AI Drafter 
TaxTMI 
TaxTMI 
2015 (12) TMI 95
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....e assessee transacted with its Associated Enterprise [AE] as defined in Section 92A of the Act, the matter was referred to Transfer Pricing Officer [TPO], who issued an order u/s. 92CA of the Act dt. 31-03-2010. The AO framed draft assessment order dt. 31-12-2010 taking into account the TP order. The total income in the draft order was determined at Rs. 1,07,98,53,286/- under normal computation. AO did not compute book profits in the draft order. Assessee objected to the draft order vide its objections filed before DRP, Hyderabad on 03-02- 2011. The DRP disposed off the objections vide its order dt. 26-09-2011 u/s. 144C of the Act. Pursuant to the said directions, AO passed the final order u/s. 143(3) determined the total income at Rs. 1,07,93,35,036/- vide order dt. 20-10-2011. 3. Aggrieved on the above action of AO, assessee has raised as many as 20 grounds. Out of which, Ground No. 1 and 20 are general in nature and does not require any adjudication. 4. We have heard the Ld. Counsel Mr. Raghunathan Sampath, Ld. AR and Mr. T. Venkata Reddy, Ld. CIT-DR and perused the paper books placed on record in three volumes containing pages 1 to 2242 and various case law and charts sub....
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.... provisions. The ground is accordingly considered allowed. Ground No. 3: The Dispute Resolution Panel erred in confirming the Transfer Pricing Officer's order under sec. 92CA of the Act, for making an adjustment of Rs. 8,04,750/- as interest in respect of share application money of Rs. 4,60,00,000/- deposited with Matrix Laboratories BV, Netherlands (Associated Enterprise) which was converted as Equity Share capital subscription in the subsequent period. 6. The facts leading the above ground are that assessee as part of business expansion plans incorporated 100% subsidiary Matrix Laboratories BV, Netherlands and subscribed to further equity to the tune of Rs. 4.60 Crores i.e., EURO 8 Lakhs. The moneys were remitted on 13-02-2006 and allotment was made on 12-06-2006. The TPO, however, treated the share application money pending allotment as loan advanced and interest to be charged thereon. He adopted the rate of 14% interest for the period of application to allotment. Assessee objected to the calculation of interest stating that due to regulatory approvals, there was delay in allotment, but basically the amount was towards share capital and TPO is not correct in characteri....
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....f corporate guarantee extended to Mchem Pharma Group Ltd., China a subsidiary company of the tax-payer. 7. Briefly stated, in order to acquire entry into European markets, assessee floated 100% owned company in Netherlands for which it incorporated a special purpose vehicle Matrix Laboratories NV. Matrix India infused equity capital of 30 Millions and also gave corporate guarantee to ABN Amro Bank, Netherlands based on which the bank gave a loan of EURO 165 Million (equivalent to INR 955.84 Crores). In addition, assessee also provided corporate guarantee to ABN Amro Bank, Singapore and Rabo Bank, Singapore in respect of loan to Mchem Pharma Group Ltd., for an amount of Rs. 30.40 Crores. TPO considered the corporate guarantee and adopted a guarantee commission @ 2% on amount extended by assessee, as against assessee's contention of treating the guarantee as a non-fund based quasi equity transaction. Assessee objected to the adjustment made before the DRP. However, DRP agreed with TPO and objections were rejected. 7.1 It was submitted by Ld. Counsel that at present providing corporate guarantee is considered for the purpose of transfer pricing adjustment, but the rate at wh....
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....,94,695/-. This issue was considered by the co-ordinate Bench in the later year in assessee's own case for AY. 2008-09 and Ld. Counsel fairly admitted the issue was held against assessee. In that above referred case, the coordinate Bench has held as under: "15. We have considered the issue and examined the facts on record and the case law relied upon by the assessee. As per the note given as part of report of Transfer Pricing Report for assessment year 2007-2008, it can be observed that receipts are in the nature of one time settlement in consideration for costs and liabilities incurred by Matrix as a consequence of ceasing its programme to develop and manufacture 'Perindopril' made using the process. The entire amount of Rs. 97.87 crores was offered as income in assessment year 2005-2006 based on receipt basis. As can be seen the amount of Rs. 26.91 crores credited to the P & L account this year is only a notional deferred income whereas the actual income was received much earlier. As can be seen from the facts on record, the corresponding expenditure pertaining to development of 'Perindopril' was spent much earlier i.e., much prior to assessment year 2005-2....
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....h the principles laid down under section 37(1) or the principles on patent infringement compensation. The simple issue to be examined is, whether the income accounted by the assessee will become operational income for the purpose of arriving at the operational profit. The Assessing Officer has excluded the same stating that the same is nothing but notional ITA.No.66/Hyd/2013 Mylan Laboratories Ltd. (Formerly Matrix Laboratories Ltd.) revenue. We agree with the finding of the Assessing Officer as held by the DRP that the income from settlement of patent infringement cannot become part of operating revenues either on bulk drug manufacturing (API) segment or on product development service (PDS) segment which are two different segments in which assessee is operating and accordingly we agree with the DRP's stand that this income falls under the category of 'other income' and not operating revenue. Not only that the income does not pertain to the relevant financial year nor the costs are incurred in the year under consideration. If without the cost, the income is included in the computation of operational profits, the same gets skewed because of inclusion of extraordinary ite....
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....stments. The co-ordinate Bench in the case of M/s. Capital IQ Information Systems (India) Pvt. Ltd., Vs. DCIT in ITA No. 1961/Hyd/2011 dt. 23-11-2012 (supra), has considered the issue as under: "27. We have considered the submissions of the parties in this regard. The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd. (supra), while considering a dispute of similar nature, observed as follows- "The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company......." Following the aforesaid decision of the Bangalore Bench of the Tribunal, the Hyderabad Bench of the Tribunal held in the case of Four Soft Ltd. (supra) in the following manner- "16. With regard to the exclusion of gain on account of foreign exchange fluctuation while computing the net margin, as claimed by the assessee, we find that the exchange fluctuati....
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....to Xiamen Mchem Pharma, China aggregating to Rs. 81.87 Crores. The company also purchased raw materials to the tune of Rs. 35.88 Crores from Xiamen Mchem Pharma, China. The company further received/earned an amount of Rs. 40.52 Crores in respect of product development services rendered to Mylan Laboratories Inc, USA. Apart from the above, the company purchased samples from Doc Pharma, Belgium to the tune of Rs. 1.60 lakhs and availed R&D services from Explora SA, Switzerland for Rs. 29.20 Lakhs. 9.1 The assessee in the transfer pricing documents aggregated the above mentioned international transactions into manufacturing of API's activity and ALP was determined by selecting Transactional Net Margin Method (TNMM) as the most appropriate method and adopted the operating profit/sales margin on sales as Profit Level Indicator (PLI). It has justified its arm's length transactions by selecting comparables and filing a Transfer Pricing report. 9.2 The TPO rejected the comparables selected by assessee on the following grounds vide its show cause notice dated 24-02-2010: i. Current year data not used but multiple year data applied; ii. Appropriate key words are not used; iii.....
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....assessee's entire business activity during the year involved only manufacturing bulk drugs. Therefore, TPO's observation that companies with formulations also are comparable is not acceptable. With reference to M/s. Divi's Labs Ltd., it was submitted that M/s. Divi's Labs Ltd., is required to be excluded on the basis that the said company is operating under a different set of business functionality. Divi's is engaged in manufacture of generic APIs, custom synthesis of active ingredients and intermediates for innovator companies and other specialty chemicals like peptide building blocks and Nutraceuticals. 50% of the total revenue is earned from custom synthesis for innovator customers. Further, as is seen from Annual Report Per Point # 11 of notes to accounts, exports constitute about 93% of the total sales where as exports constitute about 59% of the total sales of Matrix. Further, there is no R&D expenditure comparable to assessee. As stated by the TPO at para 12.1 of his order, the degree of comparison, inter alia, depends on level of market and geography in which market operates. Accordingly, since Divi's Labs predominantly operates in markets outside India, the same cannot be ....
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....e returned income, corresponding to adjustment u/s. 92CA of the Act, made by Transfer Pricing Officer in Astrix Laboratories Limited, (a resident JV Company) on the ground that the amounts paid by the said resident company to the assessee are not at Arms-length price. 10. The issue in this ground is with reference to adjustment made U/s. 92CA, in the case of Astrix Laboratories Limited on the payments made to assessee to an extent of Rs. 3,31,40,155/-. In the case of JV company called Astrix Laboratories, Ld. TPO vide order dt. 29- 10-2010 held that expenditure incurred by Astrix to the above extent cannot be allowed as he determined the ALP to be NIL. While Astrix Laboratories is agitating the disallowance, assessee sought relief by requesting for a deduction of said income as it amounts to taxation of the amount. The DRP rejected the contention stating that the taxability or otherwise of an issue in another company would not determine the basis of taxation in the case of assessee. 10.1 This issue was already decided against assessee in ITA No. 66/Hyd/2013 vide para 34 which is as under: "34. After considering the rival contentions we are not sure how this ground could ar....
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....d u/s. 10B of the Act in respect of Export Oriented Undertakings situated at Pashamylaram (Unit-7), and Jeedimetla (Unit-3.2) 11. The facts leading to the above ground are that assesseecompany is engaged in manufacturing and sale of API (bulk drugs). The unit situated at Jeedimetla -unit 3.2 is said to be eligible for claiming deduction u/s. 10B of the Act. AO following the order u/s. 263 dt. 13- 10-2010 for AY. 2005-06 held that unit is not newly established undertaking and was existing prior to incorporation of provisions of Section 10B and conditions are not fulfilled, further, the unit was not located in export process zone. Even though Hon'ble AP High Court directed the CIT to examine the approvals granted to the eligible units of assessee in terms of following regulations laid down by Central Govt., the CIT-4 seems to have examined new ground for denying exemption and the same since been disputed by assessee before the Hon'ble High Court in W.P.No. 1398/11. AO following the orders in earlier years did not allow the claim of assessee u/s. 10B on the said unit. DRP however, noticed that the issue is subject to revisional proceedings by the CIT and the WP is pending b....
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....bjected to such disallowance before DRP, but, the DRP also confirmed the disallowance. 12.2 The ld. AR submitted before us that the company has incurred the expenditure of contribution made to fund of its directors, who hold more than 5% share in the company. While making the contribution, assessee has also deducted tax at source and has remitted the same to the government. Therefore, the contribution made being in the nature of expenditure incurred wholly and exclusively for the purpose of assessee's business is covered by the provisions of Section 37. It was submitted that as the assessee has treated the contribution as part of the salary of the specified directors and has also deducted tax on the said amount, it ceases to be in the nature of contribution to a superannuation/ gratuity fund and accordingly it is allowable as expenditure u/s 37. In support of such claim, he relied upon a decision of the Hon'ble Gujarat High Court in case of CIT Vs. Karamchand Premchand Pvt. Ltd. [200 ITR 281]. The Ld. AR submitted that unless there is express or implied prohibition under other provisions of the Act, any expenditure incurred wholly and exclusively for the purpose of business can ....
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....68 to 371/Bang/2010 etc., dated 16- 07-2013 and accordingly, requested for restoring the issue to the file of the Assessing Officer to examine in the light of the findings and decision of the Special Bench of the ITAT. In the case of Dr Reddy Laboratories the issue was decided as under: 9.3 After hearing the case, the Special Bench of the Income-tax Appellate Tribunal Bangalore in the case of Boicon Ltd Vs DCIT held that ESOP discount (difference between market price and issue price) is a deductible expenditure at the time of vesting of the option. An adjustment has to be made if the market price is different at the time of exercise of the option. In that case also assessee framed an Employee Stock Option Plan (ESOP) pursuant ITA.No.66/Hyd/2013 Mylan Laboratories Ltd. (Formerly Matrix Laboratories Ltd.) to which it granted options to its employees to subscribe for shares at the face value of Rs. 10. As the market price of each share was Rs. 919, the assessee claimed that it had given a discount of Rs. 909 which was allowable as a deduction as 'employee compensation. Though the options vested equally over four years, the assessee claimed a larger amount in the first year than....
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.... then prevailing. The fact that the SEBI Guidelines do not provide for the adjustment of discount at the time of exercise of options is irrelevant because accounting principles cannot affect the position under the Income-tax Act. (v) On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought to be claimed in four equal installments on a straight line basis. The decision in the case of Ranbaxy Laboratories 124 TTJ 771 (Delhi) was reversed and S.S.I. Ltd. v. DCIT 85 TTJ 1049 (Chennai) approved, PVP Ventures 211 Taxman 554 referred. The decision of Spray Engineering Devices Ltd 53 SOT 70 (Chd) was also approved. The above decisions referred by Special Bench was relied upon by assessee, therefore there is no need to refer them again. AO is directed to work out the deduction keeping in mind the principle laid down by the Special Bench in the above referred case, after giving an opportunity to assessee. Ground is allowed for statistical purposes. 13.1 Therefore, considering the request, we restore this issue to the file of the Assessing Officer to examine the clai....
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....mmon expenses on the basis of ratio of employees head count was held reasonable, conservative and justified. It was the contention that the rationale adopted by the assessee should be accepted. 14.2 This issue was considered in AY 2008-09 as under. "We have considered the issue and examined the facts. Even though the issue was pending in earlier year, we are of the opinion that issue can be decided independently in this year. After considering the facts as stated in the objections before the DRP and also before us, we are of the opinion that assessee has allocated the corporate overheads on a rational basis based on the material cost of purchase and number of people worked for the unit and also on the basis of head account which is reasonable. Adopting sales turnover as the basis may result in skewed allocation. For example, if a particular unit is producing only high cost/ high price product, the effort and service cost for that unit will be less whereas, the profit margin will be more. If the unit is not producing much in the year and has lesser sales, allocation of amount on the basis of turnover may result in under allocation of service cost. Even in the case where the un....
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....ort and substantiate its claim by filing relevant documentary evidence and has urged that an opportunity may be given to the assessee for this purpose by sending the matter to the Assessing Officer. Since the learned Departmental Representative has not raised any objection in this regard, we restore this issue to the file of the Assessing Officer with a direction to examine the assessee's claim for weighted deduction under S.35(2AB) in respect of expenditure incurred for registering patents outside India only to the extent of Rs. 73.67 lakhs afresh, after giving assessee proper and sufficient opportunity to establish its case in accordance with Explanation to S.37(2AB). Ground No.3 is accordingly partly allowed for statistical purposes". 15.1 Respectfully following the same, we restore the issue to the file of AO with the same direction to examine assessee's claim in respect of expenditure incurred for clinical trials outside India after giving assessee proper and sufficient opportunity to establish the case in regard to explanation to Section 37(2AB). This ground is accordingly allowed for statistical purposes. Ground No. 15: The Dispute Resolution Panel erred in not directi....
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....preciation of Rs. 11,86,523/- on brought forward written down value of Rs. 47,46,094/- in respect of non-compete fee paid to M/s. Medispan Ltd by Medicorp Technolgoies Ltd. in previous year relevant to assessment year 2002-2003. Consequent to merger of the Medicorp Technologies Ltd. with the assessee-company, the depreciation was claimed on the written down value. Even though the assessee's claim was crystallized by the Orders of the ITAT in ITA.No.201/2004- 2005 dated 25-06-2007, wherein the payment of fee was considered eligible for depreciation, the Assessing Officer did not grant the depreciation on the reason that reference application is pending before the Hon'ble High Court and the issue has not been finalized. This cannot be a reason for denying the depreciation claimed. Since, ITAT has already ordered the depreciation to be allowed in assessment year 2002- 2003, consequently, depreciation has to be allowed on WDV in this year. He is empowered to take rectification proceedings in case that order was not upheld by the Hon'ble High Court. In view of this, to that extent of claim of depreciation amounting to Rs. 11,86,523/- on brought forward written down value, As....
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....ed by the assessee that noncompete fee is revenue expenditure was rejected and held that noncompete fee for acquisition of business has been held as capital expenditure as the same was incurred for the initial outlay of the business. Following the above principles and the decision of the Hon'ble Delhi High Court in the case of Hidustan Coco Beverages Pvt. Ltd. 331 ITR 192 (Del), the ITAT, Chennai Bench 'A' in Arkema Peroxides India (P) Ltd. vs. ACIT vide ITA.No.2212/Mad/2006 dated 13-01-2012 has held, as under : "From the decision of the Hon'ble Delhi High Court in the case of CIT v. Hindustan Coco Cola Beverages (P.) Ltd. [2011] 331 ITR 192 (Delhi) it is clear that 'business or commercial rights of similar nature' are not manufactured or produced over-night, but are brought into existence by experience and reputation. The noncompete fee is outcome of an agreement entered into between two parties. It does not represent any intangible asset, such as, knowhow, patents, copyrights, trademarks, licences, franchises, etc. Therefore, in view of decision of the Hon'ble Delhi High Court in the case of Hindustan Coca Cola Beverages P. Ltd. non-compete agreemen....
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....ating to this ground are that assessee has sold a property by entering into agreement of sale with three parties in June/Sept. 2005 relevant for the AY.2006-07. The company offered capital gains as Short Term Capital Gain of Rs. 1,52,66,486/- (Sale price - Cost price) as the possession was handedover. The property however, was registered on 24-08-2006 relevant for impugned assessment year, AO invoking the provisions of Section 50C considered the registration value and reworked out the capital gains by bring the difference to capital gains at Rs. 8,55,50,992/-. The DRP did not interfere as the proceedings for AY. 2006-07 were reopened and are pending. 18.1 Ld. Counsel placed on record the order U/s. 143(3) r.w.s. 147 in AY. 2006-07 where in AO did not make any variation except stating that the issue was dealt with in AY. 2007-08. He placed his arguments as contended before DRP/AO. 18.2 After considering the rival contentions and perusing the orders on record. We cannot approve the action of AO in bringing to tax in two years for the following reasons: (a) Assessing Officer has not disputed the fact that property was handed over in Sept. 2005. By virtue of the decision of ju....
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....sessee's own case in ITA No.835 to 837/Hyd/2005 dated 02-07-2012 for AYs. 2001-02 to 2002-03 and 2003-04. The Co-ordinate Bench while considering identical nature of dispute, held as under: "10. We have heard both the parties on this issue. This issue is common in all these appeals. While the assessee contests the CIT (A)'s order for not allowing deduction under clause (iv) of ' Explanation on the entire amount of export prof its computed from the base of book prof its but instead restricting the deduction in terms of the phasing out per subsection (1B), the Department is disputing the order of the CIT(A) for computing the deduction based on book prof its instead of the amount as computed under section 80HHC based on prof its of the business under clause (baa). The assessee relies on the recent decision of the Supreme Court in the case of Ajanta Pharma Ltd v CIT (2010) (327 ITR 305). The assessee submitted that the Apex Court has approved the Special Bench decision of ITAT in DCIT v Syncom Formulations ( I) Ltd. (2007) (106 ITD 193). 11. The DR fairly conceded that the decision of the Supreme Court in the case of Ajanta Pharma (supra) is against the Department and in ....