THE DCIT CIR 6(1), MUMBAI V. M/S. BASF INDIA LTD, MUMBAI

ITA 7626/MUM/2005

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1115 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Assessment Year: 2002-2003
• Appeal Filed On: 30-12-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Assessee Lawyers: HEENA DOSHI; T POORAN
• Keywords: Transfer pricing; International transaction
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE T.R.SOOD, A.M & SHRI R.S.PADVEKAR, JM. I.T.A.NO.7626/MUM/2005 - A.Y 2002-03 DY. COMMISSIONER OF I.T., CIRCLE 6(1), MUMBAI VS. M/S BASF INDIA LTD., RHONE POULENE HOUSE, S.K.AHIRE MARG, WORLI, MUMBAI 400 025 PAN NO.AAACB 4599 E AND I.T.A.NO.195 /MUM/2006 - A.Y 2002-03 M/S. BASF INDIA LTD., MUMBAI VS. DY. COMMISSIONER OF I.T., CIRCLE 6(1), MUMBAI (APPELLANT) (RESPONDENT) REVENUE BY : MR. NARENDRA SINGH. ASSESSEE BY : MR. T.POORAN & MS.HEENA DOSHI. O R D E R PER T.R.SOOD, AM: THESE CROSS APPEALS ARE DIRECTED AGAINST CIT[A]S ORDER DATED 25-10-2005 FOR THE A.Y 2002-03. THEY ARE HEARD TOGE THER AND DISPOSED OF BY THIS COMMON ORDER. 2. I.T.A.NO.7626/M/05 [REVENUES APPEAL] : THE REVENUE HAS RAISED THE FOLLOWING TWO GROUNDS- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT[A] ERRED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE AMOUNT OF SALES-TAX AND EXCISE DUTY FROM THE TO TAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S.80H HC OF THE ACT RELYING UPON THE DECISION OF THE BOMBAY HIGH CO URT IN THE CASE OF SUDARSHAN CHEMICALS INDUSTRIES LTD. (245 IT R 769) WHICH HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND C ONTESTED BY WAY OF FILING SLP. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT[A] ERRED IN DIRECTING THE ASSESSING OFFICER NOT TO DEDUCT 90% OF MISCELLANEOUS RECEIPTS BY WAY OF RECO VERY OF R&D EXPENSES, RECOVERY OF OCTROI AND FREIGHT BROKER AGE, SALES- 2 TAX SET OFF, TECHNICAL SERVICE FEES, WRITE BACK OF CREDITORS AND INTEREST RECEIVED FROM SUNDRY DEBTORS, AS PROVIDED FOR BY EXPLANATION (BAA) WHILE COMPUTING THE DEDUCTION U/S .80HHC WITHOUT APPRECIATING THAT THE SAME HAD NO NEXUS WIT H THE BUSINESS PROFITS DERIVED FROM THE BUSINESS OF EXPOR TS. 3. GROUND NO.1 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HO N'BLE APEX COURT IN THE CASE OF LAXMI MACHINE WORKS 290 ITR 667. IN THI S CASE, THE HON'BLE SUPREME COURT HAS HELD AS UNDER: THE PRINCIPLE REASON FOR ENACTING A FORMULA IN SEC TION 80HHC OF THE INCOME TAX ACT, 1961, IS TO DISALLOW A PART OF THE CONCESSION THEREUNDER WHEN THE ENTIRE DEDUCTION CLAIMED CANNOT BE REGARDED AS RELATING TO EXPORTS. THEREFORE, WHILE INTERPRETING THE WORDS TOTAL TURNOVER IN THE FORMULA IN SECTION 80HHC ONE HAS T O GIVE A SCHEMATIC INTERPRETATION. THE VARIOUS AMENDMENTS MADE THEREIN SHOW THAT RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, ETC., DO NOT FORM PART OF BUSINESS PROFITS AS THEY HAVE NO NEXUS WITH THE ACTIVITY OF EXPORT. THE AMENDMENTS MADE FROM TIME TO TIME INDIC ATE THAT THEY BECAME NECESSARY IN ORDER TO MAKE THE FORMULA WORKA BLE. IF SO, EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PART OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3): OTHERWISE THE FORMULA BECOM ES UNWORKABLE. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE DECID E THIS ISSUE AGAINST THE REVENUE. 4. GROUND NO.2 : BEFORE US THE LD. DR SUBMITTED THAT THE ISSUE RAISED IN THIS GROUND PERTAINED TO EXCLUSION OF 90% OF THE RECEIPTS IN TERMS OF CLAUSE (BAA) OF SEC.80HHC (4C) AND IS NOW COVERED IN FAVOUR OF THE REVENUE BY THE DECISION OF THE HON'BLE SUPRE ME COURT IN THE CASE OF K. RAVINDRANATHAN NAIR 295 ITR 228. 5. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE SUBMITTED THAT NATURE OF EXPENSES HAS NOT BEEN EXAMINED BY TH E AO IN DETAIL AND SOME OF THE ITEMS ARE SIMPLY REIMBURSEMENT OF EXPEN SES AND/OR RECOVERY OF EXPENSES INCURRED EARLIER AND, THEREFOR E, SHE WILL HAVE NO OBJECTION IF THE WHOLE ISSUE IS RE-EXAMINED. 3 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT THE NATURE OF EXPENSES HAS NOT BEEN EXAMINED BY THE LOWER AUTH ORITIES. THEREFORE, IN THE INTERESTS OF JUSTICE, WE SET ASID E THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO RE-EXAMINE THE NATURE OF EXPENSES AND THEN DECIDE THE SAME IN THE LIGHT OF THE DECISION O F THE HON'BLE SUPREME COURT IN THE CASE OF K. RAVINDRANATHAN NAIR [SUPRA], AS WELL AS THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. DRESSER RAND INDIA PVT. LTD. 323 ITR 423. 7. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. 8. I.T.A.NO.195/M/06 [ASSESSEES APPEAL] : IN THIS APPEAL, ASSESSEE HAS RAISED THE FOLLOWING GROUNDS; 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS] HA S ERRED IN CONFIRMING THAT THE ADJUSTMENT MADE ON ACCOUNT O F EXCESS PRICE AS COMPARED TO ARMS LENGTH PRICE WAS LIABLE TO BE MADE TO THE EXTENT OF RS.14,01,776. HE OUGHT NOT TO HAVE DONE SO. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX [APPEALS] HA S ERRED IN DIRECTING THE ASSESSING OFFICER TO RE-COMPUTE TH E DEDUCTION U/S.80HHC(3)(A) AFTER SETTING OFF OF THE BUSINESS L OSS BROUGHT FORWARD FROM THE EARLIER ASSESSMENT. HE OUGHT NOT T O HAVE DONE SO. 9. GROUND NO.1 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT THE ASSE SSEE HAD MADE CERTAIN PURCHASES FROM ASSOCIATED ENTERPRISES [AE] AND, THEREFORE, THE MATTER WAS REFERRED TO TRANSFER PRICING OFFICER [TP O] U/S.92CA(1). IN RESPECT OF CERTAIN ITEMS, IT WAS FOUND BY THE TPO T HAT THE PRICE PAID BY THE ASSESSEE WAS HIGHER THAN ARMS LENGTH PRICE AND , THEREFORE, AN ADJUSTMENT WAS MADE FOR A SUM OF RS.34,32,620/- FOR VARIOUS ITEMS. 4 10. ON APPEAL, ADDITION IN RESPECT OF ITEM LIPODERM LIQUOR, WAS DELETED BY THE LD. CIT[A] BECAUSE HE FOUND THAT THE RE WAS SALE TO ONLY ONE OTHER PARTY BY THE AE BUT THE SAME WAS FOR A BU LK QUANTITY. SIMILARLY, ADDITION IN RESPECT OF CAPRO TABLETS WAS ALSO DELETED, BECAUSE AE HAS SUPPLIED THE ABOVE CONSIGNMENT THROU GH A PUBLIC SECTOR UNDERTAKING I.E. M/S PROJECT ENGINEERING COM PANY LTD., AND THE SAME WAS NOT COMPARABLE. THE REVENUE HAS NOT FILED AN APPEAL IN RESPECT OF THESE TWO TRANSACTIONS. 11. AS FAR AS THE OTHER TRANSACTIONS ARE CONCERNED, THE ADDITION HAS BEEN CONFIRMED BY THE LD. CIT[A]. 12. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBM ITTED THAT AS FAR AS ITEM REGARDING PRESTOGEN D IS CONCERNED, THE DIF FERENCE WAS BECAUSE OF PLACEMENT OF ORDERS AT DIFFERENT POINTS OF TIME AND, THEREFORE, THERE WAS A VALID REASON FOR THE DIFFERE NCE. AS FAR AS ITEM LUWAX OA PASTILLE IS CONCERNED, THE SAME WAS SUPPL IED BY THE AE TO THE OTHER IMPORTER AT A PRICE CHARGED AT 1.03 EURO PER UNIT, WHEREAS THE SAME WAS SUPPLIED TO THE ASSESSEE AT 1.05 US $. SINCE THE VALUE OF EURO IS MUCH HIGHER THAN THE US DOLLAR, THEREFORE, PRICE CHARGED TO THE ASSESSEE WAS JUSTIFIED. AS FAR AS THE OTHER TWO ITE MS I.E. AMDEA 05 AND BUTYL, ACRYLATE ARE CONCERNED, IN BOTH THESE CASES, THE DIFFERENCE IN PRICE IS ABOUT 4% WHICH IS LESS THAN 5% AND THUS, N O ADJUSTMENT COULD HAVE BEEN MADE BECAUSE 2 ND PROVISO TO SUB-SEC.[2] OF SEC.92C CLEARLY PROVIDES THAT IF VARIATION BETWEEN THE ARMS LENGTH PRICE DETERMINED BY THE AUTHORITIES AND THE PRICE AT WHICH THE TRANSACT ION TOOK PLACE DOES 5 NOT EXCEED 5%, THEN THE ACTUAL PRICE SHALL BE TAKEN TO BE THE ARMS LENGTH PRICE. 13. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTE D THE ORDER OF THE CIT[A]. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT AS FAR AS ITEM PRESTOGEN D IS CONCERNED, IT WAS CLE ARLY FOUND BY THE LOWER AUTHORITIES THAT ASSESSEE HAS PURCHASED THE S AME AT US DOLLAR 1.99 PER UNIT IN COMPARISON TO US DOLLAR RS.1.65 PE R UNIT AT WHICH THE SUPPLIES WERE MADE TO OTHER CUSTOMERS. THOUGH IT WA S STATED THAT THIS IS BECAUSE OF THE DIFFERENCE AT THE POINT OF TIME W HEN THE ORDER WAS PLACED, BUT NO EVIDENCE WAS FILED BEFORE US, AND WH EN A SPECIFIC QUERY WAS RAISED IN THIS REGARD, LD. COUNSEL OF THE ASSES SEE SHOWED HER INABILITY TO PRODUCE ANY EVIDENCE. THEREFORE, CLEAR LY THE PRICE PAID BY THE ASSESSEE IN RESPECT OF THESE ITEMS IS ON HIGHER SIDE AND TPO HAS CORRECTLY DETERMINED THE ARMS LENGTH PRICE AND ACCO RDINGLY WE CONFIRM THE ADDITION IN RESPECT OF THIS ITEM. 15. AS FAR AS ITEM LUWAX OA PASTILLE IS CONCERNED, IT IS CLEAR THAT TO OTHER PARTIES THE PRICE CHARGED WAS 1.03 EURO WHERE AS THE PRICE CHARGED TO THE ASSESSEE WAS 1.05 US DOLLAR. FIRSTLY , SINCE DIFFERENT CURRENCIES ARE INVOLVED, THESE PRICES ARE NOT COMPA RABLE. IN ANY CASE, THE VALUE OF ONE EURO IS DEFINITELY MUCH MORE THAN THE VALUE OF ONE US DOLLAR DURING THE RELEVANT PERIOD AND EVEN TODAY, T HEREFORE, THE PRICE CHARGED TO THE OTHER PARTIES SEEMS TO BE HIGHER AND ACCORDINGLY NO ADJUSTMENT COULD HAVE BEEN MADE. THEREFORE, IN RESP ECT OF THIS ITEM, WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND DELETE THE ADDITION. 6 16. AS FAR AS LAST TWO ITEMS I.E. AMDEA 05 AND BUTY L, ACRYLATE IS CONCERNED, WE AGREE WITH THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE. SECOND PROVISO TO SEC.92C(2) READS AS UND ER: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRIC E SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER C ENT OF THE LATTER, THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HA S ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH P RICE. THE ABOVE CLEARLY SHOWS THAT IF THE DIFFERENCE IS L ESS THAN 5% THEN THE ACTUAL PRICE PAID SHOULD BE CONSIDERED AS ARMS LEN GTH PRICE. THE TPO AS WELL AS CIT[A] HAVE CLEARLY OBSERVED THAT DIFFER ENCE IN RESPECT OF THESE TWO ITEMS IS 4% AND, THEREFORE, SAME HAS TO B E RECKONED IN TERMS OF SECOND PROVISO. SIMILAR VIEW WAS TAKEN IN THE CASE OF SONY INDIA VS. DY. CIT BY DELHI BENCH OF THE TRIBUNAL [1 14 ITD 448]. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT[ A] AND DELETE THE ADDITION IN RESPECT OF THESE TWO ITEMS. THUS, THIS GROUND IS PARTLY ALLOWED. 17. GROUND NO.2 : THE LD. COUNSEL OF THE ASSESSEE FAIRLY ADMITTED THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF IPCA LA BORATORIES LTD. VS. DY. CIT [266 ITR 521] WHEREIN IT WAS HELD THAT DEDU CTION U/S.80HHC (1) COULD BE ALLOWED ONLY IF THERE WAS A POSITIVE P ROFIT. FURTHER, SEC.80AB HAS TO BE GIVEN AN OVER RIDING EFFECT AND ACCORDINGLY LOSSES HAVE TO BE REDUCED BEFORE GIVING DEDUCTION U/S.80HH C. THE HON'BLE SUPREME COURT AGAIN IN THE CASE OF OF CIT VS. SHIRK E CONSTRUCTION EQUIPMENT LTD. [291 ITR 380] HAS FURTHER HELD AS UN DER: SECTION 80AB OF THE INCOME-TAX ACT, 1961, SPECIFYI NG THAT PROFITS ARE THOSE AS DETERMINED FOR THE PURPOSE OF THE ACT, WIL L APPLY FOR 7 DETERMINING PROFITS FROM EXPORT BUSINESS FOR THE PU RPOSES OF THE DEDUCTION UNDER SECTION 80HHC. IN DETERMINING BUSINESS PROFITS FOR THE DEDUCTION U NDER SECTION 80HHC THE UNABSORBED BUSINESS LOSSES OF EARLIER YEARS UND ER SECTION 72 SHOULD BE SET OFF. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE DECID E THIS ISSUE AGAINST THE ASSESSEE. 18. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF JULY, 2010. SD/- SD/- (R.S.PADVEKAR) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 16 TH JULY, 2010. P/-*