Itxa/635/2018 Of Pr. Commissioner Of Income Tax -11, Mumbai v. Schott Glass Inida Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYPURTIPRASADORDINARY ORIGINAL CIVIL JURISDICTIONPARABDigitally signed byPURTI PRASADPARABDate: 2023.07.21INCOME TAX APPEAL NO. 635 OF 2018 10:44:34 +0530 Principal Commissioner of IncomeTax – 11, Mumbai V/s.Schott Glass India Pvt. Ltd. ….Appellant ….Respondent ---- Mr. P.C. Chhotaray for Appellant.Mr. Jeet Kamdar i/b Mr. Atul K. Jasani for Respondent. ---- CORAM : K.R. SHRIRAM & FIRDOSH P. POONIWALLA, JJ. DATED : 12[th] JULY 2023 P.C. : 1.The following three substantial questions of law are proposed to be framed. QUESTION OF LAW 1.Whether on the facts and in the circumstances of the case, theHon’ble ITAT was justified in deleting the adjustment ofRs.10,26,28,141/- to the manufacturing income, without appreciatingthe fact that in the TP Study report, the assessee had benchmarked itstransactions using two segments namely manufacturing and indentingbut during the TP proceedings, it separated the losses from solar test,arbitrarily to present better margins under manufacturing segment? 2.Whether on the facts and in the circumstances of the case, theHon’ble ITAT was justified in directing to allow the set off of broughtforward unabsorbed depreciation for A.Y. 1999-2000 and 2000-01against incomes of A.Y. 2010-11 in contravention of the pre-amendedprovisions of section 32(2) of the Act applicable period of 8 yearsimmediately succeeding the assessment year for which suchdepreciation allowance was first computed got expire in A.Y. 2007-08and 2008-09 respectively? 3.Whether on the facts and in circumstances of the case and in law,the Tribunal was right in directing to allow the set off of broughtforward unabsorbed depreciation for A.Y. 1999-2000 and 2000-01 i.e.for the period prior to amendment in sub section (2) of Section 32 ofthe Act w.e.f. 1/4/2002? QUESTION NO. 1 2.This appeal impugns an order dated 8[th] March 2017 passed bythe Income Tax Appellate Tribunal (ITAT) for Assessment Year 2010-11.Revenue had approached the ITAT challenging the directions of the DisputeResolution Panel (DRP), Mumbai passed on 27[th] November 2014 whereasthe assessee had filed cross objections and challenged the order of theAssessing Officer (A.O.) passed on 29[th] January 2015. 3.Assessee was engaged in the business of trading andmanufacturing of glass. Assessee filed its return of income on 15[th] October2010 showing NIL income under normal provisions and book profit ofRs.9.21 Crores under Section 115 JB of the Income Tax Act, 1961 (the Act).The A.O. issued a draft order under Section 143(3) read with Section144C(1) of the Act vide letter dated 26[th] February 2014 proposing to add : (a) Adjustment on account of Transfer Pricing (TP) of Rs.34.49Crores.(b) Dis-allowance out of repairs and maintenance of Rs.31.63Lakhs. (c) Rejection of claim of set off of brought forward unabsorbeddepreciation of Rs.2.86 Crores. 4.Challenging the order passed by the Transfer Pricing Officer (TPO)/A.O., assessee filed objections before the DRP. Vide its letter dated27[th] November 2014 DRP issued directions under Section 144C(5) of theAct. Pursuant thereto, the A.O. completed the assessment under Section143(3) read with Section 144C(13) of the Act determining the income of the assessee at Rs. NIL under normal provisions and book profit of Rs.9.21Crores. 5.The TPO after considering the material before him determinedthe Profit Link Indicator (PLI) of Operating Profit (OP)/Operating Cost (OC)at 25.83%. Accordingly, an adjustment amounting to Rs.10.26 Crores wasproposed in the manufacturing segment. (c) Rejection of claim of set off of brought forward unabsorbeddepreciation of Rs.2.86 Crores. 4.Challenging the order passed by the Transfer Pricing Officer (TPO)/A.O., assessee filed objections before the DRP. Vide its letter dated27[th] November 2014 DRP issued directions under Section 144C(5) of theAct. Pursuant thereto, the A.O. completed the assessment under Section143(3) read with Section 144C(13) of the Act determining the income of the assessee at Rs. NIL under normal provisions and book profit of Rs.9.21Crores. 5.The TPO after considering the material before him determinedthe Profit Link Indicator (PLI) of Operating Profit (OP)/Operating Cost (OC)at 25.83%. Accordingly, an adjustment amounting to Rs.10.26 Crores wasproposed in the manufacturing segment. 6.Assessee in its objections before the DRP contended that theTPO was wrong in including the solar testing cost which was operating innature, that it was an extraordinary cost, that it had undertaken trial run forproduction of solar receiver tubes during the year under consideration, thatthe economic conditions turned unviable and there was no demand for solartubes, that assessee stopped manufacturing the tubes, that it had incurredhuge costs with respect to solar test activity, that the Associated Enterprise(AE) had paid compensation to assessee to recover from the losses, that theactivity resulted in loss, that same had to be excluded in the PLIcomputation of manufacturing segment, that even if it was part ofmanufacturing activity it had to be excluded as an unusual event, that theTPO had not excluded the non operating expenditure and income whilecomputing PLI, that if the non operating expenditure/income wasconsidered the net cost plus markup ratio will be 17.39% and operatingmargin ratio would be 14.81% etc. 7.The A.O./TPO had problem with assessee excluding losses insolar trial in computing the PLI of manifesting segment in respect of SolarTest (ST). Assessee had during the year undertaken solar trial test activityto produce solar receiver tubes. The activity was undertaken from 9[th]October 2009 to 23[rd] November 2009. Admittedly, assessee’s regularbusiness is production of tubes for pharmaceutical packaging and the solartrial activity was an exception to its regular business. Assessee hadconducted solar trial looking into opportunity of high profitable solarreceiver tubes production which is a component of concentrated solar powerplant. The solar trial test business did not take off the way the companyexpected and therefore assessee decided to discontinue the solar trial testactivity and decided to provide for impairment of the assets used for solartrial activity considering no use in near future. 8.While going through the Transfer Pricing Study Report, the TPOfound that (i) assessee had benchmarked its transaction after segmentalizingthe activities into manufacturing and indenting, i.e., there were only twosegments as per segmental accounting and (ii) Assessee, however, while computingthe margin (PLI) had divided the segmental accounting into three parts, thatST had separate segment from the manufacturing segment and that thesame was not so presented in the audited segmental accounting. 9.Mr. Chhotaray relying on the judgment of the Hon’ble ApexCourt in Apollo Tyres Ltd. vs. Commissioner of Income Tax[1] submitted thatso much as the A.O. has to accept the authenticity of the accounts withreference to the provisions of the Companies Act, it applies equally toassessee as well. Since assessee had only benchmarked its transactions in twosegments, i.e., manufacturing and indenting, assessee could not havecreated third segment for solar trial. Therefore, the adjustment amountingto Rs.10.26 Crores as proposed by the A.O. in the manufacturing segmentwas correct. 9.Mr. Chhotaray relying on the judgment of the Hon’ble ApexCourt in Apollo Tyres Ltd. vs. Commissioner of Income Tax[1] submitted thatso much as the A.O. has to accept the authenticity of the accounts withreference to the provisions of the Companies Act, it applies equally toassessee as well. Since assessee had only benchmarked its transactions in twosegments, i.e., manufacturing and indenting, assessee could not havecreated third segment for solar trial. Therefore, the adjustment amountingto Rs.10.26 Crores as proposed by the A.O. in the manufacturing segmentwas correct. 10.After considering the order passed by the TPO and theobjections raised by assessee, the DRP held that in Schedule 20 of theAnnual Accounts of assessee the revenue from ST activity was shown atRs.10.27 Crores as against cost of Rs.11.58 Crores resulting in net loss ofRs.1.31 Crores. The DRP also observed that in the notes to accountsSchedule 22, Item No. 21 revealed that assessee had undertaken ST activityto produce solar receiver tubes, between 9[th] October 2009 to 23[rd] November2009 as against assessee’s regular business of production of tubes forpharmaceutical packaging. The DRP also noted that the Annual Accountsindicated and in particular the directors report indicated that the solar trialactivity was an exception to its regular business and the company had madeprovision for impairment of assets of Rs.13.90 Crores as per AccountingStandard 28. The DRP also noted that in the Annual Accounts it is noted 1 (2002) 274 ITR 254 that the expenses for ST activity were exceptional. The DRP thereforedirected TPO to exclude losses in solar trial run up in computing the PLI ofmanufacturing segment. The DRP also held that the expenses/income underthe head non operating transactions had to be excluded for arriving at thecorrect PLI. This has been upheld by the ITAT. 11.As held by the Hon’ble Apex Court in Apollo TyresLtd. (supra)the A.O. has to accept the authenticity of the accounts. It is not a case ofthe A.O. that the accounts of assessee have not been scrutinized or certifiedby statutory auditors or approved by the company in general meeting or hasnot been filed before the ROC. In fact, Mr. Chhotaray stated that thecompany should also accept these accounts as much as the A.O. hasaccepted the accounts of assessee. The Directors note in the AnnualAccounts specifically refers to solar trial test and how the activityundertaken did not take off and how having regard to the principles ofaccounting standard of impairment of assets (AS 28) assessee has made theprovisions of Rs.13,90,63,509/- in respect of such impairment. Theauditors have accepted it. The accounts have been approved by thecompany in general meeting and has also been filed by the Registrar ofCompanies. Therefore, the ITAT was correct in not interfering with theorder of the DRP with regard to computation of PLI. The DRP has correctlyheld that the ST activity was an extraordinary item and was not part of theregular business of assessee and there was impairment of asset. QUESTION NOS. 2 AND 3 12.As regards the proposed questions of law no. 2 and 3,Mr.Chhotaray in fairness agreed that the issue would be covered by theorder of the Hon’ble Apex Court in the case of Principal Commissioner ofIncome Tax, Vadodara 1 vs. Petrofills Co-operative Ltd.[2] which upheld theorder dated 5[th] March 2018 passed by the Gujarat High Court. Even thiscourt in the case of Commissioner of Income Tax vs. Hindustan UnileverLtd.[3] has taken the same view that depreciation should be allowed to becarried forward. 13.In the circumstances, Appeal dismissed. (FIRDOSH P. POONIWALLA, J.) (K.R. SHRIRAM, J.) 2 (2021) 130 Taxman.com 191 SC 3 (2017) 394 ITR 73 (Bom)