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Income Tax Appellate Tribunal, DELHI BENCH: ‘H’ NEW DELHI
Before: SHRI G.C. GUPTA & SHRI J.SUDHAKAR REDDY
ORDER
PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
1. This is an appeal filed by the Revenue against the order of the Ld.CIT(A)-XXI, New Delhi dated 18.6.2012 for the A.Y. 2003-04.
The brief facts of the case are narrated in para 2 of the Ld.CIT(A)’s order, which is extracted for ready reference.
“2. Brief facts of the case: Wringley India Private Limited engaged in the manufacture and sale of confectionary products i.e. bubble gums, chewing gums, lollipops and toffees amalgamated with the appellant with the appointed date of April 01, 2005. Wrigley India Private Limited is engaged in the business of manufacture and sale of confectionary products like bubble gums, chewing gum, candies etc. Joyco India amalgamated into Wrigley India with the appointed dated of April 01,2005. The amalgamation was duly approved by the Delhi high Court vide its order dated September 08, 2006 which became effective on filing of the certified copy
Wringley India (P) Ltd. of order with Registrar of Companies, NCT of Delhi & Haryana on October 13, 2006. For the year under consideration, the appellant had filed its return of income at Rs.6,37,63,610/- as per the provisions of Income-tax Act, 1961. The return was processed under section 143( 1) of the Act and, thereafter, taken up for scrutiny by issue of notice under section 143(2) of the Act dated October 18, 2004, served on the company on October 19, 2004. The assessment was framed under section 143(3) of the Act vide order dated February 27, 2006 assessing the total income of the company at Rs.9,98,42,060/- as against the returned income of Rs.6,37,63,610/-. Out of the various disallowances made by assessing officer, specific disallowances made by the AO relevant for the issues under consideration are as under:-
* Reducing the deduction under section 80IB of the Act from its claim of Rs.l1,08,78,645 to Rs.7,59,29,232 on account of denying the deduction under section 80 IB of the Act in respect of profits of the Gum base unit. * Disallowance of payment of club entrance fee of Rs.10 lakhs treating it as business expenditure u/s 37 of the Act.
On further Appeal, the Delhi Tribunal vide its order dated December 19, 2008 held, inter alia, as under:- * Payment of club entranced fee of Rs.10,00,000/-:- The Tribunal observed that whether the expenditure was capital in nature or revenue in nature will depend upon the fact whether the amount was refundable to the company at the time of termination of membership. If amount is not refundable, then the expenditure would be deductible under section 37(1) of the Act. The Tribunal remanded the matter to the file of AO examine the whether the club expenditure was refundable and decide whether the expenditure is deductible or not.
* Deduction under section 80-IB of the Act:- The Tribunal allowed the deduction to the Gumbase unit under section 80IB of the act. However, it asserted that what is required to be found out is the market value of transferred goods in the Indian market. The Tribunal observed that since the market value of the goods has not been determined during the course of proceedings before the AO and CIT (A) respectively, therefore, the mater is to be restored to the file of AO for determination of the market value of the goods transferred.
The AO passed order dated December 30, 2009 pursuant to the Tribunal order dated December, 19,2008 and concluded as under:-
Wringley India (P) Ltd. • The disallowance of club membership fee was reduced from Rs.10,00,000/- to Rs.3,00,000/-. The club membership fee of Rs.3,00,000/- is not allowable as business expenditure and therefore, needs to be disallowed.
• The AO allowed the deduction under section 80-18 of the Act in respect of the profits derived. by the Gumbase unit considering the lower market value of the goods transferred to other units. As a result, overall deduction under section 80IB has been reduced to Rs.8,10,18,150/- as against the original claim of Rs.l1,08,78,645/-.”
Aggrieved, the assessee has come up in appeal before the First Appellate Authority. The First Appellate Authority granted pat relief.
On the issue of payment of Club entrance fees, the disallowance made by the A.O. to the extent of Rs.3 lakhs was upheld.
On the issue of deduction u/s 80 IB, the Ld.CIT(A) called for the remand report from the A.O, as various details were filed by the assessee during the appellate proceedings. The A.O. submitted a remand report and the assessee filed a rejoinder on 3.5.2012. After considering the same, the Ld.CIT(A) allowed the claim of the assessee.
Aggrieved the Revenue is in appeal before us on the following grounds.
“1. On the facts and in the circumstances of the case and in law the ld. CIT(A) has erred in allowing the relief to assessee of Rs. 2,98,60,495/- disallowed by the AO by reducing deduction u/s 80IB of the I.T. Act.
2. The appellant craves for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of appeal.”
We have heard Shri J.P.Chandrekar, Ld.Sr.D.R. on behalf of the Revenue and Shri Ravi Sharma, the Ld.Counsel on behalf of the assessee.
Wringley India (P) Ltd. 8. After careful consideration of the facts and circumstances of the case, perusal of material placed on record and orders of the authorities below as well as case laws cited, we hold as under.
The Ld.D.R. submitted that this is a second round of appellate proceedings and the issue is limited to the determination of market value of price at which the goods are transferred from gum base unit to other units, for the purpose of computing quantum of deduction u/s 80 IB of the Act. He contended that the assessee inflated the transfer price with the objective of inflating the exemption u/s 80 IB of the Act, as other Unit-I is eligible only for exemption of 30% of the profit. He relied on the order of the A.O. and submitted that the Ld.CIT(A) has granted relief without proper appreciation of the facts.
The Ld.Counsel for the assessee on the other hand relied on the order of the First Appellate Authority. He further relied on the decision of the Kolkata Bench of the Tribunal in the case of Assam Carbon Products Ltd. vs. ACIT 100 TTJ 224 for the proposition that the market value can be determined, based on proforma invoice of imported goods. He further relied on the decisions in the case of JCIT vs.Cipla Ltd. (2 SOT 617) Mumbai Bench of the Tribunal and the judgement of the Hon’ble Gujarat High Court in the case of Anil Starch Products Ltd. vs. CIT (1966) 59 ITR 514, for the proposition that cost of production cannot be taken as market value of goods, as done by the A.O. in the case of orion and lotti kinds of gum base, out of the four different kinds of gum base. He pointed out that the Ld.Commissioner held that the A.O. has taken a rate, without assigning any rationale to her action.
This is a second round of appellate proceedings. The ITAT C Bench of the Delhi Tribunal in ITA 1562/Del/2007 for the same A.Y. 2004-05 vide order dt. 19th December, 2008, has remanded the issue to the file of the A.O. by observing as under.
Wringley India (P) Ltd. “8.2. We have considered the facts of the case and rival submissions. It is clear that the provision contained in section 80IA(8) is applicable to the facts of this case. But as earlier pointed out, what is required to be found out is whether “the market value of transferred goods on the date of transfer” in the Indian market. This has not been done either at the stage by the Ld.Counsel, this matter is restored to the file of the AO for fresh adjudication after hearing the assessee. The matter shall be decided in the light of directions contained in this order as aforesaid. Thus, these grounds are also treated as allowed for statistical purposes.”
During the course of assessment proceedings, on a query, the AO submitted that gum base is not easily available in the market and that there are hardly any manufacturers of that quality of gum base used by the assessee in its products. It was submitted that even if certain manufacturers of gum base are found, the quality standards do not match with that of the assessee. On the ground that there are no comparative prices available in the market, the assessee adopted the transfer price of gum base at the imported cost.
The A.O. for verifying the market price of gum base, issued notices u/s 132(6) to M/s Perfetti Van Melle. In response, it was submitted that this company was dependent on imported gum base only. The AO carried out an internet search and found that a company by name M/s Sun Euro Base was having an international high quality gum base factory and that M/s Candico of Mohan Cooperative Industrial Estate, New Delhi was its customer. Notices u/s 133(6) were issued and it was found from the information gathered, that the base price of gum base in the local market ranges from Rs.52/- to Rs.96/- only. Accordingly the transfer price of Unit IV i.e. gum base unit was determined as under by the A.O.
Wringley India (P) Ltd. “4.5. The transfer price of Unit IV on the basis of above fair market value is worked out as below.
S.No. Type of gum Quantity Rate (transfer Amount – Rs. base Produced (Kgs) price) Rs.
Non-acidic 1431732 95 136014540 2. Acidic 106528 114 12144192 3. Orion 77584 58 4499872 4. Lotto 59533 121 7203493 15,98,62,097 4.6. As per the original computation of the assessee the transfer price from Unit IV (gum base unit) was declared at Rs.20,79,38,948/- profit of this unit was claimed at Rs.5,26,17,830/-. After recomputation as above the said transfer price comes to Rs.15,98,62,097/- and the profit is worked out as below. Gumbase Quantity Base Price Cost of Transfer Profit Kg. production Price Non-acidic 1431732 90 128855880 136014540 7158660 Acidic 106528 109 11611552 12144192 532640 Orion 77584 58 4499872 4499872 - Lotto 59533 121 7203493 7203493 - Total: 76,91,300 13.1. There are four types of gum base. In the case of orion and lotto the cost of production was adopted as the market price by the Assessing Officer. This is not tenable in view of decisions relied upon by the assessee in the case of JCIT vs.Cipla Ltd. ((supra) Mumbai Bench of the Tribunal and the judgement of the Wringley India (P) Ltd. Hon’ble Gujarat High Court in the case of Anil Starch Products Ltd. vs. CIT (supra).
13.2. The A.O. on the one hand observed that the gum base sold ranges from Rs.50 to Rs.96 and that the information obtained from M/s Perfetti Van Melle was Rs.168/- for the year 2003-04 and Rs.124/- per kg for the A.Y. 2004-05. The A.O. has applied price of Rs.95 per kg in respect of non acidic gum base. There is no logic given by him by adopting these rates. Thus, rates adopted by the A.O. for all the four types of gum base, in our opinion, has rightly been held as incorrect by the First Appellate Authority.
As there is no other material available on record, to challenge the transfer price declared by the assessee, which is on the basis of invoices from CAFOSA, we have no other alternative but to uphold this claim. In the result we dismiss this appeal by the Revenue.
In the result this appeal is dismissed.
The order is pronounced in the open court on 09th October, 2015.