India: SAP Based ERP Accounts Sufficient To Claim Tax Holiday - ITAT

Last Updated: 9 May 2016
Article by Vaish Associates Advocates

In a recent far reaching order (pronounced on April 25, 2016) in the case of pharma major, Ranbaxy Laboratories Ltd. vs. ACIT, the Delhi Bench of the Tribunal has laid down the principles governing requirement of maintaining separate books for claiming tax holiday under sections 80IB/IC of the Income Tax Act, 1961 ('the Act') and held that maintenance of accounts on SAP based ERP system tantamounts to maintaining separate books of account.

FACTS OF THE CASE

In the aforesaid case, the assessee, a pharma giant, claimed deduction amounting to ` 136.68 crores under sections 80-IB/IC of the Act in respect of 5 eligible unit(s). The assessee had maintained separate books of account on SAP based ERP system. The assessee's claim of deduction under sections 80-IB/IC of the Act was supported by audit report in Form 10CCB filed along with the return of income. The eligible profits of the units were computed by: (i) reducing actual direct expenses incurred at respective units; and (ii) allocating/apportioning common expenses debited at head office/research center, on a rational and scientific basis.

The assessing officer disallowed the entire claim on the ground that separate books of accounts were not being maintained in respect of the aforesaid units, despite the fact that similar claim had consistently been made and allowed in the past assessment years.

The aforesaid disallowance was confirmed by the Dispute Resolution Panel.

TAXPAYERS CONTENTIONS

The assessee raised following main contentions:

  • Eligibility/ allowability must be tested/determined in the first year of claim;
  • There was no requirement to maintain separate books of accounts; and
  • In any case, separate books of accounts were maintained in SAP based ERP system.

DECISION OF THE TRIBUNAL

The Tribunal, allowing the claim of deduction, enunciated the following broad principles:

(a) If the eligibility/ allowability of claim of deduction under section 80IB/IC of the Act is tested/determined by the Revenue in the first or any past year of claim and such claim has been allowed, then, no disallowance can be made in subsequent years;

In assessee's case, the Tribunal held that relief having been allowed in respect of some of the units in the past, disallowance of deduction of the same units in the current year was not permissible.

(b) In terms of section 80IA(7) read with Rule 18BBB of the Income Tax Rules, 1962, there is no strict legal requirement for maintenance of separate books of account and the only prerequisite is determination of correct profits eligible for deduction.

(c) Maintenance of accounts on SAP based ERP system tantamounts to maintaining separate books of account since the assessee can, at any given point of time, extract the product-wise, unit-wise, geography-wise, independent profit and loss account and balance sheet as well as respective ledgers, cashbook and bankbook of each unit independently.

COMMENTS

The aforesaid decision of the Tribunal path breaking inasmuch as it is the first decision wherein the Tribunal has, in context of tax holiday under section 80-IB of the Act, held that there is no strict legal requirement for maintenance of separate books of accounts. The Tribunal has aptly noted that if from any system/ software, identified and separate accounts relatable to any particular unit/ undertaking are discernible and are capable of being generated, the same constitutes sufficient compliance as regards maintaining separate books of accounts for such unit/undertaking for the purpose of claiming deduction under the above section.

The Tribunal has also recognized the technological advancements in the modern era and held that maintenance of books of accounts on SAP based ERP system tantamounts to maintenance of separate books of accounts and it is not required in law to maintain accounts in conventional form.

Vaish Associates represented Ranbaxy in this matter.

© 2016, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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