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Income Tax Appellate Tribunal, “ D ” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED & MS. MADHUMITA ROY
PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeals have been filed at the instance of the Assessee, and the Revenue against the order of the Commissioner of Income Tax (Appeals)–8, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-XIV/523/13-14 dated 01/04/2015 arising in the assessment order passed under s.143(3) r.w.s.144C of the Income Tax Act,
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 2 - 1961(hereinafter referred to as "the Act") dated 14/03/2014 relevant to Assessment Year (AY) 2010-11.
ITA No.1947/Ahd/2015 – AY 2010-11 (Assessee’s appeal)
The assessee has raised the following grounds of appeal:-
The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in making an addition of Rs.38,565/- u/s.36(1)(va) of the Act on account of alleged late payment of employee’s contribution towards superannuation fund. 2. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in not allowing sett-off of brought forwards losses/unabsorbed depreciation of Rs.11,02,365/- of earlier years against the income of current years or to be carried forward to the succeeding assessment years. 3. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in adding prior period income of Rs.4,29,490/- to the total income of the appellant after treating the same as taxable u/s 41 of the Act. 4. The learned CIT(A) has erred in law and on the facts in not appreciating the fact that prior period income amounts to Rs.3,76,358/- instead of Rs.4,29,490/- and in any case the former should have been added to the total income. 5. The learned CIT(A) has erred in law and on the facts in confirming the action of AO in not allowing prior period expenditure of Rs.18,79,653/-. 6. Alternatively learned CIT(A) ought to have confined the disallowance only to the extent of net prior period expenditure, after reducing the prior period income of Rs.3,76,358/-, amounting to Rs.15,03,295/-.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 3 - 7. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of learned AO in not determining book profit as per the mechanism provided u/s.115JB of the Act. 8. The learned CIT(A) has red in law and on the facts of the case in confirming the action of AO in not allowing MAT credit of Rs.17,26,221/- on tax liability calculated on book profit u/s.115JB of the Act. 9. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in adding Rs.2,33,75,788/- towards adjustment in Arm’s Length Price without there being any jurisdiction as well as legal and factual basis for the same. 10. The learned CIT(A) has erred in law and on the facts of the case in not following the order of his predecessor for AYs 2006- 07 & 2007-08 involving identical issue in the case of the very appellant. Ld. CIT(A) further erred in not giving a single reason as to how the orders of earlier years are not required to be following. This action of ld. CIT(A) is in gross violation of the hierarchical judicial system and the settled legal principles. 11. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in selecting comparable companies whose turnover were not within the comparable range of the appellant. Ld. CIT(A) further erred in not adopting range of 50% in the figure of turnover as held in A.Y. 2006-07 & 2007-08 in the case of the appellant. 12. The learned CIT(A) has erred in law and on the facts of the case in not allowing benefit of shortfall within the range of 5% as provided in the proviso to S.92C(2) of the Act. 13. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in selecting comparable companies earning super profits and compared the same with the appellant’s profits. 14. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in invoking the provisions of chapter X without prima facie demonstrating that there was some tax avoidance.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 4 - 15. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of AO in referring the case to TPO without recording as to how interference was necessary on account of pricing adopted by the appellant and without providing an opportunity of being heard to the appellant prior to such reference. 16. In any case the whole reference u/s.92CA(1) of the Act and consequent order are bad and illegal and hence deserves to be quashed. 17. The learned CIT(A) has erred in law and on facts of the case in confirming the action of AO in not allowing deduction of Rs.19,02,690 u/s.10B of the Act on account foreign exchange gain earned by eligible units. 18. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of learned AO in not granting deduction u/s.10B of the Act on revised gross total income. 19. Both lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 20. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld.AO in levying interest u/s.234A/B/C of the Act. 21. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld.AO in initiating penalty u/s.271(1)(c) of the Act.
The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the disallowance made by the Assessing Officer of Rs. 38,565/- on account of late payment of employees’ contribution towards superannuation fund u/s.36(1)(va) of the Act.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 5 - 4. Briefly stated facts are that the assessee in the present case is a limited company and engaged in the business of manufacturing of pharmaceuticals and fine chemicals. The assessee in the year under consideration has deposited employees’ contribution towards PF and ESI, etc., after the due date as prescribed under the relevant Act. Therefore, the Assessing Officer disallowed the same under the provisions of section 36(1)(va) of the Act and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the Ld. CIT(A) who has confirmed the order of the Assessing Officer.
Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. The ld. AR before us conceded the fact that the issue is covered against the assessee by the Hon’ble Gujarat High Court in the case of CIT vs. GSTRC reported in 41 taxmann.com 100. However, the ld. AR before us further submitted that the due date for the depositing the amount of employees contribution towards PF/ESI is to be seen from the relevant month, in which salary was paid to the employees and not from the month in which salary became due. The ld. AR in support of his claim relied on the order of this jurisdictional Tribunal in the case of Suzlon Energy Ltd. vs. DCIT reported in 764 & 765/Ahd/2018 vide order dated 27.06.2018, wherein it was held as under: “We may, however, add that a co-ordinate bench of this Tribunal, in the case of Rajjratna Metal Industries Ltd Vs. ACIT (ITA No.940/Ahd/2015; order dated 22.09.2017), has observed as follows:-
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 6 - "3. Assessee's latter substantive ground challenges correctness of both the lower authorities' action disallowing/adding a sum of Rs.3,85,810/- u/s. 36(1)(va) r.w.s. 2(24) of the Act on account late payment of employees' contribution to PF & ESI in question. There is no dispute that hon'ble jurisdictional high court's decision in CIT vs. Gujarat State Road Transport Corporation (2014) 366 ITR 170 (Guj) upholds such a disallowance in principle. The assessee's case however is that relevant due date has to be seen not from the relevant month of salary but the one pertaining to its payment. He then files a computation chart indicating it to have paid above employees' PF/ESI contributions on 22.05.2009 and 28.05.2009 as against the due dates thereof following on 20.06.2009. The Revenue fails to dispute this factual position. We therefore quote this tribunal's co-ordinate bench decision in Kanoi paper & Industries Ltd. vs. ACIT 75 TTJ 448 that the relevant date in such case is that of month of the actual payment of wages/salaries. We therefore rely on the above co-ordinate bench decision and direct the Assessing Officer to delete the impugned disallowance as well.”
In effect thus while any delayed deposit of PF/ESI is to be disallowed, in terms of Hon'ble Gujarat High Court's judgment in the case of Gujarat State Road Transport Corporation (supra), the question as to whether there is a delay or not may be decided by the Assessing Officer in the light of above observations by the coordinate bench. The assessee will get relief, if found admissible, on that basis.
In the result, appeals of the assessee are allowed for statistical purposes. Pronounced in the open court today on the 27th June, 2018.”
Because of the above, the AR for the assessee before us submitted that the matter could be restored to the file of AO for fresh adjudication regarding the above.
On the other hand, ld DR relied on the order of authorities below.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 7 -
6.1 We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has delayed in the payment of employee’s contribution of PF/ ESI as specified under the relevant Act. Therefore, the disallowance was made by the AO u/s 36(1)(va) r.w.s. 2(24)(x) of the Act. The Ld CIT-A subsequently confirmed the view taken by the AO. The ld. AR before us has not challenged the proposition laid down by the Hon’ble Gujarat High Court in the case of CIT Vs. GSRTC (Supra), wherein it was held as under: “In view of the above and for the reasons stated above, and considering section 36(1)(va) of the Income Tax Act, 1961 read with sub-clause (x) of clause 24 of section 2, it is held that with respect to the sum received by the assessee from any of his employees to which provisions of sub- clause (x) of clause (24) of section (2) applies, the assessee shall be entitled to deduction in computing the income referred to in section 28 with respect to such sum credited by the assessee to the employees' account in the relevant fund or funds on or before the "due date" mentioned in explanation to section 36(1)(va). Consequently, it is held that the learned tribunal has erred in deleting respective disallowances being employees' contribution to PF Account / ESI Account made by the AO as, as such, such sums were not credited by the respective assessee to the employees' accounts in the relevant fund or funds (in the present case Provident Fund and/or ESI Fund on or before the due date as per the explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees' contribution to the employees' account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act.”
However, the ld. AR before us has submitted that the due date for depositing the employee’s contribution towards PF/ESI should be seen from the date of the payment and not from the due date. In this regard,
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 8 - we note that the Jurisdictional Tribunal in the identical facts and circumstance in the case of Suzlon Energy Ltd.(supra) has restored this issue to the file of the AO for fresh adjudication. Therefore, respectfully following the same we are inclined to restore the issue on hand to the file of AO for fresh adjudication and in accordance to the provision of law as well as after considering the order of this Tribunal in the case of Suzlon Energy Ltd. (Supra). Thus, the ground of appeal of the assessee is allowed for statistical purpose.
6.2 In the result, the appeal filed by the assessee is allowed for statistical purposes.
The second issue raised by the assessee is that Ld. CIT(A) erred in upholding the order of the Assessing Officer by not allowing the set off of the brought forward losses/unabsorbed depreciation amounting to Rs. 11,02,365/- against the current year income as well as not allowing the same to be carried forward to the succeeding assessment years.
The assessee during the year has set off of previous year’s losses of Rs. 11,02,365/- against the current year income as mentioned in the statement of the total income. However, the Assessing Officer during the assessment proceedings observed that there are no brought forward losses/unabsorbed depreciation in the order passed u/s 154 of the Act for the AY 2008-09 and 2009-10. Therefore, the Assessing Officer was of the view that there was no brought forward losses/unabsorbed
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 9 - depreciation carried forward from the earlier years. Accordingly, the Assessing Officer disallowed the same and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the Ld.CIT(A). The assessee before the Ld.CIT(A) submitted as under:
“6.2. In this connection, the working for carried forward losses/unabsorbed depreciation furnished during the course of assessment proceedings is enclosed herewith marked as Annexure-A. Please refer last column for AY 2008-09 and 2009-10. This would show that loss of Rs.1,35,35,021/- for AY 2006-07 was set-off in AY 2008-09 (considering the order giving effect to the CIT(A) order for AY 2008-09) and in the assessment order for AY 2009-10 as per the records of the department. Therefore, it was the observation of the ld. AO that there was no brought forward loss in the year under consideration for set-off against the income of current year. At this juncture, it is pertinent to note that when the impugned assessment order for AY 2010-11 was passed on 14/03/2014, the first appellate order for AY 2009-10 was not passed by Your Honour. The same came to be passed on 15/12/2014 only. Pls. refer pg no.216 of the compilation of orders. In the said appellate order, Your Honour has given part relief to the Appellant, which would have effect on the total income for AY 2009-10, and in result, it would give effect for the computation of set-off of brought forward losses of earlier year against the income of the current year. Therefore, Your Honour is requested to give direction to the ld.AO to allow set-off of brought forward losses of earlier year against the current year after giving effect to the order of Your Honour for AY 2009-10.”
The copy of the Annexure showing brought forward losses and unabsorbed depreciation is placed on pages 239 & 240 of the paper-book. However, the Ld. CIT(A) disregarded the contention of the assessee and confirmed the order of the Assessing Officer by observing as under:
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 10 -
“4.2. The submissions of appellant are considered. I am of the view that issues related to losses/unabsorbed depreciation, so far as, their determination is concerned, is to be done as per records of the earlier years and in those years only. It is not the case of appellant that losses properly determined in the earlier years have not been allowed during the current year. The issue of determination of losses of earlier years cannot be agitated during the current year. The ground of appeal is dismissed.”
Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
The Ld.AR before us submitted that assessee is eligible for set-off of brought forward losses and unabsorbed depreciation. Hence, a direction may be given to Assessing Officer to compute correct amount of brought forward business loss and unabsorbed depreciation following the law after taking into account the orders passed by Hon’ble Appellate tribunal authorities in assessee’s case.
On the other hand, the Ld. DR supported the order of the authorities below.
We have heard the Ld. Representatives appeared for the respective parties. We have perused the relevant materials available on record. At the outset, we note that the Ld. CIT-A rejected the ground of appeal of the assessee by observing that the issue of determination of losses of the earlier years cannot be agitated during the current year.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 11 -
However, on perusal of the submission as discussed above, we note that the assessee never agitated for the determination of the losses/unabsorbed depreciation of earlier years as held by the Ld. CIT(A). The only plea of the assessee was that there are brought forward losses/unabsorbed depreciation which need to be set off in the year under consideration. We also find that the assessee has filed an Annexure placed on page Nos. 239 & 240 of the paper-book depicting the losses pertaining to the earlier years which were carried forward in the year under consideration. There was no defect pointed out by the authorities below on the submission of the assessee. Therefore, we are of the view that the matter needs to be adjudicated afresh by the Assessing Officer after giving a reasonable opportunity of hearing to the assessee. Accordingly, we set aside the issue to the file of Assessing Officer with the direction to allow the brought forward losses/unabsorbed depreciation of the earlier year against the current year income as well as to carry forward such losses/unabsorbed depreciation to the succeeding assessment years as per the provisions of law. Hence, the ground of appeal of the assessee is allowed for statistical purposes.
The next issues raised by the assessee in ground Nos.3, 4, 5 & 6 are that the Ld. CIT(A) erred in upholding the order of the Assessing Officer by sustaining the addition of prior period income of Rs.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 12 - 4,29,490/- under the provisions of section 41 of the Act. The assessee also agitated the amount of income in the ground of appeal.
As per the assessee, the correct amount of prior period income is of Rs. 3,76,358/- only. The Assessing Officer during the assessment proceedings observed that the assessee had shown prior period income of Rs. 4,29,490/- in its tax audit report in form No.3CD in the clause (ii)(b) of Form No.3CD which was reduced from the statement of income. Accordingly, a query was raised by the Assessing Officer vide order- sheet entry dated 06.02.2014 for an explanation regarding the deduction of prior period income from the statement of income.
The assessee in compliance to it submitted that prior period expenses amounting to Rs. 18,79,653/- were debited to the Profit & Loss account after adjusting the prior period income of Rs. 3,76,358/- only. Thus, in effect the balance amount of Rs. 15,03,295/- (Rs. 18,79,653 – Rs. 3,76,358) was debited in the P&L Account. As per the assessee, the prior period expenses should be treated in the manner of prior period income.
16.1. However, the Assessing Officer disregarded the submission of the assessee by observing that there is no provision for allowing the prior period expenses from the total income of the assessee. However, there is provision for charging the prior period income u/s 41(1) of the Act.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 13 - Therefore, the Assessing Officer disallowed the same and added the sum of Rs. 4,29,490/- to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that the adjustment on account of prior period income and expenses is representing the actual expenses incurred by the assessee for the business. Therefore, the claim of the assessee is legitimate. Accordingly, the assessee requested the Ld. CIT(A) to allow the adjustment of prior period income with the prior period expenses.
17.1. However, the Ld. CIT(A) disregarded the contention of the assessee and confirmed the order of the Assessing Officer by observing as under: “5.3. The submissions are considered it is seen that there is a specific section available under the act, namely, sec 41, under which income of prior year can be taxed. Hence the action of assessing officer in taxing the income of earlier year was proper and is confirmed. However, there is no corresponding section for allowing deduction of expenses pertaining to earlier year. The method of accounting followed by the appellant has to be seen for allowing any chargeable under section 28 to 44DB. Section 145 clearly provides that income chargeable under the head business will have to be allowed as per recognized system of accounting which is to be either mercantile system or the cash system. Admittedly, the appellant follows Mercantile system of accounting. Since under the mercantile system of accounting, prior period expenses are not allowed, the plea of the appellant to allow prior period expenses is rejected. So far as the request for adjustment of prior period expenses to prior period income is concerned, the
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 14 - same can only be done when there is one-to-one correspondence between the income and expenditure. No such relationship has been shown. Even the nature and details of prior period income and expenses are not furnished. In view of this, external the assessing officer is confirmed and the grounds of appeal number 5 to 7 are dismissed.”
The Ld. AR before us submitted that the Assessee had earned “prior period income” of Rs. 3,76,358/- and incurred “prior period expenses” of Rs. 18,79,653/-. Accordingly, “net” expenses of Rs. 15,03,295/- (i.e. Rs. 18,79,653 – Rs. 3,76,358) were debited to P&L a/c. He submitted that Assessing Officer was of the view that “prior period expenses” are not allowable and “prior period income” is to be taxed as income. Accordingly, Assessing Officer made the addition of Rs. 4,29,490/- (correct amount being Rs. 3,76,358/-) in respect of “prior period income”. The said view came to be confirmed by Ld. CIT(A) as well. Further, it is settled law that once “prior period income” is taxed; there is no reason to disallow “prior period expenses” being a part of prior period adjustment, i.e., set off of prior period expenses must be allowed against prior period income. Reliance is placed on “DCIT vs. Dishman Pharmaceuticals & Chemicals in ITA No.692/Ahd/2011 & others”.
On the other hand, the Ld. DR supported the orders of the authorities below.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 15 - 20. We have heard the rival contentions and perused the materials available on record.
At the outset, we find that the Hon’ble Tribunal Ahmedabad in the identical facts and circumstances in the case of DCIT vs. Dishman Pharmaceuticals & Chemicals in ITA No.692/Ahd/2011 & others have decided the issue in favor of the assessee for AY 2005-06 & others dated 23/05/2018. The relevant extract of the order is reproduced as under:
“59. With the assistance of the ld.representatives, we have gone through the record carefully. The ld.AO while assessing prior period income of Rs.46,50,648/- has observed that since it is taxable income offered by the assessee itself, an item has to be included in the total income of the assessee on the principles of taxability on accrual or receipt basis. This has been offered by the assessee on receipt basis. Therefore, it is to be taxed, with regard to the allowance of prior period expenditure, the ld.AO has observed that such item cannot be allowed because it is not ascertainable whether this expenditure has been crystallized in the current year or not. According to the AO, bills and vouchers were not produced by the assessee. On appeal, the ld.CIT(A) confirmed the view point of the AO by observing that set off prior period expenditure against prior period income could be granted if the such expenditure was incurred for earning such income. In this way, the ld.CIT(A) concurred with the AO. The ld.counsel for the assessee in support of its contentions relied upon the judgment of Hon’ble Gujarat High Court in the case of Saurashtra Chemicals reported in 213 ITR 523 (Guj). He also relied upon the judgment of Hon’ble Supreme Court in the case of CIT Vs. Excel Industries Ltd., 358 ITR 295 (SC). On the strength of the Hon’ble Supreme Court’s decision, it was contended that in every year the assessee has prior period expenditure as well as income because in such a big organization quantification of certain expenditure and their crystallization always remained depended upon many circumstances, and sometime they crystallised in the subsequent period. The AO ought to have followed the principle of consistency and allowed the deduction of such prior period expenditure. On the other
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 16 - hand, the ld.DR relied upon the orders of the Revenue authorities below. 60. We have duly considered rival contentions. We find that income of the assessee is being assessed at entity level. All the expenditure debited under different heads cannot be decided qua a specific receipt. 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 was incurred for earning a particular receipts offered under the head prior period income. To our mind, if an assessee is offering prior period income, then the expenditure which was incurred under different heads ought to be set off against that income. Therefore, we are of the view that net differential amount of Rs.3,39,534/- ought to be assessed as income of the assessee. We allow both these grounds of appeal for statistical purpose and direct the AO to allow set off prior period expenditure against prior period income and only net income is to be added to the total income of the assessee.” 22. The facts of the case on hand are identical to the facts of the case as discussed above, i.e., in ITA No.692/Ahd/2011. Therefore, respectfully following the same, we are inclined to reverse the orders of the authorities below. Accordingly, we set aside the order of the Ld. CIT(A) and direct the Assessing Officer to delete the addition made by him. Hence, the grounds of appeal of the assessee are allowed.
The next issues raised by the assessee in ground Nos.7 & 8 are that the Ld. CIT(A) erred in confirming the order of Assessing Officer by not allowing the MAT credit of Rs. 17,26,221/- u/s 115 JAA of the Act.
23.1. The assessee in the year under consideration has reduced MAT credit from the book profit determined u/s 115JB of the Act. However,
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 17 - the Assessing Officer was of the view that no such MAT credit is allowable against the income determined u/s 115JB of the Act. Accordingly, the Assessing Officer sought an explanation from the assessee vide order-sheet entry dated 10/12/2013. The assessee did not make any reply to the query raised by the Assessing Officer. Accordingly, the Assessing Officer disallowed the same and added to the income determined u/s 115JB of the Act.
The aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that it is very much entitled to the credit of the MAT amount paid in the earlier and current year against the income computed under the normal provisions of the Act. However, the Ld. CIT(A) disregarded the contention of the assessee and confirmed the order of the Assessing Officer by observing as under:-
“6.3. The submissions are considered. Ground number 8 is related to allowing tax credit for MAT, even while computing tax liability on book profit under section 115JB. The stand of the appellant is not supported by any law and so ground number 8 is dismissed.”
Being aggrieved by the order of the Ld. CIT(A), the assessee is in the second appeal before us.
The Ld.AR before us submitted as under:- “Assessing Officer has erred in not determining book-profit in accordance with the scheme of the Act as prescribed u/s.115JB.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 18 - Assessing Officer has further erred in not allowing MAT credit of Rs.17,26,221/- on tax liability calculated on book-profit u/s.115B.
CIT(A) also confirmed such actions of Assessing Officer.
A direction may be given to Assessing Officer to compute correct amount of “book –profit” and “MAT credit” in accordance with law after taking into account the orders passed by Hon’ble the ITAT in assessee’s own case.”
On the other hand, the Ld. DR vehemently supported the orders of the authorities below.
We have heard the Ld. Representatives appearing for the respective parties. We have perused the relevant materials available on record.
From the preceding discussion, we note that the Assessing Officer rejected the credit of MAT as claimed by the assessee on the ground that the assessee is not entitled to claim the credit of taxes paid under MAT in the earlier years while determining the income under the head MAT. From the order of the Assessing Officer, it is transpired that the assessee was claiming the credit of tax paid under MAT in the earlier years against the income determined under MAT provisions for the current year. However, the submission of the assessee reveals that it has claimed the credit of tax paid under MAT against the computation of income under the normal provisions. From the above details, we note mismatch
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 19 - between the finding of the Assessing Officer vis-a-vis submissions made by the assessee before the Ld. CIT(A).
However, we note that the assessee is very much entitled to claim the credit of tax paid under MAT against the income computed under the normal provisions under section 115JAA of the Act, which reads as under:
75[Tax credit in respect of tax paid on deemed income relating to certain companies. 76 115JAA. (1) Where any amount of tax is paid under sub-section (1) of section 115JA by an assessee being a company for any assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section. 77[(1A) Where any amount of tax is paid under sub-section (1) of section 115JB by an assessee, being a company for the assessment year commencing on the 1st day of April, 2006 and any subsequent assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section.] 78[(2) The tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under sub-section (1) of section 115JA and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act:
In view of the above, we are of the view that the entire matter needs re-examination afresh by the Assessing Officer. Accordingly, we set aside the issue to the file of Assessing Officer for fresh adjudication following the provisions of law. Hence, grounds of appeal of the assessee are allowed for statistical purposes.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 20 - 32. The inter-connected issue raised by the assessee in ground No. 9 to 16 is that the Ld. CIT(A) erred in confirming the adjustment made by the AO for Rs. 2,33,75,788.00 on account of upward transfer pricing adjustment.
The assessee during the year has made various international transactions with its associated enterprises including the transactions as detailed under:
Sl.No. Description Method used by Amount in (Rs.) the assessee 1. Purchase of Raw TNMM 24887354 Material 2. Purchase of Assets TNMM 365800 3. Sale of various TNMM 145720725 products
The assessee in respect of the above transactions used the TNMM method for determining the Arm Length Price. The assessee has determined the margin in respect of the international transactions as discussed above at the rate of 18.37% using PBDIT as the percentage of the sale.
The assessee worked out the margin of the comparable companies at the rate of 10.55% using PBDIT as the percentage of the sale. Accordingly, the assessee claimed that it has carried out its international transactions with its associated enterprises at ALP and accordingly
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 21 - submitted that there should not be any adjustment in the ALP declared by it.
The assessee has selected 17 companies for comparables. The details of such companies are recorded on page 12 of TPO order.
However, the TPO was not satisfied with the comparables selected by the assessee and the PLI, i.e., PBDIT used in determining the ALP. Accordingly, the AO proposed to select certain companies for the comparables and use the PLI by operating profit/ operating cost.
The assessee alternatively submitted that there will not be any change even the PLI is determined by operating profit/ operating cost. As per the assessee, the average OP/OC works out at 8.63% of the comparable companies whereas its margin works out @ 10.35% of OP/OC.
However, the TPO disagreed with the submission of the assessee and worked out the average PLI after selecting 5 companies. The necessary details of the companies selected and the working of PLI of such companies stand as under:
Sr. Company Operating Operating Operating OP/Cost No. Revenues Cost Profit in % in Rs.Cr. Rs.Cr. Rs.Cr. 1. Embio Ltd. 77.05 64.21 12.84 19.99689 2. Harman 131.78 91.4 40.38 44.17943 Finochem Ltd.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 22 - 3. Malladi Drugs 192.53 166.8 25.73 15.42566 & Pharmaceuticals Ltd. 4. Shilpa Mediare 240.67 172.07 68.6 39.8675 Ltd. 5. Tonira Pharma 37.02 33.19 3.83 11.53962 Ltd. [Merged] AVERAGE 26.20%
In view of above the TPO made Rs. 2,33,75,787/- on account of transfer pricing adjustment as detailed under :
Description Amount in Rs. Operating Cost as per books (computed in 14,74,60,808.00 para 5.1 of show cause notice) Profit at Arms length Price (ALP) @ 26.20% 3,86,34,731.70 of operating cost Operating Revenue (at ALP)(A) 18,60,95,539.70 Operating Revenue (Price) received as per 16,27,19,752.00 books (computed in para 5.1 of show cause notice) (B) Shortfall being adjustment u/s.92CA (C=A-b) 2,33,75,787.70 5% of the price shown in the books (i.e. 85,30,404/- international transaction in cost amounting to Rs.17,06,08,079/- (Sale and purchases)
Accordingly, the AO added the sum of Rs. 2,33,75,787.00 the total income of the assessee.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 23 - 41. Aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that the comparable companies having turnover within the range of 50% of its turnover should have been taken for determining the ALP. The assessee also submitted that the Ld CIT-A selected the comparable companies in the range of 50% in the own case of the assessee for the assessment year 2006-07 and 2007-08.
Without prejudice to the above, the assessee also submitted that there is a single company comparable to assessee company in the companies selected by the TPO which is having turnover nearest to the assessee company, i.e. tonira pharma ltd. If such company is considered as comparable, then the case of the assessee is falling within the range of variation of 5%. Therefore there cannot be any adjustment on account of the transfer price.
The assessee also submitted that the comparable companies having supernormal profit should be excluded to determine the ALP. As per the assessee, the company namely Herman finochem Ltd and Shilpa Medicare Ltd are having super profit. Therefore these cannot be considered for comparables. The assessee also claimed that if remaining 3 companies are used for comparison, then the case of the assessee is falling within the range of 5% of the variation. Accordingly, the assessee claimed that there should not be any adjustment on account of transfer pricing.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11
- 24 - 44. However, the Ld. CIT(A) disregarded the contention of the assessee and confirmed the order of the TPO/ AO by observing as under:
7.5. The contentions raised by the appellant can be summarized as below: -in the earlier years in appeal, the addition is deleted. -The comparables be selected within the range of 50 percent of the turnover -the companies with super normal profits should be excluded 7.6. As each assessment year is a separate assessment year and this maxim applies more to the transfer pricing because of difference in facts and comparables in each of the years, the submission made is not acceptable. In any case, the earlier decisions do not have precedence value unless the facts are same. Further, these decisions are not binding. It is further noted that appellant has not pointed out any differences in the functions, assets or the risk profile of the comparables adopted by the TPO, this has to be kept in view while considering the decision in respect of all the above contentions raised by the appellant. ] 7.7. With reference to difference in profit rates, the issue was also raised before the transfer pricing officer as discussed by him in para 6.7. After considering the discussion made by the transfer pricing officer in para 6.7 where TPO has also pointed out various judicial pronouncements, I am of the considered opinion that under Indian transfer pricing system, what is required to be seen is the reasons for supernormal profit and if there are some specific reasons, for supernormal profits, then the profit ratio of such comparable is required to be suitably modified to nullify the effect of reason resulting in such supernormal profit. Following judicial pronouncements is also important:
Trilogii E-Business Software India vs. DClT (lTAT Bangalore) [140 ITD 540] : (Date of pronouncement) 23. 11.2012, AY 2007-08
Transfer Pricing: Comparables cannot be ignored on ground of abnormal profits/losses if they are functionally comparable
The assessee provided software research & development services to its' USA based AE and was remunerated on a 'cost plus' basis. The assessee claimed that applying the TNMM and using operating profits to cost as the Profit Level Indicator ("PLI"), its PLI of 9.98% was at arms length.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 25 - The TPO & DRP rejected the>assessee's claim and computed the ALP at 24.35% and made an adjustment of Rs. 6.20 crores. The Tribunal had to consider the following issues: (i) whether jn selecting a comparable, a turnover filter has to be adopted, (ii) whether companies with abnormal 'margins can be regarded as comparable, (iii) whether a filter can be applied to distinguish between companies earning revenue from rendering "onsite services" as compared to those rendering "offshore services" even though there is no functional difference between the two activities & (iv) whether the TPO is confined to information in public domain or he can collect information u/s 133(6). HELD by the Tribunal:
………….
(ii) U/s 92C & Rule 10B(2), there is no bar to considering companies with either abnormal profits or abnormal losses as comparable to the tested party, as long as they are functionally comparable. This issue does not arise in the OECD guidelines and the US TP regulations because they advocate the quartile method for determining ALP under which companies that fall in the extreme quartiles get excluded and only those that fall in'the middle quartiles are reckoned for comparability. Cases of either abnormal profits or losses (referred to as outliners) get automatically excluded. However, Indian regulations specifically deviate from OECD guidelines and provide Arithmetic Mean method for determining ALP. In the arithmetic mean method,, all companies that are in the sample are considered, without exception and the average of all the companies is considered as the ALP. Hence, while the general rule that companies with abnormal profits should be excluded may be in tune with the OECD guidelines, it is not in.tune with Indian TP regulations. However, if there are specific reasons for abnormal profits or losses or other general reason's as to why they should not be regarded as comparables, Ihen they can be excluded-for comparability. It is for the Assessee to demonstrate existence of abnormal factors. On facts, as the assessee has not shown any factors for abnormal profits, no comparable can be excluded for that reason (contra view in Quark Systems & Sap Labs noted);
Unless such specific reasons are shown by the appellant, there is no reason to exclude any functionally comparable company from the list of comparables and hence, considering the discussion made by the TPO,
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 26 - and in the light of discussion above, this ground taken by the appellate is rejected.
7.8. Now the issues related to exclusion of companies having turnover difference is considered. The appellant wants that only comparables turnover within the range of 50 percent turnover should be considered. There is no reason given for this. Does a difference in turnover result into high profits? Is it necessary so in the industry or in the market in which the appellant is working? No such examples are shown by the appellant. Does a big size result into only the economies? It is now said that there are more diseconomies rather than economies resulting from a big size. It is rightly said that " Small is;Beautiful".
7.9. Coming to the judicial decisions on the issue, some of the judicial findings with the case references are as below:
7.V.J.Trilogy E-Business Software India us. DCIT (ITAT Bangalore) [140 ITD 540)
November 23, 2012 (Date of pronouncement), AY :2007-08. Transfer Pricing:
Turnover filter is an important criteria in choosing comparables (i) para 12: The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. i 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No. 1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of Q 1 crore to Q 200 crores was held to be proper. The following relevant observations were brought to our notice:-
"9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 27 - the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counselfor the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing pro/it margin.
Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification hcis to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into; consideration for the purpose of making TP study. "
(ii) para 19: A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that ,the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are ..with regard to the comparability of the comparable relied upon by the TPO.
(iii) In this regard we find that the provisions of law as the decisions clearly lay down the principle that the turnover ; filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 28 - in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd, v. DCIT, ITA No.1231/Banq/2010). Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the Id. counsel for the assessee.
Thus the range of turnover of Icrore and 200 crores was held justified for the company . having turnover of Rs. 47.5 crores. Thus even a company having 1/50 times less turnover was considered within the acceptable range. Further., in another case referred above Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.l231/Bang/2010 the turnover range up to 200 crore which was 25 times of turnover of 8.15 crore was held to be justified as comparable. ; 7.9.2 [2015] 54 taxmann.com 53 (Delhi - Trib.) IN THE ITA J DELHI BENCH I' Calibrated Healthcare Systems India (P.) Ltd.
Company with marked differences as regards risk profile, nature of services, ownership of IP rights, expenditure on R&D etc. cannot be selected as comparable company
In this case, the factors related to this profile, nature of services etc were considered more important than the turnover differences.
7.9.3. Symantee softivare Solutions Pvt Ltd vs. ACIT (lTAT Mumbai') June 21, 2011
Date of pronouncement: 31/05/2011, Ay. 2006-07 Transfer Pricing principles on use of multi-year data, turnover filter, risk adjustment & +/- 5% adjustment The assessee's appeal raised the issues whether (i) the TPO could consider financial information of comparables not available at the time of TP study, (ii) multi-year data of comparables could be considered, (iii) a turnover filter had to be applied for identification of comparable companies, (iv) an adjustment for difference in functional and risk profile of comparable companies vis-a-vis of the assessee had to be
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 29 - rnade and (v) the amendment of +/-5% variation law was retrospective. HELD by the Tribunal:
(i) The burden of proving that the transactions with the AE is at arms' length is on the assessee. If the Transactionai Net Margin Method ("TNMM") is adopted, the comparison has to be made between the net margin realised from the operation of the uncontrolled parties' transaction and net margin derived by the assessee on similar international transactions. The comparison should be between the net margins on transaction basis and not at enterprise level;
(ii) U/s 92CA(3), the TPO is entitled to consider material in public domain which, though not available to the assessee at the time of the TP study, is relevant for the financial year;
(iii) Ordinarily only the data pertaining to the financial year of the transaction can be considered. The proviso to Rule 10B (4) which permits the use of data relating to other than the financial year in which the international transaction has been entered into; being not more than two years prior to such financial year does not mean that one can insist on the use of multi-year data but it has a limited role only when the data of earlier years reveal facts which could have influenced on determination of the TP in relation to the transaction being compared. As the assessee has not made out a case that taking the data for only the current financial year will not present the correct and fair financial result of the comparables, the claim for multi-year data cannot be entertained;
(iv) While in principle, comparables having an abnormal difference of turnover and distorted operating profits have to be excluded for determining the ALP, the claim that as the assessee revenue is about Rs. 20 crores, comparables having more than 50 crores and less than 5 crores of turnover should be excluded is not acceptable because no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. It is accepted economic principle and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 30 - Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself;
(v) The argument that an adjustment should be made for difference in function and risk level is not acceptable because the assessee has not brought on record how such functional difference and risk has influenced the result of the comparables with quantified data. Further, the +1-5% adjustment as the 2nd Proviso to s. 92C is intended to adjust for such differences;
(vi) The department's argument that the amendment by FA 2009 w.e.f. 1. 10.2009 to the 2nd Provio to s. 92C with regard to the +/- 5% variation from thei arithmetic mean of the ALP is clarificatory and procedural and so retrospective is not correct.
Thus it was clearly held in this case that assessee will have to bring specific facts on record to show that due to differences in the turnover, the comparables become non-comparables.
7.10. Thus the conclusion drawn from the above is that in general, due to only the difference in turnover, a comparable cannot be rejected. It has to be seen whether due to difference in turnover, there is change in the risk profile and profitability of the company. Further, the turnover differences is to be seen on Log scale. That is a company having 10 times turnover or 10 percent of the turnover can be easily included among the comparables while a company with differences more than hundred times turnover or less than one percent turnover will have to be excluded.
7.11. In the present case, it is seen that operating revenue of the appellant as per books is 16.3 crores. The companies which are choosing for comparability have the turnover range of 37 crores to 240crores. Thus the highest turnover company is having turnover of only 14.8 times. In fact the company having a turnover lower than this particular comparable is having higher profit margin. In view of this, I do not find any reason to reject any of the comparable and hence addition made by the assessing officer/transfer pricing officer is being
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 31 - confirmed. For the reasons discussed above, I do not find any logic that only turnover range of 50 percent should be considered. Thus the grounds of appeal related to transfer pricing adjustment are dismissed.”
Being aggrieved by the order of the Ld. CIT(A) assessee is in appeal before us. The Ld. AR before us filed a paper book running from the page of 1 to 284, and Annexure A to F and submitted as under:
“At the outset, the issue is covered by the decision of ITAT in Assessee’s own case for earlier years as follows wherein application of “Turnover filter” has been upheld: - Schutz Dishman Biotech P.Ltd. vs. DCIT – ITA 954/Ahd/2012 – Asst.Year 2007-08 (Annexure”B”) - DCIT vs. Schutz Disman Biotech Pvt.Ltd. – ITA 2060/Ahd/09 and others – Asst.Year 2006-07 (Annexure”E”);
In view of orders of earlier years as above, “Turnover filter” ought to have been applied by TPO. Accordingly, range of 50% based on assessee’s turnover will be Rs.24,40,79,628/- on the higher side. Hon’ble ITAT, in assessee’s own case for AY 2007- 08, has approved the application of “Turnover filter” in the range of +/- 50%.
- Assessee submitted even before the learned CIT(A) to follow his own order for the AY 06-07 and 07-08 but he chose not to follow the same by observing that each year is separate. - Hon’ble Apex Court, in the case of “Bharat Sanchar Nigam Ltd. and Another vs. UOI and others – 282 ITR 273 (SC) (Relevant @ Pg. 286, Para 20”, has held that where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial, can generally be permitted to take a different view except when the earlier decision is per
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 32 - incuriam. In this case, “turnover filter” has rightly been applied by Hon’ble CIT(A) and ITAT in earlier years. Hence, in view of the ratio laid down by Hon’ble Apex Court orders of earlier years passed by Hon’ble ITAT may be followed in the larger interest of justice. - In fact, it is worth appreciating that CIT(A) has himself, following Hon’ble ITAT’s order for AY 06-07, accepted application of “turnover filter” within the very same range, as approved by Hon’ble the ITAT, for the AY 2011-12 and 2013- 14. Copy of such orders is placed at Annexure”C (Colly.)”. - Turnover of none of the five comparables selected by TPO (Pg.46 of TPO’s order) falls within the above stated range. Hence, on this short count, all five comparables selected by TPO deserves to be excluded and consequently, entire TP adjustment deserves to be deleted. - At best, even if the turnover range is slightly relaxed, the only comparable selected by TPO which is closest to the above stated range is “Tonira Pharma Ltd.” (Pg. 46 of TPO’s order) having turnover of Rs.37.02 crore. It is a settled law that only one comparable is also a good comparable. Accordingly, even if ALP is determined taking that company as a base, then also the shortfall would be within the range of 5% (Pg.227 of P/B), as available to the assessee as per the proviso to S.92C(2). Hence, even on that score, no TP adjustment is warranged. Hence, impugned addition deserves to be deleted. - Secondly, Super-normal profit making companies are also required to be excluded from the comparison as the same would give distorted picture of ALP comparison. Reliance is placed on: - PCIT vs. Barclays Technology Centre India (P.) Ltd. – (23018) 95 taxmann.com 170 (Bom) (Annexure “F”). - Google India (P.) Ltd. vs. DCIT – 55 SOT 489 (Bang) (Annexure “D”).
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 33 - 46. On the other hand, the Ld. DR relied on the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. In the instant case, the issue relates to the selection of companies selected by the TPO for comparables. The assessee claims that the comparable companies having turnover within the range of 50% of the assessee company should be selected for comparables to determine the ALP. In this regard, we find that the Hon’ble ITAT in the own case of the assessee in ITA No. 954/Ahd/2012 for AY 2007-08 vide order dated 05.06.2018 has upheld the selection of companies within the range of 50% of the turnover of the assessee company. The relevant extract of the order is reproduced as under:
“8. We have duly considered rival contentions and gone through the record. As observed earlier, the Revenue and the assessee have not disputed selection of appropriate method i.e. TNMM; selection of tested party i.e. assessee; selection of profit level indicator i.e. operative profit/operative cost. They are only disputing on selection of comparables. The assessee has selected four comparables viz. Advik Laboratories Ltd., Gujarat Terce Laboratories Ltd., Zyden Gentc Ld., and Welcure Drug & Pharmaceuticals Ltd. All these comparables were not accepted by the TPO because according to him, they were not engaged in manufacturing bulk drug, rather they are manufacturing formulations i.e. tablets, capsules, syrups etc. Thus, the ld.TPO selected comparables which were engaged in manufacturing of bulk drugs. The comparables selected by the TPO and working of their PLI reads as under:
Name of Company Economic Sales Cr. Export Cr. Export Activity % of the total sales Advik Laboratories Drug 9.74 0.0 0% Ltd. Formulations
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11
- 34 - Gujarat Terce Drug 11.22 0.04 0.36% Laboratories Ltd. Formulations Zyden Gentec Ltd. Drug 7.12 1.2 16.85% Formulations Welcure drug & Drug 18.79 0.07 0.37% Pharmaceutical Ltd. Formulations
On the basis of above PLI, the ld.TPO has worked out adjustment required to be made in the value of international transactions entered by the assessee with its AE. The first question for our determination is whether turnover filter is to be applied or not. According to the ld.DR, this filter ought not to be applied. She made reference to the decision of ITAT, Mumbai. However, we are of the view that in large number of decisions, it has been held that turnover filter is one of the essential filter in order to select comparables when acted in same atmosphere. It is pertinent to observe that while conducting transfer price analysis an effort is being made to compare related party transactions undertaken by the assessee with the uncontrolled transactions undertaken by the comparable, and thus arrive at a conclusion as to whether transaction bench mark is at arm’s length or not. For example, a chosen company, though functionally comparable has entered international transactions beyond a percentage with related parties, it is quite possible that its overall profit may have distorted due to such transaction rendering it as un- comparable. There are so many other circumstances which are required to be examined under FAR analysis, and due to this, adjudicator is required to apply appropriate filter in order to work out comparables which have not under any influence of the related party transactions. Hon’ble Bombay High Court in the case of CIT Vs. Pentair Water India (P.) Ltd., 381 ITR 216 concluded that turnover is obviously a relevant factor to be considered for comparability. Hon’ble High Court has relied upon the decision of Hon’ble Delhi High Court in the case of CIT Vs. Agnity India Technologies (P.) Ltd., (2013) 36 taxmann.com 289. Thus, there are conflicting decisions in favour or against the application of turnover filter. However, the ld.Revenue authorities have not brought to our notice of any judgment of the Hon’ble jurisdictional High Court which prohibits application of turnover filter. Therefore, we are of the view that the ld.CIT(A) has rightly made an analysis that smaller companies having turnover of Rs.3 crores could not be considered as comparable with the assessee who has turnover of Rs.15.84 crores. Similarly, the company who has turnover of more than Rs.30 crores could not be compared with the assessee. Thus, we do not find any error in the order of the ld.CIT(A) on this aspect, and if we uphold the turnover filter then the ground of appeal raised by the
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 35 - Revenue is required to be rejected. Accordingly, we reject the grounds of appeal raised by the Revenue. 10. So far as adjustments confirmed by the ld.CIT(A) is concerned, we find that the assessee has demonstrated that Welcure Drug & Pharmaceuticals Ltd. was engaged in the manufacturing of bulk drugs. Hence, it was a comparable. It has been excluded by the TPO as well as no reason has been assigned by the ld.CIT(A) in the impugned order. Working made by the ld.counsel for the assessee in the synopsis reads as under:
Particulars Gennex Welcure Total Sales 10.98 18.79 29.77 Operating Cost 9.70 21.21 30.91 Operating Profit 1.28 -2.42 -1.14 OP/OC (%) 13.20 -11.41 -3.69
Sales of Welcure Drug & Pharmaceuticals Ltd. are less than the turnover filter of Rs.23 crores. Thus, it falls in the criteria of consideration and ought to be included in the list of comparable. Once it is included in the list of comparable, then the profit level indicator would be (-) 3.69% and no adjustment would be required in the value of international transaction as per section 92(3) of the Act, because it will go to reduce the value of the international transaction as declared by the assessee. Considering this aspect, we allow appeal of the assessee and delete adjustment made in the value of international transactions.”
We also note that the Ld. CIT(A) in the own case of the assessee pertaining to the assessment year 2011-12 and 2013-14 after having a reliance on the order of this tribunal in the own case of the assessee (supra) deleted the addition made by the TPO. The orders of the Ld. CIT(A) are placed on record in Annexure C.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 36 - 49. The Ld. DR before us has not brought anything on records suggesting that the revenue has preferred an appeal against the order of the Ld. CIT(A).
Because of the above, we do not want to deviate from the finding of the Hon’ble ITAT in the own case of the assessee as discussed above. Therefore we direct the AO/ TPO to select comparable companies having the nearest turnover to the assessee company. In the instant case, we note that there is a single company as discussed above having the nearest turnover to the assessee company. Therefore we direct the AO/TPO to select that company and make suitable adjustments within the provisions of law.
From the above, we note that the assessee succeeds in its appeal by turnover criteria as directed above for the selection of comparable companies. Therefore we refrain ourselves from adjudicating the issue of super profit as indicated by the assessee. Thus the grounds of appeal of the assessee are allowed.
The next issue raised by the Assessee in this appeal is that Ld.CIT(A) erred in not allowing deduction of Rs.19,02,690/- u/s.10B of the Act on account of foreign exchange gain.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 37 - 53. The assessee in the year under consideration has shown an income of Rs.13,60,598/- on account of fluctuation in foreign exchange. The assessee in respect of such income claimed the deduction u/s 10B of the Act. However, the Assessing Officer was of the view that the income represented by foreign currency fluctuation is not arising from the export activity as amended u/s.10B of the Act. Therefore, the Assessing Officer disallowed the deduction u/s 10B of the Act in respect of such income of Rs.13,60598/- only and added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld. CIT(A). The assessee before the Ld. CIT(A) submitted that the income on account of foreign exchange fluctuation was directly linked with the export business of the assessee. Therefore, the same should be allowed as deduction u/s.10B of the Act.
However, the Ld. CIT(A) disregarded the contention of the assessee and confirmed the order of the Assessing Officer by observing as under:-
“8.3. The submissions are considered. It is seen that on sale of goods the invoices are raised in foreign currency and the same is accounted in the Indian currency by taking into account the exchange rate prevailing on the date of sale. However on the date of realisation of money even though in foreign currency, the amount remains same, in the Indian currency it is changed due to variation in the rate of foreign currency. Thus there is considerable time gap between the accounting of foreign currency variation/fluctuation and the actual sale of goods. The source of foreign currency variation lies in the gain/loss happening due to exchange rate fluctuation in the international market. This has got nothing to do with the actual sale. In fact, if the amount is left in the
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 38 - foreign currency account, there will be variation in the Indian currency if date of realisation and the date of withdrawal from foreign currency account are different. Now can this particular exchange variation be also termed as related to export of goods? The answer is no. This aspect was not considered in ITAT case relied upon and so due to difference in facts , it cannot be followed. The case of Priyanka Gems [367 ITR 575 (Guj)] dealt with issue of exclusion in clause (baa) to Explanation of Sec. 80HHC, and that has got nothing to do with provision of Sec.10B and so, that argument is rejected.
8.4. The amount which is allowable to an assessee as a deduction under s. 10B is profits and gains derived by the assessee from 100 per cent EOU. Thus, the amount which qualifies for deduction should be profits and gains directly arising from the activity of conducting the business of the EOU. The income which accrues to an assessee from an activity which is not directly from the conduct of business of the EOU may be an income incidental to the business of EOU but the same cannot be held to be an income derived from the EOU. In the instant case, the assessee has derived the income in question because of his making an investment in EEFC account. To make a deposit in EEFC account is not an activity of actual conduct of the business of the EOU. It is a step removed from the actual conduct of the business of the EOU. Hence, the said income cannot be held to be a profit actually derived from EOU as the same is due to the variation in value of foreign currency and not the value of goods exported. The view is supported by the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99 : (2003) 262 ITR 278 (SC) and Liberty India vs. CIT [2009] 317 ITR 218. Therefore, it is held that exchange fluctuation gain is not an income derived from the qualified activity given in section 10B and so the action of assessing officer in not allowing deduction under section 10B based on the reasons given by him in para 9 of the assessment order (which are not repeated here) are upheld.
8.5. However, so far as the computation of disallowance of deduction under section 10B is concerned, the assessing officer should verify whether the export turnover includes exchange rate fluctuation gain or not and if it is found that the same is not included here then the assessing officer should recompute the disallowance made on account of disallowing deduction under section 10B on exchange rate
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 39 - fluctuation gain, The ground of appeal number 15 is thus partly allowed.
8.6. As far as ground number 16 related to deduction under section 10 B on revised gross total income is concerned, it is seen that appellant has not pointed out the additions made in the assessment order and their relationship to the business of export undertaking. In the absence of such details the ground-raised by the appellant in ground number 16 is dismissed.”
Being aggrieved by the order of the Ld. CIT(A), assessee is in appeal before us.
The Ld.AR submitted that the Assessing Officer denied deduction u/s 10B on foreign exchange fluctuation gain arising on account of rate difference and such action was confirmed by CIT(A). He further submitted that Assessing Officer and CIT(A) failed to appreciate that exchange rate fluctuation was directly related to exports and hence, any gain arising on account of fluctuations in foreign exchange rates forms part of income derived from the eligible undertaking. Accordingly, such gain is eligible for deduction u/s.10B. Reliance is placed on followings: 1. DCIT vs. Dishman Pharmaceuticals & Chemicals – ITA No.692/Ahd/2011 & others. 2. CIT vs. Priyanka Gems – Tax Appeal No.1468 of 2006 and others. 3. CIT vs. Alps Chemicals Ltd. – Tax Appeal No.677 of 2007. 4. Ito vs. Banyan Chemicals P.Ltd. 117 ITD 376 (Ahd)(TM).
56.1. The Ld.AR submitted that accordingly, the deduction u/10B should be allowed on foreign exchange gain.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 40 -
The Ld. DR vehemently supported the order of the authorities below.
We have heard the Ld. Representatives appearing for the respective parties. We have perused the relevant materials available on record. At the outset, we find that the Hon’ble Ahmedabad Tribunal in the identical facts and circumstances has decided the issue in favor of assessee in the case of ITO vs. Banyan Chemicals P.Ltd. 117 ITD 376 (Ahd)(TM). The relevant extract of the order is reproduced hereunder: “18. On a perusal of this chart, we find that the receipt of Rs. 15,51,239 includes Rs. 15,31,518 as the gain on the sales realization in US Dollar on the date of its receipt and deposit in EEFC account and balance Rs. 19,721 is with regard to exchange gain on import payment. Therefore, the assessee would be entitled to the deduction under section 10B with regard to exchange gain of Rs. 15,31,518 only which is the gain on the day of deposit of US$ in the EEFC Account. In my opinion, therefore, the assessee should be granted deduction under section 10B of the Act with regard to exchange gain of Rs. 15,31,518. I hold accordingly.”
Since the facts are identical to the facts of the case reported in 117 ITD 376 in the case of Banyan Chemicals P.Ltd.(supra), the ground of the assessee’s appeal is allowed.
The last issue raised by the assessee in ground No.18 is that the Ld. CIT(A) erred in not granting deduction u/s.10B of the Act on the revised gross total income.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 41 - 61. At the outset, we note that it is a settled law that whatever disallowances will be made in respect of their unit/undertaking/company eligible for deduction u/s.10B of the Act, then the deduction will be claimed by the assessee will be enhanced by the amount of the disallowances. In this regard, we find relevant to refer the necessary portion of Circular No.37 of 2016 issued by CBDT dated 02.11.2016 which is reproduced below:-
“3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance.”
61.1. In view of the above Circular, we hold that the deduction u/s.10B of the Act will be enhanced by the disallowances made by the Assessing Officer in the assessment proceedings. Thus, we direct accordingly. Hence, the ground of appeal is allowed.
Coming to Revenue’s appeal in ITA No.1909/Ahd/2015
The only issue raised by the Revenue is that the Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for Rs. 2,20,10,405/- u/s.69 of the Act.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 42 - 63. At the outset, we note that the Revenue raised the identical issue in the own case of the assessee in ITA No.525/Ahd/2015 pertaining to the AY 2009-10 which has been decided by this Tribunal in favor of the assessee and against the Revenue. The relevant extract of the order is reproduced below:
“8. We have heard the rival contention and perused the materials available on record. At the outset, we note that the identical issue was decided by this tribunal in the case of the assessee in ITA 1229/AHD/2012 for the AY 2007-08 vide order dated 5th June 2018. The relevant extract of the order is reproduced below:
“13. Brief facts in this regard are that the Id.AO noticed that there was a variation in actual consumption of raw-material and standard consumption of material. To the show cause, assess,-e explained reasons for the variations in the consumption of the raw material as also extent of and how the variations arisen. However, the ld. AO did not accept the explanation of the assessee and busing his earlier order for the assessment year 2002-03 to 2006-07, an addition of Rs.62,63.591/- on account of items consumed less than the standard norms and further addition of Rs. 1,43,79,263/- on account of items consumed more than the standard norms were made. These two additions were challenged before the ld. First Appellate Authority, who folloiwng his order of the assessment year 2006-07 while following the order if the Tribunal in the case of assessee for the assessment years 2002-03, 2003-04 and 2004-05 deleted the impugned additions.
At the outset. ld. counsel for the assessee has placed on record copy of the order of the Tribunal passed in the assessment
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 43 - year 2005-06 an 2006-07 in ITA No.2060/Ahd/2009 and 3l41/Ahd/2011 wherein similar addition has been deleted. The ld. First Appellate authority has followed the order of the Tribunal passed in the assessment years 2002-03, 2003-04 and 2004-05. The relevant observation of the ld.CIT(A) reads as under:
"4.3 Decision: I have carefully perused the assessment order and the submissions given by the appellant. The addition was made by the A. O. by following the order of the A.O. for A. Y. 2002-03. The similar addition was also made by the A.O. for A. Y. 2006-07 while deciding of the appellant for that year. The addition have been deleted by me by following the order of the ITAT, Ahmedabad in the case of the appellant for A. Ys. 2002-03, 2003- 04 & 2004-05. Accordingly, the addition made by the A. O. in this year is also directed to be deleted. Therefore, the additions of Rs.1,43,79,263/- on account of inflation of purchase of raw materials and Rs.62,63,591/- u/s. 69 of the Act is directed to be deleted. The grounds of appeal are accordingly allowed."
We have considered rival submissions and gone through the record. We find dial the Tribunal has discussed this issue from para 4 to 4.1 in the assessment year 2005-06 and in para 9 in assessment year 2006-07. Basically, the Tribunal has followed order passed in the assessment year 2003-04 and 2005-06 on this issue and confirmed the order of the ld.CIT(A). Considering the similarity of the issue, we do not find any error in the order of the ld.CIT(A). This ground of appeal of the Revenue is rejected.”
8.1 We further find that the Hon’ble Gujarat High Court in the case of the assessee has also decided the issue in its favor in Tax Appeal No.1182 of 2008 pertaining to the A.Y. 2002-03 vide order dated 12.08.2016. The relevant extract of the order is reproduced below:
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11 - 44 -
“7. We have heard learned counsel for the parties. In view of the observations made by the Tribunal, we are of the opinion, that the assessee was manufacturing pharmaceutical, medicines, which are being exported. The assessee was maintaining the norms which are prescribed by the Government of India for a particular pharmaceutical medicine which is to be exported. Since there was a variation in the ratio, the Assessing Officer made addition based on the statement of the General Manager, in-charge production. In our view, the Assessing Officer has based his addition on the basis of the documents which are not available on the record and based on the statement of the General Manager, in-charge production. Whether the assessee has followed the prescribed norms is not within the purview of the Income-tax Authority, In our view, the Tribunal has rightly held that the CIT(A) was wrong in relying on the input out consumption ratio. In our view, the Assessing Officer and the Commissioner of Income-tax (Appeals) have gone on different directions. Therefore, the view taken by the Tribunal is required to be accepted. In that view of the matter, we answer issue No. 1 in Tax Appeal No.1182 of 2008 in favour of the assessee and against the revenue.”
In view of the above, and respectfully following the same, we do not find any infirmity in the order of ld. CIT(A). Hence the ground of appeal of the Revenue is dismissed.”
Since the facts of the case on hand are identical to the facts of the case in ITA No 525/AHD/2015, accordingly, respectfully following the same we dismiss the ground of appeal of the Revenue.
In the result, the Revenue’s appeal is dismissed.
ITA No.1947/Ahd/2015(by Assessee) & ITA No.1909/Ahd/2015 (by Revenue) Schutz Dishman Biotech Ltd. vs. DCIT Asst.Year - 2010-11
We summarize the result as under: A. Assessee’s appeal in ITA No.1947/Ahd/2015 (i) Ground Nos.1,2, 7 & 8 are allowed for statistical purposes. (ii) Ground Nos.3 to 6 and 9 to 16 & 17, 18 are allowed. B. Revenue’s appeal in ITA No.1909/Ahd/2015 (i) Appeal of the Revenue is dismissed. This Order pronounced in Open Court on 01/01/2019
Sd/- Sd/- (MS.MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 01/01/2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-8, Ahmedabad �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 26.11.2018 (dictation pad 37- pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member 13.12.2018 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S … 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….4.1.19 7. Date on which the file goes to the Bench Clerk…………………4.1.19 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………