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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, JM & SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R
Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeal by assessee for Assessment Year [AY] 2005-06 contest the order of Ld. Commissioner of Income Tax (Appeals)-15, Mumbai [CIT(A)], Appeal No.CIT(A)-15/Arr.14/13-14 dated 31/10/2013 qua Lupin Limited Assessment Year:2005-06 confirmation of certain additions. The assessment for impugned AY was framed by Ld. Assistant Commissioner of Income Tax, LTU, Mumbai [AO] u/s 143(3) on 30/12/2008. The grounds raised
in the appeal may be summarized as follows:- Sl.No Head Ground Numbers 1. Prior Period expenditure 1 & 2 2. Interest on Income Tax Refund 3 3. Disallowance u/s 14A 4 to 7 4. Provision for Leave Encashment 8 5. Transfer Pricing Adjustment 9 & 10 6. General in nature 11 & 12
Facts in brief are that assessee being resident corporate assessee engaged in manufacturing of pharmaceuticals, scientific research etc. was assessed u/s 143(3) at loss of Rs.21.58 Crores under normal provisions after certain adjustments / disallowances as against revised returned loss of Rs.24.36 filed by the assessee on 07/11/2006. As evident from grounds of appeal
, the subject matter of the appeal is certain Transfer Pricing Adjustments [TP] as well as non-TP adjustments as confirmed by Ld. first appellate authority, which we shall deal in subsequent paragraphs.
3. Ground Numbers 1 & 2 are related with disallowance of prior-period royalty payments of Rs.57.27 Lacs paid by the assessee to an entity namely Fujiwasa Pharmaceuticals Co. Ltd., Japan for use of trademark pursuant to license agreement dated 02/04/2003. The aforesaid payment pertained to sales made by the assessee during the month of March, 2004. As per the terms of the agreement, the royalty payment @3% against the Lupin Limited Assessment Year:2005-06 same was payable within a period of 60 days from the end of the quarter. The assessee has not claimed the same in AY 2004-05 but claimed the same as prior period items in AY 2005-06 which has been denied by the revenue on the premise that the same had already crystallized in AY 2004- 05 and the assessee, following mercantile system of accounting, could not be allowed deduction of the same in the impugned AY. Upon due consideration, we find that it is undisputed fact that the payment pertains to AY 2004-05 and the liability had already crystallized in that AY only and therefore, the assessee, following mercantile system of accounting, was eligible to claim the same in AY 2004-05 only. The tax neutrality plea raised before us by Ld. AR could not be accepted since there was no justifiable reason which prevented the assessee to claim the same or make provision thereof in AY 2004-05. Therefore, in our opinion, the deduction thereof has rightly been denied to the assessee in the impugned AY. However, as a logical consequence, since the expenditure is a legitimate claim of the assessee and the assessee was entitled to claim the same in AY 2004-05, Ld. AO is directed to verify and consider the claim of the assessee for AY 2004-05. Technically, the grounds stands dismissed, however, the assessee shall get consequential relief in AY 2004-05. 4.1 Ground Number 3 is related with adjustment of interest on Income Tax demand with interest on Income Tax refund received by the assessee. During assessment proceedings, it was noted that the assessee received interest of Rs.3.01 Crores on Income Tax refunds pertaining to earlier AYs Lupin Limited Assessment Year:2005-06 starting from AY 1996-97. The assessee has paid interest of Rs.99.11 Lacs on Income tax demand pertaining to AY 2004-05 and offered the net interest i.e. Rs.2.02 Crores to Tax in impugned AY. The Ld. AO denied the said adjustment on the premise that interest expenditure had no nexus with the interest earned by the assessee and statute did not provide for deduction of interest paid on Income Tax. The stand of Ld. AO has been confirmed by Ld. first appellate authority by placing reliance on the order of Pune Tribunal rendered in Sandvik Asia [15 Taxmann.com 381]. Aggrieved, the assessee is in further appeal before us. 4.2 The Ld. AR has drawn our attention to the fact that similar issue stood against assessee for AY 2007-08 by the order of this Tribunal vide & 4338/Mum/2011 dated 17/02/2016. However, the order has subsequently been recalled vide MA No.49/Mum/2017 dated 16/04/2018, finding mistake in the same. The copies of the orders have been placed before us. On merits, Ld. AR has placed reliance on the judgment of Hon’ble Bombay High Court rendered in DIT Vs. Bank of America NT & SA [ITA 177 of 2012 dated 03/07/2014] & order of Mumbai Tribunal rendered in Cynamid India Limited Vs. ITO [ITA No. 4561/Bom/1982 23/05/1984]. Per Contra, Ld. DR supported the stand taken by lower authorities. 4.3 Upon careful consideration, it is evident from the order of Ld. AO that the interest received by the assessee was assessable under the Head Income from other sources and the netting-off has been denied by the Ld. AO on the premise that the interest payment had no nexus with the interest Lupin Limited Assessment Year:2005-06 earned by the assessee and the statute do not provided for such deduction. In our opinion, the assessee’s claim could, at the most, fall u/s 57(iii). Upon perusal of the case laws, we find that present factual matrix is squarely covered by the cited decision of Hon’ble Bombay High court which has confirmed the stand of Tribunal in this regard. Upon perusal of Tribunal order which was under challenge before Hon’ble High Court, we find that the claim has been allowed by the Tribunal by making following observations:- 14. Ground No. 3 raised by the assessee reads as follows: "3.1 The CIT(Appeals) erred in confirming the disallowance of interest paid to the Income-tax Department having failed to appreciate that the expenditure was incurred in the normal course of business and is, therefore, allowable. 3.2 Without prejudice to the above, your appellants submit that in any case, the interest of Rs. 1,026,906 paid to the Income-tax authorities be allowed to be set off against the interest of Rs. 10,757,930 received from the Income-tax authorities during the same financial year, and only the net interest received or paid be taxed or disallowed as the case may be."
15. The assessee received interest on refund of taxes paid. The assessee also paid interest on taxes payable. The assessee sought to set off the interest paid against the interest received and offered the net interest received to tax. The Assessing Officer for the reasons given while disallowing similar claim made by the assessee in assessment year 1991-92 refused to allow the set off and brought the gross interest income to tax. On appeal by the assessee the CIT(A) confirmed the order of the Assessing Officer for the following reasons. "7. Ground No. 7.—"Indirect Income received from the Department" The assessee paid interest to the Income-tax Deptt. amounting to Rs. 10,26,906 during the present assessment year. The assessee claimed that this was business expenditure and, therefore, this should have been allowed. The assessee has received an interest of Rs. 1,07,57,930. It was claimed that the amount of interest paid by the assessee should have been allowed to be set off against the interest received from the department and taxed in the hands of the assessee. The ld. Advocate pleaded that the interest paid to and received from was from the same party i.e., Government of India. That, therefore, both the transactions should be taken together and the interest paid by the assesee should be adjusted against the interest received by the assessee and only net interest so arrived at should be taxed in its hands. The ld. A.O relying upon appellate orders for the assessment year 1990-91, rejected the claim of the assessee. The ld. Advocate, however, placed reliance on the two Tribunal judgments in this regard. The two decisions are: (a) Cyanamidi India v. ITO [ITA No. 4561(Bom.) of 1991-92, dated 23-5-1984].
Lupin Limited Assessment Year:2005-06 (b) R.M. Agarwal v. ITO 2 SOT 361 (Delhi) The case at (a) above is directly on the point. However, I must say that both the judgments do support the contention raised by the ld. Advocate. However, I tried with due respect, I could not persuade myself to follow those judgments on this point. The interest received from the department is assessable under the head "Other Sources". There is no dispute on this. The ld. Advocate did agree that the only head of income under which this interest was assessable was the head other sources. If this is settled, then, the only deduction that could be allowed were the deductions as stated in section 57 of the Income-tax Act. Obviously, the deductions referred to in clauses (i) (ia), (ii ) and (iia) are not relevant for the above purpose. Therefore, the only clause under which this deduction could be claimed is clause (iii) of section 57 the conditions for allowing any expenditure under this clause is that the expenditure should have been incurred wholly and exclusively for the purpose of making or earning such income. The assessee had paid interest to the department either for late payments or for short payments. That means, interest has been levied for one default or the other. Now can it be said that incurring such default was for the purposes of earning interest from the department. The answer is obvious. The law is well settled that once the income falls under a particular head, the taxable income has to be computed with reference to the particular provisions given in the Act with regard to the said head of income. In Nalinikant Mody 61 ITR 420 (SC), this proposition has been clearly laid down. Therefore, the ld. Officer was justified in rejecting the claim of the assessee. The ground is not allowed."
At the time of hearing of this appeal it was brought to our notice that identical issue was considered by the Tribunal in assessee's own case in ITA No. 5240/Bom./05 for assessment year 1990-91 and the Tribunal on an identical issue held as follows: "13. Coming to the last ground on the netting of interest we find that the Bombay Bench "C" of the Tribunal in the case of Cyanamidi India Ltd. v. ITO [ITA No. 4561(Bom.) of 1982] has taken a view on the matter. At para 9 of its order it is held as follows: "We find merit in Shri Irani's submission that between two persons, there can be only one account. Proceeding on that basis, one has to consider the net interest received by the assessee as assessee's income from other sources. Accordingly we direct the Income-tax Officer to reduce the business income by an amount of Rs. 3,52,988 and to charge income from other sources an amount of Rs. 3,44,600." In R.N. Agarwal v. ITO (supra ) at paragraph 14, the same issue is discussed wherein it is held as follows: "14… It is true that in view of the decision of the Punjab and Haryana High Court in Oriental Carpets case ( supra), interest paid by the assessee on delayed payment of tax could not be deducted under section 37(1) of the Act as business expenditure. But if the facts of the case are taken into consideration it would appear that it is not the assessee's case that deduction for the interest paid should be allowed in the computation of income from business. It is also not seriously urged before us that deduction for the amount should be made in terms of section 57(iii). The case of the assessee merely is that only the net income from interest which is the real income should be assessed. To us this argument seems to be plausible. The assessee was to receive from the Government certain amount of refund obviously because excess tax had been paid. On that account the Government paid interest under section 244.On the other hand, Lupin Limited Assessment Year:2005-06 the assessee retained the Government money by delaying payment of tax and accordingly interest became payable by the assessee to the Government. If the interest paid by the assessee on delayed payment of tax could not be treated as business expenditure, as held by the Punjab and Haryana High Court in Orient Carpets's case (supra), interest received from Government on delayed payment of refund for the same reasons could not be treated as income from business. In fact both, the interest received and the interest paid are to be assessed under the head 'Income from other sources' although the ITO seems to have assessed the Government retained the assessee's money and paid interest thereon, the assessee, in the same way, retained the Government's money and paid interest thereon. Both had the same character and, therefore, if the interest received from the Government exceeded the interest paid by the assessee, then only net amount could be taxed. Similarly, if the interest received was less than the interest paid difference only should be allowed, while computing the income from other sources. The real income from interest has to be determined in this manner and to be considered while making the assessment. If the issue is considered from this angle which seems to us to be the proper approach, neither the Punjab and Haryana High Court decision in Orient Carpets case (supra) would stand in the assessee's way, nor the plea that the interest paid by the assessee is not expenditure contemplated under section 57(iii) could deprive the assessee the benefit of the adjustment of the interest paid against interest received from the Government. We direct that interest paid under section 220(2) amounting to Rs. 18,597 be adjusted against the interest received under section 244 amounting to Rs. 19,490 and the net amount only should be taxed." Respectfully following the co-ordinate bench decisions relied upon by the learned counsel for the assessee we allow the ground to the extent of netting of interest. Respectfully following the decision of the Tribunal referred to above we allow ground No. 3 raised by the assessee. The claim of the assessee has been allowed on the premise that between two persons, there could only be one account and therefore, the benefit of netting was available to the assessee. As noted above, the Hon’ble court has confirmed the stand of Tribunal by not admitting the appeal of the revenue. Therefore, respectfully following the same, by deleting this addition, we allow this ground of assessee’s appeal.
Ground numbers 4 to 7 are related with disallowance u/s 14A for Rs.7.10 Lacs since the assessee earned tax free income of Rs.14.33 Lacs. Ld. AO, applying Rule 8D, computed the same at Rs.7.10 Lacs comprising- Lupin Limited Assessment Year:2005-06 off of interest disallowance u/r 8D(2)(ii) for Rs.5.80 Lacs and expense disallowance @0.5% of u/r 8D(2)(iii) for Rs.1.3 Lacs. The same upon confirmation by Ld. CIT(A) has been contested before us. The Ld. AR submitted that own funds in the shape of Share Capital & Reserves far exceeded the investment made by the assessee and therefore, the assumption was to be drawn in favor of the assessee that the investments were made out of own funds. At the same time, the Ld. AR pleaded for reasonable expenses disallowance since Rule 8D was not applicable in the impugned AY. The bare perusal of the financials of the assessee reveal that Shareholders’ funds of more than Rs.500 crores far exceeds the meager investment of Rs.9.37 crore made by the assessee. Further the opening investments stood at Rs.8.91 crores which demonstrate that fresh investment were marginal in the impugned AY and therefore, interest disallowance, in our opinion, is not justified. The expenses disallowance is estimated at 5% of exempt income earned by the assessee. The Ld. AO is directed to re-compute the same in the light of our decision.
Ground No. 8 is related with provision of leave encashment for Rs.79.55 Lacs made by the assessee during the impugned AY. The same was initially suo-moto disallowed by the assessee u/s 43B(f) in computation of income but later on claimed during assessment proceedings in view of the judgment of Hon’ble Calcutta High Court rendered in Exide Industries Ltd. Vs. UOI & Ors. The same has been denied by the lower authorities since the revenue’s appeal against the same was pending before Hon’ble Lupin Limited Assessment Year:2005-06 Apex Court and the Hon’ble Court, by way of interim order, stayed the operation of the cited judgment of the Hon’ble Calcutta High Court. Both the representative converged on the point that suitable directions may be given to the lower authorities to apply the ruling whenever rendered by Hon’ble Apex Court in the aforesaid matter. Therefore the issue, at the outset, is restored back to the file of Ld. AO with a direction to apply the ruling of Hon’ble Apex Court rendered in aforesaid matter. However, it is clarified that in term of directions of Hon’ble Supreme Court, the assessee shall pay tax on the disallowance as if Section 43B(f) was on statute book. Therefore, the Ld. AO is directed to compute the tax, if any, after making such disallowance. The assessee would be at liberty to seek the amendment to the assessment order in terms of the ruling of Hon’ble Court. Technically, the ground of appeal
, for the time being, stand dismissed.
7. Ground Numbers 9 & 10 are related with TP adjustment against purchase of raw material and sale of finished goods. The adjustment against purchase of raw material has not been pressed by Ld. AR due to smallness of the amount involved. The TP adjustment of Rs.8 Lacs on account of Sale of finished goods is under appeal before us. 8.1 Facts qua the same are that the assessee sold finished goods to its Associated Enterprises [AE] situated in Thailand & Hong Kong amounting to Rs.24.33 Crores and benchmarked the same using TNMM method. The Ld. TPO, applying internal CUP and applying customs rate, computed the adjustment at Rs.8 Lacs. The same, upon confirmation by first appellate Lupin Limited Assessment Year:2005-06 authority, is under challenge before us. The Ld. AR made a short submission that the adjustment are primarily related with sale made by assessee to its AE situated at Hong Kong and therefore, the CUP rates for Hong Kong only should be compared to work out the said disallowance as against average rates of various countries taken by Ld. TPO. The working of the same has been placed before us. At a glance, we find the submissions quite plausible and therefore, accepting the said contention, we reduce the impugned TP adjustment to Rs.43,620/- as per the computations placed before us. This ground stands partly allowed. It is agreed between the representatives that this approach shall remain valid only for this impugned AY and would not be applicable in any other AY.
9. Ground Numbers 11 & 12 are general in nature. All the grounds stand disposed-off in terms of our above order.
10. Finally, the assessee’s appeal stands partly allowed.
Order pronounced in the open court on 27th April, 2018. Sd/- Sd/- (Saktijit Dey) (Manoj Kumar Aggarwal) �या�यक सद�य / Judicial Member लेखा सद�य / Accountant Member मुंबई Mumbai; �दनांकDated : 27. 04.2018 Sr.PS:-Thirumalesh Lupin Limited Assessment Year:2005-06 आदेशक���त�ल�पअ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकरआयु�त(अपील) / The CIT(A) 4. आयकरआयु�त/ CIT– concerned 5. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, मुंबई/ DR, ITAT, Mumbai 6. गाड�फाईल / Guard File