Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH I-1: NEW DELHI
BEFORE SHRI H. S. SIDHU, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 3738, 3739/Del/2016
(Assessment Year: 2010-11, 2011-12)
Dharampal Satyapal Ltd, Vs. DCIT,
1711, S. P. Mukherjee Marg, Central Circle-29,
Delhi New Delhi
PAN: AAACD0132H
(Appellant) (Respondent)
ITA No. 3882 & 3883/Del/2016
(Assessment Year: 2010-11 & 2011-12)
DCIT, Vs. Dharampal Satyapal Ltd,
Central Circle-29, 1711, S. P. Mukherjee Marg,
New Delhi Delhi
PAN: AAACD0132H
(Appellant) (Respondent)
Assessee by : Shri R. S. Singhvi, CA
Shri Satyajit Goel, CA
Revenue by: Shri Sanjay I Bara, CIT DR
Date of Hearing 13/02/2019
Date of pronouncement 18/04/2019
ORDER
PER PRASHANT MAHARISHI, A. M.
1. These are four cross appeals filed by Assessing Officer i.e. Deputy
Commissioner of Income tax, Central Circle 4, New Delhi [ Ld AO]
and assessee, M/S Dharampal Styapal Limited for two assessment
years i.e. AY 2010-11 and 2011-12, involving similar issues.
Therefore, arguing counsels of both sides argued them together and
hence, for sake of convenience, all these four appeals are disposed of
by this common order.
Page | 1
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
2. Coming to assessment year 2010 11, in ITA number 3738/Del/2016 is
preferred by Assessee against consolidated order passed by learned
Commissioner Of Income Tax (Appeals) 44, New Delhi dated
29/2/2016 for assessment year 2005 06 to 2011 12 raising
following grounds of appeals
1 (i) That on facts and circumstances of case, Ld. CIT(A)
has erred in upholding validity of issue of notice u/s 153A of I.T.
The Act, 1961 and consequential assessment even though it is not
based on any incriminating material seized during course of
search.
(ii) That on similar facts, reassessment proceedings u/s 147 for
AY 2004-05 were quashed by Hon`ble ITAT vide its order dated 8th
January 2016 on ground that there was no tangible/incriminating
material and as such on parity of reasoning and principle laid
down, there is no legal basis for assuming jurisdiction u/s 153 A of
I.T. Act, 1961.
(iii) That scope of proceedings u/s 147 being wider than 153A, in
absence of any incriminating material, proceedings u/s 153A are
illegal and invalid.
(iv) That in absence of pending assessment proceedings and
existence of tangible material, there is no case of abatement of
completed proceedings and assumption of jurisdiction u/s 153 A of
I.T. Act, 1961.
(v) That reference to special auditor u/s 142(2A) is illegal and
uncalled for and report of special auditor cannot be a basis for any
addition and disallowance as scope of section 153 A is confined to
incriminating material.
(vi) That even otherwise, various additions and disallowances in
relation to proceedings u/s 153A were merely on basis of change of
opinion and reappraisal of facts existed and examined during
original assessment proceedings, same are beyond jurisdiction and
Page | 2
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
scope of assessment u/s 153 A of The Act since impugned
additions and disallowances are not based on any incriminating
material.
(vii) That in absence of any incriminating material, it is not open to
disregard settled issues as per original assessment and appellate
proceedings in context of scope and scheme of section 153A of
The Act.
2(i). That on facts and circumstances of case, Ld. CIT(A) was not
justified in confirming disallowance of Rs. 33,90,712/- u/s 40A(3)
of I.T. The Act, 1961.
(ii). That even otherwise, payment is covered under exception in
clause (k) of Rule 6DD and as such there is no case of any default of
u/s 40A(3) of I.T. Act, 1961.
3(i). That on facts and circumstances of case, Ld. CIT(A) was not
justified in confirming disallowance of Rs. 25,000/- on ground of
non-deduction of TDS u/s 40(a)(ia) of I.T. Act, 1961.
(ii) That there is no case of applicability of TDS provisions on
nature of payments and as such disallowances u/s 40(a)(ia) is
illegal, arbitrary and without any ground or basis.
(iii) That in any case, impugned disallowance is without
appreciating proviso to section 201(1) of I.T. Act, 1961.
4. That finding of conclusion of CIT(A) in respect of value of work
in progress is illegal and arbitrary as valuation of work in progress is
based on regular system of accounting and based on legal and
accounting principles.
5(i) That CIT(A) having accepted claim of assessee that there is
no case of any disallowance of interest paid on borrowed funds to
extent of Rs. 2,02,14,239/- u/s 36(l)(iii), it is not open to issue
direction for charge of interest on notional basis in respect of
advances to sister concerns for purpose of business.
Page | 3
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
(ii) That these directions are illegal, arbitrary and beyond
jurisdiction.
6(i). That on facts and circumstances of case, Ld. CIT(A) was not
justified in restricting disallowance to Rs. 4,37,504/- u/s 14A
without appreciating that impugned disallowance is without
recording satisfaction in terms of provisions of section 14A(2) of
The Act.
(ii) That appellant has not incurred any expenditure for earning of
exempt income and as such provisions of section 14A are not
applicable to facts of case.
7(i). That on facts and circumstances of case, Ld. CIT(A) was not
justified in confirming disallowance of Rs. 17,58,546/- on account
of excess claim of deduction u/s 80IB/IC on alleged ground that
appellant had violated provisions of section 80IA(5) in as much as
business losses pertaining to financial year 2001-02 and 2002-03
had not been taken into account while computing deduction under
section 80IB/IC of The Act.
(ii) That action of lower authorities is illegal, arbitrary and without
jurisdiction as same is not in conformity with provisions of section
153 A of The Act.
8(i). That on facts and circumstances of case, Ld. CIT(A) was not
justified in upholding disallowance of deduction u/s 80IB/80IC on
ground that fair market value of goods transferred from Noida
division to eligible units is higher in terms provisions of section
80IA(8) read with 80IB( 13) and 80IC(7) of The Act as follows :
a. In respect of unprocessed goods, by restricting profit markup
to extent of 2% instead of 10% as computed by assessing officer.
b. In respect of processed Kathha (Catechu), by confirming
valuation done by assessing officer and upholding mark up of
Page | 4
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
manufacturing expenses and profit rate @ 37.85% and 10%
respectively.
c. In respect of processed Cardamom (Elaichi), by confirming
valuation done by assessing officer and upholding mark up of
manufacturing expenses and profit rate @ 37.85% and 10%
respectively.
(ii) That AO and CIT(A) have erred in attributing direct and
indirect manufacturing costs to cost of goods procured and
transferred to eligible units.
(iii) That AO and CIT(A) were not justified in applying mark up rate
of profit @10% on value of goods so transferred and same is
highly arbitrary and without any basis.
(iv) That adjustment of cost and consequential claim of deduction
u/s 80IB/80IC is illegal, arbitrary and based on conjectures and
surmises.
(v) That action of lower authorities is illegal, arbitrary and without
jurisdiction as same is not in conformity with provisions of section
153 A of The Act.
9(i). That on facts and circumstances of case, Ld. CIT(A) was not
justified in confirming disallowance of deduction under section
80IB/IC by applying provisions of section 80IA(8) read with 80IB(13)
and 80IC(7) of The Act, on ground that rate of technical know-
how fee on value of goods transferred from perfumery division to
eligible unit should be @2.75% as against 2.5% declared by
appellant.
(ii) That adjustment of cost and consequential claim of deduction
u/s 80IB/80IC is illegal, arbitrary and based on conjectures and
surmises.
Page | 5
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
(iii) That action of lower authorities is illegal, arbitrary and
without jurisdiction as same is not in conformity with provisions of
section 153 A of The Act.
10(i). That on facts and circumstances of case, Ld. CIT(A)
was not justified in upholding disallowance of deduction u/s
80IB/80IC to extent of Rs 3,50,357/- by increasing value of goods
transferred from Canpack division to eligible units on ground that
fair market value of goods transferred is higher in terms provisions
of section 80IA(8) read with 80IB(13) and 80IC(7) of The Act.
(ii) That profit mark up rate of 10% is highly arbitrary and
without any valid basis or justification.
(iii) That adjustment of cost and consequential claim of deduction
u/s 80IB/80IC is illegal, arbitrary and based on conjectures and
surmises.
(iv) That action of lower authorities is illegal, arbitrary and without
jurisdiction as same is not in conformity with provisions of section
153 A of The Act.
11(i). That on facts and circumstances of case, Ld. CIT(A)
was not justified in restricting disallowance of deduction under
section 80IB/IC by applying provisions of section 80IA(8) read with
80IB(13) and 80IC(7) of The Act, on account of re-computation of
profits of eligible undertaking, by increasing value of common
costs incurred at corporate office, depots, branches, etc. and
allocated to such units in an appropriate ratio, with profit margin of
10% as against 26.14% applied by AO.
(ii) That Ld. CIT(A) was not justified in holding that various
corporate services rendered by corporate office, depots, branches,
etc. to eligible undertakings, should have been allocated to eligible
units at fair market price/cost plus appropriate mark-up for
Page | 6
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
purposes of computing deduction under section 80IB/IC read with
section 80IA(8) of The Act.
(iii) That Ld. CIT(A) has failed to appreciate that no services were
rendered by other divisions, viz., corporate office, depots, branches,
etc., to eligible undertakings, but expenses were incurred by such
divisions on behalf of eligible undertakings, which was
subsequently allocated to such eligible units.
(iv) That adjustment of cost and consequential claim of deduction
u/s 80IB/80IC is illegal, arbitrary and based on conjectures and
surmises.
(v) That action of lower authorities is illegal, arbitrary and without
jurisdiction as same is not in conformity with provisions of section
153 A of The Act.
12(i). That on facts and circumstances of case, Ld. CIT(A)
was not justified in confirming disallowance of deduction u/s
80IB/80IC to extent of RS.3,95,71,939/- by applying provisions of
section 80IA(8) read with 80IB(13) and 80IC(7) of The Act on
ground that eligible undertakings should have paid royalty to Head
Office for using brand Rajnigandha`, allegedly owned by Head
Office.
(ii) That Ld. CIT(A) was not justified in holding that brand
Rajnigandha` was owned by head-office and not by eligible
undertakings and as such eligible units should pay royalty for
usage of same.
(iii) That adjustment of royalty and consequential claim of
deduction u/s 80IB/80IC is illegal, arbitrary and based on
conjectures and surmises.
(iv) That action of lower authorities is illegal, arbitrary and without
jurisdiction as same is not in conformity with provisions of section
153 A of The Act.
Page | 7
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
13(i). That Ld. CIT(A) erred on facts and in law in sustaining
disallowance of purchase of sandalwood oil to extent of Rs
54,94,24,290/- holding same to be bogus.
(ii) That Ld. CIT(A) erred on facts and in law in endorsing
allegation of assessing officer that bogus bills were obtained by
appellant from two companies, viz., M/s. SurvaVinayak Industries
Limited (in short SVIL`) and M/s. Allied Perfumery Private Limited
(in short APL`) , in order to inflate purchase of sandalwood oil.
(iii) That Ld. CIT(A) erred on facts and in law in endorsing
allegation of assessing officer that cash was received by appellant
from above two concerns, that too, on basis of erroneous
inferences/ assumptions on basis of certain seized documents.
(iv) That Ld. CIT(A) erred on facts and in law in relying upon ex-
parte statements/ materials collected behind back of appellant,
without allowing cross-examination and/ or confronting same to
appellant, in gross violation of principles of natural justice.
(v) That Ld. CIT(A) erred on facts and in law in endorsing
allegation of assessing officer that appellant obtained bogus bills
towards purchase of sandalwood oil in order to reduce taxable
income.
14(i). That on facts and circumstances of case, LD. CIT(A)
was not justified in confirming transfer pricing adjustment of Rs.
5,95,51,686/- to arm`s length price of interest received from loan
advanced to associated enterprise by relying on TPO`s order.
(ii) That CIT(A), assessing officer and TPO has erred on facts and
in law in applying interest rate of 16.31% p.a. on basis of SBI
prime lending rate + 400bps on loan advanced by appellant to
its wholly owned subsidiary, namely, DS Business AG as against
interest at rate of 3% p.a. charged by appellant.
Page | 8
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
(iii) That CIT(A), assessing officer and TPO has erred on facts and
in law in considering average Prime Lending Rate of SBI as arms
length rate of interest without appreciating that such rate is
applicable on loans availed in India in domestic currency.
(iv) That loan was advanced by appellant to its associated
enterprise in foreign denominated currency and accordingly LIBOR
rates prevailing in international market should be considered for
benchmarking and not SBI prime lending rate.
15(i) That lower authorities have erred in charging interest
u/s. 234A, 234B & 234C of The Act without application of mind.
(ii) That charge of interest is not justified on facts and under
law.
3. Ld AO has raised following grounds of appeal in ITA No.
3882/Del/2016 for Assessment Year 2010-11:-
"1. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting reduction of claim u/s
80IB/80IC of Rs. 10,17,34,012/- made by AO by increasing
value of goods transferred from Noida units to eligible units
treating them processed goods and by reducing 80IB/80IC to that
extent.
2. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in directing AO to calculate royalty @ 2.5%
of raw material without excise duty as against 3%, rate approved
by Min. of Company Affairs in respect of goods transferred from
,,perfumery division to eligible units.
3. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting reduction of claim u/s
80IB/801C of Rs. 3,27,04,671/- made by AO by taking into
account expenditure (depreciation of fixed assets of corporate office
Page | 9
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
and expenses of depots) of Rs. 3,27,04,671/- incurred by
businesses of assessee for providing services to eligible
undertakings which has not been allocated to eligible
undertakings and by reducing deduction u/s 80IB/80IC of The
Act, to that extent.
4. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting reduction of claim u/s
80IB/80IC of Rs. 15,08,36,977/- made by AO by taking into
consideration fair market value of services obtained by eligible
undertakings from corporate offices, depot, and branches etc.
thereby re-computing profits of eligible undertakings resulting in
reducing of deduction 80IB/80IC to that extent.
5. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting reduction of claim u/s
801B/801C of Rs. 6,90,85,390/- thus ignoring fact that royalty
payment @3% which was made to sister concern taken by AO was
rate approved by Regional Director.
6. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting reduction of claim u/s
80IB/80IC of Rs. 22,95,045/- made by AO on account of
processing charges of betel nut @3% in place of 2.5% taken by
assessee, thus ignoring fact that processing-charges (2)3%
which was made to sister concern taken by AO was rate
approved by Regional Director.
7. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in allowing amount of Rs.il,46,248/- on
account of excise duty refund for computation of deduction u/s
801C.
8. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in ^ law & on facts in deleting addition of Rs. 19,34,839/-
made by AO on account of prior period expenses.
Page | 10
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
9. Whether on facts & in circumstances of case, Ld. CIT(A) has
erreu in law & on facts in deleting addition of Rs. 2,63,45,007/-
made on account of foreign exchange fluctuation, thus ignoring
provision of AS-11.
10. Whether on facts & in circumstances of ease, Ld. CIT(A) has
erred in law & on facts in deleting disallowance of
Rs.4,98,31,329/- made by AO on account section 14A of Income
Tax The Act, 1961 and thus restricting disallowance to extent of
exempt income.
11. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in directing to take basis of calculation
from lowest purchases from third party, thus ignoring facts and
evidences of bogus purchases unearthed during course of search
and post search proceedings.
12. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting addition of Rs. 3,87,876/- made
on account of lesser rate of job work charged from sister concerns
in comparison to other related parties.
13. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in holding that profit arising out of sale of
shares of M/s Coastal Project (P) Ltd. pertains to M/s S.R. Credits
(P) Ltd. and not to assessee company, thus, ignored colourable
device adopted by assessee to avoid taxes.
14. That order of CIT(A) is perverse, erroneous and is not tenable on
facts and in law.
15. That grounds of appeal are without prejudice to each other."
4. Narrating facts, assessee appellant is a company engaged in
business of manufacturing and trading in pan masala, Guthkha, zarda
, perfumery compounds and herbs, mouth freshener, salt, spices, snack
food, natural spring water and processing of silver etc. assessee filed
Page | 11
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
its return of income on 31/9/2010 declaring total income of INR
34,12,08,416/ however since minimum alternate tax liability u/s
115JB of The Act was higher, assessee paid tax on book profit of INR
1,37,77,57,881/. Meanwhile search and seizure operations in terms of
provisions of section 132 of The Act were carried out at premises of
appellant company and other group concerns on 21/1/2011. Therefore,
consequent to search, AO issued notice under section 153A of The
Act on 9/1/2012. On 22/2/2012, assessee offered original return filed
under section 139 (1) of The Act as return of income under section
153A of The Act. learned AO noted that there is a complexity in
books of accounts of appellant and therefore he passed an order u/s
142 (2A) of The Act pointing a special auditor to conduct audit of
books of accounts of assessee. Such special audit was conducted an
audit report was filed with AO on 15/1/2013. Consequently, AO
issued questionnaire based on audit report on 10/12/2013, which was
replied by assessee. Hence after considering replies of assessee
learned AO passed an order u/s 153A of The Act on 26/5/2014
determining total income of appellant at INR 1, 89, 55, 39, 637/
under normal computation provisions and determined book profit u/s
115JB of The Act at INR 1, 37, 77, 57, 881/ making various
disallowances and additions. assessee aggrieved with order of
learned AO preferred an appeal before learned CIT A, who passed an
order on 29/2/2016 for assessment year 2005 06 to 2011 12 by way
of a consolidated order partly allowing appeal of assessee and partly
confirming certain additions/disallowances. Therefore, AO as well as
assessee aggrieved with his order, have filed these appeals before
coordinate bench.
5. We come to appeal of assessee where ground number 1 of appeal
challenges validity of issuance of notice u/s 153A of The Act and
consequential assessments made by learned assessing officer. As per
this ground, assessee says that when 147 for assessment year 2004
05 were quashed by coordinate benches jurisdiction u/s 153A of
Page | 12
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
The Act also does not survive. It was further mentioned that in absence
of any incriminating material, proceedings under section 153A are
illegal and invalid , assessee also challenged audit under section 142
(2A) of The Act and further stated that even otherwise various
additions and disallowances in relation to proceedings under section
153A were merely made on basis of change of opinion and reappraisal
of same facts which existed and examined during original assessment
proceedings.
6. At time of hearing learned authorised representative did not press
ground number 1 of appeal. Hence, it is dismissed.
7. Second ground of appeal is with respect to disallowance u/s 40A (3) of
The Act amounting to Rs 33,90,712/. learned assessing officer noted
that special auditor has reported that expenses aggregating to INR
33,90,712/ have been made in violation of provisions of section 40A
(3) of The Act. In submission of assessee, there was no denial of fact
that cash expenditure in excess of INR 20,000/- has been made.
However assessee submitted that said payment have been made
which are covered under rule 6DD of income tax rules as expenditure
was incurred by staff and later on adjusted reimbursed to payee. As
per detailed produced by assessee, said expenditure has been
incurred which does not fall in any of exceptions provided under rule
6DD of IT rules and therefore learned assessing officer disallowed
same applying provisions of section 40A (3) of The Act holding that
there is a contravention of above provision.
8. Learned CIT A dealt with above disallowance as per para number 6.3
of his order. He confirmed disallowance holding that employees are
not agent of assessee company therefore; reimbursement of such
expenses to employee of travelling etc. cannot be said that payment
is made through an agent.
9. Learned Authorised representative vehemently stated before us that
cash payments have been made for purpose of purchase of Silver from
MMTC to extent of Rs. 24,24,212/- and balance payment of Rs.
Page | 13
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
9,66,500/- is towards reimbursement of travel expenses to employees of
company. Details of cash payment are placed at Page 1 of
Supplementary paper book 2. Disallowance is merely on ground that
payments have been made in contravention of section 40A(3) of The
Act. It is relevant to submit that aggregate cash payment of Rs.
24,24,212/- has been made to MMTC which is Government of India
undertaking for purchase of silver and as such provisions of section
40A(3) read with Rule 6DD are not applicable. It may be appreciated
that since payment is directly made to Central government
undertaking, same is to be considered as legal tender. He further relied
up on judicial precedents of M.R. Soap (P.) Ltd. v. IAC
[1988] 32 TTJ (Delhi) 505, Kamta Prasad Mittal v. DCIT (ITAT Lucknow)
(ITA No.1 45/LKW/15)(dated 21/02/18) where cash Payment made to
BSNL cannot be disallowed u/s 40A(3). CIT v. Devendrappa M. Kalal
[2013] 219 Taxman 122 (Kar) . Hence he submitted that this being well
established principle, there is no case of any disallowance u/s 40A(3)
read with rule 6DD(b) of The Act.
10. With regards to reimbursement of expenses to extent of Rs. 9,66,500/-
to employees, it is submitted that such reimbursement was towards
accumulated bills of tour and travels and individual bills being less
than Rs. 20,000/-, there is no case of breach of provisions of section
40A(3) of The Act. In this connection, reference may be made to
decision of Delhi tribunal in case of ACIT v. Nirman Associates (Del
ITAT) (ITA No. 4272/D/11). In light of facts and legal position clarified
above, disallowance u/s 40A(3) is not sustainable and may kindly be
deleted.
11. Learned CIT DR vehemently supported order of lower authorities and
referred to special audit report wherein such disallowance is proposed.
He further submitted that reimbursement of expenditure in Cash more
than INR 20,000 is also in violation of provisions of section 40A (3) of
Page | 14
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
The Act and therefore lower authorities has correctly applied
provision of law in considering disallowance.
12. We have carefully considered rival contention and perused orders of
lower authorities. We have also perused audit report u/s 142 (2A) of
The Act. Assessee has made cash payment in excess of INR 20,000/- on
11 occasions for purchase of silver from Mineral And Metal Trading Corp
(MMTC) amounting to INR 2424212/ and also made reimbursement to
various employees of INR 9 66500/. Therefore assessee has made a
total payment of Rs 3390712/- in excess of INR 20,000 each and
therefore auditor reported same as disallowable u/s 40 A (3) of The
Act. claim of assessee is that payment of INR 2424212/ has been
made to a government agency and therefore it cannot be disallowed, as
there is no doubt about genuineness of payment. payment is
supported by receipt from mineral and metal trading Corp for purchase
of silver to be used in business of assessee. However, on careful
consideration of details of payment made we find that mineral and
metal trading Corp is though a government undertaking but a public
listed company, therefore it cannot be said that payment is made to
government. Further, no business exigency or any other situation
falling in to exception of rule 6DD was shown. Further the question of
genuineness does not determine the disallowance u/s 40A (3) of the Act.
Non genuine expenses as such are not allowable u/s 28 of the Act and
therefore same cannot be question u/s 40A (3) of the Act. In view of
this we do not find any infirmity in confirming disallowance of INR
2424212/ u/s 40A (3) of The Act.
13. With respect to amount reimbursed to various employees, it was
stated that this is reimbursement of tour bill of employees however,
none of amount of bill is in excess of INR 20,000. It was stated that
payment is made to various employees on that particular date which is
in excess of INR 20,000/- , however, none of bills which has been
supported for expenditure exceeds INR 20,000. For purpose of
disallowance u/s 40 A (3) of The Act both expenditure and payment
Page | 15
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
should exceed INR 20,000/-. As in case of reimbursement of tour bills
to various staff each expenditure does not exceed INR 20,000/- ,
disallowance of INR 966500/ under section 40A (3) is unwarranted.
Revenue has not pointed out that any of such expenditure and payment
both exceeds specified limit. In view of this, ground number 2 of appeal
of assessee is partly allowed.
14. Assessee did not press ground number 3 of appeal being disallowance of
INR 25,000 on ground of non-deduction of tax at source. Accordingly, it
is dismissed.
15. Ground number 4 of appeal is with respect to valuation of work in
progress. learned assessing officer in para number 23 25 of
assessment order noted that special auditor reported that assessee
company has not classified its inventory as per requirement of
schedule VI of Companies The Act, 1956. He observed that assessee
company has not included in valuation of work in progress, indirect
cost like manufacturing expenses, power and fuel, direct labor etc. and
fixed and variable overheads like depreciation in plant and machinery,
factory building, factory management, administration costs and other
indirect costs incurred for conversion of stock in trade. Therefore,
learned assessing officer noted that valuation of work in progress in
form of semi finished goods and unpacked finished goods resulting in
under valuation of inventory is of INR 31639765/- resulting in
understatement of income to that extent. Unit wise details of
valuation of working progress in form of semi finished goods and for
unpacked goods was given as per para number 10 of audit report.
Learned AO noted that difference in valuation of opening inventory of
work in progress after loading of indirect cost as per accounting
standard 2 was Rs. 28766959/-, hence, it resulted into net
understatement of profit of Rs. 2872806/. Assessee explained before
assessing officer that company has valued its inventory as per
accounting policy adopted as per accounting standard two issued by
ICAI. It was further stated that assessee has already included cost of
Page | 16
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
conversion and cost related to freight, insurance, and job work charges
in valuation of raw materials and further sample copy of valuation
sheet was provided. It was further shown that certain indirect
expenditure is also considered by special auditor cannot form part of
valuation of inventory as per accounting standard two of ICAI.
Therefore, it was stated that no adjustment because of valuation of
closing stock should be made. Assessee further stated that issue is
decided in favour of assessee on this aspect for assessment year 2004
05. Learned AO rejected explanation of assessee and relied upon
audit report of special auditor. He therefore made addition of Rs
2872806/. It was confirmed by learned CIT A.
16. Learned authorised representative submitted that it is relevant to
mention that appellant assessee has valued closing stock in
accordance with guidelines laid down by AS-2 and it has been
consistently followed in all years. Same system has been followed for
valuation of opening stock and fact that closing stock of year under
reference has been carried forward as opening stock of next year; there
is even otherwise no adverse revenue implication. Further,
observations of Special auditor are arbitrary and seek to include other
indirect costs in valuation of closing stock, which is illogical and
contrary to accounting standard. He further submitted that in any case,
assessing officer himself has accepted valuation of closing stock in AY
2013-14 onwards and no addition has been made in this regard. In
these circumstances, addition in present year is inconsistent and not
based on correct appreciation of facts of case and valuation of stock
done by assessee, which is as per AS-2. Factual position to this effect
is supported from assessment order for AY 2013-14 wherein no addition
on this issue has been made. He submitted that even otherwise, in case
any change is made to method of valuation of closing stock,
corresponding effect has to be given to value of opening stock as well
and as such action of assessing officer is only enhancing value of
closing stock is mechanical and against principle laid down by Hon`ble
Page | 17
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Delhi High Court in case of CIT v. Mahavir Alluminium Ltd. (2008)297
ITR 77 (Del) in which it was held as under:
"We are of opinion that in present case, there is no question of any double benefit
being given to assessee. Paragraph 23.13 of guidance note itself makes it clear that
whenever any adjustment is made in valuation of inventory, this will affect both
opening as well as closing stock. It is also to be noted that if any adjustment is
required to be made by a statute, (as for example Section 145A of The Act), effect to
same should be given irrespective of any consequences on computation of income
for tax purposes. Section 145A of The Act begins with as non-obstante clause, and
therefore, to give effect to Section 145A of The Act, if there is a change in closing
stock as on 31st March, 1999, there must necessarily be a corresponding adjustment
made in opening stock as on 1st April, 1998.
17. He further submitted that Further, considering entirety of facts,
adjustment in value of opening and closing stock would be a revenue
neutral exercise and no fruitful purpose would be served in undertaking
such exercise. In this connection, reference may be made to decision of
Supreme Court in case of CIT v. Excel Industries Ltd. [2013] 358 ITR
295 where in it is held that Income-Tax department to not to indulge in
fruitless litigation where no loss of revenue is involved. In view of
factual and legal position clarified above, impugned addition is not
sustainable on facts and under law particularly when assessing
officer himself has accepted valuation of closing stock AY 2013-14.
18. Learned departmental representative relied upon orders of lower
authorities. However, he did not controvert that there is no change in
method of valuation of closing stock employed by assessee in
impugned assessment year as compared to assessment year 2013 14
and subsequently assessing officer has accepted method of valuation
adopted by assessee in subsequent years.
19. We have carefully considered rival contentions and perused orders of
lower authorities. It is apparent that method of valuation and its cost
components have been disputed by revenue in present year. However
subsequently from assessment year 2013 14 onwards method of
Page | 18
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
valuation and cost included in cost of inventory has not been
disputed by revenue and is accepted as correct. That be fact that in
subsequent year has cost component of valuation of closing stock
has been accepted, which is on identical basis as in impugned AY, it
shows that revenue has accepted same as correct in that year but has
disputed it for this year. Only basis is he audit report u/s 142 (2A) of
the Act. Learned departmental representative could not show us any
reason to show that how method of valuation of closing stock as well
as cost component included therein by assessee are different from
those were adopted for assessment year 2013 14. In view of above,
undisputed position that in subsequent years learned assessing officer
has accepted method of valuation as well as cost component included
for inventory valuation of inventory, addition made by learned
assessing officer in current year cannot be sustained. In view of this,
ground number 4 of appeal is allowed.
20. Ground number 5 of appeal of assessee is with respect to
disallowance of interest paid on borrowed funds to extent of INR 2
0214239/ u/s 36 (1) (iii) of The Act. Special auditor has pointed out
that though Assessee Company has claimed interest paid on
borrowed funds at higher rate of interest as business expenditure.
Assessee Company has given loans and advances to its group
companies out of borrowed funds without charging adequate interest in
some cases. Therefore, as interest charged from group companies are
lower than rate of interest paid by it on funds borrowed. Therefore,
special auditor noted that business expediency to borrow funds at
higher rate of interest paid to its other group concerns on funds
borrowed from them is not demonstrated. Hence it was reported that
total interest claimed by assessee company as business expenditure of
INR 20214239/ is not allowable. Reason being difference between
higher interest rate borrowing of funds by applying rate of interest
paid on funds borrowed and interest charged from group concerns at a
lower rate, which is not allowable as an expenditure to assessee under
Page | 19
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
provisions of section 36 (1) (iii) of The Act. On questioned by ld AO,
assessee explained that assessee has given above funds to group
companies out of retained earnings of assessee company and
borrowed funds have not been utilized. It was further stated that
borrowed funds have been utilized only for expansion of business. It
was further stated that rate of interest specified by special auditor is
also not correct. However, learned assessing officer rejected
contention of assessee and disallowed interest expenditure of INR 2
0214239/ holding that it has not been incurred wholly, necessarily
and exclusively for purpose of business of assessee company. When
this issue was agitated before learned CIT A, he upheld
disallowance. He held that he has perused bank statement contained
in paper book filed by assessee where loan were advanced to sister
concerns from cash credit account having negative balances.
Therefore, he held that immediate source for advancing loan to sister
concern and associated concerns are cash credit account borrowings
from bank. He further stated that as in assessment year 2004 05
amount is required to be disallowed as per interest paid to cash credit
account of bank of assessee. Accordingly, he upheld disallowance
partly.
21. Learned authorised representative vehemently contested disallowance
confirmed by learned CIT A and submitted that observation of ld
AO and CIT(A) are factually and legally incorrect and impugned
disallowance is on arbitrary and mechanical basis. It is submitted that
funds have been advanced to sister concerns on account of business
and commercial expediency, there is no case of any disallowance of
interest u/s 36(1)(iii) of The Act. It is relevant to note that appellant
assessee is engaged in variety of business segments and loans so made
to sister concerns are for purpose of advancing business interest of
assessee. There is no finding recorded by ld AO or CIT (A) that funds
have not been advanced for business purposes and disallowance is
merely on conjectures and surmises. He relied up on decision of Hon`ble
Page | 20
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Delhi High Court in case of Pr. CIT v. Reebok India Company[2018]
259 Taxman 100 (Delhi) & Honorable supreme court in Hero Cycles
(P) Ltd vs. CIT[2015] 379 ITR 347 (SC) , CIT Vs. S.A. Builders Ltd.
288 ITR 1 (SC). He further submitted that in any case, assessee has
substantial amount of own funds in form of share capital and reserves
out of which these advances were paid. This is corroborated from
balance sheet as well as statement of cash credit account. It may be
submitted that even CIT (A) has accepted fact that funds have been
given out of cash credit account after receiving sale proceeds from
customers and as such, there is no nexus between borrowed funds and
advances made to sister concerns. As per comparative chart and bank
statement placed at Page 2-21 of Supplementary Paper book - 2, he
submitted that it is self evident that appellant has substantial non-
interest bearing funds and it has to be presumed that business
advances to sister concerns amounting to Rs. 43 Cr was out of own
funds. Details of non-interest bearing funds submitted were as under
:
Share Capital Rs. 21,51,43,090/-
Reserves and Surplus Rs. 571,60,32,751/-
Total Rs. 593,11,75,841/-
22. He therefore submitted that position has to be examined in totality and
it is not open to consider entries in bank account in a distorted and
isolated manner. He further relied up on several judicial precedents as
under :
i. CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC)
ii. CIT Vs. Bharti Televenture Ltd. 51 DTR 98 (Del.)
iii. CIT Vs. Tin Box Co. 260 ITR 637 (Del.)
Page | 21
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
iv. CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340
(Bom)
23. He submitted that in light of factual and legal position clarified above,
there is no case of any disallowance of interest u/s 36(1)(iii) of Income
Tax The Act, 1961.
24. Learned departmental representative vehemently supported order of
learned assessing officer and learned CIT A. He submitted that when
assessee has borrowed interest bearing funds at higher rate of
interest and has diverted same towards lower interest earning
advances to sister concerns, learned AO has correctly disallowed
above sum. With respect to Nexus of funds, he stated that assessee has
made payment from cash credit account of assessee and therefore
Nexus is clearly proved.
25. We have carefully considered rival contention and perused orders of
lower authorities. Fact shows that for year ended on 31/3/2011
assessee have given an outstanding loan and advances to sister concern
unrelated parties amounting to Rs. 41.27 Crores. However assessee
has also stated that it has share capital and reserves and surplus as
per audited accounts available as on that date shows that assessee has
non-interest-bearing funds available with him of INR 7 1 5,00,00,000.
Therefore, it is apparent that non-interest-bearing funds available with
assessee far exceeded loans and advances given by assessee to its
sister concern at lower interest rate or without charging interest.
assessee has also submitted a chart which shows that despite identical
facts in assessment year 2013 14 learned assessing officer has not
made any addition to total income of assessee on account of interest
disallowance. Therefore, situation has been accepted by learned AO
in assessment year 13 14 onwards. Even otherwise assessee has
submitted copies of bank statement in paper book. Perusal of bank
statements shows that whenever advances have been given to sister
concern there was balance in cash credit account and it is positive
Page | 22
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
and not negative as held by CIT (A) , therefore, it cannot be said that
nexus been proved that amount is advanced out of borrowed funds.
Therefore, claim of assessee was that though cheques have been
issued from cash credit account, but whenever advances have been
given to sister concerns, there were positive balances available with
assessee and not negative cash credit loan account. Therefore, it is
apparent that assessee has not given advances out of borrowed
funds, which is cash credit limit available to assessee. Bank
accounts statements filed in paper book were not controverted by
learned departmental representative. Further fact remains that on
date of giving loan to sister concern, cash credit account did have
balance due to assessee from banks. It shows that borrowed funds
have not been used by assessee for giving advances to sister concern.
Therefore merely giving cheques from cash credit account does not
show that assessee has utilized borrowed funds. Even otherwise
assessee has huge excess funds available which are non-interest-
bearing in form of share capital and reserves and surplus compared to
advances given to sister concern at lower rate of interest or without
charging interest, honourable Supreme Court in 410 ITR 466 in para
number 33 has held as under:-
33. We do not see how when Assessing Officer's
views are that in cases of interest-free loans and
interest given by assessee to its subsidiary companies
are in above sums, still, principle laid down by this
court that if there are funds available to them interest-
free and overdraft or loans taken, would not apply. This
view of Assessing Officer is ex facie contrary to
settled principle that a presumption would arise that
investment would be out of interest-free funds
generated or available with company. Then,
borrowed capital in hand in that case and interest
expenditure was deductible under section 36(1) (iii) of
Page | 23
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Income tax The Act, 1961. Tribunal held that
interest-free fund available to assessee is sufficient to
meet its investment. It can be presumed that
investments were made from interest-free funds
available with assessee. This position clearly emerges
from record and for current assessment year as well.
We do not see how a different view in facts and
circumstances can be taken. If Tribunal had followed
earlier view and on facts, then, there is no perversity
when nothing contrary to factual material was
brought on record by Revenue. In such
circumstances, concurrent view on disallowance of
interest was reversed and appeal of assessee to that
extent was partly allowed. We do not see any
substantial question of law arising from such a view of
Tribunal.
[underline supplied by us]
26. In view of above undisputed fact that non-or lower interest-bearing
advances given to subsidiary or sister concern are less than interest
free funds in form of share capital and reserves and surplus available
with assessee, interest disallowance u/s 36 (1) (iii) of The Act cannot
be made. Hence, in view of above facts, we reverse finding of lower
authorities in disallowing interest expenditure. Accordingly, ground
number 5 of appeal of assessee is allowed.
27. Ground number 6 of appeal of assessee is against disallowance u/s
14 A of The Act of INR 437504/. Assessing officer has made
disallowance on basis of working of Special Auditor. Special auditor
has simply applied Rule 8D for purpose of computation of disallowance
u/s 14A of Income tax The Act, 1961. Learned assessing officer noted
that assessee has earned dividend income of INR 1576500/ and has
investment in only on subsidiary or exempt interest-bearing investment
Page | 24
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
amounting to INR 2458403027/. Learned AO further noted that
Assessee Company has borrowed funds during year, which have also
been used for making investment. He further noted that Assessee
Company has not apportioned any interest, which has been incurred to
earning exempt income. Therefore auditor has worked out
disallowance applying rule 8D of income tax rules 1962 amounting to
INR 5 0268833/. So, learned AO asked assessee to explain why
disallowance of INR 5 0268833/ should not be made. Assessee stated
that assessee has offered disallowance of INR 437504/ u/s 14 A of
The Act at time of filing of return of income as per tax audit report.
It was further stated that Assessee Company has earned only INR
1596000/ as dividend income and borrowed funds were not at all
utilized for investment in shares hence disallowance cannot be made.
Learned AO rejected explanation of assessee and stated that
substantial expenditure has been incurred by assessee for earning
exempt income and therefore provisions of section 14 A are clearly
attracted, hence, disallowance of INR 50268833/ was made applying
provisions of section 14 A read with rule 8D of The Income Tax Rules.
Ld CIT(A) has allowed substantial relief to assessee and has directed
assessing officer to exclude growth oriented investments while applying
Rule 8D(2)(iii). Also, regarding application of Rule 8D(2)(ii), ld CIT(A)
held that investments which have been made through cash credit
account, rate of interest in cash credit account should be adopted.
However, assessee aggrieved with order of lower authorities has
preferred this ground before us.
28. Learned authorised representative submitted that assessee has only
earned exempt income to extent of Rs. 15,96,000/- which is
corroborated from Schedule 16 of P&L a/c placed at Page 165 of PB
Vol.1 and also taken note by Special Auditor. Further, assessee has
made suo motu disallowance of Rs. 4,37,504/- in return of income
which is also acknowledged by assessing officer. It is pertinent to
mention that all investments are out of own funds of assessee and as
Page | 25
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
such there is no nexus between interest bearing funds and investment
yielding tax free income. Ld AO and CIT (A) have failed to appreciate
that Rule 8D is not automatic in nature and it is incumbent upon AO
to record requisite satisfaction with regards to incurring of expenses in
connection with earning of exempt income. However, no such
satisfaction has been recorded and lower authorities particularly when
assessee has suo motu made disallowance in return of income, ld AO
has not shown as to how disallowance offered in return is incorrect.
In this connection, reference may be made to decision of Apex Court in
case of Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) in which
it was held as under :
Having regard to language of section 14A(2), read with
rule 8D of Rules, it is also made clear that before
applying theory of apportionment, Assessing Officer
needs to record satisfaction that having regard to kind of
assessee, suo motu disallowance under section 14A was
not correct. It will be in those cases where assessee in
his return has himself apportioned but Assessing Officer
was not accepting said apportionment. In that
eventuality, it will have to record its satisfaction to this
effect. Further, while recording such a satisfaction,
nature of loan taken by assessee for purchasing
shares/making investment in shares is to be examined
by Assessing Officer.[Para 41] .
29. In light of above, disallowance u/s 14A read with rule 8D is not
sustainable in absence of recording of satisfaction in terms of provisions
of section 14A(2) of The Act. Further, it is relevant to note that
appellant assessee has earned total exempt income of Rs. 15,96,000/-
only from four investments amounting to Rs. 4,54,16,313/-, details of
which are as under :
Page | 26
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Particulars Dividend Income Opening value Closing value
as on 01.04.09 as on 31.03.10
Uflex Industries Ltd. 15,20,000 3,72,76,848 3,60,64,297
Godrej industries Ltd. 12,500 43,50,000 42,04,824
Indswift Ltd. 26,000 53,16,647 51,47,192
Dhampur Sugar 37,500 50,76,226 Nil
Total 15,96,000 5,20,19,721 4,54,16,313
30. There is no dispute to effect that assessee has its own funds to extent
of more than Rs. 590 crores and as such all these investments are fully
covered from own funds and there is no case of any disallowance under
rule 8D(2)(ii). Also, there being no case of any direct or indirect claim of
interest in connection with investment, disallowance u/s 14A read with
Rule 8D, if any, has to be restricted to 0.5% of average investment as
specified in Rule 8D2(iii). Further, disallowance as per rule 8D(2)(iii)
has to be computed only in respect of investments yielding exempt
income and accordingly assessing officer is not justified in applying
formula prescribed in Rule 8D to entire value of investment. legal
position to this effect is well settled and reference may be made to
decision of Delhi High Court in case of ACB India Ltd vs. ACIT [2015]
374 ITR 108 (Delhi High Court) in which it was held as under :
S. 14A & Rule 8D(2)(iii): In computing average value of
investment, only investments yielding non-taxable income have to
be considered and not all investments.
31. Above said decision has been followed and applied by Hon`ble Delhi
Tribunal in case of DCIT v. DLF Commercial Developers Ltd. (ITA No.
1388/D/13) (01/03/2018) in which it was held as under :
9. Turning to clause (iii) of Rule 8D(2), it is noted that
Assessing Officer as well as CIT(A) computed/confirmed
disallowance u/s 8D(2)(iii) @ ½% of average value of
investments. Hon'ble jurisdictional High Court in ACB India
Ltd. vs. ACIT (2015) 374 ITR 108 (Del) has held that value of tax
Page | 27
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
exempt investments should be considered instead of total
investments for adopting average value of investments of
income which is not part of total income. effect of this
decision is that while making disallowance under Rule 8D(2)(iii),
it is only average of those investments which have yielded
exempt income are to be taken into consideration and not
average of all investments. Adverting to facts of instant case,
it is seen that disallowance has been made in ignorance of
above mandate of law as approved by Hon`ble Delhi High
Court. We, therefore, set aside impugned order and direct
computation of correct amount of disallowance under clause (iii)
of Rule 8D(2) accordingly.
32. It is made clear that if disallowance under clause (iii) of Rule 8D(2)
exceeds amount of exempt income, then, disallowance should be
restricted to such income alone. If, however, this exercise results in
some further relief to assessee, same should be granted.
33. He also submitted detailed working of disallowance as per Rule
8D(2)(iii) in context of investments yielding exempt income as placed at
Page 22 of Supplementary Paper book-2 as per which disallowance is
worked out at Rs. 2,43,590/- only, which is less that disallowance
already made by assessee in return of income i.e. Rs. 4,37,504/- and
as such impugned disallowance of Rs. 4,98,31,329/- is not sustainable
on law and facts and same may kindly be deleted. He further submitted
without prejudice to above submission, in case any disallowance u/s
14A is called for, same should be restricted to extent of exempt income
of Rs. 15,96,000/- only. legal position to this effect is well supported
from decision of Hon`ble Supreme Court in case of Pr. CIT v. State
Bank of Patiala [2018] 259 Taxman 314 (SC) and Delhi High Court in
case of Joint Investments Pvt. Ltd. Vs. CIT [2015] 372 ITR 694 (Del).
relevant head note in case of Pr. CIT v. State Bank of Patiala [2018]
259 Taxman 314 (SC) is as under:
Page | 28
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Section 14A, read with section 263, of Income-tax The Act,
1961 - Expenditure incurred in relation to income not
includible in total income (Computation of) - Assessment year
2010-11 - In course of assessment, Assessing Officer made
addition on account of apportionment of expenses against
exempted income under section 14A - Commissioner passed a
revisional order directing Assessing Officer to enhance amount
of addition under section 14A - Tribunal set aside revisional
order as well as consequent assessment order passed by
Assessing Officer enhancing addition made under section 14A -
High Court upheld order of Tribunal holding that amount of
disallowance under section 14A could be restricted to amount of
exempt income only and not a higher figure - Whether on facts,
SLP filed against decision of High Court was to be dismissed on
merits- Held, yes.
34. Therefore he submitted that disallowance made by learned assessing
officer as well as confirmed by learned CIT A is not sustainable
firstly on account of non-recording of satisfaction and secondly for
reason that no interest disallowance even otherwise can be made. He
further stated that while making expenditure disallowance only
investments, which have yielded tax-free income, are required to be
considered.
35. Learned departmental representative vehemently supported orders of
lower authorities. He submitted that when assessee has earned
exempt income and there is a substantial increase in amount invested
in subsidiary company, learned assessing officer on basis of audit
report of special auditor has invoked provisions of section 14A and
worked out disallowance applying provisions of rule 8D of income
tax rules 1962. He submitted that tax audit has correctly recorded
satisfaction with respect to disallowance to be made. Even working of
disallowance has been made. He therefore stated that assessing officer
has applied his mind to show satisfaction and then made
Page | 29
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
disallowance. Even otherwise he stated that there is no provision in
section 14 A of The Act and applicability of rule 8D to exclude any of
sums. Therefore, he stated that addition/disallowance made by
learned assessing officer be sustained.
36. We have carefully considered rival contention and perused orders of
lower authorities as well as audit report of special auditor.
Undisputedly assessee has earned during year exempt income of INR
1 596000/. Assessee has offered a sum of INR 437504/ as
disallowable expenditure u/s 14 A of the Act. As per para number 36 of
assessment order it is apparent that special auditor has worked out
disallowance under rule 8D of income tax rules applying formula
contained therein and disallowance was computed at INR 50268833/.
Assessee explained to ld AO that it has made a disallowance of INR
437504/ and stated that it has not incurred any interest expenditure
as borrowed funds were not utilized for investment in shares. However,
it were utilized for purposes of business. Learned assessing officer
without recording any satisfaction about correctness of claim of
assessee of computing disallowance of INR 437504/- or examining
contention of non utilization of borrowed funds for making investment
in shares, applied provisions of rule 8D and made a disallowance of
INR 50268833/ and reduced it from already disallowed sum of INR
437504/ by assessee. Therefore, net disallowance of Rs.
49831329/ was made. As is well known, section 14A of The Act
relates to expenditure incurred in relation to income not includible in
total income. Sub-section (1) of section 14A provides that for purposes
of computing total income under Chapter IV, no deduction shall be
allowed in respect of expenditure incurred by assessee in relation to
income, which does not form part of total income under The Act. As
per sub-section (2) of section 14A, Ld . Assessing Officer would
determine amount of expenditure incurred in relation to such income
which does not form part of total income in accordance with method
as may be prescribed, if having regard to accounts of assessee, he is
Page | 30
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
not satisfied with correctness of claim of assessee in respect of such
expenditure. Method for such purpose has been prescribed under rule
8D of Rules. Sub-rule (1) of rule 8D substantially reiterates what sub-
section (2) of section 14A provides. Essentially, under sub-rule (1),
Assessing Officer would be authorized to determine expenditure to be
disallowed in relation to earning tax- free income, in terms of sub-rule
(2) where having regard to accounts of assessee of previous year, if
he is not satisfied with correctness of claim of expenditure made by
assessee or claim made by assessee is that no expenditure has been
incurred in relation to income which does not form part of total income.
Further Hon Supreme court in 402 ITR 640 has held that:-
41. Having regard to language of section 14A(2) of The
Act, read with rule 8D of Rules, we also make it clear
that before applying theory of apportionment,
Assessing Officer needs to record satisfaction that having
regard to kind of assessee, suo motu disallowance
under section 14A was not correct. It will be in those
cases where assessee in his return has himself
apportioned but Assessing Officer was not accepting
said apportionment. In that eventuality, it will have to
record its satisfaction to this effect. Further, while
recording such a satisfaction, nature of loan taken by
assessee for purchasing shares/ making investment in
shares is to be examined by Assessing Officer.
37. Therefore it is apparent that before proceeding to apply provisions of
rule 8D or enhancing disallowance, learned assessing officer is
required to record a satisfaction that having regard to kind of
assessee suo motu disallowance u/s 14A was not correct. In present
case, such satisfaction by assessing officer is missing. He has merely
proceeded on basis of finding of special auditor under section 142
(2A) of the Act. Therefore, disallowance made by learned assessing
officer is not sustainable. Accordingly, we direct learned assessing
Page | 31
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
officer to delete disallowance in excess of disallowance offered by
assessee of INR 437504/ u/s 14 A of The Act. Accordingly order of
learned CIT A is reversed and ground number 6 of appeal is allowed.
38. Ground number 7 of appeal challenges confirmation by learned CIT
A of disallowance of INR 1758546/ on account of excess claim of
deduction u/s 80 IB/IC on alleged ground that appellant had violated
provisions of section 80 IA (5) of the Act as business losses pertaining
to financial year 2001 02 in 2002 03 had not been taken into
account while computing deduction u/s 80 IB /IC of the Act.
39. Learned authorised representative at time of hearing of appeal
submitted that he does not want to press this ground of appeal.
Therefore, it is dismissed.
40. Ground number 8 of appeal is with respect to finding of learned CIT
A in upholding disallowance of deduction u/s 80 IB/IC on ground
that fair market value of goods transferred from Noida Division to
eligible unit is higher in terms of provisions of section 80 IA (8) read with
80 IB (13) and 80 IC (7) of The Act for reason that in respect of
unprocessed goods profit Mark up to extent of 2% instead of 10% as
computed by assessing officer was restricted. With respect to
processed catechu, he confirmed valuation by assessing officer and
uphold markup of manufacturing expenses and profit rate at rate of
37.85% and 10% respectively. Assessee is further aggrieved in respect of
processed cardamom where learned CIT A confirmed valuation done
by assessing officer and uphold markup of manufacturing expenses
and profit rate @ of 37.85% and 10% respectively.
41. Learned assessing officer-examined fact, that assessee has transferred
goods from units located at Noida to eligible undertaking at below fair
market price. Special auditor reported that from units located at
Noida assessee has transferred work in progress in form of processed
raw material/semi finished goods worth INR 394051682/ to
undertaking eligible for deduction u/s 80 IC below its cost, though
assessee company ought to have transferred same at fair market price
Page | 32
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
on date of transfer. Special auditor reported that during year under
consideration unit has transferred work in progress and for working
out value of such transfer, unit has followed same methodology as
followed for valuation of its closing work in progress. Therefore, he held
that unit has transferred goods in form of work in progress to
eligible unit below its cost insofar as value does not include direct cost
like manufacturing expenses, power and fuel, direct labour and other
fixed and variable overheads like depreciation on plant and machinery
factory building etc. .Therefore auditor stated that in absence of any
comparable market quotation profit margin of 10% on cost provided for
transfer of excise able goods for captive consumption and followed by
assessee company for transfer of excisable goods to these eligible units
was considered to workout fair market value of this transfer. Therefore
auditors suggested that profit margin of 10% on of cost and therefore
there is an understatement of taxable profit of unit by INR 1
01734012/ learned assessing officer questioned assessee on this
aspect. Assessee submitted that most of goods are transferred as it is
after buying from market without any value addition and even
otherwise value addition is negligible, however, it was contested that
there is no basis for any margin, much less margin of 10%. It was
further contested by assessee that identical issue has been decided
by The Commissioner of Income Tax Appeals in assessee`s own case for
assessment year 2004 05 partly deleting addition. Learned assessing
officer rejected explanation of assessee. He held that 10% profit
margin is normal profit margin also prescribed under Central Excise
rules for valuation of goods of captive consumption. He further stated
that special auditor has given detailed working of fair market value of
transfer of goods from non-eligible unit to eligible undertaking.
Thereafter learned assessing officer held that fair market value of
said goods exceeds transfer value by a sum of INR 1 01734012/.
Above issue was contested by assessee before learned CIT A.
Page | 33
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Learned CIT A followed his own order for assessment year 2004 05
wherein
i. in case of goods, which are not processed and sent to
eligible units as such, he directed learned assessing officer
to load profit margin of service charges rate of 2% on value
of goods transferred which is directly sent without
processing.
ii. With respect to goods those are processed, he confirmed
loading of average manufacturing expenses of 37.85% as
processing value addition has taken place and further
confirmed charging of profit at rate of 10%.
iii. With respect to cardamom, he confirmed action of
assessing officer of loading of manufacturing expenses at
rate of 37.58 percent and profit at rate of 10% as per
Excise rules subject to deduction of cost of Chilka transferred
to other units from addition.
42. Therefore, assessee is aggrieved with order of learned CIT A has
preferred this appeal.
43. Ld Authorised representative submitted as under :-
i. That issue relates to transfer of following three products from
Noida division to eligible unit in Guwahati :
a. Supari
b. Katha
c. Elaichi
ii. Assessing officer has recomputed value of goods transferred on
basis of observation of Special Auditor after loading 14.73% mark
up on account of manufacturing cost and further 10% mark up on
account of profit to value of goods so transferred by applying
provisions of section 80IA(8) read with section 80IB(13)/80IC(7) of
The Act.
Page | 34
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
iii. Ld CIT (A) has allowed part relief in respect of goods transferred
without processing by reducing mark up to 2% and upheld
valuation done by AO in respect of semi-processed goods.
iv. In this connection, we may submit that assessing officer has
failed to appreciate facts of case and adjustment in value of
goods is misconceived and on arbitrary basis. goods namely
Supari, Katha, and Elaichi are transferred from Noida to eligible
unit in Guwahati after negligible amount of processing and as such
mark up of 14.73% on account of manufacturing cost is highly
arbitrary and without any basis. Further, it may be appreciated
that value of goods transferred already includes cost of
processing and freight charges and as such there is no ground or
basis for any notional mark up of 14.73%.
v. Further, assessing officer has loaded mark up of 14.73% on
basis of observation of special auditor and has failed to carry out
any independent investigation to justify relevance and
applicability of same. It may be appreciated that assessing officer
has not given any basis for estimating manufacturing and
processing charges to extent of 14.73% and as such adjustment
is highly arbitrary and without any basis.
vi. In addition, there is absolutely no justification for loading
additional 10% mark up because of profit as goods are
transferred without any substantial value addition. Further,
assessing officer has not brought on record any comparable case to
justify such huge profit as present case involves simple transfer
of goods wherein non-eligible unit is merely acting as a
procurement agent on behalf of eligible units in order to ensure
economy of cost and regular supply to eligible units.
vii. It may be clarified that these products have been purchased for
captive consumption and same is not tradable commodity. There
has been no sale to any outside party and as such presumption
about any profit or market value is irrelevant and misconceived.
Page | 35
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Further, special auditor has referred central excise rules for
purpose of estimation of profit @ 10%. In this regard we may
submit that reference to excise rules is wholly irrelevant and out of
context as same have no relevance or bearing under Income Tax
The Act. rate of 10% profit as per Rule 8 of Central Excise
Valuation Rules is specifically for purpose of calculating excisable
value of marketable goods and as such same cannot be made basis
for estimating fair market value of consumable items in terms of
section 80IA(8) read with section 80IB(13)/80IC(7) of The Act.
VIII. It is pertinent to note that provisions of section 80IA(8) read with
section 80IB(13)/80IC(7) of The Act authorizes an assessing
officer to make adjustments in claim of deduction by substituting
fair market value of goods transferred from non-eligible unit to
eligible unit. section specifically talks about market value that in
itself means that product must be marketable having distinct
identity. However, goods in present case are raw material being
part of production process having no separate identity. product
purchased from third parties is transferred after minimal
processing and as such, there is not much difference between
purchase price and transfer price of goods and as such
assessing officer is not justified in enhancing value without
making reference to any comparable cases.
IX. Further, assessing officer has not brought anything on record to
establish market value of goods for purpose of provision of
section 80IA(8) and as such adjustment made to value of goods
transferred from non-eligible unit to eligible unit is arbitrary and
not supported by any cogent reasoning.
x. There is thus no basis for addition because of 10% mark up even
on cost of goods.
xi. In any case, goods have been purchased on behalf of eligible units
and at best, any mark up on account of profit should be on
Page | 36
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
processing charges only which could only be to extent of 1-2% of
actual cost or value of goods transferred.
44. Learned CIT DR vehemently supported order of learned CIT-A appeal
and stated that he has followed order of assessee for assessment year
2004 05. Even otherwise, he stated that there is no infirmity in order
of learned assessing officer and CIT A has reduced margin with
respect to goods transferred without any processing.
45. Learned authorised representative vehemently stated that finding of
learned CIT A for assessment year 2004 05 was not at all relevant
now as same A.Y. assessment was passed u/s 147/153A of The Act
and same has been quashed which has been upheld by honourable
High Court and therefore such findings now no more exist.
46. We have carefully considered rival contention and perused orders of
lower authorities as well as audit report u/s 142 (2A) of income tax
The Act of special auditor. Allegation on assessee is that it has
made Inter transfer of goods however same has not been taken at
market rate and therefore auditor has suggested applicability of rule
8 of Central Excise Valuation (Determination of Price of Excisable
goods) Rules, 2000 which provides as under:-
[8. Where whole or part of excisable goods are not sold by
assessee but are used for consumption by him or on his behalf
in production or manufacture of other articles, value of such
goods that are consumed shall be one hundred and ten per cent
of cost of production or manufacture of such goods. ]
47. Provisions of section 80 IA (8) provides that
(8) Where any goods 39[or services] held for purposes of eligible
business are transferred to any other business carried on by
assessee, or where any goods 40[or services] held for purposes of any
other business carried on by assessee are transferred to eligible
business and, in either case, consideration, if any, for such transfer
as recorded in accounts of eligible business does not correspond to
Page | 37
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
market value of such goods 41[or services] as on date of transfer,
then, for purposes of deduction under this section, profits and
gains of such eligible business shall be computed as if transfer, in
either case, had been made at market value of such goods 42[or
services] as on that date :
Provided that where, in opinion of Assessing Officer,
computation of profits and gains of eligible business in manner
hereinbefore specified presents exceptional difficulties, Assessing
Officer may compute such profits and gains on such reasonable basis
as he may deem fit.
Explanation - 43[For purposes of this sub-section, "market value", in
relation to any goods or services, means-
(i) price that such goods or services would ordinarily fetch in
open market; or
(ii) arm's length price as defined in clause (ii) of section 92F,
where transfer of such goods or services is a specified domestic
transaction referred to in section 92BA.]
48. Above section provides that if eligible business receives any services/
goods from other units or business of assessee then if transaction
value as recorded in books of account is not corresponding to market
value of such goods or services on date of transfer then deduction
u/s 80 IA shall be adjusted as a such transfer has been made at
market value of such goods as on that date. Market value has further
been defined to show that it is price such goods would ordinarily fetch
in open market. For this year provisions of domestic transfer pricing
does not apply and therefore clause number (ii) do not apply. Further, if
assessing officer finds it exceptionally difficult AO may compute
income/deduction, as he may deem fit. Admittedly, in this case
learned AO has held that market price of such goods are to be
determined as per rule 8 of Central Excise valuation rules 2000.
There is no finding by assessing officer about exceptional difficulty
Page | 38
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
being faced in computing such market rate. Even otherwise, assessing
officer is guided by auditor has adopted 10% profit over actual cost
incurred by assessee of goods transferred as market rate. Learned
CIT A has held that on goods, which are not processed at all and sent
to eligible unit directly, then he has imputed profit margin at rate of
2% on value of goods transferred instead of 10%. With respect to
goods, which are processed through job work, learned CIT A has
upheld loading of average manufacturing expenses of 37.85% and
further, charging of profit at rate of 10% as per rule 8 of Central Excise
rules. With respect to goods such as cardamom, which is purchased,
processed, and then transferred to eligible units, he has further upheld
cost loading of 37.58% and further profit at rate of 10% as a market
price of goods. However in above prices there is no finding that in
open market such semi finished goods are sellable or not. Explanation
which defines market price provides that market price means price
such goods would fetch ordinarily in open market. Therefore, there
has to be a clear-cut finding that such goods are marketable, they have
a sale price, and such sale prices determination is in open market.
Therefore, it is apparent that market price can be more than cost and
less than cost of goods. Therefore, any approach of loading of cost
on goods, which are transferred from one undertaking to another
undertaking without determination of market price of such goods, is not
the mandate of provisions of section 80 IA (8) of The Act. Therefore any
such attempt to substitute cost plus profit as market value of
goods without finding out what could be market value` of goods is
not acceptable as it is not requirement of law. If views of lower
authorities is subscribed to, then it will amount that market price can
never be less than cost of goods sold and therefore it presumes a
market where only profit exists. Such can never be situation. In view
of this, we reject finding of lower authorities and learned assessing
officer that value that has been recorded in transfer of goods from one
unit to another should further be loaded by cost of 37.58%. Further
Page | 39
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
10% profit has been presumed under Central Excise provision for
purpose of transfer of goods as captive consumption for another unit.
Therefore if goods having a cost of Rs 100/- is transferred to another
unit, then transaction value of such goods shall be considered at INR
110/. Therefore transferring unit will pay excise duty on INR 1 10
and unit to which such goods have been transferred will claim duty
credit paid on transfer value of INR 110. Therefore, above rule can
only be applied with respect to duty set off of excisable units. Central
Excise rules has stated that INR 110/ would be deemed transaction
value of such goods. Rule 8 of Central Excise valuation rule is a
deeming provision. It does not say what could be market price of such
goods but for purpose of levy of Central Excise it deems that INR 110/
shall be transaction value. Therefore, in absence of any mandate
available that Central Excise valuation rule 8 provides for market
price of such goods, same cannot be imported into provisions of section
80 IA (8) of The Act. However, as assessee himself has stated that
profit can be imputed at rate of 1 or 2% of value of transaction price
recorded in books of accounts, we direct learned assessing officer in
case of processed goods such as Kattha and cardamom to compute 2%
on process charges as profit for computation of market price of
goods transferred inter-unit. Accordingly, learned assessing officer is
directed to consider transaction value of goods, which are not
processed and sent to eligible unit, is recorded in books of accounts.
With respect to goods, which are processed through job work and
transferred to eligible unit, learned AO is directed to impute 2% profit
over job work charges i.e. cost incurred by assessee for
determination of profit u/s 80 IA of income tax The Act. Accordingly,
ground number 8 of appeal of assessee is allowed with above
direction.
49. Ground number 9 of appeal is against confirmation of disallowance
of deduction u/s 80 IB/IC by applying provisions of section 80 IA (8)
Page | 40
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
read with section 80 IB (13) and 80 IC (7) of The Act on ground that
rate of technical knowhow fee` on value of goods transferred from
perfumery dividend to eligible unit should be 2.75% as against 2.5%
declared by appellant.
50. Ld assessing officer has made adjustment in claim of deduction u/s
80IB/IC on ground that technical knowhow fee/royalty @ 2.5% paid to
Dharampal Satyapal & Sons P. Ltd. (DSSP) in respect of goods
transferred to Perfumery division is not in accordance with approval
from Regional Director, Department of Finance Ministry, as per which
ceiling rate of technical know-how fees was fixed @ 3%. Accordingly,
assessing officer adopted technical know-how fee/ royalty @3% in
respect of goods transferred to eligible units resulting in reduction of
claim of deduction u/s 80IB/IC. The ld CIT(A) rejected action of
assessing officer of adopting rate of technical know-how fee/royalty @
3% on ground that it is maximum ceiling limit fixed by Regional
Director and rate of 2.5% being mutually decided as per Technical
Assistance agreement is in accordance with provisions of section 80IA(8)
of The Act. However, CIT (A) directed AO to load 10% mark-up on
technical know-how fee @2.5% paid by assessee and re-compute
adjustment after taking rate @ 2.75%. CIT (A) is of view that since
technical know-how fee/royalty on goods purchased from DSSP. ltd is
expenses in hands of eligible units, there should be mark-up of 10% of
such technical know- how fee/royalty.
51. Learned authorised representative submitted that assessing officer
himself has accepted rate of technical know-how / royalty @ 2.5% in
AY 2013-14 onwards and no adjustment has been made in this regard.
In these circumstances, addition in present year is inconsistent and
not based on correct appreciation of facts of case. Factual position to
this effect is supported from TPO order for AY 2013-14 and 2014-15
placed at Page 38 69 of Supplementary paper book 2. In any case, it
is submitted that action of CIT(A) in loading mark up of 10% of technical
know-how/royalty paid to Dharampal Satyapal & Sons P. Ltd. is
Page | 41
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
arbitrary and not in accordance with provisions of section 80IA(10) of
The Act. It is relevant to note that rate of technical know-how/royalty @
2.5% over value of goods purchased by assessee and from Dharampal
Satyapal & Sons P. Ltd. was mutually agreed as per written agreement
and as such there is no question of mark-up of 10% on agreed technical
know-how/royalty @ 2.5% particularly when same is payable to third
party. Further, technical know-how/royalty is in respect of right to use
technical know-how available with Dharampal Satyapal & Sons P. Ltd.
in respect of perfumery product and same being of intangible nature; it
is not open to CIT (A) to make arbitrary adjustments without
appreciating facts and nature of payment. Moreover, technical know-
how/royalty being intangibles, provisions of section 80IA(8) are not
applicable as same are only relevant to transfer of goods or services.
Moreover, rate of technical know-how/royalty is approved by Regional
Director and same was paid over and above actual purchase value of
goods, and there being no dispute with regards to transfer value of
perfumery products, there is no basis or justification for making further
mark up of 10% and as such we may submit that impugned adjustment
made by CIT(A) is not sustainable under law and same may kindly be
deleted. Even otherwise, action of CIT(A) is self defeating and contrary
to own his finding which was rendered while adjudicate Ground No. 6 of
Revenue`s appeal wherein on identical circumstances, CIT(A) deleted
adjustment made by assessing officer. As per said ground, issue was
regarding payment of processing charges to Dharampal Satyapal & Sons
P. Ltd. @ Rs. 2.5/kg whereas maximum ceiling capped by Regional
Director was Rs. 3/kg. Assessing officer made adjustment in claim of
deduction u/s 80IB/IC by taking into account maximum rate of
processing charges. CIT(A) deleted said adjustment in entirety after
holding that maximum ceiling limit fixed by RD cannot be considered as
basis for making adjustment u/s 80IA(10) of The Act. No mark-up of
10% was added. Relevant finding of CIT(A) is at Page 94 Para 9.3. In
light of above, impugned adjustment made by CIT(A) by adding mark-
Page | 42
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
up of 10% of rate of technical know-how/royalty is liable to be deleted
and technical know-how/royalty @ 2.5% be considered on value of
goods purchased and transferred.
52. Ld. CIT DR relied upon order of learned AO.
53. We have carefully considered rival contentions and perused orders of
lower authorities. Learned auditor has noted that during year under
consideration perfumery division unit has transferred perfumery
products of INR 1530307821 to various manufacturing units including
units eligible for deduction. Perfumery unit manufactures excisable
products and transfer same to other eligible units as per valuation of
rule 8 of Central Excise (valuation rules, 2000) and read with cost
accounting standard 4 issued by Council of Institute of cost and
works accountants of India [ICWA] on cost of production for captive
consumption. Learned AO noted that from books of accounts it is
observed that technical know-how has been booked at rate of 2.5%
instead of 3% of raw material consumed resulting in over statement of
profit of eligible units by INR 6227744/ and therefore it was held that
such technical know-how fees paid to other concern is in nature of
direct expenses and should be included in cost of production for
purpose of determining market price of goods transferred.
Accordingly learned AO on basis of audit report made an addition of
INR 6227744/. It is contention of learned authorised representative
that in assessment year 2013 14 onwards no such adjustment has
been made despite there being identical facts and circumstances of
case and eligible unit is also eligible for deduction under those
sections. This fact has not been controverted by learned departmental
representative. Therefore, it is a fact that in subsequent year claim of
assessee has been accepted by learned assessing officer and not
disputed whereas in this year it has been disputed. Therefore, it is
apparent that when claim of assessee has been accepted in
subsequent year on identical facts and circumstances, which is not
disputed, therefore there is no reason to sustain any such addition
Page | 43
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
during year. Accordingly, ground number 9 of appeal of assessee is
allowed.
54. Ground number 10 of appeal is against disallowance upheld by
learned CIT A with respect to eligible unit for tax holiday to extent
of INR 3504357/- by increasing value of goods transferred from can
pack Division to eligible units on ground that fair market value of
goods transferred is higher in terms provisions of section 80 IA (8) read
with section 80 IB (13) and 80 IC (7) of The Act. assessing officer has
made adjustment on basis of observation of Special Auditor as per
which it was alleged that assessee has transferred goods from Can pack
Division to eligible without proper valuation in terms of Rule 8 of Central
Excise Rules read with CAS -4. CIT(A) has upheld adjustment.
55. Learned authorised representative submitted that in this connection, it
is of utmost importance to mention that goods transferred from
Canpack Division to eligible unit has been valued strictly on basis of
Rule 8 of central excise rule read with CAS-4 and as such observation
of Special Auditor is factually incorrect. working of transfer value of
goods as per excise rules and relevant excise rules and CAS-4 are placed
at Page 23-25 & 26-37 of Supplementary paper book 2 from which it is
self evident that goods has been transferred for captive consumption at
110% of cost in accordance with Rule 8 of Central Excise Rules. In
view of above facts, impugned adjustment is on illegal and arbitrary
basis and same may kindly be deleted as assessee has already loaded
cost in accordance with Rule 8 of central excise rules.
56. Learned departmental representative vehemently supported order of
learned assessing officer, he extensively read the order of the d AO and
CIT A to support the addition.
57. We have carefully considered rival contention and found that identical
issue with respect to applicability of rule 8 of Central Excise valuation
rules, ( 2000) has been applied by learned assessing officer to
determine fair market value of goods transferred inter-unit. We have
already discussed applicability of rule 8 of Central Excise valuation
Page | 44
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
rules, 2000 for purpose of working out market price of goods
transferred and rejected same while deciding ground number 8 of
appeal of assessee. Therefore, for similar reason we also do not
subscribe addition made by learned assessing officer by applying
Central Excise valuation rules and imputing 10% profit margin in
goods transferred to determine market price of such goods.
Accordingly, ground number 10 of appeal of assessee is allowed.
58. Ground number 11 of appeal of assessee is against order of learned
CIT A with a direction to apply a profit margin of 10% against 26.14%
applied by learned assessing officer over and above allocating value of
common cost incurred at corporate office, depot, branches et cetera and
allocated to such units and an appropriate ratio. Therefore, direction
of learned CIT A is to allocate appropriate cost of corporate office
etc. then add that to a profit margin of 10% for purpose of working out
deduction of eligible unit u/s 80 IB/IC/IA of The Act. Ld AO has
made adjustment on basis of observation of Special Auditor as per
which, common cost incurred in respect of eligible units must be
allocated after loading mark up @ 26.14% being rate of operating profit
after applying provisions of section 80IA(8) read with sub-section 13 of
section 80IB and sub section 7 of section 80IC and making an upward
adjustment on account of profit element on these common cost. Ld CIT
(A) allowed part relief by reducing mark-up from 26.14% to 10%.
59. Learned authorised representative submitted that it is not case of
assessing officer or CIT (A) that Head Office of assessee is providing
any services to eligible units. Provisions of section 80IA(8) read with
sub-section 13 of section 80IB and sub section 7 of section 80IC will
only come into play where services have been provided by HO to
eligible unit. However, in present case, services have been rendered
by third party at market price and head office is merely allocating
proportionate cost to eligible units and as such there is no occasion to
compute fair market value of these costs since they are not in nature
of goods or services rendered by Head office. Further, allocation of
Page | 45
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
depreciation as done by Special Auditor has already been deleted by
CIT(A) (Page 181) on ground that depreciation is unit and asset specific
and same cannot be allocated on arbitrary basis. Since mark-up @10%
has also been applied to allocated portion of depreciation, observation
of CIT(A) while applying 10% mark-up is irrational and contrary to his
own findings. It may be appreciated that it is a case of simple allocation
of costs incurred on behalf of units and as such loading of mark-up on
such allocation is in total disregard to provisions of section 80IA(8)
r.w.s. 80IB(13) & 80IC(7) of Income Tax The Act, 1961. Even otherwise,
it may also be appreciated that allocation of common cost is in nature
of reimbursement of expenses and as such, there is no valid ground or
basis for attributing any profit on such reimbursements.
60. Learned authorised representative further referred to para number 21.3
of decision of learned CIT A for assessment year 2004 05 wherein
he has allowed appeal of assessee and deleted above addition. He
therefore submitted that it is applicable for this year also.
61. Learned departmental representative vehemently supported order of
learned assessing officer and stated that it page number 177 of order
of learned CIT appeal wherein he has held that head office, depot and
branches being a separate entity has incurred expenditure on behalf of
various units including industrial undertaking eligible for deduction is.
He rejected argument of learned authorised representative that no
services have been provided for services were not acceptable as these
expenditure include even advertisement expenses, sales expenses etc.
He further held that even if reimbursement of expenses for purchase of
raw material and finished goods which goes for eligible undertaking
some services have been provided by head office and branch office. He
further held that learned CIT A has upheld that any independent
persons would have charged trading profit margin on such transfer of
goods. Accordingly, he applied estimated profit of 10% of such cost as
profit of an office/branches/depot for such services. He therefore
submitted that findings given by learned CIT A are incontrovertible.
Page | 46
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
62. We have carefully considered rival contentions and perused orders of
lower authorities as well as report of special auditor. Fact shows that
AO has stated that though assessee has allocated all applicable cost to
respective units however AO said that it should further be loaded by
markup of 26.14% being operating profit after applying provisions of
section 80 IA (8) read with subsection 13 of section 80 IB and section 7
of section 80 IC for making an upward adjustment on account of profit
element on these common cost. Learned CIT A has reduced
markup from 26.14% to 10%. Undisputedly assessee has allocated all
cost to respective units for purpose of determining eligible profit for
deduction. Only issue is that whether further markup is required to be
allocated on these cost or not. Claim of assessee is that various
services rendered by 3rd party are at market rate and head office has
merely allocated proportionate cost to eligible units and has neither
transferred any goods or nor provided any services. It is also claim of
assessee that no further services have been rendered by these offices to
eligible unit of assessee except allocating cost. Here, undisputedly
allocation key has been correctly applied and not questioned by
revenue. Therefore, only argument of revenue is that various cost
allocated by head office/branches and depot shall also be further
increased by a markup of profit of 10% over such cost. Identical issue
has been decided by coordinate bench in [68 taxmann.com 322]
wherein contention of revenue was that selling and distribution
activity is itself a separate profit centre , therefore whatever services
have been provided by selling and distribution arm of assessee to
eligible undertaking, should have been charged adding profit and
reduced from profit of industrial undertaking after valuing services of
selling and distribution arm of company by loading profit element.
Coordinate bench has decided that no such profit markup is required to
be added when only costs have been allocated and no identification of
any specific services provided by such units to eligible unit is found.
For holding so coordinate bench also relied upon decision of another
Page | 47
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
coordinate bench in Cadila Healthcare Ltd. v. Addl. CIT [2012] 21
taxmann.com 483/67 SOT 110 (URO)(Ahd. - Trib.) and held as under:-
"87. It is one of contention of revenue that selling and distribution
activity is itself a separate profit center and therefore whatever services
have been provided by selling and distribution arm of company to
eligible undertaking should have been charged and reduced from
profit of industrial undertaking after valuing service of selling and
distribution arm of company at market rate. At present assessee has
allocated it at cost. Therefore, ld. AO has invoked provisions of section
80 IA (8) of The Act. It is not dispute that that products
manufactured by these industrial units are sold by selling and
distribution arm of assessee and cost incurred is allocated to these
respective units on basis of appropriate allocation key of 'sales'. Ld.
AR of appellant relying on decision of coordinate bench of Cadila
Healthcare Ltd. (supra) has submitted that there cannot be any specific
demarcation between manufacturing and selling activities of assessee
and profit accrues only at time of sales of goods only. Therefore,
contention of revenue that selling and distribution function of
assessee is a separate profit center is required to be rejected at
threshold. We have carefully considered argument of ld. AR and of
revenue on this point as well as ld. AO and Ld. DRP. We are of view
that this argument is almost similar to argument raised by revenue
in case of Cadila Healthcare Ltd. (supra) Coordinate bench has dealt
with these arguments from all angles of controversy and has held as
under :--
'9.4 Ld. Counsel has asserted that undisputedly, it was an
"inter-division transfer", hence it was expected to record same
at arm's length price. He has pleaded that assessee is blowing
hot and cold in same breath. When it comes to transfer of
services and goods, it opposes arm's length price adjustment
and says that expenses which have been incurred in past need
Page | 48
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
not be taken into consideration. As discussed earlier, this logic
do not commensurate with provisions of sections. Even then
for argument sake if expenses relatable to current year are to
be apportioned; it was found that assessee had not
apportioned even a penny of expenses in development and
research of new products of Baddi Unit.
9.5 Next, Revenue's Counsel has drawn our attention on profit
& loss account of eligible Unit, i.e. Baddi Unit, (refer Page
No.87 of paper-book). Ld. DR has said that sales to tune of
Rs. 1,19,13,22,749/- were recorded for accounting period
ended on 31.3.2006. He has pleaded that if said Unit was to
sale its products on stand alone basis, then said Unit which
was only two years old could not fetch such high sale price.
said Unit has shown high profit at Rs. 1,16,82,91,400/-. goods
manufactured by said Unit were transferred to marketing
division of assessee-company and sale price was noted by
Baddi Unit as per final sale price of product. But fact is that
marketing divisions and C&F are involved, therefore sales are
realized by main marketing division. He has thus pleaded that
profit derived from "marketing function" cannot be dragged to
manufacturing unit for purpose of claiming deduction
u/s.80IC. Special Provision is confined to certain
Undertakings, as defined in Statute, and such eligible
undertakings are entitled for deduction of profit of such
undertakings only. He has again drawn our attention that only
source of income should be eligible source of income and not
other sources of income, such as, profits of marketing division
or profits on account of established brand. For allocation of
profit of manufacturing unit mandate is very clear because
Income Tax Rule, 1962 contains Rule 18BBB wherein as per
sub-rule(2) a separate report is to be furnished by each
undertaking and that report shall be accompanied by a profit &
Page | 49
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
loss account and balance-sheet of that Undertaking as if
Undertaking is a distinct entity. He has therefore argued that
allocation of profit of a manufacturing unit should be made on
stand alone basis. He has questioned that how sale price of
products of Baddi Unit were determined and recorded.
Because of brand value sale price must have been
determined by management as if profit is earned by
assessee-company on sale of products of Baddi Unit. It was
recorded on presumption that sales were executed by Head
Office by charging brand value, name of product and
goodwill of Company. In any case, according to Ld. DR, a
reasonable expenditure should have been provided, so that
such an abnormal profit @ 58.66% could be checked.
9.6 In support of above submissions, Mr. Srivastava has
placed on strong reliance on decision of Hon'ble Supreme
Court in case of CIT v. Ahmedbhai Umarbhai & Co. [1950] 18
ITR 472 for legal proposition that, quote " profits received
relate firstly to his business as a manufacturer, secondly to his
trading operations, and thirdly to his business of import and
export. Profit or loss has to be apportioned between these
businesses in a business like manner and according to well
established principles or accountancy." Unquote. He has also
placed reliance on Liberty India (supra) .
10. We have heard both side at length. controversy as raised
by Addl. CIT Mr. Mahesh Kumar, officiating as AO, has serious
repercussions on subject of computation of "eligible profit"
while claiming a deduction under Statute. adjustments as
suggested by AO while working out manufacturing profit of
an eligible Unit has a far reaching consequences on all such
tax-payers; therefore we have to deal this issue carefully and
little elaborately, so that we can reach to a logical conclusion.
Page | 50
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
10.1 To begin with, it is better to elucidate that I.T. The Act
has only defined 'income' (Sec. 2(24)) as well as 'business' (Sec.
2(13)) but not term "profit and gains". However, section we
have to deal with i.e. Sec. 80 IC revolves around term 'profits
and gains'. As per section 2(13) 'business' includes trade,
commerce or manufacture. In auxiliary, as per section 2(24)
'income' includes (i) profits and gains. An 'income' has to have a
component of 'profits & gains' but all type of 'profits & gains'
may not be an 'income' for tax purpose under The Act.
section in controversy i.e. Sec. 80 IC of The Act is embedded
with both these terminology, reproduced verbatim :--
"80IC (1) Where gross total income of an assessee includes any
profits and gains derived by an undertaking or an enterprise
from any business referred to in sub-section (2), there shall, in
accordance with and subject to provisions of this section, be
allowed, in computing total income of assessee, a deduction
from such profits and gains, as specified in sub-section(3)".
10.2 'business' is prescribed in sub-section (2) in following
manner :
(2) This section applies to any undertaking or enterprise
(a) which has begun or begins to manufacture or produce any
Article or thing .........
Therefore, 'manufacturing' is first criteria for eligibility of
'business' to qualify for deduction. Hence 'profits' are
required to be derived from a manufacturing undertaking which
is producing specified article. That 'profit' is inclusive in
'gross total income'. As already noted, terminology "profit" has
not been defined in this The Act therefore we have taken help
of other resources. basic question is that what is "profit" of a
manufacturing unit?
Page | 51
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Firstly, term "Profit" implies a comparison between stage of a
business at two specific dates separated by an interval of a
year. Thus fundamentally meaning is that amount of gain
made by business during year. This can be ascertained by a
comparison of assets of business at two dates. To determine
"profit" of a manufacturing Unit accounting standard has
given certain guidelines, enumerated in short. In accounting
"profit" is difference between purchase price and cost of
bringing product to market. A "gross profit" is equal to sales
revenue minus cost of goods sold or expenses that can be
traced directly to production of goods. Rather, "operating
profit" is also defined as equal to sales revenue minus cost of
goods plus all expenses, except interest and taxes. Most of
manufacturing companies have 'Total Cost' based pricing
method. Total Cost has, broadly speaking, two components; i.e.
raw-material plus value addition (it includes all overheads).
Therefore, profit margin is price minus total cost. In
manufacturing Unit, thus cost of conversion is production
overheads, such as, direct labour cost and inextricably linked
expenditure of production. In general, every manufacturing
concern has fixed manufacturing capacity. So objective of
such concern ought to be to maximize profit. Now problem,
as posed, is that let us assume that said manufacturing unit
is producing two products; viz. "A" & "B". For production of "A"
product, let us say, there is less working hours, but fetching
more value for less money. However, in production of product
"B" due to complex process of manufacturing it requires more
working hours. For pricing product "B" situation is that more
money expenditure and may fetch less value. Therefore, in
processing department it is not possible to segregate two
components to determine segregated margins. Keeping this
accounting principle in mind, we revert back to language of
Page | 52
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
section 80IC which says that a deduction is permissible of such
profits of a specified Undertaking engaged in manufacturing of
certain article or thing. business of said enterprise/concern
should be manufacturing of article or thing and profit
therefrom is eligible for deduction u/s.80IC if that profit is part
and parcel of gross total income. As noted hereinabove, profit
is difference between purchase price and cost of production
along with cost of bringing product to market. This basic
principle of accountancy, as appeared, have been adopted by
Baddi Unit because as per Profit & Loss account, cost of
material, personal cost and general expenses, corporate
expenses were reduced from sale price to arrive at "profit
before tax" i.e. Rs. 116,82,91,400/-.
10.3 It is not in dispute that for Baddi Unit assessee has
maintained separate books of accounts and therefore drawn a
separate profit and loss account. In such a situation, whether
AO is empowered to disturb computation of profit, is always a
subject matter of controversy. From side of assessee, reliance
was placed on Addl. CIT v. Delhi Press Patra Prakashan [2006]
10 SOT 74 (Delhi) (URO). In this case, assessee was claiming
deduction u/s.80IA in respect of a Unit No.4. said Unit was
showing profit @ 62%. As against that, AO has noticed that a
margin of profit shown by assessee as a whole was only to
extent of 10%. AO has therefore recomputed profit of said
Unit by applying sub-section (10) of section 80IA and restricted
profit of said Unit to 10% only. While dealing this issue,
Respected Coordinate Bench has concluded that it was not
justified to disturb working of profit merely because profit
rate of eligible unit was substantially higher than overall rate of
profit of other Units of assessee, more so when separate books
were maintained by assessee in respect of said eligible Unit.
In present case as well AO has proceeded to disturb profit of
Page | 53
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Baddi Unit and held that only 6% profit is eligible for deduction
u/s.80IC. While doing so, identically, AO has not pinpointed
any defect in working of "profit" of Baddi Unit. In such a
situation, we can say that legal proposition as laid down by
Delhi Bench can also be applied in present appeal as well.
10.4 AO has also concluded that only incremental profit,
representing difference between profits earned earlier when
products were procured on P2P basis and profits earned by
Baddi Unit, should be treated as a manufacturing profit. AO
has then said that earlier assessee was procuring products
on P2P basis and showing average profit at 80%, however, on
basis of average selling rate of produces manufactured by
Baddi Unit average profit was gone up to 86%. AO has
therefore restricted deduction only at 6%. He has placed
reliance on Rolls Royce Plc (supra). In that case, assessee was
a UK based company carrying on marketing and sales activities
in India through a subsidiary. subsidiary was also rendering
support services to assessee, a UK based company. assessee
was carrying out manufacturing operations. It was held that
35% of its profits could be attributed to marketing activities
carried out in India and, therefore, chargeable to tax in India.
Facts of that case were altogether different and there was a
finding that undisputedly there was a PE in India and as per
Indo-UK DTAA income has to be taxed in India. An another
fact was that there was no separate account of assessee's
India operation and AO had found that on basis of global
accounts profits were determined on sales. In that case,
marketing was said to be primary activity for earning profit.
profit was directly due to operation in India. In that context
word "attributable" was considered and then it was held that
such part of income as it was reasonably attributable to
operations carried out in India is taxable. expression "business
Page | 54
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
connection" was also considered and then it was found that it
will include a person acting on behalf of a non-resident and
carried on certain activities is having business connection. A
business connection has to be real and intimate and through
which income must accrue or arise whether directly or
indirectly to non-resident. On those facts, since it was found
that R&D activities were carried out by assessee, therefore,
15% of profit was allocated to R&D activities and balance of
profit was attributable to marketing activities in India. said
decision was entirely based upon connectivity of marketing
operations with profits. CBDT Circular No.23 of 1969 dated
23/07/1969 was also taken into account wherein it was opined
that where a non-resident's sales to Indian customers are
secured through services of an agent in India then that profit
is attributable to agent's services. Meaning thereby because of
close connection of agent's marketing activity proportionate
profit was attributed to said activity. Contrary to this, there
was no finding that upto extent of 80%, profit was attributed
to assessee-company. segregation between 80% and 6% was
not on account of any evidence through which it could
independently be established that major portion of profit
could be attributed to assessee-company and rest of profit
could only be attributed to Baddi Unit.
10.5 AO has also made out a case that book profit percentage
of Baddi Unit was 58.67%, whereas profit of assessee-
company as a whole was 11.88%. If we further elaborate this
aspect, then AO has also given a working through which
average selling rate was 86.36% of Baddi Unit. Meaning
thereby if we presume for example that assessee has gross
profit of 86%, then net profit was disclosed at 58%. A question
thus arises that what beneficial purpose could be served for
reduction of gross profit to a lower percentage of net profit,
Page | 55
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
specially when allegation of A.O. was that there was an
attempt to declare higher profit of Baddi unit to get more
advantage of deduction. On perusal of P&L account, it is an
admitted factual position that assessee has in fact debited
certain expenses which have included head office expenses,
such as, marketing expenses and corporate expenses. Meaning
thereby net profit of Baddi Unit was not merely production
cost minus sale price, but difference of sale price minus all
general expenses which were attributable to sales. Therefore, it
is not reasonable to say that unreasonably profit was
escalated. difference between two percentages of profit, i.e.
about 28% ( G.P. - N.P.) thus represented expenditure which
could be said to be in respect of marketing network and brand
of product related expenses. AO has not complained about
allocation of expenditure as made by assessee while
computing profit of Baddi Unit. Once assessee has itself
taken into account related expenses to arrive at net profit,
then it was not reasonable on part of Revenue Department to
further reallocate those expenses by curtailing percentage of
eligible profit.
10.6 From side of Revenue, ld. Special Counsel has argued
that in terms of provisions of section 80IA(5) deduction is to
be computed as if such eligible business is only source of
income of assessee. According to him, manufacturing profit
was only source of income and that alone should be accounted
for in P&L account to claim deduction u/s.80IC of The Act.
Ld. DR has explained that as per view of A.O. up-to 80% of
profit was result of efficient marketing net work plus due to
brand name of company. Only 6% was manufacturing profit,
per A.O. It is true that section 80IC does recognized provisions
of section 80IA. Refer, Sub-section (7) of section 80IC which
prescribes as follows:--
Page | 56
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
"Section 80IC(7) : provisions contained in sub-section (5) and
sub-sections (7) to (12) of section 80IA shall, so far as may be,
apply to eligible undertaking or enterprise under this section."
Due to this reason, our attention was drawn on provisions of
section 80IA(5) of IT The Act; reads as under:--
"Section 80IA(5) : Notwithstanding anything contained in any
other provision of this The Act, profits and gains of an eligible
business to which provisions of sub-section (1) apply shall, for
purposes of determining quantum of deduction under that
sub-section for assessment year immediately succeeding
initial assessment year or any subsequent assessment year, be
computed as if such eligible business were only source of
income of assessee during previous year relevant to initial
assessment year and to every subsequent assessment year up
to and including assessment year for which determination is
to be made."
As per this section, profits of an eligible undertaking shall be
computed as if such eligible business is only source of income
of assessee. In this section again, Statute has used three
terms, i.e. "profit", "business" and "income". As narrated
hereinabove an 'income' has a wider expression than 'profit'.
Likewise, 'business' has also a wider meaning than word
'income'. In present case, manufacturing of pharmaceutical
products is declared as "eligible business". Then question is
that what is profit of such an eligible business? On careful
reading of this sub-section, it transpires that said eligible
profit should be only source of income. If we examine
separate profit & loss account of Baddi Unit, then it is apparent
that only source of income was sales of qualified products.
In said P&L A/c there was no component of any other sources
of income except sale price and otherwise also assessee has
Page | 57
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
confined claim only in respect of eligible profit which was
derived from sales of pharmaceutical products. This section
do not suggest that eligible profit should be computed first by
transferring product at an imaginary sale price to head office
and then head office should sale product in open market.
There is no such concept of segregation of profit. Rather, we
have seen that profit of an undertaking is always computed as
a whole by taking into account sale price of product in
market.
10.7 Ld. AO has suggested that assessee should have passed
entries in its books of account by recording internal transfer of
product from Baddhi Unit to head office marketing unit and
that too at arm's length price. From side of appellant an
argument was raised that what should be arm's length price in
a situation when a product is ultimately to be sold in open
market. Whether AO is suggesting that an imaginary line be
drawn to determine profit of Baddi Unit at a particular stage
of transfer of products. Definitely a difficulty will arise to arrive
at sale price as suggested by AO on transfer of product from
Baddi to head office. What could be reasonable profit which is
to be charged by Baddi Unit will then be a subject of dispute
and shall be an issue of controversy. On contrary, if sale
price is recorded at market price, which is easily ascertainable,
that was recorded in Baddi Unit account, scope of
controversy gets minimal. Rather, intense contention of
Ld.AR is that facts of case have explicitly demonstrated that
goods manufactured at Baddi Unit were transported to various
C&F agents across country for sale purpose. Therefore,
eligible business is manufacturing of pharmaceutical products
and only source of income was profit earned on sale of
products.
Page | 58
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
10.8 An interesting argument was raised by ld. Special Counsel
that provisions of section 80IA(8) prescribes segregation of
profit in case of transfer of goods from one Unit to another Unit.
But section 80IA(8) reads as follows:--
'Section 80IA(8) : Where any goods or services held for
purposes of eligible business are transferred to any other
business carried on by assessee, or where any goods [or
services] held for purposes of any other business carried on by
assessee are transferred to eligible business and, in either
case, consideration, if any, for such transfer as recorded in
accounts of eligible business does not correspond to market
value of such goods [or services] as on date of transfer, then,
for purposes of deduction under this section, profits and
gains of such eligible business shall be computed as if
transfer, in either case, had been made at market value of
such goods or services as on that date:
Provided that where, in opinion of Assessing Officer,
computation of profits and gains of eligible business in
manner hereinbefore specified presents exceptional difficulties,
Assessing Officer may compute such profits and gains on such
reasonable basis as he may deem fit.
Explanation : For purposes of this sub-section, "market value",
in relation to any goods or services, means price that such
goods or services would ordinarily fetch in open market.
Where any goods held for purpose of eligible business are
transferred to any other business carried on by assessee, then
if consideration for such transfer as recorded in accounts of
eligible business do not correspond to market value of such
goods, then for purposes of deduction profits and gains of
such eligible business shall be computed as if transfer has
been made at market value of such goods as on that date.
Page | 59
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Though section has its own importance but area under which
this section operates is that where one eligible business is
transferred to any other business. We again want to emphasis
that word used in this section is "business" and not word
"profit". We can hence draw an inference by describing these
two words and thus have precisely noted that 'eligible business'
has a different connotation which is not at par or identical with
"eligible profit". matter we are dealing is not case where
business as a whole is transferred. This is a case where
manufacturing products were sold through C&F in market.
Even this is not case that first sales were made by Baddi Unit
in favour of head office or marketing unit and thereupon
sales were executed by head office to open market. Once it
was not so, then fixation of market value of such good is out of
ambits of this section. If there is no inter-corporate transfer,
then AO has no right to determine fair market value of such
goods or to compute arm's length price of such goods. AO
has suggested two things; first that there must be inter-
corporate transfer, and second that transfer should be as per
market price determined by AO. Both these suggestions are
not practicable. If these two suggestions are to be implemented,
then a Pandora box shall be opened in respect of
determination of arm's length price vis a vis a fair market and
then to arrive at reasonable profit. Rather a very complex
situation shall emerge. Specially when Statute do not
subscribe such deemed intercorporate transfer but subscribe
actual earning of profit, then impugned suggestion of AO do
not have legal sanctity in eyes of law.
10.9 A very pertinent question has been raised by ld.AR Mr.
Patel that what should be line of demarcation to determine
sale price of a product if not market price. As far as present
system of fixation of sale price of product is concerned, a
Page | 60
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
consistent method was adopted keeping in mind several
factors, depending upon market situation, we have been
informed. But if assessee is compelled to deviate from
consistent method of pricing, then any other suggestion shall
not be workable because no imaginary line of profit can be
drawn, precisely pleaded before us. So uncertainty is that on
production cost what should be reasonable mark-up which
shall cover up margin of profit of a manufacturing unit. And
why at all this complex working of computation be adopted by
this assessee when a very simple method is adopted that on one
side of P&L A/c production cost plus overheads were debited
and on other side of P&L A/c sale price was credited to
computed profit. There are certain expenditure which are
notional expenditure and there are certain expenditure which
are self-generated to create brand value of a product.
Naturally, allocation of notional expenditure particularly in
respect of self- generated brand is a matter of hypothesis and
not a matter of realty. Logically it is not realistic to set apart a
value of a self generated brand which had grown in number of
years.
10.10 segment reporting of profit is although in practice but
purpose of such reporting is altogether different. Such segment
information is particularly useful for financial analysis, so that
management may keep a close watch on performance of
diversified business lines. areas of demarcation are business
segment, geographical segment, etc. But as far as Revenue of
an enterprise is concerned while segmentation is required, then
Revenue from sales to external customers are reported in
segmented statement of profit and loss. In an accounting
system, an intra-company sale between divisions or units is not
regarded as Revenue for purpose of such financial reporting.
As per Accounting Standards an Enterprise Revenue ignores
Page | 61
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
in house-sales that represent Revenue to one segment and
Expense to another. In this connection, AO has discussed
Hon'ble Supreme Court decision pronounced in case of Liberty
India (supra). AO wanted to justify his attempt of segmentation
on basis of theory that only profits derived due to
manufacturing activity can be said to be derived from eligible
undertaking. It was contested by AR before us that "segment
reporting" is about segregation of business and not about
segregation of any specific activity. In case of Liberty India
(supra) it was observed that IT The Act broadly provides two
types of tax incentives, namely, investment linked incentives
and profit linked incentives. Court was discussing Chapter VIA
which provides incentive in form of tax deductions to
category of "profit linked incentives". incentive is linked with
generation of 'operational profit'. Therefore, respected
Parliament has confined grant of deductions only derived from
eligible business. Each eligible business constitutes a stand
alone item in matter of computation of profit. Court has said
that because of this reason concept of "segment reporting" was
introduced in Indian Accounting Standards. Ld. Counsel Mr.
Srivastava has argued that deduction u/s.80IC is a profit
linked incentive. Only Operational Profit has to be claimed for
80IC deduction. According to him, each of eligible business
constitutes a stand alone item in matter of computation of
profit. For computation of profit of an eligible business word
used is "derived" in section 80IC which is a narrower
connotation, as compared to word "attributable". In other
words, by using expression "profits derived by an
undertaking", Parliament intended to cover such sources not
beyond first degree, i.e. first degree of manufacturing activity.
law pronounced by Hon'ble Supreme Court is final and should
Page | 62
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
not be disputed. However, a judgement is to be correctly
interpreted.
10.11 Finally, on question of segmentation of profit a
vehement reliance was placed on an old precedent namely
Ahmedbhai Umarbhai & Co. (supra). Facts of that case was that
assessee had owned three Mills at Bombay and one at Raichur
(Hyderabad). assessee was manufacturing oil from
groundnuts. produced at Raichur, Hyderabad is partly sold at
Raichur and partly in Bombay. question was in respect of
liability under Excess Profit Tax The Act (EPT The Act) for oil
manufactured at Raichur but sold in Bombay. controversy was
that assessee had contended that a part of profits derived
from sales in British India of oil manufactured at Raichur was
attributable to manufacturing operations at Raichur which are
an essential part of their business and that such profit must be
excluded from assessment under EPT The Act. It was narrated
that in other words, The Act brings within its ambit all income
in case of a person resident in British India which accrues or
arises or which is deemed to accrue or arise to him in British
India during accounting year. If Sec. 5 of The Act stopped
short at that stage, it was undoubted that in case of
respondent who is a resident in British India all his income, no
matter where it arose, within British India or without British
India, would be chargeable to excess profits tax just in same
way as it chargeable to income-tax under Indian IT The Act.
whole of his income arising in Raichur has legitimately been
taxed under that The Act. In that decision also, word
"business" was defined, i.e. business includes any trade,
commerce or manufacture. It has also been said that all
businesses, to which said law applied, carried on by same
person shall be treated as one business for purpose of said
The Act. question was about manufacturing activity and it
Page | 63
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
was contended that if a man is a manufacturer as well as a
seller of goods, then in his case term "part of a business"
means carrying on all two activities together and therefore
constitute part of business. One of Hon'ble Judges has said
that activities which assessee carried on at Raichur was
certainly a business of assessee. On one hand, it was argued
that accrual of profit must necessarily be at place where
sale proceeds are received or realized. But on other hand, it
was argued that profits received relate (i) firstly to his business
as a manufacture, (ii) secondly to his trading operations and (iii)
thirdly to his business of export. On that basis, it was opined
that profit or loss has to be apportioned between these
businesses in a business like manner and also according to well
established principle of accountancy. This apportionment of
profits between a number of businesses which are carried on by
same person at different places determines also place of
accrual of profit. The Act of sale is mode of realizing profits.
If goods are sold to a third person at Mill premises, one could
have said that profits arose by reason of sale. Profit would
only be ascribed to business of manufacture and would arise
at Mill Premises. Merely because a Mill owner has started
another business organization in nature of sale depot, that
cannot wholly deprive business of manufacture of its profits,
though there may have to be apportionment in such a case
between business of manufacture and business of shop
keeping. question which was answered was that whether in
respect of manufacturing business of assessee in Raichur,
profits accrue or arise and if so, at what place. One of Hon'ble
Judges has opined that manufacturing profit arise at place of
manufacture and that sale profits arise at place of sale and
that apportionment has to be made between two, though
place of receipts and realization of profits is place where
Page | 64
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
sales are made. Simultaneously it was also opined that
manufacturing profit could not be said to have accrued at that
place because there was nothing done from which profits
could accrue. There was an interesting contradiction because of
divergent views and it was also expressed that it was a fallacy to
regard profits as arising solely at place of sale. It was said
that revenue of company are derived from a series of
operation, including purchase of raw-materials or partly
manufactured articles, completely manufacturing its products
and transporting and selling them, and receiving proceeds of
such sales. essence of its profit-making business is a series of
operations as a whole.
10.12 We have carefully perused this decision of Hon'ble
Supreme Court as cited by Special Counsel Mr. Srivastava. At
outset, we want to place on record that entire issue before
Hon'ble Supreme Court was in respect of third proviso to
section 5 of EPT The Act. said proviso was duly a reproduced
in para-40 of order and for ready reference typed below:--
"Provided further that this The Act shall not apply to any
business whole of profits of which accrue or arise in an
Indian State, and where profits of a part of a business accrue
or arise in an Indian State, such part shall, for purposes of
this provision, be deemed to be a separate business whole of
profits of which accrue or arise in an Indian State, and other
part of business shall, for all purposes of this The Act, be
deemed to be a separate business."
point for consideration was that whether on those facts third
proviso to section 5 could be invoked. manufacturing activity
of making ground-nut oil was carried out at Raichur
(Hyderabad) which was treated as a separate business within
meaning of said proviso and thereupon it was claimed as
Page | 65
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
exempt being carried out within territorial jurisdiction of
Indian State. So Court has observed that to succeed in their
claim, it is incumbent upon assessee to show that there was in
fact a part of a business and that profit had actually accrued
or arose in that part of an Indian State. Court has clearly
stated in para-41 that both elements should found exist and
then only business could be treated as a separate business.
However, said proviso has propounded only deeming
provisions, as is apparent from language of section itself. For
purpose of said section, it was deemed to be a separate
business. whole of profits of which accrue in an Indian State
and other part of business be deemed to be a separate
business. In para-44, Hon'ble Court has discussed problem
with reference to certain decisions of English Courts and then
made an observation that it had been held that if separation is
possible in such cases, proper course is to follow that sever
profits of two businesses and assess accordingly. result of
discussion was that profits of two businesses were directed to
be apportioned. Simultaneously, Hon'ble Court has also made
an observation, quote "It is true that these are cases where
several businesses were amalgamated and carried on together,
or more of which were not liable to tax or excess profits duty;
but principle of apportionment upon which these cases were
decided could, in my opinion, be applied with equal propriety to
cases where one part of business is distinct and separate from
other parts and is capable of earning profits separately."
unquote. Hon'ble Judge was therefore very much concern
about fact that business should be capable of earning profits
separately. Rather, in subsequent paras it was further made
clear that manufacturing profit could be sub-divided only if
there was no insuperable/challenging difficulty in making such
apportionment. A possibility was therefore discussed that there
Page | 66
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
could be apportionment of net profit that accrue to business
of assessee and one portion of it could be allotted to that part
of business which relates to manufacture of said commodity
which was ultimately sold in market.
Raichur factory certainly has business connection in British
India for a part of oil manufactured by it is sold through
Bombay establishment of assessee. That all operations of
Raichur business are not carried on in Bombay. Therefore,
profits that would be deemed under this section to accrue or
arise in Bombay will only be profits which may reasonably be
attributed to that part of operations carried on in Bombay,
that is to say, to sale of part of its oil in Bombay. In this
context, an observation was made that a trade is completed at a
place where a business transaction is closed. Profits of a
business are undoubtedly not "received" till commodity are
sold and they are ascertained only when sale take place. This
aspect has not been doubted or challenged even in said order.
But in said order question was that if a part of a business
consisted of manufacturing activity and that activity can be
segregated so as to compute yield profit, then whether such
profit accrue only at place where manufacture are sold. To
answer this question, Hon'ble Court has commented in para-
49 that there was no express direction as to apportionment in
third proviso to section-5 of EPT The Act. opinion expressed
was very specific that a profit can accrue in respect to that part
of a business only when apportionment is possible. Hon'ble
Court has said that only on said assumption that
apportionment was possible said proviso was based upon that
presumption only. If no apportionment can be made in respect
of process of a particular business, then that will not be
considered to be a part of business at all and held that
proviso will not apply. It was concluded that principle of
Page | 67
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
apportionment was implied therein. After this detailed
discussion, we thus arrive at conclusion that principle of
apportionment was criteria for segregating manufacturing
profit if it was feasible to do so. As against that in present case
assessee has computed profit of Baddi Unit on basis of
well accepted principle of accountancy that a profit is accrued
where a transaction is closed, meaning thereby profit arises
solely at time of sale.
10.13 After detailed discussion, before we close controversy
we would like to express that AO's proposition of segmentation
of eligible profit of manufacturing unit was not altogether
meaningless. This approach of AO cannot be brushed aside on
fact of it. But at present, when method of accounting as
applicable under Statute, do not suggest such segregation or
bifurcation, then it is not fair to draw an imaginary line to
compute a separate profit of Baddi Unit. Baddi Unit has in
fact computed its profit as per a separately maintained books of
account of eligible manufacturing activity. To implement
method of computation at stand alone basis, as conveyed by
AO, manufacturing unit has prepared a profit & loss account
of its manufacturing-cum-sale business activity. If Statute
wanted to draw such line of segregation between
manufacturing activity and sale activity, then Statute should
have made a specific provision of such demarcation. But at
present legal status is that Statute has only chosen to give
benefit to "any business of drug manufacturing activity" which
is incurring expenditure on research activity is eligible for this
prescribed weighted deduction. segregation as suggested by
AO has first to be brought into Statute and then to be
implemented. Without such law, in our considered opinion, it
was not fair as also not justifiable on part of AO to disturb
method of accounting of assessee regularly followed in
Page | 68
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
normal course of business. It is true that otherwise no fallacy or
mistake was detected in books of accounts of Baddi Unit
prepared on stand alone basis through which only source of
income/profit was manufacturing of specified products. We
therefore hold that AO's action of segregation was merely
based upon a hypothesis, hence hereby rejected. These two
grounds Nos.6 & 7 are allowed."
88. We have carefully perused this decision and note that controversy
in this ground of appeal with respect to applicability of section 80 IA
(8) of The Act, on marketing and other selling distribution as well as
research and development services provided by undertaking as a
whole to eligible industrial undertaking at cost or market rate for
working out eligible profit for deduction, has been decided. Ld. DR
could not point out any other contrary judgment to decision cited by
Ld. AR. Therefore, we respectfully following above decision of
coordinate bench hold that provisions of section 80IA(8) of The Act
does not apply to assessee on transfer of services of marketing
division of company to eligible industrial undertaking whose profits
are claimed as deductible.
63. Therefore in absence of any finding that head office, branches or depot
are providing any services and are considered as a profit centre by
assessee or any finding by learned assessing officer, no further profit
can be attributed on actual cost allocated by these units to eligible
units. Further actual cost charged by 3rd parties are merely allocated
to eligible and non eligible units of assessee without making any
further noticeable addition to such costs, profit ratio of 10% over and
above cost cannot be imputed for working out eligible profit of unit.
Further learned CIT A in assessee`s own case for assessment year
2004 05 has himself held that without any provision of services to
assessee, he himself did not agree with finding of learned assessing
officer about these facts for assessment year 2004 05. Learned CIT
Page | 69
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
DR also did not point out before us that was there any value addition
made by these head office or branches to various cost allocated by
assessee. In view of this ground, number 11 of appeal of assessee is
allowed and AO is directed to not to markup any profit element on
allocation of common cost to eligible undertaking.
64. Ground number 12 of appeal of assessee is with respect to
deduction of claim of deduction u/s 80 IB/80 IC to extent of INR
39571939/ in respect of royalty on use of brand name Rajinigandha`
by eligible units in terms of provisions of section 80 IA (8) read with
section 80 IB (13) and 80 IC (7) of The Act. Learned assessing officer
has noted that eligible undertaking is are manufacturing and selling
their products under brand name Ranjnigandha is owned by
corporate office of Assessee Company. Above brand as noted by him
is a well-established brand, which has been used by eligible
undertaking, is without making any provision for payment of royalty etc.
in its books of accounts. These facts were also pointed out by special
auditor and therefore as suggested by special auditor fair market
value of transfer of Rajinigandha brand by corporate office to eligible
units should also be considered at rate of 1% of sale value of
finished products manufactured and sold in name of said brand.
Therefore profit of these brands are allocated to eligible undertaking
would have reduced eligible profit for deduction by INR 3 9571939/-.
Assessee submitted before learned assessing officer that no expenses
are incurred by eligible units in this regard nor any income has been
earned for use of brand name. It was further stated that above brand
is owned by assessee company itself and therefore there is no question
of charging any royalty of nature suggested by AO. Learned
assessing officer rejected contention of assessee and stated that it is
evident that royalty attributable to use of brand name by eligible
undertaking has not been charged by brand owning entity. It is
further noted by him that above brand is owned by head
office/corporate office and accordingly for working out correct profit of
Page | 70
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
eligible unit is provided u/s 80 IA (8) of The Act, non charging of such
royalty for use of brand has resulted into distortion of real profit of
eligible undertaking. He proposed that profits of eligible undertaking
should be reduced by INR 39571939/. On appeal before learned CIT
A he held that definitely brand has been developed overall long period
and is property of corporate or head office of company. Therefore,
he confirmed above addition.
65. Learned authorised representative submitted that brand is owned by
assessee company as such and every unit or division of company is
owner of said brand. He therefore stated that it is impossible to
comprehend as to how a company can pay royalty to itself. He further
stated that learned assessing officer and Commissioner Appeals has
picked up a wrong comparable to make addition in hands of assessee.
It was stated that case of royalty in case of Tulsi mix` brand is out of
context and not relevant to facts of case as in that case assessee
himself is being royalty to an independent third party in view of
exploitation of its brand name. On contrary it was submitted that
present brand originally owned and used by various units of
company and as such there is no case of any know how royalty to be
reduced from eligible profit. He further stated that in similar
circumstances and facts of case AO has not made any adjustment
because of royalty in respect of same brand for assessment year 2013
14 onwards and as such impugned adjustment is inconsistent. He
further stated that factual position to this effect is supported from
order of learned transfer pricing officer for assessment year 2013 14
and 2014 15. He extensively referred to page number 38 69 of
paper book number 2. He further submitted that royalty being an
intangible is not covered under provisions of section 80 IA (8) of The
Act as above provision only apply in case of goods and services.
Therefore he submitted that AO is not justified in reducing claim of
deduction by adjusting notional royalty in respect of brand
RajaniGandha payable by eligible units to head office.
Page | 71
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
66. Learned departmental representative vehemently supported order of
learned assessing officer and learned CIT A. He submitted that
royalty is payable for use of brand owned by another unit of
assessee for being used by eligible unit for manufacturing. He
therefore submitted that user of above brand by eligible unit is a
service and therefore provisions of section 80 IA (8) of The Act are
applicable.
67. We have carefully considered rival contention and perused orders of
lower authorities. Undisputedly brand originally is owned by assessee
company and no royalty is paid by assessee to an outsider i.e. 3rd
party. Learned assessing officer has compared royalty payment made
by assessee for another brand of Tulsi mix` to another party.
Admittedly, in case of assessee for assessment year 13 14, learned
transfer-pricing officer in order dated 30/10/2017 while benchmarking
specified domestic transactions has also not made any adjustment on
this account. No doubt, there is a service to the eligible unit for using
the brand name but its market value is required to be determined.
Assessee has not given this brand name for exploitation to any third
party. Further for market value in relation to services of user of
above brand name would be price that such goods or services would
ordinarily fetch in open market. Assessee has also not allowed
anybody else to utilize above brand. Ld AO has compared with the
brand name Tulsi Mix` for which assessee is paying royalty, which is
owned by third party. There is no comparison shown by the ld AO that
both are similar brands. Further in later on years ld AO himself has not
adjusted the legible profit on this account, therefore, it is apparent that
ld AO himself do not think that such adjustment is required to be made.
Therefore, brand market value is also not determined by learned
assessing officer. In view of this ground number 12 of appeal of
assessee is allowed.
68. Ground number 13 of appeal is against confirmation of disallowance of
INR 901187656/- in respect of claim of purchase of sandalwood oil from
Page | 72
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
M/s Surya Vinayak industries Ltd and Allied perfumers private limited.
Brief facts of case shows that ld assessing officer has made
disallowance of purchase to extent of Rs. 72,23,61,646/- from M/s.
Surya Vinayak Industries Ltd. (SVIL) and Rs. 17,88,26,010/- from M/s.
Allied Perfume P. Ltd. (APPL) by making reference to seized annexure A-
1/ Page 52. Ld AO has alleged that part of purchases of sandalwood
oil as recorded in books of assessee are inflated and bogus and that
seller M/s. Surya Vinayak Industries Ltd. and APPL does not have
production capacity to supply recorded quantity of Sandalwood Oil.
However, CIT(A) has restricted disallowance to Rs. 54,94,24,290/- on
ground that there is no dispute regarding purchase and use of quantity
for manufacturing and sale and CIT(A) computed disallowance on
basis of lowest price of other suppliers. Further, AO has made
complete disallowance of purchases from APPL and part disallowance
from purchases from SVIL. Relevant working of disallowance is at Page
84-85 of assessment order. AO has made such disallowance without
appreciating use of actual quantity with reference to manufacturing
carried out by assessee. CIT(A) has also disputed price of
purchases from SVIL and APPL and has observed that purchases are
inflated and adjustment was made in respect of overall purchase price
based on quantity purchased from these two parties by referring to
lowest price of other suppliers. However, quantum of purchase and use
of it in manufacturing process was not disputed after making necessary
verification of raw material used and quantity manufactures. It was
corroborated from excise records. CIT (A), after considering overall
facts of case, held that there is no dispute regarding correctness of
quantity of Sandalwood oil purchases and recorded in books of
assessee and only dispute is regarding value of purchases. Accordingly,
CIT(A) applied minimum purchase rate from third party to quantity of
Sandalwood oil purchased from SVIL and APPL. Relevant working is at
Page 297-298 of CIT(A)`s order. Disallowance was restricted to Rs. 54,
Page | 73
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
94,24,290/- as against Rs. 90,11,87,656/-. Therefore, assessee is in
appeal in this ground.
69. Learned authorised representative submitted that identical issue has
been considered by Hon`ble ITAT in order for AY 2005-06 to 09-10 in
favour of appellant wherein Hon`ble court has held that alleged seized
documents relied upon by AO are neither incriminating in nature nor
credible evidence to justify allegation of inflation of purchase price. It
has been held by Hon`ble ITAT that entire story of inflated purchases is
merely on basis of conjectures and there is no real evidence to
establish any sort of case against appellant. It was submitted that
whole basis of disallowance is based on Page No. 52 of Annexure A/1
seized during course of search on 21.01.2011 and same is year specific
and it is not known as to how such document is relevant for AY 2010-11
i.e. year under consideration. In light of finding of Tribunal, alleged
annexure A-1/ Page 52 is not relevant to AY 2010-11 and same could
not be considered as basis for any addition in AY 2010-11. Further, AO
and CIT(A) has not disputed fact that entire purchases of Sandalwood
Oil is fully supported from invoices issued by parties and use of same
for manufacturing of final product. Further, assessing officer was not
justified in relying upon seized document Page 52 of Annexure A/1 as
same is incoherent, dumb and wholly irrelevant to case of assessee.
Further, seized document relates to AY 2011-12 and as such, it has
no relevance or bearing to assessment year under consideration. It is
also important to note that name of assessee is nowhere mentioned in
said document and it is not known as to how such document is relevant
to present case. Hon`ble ITAT has specifically disputed correctness
of this document and has held that no adverse inference could be drawn
on basis of same. He further submits that theory of bogus purchases
and return of cash by SVIL and APPL as suggested by assessing
officer has no valid basis as assessing officer has failed to bring any
evidence on record to demonstrate alleged synchronized flow of cheque
and cash between assessee and these companies and as such adverse
Page | 74
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
inference is merely on hypothetical basis. reference to statement of
various persons, who have no direct involvement with reference to
alleged annexure A/1 Page 52, is not relevance. Assessee has simply
made purchases of Sandalwood Oil from SVIL and APPL, which are
independent third parties, and assessee is not answerable to internal
affairs of these concerns. Further, statement of third parties have not
been recorded so as to establish authenticity and genuineness of alleged
seized annexure A-1 page 52 and as such computerized sheet of alleged
annexure is of no evidentiary value in absence of any
corroboration/cross examination. It is pertinent to note that
manufacturing, sales are fully reconciled and corroborated with VAT
return and excise records, and as such there could be no dispute with
regard to correctness of quantitative trading results. Further, there is no
adverse evidence on record regarding disputing quantum of purchases
of sandalwood oil and reconciliation of purchases with production. It is
self evident that whole addition is merely based on inferences and bald
allegations, which are not supported from any documentary evidences.
In any case, once correctness of purchases recorded in books is
accepted, dispute regarding valuation of it is wholly irrelevant as
revenue authorities cannot sit in armchair of assessee and decided
reasonableness of an expenditure. It is not case of revenue that M/s.
Surya Vinayak Industries Ltd. and M/s Allied Perfumers Pvt. Ltd. are
related parties or provisions of section 80IA(8) or 80IA(10) are applicable
and as such there is no ground or basis for any disallowance of
purchases of Sandalwood Oil from M/s. Surya Vinayak Industries Ltd.
and M/s Allied Perfumers Pvt. Ltd. keeping in view documentary
evidences placed on record in form of bills, vouchers, documents
showing actual receipt of material, documents in support of actual
movement of goods and actual consumption in manufacture of final
products, viz., Pan Masala, Tobacco and Gutka products. Even
otherwise, CIT (A) has erred in applying third party minimum rate
while computing value of purchase in case of SVIL and APPL. It is
Page | 75
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
relevant to mention that no investigation has been carried out to
demonstrate comparability of cases. There are several factors which
affect price of a commodity and without making any objective
comparison with regard to quality, brand, nature and type of product,
there could be no ground or basis for applying data of a third party
transaction. While applying minimum rate of other party, CIT (A) has
ignored fact that other parties have also supplied Sandalwood Oil at
different rates as per details given at page 70 of Supplementary paper
book 2. Further, CIT (A) has also ignored fact that various items
manufactured are of different qualities and use of different category of
raw material based on business and commercial expediency and also
corroborated from manufacturing of difference quality and sale price
and as such mechanical application of minimum rate is highly arbitrary
and irrelevant. In any case, even if purchase price of other parties is to
be considered, same should be average price and not lowest price. In
light of above discussion and order of Hon`ble ITAT for AY 2005-06 to
09-10, Issue stands settled in favour of appellant as lower authorities
have not brought anything on record to substantiate allegation of
inflated purchases particularly when seized material relied upon does
not belong to year under consideration and there is no other material or
finding to support such addition. There is thus no justification for
disallowance of claim of purchases to extent of Rs. 54,94,24,290/- on
basis of application of minimum third party purchase rate and same
may kindly be deleted.
70. Learned departmental representative extensively read para number 70
102 of assessment order. It was stated that on perusal of annexure A
1 seized during course of search and seizure action and also various
other an action it is apparent that assessee has made bogus purchases
from Messer Surya Vinayak industries Ltd amounting to INR 7
22361646/ and from Messer Allied perfumers private limited of INR 1
78826010 totaling to INR 901187656 in all. He further submitted that
such bogus purchases have been added by learned assessing officer
Page | 76
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
giving conclusive reasons. He further went on there from and continued
until para number 147 of assessment order and then stated that
assessee has made bogus purchases from above two companies and
therefore addition has been made in hands.
71. We have carefully considered rival contentions and perused orders of
lower authorities. learned CIT A has decided whole issue and held
that based on all evidences gathered during search and post search
proceedings in case of appellant and Florian a group of cases, he is
satisfied that there are enough evidences in form of seized documents
and statement recorded during search and post search proceedings
which clearly establishes that so Vinayak industries Ltd and Allied
perfumery is private limited has not supplied goods namely
Sandalwood oil to assessee and I have merely issued bogus bill to
assessee and received cheques from assessee and paid back to
assessee in cash after some adjustment in rate and apportioning excise
duty. After giving this finding, he further held that Sandalwood oil is an
excisable product and entered in excise registrar of perfumery
compound division of assessee. He further noted that on date of such
there was no discrepancy in stock of sandalwood oil found which is
apparent from assessment order where assessing officer himself as
mentioned that during course of search proceedings conducted
sandalwood oil was found in production for being hundred KG and in
managing director room wearing 208.74 KG. He further considered
consumption of sandalwood oil after reducing purchases from two
companies and also after incorporating quantity purchased from these
two companies and compared them. He noted that if quantity
purchased from these two entities are disallowed and not taken into
consideration than revised yield ranges from 102.57% to 112.62
percentage of entire consumption of raw material, which gives an
absurd result of finished goods production, which is exceedingly
consumption. He further noted that quantity of finished product 4 KG
on consumption of sandalwood oil ranges from 6.5 8.54 for various
Page | 77
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
assessment years appears to be reasonable in variation whereas if
entire quantity purchased from these 2 entities are ignored and finished
product per KG consumption of sandalwood oil will range from 13.47 to
65.25 therefore he held that if quantity purchased from these 2 entities
are not considered in quantitative details will give an erroneous and
inconsistent results in terms of finished product ratio. He further found
that views taken by him is also supported by words mentioned in
seized documents annexure A 1 and page number 42 seized from
laptop of Mr. Gupta where there is a mention of adjustment of
apportionment of excise duty and rate difference. Therefore, he gave a
conclusive finding that purpose of these bills is just adjustment in
prices. He further analyze details of purchases from all parties
assessment year -wise in respect of sandalwood oil purchase and he
found that average rate of alleged purchase from these 2 entities is a
much higher rate compared to other undisputed parties. Therefore, he
noted that purpose of mentioning quantity of goods as Central would
oil ( C ) and sandalwood oil (SU) is just to inflate cost of sandalwood
oil purchased and used for manufacturing purposes in perfumery
division. He further reached at a conclusion that appellant has though
purchase sandalwood oil from grey market but billing of it has been
made by these two entities at higher cost. Accordingly, he held that
entire quantity purchased from these two entities could not be ignored,
as it will go against maintenance of quantitative records as per Central
Excise rules and inconsistent results in terms of yield of finished goods.
Therefore, he held that purpose of issuing bogus bill by these two
entities is just to inflate purchase in amount and to increase amount
of purchases in terms of rupees for sandalwood oil. Accordingly, he
upheld that in fact assessee has purchased sandalwood oil from
grey market, quantity of such purchases were entered into Central
Excise register however for purpose of accounting and recording it in
books of accounts assessee used these two entities and obtained bogus
bills from them at higher rate. However, the order of the ld CIT (A) is for
Page | 78
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
the combined Assessment years for many years. He has given a finding
for Ay 2011-12 however, he did not show that how this issue is related
to AY 2010-11. The coordinate bench in its order in case of the assessee
for the above paper has held that it pertains to Ay 2011-12. Therefore
cognizance of the same can be taken only for the year Ay 201--12. There
is no evidence found during the course of search that these are the
transactions related to this year. The order of the coordinate bench in
assessee`s own case is clear on this issue with respect to which year
the cognizance of these seized material would be taken.
28. The main seized paper on which heavy reliance is placed up on
by revenue is Page No. 52 of annexure A-1 which is a statement dated
30.11.2010 where in the details of three bills dated 19.11.2010 and
26.11.2010 are given. The details of the bill show quantity, rate, and
the amount. The total quantity purchased by the assessee is 650 kgs
and corresponding amount is Rs. 4.64 crores. There is account
statement below which gives the details of payment made up to
31.10.2010 of Rs. 6.70 crores as excess and there is two entry of rate
difference and further there is an adjustment on account of excise
duty and thereafter Rs. 2.04 crores is determined as amount to pay
from which an amount paid by party of Rs. 10.50 crores is deducted
which resulted into excess paid of Rs. 12.54 crores. Below that, there
is a statement in which details of cash payment starting from
02.11.2010 to 24.11.2010 is mentioned totaling to Rs. 10.50 crores. A
further details of account of SVIL and APPL is mentioned and net of it
is stated to have been amount excess received of Rs. 9.49 crores
which result in to amount to receive of Rs. 30436590/-.
29. Surya Vinayak Industries in fact gave this document to Shri Rajiv
Kumar who is managing Director of Dharampal Stayapal Ltd. This
paper was shown to him vide question No. 13, which was replied by
him by asking for some time. He further replied this question vide
question No. 27. The ld AO further examined Shri Rajiv Gupta on
Page | 79
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
13.06.2011 where he has denied of having paid any excess cash to
the assessee. The director of M/s. Surya Vinayak Industries Ltd was
also summoned and his statement was recorded on 02.05.2011
wherein, he too have denied having received the payment other than
by cheque or payment any cash in lieu of sales of material to the
assessee company. The ld Assessing Officer himself has stated that
the paper is dated 30.11.2010 that means the transaction in this
paper are showing the transaction for the month of November 2010.
The excess amount paid up to 31.10.2010 is mentioned. The balance
is also shown up to 30.11.2010, therefore, it is apparent that this
paper does not pertain to Assessment Year 2005-06 to 2009-10 but
for Assessment Year 2011-12. None of the transaction showed in this
paper pertain to the impugned Assessment Years mentioned before
us. The Hon'ble Supreme Court in case of Sinhagd Technical
Educational Society (Supra) has held that the incriminating material
seized must pertain to assessment years in question. In that
particular case the ITAT in [2011] 16 taxmann.com 101 (Pune)/[2012]
50 SOT 89 (Pune)(URO)/[2011] 140 TTJ 233 (Pune) has held in para
no 9 that In the process, the AO totally missed the requirements of
the law i.e. only the assessment year with the pending assessments
and the assessment year with the assessment year specific
incriminating documents/transactions or seized asset should only be
reopened under the provisions of the first proviso to s. 153A of the Act
and not otherwise. It was further held as under in para no 13 that :-
13. From the above, it is evident that the where nothing
assessment year and assessee specific incriminating "money,
jewellery or other valuable article or thing or books of account
or documents", the assessments for assessment years cannot
be disturbed. Further, the concluded assessments should not
be disturbed merely for making routine additions, which could
have been otherwise done in the regular assessment and of
course, the pending assessments fall under exceptions. As
Page | 80
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
stated by the learned counsel point No. 9 of his note reproduced
above, "nothing is seized pertaining to asst. yrs. 2000-01 to
2003-04 obviously there is no question of recording satisfaction
note". On this reasoning itself, we find that the assessee has to
succeed. Therefore, we do not examine the other arguments of
the counsel. Otherwise, the counsel argued that the reopening
of the assessment for the asst. yrs. 2000- 01 to 2001-02 is
impermissible in view of the judgment of Ahmedabad Bench in
the case of Vijay M. Vimawal (supra). Further, he also argued
that the assessment of asst. yr. 2003-04 was actually completed
under s. 143(3) on 30th March, 2006 i.e. prior to receipt of the
impugned documents by the AO on 18th April, 2007, this
assessment was not pending. Attending to these arguments of
the counsel is superfluous and merely an academic exercise as
we have upheld the applicability of the decision of the Tribunal
in the case of LMJ International Ltd. (supra) for the proposition
that the "where nothing incriminating is found in the course of
search relating to any assessment years, the assessments for
such years cannot be disturbed" and other local decision cited
above. Accordingly, the additional ground raised by the
assessee for all the four appeals under consideration is allowed
and in favour of the assessee. The matter reached honourable
Bombay High court [2015] 63 taxmann.com 14 (Bombay)/
[2015] 235 Taxman 163 (Bombay)/ [2015] 378 ITR 84
(Bombay)/ [2015] 278 CTR 144 (Bombay) where in para no 7 it
is held that If there is reference made to some loose papers
found and seized from his residence indicating some "on money"
receipt during the admission process then above co-relation and
assessment year wise ought to have been established. In the
circumstances, we do not think that the tribunal's order raises
any substantial question of law. On further appeal before
Honourable Supreme court in [2017] 84 taxmann.com 290
Page | 81
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
(SC)/ [2017] 250 Taxman 225 (SC)/ [2017] 397 ITR 344 (SC)/
[2017] 297 CTR 441 (SC) held as under:-
15. At the outset, it needs to be highlighted that the
assessment order passed by the AO on August 7, 2008
covered eight Assessment Years i.e. Assessment Year
1999-2000 to Assessment Year 2006-07. As noted above,
insofar as Assessment Year 1999-2000 is concerned,
same was covered under Section 147 of the Act, which
means in respect of that year, there were re-assessment
proceedings. Insofar as Assessment Year 2006-07 is
concerned, it was fresh assessment under Section 143(3)
of the Act. Thus, insofar as assessment under Section
153C read with Section 143(3) of the Act is concerned, it
was in respect of Assessment Years 2000-01 to 2005-06.
Out of that, present appeals relate to four Assessment
Years, namely, 2000-01 to 2003-04 covered by notice
under Section 153C of the Act. There is a specific purpose
in taking note of this aspect which would be stated by us
in the concluding paragraphs of the judgment.
16. In these appeals, qua the aforesaid four Assessment
Years, the assessment is quashed by the ITAT (which
order is upheld by the High Court) on the sole ground
that notice under Section 153C of the Act was legally
unsustainable. The events recorded above further disclose
that the issue pertaining to validity of notice under
Section 153C of the Act was raised for the first time
before the Tribunal and the Tribunal permitted the
assessee to raise this additional ground and while dealing
with the same on merits, accepted the contention of the
assessee.
17. First objection of the learned Solicitor General was
that it was improper on the part of the ITAT to allow this
Page | 82
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
ground to be raised, when the assessee had not objected
to the jurisdiction under Section 153C of the Act before
the AO. Therefore, in the first instance, it needs to be
determined as to whether ITAT was right in permitting the
assessee to raise this ground for the first time before it, as
an additional ground.
18. The ITAT permitted this additional ground by giving a
reason that it was a jurisdictional issue taken up on the
basis of facts already on the record and, therefore, could
be raised. In this behalf, it was noted by the ITAT that as
per the provisions of Section 153C of the Act,
incriminating material which was seized had to pertain to
the Assessment Years in question and it is an undisputed
fact that the documents which were seized did not
establish any co-relation, document-wise, with these four
Assessment Years. Since this requirement under Section
153C of the Act is essential for assessment under that
provision, it becomes a jurisdictional fact. We find this
reasoning to be logical and valid, having regard to the
provisions of Section 153C of the Act. Para 9 of the order
of the ITAT reveals that the ITAT had scanned through
the Satisfaction Note and the material which was
disclosed therein was culled out and it showed that the
same belongs to Assessment Year 2004-05 or thereafter.
After taking note of the material in para 9 of the order,
the position that emerges therefrom is discussed in para
10. It was specifically recorded that the counsel for the
Department could not point out to the contrary. It is for
this reason the High Court has also given its imprimatur
to the aforesaid approach of the Tribunal. That apart,
learned senior counsel appearing for the respondent,
Page | 83
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
argued that notice in respect of Assessment Years 2000-
01 and 2001-02 was even time barred.
19. We, thus, find that the ITAT rightly permitted this
additional ground to be raised and correctly dealt with the
same ground on merits as well. Order of the High Court
affirming this view of the Tribunal is, therefore, without
any blemish. Before us, it was argued by the respondent
that notice in respect of the Assessment Years 2000-01
and 2001-02 was time barred. However, in view of our
aforementioned findings, it is not necessary to enter into
this controversy.
20. Insofar as the judgment of the Gujarat High Court
relied upon by the learned Solicitor General is concerned,
we find that the High Court in that case has categorically
held that it is an essential condition precedent that any
money, bullion or jewellery or other valuable articles or
thing or books of accounts or documents seized or
requisitioned should belong to a person other than the
person referred to in Section 153A of the Act. This
proposition of law laid down by the High Court is correct,
which is stated by the Bombay High Court in the
impugned judgment as well. The judgment of the Gujarat
High Court in the said case went in favour of the Revenue
when it was found on facts that the documents seized, in
fact, pertain to third party, i.e. the assessee, and,
therefore, the said condition precedent for taking action
under Section 153C of the Act had been satisfied.
21. Likewise, the Delhi High Court also decided the case
on altogether different facts which will have no bearing
once the matter is examined in the aforesaid hue on the
facts of this case. The Bombay High Court has rightly
Page | 84
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
distinguished the said judgment as not applicable giving
the following reasons:
"8. Reliance on the judgment of the Division Bench
of the High Court of Delhi reported in case of SSP
Aviation Ltd. v. Deputy Commissioner of Income Tax
[2012] 346 ITR 177 is misplaced. There, search was
carried out in the case of "P" group of companies. It was
found that the assessee before the Hon'ble Delhi High
Court had acquired certain development rights from "P"
group of companies. Based thereon, the satisfaction was
recorded by the Assessing Officer and he issued notice in
terms of Section 153C. Thereupon the proceedings were
initiated under section 153A and the assessee was
directed to file returns for the six assessment years
commencing from 2003- 04 onwards. The assessees filed
returns for those years but disclosed Nil taxable income.
These returns were accepted by the Assessing Officer,
however, in respect of the assessment year 2007-08 there
was a significant difference in the pattern of assessment
for this year also, the return was filed for Nil income but
there were certain documents and which showed that
there were transactions of sale of development rights and
from which profits were generated and taxable for the
assessment year 2007-08. Thus, the receipt of Rs.44
crores as deposit in the previous year relevant to the
assessment year 2008-09 and later on became subject
matter of the writ petition before the Delhi High Court.
That was challenging the validity of notice under section
153C read with section 153A. In dealing with such
situation and the peculiar facts that the Delhi High Court
upheld the satisfaction and the Delhi High Court found
that the machinery provided under section 153C read
Page | 85
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
with section 153A equally facilitates inquiry regarding
existence of undisclosed income in the hands of a person
other than searched person. The provisions have been
referred to in details in dealing with a challenge to the
legality and validity of the seizure and action founded
thereon. We do not find anything in this judgment which
would enable us to hold that the tribunal's understanding
of the said legal provision suffers from any error apparent
on the face of the record. The Delhi High Court judgment,
therefore, will not carry the case of the revenue any
further."
We, thus, do not find any merit in these appeals.
Therefore as per principle enunciated by the Honourable
supreme court, there has to be specific incriminating
material for each assessment year assessed u/s 153A /
153C which is concluded and addition can be made
based on that only.
30. Based on the page no 52 of annexure A/1 that is containing
accounts as at 31/10/2010. Therefore, it relates to AY 2011-12
only. No documents were shown to us or referred to in the
Assessment order shows that any incriminating material was found
which even remotely shows that assessee has purchased sandalwood
at over invoiced price from those parties. The rate list of material was
found for the years in appeal and no attempt was made to show that
the material purchased DCIT Vs. Dharampal Satyapal Ltd, ITA No.
3877, 3878, 3879, 3880, 3881/Del/2016 (Revenue) ITA No. 3310,
3717, 3718, 3719, 3737/Del/2016(Assessee) (Assessment Year: 2005-
06 to 2009-10) Page | 56 by the assessee from this party is not at the
market rate prevailing on those days. Mere assertion that assessee
has purchased material from this party in these years and therefore
there has to be over invoicing of the purchases is a mere assertion
without any material. Therefore, we do not have any hesitation to hold
Page | 86
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
that In the present case the impugned seized paper does not belong to
the Assessment Years involved in the impugned appeals.
31. Furthermore, with respect to the same paper it is also important
to note that it is evident from that paper that Surya Vinayak
Industries have over paid the assessee than what it should have
allegedly paid for over invoicing. This evident facts also runs contrary
to the other finding that Surya Vinayak industries is company of not
having capacity to supply so much material in para no 145 of the
order. If it is so then how it could have paid the assessee over and
above what is required to be paid if the goods are over invoiced. The
sum over paid by that company to the appellant is not small
compared to the purchases. Even circular route stated by ld AO in
various para of assessment order 143 onwards also proves contrary if
read with the order passed u/s 154 of the act. Therefore according to
revenue assessee has reduced the profit by booking the over invoiced
purchases of the eligible units, and such income is also derived from
the eligible industrial undertaking and further assessee is eligible for
higher deduction u/s 80 IC of the act.
32. The LD AO has stated that the companies from whom the material
has been purchased are not capable of supplying that quantity of raw
material. The ld CIT (A) has held that the quantity details of the
assessee cannot be doubted for the reason that amount of finished
goods assessee has produced does not justify the lower consumption
of material than what is shown by the assessee. This finding of facts
is not disputed by revenue. Therefore it cannot be disputed that
assessee has purchased the material. Now the issue is at what rate. If
it s the case of the revenue that assessee has purchased goods at Rs
100 But has booked purchases at Rs 150 and received Rs 50 back
from the supplier in cash, then revenue should have brought on
record the near about comparable prices of those material with
reasonable evidences. These facts could have been proved either by
Page | 87
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
the availability of the material in the market or also by the production
cost of the supplier. Revenue has not brought on record any such
material. Most of the part of the order justifying the addition in
absence of this merely remains allegations without evidences.
Additions in such a manner cannot be sustained.
33. With respect to the other seized material which have been dealt
with by the ld Assessing Officer are dealt with at para No. 107 of the
Assessment order as under:- 107. Certain other seized documents
also confirm the fact that there is no product by the name of
Sandalwood oil (C) or Sandalwood oil (SU) being supplied by M/s
Surya Vinayak Industries Ltd. to M/s Dharampal Satyapal Ltd. Page
No. 61-71 of Annexure A-ll seized from Perfumery Division, Okhla In
these pages, there is a chart depicting purchase of various raw
materials (132 in total) by DSL [Perfumery Division] for the year 2006-
07, 2007-08 and 2008-09 and suppliers thereof. The first and very
important aspect of this chart is that wherever necessary, each and
every item has been classified and named separately and it contains
various compounds. But nowhere in this chart there is any mention of
Sandalwood oil [C] and Sandalwood Oil [SU]. At S. No. 121, there is
mention of SANDALWOOD OIL as raw material. Their suppliers are
mentioned in the next column with party name and yearly quantity
purchased from them. In this column there is no classification of any
sandalwood oil [C] or sandalwood oil [SU]. Just one item is mentioned
and that is sandal wood oil. SVIL and Kamakhya Oil Co and other
concerns are shown as their suppliers. This proves that only
sandalwood oil is being supplied by SVIL. Page No.7 to 12 of Annexure
A-16 of Perfumery Division is the statement of raw materials taken
from the I.A.S. software which is used in the perfumery division. This
statement shows the opening balance, total receipts, total
consumption, closing balances, physical balance along with
short/excess for the period 1.4.09 to 31.03.10. This statement is
showing the date in respect of more than 150 raw materials being
Page | 88
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
purchased by Perfumery Division. In this statement there is mention
of only sandalwood oil and not any [C] or [SU]. In the same way page
No.2 to 6 of this annexure are the statement of physical stock as on
23.03.2010 prepared by the staff of Perfumery Division. All the items
of this physical stock statement dated 23.03.2010 tally with the I.A.S.
statement available in page No.9 to 12 taken on 31.3.2010. But
surprisingly, the sandalwood oil is not included in this statement of
physical stock taken on 23.03.2010 which goes to show there was no
stock of sandalwood oil present on that day, whereas the closing
balance of I.A.S. statement says closing balance of 2926 Kgs. This
again proves the booking of bogus purchase of sandalwood oil by M/s
DSL. Page no. 72 of Annexure 14 seized from Perfumery Division of
Okhla are now being referred to and discussed. On page 72 there is
mention of various raw material purchases as on 31.12.2010. Item
No.8 is sandalwood oil where receipt as per MD (Shri Rajiv Gupta) is
12,694 Kg and as per Accounts it is 12,894. A different of 200 Kgs is
there and in the remarks column it is mentioned that details are
attached. And in this context entries of Page no. 67 are being referred.
On this page bill wise detail of purchase from various parties of
sandalwood oil for the period 1.4.10 to 31.12.2010 are mentioned.
Page No.87 to 90 of Annexure A-11 of the Perfumery Division are now
being referred to and discussed. In these pages DSL has calculated
the average rate of its raw materials. In these pages also there is no
mention of any raw material by the name of Sandalwood oil [C] or
[SU]. What is there, is only sandalwood oil, whose average rate is
mentioned at Rs.62503/- per kg. In the same annexure in page no.83
to 86, DSL has made a chart of average rate or last rate whichever is
higher as on 31.3.2010 for its raw materials. In this chart only the
price of sandalwood oil is mentioned which Rs.67,864/- per kg. and
there is no [C] or [SU]. Further, page no.79 to 89 of Annexure A-15
contains the office of Form ER- 4 (Annual Return F.Y. 2008-09) which
was submitted to the Excise Department. In annexure I (page No.84)
Page | 89
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
information relating to major purchase of raw materials for 2008-09 is
given. It contains only one item and that is SANDALWOOD OIL,
quantity purchased is shown at 17,066 Kgs valuing Rs.l
18,69,74,659/-. And th-is includes all the purchases made from SVIL,
APPL and Kamakhya Oil Co. and others. Annexure II [page 82 to 83]
contains the detail of finished goods. Finished goods are 39 in number
and value there of is declared at Rs. 142^92,20,822/-. It is surprising
to see that out of Rs.l 42.00 crores of sale, the most expensive
ingredient is sandalwood oil and value thereof is Rs.118.00 crores 34.
On reading of the above paragraph the main contention of the ld
Assessing Officer is that there is no product by the name of
sandalwood oil (C) or Sandalwood Oil (U) being supplied by Surya
Vinayak Industries ltd to M/s. Dharampal Stayapal Ltd (assessee).
The page NO. 226 of Annexure 11, which is also the statement of
physical stock as on 23.03.2011, does not fall into the assessment
years in the above appeal. Further page NO. 72 of Annexure A-14 also
pertain financial year 01.04.2010 to 31.12.2010. The central Excise
Return Filed in Form NO. ER-1 cannot be said to be incriminating
material, as it does not show any escapement of income involved in
those papers. Hon'ble Supreme Court Sinhgad Technical & Education
society ( supra) in the para No. 18 has endorsed the reasoning given
by the coordinate bench stating it to be logical and valid that
incriminating material, which was seized, had to pertain to the
Assessment Years in question and the documents seized must
established any correlation document-wise with the Assessment Years
involved. From the above reading of the documents, it is apparent that
none of the seized documents belongs to the Assessment Years 2005-
06 to 2009-10. Even otherwise, without commenting whether they are
incriminating or not, it does not pertain to the assessment years
involved. The ld CIT DR could not show us document, which
pertained to the Assessment Year 2005-06 to 2009- 10. As none of the
documents seized during the course of search are shown to us
Page | 90
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
pertaining to the Assessment Year 2005-06 to 2009-10, we are of
opinion that all the additions made by the ld Assessing Officer are not
based on incriminating documents found during the course of search,
hence they are not sustainable.
72. Therefore, the coordinate bench has given a categorical finding that this
seized document does not belong to AY 2010-11 but for Ay 2011--12.
There is no material shown to us by the LD CIT DR, which authorizes
us to impute the seized papers pertaining to later years for making
addition in the earlier years. Revenue has also not initiated any
redressal mechanism provided in the act. No reasons are given by the ld
AO or ld CIT (A) to extrapolate those seized documents for AY 2010-
11. The findings of ld CIT (A) are also for Ay 2011-012 and for the
reason without application of mind that whether such seized
documents are relevant for other AYs other than AY 2011-12, he
confirmed the additions for those years. The coordinate bench has given
a categorical finding that those papers are pertaining to AY 2011-12
only. We have also taken cognizance of those papers in AY 2011-12 and
upheld addition on those papers n appeal of assessee for that year.
Therefore, in view of above facts, no addition is warranted in this AY on
the basis of the seized papers Accordingly, ground number 13 of
appeal of assessee is allowed.
73. Now we come to ground number 14 of appeal of assessee which is
against transfer pricing adjustment of INR 59551686/. Identical
addition has been made for AY 2012-13, the ld CIT (A) has considered
the figures and facts for AY 2012-13, and therefore in this order for
sake of simplicity, facts for that year are considered. For AY 2012-13 ,
In form number 3CEB filed by assessee and international transaction
as reported International transaction of interest on loan with its
associated enterprise DNS business AG to Rs 22163283/, same was
referred by learned assessing officer to The Additional Commissioner
Of Income Tax, Transfer Pricing Officer I (1), New Delhi for
determination of arm`s-length price. International transaction is that
Page | 91
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
assessee has advanced foreign currency loan to its subsidiary in
Switzerland of INR 176420000/ where rate of interest charged is only
3%. Assessee benchmarked this transnational transaction adopting
CUP as most appropriate method. Learned transfer pricing officer
issued a show cause notice to assessee on 20/11/2013 wherein he
noted that since tested party is assessee , prevalent interest rate that
could have been earned by taxpayer by advancing loan to an
unrelated party in India, with weak financial health as that of
associated enterprises, as there is no security provided by subsidiary
against loan advanced, he proposed to charge interest at rate of
16.31% on rupee equivalent of loan advanced to associated
enterprise. Assessee submitted its reply on 3/12/2013 submitting
that assessee company has given foreign currency loan to its wholly
owned subsidiary in Switzerland at interest of 3%. It was further
contested that where transaction was of lending money in foreign
currency to its foreign subsidiaries in such a situation domestic prime
lending rate would have no applicability and international rate fixed
being LIBOR should be taken as benchmark rate for international
transaction. Learned transfer pricing officer rejected contention of
assessee and stated that assessee, in process of lending money to its
subsidiary has not followed arm`s-length principle by not correctly
assessing risk associated with international transaction of lending of
money where cost of borrowing is not relevant but return that it
would have earned in India if money was not lent should be
benchmark. Therefore, he adopted return associated with BB rated
bonds and calculated 16.67% rate of return. He further adopted an
alternative analysis and stated that as there is no credit rating available
of associated enterprise, he adopted BB and D ratings for it. He
further exercised powers under section 133 (6) and obtained average
yield on long-term instruments from Crisil. Reply received for yield
BBB grade corporate bond for 5-year period of 11.22%, which he
considered for BB rated bonds yield 20% more than such bonds and
Page | 92
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
accordingly held that 16.31% would be return rate. Therefore he
calculated interest applying rate of interest at 16.31 percentage and
computed interest that should have been charged by assessee of Rs.
110997973/ whereas assessee has booked interest of Rs.
22163283/ and stated that total interest chargeable would have been
Rs. 88834690/. Accordingly, he made an adjustment of Rs.
88834690/ u/s 92CA of The Act and passed an order on
23/12/2013. For AY 2010-11 the addition was made of RS INR
59551686/- .
74. The learned CIT (A) in para number 32.3 of his order has decided
whole issue. He rejected contention of assessee that it is a
shareholder activity rejecting that advancement of loan cannot be
characterized as a shareholder activity and it is a financial transaction
and required to be benchmarked. He further noted that his view is also
supported by term loan advanced which was later on to be converted
into a share capital. Further with respect to argument of learned
authorised representative that issue is squarely covered by decision of
honourable jurisdictional High Court in case of cotton natural India
private limited, he considered loan agreement and stated that as
specifically currency of loan is not mentioned in loan agreement and
ceiling of loan is fixed in Indian rupees and that currency of loan is in
Indian rupees only and therefore foreign currency fluctuation in Indian
rupee loan will not effect and therefore primary LIBOR rate or interest
rate prevailing in foreign country will not apply on this loan.
Accordingly, he upheld action of learned transfer pricing officer
holding that Indian interest rate on such loan for benchmarking
interest transaction of loan advanced is required to be taken by taking
state bank of India prime lending rate for purpose of benchmarking
interest rate under CUP method. Assessee aggrieved with order of
learned CIT A preferred this appeal by this ground of appeal.
75. Learned authorised representative submitted that in remand report
submitted before learned CIT A for assessment year 13 14 learned
Page | 93
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
AO has accepted that loan has been advanced in foreign currency. He
further referred to copy of remand report placed at page number 72 of
paper book number 2. He further submitted that assessee has
determined its arm`s-length price at Rs. 2 2163283/ at rate of 3% per
annum inclusive of LIBOR rate applicable on loan. However learned
transfer pricing officer determine ALP at INR 8 1714969/ and thereby
addition of INR 59551686 has been made. He further submitted that
learned transfer-pricing officer has used CUP method for benchmarking
international transaction by adopting interest rate at rate of 16.31
percentages per annum by benchmarking with prime lending rate of
state bank of India and making an adjustment of further 400 basis
points. He submitted that since borrowing entity is a resident of
Switzerland which is a country that functions on LIBOR plus rates,
hence, borrowing entity would have received a loan on LIBOR plus
rates in that jurisdiction. Therefore, there should be rate applicable for
calculating arm`s-length price as against interest rate based on Indian
prime lending rate. He stated that this is based on logic that had
borrowing entity approached banks in its own country of residence they
would have paid interest on LIBOR plus rates. Further, he submitted
that it is a settled legal position that in case of an associated enterprise
transaction interest to be charged for benchmarking transaction of
loans advanced by taxpayer to its foreign associated enterprise in
foreign currency should be computed on basis of London interbank
offered rate (LIBOR) and not as per domestic rates as such as prime
lending rate offered by Indian banks as it has no relevance on such
foreign currency loans. He further relied on decision of honourable
Delhi High Court in case of CIT vs Cotton naturals private limited [ 55
taxmann.com 523] wherein it has been held that with respect to
appropriate comparable rate of interest on foreign currency dominated
loan interest rate should be market determine interest rate applicable
to currency concerned in which loan has to be repaid. He further
stated that in impugned case assessee has advance loan to its wholly-
Page | 94
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
owned subsidiary in Switzerland in foreign currency and same is
repayable in that foreign currency only and therefore issue squarely
covered by decision of honourable jurisdictional High Court. He
further referred to decision of coordinate bench in ITA number
06/07/2002/del/2015 dated 8/10/2018 wherein DCIT vs Seigwerk
India private limited similar view was upheld. He further referred to
decision of coordinate bench in ITA number 5816/del/2012 wherein it
was held that in a case where loan was advanced in foreign currency
interest rate on foreign currency loan being qualitatively different, even
if one has to see interest, that assessee should have earned one has to
see interest that assessee would have earned on foreign currency
loans and not rupee dominated loans. He further referred to decision
of honourable Bombay High Court in CIT vs. Tata auto comp systems
Ltd [374 ITR 516 ] wherein it is held that where assessee advance loan
to its foreign associated enterprise, rate of interest was to be
determined on basis of rate prevailing in country where loan had been
consumed. Therefore he is submitted that benchmarking of interest, if
any, should be done on basis of LIBOR instead of prime lending rate of
state bank of India is all transaction with its associated enterprise have
been undertaken in one currency and as such transfer pricing
adjustment is not sustainable under law.
76. Learned departmental representative vehemently supported order of
learned transfer pricing officer and learned CIT A.
77. We have carefully considered rival contention and perused orders of
lower authorities. Facts in facts show in present case is that assessee
has given a loan to its wholly owned subsidiary in Switzerland namely
DS Business AG, Switzerland at interest rate of 3% per annum.
Currency of loan is Foreign currency and therefore assessee stated that
Swiss LIBOR should be taken for benchmarking interest rate and not
Indian rate. In remand, report submitted by learned transfer pricing
officer in para number 2.1 it is clearly submitted that assessee has
given loan to its associated enterprise in foreign currency and however
Page | 95
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
till now such loan has not been repaid by associated enterprise. From
this, it is apparent that assessee has lent money to its foreign associated
enterprise in foreign currency. Honourable Delhi High Court in CIT vs.
Cotton Naturals P Limited [ 2015 TII 09 HC Del TP] dated
27/03/2015 has clearly held that there is no justification or cogent
reason for applying prime lending rate for outbound loan transactions
where Indian patent has advance loan to an associated enterprises
abroad. In view of this finding of learned CIT A is not correct that
prime lending rate should be applied. Though, learned CIT A is
correct in holding that there is no stipulation about repayment
currency in loan agreement, However in absence of any such clause in
agreement it cannot be said that such loan is required to be repaid in
Indian Rs. Only and therefore, PLR has been correctly applied where
fact shows that loan has been granted in foreign currency. Honourable
Gujarat High Court in 2018-TII-169-HC-AHM-TP in R/Tax Appeal
No. 687 of 2018 of PRINCIPAL COMMISSONER OF INCOME TAX
RAJKOT-1 Vs JYOTI CNC AUTOMATION PVT LTD has also held that
since AE is situated in France, it is most appropriate to consider mark
up on basis of average speed over LIBOR charged in France.
Accordingly, orders of learned lower authorities are reversed with
respect to applicability of Indian interest rate on such loan for
benchmarking interest transaction of loan advanced. No other
arguments were advanced by either of parties on other issues involved
other than that of applicability of PLR vs. LIBOR. In result ground,
number 14 of appeal of assessee is allowed.
78. In result, appeal filed by assessee is partly allowed.
79. Now we proceed to decide appeal of learned joint Commissioner of
income tax (OSD), central circle 29, New Delhi. 1st ground of appeal
is with respect to disallowance deleted by learned CIT A by reducing
claim under section 80 IB / 80 IC of INR 101734012/- made by
learned assessing officer by increasing value of goods transfer from
other units to eligible units treating them process goods and by
Page | 96
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
reducing 80 IB/ 80 IC to that extent. Both parties agreed that this
issue is squarely covered by ground number 8 of appeal of assessee.
For reasons given while deciding ground number 8 of appeal of
assessee and of a direction therein to compute 2% of value of job work
charges only in certain transactions, we dismiss ground number 1 of
appeal of learned assessing officer.
80. Ground number 2 of appeal of assessee is with respect to direction
of learned CIT A in directing learned assessing officer to calculate
royalty at rate of 2.5% of raw material without excise duty as against
3%, rate approved by Ministry of company affairs in respect of
service/ goods transfer from perfumery division to eligible units. Both
parties confirmed that this ground is connected to ground number 9 of
appeal of assessee. We have decided ground number 9 of appeal of
assessee wherein we have held that because assessing officer himself
has accepted rate of technical know-how/royalty at rate of 2.5% in
assessment year 2013 14 onwards and no adjustment has been made
in this regard and therefore in present case addition is unwarranted.
In view of this ground number 2 of appeal of learned assessing officer
is dismissed.
81. Ground number 3 of appeal of learned assessing officer is with
respect to reduction of claim u/s 80 IB of INR 3 2704671 made by
learned assessing officer taking into account expenditure such as
depreciation of fixed assets of corporate office and expenses of depot
of INR 32704671/- incurred by business of assessee for providing
services to eligible undertaking which is not been allocated to eligible
undertaking and by reducing deduction u/s 80 IB and I 80 IC of The
Act to that extent.
82. We have heard both parties. Learned CIT DR vehemently supported
order of learned assessing officer and submitted that depreciation is
required to be allocated to total expenditure incurred by eligible unit
for purpose of working out right amount of eligible deduction.
Page | 97
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Learned authorised representative vehemently supported order of
learned CIT A.
83. We have carefully considered rival contention and perused order of
lower authorities. Learned assessing officer has made adjustment of
claim of deduction u/s 80IB/IC on basis of observation of Special
Auditor as per which depreciation of Head office must be allocated to
eligible undertaking. Learned CIT(A) has deleted adjustment on
reasoning that statutory claim of depreciation u/s 32 is on basis of
asset put to use at specific location/unit and same cannot be allocated
on pro rata basis. relevant finding of CIT(A) is as under :
I have considered assessment order, written submissions and
oral arguments of Ld AR. For AY 2004-05, I have considered
issue and given relief to assessee in appellant case in appeal
no.12/12-13/1038. My findings on this issue are reproduced as
under:
I have considered assessment order, written submissions and
oral arguments of Ld AR during appellate proceeding. Ld.AR
has argued that depreciation of Noida Division and corporate
office are assets of these divisions. Therefore, question of
allocating depreciation to eligible units does not arise. Similarly,
expenses of Rs. 20,26,125 are belonging to depots. Hence
question of loading this expense to eligible unit does not arise.
Ld AR has alternatively argued that any such addition will not
have impact on taxable income. I have examined arguments of
Ld. AR that depreciation of a particular unit cannot be
bifurcated in prorata basis, as depreciation is eligible even if
asset is not used exclusively for business. As far as, other
expense amounting to Rs. 20,11,566 debited for specific division
Noida Gutka Division there is no question of allocating such
expense to eligible units unless it is proved that same is not
pertaining to Noida Gutka Division. Therefore, I direct AO to
Page | 98
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
delete these additions. I would like to clarify here that I do not
agree with argument of Ld AR that proportionate disallowance
of deprecation or expense from other unit to eligible unit
claiming deduction u/s 80IB/80IC will not effect quantum of
deduction, as shifting of expense from other unit to eligible unit
will reduce profit of eligible unit, hence quantum of deduction
and therefore total income will reduce, though total income will
remain same. Accordingly, there will be impact on total income.
However on merits of addition, I have given relief. As a result
this ground of appeal is allowed.
Depreciation under Income Tax The Act u/s 32 is eligible even
asset is used for single day during FY for business of
assessee is entitled for claiming depreciation u/s 32 of IT The
Act. In present case, definitely there are units of appellant
which are not claiming deduction u/s 80IB/80IC and
headquarter assets can be said to be used for such units also.
Further, I agree with arguments of Ld AR that depreciation
cannot be bifurcated on proportionate basis. Accordingly,
reduction on quantum of deduction u/s 80IB/80IC on account
of depreciation cannot be confirmed. These grounds of appeal for
various AYs are allowed.
84. On perusal of order of learned CIT (A), we find that issue has been
decided after considering facts and submissions of appellant. He has
rightly held that depreciation on assets of one particular unit/division
cannot be allocated to some other unit/division and as such,
finding recorded by CIT (A) is well reasoned and based on sound
legal principles. Further issue is also supported by decision of
coordinate bench in case of ACIT v. Secure Meters Ltd. (ITA No.
542/Ju/2007 & 349/JU/2009) (28.08.2012) wherein Hon`ble Tribunal
upheld order of ld CIT (A) deleting adjustment of deduction u/s
Page | 99
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
80IB/IC on account of allocation of depreciation of assets in Head
Office. relevant finding is as under :
2.8 above findings of ld. CIT (A) in our considered view are in
consonance with decision of Hon'ble Apex Court in case of
Rajasthan State Warehousing Corporation vs. CIT (supra). findings
of Hon'ble Apex Court has also been tabulated in order of ld.
CIT(A) at pages 20 and 21 of his order. ld. CIT(A) has given
categorical findings that various assets at HO are used for day to
day working at HO. These assets are not used for activities of two
units at Bated and Barotiwala. At HO at Udaipur, company has to
perform certain corporate functions and these assets are used for
that purpose. Hon'ble Supreme Court held that no such expenses
can be apportioned against separate independent unit. AO has
mainly relied on order of Hon'ble High Court in case of
Rajasthan State Warehousing Corporation vs. CIT (supra) which has
been reversed by Hon'ble Supreme Court. Therefore, ld. CIT (A)
held that apportionment on account of HO made by AO was not
justified. ld. DR also mainly relied on order of AO including
decision of Hon'ble Jurisdictional High Court. However, ld. DR
could not point out as to why order of Hon'ble Jurisdictional High
Court is still applicable when same has been reversed by Hon'ble
Apex Court, which has been considered by ld. CIT(A). Therefore, in
view of facts and circumstances of case and in view of findings
given by ld. CIT(A) which are reproduced somewhere above in this
order, we hold that ld. CIT(A) was justified in allowing claim of
assessee.
85. Further, during course of hearing it was submitted that even
otherwise, assessing officer has not made any adjustment on account
of allocation of depreciation from AY 2013-14 onwards, which is also
supported by order of learned transfer pricing officer for AY 2013-14
and 2014-15. In view of above facts we do not find any infirmity in
Page | 100
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
order of learned CIT A in directing learned assessing officer to not to
consider depreciation on various assets for purpose of reduction of
claim under section 80 IB and 80 IC of income tax The Act.
Accordingly, ground number 3 of appeal of learned assessing officer is
dismissed.
86. Ground number 4 of appeal of learned assessing officer is with
respect to deletion of reduction of claim u/s 80 IB/80 IC of INR
150836977/- for which learned assessing officer taking into
consideration fair market value of services obtained by eligible
undertaking from corporate offices, depose and branches et cetera was
made. Both parties confirmed that this is connected to ground
number 11 in appeal of assessee. As we have already allowed
ground, number 11 of appeal of assessee this ground of appeal of
learned AO does not survive for reason given by us therein.
Accordingly, ground number 4 of appeal is dismissed.
87. Ground number 5 of appeal of learned AO is against order of
learned CIT A in deleting reduction of claim u/s 80 IB/80 IC of INR 6
9085390/- thus ignoring fact that royalty payment at rate of 3%
which was made to sister concern taken by AO was rate approved by
regional Dir. Ld Assessing officer has made impugned adjustment of
claim of deduction u/s 80IB/IC on ground that royalty @ 1% of net
sales paid to M/s. Dharampal Satyapal & Sons P. Ltd. (Third party) is
less than rate approved by Regional Director of Central Government
which is 3% and as such profit of eligible units and consequential
claim of deduction 80IB/IC is inflated due to less royalty payment.
Accordingly, claim of deduction was reduced by increasing royalty
payment by eligible units by 2% of net sales in terms of provisions of
80IA(10) r.w.s. 80IB(13) & 80IC(7) of Income Tax The Act, 1961.
CIT(A) deleted adjustment on ground that rate fixed by Regional
Director was maximum ceiling limit and same cannot be considered as
fair value for adjustment in terms of provisions of section 80IA(10) r.w.s.
80IB(13) & 80IC(7) of Income Tax The Act, 1961.
Page | 101
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
88. We have heard both parties on issue and considered order of
learned lower authorities. learned CIT A has deleted above addition
considering that M/s Dharampal Satyapal & Sons Ltd. owns trade
mark in field of chewing tobacco such as Tulsi etc. As M/s Dharampal
Satyapal& Sons Ltd. is a related party, approval was required for
terms and conditions of such royalty payment by Director of Central
Govt.of India. As per said agreement, royalty payment cap was fixed at
3% of net sales. However, as mutually agreed, royalty was paid @1% of
net sales. Here also Ld AR has argued as in earlier grounds that
maximum ceiling of royalty cannot be taken, as market rate as
assessing officer has not brought any facts on record stating that under
similar circumstances any party has not paid royalty @3%. Maximum
ceiling approved by Regional Director is only maximum ceiling cap for
payment of royalty as per provision of that Act. Further Ld. AR argued
that same rate of royalty is paid to other undertaking of appellant,
which are not eligible for deduction u/s 80IB/80IC. Reasons given by
ld CIT (A) for deleting addition are found to be correct. No infirmity
was also pointed out by learned departmental representative. It may
be appreciated that rate approved by Regional Director is maximum rate
and there could we no ground or basis for treating same for any
adjustment in terms of provisions of section 80IA(10) r.w.s 80IB(13) and
80IC(7) of The Act. It is relevant to note that same rate of royalty @1%
is being paid by both eligible as well as non-eligible units and as such,
impugned adjustment is on arbitrary and mechanical basis. In view of
this , order of ld CIT(A) deleting adjustment of deduction u/s 80IB/IC
on account of notional royalty in respect of Tulsi Brand in excess of
1% being payable by eligible units to M/s. Dharampal Satyapal & Sons
P. Ltd. Deserves to be upheld as same rate was applied and accepted
even by AO in respect of non-eligible units. Accordingly, ground
number 5 of appeal of learned assessing officer is dismissed.
89. Ground number 6 is also with respect to deleting reduction of claim
u/s 80 IB/80 IC of Rs. 2295045/ made by learned assessing officer
Page | 102
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
on account of processing charges of betel not at rate of 3% in place of
2.5% taken by assessee, thus, ignoring fact that processing charges
at rate of 3% which was made to sister concern taken by learned
assessing officer was rate approved by regional Dir. Ld assessing
officer has made impugned adjustment of claim of deduction u/s
80IB/IC on ground that Betel nut processing charges @ Rs. 2.5 per Kg
paid to M/s. Dharampal Satyapal & Sons P. Ltd. (Third party) is less
than rate approved by Regional Director of Central Government which is
Rs. 3 per Kg and as such profit of eligible units and consequential
claim of deduction 80IB/IC is inflated due to less payment of processing
charges. Accordingly, claim of deduction was reduced by increasing
Betel nut processing charges claimed by eligible units by Rs. 0.5 per Kg
in terms of provisions of 80IA(10) r.w.s. 80IB(13) & 80IC(7) of Income
Tax The Act, 1961. ld. CIT(A) deleted adjustment on ground that
rate fixed by Regional Director was maximum ceiling limit and same
cannot be considered as fair value for adjustment in terms of provisions
of section 80IA(10) r.w.s. 80IB(13) & 80IC(7) of Income Tax The Act,
1961.
90. We have carefully considered rival arguments as well as order of
lower authorities. We have considered assessment order, appellate
order, written submission, and oral arguments of Ld. A and LD. DR .
Ld Assessing Officer has made addition on account of report of
special auditor suggesting that market rate of processing betel nut
should be at maximum ceiling rate as approved by Regional Director of
Central Govt. of India which is at Rs. 3 per kg. instead of processing
charges debited @ Rs. 2.5 per keg. Less charging of processing charges
has resulted into over statement of profit of eligible undertaking for
claiming deduction u/s. 80IB/80IC. Main argument of Ld. AR against
said finding is that Regional Director has fixed maximum amount of
job charges. Such maximum amount cannot be taken as market rate of
job charges, which an independent party would charge for, said work.
It is business decision between parties to fix job charges within
Page | 103
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
overall ceiling approved by Regional Director i.e. 3%. Assessee
Appellant and associated concern has agreed for processing charges @
2.5%. Further, Ld. AR argued that same rate of job charges has been
paid by other units of appellant as well who are not eligible for
deduction u/s. 80IB/80IC. Therefore, rate cannot be questioned to
reduce profit to eligible undertaking. Even otherwise, Maximum ceiling
rate of job charges cannot be taken as market rate of such charges.
Further, appellant has charged similar rate of job charges for other
industrial undertaking, which are not eligible for deduction u/s.
80IB/80IC. Under these circumstances, ld AO has taken an incorrect
view that on account of job charges to its associate concern for
processing beetling has resulted into over statement of profit of
industrial undertaking eligible for deduction u/s. 80IB/80IC. finding of
CIT(A) is well reasoned as he has held that rate approved by Regional
Director is maximum rate and there could no ground or basis for
treating same for any adjustment in terms of provisions of section
80IA(10) r.w.s 80IB(13) and 80IC(7) of The Act. It is relevant to note
that same rate of processing charges @ Rs. 2.5 per Kg is being paid by
both eligible as well as non-eligible units and as such, impugned
adjustment is on arbitrary and mechanical basis. Accordingly, we
uphold order of ld CIT (A) and direct assessing officer not to alter
deduction u/s. 80IB/80IC of eligible undertaking on account of
variation in job charges. Ground number 6 of appeal of learned AO is
dismissed.
91. Ground number 7 of appeal of learned assessing officer is against
action of learned CIT A in allowing an amount of Rs. 1146248 on
account of excise duty refund for computation of deduction u/s 80 IC
of income tax The Act. assessing officer has considered adjustment
on basis of observation of special auditor. Special auditor is of
opinion that Excise duty refund is an incentive received from
government and it is in nature of other income and cannot be said to
be derived from industrial undertaking. Accordingly, claim of deduction
Page | 104
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
u/s 80IC was reduced. ld CIT(A) deleted addition on basis of
decision of Hon`ble Delhi High Court in case of sister concern of
assessee in CIT v. M/s. Dharampal Premchand Ltd. 317 ITR 353 (Del)
wherein Hon`ble High Court held that excise duty refund is linked with
manufacturing activity of assessee and same qualifies for deduction
u/s 80IB of The Act. Hon supreme court in Hon`ble Supreme
Court in case of CIT v. Meghalaya Steels Ltd [2016] 383 ITR 217 (SC)
has approved same. Therefore as honourable CIT A as decided
whole issue following decision of honourable jurisdictional High
Court, learned departmental representative also could not point out
any contrary decision on this issue, we uphold order of learned CIT
A in holding that excise duty refund is part of eligible income for
deduction u/s 80 IC of income tax The Act. Accordingly, ground
number 7 of appeal of learned assessing officer is dismissed.
92. Ground number 8 of appeal is with respect to deletion of addition of
INR 1 934839/ on account of prior period expenses. Assessing
officer has considered disallowance merely on basis of report of
Special auditor without even examining details or nature of expenses.
CIT(A) deleted disallowance on ground that neither Special auditor
nor assessing officer has mentioned specific details of prior period
expenses particularly when assessee has suo motu disallowed proper
period expenses to extent of Rs. 45,27,338/- in return of income. It
was further held that assessee being subjected to tax at highest slab
rate in all years, impugned disallowance is tax neutral.
93. Learned departmental representative vehemently supported order of
learned assessing officer whereas learned authorised representative
supported order of learned CIT A.
94. We have carefully considered rival contentions. learned CIT A has
deleted disallowance on ground that neither special auditor nor
assessing officer has specifically mentioned any details about prior
period expenditure and he also considered that assessee himself is also
disallowed prior period expenditure of Rs. for 527338/ in return of
Page | 105
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
income itself. Further, as learned assessing officer has not pointed out
about time when bills were admitted by assessee has a liability by
approving it. Further finding and conclusion of CIT (A) are well
reasoned. Special auditor and assessing officer have failed to point out
specific expenditure and disallowance is on mechanical basis without
appreciating facts of case. Learned CIT DR also could not point out
any infirmity in order of learned CIT A. In any case, genuineness
of expenses is not dispute and only issue being year of allowability
particularly when tax rate remains same; disallowance is merely on
technical ground. In view of this we uphold order of learned CIT A
deleting addition of INR 1 934839/ on account of prior period
expenditure. Accordingly, ground number 8 of appeal of AO is
dismissed.
95. Learned assessing officer has challenged in ground number 9 deletion
of addition of INR 2 6345007 made on account of foreign exchange
fluctuation. Assessing officer has computed loss on fluctuation of
foreign currency in respect of loan advanced to wholly owned subsidiary
M/s. DS Business AG. Action of assessing officer is on basis of
report of Special auditor wherein Special Auditor has observed as per
AS-11, foreign currency transactions must be reported on closing rate
as on Balance sheet date and any difference must be recognized as
profit or loss. Even though, action of assessing officer in computing
foreign exchange fluctuation loss has reduced income of assessee
during year under reference, however, said treatment is principally
wrong and against scheme of The Act. It is further clarified that this
very issue is present in all years i.e. 2005-06 to 2011-12 wherein in
some years it has resulted in increase in taxable income whereas in
some years it has resulted in reduction. CIT(A) has decided issue vide
consolidated order wherein effect of addition/loss of such foreign
exchange fluctuation of foreign currency loan has been nullified on
basis of decision of Apex Court in case of CIT v. Tata Locomotive and
Engineering Co. Ltd. [1966] 60 ITR 405(SC) and Sutlej Cotton Mills Ltd.
Page | 106
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
v. CIT [1979] 116 ITR 1(SC) . Ld CIT (A) has rightly held that loan
transaction being on capital account, gain or loss arising on
fluctuation of foreign currency is capital in nature and not taxable
under Income tax The Act. Learned departmental representative also
could not point out any reason to say that order of learned CIT A is
incorrect and foreign exchange fluctuation gain arising to assessee on
statement of foreign currency loan is not a capital receipt. Accordingly
order of learned CIT A is upheld and ground number 9 of appeal of
AO is dismissed.
96. Ground number 10 of appeal of learned assessing officer`s appeal is
against order of learned CIT A wherein he has deleted disallowance
of Rs. 49831329/ made by assessing officer on account of section 14
A of income tax The Act and thus restricting disallowance to extent
of exempt income only. Both parties confirmed that this ground of
appeal is directly related to ground number 6 of appeal of assessee.
While deciding ground number 6 of appeal of assessee we have
restricted disallowance u/s 14 A of income tax The Act to extent of
disallowance already offered by assessee on this score, therefore, for
reasons stated therein, we dismiss ground number 10 of appeal of
learned AO.
97. Ground number 11 of appeal of learned assessing officer is with
respect to direction of learned CIT A with respect to computing
income of assessee with respect to bogus purchases found during
course of search taking lowest purchase price from third parties. Both
parties agreed that this ground is identical to ground number 13 of
appeal of assessee. As we have already held in that particular ground
that seized paper relates to assessment year 2011 12 and not to
assessment year 2010 11 and therefore no addition can be made
during year as seized paper do not relate to assessment year
concerned. Accordingly, ground number 11 of appeal of assessee
officer is dismissed.
Page | 107
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
98. Ground number 12 of appeal is with respect to addition deleted by
learned CIT of INR 387876/- made on account of lesser rate of job work
charges from sister concern in comparison to other related parties.
LD AO has considered addition on basis of report of Special auditor
wherein it has been observed that Silver foil division of assessee was
charging Rs. 3,000/- per Kg from M/s. Dharampal Premchand Ltd.
towards job work charges whereas it has charged Rs. 4,100/- per Kg
from third parties and as it has resulted in understatement of income of
assessee and inflation of profits of eligible units of sister concern.
Accordingly, addition in respect of difference of rates was made. Ld CIT
(A) has deleted addition on ground that impugned addition is purely
on notional basis and not sustainable under law.
99. We have heard rival contentions whole addition has been made by
learned assessing officer on presumption that Assessee Company has
charge of charges at rate of INR 3000 per KG to its group concern for
doing job work for them and silver file division as against INR 4100 per
KG charged to other parties and other units of company. This was
remark of special auditor and it was stated that if it were done for
eligible units of group concern then group concerns would be entitled
for higher deduction by INR 377876. It is evident that addition of higher
rate of job charges is on hypothetical basis and against concept of real
income. Further, it is not open to assessing officer to sit in armchair of
assessee and to make business decisions on arbitrary basis. Further,
there is no provision in Income tax The Act, 1961 that warrants such
adjustment and as such, action of assessing officer in increasing
rate of job work charged from sister concern M/s. Dharampal
Premchand Ltd. is not sustainable under law. Order of CIT (A) is well
reasoned and learned departmental representative could not controvert
order of learned CIT A therefore, addition in respect of job work has
rightly been deleted by CIT (A). Accordingly, ground number 12 of
appeal of learned AO is dismissed.
Page | 108
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
100. Ground number 13 of appeal of AO is against deletion of addition
with respect to profit arising out of sale of shares of Messer`s coastal
Project`s private limited pertains to Messer is SR credits private limited
and not to assessee company. Assessing officer has considered
addition on basis of documents seized from premises of assessee,
which are in nature of proposed MOU, dated 19.01.2007 entered
between assessee and M/s. Coastal Projects P. Ltd. for purchase of
shares by assessee. assessing officer observed that assessee
purchased 18,12,500 shares of M/s. Coastal Projects P. ltd. for a
consideration of Rs. 72,50,00,000/- on 29.02.2008 and sold them to
M/s. S.R. Credits P Ltd. on 21.09.2009 for sum of Rs. 82,50,00,000/-
thereby earning profit. Subsequently, M/s. S.R. Credits P. Ltd. sold
these shares for total consideration of Rs. 110,99,93,126/- to foreign
institutional investors. LD AO has alleged that entire arrangement is a
colourable device and profit earned by M/s. S.R. Credits P. Ltd. actually
belongs to assessee. As a result, gain earned by M/s. S.R. Credits P.
ltd. is taxed in hands of assessee. In fact, transaction between M/s.
S. R. Credits P. Ltd. and foreign institutional investors was of
independent nature based on their own business interest and it could
have no bearing to assessee. Further, assessee has already earned
reasonable profit in transaction as short-term capital gain and in
light of documentary evidences on record, it should be considered as in
order. In any case, there can be no justification for any addition on
notional and hypothetical basis.
101. The ld CIT(A) deleted addition on ground that in case of M/s. S.R.
Credits P. ltd., first appellate authority has upheld sanctity and
genuineness of transaction and as such there is no ground or basis for
any addition in hands of assessee. Therefore learned AO aggrieved
with order of learned CIT A preferred this appeal before us.
102. Learned departmental representative vehemently referred to order of
learned assessing officer whereas learned authorised representative
relied upon order of learned CIT A.
Page | 109
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
103. We have carefully considered rival contention and perused orders of
learned lower authorities. learned CIT A is dealt with whole order
as under:-
I have considered assessment order, written
submission and oral arguments of Ld. AR. After
considering entire facts and evidences gathered by
assessing officer, which are reproduced in assessment
order. I have held in case of M/s. SR Credit PVt. Ltd. in
appeal no. 102/13-14/1253 vide appellate order dtd.
21/03/2013 that it could not established that these
transactions are pertaining to appellant not M/s. SR
Credit Pvt.Ltd. Therefore, capital gain arising out and
these transactions are taxable in hands of M/s. SR
Credit Pvt.Ltd. My finding in case of M/s. SR Credit
Pvt. Ltd. in above said appeal no is reproduced as
under:-
I have considered assessment order, written
submission, report of assessing officer and oral
arguments of LD AR during appellate proceedings.
First arguments against jurisdiction of addition u/s.
153A. Ld. AR has relied on various judicial
pronouncements that no addition/disallowance or
tinkering can be made in closed assessment without
incriminating evidences gathered during search and
relied on various judicial pronouncements. On this
issue, I have perused assessment order. assessing
officer has relied on two seized documents to prove that
transaction of sale and purchase of shares of M/s.
Coastal Projects Pvt. Ltd. (CPPL) do not belong to
appellant but M/s. DSL namely.
Page | 110
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
i) page 1-6 of Annexure AA seized from office at A-
85 Sector, Noida and page 1-58 of Annexure AA-1. I
have perused assessment order with a view to ascertain
contents of these seized documents. Page no. 1-6
Annexure AA is memorandum of understanding dtd.
19/01/2007 written on stamp paper between DSL &
Coastal Projects Pvt. Ltd. By virtue of this agreement
M/s. DSL agreed to invest Rs. 100 crores by picking up
2,50,00,000/- shares at face value of Rs. 10 with
premium of Rs. 390 per share. Page 1-58 of annexure
AA-1 contain another agreement dtd. 12/03/2008
between Coastal Projects Pvt. Ltd. (and Dharampal
Satyapal Ltd., FIL Capital management (Mauritium) Ltd.
Sequila India Growth Investment Holding & Dents
Cheque Bank AG, Hongkong Branch. Through these
agreements, new investors have agreed to purchase
shares held by M/s. DSL at a price of Rs. 553.24 per
equity.
Therefore, above, seized documents are related to
findings that shares of CPPL acquired by DSL@Rs. 400
per share was intended to FIIS15 for higher
consideration by DSL which has been sold to appellant
at lesser rate. Therefore, in my view, there are
incriminating seized document which supports stand of
assessing officer that transaction of sale and purchase
of shares by appellate is not real but these shares are
sold by M/s. DSL. In view of above facts, assessing
officer regarding transaction of shares of CPPL. Hence,
arguments of Ld AR that eh action of assessing officer
regarding treatment of shares by assessing officer is not
based on any incriminating seized documents is not
correct. Therefore, judicial pronouncement relied by
Page | 111
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Ld. AR is misplaced on fact. Therefore, judicial
argument of Ld. AR are dismissed.
i) I would discuss issue on merits.
Sale of shares of coastal power projects Pvt. Ltd. by
appellant to FIIS. assessing officer held that sale of
shares of Coastal Power Projects Pvt. Ltd. by appellant
is arranged transaction to reduce profit by Dharampal
Satyapal Ltd (DSL) as Dharampal Satyapal Ltd, is having
taxable income and appellant is only showing loss.
Main grounds and evidence relied by assessing officer
are as under:-
a) Dharampal Satyapal Ltd. has sold 18,12,500/-
shares of M/s. Coastal Power Projects Pvt. Ltd. on
21/08/2009 to appellant for consideration of Rs.
82.50 crores which ultimately was sold by appellant for
Rs. 110,99,93,126/- to F11s. vide purchase agreement
dtd. 09/10/2009. An agreement was found during
search dtd. 12/03/2008 for sale of shares amongst
Dharampal Satyapal Ltd. F11s and Coastal Ltd. where
consideration was shown as Rs. 100,29,47,500/-.
Therefore, assessing officer concluded that shares
were transferred to appellant at lower cost.
ii) Though formal engagement letter was issued by
M/s. SR Credits Pv t.Ltd. to Yes Bank, however, Mr.
Namit of Yes Bank which has maintained escrow account
has stated that initial meeting was held between various
officers of namely Sh. Anil Goswami, GM, DSL, Rajiv
Gupta (MD), DSL. Mr. Rajesh Gupta, Director, DSL and
official of Yes Bank on 28/07/2009, which suggest that
transaction in name appellant is only paper
transaction.
Page | 112
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Ld AR argued that issue of transfer of shares by
Dharampal Satyapal Ltd. was not finalized with FIIS as
per seized agreements which was dtd. 21/08/2008 and
deal account not be finalized. Dharampal Satyapal Ltd.
continued its effort to sale share of M/s. Coastal Power
Projects Pvt. Ltd. which is evident from e-mail seized
during search operation where offer was for Rs. 73.1
crore only. This proves that shares of Coastal Power
Projects Ltd. was not sold to appellant at lower cost
which was Rs. 82.50 crores on 21/08/2009 which
exceeds offer as per e-mail which is confirmed by
assessing officer also.
Ld AR further argued that no statement of bank officer
Sh. Namit was given to appellant during assessment
proceedings for rebuttal. Even on reference assessing
officer in his reply has stated that such statement is not
part of appraisal report which means such statement
was not even seen by assessing officer. Further, Ld AR
argued that appellant is also a group concern of
Dharampal Satyapal Ltd. overall management is
common. Therefore, even if meeting was held by
managing director or senior officials of Dharampal
Satyapal Ltd. they were representing M/s. SR Credit Pvt.
Ltd. only as formal engagement letter was issued in
name of appellant by Yes Bank official as per version
of assessing officer also. Therefore, Ld AR argued that
there is no evidence to suggest that transaction entered
by appellant is only paper transaction to divert profit
of Dharampal Satyapal Ltd.
I have considered entire facts and circumstances of
case. agreement seized suggest transfer price of
Page | 113
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
shares held by Dharampal Satyapal Ltd. at Rs. 100.29
crores is dtd. 12/03/2008 was not complied. In seized
document in form of e-mail dtd April, 2009 evidences
that said share transaction as not concluded as per
seized agreement dtd. 21/08/2009 relied by assessing
officer in support of higher price. As per seized e-mail
offer of share was only Rs. 73 crores and appellant
has purchased these shares for Rs. 82.50 crores.
Therefore, it is not proved that shares of Coastal Power
Project Pvt. Ltd. was sold to appellant company at
lesser rate.
Further, I agree with arguments of Ld AR that
statement of Sh. Sumit of Yes Bank relied by assessing
officer that initial meeting for transfer of said shares
was held between Directors and Senior of Dharampal
Satyapal Ltd. and Yes Bank was never confronted to
assesse and is not even in record for assessing officer.
Ld Assessing officer without seeing statement has
incorporated content of such statement in assessment
order. Even if it is presumed that at initial stage meeting
were held between managing directors and directors and
senior officer of Dharampal Satyapal Ltd and Yes Bank,
it does not prove that transaction were sham as formal
engagement letter was issued is name of appellant.
appellant is definitely as associate entity of flagship
company Dharampal Satyapal Ltd. Therefore, such
initial meeting even it held as per statement relied by
assessing officer in no way makes transaction unreal.
Considering entire facts and circumstances of case, I
do not agree with findings of assessing officer that
transaction of transfer of shares of M/s. Coastal Power
Page | 114
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
Projects Pvt. Ltd. does not pertain to appellant.
Accordingly, I direct assessing officer to consider profit
on sale of such transaction in hands of appellant.
related first grounds on allowed.
iii) Disallowance of Rs. 2,78,43,961/- under legal
and professional expenses:-
These expenses are paid to Yes Bank amounting to Rs.
2,77,17,116/- and M/s. Amarchand Mangaldas and
Suresh A Shroff and Company amounting to Rs.
1,26,845/- on sale transaction of shares of Coastal
Power Project Pvt. Ltd. Assessing officer has disallowed
expenses on ground that these expenses pertain to
transaction of ale of Coastal Power Project Pvt. Ltd.,
which did not pertain to appellant. Ld AR argued that
service by these concerns for transfer of shares is not
questioned and allowable. As I have held that these
shares transaction of Coastal Power Project Pvt. Ltd.
pertain to appellant, these expenses are allowable
expenses in hands of assesse. Accordingly, I direct
assessing officer to delete addition made on account of
disallowance of expenses. Second ground of appeal is
allowed.
iv) Disallowance of loss of Rs. 7,03,15,125/- on share
transaction of M/s. Blue Wings Tour and Travel Ltd.
facts of this addition is that M/s. D.S. Hotel & Resorts
(I) Ltd. has purchased 50,000 shares of M/s. Boue Wings
Tour and Travels Pvt. Ltd. on 14/12/2005 for
consideration of Rs. 10,60,50,000/- from Maroo family.
These shares were purchased by appellant at same cost
in June 2009. On 25/09/2009, these shares were sold
to Maroo family again for consideration of Rs.
Page | 115
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
3,60,00,000/-. Therefore there was a loss of Rs.
7,03,15,125/- to appellant.
Ld. Assessing Officer has disallowed said loss on
found that same is a share transaction with a view to
decrease profit on account of sale of shares of Coastal
Power Project Pvt. Ltd.
Ld. AR during appellate proceedings argued that
appellant is in business of shares trading and
transaction of shares of Blue Wings and Travels Pvt. Ltd.
are all reflected in books of accounts of respective
parties supported by transfer of shares. shares of M/s.
Blue Wings Tower & Travels Pvt. Ltd. is sold to outside
various person of Maroo Family Ld AR argued that
assessing officer has not corroborated any evidence
against said transaction. I agree with arguments of Ld
AR that all transaction are backup by evidence and
assessing officer has not corroborated any evidence on
record to prove these transaction as in genuine.
Therefore, I direct assessing officer to allow loss on sale
of shares of M/s. Blue Wings Tower & Travels Pvt. Ltd.
3rd ground of appeal is allowed.
As, I have held that capital again is taxable in hands of
M/s. SR Credit Pvt. Ltd. and there is no new fact brought
on record. Therefore, addition on account of capital gain
for share transaction for sale of shares of Coastal Power
Project Pvt. Ltd. cannot be taxed in hands of
appellant. Therefore, addition made on account of
capital gain for share transaction for same shares of
Coastal Power Project Pvt. Ltd. is deleted in appellant`s
hand. These grounds of appeal are hereby allowed.
Page | 116
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
104. On careful perusal of finding of learned CIT A it was found to be
reasoned and based on settled legal principles. It may be appreciated
that purchase and sale of shares of M/s. Coastal Projects P. Ltd. by
assessee is properly documented and there is actual flow of
consideration between parties. Further, assessing officer has not
disputed genuineness of transaction and as such, impugned
addition is merely on basis of conjectures and surmises. assessee is
also produced all documents which are relevant to whole transaction
at page number 74 123 of supplementary paper book. Learned
departmental representative could not point out any infirmity in those
documents with respect to whole transaction. Further, there is no
material or evidence on record to establish that consideration received
by M/s. S.R. Credits P. ltd. is received or transferred to assessee or has
been utilized by assessee and as such, allegation of colourable device
is unsubstantiated and uncorroborated. Mere fact that shares have
finally been purchased by foreign institutional investors furthermore
strengthens fact that transaction is genuine and fully acted upon by
respective parties. It is not case of assessing officer that assessee has
breached or contravened any provisions of Income tax The Act, 1961
and as such impugned addition is on hypothetical basis and total
disregard to principle of real income. In view of above facts we do not
find any infirmity in order of learned CIT capital in deleting whole
addition on account of profit on sale of shares of Messer`s coastal Project
private limited which in fact pertains to Messer is SR credits private
limited and not to assessee. Accordingly, ground number 13 of
appeal of learned assessing officer is dismissed.
105. Ground number 14 15 16 are general in nature and therefore those
are dismissed.
106. In result appeal filed by Deputy Commissioner of income tax, Central
Circle 4, New Delhi in ITA number 388 2/Del/2016 for assessment
year 2010 11 is dismissed.
Page | 117
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
107. Now we proceed to decide appeal of assessee for assessment year
2011 12, which is also filed against consolidated order of learned
CIT A 44, New Delhi dated 29/2/2016. Assessee has raised
following grounds of appeal in ITA No. 3739/Del/2016 for Assessment
Year 2011-12:-
1(i) That on facts and circumstances of case, Ld. CIT(A) was not justified
in confirming disallowance of Rs. 12,11,775/- u/s 40A(3) of I.T. The
Act, 1961.
(ii) That claim is in respect of reimbursement of expenses by employees
and there being no dispute about genuineness and justification of
claim, there is no case of any default in terms of provisions of section
40A(3) of The Act.
(iii) That even otherwise, payment is covered under exception in clause (k)
of Rule 6DD and as such there is no case of any default u/s 40A(3) of
I.T. The Act, 1961.
2. That finding of conclusion of CIT(A) in respect of value of work in
progress is illegal and arbitrary as valuation of work in progress is
based on regular system of accounting and based on legal and
accounting principles.
3(i) That CIT(A) having accepted claim of assessee that there is no case
of any disallowance of interest paid on borrowed funds to extent of
Rs. 3,00,903/- u/s 36(l)(iii), it is not open to issue direction for charge of
interest on notional basis in respect of advances to sister concerns for
purpose of business.
(ii) That these directions are illegal, arbitrary and beyond jurisdiction.
4(i) That on facts and circumstances of case, Ld. CIT(A) was not justified
in confirming disallowance to Rs. 43,10,566/- u/s 14A without
appreciating that impugned disallowance is without recording
satisfaction in terms of provisions of section 14A(2) of The Act.
Page | 118
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
(ii) That appellant has not incurred any expenditure for earning of exempt
income and as such provisions of section 14A are not applicable to
facts of case.
(iii) That disallowance is illegal, arbitrary and or excessive.
5(i) That on facts and circumstances of case, Ld. CIT(A) was not justified
in upholding disallowance of deduction u/s 80IB/80IC on ground
that fair market value of goods transferred from Noida division to
eligible units is higher in terms provisions of section 80IA(8) read with
80IB(13) and 80IC(7) of The Act as follows :
a. In respect of unprocessed goods, by restricting profit markup to
extent of 2% instead of 10% as computed by assessing officer.
b. In respect of processed Kathha (Catechu), by confirming
valuation done by assessing officer and upholding mark up of
manufacturing expenses and profit rate @ 37.85% and 10%
respectively.
c. In respect of processed Cardamom (Elaichi), by confirming
valuation done by assessing officer and upholding mark up of
manufacturing expenses and profit rate @ 37.85% and 10%
respectively.
(ii) That AO and CIT(A) have erred in attributing direct and indirect
manufacturing costs to cost of goods procured and transferred to
eligible units.
(iii) That AO and CIT(A) were not justified in applying mark up rate of
profit @10% on value of goods so transferred and same is highly
arbitrary and without any basis.
(iv) That adjustment of cost and consequential claim of deduction u/s
80IB/80IC is illegal, arbitrary and based on conjectures and surmises.
6(i) That on facts and circumstances of case, Ld. CIT(A) was not justified
in confirming disallowance of deduction under section 80IB/IC by
Page | 119
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
applying provisions of section 80IA(8) read with 80IB( 13) and 80IC(7)
of The Act, on ground that rate of technical know-how fee on value
of goods transferred from perfumery division to eligible unit should be
@2.75% as against 2.5% declared by appellant.
(ii) That adjustment of cost and consequential claim of deduction u/s
80IB/80IC is illegal, arbitrary and based on conjectures and surmises.
7(i) That on facts and circumstances of case, Ld. CIT(A) was not justified
in upholding disallowance of deduction u/s 801B/80IC to extent of
Rs. 1,36,34,222/- by applying provisions of section 80IA(8) read with
80IB(13) and 80IC(7) of The Act, on ground that fair market value of
goods transferred from ,,Silverfoil Division to eligible undertaking was
higher than that declared by appellant.
(ii) That adjustment of cost and consequential reduction of claim of
deduction u/s 80IB/80IC is illegal, arbitrary and based on conjectures
and surmises.
8(i) That on facts and circumstances of case, Ld. CIT(A) was not justified
in upholding disallowance of deduction u/s 80IB/80IC to extent of
Rs 5,82,029/- by increasing value of goods transferred from Canpack
division to eligible units on ground that fair market value of goods
transferred is higher in terms provisions of section 80IA(8) read with
80IB(13) and 80IC(7) of The Act.
(ii) That profit mark up rate of 10% is highly arbitrary and without any
valid basis or justification.
(iii) That adjustment of cost and consequential reduction of claim of
deduction u/s 80IB/80IC is illegal, arbitrary and based on conjectures
and surmises.
9(i) That on facts and circumstances of case, Ld. CIT(A) was not justified
in restricting disallowance of deduction under section 80IB/IC by
applying provisions of section 80IA(8) read with 80IB( 13) and 80IC(7)
of The Act, on account of re-computation of profits of eligible
Page | 120
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
undertaking, by increasing value of common costs incurred at
corporate office, depots, branches, etc. and allocated to such units in an
appropriate ratio, with profit margin of 10% as against 27.09% applied
by AO.
(ii) That Ld. CIT(A) was not justified in holding that various corporate
services rendered by corporate office, depots, branches, etc. to eligible
undertakings, should have been allocated to eligible units at fair market
price/cost plus appropriate mark-up for purposes of computing
deduction under section 80IB/IC read with section 80IA(8) of The Act.
(iii) That Ld. CIT(A) has failed to appreciate that no services were rendered
by other divisions, viz., corporate office, depots, branches, etc., to
eligible undertakings, but expenses were incurred by such divisions on
behalf of eligible undertakings, which was subsequently allocated to
such eligible units.
(iv) That adjustment of cost and consequential reduction of claim of
deduction u/s 80IB/80IC is illegal, arbitrary and based on conjectures
and surmises.
10(i). That on facts and circumstances of case, Ld. CIT(A) was not justified
in confirming disallowance of deduction u/s 80IB/80IC to extent of
Rs.5,51,62,247/- by applying provisions of section 80IA(8) read with
80IB(13) and 80IC(7) of The Act on ground that eligible
undertakings should have paid royalty to Head Office for using brand
,,Rajnigandha, allegedly owned by Head Office.
(ii) That Ld. CIT(A) was not justified in holding that brand ,,Rajnigandha
was owned by head-office and not by eligible undertakings and as
such eligible units should pay royalty for usage of same.
(iii) That adjustment of royalty and consequential reduction of claim of
deduction u/s 80IB/80IC is illegal, arbitrary and based on conjectures
and surmises.
Page | 121
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
ll(i). That Ld. CIT(A) erred on facts and in law in sustaining disallowance of
purchase of sandalwood oil to extent of Rs 84,54,88,059/- holding
same to be bogus.
(ii) That Ld. CIT(A) erred on facts and in law in endorsing allegation of
assessing officer that bogus bills were obtained by appellant from two
companies, viz., M/s. SurvaVinayak Industries Limited (in short ,,SVIL )
and M/s. Allied Perfumery Private Limited (in short ,,APL) , in order to
inflate purchase of sandalwood oil.
(iii) That Ld. CIT(A) erred on facts and in law in endorsing allegation of
assessing officer that cash was received by appellant from above
two concerns, that too, on basis of erroneous inferences/ assumptions
on basis of certain seized documents.
(iv) That Ld. CIT(A) erred on facts and in law in relying upon ex-parte
statements/ materials collected behind back of appellant, without
allowing cross-examination and/ or confronting same to appellant, in
gross violation of principles of natural justice.
(v) That Ld. CIT(A) erred on facts and in law in endorsing allegation of
assessing officer that appellant obtained bogus bills towards
purchase of sandalwood oil in order to reduce taxable income.
12(i). That on facts and circumstances of case, LD. CIT(A) was not justified
in confirming transfer pricing adjustment of Rs. 8,88,34,690/- to arms
length price of interest received from loan advanced to associated
enterprise by relying on TPOs order.
(ii) That CIT(A), assessing officer and TPO has erred on facts and in
law in applying interest rate of 16.31% p.a. on basis of SBI prime
lending rate + 400bps on loan advanced by appellant to its wholly
owned subsidiary, namely, DS Business AG as against interest at
rate of 3% p.a. charged by appellant.
(iii) That CIT(A), assessing officer and TPO has erred on facts and in law
in considering average Prime Lending Rate of SBI as arms length
Page | 122
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
rate of interest without appreciating that such rate is applicable on
loans availed in India in domestic currency.
(iv) That loan was advanced by appellant to its associated enterprise in
foreign denominated currency and accordingly LIBOR rates prevailing
in international market should be considered for benchmarking and
not SBI prime lending rate.
13(i) That lower authorities have erred in charging interest u/s. 234A,
234B & 234C of The Act without application of mind.
(ii) That charge of interest is not justified on facts and under law.
108. The first ground of appeal is with respect to confirmation of
disallowance of INR 1211775/ u/s 40A (3) of The Act. Both parties
agreed that it is identical to ground number 2 of appeal of assessee for
assessment year 2010 11. It was further stated that above amount is
merely reimbursement to staff. On careful consideration of argument
of both parties and as per our decision in ground number 2 of
appeal of assessee for assessment year 2010 11 with respect to
reimbursements of expenses to staff where the amount of expenditure
as well as amount of payment both does not exceed specified sum, no
disallowance can be made, , we reverse order of learned CIT appeal
confirming above addition. Accordingly ground number 1 of appeal is
allowed.
109. Ground number 2 of appeal is with respect to valuation of work in
progress, which is similar to ground number 4 of appeal of assessee
for assessment year 2010 11. Both parties also agreed that there is
no change in facts and circumstances of case. We have already
decided above ground of appeal in appeal of assessee for assessment
year 2010 11 wherein because of reason that in subsequently from
assessment year 2013 14 method and component of cost of
inventory have been accepted by learned assessing officer we have
deleted addition made for that year in appeal of assessee. Further
Page | 123
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
similar reasons we reverse order of learned CIT A. Accordingly,
ground number 2 of appeal of assessee is allowed.
110. Ground number 3 of appeal is with respect to disallowance of interest
expenditure u/s 36 (1)(iii) of INR 3 00903 wherein national interest has
been charged and advances to sister concern for purpose of business.
Both parties agreed that this is identical to ground number 5 of
appeal of assessee for assessment year 2010 11. On careful
consideration of facts in this year also, and for reason that assessee
has huge non-interest-bearing funds in form of share capital and
reserves and surpluses more than amount advanced by assessee to
its sister concern addition was deleted in that year. There is no change
in facts and circumstances of case and therefore for similar reasons
we reverse order of learned CIT A and direct assessing officer to
delete disallowance of INR 3 00903 on account of interest expenditure.
Accordingly, ground number 3 of appeal is allowed.
111. Ground number 4 of appeal of assessee is with respect to
disallowance u/s 14 A of income tax The Act of INR 4 310566/. Both
parties agreed that this ground is identical to ground number 6 of
appeal of assessee. They also confirmed that there is no change in
facts and circumstances of case. We have carefully considered rival
contention and perused ground number 6 of appeal of assessee for
assessment year 2010 11 wherein we have deleted addition only
because of reason that learned assessing officer has not recorded
satisfaction u/s 14 A (2) of income tax Act. Therefore for similar
reasons and with a direction that disallowance offered by assessee
may be sustained to that extent only, we reverse order of learned CIT
A of confirming disallowance of INR 4 310566/ and allow ground
number 4 of appeal accordingly.
112. Ground number 5 of appeal of assessee is with respect to
disallowance confirmed by learned CIT A of deduction u/s 80 IB/80
IC on ground that fair market value of goods transferred from Noida
division to eligible unit is higher. Both parties agreed that facts
Page | 124
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
relating to this ground are identical to ground number 8 of appeal of
assessee for assessment year 2010 11. We have carefully considered
rival contention and vide ground number 8 of appeal of assessee
wherein we have directed learned assessing officer to consider
transaction value of goods, which are not processed and sent to eligible
units as recorded in books of accounts. With respect to goods, which
are processed through job work and transferred to eligible unit, we
direct learned assessing officer to impute 2% profit on job work
charges that is cost incurred by assessee to consider same as a
market price for determination of eligible profit u/s 80 IA/IB/IC of
income tax The Act. Further similar direction is also given while
deciding ground number 5 of appeal of assessee for this year too.
Accordingly, ground number 5 of appeal of assessee is allowed with
above direction.
113. Ground number 6 of appeal of assessee is also with respect to
disallowance confirmed by learned CIT A with respect to deduction
u/s 80 IB/IC on ground that rate of technical know-how fee on value
of goods transferred from perfumery division to eligible unit should be
2.75% as against 2.5% declared by appellant. Both parties agreed
that this is similar to ground number 9 of appeal of assessee for
assessment year 2010 11. While deciding ground number 9 of
appeal has been allowed for reason that claim of assessee has been
accepted in subsequent year on identical facts and circumstances.
Therefore, for similar reasons we allow ground number 6 of appeal of
assessee for this year too.
114. Ground number 7 of appeal of assessee is with respect to
disallowance confirmed by learned CIT A of eligible income u/s 80
IB/80 IC to extent of INR 13634222/ by applying provisions of
section 80 IA (8) on ground that fair market value of goods transferred
from silver foil division to eligible undertaking was held than that
declared by appellant. Brief facts of issue are that special auditor is
reported that during year under consideration silver for unit has
Page | 125
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
transferred goods of INR 9 7796985 to various units including INR 4
5266554/ to manufacturing units eligible for deduction u/s 80 IB/80
IC of income tax Act. Learned auditor has considered for arriving at
transfer value of silver foil is on FIFO method considering value of raw
silver. He compared market value of silver on date of order booking
by customer. Therefore, he found that there is a difference in outside
customer`s sale rate and inter-unit transfer rates because of frequent
variation in price of raw silver during year. Therefore, auditor stated
that silver for unit has transferred products to eligible units below fair
market value. Based on this , he worked out fair market value of
products transferred to eligible units taking average market price and
stated that there is an understatement of profit of unit by INR
13634222/ and over statement of profits of eligible units to that extent.
Therefore, learned assessing officer made similar addition. On appeal
before learned CIT A above addition was confirmed. Therefore,
assessee has challenged it before us.
115. Learned authorised representative submitted that auditors as well as
assessing officer and learned CIT A failed to consider that due to wide
variation in price of goods being transferred by division during year
average method used by assessing officer to compute transfer value
is not justified. It was stated that silver for division of assessee at
Noida procured silver for from third-party vendors at market price,
which are, further transferred to eligible units at actual cost
comprising of procurement cost, processing cost, freight expenses on
FIFO [ 1st in 1st out] basis. Therefore, it was stated that assessee has
transferred goods at total cost comprising all these cost components.
Merely because silver for is also sold by appellant to third-party
customers at a price higher than cost at which same product was
transferred to eligible unit whole addition has been made. It was
further stated that both lower authorities made addition considering
average rate of sale price to third party during relevant AR to arrive at
market value of goods transferred by non-eligible unit to eligible
Page | 126
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
unit. He further stated that transfer value adopted by appellant was
full cost price of silver for which is procured from third party. It was
further stated that only value addition that has been made by
assessee is with respect to processing charges on silver foil. He
therefore submitted that above addition made by learned assessing
officer and confirmed by learned CIT capital is devoid of any merit
and therefore should be deleted.
116. Learned departmental representative vehemently supported orders of
lower authorities and submitted that when assessee has sold identical
material to 3rd party then same is market price of goods as on that
date and therefore assessee has reduced profit of non eligible unit
and enhanced/increased profit of eligible unit and therefore above
disallowance as rightly been made by lower authorities.
117. We have carefully considered rival contentions and perused orders of
lower authority. Appellant has procured silver for from third-party
vendors and transferred to eligible units at actual cost comprising
procurement cost, processing cost, freight expenses et cetera on FIFO
basis. Whereas learned assessing officer has taken average sale cost
rate to 3rd party to file market value of such civil file to eligible
undertaking claiming deduction u/s 80 IB/80 IC of The Act. It is
apparent that silver foil item is sold to outsiders; actual price realized
by assessee on sale of these items to third party is market value of
product as on that date. However, assessee has purchased raw silver
from third parties and as on date raw material purchased by
assessee for eligible unit was fair market value of goods purchased.
Assessee has also loaded actual cost on these goods with respect to
freight and other expenditure. However, assessee has done processing
on goods purchased from third parties therefore; assessee has
provided in fact services of processing of goods. Even otherwise as
stated by learned authorised representative that silver is a commodity
price of which fluctuates every hour therefore approach of learned
lower authorities in adopting average purchase price during year
Page | 127
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
cannot substitute market value of silver purchased by assessee for
its eligible unit. Therefore, at most processing cost of silver is
service that has been transferred by non-eligible unit to eligible unit,
which should have been done at market rate. At present assessee
has considered process cost on actual cost basis and has loaded on
price of silver. Therefore, we direct assessing officer to adopt a
margin of 2% over process cost of processed silver transferred from
non-eligible unit to eligible unit and to sustain disallowance of
deduction to that extent only. Accordingly, ground number 7 of appeal
of assessee is allowed partly to that extent.
118. Ground number 8 of appeal of assessee is with respect to
disallowance of deduction u/s 80 IB/80 IC to extent of INR 582029/
by increasing value of goods transferred from can pack Division to
eligible units on ground that fair market value of goods transferred
is higher. Identical issue has been dealt with by our in ground number
10 of appeal of assessee for assessment year 2010 11. Both
parties confirmed that facts and issue involved therein are identical.
While deciding ground number 10 of appeal of assessee for
assessment year 2010 11 after discussing applicability of rule 8 of
Central Excise valuation rules, 2000 for purpose of working out
market price of goods transferred. We rejected it. Therefore, for
similar reasons we do not subscribe addition made by learned
assessing officer and confirmed by learned CIT A which is relying on
Central Excise valuation rules and imputing 10% profit margin in
goods transferred to determine market price of such goods. Therefore
accordingly ground number 8 of appeal of assessee is allowed and
order of learned CIT A is reversed and AO is directed to delete
disallowance of deduction u/s 80 IB/80 IC to extent of INR 582029/.
119. Ground number 9 of appeal of assessee is with respect to
disallowance of cost of service/common cost of eligible undertaking
which is similar to ground number 11 of appeal of assessee for
assessment year 2010 11. Both parties also confirmed that there is
Page | 128
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
no change in facts and circumstances of case. While deciding issue
in assessment year 2010 11 we have held that gross profit ratio of
10% over and above actual cost incurred by assessee cannot be
imputed for working out eligible profit of unit. We have allowed
ground number 11 of appeal of assessee for that year holding that
there is no value addition made by these head office or branches to
various cost allocated by assessee. For similar reasons we allow
ground number 9 of appeal of assessee reversing order of learned
CIT A.
120. Ground number 10 of appeal of assessee is with respect to
disallowance of deduction u/s 80 IB/80 IC to extent of Rs
5,51,62,247/ wherein learned assessing officer has made addition
which is confirmed by learned CIT appeal that eligible undertaking
should have paid royalty to head office for using brand allegedly owned
by head office. Both parties confirmed that this ground of appeal is
identical to ground number 12 of appeal of assessee for assessment
year 2010 11. While deciding above ground for assessment year
2010 11 we hold that undisputedly brand is owned by assessee
company and royalty is not paid by assessee to 1/3 party. Addition
was also considered on ground that learned AO has considered
another brand of Tulsi mix, which is paid by assessee to an outsider,
and therefore addition was made. Above addition was deleted for
reason that assessee has used the brand but there is no identification of
market value in relation to Rajinigandha brand of assessee but it
was with respect to Tulsi mix brand. Therefore, fair market value of
property of their particular brand was not ascertained by learned
assessing officer. Therefore, addition was deleted in that year.
Accordingly for similar reasons we also reverse order of learned CIT
A and allow ground number 10 of appeal of assessee.
121. Ground number 11 of appeal is with respect to addition on purchase
of sandalwood oil of INR 845488059/ holding that it is a bogus
purchase shown by assessee. In all earlier years, we have decided this
Page | 129
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
issue holding that seized documents does not belong to assessment
year other than assessment year 2011 12. Therefore, cognizance is
now required to be taken of these seized documents for this year. Brief
facts of case shows that in respect of claim of purchase of sandalwood
oil from M/s Surya Vinayak industries Ltd and Allied perfumers private
limited. Brief facts of case shows that ld assessing officer has
made disallowance of Rs 1239246117/- of purchase to extent from
M/s. Surya Vinayak Industries Ltd. (SVIL) and from M/s. Allied Perfume
P. Ltd. (APPL) by making reference to seized annexure A-1/ Page 52.
AO has alleged that part of purchases of sandalwood oil as recorded
in books of assessee are inflated and bogus and that seller M/s.
Surya Vinayak Industries Ltd. and APPL does not have production
capacity to supply recorded quantity of Sandalwood Oil. However, ld
CIT(A) has restricted disallowance to Rs. 84,54,88,059/- on ground
that there is no dispute regarding purchase and use of quantity for
manufacturing and sale and CIT(A) computed disallowance on basis
of lowest price of other suppliers. Further, ld AO has made complete
disallowance of purchases from APPL and part disallowance from
purchases from SVIL. Relevant working of disallowance is at Para no
138 of assessment order. Ld. AO has made such disallowance without
appreciating use of actual quantity with reference to manufacturing
carried out by assessee. Ld CIT (A) has also disputed price of
purchases from SVIL and APPL and has observed that purchases are
inflated and adjustment was made in respect of overall purchase price
based on quantity purchased from these two parties by referring to
lowest price of other suppliers. However, quantum of purchase and use
of same in manufacturing process was not disputed after making
necessary verification of raw material used and quantity manufactured.
He corroborated it with excise records. Ld. CIT (A), after considering
overall facts of case, held that there is no dispute regarding correctness
of quantity of Sandalwood oil purchases and recorded in books of
assessee and only dispute is regarding value of purchases. Accordingly,
Page | 130
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
ld. CIT(A) applied minimum purchase rate from third party to quantity
of Sandalwood oil purchased from SVIL and APPL. Relevant working is
at Page 297-298 of CIT(A)`s order. Disallowance was restricted to Rs.
84,54,88,059/- as against Rs. 123,92,46,117/- . Therefore, assessee
is in appeal on this ground.
122. Learned authorised representative submitted that identical issue has
been considered by Hon`ble ITAT in order for AY 2005-06 to 09-10 in
favour of appellant wherein Hon`ble court has held that alleged seized
documents relied upon by AO are neither incriminating in nature no
credible evidence to justify allegation of inflation of purchase price. It
has been held by Hon`ble ITAT that entire story of inflated purchases is
merely on basis of conjectures and there is no real evidence to
establish any sort of case against appellant. In light of finding of
Tribunal, alleged annexure A-1/ Page 52 is not relevant to AY 2010-11
and same could not be considered as basis for any addition in AY 2010-
11.
123. He further submitted that Ld AO and LD CIT (A) has not disputed fact
that entire purchases of Sandalwood Oil is fully supported from invoices
issued by parties and also use of same for manufacturing of final
product. Further, assessing officer was not justified in relying upon
seized document Page 52 of Annexure A/1 as same is incoherent,
dumb and wholly irrelevant to case of assessee. It is also important to
note that name of assessee is nowhere mentioned in said document
and it is not known as to how such document is relevant to present
case.
124. He further submitted that theory of bogus purchases and return of
cash by SVIL and APPL as suggested by assessing officer has no valid
basis as assessing officer has failed to bring any evidence on record to
demonstrate alleged synchronized flow of cheque and cash between
assessee and these companies and as such adverse inference is merely
on hypothetical basis. Reference to statement of various persons, who
have no direct involvement with reference to alleged annexure A/1 Page
Page | 131
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
52, is not relevance. Assessee has simply made purchases of
Sandalwood Oil from SVIL and APPL, which are independent third
parties, and assessee is not answerable to internal affairs of these
concerns. Further, statement of third parties have not been recorded so
as to establish authenticity and genuineness of alleged seized annexure
A-1 page 52 and as such computerized sheet of alleged annexure is of
no evidentiary value in absence of any corroboration/cross
examination. He stated that manufacturing, sales are fully reconciled
and corroborated with VAT return and excise records, and as such,
there could be no dispute with regard to correctness of quantitative
trading results. Further, there is no adverse evidence on record
regarding disputing quantum of purchases of sandalwood oil and
reconciliation of purchases with production. Therefore, according to
him it is self evident that whole addition is merely based on inferences
and bald allegations, which are not supported from any documentary
evidences.
125. He further submitted that in any case, once correctness of purchases
recorded in books is accepted, dispute regarding valuation of it is
wholly irrelevant as revenue authorities cannot sit in armchair of
assessee and decided reasonableness of an expenditure.
126. It is not case of revenue that M/s. Surya Vinayak Industries Ltd. and
M/s Allied Perfumers Pvt. Ltd. are related parties or provisions of
section 80IA(8) or 80IA(10) are applicable and as such there is no
ground or basis for any disallowance of purchases of Sandalwood Oil
from M/s. Surya Vinayak Industries Ltd. and M/s Allied Perfumers Pvt.
Ltd. keeping in view documentary evidences placed on record in form
of bills, vouchers, documents showing actual receipt of material,
documents in support of actual movement of goods and actual
consumption in manufacture of final products, viz., Pan Masala,
Tobacco and Gutka products.
127. He submitted that even otherwise, ld CIT (A) has erred in applying
third party minimum rate while computing value of purchase in case of
Page | 132
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
SVIL and APPL. It is relevant to mention that no investigation has been
carried out to demonstrate comparability of cases. There are several
factors which affect price of a commodity and without making any
objective comparison with regard to quality, brand, nature and type of
product, there could be no ground or basis for applying data of a third
party transaction. While applying minimum rate of other party, ld CIT
(A) has ignored fact that other parties have also supplied Sandalwood
Oil at different rates as per details given as per separate sheet. Further,
ld CIT (A) has also ignored fact that various items manufactured are of
different qualities and use of different category of raw material based on
business and commercial expediency and also corroborated from
manufacturing of difference quality and sale price and as such
mechanical application of minimum rate is highly arbitrary and
irrelevant. In any case, even if purchase price of other parties is to be
considered, same should be average price and not lowest price.
128. He therefore submitted that thus there is no justification for
disallowance of claim of purchases to extent of Rs. 845488059/- on
basis of application of minimum third party purchase rate and same
may kindly be deleted.
129. Learned departmental representative extensively read para number 70
102 of assessment order. It was stated that on perusal of annexure A
1 seized during course of search and seizure action and also various
other an action it is apparent that assessee has made bogus purchases
from Messer Shri Surya Vinayak industries Ltd amounting to INR
1253628766/- and from Messer Allied perfumers private limited of INR
64128420/- totaling to INR 1317757186/- in all. He further submitted
that such bogus purchases have been added by learned assessing
officer giving conclusive reasons. He further went on there from and
continued until para number 147 of assessment order and then stated
that assessee has made bogus purchases from above two companies
and therefore addition has been made in hands.
Page | 133
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
130. We have carefully considered rival contentions and perused orders of
lower authorities. learned CIT A has decided whole issue and held
that based on all evidences gathered during search and post search
proceedings in case of appellant and Florian a group of cases, he is
satisfied that there are enough evidences in form of seized documents
and statement recorded during search and post search proceedings
which clearly establishes that Surya Vinayak industries Ltd and Allied
perfumery private limited has not supplied goods namely Sandalwood
oil to assessee and they have merely issued bogus bills to assessee
and received cheques from assessee and paid back to assessee in
cash after some adjustment in rate and apportioning excise duty. After
giving this finding, he further held that Sandalwood oil is an excisable
product and entered in excise registrar of perfumery compound
division of assessee. He further noted that on date of search, there
was no discrepancy in stock of sandalwood oil found which is apparent
from assessment order where assessing officer himself has mentioned
that during course of search proceedings conducted sandalwood oil
was found in production and in managing director room. He further
considered consumption of sandalwood oil after reducing purchases
from two companies and also after incorporating quantity purchased
from these two companies and compared them. He noted that if
quantity purchased from these two entities are disallowed and not taken
into consideration than revised yield ranges from 102.57% to 112.62%
of entire consumption of raw material, which gives an absurd result of
finished goods production that is exceeding consumption. He further
noted that quantity of finished product per KG on consumption of
sandalwood oil ranges from 6.5 8.54 for various assessment years
appears to be reasonable in variation whereas if entire quantity
purchased from these two entities are ignored then finished product
per KG consumption of sandalwood oil will range from 13.47 to 65.25
kgs. Therefore, he held that if quantity purchased from these two
entities are not considered in quantitative details it will give an
Page | 134
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
erroneous and inconsistent results in terms of finished product ratio.
He further found that views taken by him is also supported by words
mentioned in seized documents annexure A 1 and page number 42
seized from laptop of Mr. Gupta where there is a mention of
adjustment of apportionment of excise duty and rate difference.
Therefore, he gave a conclusive finding that purpose of these bills is
just adjustment in prices. He further analyzed details of purchases
from all parties assessment year -wise in respect of sandalwood oil
purchase and he found that average rate of alleged purchase from these
two entities is at a much higher rate compared to other undisputed
parties. Therefore, he noted that purpose of mentioning quantity of
goods as Sandalwood Oil (C) and sandalwood oil (SU) is just to inflate
cost of sandalwood oil purchased and used for manufacturing purposes
in perfumery division. He further reach at a conclusion that
appellant has though purchased sandalwood oil from grey market but
billing of same has been made by these 2 entities at higher cost.
Accordingly, he held that entire quantity purchased from these 2 entities
cannot be ignored, as it will go against maintenance of quantitative
records as per Central Excise rules and inconsistent results in terms of
yield of finished goods. Therefore, he held that purpose of issuing
bogus bill by these two entities is just to inflate purchase in amount
and to increase amount of purchases in terms of rupees for
sandalwood oil. However, there is no impact on quality details of
purchases and consumptions. Accordingly, he upheld that in fact
assessee has purchased sandalwood oil from grey market, quantity
of such purchases were entered into Central Excise register however
for purpose of accounting and recording it in books of accounts
assessee used these two entities and obtained bogus bills from them at
higher rate than what is actual purchases rates from grey market.
These findings of learned CIT A are convincing, based on proper
analysis of quantitative details maintained by assessee. These are
Page | 135
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
further not controverted by both parties by producing any cogent
evidence.
131. First contention that is raised by assessee is that issue squarely
covered in favour of assessee by decision of coordinate bench for
assessment year 2005 06 to 2009 10 in favour of appellant is
devoid of any merit as those cases were decided on issue of whether
there was any incriminating material found during course of search or
not with respect to those assessment years. Further as document also
do not pertain to those years therefore, we have not confirmed any
addition up to AY 2010-11. In fact, in that, decision coordinate bench
has categorically held that evidence in form of page number 52 of
annexure A 1 is very specific to assessment year 2011 12; therefore,
we confirm addition in this year. Therefore above decision in fact
categorically states that addition if any is required to be made in year
2011 12 as incriminating material is found for that particular year.
As seized document pertain to this year, therefore, ld assessing
officer could have made an addition based on seized documents found
during course of search, which conclusively proves that assessee has
obtained bogus bills for sandalwood oil from these two concerns.
Therefore, argument of assessee that as addition is not confirmed in
those years, it should also not be made in this year is devoid of any
merit and hence rejected.
132. Second argument of assessee that theory of bogus purchases and
return of cash by two entities as suggested by assessing officer has
no valid basis as assessing officer has failed to bring any evidence on
record to demonstrate alleged synchronized flow of cheque and cash
between assessee in this company and as such adverse inference is
wrongly drawn. This argument does not hold any water in case as
assessee was found to have purchased merely bills for purchase of
sandalwood oil whereas it has conclusively proved that material has
been purchased from grey market. Seized documents also shows that
assessee has entered into cash transactions against bills issued by
Page | 136
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
these parties as there is a perfect sharing of excise duty credit available
to assessee also. Therefore, if material is so evident and staring at
face of assessee there is no corroborative material, which is required to
be brought on record by AO. Further statement of persons also
proves that assessee has entered into practice of buying only bills from
assessee and purchasing material from somewhere else. Hence, this
argument is rejected.
133. Third argument of assessee also does not hold any water that
statement of various persons who have no direct involvement with
reference to alleged seized paper hence, is not relevant. Those persons
have shown modus operandi of assessee. Therefore, they are relevant
with respect to whole transaction.
134. Fourth arguments with respect to statement of 3rd parties and their
records as well as computerized sheet does not have any evidentiary
value in absence of corroboration of cross-examination of those parties
is also devoid of any merit. In fact, these parties have dealings with
assessee. Those parties have deposed against fact stated by assessee.
Therefore if assessee finds that those parties have misquoted facts
than it is duty of assessee to produce those parties before assessing
officer with adequate evidence corroborating fact that those quote by
these parties was erroneous. Assessee has not done anything to prove
so. In view of this argument of corroboration or cross-examination is
devoid of any merit.
135. Fifth arguments of assessee is that manufacturing and sales are fully
reconcile uncorroborated with Vat t return and excise records also
does not hold any water in view of fact that assessee has purchased
material from grey market and replaced them with bills in books of
accounts obtained from these two parties. Therefore, naturally
manufacturing and sales would be reconciled and so VAT record and
excise records.
136. Sixth argument of assessee is that once correctness of purchases
recorded in books are accepted dispute regarding valuation of it is
Page | 137
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
wholly irrelevant. Further, claim of assessee that these two parties
were alleged to have provided bogus bills to assessee are not related
parties and therefore there is no ground or basis for any disallowance of
deduction u/s 80 IA (8) or 80 IA (10) of The Act. Above argument of
assessee is also deserves to be rejected at threshold itself as assessee
has inflated cost of raw materials by purchasing material from grey
market at market rate and replacing it with bogus bills of these two
alleged concerns at higher rate. It is not at all necessary that bogus
bills can be purchased only from related parties; therefore, argument of
assessee that these two parties are unrelated to assessee is devoid of
any merit.
137. Seventh arguments that further even purchases of bogus bills are
also a commercial transaction, which has been carried out by these two
entities between assessee and these parties. All documents
supporting transaction in form of bills, vouchers, documents showing
actual receipt of material, documents in support of actual movement of
goods and consumption in manufacture of final products are not of
any relevance for reason that assessee has in fact purchased goods,
otherwise quantitative details shown by assessee would be skewed,
only allegation is with respect to obtaining bills of purchase of
material not at market rate but at higher rate. In view of this
lower authorities have conclusively proved fact that assessee has
purchased material from grey market and replaced it with bills of
these two alleged entities without procuring goods from them and
financial transaction is shown to have entered at higher than market
rates.
138. Eighth arguments are question that arises is that what could be
amount of addition in hands of assessee on account of these
transactions. Allegations that have crystallized in above transaction is
that assessee has purchased sandalwood oil from grey market without
obtaining bills from parties from whom material has been purchased
but bills have been obtained from these two entities without
Page | 138
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
purchasing material from them. Rates charged by these two parties in
those bogus bills are higher than market rate. Assessee has return
of cash to extent of bill price as stated in those bogus bills issued by
these two parties and purchased material from grey market at market
rate, therefore assessee has paid market value of those goods in grey
market. Therefore, difference, which can be added in hands of
assessee, is difference between market rate of goods purchased and
bill value in bogus bills issued by these two parties. learned CIT A
has considered market price as minimum price paid by assessee
with respect to various parties during year, whereas alternative claim
of assessee is that such market price should be taken as average price
of sandalwood oil during year. Claim of assessee is that because of
several factors, which affect price of commodity such as quality, brand,
nature, and type of product and therefore minimum price always,
demonstrates lower quality material without brand and in smaller
quantities. This is also apparent from fact that page number 298 of
order of learned CIT appeal where to derive at minimum price of
sandalwood oil he has taken a bill wherein assessee has purchased
only hundred kilograms of material, where rate of sandalwood per
KG is only INR 28142.40, whereas assessee has purchased total
quantity of INR 18894.210 kg during year amounting in all to INR
1436436257/-. Further alleged purchase of material from grey
market and substituting it with bill price of these two alleged parties
total quantity purchased by assessee is of 16702.800 kg and for
making of addition purchase transaction of only hundred kilograms is
taken which is not even 1% of alleged transaction. Therefore making
an addition by selecting an inadequate and inappropriate sample is
neither fair nor proper. In view of above, argument it is apparent that
assessee has purchased sandalwood throughout year and it is not
case of ld AO or CIT (A) that price of sandalwood was always stagnant
and does not depend upon quality, brand, and nature of product,
terms, and conditions of goods. In view of this, we find that there is no
Page | 139
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
basis for taking minimum price for purpose of computing above
addition. According to us, average price if taken by revenue for
purpose of making addition would obliterate to some extent any
difference between purchases on various dates, of different quantities,
of different qualities, from different parties, from different destination
and of different rates. This is also supported from fact that assessee
has purchased sandalwood from 4 different parties of 18894.210 KG. In
those 4 parties, two parties were alleged bogus bill providers are also
included. Total purchases are of Rs. 1436436257/- during year.
Average rate of purchases from balance two parties (ignoring 2 parties
who provided bogus bills) ranges from Rs. 75882.10 - to INR 28272.38.
Average rate of purchases is INR 54156.49 per kg. In view of above
facts, we direct learned assessing officer to make addition in hands
of assessee for 16702.800 kg by replacing purchase price shown by
two parties in their bills by average rate of purchases of INR 54156.49
per kilogram which works out difference of Rs 41,31,92,185/-.
Accordingly addition of Rs 41,31,92,185/- is confirmed and balance
addition is deleted. Accordingly, ground number 11 of appeal of
assessee is partly allowed.
139. Ground number 12 of appeal of assessee is with respect to transfer
pricing adjustment of Rs 88834690/ confirmed by learned CIT appeal
with respect to arm`s-length price of interest received from loan
advanced to wholly owned subsidiary in Sweden being associated
enterprise. Learned transfer pricing officer applied interest rate of
16.31% per annum applying state bank of India prime lending rate
+400 bps on loans advanced by appellant to its wholly owned
subsidiary where assessee has charge interest at rate of 3% per
annum. Both parties confirmed that identical ground of appeal has
been considered in assessee`s appeal for assessment year 2010 11
vide ground number 14. It was further stated that there is no change in
facts and circumstances of case.
Page | 140
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
140. We have carefully considered rival contention and find that identical
ground of appeal of assessee for assessment year 2010 11 has been
decided by us wherein relying on decision of honourable Delhi High
Court in cotton natural private limited appeal of assessee was allowed
on that ground. Therefore, for similar reasons ground number 12 of
appeal for this year also is allowed.
141. Ground number 13 is with respect to charge of interest u/s 234A,
234B and 234C of The Act. Before us, no arguments were advanced by
assessee. Therefore, it is dismissed.
142. Accordingly, appeal of assessee is partly allowed.
143. Now we come to appeal of learned assessing officer wherein following
grounds have been raised l in ITA No. 3883/Del/2016 for Assessment
Year 2011-12:-
"1. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting reduction of claim u/s
80IB/80IC of Rs. 12,12,36,832/- made by AO by increasing
value of goods transferred from Noida units to eligible units
treating them processed goods and by reducing 80IB/80IC to
that extent.
2. Whether on facts & in circumstances of case, Ld. CIT (A)
has erred in law & on facts in directing AO to calculate royalty
@ 2.5% of raw material without excise duty as against 3%, rate
approved by Min. of Company Affairs in respect of goods
transferred from ,,perfumery division to eligible units.
3. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting reduction of claim u/s
80IB/80IC of Rs. 3,54,13,197/- made by AO by taking into
account expenditure (depreciation of fixed assets of corporate
office and expenses of depots) of Rs. 3,54,13,197/- incurred by
businesses of assessee for providing services to eligible
undertakings which has not been allocated to eligible
Page | 141
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
undertakings and by reducing deduction u/s 80IB/80IC of
The Act, to that extent.
4. Whether on facts & in circumstances of case, Ld. CIT (A)
has erred in law & on facts in deleting reduction of claim u/s
80IB/80IC of Rs.21,68,29,686/- made by AO by taking into
consideration fair market value of services obtained by
eligible undertakings from corporate offices, depot, and branches
etc. thereby re-computing profits of eligible undertakings
resulting in reducing of deduction 80IB/80IC to that extent.
5. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in and on facts in deleting reduction of claim u/s
801B/80IC of Rs. 4,85,85,020/- thus ignoring fact that
royalty payment @3% which was made to sister concern taken
by AO was rate approved by Regional Director.
6. Whether on facts & in circumstances of case, Ld. C1T(A)
has erred in law & on facts in allowing amount of Rs.
17,33,526/- on account of excise duty refund for computation
of deduction u/s 80IC.
7. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting addition of Rs. 16,24,418/-
made by AO on account prior period expenses.
8. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting addition of Rs.
10,96,21,278/- made on account of foreign exchange fluctuation,
thus ignoring provision of AS-11.
9. Whether on facts & in circumstances of case, Ld. CIT(A) has
erred in law & on facts in deleting disallowance of Rs.
1,98,85,294/- made by A O on The Act so' section 14A of
Income Tax The Act, 1961 and thus restricting disallowance to
extent of exempt income.
Page | 142
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
10. Whether on facts & in circumstances of case, Ld. CIT (A)
has erred in law & on facts in directing to take basis of
calculation from lowest purchases from third party, thus
ignoring facts and evidences of bogus purchases unearthed
during course of search and post search proceedings.
11. Whether on facts & in circumstances of case, Ld. CIT (A)
has erred in law & on facts in deleting addition of Rs.
2,45,310/- made on account of lesser rate of job work charged
from sister concerns in comparison to other related parties.
12. That order of CIT (A) is perverse, erroneous and is not tenable
on facts and in law.
13. That grounds of appeal are without prejudice to each other."
144. Ground number 1 of appeal is with respect to addition deleted by
learned CIT A with respect to deduction claimed under section 80 IB
and 80 IC of INR 1 21236832 by increasing value of goods transferred
from Noida units to eligible units treating them process goods and by
reducing eligible profit to that extent. Both parties confirmed that
this is identical to ground number 1 in appeal of learned assessing
officer for assessment year 2010 11. They also confirmed that there is
no change in facts and circumstances of case of assessee. We have
carefully considered rival contention and decided ground number 1 of
appeal of learned assessing officer for assessment year 2010 11
dismissing same with a direction to learned assessing officer.
Accordingly, this ground of appeal is also dismissed.
145. Ground number 2 of appeal of AO is with respect to deletion of
royalty addition made by learned assessing officer at rate of 3% at
rate approved by Ministry of company affairs in respect of goods
transferred from perfumery division to eligible units. This is identical to
ground number 2 of appeal of learned assessing officer wherein we
have confirmed action of learned CIT capital in deleting above
addition as learned assessing officer himself in assessment year 2013
Page | 143
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
14 onwards has not made any adjustment accordingly for similar
reasons we dismiss ground number 2 of appeal of learned assessing
officer.
146. Ground number 3 of appeal of AO is with respect to disallowance of
deduction u/s 80 IB and 80 IC where expenditure are not allocated to
eligible undertaking. Both parties confirmed that this is identical to
ground number 3 of appeal of learned assessing officer for
assessment year 2010 11. As We Have Already Deleted Addition for
Assessment Year 2010 11 with Respect to Depreciation of Fixed
Assessee As Well As Allocation of Expenditure, for Similar Reasons
Given Therein We Also Dismiss Ground Number 3 of Appeal
147. Ground Number 4 of Appeal of Learned Assessing Officer Is with
Respect to Fair Market Value of Services Obtained by Eligible Units
While Calculating Deduction U/s 80 IB/80 IC of The Act. Both
Parties Confirmed That This Is Identical to Ground Number 4 of
Appeal of Learned Assessing Officer for Assessment Year 2010 11.
Therefore for Similar Reasons Contained Therein We Dismiss Ground
Number 4 of Appeal of Assessing Officer for This Year Too.
148. Ground Number 5 of Appeal of Learned Assessing Officer Is against
Deleting Reduction of Claim U/s 80 IB 80 IC on Account of Royalty
Payment to Sister Concern. Identical ground has been decided by us
in appeal of learned assessing officer for assessment year 2010 11
wherein we have dismissed this ground of appeal. Therefore, for
similar reasons we dismiss this ground of appeal also.
149. Ground number 6 of appeal of learned assessing officer is with
respect to allowability of deduction u/s 80 IC in respect of excise
duty refund considering same as an eligible income or not. Identical
issue has been considered by us in appeal of learned assessing officer
in ground number 7 for AY year 2010 11 wherein we have held that
excise duty refund is an income eligible for purpose of deduction u/s
80 IB of income tax the act as it is derived from industrial
Page | 144
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
undertaking. accordingly ground number 6 of appeal of learned
assessing officer is dismissed
150. Ground number 7 of appeal of assessee is with respect to
disallowance of prior period expenditure. Both parties confirmed that
this is identical to ground number 8 of appeal of assessee officer for
assessment year 2010 11. We have carefully considered rival
contention and find that ground number 8 of appeal of assessing
officer for assessment year 2010 11 has been dismissed by us in
therefore for similar reasons we also dismiss ground number 7 of this
appeal.
151. Ground number 8 of appeal is with respect to foreign exchange
fluctuation loss, which is identical to ground number 9 of appeal of
learned assessing officer. We have already decided this ground of
appeal dismissing appeal of learned assessing officer confirming
order of learned CIT (A) and therefore for similar reasons contained
therein we also dismiss ground number 8 of appeal of assessee.
152. Ground number 9 of appeal of assessee is with respect to
disallowance u/s 14 A of income tax the act. Learned authorised
representative submitted that assessing officer has computed
disallowance to extent of Rs. 24195860/- and restricted it to extent
of Rs. 19885294/ after giving due amount of set off disallowance of Rs.
4310566/- offered in return of income. Learned CIT A allowed
partial relief. Both parties submitted that identical issue has been
considered by coordinate bench in Appeal of Learned AO for
assessment year 2010 11 vide ground number 10 of appeal. Above
issue is connected with appeal of assessee for same year wherein
disallowance confirmed by learned CIT A has been challenged. We
have already stated that learned assessing officer has made addition
without recording any satisfaction with regard to incorrectness of
claim of assessee. Therefore, ground of appeal of learned assessing
officer was dismissed with direction to retain only addition which has
been offered by assessee in its computation of income. In current
Page | 145
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
year disallowance offered by assessed of INR 4310566/.
Accordingly, ground number 9 of appeal of learned assessing officer is
dismissed.
153. Ground number 10 of appeal of learned assessing officer is directly
connected to ground number 11 of appeal of assessee. While
deciding ground number 11 of appeal of assessee we have given
detailed resident and upheld partial disallowances confirmed by
learned CIT appeal. Therefore, for reasons given there under this
ground of appeal of learned assessing officer does not survive.
Accordingly, ground number 10 of appeal of assessing officer is
dismissed.
154. Ground number 11 of appeal is with respect to addition in respect of
job charges paid at lesser rate. Both parties confirmed that identical
ground of appeal has been decided in case of appeal of learned
assessing officer for assessment year 2010 11 vide ground number 12.
We have carefully considered rival contention and find that ground
number 12 of appeal of learned assessing officer for assessment year
2010 11 is dismissed for reasons given therein we also dismiss
ground number 11 of appeal in present case.
155. Accordingly, appeal of learned assessing officer is dismissed.
156. Accordingly, appeals of learned assessing officer for both the Ays are
dismissed and appeals of assessee are partly allowed for both the
assessment years.
Order pronounced in open court on 18/04/2019.
-Sd/- -Sd/-
(H.S. SIDHU) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 18/04/2019
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
Page | 146
Dharampal Satyapal Ltd Vs, DCIT
ITA No. 3738, 3739/Del/2016 (A) & ITA No. 3882 & 3883/Del/2016(R)
Assessment Year: 2010-11 & 2011-12
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
Page | 147
|
