2015 (3) TMI 983 - AT - Income Tax

Tribunal Decision: Time Limits, Capital Gains, Deductions Allowed, ESOPs, Disallowances, Transfer Pricing

Dr. Reddy’s Laboratories Limited Versus Addl. CIT Circle-1(2), Hyderabad

Dr. Reddy’s Laboratories Limited Versus Addl. CIT Circle-1(2), Hyderabad - [2014] 30 ITR (Trib) 393 (ITAT [Hyd]) Issues Involved:1. Validity of considering the second revised return filed by the assessee.2. Classification of capital gain on the sale of Goa unit.3. Disallowance of expenditure towards payment of interest to the Department of Chemicals and Petrochemicals (DCP).4. Disallowance of expenditure incurred by the assessee towards honoring a bank guarantee for Pathnet.5. Disallowance of expenditure on Employee Stock Option Plan (ESOP).6. Disallowance of payments to non-residents under section 40(a)(ia).7. Disallowance of various business promotion expenditures.8. Allocation of part of the head office expenditure against profits of units eligible for deductions under sections 10B and 80-IB.9. Treatment of payment made for acquiring customer contracts of Falcon as capital expenditure.10. Disallowance of contribution to ILS as revenue expenditure.11. Disallowance of loss incurred on transfer of investment in Pathnet.12. Disallowance of loss incurred in write-off of investment in Aurantis.13. Transfer pricing adjustment on interest charged on advances to subsidiaries.Detailed Analysis:1. Validity of Considering the Second Revised Return Filed by the Assessee:The assessee filed a second revised return on December 24, 2009, to give effect to the merger order of the Andhra Pradesh High Court. The Dispute Resolution Panel (DRP) rejected this return, stating that it was beyond the time-limit prescribed under section 139(5) of the Income-tax Act, which allows filing a revised return before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The Tribunal upheld this view, rejecting the assessee's contention that the second revised return should be considered valid.2. Classification of Capital Gain on the Sale of Goa Unit:The issue was whether the capital gain arising from the sale of the Goa unit was a short-term or long-term capital gain. The Tribunal examined the dates of application, allotment, and possession of the land. It concluded that the unit was set up only when the assessee got possession of the land on April 10, 2003. Since the sale occurred within 36 months of this date, the gain was classified as a short-term capital gain.3. Disallowance of Expenditure Towards Payment of Interest to the Department of Chemicals and Petrochemicals (DCP):The assessee paid an amount towards overcharged sales and interest for violating the norms of the Drugs (Prices Control) Order (DPCO). The Tribunal held that while the principal amount was allowed as a deduction under section 37(1), the interest was compensatory and not penal in nature, thus allowable as a deduction.4. Disallowance of Expenditure Incurred by the Assessee Towards Honoring a Bank Guarantee for Pathnet:The Tribunal restored this issue to the Assessing Officer (AO) to examine whether the bank guarantee was given at the time of investment or subsequently in the course of business. If given at the time of investment, it would be capital in nature; otherwise, it could be considered under commercial expediency.5. Disallowance of Expenditure on Employee Stock Option Plan (ESOP):The Tribunal referred to the Special Bench decision in the case of Biocon Ltd., which held that the discount on ESOPs is a deductible expenditure. The AO was directed to work out the deduction based on the principles laid down by the Special Bench.6. Disallowance of Payments to Non-Residents Under Section 40(a)(ia):The Tribunal held that the AO must establish that the payments made to non-residents were taxable in India before disallowing them under section 40(a)(i). Since the AO did not establish this, the disallowance was not justified.7. Disallowance of Various Business Promotion Expenditures:The Tribunal upheld the disallowance of business promotion expenditure, gifts, and compliments, and individual doctor services, as these were not satisfactorily explained as related to business. However, the issue of local doctors' meet expenditure was set aside to the AO for fresh consideration.8. Allocation of Part of the Head Office Expenditure Against Profits of Units Eligible for Deductions Under Sections 10B and 80-IB:The Tribunal set aside this issue to the AO to re-examine the claim, following the principles laid down in the assessee's own case for the assessment year 2003-04.9. Treatment of Payment Made for Acquiring Customer Contracts of Falcon as Capital Expenditure:The Tribunal agreed with the AO and the DRP that the payment made to acquire customer contracts of Falcon was capital in nature and allowed depreciation under section 32.10. Disallowance of Contribution to ILS as Revenue Expenditure:The Tribunal restored this issue to the AO to examine the alternate claim under section 37(1), as the claim under section 35AC was not admissible.11. Disallowance of Loss Incurred on Transfer of Investment in Pathnet:The Tribunal held that the loss on transfer of investment in Pathnet should be considered as a capital loss and allowed set off or carry forward as per the provisions of the Act.12. Disallowance of Loss Incurred in Write-off of Investment in Aurantis:Similar to the Pathnet issue, the Tribunal directed the AO to consider the loss as a capital loss and allow set off or carry forward as per the provisions of the Act.13. Transfer Pricing Adjustment on Interest Charged on Advances to Subsidiaries:The Tribunal directed the AO to modify the arm's length price adjustment based on the rate of interest received on deposits made with banks and public companies, following the findings in the assessee's own case for the assessment year 2004-05.