TaxTMI 
TaxTMI 
2017 (4) TMI 462
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons involving the provisions of Transfer Pricing. 4. So far as this grievance of the assessee is concerned, the relevant material facts are as follows. The assessee before us is one of the leading pharmaceutical companies in India, and it has entered into a number of international transactions with its associated enterprises abroad. As a result of the scrutiny proceedings before the Transfer Pricing Officer, arm's length price adjustments were recommended in respect of (i) interest on loans to the AEs- Rs. 5,00,35,270; (ii) guarantee fee charges- Rs. 4,19,22,177; and (iii) liaison services- Rs. 34,86,285. The background in which these ALP adjustments were made is set out below: (i) Interest on loans to AEs: Rs. 5,00,35,270 5. It was noticed by the TPO that on 9th October 2007, the assessee had advanced an optionally convertible loan to Zydus International Pvt Ltd, Ireland, for an amount of US $ 27 million. The tenure of this loan was five years and the lender had the option for repayment or for conversion of loan into equity at par with the company at any time during the tenure of the loan. In case of repayment, the cumulative interest payable by the borrower was LIBOR plu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....can take shares of subsidiary companies". The TPO further observed that "favourable conversion terms in 100% equity does not have any significance as it is only the assessee who can make investment in the subsidiary and use any mode of investment i.e. debt or equity". It was also noted that favourable conversion option is a misnomer since it does not carry any return to investor. It was also noted that these shares are not saleable in the open market and. As regards assessee's comparison with zero coupon convertible bonds in which entire premium is paid at the end of the term, it was noted that there is no quarrel with the proposition that the assessee can indeed issue such bonds, but once the assessee himself agrees that interest is payable on cumulative basis in the event of option of conversion not being exercised, all that is required to be done is to ascertain an arm's length interest on the said transaction. As regards the claim of the assessee that no arm's length price can be attributed when no income has arisen, it was observed that "Section 92 is not a substitute to Section 5; it is not a charging section, but it gives the TPO an authority to go behind a related party tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... loans in the form of bank loans, buyers' credit, suppliers' credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years. ii) Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency. Further, the bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993", and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments. The ECB policy is applicable to FCCBs. The issue of FCCBs is also required to adhere to the provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from time to time." 7.4.7 The above categorization clearly indicates th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ithin the 'equity' category. In light of the predominantly 'debt' character of the instrument, it is liable to be treated as a debt and not equity. Sr.No. Test Description Assessee's Comments TPO's comments 1 Names or labels given to the instruments Name given to the instrument In our case, the name of the instrument is convertible loanandis, hence, neutral Optionally convertible loan points towards loan 2 Presence or absence of a fixed maturity date The presence of a fixed maturity date is virtually essential for a debt classification The convertible loan is for a period of 5 years. Hence, the instrument takes the colour of a Loan. Loan 3 Source of payments A taxpayer willing to condition the repayment of an advance on the financial well being of the receiving company acts as a capital investor and not as a creditor expecting to be repaid regardless of the company's success or failure. We understand that if the repayment is possible only out of corporate earnings, the transaction has the appearance of equity contribution but if the repayment is not dependent upon earnings, the transaction reflects a loan. We ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to other creditors it flows in favour of Equity. Character of Loan. Wrong to hold that it is given in shareholding capacity. No subordination attached to the loan. On demand, payable at par with other loans. 7 Intent of the parties The inquiry of a court in resolving the debt equity issue is primarily directed at ascertaining the intent of the parties. The intent of the parties, in turn, may be reflected by their subsequent acts, the manner in which the parties treat the instruments is relevant in determining their character. The intent of the parties is clear from the fact that with respect to the convertible loan of USD 27 Mn it has been converted into equity in the year under consideration. As per this test, the instrument takes the character of Equity. With respect of the loan of USD 8 Mn the intention will manifest only in subsequent years. Hence this factor is Neutral. None of the convertible loans during the present period have been converted. Hence, the intention will manifest in future. However, for the present, non- conversion reveals a loan character for the amounts. 8 Identity of interest between creditor and stockholder If advances are made ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t a conclusion whether it is in the nature of debt or equity. Thus, this test is neutral in our case. Assessee would have all means to recover in case of non-payment. Character of loan. 13 Risk involved in making advances A significant consideration in the inquiry is whether the funds were advanced with reasonable expectations of repayment regardless of the success of the venture or were placed at the risk of the business. Several factors show the uncertainty of repayment like long and conditional maturity dates. Since the purpose of the funding was in furtherance of the inorganic growth strategic of Cadila the risk was comparatively higher and hence as per this test, the instrument takes the character of Equity. Equity As explained above, on 10 counts, the loan comes out as a loan and only on three counts, it can be adopted as equity. The dominant nature of the convertible loan is loan and not equity. 7. On this basis, the TPO concluded that the transaction was of debt rather than that of equity. He thus proceeded to make an ALP adjustment, by computing interest @ 7.02% in respect of the first loan, and interest @ 9.62% in respect of the second lo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward, as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason that the transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of 'quasi capital'. 11. As for the connotations of 'quasi capital', in the context of determination of arm's length price under transfer pricing regulations, we may refer to the observations made by a coordinate bench of this Tribunal- speaking through one of us (i.e. the Accountant Member), in the case of Soma Textile & Industries Ltd Vs ACIT [(2015) 154 ITD 745 (Ahd)], as follows: 5. ..............The question, however, arises as to what are the connotations of expression 'quasi capital' in the context of the transfer pricing legislation. 6. Hon'ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd Vs ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that "A phra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression 'quasi capital', in our humble understanding, is relevant from the point of view of highlighting that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. 13. Let us, at this stage, take note of the US Tax Court decision, relied upon by the TPO, in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09, 13677-09; order dated 20th September 2012). It has been referred to by the TPO as decision of the US Supreme Court but in fact it is a decision of the US Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by PepsiCo's Netherlands subsidiaries to certain PepsiCo domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... should have charged interest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm's length consideration of raising the funds, unless profit sharing is implicit in the consideration for raising the funds itself- which is neither the normal commercial practice nor the case before us. The cost of raising funds is determined much before the returns from funds so raised is even known. To hold that cost of funds raised should have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm's length price of a transaction, it is immaterial as to what 'benefit' an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bank in respect of Zydus Netherlands BV (Guarantee amount: US $ 30 million; Period: 365 days) and to Bank of Baroda in respect of Zydus Inc USA (Guarantee amount: US $ 30 million; Period: 365 days). So far as these two guarantees were concerned, the assessee did not charge any guarantee fees at all. The assessee's explanation for not charging any guarantee commission from these AEs was that "these companies have availed loans from banks to make strategic acquisitions in furtherance of Cadila's inorganic expansion strategy". It was stated in the assessee's transfer pricing report that "issuance of guarantees to these AEs has benefitted Cadila itself rather than the AEs, and hence, keeping with the arm's length principle, no guarantee commission has been charged". These contentions of the assessee did not find favour with the TPO. He was of the view that "the current OECD guidelines as well as cases decided by the US and Canadian tax courts have also held that provision of guarantee by the guarantor is a service rendered and the guarantor is justified in charging a suitable fees for this service". The TPO was further of the view that the credit rating variation between Cadila and its....
X X X X Extracts X X X X
X X X X Extracts X X X X
....benchmarking of guarantees in light of fresh comparable data now accessible. The concept of res judicata would not apply in a scenario of database analysis on a year to year basis. ii. It is an acknowledged fact that there is significant benefit passed on to the AEs by giving guarantees while a significant risk is assumed on behalf of the AE. Hence, considerable service has been rendered by the assessee while giving guarantees. The acquisition is being done by the AE and not by the assessee although it may benefit as a part of the group as a whole. However, when the matter is being considered at an arm's length, such benefit has to be attributed to the AE acquiring the shares. To this extent, there is no benefit to the assessee company. Substantive funds have been raised by AEs on account of the guarantees given by the assessee company and all these guarantees mean additional risk on the assessee and a charge on the balance sheet. The liability of the guarantee will result in higher risk margin being applied in case of the loans to the assessee because of its exposure. iii. The assessee is correct to the extent that in specific circumstances, the value of guarantee can be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onds (A and BB) as mentioned above would represent the level of risk being adopted by the assessee company on behalf of its AE. 6.7 An attempt has been made to analyze the bond data in US market to arrive at various levels of yields for differently rated bonds in a global scenario since the US bond market is a mature one and is freely traded globally. The coupon rate represents yield on various bonds and the rate is directly proportional to the rating given to the bond. Higher the risk of default by the issuing company on this bond, higher the coupon rate. Details of these bonds are available on the web. The details of such corporate bonds available on www.finanace.vahoo.com (publicly available) was gathered. On analysis of over 1100 bond data, from where the bonds issued during the FY 2008-09 were segregated, it is seen that the difference in coupon rate (yield or interest rate) in respect of AA rated bonds and BB rated bonds comes to 2.706%age points. By taking guarantee for payments on behalf of its AE, the assessee has incurred significant currency risk as evident by general depreciation of rupee against dollar. In order to factor this currency risk, the above spread is incr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or investments in step down subsidiaries, could indeed be given without charging any fees. The relevant observations of the DRP are as follows: Considering the facts of the case, we direct the TPO to accept guarantee fees @1% as in earlier years. However, we are not impressed by the assessee's argument that some of the guarantees were given as shareholder's service and hence no charge will be justified. The AO has detailed the reasons as to why providing guarantee is a service that requires arm's length payment. We uphold charge of guarantee commission in respect of all the guarantees provided albeit @ 1%. 20. The Assessing Officer thus proceeded to make an ALP adjustment of Rs. 4,19,22,177 in respect of guarantee commission. The assessee is aggrieved and is in appeal before us. 21. Learned representatives fairly agree that so far as this issue is concerned, it is covered, in favour of the assessee, by a coordinate bench decision in the case of Micro Ink Ltd Vs ACIT [(2016) 157 ITD 0132 (Ahd)], even as learned Departmental Representative vehemently relied upon the stand of the authorities below. 22. In the case of Micro Ink (supra), dealing with the above issue, a coord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know -how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore AEs, at least one of which should be a non-resident. An international transaction can be a transaction of the following types: in the nature of purchase, sale or lease of tangible or intangible property, in the nature of provision of services, in the nature of lending or borrowing money, or in the nature of any other transaction having a bearing on the profits, income, losses or assets of such enterprises An international transaction shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises. Section 92B (2), covering a deeming fiction, provides that even a transaction with non-AE in a situation in which such a transaction is de facto controlled by prior agreement with AE or by the terms agreed with the AE. 26. Let us now deal with the Explanation, inserted with retrospective effect from 1st April 2002 i.e. right from the time of the inception of transfer pricing legislat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation. These items can only be covered in the residual clause of definition in international transactions, as in Section 92B(1), which covers "any other transaction having a bearing on profits, incomes, losses, or assets of such enterprises". 30. It is, therefore, essential that in order to be covered by clauses (c) and (e) of Explanation to Section 92B, the transactions should be such as to have bearing on profits, incomes, losses or assets of such enterprise. In other words, in a situation in which a transaction has no bearing on profits, incomes, losses or assets of such enterprise, the transaction will be outside the ambit of expression 'international transaction'. This aspect of the matter is further highlighted in clause (e) of the Explanation dealing with restructuring and reorganization, wherein it is acknowledged that such an impact could be immediate or in future as evident from the words "irrespective of the fact that it (i.e. restructuring or reorganization) has bearing on the profit, income, losses or assets of such enterprise at the time of transaction or on a future date". What is implicit in this statutory provision is that while impact on " profit,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(c) of Explanation to Section 92B, and yet it may not constitute an international transaction as the condition precedent with regard to the 'bearing on profit, income, losses or assets' set out in Section 92B(1) may not be fulfilled. For example, an enterprise may extend guarantees for performance of financial obligations by its associated enterprises. These guarantees do not cost anything to the enterprise issuing the guarantees and yet they provide certain comfort levels to the parties doing dealings with the associated enterprise. These guarantees thus do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. One may also have a situation in which there is a receivable or any other debt during the course of business and yet these receivables may not have any bearing on its profits, income, losses or assets, for example, when these receivables are out of cost free funds and these debit balance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not". The very fact of charging this guarantee commission brings the issuance of corporate guarantees to the net of transfer pricing. Nevertheless, the ALP adjustment made by the TPO was deleted by the Tribunal. Aggrieved by the relief so given by the Tribunal, the matter was carried in further appeal, by the Commissioner, before the Hon'ble Bombay High Court which eventually upheld the relief granted by the Tribunal. The appeal before the Hon'ble High Court was by the Commissioner, and not by the assessee, and, therefore, the grievance against the issuance of corporate guarantee being held to be an international transaction could not have come up for consideration. Of course, the assessee had no occasion to challenge the stand of the Tribunal on this aspect since the addition, on merits, was deleted anyway making revenue's success in this respect hollow and of no damage to the interests of the assessee. It was in this backdrop that the action of the Tribunal was upheld in granting relief to the assessee on merits. It is difficult to understand as to how this decision is taken as supporting the proposition that the issuance of corporate guarantee, even in a case in whic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pra), which has been relied upon by the learned Departmental Representative, we find that the operative portion of this judgment, so far as relevant to this discussion, is as follows: '213. The amendment to section 2(47) raises several important questions of fact and of law. Whether or not it affects the proceedings which were the subject matter before the Supreme Court is not relevant for the purpose of this Writ Petition. But, whether it is relevant or not for the purpose of the assessment proceedings in respect of the petitioner which are the subject matter of this Writ Petition, is relevant. The effect of the amendment would have to be considered. It cannot be brushed aside. 214. Section 2(47), as amended, even on a cursory glance raises various issues. It is necessary to note four preliminary aspects of Explanation 2 to section 2(47). Firstly, as the opening words, For the removal of doubts it is hereby clarified that ......", indicate it is a clarificatory amendment. Secondly, it is an inclusive definition as is evident from the words "transfer" includes ". Thirdly, the amendment is with retrospective effect from 1st April, 1962. Fourthly, the Finance Ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns of the Framework agreements themselves, to wit as regards the construction of the clauses thereof without the aid of any other material for interpreting them. Vodafone's case obviously considered the ambit of the term "transfer" prior to the amendment. In the present assessment proceedings, it is the amended definition which would have to be considered. 218. We do not find it either necessary or proper to indicate the application of section 2(47) as amended to the present proceedings. The application would depend upon the facts on record or those may be permitted to be brought on record. 219. There is another aspect. The petitioner may well contend that the amended definition makes no difference it being clarificatory in nature. The provisions thereof must, therefore, be deemed always to have been in existence. We will presume that it would be open to the petitioner to contend, therefore, that the judgment of the Supreme Court would remain entirely unaffected for the Supreme Court must be deemed to have considered the term as per its true ambit, as always intended by the Parliament. On the other hand, it may be equally open to the Revenue to contend that ce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erved that the effect of amendment will have to be considered, Hon'ble Bombay High Court has also observed that even after taking into account the amendments, the legal implications of this amendment is still an open issue which will have to be adjudicated in the light of pleadings of the parties. Even in these observations, which do not anyway decide anything on merits, effect of a retrospective amendment was not in the context of the precise issue before us, or on the scope of the international transaction, but in respect of connotations of 'transfer'. As learned counsel rightly contends, in the light of Hon'ble Bombay High Court's judgment in the case of Sudhir Jayantilal Mulji (supra) "ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein". In view of these discussions, the reliance placed on Vodafone India Services (P.) Ltd. (supra) is also equally misplaced and devoid of legally sustainable merits. In any case, as is noted by Hon'ble Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 44....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith the reliance placed by the revenue authorities on GE Capital's case by the Tax Court of Canada. In the DRP's order, a reference is made to well known Canadian decision in the case of GE Capital Canada (supra). The said case, to quote the words of the DRP, "also shows that the group company issuing the guarantee (i.e. guarantor) would, in principle, at least need to cover the cost that it incurs with respect to providing the guarantee" and that "these costs may include administrative expenses as well as the costs of maintaining an appropriate level of cash equivalents, capital, subsidiary credit lines or more expensive external funding conditions on other debt finance". The DRP had also noted that "in addition, the guarantor would want to receive appropriate compensation for the risk it incurs" and concluded that "following the above discussions, an arm's length guarantee fees is typically required to be determined by establishing a range of fees that the guarantor would, at least, want to receive and the fees that the guaranteed group company would be willing to pay depending on the prevailing conditions within financial markets in practice". 30. However, while d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p://laws-lois.justice.gc.ca/eng/acts/I-3.3/page-419.html#h-156] coupled with the legal position that arm's length adjustment to the prices of such transaction come into play "Where a taxpayer or a partnership and a non-resident person with whom the taxpayer or the partnership, or a member of the partnership, does not deal at arm's length" [See Section 247(2) ibid]. When one takes into account these variations in the statutory provisions, it will become very obvious that the provisions of the Indian Income-tax Act, 1961 and the Canadian Income-tax Act, 1985 are so radically different that just because a particular transaction is to be examined on arm's length principle in Canada cannot be a reason enough to hold that it must meet the same in India as well. While the Canadian transfer pricing legislation, as indeed the transfer pricing legislation in many other jurisdictions, does not put any fetters on the nature of transactions between the AEs, so as to be covered by the arm's length price adjustment, and, therefore, covers all transactions between the related enterprises, Indian transfer pricing legislation covers only such transactions as are "in the nature of pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ant for the present purposes because all that we are concerned with right now is understanding the conceptual basis on which, contrary to popular but apparently erroneous belief, the issuance of corporate guarantees can indeed be kept outside the ambit of services. The relevant extracts from this document are as follows: "102. An independent company that is unable to borrow the funds it needs on a stand-alone basis is unlikely to be in a position to obtain a guarantee from an independent party to support the borrowings it needs. Where such a guarantee is given it compensates for the inadequacies in the financial position of the borrower; specifically, the fact that the subsidiary does not have enough shareholders' funds. ..... 103. It would not be expected that a company pay for the acquisition of the equity it needs for its formation and continued viability. Equity is generally supplied by the shareholders at their own cost and risk. 104. Accordingly to the extent that a guarantee substitutes for the investment of the equity needed to allow a subsidiary to be self-sufficient and raise the debt funding it needs, the costs of the guarantee (and the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e cases assistance in day-to-day management". The shareholder activities are thus seen as conceptually distinct from the provision of services. The issuance of corporate guarantee, as long as it is in the nature of shareholder activity, cannot, therefore, amount to a "provision for services". 34. Undoubtedly, pioneering work done by the OECD, in the field of international taxation, has been judicially recognized worldwide by various judicial forums, including, most notably by Hon'ble Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP). Their Lordships also referred to Lord Radcliffe's observations in Ostime v. Australian Mutual Provident Society [1960] 39 ITR 210 (HL), which has described the language employed in the models developed by the OECD as the "international tax language". The work done by OECD in the field of transfer pricing is no less significant. No matter which part of the world we live in, and irrespective of whether or not that tax jurisdiction is an OECD member jurisdiction, the immense contribution of the OECD, in the field of the transfer pricing as well, is admired and respected. However, the r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he actual facts and circumstances, and it is not possible in the abstract to set forth categorically the activities that do or do not constitute the rendering of intra- group services. However, some guidance may be given to elucidate how the analysis would be applied for some common types of activities undertaken in MNE groups. 7.8 Some intra-group services are performed by one member of an MNE group to meet an identified need of one or more specific members of the group. In such a case, it is relatively straightforward to determine whether a service has been provided. Ordinarily an independent enterprise in comparable circumstances would have satisfied the identified need either by performing the activity in-house or by having the activity performed by a third party. Thus, in such a case, an intra-group service ordinarily would be found to exist. For example, an intra-group service would normally be found where an associated enterprise repairs equipment used in manufacturing by another member of the MNE group. 7.9 A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the gr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for or to perform for itself.' (Emphasis supplied) 36. We have noticed that the 'OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations' specifically recognizes that an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder "would not justify a charge to the recipient companies". It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. It is essential to appreciate, at this stage, the distinction in a service and a benefit. One may be benefited even when no services are rendered, and, therefore, in many a situation it's a 'benefit test' which is crucial for transfer pricing legislation, such as in US Regulations 1.482-9(1)(3)(i) which defines 'benefit', form a US Transfer Pricing perspective, as....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services. There is no such express reference to the benefit test, or to the concept of benefit attached to the activity, in relevant definition clause of 'international transaction' under the domestic transfer pricing legislation. As we take note of these things, it is also essential to take note of the legal position, in India, in this regard. No matter how desirable is it to read such a test in the definition of the international transaction' under our domestic transfer pricing legislation, as is the settled legal position, it is not open to us to infer the same. Hon'ble Supreme Court, in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 (SC) , took note of the situation before Their Lordships in these words: "We have given anxious thoughts to the persuasive arguments of Mr Sharma. His arguments, if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s seek to be compensated, even for the secured guarantees, for the financial risk of liquidating the underlying securities and meeting the financial commitments under the guarantee, the guarantees issued by the corporates for their subsidiaries are rarely, if at all, backed by any underlying security and the risk is entirely entrepreneurial in the sense that it seeks to maximize profitability through and by the subsidiaries. It is inherently impossible to decide arm's length price of a transaction which cannot take place in arm's length situation. The motivation or trigger for issuance of such guarantees is not the kind for consideration for which a banker, for example, issue the guarantees, but it is maximization of gains for the recipient entity and thus the MNE group as a whole. In general, thus, the consideration for issuance of corporate guarantees are of a different character altogether. 40. At this stage, it would appropriate to analyze the business model of bank guarantees, with which corporate guarantees are sometimes compared, in the context of benchmarking the arm's length price of corporate guarantees. A bank guarantee is a surety that that the bank, or t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....group entity will issue the guarantee nevertheless because these are compulsions of his group synergy rather than the assurance that his future obligations will be met. We see no meeting ground in these two types of guarantees, so far their economic triggers and business considerations are concerned, and just because these instruments share a common surname, i.e. 'guarantee', these instruments cannot be said to be belong to the same economic genus. Of course, there can be situations in which there may be economic similarities, in this respect, may be present, but these are more of an exception than the rule. In general, therefore, bank guarantees are not comparable with corporate guarantees. 41. As evident from the OECD observation to the effect "In contrast, if for example a parent company raises funds on behalf of another group member which uses them to acquire a new company, the parent company would generally be regarded as providing a service to the group member", it is also to be clear that when the corporate guarantees are issued for the purpose of subsidiaries raising funds for acquisitions by such subsidiaries, these guarantees will be deemed to be services to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions made by Hon'ble High Court, speaking through Hon'ble Justice Easwar (as he then was), as follows: '16. The Organization for Economic Co-operation and Development ('OECD', for short) has laid down "transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....action can only be, and is, motivated by the shareholder, or ownership considerations. No doubt, under the OECD Guidance on the issue, an explicit support, such as corporate guarantee, is to be benchmarked and, for that purpose, it is in the service category but that occasion comes only when it is covered by the scope of 'international transaction' under the transfer pricing legislation of respective jurisdiction. The expression 'provision for services' in its normal or legal connotations, as we have seen earlier, does not cover issuance of corporate guarantees, even though once a corporate guarantee is covered by the definition of international transaction', it is benchmarked in the service segment. In view of the above discussions, OECD Guidelines, as a matter of fact, strengthen the claim of the assessee that the corporate guarantees issued by the assessee were in the nature of quasi-capital or shareholder activity and, for this reason alone, the issuance of these guarantees should be excluded from the scope of services and thus from the scope of 'international transactions' under section 92B. Of course, once a transaction is held to be covered by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssuance of guarantee in general, there could not have been an occasion to give such hedged advice. This will be stretching the things too far to suggest that just because when guarantees are included in the international transactions, these guarantees are included in service segment in contradistinction with other heads under which international transactions are grouped, the guarantees should be treated as services, and, for that reason, included in the definition of international transactions. That is, in our considered view, purely fallacious logic. In our considered view, under Section 92B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that Section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions, which are stated to be included in the scope of expression 'international transactions' by virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service" which are anyway covered in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises ". ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bility under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment or receivable or any other debt during the course of business, as will have "a bearing on the profits, income, losses or assets or such enterprise". This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....coordinate bench took in Four Soft Ltd. case (supra), but if the scope of the provision was indeed enlarged, as is our opinion, the question that really needs to be addressed whether, given the peculiar nature and purpose of transfer pricing provision, is it at all a workable idea to enlarge the scope of transfer pricing provisions with retrospective effect There can be little doubt about the legislative competence to amend tax laws with retrospective effect, and, in any case, we are not inclined to be drawn into that controversy either. On the issue of implementing the amendment in transfer pricing law with retrospective effect, in the case of Bharti Airtel Ltd. (supra), a coordinate bench had observed as follows: "34. There is one more aspect of the matter. The Explanation to Section 92B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92B enlarges the scope of Section 92B itself, even as it is modestly described as 'clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective eff....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Mum.), held that even though the assessee had not deducted the applicable tax at source under section 195, the disallowance could not be made under section 40(a)(i) since the taxability was under the provisions which were amended, post the payment having been made by the assessee, with retrospective effect. All this only shows that even when law is specifically stated to have effect from a particular date, its being implemented in a fair and reasonable manner, within the framework of judge made law, may require that date to be tinkered with. When a proviso is introduced with effect from a particular date specified by the legislature, the judicial forums, including this Tribunal, at times read it as being effect from a date much earlier than that too. One such case, for example, is CIT v. Ansal Landmark Township (P.) Ltd. [2015] 377 ITR 635/234 Taxman 825/61 taxmann.com 45 (Delhi), wherein Hon'ble Delhi High Court confirmed the action of the Tribunal in holding that the provision, though stated to be effective from 1st April 2013 must be held to be effective from 1st April 2005. Whether such an exercise can be done in the present case is, of course, something to be examined and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....), an earlier considered decision on the same issue by coordinate bench of equal strength was simply disregarded and that fact takes this decision out of the ambit of binding judicial precedents. We have also noted that in view of the decision a coordinate bench, in the case of JKT Fabrics v. Dy. CIT [2005] 4 SOT 84 (Mum.) and following the Full bench decision of Hon'ble AP High Court in the case of CIT v. BR Constructions [1993] 202 ITR 222/[1994] 73 Taxman 473 (AP), a decision disregarding an earlier binding precedent on the issue is per incurium. Such decisions cannot be basis for sending the matters to special bench since occasion for reference to special bench arises when binding and conflicting judicial precedents from coordinate benches come up for consideration. That was not the case here. All these factors taken together, in our considered view, it was not possible in this case to refer the matter for constitution of a special bench. In any case, whatever we decide is, and shall always remain, subject to the judicial scrutiny by Hon'ble Courts above and our endeavour is to facilitate and expedite, within our inherent limitations, that process of such a judicial scr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee are required to be registered with the competent authorities, under the local regulatory framework, in each jurisdiction. The assessee has obtained these registrations through its local affiliates in such jurisdictions. During the relevant previous year, the assessee has paid product registration charges amounting to Rs. 2,48,48,862, at a mark up @ 10% over actual expenses incurred, to Zydus Healthcare (USA)LLC (Zydus LLC, in short) , and Rs. 4,44,95,968, at a mark up @ 6%, to Zydus Pharma Inc, Japan (Zydus Japan, in short). The stand of the assessee was that the services rendered by these entities was for preparing all the relevant information and data, filing applications, before the regulatory authorities in respective jurisdictions. This work was one under the guidance of technical and qualified persons. The work was done under the local regulatory framework and in accordance with the local laws. The AEs were also to follow up with the regulatory authorities, deal with deficiency letters, if any, in respect of such registration applications and provide necessary legal and technical inputs to the assessee. As the AEs were the least complex entities, between the assessee a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ualitative and quantitative screening, the assessee has finally identified the following 9 comparable independent companies: 1 AOCORP AUSTRIA LIMITED 2 COG CO LTD 3 COMMUNICATION DESIGN INTERNATIONAL LTD. 4 FAR EAST DDB PUBLIC COMPANY LIMITED 5 LEGS COMPANY LIMITED 6 MPCLTD 7 OR1COM INC 8 PHOTON GROUP LIMITED 9 SALMAT LIMITED 5.3.2 The weighted average NCP of the aforesaid 13 companies comes to between 2.6% to 13.52% with an arithmetical mean of 6.03 per cent. Thus, the NCP of Zydus Japan was taken at 6 percent. 25. The Transfer Pricing Officer was, however, not satisfied with the approach so adopted by the assessee. He rejected the same by observing as follows 5.4 The business description of above companies which the Assessee wants to compare for its product registration services are perused. The companies selected are primarily in the business of direct mail media, marketing, advertising, public relation services, management services, business consulting services, outdoor advertising services, etc. None of these companies have functions which are similar to the activities of Zydus LLC and Zydus Japan i.e. product registration services. In view ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he amount so computed was disallowed as in excess of arm's length price. As regards the assessee's stand that even if the arm's length price is computed on the basis of assessee's stand in 2006-07, which has met approval of the Tribunal, the benefit of +_5% should be allowed, the TPO rejected the same and observed that such an adjustment comes into play only when there are more than one comparable prices available and the ALP is computed on the basis of arithmetic mean of such prices. What the TPO disregarded, however, was the fact that the Tribunal had also directed the benefit of +_5% in the order. In effect thus, the amount paid by the assessee in excess of 2% mark up was declined, and 2% mark up was accepted as an arm's length price. On this basis, an ALP adjustment of Rs. 34,86,285 was justified. Aggrieved by the addition so proposed, assessee carried the matter in appeal before the DRP, but without any success. Aggrieved by the resultant ALP adjustment of Rs. 34,86,285, the assessee is in appeal before us. 27. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position, 28. We ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the assessee, is demonstrated. If these comparables are not appropriate, let there be other comparables which are appropriate. If comparables are not available for a application of a particular method of the ALP, the possibilities of other methods are to be examined. As for his observation to the effect that "in fact, transaction carries zero risk and if it was to be compared with independent entrepreneur, adjustment to the results of above mentioned companies was to be carried out which would have resulted into profit of almost zero percent as these were purely administrative support services provided by one person to another and where all cost incurred on behalf of others has been paid to the last penny", this observation is very much divorced from the ground reality inasmuch as it cannot be suggested that when an enterprise carries on any work for an independent enterprise or rank outsider, which does not have any risk at all, the enterprise should do it without any mark up or profit to itself and he should not even recover any part of the overheads costs relatable to such a work. When a business enterprise does anything for an independent enterprise, as is the inherent natur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urce. On this fact, the Assessing Officer required the assessee to show cause as to why all these payments aggregating to Rs. 101.44 crores, without deduction of tax at source, not be disallowed under section 40(a)(i). It was pointed out by the assesse that, vide his earlier submissions, complete details of payments made to non-residents have already been placed on record. It was also pointed out at the time of making these payments, the taxability of payments in the hands of the non-residents is duly examined and only when it does not have any income taxable in India, the payments are made without deduction of tax at source. It was also submitted that the supporting evidences are duly furnished to the tax authorities and no infirmities therein have been pointed out. It was then submitted that, as is the settled legal position in the light of Hon'ble Supreme Court's judgment in the case of G E India Technology Centre Pvt Ltd Vs CIT [(2010) 327 ITR 456 (SC)], tax withholding obligations under section 195(1), from payments made to non residents, come into play only when income embedded therein are taxable in India. That is not, according to the assessee, case here. It was also submit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he said foreign research entity. Therefore payments for clinical trials are fees for technical services as these services not only involve services of technical person, but also these services are ancillary and subsidiary to the application or enjoyment of information for which the payments are made. Assessee submitted that with regard to the Bio-Analysis and Clinical Trials the language of the DTAA with USA, UK, Canada and Singapore, is clear with regard to 'fees for Technical Services' which exclude such payments when no technology is made available by the non-resident party, to whom such payment for Bio-Analysis is made. 3.7 Contention of the assessee is considered carefully. The arguments of the assessee are that the 'DTAA with regard to FTS excludes such payments where no technology is made available by the non-resident. Article 12 reads as under : ARTICLE 12-Royalties and fees for included services-1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Cont....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 (a) of this article is received; or b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design. UK Article 12 4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ;....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and the assessee was liable to deduct tax from such payments. Between the sub clauses (a) and (b) of clause 4 of Article the word used is "or", therefore the payments in question fall under sub clause (a) and not under sub clause (b) as sought to be argued by the assessee. Certificate of a CA in form 15CA/CB is not the final authority on the taxability of an amount in India. It is a facility given to the assessee for convenience in remittance. Payments for consultancy (legal. patent application or other consultant) 3.9 There are 69 entries of consultancy, 160 entries of consultancy for patent fees and one entry for legal fees in the data supplied to the assessee. These were payments towards services given by the foreign law firms either individuals, firm of individuals or companies with regards to IPRs and Trademark Registration/Patent Registration. Assessee has contended that the payment falls in the 'Independent Personal Services' under DTAA and falls in Article 14 or 15 of the DTAA. For example, Article 15 of DTAA between India-USA reads as under ARTICLE 15 - Independent personal services - 1. Income derived by a person who is an individual or firm of ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any Amount paid 1 SL Balnes Anapharm INC 15,15,286 3.11 The assessee was liable to deduct tax from these payments which are in the nature of Independent Personal services, but failed to deduct u/s 195 of the Act. Certificate of a CA in form 15CA/CB is not the final authority on the taxability of an amount in India. It is a facility given to the assessee for convenience in remittance. Therefore after examination of the nature of 'Independent Personal Services' it is held that the amounts paid to companies are taxable in India and the assessee failed to deduct tax. 3.12 Details of payments made to non-residents without deduction of tax is as under : Nature of Expenditure Amount Nature of payment u/s. DTAA 1 Bio Analysis 13,33,43,342 Fees included Services (Article 12) 2 Clinical Trials 73,03,725 3 Consultancy Fees 87,00,440 Independent Personal Services (Article 15) 4 Consultancy Fees for Patent Application 73,96,136 5 Legal Fees-SL. Balnes 15,15,286 6 Professional Fees (Linklatees S.L., Spain Company) 29,80,712 7 Various Remittances 2,06,56,661 Consultancy etc., (Article 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 37. We must, at the outset, express our anguish at the evasive approach adopted by the DRP. They have simply declined to examine the matter on merits and preferred to let the Income Tax Officer in international tax wing decide what the DRP ought to have decided on its own. Simply because an ITO in the international tax wing decides that tax ought to have been deducted at source from certain payments to non-residents, it does not mean that the DRP must mechanically uphold the related disallowance under section 40(a)(i). What was before the DRP was the question as to disallowance under section 40(a)(i) has been correctly made or not, and essentially, therefore, the DRP was required to decide as to whether income embedded in these payments was taxable in India or not. This process of judicial scrutiny cannot be delegated to a lower functionary, but when DRP holds that, to the extent such a disallowance is supported by the stand that the ITO (International Taxation) takes, the disallowance is upheld, the DRP, in effect, decides the matter on the basis of scrutiny by a lower functionary. Upholding the disallowance only because the disallowance is in consonance with the stand taken b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....strates that the recipient has a tax liability in respect of income embedded in the payment, he cannot invoke disallowance under section 40(a)(i). It is equally true that the Assessing Officer cannot decide taxability of income embedded in these payments on the basis of sweeping generalizations either. Essentially, therefore, the DRP also must decide the matter on the same parameters and in the same manner. While doing so, the DRP may also call for, and take into account, specific case by case comments of the Assessing Officer on each of, or each set of- as may be appropriate, the payment. The DRP may also take into account decisions of the coordinate benches, on the taxability of income embedded in such payments, in assessee's own case as indeed in other similarly situated cases, as also other binding judicial precedents. 40. In view of the above discussions, as also bearing in mind entirety of the case, we deem it fit and proper to remit the matter to the file of the DRP for adjudication de novo on merits, after taking into account the decisions of the coordinate benches in assessee's own case as indeed other binding judicial precedents, in accordance with the law and by way o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nvestments must therefore be kept out of investments yielding tax exempt income for the purpose of rule 8D. As for the correct figure of interest paid, it is purely a factual issue and the Assessing Officer is, therefore, directed to look into the contention of the assessee by way of a speaking order after giving an opportunity of hearing to the assessee. To the extent, disallowance under section 14A r.w.r. 8D stands reduced as a result of the above, the assessee will get relief. The balance addition stands confirmed as no grievance is raised in respect of that portion of disallowance. With these directions, the matter stands restored to the file of the Assessing Officer. 46. Ground no. 3 is thus allowed for statistical purposes. 47. Ground no. 4 is not pressed and is dismissed as such. 48. In ground no. 5, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in not acknowledging in the Assessment Order, the availability of the amount of Carried Forward MAT Credit u/s. 115JAA of Rs. 20,08,52,398/-, to which the Appellant is lawfully entitled to in view of it being covered under the provisions of MAT u/s. 115JB. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assesse, by a coordinate bench in assessee's own case for the assessment year 2008-09, which in turn has followed the assessment years 2006-07 and 2007-08 which have attained finality as revenue's appeals against these orders stand dismissed. As a matter of fact, all that the DRP has done is to follow the said order of the coordinate bench. 55. We see no infirmity in the relief so granted by the DRP and no arguments have been advanced before us to even contend that we should take any other view of the matter than the view so taken by the coordinate bench. In this view of the matter, and respectfully following the coordinate bench decision, we confirm the relief granted by the CIT(A) and decline to interfere in the matter. 56. Ground nos. 1 to 3 are thus dismissed. 57. In ground no. 4, the Assessing Officer has raised the following grievance: 58. As regards this grievances of the Assessing Officer as well, learned representatives fairly agree that the issue is covered, in favour of the assesse, by a coordinate bench in assessee's own case for the assessment year 2008-09, which in turn has followed the assessment years 2006-07 and 2007-08 which have attained finality....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was also of the view that exemption under section 10(2A) is to avoid double taxation of an income, in the hands of the partnership firm as also in the hands of the partners, but when an income is not taxable in the first place, section 10(2A) cannot come into play at all. It was in this backdrop that the Assessing Officer proposed an addition of Rs. 76,75,02,966. Aggrieved, assessee raised a grievance before the Dispute Resolution Panel. The DRP was of the view that, as explained by the CBDT circular No. 636 dated 31st August 1992, the legal position is that "the share of partner in the income of the firm will not be included in computing his total income". This circular was issued in the context of explaining the scope of Section 10(2A) and it binds the field authorities. It was held by the DRP that "on holistic consideration of entire facts, interpretation given by the Assessing Officer is resulting into absurd situation defeating the very purpose of introduction of the new scheme of taxation of firms and partners with effect from 1st April 1993 and is against the binding circular issued by the CBDT, and, hence, it is held that addition made by the Assessing Officer cannot be sus....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... opaque entity and taxed as such on the profits arising in its hands, the share of profits in the firm in the hands of its partners are excluded from their taxable income. The point of taxation is, as such, the profits being earned by the partnership firm. Once the tax liability in respect of these profits is discharged, that is end of the matter. Any subsequent division of profits does not result in taxation once again in the hands of the partners. Viewed thus, total income of the partnership firm cannot mean taxable income of the partnership firm because the connotations of total income must essentially extend to a literal and common sense meaning of 'total income' which refers to the 'income of the firm in its entirety'. It is so for the reason that in case an income of the firm is held to be not taxable in nature, by the virtue of an incentive provision or whatever other reason, it cannot be brought to tax in the hands of the partner only because it has not been taxed in the partnership firm; that would be destructive of the purpose for which incentive deduction is granted to the partnership firm. If a literal interpretation is to be adopted, as indeed has been adopted by the A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....no distinction between registered and unregistered firms, and clauses (39) and (48) of section 2 containing the definition of "registered firm" and "unregistered firm" have been omitted. After allowing remuneration and interest to the partners, the balance income of the firms will be subject to maximum marginal rate of tax of income-tax, which will be 40% for assessment year 1993-94. The surcharge on income-tax will be at the rate of 12%, of the total tax, if the income exceeds Rs. 1,00,000. The earlier distinction between rates of income-tax for professional and non-professional firms has been removed. Partners are not liable to tax in respect of the share of income from the firm. However, remuneration and interest allowed to partners will be charged to income-tax in their respective hands. The only distinction between professional and non-professional firms will be in respect of slabs for allowing deduction to firms in respect of remuneration. 48.2 The share of the partner in the income of the firm will not be included in computing his total income [section 10(2A)]. However, interest, salary, bonus, commission or any other remuneration allowed by the firm to a partner will be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to the number of times the terms of a partnership deed may be changed during a previous year in so far as payment of salary, bonus, commission or other remuneration to a working partner is concerned. It is also possible that a partner who is not a 'working partner' may become a 'working partner' at any point of time during a year (or vice versa). In such a situation also, the said terms of the deed may be suitably amended. 48.6 Of the aggregate payment to all partners by way of salary, bonus, commission or other remuneration upto Rs. 50,000 is fully allowable in the hands of the firm. In case the aggregate payment exceeds the limit of Rs. 50,000, certain monetary limits have been prescribed under section 40(b)(v)) in the form of a percentage of "book profit" [defined in Explanation 3 to section 40(b)]. Upto a "book- profit" of Rs. 1,00,000 or a loss, in the case of a professional firm and Rs. 75,000, in the case of a non-professional firm, the limit is 90% of the "book-profit" or Rs. 50,000 whichever is higher. For "book- profit" exceeding Rs. 1,00,000 in the case of a professional firm and Rs. 75,000 in the case of a non professional firm, the limit is 60% of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tween a registered and unregistered firm has been removed, a firm will be assessed as a firm only if- (i) the partnership is evidenced by an instrument ; and (ii) the individual shares of the partners are specified in that instrument. A copy of the partnership instrument duly certified has to accompany the return of income for the relevant year for which assessment as a firm is first sought. Thereafter, assessment as a firm will continue to be made so long as the constitution of the firm remains unchanged. Whenever there is a change in the constitution of a firm, a copy of the new partnership instrument has to be similarly filed. Where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed as for the assessment year in the same manner as an association of persons and all the provisions of this Act shall accordingly be applicable (section 185). [Underlined portion has been relied upon by the assessee and the DRP] 67. The scheme of taxation of firm, as evident from the above circular, supports our preceding analysis about true connotations of the expression 'total income' appearing in section 10(2A). As is quite cl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce: Whether the DRP has substantially erred in holding that Trademark Registration and Patent fee of Rs. 4.64 Crores are revenue expenses when the same are classified as intangible assets u/s.32(1)(ii) of the Act. 73. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case, and Hon'ble High Court has declined to admit appeal against such decision, as in the esteemed views of Their Lordships, no question of law arises from these decisions. The relief granted to the assessee on this point in past has thus achieved finality. In this view of the matter, we approve the relief granted by the DRP on this point and decline to interfere in the matter. 74. Ground no. 7 is thus dismissed. 75. In ground no. 8, the Assessing Officer has raised the following grievance: Whether the DRP has substantially erred in holding that the expenses incurred outside the approved R&D facility is also eligible for weighted deduction in contravention of section 35(2AB) whereby only expenditure on in-house research and development facility qualifies for weighted deduction. 76. Learned representative....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dispute that the vehicle was owned, in substance, by the assessee and the vehicle was used for the purposes of its business, there cannot be any legally sustainable reasons for declining the depreciation. Learned Departmental Representative could not bring on record any material to dislodge the findings of the DRP. We approve the action of the DRP and decline to interfere in the matter. 81. Ground no. 9 is thus dismissed. 82. In ground no. 10, the Assessing Officer has raised the following grievance: Whether the DRP was right in allowing foreign exchange derivative loss of Rs. 30.40 Crores despite the finding that the same was a notional loss in the nature of contingent liability not pertaining to the relevant year. 83. As regards this grievance of the Assessing Officer, the relevant material facts are as follows. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed a deduction of Rs. 5,686.40 lakhs in respect of exchange rate arising on long term foreign currency loans, even though only Rs. 2,645.90 lakhs, relating to loss actually incurred in this year, was amortized and debited to the profit and loss account. On the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ayments are actually made. As we deal with this question, it is important to bear in mind the fact that it is one of the most fundamental principles of accounting that while all anticipated losses are taken into account in computing the profits and losses of business, even though such losses may not have crystallized, as long as these losses can be reasonably quantified. This approach can be contrasted with the anticipated profits being ignored, in the computation of profits and losses of an enterprise, unless the profits are actually realized. To that extent, there is a dichotomy in accounting approach but then this is what is the sound accounting policy and it has the sanction of law. As a matter of fact, it is this principle, as recognized by Hon'ble Supreme Court in the case of Chainrup Sampatram Vs CIT [(1953) 24 ITR 481 (SC)], which explains the valuation of closing stock on market price or cost price whichever is less. The loss actually incurring to the assessee may finally be more or less than the loss computed on the balance sheet date but that does not affect the claim for deduction of a loss which can be reasonably anticipated. There is thus, in principle, no difficulty ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. 86. To this extent, the Assessing Officer was clearly in error in treating the loss on foreign exchange as a notional loss not deductible in computation of business income, as long as the related transaction is on revenue account- as aspect which is not in dispute. The relief granted by the DRP was thus justified. In any case, learned Departmental Representative has not pointed out any reasons or arguments for not confirming the action of the DRP. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at on the facts of this case. 87. Ground no. 10 is thus dismissed. 88. In ground no. 11, the Assessing Officer has raised the following grievance: Whether the DRP is right in deleting the addition to Book Profit amounting to Rs. 16.06 Crores being addition u/s 14A, despite the specific clause (f) to Exp.1 of section 115JB. 89. As regards this grievances of the Assessing Officer, learned representatives fairly agree that the issue is cover....
X X X X Extracts X X X X
X X X X Extracts X X X X
....France 13,44,042 97. The relevant facts of the case, so far as item nos. (i), (ii) and (iii) are concerned, are broadly the same as for the assessment year 2009-10 which we have discussed in detail earlier in this order. The variation is only in terms of the quantum of adjustments. For the sake of brevity, we need not, therefore, discuss these facts in much detail. As far as ALP adjustment on account on interest on loan to Zydus France is concerned, the relevant facts are like this. During the course of proceedings before the TPO, it was noticed that the assessee has advanced a loan to Zydus France and the interest rate charged thereon is 6 months LIBOR plus 2.40%. The TPO, however, rejected this claim and, on the basis of information gathered from Dealscan database- except for inter alia secured loans or loans to A, AA and AAA rated companies, adopted the rate of 4.48% pa. Accordingly, an ALP adjustment of Rs. 13,44,042 was proposed. Aggrieved by the adjustments so proposed by the TPO, except for the product registration consideration paid to the AEs, assessee raised the grievance before the DRP. So far as ALP in respect of guarantee commission charges are concerne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i Airtel Limited Vs ACIT [(2014) 161 TTJ 283], and a coordinate bench had deleted a similar ALP adjustment on account of interest amounting to Rs. 10,11,786 wherein the same approach of adopting 400 basis points above the LIBOR as ALP was adopted. While deleting this ALP adjustment, speaking through one of us, the Tribunal had, inter alia, observed as follows: 62. As far as the first adjustment is concerned, while the TPO has adopted the rate as 4% over LIBOR rate, he has not set out the specific basis of this rate. He has mentioned about some information gathered from websites of financial institutions which, according to him, states that, "for the foreign currency denominated term loans, the maximum rate of interest is 4% over 6 months LIBOR", and then proceeded to adopt this maximum interest rate as a fair basis for his computing the arm's length price. On the other hand, the assessee has taken two specific comparables of USD borrowings, i.e. L&T and Seri Infrastructure, on the interest rate of LIBOR + 150 bps and 1.4% to 1.7% band over LIBOR respectively. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiari....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isk of single party dealing. This approach overlooks the fact that the assessee has advanced monies to its subsidiaries which are under its management and control- a factor which substantially reduces the risk rather than increasing it. On these facts, it is difficult to understand, much less approve, any rationale for adjustment on account of higher risks. On this point also, we see no merits in the stand of the TPO. (Emphasis, by underlining, supplied by us now) 8. When the matter was carried in further appeal, this time by the Commissioner, before Hon'ble Delhi High Court, Their Lordships were, vide judgment dated 25th February 2015- a copy of which was placed before us by the learned counsel, pleased to approve the reasoning adopted by the Tribunal. In doing so, Their Lordship observed as follows: 8. The ITAT has also taken note of the fact that two specific comparables of USD borrowings i.e. L&T and Seri Infrastructure, on the interest rate of Libor had been taken into consideration. There is no material whatsoever, save and except for vague observations about weak financials of the subsidiaries - which are not supported by any specific facts and proceed on swee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppeal taken by the assessee, following grievance is raised: That the learned Assessing Officer erred in law and on facts in making a disallowance of Rs. 11,23,95,002/- u/s 14A instead of Rs. 6,46,64,270/- being the correct disallowance as per Rule 8D r.w.s. 14A of the I.T. Act, offered by the assessee in its Return of Income. 103. On this ground, the assessee has limited arguments pointing out some apparent mistakes in the conclusions arrived at by the Assessing Office, which have been approved by the DRP rather mechanically. An identical issue came up for our adjudication in the immediately preceding assessment year, and, by our directions earlier in the order, we have remitted the matter to the file of the Assessing Officer for fresh consideration to deal with the objections raised by the assessee. In the present year also, the assessee has pointed out somewhat similar objections by way of a rectification petition under section 154 which is stated to be pending even now. We deem it fit and proper to remit the matter to the file of the Assessing Officer for this assessment year also and direct the Assessing Officer to deal with the points made by the assessee in his rectific....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... We now take up the appeal filed by the Assessing Officer for the assessment year 2010-11. 113. In the process of dealing with assessee's cross appeal for the same assessment year, we have already dealt with and dismissed the first two grounds of appeal of the Assessing Officer. 114. Ground nos. 1 and 2 are thus dismissed. 115. In ground no. 3, the Assessing Officer has raised the following grievance: The DRP has erred in deleting the addition of Rs. 13,40,16,897/- made by the AO u/s. 40(a)(i) of the Act in respect of commission on export, legal and professional fees and clinical trial and analytical and testing charges. 116. The relevant material facts related to the above ground of appeal are as follows. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has a made a number of payments without any deduction of tax at source. The matter was probed further and explanations of the assessee were called. Thereafter, the Assessing Officer proceeded to make the impugned disallowance by observing as follows: 3.3 A careful perusal of the assessee's submission revels that the assessee has considered only payments in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2,390,102 - Not Applicable since Tax Deducted Legal & Professional Fees 37,004,592 19,280,817 1,937,270 17,723,775 Remittances of Rs. 1,77,23,775/- are towards such Professional Consultancy Fees for Legal Services, paid to Non-Resident Individual or Firm, in the nature of Independent Personal Services, which are not liable to TDS u/s.195 in view of the clear language of the provisions of the applicable DTAA (Article 14 or 15, as the case may be) with the respective countries. In other cases, Tax has been deducted. Clinical Trials & Analytical & Testing Charges 46,804,814 46,804,814 Remittances are mainly covered under the DTAA with USA, Canada, UK etc., where the clear language of 'Fees for Technical or Included Services' excludes such payments, where no Technology is made available by the non- resident party, to whom such payment for Clinical Trials is made. Accordingly, no liability for TDS u/s.195 arises in such cases, as directly held by the AAR n its ruling in the case of Anapharm Inc., 305 ITR 394 (AAR), as also the direct decision of the Mumbai ITA in the case of Wockhardt Ltd., 10 taxmann.com 208 (Mum) on t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,92,80,817/-leaving an amount of Rs. 1,77,23,775/- on which no TDS has been made. The submission of the assessee for non-deduction of tax is that the payments have been made to non-resident individual or firm in the nature of independent personal services which are not liable to TDS u/s. 195 of the Act is not acceptable. Scope of income as provided in clause (b) oil Sub-section 2 of Section 5 of the Act states that the income accrues or arises or is deemed to accrue or arise to non-resident in India is taxable. Clause (b) of Sub-Section (2) of Section 5of the Act provides that the total income of any previous year of a person whey is non-resident includes all income whatever source derived which accrues or is deemed to accrue arise to him in India during the year. The assessee submission that Article-15 of DTAA with United States provides that payment for professional fees to non-resident is not chargeable in view of Article-15 of said DTAA is found to be devoid of any merit. For the purpose of income-tax, the professional services are defined as - "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd the effects of medicine are analyzed and submitted to the assessee company in the form of information consisting of observations, graphs, tables and suggestions by the said foreign research entity. Therefore payments for clinical trials are fees for technical services as these services not only involve services of technical person, but also these services are ancillary and subsidiary to the application or enjoyment of information for which the payments are made. (b) Analytical studies for Bio Analysis: Bio Analysis studies involve highly technical Analytical study of distribution of medicine the body of the animal/human being after administration of the same. This may involve study with time taken for distribution of medicine to the particulars organ of the body and amount/concentration of medicine reaching the organ and reaction of cell of the organ etc. This is also a highly technical study and covered by FTS. After the Analytical study the Research Institute submits a report giving the data and analysis of studies. All these data and analysis of studies submitted to the assessee company in the form of information consisting of observations, graphs, tables and suggestion....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mation. Therefore the payments for Clinical Trials and Bio Analysis studies clearly falls in Fees for included services and the assessee was liable to deduct tax from such payments. Therefore, the payments of Rs. 4,68,04,814/- being clinical trials & analytical & testing charges made by the assessee company to non-residents without deducting the tax as required 195 is liable to be added u/s 40(a)(i) of the Act. 3.5 In view of the above, the commission expense of Rs. 6,94,88,308/-, Legal & Professional charges of Rs. 1,77,23,775/- and clinical trials & analytical & testing charges of Rs. 4,68,04,814/- totalling Rs. 13,40,16,897/- [69488308 + 17723775 + 46804814] are disallowed u/s. 40(a)(i) of the Act. 117. Aggrieved, assesse raised an objection before the DRP and the DRP, after an elaborate analysis of each of the point, deleted the said disallowance. The reasoning broadly taken by the DRP was this. It was held that in none of these cases, any income embedded in the payments was taxable in India. The DRP held that commission payments in the hands of non resident are not taxable in India to the extent, as is the admitted position in this case, all the related activities ae car....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the sake of brevity, we are not adding reproductions from the orders relied upon by us and these orders will be deemed to be attached and forming part of this order. 120. Ground no. 3 is thus dismissed. 121. In ground no. 4, the Assessing Officer has raised the following grievance: The DRP has erred in considering Product Registration expenses of Rs. 6,40,32,914/- as revenue expenditure when the same entitles the assessee to export the registered drugs to various countries for many years. 122. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case, and Hon'ble High Court has declined to admit appeal against such decision, as in the esteemed views of Their Lordships, no question of law arises from these decisions. The relief granted to the assessee on this point in past has thus achieved finality. In this view of the matter, we approve the relief granted by the DRP on this point and decline to interfere in the matter. 123. Ground no. 4 is thus dismissed. 124. In ground no.5, the Assessing Officer has raised the following grievance: The DRP has substantially erred ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is used by the company. The beneficial ownership thus rests with the assessee company. The depreciation was proposed to be declined by the Assessing Officer mainly on the ground that the assessee did not own the vehicle in question. However, the assessee succeeded in the DRP in his objection to this proposal. We have noted that the DRP has given a categorical finding to the effect that the car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the DRP, the mere fact that the car was not legally owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the depreciation on car cannot be declined. Aggrieved, assessee is in appeal before us. 132. Having heard the rival contentions and having perused the material on record, we are not inclined to disturb very well reasoned findings of the DRP and the conclusions arrived at by the DRP. Once it is not in dispute that t....