TaxTMI 
TaxTMI 
TaxTMI 
2017 (5) TMI 529
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....'s legal and marketing expenses incurred which have no basis and is without any empirical evidence. 3. Whether on the facts and in the circumstances of the case, the DRP is correct in law in holding that expenditure towards stockbased compensation (ESOPs) is Revenue expenditure when the Tribunal in the case of Medha Servo Drivers Private Limited versus upheld the addition on account of ESOPs as being capital in nature. 4. Any other ground that may be urged at the time of hearing the appeal." 1.1. Similarly for the A.Y. 2010-2011 assessee company raised 21 grounds and also filed additional grounds. In the cross-appeal by Revenue only two grounds were raised. Facts available/referred to in A.Y. 2009-10 are sufficient to project the rival contentions for both the years. We, therefore, refer to the record of A.Y. 2009-2010. 2. Both parties admitted that major issues are common for both the years and the Learned Counsel for the Assessee prepared a chart referring to the relevant pages in the draft order, TPO's order, DRP's order as well as the final assessment order, issue-wise. We, therefore, feel it appropriate to refer to the chart filed for each year separately. Wherever it i....
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...., engaged in research on new products and on process development of existing products. As per 3CEB report, assessee aggregated the transactions pertaining to purchase, sales, royalty income, interest, fees etc., by applying TNMM method. The transactions put together works-out to 45.38% of the total revenue and in the absence of suitable CUPs available for transactions pertaining to purchase, sales, reimbursements of royalty income etc., TNMM method was found to be most appropriate method. For suitable comparables, information was taken from PROWESS and CAPITALINE database, by taking into account current year data only. The following filters were adopted by the TPO for rejecting certain companies. (a) Companies whose data is not available for F.Y. 2008-09. (b) Companies whose software services are less than Rs. 1 crore (c) Companies whose revenue from manufacture and pharmaceuticals is less than 75% of the total operating revenues. (d) Companies who have more than 25% related party transactions (income sales expenditure combined) of the operating revenues. (e) Companies having different financial year ending or data of the company which does not fall within 12 months period i.e....
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....ging interest at 9.56%. It is not in dispute that the average lending rate prevalent in Mexico was 8.30%. However, the TPO observed that the aforementioned rate is applicable to only prime customers who have good credit rating whereas the taxpayer herein has weak finance and low creditworthiness. According to the TPO, the World Bank lending rate cannot be applied to such cases. In his opinion, interest @ 12% p.a. should be taken into consideration. 5.4. When the same was put to the assessee, it was replied that the loan was advanced to overseas subsidiaries based on commercial relationship. The loan given to these subsidiaries are risk free and is recoverable after stipulated period. It was further contended that the domestic rates would have no application when the transaction between the assessee and the A.E. is in foreign currency. The transaction being an international transaction, LIBOR rate would come into play and it should be looked upon based on commercial principles. The contention of the assessee was that LIBOR+ 2% should be adopted as arms length interest. 5.5. The TPO did not accept the contention of assessee. In his opinion, the correct approach would be to benchmar....
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.... Kanto Cylinders Ltd., vs. DCIT (ITA.No.542/Mum/2012) wherein the Bench observed that various factors have to be evaluated while pricing guarantee commission. The company requested the TPO to adopt 0.7% as guarantee commission. 6.2. The TPO observed that the assessee has not advanced any arguments on merits but merely relied upon the DRP's direction for the earlier year which is not binding on the TPO while deciding the case of the subsequent year. Since the A.E. has received the benefit of lower interest rate by 1.3 percent points, solely due to corporate guarantee given by the tax payer, the ALP of the fee for the corporate guarantee was determined at 1.3% p.a. of the loan amount and observed that on this count adjustment of Rs. 24.45 crores need to be made under section 92CA of the Act. 7. Upon receiving the order of the TPO, a draft assessment order was passed by the A.O. by determining the total income at Rs. 327,63,42,635. In the draft assessment order the A.O. made the following additions : 1. Claim of ESOP Rs. 19,16,80,304. 2. Claim of depreciation on goodwill of Rs. 1,97,63,349 3. Weighted deduction u/s.35(2AB) of Rs. 169,34,19,392 4. Disallowance of maintenance expe....
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....iture was referrable to travel, conveyance, lunch/dinner, gifts and complimentaries to Doctors for promoting its products and such expenditure falls under the category of business promotion. 12.1. The A.O. observed that as per the Medical Council of India, there is a prohibition from taking any gifts, travel facility, hospitality, cash or monthly grant from the pharmaceutical and other allied health sector industries. Reliance was placed upon the circular issued by the CBDT vide Circular No.5/2012 wherein it was clarified that any expenditure incurred, in providing abovementioned or similar freebies, is in violation of the provisions of Indian Medical Council Regulations, 2002 and therefore, inadmissible by virtue of Explanation to Section 37(1) of the Act. 12.2. It may be noted that assessee's case was that the guidelines issued by the Medical Council is applicable to medical practitioners and not to pharmaceutical companies because the medical Council seeks to regulate the conduct of the Medical practitioners but the same do not prohibit the pharmaceutical industry from promoting its products. So far as the assessee is concerned, the expenditure was incurred wholly and exclusiv....
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.... assessee. 16. The assessee filed objections to the draft assessment order before the DRP on the following points : 1. "Proposed adjustment of Rs. 8,11,30,972 by the Assessing Officer/Transfer Pricing Officer (TPO) u/s.92CA(3) of the I.T. Act, 1961 in respect of interest of loan provided to Associated Enterprises (AE). 2. Proposed adjustment of Rs. 24,45,30,000 by the Assessing Officer/Transfer Pricing Officer (TPO) u/s.92CA(3) of the Act in respect of corporate guarantee fee not charged on loan provided by Lender to A.E. 3. Proposed action of the Ld. A.O. in disallowing the expenditure of Rs. 19,69,80,304 incurred by the assessee on the Employee Stock Option Plan (ESOP). 4. Proposed action of the Ld. A.O. in disallowing Rs. 1,97,63,349 towards claim for depreciation on goodwill. 5. Proposed action of the Ld. A.O. of not allowing weighted deduction of 150% u/s.35(2AB) in respect of expenditure on scientific research amounting to Rs. 169,34,19,392 incurred by the assessee. 6. Proposed treatment of Ld. A.O. in disallowing maintenance expenditure amounting to Rs. 50,20,503 (net of depreciation). 7. Proposed treatment of Ld A.O. in disallowing certain expenditure amountin....
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....ase of Biocon Ltd., vs. DCIT to hold that expenditure incurred towards ESOPs is an ascertained liability and thus, the allowance is revenue expenditure. 17.3. As regards the disallowance of claim of depreciation on goodwill, the DRP followed the order passed by them in the assessee's own case for the A.Y. 2008-09 and rejected the contention of the assessee. 17.4. With regard to claim of weighted deduction under section 35(2AB) of the Act, the assessee furnished certificate in Form 3CL issued by DSIR to contend that as per the said certificate the assessee is entitled to deduction. The Panel accordingly directed the A.O. to consider Form 3CL and allow weighted deduction as per Law. 17.5. As regards the disallowance of maintenance expenses (net of depreciation) the Panel observed that though the assessee contends that the expenditure is on account of repair and maintenance undertaken on a routine basis and did not result in any enduring benefit, details of the expenditure having not been filed the objection of the assessee was rejected. 17.6. As regards the expenditure incurred on the Doctors meetings etc., the Panel observed that identical issue was decided for the A.Y. 2008-09 ....
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....tion 92B of the Act, the same ought to have been Benchmarked in order to show that the same was within the arms length range but the assessee had nowhere mentioned about the modus of payment. 18.1. Based on the information available on record, the DRP vide letter dated 08.11.2013 issued a show cause notice to the assessee as to why 25% of the total profit paid to DRL Swiss, by DRL USA, should not be brought to tax in the hands of the assessee since no deduction is allowable on such payments, under section 37(1) of the Act. 18.2. In its reply, assessee raised a preliminary ground objecting to the jurisdiction of the DRP to deal with any variation which is not part of the draft assessment order. It was also contended that the power of DRP to enhance the variation includes power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding such matter was raised or not. In the instant case, the matter having not been considered at any stage, the DRP has no jurisdiction to deal with the issue. 18.3. Without prejudice to the technical ground the assessee contended that by virtue of an agreement dated 05.10.2006 with GSK assessee had to ....
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....o lower tax regime. The Panel referred to the 'Tripartite Agreement' by and between 'DRL USA, DRL India and GSK' as well as the date of agreement with DRL Switzerland to highlight that the Switzerland A.E. would not have taken risk on account of litigation between U.S. District Court which was concluded in 2006; the agreement between Swiss A.E. and assessee was entered into on 1st May, 2008. 18.7. Having regard to the detailed reasons given in its report, the Panel concluded that by virtue of share of 25% of profit with Switzerland A.E. the profit which was taxable in India was diverted to Switzerland. In otherwords, the amount diverted to Switzerland is assessable to tax in India. 19. Based on the final report of the DRP, the A.O. completed the assessment by arriving at the total income, after T.P. adjustment, at Rs. 287,46,89,931. 20. In so far as the A.Y. 2010-2011 is concerned, this issue was considered by the TPO elaborately based on the information supplied by the assessee. In this regard, he observed that DRL USA was incorporated in Switzerlnad in 2007 to cater to European customers, liaise with major Pharma Innovators situated in Europe. Thus it has no specific competenc....
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....towards stock based compensation (ESOPs) is Revenue in nature when the Tribunal in the case of Medha Servo Drivers P. Ltd., held that such expenditure is capital in nature. 23. Assessee also preferred appeals for both the years by raising various grounds which are taken-up item-wise. 24. It deserves to be mentioned that the case was heard on dayto- day basis and on the final day the Authorised Representative of assessee as well as Revenue were directed to furnish written submissions which may include the counter arguments to meet the points urged by the other party. On behalf of the assessee 41 pages synopsis, of the arguments, was filed along with two annexures. Similarly, the Ld. CIT-D.R. filed his written submissions running into 40 pages. 25. Ground Nos. 2 to 8 for the A.Y. 2009-2010 and ground Nos. 5 to 11 for the A.Y. 2010-2011 are directed against the issue referable to corporate guarantee provided by assessee company to it's A.Es. 26. The first issue is with regard to the bank guarantee extended by the assessee for a loan availed by Lacock Holdings. According to the tax authorities the ALP of the corporate guarantee should be taken as 0.7% of the value of the loans give....
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....(c) of Explanation to Section 92B of the Act but it can be considered as an international transaction only when it has a bearing on profit or loss of the assessee. In the instant case, assessee has not incurred any cost to provide such guarantee and thus it will not have any impact on the profits or costs of the assessee. By providing such guarantee the subsidiary can enjoy loan at low interest rates with no cost to the assessee. It was also submitted that the amendment made to Section 92B has no retrospective operation and cannot be applied to the period falling prior to the previous year relevant to the A.Y. 2013-2014. In fact, no new guarantees were provided in this year. Apart from several case law, the Learned Counsel for the Assessee strongly relied upon the decision of the ITAT, Delhi Bench in the case of Bharati Airtel Limited 161 TTJ 428 to submit that even after the amendment in Section 92B a corporate guarantee, for the benefit of the A.Es, which does not involve any costs to the assessee and does not have any bearing on profits, income, loss or assets of the enterprise, would not fall within the ambit of "International Transaction" to which ALP adjustment can be made. I....
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....justment is not warranted on this aspect. 30. Since we are of the opinion that it falls outside the ambit of "International Transaction" the alternative contention urged before us need not be taken into consideration. Suffice to say, that each year being independent, merely because the assessee has accepted in the earlier year it would not come in the way of the assessee to urge the same issue in a subsequent year. 31. The next issue is with regard to the attribution of additional interest on loans given to A.Es. This issue is raised vide ground Nos. 9 to 12 for the A.Y. 2009-2010 and ground Nos. 1 to 4 in the A.Y. 2010- 2011. In so far as A.Y. 2009-2010 is concerned, ALP adjustments are only with reference to inter-corporate loans to it's A.E. namely Lacock Holdings, Cyprus and Falcon Mexico wherein the interest was charged by the assessee at 5% and 9.5% respectively. The TPO benchmarked interest rates at 6.5% and 12% by taking into account Euribor rate + 2.5% and Mexican rates respectively. The loans advanced, interest charged from A.Es as well as rate adopted by DRP are tabulated below: A.Y. 2009-2010 Name of borrower (AE) Interest charged by appellant (%) ALP interest det....
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....in the tax-payers case for the A.Y. 2004-2005, that 7% p.a. is an appropriate ALP. Thus the A.O. adopted 7% in this year also. Reliance was placed upon several decisions on this aspect. 33. Joining the issue, the Learned Counsel for the Assessee submitted that DRP has erroneously mentioned that the ITAT, Hyderabad Bench has held that respective countries foreign currency lending rate should be considered instead of LIBOR. It was strongly contended that LIBOR is a comparable rate for benchmarking interest and not local interest rates in the respective countries. It was also contended that for the A.Y. 2006-2007 the Tribunal, in principle, accepted LIBOR + 200 basis points which works-out to 7% in that year and therefore, it was accepted by the assessee. For the A.Y. 2007-08 though LIBOR + 2% is accepted as ALP, it was wrongly mentioned that LIBOR + 2% or 7%, whichever is higher, to be considered, while following the order of the Tribunal in the assessee's own case for the earlier year. It was also submitted that the assessee is in the process of filing M.A. against the ITAT order for the A.Y. 2007-08. Even otherwise various Benches of the Tribunal consistently held that for benchma....
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....principle that LIBOR + 200 basis points can be adopted as ALP. Under these circumstances, we set aside the matter to the file of the A.O. who is directed to adopt the LIBOR rate applicable for the years under consideration + 200 basis points to arrive at the ALP. This issue is disposed of accordingly. 37. Ground No.21 for the A.Y. 2009-2010 is with regard to allowability of claim of depreciation on goodwill. Brief facts are that American Remedies Ltd., got merged with the assessee w.e.f. 01.04.1999. Upon merger the difference between the consideration and the net worth was considered as goodwill and depreciation was claimed on such goodwill. A.O. disallowed the claim on the ground that it is not an intangible asset. This view was confirmed by the DRP. It is not in dispute that this very issue was considered by the ITAT in assessee's own case for the A.Y. 2007-08 (ITA.No.229/Hyd/2011 and ITA.No.84/Hyd/2013 dated 02.01.2017) wherein the Bench allowed the plea of the assessee by observing as under : "40. Having regard to the rival contentions and the material on record and respectfully following the decision of the Hon'ble Supreme Court in the case of CIT vs. Swifs Securities Ltd., ....
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....ecision of ITAT, Mumbai Bench in the case of ACIT vs. Liva Health Care 161 ITD 63 wherein it was held that expenditure incurred by a pharmaceutical company on overseas tours of Doctors to increase their sales and profitability was not an allowable expenditure inasmuch as overseas trips were directed towards leisure and entertainment of Doctors and their spouses rather than focussing on the product information dissemination. Ld. D.R. relied upon the Circular issued by the CBDT (No.5/2012 dated 01.08.2012) to submit that any freebies provided by Health Sector Industries to medical practitioners is in violation of the Regulations issued by Medical Council of India falling within the ambit of Explanation-1 to Section 37(1) of the Act. The said Circular refers to the prohibition imposed on the medical practitioners from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied Health Care Industries. 42. Learned CIT (DR) submits that the validity of the CBDT circular was subject matter of challenge before the Hon'ble High Court of Himachal Pradesh in a writ petition filed by Confederation of Pharmaceutical Industry wherein it was held that....
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....rving as under : "53. Respectfully following the same, we set aside the issue to the file of the A.O. with a similar direction to verify the nature of the expenditure and disallow only such expenditure which is not incurred for the business purposes of the assessee. This ground is accordingly treated as allowed for statistical purposes." 43.1. The facts and circumstances being identical, we hereby direct the A.O. to verify the nature of the expenditure and disallow only such expenditure which was not incurred for the purpose of business of the assessee. This ground is accordingly treated as allowed for statistical purposes. 44. The next issue is with regard to the allocation of corporate overheads expenses to tax holiday units (Ground No.24 in A.Y. 2009- 2010 and Ground No.18 in A.Y. 2010-2011). 45. Facts in brief are as follows. During the year under consideration assessee claimed certain amount of exemption under section 10B of the Act on the eligible undertaking. A.O. allocated the corporate overheads on adhoc basis to undertaking claiming exemption under section 10B and thereby, reduced the amount of exemption available. It is not in dispute that only the profits and gains....
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.... communication expenses, research and development expenses etc. Under the circumstances, in order to arrive at the correct amount of profits eligible for tax exemption, it is important to consider method of allocation of such head office expenses against tax holiday units. While doing so, a) All common expenses are to be allocated on a reasonable and scientific basis i.e. turnover. head count etc.; b) Even if the expenses are in the nature of interest & finance charges, human resources expenses which do not directly relate to tax holiday units, they should be reasonably allocated to the tax holiday undertakings on the premise that the head office does not exist for its own sake, but its existence is relevant for all activities undertaken by various units/profit centers; and c) Non-allocation of common head office expenses might lead to inflation of profits of tax holiday undertakings and consequent excess claim of tax exemption and deflation of income in the hands of head office, leading to erosion of domestic tax base. In this regard, reliance is placed on the following decisions as detailed below : a. Controla & Switchgear Co. Ltd. Vs . DClT in ITA No.1155/2011 dated 14.1....
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....elling the product in USA. All the manufactures that sell products in United States are subjected to extensive regulation by U.S. Federal Government and U.S. FDA. 2. DRL India filed an Abbreviated New Drug Application ('ANDA') for the drug namely "Sumatriptan" (which is used in the treatment of migraine headaches) before the U.S. FDA for selling the drug in United States. Subsequently, DRL India has got approval to manufacture the developed product in India and sell product in USA. 3. However, GlaxoSmithKline (GSK) is already having patent rights as original Innovator for similar kind of product and marketing the drug under the brand name 'Imitrex' in USA. 4. As the patent period has not expired, GSK has filed a patent infringement petition against DRL India before the US Federal Courts. Subsequently, GSK and DRL India and its group have entered into a settlement agreement to settle matter out of Court to avoid litigation in USA vide agreement dated 5 October 2006 (Please refer Page No.622 to 650 of Paper Book Volume - II). 5. As per the settlement agreement, GSK, DRL India and Dr. Reddy's Laboratories Inc., US (DRL US) entered into supply and distribution agreement of the ....
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.... 146 73 65 8 9. During the Assessment Proceedings u/s 143(3) for the AY 2009-10, the Assessing Officer ('AO') has not questioned the transaction of profit share transferred to DRL Swiss. However, the AO has requested the DRP vide a letter 16/09/2013 to Disputes Resolution Panel ('DRP') requiring the DRP to look back into the transaction again (please refer para 14.0 of DRP order). Accordingly, DRP issued a show cause notice u/s 37(1) (sic.) of the Income-tax Act, 1961 ('the Act') and made an addition of Rs. 159 crores towards disallowance u/s 92CA and u/s 37(1) of the Act on the amounts transferred to DRL Swiss. Our Submissions 10. The Appellant submits that as per the agreement between DRL India, DRL US and GSK provides for product liability insurance (means an insurance that indemnifies the Manufacturer, Distributors against third party liability arising out of the sale of products) for a minimum sum assured of USD 25 million is undertaken by DRL Group and GSK will not be responsible for any product liability claims except for manufacturing defects. 11. The Appellant submits that the risk of SSA (means the price fall risk after the exclusive period) will be ....
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....section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) ..... (3) ..... (4) ....... (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5) after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),- (a) make such further enquiry, as it thinks fit....
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....sed draft order. In view of this, ground No. 1 raised by assessee is upheld. Consequently ground No. 2, 3 & 4 which are raised as alternate grounds without prejudice, are also deemed to have been allowed". 21. We pray before your Honours that in the present case, the issue relating to profit share to DRL Swiss was not discussed in the draft assessment order and therefore, the DRP has no jurisdiction to consider the new issue. Further, we submit that if the DRP allows AO, then there would be no end to the assessment proceedings which was not the intention of the DRP. 22. The Appellant submits before your Honour that in the present case the DRP has issued notice under section 37(1) of the Act for disallowing profit share to DRL Swiss, but they have disallowed under section 92CA of the Act. 23. Section 92CA(1) of the Act provides as under:- "Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the [Principal Commissioner or] Commissioner, refer the computation of the arm's lengt....
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....e how much is the reasonable expenditure under section 37(1) of the Act. In this regard, we place reliance on the following judgments: In the case of S.A. Builders Ltd. Vs. CIT(A), Chandigarh [2007] 288 ITR 1 (SC), the Hon'ble Supreme Court held that at para no.34 as under: "We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point....
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....ere is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. 14. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses." 30. In the present case the DRP has disallowed profit share to DRL Swiss on the ground disqualificati....
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....h Court in the case of GE India Technology Centre Vs. DRP (2011) 338 1TR 416. 2. The objections raised by the assessee in regard to powers of DRP are not tenable in view of the following submissions:- As per the provisions of Sec. 144C(8), the DRP is vested with the powers of enhancement of variations proposed in the draft assessment order, apart from others. Further, the power of DRP with regard to enhancement of income has been further widened by virtue of Explanation to Sec. 144C(8), to all the matters arising out of assessment proceedings relating to draft order passed irrespective of the fact whether such issues raised or not by the assessee. This explanation has been inserted by Finance Act, 2012 with retrospective effect from 01.04.2009. The relevant portion of the Statute is reproduced for ready reference: Explanation.- For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assess....
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....pective of the assessment year .... II In view of the above clarification, we are of the view that the DRP was within its domain and also justified in exercising the powers conferred under Explanation to s. 144C (8) of the Act. Moreover, it was the contention of the assessee that the DRP has power only to enhance or reduce the adjustment that has already been carried out u/s 92CA. In other words, it was the learned AR's submission that the DRP has no power to treat transactions in respect of which either no adjustment was proposed by the learned TPO or such transaction does not form part of the report u/s 92E. This submission of the learned AR is devoid any merits, in view of the Memorandum explaining the intention behind introduction of explanation below s. 144C (8) which read as under: "Power of the DRP to enhance variations Dispute Resolution Panel (DRP) had been constituted with a view to expeditiously resolve the cases involving transfer pricing issues in the case of any person having international transactions or in case of a foreign company. It has been provided under sub-section (8) of section 144C that DRP may confirm, reduce or enhance the variations proposed in th....
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....djustment in respect of Management fee, Tender cost reimbursed and R&D expenses totalling 63.69Iakh and the DRP enhanced this variation of 63.69 lakh to '1.17 crore. As the subject matter of enhancement in the present case continues to remain the same, being the adjustment flowing from the TPO's order, we find no force in the contention that the DRP ought not to have ventured to increase the variation to the prejudice of the assessee in a reference made by the assessee for reduction of the amount of adjustment made in the draft assessment order. 7. The Id. DR pressed into service Explanation ta sub-section (8) of section 144C for bolstering his submission in support of the enhancement. At this juncture, it would be prudent to note the Finance Act, 2012 has inserted this Explanation with retrospective effect from 01.04.2009 which provides as under.- "For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised ....
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....ed) (3) On conclusion of hearing, the panel may issue directions within the specified period." 4. In this regard, it is submitted that reliance placed by the appellant on the decision of Dredging International NV Vs. ACIT (supra) which in turn relied upon the decision of Hon'ble Karnataka High Court in the case of GE India Technology Centre Pvt. Ltd. Vs. DRP (supra) was rendered prior to insertion of Explanation to sub-section (8) of Sec. 144C. Accordingly, those decisions have no relevance to the facts of the case on hand and law applicable thereof. Further, the Hon'ble ITAT in the case of Himalaya Drug Company (supra) has considered the decision of GE India Technology Centre (supra) and differentiated the same on account of facts as well as amended provisions of Sec. 144C(8). 5. Accordingly, it is humbly submitted that in view of newly inserted Explanation to sub-section 144C(8), the DRP is empowered to take cognizance of any new issue, which comes to the notice of the DRP during the course of the proceedings either suo-moto or on account of reference made by the Assessing officer/TPO. Accordingly, on the basis of such new issue, the DRP is empowered to enhance the....
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.... in the draft assessment order or change in the variations proposed to the international transactions in the draft assessment order. Accordingly, the DRP has considered such information and made available of the same to the assessee for its comments. After having afforded adequate number of opportunities of hearing to the assessee and admitting the arguments and evidences furnished by the assessee, the DRP enhanced the variation proposed in the draft assessment order. 8. The argument of the assessee's counsel that the AO has no power to furnish information to DRP is not tenable inasmuch as there is no provision in Income Tax Act preventing the Assessing Officer from sharing the information with the DRP in connection with draft assessment order pending for adjudication on the basis of objections raised by the assessee. For this purpose, the demand for legislative sanction is overstretching the argument beyond limitation. As explained above, it is the prerogative of the DRP either to consider such information or reject the same. But, at the same time, there is no prohibition as far as AO sharing the information with DRP. 9. In continuation of Ground No.19 i.e. "Not undertakin....
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....w fees and the ITAT held the issue in favour of the assessee on the ground that the TPO failed to bring information on record that payment of royalty @ 7.5% on net sales was not at ALP. While doing so, the ITAT observed that royalty agreements were periodically approved by RBI and Ministry of Industry and the assessee was paying the amounts as per the agreements. 11. On the other hand, in the instant case, a clear cut finding has been recorded by the DRP that no services had been rendered by the AE warranting payment of 50% of profit share to DRL SA due to peculiar set of facts and circumstances of the case. Similarly, the agreement entered into by the assessee with DRL SA was not approved either by the RBI/ Ministry of Industry or any other Government Authority / Agency to vouch the genuineness and legitimate requirement of the transaction with the AE - DRL SA. Accordingly, the reliance placed by the appellant is not applicable to the case on hand. 12. In continuation to Ground No. 26 i.e. "The AO erred in disallowing the amount of profit share to DRL SA under section 37 of the Act", during the course of argument, the AR of the assessee has contended that the AO cannot decide ....
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....ubmitted that the gross amount of Rs. 318,97,44,080/- is not credited to the P&L account and there is no debit to the P & L account of Rs. 159,48,72,040/-. Only the net amount of Rs. 159,48,72,040 is disclosed in the P & L account under the head "License fees, net''(please refer to page Nos. 103 & 127 of assessee's paper book Vol. I). vii. As per statutory Audit report u/s 44AB of IT Act., in Form No. 3CD, it is mandatory to report the details of related party transactions i.e., particulars of payments made to persons specified u/s 40A(2)(b). In the instant case, the auditor/assessee ought to have reported the transactions the assessee had with both the AEs i.e DRLI USA and DRI SA. However, the said transactions have not been reported in Annexure 6 of the report (please refer to page Nos. 217 & 234 of assessee's paper-book Vol. I). viii. As per statutory Audit report u/s 92E of IT Act, in Form No 3CEB, it is mandatory to report particulars relating to all international transactions. In the instant case, the auditor/assessee have failed to report the transaction with DRLI USA & DRI SA in annexure 4A of the report( please refer to page no 252 & 264 of assesse....
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....ent agreement by the assessee group with GSK in the year 2006 itself, there is no scope of any risk relating to the litigation pending in the Civil Case. However, in the said MoU, it is stated that DRL SA has undertaken to take risk on account of legal issue pending in the case. Under the circumstances, it is submitted that DRL SA has no role to play in the litigation with GSK as it came into existence only in the FY 2007-08 and the settlement with GSK was completed in the month of May, 2006. xiii. Further, in the written submissions filed by the appellant before the Hon'ble ITAT, it is stated that DRL SA has undertaken product reliability risk, fall in price risk and also share of cost of development of the product and legal cost. As such, there is a difference between what is mentioned in the MoU and what is stated by the appellant in the written submissions with regard to scope of the agreement between the assessee and DRL SA. In this regard, it is submitted that at the time of development of the product by the assessee group Le. prior to FY 2006-07, DRL SA was not in existence. Accordingly, there is no truth in the assessee's submission that DRL SA has shared develop....
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....) The breach of any obligation, covenant, agreement, representation or warranty of GSK or a GSK Party contained in this Agreement; (ii) Any violation of applicable Law by GSK, or a GSK Party, in connection with the performance of GSK's or its Affiliates; obligations under this Agreement; or (iii) Product Claims only to the extent arising out of a manufacturing defect of GSK Supplied Product." (emphasis supplied) Further, in the same agreement under Section 8.4 : Insurance, at c1ause(b), it is once again stated that GSK shall take full responsibility with regard to insurance for product liability and general liability. The relevant portion of the same is reproduced below: "Section 8.4 Insurance. (a) For the Term, and for a period of five (5) years after the expiration of this Agreement or the earlier termination thereof, Dr. Reddy's shall maintain at its sale cost and expense, product liability and other insurance for itself in amounts, respectively, which are reasonable and customary in the United States Pharmaceutical industry for companies of comparable size and activities at the respective place of business of Dr. Reddy's, provided in no event shall....
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....uld have been compensated by the assessee directly to the distributors / consumers rather than assigning the same to a fledgling such as DRL SA which has no exposure to this kind of activities. Further, it is very important to note that, there was no impact on price during the FY 2008-09 under reference inasmuch as the end of the exclusivity period of 180 days happened in subsequent FY 2009-10 relevant to AY 2010-11. Accordingly, there is no cost attributable to price risk born by the assessee in the AY 2009-10 in order to assign the same to DRL SA. xviii. Further there is a violation of the terms and conditions mentioned in the Settlement agreement between GSK and the assessee dated 06/10/2006 wherein at page 6, para 11 at of agreement, it is stated that "This Agreement and the rights herein shall not be assigned or otherwise transferred without the written consent of all Parties Each of the Parties represents and warrants that it has not sold or conveyed or otherwise transferred any claim, demand or cause of action related to the District Court Case that it has or had against any Party." As such, the assessee has assigned certain rights emanating from the agreement to DRL S....
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....owever, it has created a legal framework by way of entering into an agreement in writing and thereafter transfer of money to DRL SA. Also, the assessee has failed to produce any evidence in regard to actual expenditure incurred during the financial year relevant to assessment year under reference in connection with risks assigned to the DRL SA i.e.- 1) what is the amount of post sale liability attributable to marketing, distribution and selling functions of the assessee group; 2) What is the amount of legal expenses incurred in connection with Civil Case pending, if any, subsequent to entering into agreement during the financial year under reference; and 3) What is the amount of expenditure incurred in connection with fall in price after the termination of exclusivity period. In this regard, it is pertinent to note that as the exclusivity period is falling during the financial year 2009-10 relevant to subsequent assessment year, neither assessee nor its AE should have incurred any expenditure. 4) Any other expenditure incurred in connection with the transactions referred to above. Further, it is clearly brought out that DRL SA is not capable of performing the said funct....
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.... but simply 50% of their income share from DRL USA has been earmarked towards such services payable to DRL Switzerland. 16. On the other hand, it is submitted that in the case of Dalmia Cements (supra) itself, it is held by Hon'ble High Court of Delhi that contractual payment relating to business need not be disallowed unless it suffers from "the vice of collusiveness or colourable device". The relevant portion of the same is reproduced below: "For the allowance under section 37(1), the following conditions are to be satisfied, i.e. : (a) there must be expenditure, (b) such expenditure must not be of the nature described in sections 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenses of ,the assessee, (d) the expenditure must have been laid out or expended wholly and exclusively for the purposes of the business or profession. The word "wholly" refers to the quantum of expenditure, while the word "exclusively" refers to the motive, objective and purpose of the expenditure. An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to c....
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....s still open to the Incometax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof was properly deductible under section 37. Prima facie, all the findings of the Tribunal were findings of fact and, therefore, the Tribunal was justified in not stating a case for opinion of High Court under section 256(1) and High Court was justified in not calling for a statement of case under section 256(2)." 19. Further, the Hon'ble Supreme Court in a recent decision in the case of Ganapati & Co Vs. CIT (2016) 381 ITR 363 (copy enclosed) has held that failure on the part of the assessee to produce proof of service rendered during the assessment year in question with regard to service charges paid to firm having common partners would attract disallowance of such service charges u/s. 40A(2) rws 37(1). Further, the Hon'ble Gujarat High Court in the case of Jayesh Roychand Shaw Vs. ACIT (2014) 360 ITR 387 (copy enclosed) has held that in view of finding recorded that payments were not made exclusively for the purpose of business, the salary paid to relatives cannot be treated as business exp....
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....aper Book Volume-I to for the AY 2009-10 wherein the transaction with DRL Swiss is made available in the Transfer Pricing report of the Appellant. c. We submit that the transaction has been disclosed in the financials as well as Transfer Pricing report filed before the AO. Hence, we submit that there is no failure on the part of the Appellant in disclosing the transaction. The reason for disclosing the transaction on net basis is the share of profit to DRL Swiss is connected with the share of profit received from DRL USA as these are originating from the marketing and sale of product - Sumatriptan in USA. From the above, it may be observed that there is no intention on the part of Appellant not to disclose the said transaction with DRL Swiss. d. Further, with respect to the contention of the Ld. DR on nondisclosure of the transaction in report u/s 44AB of the Act, we submit that clause 18 of tax audit report (Form 3CD) requires the tax auditor to report particulars of payment made to persons specified under section 40A(2)(b). Section 40A(2) provides that expenditure for which payment has been or is to be made to certain specified persons listed in 40A(2)(b) are to be reported i....
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....r ease reference:- Insurance. For the Term and for a period of five (5) years after the expiration of this Agreement or the earlier termination thereof, Dr. Reddy's shall maintain at its cost and expense, product liability and other insurance for itself in amounts, respectively, which are reasonable and customary in the United States pharmaceutical industry for companies of comparable size and activities at the respective place of business of Dr. Reddy's, provided in no event shall the product liability insurance amounts be less than Twenty- Five Million U.S. Dollars (U.S. $ 25,000,000) per occurrence (or claim) and Twenty-Five Million U.S. Dollars ( U.S. $ 25,000,000) in the aggregate limit of liability per year, with a self-insured retention of Five Million U.S. Dollars (U.S. $5,000,000). Such insurance shall insure against all liability, including personal injury, product liability, physical injury, clinical development liabilities, or property damage arising out of the development, manufacture (including packing and labelling), sale, distribution, or marketing of GSK Supplied Products. Dr. Reddy's shall provide written proof of the existence of such insurance to GSK upon re....
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....y, development of product, legal cost, fall in price in connection with marketing, distribution, and sale of the product. o. In this connection, we submit that the post sales liability towards price fall occurred in AY 2010-11 and DRL Swiss has already undertaken the liability amounting to Rs. 57 Crs. This matter was duly examined by the AO and necessary effect was duly given in the assessment order of AY 2010-11. Similarly, legal and development cost details are duly furnished and recorded in the T.P. order for A.Y. 2009-10. (Please refer para 8 at page 23 above). As per the assessment order passed by the AO for Ay 2010-11, "The assesses also submitted that as per clause 1.3 of the agreement with Dr.Reddy's USA and DRL India, the gross profit means Net sales reduced the price fall adjustment etc., and as per clause 2 of the agreement, 50% of the profit i.e. after price fall adjustments, has been shared with DRL India. In effect, what DRL India has received as profit share after price fall adjustment from Dr.Reddy's USA is only Rs. 72,93,09,429 (Rs.129,84,03,185 - Rs. 56,90,93,756) out of which Rs. 64 crs was retained by DRL India and the balance of about Rs. 8 crs has been ....
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....Appellant should be viewed in the contest of business expediency and the AO cannot step into the shoes of the Appellant. It may be noted that the DRL Swiss has not only undertaken the insurance liability but also has undertaken the 50% of Shelf-stock adjustment risk. If there was no such arrangement, DRL India would have borne the entire costs towards shelf-stock adjustment, which was borne by DRL Swiss in the AY 2010-11. We reiterate that in addition to business reason that the undertaking of product liability insurance with an Indian Insurance Company for a product to be sold in USA is not possible as the insurance amount is USD 25 million, as per the FEMA Regulations no person resident in India shall take any general policy issued by an Insurer outside India without specific approval from Central Government. u. In the written submissions filed by the DR before the ITAT, the DR alleged that the Appellant has used the agreement as colourable device to evade tax in India. v. The Appellant has entered into agreements as per the out of court settlement with GSK. Share of Profits from sale of the generic drug Sumatriptan in US market brought to India and offered for tax in India....
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....e functions. The Assessing Officers must in accordance with the statutory provisions discharge their functions and it cannot be said that an Assessing Officer can refuse to discharge his function even when the statutory provisions require him to act in a particular way. In the very nature of the things empowered to be done and in the very nature of the object for which the provisions of the Act are enacted as also the conditions in which the powers are to be exercised by the Assessing Officers under the Act, it is clear that these powers are coupled with a duty to exercise them when the statutory provisions warrant their exercise. If a statute invests a public officer with an authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the things when a party interested and having a right to apply, moves in that behalf, and circumstances for exercise of that authority are shown to exist. Even if the words used in the statute are prima facie enabling, the Courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right, public or private, of a citizen or for the safegua....
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....can only consider the matters which emanate from the orders passed by A.O./TPO. 54. The Ld. D.R. on the other hand pointed out that the provisions of section 144C were amended w.e.f. 01.04.2009, by inserting Explanation to Section 144C(8) by Finance Act, 2012, whereby the DRP was given wider powers i.e., to consider "Any matter arising out of the assessment proceedings relating to the draft order" notwithstanding that such matter was raised or not by the eligible assessee. In otherwords, even the matters not agitated by the assessee before the DRP can be considered for the purpose of enhancement. In fact, the DRP had issued a notice to assessee in 2013 by which time the Explanation to section 144C(8) was already in force. The case of the Revenue is also supported by the decisions of Tribunal referred to by the Ld. D.R. in the written submissions. Under the circumstances, we uphold the plea of the Ld. CIT-D.R. and hold that the DRP is well within its competence to consider the issue pertaining to profit sharing between DRL India and DRL SA. 55. This leaves us with the substantial issue i.e., correctness of disallowance of the claim of sharing of profits. We have extracted detailed....
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....ounsel for the Assessee there are restrictions for an Indian Company to take any General Insurance Policy outside India unless there is specific approval from Central Government. Since DRL, SA had undertaking the product liability insurance as well as SSA risk of 50% it cannot be said that DRL SA had not rendered any service to earn 25% share out of profits. 58. The contention of the Revenue is that DRL, SA has come into existence in 2007 and there is no reason as to why it should reimburse 50% costs of R & D expenditure to DRL, India. It is also the case of the Revenue that the litigation with regard to who should manufacture the product and market in USA ended in a settlement in 2006 by which time DRL, USA was not even in existence and therefore, there was no need to share 50% of the costs by DRL SA, referrable to the litigation and R & D; Thus, it is a colourable device. 58.1. However, it is not denied that DRL, SA made such payments. R & D expenditure is ordinarily claimed by the assessee as a Revenue expenditure and as and when it is reimbursed the same would be treated as revenue expenditure in the hands of the assessee in the year of receipt; In the instant case, there is ....
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....e vide letter dated 14.03.2014 submitted that the TPO while determining the ALP in respect of the profit share on marketing and distribution of Sumatriptan - Switzerland made an adjustment Rs. 64,92,01,592 which is the Gross Profit share of the marketing & distribution of the above product and ignored the price fall adjustment amounting to Rs. 56,90,93,756/-. However, as per the agreement of M/s. DRL India with M/s. DRL Switzerland, M/s. DRL Switzerland has undertaken to bear the risk of price fall adjustment as a result of which only an amount of Rs. 8,01,07,837 was transferred as profit share to M/s. DRL Switzerland. The assessee also produced copies of the Debit Notes & Credit Notes issued by Dr. Reddy's US and the copies of the agreement between Dr. Reddy's US and M/s. DRL, India in support of its claim. The assessee also submitted the chronicle of events for the launch of Sumatriptan and entering into agreement with Dr. Reddy's US and DRL, Switzerland and also proof that the Sumatriptan (imitrex) was launched only in November, 2008 which is subsequent to the entering into agreement with DRL, Switzerland i.e. in May, 2008. The assessee also submitted that as per the....
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.... liability and SSA risk. If there is no such arrangement, DRL, India would have borne the entire costs towards SSA which, in the instant case, was borne by DRL, SA in the A.Y. 2010-2011. 62. Having regard to the overall circumstances of the case, we are of the firm view that the sharing of profits between DRL, India and DRL SA is for bonafide business purposes and therefore, assessee is entitled to claim deduction on this count. It may not be out of place to mention that the A.O. was of the view that the assessee has a major role in product development and therefore, in the process of sharing profits between DRL US and DRL, India, assessee is entitled to larger share i.e., 60%. It is not in dispute that the DRL, US has undertaken the responsibility of warehousing and marketing the product in US territory which is the main role that requires to be played in selling a drug during the exclusivity period. Despite that assessee having initially done the Research and filed an abbreviated new drug application for the drug namely "Sumatripton" and got approval to manufacture and develop the product in India and to sell the same in USA, there was an agreement between DRL, US and DRL, India....