2016-VIL-972-ITAT-AHM

Income Tax Appellate Tribunal AHMEDABAD

ITA. No: 2430 & 2400/AHD/2009

Date: 03.05.2016

SUN PHARMACEUTICAL INDUSTRIES LTD

Vs

ASST. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-1, BARODA AND VICA-VARSHA

For the Appellant : Shri S.N. Soparkar, A.R
For the Respondent by : Shri R.I. Patel, CIT/D.R.

BENCH

SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, JJ.

JUDGMENT

1. ITA Nos. 2430 & 2400/Ahd/2009 are appeals by the Assessee and the Revenue preferred against the very same order of the ld. CIT(A)-IV, Ahmedabad dated 24.02.2009 pertaining to A.Y. 2005-06. These cross appeals were heard together and are disposed of by this common order for the sake of convenience.

2. At the very outset, the ld. counsel for the assessee stated that the issues raised by the assessee and the revenue in their respective appeals are settled either in favour of the assessee or in favour of the revenue by the earlier order of the Tribunal in assessee’s own case. To substantiate, the ld. counsel furnished the detailed chart explaining how the grounds of appeal are covered by the earlier decision of the Tribunal in assessee’s own case. The ld. D.R. fairly conceded to this. On such concession, we have heard the rival contentions and have carefully perused the orders of the authorities below. We have also the benefit of the order of the Tribunal in assessee’s own case in earlier years. We accordingly decide these appeals.

ITA No 2430/Ahd/2009 for A.Y. 2005-06.

1st ground is of general in nature and needs no separate adjudication.

Ground no. 2 relates to the disallowance of overriding commission paid to Associated Enterprise pursuant to the order of the Transfer Pricing Officer.

3. While scrutinizing the return of income, the A.O noticed that the assessee has paid export commission of Rs. 5,17,21,555/- to M/s. Sun Pharma Global Inc., an associate enterprise of the assessee. This issue was referred to the Transfer Pricing Officer for determination of Arm’s Length Price under section 92CA(1) of the Act. The TPO vide order dated 17.03.2008 has determined ALP at Nil. Thus, the difference amount of Rs. 5,17,21,555/- was treated as excess commission paid by the assessee to its AE which needs to be disallowed. Assessee was asked to explain the nature of transactions and whether the payment is within Arm’s Length Price. Assessee filed a detailed and elaborate reply to substantiate its claim that the payment is at Arm’s Length Price. It was brought to the notice of the A.O that in earlier assessment years i.e. A.Ys. 2002-03, 2003-04 & 2004-05, the ld. CIT(A) has accepted the normal commission paid to the AE and the only ground which the ld. CIT(A) has rejected is the payment of overriding commission wherein the ld. CIT(A) has directed that only in those cases where the overriding commission paid together with the existing commission paid is in excess of 3% of the turnover, then the excess has to be disallowed. The submission of the assessee was considered who dismissed the same and added an amount of Rs. 5,17,21,555/- on account of excess commission paid to its associate concern.

4. Assessee carried the matter before the ld. CIT(A) and reiterated its claim that the payment is at ALP. After considering the facts and the submissions, the ld. CIT(A) observed that similar question had arisen in assessee’s own case during assessment years 2002-03, 2003-04 & 2004-05 which was partly decided by the ld. CIT(A) in favour of the assessee regarding commission paid and partly dismissed with regard to overriding commission paid. The ld. CIT(A) further observed that since there is no change in the facts and circumstances during the year under appeal, he directed the A.O to take a similar view as taken in earlier years and accordingly allowed partial relief to the assessee.

5. Before us, the counsel for the assessee stated that the Tribunal has decided this issue in favour of the assessee and against the revenue in ITA No. 1558 & 1676/Ahd/2006, 1513 & 1701/Ahd/2007 and 1193 & 1287/Ahd/08. The ld. D.R. could not bring any distinguishing decision in favour of the revenue. We have given a thoughtful consideration to the facts in issues. We find force in the contention of the ld. counsel. An identical issue was considered and decided by the Tribunal in assessment years 202- 03, 2003-04 & 2004-05 (supra). The Tribunal has considered a similar issue qua ground no. 11 of the appeals before it and have held as under:-

Ground no. 11 relates to the disallowance of overriding commission paid to Associated Enterprise.

25. This issue relates to the transfer pricing adjustment and hence has been considered by the TPO in its order dated 24.03.2005 made u/s. 92CA(3) of the Act.

26.During the course of transfer pricing assessment proceedings, the TPO noticed that the assessee has paid importing commission towards associate entity amounting to Rs. 335.63 lacs. The associate entity M/s. Sun Pharma Global Inc is a subsidiary of the assessee company and is a tax resident of British Virgin Islands. The assessee claimed that the associate entity provided marketing and promotion to the assessee’s products in the export market on a global basis. In its transfer pricing study report, the assessee contended that the commission paid is comparable to the commission paid by it to nonrelated parties. It was brought to the notice of the TPO that the weighted average rate of commission works out to 7.84% on total sales and on similar arrangement in India, the assessee has paid commission @ 11% . Therefore the payment is at arm’s length. After considering the facts and the submissions, the TPO observed that the assessee has not submitted any documentary evidence in respect of its arrangements with any of these persons. The TPO also observed that the assessee had failed to establish the arms length nature of the transaction under the CUP method. Accordingly, the assessee was asked to provide the documentary evidence in support of the various services rendered by the AE. The assessee was also asked to provide the details of expenses incurred in various locations of the world by the AE to establish the services rendered by them. The assessee was also asked to provide the details of persons employed by the AE along with their qualification; the assessee filed the necessary details. The TPO at Para 9 of his order had observed that the assessee failed to justify the margin of the subsidiary company by comparing it with other companies included in similar activities. At this juncture, we have to state that this observation of the TPO is out of context and totally irrelevant because the assessee is the tested party and not its AE. Assessee’s transactions have to be considered at arm’s length and not the profitability of the AE. The TPO finally concluded by holding that the assessee has failed to discharge the onus laid upon it to determine the arm’s length price of its international transactions.

27. Accordingly, the arm’s length price for the international transaction was determined as under:-

(a) In respect of over-riding commission @ 1%, no explanation has been given by the assessee as to why the said commission is payable, particularly in view of the fact that on the same sales commission is separately being paid to third parties. Hence, arm’s length price for the same is determined at Nil.

(b) Regarding commission paid @ 3% for the own customers of the associate entity, no evidence has been brought on record to show that the associate entity procured these customers for the benefit of the assessee. Hence, arm’s length price for the same is also determined at Nil.

(c) Regarding reimbursement of expenses, the amount is accepted as the arm’s length price.

28.Assessee carried the matter before the ld. CIT(A). The ld. CIT(A) has considered this issue at Para 23 of its order. After elaborating discussing the findings of the A.O, the ld. CIT(A) discussed the submissions made by the assessee and after considering the functions performed by the AE and at Para 23.09 of his order, the ld. CIT(A) observed that the assessee has submitted copy of agreement in relation to the nature of services rendered by the AE, certain e-mail messages to prove the nature of transaction which has not been proved false by the TPO. The ld. CIT(A) agreed that the TPO is legally and factually wrong in treating as if no transaction has taken place. After considering the range of commission, the ld. CIT(A) finally was of the opinion that the commission up to 3% was reasonable and at arm’ length and requires no adjustment and directed the A.O to delete the addition of Rs. 1,43,43,210/-.

29.However, on the point of overriding commission, the ld. CIT(A) was of the opinion that the overriding commission is to be allowed on the sales made through AE, overriding commission is also to be allowed on the sales made through non -related parties where commission is paid @ 3% and overriding commission is not to be allowed where commission is more than 3% to the non- related enterprises.

30.Aggrieved by this findings of the ld. CIT(A) both assessee and the revenue are in appeal before us. The ld. counsel for the assessee vehemently stated that the action of the revenue authorities is beyond the scope of the provisions contained in Chapter 10 of the Act. It is the say of the ld. counsel that under Chapter 10 the only power of the revenue authorities is to see whether the international transaction entered into by the assessee are at arm’s length or not. The ld. counsel further stated that it is not open to the revenue authorities under Chapter 10 to see whether any services have been rendered by the AE or not. The ld. counsel concluded by saying that if the revenue authorities are of the opinion that no services have been rendered the disallowance can be made under other provisions of the Act. Per contra, the ld. D.R. strongly supported the findings of the A.O.

31. We have given a thoughtful consideration to the orders of the authorities below. We have also gone through the transfer pricing assessment order. The assessee has paid commission to its AE and we find that the basis for the payment of commission has also been given to justify it to be at arm’s length. The TPO/A.O has nowhere denied that the weighted average rate of commission paid by the assessee is 7.84% as against 11% paid to unrelated party. We also find that in his appellate order, the First Appellate Authority has observed the rate of commission ranging from 0.38% to 33.33%, the assessee’s rate is at 3%. We also find that none of the revenue authorities below have brought any comparable case on record to show that the payment of commission by the assessee is not at arm’s length. On the contrary, we find that the A.O. has disallowed merely because he was of the opinion that no services have been rendered. This finding is beyond the provisions of Chapter 10 of the Act in as much as under chapter 10, the TPO/A.O. has to see whether the international transaction entered by the assessee is at arm’s length or not. There are other provisions in the act wherein the A.O. can test the genuineness of the transaction but in any case not under Chapter 10 of the Act. As mentioned elsewhere, no comparable case have been brought on record which could justify that the payment of 3% + 1% overriding commission is not at arm’s length, we set aside the findings of the ld. CIT(A) and direct the A.O. to delete the entire transfer pricing adjustment made by it. Ground no. 11 is accordingly allowed.

6. As observed by the ld. CIT(A), there is no change in the facts and the circumstances of the case during the year under appeal. Therefore, respectfully following the findings of the Co-ordinate Bench (supra), we direct the A.O to delete the entire Transfer Pricing adjustment made by it. Ground no. 2 is accordingly allowed.

Ground no. 3 relates to the disallowance of deduction u/s. 10B of the Act in respect of Ahmednagar Unit.

7. While scrutinizing the return of income, the A.O noticed that the assessee has claimed exemption of income u/s. 10B of the Act amounting to Rs. 28,25,01,313/- in respect of Ahmednagar, Panoli and Chennai Units. Vide notice dated 02.08.2007, the assessee was asked to explain the claim of deduction u/s. 10B qua the order of the Development Officer as SEEPZ,SEZ dated 25.07.2006 in which LOP for claiming deduction u/s. 10B has been cancelled.

8. Vide letter dated 24.08.2007 was explained that the said order of the Development Commissioner has cancelled LOP for Ahmednagar Unit only. Further, it was brought to the notice of the A.O that the assessee has preferred an appeal against the said order of the Development Commissioner.

9. Taking a leaf out of this reply of the assessee, the A.O disallowed the claim of deduction u/s. 10B in respect of Ahmednagar Unit amount to Rs. 23,45,24,639/-.

10. Assessee carried the matter before the ld. CIT(A) but without any success. The ld. CIT(A) while deciding this grievance of the assessee observed that his predecessor has allowed the claim of exemption in respect of Panoli Unit in earlier assessment years i.e. 2002-03, 2003-04 & 2004-05 and accordingly directed the A.O to allow the claim in respect of Panoli Unit. However, in respect of Ahmednagar Unit, the ld. CIT(A) observed that since the LOP has been cancelled exemption u/s. 10B in respect of Ahmednagar Unit cannot be allowed. Before us, the ld. counsel for the assessee stated that in earlier years, the Tribunal has restored this issue to the files of the A.O to be decided afresh. We have carefully perused the orders of the Tribunal. The Tribunal has considered this grievance at ground nos. 16 & 18 taken together. However, we find that since these grounds were not adjudicated, therefore the matter was restored back to the files of the A.O for fresh adjudication. However, we find that during the year under consideration, both the lower authorities have adjudicated the issue; therefore, there is no reason why the matter should be sent back for fresh adjudication. However, we find the LOP has been cancelled vide order dated 25.07.2006 which pertains to F.Y. 2007-08. Therefore, we do not find any reason why the exemption should be denied for the year under consideration. Since in earlier years, the exemption was allowed. Therefore, we direct the A.O to allow the claim of deduction u/s. 10B of the Act for the year under consideration. Ground no. 3 is accordingly allowed.

Ground no. 4 relates to the disallowance of trade mark registration and overseas product registration charges u/s. 35(2AB).

11. On perusing the details of R & D expenditure, the A.O found that the assessee has claimed weighted deduction @ 150% on –

(a) Trade Mark Registration Charges : 2,42,56,296/-

(b) Overseas Product Registration Charges : 2,00,00,508/-

12. The assessee was asked to justify its claim. Assessee filed a detailed reply justifying its claim of weighted deduction. It was explained that the expenditure incurred for product registration although named as Product Registration Expenditure is not merely an expenditure for registration of the product, but in large measure constitutes expenditure for validation and confirmation of the Research carried out. The A.O did not accept the claim of the assessee holding that these expenses were incurred for registration of drug patents in foreign countries. The A.O accordingly withdrew the weighted deduction and allowed only 100% of the same as revenue expenditure.

13. Assessee carried the matter before the ld. CIT(A) but without any success. While dismissing the grievance of the assessee, the ld. CIT(A) followed the findings of his predecessor given in A.Y. 2002-03 to 2004-05. Before us, the ld. counsel for the assessee stated that the Tribunal in assessee’s own case in earlier years has decided this issue in favour of the assessee and against the revenue in ITA No. 1558/Ahd/2006. The ld. D.R. could not bring any distinguishing decision in favour of the revenue.

14. We have given a thoughtful consideration to the order of the Tribunal in earlier years; we find that the Tribunal while deciding the issue in favour of the assessee has followed the decision of the Co-ordinate Bench, Mumbai in the case of USV Ltd. 54 SOT 615. Findings of the Tribunal read as under:-

24. We have carefully perused the orders of the authorities below. We find that the ld. CIT(A) has simply followed the findings of his predecessor for A.Y. 2000-01. We also find that the assessment order for A.Y. 2000-01 has been quashed by the Tribunal vide a ITA Nos. 1199 & 1279/Ahd/2006, which means that the basis for upholding the disallowance has been removed. We further find that on identical set of facts, the Mumbai Bench in the case of USV Ltd. (supra) has allowed the claim of the assessee in respect of expenditure incurred in respect of patent application. Respectfully, following the findings of the co-ordinate Bench (supra), we direct the A.O to delete the disallowance of Rs. 44,71,906/-. Ground no. 10 is accordingly allowed.

15. Respectfully following the findings of the Co-ordinate Bench (supra), we direct the A.O to delete the disallowance. Ground no. 4 is accordingly allowed.

Ground no. 5 relates to the exclusion of interest on loans to employees for deduction u/s. 80IB.

16. The A.O has excluded other income of Rs. 11,000/- from the computation of deduction u/s. 80IB on the ground that this amount is not derived from the manufacturing activity. The ld. CIT(A) confirmed the action of the A.O following the decision of his predecessor given in earlier assessment years. Before us, the ld. counsel for the assessee brought to the notice the decision of the Tribunal given in earlier assessment years and pointed out that the Tribunal has restored this issue to the files of the A.O with a direction to decide the issue afresh in the light of the ratio laid down by the Hon’ble Supreme Court in the Liberty India 317 ITR 218.

17. We have carefully perused the orders of the authorities below qua the decision of the Tribunal, we find force in the contention of the ld. counsel. The Tribunal has considered an identical grievance qua ground no. 17 and has decided as under:-

Ground no. 17 relates to the inclusion of income from scrap sale, miscellaneous income and interest on loans to employees from profits computed u/s. 80IB of the Act.

39. In so far as, inclusion of sale of scrap is concerned, we find that the Tribunal in its order in ITA Nos. 3289 & 3434/Ahd/2003 in assessee’s own case for A.Y. 2001-02 has followed the findings of the Tribunal given in A.Y. 1999-2000 & 2000-01 and directed the A.O to re-compute the turnover after excluding the sale amount of scrap. Respectfully, following the findings of the Tribunal (supa), we direct the A.O to decide the issue in line with the directions given by the Tribunal in earlier assessment years. In so far as, the issue relating to miscellaneous income and interest on loans to employees, the A.O is directed to decide the issue afresh in the light of the ratio laid down by the Hon’ble Supreme Court in the case of Liberty India 317 ITR 218. Ground no. 17 is accordingly allowed.

18. Respectfully following the decision of the Tribunal (supra), we direct the A.O accordingly. Ground no. 5 is treated as allowed statistical purpose.

Ground no. 6 relates to the reallocation of R & D expenses @ 12.5% for computing deduction u/s. 80IB.

19. While scrutinizing the return of income, the A.O found that the assessee has claimed R & D Revenue Expenditure of Rs. 110,99,69,871/- and R & D Capital Expenditure of Rs. 59,79,84,814/- totaling to Rs. 170,79,54,685/-. The A.O further found that the assessee has allocated only Rs. 4,34,25,000/- on account of R & D expenses in Silvassa II Unit. The A.O was not convinced with the allocation and accordingly asked the assessee to explain why the expenses should not be reallocated in the ratio of turnover. Assessee explained that it has allocated the revenue expenditure across all its units whether manufacturing bulk drugs or formulation drugs and whether claiming any special deduction under the Act or not. Assessee filed a detailed working of the allocation of expenses. The reply of the assessee did not find any favour with the A.O who was of the firm belief that R & D expenses are basically pertaining to the head office expenses which are not directly relatable to a particular unit. According to the A.O, if the expenses are not scientifically distribute, it may lead to excess deduction u/s. 80IB or 10A or 10B of the Act. Taking a leaf out of the earlier assessment years, the A.O reallocated further expenses of Rs. 4,27,59,003/- to the Silvassa II Unit.

20. Assessee carried the matter before the ld. CIT(A) and reiterated its claim of deduction. However, the ld. CIT(A) followed the findings of his predecessor given in earlier assessment years holding that there is no change in the facts and circumstances of the case during the year under appeal. Before us, the ld. counsel for the assessee drew our attention to the decision of the Tribunal given in earlier assessment years and requested for a similar view. We have carefully considered the facts in issue in this ground of appeal. We have also gone through the findings of the Tribunal given in earlier assessment years in ITA No. 1558/Ahd/2006. We find that an identical issue was considered qua ground no. 6 by the Tribunal and the findings read as under:-

Ground no. 6 relates to the allocation of R & D expenses for determining profits eligible for deduction u/s. 80IB and Section 10B of the Act.

12. We find that while confirming the action of the A.O, the ld. CIT(A) has followed the order of the First Appellate Authority given for A.Y. 2000-01. As mentioned elsewhere in ground no. 5 above reopened assessment order of 2000-01 has been quashed by the Tribunal in ITA Nos. 1199 & 1279/Ahd/2006. The very basis for confirming the action of the A.O has been removed by the Tribunal. We find that the dispute arose because of the answer given by Dr. T.Rajamannar, Senior Vice President of SPARC, Baroda. In his statement given on oath u/s. 131 of the Act, it was admitted that there is an increase in the expenditure for R & D from 10 to 15%.

13. The ld. Counsel for the assessee vehemently submitted that the question related to the raw materials and not to all the items of expenditure and, therefore, the revenue authorities have erred in generalizing the statement of the Senior Vice President. We have given a thoughtful consideration to the findings of the lower authorities. We have also considered the statement of Dr. T. Rajamannar. Undisputedly, the question related to the raw materials and not to all the items of expenditure under this head. In our considered opinion one cannot carry out the allocation on the basis of pick and choose method. We accordingly direct the A.O to restrict the re-allocation only to the raw material, assessee gets partial relief.

21. As observed by the First Appellate Authority, there is no change in the facts and circumstances. Therefore, respectfully following the decision of the Co-ordinate Bench (supra), we hold accordingly. Ground no 6 is treated as allowed for statistical purpose.

22. With ground no. 7, the assessee claims that the ld. CIT(A) erred in not admitting and adjudicating grievance relating to the treatment of foreign exchange fluctuation gain. The ld. counsel straightway drew our attention to the decision of the Tribunal given in ITA No. 1558/Ahd/2006 and pointed out that since in earlier years also. The ld. CIT(A) has not adjudicated on this issue and unless the issue is adjudicated upon in earlier years. There cannot be any separate finding for the year under consideration. We find that the Tribunal at para 38 of its order has made the following observations:-

38. While discussing the grievance of the assessee at Para 30.3 and also at Para 32.2 of his order, the ld. CIT(A) has observed that these grounds of appeal are not emanating from the action of the A.O. hence, cannot be entertained at this stage. Before us, the ld. counsel for the assessee stated that legal issues can be taken up at any stage and the appellate authorities are bound to consider such legal issues. We find force in the contention of the ld. counsel since both these grounds relates to legal issues raised by the assessee not entertained by the revenue authorities. In our considered opinion, the matter deserves to be decided afresh as the assessee can take up legal issues at any stage. For this proposition, we draw support from the decision of the Hon’ble High Court of Bombay in the case of Pruthvi Brokers & Shares Pvt. Ltd. 349 ITR 336. We accordingly restore this issue to the files of the A.O. The A.O is directed to decide these issues afresh after giving a reasonable opportunity of being heard to the assessee and as per the provisions of the law.

23. We find force in the contention of the ld. counsel unless the issue is decided in earlier years; the same cannot be decided in subsequent years. We, therefore, direct the A.O to decide these issues afresh. After deciding these issues in earlier assessment years and after giving a reasonable opportunity of being heard to the assessee. Ground no. 7 is treated as allowed for statistical purpose. Ground no. 8 relates to the disallowance of deduction u/s. 10B of Ahmednagar Unit for computing book profit.

24. Since we have directed the A.O to allow the claim of deduction u/s. 10B for Ahmednagar Unit qua ground no. 3 of this order. We accordingly direct the A.O to allow the deduction u/s. 10B for Ahmednagar Unit for computing book profit. Ground no. 8 is accordingly allowed. Ground No. 9 relates to the addition of sales made to Sun Pharmaceuticals Industries.

25. While scrutinizing the return of income, the A.O found that the assessee has sold raw materials/products to sister concern at lower rates. Assessee was asked to explain the transactions with its sister concern, Sun Pharmaceutical Industries. Assessee filed a detailed reply giving exhaustive list of all the raw materials/products being sold to its sister concern vis-à-vis third parties along with the rates and quantity sold. The A.O was of the firm belief that the assessee has been selling products to its sister concern at a rate lower than sold to third parties. The A.O observed that since the assessee is holding 95% share in its sister concern and the sister concern is claiming 100% deduction u/s. 80IB on its profits. Therefore, in effect the assessee is indulged in diversion of profit and avoidance of tax by suppressing the sale price. The A.O accordingly made an addition of Rs. 21,25,278/-.

26. Assessee carried the matter before the ld. CIT(A) but without any success. Before us, the ld. counsel for the assessee stated that an identical issue was considered by the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008 and has decided the issue in favour of the assessee and against the revenue. This issue has been considered by the Tribunal qua ground no. 12 as under:-

Ground no. 12 relates to the addition made on account of sales to Sun Pharmaceutical Industries.

83. This issue has been considered by the A.O at Para 12 of his order. A survey u/s. 133A of the Act was conducted on the assessee as well as its sister concern Sun Pharmaceutical Industries which is a partnership firm. During the course of the survey operations, it was noticed that the assessee has been selling certain raw materials /products to its sister concern at a lower rate than was sold to third parties and thereby diverting the profits. Assessee was asked to explain its stand. Assessee filed a detailed reply giving details of raw materials/products being sold to its sister concern and to third parties along with rates and quantity sold. On analysis of the reply, the A.O found that there were certain raw materials/products which were being sold to the sister concern at a lower rate than sold to third parties. The A.O proceeded by computing an addition of Rs. 19,49,930/- on account of unreasonably low selling price on sale of raw materials/products sold to its sister concern.

84. Aggrieved by this, assessee carried the matter before the ld. CIT(A) but without any success.

85. Before us, the ld. counsel for the assessee stated that it is not clear under which provision of the act additions have been made. Further the counsel stated that no 80IB deduction has been claimed by it which could justify the action of the A.O. Per contra, the ld. D.R. strongly supported the findings of the revenue authorities.

87. We have given a thoughtful consideration to the orders of the authorities below. We agree with the contention of the ld. counsel that no specific section has been mentioned in the assessment order for making the impugned additions. A perusal of the assessment order show that the additions have been made by treating the transactions u/s. 40A(2) of the Act. In that case, we have to state that provisions of section 40A(2) are applicable only in respect of payments made to related parties mentioned therein. But the transaction before us is of credit in nature i.e. sales so provisions of section 40A(2) are not at all applicable.

27. Respectfully following the findings of the Tribunal (supra), we direct the A.O to delete the addition of Rs. 21,25,278/-. Ground no. 9 is allowed.

Ground no. 10 relates to the disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries amounting to Rs. 13,35,61,482/-.

28. While scrutinizing the return of income, the A.O found that as per the partnership deed between the assessee and Sun Pharmaceutical Industries. The assessee was entitled to draw yearly remuneration of 15% of the net profits of the partnership firm. The A.O further found that the assessee has received 15% of net profits of SPI as per the partnership deed. However, the A.O found that SPI has not debited this remuneration to its Profit and Loss account in the light of explanation 4 to Section 40B of the Act. The A.O further noticed that the assessee has also not offered this remuneration claiming that the remuneration would be chargeable to tax only if the same is allowed as deductible from the profits of the firm and since the same is not allowed in the hands of the firm, the same cannot be taxed in the hands of the assessee. The A.O found that though the remuneration has not been included by the assessee but it has debited all the related expenditure in its books of account. The A.O accordingly disallowed the expenditure so debited treating the same as expenditure not incurred wholly or exclusively for the purpose of business.

29. Assessee carried the matter before the ld. CIT(A). After considering the facts and circumstances and drawing support from the findings given in A.Y. 2004-05 directed the A.O to recalculate the disallowance.

30. Aggrieved by this, the assessee is before us. Ld. counsel for the assessee pointed out that an identical issue have been considered by the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008 and has decided the issue in favour of the assessee and against the revenue. We have carefully considered the facts in issues relating to this ground of appeal. We find force in the contention of the ld. counsel. An identical issue has been considered by the Tribunal in ITA No. 1193/Ahd/2008 qua ground no. 13 in that appeal and has decided the issue as under:-

Ground no. 13 relates to the disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries.

88. This issue has been discussed by the A.O at para 13 of his order wherein he has mentioned that during the course of survey operations. A copy of partnership deed between the assessee and Sun Pharmaceutical Industries (SPI) was found along with a copy of supplementary partnership deed. The A.O further observed that as per the partnership deed, the assessee was entitled to draw yearly remuneration of 15% of the net profits of the partnership firm. The A.O further observed that the assessee had received 15% of net profits of SPI Rs. 15,75,55,219/- as per the agreement of partnership. However, the A.O noticed that the partnership firm has not debited this remuneration paid to the assessee by taking recourse to the provisions of section 40(b) wherein remuneration is allowed to a working partner who is an individual.

89. The A.O further noticed that though the remuneration was not offered for taxation by the assessee but it has debited the expenditure incurred on behalf of the partnership firm in its books of account. The A.O was of the firm belief that these expenditures are not related to the earning of income and accordingly disallowed – (a) selling and distribution expenses 25,68,21,928/- salary and allowance to field staff 24,12,98,724/- totaling to Rs. 49,81,20,652/-. The A.O proceeded by disallowing Rs. 8,49,79,383/- based on the ratio of the total turnover of the assessee and the partnership firm SPI.

90. Aggrieved by this, the assessee carried the matter before the ld. CIT(A). Ld. CIT(A) has considered this grievance at para 26 vide ground no. 25 before him. After considering the facts and the submissions, the ld. CIT(A) was of the opinion that the assessee already had an existing sales and distribution network in the form of C & F agent, etc. Therefore the assessee was not required to incur any additional/extra expenses for undertaking the marketing function for and on behalf of partnership firm. The ld. CIT(A) further observed that most of the expenses incurred by the assessee for the sales were in the nature of fixed expenses. However, there were similar additional expenses incurred by the assessee for carrying out the sales for and on behalf of the partnership firm. The ld. CIT(A) finally concluded by holding that the incremental expenses incurred by the assessee in excess what was incurred in the preceding year towards the marketing and distribution should be allocated and accordingly directed the A.O to recalculate the disallowance.

91. Aggrieved by this finding of the ld.CIT(A) both assessee and the revenue are in appeal before us. The ld. D.R. strongly stated that since the assessee has not shown any income from remuneration from the partnership firm. The assessee was not entitled for the claim of deduction. The ld. D.R. further stated that no bifurcation have been provided by the assessee to show the expenses incurred for the purpose of the business of the partnership firm and for the assessee company. The D.R. concluded by saying that there is no error in the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated the claim and stated that there is no basis for allocating the expenses pro rata. The ld. counsel further stated that the First Appellate Authority further erred in disallowing the expenditure on pro rata basis only on incremental expenses. It is the say of the ld. counsel that the disallowance is unjustifiable. 92.We have carefully perused the orders of the authorities below. We have also given a thoughtful consideration to the rival submissions. There is no denying that the partnership deed has a provision for the payment of remuneration to the whole time working partner by virtue of which the assessee was entitled for the remuneration. There is also no denying that as per the provisions of section 40(b) of the act, the remuneration is payable to a whole time working partner who is an individual and the assessee is a limited company. Therefore the assessee could not have shown this remuneration as part of its computation of income. It is also a fact that the partnership firm has also not debited this remuneration to its Profit and Loss account. However, the assessee company using its network has incurred certain expenditure which according to the revenue authorities are not directly related to earning of income. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee and not for the purposes of earning profit. As per the agreement between the assessee company and the partnership firm, the assessee had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Thus, it cannot be said that the expenditure incurred by the assessee are not for the purposes of its business. Since the assessee is holding 95% in the partnership firm it becomes the duty of the assessee to promote the business of the partnership firm, in the capacity of the majority stake holder. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee’s business or the business of the partnership firm where the assessee is a majority stake holder. Therefore, in our considered opinion, the expenditures incurred by the assessee company deserves to be allowed and we direct the A.O to delete the addition of Rs. 8,49,79,383/-.

31. Respectfully following the findings of the Co-ordinate Bench, we direct the A.O to delete the addition of Rs. 13,35,61,482/-. Ground no. 10 is accordingly allowed.

32. In the result, the appeal filed by the Assessee is allowed in part for statistical purpose.

ITA No. 2400/Ahd/2009 Revenue’s appeal for A.Y. 2005-06

Ground no. 1 relates to the direction to rework Arm’s Length Price with regard to commission paid to AE.

33. An identical issue has been decided by us in favour of the assessee and against the revenue in assessee’s appeal in ITA No. 2430/Ahd/2009 qua ground no. 2 of that appeal. For our detailed discussion therein, ground no. 1 is dismissed.

Ground no. 2 relates to the direction to grant of exemption u/s. 10B in respect of Panoli Unit.

34. We find that the First Appellate Authority has followed the findings given in A.Y. 2002-03 to 2004-05 which have been confirmed by the Tribunal in ITA No. 1287/Ahd/20008. The Tribunal has decided this issue qua ground no. 2 in that appeal as under:-

Ground no. 2 relates to the grant of exemption u/s. 10B to Panoli and Ahmednagar unit. 97.This issue has been accepted by the revenue in A.Y. 2002-03, therefore, we do not find any merit in this grievance of the revenue. Further we find that in the grounds of appeal itself, the reference given by the revenue relates to the order dated 25.07.2006 which pertains to F.Y. 2006-07 and A.Y. 2007-08 whereas we are in A.Y. 2004-05, therefore, the said order of the Development Commissioner is not applicable for the year under consideration. Therefore for this year, this issue is decided in favour of the assessee and against the revenue. However, the A.O is free to take a different view in the relevant assessment year, ground nos. 2 & 3 are dismissed.

35. Respectfully following the findings of the Co-ordinate Bench (supra), we hold accordingly. Ground no. 2 is dismissed. Ground No. 3 relates to the inclusion of interest on overdue bills in gross sales while computing deduction u/s. 80IB.

36. While examining the claim of deduction, the A.O has found that the assessee has included interest on overdue bills amounting to Rs. 44,55,000/-. The A.O was of the firm belief that interest on overdue bills is not derived from the manufacturing activity and accordingly excluded the same from the claim of deduction while doing so; the A.O followed the findings given in A.Y. 2002-03 to 2004-05.

37. Assessee carried the matter before the ld. CIT(A) and reiterated its claim. The ld. CIT(A) was convinced with the claim in the light of the decision of the Hon’ble Jurisdictional High Court in the case of Nirma Industries Ltd. 283 ITR 402 and accordingly directed the A.O to include the interest on overdue bills while computing deduction u/s. 80IB.

38. Since the First Appellate Authority has followed the decision of the Hon’ble Jurisdictional High Court given in the case of Nirma Industries Ltd. (supra), we do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 3 is accordingly dismissed.

Ground no. 4 relates to the reallocation of R & D expenses.

39. An identical issue has been decided by us in assessee’s appeal in ITA No. 2430/Ahd/2009 qua ground no. 6. For our detailed discussion therein, we confirmed the findings of the ld. CIT(A) and dismissed ground no. 4 of this appeal. Ground no. 5 relates to the direction to exclude income of Panoli Unit for calculation of Book Profit.

40. The A.O has denied the claim of deduction while working out the book profit u/s. 115JB of the Act since he had denied the exemption u/s. 10B. Since the ld. CIT(A) allowed the claim of deduction in respect of Panoli Unit, therefore, directed the A.O to exclude the income working of the book profit u/s. 115JB of the Act. Since, this finding of the ld. CIT(A) has been confirmed by the Tribunal in earlier years in ITA No. 1287/Ahd/2008 qua ground no. 2 of that appeal. We do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 5 is accordingly dismissed. Ground no. 6 relates to the recalculation of disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries.

41. An identical issue has been decided by us in assessee’s appeal in ITA No. 2430/Ahd/2009 qua ground no.10. For our detailed discussion therein, this grievance of the revenue is dismissed. Ground nos. 7 & 8 are of general in nature and needs no separate adjudication.

42. In the result, the appeal filed by the Revenue is dismissed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.