CIBA INDIA LIMITED (THROUGH THEIR SUCCESSORS BASF INDIA LIMITED), MUMBAI V. ADDL CIT 9(1), MUMBAI

ITA 791/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75211 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 09-01-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 28-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts
• Section: 80HHC; 80IB

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , , !' , # $ BEFORE SHRI I.P. BANSAL, JM AND SHRI N.K. BILLAI YA, AM ./ I.T.A. NO. 791/MUM/2011 A N D ./ I.T.A. NO. 2537/MUM/2008 ( % % % % / ASSESSMENT YEAR : 2004-05 M/S. CIBA INDIA LTD (THROUGH THEIR SUCCESSORS BASF INDIA LTD), 1 ST FLOOR, VIBGYOR TOWERS, UNIT NO. 101, PLOT NO. C-62, G-BLOCK, BANDRA COMPLEX, BANDRA(E) MUMBAI-400 051 / VS. THE ACIT 9(1), AAYAKAR BHAVAN, MUMBAI-400 020 & # ./ '( ./ PAN/GIR NO. : AAACC 4147P ( &) / APPELLANT ) .. ( *+&) / RESPONDENT ) &) , / APPELLANT BY: SHRIPERCY PARDIWALA MS. AARTI SATHE SHRI ALIASGER RAMPURWALA *+&) - , / RESPONDENT BY: SHRI NEERAJA PRADHAN - ./# / DATE OF HEARING : 09.01.2014 01% - ./# / DATE OF PRONOUNCEMENT : 09.01.2014 2 / O R D E R PER N.K. BILLAIYA, AM: THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE TWO SEPARATE ORDERS OF THE LD. CIT(A), MUMBAI PERTAINING TO A. Y. 2004-05. AS BOTH CIBA INDIA LTD. 2 THESE APPEALS WERE HEARD TOGETHER THEY ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. ITA NO. 791/M/2011 2. THE ASSESSEE HAS RAISED 6 SUBSTANTIVE GROUNDS AN D ONE ADDITIONAL GROUND. GROUND NO. 1(A) READS AS UNDER: THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN EXCLUDING 90% OF THE FOLLOWING RECEIPTS WHILE WORKI NG PROFITS OF THE BUSINESS FOR THE PURPOSE OF CALCULAT ION OF DEDUCTION U/S. 80HHC OF I.T. ACT, 1961 BY HOLDING T HAT THEY ARE IN THE NATURE OF RECEIPTS MENTIONED IN EXPLANAT ION (BAA) TO SEC. 80HHC. S. NO. PARTICULARS AMOUNT (IN RS.) 1. CUSTOMERS BALANCES WRITTEN BACK DURING THE YEAR 1,32,202 2. EXPENSES RECOVERED FROM EMPLOYEES FOR CANTEEN EXPENSES 1,55,217 3. INCOME FROM OTHER SERVICES 4,69,650 4. INSURANCE CLAIM RECEIVED DURING THE YEAR AGAINST DAMAGE/LOSS OF COMPANYS GOODS 4,61,650 5. RECOVERY OF EXPENSES FROM EMPLOYEES 21,364 6. EXCESS PROVISION WRITTEN BACK 31,89,826 7. CASH DISCOUNT RECEIVED 33,895 8. REIMBURSEMENT OF EXPENSES RECEIVED FROM DIAMOND DYE-CHEM LTD 97,529 7. TECHNICAL SERVICES RECOVERED 23,62,415 8. OTHER MISCELLANEOUS INCOME 3,34,362 TOTAL 72,58,110 3. IT IS THE SAY OF THE LD. COUNSEL THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASS ESSEES OWN CASE IN ITA NOS. 7779 & 7780/M/10 AND 792/M/11. THOUGH THE LD. DEPARTMENTAL REPRESENTATIVE AGREED TO THIS BUT RELIED UPON THE D ECISION OF THE HONBLE CIBA INDIA LTD. 3 JURISDICTIONAL HIGH COURT IN THE CASE OF DAMODAR MA NGALJI MINING CO. TAX APPEAL NO. 26 OF 2006. 4. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES AND THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE . WE FIND THAT SIMILAR ISSUE CAME UP FOR HEARING BEFORE THE TRIBUNAL AND T HE TRIBUNAL HAS CONSIDERED THIS ISSUE AT PARA-18 ON PAGE-6 OF ITS O RDER AND AT PARA-23, THE TRIBUNAL HAS RESTORED THIS ISSUE BACK TO THE FILES OF THE AO WITH A DIRECTION THAT THE AO SHOULD VERIFY EACH ITEM BEFOR E COMING TO ANY CONCLUSION. RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNAL, WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO. TH E AO IS DIRECTED TO VERIFY EACH ITEM , DENOVO , AFTER CONSIDERING THE JUDICIAL DECISIONS AND THE DECISION RELIED UPON BY THE LD. DR. NEEDLESS TO ME NTION THAT THE AO SHALL GIVE A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 1(A) IS ALLOWED FOR STATISTICAL PURPOSE. 5. GROUND NO. 1(B) READS AS UNDER: WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED TH AT ONLY THE NET AMOUNT SHOULD BE EXCLUDED WHILE COMPUTING PROF IT OF THE BUSINESS FROM THE PURPOSE OF DEDUCTION UNDER S ECTION 80HHC 6. IN LINE WITH THE DIRECTION GIVEN FOR GROUND NO. 1(A), THE AO IS DIRECTED TO DECIDE THIS ISSUE IN THE LIGHT OF THE J UDICIAL DECISIONS AND THE DECISION RELIED UPON BY THE LD. DR AFTER GIVING A R EASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 1(B) IS ALLOWED FOR STATISTICAL PURPOSE. 7. GROUND NO. 2 READS AS UNDER: THE CIT(A) ERRED IN UPHOLDING THE ACTION OF AO IN NOT ALLOWING DEDUCTION U/S. 80HHC ON DEPB BENEFIT OF RS . CIBA INDIA LTD. 4 1,57,15,326/- ON THE GROUND THAT CONDITION FOR ALLO WANCE OF DEDUCTION U/S. 80HHC ON DEPB AS PROVIDED BY TAXATIO N LAWS AMENDMENT ACT, 2005 ARE NOT SATISFIED. 8. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THIS ISSUE HAS BEEN SETTLED AT REST BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TOPMAN EXPORTS 342 ITR 49. 9. WE FIND FORCE IN THE CONTENTION OF THE LD. SENIO R COUNSEL. WE, ACCORDINGLY RESTORE THIS ISSUE BACK TO THE FILE S OF THE AO. THE AO IS DIRECTED TO DECIDE THIS ISSUE AFRESH IN THE LIGHT O F THE DECISION OF THE HONBLE SUPREME COURT CITED HEREINABOVE. THIS GROU ND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 10. GROUND NO. 3 & 4 READ AS UNDER: 3. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF AO IN ADDING BACK REVERSAL OF PROVISION FOR CONTINGENCY AMOUNTING TO RS. 62,70,246/- 4. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF AO I N ADDING BACK REVERSAL OF PROVISION FOR DOUBTFUL DEBT S AMOUNTING TO RS. 1,61,79,542/- 11. THESE ISSUES HAVE BEEN DISCUSSED BY THE AO A T PARA-8.1 AND 9 OF THE ASSESSMENT ORDER. THE AO HAS OBSERVED THAT THE ASSESSEE HAS REVERSED PROVISIONS AND TRANSFERRED IT TO OTHER I NCOME BUT NOT OFFERED THE SAME TO TAX. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS NOT FURNISHED ANY YEAR-WISE OR AMOUNT-WISE DETAILS OF S UCH PROVISION NOR THE ASSESSEE HAS PROVED THAT THE REVERSAL OF PROVISION WAS OUT OF DISALLOWANCES MADE IN EARLIER YEARS. CIBA INDIA LTD. 5 12. THE LD. CIT(A) HAS CONSIDERED THE GRIEVANCE OF THE ASSESSEE VIDE GROUND NO. 8 & 9 OF HIS APPELLATE ORDER. IT IS THE CLAIM OF THE ASSESSEE THAT THE LOWER AUTHORITIES HAVE NOT APPRECIATED THE FACTS PROPERLY. 13. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTEN TION TO PAGES 21 TO 24 OF THE PAPER BOOK AND SUBMITTED THAT THE ASSESSE E HAS EXPLAINED HOW AND WHEN THE PROVISIONS HAVE BEEN CREATED AND HOW A ND WHEN THE SAME WERE REVERSED EXPLAINING THAT SINCE THEY WERE NOT C HARGED TO PROFIT AND LOSS ACCOUNT ANY REVERSAL WOULD NOT AMOUNT TO INCOM E OF THE ASSESSEE. 14. THE LD. DR STRONGLY SUPPORTED THE FINDINGS OF T HE LOWER AUTHORITIES. 15. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOW ER AUTHORITIES AND THE RELEVANT MATERIAL EVIDENCE BROUGHT ON RECORD. WE FIND FORCE IN THE CONTENTION OF THE LD. SENIOR COUNSEL. THE ISSUE NE EDS TO BE DECIDED AFRESH, THEREFORE WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO. THE AO IS DIRECTED TO VERIFY THE DETAILS FURNISHED BY T HE ASSESSEE. THE ASSESSEE IS DIRECTED TO EXPLAIN ITS CLAIM BY BRINGI NG COGENT MATERIAL EVIDENCES ON RECORD. THE AO IS EXPECTED TO GIVE A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 3 & 4 IS ALLOWED FOR STATISTICAL PURPOSE. 16. GROUND NO. 5 & 6 READ AS UNDER: 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, AND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE AO OF RS. 75,93,810/- BY ADOPTING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING THE ARMS LENGTH PRICE IN CIBA INDIA LTD. 6 RESPECT OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY TO ASSOCIATED ENTERPRISES (AES) INSTEAD OF COMPARABLE UNCONTROLLED METHOD (CUP) AS APPLIED BY THE APPELLANT. 6. WITHOUT PREJUDICE TO GROUND NO. 5, THE LD. CIT(A ) ERRED IN DISREGARDING THE SCHEME OF ARRANGEMENT APPROVED BY THE HONBLE HIGH COURT AND THE APPROVAL GRANTED BY THE RESERVE BANK OF INDIA, WHILE DETERMINING THE ARMS LENGTH NATURE OF THE ROYALTY PAYMENT. 17. THESE GROUNDS RELATE TO TRANSFER PRICING ADJUST MENT. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL V IDE ITA NOS. 7779 & 7780/M/10 AND 792/M/11. 18. THE LD. DR FAIRLY CONCEDED TO THIS. 19. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOW ER AUTHORITIES AND THE ORDER OF THE TRIBUNAL (SUPRA). WE FIND THAT SI MILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL AT PARA-3 ON PAGE-2 OF I TS ORDER AND AT PARA-9 ON PAGE-4, THE TRIBUNAL HELD AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUS ED THE ORDERS OF THE LOWER AUTHORITIES AND ALSO THE RE LEVANT MATERIAL EVIDENCE BROUGHT ON RECORD IN THE FORM OF PAPER BOO K. WE HAVE ALSO BENEFIT OF GOING THROUGH THE DIRECTIONS ISSUED BY THE DRP FOR AY 2006-07. WE FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL THAT IN SUBSEQUENT YEAR THE DRP HAS ACCEPTED THE CU P METHOD AS THE MOST APPROPRIATE METHOD. THE DRP THUS HAS DI RECTED THE TPO AS UNDER: THE FACTS OF THE CASE HAVE BEEN CONSIDERED BY THE DRP. IT IS SEEN THAT THE ASSESSEE ON THE BASIS OF ITS OWN SEAR CH FROM THE DATABASE HAS FOUND OUT THE FOLLOWING CUP: CIBA INDIA LTD. 7 (I) 4.46% ON EXPORT SALES AND (II) 4.01% ON DOMESTIC SALES. AGAINST THIS APPROACH OF THE ASSESSEE, THE TPO HAS PLACED RELIANCE ON TNMM WITHOUT ANALYZING THE SUITABILITY OR GIVING ANY SPECIFIC REASONS FOR REJECTION OF THE CU P PROVIDED BY THE ASSESSEE. THE A.O. ON THE BASIS OF TNMM ANALYSIS, HAS COME TO A CONCLUSION THAT IN ORDER TO BE ABLE TO ACHIEVE COMPARABLE MARGIN OF 5.83%, THE EXPENSE WIL L HAVE TO BE REDUCED AND ON THAT BASIS THE ROYALTY WILL HA VE TO BE DETERMINED AT NIL VALUE. THE METHOD ADOPTED BY TH E TPO IS NOT REASONABLE IN AS MUCH AS THE REQUIRED REDUCTION IN THE COST CANNOT BE MADE ONLY IN RESPECT OF ONLY ONE INT ERNATIONAL TRANSACTION, WHEREAS THE ASSESSEE HAS ENTERED INTO AS MANY AS 16 INTERNATIONAL TRANSACTIONS. IT IS ALSO SEEN T HAT THE TPO HAS ACCEPTED THE CUP METHOD IN RESPECT OF AGENCY COMMISSION. THEREFORE, IT DOES NOT APPEAR REASONABL E TO TREAT THE VALUE OF ROYALTY AT NIL ON THE BASIS OF COMPARABLE MARGIN. SINCE THE CUP METHOD HAS ALREADY BEEN ACCEP TED IN THE CASE OF AGENCY COMMISSION AND OTHER CHARGES, TH E TPO IS DIRECTED TO EXAMINE THE CUP AS OFFERED BY THE AS SESSEE IN ITS TP REPORT AND ADJUSTMENT IF ANY REQUIRED SHOULD BE MADE ON THAT BASIS. 20. FACTS AND ISSUES BEING IDENTICAL, RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNAL, WE DIRECT THE AO TO EXAMINE THE CU P OFFERED BY THE ASSESSEE IN ITS TP REPORT AND ADJUSTMENTS, IF ANY, REQUIRED SHOULD BE MADE ON THAT BASIS. 21. SINCE GROUND NO. 6 IS AN ALTERNATIVE PLEA WITHO UT PREJUDICE TO GROUND NO. 5 IN THE LIGHT OF OUR FINDING FOR GROUND NO. 5 GRIEVANCE RAISED VIDE GROUND NO. 6 BECOMES OTIOSE. 22. THE ADDITIONAL GROUND RAISED BY THE ASSESSEE RE ADS AS UNDER: CIBA INDIA LTD. 8 THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO , IN REDUCING THE AMOUNT OF DEDUCTION U/S. 80IB OF THE I .T. ACT, 1961 WHILE COMPUTING PROFITS OF THE BUSINESS FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80HHC OF THE ACT . 23. THE SENIOR COUNSEL FOR THE ASSESSEE POINTED OUT THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HONB LE JURISDICTIONAL HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES 333 ITR 42 24. THE LD. DR FAIRLY CONCEDED. 25. CONSIDERING THE DECISION OF THE HONBLE JURISDI CTIONAL HIGH COURT, WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO. THE AO IS DIRECTED TO DECIDE THIS ISSUE AFRESH IN THE LIGHT OF THE DECISI ON OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA). 26. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 2537/MUM/08 27. THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO T HE ADDITION OF THE REVERSAL OF PROVISION FOR BAD AND DOUBTFUL DEBTS AN D FOR CONTINGENCIES. 28. WE HAVE DISCUSSED THIS ISSUE AT LENGTH IN ITA N O. 791/M/2011 VIDE GROUND NO. 3 & 4. IN THE LIGHT OF OUR FINDING S IN THE SAID APPEAL, THIS GRIEVANCE OF THE ASSESSEE BECOMES OTIOSE. THE GRO UND RAISED BY THE ASSESSEE IS DISMISSED. CIBA INDIA LTD. 9 29. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 791/M/2011 IS ALLOWED FOR STATISTICAL PURPOSE AND I TA NO. 2537 FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09.01.2014 . 2 - 1% # 3 45 09.01.2014 1 - 6 SD/- SD/- (I.P. BANSAL ) (N.K. BILLAIYA) /JUDICIAL MEMBER # / ACCOUNTANT MEMBER MUMBAI; 4 DATED 09.01.2014 . . ./ RJ , SR. PS 2 2 2 2 - -- - *. *. *. *. 7%. 7%. 7%. 7%. / COPY OF THE ORDER FORWARDED TO : 1. &) / THE APPELLANT 2. *+&) / THE RESPONDENT. 3. 8 ( ) / THE CIT(A)- 4. 8 / CIT 5. 96 *. , , / DR, ITAT, MUMBAI 6. 6: ; / GUARD FILE. 2 2 2 2 / BY ORDER, +. *. //TRUE COPY// < << < / = = = = ' ' ' ' (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI