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Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: Shri Laxmi Prasad Sahu & Shri K.Narasimha Chary
Per Shri Laxmi Prasad Sahu, A.M.: This appeal filed by the assessee is directed against the order dated 26.09.2016 of the Learned Commissioner of Income Tax (Appeals)-5, Hyderabad relating to AY 2007-08. On the following grounds of appeal:
The learned CIT (A) erred in not appreciating the submission of assessee that allocation of corporate overhead to tax holiday units is a debatable issue and the same cannot be covered with in the scope of section 154. 2. The learned CIT (A) erred in travelling beyond the scope of 154 and confirming the order of A.O issued under 154. 3. The learned CIT (A) wrongly applied the ruling of ITAT for A Y 03-04 to A Y 07-08, stating that the failure of A.O in following the direction of IT AT is a mistake apparent from record. The learned CIT(A) ignored the fact that the issue
2 Dr.Reddy’s Laboratories Ltd. is debatable in nature as various recent rulings of Hon 'ble High Courts are in favour of assessee.
The learned CIT(A) erred in not considering and adjudicating the appeal with regard grounds of appeal as raised before him but in confining himself to the issue of allocation of corporate overheads to the units claiming deduction U/S 80IB/80lC.
From the above grounds, the sole substantive issue raised by the assessee is regard to challenging of the rectification order passed by the Assessing Officer (AO) u/s. 154 of the I.T.Act 1961and confirmed by the ld.CIT(A).
The brief facts of the case are that the AO completed the assessment u/s. 143(3) on 28.10.2011 determining the total income at Rs.401,50,38,460/-. Letter on within the four years, the AO issued notice u/s.154 of the I.T.Act on14.10.2015 proposing to rectify the order passed u/s. 143(3) of the I.T.Act. By observing as “excess claim of deduction u/s. 80IB and 80IC needs to be disallowed”. Against this, the assessee filed letter, which is placed at paper book page NO.191. On 30.10.2015 the AO sent a letter to the assessee and proposing to allocate the corporate expenditure to the units eligible u/s.80IB and 80IC of the Act and reduce the claim of 80IC and 80IB of the Act, which is as under:-
Office of the Deputy Commissioner of Income Tax, Circle-17(1) 6th floor, 'B'Block , A.C.Guards, Hyderbad.
F.No.AMCD7999Q/2015-16 Dated:30/10/2015 To The Principal Officer, M/s Dr. Reddy's Laboratories Ltd. 8-2-337, Road No.3, Banjara Hills, Hyderabad Sir, Sub: IT Assessment - A.Y. 2007-08 - your own case - matter - reg. Ref: Notice issued u/s 154/155 dated 14.10.2015
3 Dr.Reddy’s Laboratories Ltd. &&& Please refer to the above. On verification of the assessment record for the A.Y. 2007-08, the following is observed.
As per the provisions of section 80IC(7) r.w.s.80IA(5), the profits and gains of an eligible business, for the purpose of determining the quantum of deduction shall be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year to which the determination is to be made. It is seen from the computation of income statement that the assessee company claimed deduction of Rs.11 ,24,80,738 u/s 80IB (Yanam unit) and Rs.100,41,99,143 u/s 80IC (Baddi unit). As per the separate accounts of the above said units, the turnover of each unit I was Rs.78,66,36,730 (Yanam unit) and Rs.206,31,19,015 (Baddi unit) respectively and derived profits of Rs.37,49,35,794 (Yanam unit eligible for 30% deduction) and Rs.100,41,99,143 (Baddi unit eligible for 100% deduction). It is further observed that the following corporate expenditure was not allocated to these eligible units mentioned supra. It is seen from the profit and loss account vide schedule -16 "operating & other expenses "and schedule 17- "Finance charges" the assessee company incurred the following corporate overhead expenses which shall be apportioned to all the units based on the turnover of each unit to the total turnover of the company. S No Head of expenditure Amount (Rs.)
1 Director's remuneration 37,43,61,000
2 Auditor's remuneration 84,65,000
3 Bank charges 3,98,83,000
4 Sundry expenses 36,46,37,000
5 Interest and finance 47,96,82,000 charges 126,70,28,000 Total
Thus, the total corporate overhead expenditure works out to Rs.126,70,28,000 which needs to be split between the units claiming deductions under section 80IB (Yanam) and 80IC (Baddi) units respectively.
Yanam 80 IB Unit Baddi 80 IC Unit TTO of the Company (DRL)
Sales/income 78,66,36,730 206,31,19,015 3828,03,81,450
% on TTo of the 2.05% 5.38% company (DRL) Corporate overhead 2,59,74,074 6,81.66,106 expenditure allocated on the basis of %
Hence, these corporate overhead expenditure needs to be allocated based on the turnover as per the table above.
4 Dr.Reddy’s Laboratories Ltd. The profits eligible for deduction after allocating the corporate overheads is worked out as under :-
Baddi 80 IC Unit Yanam 80 IB Unit Profits as stated 37,49,35,794 100,41,99,143
Less : allocation of 2.59,74,074 6,81,66,106 corporate overheads
Profits of eligible 34,89,61,720 93.60,33.037 units Eligible deduction (30%) 10,46,88,516 (100%) 93,60,33,037 Less: Deduction 11,24,80,738 100,41.99,143 claimed Excess claim of 77,92,222 6,81,66,106 deduction
Thus, the resultant excess claim of deduction needs to be disallowed and added back to the taxable income. Omission to do so resulted in excess claim of deduction u/s 80IB Yanam unit of Rs.77.92,222 and u/s 80IC 8addi unit of Rs.6.81 ,66, 106. The total excess claim of 'deduction u/s 80IB and u/s 80IC works out to Rs.7.59,58,328 with a tax effect of Rs.3,96,29,738.
In view of the above facts, it is proposed to modify the assessment accordingly. For this purpose your case is posted for hearing on 03.11.2015 at 10.30 A.M.
Against the above letter, the assessee filed objections , which is placed on the paper book.
Accordingly, the AO passed the order u/s. 154 of the Act on 04.01.2016 and he observed that the assessee has claimed excess deduction u/s. 80IB of Yanam unit for Rs.77,92,222/- and u/s. 80IC Baddi unit of Rs.6,81,66,106/- which are to be disallowed.
Aggrieved from the order of the AO, the assessee filed appeal before the ld.CIT(A). During the course of appellate proceedings before the ld.CIt(A), the assessee filed written submissions, after considering the same the ld.CIT(A) has passed the order, the relevant part is as under:-
Submission of the appellant: During the appeal proceedings the assesse company submitted written explanation, which is as follows:
5 Dr.Reddy’s Laboratories Ltd. "With reference to the above captioned subject, we bring to your kind attention that the regular assessment for the AY 2007-08 was completed in FY 11-12. The assessee furnished from time to time all the information required by the Assessing officer and the A.O passed the order on 28.10.2011 after considering the submissions of the assessee. In FY 15-16, with no finding of any mistake in the order passed u/s. 143(3) in terms of the provisions of sec. 154, the A.O issued notice u/s 154j155 proposing amendment to the assessment order dated 28.10.2011 stating that 'excess claim of deduction u/s 801B & 80le needs to be disallowed'.
Subsequently upon the request by the assessee, the A.O vide letter dated 30.10.2015 communicated his observations in respect of the assessment for the AY 2007-08 wherein it was mentioned that the corporate expenditure was not allocated to the units eligible ujs.8018 / 80lC and hence the excess claim of deduction needs to be disallowed and added back to the taxable income.
At the outset, it is hereby submitted that the issue of allocation of corporate overheads for the current assessment year is only a result of change in opinion and reviewing an assessment already completed. For an issue to be covered u/s. 154, it should be a mistake, invariably of facts and figures, apparent from record.
We have filed our objections with the AO on the ground that, the AO had undertaken review of the order in guise of rectification and debatable issue cannot be a reason for passing order u/s 154. Since allocation of corporate overhead to units eligible u/s 8018 and 80lC is a debatable issue before law and varied interpretations have been given by various courts on this as aspect, non- allocation of corporate overheads to units cannot be a reason to pass order u/s 154.However, without considering the objections made by the assessee, the A.O passed order u/s 154 on 04.01.2016 allocating corporate overheads to the units eligible u/s 80IB and 80lC.
In this regard our submission is as follows:
1 . In case of Dr.Reddy's Laboratories Limited for the AY 03-04 & 04-05, CIT(A) in ITA No. 0041/CIT(A)-II, Hyd/2012-13 and ITA No. 0042/CIT(A)-II, Hyd/2012-13 held that an issue which needs application of mind cannot be treated as mistake apparent from the record and does not fall under the purview of section 154. And further, the IT AT also upheld the order of CIT(A). II. Review of order by AO not permissible The learned A.O had undertaken review of the order passed u/s 143(3) on 28/10/2011 in the guise of rectification which is not covered by section 154. In other words, a review of the assessment order cannot be entertained ix]» 154 of the Act.
In the case of Parameswaran Pillai (K) Vs ITO (Addl) (1955) 28ITR 885 (Trav-Coch); RajeshwarPershad Gala) Vs CIT (1955) 28ITR 842 (Pun) it was ruled that, the power conferred by these provisions is a power to correct mistakes and not a power of review. In the case of CIT Vs United Mercantile Co Pvt. Ltd (1986) 158 ITR 41 (Raj); CIT (Addl) Vs Chemical Limes (1984) 149IR 325 (Raj) it was held that under section 154, an assessing officer cannot be permitted to revise or review his earlier order. In the case of CIT Vs Ram Bahadur Thakur Ltd (1999) 237 ITR 217 (Ker) it was held that review cannot be under taken in the guise of rectification. III. Rectification cannot be made in respect of a debatable issue: The issue needs application of mind and the decision needs to be established by a long drawn process of reasoning where two opinions are possible. Various courts have given divergent views on the same issue and recent decision pronounced by High Court of Madras in the case of CIT Vs Hindustan Lever Limited [Tax Case (Appeal)
6 Dr.Reddy’s Laboratories Ltd. No.219 of 2006, 267, 269, 270, 273 and 274 of 2008) is in favour of the assessee. Hence the modification proposed by the AO does not amount to mistake apparent from record for the purpose of application of section 154 of the Act. In this regard we rely upon the decision of Hon'ble Supreme Court in various cases including the following: a) In the case of MEPCO Industries Ltd Vs CIT [(2009) 319 ITR 205] it was held that the right to rectify mistakes cannot be invoked in a case of mere change of opinion. A rectifiable mistake was a mistake which was obvious and not something which had to be established by a long drawn process of reasoning or where two opinions are possible. A decision on a debatable point of law cannot be treated as 'mistake apparent from record b.Similar decision was given by the Hon'ble Be in the case of TS Balaram vs, Volkart Brother [1971 AIR 2204, 1972 SCR (1) 30) In addition we rely on the following case laws to support our argument wherein it was held that debatable issue could be taken up regular assessment and not under sec. 154 a) DCIT Vs K.S. Venkatesh (ITA No. 416/2009) b) CIT VsRicha and Co (2001) 252ITR 40 (Del) c) CIT Vs Udaipur Distillarv Co Ltd (No 3) 267 ITR 366 (Raj); d) CIT Vs Udaipur Distillarv Co Ltd (No 1) (2004) 267 ITR 358 (Raj); e) Jasatdal June and Industries Ltd Vs CIT (2004) 266ITR 587 (Cal): IV. Submission on ground of merit Without prejudice to the above argument we would like to bring to your kind notice that the proposed allocation of corporate overhead by the AO is not warranted in view of the conditions placed by Se.80 IS & 80 IC restricting the deduction to the income derived from the said units which is also applicable in context of the expenditure thereby not requiring the allocation of corporate overhead. > Income Tax provisions governing deductions or tax incentives restrict the Scope of deduction only to the income derived from such undertaking. When the deduction is restricted only to the income derived from such undertaking, provision of this section cannot be extended to expenditure incurred at Corporate office while computing the deductions. > The undertakings which are availing the tax deductions are independent in nature and have distinct factory license, management and work force and for all the practical purpose, are standalone undertakings capable carrying on themselves. Role of the Corporate office is totally independent and is meant to discharge corporate and administrative functions. When the income tax law restricts avail merit of tax deductions which are specifically derived from the undertaking, extending the scope of the section to corporate related expenditure does not amount to correct interpretation of law". 14. It is an admitted fact that the assessee company did not allocate any expenditure incurred on accounts of payment of remuneration to directors and sales commission to directors and other corporate head office expenses to the units enjoying the deduction u/s 10Bj80IBj80HHC of the LT. Act. For assessment years 2006-07 and 2008-09 the AO apportioned the corporate overheads amongst exempted units and quantified the deduction. But for assessment year 2007-08 the Assessing Officer did not do so in scrutiny assessment. 15. The same issue was discussed at length by the Assessing Officer in his the assessment order in page No. 31 to 34 for assessment year 2003-04. The Assessing Officer, concluded that "it cannot be said that Corporate expenditure was incurred only for other than the tax exempted units and the Directors have put in their efforts and worked only for units not enjoying any deduction under the Act. Their services were available for the entire organization including the units enjoying the deduction in the Act, and the Corporate expenditure needs to be allocated to all units. Accordingly, he quantified the Corporate expenses attributable to exempted units.
7 Dr.Reddy’s Laboratories Ltd. This issue was contested before the CIT(A). The CIT(A) vide his order No. ITA No. 558/CIT(A)-2/2005-06 dated 30/03/2007 dismissed the submission of the assessee in page No. 38 on his order. The CIT(A) also hold that it can not be said that Corporate expenditure was incurred only for other than the tax exempted units and the directors have put in their efforts and work only for units not enjoying any deduction under the act. Their services were available for the entire organization including the units enjoying the deduction under the act, and the corporate expenditure needs to be allocated to all the units.
This issue was also agitated by the assessee company before the Honourable ITAT. The Hon'ble !TAT vide ITA No.739 & 655/H/2007 in page No.4 to 5 had discussed the issue. They hold that:
The next ground Is that the CIT(A) erred in confirming the assessing officer's allocating corporate administrative overheads and expenses on the basis of respective turnover vis-a-vis total turnover of the company in computing profits eligible u/s. 10B, 80IB and 80HHC of the IT Act.
Brief facts of the issue with regard to allocation of administrative and other expenses to Units enjoying deduction u/s. 10B, 80IB, etc. The assessing officer noticed that the assessee company has not allocated the expenditure incurred on account of payment of sales commission to Directors, remuneration paid to directors and other general expenses to the units enjoying deduction u/s. 10B /80HHC/ 801B of the I T Act, 1961. The assessing officer found that a sum of Rs. 10,40,07,000/- was debited towards remuneration to directors besides other expenditure claimed as Corporate expenditure which is not allocated to units enjoying exempted income. The assessee submitted before the assessing officer that each of the unit have their own administrative staff, offices and other expenditure which are accounted in arriving at the profit of the undertaking. However, the explanation was not acceptable to the assessing officer and the assessing officer held that it cannot be said that corporate expenditure was incurred only for other than the tax exempted unit and the directors have put in their efforts and work only for units not enjoying any deduction under the Act. Their services were available for the entire organization including the units enjoying the deduction under the act and the Corporate expenditure needs to be allocated to all the units. The assessing officer identified total expenditure to be considered for allocation amounting to Rs. 38,08,900/_ and allocated the same to all the units.
The CIT(A) held that corporate common expenditure needs is to be ailocated to all the units under same management. Against this the assessee is in appeal before us. The authorized representative relied on the judgement of Bangalore Bench in the case of Wipro GE Medical Systems Ltd. (81 TTJ 455).
On the other hand, the learned departmental representative relied on the order of the Tribunal in the case of Nitco Tiles Ltd., Vs. DCiT 30 SOT 474 and submitted that the turnover shall be the basis for allocating the overhead expenses. She Submitted that all expenses of the business, whether direct or indirect project specific or common expenses have to be considered for computation of the profits and gains of eligible business u/ s. 80HHC.
We have carefully gone through the order of the Tribunal in the case of Wipro GE Medical Systems Ltd., cited supra and wherein it was held it was held that the assessee is rightly having allocated indirect expenses to the two units according to the wages and other expenses on the basis of sales for arriving respective profits of its two units. The assessing Officer is directed accept the assessee's working in relation
8 Dr.Reddy’s Laboratories Ltd. to the deduction u/s. 80IA. In view of the above judgement, in our opinion, in the absence of identifying the expenditure of the export division, there is no basis other than allocating the total indirect cost on the basis of turnover. Accordingly, we direct the assessing officer to apportion the expenditure on the basis of turnover of various units. The issue is set aside to the file of assessing officer for fresh consideration, (emphasis supplied)
Thus, the observation of the ITAT is clear and unambiguous. They have categorically held that in the absence of identification of the expenditure of the export division, there is no basis other than allocating the total indirect cost on the basis of turnover.
The AO accordingly should have apportioned expenditure on the basis of turnover of various units. But the AO did not allocate the expenditure in the assessment or took any remedial action u/s 147 or 263 of the act. The AO rectified the assessment order u/s 154 of the Act holding the above issue as a mistake apparent from the record.
The only contention of the assessee is that allocation of corporate overhead to the eligible units is at best a debatable point of law and any matter involving debatable point of law cannot be rectified u/s. 154;
Having heard the assessee and having considered its submissions as regards the issue whether AO under s, 154 has the power to rectify such order, I find it necessary to reproduce the provisions of s, 154 which are as under: "154 (1) With a view to rectifying any mistake apparent from the record an IT authority referred to in s. 166 may,- (a) amend any order passed by it under the provision of this Act; [(b) amend any intimation or deemed intimation under sub-so (1) of s. 143; (lA) Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-so (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter ich has been, so considered and decided ..... ."
Thus, cl. (a) of sub-so (i) gives the power to an IT authority to rectify any mistake apparent from record and amend any order passed by it under the provisions of the Act. An order under s. 154 giving effect to the order of the CIT(A) is an order passed by it under the provisions of the Act and is exigible to the jurisdiction under s. 154. The next question is whether there is any mistake apparent from record which needs rectification. I find that the ITAT in their order dt. 29th October 2010 had clearly stated that, in the absence of identifying the expenditure of the export division, there is no basis other than allocating the total indirect cost on the basis of turnover. Accordingly, they directed the assessing officer to apportion the expenditure on the basis of turnover of various units. With regards to the head office and corporate and common operating expenses, it was directed to be allocated on turnover basis. But the AO while finalising assessment order has failed to follow the same for subsequent AY 2007-08. This is clearly a mistake apparent from record and it can be rectified under s. 154 of the Act. The AO has issued notice to the assessee before making the necessary rectification. Therefore all the grounds of appeal raised by the 35 assessee are dismissed holding that the AO is empowered to rectify the order under s. 154 of the Act and also that rectification is in consonance with the observation of the ITAT. [PROCTER & GAMBLE INDIA LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX (2008) 113 TTJ 0682 followed]. In the result, the appeal is dismissed.”
9 Dr.Reddy’s Laboratories Ltd.
Aggrieved from the order of the ld.CIT(A), the assessee filed appeal before the Income tax Appellate Tribunal.
The ld. AR reattracted the submissions made before the lower authorities. He has also filed written synopsis which is as under:-
SYNOPSIS Background:-
For the AY 2007-08, the assessee has claimed deduction/exemption of profits in respect of 4 units as under:-
S.No. Name of the Unit Deduction Comments claimed u/s. 1 Paidi Bhimavaram Unit Section 10B Without allocating corporate overheads
2 Bachupally Unit Section 10B Without allocating corporate
3 Yanam Unit Section 80IB Without allocating corporate overheads
4 Baddi Unit Section 80IC Without allocating corporate overheads
We submit that, the assessee has claimed the deduction under respective sections, without allocating the corporate overheads to the tax holiday/special units while filing return of income.
It is submitted that, the income & expenditure which are related and directly allocatable to the special units have been quantified and deduction has been claimed for the special units.
Draft assessment order:-
10 Dr.Reddy’s Laboratories Ltd. 4. The Assessing Officer ("AO") has issued Draft Assessment Order dated 31.12.2010.
The status of deduction claimed for 4 units is as under in the draft assessment order:- S.No. Name of the Deduction Status in draft Unit claimed u/s. order 1 Paidi Section 10B 100% of deduction Bhimavaram disallowed for Unit want to ratification letter
2 Bachupally Section 10B 100% of deduction Unit allowed 3 Yanam Unit Section 80IB 100% of deduction allowed
4 Baddi Unit Section 80IC 100% of deduction allowed
Since, there are adjustments prejudice to Company, the Company has filed objections before the Dispute Resolution Panel ("ORP"). Dispute Resolution Panel
During the proceedings before the ORP, the AO filed a letter dated 15.07.2011 (para 19, page 143 of paper book) before the ORP, requesting for allocation for corporate overhead expenses to all the 4 special units.
Against the same, the DRP has held that, since there is no variation proposed in the draft order with respect to deduction claimed under 10B/80IS/80lC of the Act, the ORP has rejected the request of the AO for the 3 units (i.e., S.No 2,3 and 4 of table at para 4 above).
With respect to 1 unit i.e., Paidi Bhimavaram unit, as the AO has already proposed a variance in the draft order by disallowing the 100% of deduction claimed u/s 10B of the Act for want to ratification letter, the DRP, upon filing of ratification letter, has directed the AO to allow the deduction claimed u/s 10B of the Act in respect of Paidi Bhimavaram unit. However, based on the request/enhancement letter filed by the AO, the ORP has allowed the claim of the AO, as the variation has already been proposed by the AO in the draft order.
In short, after filing the ratification letter before the ORP, the ORP has granted the relief for 10B deduction in respect of Paidi Bhimavaram unit. However, the ORP have directed the AO for allocation of corporate overhead expenses to such unit, while allowing the deduction u/s 10B for Paidi Bhimavaram unit.
For the remaining 3 units, the ORP held that, panel may not enhance on the issues on which no variation is proposed in the draft order and held that, department may take recourse available under 263 or 147 or otherwise permissible under the Act (Para 19.2 at page 144 of paper book).
Final Assessment Order
11 Dr.Reddy’s Laboratories Ltd. 11. The AO has passed the Final Assessment Order u/s 143(3) r.w.s 144C(S) dated 28.10.2011. The status of the of deduction claimed for 4 units is as under in the final assessment order:-
S.No. Name of the Unit Deduction Status in claimed u/s. draft order 1 Paidi Bhimavaram Unit Section 10B Deduction allowed after allocation of corporate overheads 2 Bachupally Unit Section 10B 100% of deduction allowed 3 Yanam Unit Section 80IB 100% of deduction allowed
4 Baddi Unit Section 80IC 100% of deduction allowed
ITAT
Aggrieved by the Final Assessment Order on the issue of allocation of corporate overhead for Paidi Bhimavaram 10B unit, the Appellant herein filed an appeal before the ITAT in ITA.No.2229/Hyd/2011 raising the ground that corporate overhead should not be allocated. The Hon'ble ITAT vide order dated 2 January 2017 at para 64 (refer Annexure 1) confirmed the DRP direction and held that corporate overhead should be allocated, however, the Hon'ble ITAT held that net corporate overhead expenditure should be allocated. However, in so far as tax holiday benefits in respect of other 3 units were not before the ITAT as it was not part of the Final Assessment Order.
Hight Court
Aggrieved by the order of the Hon'ble ITAT in holding that corporate overhead should be allocated, the Appellant has filed appeal before High Court and the said "Substantial Questions of Law" are admitted and pending final disposal.
Rectification u/s 154
The AO has issued notice dated 14.10.2015 (Pg. 190 of the paper book), very close the expiry date of statutory limitation period of 4 years from the date of the Final Assessment Order.
The AO proposed to rectify the Final Assessment Order dated 28.10.2011 for allocating corporate overheads to 8018 and 80lC units.
The Appellant in its response dated 30.10.2015 (Pg. 192 of the paper book) against the notice for 154, submitted that as on date of issue of notice for rectification, the issue of
12 Dr.Reddy’s Laboratories Ltd. allocation corporate overheads is a debatable issue as there is a favourable Madras High Courf9iecision in the case of CIT v« Hindustan Lever Ltd dated 24.09.2012, wherein it was held that head office expenses should not be allocated to tax holiday units.
We submit that, it is a settled principle that when there are two views possible as on the date of issue of 154 notice, the said issue cannot be subject to proceedings under Section 154 of the Act.
Apart from the above, it is submitted that, Draft Assessment Order cannot be rectified, as it is draft of the assessment. The issue of allocation of overheads has been raised by the AO before the DRP, which was rightly negated by DRP and subsequently the Final Assessment Order has been passed in line with the DRP directions. As per section 144C(13) of the Act, the AO shall pass the Final Assessment Order in line with DRP directions, and the AO does not have any scope/power to make amendments in the Final Assessment Order. In the present case, since the Final Assessment Order u/s 143(3) r.w.s 144C has been passed on pursuance of the DRP directions and it is in accordance with the directions issued by DRP, we submit that, there is no mistake in Final Assessment Order, which can be subject to rectification. However, in the subject case, the AO has sought to rectify the aforesaid Final Assessment Order, which is beyond his jurisdiction/power.
It is pertinent to note that for the subject AY for one 10B unit in Paidi Bhimavaram, the deduction was restricted by allocating net corporate overhead during the course of regular assessment proceedings. Therefore the principle of debatable issue does not arise for the same. However, in respect of 80lB and 80lC units are concerned the deduction was sought to be restricted in proceedings under section 154 of the Act. It is respectfully submitted that only in respect of adjustment made in 154 proceedings, it has to be adjudicated whether or not the issue is debatable.
Therefore, merely because the deduction was restricted for one unit under regular assessment, the same cannot be a basis to determine whether the said disallowance should be also restricted for 80lB and 80le units ignoring the fact that both the proceedings are completely different and only if the proceedings are legally valid the addition proposed could be sustained. In case the proceedings initiated under Section 154 of the Act is not valid in law as the issue sought to be rectified is debatable, then the addition cannot be sustained.
Assuming without admitting! had the same disallowance was done in revision proceedings under section 263 or in reopening proceedings under section 147 of the Act! the Appellant may not have valid grounds to question the same. In fact the DRP has also suggested the same. However! the AO without initiating proceedings under section 263 or 147! has resorted proceedings under section 154 in the fag end of the proceedings. Further, the order under section 154 is passed beyond 4 years.
Without prejudice to above submission on the validity of proceedings under section 154 of the Act! the Hon'ble ITAT in the Assessee's own case for the AY 2007-08 (referred supra) (refer Annexure-1) at Page no.48 and para no.64 has held that! the net of corporate overheads (i.e., corporate expenses - corporate income) to be allocated to special units! based on the turnover. The relevant extract of the order is given below:-
"The learned Counsel for the assessee submitted that it is only the net expenditure and
13 Dr.Reddy’s Laboratories Ltd. not the gross expenditure which should be allocated amongst all the Units. We agree with the contention of the assessee and direct the AD to allocate the only net expenditure of the corporate entity amongst all the units on the basis of the turnover. Thus, the alternate contention of the assessee is allowed. "
Accordingly! we submit that! if our contention that, rectification u/s 154 cannot be made is not accepted! the Appellant alternatively submits that, appropriate directions may be issued to the AO to allocate net corporate expenditure for the 8018 and 80le units, based on the Hon’ble ITAT order for the same year i.e., AY 2007-08 and thereby render justice.
In addition to the written submissions, he submitted that if there was a debatable issue, then rectification cannot be made. The assessee has himself not disallowed any corporate expenditure in regard to the exempted units. The income tax provisions or tax incentives restrict the scope of deduction only to the income derived from such undertaking. When the deduction restricted only to the income derived from such undertaking, provision of this section cannot be extended to expenditure incurred at corporate office while computing the deductions. The AO also cannot review his own order in support of his arguments, he relied on the following judgments
1.Hon’ble ITAT, Hyderabad Bench in ITA No.150 & 151/Hyd/2014 for AY 2003-04 & 2004-05 2.Hon’ble Surpeme court in the case of T.S.Balaram, ITO vs Volkart Brothers (82 ITR 50) 3. Hon’ble Supreme court in the case of Mepco Industries Ltd vs CIT 185 taxman 409 4. Hon’ble Gujarat High court in the case of Gujaraat State Seeds Coproation Ltd. vs. ITO 68 taxman.com 104 5. Hon’ble High court Rajasthan in the case of CIT vs. United Mercantile co.(p.) Ltd. 27 taxman 404 6. Hon’ble Kolkata Judgment in the case of CIT vs. Essel Mining & Industries Ltd. 53 taxmann.com 292 7. Hon’ble Bombay High court in the case of CIT v. Reliance Industries Ltd. 48 tamxnan.com 362 8. Hon’ble Allahabad High court in the case of Kesharwani Zarda Bhandar vs. CIT 30 tamxnan.com 362 9. Hon’ble chandigarh tribunal judgment in the case of S.R.Industries Ltd. vs. ACIT 62 taxmann.com 677 10. Hon’ble chandigarh Tribunal judgment in the case of S.R.Industries Ltd. vs ACIT 62 tgaxmann.com 384 11. Hon’ble Mumbai Tribunal judgment in the case of ACIT vs. Mahindra & Mahindra Ltd. 86 taxmann.com 162 12. Hon’ble Chandigarh Tribunal judgment in the case of Stanley Industries vs ACIT (40 taxmann.com 144)
14 Dr.Reddy’s Laboratories Ltd. 13. Hon’ble Madras High court judgment in the case of CIT vs. Hindustan Unilver Ltd. 42 taxmann.com 132 14. Hon’ble Mumbai High court judgment in the case of CIT vs Kanmani Metals & Alloys Ltd. 183 ITR 327 15. Hon’ble Calcutta High Court in the case of Tide Water Oil Co(India) Ltd vs CIT (353 ITR 300).
The ld. AR of the assessee also submitted that if rectification u/s.154 is accepted by Hon’ble Tribunal then the AO amy be directed to follow the ITAT direction as per para No.64 of the ITA No.2229/Hyd/2011 for AY 2007-08.
The ld. DR relied on the order of the lower authorities and he further submitted that it cannot be said that corporate expenditure was incurred only for the units other than the tax exempted units and the Directors has have put in their efforts and worked only for units not enjoying any deduction under the Act. Their services were available for the entire organization including the units enjoying the deduction in the Act and the corporate expenses needs to be allocated to all the units and the benefit is utilized the corporate expenditure should be allocated on the basis of the turnover. The assessee has not allocated the corporate expenditures among the exempted units. This issue was not examined by the AO properly accordingly, the AO has sought rectification which was a mistake apparent from the records. This issue was consistently raised by the AO which has been confirmed by the ld.CIT(A) as well as by the Hon'ble ITAT. The Hon'ble ITAT in ITA No. 2229/Hyd/2011 for AY 2007-08 has decided this issue in favour of the revenue. There is no any debatable issue. It was a mistake apparent from the records to which the rectification can be made by the AO as per the section 154 of the Act. The case law relied by the Ld.AR is on different set of facts. Therefore, it is not applicable to the assessee.
After hearing both the sides and perused the entire material available on record and order of the authorities below. The AO passed
15 Dr.Reddy’s Laboratories Ltd. the order on 04.01.2016 u/s. 154 and he disallowed the excess claim of deduction in respect of Yanam unit and Baddi Unit. The assessee is running four units, which are eligible for deduction/exemptions as per u/s. 10B, 80IB and 80IC. The ld. AR of the assessee has vehemently submitted that there was a debatable issue to which the rectification cannot be made u/s 154 of the Act is not acceptable because, the corporate expenditures are not related only for the corporate office, the expenditure are relating to the controlling and managing of the entire business of the assessee, whether it is a exempted unit or non exempted unit. Therefore, the expenditures should be apportioned among the all business units of the assessee for true computation of the taxable profit. The assessee has not apportioned but the revenue authorities consistently apportioned the corporate expenditures and the Hon'ble ITAT in ITA No.2229/Hyd/2011 for AY 2007-08 held as under:-
“59.As regards Ground No.13, brief facts are that the assessee claimed deduction u/s 10B of the Act for one Unit at Bajpally and another unit at Paidi Bhimavaram. During the assessment proceedings, assessee filed the copy of the Board of Industries only in the case of Bajpally Unit and for the other Unit, no such ratification letter was filed. Therefore, the AO allowed deduction u/s 10B for Bajpalli Unit only. The assessee raised objection before the DRP along with a letter dated 15.07.2011 stating also that the corporate overheads were not allocated to various units before granting/disallowance u/s 10B of the Act. The assessee argued before the DRP that it has been claiming deduction u/s 10B as per the approval given by the Development Commissioner of VSEZ and that this certificate was issued by the Commissioner under the delegated authority of Board of Industries. The assessee placed reliance upon the decision of the Tribunal at Delhi in the case of DCIT vs. Valliant Communication Ltd in ITA No.2706/Del/2008. Further, the assessee also filed a letter dated 10.06.2011 from the Asstt. .Development Commissioner VSEZ stating that the Board of approvals rectified the approval dated 21.02.2003 vide letter No.14/1/2011-EOU dated 18.1.2011. The DRP taking the note of the approval/rectification by the Board of Industries held that the assessee is entitled for the deduction u/s 10B of the Act with regard to Paidi Bhimavaram project, but however, directed the reduction of the corporate overhead before allowing the deduction u/s 10B of the Act. The assessee is challenging the allocation of the overhead before us.
16 Dr.Reddy’s Laboratories Ltd. 60. The learned Counsel for the assessee stated that the DRP by allocating the corporate overheads to the eligible units, has enhanced the draft assessment, though it does not have the power to consider the issues which are not proposed in the draft assessment order. In support of this contention, he placed reliance upon the decision of the Hon'ble Karnataka High Court in the case of GE India Technology Centre P Ltd vs. DRP (338 ITR 416 (Kar.). He also drew our attention to the provisions of section 114C(6) of the Act in support of this contention. Without prejudice to the above technical ground, the assessee prayed that the corporate overhead should not be allocated because section 10B contemplates that only profits and gains derived from undertaking is eligible for deduction and the 10B unit is independently functional with separate/identified set of employees and therefore, expenses which are not directly related to the undertaking should not be allocated on adhoc basis. In support of this contention he placed reliance upon the following decisions: a) AAR in National Fertilizers Ltd., In Re (145 Taxman 5) b) CIT vs. Kanmani Metals & Alloys Ltd (183 ITR 327(Bom.) c) Tide Water Oil Co. (India) Ltd vs. CIT (353 ITR 300(Cal.) d) Income Tax Appellate Tribunal's order in assessee's own case reported in (2014) 30 ITR (Trib.) 434. e) CIT vs. Hindustan Unilever Ltd (2014) 42 taxmann.com 132 (Mad). 61. Without prejudice to the above contention, the assessee prayed that the expenses are to be allocated to the respective units by taking the note of the expenditure for allocation. 62. The learned DR however, supported the orders of the authorities below and submitted that the corporate entity also has invested the time of its employees on the effective functioning of the 10B Unit and therefore, the corporate overheads are to be allocated amongst all the Units proportionate to their turnover. 63. Having regard to the rival contentions and the material on record, we find that in the assessee's own case for the A.Y 2006-07, the Coordinate Bench of this Tribunal at Mumbai has considered this issue at Para 12.5 and following the decision of the assessee's own case for A.Y 2003-04, this issue is set aside to the file of the AO for re-examination of the claim on similar lines. For the sake of ready reference and clarity, the relevant paragraphs are reproduced hereunder: "12.4 Without prejudice to the above, it was further contended that, the A.O while computing the corporate Overhead, has considered corporate expenditure including finance charges, but has failed to consider interest income and gain on foreign exchange fluctuations which are also attributable to corporate activities only. Hence while computing corporate Overhead allocable to the said units, he has to necessarily net-off the corporate income from the corporate expenditure and net only should be considered as corporate Overhead allocable.
17 Dr.Reddy’s Laboratories Ltd. 12.5 We have considered the issue. This issue was discussed by ITAT in assessment year 2003-04 in assessee's own case from para 14 to para 18 onwards. The issue was set aside to the Assessing Officer observing as under: "18. We have carefully gone through the order of the Tribunal in the case of Wipro GE Medical System Ltd. cited supra and wherein it was held that the assessee is rightly having allocated indirect expenses to the two units according to the wages and other expenses on the basis of sales for arriving respective profits of its two units. The Assessing Officer is directed to accept assessee's working in relation to deduction u/s.80IA. In view of the above judgment, in our opinion, in the absence of identifying the expenditure of the export division, there is no basis other than allocating the total indirect cost on the basis of turnover. Accordingly, we direct Assessing Officer to apportion the expenditure on the basis of turnover of various units. The issue is set aside to the file of Assessing Officer for fresh consideration." 12.6 Respectfully following the above, in this year also the matter is set aside to AO to re- examine the claim on similar lines. Accordingly, ground is allowed for statistical purposes". 64. The learned Counsel for the assessee submitted that it is only the net expenditure and not the gross expenditure which should be allocated amongst all the Units. We agree with the contention of the assessee and direct the AO to allocate the only net expenditure of the corporate entity amongst all the units on the basis of the turnover. Thus, the alternate contention of the assessee is allowed.
The assessee have four units out of which in two units, the assessee has not allocated the corporate expenditures. Considering the entire set of facts, we observed that there was no debatable issue involving in this case. Accordingly, the order passed by the AO is correct as per section 154 of the I.T.Act. Respectfully following the above judgment of the Co- ordinate Bench of the Tribunal cited (supra) in assessee's own case, the alternate plea of the assessee is accepted. Accordingly, we direct to the AO for disallowances of excess claim of deduction of exempted units has to be calculated as per para No.64 cited (supra). Accordingly, the appeal of the assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed for the statistical purposes.
18 Dr.Reddy’s Laboratories Ltd. Order pronounced in the Open Court on 08th July, 2022.
Sd/- Sd/- (K.NARASIMHA CHARY) (LAXMI PRASAD SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 08th July, 2022. Thirumalesh/sps Copy to:
S.No Addresses 1 Dr.Reddy’s Laboratories Limited 8-2-337, Road No.3 Banjara Hills,Hyderabad-500 034 2 DCIT,Circle-17(1) Hyderabad 3 CIT(A)-5, Hyderabad 4 Pr.CIT-5, Hyderabad 4 DR, ITAT Hyderabad Benches 5 Guard File
By Order