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Income Tax Appellate Tribunal, MUMBAI BENCH “H” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the revenue. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-24 [in short ‘CIT(A)’], Mumbai and arises out of the assessment order u/s 143(3)(ii) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal
read as under:
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred has erred in deleting the addition made by the AO by restricting M/s Zydus Nycomed 10B of the Act, invoking the provisions of section 80IA(10)/69-C of the Act.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting that net profit @ 84% is not “more than ordinary profit” despite the fact that close connection between the parties carrying on the eligible business has been established and the course of business between the parties is so arranged that the business transacted between them earned “more than ordinary profit”.
3. Briefly stated, the facts of the case are that the assessee-company is engaged in the business of manufacturing key intermediates used in production of anti-ulcerant drug Pantoprazole. It filed its return of income for the assessment year (AY) 2008-09 on 05.08.2009 declaring total income of Rs.3,11,55,310/-. The assessee is manufacturing and exporting the above products exclusively for its joint venture partner Nycomed GMBH, Germany and claiming deduction u/s 10B on the income therefrom. During the year, it has shown sales of Rs.133.75 crores at a cost of production of Rs.21.06 crores and a profit after taxation of Rs.108.04 crores and claimed deductions u/s 10B of Rs.106.29 crores. During the course of assessment proceedings the AO observed that the assessee’s gross profit margin was 84% and net profit margin 81%. The AO computed the deduction allowable u/s 10B in assessee’s case at Rs.7,67,54,690/- as against the claim of Rs.106,20,89,210/-. Additionally, the AO relying on the decision for AY 2006-07 also invoked the provisions of section 10B(9) to disallow the entire claim of exemption u/s 10B which was stated to be without prejudice to the above action.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) followed the order of the ITAT in assessee’s own case for AYs 2003-04, 2004-05 and 2005-06 and held that the AO was not justified in drawing conclusion against the assessee that its course of business with Nycomed GMBH, Germany was so arranged that the business transacted between them produced to the assessee more than the ordinary profits, which might be expected to arise in such case. Accordingly, the Ld. CIT(A) directed the AO to allow the assessee’s claim for exemption u/s 10B as claimed in its return of income.
5. Before us, the Ld. DR submits that the AO has rightly restricted the disallowance to Rs.7,67,54,690/- as against the claim of Rs.106,20,89,210/- made by the assessee u/s 10B of the Act. It is further submitted that additionally, the AO relying on the decision in AY 2006- 07 has rightly invoked the provisions of section 10B(9) to disallow the entire claim of exemption u/s 10B which was stated to be without prejudice to the above action. Thus the Ld. DR supports the order passed by the AO. 6. Per contra the Ld. counsel of the assessee submits that the above issue has been decided in favour of the assessee by the order of the ITAT in assessee’s own case for the AYs 2003-04 to 2005-06 reported in (2014) 41 taxmann.com 273 (Mumbai-Trib) and AYs 2007-08 & 2010- 11 (ITA No. 2670 & 3337/Mum/2016).
We have heard the rival submissions and perused the relevant materials on record. We find that the same issue arose in AYs 2003-04 to 2005-06 (supra). The Tribunal held as under: “20. The increase in gross profit rate for the years under consideration as compared to that of A.Y. 2002-03 which was taken by the AO as the year of ordinary profits thus was properly explained by the assessee and keeping in view the said explanation which was based on the relevant facts and figures, we are of the view that the ld. CIT(A) was fully justified in holding that the profits of the assessee company from its eligible business for the years under consideration could not be regarded as more than the ordinary profits which are expected to rise in such eligible business so as to attract the provisions of section 80IA(10) of the Act. In our opinion, the AO, therefore, was not justified in invoking the provisions of section 80IA(10) of the Act to restrict the deduction claimed by the assessee u/s 10B of the Act and the ld. CIT(A) is fully justified in deleting the addition made by the AO by restricting the claim of the assessee for deduction u/s 10B of the Act in all the three years under consideration. 21. It is also pertinent to note that APAG, Germany was a joint venture partner in the assessee company having 50% share only and it is difficult to comprehend as to how and why it will enter into any sort of arrangement to allow the assessee company to make more than ordinary profits at its own cost knowing fully well that the benefit of such arrangement as a result of any excess profit could be shared by it only to the extent of 50% with the balance 50% going to the other joint venture party. In the case of Digital Equipment India Ltd. vs. DCIT, (2006) 103 TTJ (Bang.) 359 cited on behalf of the assessee before the ld. CIT(A), a similar issue was involved wherein the deduction claimed by the joint venture company was restricted by the Revenue Authorities by invoking the provisions of section 80I(9) which are analogues to the provisions of section 80IA(10) of the Act and the addition made on this M/s Zydus Nycomed Tribunal holding that the Digital Group Worldwide, the overseas joint venture partner will not pay any undue sum to the joint venture which it could not recoup entirely to the exclusion of others. It was also held that mere substantial profit by itself would not give rise to a conclusion that there could be any such arrangement to produce more than the ordinary profits to the assessee from eligible business.
As already noted, a different course was adopted by the AO while making the addition on the similar issue in A.Y. 2005-06 by treating the alleged extra ordinary profits as unexplained expenditure of the assessee on the ground that cost of sales to that extent was not shown by the assessee in the books of account. Accordingly, the addition was made by him to the total income of the assessee u/s 69-C of the Act. As already held by us on the basis of comparative gross profit working of the eligible business of the assessee company, there was no case of more than normal profit earned by the assessee in A.Y. 2005-06 as compared to A.Y. 2002-03 as alleged by the AO and whatever increase in the gross profit rate was there in A.Y. 2005-06 as compared to A.Y. 2002-03, the same was satisfactorily explained by the assessee. It therefore follows that there was no case of any cost of sales incurred by the assessee outside the books of account which could be treated as unexplained expenditure by invoking the provisions of section 69-C of the Act. Moreover, as rightly contended by the ld. counsel for the assessee for invoking the provisions of section 69-C of the Act, the onus is on the AO to establish that the relevant expenditure was actually incurred by the assessee and there is nothing brought on record by the A.O. to discharge this onus.
For the reasons given above, we uphold the impugned orders of the ld. CIT(A) deleting the addition made by the AO by restricting the claim of the assessee for deduction u/s 10B of the Act invoking the provisions of section 80IA(10)/69-C of the Act in all the years under consideration and dismiss ground No. 3 of the Revenue’s appeal for A.Y. 2003-04, and ground No. 1 of the Revenue’s appeals for assessment years 2004-05 and 2005-06.”