hands of the assessee. Assessee contended that assessee is not a registered shareholder of B.R. Laboratories, and there was no question of deemed dividend in the case of the assessee. To this, the assessee placed reliance upon the decision of ACIT Vs. Bhaumik Colour P.Ltd., 118 ITD 1 (Mum)(SB). As regards funds received from Bhadra Raj Holdings P.Ltd. was concerned, it was contended before the AO that transactions with this holding company were in the nature of current accommodation adjustment entries as was evident from the assessee's ledger in the books of Bhadra Raj Holdings Pvt., and therefore, no addition can be made. Reliance was placed on the judgment of Hon'ble Gujarat High Court the case of Schutz Dishman Bio-tech P.Ltd., Tax Appeal No.958 & 959 of 2015 (Guj). It was further contended that in the case of Bhadraj Raj Holdings P. Ltd. dividend was already distributed and adjustment of the same be given. However, the ld.AO did not accept this explanation of the assessee, and ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 43 treated both these amounts i.e. Rs.72,38,698/- and Rs.3,10,08,567/- standing as reserve funds in the accounts of B.R. Laboratories and Bhadraj Holdings Pvt. Ltd as deemed dividend income. Dissatisfied with the addition, the assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A) however deleted addition in respect of deemed dividend on account of loan taken from B.R. Laboratories and confirmed the addition in the case of the loan taken from Bhadra Raj Holdings P.Ltd.
56. Both the assessee and Revenue are before us challenging respective additions/deletions i.e. Revenue is challenging deletion of loan of Rs.72,38,698/- received from B.R. Laboratories and the assessee is challenging confirmation of addition made by the AO of Rs.3,10,08,567/- received from Bhadra Raj Holdings Pvt.Ltd.
57. So far as ground no.5 of Revenue's appeal is concerned, we find that similar issue has been examined in the assessment year 2005-06 wherein we have followed the orders of the ITAT in earlier years in the case of SDBL. Even the Hon'ble High Court has confirmed the order of the ITAT in tax appeal no.958 and 959 of 2015. It is necessary to take note of the relevant portion of the order of the Tribunal on this issue. It reads as under:
"18. Brief facts of the case are the AO has observed that during the assessment proceedings of A.Y 2006-07, it was seen that Schutz Dishman Bio-tech P.Ltd. ("SDBPL" for short) has given loans to the assesee. Assessee holds 22.3% share holding of SDBPL. Thus, the ld.AO was of the view that loans given to the assessee deserves to be treated as deemed dividend under section 2(22)(e) of the Act. Similarly, the assessee has received loan from B.R. Labs P.Ltd. amounting to Rs.16,03,933/-. Both these loans were treated by the AO as deemed dividend in the hands of the assessee and addition of Rs.2,41,04,933/- was made under section 2(22)(e) of the Act in reassessment order. Dissatisfied with the addition, the assessee carried the matter in appeal before the ld.CIT(A).
19. It contended that similar issue was taken in the hands of SDBPL. Dispute travelled upto the ITAT, and it was held that assessee and SDBPL were maintaining current accounts. These were not in the nature of loans which could be treated as deemed dividend. With regard BR Laboratory, it was contended that it is not a registered share holder of BR Laboratory, and therefore, in view of Special Bench decision of the ITAT in the case of ACIT Vs. Bhaumik Color P.Ltd., 118 ITD 1 (Mum)(SB) such loans are not to be treated as deemed dividend.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 44 The ld.consel for the assessee submitted that in the case of SDBPL issue travelled to the Hon'ble High Court in Tax Appeal No.958 of 2015 wherein Hon'ble High Court upheld order of the ITAT by observing that the Tribunal has rightly held that there are large number of adjustment entry in the accounts between two entities; the amounts were not in the nature of deposits, but merely adjustments and section 2(22)(e) of the Act would not be applicable. The ld.counsel for the assessee further drew our attention towards the order of the ITAT passed in the assessee's own case for the Asstt.Year 2003-04 and 2040-05. He placed on record copy of the Tribunal's order in ITA No.2015 & 2125/Ahd/2012. It appears that in these assessment years also there must be some reopening that is why second round of litigation is there. The ld.DR on the other hand relied upon order of the AO. He failed to controvert submission made by the ld.counsel for the assessee.
20. We find that in the Asstt.Years 2003-04 and 2004-05, the Tribunal has considered identical issue in assessee's own case. Following finding of the Tribunal deserves to be noted:
"7. The Id. CIT(A) was convinced after verification that the issue is covered by the decision of the First Appellate Authority. The relevant findings of the Id. CIT(A) for A.Y. 2003-04 reads as under:-
"It is not in dispute that appellant had lot of business transactions with M/s Schutz Dishman Biotech Ltd. There were transactions of purchase of raw material as well as temporary accommodation deposits. Assessing officer of M/s Schutz Dishman Biotech Ltd initiated action under section 201 (1) by treating the transaction with appellant company as deemed dividend and the said company was treated as assessee in default for not deducting TDS in assessment year 2004-05 and 2005-06. In both the years, CIT(A)-XXl, Ahmedabad by order dated 28-09-2010 held that transactions entered into by the appellant which its associate concern would not attract the provisions of section 2(22)(e) of the act. And accordingly there would not be any obligation to deduct tax under section 194 and therefore the assessee cannot be treated as the assessee in default within the meaning of section 201(1) of IT act. The relevant extract of the said appeal order in para-six is quoted below-
"There is large number of debit and credit transactions. Meaning thereby, the appellant has given and received funds as and when required to and from its associate concern. It is not on account whereby loans and advances have been given to the associate concern. It is on account payments in the nature of current adjustment accommodation account wherein there is a movement of funds both ways, on the basis. Unlike transactions of loan and advances, the movement funds is both ways and the same is more in the nature of current account rather than a loan account. Transactions in the nature of loans and advances are usually very few and for a longer duration. In the facts of the present case, ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 45 the nature of the transaction as in the form of current accommodation, adjustment account and therefore the same is not a transaction in the nature of loans and advances. In absence of any loans and advances, the provisions of section 2 (22) (e) of the act in respect of deemed dividend are not attracted and therefore the question of deduction of tax at source also would not arise."
Since these transactions between appellant and its associate concern M/s Schutz Dishman Biotech Ltd was there since assessment year 2004-05 onwards and during the year the debit balance in the appellant's account was substantially reduced. Since CIT (A) did not find the transactions between appellant and its associate concern as loans and advances given, logically the same cannot be loans and advances received by the appellant.
It is not in dispute that in the books of the associate concern, there are five accounts relating to various transactions in the name of appellant and six accounts in the name of associate concern in the books of appellant. In these many accounts where a large number of debit and credit entries involving different business transactions. Apart from this, there are certain financial . transactions also in these accounts. The movement of funds was not for any period but was frequent and in both ways. Respectfully following the decision of Id CIJ (appeal) in the case of associate concern holding that transactions are not in the nature of loan and also decisions of jurisdictional ITAJ relied upon by the appellant, the addition on account of deemed dividend cannot survive in this year."
Facts relating to the financial transactions with SDBPL are identical to the aforesaid assessment year in which the issue is decided in favour of the appellant. In view of this, by following the appeal order in assessment year 2006-07, addition on account of deemed dividend in respect of financial transactions with SDBPL made by the assessing officer is not confirmed.
8. A perusal of the aforementioned findings of the Id. CIT(A) shows that he has followed the findings given in A.Y. 2006-07 wherein the First Appellate Authority has followed the decision taken in the case of SDBPL. We find that the appeal of SDBPL travelled up to the Hon'ble Jurisdictional High Court of Gujarat wherein the Hon'ble High Court was seized with the following question of law for consideration;-
"Whether on facts and in law the ITAT wax right in cancelling the order passed u/s 201(1) and 201 (A) of the Act, without appreciating that the amount advanced was in the nature of deemed dividend u/s 2(22)(e) of the Act'.'"
9. And the relevant findings of the Hon'ble High Court reads as under:-
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 46
4. It can thus be seen that the Commissioner as a matter of fact found that the payments were not in the nature of current adjustment. There was movement of fund both ways on need basis. The transactions in the nature of loans and advances are usually very few in number whereas in the present case, such transactions are in the form of current accommodation adjustment entries. The Commissioner therefore, held that the transactions were not in the nature of loans and advances. The Revenue carried the matter in appeal. The Tribunal concurred with the view of the. CIT (Appeals) and held that the amounts were not in the nature of Inter Corporate Deposits and were therefore, not to be treated as loans or advances as contemplated in section 2(22)(e) of the Act.
5. The issue is substantially one of appreciation of facts. When the CIT(Appeals) as well as Tribunal concurrently held that looking to large number of adjustment entries in the accounts between two entities, the amounts were not in the nature of loan or deposit, but merely adjustments, application of section 2(22)(e) of the Act would not arise.
Consequently, no question of law arises. Tax appeals are dismissed."
21. Respectfully following order of the Tribunal in assessee's own case, we do not find any merit in this appeal. It is rejected."
According to this finding, section 2(22)(e) of the Act is not applicable on the transactions between these two parties. Considering our finding in the Asstt.Year 2005-06, we do not find any merit in this ground of appeal of Revenue. It is rejected.
58. So far as grounds of assessee are concerned, the ld.counsel for the assessee submitted that inter corporate deposits made by the assessee- company and the Bhadraja Holdings P.Ltd. are in the nature of current accommodation adjustment entries not in the nature of loans and advances so as to attract provisions of section 2(22)(e) of the Act. The assessee was maintaining a sort of current account with M/s.Bhadra Raj Holdings P.Ltd. and the assessee has not taken any loans and deposits from its sister concern during the year. It is therefore prayed that no addition be made under section 2(22)(e) of the Act. Alternatively, it is pleaded that at the most what could be added was only the accumulated amount of profit & loss account of the payer company and not the entire amount of alleged loan or advances. It is submitted that M/s.Bhadra Raj Holdings P.Ltd. has already declared and distributed dividend of Rs.6,90,00,000/- and therefore while making addition under section 2(22)(e) of the Act in the hands of the assessee, adjustment against actual distribution of dividend is required to be given and only net ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 47 amount of deemed dividend could be added. If this is the position, then as per clause (iii) of section 2(22)(e) of the Act set off of the said sum be granted, consequently, no addition survives under section 2(22) of the Act.
59. On the other hand, the ld.DR submitted that the assessee-company is having 40% shareholding in the Bhadra Raj Holdings P.Ltd. Nature of accounts showed that it was not a running account as the funds moved from one direction only i.e. the assessee was getting funds from 1st April, 2006 till 5th September, 2006 and thereafter from 5th September, 2006 there were cash outflow in the form of repayment till 27th March 2007. Therefore, it showed that transactions are nothing but loan transactions and cannot be treated as inter-corporate deposits or current account with associate concern. He relied on orders of the Revenue authorities.
60. We have heard both the parties and gone through the record. We find that in the asstt.year 2006-07, we have considered similar transactions between the assessee and the SDBPL. When the issue travelled to the Hon'ble High Court in earlier year, then it was pointed out that these were not simplicitor loan transactions, rather these are the business transactions whereby the current amount is being maintained. Both parties have given amounts to each other and these are adjustment entries. Considering the current account and number of transactions, and since the Hon'ble High Court has upheld the finding of the Tribunal in earlier years that these are not loans, which could be brought in the ambit of section 2(22)(e) of the Act for the purpose of treating it as deemed dividend, we respectfully following the order of the ITAT in the assessment year 2006-07 as well as judgment of the Hon'ble High Court in earlier years, are of the view that advance given to M/s.Bhadra Raj Holdings P.Ltd. cannot be treated as deemed dividend. We allow this ground of appeal.
61. Ground Nos.25 to 27, ground no.16 to 19 and 14 to 16 (assessee's appeals); ground no.5 to 8, ground no.4 to 6 and ground no.2 (in Revenue's appeal) for the assessment years 2007-08 to 2009-10 respectively. The issue agitated in all these years and all these grounds relates to determination of ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 48 correct amount for grant of deduction under section 10B of the Income Tax Act, 1961.
62. After hearing both the sides, we find that this issue is similar to issue raised in assessment year 2006-07, wherein we allowed the claim of the assessee. Relevant paragraphs of the order of the Tribunal for Asstt.Year 2006-07 reads as under:
"46. Brief facts of the case are that in the return of income, the assessee has claimed deduction under section 10B of the Act at Rs.33,19,35,229/- in respect of EOU units at Bavla and Naroda. The assessee has submitted audit report inform No.56G of the Act. On analysis of the returns and documents, the ld.AO as of the view that the assessee is not entitled for deduction under section 10B on some of the items. Accordingly, he made adjustments and reduced deduction by a sum of Rs.10,21,60,135/-. In other words, the ld.AO has computed the deduction at Rs.22,97,75,094/-. Six points which have been considered by the AO for making adjustment in the computation of deduction are as under:
i) Unrealised export excluded from the export turnover;
ii) Other income not considered for eligible deduction u/s 10B ;
iii) Custom Duty allocated on the basis of raw material imports in EOUs and Non-EOU ;
iv) Packing expenses and packing material expenses allocated in proportion to quantum of sales in EOUs and Non-EOU ;
v) Clearing and Forwarding exports expenses allocated in proportion to quantum of sales in EOUs and Non-EOU ;
vi) Allocation of Administrative and Interest expenses in proportion to.
total sales in EOUs and Non-EOU.
47. Out of the above six points, the assessee is challenging order of the ld.CIT(A) on issue no.1 and 2 whereas Revenue is challenging order of the CIT(A) on issue nos.3 to 6.
48. With the assistance of the ld.representatives, we have gone through the record carefully. There is no dispute with regard to the proposition that assessee is entitled for grant of deduction under section 10B of the Act. The dispute relates to quantification of the deduction. First we take the issue agitated by the Revenue in its grounds of appeal. In the first fold of grievance, the Revenue has contended that the AO has rightly allocated custom duty on the basis of raw-material imports in EOU and non-EOU units. The AO was of the view that custom duty paid by the assessee and debited in the accounts ought to be allocated on the imports made for the EOU units. The ld.CIT(A) after making a detailed analysis held that there was no custom duty on the imports made required to be consumed in EOU units. If that be a fact, then how the AO could allocate such amount to such units ? The assessee has ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 49 been maintaining separate books of accounts and debited actual expenditure in each unit. Therefore, the ld.CIT(A) is justified in holding that custom duty which is not incurred by the assessee on the imports of raw-material meant for EOU units cannot be allocated. We do not any merit in this fold grievance raised by the Revenue. It is rejected.
49. Next three fold grievances are common. The grievance of the Revenue in these folds of grievances relates to allocation of expenditure incurred towards packing material, clearing and forwarding expenses, administrative and interest expenses. It is pertinent to observe that where mixed accounts and common management is there, then certain overhead expenses required to be allocated at the level of HO, but if an assessee is maintaining separate books accounts and demonstrate all expenditure incurred by it; identifiable and allocatable, then on estimate basis such expenditure cannot be allocated on the basis of turnover or quantum of sales. The ld.CIT(A) has observed that accounts of the assessee were audited. It has maintained separate accounts. The AO did not pin-point specific defects in the expenditure debited by the assessee. In other words, if the AO is able to lay his hand on a particular expenditure, which is meant for EOU units, but debited either to the HO or in non-EOU units, then probably he would be justified in allocating expenditure on estimated basis. But no such exercise has been carried out by the AO, therefore, we do not find any merit in this ground of appeal. Grounds of appeal raised by the Revenue in this connection are rejected.
50. As far as first fold grievance of the assessee is concerned, the ld.AO has excluded unrealized exports from export turnover. The ld.CIT(A) confirmed his action.
51. The ld.counsel for the assessee submitted that no doubt unrealized export has been excluded from the export turnover, then simultaneously these amount should be excluded from the total turnover while computing the eligible amount for grant of deduction under section 10B.
52 We find force in this contention, because if an item does not fall in export turnover, then it is to be excluded from total turnover also. We direct the AO to exclude unrealized exports from the export turnover as well as from total turnover for computing deduction admissible under section10B of the Act.
53. In the next fold grievance, assessee has pleaded that the ld.CIT(A) has erred in not including other income in the eligible profit for deduction under section 10B. The ld.counsel for the assessee at the very outset submitted that this issue is squarely covered in favour of the assessee by the order of Special Bench of the ITAT in the case of Maral Overseas Ltd. Vs. CIT, 136 ITD 177. He further contended that ITAT, Ahmedabad has followed this decision in the case of Sonic Technology P.Ltd. rendered in ITA NO.2665 & 2720/Ahd/2011. On the other hand, the ld.DR relied upon the orders of the ld.CIT(A).
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 50
54. We have duly considered rival submissions and gone through the record. We find that Special Bench of ITAT in the case of Maral Overseas Ltd. (supra) has considered this issue. The ld.AO has been harping upon the decision of Hon'ble Supreme Court in the case of Liberty India Ltd. Vs.CIT, 317 ITR 218 in coming to the conclusion that other incomes viz. sale of scrap etc. are not to be considered as derived from export activities. It is pertinent to observe that in the case of Sonic Technology P.Ltd. the assessee has claimed deduction after including interest income, sale of scrap, sundry balance written off, exchange rate fluctuations and incremental turnover and disbursement of subsidy from the government. These items were held to be eligible for grant of deduction under section10B of the Act. The ITAT in the case of Sonic Technology has further observed that order of the Special Bench Indore Bench has been upheld by the Hon'ble Delhi High Court. Discussion made by the ITAT qua this issue reads as under:
"11. We also find that the decision of Special Bench of Tribunal in the case of Maral Overseas Ltd. (supra) was upheld by Hon'ble Delhi High Court in the case of Hritnik Export Pvt. Ltd.(ITA No. 219/2014 & 239/2014 order dated 13.11.2014) wherein Hon'ble High Court dismissed the appeal of Revenue by holding as under:-
By way of these appeals, the Revenue has challenged the orders passed by Income Tax Appellate Tribunal (Tribunal, for short) dated 11th September, 2013 and 24th October, 2013 relating to assessment years 2008-09 and 2009-10, respectively. Tribunal has followed the decision of their Special Bench in the case of Maral Overseas Ltd. versus Additional Commissioner of Income Tax decided on 20th March, 2012, in which it has been held:-
"78. Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100% EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export.
The formula is as under :-
Profit of the business of the Undertaking X Export turnover Total turnover of business carried out by the undertaking
79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, not-
with-standing the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 51 eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the ''profits of the business'' which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub- section (4) of section 10A/10B of the Act is a complete code providing the mechanism for computing the ''profits of the business'' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar; 284 ITR 584 had approved the . A.Y. 2007-08 principle laid down in the Special Bench decision in International Reserarch Park Laboratories v. ACIT (supra). In the asses see's own case the I.T.A.T. in the preceding years, after considering the decision in the case of Liberty India held that provisions of section 10B are different from the provisions of section 80IA wherein no formula has been laid down for computing the eligible business profit.
80. In view of the above discussion, question no. 2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B( 1) read with section 10B(4) of the Act."
The aforesaid view is in consonance with the decision of this Court dated 1st September, 2014 passed in ITA 438/2014, Commissioner of Income Tax-VII versus XLNC Fashions in which this court has held as under :-
"Deduction under Section 10B of the Income Tax Act, 1961 (Act, in short) is to be made as per the formula prescribed by Sub-Section (4), which reads as under:
"10B. Special provision in respect of newly established hundred per cent export- oriented undertakings-
.........
...........
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 52 (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking".
Sub-section (4), therefore, is the special provision which enables the assessee to compute the profits derived from the export of articles or things or computer software. We do not see any conflict between Sub- section (1) and Sub-section (4) to Section 10B, as Sub- section (1) states that deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking from the export of articles or things or software would be eligible under the said Section. Sub- section (1) is a general provision and identifies the income which is exempt and has to be read in harmony with Sub-section (4) which is the formula for finding out or computing what is eligible for deduction under Sub-section (1). Neither of the two provisions should be made irrelevant and both have to be applied without negating the other. In other words, the manner of computing profits derived from exports under Sub-section (1), has to be determined as per the formula stipulated in Sub-Section (4), otherwise Sub-section (4) would become otise and irrelevant.
The issue in question in this appeal which pertains to the Assessment Year 2009-10, relates to duty draw back in the form of DEPB benefits. As per Section 28, clause (iii-c), . A.Y. 2007-08 any duty of customs or excise repaid or repayable as drawback to a person against exports under Customs and Central Excise Duties Draw Back Rules, 1971 is deemed to be profits and gains of business or profession. The said provision has to be given full effect to and this means and implies that the duty draw back or duty benefits would be deemed to be a part of the business income. Thus, will be treated as profit derived from business of the undertaking. These cannot be excluded.
Even otherwise, when we apply Sub-section (4) to Section 10B, the entire amount received by way of duty draw back would not become eligible for deduction/exemption. The amount quantified as per the formula would be eligible and qualify for deduction/exemption. The position is somewhat akin or close to Section 80HHC of the Act, which also prescribes a formula for computation of deduction in respect of exports.
In view of the aforesaid, we do not find any merit in the present appeal and the same is dismissed."
Karnataka High Court in Commissioner of Income Tax, Central Circle versus Motorola India Electronics (P) Ltd., ITA No. 428/2007, decided on 11.12.2013, reported as [2014] 46 taxmann.com 167 (Karnataka) has also taken a similar view, wherein it has been held:-
"By Finance, Act, 2001, with effect from 01.04.2001, the present Sub- section (4) is substituted in the place of old Sub-section (4). No doubt Sub- section 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 53 Therefore, it excludes profit and gains from export of articles. But Sub- section (4) explains what is says that profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary there is specific provisions like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking."
In view of the aforesaid position, the appeals have to be dismissed. We order accordingly.
12. We thus find that the decision of Special Bench of Tribunal in the case of Maral Overseas (supra) wherein the ratio that once on income forms part of the business of the income of the eligible undertaking of the Assessee, the . A.Y. 2007-08 same cannot be excluded from the eligible profits for the purpose of computing deduction u/s. 10B of the Act, has been upheld by Hon'ble Delhi & Karnataka High Courts in the case of Hritnik Exports Pvt. Ltd. & Motorola India Electronics Pvt. Ltd."
55. Respectfully following the above, we allow second fold of grievance raised by the assessee in its ground no.27 and direct the AO to include this other income in the eligible profit for the purpose of grant of deduction under section 10B of the Act.
56. In view of the above discussion, we do not find any merit in the appeal of the Revenue. It is dismissed."
63. Before us no disparity of the facts has been pointed out by the ld.DR in these years in this behalf. Therefore, following our order for the assessment year 2006-0 in assessee's own case we direct the AO to allow the claim of the assessee under section 10B in accordance with our directions contained in order for the assessment year 2006-07. Accordingly, we allow the grounds of appeals of the assessee and reject that of the Revenue.
64. In Ground No.28 for the assessment year 2007-08 the assessee is challenging confirmation of addition under section 14A while computing book profit.
ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 54
65. Brief facts in this behalf are that assessee has shown dividend income of Rs.2,44,60,691/- which was claimed as exempt income under section 10(34) of the Act. However, assessee has not disallowed any expenditure for earning such income. Assessee explained since business of the assessee is indivisible expenditure incurred could not be apportioned and therefore cannot be disallowed. The ld.AO held that this was against the provisions of section 14A, and he accordingly calculated disallowance under section 14A read with rule 8D at Rs.3,93,000/-. Thereafter, while calculating book profit under section 115JB of the Act, the ld.AO increased the book profit by Rs.3,93,000/-. The assessee has challenged including this disallowance under section 14A in the book profit before the ld.CIT(A), but did not succeed. Issue is now agitated before us.
66. The ld.counsel for the assessee submitted that disallowance under section 14A cannot be added to book profit under section 115JB in view of the decision of the Tribunal in the case of ACIT Vs. Suzlon Energy Ltd., ITA No.901/Ahd/2011 wherein the Tribunal has followed orders of the co-ordinate bench in the case of Cadila Pharmaceuticals Ltd. Vs. ACIT, ITA No.1146 and 1518/Ahd/2011 and Atul Ltd. Vs. ACIT, ITA No.8/Ahd/2013. He further submitted that it is settled position that calculation of book profit under MAT provisions should be without resorting to calculation made under section 14A read with rule 8D. Therefore, it is submitted by the ld.counsel that no adjustment is called for in respect of disallowance under section 14A while working out book profit under section 115JB of the Act.
67. On the other hand, the ld.DR while supporting the orders of both the Revenue authorities contended that provisions of section 14A read with Rule 8D are applicable for calculation of profits both under MAT and normal provisions, and therefore, both the authorities below included disallowance under section 14A in the book profit of the assessee.
68. We have considered rival contentions and gone through the record. We find that similar issue came up before the Special Bench, ITAT, Delhi in the case of ACIT Vs. Vireet Investment P. Ltd., ITA No.502/D/2012. Issue before the Special Bench is directly on point i.e. whether the expenditure incurred to ITA No.955 /Ahd/2012 and Others ACIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. & Others 55 earn exempt income computed under section 14A could not be added while computing book profit u/s.115JB of the Act. The Special Bench after discussing the issue in detail and considering various authoritative pronouncements answered in favour of the assessee by holding that scope of section 14A could not be extended to the provisions of section 115JB, and computation of book profits under section 115JB is to be made without resorting to disallowance under section 14A read with rule 8D of the Act. Therefore, following the judgment of the Special Bench in the case of Vireet Investment P. Ltd. (supra) we direct the AO to recompute the book profit by excluding disallowance under section 14A and we allow this ground of appeal of the assessee.
69. Grounds no.29 to 31 of appeal of the assessee are general grounds of appeal, which do not require specific adjudication, hence, rejected.
70. In combined result, all appeals of the assessee are allowed and that of Revenue are dismissed.
Order pronounced in the Court on 20th June, 2018 at Ahmedabad.
Sd/- Sd/- (AMARJIT SINGH) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER