ACIT 10(3), MUMBAI vs. STRIDES ARCOLAB LTD, NAVI MUMBAI

आदेश / O R D E R

PER RAVISH SOOD, JM:

1. “On the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in deleting disallowance of deduction amounting to Rs.6,56,69,350/- claimed u/s 35(2AB) by the assessee for fulfillment of conditions thereon.

2. On the facts and in the circumstances of the case and in law, the Learned CIT(A) was not justified in deleting the adjustments made by the Assessing Officer in Arm's Length Price u/s. 92CA(3) of the Act amounting to Rs.3,70,70,000/-.

3. On the facts and in the circumstances of the case and in law, the Learned CIT(A) was not justified in deleting the addition on account of depreciation of Rs.85,40,684/- made by the TPO in the rectification order dated 12.03.2009.

(i). Export of finished goods :Rs. 3,70,70,000/- (ii). Interest on advances :Rs. 33,49,416/- (iii). Purchase of trade marks :Rs. 6,44,90,350/- Total :Rs.10,49,09,766/- The A.O. after receiving the report of the TPO therein deliberated on certain other issues and assessed the income of the assesssee at Rs.38,29,29,330/-.

(A) CLAIM OF DEDUCTION UNDER SECTION 35(2AB) :

4. The assessee in its return of income had claimed deduction of Rs.19,70,08,052/- u/s 35(2AB) of the ‘Act’. That during the course of the assessment proceedings it was though submitted by the assessee that the requisite conditions contemplated for claiming the deduction under the aforesaid statutory provision stood duly satisfied during the year under consideration, however the A.O. being guided by the fact that the said deduction was disallowed by his predecessor while framing the assessment in the hands of the assessee in the earlier assessment years, thus adopting the observations of his predecessor therein concluded that as the assessee had not entered into an agreement with the prescribed authority for cooperation for such Research and Development facility and for audit of accounts maintained for the said facility, as required under law, and rather had merely submitted the form for such agreement with the DSIR which could not be construed as fulfillment of the precondition contemplated u/s 35(2AB), therefore disallowed the aforesaid claim towards weighted deduction of Rs.19,70,08,052/- raised by the assessee u/s 35(2AB), and substituted the same by a deduction of Rs. 13,13,38,701/- under Sec. 35(1)(i) and Sec.35(1)(iv) of the ‘Act’. That consequent to the aforesaid deliberations, the A.O made a consequential addition of Rs.6,56,69,350/- [Rs. 19,70,08,052/- (-) Rs. 13,13,38,701/-] in the hands of the assessee.

4.1 The assessee assailed the disallowance of its claim towards weighted deduction under Section 35(2AB) before the CIT(A). The assessee submitted before the CIT(A) that all of the requisite conditions contemplated for claiming the aforesaid weighted deduction stood duly satisfied, and in support of his aforesaid contention placed substantial material on the record of the said first appellate authority. The CIT(A) after deliberating on the submissions of the assessee and perusing the material available on record, therein found favor with the claim of the assessee and held that the latter had duly satisfied the requisite conditions for claiming the deduction u/s 35(2AB). The department being aggrieved with the allowing of the claim of the assessee company under Section 35(2AB) by the CIT(A), therein leading to a consequent deletion of an addition of Rs.6,56,69,350/- in the hands of the assessee, had therein carried the matter in appeal before us. That during the course of the hearing of the appeal the Ld. Departmental representative (for short ‘D.R’) relied on the order of the A.O. and submitted that the CIT(A) had wrongly concluded that the assessee satisfied all the requisite conditions for claiming the deduction u/s 35(2AB). That on the other hand the Ld. Authorized Representative (for short ‘A.R’) for the assessee submitted that the CIT(A) observing that the assessee had carried out a conjoint satisfaction of all the requisite conditions contemplated u/s 35(2AB) had thus rightly vacated the order of the A.O. holding to the contrary and deleted the consequential addition of Rs.6,56,69,350/- made in the hands of the assessee. It was further averred by the Ld. A.R that the A.O. had misconceived the factual matrix and instead of independently considering the satisfaction of the requisite conditions by the assessee for claiming the deduction u/s 35(2AB) during the year under consideration, had gone by the order of his predecessor in preceding years and on the basis of misconceived facts had drawn adverse inferences as regards the entitlement of the assessee towards the claim of the aforesaid weighted deduction u/s 35(2AB) during the year under consideration.

4.2 We have heard the authorized representative for both the parties, perused the orders of the lower authorities and the material placed on record before us. We find substantial force in the contention of the Ld. A.R that the A.O while dislodging the claim of the assessee towards the aforesaid weighted deduction u/s 35(2AB) had instead of vetting and verifying the satisfaction of the requisite conditions contemplated under the said statutory provision by the assessee during the year under consideration, had rather gone by the observations recorded by his predecessor in the preceding years. We find that unlike the preceding years where the assessee had failed to produce the copy of the agreement with the Department of Scientific & Industrial Research (DSIR) as required in Sub-section (3), during the course of proceedings before the lower authorities for the year under consideration the assessee as required u/s 35(2AB) had placed on record the copy of the letter dated 06.03.2007 along with the order of approval in ‘Form No. 3CM’ of In-house Research and Development Facility issued by DSIR. The assessee had further filed a copy of the report dated 05.03.2007 submitted by the prescribed authority to the Directory General (Income Tax Exemptions) under Sec. 35(2AB) in ‘Form 3CL’, therein evidencing the agreement entered into for co-operation and research development facility and for audit of accounts maintained for that facility. We thus in the backdrop of the aforesaid facts are of the considered view that as the assessee had during the year under consideration duly satisfied the requisite conditions under Sec. 35(2AB), therefore no infirmity emerges from the observations of the CIT(A). In this regard it would also be relevant to point out that no material had been produced before us by the Ld. D.R. which could persuade us to conclude that the order passed by the CIT(A) in context of vacating the disallowance of deduction under Sec. 35(2AB) suffered from any perversity. We thus in light of the aforesaid facts are of the considered view that the CIT(A) on the basis of a well reasoned order had set aside the disallowance of deduction of RS. 19,70,08,052/- claimed by the assessee u/s 35(2AB), and as a result thereof had vacated the consequential addition of Rs.6,56,69,350/- in the hands of the assessee. We find no reason to disturb the aforesaid order of the CIT(A) on the issue under consideration, and thus to the said extent uphold the same. The Ground of appeal no. 1 so raised before us is dismissed.

(B).DELETION OF ADJUSTMENTS TO ARMS LENGTH PRICE

5. That the TPO on a reference being made by the A.O, therein vide his order u/s 92CA(3), dated 31.10.2008, carried out an upward adjustment of Rs.3,70,70,000/- as regards the ALP pertaining to the ‘Export of finished goods’ made by the assessee to its AEs. The A.O. giving effect to the aforesaid order of the TPO, therein made an addition of Rs.3,70,70,000/- in the hands of the assessee. The assessee assailing the aforesaid addition therein carried the same in appeal before the CIT(A), who being of the view that as the upward adjustments towards ‘ALP’ made by the AO/TPO as regards the ‘Export of finished goods’ by the assessee to its A.Es were recurring issues which had came up in the case of the assessee for the preceding years, and the same had been deleted by him in the appeal of the assessee for A.Y. 2004-05, as well as met the same fate in the earlier years, therefore in the backdrop of the said factual matrix, being of the view that as the aforesaid upward TP adjustment of Rs.3,70,70,000/- was made in the hands of the assessee on identical facts involved in the year under consideration, therefore deleted the same.

5.1 The department being aggrieved with the order of the CIT(A) therein deleting the addition of Rs.3,70,70,000/- which was made by the A.O on the basis of the upward TP adjustment as regards the ‘Export of finished goods’ made by the assessee to its AE’s, had therein carried the matter in appeal before us. That during the course of hearing of the appeal it was submitted by the Ld. A.R that the CIT(A) while deleting the aforesaid addition had relied on the order passed by him in the case of the assessee for A.Y. 2004-05, as well as those passed in the earlier years. The Ld. A.R in all fairness relied on the order passed by the Tribunal in the case of the assessee, viz. ACIT, Range-10(3), Mumbai Vs. M/s. Strides International Limited (ITA no. 1605/Mum/2006 - A.Y. 2002-03, dated 16.12.2015), and therein took us to ‘Ground No. 8’ raised by the department before the Tribunal against the deletion of a similar addition emerging from an upward adjustment to the ALP made by the A.O. involving identical facts, wherein the Tribunal observing as under:-

“We have gone through the submissions made by both the sides as well as order of the lower authorities. It is noted by us that Ld. CIT-DR is factually correct in submitting that CIT(A) has deleted the addition without following the correct approach. The issues with regard to transfer pricing adjustment have to be resolved following a mechanism and complying with the provisions as contained in Chapter X, dealing with the transfer pricing issues as contained in sections 92-92F and connected rules as contained in Rules 10A,10B,1OC,10D and 10E of Income Tax Rules 1962. These sections and rules prescribe various methods that may be employed to establish arm's length price, explaining applicability of each method, the documentation required to be maintained and form of the certificate to be issued by auditors in this regard. These regulations provide that any income arising from the international transactions shall be determined having regard to the arm's length price. This issue has now been decided in various courts that where international transactions are involved with AE, then arm's length price has to be determined in line with the aforesaid provisions. It is noted by us that Ld. CIT(A) has decided this issue without taking into account the effect of these provisions. Therefore, in our considered view, this issue needs to be sent back. On the other hand, the assessee has also made a grievance that the TPO has not made proper analysis while benchmarking the transactions to compute arm's length price. It has been further suggested that TNMM method will be most appropriate method, No objection has been raised by the ld. CIT-DR in this regard. Therefore keeping in view all the facts and circumstances of this case, we deem it appropriate to send this issue back to the file of the TPO who shall carry out afresh search and make fresh analysis and shall also keep in view the aforesaid objections raised by the assessee.

The TPO shall also give adequate opportunity of hearing to the assessee to submit required details and documents, as per law, before deciding this issue afresh. Thus, with these directions, this issue is sent back to the file of AO/TPO. Thus ground no. 8 of Revenue's appeal is allowed for statistical purposes.”

, had therein restored the matter to the file of the AO/TPO. Thus, in the backdrop of the aforesaid factual position which was very fairly brought to our notice, it was thus submitted by the Ld. A.R that as identical facts were involved in the year under consideration, therefore the matter on the same footing may be restored to the file of the AO/TPO. That on the other hand the Ld. D.R agreed that he had no objection if the matter was restored to the file of the AO/TPO on the similar lines as had been recorded by the Tribunal while disposing of the aforesaid appeal of the assessee for A.Y. 2002-03, so that the issue pertaining to TP adjustment may be resolved following a mechanism which is found to be in compliance with the provisions contained in Chapter X dealing with the Transfer pricing issues contained in Section 92 to 92F, and the connected rules contemplated in Rules 10A, 10B, 10C, 10D, and 10E of the Income tax Rules, 1962. It was however submitted by the Ld. D.R that while restoring the matter, no directions as regards the particular method to be adopted be given by the Tribunal, to which no objection was raised by the Ld. A.R.

5.2 We have heard the authorized representatives of both the parties, perused the orders of the lower authorities and the material placed on record before us. We have given a thoughtful consideration to the facts of the case and are of the considered view that as observed by us hereinabove, as the issue pertaining to determination of ALP w.r.t. ‘Export of finished goods’ by the assessee to its AEs, in the backdrop of the same facts involved during the year under consideration had already been looked into by the Tribunal in the case of the assessee for A.Y. 2002-03, therefore in light of the said factual matrix and the concessions made by the aforesaid parties before us, we restore the matter to the file of the TPO who shall determine the ‘ALP’ as regards the ‘Export of finished goods’ carried out by the assessee to its AE’s during the year under consideration by following the directions of the Tribunal in its order dated 16.12.2015 (supra) in a similar situation and by a mechanism consistent with the provisions dealing with the Transfer pricing issues contemplated by Section 92-92F, and the connected rules contained in Rules 10A, 10B,10C,10D and 10E of the Income Tax Rules 1962. At this point, we may clarify that even in A.Y. 2002-03 no particular method has been directed to be adopted by the Tribunal. Rather, the matter has been remanded back for fresh analysis, as is evident from a reading of the relevant portion of the order, which we have extracted in the earlier part of this order. Needless to say, the TPO shall during the course of the set aside proceedings afford opportunity of being heard to the assessee. The Ground of appeal no. 2 so raised before us is thus allowed for statistical purpose in terms of our aforesaid observations.

(C).DELETION OF ADDITION ON ACCOUNT OF DEPRECIATION

6.1 That during the course of hearing of the appeal the Ld. D.R strongly objected to the admission of the documentary evidence by the CIT(A), viz. copies of the agreements wherein trademarks had been purchased by the AEs from outside parties, which it was averred by the CIT(A) was not in terms of the procedure contemplated under Rule 46A of the Income-tax Rule 1962. It was submitted by the Ld. D.R that the aforesaid documents which were clearly in the nature of ‘additional evidence’ could only be admitted by the CIT(A) in exercise of his powers under Rule 46A, and the same had not been followed by the latter in the right spirit. It was averred by the Ld. D.R that directions be issued to the CIT(A) to consider the admission of the aforesaid documents afresh in the backdrop of the procedure contemplated under Rule 46A. The Ld. D.R in support of his aforesaid contention therein relied on the order of the ITAT, Bench ‘D’, New Delhi in the case of ITO, Ward-6(4) New Delhi Vs. M/s. Mittal International (I) Pvt. Ltd. New Delhi. (ITA no. 1671/Del/2004- A.Y 2001-02, dated 30.06.2008). That on the other hand the Ld. A.R objecting to the aforesaid contention so raised by the Ld. D.R, therein submitted that the CIT(A) not being oblivious of the fact that the aforesaid documents were not filed before the TPO, had thus vide his letter dated 08.03.2010 directed the A.O to carry out an enquiry under Sec. 250(4) after considering the said documents which were duly forwarded to the TPO. It was submitted by the Ld. A.R that the TPO had thereafter carried out an enquiry, and after affording opportunity to the assessee, therein finally forwarded his remand report to the CIT(A) on 10.06.2010, wherein the objections as regards admission of the said documents which were available during the course of the assessment proceedings, as well as regards the reliability of the documents placed on record by the assessee were raised before the CIT(A). It was submitted by the Ld. A.R that the CIT(A) in exercise of his power under Section 250(4) had called for a report from the TPO, who after duly perusing, verifying and vetting the documents had filed his report with the CIT(A), alongwith raising of objections as regards both the admission and reliability of the documents before him. It was thus averred by the Ld. A.R that it was not a case where the CIT(A) had admitted any document at the back of the AO/TPO, but rather had exercised the jurisdiction as stood vested with him under Section 250(4) after considering the remand report of the A.O, which included the aforesaid objections raised by him during the course of the remand proceedings. The Ld. A.R thus relied on the order of the CIT(A) and submitted that the latter after duly appreciating the facts of the case had rightly deleted the disallowance/addition of Rs.85,40,684/- pertaining to the purchase of trademarks by the assessee from its AEs.

6.2 We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We have given a thoughtful consideration to the facts of the case and are of the considered view that the CIT(A) after calling for a remand report from the A.O, had therein by way of a reasoned order dealt with the issue under consideration. We find that the CIT(A) after considering the fact that now when the assessee had paid the same price for brands/registrations, as was paid by the AEs for acquiring the same from unrelated third party owners of such product brands/registration a few months ago, therefore the said fact itself was sufficient enough to fortify the fact that acquisition of brands/registrations by the assessee from its AEs was at arms length price. We find ourselves to be in agreement with the CIT(A) that the disclaimer incorporated in the certificate of the Chartered Accountant was in the nature of a customary disclaimer, which is given in the reports/certificates to protect the interest of the individual professional issuing such certificate/s, and the same in no way can go to adversely hit the reliability of the same. We are further of the considered view that in the totality of the facts involved in the present case, the CIT(A) in exercise of his powers under Sec. 250(4) had called for a remand report from the A.O, which was furnished by the latter with certain objections, both as regards admission and reliability of the documents so filed by the assessee. We are of the considered view that the CIT(A) acting upon the documents filed with him by the assessee, had therein while exercising his powers u/s 250(4) had acted in the true letter and spirit by making the said documents available to the A.O, calling for a remand report and thereafter proceeding with after considering the latters objections as regards both the admission as well as reliability of the documents filed before him by the assessee. We are unable to comprehend that as to how any infirmity could be related to the exercise of such powers by the CIT(A), and as such are unable to subscribe to the aforesaid objection so raised by the Ld. D.R before us. We thus in the backdrop of the aforesaid observations as regards the validity of the exercise of the powers by the CIT(A) under Section 250(4),thus are not impressed by the objection of the Ld. D.R, who had sought a direction that the aforesaid documents which were furnished by the assessee with the CIT(A) to support its claim that the purchase of trademarks from the AEs was as per the arms length price, be therein restored to the file of the CIT(A) for examining the same afresh in the backdrop of the procedure contemplated under Rule 46A. We further find that the reliance placed by the Ld. D.R on the order of the coordinate bench of the Tribunal in the case of :M/s. Mittal International (I) Pvt. Ltd. (supra) is distinguishable on facts, for the very reason that unlike the facts involved in the said case, in the present case the CIT(A) had not only forwarded the copies of the aforesaid documents to the A.O while calling for a remand report, but rather had acted upon the same only after considering the objections as regards the same as was so raised by the A.O in his remand report. We thus in the backdrop of our aforesaid findings are thus of the considered view that the CIT(A) by way of a reasoned order had deleted the addition of Rs.85,40,684/-, which in the absence any perversity having been brought to our notice is thus upheld. The Ground of appeal no. 3 so raised by the department is thus dismissed.

Order pronounced in the open court on 31/03/2017.