ANCHOR ELECTRICALS P.LTD,MUMBAI vs. ASST CIT CEN CIR 41, MUMBAI

ORDER PER G.S.PANNU,A.M:

The captioned appeal filed by the assessee pertaining to A.Y. 2009-10 is directed against the order of the ACIT, Cen. Cir.41, (in short the Assessing Officer ) passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short the Act) dated 04/12/2013, which is in conformity with the direction of the Dispute Resolution Pannel-1, Mumbai dated 20/11/2013.

(Assessment Year 2009-10) 2. In this appeal, assessee has raised the following grounds of appeal:-

“GROUNDS OF APPEAL Based on the facts and circumstances of the case and in law, Anchor Electricals Private Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the learned Assistant Commissioner of Income Tax, Central Circle 41, Mumbai (hereinafter referred to as 'learned AO' or 'AO') under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel-I, Mumbai (hereinafter referred to as the 'DRP') on the following grounds, each of which are without prejudice to one another: A. General 1. on the facts and in the circumstances of the case and in law the learned AO based on directions of DRP erred in assessing the total income at Rs 70,36,92,880 as against income computed as Nil by the Appellant, under the normal provisions of the Act. B. Transfer pricing adjustments on the facts and in the circumstances of the case and in law, the learned AO/ Additional Commissioner of Income-tax (Transfer Pricing) - 1(1) ('TPO') has: Non consideration of comparability analysis as documented in the transfer pricing study report 2. erred in not considering/ accepting the comparability analysis as documented by the Appellant in the Transfer Pricing study report for benchmarking the international transaction of payment of royalty to its Associated Enterprise ('AE') ie Matsushita Electric Works Limited ('MEW'). Incorrect rejection of TNMM for benchmarking purposes 3. erred in rejecting the Transactional Net Margin Method ('TNMM') adopted by the Appellant for bench marking the international transaction of payment of royalty to its AE. Incorrect application of CUP method for benchmarking purposes 4. erred in not appreciating the non-applicability of Comparable Uncontrolled Price ('CUP') method for benchmarking the international transaction of payment of royalty by the Appellant to its AE, MEW. Controlled transaction used as comparable by TPO while applying CUP Method

(Assessment Year 2009-10) 5. without prejudice to the above, erred in benchmarking the transaction of payment of royalty using a controlled transaction ie payment of royalty by Assessee to another AE (Ave Anchor Private Limited) for applying the CUP method. 6. without prejudice to the above, failed to appreciate that the rate at which royalty is paid by Assessee to its AE ie MEW is at arm's length even as per internal controlled CUP applied by the learned TPO. Determining arms length price of royalty as Nil 7. erred in disallowing payment of royalty to its AE ie MEW by considering the Assessee as economic owner of the brand names/trademarks, ignoring the fact that the brand names/trademarks for which royalty is paid, are legally owned by MEW. 8. erred in making a factually incorrect observation that the Appellant used brand names/trademarks currently owned by its AE, MEW in earlier years without paying any royalty. Commercial expediency Benefit Test 9. erred in not appreciating the various benefits received/receivable by the Appellant from its AE and thereby challenging the commercial expediency of the Appellant. C. Corporate tax adjustments on the facts and in the circumstances of the case, the learned AO based on directions of the DRP has: Deduction under section 80IC of the Act Restricting the deduction under section 80IC of the Act 10. erred in restricting the deduction under section 80lC of the Act to the extent of Rs 53,59,76,608 as against the claim of Rs 107,58,95,338; Re-computing the deduction under section 80IC of the Act by considering Rs 94,42,44,756 instead of Rs 160,88,54,139 as base point 11. erred in re-computing the deduction under section 80lC of the Act by considering Rs 944,244,756 instead of Rs 1,608,854,139 as starting point based on the Auditors Report under section 80lC and 80lB of the Act (ie Form 10CCB); Deduction under section 80IC of the Act on interest and rent 12. erred in holding that the Assessee has claimed deduction under section 80lC of the Act on interest income of Rs 13,04,27,014 and rent income of Rs 12,23,568;

(Assessment Year 2009-10) Reducing income pertaining to 80IB unit while re-computing the deduction under section 80IC of the Act 13. erred in reducing income pertaining to 80IB unit of Rs 2,85,71,926 while re-computing the deduction under section 80IC of the Act without appreciating that the same was already set off against the losses of other units; Deduction in respect of scrap sales under section 80IC of the Act 14. erred in not allowing deduction under section 80IC on scrap sales derived from the manufacturing activity of the eligible Haridwar unit; 15. without prejudice to the above, should have reduced the scrap sales only of the Haridwar unit amounting to Rs 1,19,22,639 on which deduction under section 80IC of the Act has been claimed, as against the scrap sales amounting to Rs 12,40,48,000 which pertains to the entire entity; Deduction in respect of miscellaneous income under section 80IC of the Act 16. erred in reducing the deduction under section 80IC of the Act on miscellaneous income; 17. without prejudice to the above, should have reduced the miscellaneous income only pertaining to Haridwar unit amounting to Rs 17,01,687, as against miscellaneous income amounting to Rs 4,69,66,000 which pertains to the entire entity; Deduction in respect of trading profits under section 80IC of the Act 18. erred in reducing the profits eligible for deduction under section 80IC of the Act by Rs 20,84,00,000 on the ground that same is earned from trading activity. Should have appreciated that trading profits have already been set off against the losses of other units and no deduction has been claimed under section 80IC of the Act on trading profits; 19. without prejudice to the above, should have reduced the trading profits only relating to Haridwar unit from the profits eligible for deduction under section 80IC of the Act; Deduction in respect of central excise incentive under section 80IC of the Act. 20. erred in considering that the central excise incentive amounting to Rs 2,82,222 forms part of the Haridwar unit and thereby reducing the same from the deduction under section 80IC of the Act; Short credit granted in respect of Tax Deducted at Source

(Assessment Year 2009-10) 21. erred in not granting credit for tax deducted at source of Rs 59,79,929, claimed by the Assessee during the course of the assessment proceedings Levy of Interest under section 234B of the Act 22. erred in levying interest of Rs 6,89,75,151 under Section 234B of the Act; Initiation of penalty proceedings under section 271(1)(c) of the Act 23. erred in initiating penalty under Section 271(1)(c) of the Act. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

3. In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacturing and trading of electrical goods. For the assessment year under consideration, it filed a return of income declaring ‘Nil’ income, which inter-alia, included the claim of deduction under section 80IC of the Act of Rs.158,02,82,213/- in respect of Haridwar Unit and under section 80IB of the Act of Rs.85,71,578/- in respect of Daman Unit. In an assessment finalized under section 143(3) r.w.s. 144C(13) of the Act dated 4/12/2013, the Assessing Officer has determined the total income under normal provisions of the Act at Rs.70,36,92,880/-, which inter-alia, included scaling down of deductions under section 80IC and 80IB of the Act to Rs.54,45,48,186/- and also an adjustment to determine arm's length price of the international transactions at Rs.17,23,45,725/-. The aforesaid assessment has been finalized in terms of the directions issued by the DRP vide order dated 20/11/2013 in response to the objections raised by the assessee against the draft assessment order passed by the Assessing Officer dated 4/2/2013. Before us, the (Assessment Year 2009-10) assessee company is in appeal on the afore-stated Grounds of appeal, which we shall deal in seriatim.

6. Elaborating the error on the manner in which the deduction under section 80IC of the Act has been computed by the Assessing Officer, the Ld. Representative for the assessee referred to para-14 of the assessment order, where the Assessing Officer has tabulated the deduction allowable to the assessee under section 80IC of the Act and in this calculation he has started from the figure of Rs.94,42,44,756/-, which is the profit of the business(net of profits/losses of all units). Further, it is seen that he has further reduced certain amounts from the aforesaid figure, on account of scrap sales, miscellaneous income, profit from trading activity, central excise incentives and income attributable to 80IB unit, etc. The Ld. Representative for the assessee pointed out

(Assessment Year 2009-10) that if starting point was the net business profit of the assessee the Assessing Officer ought to have adjusted the other profits/losses of all other units namely Haridwar, Daman( Unit 1 & 2), Daman( Unit -3), Daman( 4), Kutch, Dharampur, Kundi, etc. to arrive at the profit of the Haridwar unit. In fact what the Ld. Representative for the assessee has sought to point out is a mathematical discrepancy in calculation of deduction allowable to the assessee under section 80 IC of the Act . Apart therefrom, it is sought to be pointed out that the Head Office and other inter-unit transactions have been allocated by the assessee over the different units as evidenced by the chart furnished before us. It is also pointed out that the profit in the Head office account has also been allotted to all the units alongwith the administrative, sales and interest expenses in the ratio of respective sales in order to calculate the unit- wise profit or loss. Ld. Representative for the assessee pointed out that the manner in which the deduction under section 80IC has been computed by the Assessing Officer, it shows that the allocation of Head office transactions over different units done by the assessee has not been accepted. It was pointed out that this is in variance to the stand of the Assessing Officer in earlier assessment years of 2006-07, 2007-08 and 2008-09, wherein the computation of unit-wise profit/lose made by the assessee has been accepted. It is pointed out that in the current assessment year of 2009-10, it is the first year when the basis for arriving at the unit-wise profits/losses has been disturbed. The copy of the assessment order for assessment year 2008-09 passed under section 143(3) r.w.s. 144C(13) dated 15/12/2010 has been placed on record to say that the method by which the unit-wise profits/losses have been computed was accepted by the Assessing Officer. In (Assessment Year 2009-10) particular, attention was invited to a chart annexed to the assessment order for assessment year 2008-09 showing working of the unit-wise income for eligibility of deduction under section 80IC and 80IB of the Act. It was pointed out that the manner of working is similar to the chart, which was furnished at the time of hearing before us, albeit in relation to the instant assessment year 2009-10. Pointing out apparent mistakes in the computation made by the Assessing Officer in para-14, the Ld. Representative for the assessee pointed out that the Assessing Officer has excluded an amount of Rs.12,40,48,000/- as scrap sale whereas the scrap sale pertaining to the Haridwar Unit which is the subject-matter of the claim of deduction under section 80IC of the Act, was only to the tune of Rs.1,19,22,639/-. Similarly, mistakes has also been pointed out in the exclusion of the amounts of miscellaneous income and profits on trading activity of Rs.4,69,66,000/- and Rs.20,84,00,000/- respectively.

6.1 On this aspect, the Ld. Departmental Representative referred to the discussion made by the DRP in para 3.4.1 and 3.4.2 to point out that there were certain inconsistency between the figure reported by the Auditor in Form No.10CCB showing the calculation of deduction under section 80IC of the Act and the figures of profit revealed by the audited final statements, and referred to the following discussion :-

“This also means that the figure reported by the auditor in its from 10CCB at Rs.158.02 is also not correct as it does not match with the audited financials attached to form 10CCB showing profits at Rs.186,15,73,678/-, wherein the above mentioned expenses have been allocated on a different basis. In other words, there is a clear mismatch in the figure reported in the form 10CCB by the auditor and in the audited financials. It also means that the correct quantification of the amount eligible for deduction under section 80IC is not available or authenticated and the assessee is trying to claim the amount without proper verification. This also means that the amount worked out in (Assessment Year 2009-10) the sheet submitted before us of ‘unit wise computation of income for eligibility of 80 IC and 80IB’, cannot be relied upon. Thus, it is held that the unit wise bifurcations and allocations of various incomes and expenses as shown in the sheet are unsubstantiated and make-believe.” 6.2 In this context, the Ld. Representative for the assessee invited our attention to page 109 of the Paper Book, wherein is placed a copy of Form 10CCB, wherein the profit eligible for deduction under section 80IC of Act of Haridwar Unit is comuted at Rs.158,02,82,213/-. The P&L Account of the Haridwar Unit is annexed at Page 117 of the Paper Book and the net profit depicted therein is Rs.186,15,73,678/-, and this difference has prompted the Assessing Officer as well the DRP to hold that there was an incorrect quantification of the deduction under section 80IC of the Act.

6.3 In this context, we have perused the relevant reconciliation at page 137 of the Paper Book, which was also before the lower authorities. In terms of the said reconciliation, the profit of the Haridwar Unit computed in the P&L Account at Rs.186,15,73,678/- has been adjusted for interest, selling and distribution expenses and administrative and miscellaneous expenses to Rs.193,70,15,244/-,which corresponds to the figure in chart of unit-wise computation of profits, which in-turn has formed the basis for filing the return of income. Once this figure is seen in the chart of unit-wise computation of income, it would be clear that after allocation of the profits of other branches and income tax disallowances pertaining to the Haridwar Unit, the net income of Haridwar Unit comes to Rs.158,02,82,213/-. In our considered opinion, the Assessing Officer and the DRP have merely noted the difference in the figures without appreciating reconciliation and the unit-wise computation of net income made by the assessee,

(Assessment Year 2009-10) which is in conformity with the methodology accepted in the past in the income-tax returns filed by the assessee. Therefore, at the time of hearing, it was put to the parties that the matter be restored back to the file of Assessing Officer, who shall recompute the total income of the assessee based on the unit-wise computation of income made by the assessee for calculating eligibility of deduction under section 80 IC and 80IB of the Act by adopting the same methodology as was accepted in the past years. Ld. Representative for the assessee submitted that assessee would be satisfied if the verification of assessee’s computation of income eligible for 80IC benefits is carried out as per the methodology accepted in the past. On this aspect, in our view, there is an apparent mistake made by the Assessing Officer in computing the amount of deduction allowable to the assessee under section 80IC of the Act. Pertinently, the basis of allocation of administrative, sales and interest expenses, etc. adopted by the assessee to arrive at the eligible deduction under section 80IC is similar to that adopted for computing the deduction under section 80IB of the Act. Whereas, the Assessing Officer accepts the working of deduction under section 80IB of the Act as determined by the assessee, while on the other hand, determination of deduction under section 80IC of the Act has been tinkered with. This reflects inherent inconsistency on the part of the Assessing Officer on the issue of allocation of transactions of Head office and on account of administrative, sales and interest expenditure, etc. to the other manufacturing units, including those eligible for deduction under section 80 IB and 80 IC of the Act. For the said reasons, we deem it fit and proper to set-aside the matter back to the file of Assessing Officer, who shall revisit the computation of deduction allowable to the (Assessment Year 2009-10) assessee under section 80IC of the Act afresh. In the ensuring proceedings, the Assessing Officer shall not deviate from the methodology adopted and accepted in the case of the assessee for the earlier assessment years.

No.12, it is sought to be pointed out that the Assessing Officer has wrongly excluded amount of interest and rental income of Rs.13,04,27,014/- and Rs.12,23,568/- respectively while computing the deduction under section 80. IC of the Act. In this context, the Ld. Representative for the assessee pointed out that assessee has itself excluded rent and interest income for the purposes of computing the deduction eligible for deduction under section 80IC of the Act for Haridwar Unit and referred to the chart of computation in this regard. It was pointed out that in any case, the figures adopted by the Assessing Officer are wrong as they pertain to the assessee as a whole and not to the Haridwar Unit alone. On this aspect, we restore the matter back to the file of Assessing Officer, who shall verify the claim of the assessee and exclude the amounts of rent and interest income for computing deduction u/s. 80IC of the Act to the extent it pertains to Haridwar Unit only.

(i) CIT vs. Sandhu Forging Limited, 336 ITR 0444 (Del) (ii) CIT & Another vs. Modi Xerox Ltd.,265 ITR 200 (All) (iii)Asia Investments Ltd. vs. DCIT, 90 ITD 0630 (Mum.Trib) (iv)CIT vs. Micro Turners , 205 Taxman 18. 9.1 On this aspect also, we deem it fit and proper to restore the matter back to the file of the Assessing Officer with a direction that while re-computing the eligible deduction u/s. 80IC of the Act, sale of scrap generated during the manufacturing and production process be included for the benefit of section 80IC of the Act.

11. Similarly, by way of Grounds No.18 & 19, the assessee is aggrieved by the action of the Assessing Officer in excluding a sum of Rs.20,84,00,000/- for computing deduction u/s. 80IC of the Act on the ground that the same related to the trading activity. In this context, the Ld. Representative for the assessee pointed out that the said figure adopted by the Assessing Officer is wrong and is a part of the transactions of Head office account, which have been appropriately allocated over all the units. On this aspect also, the matter is remanded back to the file of Assessing Officer to verify the same afresh and reduce the trading profits relating to Haridwar Unit only for computing the deduction u/s. 80IC of the Act.

(Assessment Year 2009-10) application u/s. 154 of the Act on 03/09/2012 to the Assessing Officer, which is yet to be disposed off. The Ld. Departmental Representative appearing for the Revenue had no objection to the matter being remanded back to the Assessing Officer with direction that the plea of the assessee be disposed of expeditiously as per law. We order accordingly.

Order pronounced in the open court on 23/09/2016