Matrix Laboratories Ltd, Secunderabad V. Addl.CIT, Hyderabad

ITA 191/HYD/2009

• Counselvise Citation: 19122514 RSA 2009
• Duration Of Justice: 6 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 13-04-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 10-02-2009
• Court: TRIBUNAL
• Department Lawyers: S V S S PRASAD
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Transfer pricing; Revenue expenditure
• Section: 37(1); 10B; 37; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 191/HYD/2009 ASSESSMENT YEAR: 2005-06 MATRIX LABORATORIES LTD., HYDERABAD [PAN: AADCM3491M] VS ADDL. COMMISSIONER OF INCOME TAX, RANGE-16, HYDERABAD FOR ASSESSEE : SHRI K.A. SAI PRASAD, AR FOR REVENUE : SHRI S.V.S.S. PRASAD, DR DATE OF HEARING : 18-08-2015 DATE OF PRONOUNCEMENT : 26-08-2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS APPEAL FILED BY ASSESSEE IS AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-V, HYDERABAD D ATED 28-11-2008 FOR THE AY. 2005-06. 2. IT IS NOTICED FROM THE POWER OF ATTORNEY FILED BY THE COUNSEL THAT THE NAME OF THE COMPANY HAS BEEN CHANGED FROM MATRIX LABORATORIES LIMITED TO MYLAN LABORATORIES LIMITED. HOWEVER, NEITHER ASSESSEE FILED ANY REVISED FORM 36 NOR BROUGHT THE CHANGE OF NAME TO THE NOTICE OF ITAT. EVEN THE REVENUE HAS NOT OBJEC TED THE SAME. SINCE THE APPEAL BY ASSESSEE WAS FILED MUCH EARLIER, WE A RE CONSTRAINED TO PASS ORDER IN THE NAME OF M/S. MATRIX LABORATORIES LIMITED. I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 2 -: 3. BRIEFLY STATED, ASSESSEE IS A PUBLIC LIMITED CO MPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF BULK DRUG, INTERM EDIATES & PHARMACEUTICAL FORMULA. FOR THE YEAR UNDER CONSIDER ATION, ASSESSEE- COMPANY FILED ITS RETURN OF INCOME ON 01-11-2005 DE CLARING TOTAL INCOME OF RS. 74,65,22,264/-. THE RETURN WAS PROCESSED U/ S. 143(1) OF THE INCOME TAX ACT [ACT] ON 31-03-2006. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S. 143(2) WAS IS SUED TO ASSESSEE- COMPANY ON 18-07-2006. MEANWHILE, ASSESSEE FILED R EVISED RETURN OF INCOME ON 31-03-2007 DECLARING AN INCOME OF RS. 74, 68,47,235/-. FOLLOWING SCRUTINY, THE ASSESSING OFFICER (AO) HAS DISALLOWED A SUM OF RS. 25,65,000/- CLAIMED TOWARDS CONTRIBUTION TO SUP ERANNUATION FUND FOR SPECIFIED DIRECTORS, AND A SUM OF RS. 64,78,039 /- CLAIMED TOWARDS EMPLOYEES STOCK OPTION (ESOP) SCHEME. IN CLAIMING DEDUCTION U/S. 10B OF THE ACT IN RESPECT OF ITS EOU UNIT AT PASHAM YLARAM, ASSESSEE HAS INCLUDED AN AMOUNT OF RS. 97,03,57,916/- SHOWN AS INFRINGEMENT INCOME IN THE EXPORT TURNOVER. SINCE ASSESSEE H AS NOT MADE ANY EXPORT OF GOODS FOR THE SAME, AND THE SAID AMOUNT H AS BEEN RECEIVED FROM ANOTHER CONCERN FOLLOWING SOME PATENT DISPUTE, THE AO HELD THAT THE SAME CANNOT BE CONSIDERED AS EXPORT TURNOVER AND, THUS, EXCLUDED THE SAID AMOUNT FOR COMPUTING EXPORT TURNOVER FO R THE PURPOSE OF DEDUCTION U/S. 10B. DURING THE PREVIOUS YEAR, ASS ESSEE HAS INCURRED CORPORATE EXPENDITURE OF RS. 12,06,85,650/- WHICH I S A COMMON EXPENDITURE TO BE ALLOCATED TO ALL UNITS. ASSESSEE SPLITTING THE SAID AMOUNT UNDER THREE DIFFERENT HEADS, HAD ADOPTED DIF FERENT CRITERIA FOR APPORTIONING THE SAID AMOUNTS UNDER EACH HEAD. HOW EVER, THE AO HELD THAT THE ENTIRE COMMON EXPENDITURE HAS TO BE APPORT IONED ON THE BASIS OF TURNOVER OF EACH UNIT. ACCORDINGLY, HE COMPUTED THE APPORTIONABLE AMOUNT TO EOU UNIT AT JEEDIMETLA AT RS. 1,65,34,323 /- AND THUS, THE PROFIT FOR THE PURPOSE OF 10B OF THAT UNIT AT RS. 5 5,67,51,745/-. HE RECOMPUTED THE APPORTIONABLE AMOUNT OF THE COMMON E XPENDITURE FOR I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 3 -: THE OTHER EOU UNIT I.E., PASHAMYLARAM UNIT AT RS. 2 ,80,53,019/- AND THEREBY THE PROFIT ARRIVED FOR THE PURPOSE OF SECTI ON 10B IN RESPECT OF THIS UNIT WAS AT RS. 1,14,60,06,989/-. FOR THE PUR POSE OF DEDUCTION U/S. 10B OF THE ACT, ASSESSEE HAS EXCLUDED SALES TA X, EXCISE DUTY AND CONSIDERATION NOT RECEIVED IN RESPECT OF EXPORT FRO M TOTAL TURNOVER. HOWEVER, REFERRING TO THE PROVISIONS OF SECTION 154 (11A) OF THE ACT, THE AO ONLY EXCLUDED THE SALES TAX AND EXCISE DUTY FOR ARRIVING AT TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S . 10B. HE COMPUTED THE ALLOWABLE DEDUCTION U/S. 10B IN RESPEC T OF BOTH THE ABOVE EOU UNITS AT RS. 34,17,81,933/- AND AT RS. 47,62,16 ,474/-. AO ALSO DISALLOWED CLAIM ON EMPLOYEE STOCK OPTIONS. AGGRIE VED BY THE SAME, ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE CIT(A). LD CIT(A) PARTIALLY GAVE RELIEF. ASSESSEE IS AGGRIEVED. 4. ASSESSEE-COMPANY HAS RAISED AS MANY AS SEVEN GR OUNDS BEFORE THE TRIBUNAL. OUT OF WHICH, GROUND NO. 7 IS GENERAL IN NATURE, HENCE THERE IS NO NEED OF ANY ADJUDICATION. IN THE COURSE OF PRESENT APPEAL GROUNDS 4 AND 5 WERE NOT PRESSED AS RELIEF W AS GRANTED BY AO IN AN ORDER U/S 154. WE HAVE HEARD LD. COUNSEL FOR AS SESSEE AND LD DR FOR REVENUE. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE MATERIAL ON RECORD. THE GROUND-WISE FINDINGS ARE A S UNDER: GROUND NO.1. THE COMMISSIONER (APPEALS) ERRED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER IN EXCLUDING PATENT INFRIN GEMENT INCOME OF RS. 97,03,57,916/- RECEIVED IN CONVERTIBLE FOREIGN EXCH ANGE FROM THE EXPORT TURNOVER OF THE ELIGIBLE 100% EXPORT ORIENTED UNDER TAKING FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT . 6. FACTS LEADING TO THE PRESENT ISSUE ARE THAT THE ASSESSEE ACCOUNTED FOR AN INCOME OF RS.97.03 CRORES IN THE P ROFIT AND LOSS I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 4 -: ACCOUNT FOR THE FINANCIAL YEAR 2007-2008 AS INCOME FROM SETTLEMENT OF PATENT INFRINGEMENT INCOME RECEIVED FROM LES LABOR ATORIES SERVIER, FRANCE IN A SUIT RELATING TO PATENT OF PERINDOPRIL BEING MANUFACTURED BY THE GROUP COMPANY OF THE ASSESSEE. IT WAS THE CO NTENTION THAT THIS RECEIPT IS PART OF EXPORT TURNOVER AND IS ELIGIBLE FOR APPROPRIATE DEDUCTION U/S 10B. AO EXCLUDED THE SAME FROM EXPORT TURNOVER WHILE CALCULATING THE DEDUCTIONS. LD CIT(A) VIDE THE DETAILED DISCUSS ION IN PARA NOS. 6.1 TO 6.5 APPROVED THE ACTION OF AO. HENCE THE GROUND. 6.1 BEFORE US, LEARNED COUNSEL FAIRLY ADMITTED THA T THIS ISSUE WAS DECIDED IN AY 2008-09 AGAINST ASSESSEE. ITAT IN ITA NO. 66/HYD/2013 DT 10-01-2014 HAS HELD AS UNDER: 15. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS ON RECORD AND THE CASE LAW RELIED UPON BY THE ASSESSEE . AS PER THE NOTE GIVEN AS PART OF REPORT OF TRANSFER PRICING RE PORT FOR ASSESSMENT YEAR 2007-2008, IT CAN BE OBSERVED THAT RECEIPTS ARE IN THE NATURE OF ONE TIME SETTLEMENT IN CONSIDERATI ON FOR COSTS AND LIABILITIES INCURRED BY MATRIX AS A CONSEQUENCE OF CEASING ITS PROGRAMME TO DEVELOP AND MANUFACTURE PERINDOPRIL MADE USING THE PROCESS. THE ENTIRE AMOUNT OF RS.97.87 CRORES W AS OFFERED AS INCOME IN ASSESSMENT YEAR 2005-2006 BASED ON RECEIP T BASIS. AS CAN BE SEEN THE AMOUNT OF RS.26.91 CRORES CREDITED TO THE P & L ACCOUNT THIS YEAR IS ONLY A NOTIONAL DEFERRED INCOM E WHEREAS THE ACTUAL INCOME WAS RECEIVED MUCH EARLIER. AS CAN BE SEEN FROM THE FACTS ON RECORD, THE CORRESPONDING EXPENDITURE PERT AINING TO DEVELOPMENT OF PERINDOPRIL WAS SPENT MUCH EARLIER I.E., MUCH PRIOR TO ASSESSMENT YEAR 2005-2006. THEREFORE, THER E IS NO CORRESPONDING EXPENDITURE IN THE RELEVANT ASSESSMEN T YEAR. EVEN IF THERE ARE COSTS/ LIABILITIES FOR DEVELOPING THE PRODUCT ON WHICH THE ASSESSEE RECEIVED PATENT INFRINGEMENT COMPENSAT ION, THE COSTS AND LIABILITIES DOES NOT PERTAIN TO THE YEAR UNDER CONSIDERATION. 16. ASSESSEE RELIED ON THE DECISION OF HONBLE DELH I HIGH COURT IN THE CASE OF CIT VS. DESICCANT ROTORS S INTERNATI ONAL PVT. LTD. (2012) 347 ITR 32 (DEL.) (H.C.) WHEREIN THE ISSUE W AS WITH REFERENCE TO THE CLAIM OF EXPENDITURE UNDER SECTION 37(1). IN THAT I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 5 -: CONTEXT, THE HONBLE DELHI HIGH COURT HAS ANALYZED THE PRINCIPLES RELATING TO PATENT INFRINGEMENT RIGHTS AND HELD THA T THEY ARE PURELY COMPENSATORY IN NATURE AND CONFIRMED THE LIA BILITY OF AMOUNT UNDER SECTION 37(1) OF THE ACT AND THE ITAT ORDER WAS ACCORDINGLY CONFIRMED BY THE HONBLE DELHI HIGH COU RT. BUT AS SEEN FROM THE JUDGMENT, THE ISSUE IS NOT WITH REFER ENCE TO THE TRANSFER PRICING ADJUSTMENTS BUT WITH REFERENCE TO THE CLAIM OF AMOUNT PAID TOWARDS PATENT INFRINGEMENT AS REVENUE EXPENDITURE, WHERE THE REVENUE TREATED IT AS CAPITA L EXPENDITURE. IN THAT CONTEXT, THE DECISION WAS GIVEN WHICH ALLOW ED THE AMOUNT AS REVENUE IN NATURE. THE DISPUTE BEFORE US IS NOT WITH REFERENCE TO THE CLAIM OR RECEIPT OF THE AMOUNT. THERE IS NO DISPUTE AS THE AMOUNT WAS OFFERED AS REVENUE INCOME. THERE IS ALSO NO DISPUTE THAT THE AMOUNT OFFERED IN THE P & L ACCOUNT WAS AD JUSTED IN THE COMPUTATION OF INCOME FOR THE YEAR AS THE SAME IS A LREADY TAXED IN THE EARLIER YEAR. WE ARE NOT CONSIDERING EITHER TAXABILITY OF THE AMOUNT OR THE ALLOWABILITY OF THE AMOUNT AS A DEDUC TION/ EXPENDITURE. THE ISSUE PERTAINS TO THE TRANSFER PRI CING ADJUSTMENTS WHICH OPERATE UNDER DIFFERENT MECHANISM . WHILE ARRIVING AT THE PROFITS OF AN ORGANIZATION, THE OPE RATING PROFITS OVER THE OPERATING COST IS CONSIDERED AS A BASIC PRINCIP LE TO ARRIVE AT OPERATING PROFITS IN AN ASSESSEES CASE. AS DISCUSS ED IN THE LATER PART OF THE ORDER, THERE ARE TWO SEGMENTS OF INCOME AND DIFFERENT SEGMENTS OF PROFIT SOURCE AND DIFFERENT COMPARISONS ARE REQUIRED. WHILE ARRIVING AT SEGMENTAL PROFITS, ONLY THOSE INC OMES PERTAINS TO THAT SEGMENT AND COST PERTAIN TO THAT SEGMENT ARE A LLOCATED SO AS TO ARRIVE AT THE OPERATIONAL PROFITS FOR COMPARISON PURPOSES. THIS EXERCISE HAS NOTHING TO DO WITH THE PRINCIPLES LAID DOWN UNDER SECTION 37(1) OR THE PRINCIPLES ON PATENT INFRINGEM ENT COMPENSATION. THE SIMPLE ISSUE TO BE EXAMINED IS, W HETHER THE INCOME ACCOUNTED BY THE ASSESSEE WILL BECOME OPERA TIONAL INCOME FOR THE PURPOSE OF ARRIVING AT THE OPERATION AL PROFIT. THE ASSESSING OFFICER HAS EXCLUDED THE SAME STATING THA T THE SAME IS NOTHING BUT NOTIONAL REVENUE. WE AGREE WITH THE FIN DING OF THE ASSESSING OFFICER AS HELD BY THE DRP THAT THE INCOM E FROM SETTLEMENT OF PATENT INFRINGEMENT CANNOT BECOME PAR T OF OPERATING REVENUES EITHER ON BULK DRUG MANUFACTURING (API) SE GMENT OR ON PRODUCT DEVELOPMENT SERVICE (PDS) SEGMENT WHICH ARE TWO DIFFERENT SEGMENTS IN WHICH ASSESSEE IS OPERATING A ND ACCORDINGLY WE AGREE WITH THE DRPS STAND THAT THIS INCOME FALLS UNDER THE CATEGORY OF OTHER INCOME AND NOT OPERA TING REVENUE. NOT ONLY THAT THE INCOME DOES NOT PERTAIN TO THE RE LEVANT FINANCIAL YEAR NOR THE COSTS ARE INCURRED IN THE YEAR UNDER C ONSIDERATION. IF WITHOUT THE COST, THE INCOME IS INCLUDED IN THE COM PUTATION OF OPERATIONAL PROFITS, THE SAME GETS SKEWED BECAUSE O F INCLUSION OF I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 6 -: EXTRAORDINARY ITEMS. IT WAS DECIDED IN NUMBER OF C ASES BY THE TRIBUNAL THAT INCOMES OF EXTRAORDINARY NATURE ARE T O BE EXCLUDED AND FURTHER EXTRAORDINARY EVENTS IN ANY COMPANY ALS O MAKE IT NON-COMPARABLE WHILE DOING EXERCISE OF FAR ANALYSIS FOR COMPARABILITY PURPOSE. FOR THE REASONS STATED ABOVE , WE AGREE WITH THE ASSESSING OFFICER/DRP THAT THIS INCOME FRO M SETTLEMENT OF PATENT INFRINGEMENT CANNOT BE CONSIDERED AS OPER ATIONAL INCOME WHILE WORKING OUT THE SEGMENTAL PROFITS OR A S TOTAL PROFITS OF THE ASSESSEE FOR THE PURPOSE OF COMPARISON. AT B EST, IT CAN BE CONSIDERED AS ANOTHER SEGMENT OF INCOME FOR WHICH N O EXPENDITURE WAS CHARGED, BUT THE SAME CANNOT BE INC LUDED IN EITHER OF THE SEGMENTAL OPERATIONS OF THE ASSESSEE. THIS GROUND IS ACCORDINGLY REJECTED. 6.2 EVEN THOUGH THE ISSUE WAS DECIDED IN THE CONTE XT OF TRANSFER PRICING PRINCIPLES, THE SAME IS APPLICABLE TO THE PRESENT ISSUE. CONSEQUENTLY, WE UPHOLD THE ORDER OF LD. CIT(A) ON THIS ISSUE. GROUND IS ACCORDINGLY DISMISSED. GROUND NO.2. THE COMMISSIONER (APPEALS) ERRED IN REJECTING THE BASIS ADOPTED BY THE APPELLANT FOR APPOINTMENT OF COMMON CORPORATE OVERHEADS TO ALL THE UNITS OF THE APPELLANT COMPANY INCLUDING THE 100% EXPORT ORIENTED UNDERTAKINGS AND HOLDING THAT SUCH COMMON CORPORATE OVERHEADS SHOULD BE APPORTIONED ON THE BASIS OF RAT IO OF TURNOVER OF THE UNIT TO THE TOTAL TURNOVER OF THE COMPANY AND IN THIS MANNER REDUCING THE ELIGIBLE PROFITS UNDER SEC. 10B OF THE ACT, OF UNIT 3.2 BY RS. 36,33,275/- AND OF UNIT 7 BY RS. 17,20,761/-. 7. THIS GROUND IS ON THE QUANTIFICATION OF AMOUNT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B AND IS LINKED TO SUBSEQ UENT PROCEEDINGS U/ 263 BY CIT WHERE ELIGIBILITY ITSELF WAS DISPUTE D AND THE MATTER IS SUBJUDICE. HOWEVER, WHILE QUANTIFYING THE AMOUNT TH E ASSESSING OFFICER ALLOCATED THE CORPORATE OVER-HEADS AT AN AMOUNT MO RE THAN APPORTIONED BY THE ASSESSEE AND THEREBY, REDUCING THE PROFIT EL IGIBLE FOR BENEFIT. THE ASSESSEE IS CONTESTING THE ALLOCATION. 7.1 IT WAS CONTENDED THAT ASSESSEE HAS IDENTIFIED THE CORPORATE OVERHEADS ON THE BASIS OF ACCEPTED COST ACCOUNTING PRINCIPLES AND ALSO I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 7 -: GUIDANCE NOTE WITH REFERENCE TO COMPANY LAW. IT WAS SUBMITTED THAT THE INDIRECT MANUFACTURING EXPENSES ARE DISTRIBUTED OVE R OPERATING DIVISIONS ON THE BASIS OF GROSS MATERIAL COST AND PERSONAL CO STS ARE DISTRIBUTED OVER OPERATING DIVISIONS ON THE BASIS OF STAFF STRE NGTH IN EACH OPERATING DIVISION AND SELLING ADMINISTRATIVE COST DISTRIBUTE D OVER OPERATING DIVISIONS ON THE BASIS OF SALES AFFECTED. IT WAS CO NTENDED THAT THIS ALLOCATION IS CONSISTENT WITH THE ASSESSEES ALLOC ATION IN EARLIER YEARS AND ALSO IN TUNE WITH THE PRINCIPLES LAID DOWN UNDE R THE COST ACCOUNTING PRINCIPLES AS WELL AS GUIDANCE NOTE ISSUED BY THE M INISTRY OF COMPANY AFFAIRS IN THE AREA OF INDIRECT TAX. IT WAS THE CON TENTION THAT IGNORING THE SCIENTIFIC BASIS ADOPTED BY THE ASSESSEE, THE ASSES SING OFFICER ALLOCATED ON THE BASIS OF TURNOVER OF THE SALES IN EACH UNIT THEREBY, ARRIVING AT A DIFFERENT PERCENTAGE AND EXCESS APPORTIONMENT OF CO MMON OVERHEAD COSTS. THE LEARNED CIT(A) APPROVED THE SAME. HENCE THE GROUND. 7.2 LD COUNSEL FAIRLY ADMITTED THAT THIS ISSUE WAS DECIDED IN AY 2008-09 IN ITA 66/HYD/2013 DT. 10-01-14 WHEREIN IT WAS DECIDED AS UNDER: 45. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE F ACTS. EVEN THOUGH THE ISSUE WAS PENDING IN EARLIER YEAR, WE ARE OF THE OPINION THAT ISSUE CAN BE DECIDED INDEPENDENTLY IN THIS YEAR. AFTER CONSIDERING THE FACTS AS STATED IN THE OBJECTIONS BEFORE THE DRP AND ALSO BEFORE US, WE ARE OF THE OP INION THAT ASSESSEE HAS ALLOCATED THE CORPORATE OVERHEADS ON A RATIONAL BASIS BASED ON THE MATERIAL COST OF PURCHASE AND NU MBER OF PEOPLE WORKED FOR THE UNIT AND ALSO ON THE BASIS OF HEAD ACCOUNT WHICH IS REASONABLE. ADOPTING SALES TURNOVE R AS THE BASIS MAY RESULT IN SKEWED ALLOCATION. FOR EXAMPLE, IF A PARTICULAR UNIT IS PRODUCING ONLY HIGH COST/ HIGH P RICE PRODUCT, THE EFFORT AND SERVICE COST FOR THAT UNIT WILL BE L ESS WHEREAS, THE PROFIT MARGIN WILL BE MORE. IF THE UNIT IS NOT PRODUCING MUCH IN THE YEAR AND HAS LESSER SALES, ALLOCATION O F AMOUNT ON THE BASIS OF TURNOVER MAY RESULT IN UNDER ALLOCA TION OF SERVICE COST. EVEN IN THE CASE WHERE THE UNIT START S PRODUCTION ONLY AT THE FAG END OF THE YEAR COST OF WORKING O N THAT UNIT I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 8 -: THROUGHOUT THE YEAR FOR ESTABLISHING / STARTING PRO DUCTION MAY NOT RESULT IN ALLOCATION OF ACTUAL EXPENDITURE IF TURN OVER IS CONSIDERED. IN VIEW OF THIS, SINCE ASSESSING OFF ICER HAS NOT GIVEN ANY RATIONALE IN ADOPTING THE TURNOVER AS THE BASIS, IGNORING THE ASSESSEES METHOD, WE ARE OF THE OPINI ON THAT ALLOCATION OF EXPENDITURE AS WAS DONE BY THE ASSESS EE IS MORE RATIONALE AND IS IN TUNE WITH THE PRINCIPLES L AID DOWN BY THE INSTITUTE OF COST ACCOUNTANTS AND ALSO FOR THE PURPOSE OF COMPANY LAW. THEREFORE, CONSIDERING THE DETAILED OB JECTIONS RAISED BY THE ASSESSEE AS PLACED IN THE OBJECTIONS TO THE DRP, WE ARE OF THE OPINION THAT THE ALLOCATION BY THE AS SESSEE IS TO BE UPHELD. ASSESSING OFFICER IS DIRECTED TO ACCEPT THE ASSESSEES ALLOCATION OF CORPORATE OVERHEADS. ACCOR DINGLY, GROUND NO. 14 IS ALLOWED. 7.3 RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO TO ACCEPT THE ALLOCATION MADE BY ASSESSEE AND RE-WORKOUT THE PROFITS AS APPLICABLE. GROUND IS ALLOWED. GROUND NO.3. THE COMMISSIONER (APPEALS) ERRED IN CONFIRMING THA T RS. 64,78,039/- BEING THE AMOUNT DEBITED TOWARDS EMPLOY EE STOCK OPTION PLAN IS NOT AN EXPENDITURE INCURRED IN CONNECTION W ITH AN EXISTING LIABILITY AND THEREFORE TO BE DISALLOWED FOR COMPUTING THE TA XABLE BUSINESS PROFITS. 8. THE ASSESSEE FORMULATED EMPLOYEE STOCK OPTION P LAN FOR GRANTING CERTAIN STOCK OPTIONS TO ITS EMPLOYEES/DIR ECTORS. THIS AMOUNT HAS BEEN CHARGED AS A PERSONNEL COST AND HAS BEEN A CCOUNTED IN LINE WITH THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF C HARTERED ACCOUNTANTS OF INDIA. THE ASSESSING OFFICER HELD THAT THE EXPEN DITURE IS NOT REVENUE AND IS CONTINGENT AND NOTIONAL IN NATURE. 8.1 SINCE THIS ISSUE IS ALSO COVERED BY THE DECISI ON OF CO- ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO. 66 /HYD/2013 (AY. 2008-09) DT. 10-01-2014, RESPECTFULLY FOLLOWING THE SAME, WE REMIT THE ISSUE TO AO TO DECIDE AFRESH AS DIRECTED IN THA T YEAR. FOR THE SAKE OF RECORD THE DECISION IS AS UNDER: I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 9 -: 41. THE ASSESSEE FORMULATED EMPLOYEE STOCK OPTION P LAN FOR GRANTING CERTAIN STOCK OPTIONS TO ITS EMPLOYEES/DIR ECTORS. THIS AMOUNT HAS BEEN CHARGED AS A PERSONNEL COST AND HAS BEEN ACCOUNTED IN LINE WITH THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE ASSESSING OFFIC ER HELD THAT THE EXPENDITURE IS NOT REVENUE AND IS CONTINGENT AND NO TIONAL IN NATURE. THIS ISSUE WAS CONSIDERED IN EARLIER YEAR ALSO AND THE DRP FOLLOWING THE SAME REJECTED THE OBJECTION. IT WAS S UBMITTED THAT THE ISSUE OF ESOP WAS DECIDED BY THE HONBLE SPECIAL BE NCH OF THE ITAT BANGALORE IN THE CASE OF M/S. BIOCON LIMITED V S. DCIT (LTU) BANGALORE VIDE ITA.368 TO 371/BANG/2010 ETC., DATED 16.07.2013 AND ACCORDINGLY, REQUESTED FOR RESTORING THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE IN THE LIGHT OF THE FI NDINGS AND DECISION OF THE SPECIAL BENCH OF THE ITAT. IN THE CASE OF DR REDDY LABORATORIES THE ISSUE WAS DECIDED AS UNDER: 9.3 AFTER HEARING THE CASE, THE SPECIAL BENCH OF TH E INCOME-TAX APPELLATE TRIBUNAL BANGALORE IN THE CASE OF BOICON LTD VS DCIT HELD THAT ESOP DISCOUNT (DIFFERENCE BETWEEN MARKET PRICE AND ISSUE PRICE) IS A DEDUCTIBLE EXPENDITURE AT THE TIME OF VESTING OF THE OPTION. A N ADJUSTMENT HAS TO BE MADE IF THE MARKET PRICE IS DIFFERENT AT THE TIME OF EXE RCISE OF THE OPTION. IN THAT CASE ALSO ASSESSEE FRAMED AN EMPLOYEE STOCK OPTION PLAN (ESOP) PURSUANT TO WHICH IT GRANTED OPTIONS TO ITS EMPLOYEES TO SUBSCRIBE FO R SHARES AT THE FACE VALUE OF RS. 10. AS THE MARKET PRICE OF EACH SHARE WAS RS. 9 19, THE ASSESSEE CLAIMED THAT IT HAD GIVEN A DISCOUNT OF RS. 909 WHICH WAS A LLOWABLE AS A DEDUCTION AS 'EMPLOYEE COMPENSATION. THOUGH THE OPTIONS VESTED E QUALLY OVER FOUR YEARS, THE ASSESSEE CLAIMED A LARGER AMOUNT IN THE FIRST Y EAR THAN WAS AVAILABLE UNDER THE SEBI GUIDELINES. THE AO & CIT(A) REJECTED THE C LAIM ON THE GROUND THAT THERE WAS NO 'EXPENDITURE'. ON APPEAL TO THE TRIBUN AL, THE ISSUE WAS REFERRED TO THE SPECIAL BENCH. HELD BY THE SPECIAL BENCH: (I) THE DIFFERENCE (DISCOUNT) BETWEEN THE MARKET PR ICE OF THE SHARES AND THEIR ISSUE PRICE IS 'EXPENDITURE' IN THE HANDS OF THE AS SESSEE BECAUSE IT IS A SUBSTITUTE TO GIVING DIRECT INCENTIVE IN CASH FOR A VAILING THE SERVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE BETWEEN A CASE WH ERE THE COMPANY ISSUES SHARES TO THE PUBLIC AT MARKET PRICE AND PAYS A PAR T OF THE PREMIUM TO THE EMPLOYEES FOR THEIR SERVICES AND ANOTHER WHERE THE SHARES ARE DIRECTLY ISSUED TO EMPLOYEES AT A REDUCED RATE. IN BOTH SITUATIONS, TH E EMPLOYEES STAND COMPENSATED FOR THEIR EFFORT. BY UNDERTAKING TO ISS UE SHARES AT A DISCOUNT, THE COMPANY DOES NOT PAY ANYTHING TO ITS EMPLOYEES BUT INCURS THE OBLIGATION OF ISSUING SHARES AT A DISCOUNTED PRICE AT A FUTURE DA TE. THIS IS NOTHING BUT 'EXPENDITURE' U/S 37(1); I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 10 - : (II) THE LIABILITY CANNOT BE REGARDED AS BEING 'CON TINGENT' IN NATURE BECAUSE THE RENDERING OF SERVICE FOR ONE YEAR IS SINE QUA NON F OR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE SCHEME. ONCE THE SERVICE IS R ENDERED FOR ONE YEAR, IT BECOMES OBLIGATORY ON THE PART OF THE COMPANY TO HO NOR ITS COMMITMENT OF ALLOWING THE VESTING OF 25% OF THE OPTION. THE LIAB ILITY IS INCURRED AT THE END OF THE FIRST YEAR THOUGH IT IS DISCHARGED AT THE END O F THE FOURTH YEAR WHEN THE OPTIONS ARE EXERCISED BY THE EMPLOYEES. THE FACT TH AT SOME OPTIONS MAY LAPSE DUE TO NON-EXERCISE / RESIGNATION ETC DOES NOT MAKE THE ENTIRE LIABILITY CONTINGENT; (III) HOWEVER, THE OBLIGATION TO ISSUE SHARES AT A DISCOUNTED PREMIUM DOES NOT ARISE AT THE STAGE THE OPTIONS ARE GRANTED. IT ARIS ES AT THE STAGE THAT THE OPTIONS ARE VESTED IN THE EMPLOYEES. THE AMOUNT DED UCTIBLE HAS TO BE DETERMINED BASED ON THE PERIOD AND PERCENTAGE OF VE STING UNDER THE ESOP SCHEME; (IV) THERE IS LIKELY TO BE A DIFFERENCE IN THE QUAN TUM OF DISCOUNT AT THE STAGE OF VESTING OF THE STOCK OPTIONS (WHEN THE DEDUCTION IS ALLOWABLE) AND AT THE STAGE OF EXERCISE OF THE OPTIONS. THE DIFFERENCE HAS TO B E ADJUSTED BY MAKING SUITABLE NORTHWARDS OR SOUTHWARDS ADJUSTMENT AT THE TIME OF EXERCISE OF THE OPTION DEPENDING ON THE MARKET PRICE OF THE SHARES THEN PR EVAILING. THE FACT THAT THE SEBI GUIDELINES DO NOT PROVIDE FOR THE ADJUSTMENT O F DISCOUNT AT THE TIME OF EXERCISE OF OPTIONS IS IRRELEVANT BECAUSE ACCOUNTIN G PRINCIPLES CANNOT AFFECT THE POSITION UNDER THE INCOME-TAX ACT. (V) ON FACTS, THE ASSESSEE'S METHOD OF CLAIMING A L ARGER DEDUCTION IN THE FIRST YEAR DEFIES LOGIC. AS THE OPTIONS VEST EQUALLY OVER A PERIOD OF FOUR YEARS, THE DEDUCTION OUGHT TO BE CLAIMED IN FOUR EQUAL INSTALL MENTS ON A STRAIGHT LINE BASIS. THE DECISION IN THE CASE OF RANBAXY LABORATORIES 1 24 TTJ 771 (DELHI) WAS REVERSED AND S.S.I. LTD. V. DCIT 85 TTJ 1049 (CHEN NAI) APPROVED, PVP VENTURES 211 TAXMAN 554 REFERRED. THE DECISION OF S PRAY ENGINEERING DEVICES LTD 53 SOT 70 (CHD) WAS ALSO APPROVED. THE ABOVE DE CISIONS REFERRED BY SPECIAL BENCH WAS RELIED UPON BY ASSESSEE, THEREFORE THERE IS NO NEED TO REFER THEM AGAIN. AO IS DIRECTED TO WORK OUT THE DEDUCTION KEE PING IN MIND THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH IN THE ABOVE REFERRE D CASE, AFTER GIVING AN OPPORTUNITY TO ASSESSEE. GROUND IS ALLOWED FOR STAT ISTICAL PURPOSES. THEREFORE, CONSIDERING THE REQUEST, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE CLAIM AFRESH IN THE LIGHT OF DECISION OF THE HONBLE SPECIAL BENCH OF THE IT AT BANGALORE IN I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 11 - : THE CASE OF M/S. BIOCON (SUPRA). GROUND NO. 13 IS A LLOWED FOR STATISTICAL PURPOSES . 8.2 WE ORDER ACCORDINGLY. GROUND IS ALLOWED FOR ST ATISTICAL PURPOSES. GROUND NO. 4. THE COMMISSIONER (APPEALS) ERRED IN HOLDING THAT T HE ASSESSING OFFICER IS JUSTIFIED IN DISALLOWING THE C LAIM OF RS. 14,59,56,760/- MADE U/S. 35(2AB) ON THE GROUND THAT THE EXPENDITURE INCURRED AT THE APPROVED R&D UNIT IS NOT CERTIFIED BY THE PRESCRIBED AUTHORITY. GROUND NO. 5. THE COMMISSIONER (APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF THE CLAIM U/S. 35(1)(I) AND 35(1)(I V) OF THE ACT IN RESPECT OF ACTUAL EXPENDITURE INCURRED AT KAZIPALLY R&D UNIT O F RS. 7,24,64,004/- AND AT ICICI KNOWLEDGE PARK (FDF) UNIT OF RS. 2,48, 40,504/-. 9. SINCE RELIEF WAS ALREADY GRANTED TO ASSESSEE BY ORDER U/S. 154 DT. 13-03-2009, THE ABOVE TWO GROUNDS ARE NOT PRESSED. GROUND NO. 6. THE COMMISSIONER (APPEALS) ERRED IN REJECTING THAT SUPERANNUATION CONTRIBUTION OF RS. 25,65,000/- IN R ESPECT OF A PROMOTER MANAGING DIRECTOR IS DEDUCTIBLE UNDER SEC. 37 OF TH E ACT. ALTERNATIVELY, THE CONTRIBUTION WHICH IS TREATED AS PART OF SALAR Y ON WHICH TAX IS PAID IN THE HANDS OF PROMOTER MANAGING DIRECTOR, HAS RESULT ED IN DOUBLE TAXATION WHICH SHOULD BE ELIMINATED. 10. AS FAR AS SUPERANNUATION CONTRIBUTION FOR DIRE CTOR RS. 25,65,000/- IS CONCERNED, IT WAS SUBMITTED BY ASSES SEE BEFORE THE LOWER AUTHORITIES THAT SINCE THE SUPERANNUATION IS UNRECO GNIZED, DEDUCTION WAS CLAIMED U/S. 37. TAX WAS DEDUCTED AT SOURCE AN D THE PAYMENT PART TAKES THE NATURE OF SALARY. IN THIS CONNECTION, RE LIANCE WAS PLACED IN THE CASE OF CIT VS. KARAMCHAND PREMCHAND [200 ITR 281] (GUJ). AO DECIDED THAT SINCE CONTRIBUTION IS COVERED BY SECTI ON 36(I)(IV) AND RULES THEREIN, RECOURSE COULD NOT BE MADE TO SECTION 37. I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 12 - : 10.1 LD.CIT(A) HELD THAT CONTRIBUTION IS MADE TO U NAPPROVED SUPERANNUATION FUND. IT IS CREATED FOR THE EXCLUSI VE BENEFIT OF CMD. HENCE, DISALLOWANCE IS SUSTAINED BY CIT(A) BY FOLLO WING THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY INDIA (P) LTD., VS. CIT [285 ITR 213]. 10.2 SINCE THIS ISSUE IS COVERED IN FAVOUR OF ASSE SSEE BY THE DECISION OF CO-ORDINATE BENCH IN ASSESSEES OWN CAS E IN ITA NO.1616/HYD/2010 (AY. 2006-07) DT. 16-01-2015, THIS GROUND IS ALSO ALLOWED. THE DECISION IS AS UNDER. 35. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES AND PERUSED THE ORDERS OF DEPARTMENTAL AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. FROM THE FACTS AND MATERIALS ON RECORD, IT IS EVIDE NT THAT THE INCURRING OF EXPENDITURE HAS NOT BEEN DOUBTED OR DISPUTED BY AO. THE ONLY REASON FOR WHICH THE AO DISALLOWED THE EXPENDITURE IS SINCE CO NTRIBUTION TO SUPERANNUATION FUND IS COVERED U/S 36(1)(IV) THE SA ME CANNOT BE ALLOWED U/S 37. THE DRP HAS CONFIRMED THE DISALLOWANCE SOLE LY FOR THE REASON THAT SIMILAR DISALLOWANCE WAS UPHELD BY CIT(A) FOR THE AY 2005-06. HOWEVER, ON GOING THROUGH THE FACTS AND MATERIALS O N RECORD, WE ARE OF THE VIEW THAT THE EXPENDITURE INCURRED IS ALLOWABLE AS DEDUCTION IF NOT U/S 36(1)(IV) BUT U/S 37 OF THE ACT AS IT IS EXCLUSIVEL Y INCURRED FOR THE PURPOSE OF BUSINESS. MOREOVER, IT IS NOT DISPUTED THAT ASSE SSEE HAS DEDUCTED TAX AT THE TIME OF MAKING CONTRIBUTION TO THE SUPERANNU ATION FUND AND HAS TREATED IT AS PART OF SALARY OF THE CONCERNED DIREC TORS. THAT BEING THE CASE, THE EXPENDITURE INCURRED SHOULD BE ALLOWED AS A DEDUCTION. IN THIS REGARD, WE RELY ON CIT VS. PUNJAB FINANCIAL CORPORA TION LTD.(SUPRA). ACCORDINGLY, WE DELETE THE ADDITION MADE BY THE AO . 11. IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST, 2015 SD/- SD/- (P. MADHAVI DEVI) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 26 TH AUGUST, 2015 TNMM I.T.A. NOS. 191/HYD/09 MATRIX LABORATORIES LTD., :- 13 - : COPY TO : 1. MATRIX LABORATORIES LTD., 1-1-151/1, 4 TH FLOOR, SAIRAM TOWERS, ALEXANDER ROAD, SECUNDERABAD. 2. ADDL. COMMISSIONER OF INCOME TAX, RANGE-16, AAYA KAR BHAVAN, BASHEER BAGH, HYDERABAD. 3. CIT(APPEALS)-V, HYDERABAD. 4. CIT-IV, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.