M/S. PERFETTI VAN MELLE INDIA PVT. LTD.,GURGAON vs. DCIT, GURGAON

This appeal has been filed by the assessee against the Assessment Order dated 28/01/2016 passed by DCIT Circle-3, Gurgaon u/s 143(3) r/w Section 144C of Income tax Act, 1961 in Assessment Year 2011-12.

Particulars Manesar Chennai Rudrapur Total Total 33144 21029 74316 128489 turnover (Rs. In Lakhs) Net Profit (-)3854 (-)2037 14681 8788 (Rs. In Lakhs) % (-)11.62 (-)9.68 19.75 6.83 Profit/Loss

6.1 The Ld. AR submits that the Assessee incurred AMP expenditure of Rs. 194.02 crores of which Rs. 102 crores of balance AMP is marked up by Gross profit margin in manufacturing and sale business @ 42.66% resulting in disputed TP adjustment of Rs. 146.19 crores. The Ld. AR submitted that by referring to LG electronics decision of Special bench, TPO presumed existence of international transaction of AMP by adopting Bright Line Test ('BIT') and alleged that AE was benefited by way of increased business. The Ld. AR further submits that though the DRP had benefit of both Sony Ericson 374 ITR 118 and Maruti Suzuki 381 ITR 117 decisions of Hon'ble High court. The Ld. AR submits that the DRP deliberately ignored said decision in Maruti Suzuki and upheld existence of international transaction of AMP solely on basis of paras 52 of Sony Ericsson and other decisions i.e., presumption which was directly contrary to evidence/facts. The Ld. AR further submitted that no factual foundation with reference to facts of present case was indicated and department has not discharged its primary onus to establish or even remotely indicate basis to show existence of separate international transaction.

6.2 The Ld. AR submits that the present case is not one wherein set aside and remand for fresh consideration would be justified (on the pretext that certain judicial decisions were not available to lower authorities at the point of time of consideration of issues by them) as not only relevant decisions laying down principles applicable in the context were available but specifically pointed out. The Ld. AR further submits that if the authorities chose to ignore/failed to discharge the onus and made determination contrary to law it would be unjust and unlawful to allow them multiple opportunities to somehow try and improve their case against the Assessee. The Ld. AR further submits that as all the material relevant for deciding the issue as also case laws were available to lower authorities the critical issue about existence of international transaction deserves to be decided by this Tribunal.

6.3 As relates to issue no. 2, the Ld. AR further submitted that this is the fourth year of the assessee for claiming the benefit of Section 80IC. The Ld. AR further submitted that the Assessing Officer misinterpreted certificate issued by chartered accountant, ignored the explanation offered by the assessee and denied the benefit of this deduction. The Ld. AR submitted that the claim of the assessee is under Section 80IC(2)(a) of the Act i.e. not related to manufacturing of any items specified in thirteenth Schedule (negative list) and the same has been certified by the auditor in Form 10CCB. The Ld. AR further submitted that the fulfillment of conditions of either Section 80IC(2)(a) or Section 80IC(2)(b) is required to claim the deduction under Section 80IC of the Act and the assessee fulfills the conditions of Section 80IC (2)(a) of the Act as it is not manufacturing any product mentioned in negative list of Thirteenth Schedule. The Ld. AR submitted that CST registration was obtained as a trader in the year 2000 when Uttarakhand State was constituted while the manufacturing unit was set up only on May 15, 2007 as evident from the ‘Certificate of Registration’ issued by the Deputy Commissioner of the Department of Commercial Tax, Government of Uttarakhand. The Ld. AR submitted that the required date during the course of the proceedings was submitted at the time of assessment proceedings but the same was ignored by the Assessing Officer. The Ld. AR submitted that the assessee follows SAP based system of accounting and separate product codes exist in SAP for each product manufactured by each manufacturing unit. All sales are duly booked under the respective product codes. The Ld. AR further submitted that unit wise profit and loss accounts was submitted during the assessment proceedings, but the same was ignored by the Assessing Officer. The Ld. AR submitted that assessee maintains books of accounts physically at the respective units as well as in SAP system, though there is no requirement under the Income Tax Act to physically maintain unit wise books at the unit itself or get them audited unit wise. The Ld. AR further submits that the assessee submitted detailed reasons for higher profits in Rudrapur unit as compared to the other two manufacturing units, however the same were ignored by the AO/TPO. The Ld. AR submitted that assumption of determining production/ sales volume based on the Gross Block or Net Block will lead to hypothetical/absurd conclusions. The assessee is manufacturing different products at different units. Production process of all the items manufactured is also different. The Assessing Officer has completely disregarded the process and technology varies in producing each brand of product line. Even within a category, the production process varies with each brand name. The Assessee duly submitted all the documents as required by the Assessing Officer and the same was verified by the AO wherein no discrepancies were pointed out by him. The claim of deduction under Section 80IC is a fact specific analysis and the facts of one case cannot be squarely applied to the other. Further the case of Japan Exports which was relied by the DRP is incorrect and has distinguishing facts. The assessee is eligible to claim deduction of Rs. 149 crores. However, the deduction claimed by the assessee was restricted to Gross Total Income i.e. upto Rs. 120 crores. The Ld. AR submits that no loss/excess deduction was carried forward by the assessee. Section 80AB of the Act provides for computation of taxable business profits of that unit. While computing Gross Total Income, all the heads of income have to be considered including Income from Other Sources. Thus, the Ld. AR submits that the assessee is eligible for claiming deduction of Rs. 102 crores.

6.4 As relates to issue no. 3, the Ld. AR further submitted that depreciation disallowed on capital subsidy by the AO is not proper as the same is allowable since the amount of capital subsidy was not received during the subject year. The Ld. AR submits that if the disallowance if any made, the same should be restricted to Rs. 9,37,500/-.

7.1 The Ld. DR submits that as regards ground nos. 14 to 16 related to disallowance of claim of deduction of Rs. 102,31,58,679/- under Section 80IC of the Act, the A.O correctly held in the assessment order that the assessee has claimed deduction u/s 80IC (2) (b) as evident from the perusal of the Form No. 10CCB wherein the Auditor has observed at Para no. 25(f) of the Report that the undertaking has manufactured any article or thing mentioned in Fourteenth Schedule. In the Column No. 26 also the Auditor has mentioned the production of Pharma Products/Chloromint Candy covered by Excise Classification 30.03 to 30.05. As per the Notification No. 49/2003-Central Excise; Dated: 10/6/2003 the Excise Classification 30/3-30/2005 pertains to the Pharma Products. Thus, it is evident that the assessee has claimed deduction u/s 80IC (2)(b) and not u/s 80IC (2)(a) as subsequently claimed by the assessee. Since, during the Assessment Year 2011-12 the assessee has not produced any pharma product (Schedule XIV) hence it is not eligible for deduction u/s 80IC.

7.2 As relates to Ground No. 17, the Ld. DR relied on the principle of consistency which flows from the fact that once an opinion is formed by the Revenue on any particular issue then it cannot change that in subsequent assessment years. Thus, principle of consistency is applicable only when an opinion is formed by the A.O in earlier assessment years. The said issue was not examined by the A.O in the earlier assessment years hence the principle of consistency is not applicable. It is pertinent to mention that in subsequent assessment years deduction u/s 80IC has not been allowed. Thus, the A.O has consistently followed the identical approach from this assessment year onward. The Hon’ble Delhi High Court in case of Commissioner of Income-tax- VI, New Delhi v. Usha International Ltd. [2012] 25 taxmann.com 200 (Delhi) (FB) has held in respect of principle of “change of opinion” that when specific query is raised by the AO and it is answered by the assessee then it will be termed as ‘change of opinion’. In this case no such query, identical to the queries raised during the course of assessment proceeding for the AY 2011-12, was ever raised in the earlier assessment years. Thus, when no opinion was formed in the earlier assessment years then there is no question of any change of opinion in this assessment year by following the ratio decidendi of the above decision of jurisdictional High Court. The Ld. DR further submitted that the principle of res judicata is not applicable in case of the assessment proceeding and every assessment year is different. Though the principle of consistency has held to be applicable by the Hon’ble Courts but the Hon’ble Courts have also held in various judicial pronouncements that this principle cannot be stretched beyond a limit in cases where erroneous views were taken in past. Some of those landmark judgments are of the Hon’ble Delhi High Court in case of Krishak Bharati Cooperative Ltd. [2012] 23 taxmann.com 265 (Delhi) wherein it has been held that there cannot be a wild application of the principle of consistency after interpreting the judgment given by the Hon’ble Apex Court in case of Radhasoami Satsang which has been relied upon by the assessee.

7.3 It is now necessary to take up the submission that the Tribunal erred in departing from the "consistency" rule. This is based on the fact that for the period of about 15 years, the income tax authorities had accepted the assessee's submissions and permitted annual amortization of the initial lease consideration, as advance rent. The assessee has relied on the "consistency" rule enunciated in Radhasoami Satsang( supra). The Supreme Court observed, in that case that:

"...where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. The Ld. DR further submitted that there cannot be a wide application of the rule of consistency. In Radhasomi Satsang'scase (supra) itself, the Supreme Court acknowledged that there is no res judicata, as regards assessment orders, and assessments for one year may not bind the officer for the next year. This is consistent with the view of the Supreme Court that "there is no such thing as res judicata in income-tax matters" Raja Bahadur Visheshwara Singh v. CIT AIR 1961 SC 1062. Similarly, erroneous or mistaken views cannot fetter the authorities into repeating them, by application of a rule such as estoppel, for the reason that being an equitable principle, it has to yield to the mandate of law. A deeper reflection would show that blind adherence to the rule of consistency would lead to anomalous results, for the reason that it would engender the unequal application of laws, and direct the tax authorities to adopt varied interpretations, to suit individual assesses, subjective to their convenience, - a result at once debilitating and destructive of the rule of law. A previous Division Bench of this Court, in Rohitasava Chand v. CIT [2008] 306 ITR 242/ 171 Taxman 147 had held that the rule of consistency cannot be of inflexible application. Hon'ble Apex Court in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 (SC) has held that to perpetuate an error is no heroism and to rectify it is the compulsion of the judicial conscience. In case of CIT v. Excel Industries 358 ITR 295 the Hon’ble Apex Court has held that when the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further, it cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it. This is not the case here thus the above judgement of the Apex Court is not applicable keeping in view the facts of the case which are distinguished from the facts of the above case.

7.4 As regards to Ground No. 19, on maintenance of separate Books of Accounts for the eligible unit, the Ld. DR submitted that Separate Profit and Loss Account and Balance Sheet is required to be maintained as per the Rule 18BBB of the Income tax Rules a separate report is to be furnished by each undertaking or enterprise of the assessee claiming deduction under section 80-1 or 80-1 A or 80-IB or 80-IC and shall be accompanied by the Profit and Loss Account and Balance Sheet of the undertaking or enterprise as if the undertaking or the enterprise were a distinct entity.

7.5 The Ld. DR further submitted that in the case of an enterprise carrying on the business of developing or operating and maintaining or developing, operating and maintaining an infrastructure facility, the form shall be accompanied by a copy of the agreement of the enterprise with the Central Government or the State Government or the local authority for carrying on the business of developing or operating and maintaining or developing, operating and maintaining the infrastructure facility. In any other case, the form shall be accompanied by a copy of the agreement, approval or permission, as the case may be, to carry on the activity signed or issued by the Central Government or the State Government or the local authority for carrying on the eligible business. It is evident that separate Profit and Loss Account and Balance Sheet of the eligible unit can be prepared only if separate books of account are maintained. However, the assessee has not submitted separate Profit and Loss Account and Balance Sheet for the Rudrapur Unit. It has merely estimated the profit of the unit from the consolidated account. The Hon’ble Supreme Court has also held in case of Arisudana Spinning Mills Ltd. v. Commissioner of Income-tax, Ludhiana [2012] 26 taxmann.com 39 (SC) that for claim of deduction u/s 80IA separate accounts are required to be maintained. Thus, the claim of deduction u/s 80IC is not eligible for deduction as the assessee has not submitted separate profit and loss account and balance sheet as per the provision of Rule 18BBB of the IT Rules.

7.6 As relates to Ground No. 20 and 21 regarding rejection of Books of Account and Non-submission of required documents/information, the Ld. DR submitted that the AO has clearly held at para 4.9 that details were not submitted by the assessee and unit-wise books of account were not produced by the assessee.

7.7 As regards to Ground No. 23 and 24 related to shifting of profit from other units to the Rudrapur (eligible) unit and restriction of claim of deduction on pro-rata basis, the Ld. DR submitted that the AO has discussed in detail how the assessee has shifted profit from its other two ineligible units at Manesar and Chennai to eligible unit at Rudrapur. During the AY 2011-12 the assessee has disclosed losses of Rs.3854 Lakhs and Rs.2037 Lakhs in Manesar and Chennai unit respectively and profit of Rs.74316 lakhs in the Rudrapur Unit. The assessee’s profit has systematically declined in the ineligible units, especially the Manesar Unit which was getting deduction u/s 80IC earlier and is manufacturing identical products i.e. Chewing Gum, Toffee and Bubble Gums. The AO has discussed that the assessee was disclosing good profits in the Manesar Unit till the AY 2007-08 but since the AY 2008-09 when the assessee set-up the Rudrapur Unit the profits in the Manesar Unit started declining and resulted in loss in subsequent assessment years despite the fact that it is producing identical goods. The assessee failed to submit any plausible explanation for this as non-levy of Excise Duty, only distinguishing factor between the Manesar Unit and Rudrapur Unit, in the Rudrapur Unit cannot justify such huge difference between the profits of these units. The fact that the assessee has not maintained separate books of accounts and has not submitted separate Profit and Loss Account and Balance Sheet as mandated by the Rules 18BBB of the IT Rules establishes the shifting of profit by the assessee to lower its tax liability. From the bare perusal of the unit-wise profit and loss estimated by the assessee it is evident that the assessee has attributed less expenses on account of AMP and Operating to the Rudrapur Unit. If the above expenses, which are common expenses and in absence of separate books of account have to be distributed in pro-rata basis (on turnover), are computed in ratio of the respective sales of the three units then instead of Rs.7379 lakhs Rs. 10,993 Lakhs should be attributed on account of AMP Expenses and instead of Rs. 10,679 lakhs Rs. 14,144 Lakhs should be attributed on account of Operating and other Expenses for the Rudrapur Unit Thus, the Net profit of the Rudrapur unit will be Rs. 7601 Lakhs instead of Rs. 14681 Lakhs as claimed by the assessee. It is also evident that the assessee has basically taken over the business of the Manesar Unit once it exhausted its claim of deduction u/s 80IC. The Hon’ble Apex Court has held in case of Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC) that reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business. Thus the claim of deduction is liable to be disallowed on this ground as well. It is evident that the assessee has claimed deduction u/s 80IC by adopting colourable device to evade tax. The Hon’ble Apex Court has held in case of McDowell & Co. v. CTO(1985) 154 ITR 148 that it is the right of the revenue to disregard a transaction and look at its substance if it was undertaken as an antiavoidance tool. In Jiyajeerao Cotton Mills Ltd. v. Commissioner of Income Tax and Excess Profits Tax, Bombay AIR 1959 SC 270 the Hon’ble Supreme Court has held that - “Every person is entitled so to arrange his affairs as to avoid taxation, but the arrangement must be real and genuine and not a sham or makebelieve. ” Finally the Hon’ble Supreme Court, after analyzing all relevant judgments on “tax planning” and “tax evasion” came to the following conclusion in case of Vodafone International Holdings B.V. v. Union of India &Anr. 341 ITR 1:-

“117. Revenue cannot tax a subject without a statute to support and in the course we also acknowledge that every tax payer is entitled to arrange his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury.Revenue’s stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, calls for no reconsideration by a larger branch. ”

7.8 As relates to Ground No.25 regarding disallowance of deduction u/s 80IC on the income from other sources the Ld. DR submitted that from the perusal of the computation of 80IC deduction submitted by the assessee it is evident that the assessee has claimed deduction on the interest income on FDRs amounting to Rs.5,54,89,633/-. This issue has been settled by the Hon’ble Apex Court that deduction u/s 80IC cannot be allowed on the interest income earned on FDRs in case of Pandian Chemicals Ltd. v. CIT [2003] 129 Taxman 539 (SC). Besides the above, the Hon’ble J&K High Court has held in case of Asian Cement Industries v. Income Tax Appellate Tribunal [2012] 28 taxmann.com 290 (Jammu & Kashmir) that interest income on FDRs cannot be regarded as income flowing from business activity of industrial undertaking and, thus, it cannot be computed for deduction under section 80-IB. Identical view has been taken by the ITAT Delhi in case of M/s. A. T. Kearney India Pvt. Ltd. v. ITO ITA No. 1403/Del/2010.

7.9 As regards to Ground No. 26 and 27 related to claim of depreciation on assets on which Capital Subsidy was received, the Ld. DR submits that the assessee cannot claim the depreciation on the assets or part of the assets which have been acquired through Capital Subsidy received from the Government.

8.1 To sum up, we set aside the impugned order on the issue of transfer pricing additions towards AMP expenses and remit the matter to the file of AO/TPO for a fresh determination of their ALP in consonance with our above observations and directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Thus, Ground No. 2 to 13 are partly allowed for statistical purposes.

8.2. As relates to benefit of deduction under Section 80IC the same was claimed only for the unit situated in Rudrapur (Uttrakhand). There is net loss in the units of Manessar (Haryana) & Chennai (Tamilnadu) and there is a net profit in Rudrapur Unit. The TPO has only disallowed this claim as the assessee was not involved in manufacture of any item covered by Schedule XIV, where as the assessee has referred Schedule XIII and submitted that it is not considered by the TPO. After verifying Schedule XIII & XIV it is pertinent to note that the assessee’s location at Rudrapur is coming under the scope of 80IC but the address was not properly verified by the TPO. Therefore, this needs to be verified. We therefore, remit this issue back to the file of the TPO to examine the same as relates to the applicability of the Schedule XIII. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Therefore, Ground No. 14 to 25 is partly allowed for statistical purpose.

8.3. As related to Ground No. 26 and 27 relating to depreciation, the amount of capital subsidy was not received during the subject year as per the Ld. AR’s contention but the same needs to be verified. Therefore, we remit this issue back to the file of the TPO to examine the same. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings..

The order is pronounced in the open court on 28th of April, 2017.