© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Weighted deduction under Section 35(2AB) is not allowed while computing the income of Section 10A/10B unit

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The Bangalore Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Biocon Limited held that weighted deduction on scientific research expenditure under Section 35(2AB) of the Income-tax Act, 1961 is not allowed while computing the income of Section 10A/10B unit, and such unit will only get 100 per cent deduction of such expenditure.

The Tribunal also held that Section 10A/10B are exemption provisions, and therefore the loss of the non-eligible unit need not be set-off against the profits of Section 10A/10B unit and such loss is allowed to be carry forward.

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Weighted deduction under Section 35(2AB) is not allowed while computing the income of Section 10A/10B unit

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG in INDIA Weighted deduction under Section 35(2AB) is not allowed while computing the income of Section 10A/10B unit. Since, Section 10A/10B are exemption provisions, the loss of the non-eligible unit cannot be set-off against the profits of such unit and is allowed to be carry forward 4 July 2014 22 21 February 2013 Background The Bangalore Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Biocon Limited 1 (the taxpayer) held that weighted deduction on scientific research expenditure under Section 35(2AB) of the Income-tax Act, 1961 (the Act) is not allowed while computing the income of Section 10A/10B unit, and such unit will only get 100 per cent deduction of such expenditure. The Tribunal also held that Section 10A/10B are exemption provisions, and therefore the loss of the non-eligible unit need not be set-off against the profits of Section 10A/10B unit and such loss is allowed to be carry forward. __________________ 1 DCIT v. Biocon Limited (ITA No. 248/Bang/2010), Biocon Limited v. DCIT (ITA No. 368/Bang/2010, 369/Bang/2010, 370/Bang/2010, 371/Bang/2010, 1206/Bang/2010) Deduction under Section 35(2AB) of the Act Facts of the case  The taxpayer is a company engaged in the business of manufacture of enzymes and pharmaceutical ingredients. During the relevant year, the taxpayer had claimed deduction under Section 35(2AB) of the Act at the rate of 150 per cent. The taxpayer also had claimed benefit under Section 10B of the Act in respect of its 10B unit for which the taxpayer had maintained separate books of account.  Out of the total expenditure incurred on scientific research, a part was incurred in the 10B unit. Tax department contentions  Deduction under Section 35(2AB) of the Act is allowed only when computation of income is under the head ‘profits and gains from business and profession’ Section 28 of the Act.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  As far as the income of Section 10B unit is concerned, the same has to be worked out only on commercial basis as the same does not form part of the total income under the Act.  Section 35(2AB) of the Act will not be available while determining income on commercial lines where the computation provisions under the Act will not come into play.  Therefore, the deduction in excess of 100 per cent of expenses incurred on scientific research (which are presumed to be research expenditure) alone can be allowed and the excess 50 per cent had to be disallowed to arrive at the correct income of the Section 10B unit. Tribunal’s ruling  The CBDT circular 2 relied upon by the taxpayer cannot obliterate the interpretation of a provision by the High Court. Therefore, the decision of the Karnataka High Court in the case of Yokogawa will continue to be followed as a binding precedent.  The Tribunal relied on the decision of the Karnataka High Court in the case of Yokogawa India Ltd. 3 where it was observed that deduction under Section 10A/10B of the Act has to be allowed from the ‘total income’, and not while computing the total income. Accordingly, the expression ‘from the total income’ found in Section 10A/10B of the Act has to be contextually understood as referring to ‘total income of the ‘STP unit’ or ‘10A/10B unit’ and therefore, deduction under Section 10A of the Act has to be given before Chapter IV of the Act.  Further the High Court noted that when Section 10A of the Act was recast by the Finance Act, 2001, the Parliament was aware of the relief given in Chapter-III of the Act as being one which does not form part of the total income under the Act and yet chose to retain Section 10A in Chapter-III of the Act, which means that the said provisions shall remain as ‘exemption provision’ and not ‘deduction provision’.  Thus, when the provisions of section 10A/10B of the Act are held to be exemption provisions, the provisions of Section 35(2AB) of the Act which are contained in Chapter-IV of the Act will not be applicable.  Resultantly, the weighted deduction at 150 per cent under Section 35(2AB) of the Act will not be allowed while computing the income of Section 10A/10B unit. The 10A/10B unit will get only 100 per cent deduction of revenue expenditure. _______________________ 2 Circular No. 7/DV/2013 (File No. 279/Misc./M-116/2012-ITJ), dated 16 July 2013 3 CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 (Kar)  The excess 50 percent allowed as deduction under Section 35(2AB) of the Act has to be withdrawn as it will pull down the profits of the non- 10A/10B unit which is taxable. Set-off of non-eligible units loss against income of eligible units Facts of the case  During the relevant year, the taxpayer claimed deduction under Section 10B on the eligible unit.  The taxpayer was also having non-Section 10B units (non-eligible units) and during the relevant year, the taxpayer suffered losses in them.  The taxpayer sought to carry forward the loss of the non-Section 10B units for the set-off against the profits of non-10B units in the subsequent assessment years.  The AO was of the view that the income of Section 10B units had to be set-off against the loss of the non-Section 10B units and if it is so set-off, there will be no loss that needs to be carried forward since provisions of Section 10B are deduction provisions, and therefore the effect will have to be given to the provisions of Section 72 of the Act, even in respect of the profits of Section 10B units.  The CIT(A) upheld the AO’s order on the basis of the decision of the Karnataka High Court in the case of Himatsingike Seide Ltd. 4 wherein it was held that deduction under Section 10B has to be allowed after the set-off of unabsorbed depreciation and unabsorbed investment allowance. Further, the aforesaid provision was only an exemption provision. Tribunal’s ruling  The Karnataka High Court in the case of Yokogawa India Ltd. held as follows:  The expression ‘shall be allowed from the total income of the assessee’ does not mean total income as defined under Section 2(45) of the Act, but that expression means ‘profits and gains of the STP undertaking’ as understood in its commercial sense. Accordingly, income of the STP undertaking will not be allowed to be set-off against loss of either another STP undertaking or a non-STP undertaking. ______________ 4 CIT v. Himatsingike Seide Ltd. [2006] 286 ITR 255 (Kar)
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Though the expression used in Section 10A was ‘deduction’, but in effect it was only an exemption section.  The Karnataka High Court in the case of Yokogawa was concerned with a situation similar to that of the taxpayer in the present case and therefore, the claim of the taxpayer for carry forward of loss of the non-eligible unit had to be allowed without the set-off of profits of the Section 10A/10B unit.  The Karnataka High Court in the case of Himatasingike Seide held that unabsorbed depreciation (and business loss) of same (Section 10A/10B) unit brought forward from earlier years have to be set-off against the profits before computing exempt profits.  Section 10A/10B(6) of the Act, as amended by the Finance Act 2003 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 and onwards is eligible for set-off and carry forward for set-off against income post tax holiday, which means that they need not be so set-off as mandated in the decision of the Karnataka High Court in the case of Himatasingike Seide Ltd.  Accordingly, the decision of the Karnataka High Court in the case of Himatasingike Seide will not apply to the facts of the present case. Our comments In the present case, the Tribunal held that the weighted deduction at 150 per cent under Section 35(2AB) of the Act will not be allowed while computing income of Section 10A/10B unit. The 10A/10B unit will get only 100 per cent deduction of revenue expenditure. Further, the High Courts in various decisions 5 have taken a view that Section 10A of the Act provides for an exemption rather than a deduction and therefore, for computing the benefit under Section 10A of the Act, the current year’s loss and brought forward loss of the non-eligible unit should not be set-off against the profit of the eligible unit. Consequently, Section 10A/10B benefit will be available on the eligible unit and the losses of the non-eligible unit will be allowed to be carried forward to be set-off against future income. _________________ 5 CIT v. TEI Technologies (P.) Ltd. [2012] 25 taxmann.com 5 (Del), CIT v. Black and Veatch Consulting Pvt. Ltd. [2012] 20 taxmann.com 727 (Bom), CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 (Kar) Notwithstanding these decisions, the CBDT had issued a circular stating that the losses from ineligible units have to be set-off against the profit of the eligible units to compute the deduction under the Sections 10A, 10AA, 10B and 10BA of the Act. In the present case, the Tribunal has followed the decision of the jurisdictional Karnataka High Court in the case of Yokogawa India Ltd., and differentiated the decision in the case of Himatasingike Seide Ltd., and held that loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) cannot be set-off against the profits of 10A/10B units.
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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