DCIT, New Delhi V. M/s. Rexcin Pharmaceuticals Pvt. Ltd., New Delhi

ITA 4120/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74056 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 30-10-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 12-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K PATEL

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA ITA NOS. 4120 & 4121/DEL/2011 ASSTT. YRS: 2007-08 & 2008-09 DCIT CIR. 15(1), VS. M/S REXCIN PHARMACEUTICALS PVT. LTD., NEW DELHI. C-53, OKHLA INDUSTRIAL AREA, NEW DELHI. PAN: AACCR 6446 C ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI K. PATEL SR. DR RESPONDENT BY : SHRI V.P. GUPTA ADV. O R D E R PER R.P. TOLANI, J.M: : THESE ARE REVENUES APPEALS AGAINST SEPARATE ORDER S OF CIT(A)-XIII, NEW DELHI RELATING TO A.Y. 2007-08 & 2008-09. 2. RESPECTIVE EFFECTIVE GROUNDS RAISED ARE AS UNDE R: A.Y. 2007-08 : 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DIRECTING THE AO T O DELETE THE DISALLOWANCE OF RS. 20,39,591/- U/S 80IC BY OBSERVI NG IT NOT MORE THAN ORDINARY PROFIT AS COMPARED TO OTHER COMP ANIES IN SIMILAR BUSINESS. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN WRONG INCLUSION OF PROCESSING CHARGES OF RS. 1,24,724/- IN THE AMOUNT OF RS. 36,5 0,576/- FOR COMPUTATION OF DISALLOWANCE U/S 80IC AS THE AFORESA ID AMOUNT WAS IN RESPECT OF OKHLA UNIT AND NOT IN RESPECT OF BADDI UNIT. 2 2008-09 : 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS NOT APPRECIATED THE LATEST DECISION IN THE CASE OF LIBERTY INDIA VS. CIT (2009) 317 ITR 21 8 AND ERRED IN DELETING THE DISALLOWANCE OF RS. 7,45,211/- MAD E U/S 80IC OF THE IT ACT BY OBSERVING IT NOT MORE THAN ORDINAR Y PROFIT AS COMPARED TO OTHER COMPANIES IN SIMILAR BUSINESS. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS NOT APPRECIATED THE DECISIO N OF THE HONBLE MADRAS HIGH COURT IN PANDIAN CHEMICAL LTD. VS. CIT 254 ITR 562 AND ERRED IN INCLUDING THE SALE OF SCRA P AMOUNTING TO RS. 6,62,184/- FOR COMPUTATION OF DEDUCTION U/S 80IC OF THE I.T. ACT. 3. FIRST GROUND IN BOTH THE APPEALS IS COMMON. BRIE F FACTS ARE: THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G AND TRADING IN PHARMACEUTICAL PRODUCTS. DURING THE COURSE OF ASSES SMENT PROCEEDINGS THE ASSESSING OFFICER FOUND THAT BADDI UNIT (HIMACHAL) OF THE ASSESSEE WHICH WAS EXEMPT U/S 80IC WAS CLAIMING MORE PROFITS ON THE SA ME PRODUCTS AS COMPARED TO DELHI UNIT. RELEVANT QUERIES WERE ASKED . IN RESPONSE, THE ASSESSEE SUBMITTED FOLLOWING EXPLANATION: THE ASSESSEE IN HIS REPLY DT. 29-12-2009 STATED TH AT YOUR GOODSELF ASKED THE REASON FOR CHARGING HIGHER PROCESSING CHA RGES IN RESPECT OF THE FOLLOWING PRODUCTS AT BADDI AS COMPARED TO DELH I. YOUR GOODSELF HAS THEREFORE ASKED THE REASON AS TO WHY SUB-SECTIO N (8) OR SUB- SECTION (10) OF SECTION 80IC BE APPLIED:- RATE OF CONVERSION CHARGES AT DELHI AT BADDI (RS.) (RS.) A. EXPOREX LOTION 100 ML 1.60 3.35 B. FLUZET SUSPENSION 60 ML. 1.14 1.70 C. EXOREX LOTION -50 ML 0.95 2.65 3 IN THIS CONNECTION, WE WOULD LIKE TO SUBMIT THAT TH E COMPANY WAS MANUFACTURING CERTAIN FORMULATIONS INCLUDING THE AF ORESAID PRODUCTS ON CONTRACT LOAN LICENSE BASIS FOR M/S RANBAXY LA BORATORIES LTD. IN ITS OKHLA, DELHI UNIT ON WHICH THE EXCISE DUTY @ 16 .32% ON MAXIMUM RETAIL PRICE (MRP) WAS PAYABLE AT THE TIME OF CLEARANCE OF THE GOODS. THE MRP OF EXOREX LOTION-100 ML WAS ES.1 74.98 AND THE MRP OF FLUZET SUSPENSION-6-ML. WAS RS. 26.30 ON WHI CH EXCISE DUTY @ 16.32% (AFTER ABETMENT OF 35%) WAS PAYABLE AT RS. 18.56 AND RS. 2.79 RESPECTIVELY. EXOREX LOTION 50 ML. WAS FOR PHY SICIAN SAMPLE, WHICH WAS NOT FOR SALE. THE ASSESSEE COMPANY HAD IN VESTED ITS FUNDS IN PUTTING UP A NEW MANUFACTURING FACILITY AT BADDI WHICH WAS AN EXCISE FREE ZONE FOR A PERIOD OF 10 YEARS. ON GETTI NG THE GOODS MANUFACTURED AT BADDI, THE CORRECT MANUFACTURER LOA N LICENSEE WAS SAVING A SUBSTANTIAL AMOUNT BY WAY OF EXCISE DUTY. IN VIEW OF THE INVESTMENT MADE BY THE ASSESSEE COMPANY IN ITS NEW FACILITY AT BADDI AND THE EXCISE DUTY SAVING TO THE CONTRACTOR, THE A SSESSEE COMPANY RE- NEGOTIATED THE UPWARD PROCESSING CHARGES FOR MANUFA CTURING THE PRODUCTS ON LOAN LICENSE BASIS AT BADDI WHICH ARE A T ARMS LENGTH. IT IS CONFIRMED THAT M/S RANBAXY LABORATORIES LTD. IS A PUBLIC LIMITED COMPANY, WHICH IS NEITHER A SHARE HOLDER NOR A DIRE CTOR IN OUR COMPANY AS PROVIDED IN SECTION 40A(2) OF THE ACT AN D HENCE NOT A RELATED CONCERN. MOREOVER, THE PROCESSING CHARGES F OR BADDI WERE FIXED AT ARMS LENGTH KEEPING IN VIEW THE INVESTMEN T MADE BY THE ASSESSEE IN ITS NEW FACILITY AND THE EXCISE DUTY S AVING, HENCE IT IS RESPECTFULLY SUBMITTED THAT THE PROVISIONS OF SUB-S ECTION (8) AND (10) OF SECTION 80IC ARE NOT APPLICABLE IN OUR CASE. 3.1. ASSESSING OFFICER, AFTER MAKING VARIOUS OBSERV ATIONS HELD AS UNDER: FROM THE ABOVE CHARTS IT IS EVIDENT THAT THE ASSES SEE HAS INFLATED THE RECEIPTS IN BADDI UNIT TO A TUNE OF RS . 2039591/- (3650576- 1610985= 2039591) AND TOOK UNDUE BENEFIT OF DEDUCTION U/S 80IC. HENCE, RS. 2039591/- IS BEING D ISALLOWED FROM THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER 80 IC OF INCOME TAX ACT AND THE SAID AMOUNT IS BEING ADDED T O THE INCOME FROM OTHER SOURCES. 4 3.2. AGGRIEVED, ASSESSEE PREFERRED FIRST APPEAL. TH E CIT(A) ALLOWED THE ASSESSEES CLAIM U/S 80IC BY FOLLOWING OBSERVATIONS : 4.5. ON CAREFUL EXAMINATION OF THE MATTER, I FIND T HAT THE AO HAS MECHANICALLY PROCEEDED TO DISALLOW THE SUM OF R S. 20,39,591/- MERELY ON THE BASIS OF COMPARATIVE RATE OF THE PRODUCTS BETWEEN THE OLD UNIT IN DELHI AND THE NEW UNIT AT BADDI. I FIND THAT AS PER THE PROVISIONS OF SECTION 80IC(7) READ WITH SECTION 80IA(10) OF THE ACT, THE AO, TO BE ABL E TO INVOKE THE ABOVE PROVISIONS OF THE ACT, HAS TO FIRST ESTAB LISH THAT 'OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE....... AND ANY OTHER PERSON, OR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCED TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N SUCH ELIGIBLE BUSINESS ..... IN THE INSTANT CASE, THE AO HAS FAILED TO ESTABLISH ANY OF THE ABOVE PRE-REQUISITES, VIZ. CLO SE CONNECTION, COURSE OF BUSINESS BEING D, MORE THAN THE ORDINARY PROFITS, FOR INVOKING THE PROVISIONS OF THE ABOVE SECTION. ON TH E CONTRARY, AS POINTED OUT BY THE ID. AR, RLL IS A PUBLIC LIMIT ED COMPANY HAVING A HUGE TURNOVER AND LARGE NUMBER OF SHAREHOL DERS. IT HAS NO COMMON DIRECTORS SHAREHOLDERS WITH THE APPEL LANT COMPANY. AS SUCH, THERE IS NO CLOSE CONNECTION BETW EEN THE AS ENVISAGED UNDER SECTION 80IA(10) OF THE ACT. THE UP WARD REVISION OF THE CONVERSION CHANGE IN RESPECT OF THE AFOREMENTIONED PRODUCTS WAS ARRIVED AT ON THE BASIS OF RE- NEGOTIATION TAKING INTO ACCOUNT THE EXCISE DUTY WAI VER, COST OF INPUTS AND CONVERSION COST AS WELL AS INVESTMENT MA DE IN THE NEW PLANT ETC. THE CONVERSION CHARGES RECEIVED BY T HE APPELLANT FROM RLL AT RS. 36.50 LAKHS IS ALSO A VER Y SMALL PERCENTAGE OF PRODUCTS OF RS. 29.50 CRORES. FURTHER , TOTAL CONVERSION CHARGES RECEIVED BY THE APPELLANT FROM R LL DURING THE YEAR WAS RS. 1.26 CRORES, OUT OF WHICH THE AO H AS QUESTIONED CONVERSION CHARGE IN RESPECT OF RS. 36.5 0 LAKHS ONLY AND THE AO HAS ACCEPTED THE BALANCE CONVERSION CHAR GE FROM RLL. FURTHER, THE APPELLANT, AS PER COMPARATIVE STA TEMENTS FILED, CANNOT BE SAID TO HAVE EARNED MORE THAN ORDI NARY PROFITS AS COMPARED TO OTHER COMPANIES IN SIMILAR BUSINESS. CONSIDERING THE ABOVE, IT CANNOT BE SAID THAT THE B USINESS OF THE 5 APPELLANT WITH REGARD TO THE ABOVE PRODUCTS WAS 'SO ARRANGED' AS TO RENDER TO IT ANY HIGHER PROFIT. THE IMPUGNED DISALLOWANCE OF RS. 20,39,591/- U/S 80LC MADE BY THE AO, THEREFO RE, CANNOT BE SUSTAINED ON FACTS OR IN LAW. THE SAID ADDITION IS, THEREFORE, DELETED. 6. GROUNDS NO. 6 IS DIRECTED AGAINST WRONGLY INCLUD ING PROCESSING CHARGES OF RS. 1,24,724/- IN THE AMOUNT OF RS. 36,50,576/- FOR COMPUTATION OF DISALLOWANCE U/S 8 0LC AS THE AFORESAID AMOUNT WAS IN RESPECT OF OKHLA UNIT AND N OT IN RESPECT OF BADDI UNIT. HOWEVER, SINCE I HAVE ALREAD Y ALLOWED THE MAIN GROUNDS OF APPEAL ON THIS ISSUE, THIS GROU ND HAS BECOME INFRUCTUOUS AND NO LONGER SURVIVES. THE SAME IS, THEREFORE, REJECTED. 3.3. AGGRIEVED, REVENUE IS BEFORE US. 4. LD. DR RELIED ON THE ORDER OF ASSESSING OFFICER. 5. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT THE F ACTS ARE SELF SPEAKING. THE ASSESSEE AND RANBAXY ARE NOT RELATED CONCERNS. BOOKS OF A/CS OF BADDI AND OKHLA UNITS ARE SEPARATELY MAINTAINED AND NOT R EJECTED. WHEN THE BOOKS OF ACCOUNT ARE UPHELD, THERE IS NO JUSTIFICATION FO R ASSESSING OFFICER IN REDUCING THE CLAIM ON ASSUMPTIONS AND PRESUMPTIONS. ORDER OF CIT(A) IS RELIED ON. 6. APROPOS SECOND GROUND IT IS PROPOSED THAT IT IS MISCONCEIVED BY THE REVENUE AS THE SAME HAS BEEN REJECTED BY THE CIT(A) AND NOT ALLOWED. 6.1. APROPOS THE REMAINING GROUND FOR A.Y. 2008-09 REGARDING THE SCRAP ON INCLUSION OF THE AMOUNT ON SALE OF SCRAP WHILE C OMPUTING DEDUCTION U/S 80IC RELIANCE IS PLEADED ON HONBLE DELHI HIGH COU RT JUDGMENT IN THE CASE OF CIT VS. SADHU FORGING LTD. (2011) 336 ITR 444 (D EL.), WHICH HAS HELD AS UNDER: KEEPING IN VIEW THE ACTIVITIES OF THE ASSESSEE IN GIVING HEAT TREATMENT FOR WHICH IT HAD EARNED LABOUR CHARGES AN D JOB-WORK 6 CHARGES, IT CAN THUS BE SAID THAT THE APPELLANT HAD DONE A PROCESS ON THE RAW MATERIAL WHICH WAS NOTHING BUT A PART AND PARCEL OF THE MANUFACTURING PROCESS OF THE INDUSTRI AL UNDERTAKING. THESE RECEIPTS CANNOT BE SAID TO BE IN DEPENDENT INCOME OF THE MANUFACTURING ACTIVITIES OF THE UNDER TAKINGS OF THE ASSESSEE AND THUS COULD NOT BE EXCLUDED FROM TH E PROFITS AND GAINS DERIVED FROM THE INDUSTRIAL UNDERTAKING F OR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 80IB. THESE WERE GAINS DERIVED FROM INDUSTRIAL UNDERTAKINGS AND SO ENTITLED FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTIO N 80IB. THERE CANNOT BE ANY TWO OPINIONS THAT MANUFACTURING ACTIVITY OF THE TYPE OF MATERIAL BEING UNDERTAKEN BY THE ASS ESSEE WOULD ALSO GENERATE SCRAP IN THE PROCESS OF MANUFACTURING . THE RECEIPTS OF SALE OF SCRAP BEING PART AND PARCEL OF THE ACTIVITY AND BEING PROXIMATE THERETO WOULD ALSO BE WITHIN TH E AMBIT OF GAINS DERIVED FROM INDUSTRIAL UNDERTAKING FOR THE P URPOSE OF COMPUTING DEDUCTION UNDER SECTION 80IB. 6.2. FURTHER RELIANCE IS PLACED BY THE LD. COUNSEL FOR THE ASSESSEE ON FOLLOWING JUDGMENTS: - AARTI INDUSTRIES LTD. VS. DCIT 95 TTJ 14 (AHD.); - M/S R.N. GUPTA & CO. LTD. VS. CIT(A) (2013) (1) TMI 626 (P&H); - CIT VS. M/S MICRO TURNERS (2011) 11 TMI 442 (P&H); - CIT VS. M/S TTG INDUSTRIES LTD. (2012) (6) TMI 262 (MAD.) - FENNER (INDIA) LTD. VS. CIT (2000) 241 ITR 803 (MAD .). 7. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE RELEVANT MATERIAL AVAILABLE ON RECORD. APROPOS FIRST ISSUE I .E. ALLOWANCE OF DEDUCTION U/S 80IC AS CLAIMED BY THE ASSESSEE, WE FIND NO INF IRMITY IN THE ORDER OF CIT(A) INASMUCH AS THE ALLEGED CLOSE RELATION OF AS SESSEE AND RANBAXY DOES NOT EXIST. IN THE ABSENCE OF ESTABLISHING SUCH RELA TIONSHIP ASSESSING OFFICER HAS NO JUSTIFICATION TO TINKER WITH THE COMPUTATION OF 80IC CLAIM ON ASSUMPTIONS AND PRESUMPTIONS. THE BOOKS OF ACCOUNT OF BOTH THE UNITS ARE 7 SEPARATELY MANAGED. IN VIEW THEREOF WE UPHOLD THE O RDER OF CIT(A). THIS GROUND OF THE REVENUE IN BOTH THE YEARS IS DISMISSE D. 7.1. APROPOS SECOND GROUND IN A.Y. 2007-08, IN PARA 6 OF HIS ORDER THE LD. CIT(A) IN FACT HA REJECTED THE ASSESSEES GROUND. T HEREFORE, IN OUR VIEW REVENUE HAS RAISED THE GROUND UNDER MISCONCEPTION. THE SAME BEING INFRUCTUOUS IS DISMISSED ACCORDINGLY. 7.2. APROPOS INCLUSION OF AMOUNT ON SALE OF SCRAP I N THE COMPUTATION OF DEDUCTION U/S 80IC, LD. CIT(A) IN PARA 5.3 OF HIS O RDER HAS RELIED ON THE RATIO OF DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SADHU FORGING LTD. (SUPRA) IN ALLOWING THE CLAIM. WE SEE NO INFIRMITY IN THE ORDER OF CIT(A) IN GIVING RELIEF BY RELYING ON DELHI HIGH COURTS ORDE R. WE UPHOLD THE SAME. THIS GROUND OF THE REVENUE IS ALSO DISMISSED. 8. IN THE RESULT, BOTH THE REVENUES APPEALS ARE DI SMISSED. ORDER PRONOUNCED IN OPEN COURT ON 24-01-2014. SD/- SD/- ( SHAMIM YAHYA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 24-01-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR