BIOCON LIMTIED,BANGALORE vs. CIT, BANGALORE

Per Shri Jason P Boaz, A.M. : This appeal by the assessee is directed against the order of Commissioner of Income Tax, LTU, Bangalore dt.4.3.2016 passed under Section 263 of the Income Tax Act, 1961 (in short 'the Act') for the Assessment Year 2009-10. 2. Briefly stated, the facts of the case are as under :-

2 ITA No.907/Bang/2016 2.1 The assessee company, engaged in the business of manufacturing biotechnological products in the pharmaceutical and enzyme sector, filed its return of income for Assessment Year 2009-10 on 30.9.2009 declaring NIL income under regular provisions and ‘book profits’ of Rs.72,22,20,653 under Section 115JB of the Act. The case was taken up for scrutiny and notices under Section 143(2) and 142(1) of the Act were issued on various dates along with questionnaires calling for various details in order to verify the claims made by the assessee in the return of income. The information and details called for were admittedly furnished by the assessee form time to time. Reference was made to the Transfer Pricing Officer (TPO) under Section 92CA of the Act for determination of the Arm’s Length Price (ALP) of the international transactions entered into by the assessee in the year under consideration and the TPO vide order under Section 92 CA(3) of the Act dt.28.12.2012 determined Transfer Pricing Adjustment of Rs.20,32,95,392 in respect of the international transactions entered into by the assessee with its Associated Enterprises (AEs). The Assessing Officer passed a draft order of assessment under Section 143(3) r.w.s. 144C of the Act dt.30.3.2013 making various additions / disallowances. The assessee filed its objections thereto before the Dispute Resolution Panel (‘DRP’). The DRP issued its directions thereon under Section 144C(5) of the Act vide order dt.12.12.2013. The Assessing Officer then passed the final order of assessment for Assessment Year 2009-10 under Section 143(3) r.w.s. 144C of the Act vide order dt.30.1.2014 at NIL after allowing deduction

3 ITA No.907/Bang/2016 under Section 10AA & 10B of the Act and setting off carry forward unabsorbed depreciation of earlier years amounting to Rs.88,37,71,980. Book Profits under Section 115JB of the Act were computed at Rs.72,22,20,653. It is submitted by the learned Authorised Representative that an appeal against this order of assessment has been filed before the ITAT which is pending disposal. 2.2 The CIT, LTU, Bangalore issued a show cause notice dt.8.1.2016 to the assessee initiating revision proceedings under Section 263 of the Act for Assessment Year 2009-10 stating therein that the order of assessment passed by the Assessing Officer dt.30.1.2014 is erroneous in so far as it is prejudicial to the interests of revenue for the following reasons / issues set out in the Annexure thereto :- (i) Allocation of weighted deduction under Section 35 (2AB) needs to be allocated to units claiming deduction under Section 10B of the Act. This was not done and the assessee was allowed excessive deduction under Section 10B of the Act. (ii) Market to Market loss on forward contracts was not added back to profit while arriving at Book Profits under Section 115JB of the Act. This was required to be done as the said loss is contingent in nature. (iii) Disallowance of R & D expenses claimed in DTA Units on transfer of technology to EOU should have been made while allowing deduction under Section 10B of the Act. Therefore excessive deduction under Section 10B is allowed.

4 ITA No.907/Bang/2016 2.3 The assessee was afforded opportunity of hearings and filed written submissions dt.16.2.2016 and 24.2.2016. The ld. CIT then concluded the revisionary proceedings by passing the impugned order under Section 263 of the Act dt.4.3.2016. In the said order, the ld. CIT held that the final order of assessment for Assessment Year 2009-10 dt.30.1.2014 passed by the Assessing Officer is erroneous in so far it is prejudicial to the interests of revenue under Section 263 of the Act in respect of the three issues raised in show cause notice (supra) and in this regard the matters were remanded back to the file of the Assessing Officer for considering them afresh after affording adequate opportunity to the assessee of being heard in the matter. 3. Aggrieved by the aforesaid order under Section 263 of the Act passed by the CIT, LTU, Bangalore on 4.3.2016 for Assessment Year 2009- 10, the assessee preferred this appeal, wherein it has raised the following grounds :- 1. “ The Ld CIT has erred in passing an order under section 263 of the Act, which is bad in law and on facts. 2. The Ld CIT erred in initiating revision proceedings on matters that are debatable and where two views are possible. 3. The Ld CIT has erred in law and on facts in concluding that the order of the Assessing Officer ("AO") is 'erroneous and prejudicial to the interest of revenue' by alleging that no proper enquiry has been made and has accordingly erred in sending back the issue to the files of the AO for considering it afresh. Scope of revision proceedings 4. The Ld CIT has erred in law and on facts in initiating the proceedings under section 263 of the Act.

5 ITA No.907/Bang/2016 5. The Ld CIT has erred in law and on facts in initiating the proceedings under section 263 of the Act without appreciating that the details pertaining to adjustments proposed to be made were examined by the AO during the course of the assessment proceedings. Re-computation of book profits under section 115J8 of the Act : 6. The Ld CIT has erred in law and on facts in considering the marked to market losses, in respect of foreign exchange forward contracts, as being contingent in nature and concluding that the same is to be disallowed as per provisions of section 115JB of the Act. 7. The Ld CIT has erred in law and on facts in not appreciating the fact that the computation of foreign exchange losses were in accordance to the Accounting Standard ("AS") 11 and are hence not arbitrary expenses but towards ascertained liabilities on account of foreign currency translations. 8. The Ld CIT has erred in law and on facts in disregarding the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs Commissioner of Income Tax (2000) (245 ITR 428) (SC) and the Hon'ble Bangalore Tribunal in the case of Wipro GE Medical Systems Ltd v DCIT (81 TTJ 455) wherein it was held that a liability is not contingent, if the liability is certain to be incurred; and the liability is capable of being estimated with reasonable certainty even though the quantification may not be possible. 9. The Ld CIT has erred in facts in disregarding that in the Appellants case, it was certain that there would be an exchange difference as on March 31st of the relevant financial year. 10. The Ld CIT has erred in law in disregarding the fact that as the amount of exchange difference is computed based on the formula prescribed in AS 11 and recognized in books as per the same accounting standard, there is no uncertainty in respect of its occurrence and the same cannot be considered as a contingent liability. 11. The Ld CIT has erred in law and on facts in not considering the decision of the Hon'ble Bangalore Tribunal in the case of Quality Engineering & Software Technologies (P.) Ltd. Vs Deputy Commissioner of Income Tax wherein the provision for losses on derivative contracts was considered as an allowable expenditure.

6 ITA No.907/Bang/2016 12. The Ld CIT has erred in law and on facts in disregarding the ruling of the Supreme Court in the case of Woodword Governor, wherein the Court had supported the claim of such losses for computation of book profits under section 115JB of the Act. Hence, the same cannot be treated as contingent/ unascertained liability for MAT purposes. Allocation of weighted deduction towards units claiming relief under 10B of the Act : 13. The Ld CIT has erred in law and on facts in holding that while claiming deduction under section 10 ofthe Act, the Appellant should have considered the deduction under section 35(2AB) of the Act and the profits of the 10B units should have been arrived at after such deduction. 14. The Ld CIT has erred in law and on facts in holding that the deduction under section 10B of the Act is being allowed at a higher sum and the other taxable income is being reduced to thatextent. 15. The Ld CIT has erred in law and on facts in disregarding the Appellants submission that though the research expenses pertain to the units claiming relief under section 10B of the Act, they are not specifically incurred by the units claiming a relief under section 10B ofthe Act. 16. The Ld CIT has erred in law in disregarding that section 3S(2AB) of the Act is a beneficial provision introduced to provide certain specified assesses, a weighted deduction in respect of certain categories of expenses on satisfaction of certain prescribed conditions and that the proposal to consider a deduction under section 3S(2AB) of the Act in the computation of relief under section 10B of the Act would amount to depriving the Appellant of the benefit that the legislature intended to accord. 17. Without prejudice to the above, the Ld (IT has erred in law in not considering the fact that, the AD had examined the claim of section 35(2AB) of the Act along with the unit-wise workings of the tax holiday claim in detail during the course of assessment proceedings and hence the same could not be considered erroneous.

7 ITA No.907/Bang/2016 Attribution of EOU profits to taxable OTA Unit 18. The Ld (IT has erred in law and on facts in making an addition to the income ofthe Domestic Tariff Area ("DTA") unit and consequently bringing it to tax. 19. The Ld CIT has erred in law and on facts in holding that a certain portion of the profits of an eligible Export Oriented Unit ("EDU") unit is attributable to the DTA Unit, thereby denying the relief under section 10B of the Act to the extent of such profits. 20. The Ld CIT has erred in law in proposing to make the subject adjustment as the same is not covered under any specific provision of the Income-tax Act, 1961 21. The Ld CIT erred in disregarding the submission of the appellant where it has been stated that the EOU unit was set up to carry out manufacturing of insulin and no other facility of the Appellant had the capacity to carry out such activity at that time. Accordingly, no portion of the income of the EOU unit is attributable to the DTA unit. 22. The Ld CIT has erred in law and on facts in holding that the Appellant sought to take double benefit under the Act by claiming relief under section 3S(2AB) and 10B of the Act for the same expenditure/ cost incurred. 23. The Ld CIT has erred in law in disregarding the fact that this matter is being contested for the AY 2008-09 at the Appellate Tribunal level and hence has not reached finality, thus being a litigated issue. Other grounds 24. Without prejudice to the above, a revision order cannot be passed in cases where there are two possible views. 25. The Ld CIT has erred in law and on facts in directing the AO to obtain details and to thereafter consider the issue as per provisions of the Act.” 4.0 Grounds 1 to 5 and 24 & 25 – Validity of order passed u/s.263 of

the Act.

8 ITA No.907/Bang/2016 4.1 The above grounds (supra) are raised by the assessee in respect of

challenging the validity of the order under Section 263 of the Act passed

by the CIT, LTU, Bangalore on 4.3.2016.

4.2 The learned Authorised Representative for the assessee submitted that the final order of assessment for Assessment Year 2009-10 dt.30.1.2014 was not erroneous in so far as it is prejudicial to the interests of revenue. Referring to the Annexure to the notice under Section 263 of the Act dt.8.1.2016, it was submitted that a perusal thereof shows that the ld. CIT has admitted that the assessee's claim for deduction under Section 10B of the Act has been considered by the Assessing Officer while passing the order of assessment. In this regard, the learned Authorised Representative placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. DLF Ltd. (2013) 350 ITR 555 to submit that there is no element of unsustainability in the order of the Assessing Officer and hence the impugned order passed under Section 263 of the Act is bad in law. Referring to the CIT’s findings at para 4 on page 3 and para 5 on page 5 of the impugned order, the learned Authorised Representative submitted that the ld. CIT only held that the Assessing Officer has not considered all these issues in the right perspective, without proper reasoning. This, the ld. AR contended, meant that the ld. CIT has admitted that the Assessing Officer has considered the issue while passing the order of assessment, but the inquiry conducted is not proper or adequate. It is contended that the

9 ITA No.907/Bang/2016 inadequacy of the inquiry on the above reasons is not a ground for invoking jurisdiction under Section 263 of the Act. The learned Authorised Representative relied on various decisions in support of the contention that the issues considered in the order passed under Section 263 of the Act is capable of two views and as the Assessing Officer has taken one of the possible views, the same cannot be disturbed by the ld. CIT under Section 263 of the Act. 4.3 Per contra, the learned Departmental Representative for Revenue placed reliance on the order passed by the ld. CIT. It was submitted that as the Assessing Officer has not considered the issues in the right perspective, the ld. CIT was justified in passing the impugned order under Section 263 of the Act. 4.4.1 We have heard the rival contentions, perused and carefully considered the material on records; including the judicial pronouncements cited. The first issue in the impugned order under Section 263 of the Act is in respect of the allocation of weighted deduction (wrongly mentioned by the ld. CIT as weighted depreciation) under Section 35(2AB) of the Act to the units claiming deduction under Section 10B of the Act. The undisputed facts on this issue, as per the record before us, is that the assessee incurs R&D expenditure which are claimed as revenue in nature and are shown as a line item of deduction in the unit-wise profit and loss account, while computing the deductions under Section 10B and 10AA of the Act. The in house R&D expenses; both revenue and capital; were also eligible for deduction under Section

10 ITA No.907/Bang/2016 35(2AB) of the Act @ 150% thereof. This incremental deduction was claimed by the assessee at the entity / company level and not at the unit level. It is seen that the unit-wise profit and loss account as well as the basis of allocation of expenses was furnished to the Assessing Officer. The particulars of amounts admissible u/s. 35(2AB) was also on record before the Assessing Officer in the course of assessment proceedings (copy at page 104 of paper book). Note No.4 to the above particulars (at page 104 of paper book) stated that the amounts disclosed include expenditure incurred in units claiming deduction under Section 10AA and 10B of the Act. 4.4.2 The Assessing Officer vide Annexure to notice under Section 142(1) of the Act dt.30.7.2012 (copies of correspondence placed at pages 175 to 184 and pages 194 to 196 of paper book), inter alia, called for the following details at Query 11 – 3CD, 35D,Sec. 10B and 10AA of the Act :-

11 ITA No.907/Bang/2016

xxvi. Attachment 2: Certificates from DSIR in form 3CD and 3CM.

Further details were also called vide Annexure 1 on this issue (placed at page 194 of Paper Book at Query 3 thereof which is as under :-

“ 3. Furnish the necessary documents in support of deduction under Section 35(2AB) and 35(2) of the IT Act.”

4.4.3 AS per the details on record, it is seen that the assessee has submitted details in this regard before the Assessing Officer vide letters dt.14.8.2012, 28.12.2012, 22.1.2013, 5.2.2013, 19.2.2013, 5.3.2013, 11.3.2013 and 21.3.2013 (copies placed at pages 174 to 269 of Paper Book) and the order of assessment records that the authorized representatives appeared from time to time and furnished the details for

12 ITA No.907/Bang/2016 verification. In the above factual matrix of the case, it is evident that the issue of allowability of deduction under Section 35(2AB) of the Act was considered by the Assessing Officer while passing the order of assessment and the Assessing Officer after examining the same allowed the assessee's claim for weighted deduction under Section 35(2AB) of the Act. 4.5 The second issue considered by the ld. CIT in the impugned order under Section 263 of the Act is the recomputation of Book Profits under Section 115JB of the Act, wherein it was held that Market to Market losses should be added to book profit as being contingent in nature. According to the learned Authorised Representative, Market to Market loss claimed by the assessee has been held to be speculation loss by the DRP and the Assessing Officer has had to follow the DRP directions while passing the final order of assessment. We find, from a perusal of the record before us, that the Assessing Officer vide Annexure to Notice under Section 142(1) of the Act dt.30.7.2013 (copy placed at pages 175 to 184 and pages 194 to 196 of Paper Book) called for details which, inter alia, included - a) Justification for claim of Market to Market foreign exchange losses as admissible expenses with details thereof; b) Reconciliation of Market to Market losses with that in Annexure-1; c) Impact of foreign market to market losses on computation of deduction under Section 35(2AB) of the Act;

13 ITA No.907/Bang/2016 d) Computation of income under Section 115JB of the Act; e) Audit Report under Section 115JB; f) Working of MAT credit entitlement; g) Impact of not crediting sale of investments to P & L Account on the computation of income under Section 115JB of the Act, etc. The assessee has, inter alia, submitted these details (copy of replies at pages 174 to 269 of Paper Book); which details were also examined and considered by the Assessing Officer before passing the order of assessment. The Assessing Officer at para 3 of the order of assessment has discussed in detail about the allowability of the MTM losses. The computation of ‘Book Profits’ under Section115JB of the Act was also made by the Assessing Officer in the order of assessment. Thus it cannot be held that the Assessing Officer has not examined the issue of allowability of MTM losses under Section 115JB of the Act while passing the order of assessment. 4.6.1 The third and last issue considered by the ld. CIT in the impugned order under Section 263 of the Act is with regard to the factoring of the consideration on account of transfer of technology to the EOUs. The notice issued by the ld. CIT in revisionary proceedings stated that there is transfer of technology relating to extraction of Insulin (from ‘Pichia Pastoris’ strain) from the DTA Unit to the EOUs eligible for deduction under Section 10B of the Act without any consideration. It is stated that the profits earned from manufacture and sale of new products developed with this transfer of technology is accounted in EOU

14 ITA No.907/Bang/2016 and deduction under Section 10B of the Act is claimed. It is contended by the ld. CIT that rightful income of the DTA unit is booked in the EOUs and claimed as exempt and that the same is required to be brought to tax. The assessee in its reply dt.24.2.2016 (placed at pages 458 and 459 of Paper Book) has submitted as under :-

15 ITA No.907/Bang/2016

4.6.2 In the impugned order passed under Section 263 of the Act, the ld. CIT held as under :-

16 ITA No.907/Bang/2016

17 ITA No.907/Bang/2016

4.6.3 In the course of assessment proceedings, the Assessing Officer vide notice under Section 142(1) of the Act dt.30.7.2012 (copy placed at pages 174 to 184 and 194 to 196 of Paper Book), called for various details and documents in respect of the DTA Unit and EOUs eligible for deduction under Section 10B of the Act. These, inter alia, included the profit and loss accounts and balance sheets of the individual units, justification for treating the income earned form licensing rights as eligible for the claim of deduction under Section 10B of the Act, unit-wise break up of closing stock, sales of manufactured pharmaceuticals and trading bio-pharmaceuticals, approvals for setting up a SEZ Unit, details of amounts pertaining to units claiming deduction under Section 10AA and 10B of the Act. In this regard, it is seen that the assessee submitted details (copies of correspondence placed at pages 174 go 269 of Paper Book) which were examined / considered before passing the order of assessment. 4.7.1 From the above discussion, it is evident that all the three issues raised by the ld. CIT in the impugned order under Section 263 of the Act have been considered by the Assessing Officer in the course of assessment proceedings, therefore, it cannot be said that there was

18 ITA No.907/Bang/2016 failure on the part of the Assessing Officer to make enquiries in respect of the aforesaid these issues in the course of assessment proceedings. In our considered opinion, the ld. CIT has only substituted his views with that of the Assessing Officer in the proceedings under Section 263 of the Act, which is impermissible. In coming to this view, we drew support from the decisions of the Hon'ble Karnataka High Court in the case of CIT Vs. Saravana Developers (2016) 387 ITR 239 wherein it was held that in the absence of lack of enquiry by the Assessing Officer, the order of assessment cannot be held to be erroneous and prejudicial to the interest of revenue and any further enquiry ordered by the CIT would amount to fishing / roving enquiry in the matter already concluded. In this regard, the Hon'ble Bombay High Court in the case of CIT Vs. Nirav Modi (2016) 71 taxmann.com 272 (Bom.) at para 12 of its order has held that -

“ 12. In the present facts, the Assessing Officer was satisfied, consequent to making an enquiry and examining the evidence produced by the Assessing Officer, establishing the identity and creditworthiness of the donor as also the genuineness of the gift. The CIT in his order of Revision, does not indicate any doubts in respect of the genuineness of the evidence produced by the Assessee. The satisfaction of the Assessing Officer on the basis of the documents produced is not shown to be erroneous in the absence of making a further enquiry. It is made clear that our above observations should not be inferred to mean that it is open to the Assessing Officer to enquire into the source of source for the purpose of the present facts. This is a case where a view has been taken by the Assessing Officer on enquiry. Even if this view, in the opinion of the CIT is not correct, it would not permit him to exercise power under Section 263 of the Act. In fact, the Apex Court in Amitabh Bachchan (supra) has observed that there can be no doubt that where the view taken by the Assessing Officer is a possible view, interference under Section 263 of the Act, is not permissible.”

19 ITA No.907/Bang/2016 4.7.2 The Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. Vs. CIT (2000) 243 ITR 83 held that when an ITO adopts one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of revenue. 4.7.3 When the aforesaid judicial principles are applied to the case on hand, it is evident that the order of assessment was passed after making enquiries and application of mind on the above issues. In the impugned order under Section 263 of the Act, the ld. CIT has acknowledged that the Assessing Officer has dealt with the above issues; though in his opinion wrongly. In our view, Explanation 2 to Sec. 263 of the Act is not applicable in the case on hand as the order of assessment was passed after enquiries made by the Assessing Officer on the above issues and also cannot be invoked merely because, according to the ld. CIT, the Assessing Officer should have been made further enquiries before passing the order of assessment. In view of the facts and circumstances of the case, as discussed above, we are of the considered opinion that the ld. CIT invoked the provisions of Sec. 263 of the Act wrongly to assume jurisdiction thereunder and therefore set aside and cancel the impugned order under Section 263 of the Act dt.4.3.2016 for Assessment Year 2009-10. Accordingly the grounds raised by the assessee at S.Nos.2 to 5 and 24 & 25 are allowed. Consequently, the other grounds raised on merits are not adjudicated.

20 ITA No.907/Bang/2016 5. In the result, the assessee's appeal for Assessment Year 2009-10 is allowed as indicated above. Order pronounced in the open court on the 21st day of Feb., 2018.

Sd/- Sd/- (SUNIL KUMAR YADAV) (JASON P BOAZ) Accountant Member Judicial Member Bangalore, Dt.21.02.2018

*Reddy gp

Copy to : 1 Appellant 4 CIT(A) 2 Respondent 5 DR. ITAT, Bangalore 3 CIT 6 Guard File

Senior Private Secretary Income Tax Appellate Tribunal Bangalore.