Hetro Labs Limited, Hyderabad v. ACIT, Hyderabad

ITA 74/HYD/2007 | 2002-2003
Pronouncement Date: 30-03-2012 | Result: Partly Allowed

Appeal Details

RSA Number 7422514 RSA 2007
Assessee PAN AAACH5506R
Bench Hyderabad
Appeal Number ITA 74/HYD/2007
Duration Of Justice 5 year(s) 2 month(s) 10 day(s)
Appellant Hetro Labs Limited, Hyderabad
Respondent ACIT, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-03-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-03-2012
Date Of Final Hearing 21-06-2011
Next Hearing Date 21-06-2011
Assessment Year 2002-2003
Appeal Filed On 19-01-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH HYDERABAD BEFORE CHANDRA POOJARI ACCOUNTANT MEMBER & SMT. ASHA VIJAYARAGHAVAN JUDICIAL MEMBER ITA NO. 74 75 & 76/HYD/2007 ASSESSMENT YEARS 2002-03 2003-04 & 2004-05 M/S HETERO LABS LIMIT ED HETERO HOUSE HYDERABAD (PAN AAACH 5506R) VS THE ACIT CIRCLE 2(2) HYDERABAD APPELLANT RESPONDENT APPELLANT BY : SHRI S. RAMA RAO RESPONDENT BY : SHRI V. SRINIVAS & SH RI K. VISWANATHAN DATE OF HEARING : 8.2.2012 DATE OF PRONOUNCEMENT : ORDER PER ASHA VIJAYARAGHAVAN JM . THESE APPEALS PREFERRED BY THE ASSESSEES ARE DIRECT ED AGAINST THE ORDER PASSED BY THE CIT(A) III HYDERA BAD DATED 26.10.2010 PERTAINS TO THE ASSESSMENT YEARS 2002-03 2003-04 & 2004-05. SINCE ISSUES INVOLVED IN THESE APPEAL S ARE COMMON THEY ARE CLUBBED HEARD AND DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ASSESSMENT YEAR 2002-03 2. THE FIRST GROUND OF APPEAL IS WITH RESPECT TO R EOPENING OF THE ASSESSMENT U/S 147 OF THE IT ACT. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE THE CIT(A) THAT INITI ATION OF REASSESSMENT PROCEEDINGS BY ISSUE OF NOTICE U/S 148 VIDE LETTER DATED 22.12.2004 WAS NOT VALID SINCE THE TIME LIMIT FOR ITA NO.74 TO 76 OF 2007 M/S HETERO LABS. LIMITED HYD. 2 COMPLETION OF REGULAR ASSESSMENT U/S 143(3) WAS NOT OVER. THE CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICE R FOR THE ASSESSMENT YEAR 2002-03 IN ISSUING NOTICE U/S 148 O F THE ACT. 3. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF RAJESH JHAVERI STOCK BROKERS P LTD. VS. ACIT (291 ITR 500) (SC) WHEREIN IT HAS BEEN HELD AS FOLLOWS: 18. SO LONG AS THE INGREDIENTS OF SECTION 147 ARE FULFILLED THE ASSESSING OFFICER IS FREE TO INITIATE PROCEEDIN G UNDER SECTION 147 AND FAILURE TO TAKE STEPS UNDER SECTION 143(3) WILL NOT RENDER THE ASSESSING OFFICER POWERLESS TO INITIATE REASSESSMENT PROCEEDINGS EVEN WHEN INTIMATION UNDER SECTION 143(1) HAD BEEN ISSUED. RESPECTFULLY FOLLOWING THE DECISION OF THE APEX COU RT WE UPHOLD THE REOPENING OF ASSESSMENT AS VALID AND DISMISS TH E ASSESSEES APPEAL ON THIS ISSUE. 4. THE NEXT GROUND IS WITH RESPECT TO DEDUCTION OF EXPENDITURE INCURRED ON NEW DIRECT LICENSE FEES U/S 35 OR 37 OF THE IT ACT. THE ASSESSEE HAS CLAIMED RS.24 39 736/ - U/S 35(1)(IV) OF THE ACT. THE ASSESSING OFFICER WAS OF THE OPINION THAT NO RESEARCH AND DEVELOPMENT ACTIVITY WAS CARRIED OU T BY THE ASSESSEE COMPANY AND HENCE THE DEDUCTION CLAIMED BY THE ASSESSEE IS NOT ALLOWABLE AND INSTEAD THE ASSESSING OFFICER ALLOWED DEPRECIATION ON THE EXPENDITURE INCURRED TR EATING THE EXPENDITURE AS CAPITAL IN NATURE. THE ASSESSEE HAS REPLIED VIDE LETTER DATED 25.1.2006 TO THE SHOW CAUSE NOTICE LET TER DATED 18.1.2006 WHEREIN IT WAS STATED THAT THE COMPANY CA RRIED ON R&D ACTIVITIES FOR SCALING UP VARIOUS PRODUCTS TO C OMMERCIAL SCALE. IT WAS FURTHER SUBMITTED THAT THE ENTIRE PR OCESS OF R&D ACTIVITIES WAS BEING CARRIED ON AT THE UNIT AND LAB S/EQUIPMENTS ITA NO.74 TO 76 OF 2007 M/S HETERO LABS. LIMITED HYD. 3 WERE USED FOR THIS PROCESS. THE ASSESSING OFFICER HOWEVER OBSERVING TWO OF THE 3 SYSTEMS WERE NOT INSTALLED I N ITS PREMISES DISALLOWED DEPRECIATION ON 2/3 OF THE ASSETS IN THE ASSESSMENT YEAR 2002-03 IN ADDITION TO REJECTION OF CLAIM OF DEDUCTION U/S 35(1)(IV) OF THE ACT FOR ALL THE THREE ASSESSMENT Y EARS. 5. DURING THE APPEAL PROCEEDINGS THE LEARNED AUTH ORIZED REPRESENTATIVE OF THE ASSESSEE HAS GIVEN THE DETAIL S OF VARIOUS RESEARCH AND DEVELOPMENT ACTIVITIES CARRIED OUT BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEARS AND STATED THAT THE VARIOUS ACTIVITIES CARRIED ON IN THE FACTORY PREMISES IF EX AMINED WOULD SHOW THAT THE ACTIVITIES WERE IN THE NATURE OF RESE ARCH AND DEVELOPMENT. IT IS ALSO STATED THAT THE STATEMENT OF MANAGERS AND DIRECTOR AT THE TIME OF SURVEY WAS ON WRONG PRE SUMPTION AS ALL OF THEM MENTIONED THAT THERE WAS A QUALITY CONT ROL DEPARTMENT IN THE MANUFACTURING UNIT ITSELF WHERE T ESTING OF PRODUCTS AND MATERIAL WAS BEING DONE WHICH WAS MIS LEADING AS THE ACTIVITY CARRIED OUT BY THE PLANT AND MACHINERY WAS RESEARCH AND DEVELOPMENT WORK AND EXPENDITURE WAS ALLOWABLE AS DEDUCTION U/S 35 OF THE ACT AND NOT MERELY TESTING OF PRODUCT AND MATERIAL AND MANUFACTURE. IT HAS BEEN SUBMITT ED THAT THE WORK RENDERED BY THE ASSESSEE IN THE LABORATORIES W AS FOR EXTENSION OF KNOWLEDGE WHICH WOULD COME IN THE DEFI NITION OF SCIENTIFIC RESEARCH WITHIN THE MEANING OF SECTION 4 3(4) OF THE ACT. 6. THE CIT(A) HELD THAT SECTION 35(1)(IV) IS NOT I NTENDED TO ALLOW CAPITAL EXPENDITURE ON NORMAL BUSINESS ACTIVI TIES LIKE MANUFACTURING TESTING OR QUALITY CONTROL AND CONFI RMED THE ORDER OF THE ASSESSING OFFICER. 7. THE CIT(A) ALSO POINTED OUT THAT IN THE SISTER CONCERN M/S HETERO DRUGS LIMITED THE ASSESSEE HAD AGREED FOR D ISALLOWANCE IN THE ASSESSMENT YEAR 2005-06 AND 2006-07. HENCE THE CLAIM ITA NO.74 TO 76 OF 2007 M/S HETERO LABS. LIMITED HYD. 4 OF DEDUCTION U/S 35(1)(IV) FOR ALL THE 3 ASSESSMENT YEARS WAS DISMISSED. 8. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. THE LEARNED COUNSEL FOR THE ASSESSEE MADE ELABORATE SUBMISSIONS AND SUBMITTED A SEPARATE NOTE ON THE R&D WORKS WHICH IS SUBMITTED AT PAGES 5 TO 10 OF THE PAPER BOOK FILED BY THE ASS ESSEE. THE SUMMARY OF WHICH IS AS FOLLOWS: 1. BASIC PROCESS DEVELOPMENT 2. DEVELOPMENT OF NON INFRINGEMENT PROCESS FOR EXISTIN G ACTIVITIES. 3. FEASIBILITY STUDY OF THE PROCESS FOR VARIOUS NEW A PIS 4. NEW PROCESS DEVELOPMENT FOR EXISTING APIS FOR COST REDUCTION. 5. SCALE UP OF LABORATORY PROCESS TO COMMERCIAL SCALE. 6. CHARACTERISATION AND ISOLATION OF IMPURITIES. 7. ANALYTICAL TESTING AND METHODS DEVELOPMENT FOR RAW MATERIALS INGREDIENTS AND FINISHED GOODS (APIS) 9. THE LEARNED COUNSEL SUBMITTED THAT THE WORK REN DERED BY THE ASSESSEE IN THE LABS IS FOR EXTENSION OF KNOWLE DGE AND THEREFORE THE ASSESSEE IS ENTITLED DEDUCTION U/S 35 OF THE ACT. IT WAS FURTHER SUBMITTED THAT BY THE AO WAS NOT CORREC T IN MENTIONING THAT THE MANAGERS AND DIRECTOR HAVE STAT ED THAT THERE IS NO RESEARCH WING IN THE FACTORY PREMISES. IT WAS ALSO POINTED OUT THAT THE QUALITY OF THE DRUG HAS TO BE MAINTAINED IN ACCORDANCE WITH INTERNATIONAL STANDARDS AND THE ASS ESSEE HAS OBTAINED LICENCE FOR NEW PRODUCTS DURING THE PREVIO US YEAR UNDER CONSIDERATION AND HENCE THE ASSESSEE IS ENTIT LED FOR DEDUCTION U/S 35 OF THE ACT. THE ASSESSEE HAS ALSO SUBMITTED INTRODUCTION OF 20 DRUGS BY ITSELF WOULD PROVE THAT THERE IS R&D ACTIVITY WITHIN THE COMPANY. ITA NO.74 TO 76 OF 2007 M/S HETERO LABS. LIMITED HYD. 5 10. WE ARE OF THE OPINION BASED ON THE SUBMISSIONS MADE BEFORE US THAT WITH RESPECT TO THE R&D ACTIVITIES C ARRIED ON BY THE ASSESSEE THE ISSUE HAS TO BE EXAMINED IN MORE DETAIL BY THE ASSESSING OFFICER IN ORDER TO DECIDE WHETHER THE AS SESSEE IS ELIGIBLE FOR DEDUCTION U/S 35(1)(IV) AND HENCE WE S ET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICER. 11. THE NEXT ISSUE IS WITH RESPECT TO EXCLUDING GR OSS INTEREST AND OTHER INCOME FROM THE PROFITS OF BUSINESS FOR T HE PURPOSE OF COMPUTING DEDUCTION U/S 80HHC OF THE ACT THE ASSESS EE CONTENDED BEFORE THE CIT(A) THAT ONLY NET INTEREST SHOULD BE EXCLUDED FROM THE PROFITS AND BUSINESS UNDER EXPLAN ATION (BAA). THE CIT(A) FOLLOWED THE DECISION IN THE CASE OF (CIT VS. V. CHINNAPANDI) (282 ITR 389) (MAD.) AND REJECTED THE CLAIM OF THE ASSESSEE THAT 90% NET INTEREST SHOULD BE EXCLUDED P ROFITS OF THE BUSINESS. 12. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 13. WE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIALS AVAILABLE ON RECORD. 14. WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE APEX COURT IN THE CASE OF ACG ASSOCIATED CAPSULES P. LTD. VS. CIT (2012-TIOL-13-SC-IT-LB) WHEREIN THE APEX COURT HAS HELD THAT NETTING OF INCOME FROM EXP ENDITURE IS ALLOWED UNDER EXPLANATION (BAA) TO 80HCC I.E. ONLY 90% OF THE NET INCOME FROM OF THE NATURE MENTIONED IN CLAUSE ( 1) OF EXPLANATION BAA TO 80HHC WHICH IS ACTUALLY INCLUDED IN THE PROFITS OF THE ASSESSEE IS TO BE DEDUCTED FROM THE PROFITS OF THE ASSESSEE FOR DETERMINING PROFITS OF THE BUSINESS. WE THEREFORE SET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICE R TO RECOMPUTE THE RELIEF U/S.80HHC FOLLOWING THE RATIO OF THE APE X COURT DECISION. ITA NO.74 TO 76 OF 2007 M/S HETERO LABS. LIMITED HYD. 6 15. THE NEXT GROUND IS WITH RESPECT TO HOLDING AGA INST THE CONVERSION CHARGES AS BEING DEDUCTIBLE FROM PROFIT FOR THE PURPOSE OF ARRIVING DEDUCTION U/S 80HHC. THE LEARN ED COUNSEL RELIED ON IN THE CASE OF CIT VS. BANGALORE CLOTHING CO. (260 ITR 371) ((BOM.HC) WE FIND THAT IN LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SHRI K. RAVINDRANATHAN NAIR (295 ITR 228) (SC) AND ITS SUBSEQUENT DECISION IN THE CASE OF ACG ASSOCIATED CAPSULES P. LTD. VS. CIT (2012-TIOL- 13-SC-IT-LB) WHILE THE CONVERSION CHARGES HAS TO BE EXCLUDED FRO M BUSINESS PROFITS UNDER EXPLANATION (BAA) TO SEC 80HHC ONLY THE NET INCOME FROM CONVERSION CHARGES AFTER DEDUCTING THE EXPENDITURE INCURRED FOR THE SAME CAN BE EXCLUDED UNDER EXPLA NATION BAA TO 80HHC. WE THEREFORE SET ASIDE THE ISSUE TO THE F ILE OF ASSESSING OFFICER TO RECOMPUTE THE RELIEF U/S.80HHC IN RESPECT OF CONVERSION CHARGES BY APPLYING THE DECISIONS OF THE APEX COURT IN THE CASES OF SHRI K. RAVINDRANATHAN NAIR (295 ITR 228) AND ACG ASSOCIATED CAPSULES P. LTD. VS. CIT (2012-TIOL- 13-SC-IT- LB) . 16. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN CO NFIRMING THE ACTION OF THE ASSESSING OFFICER IN REDUCING THE DED UCTION ELIGIBLE U/S 80IB FROM THE PROFITS FOR THE PURPOSE OF WORKIN G OUT DEDUCTION U/S 80HHC. 17. WE FIND THAT THIS ISSUE IS COVERED BY THE DECI SION OF ASSOCIATED CAPSULES P LTD. VS. DCIT (332 ITR 42 (BO M. HC) WHEREIN IT HAS BEEN HELD: THE TRIBUNAL WAS NOT RIGHT IN HOLDING THAT SECTION 80IA(9) OF THE ACT MANDATES THAT THE AMOUNT OF PROFITS ALL OWED AS DEDUCTION U/S 80IA(1) OF THE ACT HAVE TO BE REDUCED FROM THE PROFITS OF THE BUSINESS OF THE UNDERTAKING WHIL E ITA NO.74 TO 76 OF 2007 M/S HETERO LABS. LIMITED HYD. 7 COMPUTING DEDUCTION UNDER ANY OTHER PROVISIONS UNDE R HEADING C IN CHAPTER VI-A OF THE ACT. 18. RESPECTFULLY FOLLOWING THE DECISION OF THE MUM BAI HIGH COURT WE HOLD THAT WHILE COMPUTING THE RELIEF U/S. 80HHC THE DEDUCTION ALLOWABLE U/S.80IB NEED NOT BE DEDUCTED F ROM BUSINESS PROFITS. 19. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN CO NFIRMING THE ACTION OF THE ASSESSING OFFICER IN REDUCING THE GRO SS AND OTHER INCOME FOR THE PURPOSE OF ARRIVING AT DEDUCTION U/S 80IB. ALTERNATIVELY HE OUGHT TO HAVE HELD THAT THE ONLY NET INCOME FROM SUCH SOURCES WOULD HAVE BEEN DEDUCTED. 20. THE CIT(A) HELD THAT THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF CIT VS. STERLING FOODS (237 I TR 579) (SC) IS APPLICABLE WHEREIN IT WAS HELD THAT ONLY THE INCOME HAVING DIRECT NEXUS WITH ELIGIBLE UNDERTAKING CAN BE CONSIDERED AS INCOME UNDERTAKING FOR COMPUTING DEDUCTION UNDER SUCH PROV ISIONS. 21. WE ARE OF THE OPINION THAT THE INCOME BY WAY OF INTEREST AND OTHER INCOME ARE TO BE EXCLUDED AFTER DEDUCTING FROM GROSS RECEIPTS THE EXPENDITURE INCURRED FOR EARNING SUCH INCOME. WITH REGARDS TO FOREIGN EXCHANGE FLUCTUATION IT WAS EXP LAINED THAT IT AROSE FROM THE SALE CONSIDERATION. THE EXPORT SALES ARE FIRST ACCOUNTED AT THE EXCHANGE RATE PREVAILING ON THE DA TE OF RAISING THE INVOICE. WHEN THE ACTUAL REALIZATION LATER IS H IGHER DUE TO EXCHANGE FLUCTUATION THE DIFFERENCE THOUGH IT IS P ART OF THE SALE CONSIDERATION OF GOODS IS ACCOUNTED SEPARATELY AS INCOME ON ACCOUNT OF EXCHANGE FLUCTUATION. IT IS CLEARLY ALSO PART OF THE SALE CONSIDERATION OF GOODS AND HENCE HAS TO BE TAKEN IN TO ACCOUNT IN COMPUTING RELIEF U/S.80IB. HENCE IN CONCLUSION WITH RESPECT TO INTEREST INCOME THE NET INCOME AFTER EXPENDITURE INCURRED FOR EARNING SUCH INCOME SHOULD BE CONSIDERED FOR RELIEF U/S 80IB ITA NO.74 TO 76 OF 2007 M/S HETERO LABS. LIMITED HYD. 8 WHEREAS IN THE CASE OF FOREIGN EXCHANGE FLUCTUATION RELIEF U/S 80IB RELIEF IS ALLOWABLE IN FULL. 22. IN THE RESULT ALL THE THREE APPEALS FILED BY T HE ASSESSEES ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON: 30. 3.20 12 SD/- SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER DATED THE 30 TH MARCH 2012 COPY FORWARDED TO: 1. M/S HETERO LABS LIMITED 8-3-166/9/1 HETERO HOUSE ERRAGADDA HYDERABAD. 2. THE ACIT CIRCLE 2(2) HYDERABAD 3. THE CIT(A) -III HYDERABAD 4. THE CIT HYDERABAD 5. THE DR ITAT HYDERABAD NP/