SYNGENTA INDIA LTD, PUNE v. JCIT (OSD) RG 1(3), MUMBAI

ITA 6575/MUM/2010 | 2003-2004
Pronouncement Date: 31-07-2013 | Result: Partly Allowed

Appeal Details

RSA Number 657519914 RSA 2010
Assessee PAN AAECS9424P
Bench Mumbai
Appeal Number ITA 6575/MUM/2010
Duration Of Justice 2 year(s) 10 month(s) 21 day(s)
Appellant SYNGENTA INDIA LTD, PUNE
Respondent JCIT (OSD) RG 1(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-07-2013
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted K
Tribunal Order Date 31-07-2013
Date Of Final Hearing 20-06-2013
Next Hearing Date 20-06-2013
Assessment Year 2003-2004
Appeal Filed On 09-09-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH MUMBAI .. !'# $ $ $ $ %$ $ & !'# !' BEFORE SHRI P.M. JAGTAP AM AND SHRI VIJAY PAL RAO JM !./ I.T.A. NO.2977/MUM/2006 ( &) * $+* &) * $+* &) * $+* &) * $+* / / / / ASSESSMENT YEAR : 2002-03 ) M/S SYNGENTA INDIA LIMITED AMAR PARADIGM SURVEY NO. 110/11/13 BANER ROAD PUNE 411 045. ) ) ) ) / VS. THE JT. COMMISSIONER OF INCOME TAX (OSD) RANGE 1(3) AAYAKAR BHAVAN M.K. MARG MUMBAI- 400 020. # !./ PAN : AAECS9424 P ( - / // / APPELLANT ) .. ( ./ - / RESPONDENT ) !./ I.T.A. NO. 6575/MUM/2010 ( &) * $+* &) * $+* &) * $+* &) * $+* / / / / ASSESSMENT YEAR : 2003-04 ) M/S SYNGENTA INDIA LIMITED AMAR PARADIGM SURVEY NO. 110/11/13 BANCE ROAD PUNE 411 045. ) ) ) ) / VS. THE JT. COMMISSIONER OF INCOME TAX (OSD) RANGE 1(3) AAYAKAR BHAVAN M.K. MARG MUMBAI- 400 020. # !./ PAN : AAECS9424 P ( - / // / APPELLANT ) .. ( ./ - / RESPONDENT ) !./ I.T.A. NO. 6448/MUM/2010 ( &) * $+* &) * $+* &) * $+* &) * $+* / / / / ASSESSMENT YEAR : 2003-04 ) THE DY. COMMISSIONER OF INCOME TAX (OSD) RANGE 1(3) AAYAKAR BHAVAN M.K. MARG MUMBAI- 400 020. ) ) ) ) / VS. M/S SYNGENTA INDIA LIMITED AMAR PARADIGM SURVEY NO. 110/11/13 BANCE ROAD PUNE 411 045. # !./ PAN : AAECS9424 P ( - / // / APPELLANT ) .. ( ./ - / RESPONDENT ) ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 2 !./ I.T.A. NO. 856/MUM/2011 ( &) * $+* &) * $+* &) * $+* &) * $+* / / / / ASSESSMENT YEAR : 2004-05 ) M/S SYNGENTA INDIA LIMITED AMAR PARADIGM SURVEY NO. 110/11/13 BANCE ROAD PUNE 411 045. ) ) ) ) / VS. THE ADDL. COMMISSIONER OF INCOME TAX (OSD) RANGE 1(3) AAYAKAR BHAVAN M.K. MARG MUMBAI- 400 020. # !./ PAN : AAECS9424 P ( - / // / APPELLANT ) .. ( ./ - / RESPONDENT ) !./ I.T.A. NO. 954/MUM/2011 ( &) * $+* &) * $+* &) * $+* &) * $+* / / / / ASSESSMENT YEAR : 2004-05 ) THE DY.COMMISSIONER OF INCOME TAX (OSD) RANGE 1(3) AAYAKAR BHAVAN M.K. MARG MUMBAI- 400 020. ) ) ) ) / VS. M/S SYNGENTA INDIA LIMITED AMAR PARADIGM SURVEY NO. 110/11/13 BANCE ROAD PUNE 411 045. # !./ PAN : AAECS9424 P ( - / // / APPELLANT ) .. ( ./ - / RESPONDENT ) ASSESSEE BY : SHRI NITESH JOSHI & SHRI BIPIN PAWAR ./ - 0 1 ! / RESPONDENT BY : SHRI AJEET KUMAR JAIN & SHRI A.C. TEJPAL !)$ 0 / // / DATE OF HEARING : 20-06-2013 23+ 0 / DATE OF PRONOUNCEMENT : 31-07-2013 ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 3 '4 / O R D E R PER BENCH : OUT OF THESE FIVE APPEALS ONE APPEAL BEING ITA NO. 2977/MUM/2009 IS THE APPEAL OF THE ASSESSEE FOR A.Y. 2002-03 WHILE T HE REMAINING FOUR APPEALS ARE CROSS APPEALS FOR ASSESSMENT YEARS 2003-04 AND 2004-05. SINCE SOME COMMON ISSUES ARE INVOLVED IN ALL THESE APPEALS TH E SAME HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS SINGLE C ONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE SHALL TAKE UP THE APPEAL OF THE ASSESS EE BEING ITA NO. 2977/MUM/2006 WHICH IS DIRECTED AGAINST THE ORDER O F LD. CIT(A)-XXI MUMBAI DATED 20-02-2006. 3. THE ISSUE RAISED IN GROUND NO. 1 RELATES TO THE DISALLOWANCE OF RS. 5 14 328/- MADE BY THE A.O. AND CONFIRMED BY THE LD . CIT(A) U/S 14-A OF THE INCOME TAX ACT 1961 (THE ACT) ON ACCOUNT OF EXPENS ES INCURRED IN RELATION TO THE EARNING OF EXEMPT DIVIDEND INCOME. 4. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF AGROCHEMIC AL PRODUCTS AND SEEDS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATI ON WAS FILED BY IT ON 31-10-2002 DECLARING TOTAL INCOME OF RS. 29 64 91 5 68/-. IN THE SAID RETURN DIVIDEND INCOME OF RS. 1 02 86 569/- WAS CLAIMED TO BE EXEMPT FROM TAX BY THE ASSESSEE. NO DISALLOWANCE ON ACCOUNT OF EXPENSE S INCURRED IN RELATION TO THE EARNING OF THE SAID EXEMPT INCOME HOWEVER WAS MADE BY THE ASSESSEE AS PER SECTION 14A OF THE ACT ON THE GROUND THAT THE I NVESTMENT IN THE CORRESPONDING MUTUAL FUND WAS MADE OUT OF ITS OWN F UNDS AND THERE WERE NO OTHER EXPENSES INCURRED FOR EARNING THE DIVIDEND IN COME ON MUTUAL FUND. THE A.O. DID NOT ACCEPT THIS STAND OF THE ASSESSEE. ACCORDING TO HIM SOME OF ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 4 THE EXPENSES DIRECTLY ATTRIBUTABLE TO THE EARNING O F THE DIVIDEND EXEMPT INCOME SUCH AS STAMP DUTY BANK COMMISSION ETC. MUS T HAVE BEEN INCURRED BY THE ASSESSEE. HE ALSO OBSERVED THAT EVEN THE PO RTION OF INDIRECT EXPENSES SUCH AS SALARY AND OTHER OVERHEADS WAS PARTLY ATTRI BUTABLE TO THE EARNING OF DIVIDEND INCOME. HE THEREFORE ESTIMATED SUCH EXP ENSES AT RS. 5 14 328/- BEING 5% OF THE EXEMPT DIVIDEND INCOME AND MADE THE DISALLOWANCE TO THAT EXTENT U/S 14A OF THE ACT. 5. THE DISALLOWANCE MADE BY THE A.O. U/S 14-A OF TH E ACT WAS CHALLENGED BY THE ASSESSEE IN AN APPEAL FILED BEFORE THE LD. C IT(A) AND BESIDES CHALLENGING THE ACTION OF THE A.O. IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT TO MAKE A DISALLOWANCE THE ASSESSEE CONTEN DED ALTERNATIVELY THAT THE DISALLOWANCE U/S 14A MADE BY THE A.O. TO THE EXTENT OF 5% OF THE DIVIDEND INCOME WAS HIGHLY EXCESSIVE AND UNREASONABLE. THE LD. CIT(A) DID NOT FIND MERIT IN THE CONTENTION RAISED ON BEHALF OF THE ASS ESSEE AND RELYING ON THE DECISION OF THE SMC BENCH OF THE TRIBUNAL IN THE CA SE OF RHYTHM EXPORTS PVT. LTD. VS. ITO (2005) 2 SOT 429 (MUM) (SMC) HE HELD THAT IT WAS THE DUTY OF THE ASSESSEE TO ALLOCATE EXPENDITURE ATTRIBUTABLE T O THE EXEMPT DIVIDEND INCOME. SINCE THERE WAS A FAILURE ON THE PART OF TH E ASSESSEE TO DO SO THE LD. CIT(A) HELD THAT THE A.O. HAD NO OPTION BUT TO DISA LLOW THE EXPENSES RELATABLE TO EXEMPT INCOME ON PROPORTIONATE BASIS. HE ALSO H ELD THAT SINCE THE CLAIM OF THE ASSESSEE OF HAVING INCURRED ANY EXPENSES IN REL ATION TO THE EARNING OF DIVIDEND INCOME WAS NOT ACCEPTABLE THE A.O. WAS FU LLY JUSTIFIED IN MAKING THE DISALLOWANCE U/S 14A OF THE ACT BY ALLOCATING THE A DMINISTRATIVE AND OTHER EXPENSES ON PROPORTIONATE BASIS AT 5% OF THE DIVIDE ND INCOME WHICH WAS QUITE REASONABLE. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DIVIDEND INCOME CAN BE EARNED WITHOUT EVEN INCURRING ANY EXPENDITUR E. HE INVITED OUR ATTENTION TO THE BALANCE SHEET OF THE ASSESSEE AS O N 31 ST MARCH 2002 PLACED ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 5 AT PAGE 69 OF HIS PAPER BOOK TO POINT OUT THAT SUFF ICIENT OWN FUNDS OF RS. 222.72 CRORES WERE AVAILABLE WITH THE ASSESSEE TO M AKE THE INVESTMENT OF RS. 18.32 CRORES IN THE MUTUAL FUND. HE SUBMITTED THAT THERE WAS ALSO NO OTHER EXPENDITURE INCURRED BY THE ASSESSEE WHICH COULD BE ATTRIBUTABLE TO THE EARNING OF DIVIDEND INCOME. HE CONTENDED THAT THERE WAS THUS NO JUSTIFICATION TO MAKE ANY DISALLOWANCE U/S 14A OF THE ACT AND IN ANY CASE THE DISALLOWANCE MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) TO THE EXTENT OF 5% OF DIVIDEND INCOME IS HIGHLY EXCESSIVE AND UNREA SONABLE. 7. THE LD. D.R. ON THE OTHER HAND SUBMITTED THAT THE INVESTMENT ACTIVITY WAS THE SUBSTANTIAL ACTIVITY OF THE ASSESSEE AND SI NCE FRESH INVESTMENT IN MUTUAL FUND WAS MADE BY THE ASSESSEE IN THE YEAR UN DER CONSIDERATION IT CANNOT BE CLAIMED THAT NO EXPENDITURE WAS INCURRED IN RELATION TO DIVIDEND INCOME ON MUTUAL FUNDS. HE CONTENDED THAT EVEN TO CONTINUE WITH THE EXISTING INVESTMENT INVOLVES DECISION MAKING AND SI NCE THE PORTION OF THE COMMON EXPENSES ON SALARIES AND OTHER ADMINISTRATIV E ACCOUNTS WAS PARTLY ATTRIBUTABLE TO THE EARNING OF EXEMPT DIVIDEND INCO ME THE DISALLOWANCE U/S 14A OF THE ACT WAS RIGHTLY MADE IN THE CASE OF THE ASSESSEE ON PROPORTIONATE BASIS. HE CONTENDED THAT EVEN THE DISALLOWANCE SO MADE @ 5% OF EXEMPT DIVIDEND INCOME IS QUITE FAIR AND REASONABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT THE INVESTMENT IN UNITS OF MUTUAL FUNDS MADE BY THE ASSESSEE STOOD AT ` 6.03 CRORES AS ON 31-03-2001 WHICH WAS INCREASED TO ` 18.32 CRORES AS ON 03-03-2002 WHICH CLEARLY SHOWS THAT THE INVESTMENT ACTIVITY WAS SUBSTANTIAL ACTIVI TY OF THE ASSESSEE AND SIZEABLE NEW INVESTMENT WAS MADE IN THE UNITS OF MU TUAL FUNDS BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. KEEP ING IN VIEW OF THIS FACTUAL POSITION OF THE ASSESSEES CASE WE ARE OF THE VIEW THAT ALTHOUGH THE ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 6 INVESTMENT IN MUTUAL FUNDS HAD BEEN MADE BY THE ASS ESSEE OUT OF ITS OWN FUNDS AND THERE WAS NO INTEREST EXPENDITURE INCURRE D IN RELATION TO THE EARNING OF DIVIDEND INCOME THE PORTION OF ADMINIST RATIVE EXPENSES INCURRED BY THE ASSESSEE WAS CERTAINLY ATTRIBUTABLE TO THE E ARNING OF THE SAID INCOME. AS RIGHTLY HELD BY THE A.O. AS WELL AS THE LD. CIT( A) SINCE NO WORKING WHATSOEVER WAS GIVEN BY THE ASSESSEE SHOWING THE EX PENSES ATTRIBUTABLE TO THE EARNING OF DIVIDEND INCOME ESTIMATION OF SUCH EXPENSES ON PROPORTIONATE BASIS TO QUANTIFY THE DISALLOWANCE U/S 14A OF THE A CT WAS VERY MUCH CALLED FOR. AS REGARDS THE ESTIMATION SO MADE BY THE AUTH ORITIES BELOW AT 5% OF THE DIVIDEND INCOME WE HOWEVER FIND MERIT IN THE ALT ERNATIVE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE SAME IS EXCES SIVE AND UNREASONABLE KEEPING IN VIEW THAT SUCH ESTIMATION TO THE EXTENT OF 2% OF THE DIVIDEND INCOME HAS BEEN HELD TO BE REASONABLE CONSISTENTLY BY THE TRIBUNAL IN VARIOUS CASES. ACCORDINGLY WE MODIFY THE IMPUGNED ORDER O F THE LD. CIT(A) AND RESTRICT THE DISALLOWANCE U/S 14A OF THE ACT AT 2% OF THE DIVIDEND INCOME. GROUND NO. 1 OF ASSESSEES APPEAL IS THUS PARTLY AL LOWED. 9. IN GROUND NO. 2 THE ASSESSEE HAS CHALLENGED THE ACTION OF THE LD. CIT(A) IN UPHOLDING THE ACTION OF THE A.O. IN DISALLOWING THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 80IB OF THE ACT IN RESPECT OF THE FOLLOWING ITEMS OF OTHER INCOME ON THE GROUND THAT THE SAME WAS NOT DERIVED FROM THE ELIGIBLE UNDERTAKING:- MONOCROTPHOS(RS) TOPIK (RS.) I) SALE OF RAW MATERIALS AND PACKING MATERIAL 32 958/- 5 402/- II) INTEREST ON EMPLOYEE LOANS 21 653/- 3 549/- III) SALE OF MANGO WOOD COCONUTS ETC. 21 117/- 3 461/- IV) CIBA SPECIALTY CHEMICALS (INDIA) LTD.- SERVICE CHARGED 9 67 788/- 1 48 957/- V) WRITE BACK OF RETENTION MONEY 33 841/- 5 547/- ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 7 10. IN ITS RETURN OF INCOME FILED FOR THE YEAR UNDE R CONSIDERATION THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80IB OF THE ACT IN RESPECT OF THE PROFITS DERIVED FROM TOPIK AND MONOCROTOPHOS UNITS. THE SAI D CLAIM OF THE ASSESSEE WAS EXAMINED BY THE A.O. AND ON SUCH EXAMINATION H E FOUND THAT CERTAIN ITEMS OF OTHER INCOME INCLUDED BY THE ASSESSEE IN T HE PROFITS AND GAINS DERIVED FROM ITS TWO UNITS FOR THE PURPOSE OF CLAIM ING DEDUCTION U/S 80IB OF THE ACT WERE SUCH THAT THE SAME COULD NOT BE SAID T O BE DERIVED FROM THE ELIGIBLE UNDERTAKINGS. HE THEREFORE EXCLUDED THE AMOUNT OF SUCH ITEMS OF OTHER INCOME FROM THE PROFITS ELIGIBLE FOR DEDUCTIO N U/S 80IB OF THE ACT AND RESTRICTED THE CLAIM OF THE ASSESSEE FOR THE SAID D EDUCTION TO THAT EXTENT. ON APPEAL THE LD. CIT(A) ALLOWED PART RELIEF TO THE A SSESSEE ON THIS ISSUE UPHOLDING THE ACTION OF THE A.O. IN EXCLUDING FIVE ITEMS OF OTHER INCOME FOR THE PURPOSE OF COMPUTING PROFITS ELIGIBLE FOR DEDUC TION U/S 80IB OF THE ACT WHICH ARE THE SUBJECT MATTER OF APPEAL BEFORE US. THE MAIN REASON GIVEN BY THE LD. CIT(A) IN SUPPORT OF HIS CONCLUSION ON THIS ISSUE WAS THAT THE SAID FIVE ITEMS OF OTHER INCOME DID NOT ORIGINATE FROM THE EL IGIBLE UNDERTAKING OF THE ASSESSEE INASMUCH AS THEIR IMMEDIATE SOURCE WAS NOT THE SAID UNDERTAKING. 10. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS REGARDS THE SALE OF RAW MATERIALS AND PACKING MATERIALS IT IS OBSERVED THAT INCOME F ROM SALE OF SCRAP HAS BEEN HELD TO BE ELIGIBLE FOR DEDUCTION U/S 80IB OF THE A CT BY THE LD. CIT(A) VIDE HIS IMPUGNED ORDER RELYING ON VARIOUS JUDICIAL PRONOUNC EMENTS. IN OUR OPINION THE RATIO OF THE SAID JUDICIAL PRONOUNCEMENTS IS EQ UALLY APPLICABLE TO SALE OF RAW MATERIALS AND PACKING MATERIALS WHICH IS NOTHIN G BUT THE RECOVERY OF COST INCURRED BY THE ASSESSEE HAVING NO PROFIT ELEMENT. WE ARE THEREFORE OF THE VIEW THAT THE SALE PROCEEDS OF RAW MATERIALS AND PA CKING MATERIALS CANNOT BE EXCLUDED FOR THE PURPOSE OF COMPUTING THE PROFIT OF THE ELIGIBLE UNDERTAKING FOR THE PURPOSE OF DEDUCTION U/S 80IB OF THE ACT. AS REGARDS THE INTEREST ON EMPLOYEES LOAN IT IS OBSERVED THAT A SIMILAR ISSU E WAS DECIDED BY THE ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 8 TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2001-02 VI DE AN ORDER DATED 9-11-2012 PASSED IN ITA NO. 7699/MUM/2004 HOLDING T HAT THE INTEREST ON EMPLOYEES LOAN CANNOT BE SAID TO BE INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80IB OF THE ACT. IN OUR OPINION EVEN THE SALE OF MANGO WOOD COCONUTS ETC . AND WRITE-BACK OF RETENTION MONEY CANNOT BE SAID TO BE INCOME DERIVED FROM THE ELIGIBLE UNDERTAKING AS THE IMMEDIATE SOURCE OF THE SAID INC OME IS NOT THE SAID UNDERTAKING. AS REGARDS THE SERVICE CHARGES RECEIV ED FROM CIBA SPECIALTY CHEMICALS (INDIA) LTD. THE LD. COUNSEL FOR THE ASS ESSEE HAS SUBMITTED THAT THE SAME IS NOTHING BUT RECOVERY OF EXPENSES ACTUALLY I NCURRED BY THE ASSESSEE. IT IS HOWEVER OBSERVED THAT THERE IS NOTHING ON R ECORD TO SUBSTANTIATE THIS STAND OF THE ASSESSEE. MOREOVER THE ASSESSEE HIMS ELF HAS DECLARED SERVICE CHARGES RECEIVED FROM CIBA SPECIALTY CHEMICALS (IND IA) LTD. AS ITS OTHER INCOME. WE ARE THEREFORE UNABLE TO AGREE WITH THE S TAND TAKEN BY THE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE. ACCORDINGL Y WE HOLD THAT SALE OF RAW MATERIALS AND PACKING MATERIALS CANNOT BE EXCLUDED FROM THE PROFITS OF THE ELIGIBLE UNDERTAKING FOR THE PURPOSE OF COMPUTING D EDUCTION U/S 80IB OF THE ACT WHEREAS THE REMAINING FOUR ITEMS ARE LIABLE TO BE EXCLUDED FOR THIS PURPOSE. AS REGARDS THE ALTERNATIVE CONTENTION OF T HE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE THAT ONLY NET INCOME IS TO B E EXCLUDED AFTER ALLOWING THE EXPENSES INCURRED FOR EARNING THE RESPECTIVE IN COME WE DIRECT THE A.O. TO CONSIDER THIS PLEA OF THE ASSESSEE AND ALLOW APPROP RIATE RELIEF AFTER NECESSARY VERIFICATION. GROUND NO. 2 OF ASSESSEES APPEAL IS ACCORDINGLY PARTLY ALLOWED. 11. IN GROUND NO. 3 THE ASSESSEE HAS CHALLENGED TH E ACTION OF THE LD. CIT(A) IN CONFIRMING THE DISALLOWANCE MADE BY THE A.O. ON ACCOUNT OF ASSESSEES CLAIM FOR DEDUCTION OF ` 8 59 555/- ON ACCOUNT OF EXPENSES DISALLOWED IN A. Y. 2003-04 BEING RELATED TO A.Y. 2002-03. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 9 12. IN THE TAX AUDIT REPORT FOR A.Y. 2003-04 ROYAL TY TO HOECHST ON SALE OF COTTON DHAVAL VARIETY DEBITED TO THE P&L ACCOUNT WA S STATED TO BE THE EXPENDITURE OF EARLIER YEAR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR A.Y. 2002-03 THE ASSESSEE THEREFORE CLAIMED DEDUCT ION ON ACCOUNT OF THE SAID EXPENSES STATING THAT THE SAME WERE PERTAINED TO A. Y. 2002-03. SINCE THE PROVISION FOR THE SAID EXPENSES WAS NOT MADE BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT IN A.Y. 2002-03 THE A.O. DISALLOWED THE DE DUCTION CLAIMED BY THE ASSESSEE IN A.Y. 2002-03. ON APPEAL THE LD. CIT(A ) CONFIRMED THE DISALLOWANCE MADE BY THE A.O. ON THIS ISSUE OBSERVI NG THAT THERE WAS NOTHING IN THE TAX AUDIT REPORT FOR A.Y. 2003-04 TO SHOW TH AT THE EXPENDITURE ON ROYALTY WAS RELATED TO A.Y. 2002-03. 13. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSER VED THAT THE ROYALTY AMOUNT IN QUESTION WAS CLAIMED BY THE ASSESSEE IN A.Y. 200 3-04 AND THE A.O. DISALLOWED THE SAME IN THAT YEAR ON THE BASIS OF TA X AUDIT REPORT WHEREIN IT WAS STATED THAT THE ROYALTY DEBITED BY THE ASSESSEE TO THE P&L ACCOUNT WAS RELATED TO EARLIER YEAR. THE RELEVANT EXTRACT FROM THE SAID AUDIT REPORT IS PLACED AT PAGE 116 OF THE ASSESSEES PAPER BOOK AND A PERUSAL OF THE SAME SHOWS THAT THERE IS NOTHING CONTAINED THEREIN TO IN DICATE THAT THE ROYALTY WAS THE EXPENDITURE PERTAINING TO A.Y. 2002-03 AS CLAIM ED BY THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO NOT BROUGHT T O OUR NOTICE ANY OTHER MATERIAL TO SHOW THAT THE ROYALTY IN QUESTION WAS R ELATED TO A.Y. 2002-03. WE THEREFORE FIND NO INFIRMITY IN THE IMPUGNED ORDER O F THE LD. CIT(A) CONFIRMING THE DISALLOWANCE MADE BY THE A.O. ON THIS ISSUE IN A.Y. 2002-03. GROUND NO. 3 OF ASSESSEES APPEAL IS ACCORDINGLY DISMISSED. 14. IN GROUND NO. 4 THE ASSESSEE HAS CHALLENGED TH E ACTION OF THE LD. CIT(A) IN UPHOLDING THE ACTION OF THE A.O. IN EXCLUDING TH E FOLLOWING ITEMS OF ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 10 MISCELLANEOUS INCOME FROM THE PROFITS OF BUSINESS FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT. RS. I) CSCIL SERVICE CHARGES 38 83 788/- II) SALE OF OLD SEEDS/FARM PRODUCE 64 16 955/- III) SALE OF RAW MATERIAL/PACKING MATERIAL 1 42 963/- IV) EXCISE DUTY REFUND 4 10 409/- V) WRITE BACK OF RETENTION MONEY 1 35 537/- VI) SALE OF MANGO WOOD COCONUTS 84 574/- VII) OTHERS 12 91 163/- 15. WHILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT THE ASSESSEE HAD INCLUDED OTHER INCOME IN THE PROFITS OF THE BUSINE SS. ACCORDING TO THE A.O. CERTAIN ITEMS OF OTHER INCOME WERE LIABLE TO BE EXC LUDED TO THE EXTENT OF 90% FROM THE PROFITS OF THE BUSINESS AS PER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT AND ACCORDINGLY THE AMOUNT OF SUCH ITEMS WA S EXCLUDED BY HIM FROM THE PROFITS OF THE BUSINESS AND THE CLAIM OF THE AS SESSEE FOR DEDUCTION U/S 80HHC OF THE ACT WAS RESTRICTED TO THAT EXTENT. ON APPEAL THE LD. CIT(A) HELD THAT CERTAIN ITEMS WERE NOT LIABLE TO BE EXCLUDED W HILE COMPUTING THE PROFITS OF THE BUSINESS AS PER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. OUT OF THE REMAINING ITEMS HE HELD THAT THE SIX ITEMS OF OTHER INCOME I.E. SERVICE CHARGES RECEIVED FROM CSCIL SALE OF OLD SEEDS/FARM PRODUCTS SALE OF RAW MATERIAL/PACKING MATERIALS EXCISE DUTY REFUND WRI TE BACK RETENTION MONEY AND SALE OF WOOD MANGO COCONUTS ETC. WERE NOT EST ABLISHED TO BE IN THE NATURE OF OPERATIONAL INCOME OF THE ASSESSEE AND RE LYING ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BA NGALORE CLOTHING COMPANY [2003] 260 ITR 371) HE HELD THAT THE SAID SIX ITEMS OF OTHER INCOME WERE LIABLE TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS FOR COMPUTING DEDUCTION U/S 80HHC OF THE ACT AS PER EXPLANATION ( BAA). AS REGARDS THE REMAINING AMOUNT OF MISCELLANEOUS INCOME OF ` 12 91 163/- THE LD. CIT(A) FOUND THAT NO DETAILS WERE FURNISHED BY THE ASSESSE E OF SUCH MISCELLANEOUS ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 11 INCOME AND HE THEREFORE UPHELD THE EXCLUSION OF 90% OF THE SAID AMOUNT FROM THE PROFITS OF THE BUSINESS FOR COMPUTING DEDUCTION U/S 80HHC OF THE ACT. 16. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT THE EXCLUSION OF MISCELLANEOUS INCOME FROM THE PROFITS OF THE BUSINE SS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80HHC OF THE ACT TO THE EXT ENT OF ` 12 91 163/- WAS UPHELD BY THE LD. CIT(A) IN THE ABSENCE OF ANY DETAILS FURNISHED BY THE ASSESSEE IN RESPECT OF THE SAID INCOME. EVEN BEFOR E US THE LD. COUNSEL FOR THE ASSESSEE HAS NOT FURNISHED ANY SUCH DETAILS AND IN THE ABSENCE OF THE SAME WE CONFIRM THE EXCLUSION OF MISCELLANEOUS INCOME AM OUNTING TO ` 12 91 163/- FROM THE PROFITS OF THE BUSINESS FOR T HE PURPOSE OF COMPUTING DEDUCTION U/S 80HHC OF THE ACT. 17. AS REGARDS THE EXCISE DUTY REFUND OF ` 4 10 409/- IT IS OBSERVED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASS ESSEE BY THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF EX TRUSION PROCESS (P.) LTD. VS. ITO [2007] 106 ITD 336) WHEREIN IT WAS HELD THAT RE FUND OF EXCISE DUTY EARLIER CLAIMED AS DEDUCTION IS NOTHING BUT BUSINESS PROFIT S IN ITS TEXTURE COLOUR AND CHARACTER FOR THE PURPOSES OF SECTION 80HHC OF THE ACT AND THE SAME CANNOT BE EXCLUDED FROM THE PROFITS OF THE BUSINESS UNDER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. RESPECTFULLY FOLLOWING T HE SAID DECISION OF THE CO- ORDINATE BENCH OF THE TRIBUNAL WE DIRECT THE A.O. TO EXCLUDE THE EXCISE DUTY REFUND FROM THE PROFITS OF THE BUSINESS FOR COMPUTI NG DEDUCTION U/S 80HHC OF THE ACT. 18. AS REGARDS THE SALE OF RAW MATERIALS AND PACKIN G MATERIALS WE HAVE ALREADY HELD WHILE DEALING WITH THE ISSUE OF DEDUCT ION U/S 80IB OF THE ACT THAT THE SAME IS IN THE NATURE OF RECOVERY OF EXPEN SES EARLIER INCURRED WITHOUT ANY ELEMENT OF PROFIT. THE SAME THEREFORE IS NOT IN THE NATURE OF ANY ITEM OF ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 12 INCOME WHICH CAN BE EXCLUDED FROM THE PROFITS OF TH E BUSINESS AS PER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. 19. AS REGARDS THE REMAINING FOUR ITEMS OF OTHER IN COME I.E. SALE OF OLD SEEDS SERVICE CHARGES RECEIVED FROM CSCIL WRITE B ACK RETENTION MONEY AND SALE OF WOOD MANGO COCONUTS ETC. IT IS OBSERVED THAT THE EXCLUSION OF THESE ITEMS OF INCOME FROM THE PROFITS OF THE BUSINESS FO R THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT WAS U PHELD BY THE LD. CIT(A) RELYING ON THE DECISION OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF BANGALORE CLOTHING COMPANY (SUPRA). IN THE CASE OF CIT VS. DRESSER RAND INDIA P. LTD. [2010] 323 ITR 429 (BOM) THE HONBLE BOMBAY HIGH COURT HAS HELD RELYING ON THE DECISION OF HONBLE SUPREME CO URT IN THE CASE OF CIT VS. K. RAVINDRANATHAN NAIR [2007] 295 ITR 228 (SC) THA T THE DECISION IN THE CASE OF CIT VS. BANGALORE CLOTHING COMPANY IS NO LONGER A GOOD LAW BY OBSERVING AS UNDER:- HOWEVER IT WAS SOUGHT TO BE URGED THAT THE DECISIO N IN BANGALORE CLOTHING WAS CITED BEFORE THE SUPREME COURT IN ITS DECISION IN BABY MARINE EXPORTS [2007] 290 ITR 323. THE SUBMISSION OF THE ASSESSEE IS THAT THE JUDGMENT IN BANGALORE CLOTHING MUST BE REGARDED AS BEING IMPLIE DLY APPROVED BY THE SUPREME COURT IN BABY MARINE EXPORTS [2007] 290 ITR 323. THE ISSUE BEFORE THE SUPREME COURT IN BABY MARINE EXPORTS [2007] 29 0 ITR 323 WAS WHETHER AN EXPORT HOUSE PREMIUM RECEIVED BY THE ASSESSEE IS INCLUDIBLE IN THE PROFITS OF THE BUSINESS OF THE ASSESSEE WHILE COMPUTING THE DE DUCTION UNDER SECTION 80HHC. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SELLING MARINE PRODUCTS BOTH IN THE DOMESTIC AND INTERNATIONAL MARKETS IN P URSUANCE OF A CONTRACT WHICH IT HAD ENTERED INTO WITH EXPORT HOUSES. THE ASSESS EE RECEIVED THE ENTIRE FOB VALUE OF THE EXPORTS TOGETHER WITH A PAYMENT WHICH WAS DESCRIBED AS AN EXPORT HOUSE PREMIUM OF 2.25 PER CENT. OF THE FOB VALUE. T HE TRIBUNAL IN THAT CASE HELD THAT THE EXPORT HOUSE PREMIUM RECEIVED BY THE ASSESSEE WAS INCLUDIBLE IN THE PROFITS OF THE BUSINESS UNDER SECTION 80HHC. TH E CONTENTION OF THE REVENUE BEFORE THE SUPREME COURT WAS THAT AS A SUPPORTING M ANUFACTURER THE ASSESSEE WAS ENTITLED TO A DEDUCTION ONLY ON THE SALE PRICE OF ITS GOODS AND THE PREMIUM RECEIVED COULD NOT BE HELD TO BE DERIVED FROM THE B USINESS OF EXPORT. BEFORE THE SUPREME COURT RELIANCE WAS PLACED BY THE ASSESSEE O N THE JUDGMENT OF THE DIVISION BENCH OF THIS COURT IN BANGALORE CLOTHING [2003] 260 ITR 371 IN SUPPORT OF THE SUBMISSION THAT IF A PARTICULAR RECE IPT IS IN THE NATURE OF AN OPERATIONAL INCOME IT MUST BE INCLUDED IN BUSINESS PROFITS. THE SUPREME COURT ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 13 HELD THAT THE ASSESSEE BEING A SUPPORTING MANUFACTU RER UNDER SECTION 80HHC(1A) IT WAS ENTITLED TO A DEDUCTION OF THE PR OFIT DERIVED FROM THE SALE OF GOODS OR MERCHANDISE TO AN EXPORT HOUSE FOR THE PUR POSES OF EXPORT. THE ASSESSEE AS CONSIDERATION FOR THE SALE OF THE GOOD S TO AN EXPORT HOUSE RECEIVED THE ENTIRE FOB VALUE OF THE GOODS AND AN EXPORT HOU SE PREMIUM OF 2.25 PER CENT. THE SUPREME COURT NOTED IN ITS FOLLOWING OBSE RVATIONS THAT AS A MATTER OF FACT THE PREMIUM WAS A PART OF THE SALE PRICE REAL IZED BY THE ASSESSEE (PAGE 334) : THE APPELLATE TRIBUNAL HAS ARRIVED AT THE DEFINIT E CONCLUSION THAT THE EXPORT HOUSE PREMIUM IS NOTHING BUT AN INTEGRAL PAR T OF SALE PRICE REALISED BY THE ASSESSEE-A SUPPORTING MANUFACTURER FROM THE EXPORT HOUSE. THE TRIBUNAL FURTHER HELD THAT THE EXPORT HO USE PREMIUM CANNOT POSSIBLY BE CONSIDERED TO BE EITHER COMMISSION OR B ROKERAGE AS A PERSON CANNOT EARN COMMISSION OR BROKERAGE FOR HIMS ELF.' THE SUPREME COURT AFFIRMED THE FINDING OF THE TRIBU NAL THAT THE EXPORT HOUSE PREMIUM WAS AN INTEGRAL PART OF THE SALE PRICE REAL IZED BY THE ASSESSEE FROM THE EXPORT HOUSE. THE SUBMISSION OF THE REVENUE THAT TH E PREMIUM WAS TOTALLY UNRELATED TO EXPORT WAS HELD TO BE LACKING IN MERIT . THE SUPREME COURT HELD THAT THE SUBMISSION WAS CONTRARY TO THE SPECIFIC TE RMS OF THE AGREEMENT ENTERED INTO BY THE ASSESSEE. THE EXPORT HOUSE PREMIUM AS HELD BY THE SUPREME COURT COULD BE INCLUDED IN THE BUSINESS PROFITS 'BECAUSE IT IS AN INTEGRAL PART OF BUSINESS OPERATION OF THE RESPONDENT WHICH CONSIST S OF SALE OF GOODS BY THE RESPONDENT TO THE EXPORT HOUSE'. THE DECISION OF T HE SUPREME COURT IN BABY MARINE EXPORTS [2007] 290 ITR 323 THEREFORE REST S ON TWO FOUNDATIONS. FIRSTLY THE SUPREME COURT AFFIRMED THE FINDING OF FACT OF THE TRIBUNAL THAT THE EXPORT HOUSE PREMIUM WAS AN INTEGRAL PART OF THE C ONSIDERATION FOR THE SALE REALIZED BY THE ASSESSEE WHICH WAS A SUPPORTING MA NUFACTURER FOR AN EXPORT HOUSE. SECONDLY THE PREMIUM AS A MATTER OF FACT WAS RELATED TO THE EXPORT ACTIVITY SINCE IT FORMED AN INTEGRAL PART OF THE B USINESS OF THE ASSESSEE WHICH CONSISTED OF THE SALE OF GOODS TO AN EXPORT HOUSE. THE SUPREME COURT HAS AS A MATTER OF FACT IN THE COURSE OF THE DISCUSSION NO T AFFIRMED THE JUDGMENT OF THIS COURT IN BANGALORE CLOTHING [2003] 260 ITR 371. THE DECISION UNDOUBTEDLY WAS CITED ON BEHALF OF THE ASSESSEE BUT THAT IN ITS ELF IS NOT A GROUND FOR THIS COURT TO HOLD THAT IT WAS IMPLIEDLY APPROVED. THERE IS NOTHING IN THE JUDGMENT OF THE SUPREME COURT TO SUGGEST THAT THE JUDGMENT IN B ANGALORE CLOTHING [2003] 260 ITR 371 WAS EITHER EXPRESSLY OR IMPLIEDLY APPRO VED. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE ASSESSEE CANN OT THEREFORE BE ACCEPTED. THE AMBIT OF EXPLANATION (BAA) HAS BEEN CONSIDERED BY THE JUDGMENT OF THE SUPREME COURT IN RAVINDRANATHAN NAIR'S CASE [2007] 295 ITR 228. THE LEGISLATIVE POLICY UNDERLYING THE PROVISION IS THAT ITEMS WHICH ARE UNRELATABLE TO THE EXPORT ACTIVITY MUST BE EXCLUDED IN THE COMPUT ATION OF BUSINESS PROFITS IN ORDER TO PREVENT A DISTORTION IN THE COMPUTATION OF THE DEDUCTION UNDER SECTION 80HHC. WHAT PROVISION SHOULD BE MADE CONSISTENT WIT H THE LEGISLATIVE POLICY UNDERLYING SECTION 80HHC IS EVIDENTLY A MATTER FOR PARLIAMENT TO DETERMINE. THE DUTY OF THE COURT IS TO INTERPRET THE LANGUAGE OF THE PROVISION. IN THE PRESENT ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 14 CASE THE INTERPRETATION OF THE PROVISION BY THE SUP REME COURT IS BINDING AND HAS TO BE FOLLOWED. ( PARA 14 & 15 A SIMILAR ISSUE AGAIN CAME UP FOR CONSIDERATION BEF ORE THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PFIZER LTD. [2011 ] 330 ITR 62 (BOM) IN THE CONTEXT OF INSURANCE CLAIM RELATED TO STOCK-IN-TRAD E WHEREIN A QUESTION INVOLVED WAS WHETHER THE INSURANCE CLAIM RELATED TO STOCK-IN-TRADE OF THE ASSESSEE COMPANY WAS LIABLE TO BE EXCLUDED WHILE CO MPUTING ELIGIBLE PROFIT U/S 80HHC AND THE SAID QUESTION WAS ANSWERED BY THE HONBLE BOMBAY HIGH COURT IN FAVOUR OF THE ASSESSEE FOR THE FOLLOWING R EASONS GIVEN IN PARA 10 AND 11. AGAIN IN PARAGRAPH 21 THE SUPREME COURT OBSERVED AS FOLLOWS (PAGE 241) : 'THE SAID CLAUSE STATED THAT 90 PER CENT. OF INCENT IVE PROFITS OR RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CH ARGES OR ANY OTHER RECEIPT OF LIKE NATURE INCLUDED IN BUSINESS PROFITS HAD TO BE DEDUCTED FROM BUSINESS PROFITS COMPUTED IN TERMS OF SECTIONS 28 TO 44D OF THE INCOME-TAX ACT. IN OTHER WORDS RECEIPTS CONSTITUTI NG INDEPENDENT INCOME HAVING NO NEXUS WITH EXPORTS WERE REQUIRED T O BE REDUCED FROM BUSINESS PROFITS UNDER CLAUSE (BAA). A BARE READING OF CLAUSE (BAA)(1) INDICATES THAT RECEIPTS BY WAY OF BROKERAGE COMMIS SION INTEREST RENT CHARGES ETC. FORMED PART OF GROSS TOTAL INCOME B EING BUSINESS PROFITS. BUT FOR THE PURPOSES OF WORKING OUT THE FORMULA AND IN ORDER TO AVOID DISTORTION OF ARRIVING EXPORT PROFITS CLAUSE (BAA) STOOD INSERTED TO SAY THAT ALTHOUGH INCENTIVE PROFITS AND `INDEPENDENT IN COMES' CONSTITUTED PART OF GROSS TOTAL INCOME THEY HAD TO BE EXCLUDE D FROM GROSS TOTAL INCOME BECAUSE SUCH RECEIPTS HAD NO NEXUS WITH THE EXPORT TURNOVER.' IN DETERMINING IN EACH CASE AS TO WHETHER A RECEIPT WHICH FORMS PART OF THE PROFITS OF BUSINESS IS LIABLE TO UNDERGO A REDUCTIO N OF NINETY PER CENT. AS STIPULATED IN CLAUSE (1) OF EXPLANATION (BAA) IT I S NECESSARY FOR THE COURT TO CONSIDER WHETHER THE RECEIPT IS 'OF A SIMILAR NATUR E INCLUDED IN SUCH PROFITS'. THE RATIONALE FOR EXCLUDING NINETY PER CENT. OF THE REC EIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT OR CHARGES IS THAT THESE ARE INDEPENDENT INCOMES AND THEIR INCLUSION IN THE PROFITS OF BUSINESS WOULD RE SULT IN A DISTORTION. IN DETERMINING WHETHER ANY OTHER RECEIPT IS LIABLE TO UNDERGO A REDUCTION OF NINETY PER CENT. THE BASIC PRESCRIPTION WHICH MUST BE BOR NE IN MIND IS WHETHER THE RECEIPT IS OF A SIMILAR NATURE AND IS INCLUDED IN THE PROFITS OF BUSINESS. TO BE SUSCEPTIBLE TO A REDUCTION THE RECEIPT MUST BE OF A NATURE SIMILAR TO BROKERAGE COMMISSION INTEREST RENT OR CHARGES. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 15 THE HONBLE BOMBAY HIGH COURT THUS HAS LAID DOWN TH E GUIDELINES IN THE DECISIONS RENDERED IN THE CASE OF DRESSER RAND INDI A (P) LTD (SUPRA) & PFIZER LTD. (SUPRA) AND THE ISSUE AS TO WHETHER A PARTICUL AR ITEM OF INCOME IS LIABLE TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80HHC OF THE ACT IS REQUIRED TO BE CO NSIDERED AND DECIDED IN THE LIGHT OF THE SAID GUIDELINES. SINCE THE BENEFI T OF THE SAID TWO DECISIONS OF THE HONBLE BOMBAY HIGH COURT RENDERED SUBSEQUENTLY WAS NOT AVAILABLE EITHER TO THE A.O. OR TO THE LD. CIT(A) WE CONSIDE R IT JUST AND PROPER TO RESTORE THE ISSUE RELATING TO THE EXCLUSION OF THE REMAININ G FOUR ITEMS OF OTHER INCOME FROM THE PROFITS OF THE BUSINESS FOR COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT TO THE FILE OF THE A.O. FOR DECIDING THE SA ME AFRESH IN THE LIGHT OF THE SAID TWO DECISIONS OF THE HONBLE BOMBAY HIGH COURT . 20. AS REGARDS THE ALTERNATIVE CONTENTION OF THE LD . COUNSEL FOR THE ASSESSEE THAT IF ANY ITEM OF OTHER INCOME IS TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS ONLY NET INCOME AFTER ALLOWING THE CORRES PONDING EXPENSES IS TO BE EXCLUDED WE DIRECT THE A.O. TO CONSIDER AND DECIDE THE SAME AFTER NECESSARY VERIFICATION. 21. AS REGARDS THE OTHER ISSUE RAISED IN GROUND NO. 4 RELATING TO ASSESSEES CLAIM FOR DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF DEPB ENTITLEMENT OF ` 3 03 720/- IT IS OBSERVED THAT THIS ISSUE IS SQUAR ELY COVERED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPO RTS VS. CIT [2012] 342 ITR 49 (SC) WHEREIN IT WAS HELD THAT THE FACE VALUE OF THE DEPB WHICH REPRESENTS IT COST IS CHARGEABLE AS INCOME UNDER CL AUSE (IIIB) OF SECTION 28 WHEREAS THE PROFIT ON TRANSFER OF DEPB IS CHARGEABL E AS INCOME UNDER CLAUSE (IIIB) OF SECTION 28. IT WAS HELD THAT ONLY 90% OF THE PROFITS ON THE TRANSFER OF DEPB COVERED UNDER CLAUSE (IIIB) THEREFORE HAS TO BE EXCLUDED TO ARRIVE AT THE PROFITS OF THE BUSINESS UNDER CLAUSE (BAA) OF E XPLANATION TO SECTION ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 16 80HHC OF THE ACT AND NOT 90% OF THE ENTIRE FACE VAL UE. THE A.O. IS ACCORDINGLY DIRECTED TO ALLOW APPROPRIATE RELIEF TO THE ASSESSEE ON THIS ISSUE AS PER THE DECISION OF THE HONBLE SUPREME COURT IN TH E CASE OF TOPMAN EXPORTS (SUPRA). GROUND NO. 4 OF ASSESSEES APPEAL IS THUS PARTLY ALLOWED. 22. AS REGARDS THE ISSUE RAISED IN GROUND NO. 5 OF ASSESSEES APPEAL RELATING TO THE ENHANCEMENT OF ASSESSMENT MADE BY THE LD. CI T(A)BY DIRECTING THE A.O. TO EXCLUDE THE ADDITION MADE U/S 92-C OF THE ACT WH ILE DETERMINING THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTIN G DEDUCTION U/S 80HHC OF THE ACT THE LD. COUNSEL FOR THE ASSESSEE HAS FAIRL Y CONCEDED THAT THIS ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE BY PROVISO TO SUB SECTION (4) OF SECTION 92-C OF THE ACT WHICH CLEARLY LAYS DOWN THAT NO DED UCTION UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE IS ENHANCED AFTER COMPUTATION OF IN COME OF THE ASSESSEE HAVING REGARD TO THE ARMS LENGTH PRICE DETERMINED U/S 92-C OF THE ACT. WE THEREFORE FIND NO MERIT IN GROUND NO. 5 OF ASSESSEE S APPEAL AND DISMISS THE SAME. 23. GROUND NO. 6 TO 9 OF THE ASSESSEES APPEAL INVO LVE A COMMON ISSUE RELATING TO THE ADDITION OF ` 71 03 561/- MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF TRANSFER PRICING ADJUS TMENT. 24. DURING THE YEAR UNDER CONSIDERATION THE ASSESS EE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS AES. I N THIS REGARD A REFERENCE WAS MADE BY THE A.O. U/S 92CA(2) OF THE ACT TO THE TPO FOR DETERMINING THE ALP OF THE SAID TRANSACTION. THE SAID TRANSACTIONS INTER ALIA WERE COMPRISED OF ROYALTY OF RS. 2.84 CRORES PAID BY THE ASSESSEE TO ITS HOLDING COMPANY M/S SYNGENTA SWITZERLAND. ALL THE INTERNATIONAL TRANSA CTIONS WITH ITS AES WERE BENCH MARKED BY THE ASSESSEE BY APPLYING TNMM. FOR THIS PURPOSE THE ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 17 PROFIT OF ITS CROP PROTECTION BUSINESS WAS COMPARED BY THE ASSESSEE WITH PROFITS EARNED BY OTHER ENTITY ENGAGED IN THE SIMIL AR BUSINESS. IN ITS TRANSFER PRICING REPORT THE ASSESSEE HAD TAKEN 21 COMPARABL E COMPANIES WHOSE AVERAGE OPERATING MARGIN WAS WORKED OUT AT 5.21% AN D SINCE THE OPERATING PROFIT MARGIN OF THE ASSESSEE IN THIS SEGMENT WAS 6 .21% THE INTERNATIONAL TRANSACTIONS ENTERED INTO IN ITS CROP PROTECTION BU SINESS WERE CLAIMED TO BE AT ARMS LENGTH PRICE. SIMILARLY THE OPERATING PROFIT MARGIN OF ITS SEEDS BUSINESS WAS COMPARED BY THE ASSESSEE WITH OPERATING PROFIT MARGIN OF OTHER ENTITIES ENGAGED IN THE SAME LINE OF BUSINESS AND SINCE THE AVERAGE OPERATING PROFIT MARGIN IN THE CASE OF SUCH COMPARABLES SELECTED BY THE ASSESSEE WAS 11.06% AS AGAINST ITS OPERATING PROFIT MARGIN OF 12.06% T HE INTERNATIONAL TRANSACTIONS ENTERED INTO IN ITS SEEDS BUSINESS WER E CLAIMED TO BE AT ARMS LENGTH PRICE. THE TRANSACTIONS INVOLVING PAYMENT OF ROYALTY TO ITS AES IN SWITZERLAND HOWEVER WAS NOT SEPARATELY BENCHMARKE D BY THE ASSESSEE CLAIMING THAT ITS MARGIN AT ENTITY LEVEL AFTER CHAR GING THE ROYALTY BEING BETTER THAN THE COMPARABLE COMPANIES THE ROYALTY PAID WAS AT ARMS LENGTH PRICE. 25. THE TPO DID NOT CONSIDER MAKING OF ANY TP ADJUS TMENT IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH ITS AES EXCEPT THE PAYMENT OF ROYALTY. IN THIS REGARD SHE REQUIR ED THE ASSESSEE TO FURNISH THE RELEVANT DETAILS OF ROYALTY PAID TO ITS AES WH ICH THE ASSESSEE FURNISHED AS UNDER:- ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 18 PRODUCT NAME SALES (RS) COST OF IMPORTED SPARES (RS.) ROYALTY SALES (RS) ROYALTY RATE ON DOMESTIC /EXPORT SALES ROYALTY AMOUNT (RS) PROFENOPHOS AGREEMENT CURACRON BULK 13 815 693 CURACRON 50 EC 273 809 385 POLYTRIN C 44 29 270 193 SUB TOTAL 316 895 271 (386 063) 316 509 208 @5% (NET OF TAX) DOMESTIC 17 583 845 THIOMETHOXAM AGREEMENT ACTARA 68 230 596 (2 941 079 ) 65 289 517 @5% (NET OF TAX) DOMESTIC 3 627 195 ACTARA 15 049 602 THIOMETHOXAM 5 489 274 SUB TOTAL 20 538 875 NIL 20 538 875 @3% (NET OF TAX) EXPORT 684 629 PRETILACHLOR AGREEMENT PETILACHLOR 72 080 768 RIFIT 19 210 564 LAPA 411 516 SUB TOTAL 91 702 848 (3 821) 91 699 027 @7% (SUBJECT TO TAX) EXPORT 6 418 932 QUINALPHOS AGREEMENT EKALUX AF (SALES UPTO JUN- 01) 2 604 952 NIL 2 604 952 @5% (SUBJECT TO TAX) DOMESTIC 130 248 TOTAL 28 444 848 26. IN ORDER TO EVALUATE THE ASSESSEES INTERNATION AL TRANSACTION WITH ITS AES INVOLVING PAYMENT OF ROYALTY AMOUNTING TO RS. 2 .84 CRORES THE DETAILS OF PAYMENT MADE BY OTHER PESTICIDE/AGROCHEMICAL COMPAN IES AS AVAILABLE IN PROWESS DATABASE WERE EXAMINED BY THE TPO WHICH R EVEALED THAT THE ROYALTY PAID BY THE ASSESSEE TO ITS AES WAS MUCH HIGHER THA N MOST OF OTHER COMPANIES OPERATING IN THIS LINE OF BUSINESS. SHE THEREFORE PROCEEDED TO ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 19 EXAMINE FURTHER THE INTERNATIONAL TRANSACTION OF TH E ASSESSEE WITH ITS AES INVOLVING THE PAYMENT OF ROYALTY. IN THIS REGARD SHE DID NOT ACCEPT THE MAIN CONTENTION OF THE ASSESSEE THAT THE ROYALTY PAID BY IT TO THE AE WAS IN CONSONANCE WITH THE COMMON POLICY PERMITTING THE PA YMENT OF ROYALTY UP TO 5% ON DOMESTIC SALES AND 8% ON EXPORT SALES. ACCORD ING TO HER THE GOVERNMENT POLICY REFERRED TO BY THE ASSESSEE WAS R ELATING TO THE FOREIGN EXCHANGE REGULATION AND THE SAME WAS FRAMED FROM TI ME TO TIME CONSIDERING THE FOREIGN EXCHANGE SITUATION. SHE HELD THAT SUCH REGULATION OR PERMISSION TO REMIT THE FOREIGN CURRENCY DOES NOT IMPLY THAT THE RELEVANT TRANSACTIONS WERE IN ACCORDANCE WITH THE TRANSFER PRICING PROVISIONS. SHE ALSO DID NOT FIND MERIT IN THE OTHER CONTENTION RAISED BY THE ASSESSEE THAT THE OVERSEAS ENTITY HAVING INVESTED SUBSTANTIAL AMOUNT ON THE R&D OF THE PRODU CT MANUFACTURED BY THE ASSESSEE IT WAS REQUIRED TO BE COMPENSATED BY PAYI NG THE ROYALTY. SHE HELD THAT THE PESTICIDE INDUSTRY WAS A GENERIC INDUSTRY AS STATED IN THE TP STUDY REPORT FURNISHED BY THE ASSESSEE WITH MOST OF THE M OLECULES OFF THE PATENT AND THERE WAS NOTHING TO SHOW THAT ANY OF THE PRODU CTS ON WHICH ROYALTY WAS PAID IS A PATENTED PRODUCT. 27. HAVING REJECTED THE CONTENTIONS OF THE ASSESSEE JUSTIFYING THE PAYMENT OF ROYALTY THE TPO PROCEEDED TO EXAMINE THE PROFIT MARGIN OF ITS PRODUCT SEPARATELY ON WHICH ROYALTY WAS PAID AND RECORDED H ER FINDINGS IN RESPECT OF EACH SUCH PRODUCTS AS UNDER:- 9.1 PRETILACHLOR: TOTAL EXPORT SALES OF THIS PRODU CT TO ASSOCIATE ENTERPRISES IS OF RS. 7.20 CRORES. ROYALTY IS PAYA BLE @ 7% ON EXPORT. TOTAL ROYALTY PAID IS RS. 50 45 424/-. ACCORDING T O THE ASSESSEE THIS PRODUCT IS COMPARABLE TO REFIT EX LOCAL SALES. HE NCE THE PROFITABILITY OF THE TWO ITEMS AS PROVIDED BY THE ASSESSEE IS AS UNDER:- REFIT EC 200 LTR LOCAL NON. AE PRETILACHLOR EXPORT TO AE QUANTITY 28 000 1 87 720 SP/UNIT 190.00 237.11 LESS: COSTS 181.46 223.42 ROYALTY - 16.60 TOTAL COSTS 181.46 240.02 PROFIT (LOSS) 8.54 (2.91) PROFIT MARGIN ON COSTS 4.71% (1.21)% ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 20 AS CAN BEEN SEEN THE EXPORT OF PRETILACHIOR HAS TW O INTERNATIONAL TRANSACTIONS EMBEDDED IN IT. THE SALE IS TO THE ASS OCIATED ENTERPRISE OF THE ASSESSEE. HENCE IT IS AN INTERNATIONAL TRANSAC TION FOR WHICH ARMS LENGTH PRICE IS TO BE DETERMINED. FURTHER THE ASSE SSEE IS ALSO PAYING ROYALTY TO ITS ASSOCIATED ENTERPRISE ON SUCH SALE. THE ROYALTY PAYMENT IS ALSO AN INTERNATIONAL TRANSACTION FOR WHICH ARMS LENGTH PRICE IS TO BE DETERMINED. ALP FOR EXPORT SALES OF THIS PRODUCT BY APPLYING THE COMPARABLE MARGIN EARNED ON LOCAL SALES OF 4.7 1% O N COSTS IS RS. 251.32. THE INTERNATIONALTRANSACTION OF EXPORT IS NOT WITH IN 5% RANGE OF THE ARMS LENGTH PRICE. HENCE EVEN ON THE EXPORT TRANSAC TION AN ADJUSTMENT IS REQUIRED @ RS. 14.21 PER KG WHICH IS ONLY SLIGHTLY LESS THAN ROYALTY PAID PER K.G. SOLD OF RS. 16.60. 9.2 REFIT : TOTAL EXPORT OF THIS PRODUCT TO AE IS R S. 1.92 CRORES. ROYALTY PAYABLE ON THE EXPORT IS @7%. ROYALTY PAID IS OF RS. 13 44 789/-. THIS ITEM IS ALSO SOLD LOCALLY. PROF IT MARGIN ON COMPARISON IS AS FOLLOWS:- REFIT EC 200 LTR LOCAL NON. AE PRETILACHLOR EXPORT TO AE QUANTITY 28 000 1 61 200 SP/UNIT 190.00 142.89 LESS: COSTS 181.46 140.62 ROYALTY - 5.20 TOTAL COSTS 181.46 145.82 PROFIT (LOSS) 8.54 (2.93) PROFIT MARGIN ON COSTS 4.71% (2.01)% AS IN THE CASE OF PRETILACHLOR HERE ALSO THE SALE OF REFIT TO ASSOCIATE ENTERPRISE CONSISTS OF TWO INTERNATIONAL TRANSACTIO NS (I.E. SALE TO ASSOCIATE ENTERPRISE AND ROYALTY PAID TO ASSOCIATE ENTERPRISE) WHICH HAVE TO BE BENCHMARKED. ARMS LENGTH PRICE FOR EXPOR T SALES OF REFIT BY APPLYING COMPARABLE MARGIN ON THIRD PARTY SALES OF 4.71% ON COSTS IS RS.152.68 THE INTERNATIONAL TRANSACTION OF EXPORT IS NOT WITH IN 5% RANGE OF THE ARMS LENGTH PRICE DETERMINED. HENCE EVEN ON THE EXPORT TRANSACTION AN ADJUSTMENT IS REQUIRED @ RS. 9.79 P ER KG WHICH IS MORE THAN THE ROYALTY PAID @RS. 5.20. 9.3 LAVA : TOTAL SALES (EXPORT) OF THIS PRODUCT TO ASSOCIATE ENTERPRISE IS RS.4 11 516/-. ROYALTY PAID IS @ 7% ON EXPORT SALES OF RS.28 806/. THE ASSESSEE HAS PROVIDED THE PROFIT MARGIN ON THIS PRO DUCT. ASSESSEE HAS EARNED A PROFIT MARGIN ON COST @ 1.2%. AS AGAINST T HE SAME THE AVERAGE MARGIN ON LOCAL SALES OF THE ASSESSEE IS 6. 23%. THUS IT IS SEEN THAT EVEN ON THIS PRODUCT THE MARGIN IS LESS AFTER PAYMENT OF ROYALTY. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 21 9.4 ACTARA EXPORT SALES OF THIS IS RS.1 50 49 6021- . ROYALTY @ 3% IS RS.4 51 488/-. ASSESSEES MARGIN ON EXPORT SALES OF 46.93% ON COSTS IS LESS THAN LOCAL MARGIN OF 53.07% (IN THE LOCAL SALE S THE ASSESSEE HAS IN FACT PAID 5% ROYALTY) HENCE THIS CLEARLY SHOWS THA T THE ASSESSEE HAS LOWER MARGINS ON EXPORT SALES TO THE ASSOCIATED ENT ERPRISE ON WHICH ROYALTY IS PAID. IF THE ROYALTY PAID ON LOCAL SALES IS EXCLUDED THE EXPORT MARGINS WOULD BE STILL LESSER IN COMPARISON. ON THE BASIS OF THE ABOVE FINDINGS THE TPO CAME TO THE CONCLUSION THAT ALTHOUGH THE ROYALTY WAS CLAIMED TO BE PAID BY THE ASSESSEE FOR COMMERCIAL EXPLOITATION OF THE TECHNOLOGY THE ASSESSEE IN FAC T WAS EARNING LESSER MARGIN ON ITS EXPORTS TO ITS AES AFTER THE PAYMENT OF ROYA LTY. SHE THEREFORE HELD THAT THERE WAS NO JUSTIFICATION OR COMMERCIAL REASO N TO PAY ROYALTY ON EXPORT OF SEEDS OF ACTARA PRETILACHLOR THIOMETHOXAM RIF IT AND LAPA. ACCORDINGLY THE TRANSFER PRICING ADJUSTMENT OF RS. 71 03 561/- WAS WORKED OUT BY THE TPO ON ACCOUNT OF PAYMENT OF ROYALTY TO THAT EXTENT WHICH IN THE OPINION OF THE TPO WAS WITHOUT ANY COMMERCIAL REASON. 28. THE TP ADJUSTMENT MADE BY THE TPO/AO WAS DISPUT ED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(A). BEFORE T HE LD. CIT(A) IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE INTERNATIONAL TR ANSACTIONS WITH ITS AES INVOLVING PAYMENT OF ROYALTY WERE EXISTING EVEN BEF ORE THE INTRODUCTION OF TP REGULATIONS. IT WAS SUBMITTED THAT AS PER THE TP S TUDY CARRIED ON BY THE ASSESSEE USING TNMM ITS OPERATING MARGIN WAS FOUND TO BE HIGHER THAN THE OPERATING MARGIN OF THE COMPARABLE COMPANIES AND TH E TPO HAVING ACCEPTED THE SAME HE WAS NOT JUSTIFIED TO EVALUATE THE ROYA LTY TRANSACTIONS AS SEPARATE AND DISTINCT TRANSACTIONS. IT WAS SUBMITTED THAT FO R EVALUATING THE ROYALTY TRANSACTION THE BENEFITS OF SUPERIOR MANUFACTURING TECHNOLOGY INFORMATION AND TECHNICAL ASSISTANCE ACCESS TO TECHNOLOGY PRO VISION OF ENHANCED PRODUCT BASKET TO ITS CUSTOMERS AS WELL AS INCREASED CAPACI TY UTILIZATION SHOULD BE TAKEN INTO CONSIDERATION. IT WAS CONTENDED THAT TH E TPO SHOULD HAVE GIVEN DUE REGARD TO ALL THESE FACTORS WHICH WERE VITAL FO R COMPARABILITY ANALYSIS AND SHOULD HAVE ADOPTED THE BASKET OF PRODUCT APPROACH. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 22 29. THE LD. CIT(A) DID NOT FIND MERIT IN THE SUBMIS SIONS MADE ON BEHALF OF THE ASSESSEE ON THIS ISSUE AND REJECTED THE SAME FO R THE FOLLOWING REASONS GIVEN IN PARA 28 AND 29 OF HIS IMPUGNED ORDER: 28. I HAVE CAREFULLY CONSIDERED THE APPELLANTS SU BMISSIONS. THE APPELLANT HAS STATED THAT THE TPO HAS DISREGARDED T HE APPROVALS RELATING TO THE PAYMENT OF ROYALTY. AS STATED IN PA RA 5.2 OF THE SUBMISSIONS DT.6.9.2003 THE INDIAN EXCHANGE CONTRO L REGULATIONS CURRENTLY IN FORCE ALLOW AN INDIAN COMPANY TO REMIT ROYALTIES UPTO 5% OF THE INDIAN COMPANYS DOMESTIC SALES AND 8% OF TH E EXPORT SALES UNDER THE AUTOMATIC ROUTE TO OVERSEAS ENTITIES. THE AMOUNT IS THEREFORE THE MAXIMUM PERMISSIBLE LIMIT AND CAN ON LY BE TAKEN TO BE GOVERNMENT ORDER IN FORCE AS PER RULE 1OB(2)(D) FOR THE MAXIMUM PERMISSIBLE AMOUNT AND NOT AN APPROVAL FOR THE QUAN TUM OF ROYALTIES. THE APPELLANT HAS RELIED ON LIC VS. ESCORTS LTD. & OTHERS (1986) 1 SCC 264 WHICH WAS A CASE IN WHICH THE PROVISIONS OF TH E FOREIGN EXCHANGE REGULATION ACT WERE SO STRUCTURED AS TO MAKE IT CLE AR THAT IT IS FOR THE RESERVE BANK OF INDIA ALONE TO CONSIDER WHETHER THE REQUIREMENTS OF THE PROVISIONS OF THE FOREIGN EXCHANGE REGULATION A CT AND THE RULES DIRECTIONS AND ORDERS ISSUED FROM TIME TO TIME HAVE BEEN1IIFIHIED AND WHETHER PERMISSION SHOULD BE GRANTED OR NOT. THE HO NBLE SUPREME COURT FURTHER OBSERVED THAT THERE IS NO PROVISION O F THE ACT [FERA] WHICH ENABLES AN INDIVIDUAL OR AUTHORITY FUNCTIONIN G OUTSIDE THE ACT [FERA] TO DETERMINE FOR HIS OWN OR ITS OWN PURPOSE WHETHER THE RESERVE BANK OF INDIA WAS RIGHT OR WRONG IN GRANTIN G PERMISSION ULS.29(L) OF THE ACT [FERA] AND THAT IT IS CERTAINL Y NOT OPEN TO A COMPANY WHOSE SHARES HAVE BEEN PURCHASED BY A NON-R ESIDENT COMPANY TO REFUSE TO REGISTER THE SHARES EVEN AFTER PERMISSION IS OBTAINED FROM THE RESERVE BANK OF INDIA ON THE GROU ND THAT PERMISSION OUGHT NOT TO HAVE BEEN GRANTED UNDER THE FERA. THE FACTS OF THE PRESENT CASE ARE DISTINGUISHABLE SINCE AS POINTED OUT ABOVE THE EXCHANGE CONTROL REGULATIONS ONLY STIPULATES THE MA XIMUM PERMISSIBLE LIMIT FOR REMITTANCE OF ROYALTIES. THE OTHER DECISI ONS AT 72 TTJ (PUNE) 72 AND 94 TTJ 53 (DEL) ARE ALSO DISTINGUISHABLE SINCE IN THOSE CASES THERE WAS SPECIFIC APPROVAL GRANTED BY GOVERNMENT OF INDI A/RBI. 29. THE APPELLANT HAS SOUGHT TO PLEAD THAT SINCE TH E TPO OBSERVED THAT THE AMOUNTS PAID BY THE APPELLANT ON ACCOUNT OF ROY ALTY WAS HIGHER THAN MOST OF THE OTHER COMPANIES OPERATING IN THIS INDUSTRY THE TPO FELT THE NEED TO FURTHER EXAMINE THE INTERNATIONAL TRANSACTION ON ACCOUNT OF ROYALTY BUT THIS IS NOT CORRECT SINCE TH E APPELLANT DERIVED BENEFITS FROM THE RECEIPT OF TECHNOLOGY AND FURTHER THE AVERAGE OF PERCENTAGE OF R&D EXPENSES TO SALES OF SOME OF REPU TED AGRO CHEMICAL COMPANIES OF 1.56% IS COMPARABLE WITH 1.63% OF EXPE NSES ON R&D PLUS ROYALTY [1.75% AFTER AMORTISING THE TECHNICAL KNOW-HOW FEES OVER 7 YEARS] OF SYNGENTA INDIAS CROP PROTECTION BUSINESS . I FIND THAT THE ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 23 PERCENTAGE OF R&D EXPENSES TO SALES VARY BETWEEN TO 1.43% FOR FOUR CONCERNS AND IT IS ONLY IN ONE CONCERN I.E. GHARDA CHEMICALS THAT THE PERCENTAGE IS 2.6% THUS RESULTING IN AN INCREASE I N THE AVERAGE R&D EXPENDITURE AS A PERCENTAGE OF SALES. COMPARED TO T HE GENERAL TREND AS REVEALED BY THE DETAILS OF THE FOUR COMPANIES ABOVE THE EXPENSES ON R&D PLUS ROYALTY OF SYNGENTA INDIAS CROP PROTECTIO N BUSINESS ARE HIGHER AND THUS THE TPOS OBSERVATIONS ARE JUSTIFIE D. AS REGARDS THE TPOS OBSERVATION THAT NO INFORMATION WAS PROVIDED REGARDING ANY STUDY UNDERTAKEN BY THE OVERSEAS ENTITY FOR THE PUR POSE OF FIXING THE ROYALTY AND THE APPELLANTS REFERENCE TO ITS LETTE R DT. 23.2.2005 IN THIS CONTEXT I FIND THAT IT WAS ACCEPTED IN THE LETTER DT. 232.2005 THAT SYNGENTA GROUP HAS NOT CONDUCTED ANY STUDY FOR THE PURPOSE OF DETERMINING THE RATE OF ROYALTY. AS REGARDS ROYALTY CHARGED BY SYNGENTA AG AND SYNGENTA CROP PROTECTION AG TO OTHER GROUP E NTITIES THE LETTER DT. 23.2.2005 REFERS TO CHINA IN WHICH ROYALTY @ 3% ON SALES FOR A PERIOD OF 10 YEARS IS PAID [IN INDIA THE RATES BETW EEN 3% TO 7%] BUT CLAIMS THAT THIS IS NOT COMPARABLE. IT MAY BE RELEV ANT TO ADD THAT THE TPO HAS NOTED IN PARA NO.8(B) THAT THE ASSESSEE HAS NOT SHOWN THAT ANY OF THE PRODUCTS ON WHICH ROYALTY IS PAID IS A P ATENTED PRODUCT IN INDIA AND THAT EVEN IN THE STUDY REPORT FURNISHED B Y THE ASSESSEE IT IS STATED THAT THE PESTICIDE INDUSTRY IS A GENERIC I NDUSTRY WITH MOST OF THE MOLECULES OFF THE PATENT. 30. AFTER REJECTING THE MAIN CONTENTIONS OF THE ASS ESSEE RAISED ON THE ISSUE OF TRANSFER OF PRICING ADJUSTMENT THE LD. CIT(A) P ROCEEDED TO VERIFY THE PRODUCE-WISE ADJUSTMENT WORKED OUT BY THE TPO AND R ECORDED HIS FINDINGS IN RESPECT OF ROYALTY PAID FOR EACH ITEM SEPARATELY AS UNDER:- 3. AS REGARDS RIFIT THE APPELLANTS CONTENTION IS THAT THE QUANTITY SOLD IN THE LOCAL MARKET 42 000 LITRES] IS SIGNIFIC ANTLY LOWER THAN THE QUANTITY SOLD IN THE EXPORT MARKET [1 6 1 200 LITRE S] VOLUME DISCOUNT IS REQUIRED TO BE CONSIDERED ALONG WITH DIFFERENCES WH ICH CANNOT BE QUANTIFIED WITH REASONABLE ACCURACY RELATING TO DIF FERENTIAL FUNCTIONS AND RISKS GEOGRAPHICAL MARKETS SIZE OF THE MARKET S CONTRACTUAL TERMS AND LEVEL OF MARKET. TAKING INTO ACCOUNT THE APPELL ANTS SUBMISSIONS IT IS FELT THAT THE PROVISIONS OF RULE 10B(1)(E)(III) ARE APPLICABLE AND THE COMPARABLE MARGIN OF 4.7 1% COMPUTED BY THE TPO IS REQUIRED TO BE ADJUSTED TO THE EXTENT OF 0.5% I.E. THE AO IS DIRE CTED TO COMPUTE THE ARMS LENGTH PRICE FOR EXPORT SALES OF RIFIT TO AE BY APPLYING COMPARABLE MARGIN OF 4.21% ON COSTS OF RS.145.82 AS AGAINST 4. 71% ON COSTS OF RS.145.82 APPLIED BY THE TPO. SINCE THE ADJUSTMENT STILL REMAINS MORE THAN THE ROYALTY PAID THE TPOS ORDER REDUCING THE ALP FOR ROYALTY BY THE ROYALTY ON EXPORT SALES F RIFIT IS CONFIRMED. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 24 35. AS REGARDS PRETILACHLOR IT IS STATED THAT THE QUANTITY SOLD IN THE LOCAL MARKET OF RIFIT BEING 28 000 LITRES IS SIGNIF ICANTLY LOWER THAN THE QUANTITY SOLD IN THE EXPORT MARKET OF PRETILACHLOR BEING 3 04 000 [STATED TO BE ERRONEOUSLY WRITTEN AS 1 87 720 BY TPO IN PAR A 9.1 OF THE TP ORDER]. IT HAS BEEN STATED THE PRETILACHLOR IS NOT SOLD IN THE LOCAL MARKET AND ACCORDINGLY THE TPO HAS TAKEN MARGIN ON LOCAL SALES OF RIFIT BULK TO EXTRAPOLATE THE MARGIN OF PRETILACHLOR BUT IT IS VITAL TO NOTE THAT RIFIT IS A FORMULATION AND PRETILACHLOR IS A TECHNICAL PE STICIDE AND THUS PRETILACHLOR WOULD ACHIEVE A LOWER MARGIN. HOWEVER I FIND THAT AS PER DISCUSSION IN PARA 9.1 AND 9.2 OF TP ORDER THE PRO FIT MARGIN ON COSTS OF PRETILACHLOR EXPORT TO AE [LOSS OF 1.21%] IS MORE T HAN THE PROFIT MARGIN ON COSTS OF RIFIT EC 200LTR EXPORT TO AE-[LOSS OF 2 .01 %] TAKING THIS FACT INTO CONSIDERATION AND THE COMPARABLE BEING THE SAM E AS FOR RIFIT SUPRA AND FOR THE REASONS GIVEN IN RESPECT OF RIFI T SUPRA THE AO IS DIRECTED TO COMPUTE THE ARMS LENGTH PRICE FOR EXPO RT SALES OF PRETILACHLOR TO AE BY APPLYING COMPARABLE MARGIN OF 4.21% 14.71% LESS ADJUSTMENT 0.5%I ON COSTS OF RS.240.02 AND MAKE ADJ USTMENT FOR ROYALTY ON EXPORT SALES OF PRETILACHLOR ACCORDINGLY . 36. WITH REGARD TO LAPA THE SALES [EXPORT] TO AE A RE RS.4 1 1 516/- ROYALTY PAID IS 7% ON EXPORT SALES ASSESSEE HAS EA RNED A PROFIT MARGIN ON COST AT 1.2%. THE AO HAS OBSERVED THAT THE AVERA GE MARGIN ON THE LOCAL A1ES OF TH1 ASSESSEE IS 623% AND THEREFORE T HE MARGIN IS LESS AFTER PAYMENT OF ROYALTY. THE APPELLANTS CONTENTIO N IS THAT THE TPO HAS USED THE AVERAGE MARGIN EARNED ON TOTAL LOCAL SALES [6.23%] (INCLUDING PRODUCTS BEARING ROYALTY) TO COMPARE THE MARGIN EAR NED FROM SALE OF LAPA TO AES [1.2%] AND THE ARMS LENGTH PRINCIPLES CANNOT BE APPLIED SINCE THE LOCAL SEGMENT HAS INTERNATIONAL TRANSACTI ONS AND FURTHER THERE ARE DIFFERENCES IN FUNCTIONS PERFORMED AND RI SKS ASSUMED. IT HAS THEREFORE BEEN PLEADED THAT THE NET MARGIN ON LOCA L SALES ON NON- ROYALTY BEATING PRODUCTS WOULD SERVE AS A BETTER CO MPARABLE WHICH 5.41% AND AFTER EXERCISING THE OPTION UNDER THE PRO VISO TO SECTION 92C(2) THE INTERNATIONAL TRANSACTION MEETS THE ARM S LENGTH STANDARD AS REQUIRED UNDER THE TP REGULATIONS. THE APPELLANT S CONTENTION REGARDING APPLICATION OF PROVISO TO SECTION 92C(2) ARE NOT BEING ACCEPTED SINCE MORE THAN ONE PRICE IS NOT BEING DET ERMINED BY THE MOST APPROPRIATE METHOD [REFER DISCUSSION SUPRA]. HOWEVE R THE APPELLANT IS JUSTIFIED IN STATING THAT THE NET MARGIN ON LOCAL S ALES OF NON-ROYALTY BEARING PRODUCTS OF 5.41% WOULD SERVE AS A BETTER C OMPARABLE. THE AO IS THEREFORE DIRECTED TO COMPUTE THE ARMS LENGTH PRICE FOR EXPORT SALES OF LAPA BY APPLYING COMPARABLE MARGIN OF 5.41% AND MAKE ADJUSTMENT FOR ROYALTY ON EXPORT SALES OF LAPA ACCORDINGLY. 37. FOR ACTARA THE TPO HAS OBSERVED THAT THE EXPOR T SA1E IS RS.1 50 49 6021- ROYALTY AT 3% IS RS4 51 488/- AND ASSESSEES MARGIN ON EXPORT SALES OF 46.93% ON COST IS LESS THAN LOCA L MARGIN OF 53.07% [ON WHICH ROYALTY OF 5% WAS PAID]. THE ASSESSEES E XPLANATION IS THAT SALE OF ACTARA TO AE AND NON-AE CANNOT BE COMPARED DUE TO DIFFERENCES ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 25 IN PACK SIZE; SMALLER PACKS TEND TO HAVE HIGHER MAT ERIAL AND OVERHEAD COST[SALE TO AE ARE OF 10 GRAM PACK WHEREAS THE SAL E TO NON-AE ARE OF 40 GRAM PACK]. IT IS FURTHER STATED THAT THE PRODUC T-WISE COMPARABILITY ANALYSIS PROVIDED IN THE SUBMISSION TO THE TPO DID NOT COVER THE ENTIRE BASKET OF ACTARA BUT WAS ONLY IN RESPECT OF A GIVEN PRODUCT HAVING SALES OF RS.59 32 365/- WHICH WAS EXTENDED BY THE TPO TO THE ENTIRE RANGE OF THE PRODUCTS HAVING SALES OF RS. 1 50 49 6021- WITH OUT PROVIDING ANY RATIONALE. IN VIEW OF THE APPELLANTS SUBMISSIONS THE AO IS DIRECTED TO REDUCE ALP FOR ROYALTY ON EXPORT SALES OF ACATRA TO THE EXTENT OF ROYALTY ON THE SALES OF A GIVEN PRODUCT OF RS.59 32 3651- S UPRA. 38. AS REGARDS THIOMETHOXAM THE APPELLANT HAS POIN TED OUT THAT THE TPO HAS DISALLOWED THE PAYMENT OF ROYALTY AMOUNTING TO RS.1 82 976/- ON SALE OF THIOMETHOXAM BUT ON PERUSAL OF THE TP OR DER IT MAY BE OBSERVED THAT IN THE ORDER THERE IS NO DISCUSSION ABOUT THE SAME AND THE TPO HAS NOT GIVEN ANY SHOW CAUSE NOTICE IN THIS REGARD. IT HAS BEEN SUBMITTED THAT SYNGENTA INDIA EARNED A NET MARGIN O F 7.2% ON SALE OF THIOMETHOXAM TO AE AND THIS PROFIT MARGIN IS HIGHER THAN THE MARGIN EARNED ON LOCAL SALES OF PRODUCT NOT BEARING ROYALT Y WHICH IS 5.4 1%. IN VIEW OF THE APPELLANTS CONTENTIONS THE AO IS DIRE CTED NOT TO REDUCE THE ALP FOR ROYALTY BY THE AMOUNT OF ROYALTY ON EXPORT SALES OF THIOMETHOXAM. THE LD. CIT(A) THUS ALLOWED PART RELIEF TO THE ASSE SSEE ON THE ISSUE OF TRANSFER PRICING ADJUSTMENT AND RESTRICTED THE ADDITION MADE ON ACCOUNT OF TP ADJUSTMENT TO THE EXTENT INDICATED ABOVE. STILL AG GRIEVED THE ASSESSEE HAS RAISED THIS ISSUE RELATING TO ADDITION ON ACCOUNT O F TP ADJUSTMENT MADE BY THE A.O. AND CONFIRMED BY THE LD. CIT(A). 31. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHEN THE OPERATING PROFIT MARGIN OF THE ASSESSEE COMPANY AT ENTITY LEV EL WAS FOUND TO BE MORE THAN THE AVERAGE OPERATING PROFIT MARGIN OF THE COM PARABLES AS PER THE TP STUDY REPORT FURNISHED BY THE ASSESSEE AND THE SAME WAS NOT DISPUTED BY THE TPO THERE WAS NO JUSTIFICATION IN DETERMINING THE ARMS LENGTH PRICE OF ROYALTY SINCE THE OPERATING PROFIT MARGIN OF THE AS SESSEE WHICH WAS FOUND TO BE AT ARMS LENGTH PRICE WAS WORKED OUT AFTER THE P AYMENT OF ROYALTY. HE CONTENDED THAT THE METHOD ADOPTED BY THE TPO TO EVA LUATE THE TRANSACTION INVOLVING THE PAYMENT OF ROYALTY WAS COMPLETELY MIS LEADING AS THE SAME DID NOT REVEAL THE ACTUAL ROYALTY RATES APPLIED IN THE THIRD PARTY ARRANGEMENTS ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 26 WITHOUT WHICH THE ANALYSIS WAS MEANING LESS. HE SU BMITTED THAT THE TPO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO PROVE THAT TH E ROYALTY PAID BY THE ASSESSEE TO ITS AE PER SE WAS UNREASONABLE. HE CON TENDED THAT THE ROYALTY ON THE OTHER HAND WAS PAID BY THE ASSESSEE AT THE RATE LOWER THAN THE RATES APPROVED BY THE RBI UNDER FERA AND SINCE THE OBJECT IVE OF THE FERA WAS TO REGULATE THE FOREIGN EXCHANGE RESOURCES THE RBI LO OKED AT THE RATE OF ROYALTY FROM REASONABLENESS PERSPECTIVE. HE CONTENDED THAT ALTHOUGH THE RBI APPROVAL IS NOT CONCLUSIVE FOR DETERMINING OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS AS HELD INTER ALIA BY TH E HONBLE DELHI HIGH COURT IN THE CASE OF NESTLE INDIA REPORTED IN 337 ITR 103 THE SAME HAS TO BE GIVEN CONSIDERATION WHILE DETERMINING THE ARMS LENGTH PR ICE OF THE TRANSACTION AS HELD BY THE DELHI TRIBUNAL OF ITAT IN THE CASE OF R EEBOK INDIA COMPANY (ITA NO. 5857/DEL/2012). HE CONTENDED THAT THE TPO HAS N EITHER DISPUTED THE BENEFIT DERIVED BY THE ASSESSEE FROM THE LICENSING OF CROP TECHNOLOGY NOR HAS PLACED ANY MATERIAL ON RECORD TO SHOW THAT THE ROYA LTY RATE CHARGED TO THE ASSESSEE BY ITS AES WAS UNREASONABLE OR EXCESSIVE. HE SUBMITTED THAT EVEN THE TPO HAS NOT REBUTTED THE COMPARABLE ROYALTY RAT ES FROM THE BROADER CHEMICAL INDUSTRY SUBMITTED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. HE CONTENDED THAT THE QUANTUM OF ROYA LTY IN ANY CASE CANNOT BE LINKED WITH THE PROFIT SINCE THE PROFIT IS A DER IVATIVE FIGURE DEPENDING ON VARIOUS FEATURES. 32. AT THIS STAGE THE LD. COUNSEL FOR THE ASSESSEE WAS ASKED BY THE BENCH TO EXPLAIN AS TO HOW THE ASSESSEE HIMSELF ADOPTED T HE PROFIT BASED TNMM METHOD TO JUSTIFY THE PAYMENT OF ROYALTY AT ARMS L ENGTH PRICE WHEN IT IS NOT LINKED WITH THE PROFIT. HE WAS ALSO ASKED TO EXPLA IN WHETHER THE CUP WOULD BE THE MOST APPROPRIATE METHOD TO DETERMINE THE ARM S LENGTH PRICE OF ROYALTY PAYMENT. IN THIS REGARD HE SUBMITTED THAT RELIABL E DATA TO APPLY CUP WAS NOT AVAILABLE AS THE YEAR UNDER CONSIDERATION WAS T HE FIRST YEAR OF TP ADJUSTMENT. HE HOWEVER AGREED THAT COMPARABLE ROYA LTY RATES FROM THE ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 27 BROADER CHEMICAL INDUSTRY WERE SUBMITTED BY THE ASS ESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS BUT THE A.O. DID NOT TAK E THE SAME INTO CONSIDERATION. THE BENCH IN THIS REGARD NOTED TH AT IN PARA 6.1 OF HER ORDER THE TPO HAS CLEARLY MENTIONED THAT IN ORDER TO EVAL UATE THE ASSESSEES INTERNATIONAL TRANSACTIONS ON ACCOUNT OF ROYALTY T HE DETAILS OF ROYALTY PAID BY OTHER PETROCHEMICAL COMPANIES AS AVAILABLE ON PROCE SS DATABASE WERE EXAMINED BY HER. WHEN THIS ASPECT WAS BROUGHT TO T HE NOTICE OF THE LD. REPRESENTATIVES OF BOTH THE SIDES AND THEY WERE ASK ED TO EXPLAIN AS TO WHETHER CUP WOULD BE THE MOST APPROPRIATE METHOD TO EVALUATE THE ROYALTY TRANSACTIONS BOTH OF THEM AGREED THAT CUP IS CERTA INLY THE MOST APPROPRIATE METHOD FOR EVALUATING THE ROYALTY TRANSACTION ESPEC IALLY WHEN THE ROYALTY CANNOT BE LINKED WITH THE PROFIT. KEEPING IN VIEW OF THIS POSITION WE CONSIDER IT FAIR AND PROPER AND IN THE INTEREST OF JUSTICE T O SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(A) ON THIS ISSUE AND RESTORE THE MAT TER TO THE FILE OF THE A.O. WITH A DIRECTION TO REDO THE EXERCISE OF COMPARABLE ANALYSIS IN RESPECT OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES INVOLVING OF PAYMENT OF ROYALTY BY ADOPTING THE CUP METHOD AFRESH. 33. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFO RE THE TRIBUNAL THE ASSESSEE HAS RAISED THE FOLLOWING ADDITIONAL GROUND WITH A REQUEST TO ADMIT THE SAME. THE AO ERRED IN COMPUTING PROFITS OF THE BUSINESS FOR THE PURPOSES OF DEDUCTION U/S 80HHC BY REDUCING THE AMOUNT OF DEDU CTION U/S 80IB THERE FROM. 34. IN THE APPLICATION FILED BEFORE THE TRIBUNAL SE EKING ADMISSION OF THE AFORESAID ADDITIONAL GROUND THE ASSESSEE HAS SUBMI TTED THAT THE ISSUE INVOLVED IN THE ADDITIONAL AGROUND IS PURELY A LEGA L ISSUE AND ALL THE RELEVANT FACTS FOR ADJUDICATION THEREOF ARE AVAILABLE ON REC ORD. IT IS FURTHER SUBMITTED THAT THIS ISSUE WAS NOT RAISED BEFORE THE LD. CIT(A ) IN VIEW OF STRING OF ADVERSE RULINGS AVAILABLE AT THE RELEVANT TIME BUT THE SAME IS NOW BEING RAISED IN VIEW ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 28 OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES (P.) LTD. VS. DCIT REPORTED IN [2011] 332 ITR 42 (BOM) WHICH IS IN FAVOUR OF THE ASSESSEE. KEEPING IN VIEW OF THE SUBM ISSIONS MADE BY THE ASSESSEE AND SINCE THERE WAS NO OBJECTION RAISED BY THE LD. D.R. WE HAVE ADMITTED THE ADDITIONAL GROUND RAISED BY THE ASSESS EE AND NOW WE PROCEED TO DECIDE THE SAME ON MERIT. 35. AS AGREED BY THE LD. REPRESENTATIVES OF BOTH TH E SIDES THE ISSUE RAISED BY THE ASSESSEE IN THE ADDITIONAL GROUND IS SQUAREL Y COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES (P.) LTD. VS. DCIT (SUPRA) WHER EIN IT WAS HELD THAT WHEN THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 80IA AND 80HHC OF THE ACT PROFITS OF BUSINESS FOR COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT ARE NOT TO BE REDUCED BY THE PROFITS OF BUSINESS ALLOWED U/S 80IA OF THE ACT. IT WAS HELD THAT RESTRICTION IN SECTION 80IA OF THE ACT RELATES TO DISALLOWANCE OF DEDUCTION AND NOT TO COMPUTATION OF DEDUCTION. SINCE THE REL EVANT PROVISIONS OF SECTION 80IA OF THE ACT ARE SIMILAR TO SECTION 80IB OF THE ACT WE RESPECTFULLY FOLLOW THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF ASSOCIATED CAPSULES (P.) LTD. (SUPRA) AND DIRECT THE A.O. TO R ECOMPUTE THE DEDUCTION U/S 80HHC OF THE ACT KEEPING IN VIEW THE RATIO OF THE D ECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULE S (SUPRA). THE ADDITIONAL GROUND OF THE ASSESSEE IS ACCORDINGLY ALLOWED. 36. AS REGARDS THE ISSUE RAISED IN GROUND NO. 10 RE LATING TO SOME CALCULATION MISTAKE IN THE INTEREST CHARGED U/S 234 -C OF THE ACT THE LIMITED CONTENTION RAISED BY THE LD. COUNSEL FOR THE ASSESS EE IS THAT THE A.O. MAY BE DIRECTED TO VERIFY THE CALCULATION U/S 234-C OF THE ACT AND ALLOW APPROPRIATE RELIEF TO THE ASSESSEE AFTER SUCH VERIFICATION. WE ACCORDINGLY DIRECT THE A.O. TO VERIFY THE WORKING OF INTEREST CHARGED U/S 234-C OF THE ACT AND RECTIFY THE MISTAKE IF ANY IN THE SAID WORKING AS POINTED OUT BY THE ASSESSEE. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 29 37. AS REGARDS GROUND NO. 11 OF THE ASSESSEES APPE AL IT IS OBSERVED THAT THE ISSUE INVOLVED THEREIN RELATING TO LEVY OF INTE REST U/S 234D OF THE ACT IS SQUARELY COVERED AGAINST THE ASSESSEE BY THE DECISI ON OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INDIAN OIL CORPORATION 254 CTR 113 WHEREIN IT WAS HELD THAT THE PLAIN LANGUAGE OF SECTION 234D OF THE ACT AS WELL AS EXPLANATION 2 THERETO INSERTED BY FINANCE ACT 2012 MAKES IT CLEAR THAT SECTION 234D IS APPLICABLE RETROSPECTIVELY EVEN TO THE PERIOD PRIOR TO 2004-05. RESPECTFULLY FOLLOWING THE SAID DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT WE DISMISS GROUND NO. 11 OF THE ASSESSEES A PPEAL. 38. NOW WE SHALL TAKE UP THE CROSS APPEALS FOR A.Y . 2003-04 BEING ITA NO. 6575/MUM/2010 (ASSESSEES APPEAL) AND ITA NO. 6448/ MUM/2010 (REVENUES APPEAL) WHICH ARE DIRECTED AGAINST THE O RDER OF THE LD. CIT(A) -15 MUMBAI DATED 22-06-2010. 39. IN GROUND NO. 1 THE ASSESSEE HAS CHALLENGED TH E ACTION OF THE LD. CIT(A) IN UPHOLDING THE ACTION OF THE A.O. IN DISALLOWING THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 80IB OF THE ACT IN RESPECT OF THE FOLLOWING ITEMS OF OTHER INCOME ON THE GROUND THAT THE SAME WAS NOT DERIVED FROM THE ELIGIBLE UNDERTAKING:- SR. NO. PARTICULARS TOPIK MULTIPURPOSE FORMULATOR UNIT (RS) TOTAL I) REPACKING CHARGES 6 49 496/- 5 59 509/- 12 09 005/- II) CREDIT FOR DUTY DRAWBACK 59 814/- 4 04 903/- 4 64 717/- III) INTERESTED ON EMPLOYEE LOANS 2 39 330/- 1 28 691/- 3 68 021/- TOTAL 9 48 640/- 10 93 103/- 20 41 743/- 40. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS ALREADY HELD BY US WHILE DECIDING A SIMILAR ISSUE INVOLVED IN ASSESSEES OWN CASE FOR A .Y. 2002-03 THERE HAS TO BE ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 30 A DIRECT OR FIRST DEGREE CONNECTION OF THE INCOME A ND THE BUSINESS OF THE ELIGIBLE UNDERTAKING IN ORDER TO BE ELIGIBLE FOR DE DUCTION U/S 80IB OF THE ACT. IN THE YEAR UNDER CONSIDERATION I.E. A.Y. 2003-04 ALL THE THREE ITEMS OF OTHER INCOME ARE SUCH THAT THE IMMEDIATE SOURCE THEREOF C ANNOT BE SAID TO BE THE BUSINESS OF ELIGIBLE UNDERTAKING AND THIS BEING SO WE ARE OF THE VIEW THAT ALL THESE ITEMS OF INCOME CANNOT BE SAID TO BE ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT. AS REGARDS THE ALTERNATIVE CLAIM OF THE A SSESSEE THAT ONLY THE NET AMOUNT OF OTHER INCOME SHOULD BE EXCLUDED WHILE COM PUTING THE PROFITS ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT WE DIRE CT THE A.O. TO CONSIDER THE SAME ON MERIT AFTER VERIFYING THE CLAIM OF THE ASSE SSEE OF HAVING INCURRED EXPENSES FOR EARNING THE SAID INCOME. GROUND NO. 1 OF ASSESSEES APPEAL IS ACCORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTIC AL PURPOSE. 41. IN GROUND NO. 2 THE ASSESSEE HAS CHALLENGED TH E ACTION OF THE LD. CIT(A) IN UPHOLDING THE ACTION OF THE A.O. IN EXCLUDING TH E FOLLOWING ITEMS OF MISCELLANEOUS INCOME FROM THE PROFITS OF BUSINESS FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT. SR. NO. PARTICULARS RS. (IN000) (I) SCRAP SALES 5 586/- (II) CASH DISCOUNT 454/- (III) GUARANTEE COMMISSION FROM HDFC 926/- (IV) SALE OF TENANCY RIGHTS 2 300/- (V) REPACKING CHARGES RECOVERED 2 904/- (VI) FEES CHARGED TO CIBA FOR USE OF FACILITIES 2 7 37/- (VII) SALE OF COCONUTS KAJU ETC. 8/- (VIII) CREDIT FOR DUTY DRAWBACK 1 253/- (IX) SALE OF WASTE CHEMICALS 543/- (X) RECOVERY OF SHARES SERVICES CHARGES FROM SYNGEN TA SEEDS INDIA PRIVATE LIMITED 3 960/- TOTAL 20 673/- 42. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS REGARDS ITEM NO. (IV) I.E. SALE OF TENANCY RIGHTS THE LD. COUNSEL FOR THE ASSESSEE HA S SUBMITTED THAT NO ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 31 DEDUCTION U/S 80HHC WAS CLAIMED BY THE ASSESSEE IN RESPECT OF THIS ITEM OF INCOME. HE THEREFORE WAS NOT PRESSED GROUND NO. 2 (IV). 43. AS REGARDS SCRAP SALES IT IS OBSERVED THAT THI S ITEM OF OTHER INCOME IS HELD TO BE NOT LIABLE TO BE EXCLUDED FROM THE PROFI TS OF THE BUSINESS FOR THE PURPOSES OF COMPUTING DEDUCTION U/S 80HHC OF THE AC T BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEARS. IN A.Y. 200 2-03 THE LD. CIT(A) HIMSELF DID NOT EXCLUDE THIS ITEM FROM THE PROFITS OF BUSIN ESS FOR COMPUTING DEDUCTION U/S 80HHC OF THE ACT. WE THEREFORE DIRECT THE A. O. TO NOT TO EXCLUDE SCRAP SALES FROM THE PROFITS OF THE BUSINESS FOR COMPUTIN G DEDUCTION U/S 80HHC OF THE ACT. 44. AS REGARDS THE REMAINING ITEMS OF OTHER INCOME WE FOLLOW OUR CONCLUSION DRAWN IN A.Y. 2002-03 AND RESTORE THE MA TTER TO THE FILE OF THE A.O. WITH A DIRECTION TO DECIDE THE SAME IN THE LIG HT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DRESSER RA ND INDIA P. LTD. (SUPRA) AND PFIZER LIMITED (SUPRA). 45. AS REGARDS THE ALTERNATIVE CLAIM OF THE ASSESSE E TO EXCLUDE ONLY THE NET AMOUNT OF BUSINESS INCOME WE DIRECT THE A.O. TO CO NSIDER THE SAME AFTER VERIFYING THE CLAIM OF THE ASSESSEE OF HAVING INCUR RED THE EXPENSES FOR EARNING THE OTHER INCOME. GROUND NO. 2 OF ASSESSEES APPEA L IS ACCORDINGLY TREATED AS PARTLY ALLOWED. 46. AS REGARDS GROUND NO. 3 IT IS OBSERVED THAT TH E ISSUE RAISED THEREIN RELATING TO THE ASSESSEES CLAIM FOR NOT REDUCING T HE AMOUNT ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT WHILE COMPUTING PROFI TS OF THE BUSINESS FOR THE PURPOSES OF DEDUCTION U/S 80HHC OF THE ACT IS SQUAR ELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES (P.) LTD. VS. DCIT (SUPRA) WHER EIN IT WAS HELD THAT WHEN THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 80IA AND 80HHC OF THE ACT PROFITS ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 32 OF BUSINESS FOR COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT ARE NOT TO BE REDUCED BY THE PROFITS OF BUSINESS ALLOWED U/S 80IA OF THE ACT. IT WAS HELD THAT RESTRICTION IN SECTION 80IA OF THE ACT RELATES TO DISALLOWANCE OF DEDUCTION AND NOT TO COMPUTATION OF DEDUCTION. SINCE THE REL EVANT PROVISIONS OF SECTION 80IA OF THE ACT ARE SIMILAR TO SECTION 80IB OF THE ACT WE RESPECTFULLY FOLLOW THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF ASSOCIATED CAPSULES (P.) LTD. (SUPRA) AND DIRECT THE A.O. TO R ECOMPUTE THE DEDUCTION U/S 80HHC OF THE ACT KEEPING IN VIEW THE RATIO OF THE D ECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULE S (SUPRA). GROUND NO. 3 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 47. AS REGARDS GROUND NO. 4 IT IS OBSERVED THAT TH E ISSUE INVOLVED THEREIN RELATING TO THE ADDITION MADE BY THE A.O. AND CONFI RMED BY THE LD. CIT(A) BY WAY OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF PA YMENT OF ROYALTY BY THE ASSESSEE TO ITS AES IS SIMILAR TO THE ONE INVOLVED IN ASSESSEES APPEAL FOR A.Y. 2002-03 WHICH HAS BEEN DECIDED BY US IN THE FOREGOI NG PORTION OF THIS ORDER. FOLLOWING OUR DECISION RENDERED IN A.Y. 2002-03 WE RESTORE THIS ISSUE TO THE FILE OF THE A.O. FOR DECIDING THE SAME AFRESH AS PE R THE SAME DIRECTION AS GIVEN IN A.Y. 2002-03. GROUND NO. 4 IS THUS TREATED AS AL LOWED FOR STATISTICAL PURPOSE. 48. IN GROUND NO. 1 OF ITS APPEAL FOR A.Y. 2003-04 (ITA NO. 6448/MUM/2010) THE REVENUE HAS CHALLENGED THE ACTI ON OF THE LD. CIT(A) IN ALLOWING DEDUCTION OF RS. 8 59 555/- CLAIMED BY THE ASSESSEE ON ACCOUNT OF ROYALTY PERTAINING TO A.Y. 2002-03. 49. IN ITS P&L ACCOUNT FOR A.Y. 2003-04 ROYALTY OF RS. 8 59 555/- WAS DEBITED BY THE ASSESSEE. IN THE AUDIT REPORT THE SAID ROYALTY WAS STATED TO BE PERTAINING TO THE EARLIER YEAR. THE A.O. THEREFOR E DISALLOWED THE ROYALTY CLAIMED BY THE ASSESSEE BEING EXPENDITURE PERTAININ G TO THE EARLIER. BEFORE THE LD. CIT(A) IT WAS POINTED OUT BY THE ASSESSEE THAT THE EXPENDITURE CLAIMED ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 33 ON ACCOUNT OF ROYALTY WAS DISALLOWED BY THE A.O. IN A.Y. 2002-03 ON THE GROUND THAT THE SAME WAS NOT ACCOUNTED FOR IN THE B OOKS OF ACCOUNT FOR THAT YEAR. IT WAS ALSO BROUGHT BY THE ASSESSEE TO THE N OTICE OF THE LD. CIT(A) THAT THE SAID DISALLOWANCE WAS CONFIRMED BY THE LD. CIT( A) IN 2002-03. IT WAS CONTENDED BEFORE THE LD. CIT(A) THAT CONSISTENT WIT H THE STAND BY THE DEPARTMENT IN A.Y. 2002-03 THE EXPENDITURE ON ROYA LTY SHOULD BE ALLOWED IN A.Y. 2003-04 WHEREIN THE SAME WAS DULY ACCOUNTED FO R IN THE BOOKS OF ACCOUNT. THE LD. CIT(A) ACCEPTED THIS CONTENTION O F THE ASSESSEE AND ALLOWED THE EXPENDITURE CLAIMED ON ROYALTY. 50. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSER VED THAT THE RELIEF GIVEN BY THE LD. CIT(A) TO THE ASSESSEE BY ALLOWING THE EXPE NDITURE ON ROYALTY HAS BEEN CHALLENGED BY THE REVENUE IN ITS APPEAL ON THE GROU ND THAT THE ASSESSEE HAS KEPT ALIVE THE CLAIM FOR ROYALTY IN A.Y.2002-03 BY FILING AN APPEAL BEFORE THE TRIBUNAL. THE SAID APPEAL OF THE ASSESSEE HAS ALRE ADY BEEN DISPOSED OF BY US CONFIRMING THE DISALLOWANCE MADE ON ACCOUNT OF ROYA LTY IN A.Y. 2002-03. THE LD. D.R. HAS ALSO FAIRLY AGREED THAT THE EXPENDITUR E ON ACCOUNT OF ROYALTY BEING GENUINE BUSINESS EXPENDITURE IS TO BE ALLOWED IN EITHER OF THE YEARS. ACCORDINGLY WE UPHOLD THE IMPUGNED ORDER OF THE LD . CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE FOR ROYALTY IN A.Y. 2003-04 A ND DISMISS GROUND NO. 1 OF REVENUES APPEAL. 51. AS REGARDS GROUND NO. 2 OF THE REVENUES APPEAL FOR A.Y. 2003-04 IT IS OBSERVED THAT THE ISSUE RAISED THEREIN RELATING TO ASSESSEES CLAIM FOR DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF DEPB B ENEFIT NOW STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS (SUPRA). WE T HEREFORE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) TO ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 80HHC OF THE ACT IN RESPECT OF DE PB BENEFIT FOLLOWING THE DECISION OF SPECIAL BENCH OF THE ITAT IN THE CASE O F TOPMAN EXPORTS REPORTED ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 34 IN 124 ITD 1 WHICH HAS NOW BEEN AFFIRMED BY THE HON BLE SUPREME COURT. GROUND NO. 2 OF REVENUES APPEAL IS ACCORDINGLY DIS MISSED. 52. NOW WE SHALL TAKE UP THE CROSS APPEALS FOR A.Y . 2004-05 BEING ITA NO. 856/MUM/2011 (ASSESSEES APPEAL) AND ITA NO. 954/MU M/2011 (REVENUES APPEAL) WHICH ARE DIRECTED AGAINST THE ORDER OF LD. CIT(A) -15 MUMBAI DATED 23-11-2010. 53. IN GROUND NO. 1 THE ASSESSEE HAS CHALLENGED TH E ACTION OF THE LD. CIT(A) IN UPHOLDING THE ACTION OF THE A.O. IN DISALLOWING THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 80IB OF THE ACT IN RESPECT OF THE FOLLOWING ITEMS OF OTHER INCOME ON THE GROUND THAT THE SAME WAS NOT DERIVED FROM THE ELIGIBLE UNDERTAKING:- SL. NO. PARTICULARS TOPIK (RS.) MULTIPURPOSE FORMULATOR UNIT (RS.) TMX UNIT TOTAL (RS.) 1. CREDIT FOR DUTY DRAWBACK 15 15 433 11 06 366 54 933 26 76 732 2. PROCESSING CHARGES RECOVERED - 84 51 548 - 84 51 548 3. MISCELLANEOUS INCOME 56 330 22 507 716 79 553 4. INTEREST ON EMPLOYEE LOANS 1 45 228 81 313 29 473 2 56 014 TOTAL 17 16 991 96 61 734 85 122 1 14 63 847 54. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS REGARDS T HE FIRST ITEM OF OTHER INCOME I.E. CREDIT FOR DUTY DRAW BACK IT IS OBSERVED THAT IN THE CASE OF LIBERTY INDIA VS. CIT (2009) 317 ITR 218 (SC) THE HONBLE SUPREM E COURT HAS HELD THAT THE IMMEDIATE SOURCE OF EXPORT INCENTIVE CREDIT FOR DUT Y DRAW BACK BEING THE RELEVANT SCHEME UNDER WHICH THE SAID INCENTIVE IS G IVEN AND NOT ELIGIBLE UNDERTAKING DEDUCTION U/S 80IB CANNOT BE ALLOWED T HEREON. GROUND NO. 1 (1) IS ACCORDINGLY DISMISSED. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 35 55. AS REGARDS THE THIRD ITEM OF OTHER INCOME I.E. MISCELLANEOUS INCOME OF RS. 79 553/- THE LD. COUNSEL FOR THE ASSESSEE HAS NOT RAISED ANY ARGUMENT IN SUPPORT OF THE ASSESSEES CLAIM. 56. AS REGARDS THE 4 TH ITEM OF OTHER INCOME I.E. INTEREST ON EMPLOYEE LOA NS AMOUNTING TO RS. 1 14 63 847/- IT IS OBSERVED THAT A SIMILAR ISSUE WAS DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2001-02 VIDE AN ORDER DATED 9-11-2012 PASSED IN ITA NO. 7699/MUM/2004 HOL DING THAT THE INTEREST ON EMPLOYEES LOAN CANNOT BE SAID TO BE INCOME DERI VED FROM THE INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80IB OF THE ACT. GROUND NO. 4 IS ACCORDINGLY DISMISSED. 57. AS REGARDS THE SECOND ITEM OF OTHER INCOME I.E PROCESSING CHARGES RECEIVED BY THE ASSESSEE AMOUNTING TO RS. 84 51 548 /- THE LD. COUNSEL FOR THE ASSESSEE HAS RELIED ON THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. TAJ FIRE WORKS INDUSTRIES [2007] 28 8 ITR 92 (MAD.). IN THE SAID CASE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF FIRE WORKS ON JOB WORK BASIS WITH MATERIAL SUPPLIED BY ITS CUSTOMERS. THE A.O. DISALLOWED THE CLAIM MADE BY THE ASSESSEE FOR DEDUCTION U/S 80HH OF THE ACT AND 80-I OF THE ACT ON THE GROUND THAT THE ASSESSEE WAS ONLY A LABOUR C ONTRACTOR AND NOT AN INDUSTRIAL UNDERTAKING. THE LD. CIT(A) AND THE TRI BUNAL HOWEVER HELD THAT ASSESSEE WAS ENTITLED FOR THE SAID DEDUCTION AND TH E HONBLE MADRAS HIGH COURT UPHELD THE SAID DECISION HOLDING THAT THE ASS ESSEE HAD ONLY BEEN SUPPLIED WITH THE RAW MATERIALS BY THE CUSTOMER AND SINCE IT HAD ENGAGED WITH ITS OWN LABOURERS TO PRODUCE THE END PRODUCT I .E CRACKERS IT SATISFIED THE TEST OF MANUFACTURE MAKING IT ENTITLED TO SPECIAL D EDUCTIONS U/S 80HH AND 80I OF THE ACT. IN THE PRESENT CASE THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AGRO CHEMICAL PRODUCTS AND SEEDS A ND THE NATURE OF PROCESSING CHARGES RECEIVED BY THE ASSESSEE IS NOT VERY CLEAR AS NEITHER THE A.O. NOR THE LD. CIT(A) HAS GIVEN ANY FINDING IN TH IS REGARD SO AS TO ASCERTAIN AS TO WHETHER THE PROCESSING CHARGES WERE RECEIVED BY THE ASSESSEE FOR ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 36 MANUFACTURE OF AGRO CHEMICAL PRODUCTS AND SEEDS ON JOB WORK BASIS WITH MATERIAL SUPPLIED BY THE CUSTOMERS. ON THE OTHER H AND IT HAS BEEN CLAIMED BY THE LD. COUNSEL FOR THE ASSESSEE WHILE ARGUING A SIMILAR ISSUE IN EARLIER YEARS THAT THE RECOVERY OF PROCESSING CHARGES WAS N OTHING BUT REIMBURSEMENT OF EXPENSES. IN THESE CIRCUMSTANCES WE ARE UNABLE TO ACCEPT THE CONTENTION RAISED BY THE LD. COUNSEL FOR THE ASSESSEE RELYING ON THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF TAJ FIRE WORKS IND USTRIES (SUPRA) WHICH INVOLVED DIFFERENT FACTS. ACCORDINGLY WE HOLD THA T ALL THE FOUR ITEMS IN QUESTION OF OTHER INCOME ARE SUCH THAT THEY CANNOT BE SAID TO BE PROFIT DERIVED FROM THE ELIGIBLE UNDERTAKING OF THE ASSESS EE ELIGIBLE FOR DEDUCTION U/S 80IB. 58. AS REGARDS THE ALTERNATIVE CLAIM OF THE ASSESSE E FOR EXCLUDING ONLY THE NET AMOUNT OF OTHER INCOME WHILE COMPUTING THE PROF IT ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT WE DIRECT THE A.O. TO CONSIDER THE SAME AFTER VERIFYING THE CLAIM OF THE ASSESSEE OF HAVING INCURRED THE EXPENS ES FOR EARNING THE SAID INCOME. GROUND NO. 1 OF THE ASSESSEES APPEAL FOR A .Y. 2004-05 IS ACCORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 59. AS REGARDS GROUND NO. 2 IT IS OBSERVED THAT TH E ISSUE INVOLVED THEREIN RELATING TO ASSESSEES CLAIM FOR DEDUCTION U/S 80HH C OF THE ACT IN RESPECT OF DEPB BENEFIT IS SQUARELY COVERED IN FAVOUR OF THE A SSESSEE BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS (SUPRA). ACCORDINGLY WE DIRECT THE A.O. TO RECOMPUTE THE DEDUCTION U/S 8 0HHC BY APPLYING THE RATIO OF THE DECISION OF THE HONBLE APEX COURT IN THIS REGARD. GROUND NO. 2 OF ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 60. IN GROUND NO. 3 THE ASSESSEE HAS CHALLENGED TH E ACTION OF THE LD. CIT(A) IN UPHOLDING THE ACTION OF THE A.O. IN EXCLUDING TH E FOLLOWING ITEMS OF ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 37 MISCELLANEOUS INCOME FROM THE PROFITS OF BUSINESS FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT. BREAK UP OF INCOME RS. (I) MISCELLANEOUS CREDIT BALANCE WRITTEN BACK AND BAD DEBTS RECOVERED 1 84 34 000/- (II) MISCELLANEOUS INCOME CONSISTING OF INCOME FROM SALE OF FARM PRODUCTS SALE OF SCRAP CASH DISCOUNT EXCISE DUTY REFUND MISCELLANEOUS WRITE OFF ETC. 2 85 31 000/- (III) PROVISION NO LONGER REQUIRED CONSISTING OF WRITE BACK OF SUPERANNUATION PROVISION ETC. 36 69 000/- 61. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS REGARDS ITEM NO. 1 & 3 OF OTHER INCOME THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMIT TED THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF SANDOZ INDIA P. LTD. (S UPRA) FULLY SUPPORTS THE CASE OF THE ASSESSEE ON THIS ISSUE WHEREIN IT WAS H ELD THAT THE AMOUNT WRITTEN BACK BY THE ASSESSEE U/S 41(1) OF THE ACT CONSTITUT ES BUSINESS PROFITS AND THE SAME THEREFORE HAS TO BE CONSIDERED WHILE WORKING O UT DEDUCTION U/S 80HHC OF THE ACT AS BUSINESS INCOME. RESPECTFULLY FOLLOW ING THE SAID DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL WE DIRECT THE A. O. TO NOT TO EXCLUDE THESE TWO ITEMS WHILE COMPUTING THE PROFITS OF THE BUSINE SS FOR THE PURPOSE OF DEDUCTION U/S 80HHC OF THE ACT. 62. AS REGARDS THE SECOND ITEM OF OTHER INCOME I.E. MISCELLANEOUS INCOME AMOUNTING TO RS. 2 85 31 000/- IT IS OBSERVED THAT A SIMILAR ISSUE HAS BEEN RESTORED BY US TO THE FILE OF THE A.O. IN THE EARLI ER YEAR WITH A DIRECTION TO DECIDE THE SAME AFRESH KEEPING IN VIEW THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HONBLE BOMBAY HIGH COURT IN THE CASE OF DRESSER RAND INDIA P. LTD. (SUPRA) AND PFIZER LIMITED (SUPR A). SIMILARLY THIS MATTER IS ALSO RESTORED TO THE FILE OF THE A.O. FOR DECIDING THE SAME AFRESH IN THE LIGHT OF THE SAID DECISION OF THE HONBLE JURISDICTIONAL HIG H COURT. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 38 63. AS REGARDS THE ALTERNATIVE CLAIM OF THE ASSESSE E FOR EXCLUDING ONLY THE NET AMOUNT OF OTHER INCOME FROM THE PROFITS OF THE BUSINESS WE DIRECT THE A.O. TO CONSIDER THE SAME AFTER VERIFYING THE CLAIM OF THE ASSESSEE OF HAVING INCURRED THE EXPENSES FOR EARNING THE SAID INCOME. GROUND NO. 3 OF ASSESSEES APPEAL FOR A.Y. 2004-05 IS ACCORDINGLY T REATED AS PARTLY ALLOWED. 64. AS REGARDS GROUND NO. 4 IT IS OBSERVED THAT TH E ISSUE RAISED THEREIN RELATING TO THE ASSESSEES CLAIM FOR NOT REDUCING T HE AMOUNT ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT WHILE COMPUTING PROFI TS OF THE BUSINESS FOR THE PURPOSES OF DEDUCTION U/S 80HHC OF THE ACT IS SQUAR ELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES (P.) LTD. VS. DCIT (SUPRA) WHER EIN IT WAS HELD THAT WHEN THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 80IA AND 80HHC OF THE ACT PROFITS OF BUSINESS FOR COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT ARE NOT TO BE REDUCED BY THE PROFITS OF BUSINESS ALLOWED U/S 80IA OF THE ACT. IT WAS HELD THAT RESTRICTION IN SECTION 80IA OF THE ACT RELATES TO DISALLOWANCE OF DEDUCTION AND NOT TO COMPUTATION OF DEDUCTION. SINCE THE REL EVANT PROVISIONS OF SECTION 80IA OF THE ACT ARE SIMILAR TO SECTION 80IB OF THE ACT WE RESPECTFULLY FOLLOW THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF ASSOCIATED CAPSULES (P.) LTD. (SUPRA) AND DIRECT THE A.O. TO R ECOMPUTE THE DEDUCTION U/S 80HHC OF THE ACT KEEPING IN VIEW THE RATIO OF THE D ECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF ASSOCIATED CAPSULE S (SUPRA). GROUND NOO. 4 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 65. AS REGARDS THE ISSUE RAISED IN GROUND NO. 5 REL ATING TO ASSESSEES CLAIM FOR INTEREST U/S 244A OF THE ACT UPTO THE DATE OF R ECEIPT OF REFUND VOUCHER INSTEAD OF THE DATE OF ISSUE OF REFUND ORDER AS GRA NTED BY THE A.O. THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE DEC ISION OF HONBLE BOMBAY (CALCUTTA HIGH COURT IN THE CASE OF CIT VS . SRI JAGANNATH STEEL ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 39 CORPORATION191 ITR 676 FULLY SUPPORTS THIS CLAIM OF THE ASSESSEE. THE A.O. IS ACCORDINGLY DIRECTED TO GRANT INTEREST U/S 244A OF THE ACT KEEPING IN VIEW THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F SRI JAGANNATH STEEL CORPORATION (SUPRA) AFTER VERIFYING THE RELEVANT FA CTS FROM RECORD. GROUND NO. 5 OF ASSESSEES APPEAL IS ACCORDINGLY TREATED AS AL LOWED. 66. AS REGARDS GROUND NO. 6 IT IS OBSERVED THAT TH E ISSUE INVOLVED THEREIN RELATING TO THE ADDITION MADE BY THE A.O. AND CONFI RMED BY THE LD. CIT(A) BY WAY OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF RO YALTY PAID BY THE ASSESSEE TO ITS AES IS SIMILAR TO THE ONE INVOLVED IN THE EA RLIER YEARS WHICH HAS BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDE R. FOLLOWING OUR DECISION RENDERED IN THE EARLIER YEAR WE RESTORE THIS ISSUE TO THE FILE OF THE A.O. FOR DECIDING THE SAME AFRESH AS PER THE SAME DIRECTION AS GIVEN IN A.Y. 2002-03. GROUND NO. 6 OF THE ASSESSEES APPEAL FOR A.Y. 2004 -05 IS ACCORDINGLY TREATED AS ALLOWED. 67. THE NEXT ISSUE INVOLVED IN THE ADDITIONAL GROUN D FILED BY THE ASSESSEE WHICH HAS BEEN ADMITTED BY US AND GROUND NO. 1 OF R EVENUES APPEAL RELATES TO THE DISALLOWANCE U/S 14A OF THE ACT MADE BY THE A.O. AT RS. 1 13 30 791/- AND SUSTAINED BY THE LD. CIT(A) TO THE EXTENT OF RS .19 69 550/-. AS AGREED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES THIS ISS UE IS SIMILAR TO THE ONE INVOLVED IN ASSESSEES APPEAL FOR A.Y. 2002-03 WHIC H HAS ALREADY BEEN DECIDED BY US IN THE FOREGOING PORTION OF THIS ORDE R. FOLLOWING OUR CONCLUSION DRAWN IN A.Y. 2002-03 WE SUSTAIN THE DISALLOWANCE U/S 14A TO THE EXTENT OF 2% OF THE DIVIDEND INCOME. GROUND NO. 1 OF REVENUE S APPEAL IS ACCORDINGLY DISMISSED WHILE THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 68. IN GROUND NO. 2 OF ITS APPEAL FOR A.Y. 2004-05 THE REVENUE HAS CHALLENGED THE ACTION OF THE LD. CIT(A) IN DIRECTIN G THE A.O. TO ALLOW THE CLAIM ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 40 OF THE ASSESSEE FOR DEDUCTION U/S 35(1)(IV) OF THE ACT IN RESPECT OF FIVE CARS LAPTOPS UPC ETC. AMOUNTING TO RS. 60 62 770/-. 69. IN ITS RETURN OF INCOME DEDUCTION OF RS. 60 62 770/- WAS CLAIMED BY THE ASSESSEE U/S 35(1)(IV) OF THE ACT ON ACCOUNT OF CERTAIN CAPITAL EXPENDITURE CLAIMED TO BE INCURRED ON SCIENTIFIC RESEARCH. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS THE SAID CLAIM WAS EXAMINED BY THE A.O. AND ON SUCH EXAMINATION HE FOUND THAT THERE WAS NO EVIDEN CE TO SHOW THAT THE RELEVANT CAPITAL EXPENDITURE INCURRED BY THE ASSESS EE ON PURCHASE OF FIVE CARS GREEN HOUSE LAND ETC. WAS PART OF RESEARCH AN D DEVELOPMENT ACTIVITY. HE THEREFORE DISALLOWED THE CLAIM OF THE ASSESSEE U/S 35(1)(IV) OF THE ACT. ON APPEAL THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASS ESSEE FOR DEDUCTION U/S 36(1)(IV) OF THE ACT RELYING INTER ALIA ON THE CO PY OF CERTIFICATE ISSUED BY THE GOVT. OF INDIA MINISTRY OF SCIENCE & TECHNOLOGY RE COGNIZING IN-HOUSE R&D UNITS OF THE ASSESSEE. 70. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS SUBMITTED BY THE LD. D.R. THE CERTIFICATE ISSUED BY THE GOVT. OF INDIA MINISTRY OF SCIENCE & TECHNOLOGY RECOGNIZING THE IN-HOUSE R&D UNIT OF THE ASSESSEE W AS PRODUCED BY THE ASSESSEE BEFORE THE LD. CIT(A) FOR THE FIRST TIME A ND RELYING ON THE SAME THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 35(1)(IV) O F THE ACT WAS ALLOWED BY THE LD. CIT(A) WITHOUT GIVING ANY OPPORTUNITY TO THE A. O. TO VERIFY THE SAME. THE LD. COUNSEL FOR THE ASSESSEE HAS NOT BEEN ABLE TO D ISPUTE THIS POSITION. THE LD. D.R. HAS ALSO CONTENDED THAT THE CAPITAL EXPENDITUR E INCURRED BY THE ASSESSEE ON ACCOUNT OF GREEN HOUSE LAND IN ANY CASE WAS NOT ENTITLED FOR DEDUCTION U/S 35(1)(IV) OF THE ACT. IN THIS REGARD THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE SAID EXPENDITURE WAS INCURRED BY THE ASSESSEE ON GREEN ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 41 HOUSE INSTALLATION AND NOT ON PURCHASE OF LAND. KE EPING IN VIEW THE SUBMISSIONS MADE BY BOTH THE PARTIES WE CONSIDER I T FAIR AND PROPER TO RESTORE THIS ISSUE TO THE FILE OF THE A.O. WITH A D IRECTION TO DECIDE THE SAME AFRESH AFTER VERIFYING THE RELEVANT CERTIFICATE FUR NISHED BY THE ASSESSEE FOR THE FIRST TIME BEFORE THE LD. CIT(A) AS WELL AS THE EXA CT NATURE OF CAPITAL EXPENDITURE INCURRED ON GREEN HOUSE LAND. NEEDLESS TO OBSERVE THAT THE A.O. SHALL AFFORD SUFFICIENT OPPORTUNITY OF BEING H EARD TO THE ASSESSEE. GROUND NO. 2 OF REVENUES APPEAL FOR A.Y. 2004-05 I S ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 71. AS REGARDS GROUND NO. 3 OF THE REVENUES APPEAL FOR A.Y. 2004-05 IT IS OBSERVED THAT THE ISSUE INVOLVED THEREIN RELATING T O ADDITION ON ACCOUNT OF DISALLOWANCE MADE U/S 14A OF THE ACT WHILE COMPUTIN G THE BOOK PROFIT U/S 115JB OF THE ACT IS CONSEQUENTIAL TO THE ISSUE OF D ISALLOWANCE U/S 14A OF THE ACT WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSE E UNDER THE NORMAL PROVISIONS OF THE ACT. FOLLOWING OUR DECISION ON T HE MAIN ISSUE WE DIRECT THE A.O. TO RESTRICT THE ADDITION ON ACCOUNT OF DISALLO WANCE U/S 14A WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT TO T HE EXTENT OF 2% OF THE DIVIDEND INCOME. GROUND NO. 3 OF THE REVENUES APP EAL FOR A.Y. 2004-05 IS DISMISSED. 72. IN THE RESULT APPEALS OF THE ASSESSEE FOR ASSE SSMENT YEARS 2002-03 2003-04 AND 2004-05 ARE PARTLY ALLOWED WHILE APPEAL OF THE REVENUE FOR A.Y. 2003-04 IS DISMISSED AND APPEAL OF THE REVENUE FOR A.Y. 2004-05 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ITA 2977/M/06 6575/M/10 ITA 64 48/M/10 856/M/11 & ITA 954/M/11 42 ORDER PRONOUNCED IN THE OPEN COURT ON 31-07-2013. . '4 0 23+ 5')6 31-7-2013 3 0 SD/- SD/- (VIJAY PAL RAO) (P.M. JAGTAP ) & !'# JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; 5') DATED 31-07-2013 $.&).!./ RK SR. PS '4 0 .&7% 8%+ '4 0 .&7% 8%+ '4 0 .&7% 8%+ '4 0 .&7% 8%+/ COPY OF THE ORDER FORWARDED TO : 1. - / THE APPELLANT 2. ./ - / THE RESPONDENT. 3. 9 () / THE CIT(A)CONCERNED MUMBAI. 4. 9 / CIT CONCERNED MUMBAI 5. %$< .&&) / DR ITAT MUMBAI K BENCH 6. =* > / GUARD FILE. '4)! '4)! '4)! '4)! / BY ORDER !/% .& //TRUE COPY// ? ? ? ?/ // /!@ !@ !@ !@ ( DY./ASSTT. REGISTRAR) / ITAT MUMBAI