TaxTMI 
TaxTMI 
2017 (5) TMI 529
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....ing at the conclusion merely on the assessee'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 ch....
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....full-fledged in-house research and development division, 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 da....
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....with regard to A.E. Falcon Mexico, the loan was given in Mexican Peso by charging 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 ....
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....eliance was also placed upon the decision of ITAT, Mumbai Bench in the case of Everest 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. 1,97,63,34....
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....octors and other guests which was held to be purely personal in nature. The case of the assessee was that the expenditure 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 ind....
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....was accepted by the DRP in the proceedings for the A.Y. 2008-09. Having regard to the circumstances, the A.O. allowed the claim of the 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 maintenan....
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....t is not an allowance deductible since it is notional and capital in nature. DRP however followed the decision of ITAT, Bangalore Special Bench in the case 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 wa....
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....erland was not discussed properly in 3CEB report or in the T.P. documentation. Since such remittances fall under the definition "International Transaction", under section 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....
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....he DRP considered the matter in extenso to hold that the sharing of 50% of profits received from DRL, USA is not on account of any commercial expediency but shifting of profits to 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....
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....sessee had a major role in development of generic drug and therefore, it is entitled to 60% share of profit. The Revenue also contended that the DRP is not correct in holding that expenditure 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 b....
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....be considered as an 'International Transaction' and as a consequence the tax authorities were not justified in making an ALP adjustment. The transaction of corporate guarantee finds a mention in clause (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....
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....deration the assessee having not incurred any costs in providing corporate guarantee it would not constitute "International Transaction" within the meaning of Section 92B of the Act and consequently, ALP adjustment 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 ....
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.... of the opinion that PLR is not a correct tool for calculating interest and assessee should have charged interest on the basis of rate of interest received on deposits made with Banks and public companies. It was also stated that in assessee's own case for the A.Y. 2006-07 the ITAT held, following the decision 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 hi....
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....unsel for the Assessee particularly in assessee's own case for the earlier years, show that benchmarking of ALP should be LIBOR + 200 basis points and TPO should not determine the ALP by taking into consideration the market rate prevailing in the respective countries. Even for A.Y. 2008-2009, the Hyderabad Bench accepted in 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....
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....he Tribunal in the A.Y. 2007-08 wherein the Bench observed that the expenditure falls within the proviso to Section 37. Since the expenditure was not allowed in the immediately preceding year, the Ld. D.R. contended that even for this year the facts being same, it cannot be allowed as deduction. Ld. D.R. adverted our attention to the decision 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, ho....
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....bility not envisaged in any of the Act or Regulation cannot be reckoned to be retrospective. 43. We have carefully considered the rival contentions and perused the material on record. An identical issue has come-up before the ITAT in assessee's own case for the A.Y. 2008-09 wherein the Bench set aside the issue to the file of the A.O. by observing 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.....
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....h undertakings. However, there are certain common head office expenses which would benefit all the units of the assessee in general. These expenses could be in the nature of general administration expenses such as travelling and conveyance expenses, marketing and selling expenses, legal and professional expenses, accounting and finance expenses, internet and 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 expens....
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....ackground:- 1. Dr. Reddy's Laboratories Limited ('DRL India' or 'Appellant') is engaged in the manufacturing and trading of pharmaceutical products mainly generic drugs. Generic drugs are finished pharmaceutical products which are ready for consumption by the patient. These drugs are required to meet the United States Food and Drug Administration (U.S. FDA) standards for selling 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, ....
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.... 318 159 159 Price fall adjustment (SSA) - - - - Total 636 318 159 159 Profit Statement for A.Y. 2010-2011 (Rupee in Cr.) Particulars Total profit share earned DRL US share DRL India share DRL Swiss share Profit share before price fall adjustment 260 130 65 65 Price fall adjustment (SSA) (114) (57) - (57) Total 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 ....
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....The Appellant submits that the DRP has no power to enhance the income or reduce the loss of the Appellant at the behest of AO during the DRP proceedings. 18. In this regard, we draw yours Honour's kind attention to section 144C of the Act which is reproduced below:- "144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this 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) obje....
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....ontract as completed during the year (which is in fact was not correct as assessee has offered more turnover in its books of account) and proposed bringing to tax the net profit at 8% of the above determined turnover. This direction of the DRP is wholly without jurisdiction and suffers from inherent lack of jurisdiction as it is not in conformity with the powers under section 144C(5) r.w.s. 144C(8). Therefore assessee's ground No. 1 is to be upheld as the DRP has varied from the proposed draft order and took up a new issue and issued directions which are at variance with the proposed 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 y....
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....ctional judgements. • Kirby Building Systems India Ltd. Vs. Addl. CIT, Range -8, Hyd. [(ITA No.1651/Hyd/2010 (AY 2006-07) and ITAT No.1975/Hyd./2011 (AY 2007-08)] • IWM construction (P) Ltd. Vs. ACIT, Circle-2(1), Range-2, Hyd. [2016] 72 taxmann.com 104 (Hyderabad - Trib.) We pray before your Honours that the ALP of the said transaction should not be determined as 'Nil'. 28. 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. 29. The Appellant submits that the AO cannot decide 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 R....
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....ssman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the revenue." Further, the above view has been upheld by Hon'ble Supreme Court in the case of S.A. Builders (Supra). In the case of Hero Cycles Private Limited Vs. CIT [2015] 379 ITR 347 (SC), the Hon'ble Supreme Court held in para no. 13 & 14 as follows:- "13. In the process, the Court also agreed that the view taken by the Delhi High Court in CIT v. Dalmia Cement (P.) Ltd. [2002] 254 ITR 377/121 Taxman 706 wherein the High Court had held that once it is established that there 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 pr....
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....f DRP proceedings. Further, it is submitted by the appellant that DRP can only give directions for confirming/enhancing/reducing the disallowances proposed in the draft assessment order by the AO after considering the objections raised etc. It is also highlighted by the appellant that in the instant case, the ORP has disallowed on its own on the issue which is not subject matter of draft assessment order. In this regard, appellant placed reliance on the decision of Mumbai Tribunal in the case of Dredging International NV V5. ACIT in ITA No. 8035/Mum/2010 dated 16.09.2011 [2011] 48 SOT 430 (Mumbai) and also on the decision of Hon'ble Karnataka High 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 pr....
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....as well as the Circular No.3 of 2012 dated 12th June, 2012. 9.2.1. At the outset, we would like to clarify that as per the Circular No.3 of 2012 dated 12.6.2012 which was the ITA Nos.1634 to 1639 of 2012 The Himalaya Drug Company Bangalore Page 63 of 78 supplementary memorandum explaining the Official amendments moved in the Finance Bill, 2012 as reflected in the Finance Act, 2012, it has been made explicit that "The date of effectivity of the provision mentioned in clause 63 of the Finance Bill, 2012 and the Notes on clauses (clause 60) thereof is 1st April, 2009, i.e., the provision would apply to all cases filed before the DRP on or after 1st April, 2009, irrespective 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 ad....
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....inst proposed adjustment, to enhance transfer pricing adjustments made by the Assessing Officer pursuant to TPO's order. It is also held by the ITAT that on the cursory look at the language of the 144C(8) shows that the power of enhancement of the DRP has been further widened to all the matters arising out of the assessment proceedings relating to draft order, irrespective of the fact whether they were raised or not by the assessee. With this, amplification of the scope of power of DRP, now even the matters not agitated by the assessee before the DRP can also be considered for the purposes of enhancement. " 6. Adverting to the facts of the instant case it is noticed that the TPO proposed adjustment 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 red....
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....Dispute Resolution Panel) Rules, 2009 stipulates that the DRP has the power to consider any matter arising out of the assessment proceedings. The relevant portion of the same is submitted below for ready reference: "10(1) : On the date fixed for hearing or on any other date to which the hearing may be adjourned, the eligible assessee or his authorized representative do not appear or when they appear, upon hearing the objections, the panel may, within the specified time, issue such directions as it deems proper. (2) While hearing the objections, the panel shall not confine to the grounds setforth in the objections but shall have power to consider any matter or grounds arising out of the proceedings. {emphasis supplied) (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.....
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....rnished by the assessee or calling for details from the Assessing officer/TPO in connection with the proceedings conducted by the TPO/AO which culminated in the form of draft order; ii. DRP can take note of any information received from the TPO or AO which has a bearing on the computation of income of the assessee / variations to the value of international transactions proposed in the draft order. iii. Any other issue or matter that comes to the notice of DRP from whichever source having bearing on the proceedings pending before the panel. 7. In the instant case, during the course of pendency of proceedings before the DRP, the AO submitted certain details having bearing on the computation of the value of international transactions proposed 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 variati....
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....The decisions of Hon'ble ITAT, Hyderabad bench in the cases of Kirby Building Systems India Ltd. Vs. Add/.CIT in ITA No. 1651/H/2010 for AY 2006-07 and ITA No. 1975/H/2011 for AY 2007- 08 and IWM Constructions Pvt. Ltd. Vs. ACIT 72 Taxann.com 104 (Hyd. Trib.) relied upon by the appellant in support of its claim that the ALP of the transaction should not be determined as Nil are not applicable to the facts of the case. In the case of IWM Constructions(supra), the ITAT gave a finding of the fact that the assessee has received some services from its AE and, accordingly, set aside the matter to AO/TPO for redetermination of ALP. Same is the case in respect of Kirby Building Systems India Ltd. wherein the issue was regarding payment of royalty and technical knowhow 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 fi....
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.... the amount i.e. Rs. 159,48,72,040/- to the DRL SA during the FY 2008-09 relevant to the AY under reference. The said amount was remitted only during the FY 2011-12 relevant to AY 2012-13. v. In the normal course, the assessee should have reported the entire amount received from DRL USA amounting to Rs. 318,97,44,080/- as forming part of its transfer pricing documentation and claimed 50% of the payment to DRL SA along with giving the justification for determination of Arms Length Price at Rs. 159,48,72,040/- by adopting one of the methods stipulated u/s. 92B rws 92C i.e. Comparable Uncontrollable Price Method, Resale Price Method, Cost Plus Method, Profit Split Method, Transactional net Margin Method etc. However, the appellant chose not to disclose such transaction. vi. It is also submitted 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 re....
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....k on account of post sale liability of the product 'Sumatriptan' and the risk concerning with the final determination of the Para-4 litigation pending in Civil Case filed by the assessee group before the District Court of the Southern District of Newyork, USA, with Glaxo Group Ltd., UK. It is also mentioned in the MoU that DRL SA would assume the risk on account of any change in the net realization value, shelf stock adjustments and other provisions on the inventory of the product i.e. Sumatriptan, charged to Dr. Reddy's by DRLI. In consideration for the same, it is stated in the MoU that the assessee shall pay DRL SA 50% of the gross profits / profit share royalty accrued to it from DRLI USA. xii. In this regard, it is submitted that after having dismissed the court case (supra) and consequent entering into settlement 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....
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....iates, and its and their officers, directors, trustees, agents and employees (individually and/or collectively referred to herein as an "Dr. Reddy's Party/l) harmless from and against any and all losses, liabilities, damages (inclusive of indirect, incidental, special or consequential (but excluding punitive) losses or damages), fees (but only reasonable attorneys fees and expenses and costs of litigation pertaining to such Dr. Reddy's Claim), and expenses paid or payable by Dr. Reddy's or a Dr. Reddy's Party to a Third Party (collectively, "Dr. Reddy's Losses") to the extent that such Dr. Reddy's Losses result [rom or arise in connection with a claim, suit or other proceeding made or brought by a Third party against Dr. Reddy's or a Dr. Reddy's Party (a "Dr. Reddy's Claim") based on, resulting from, or arising in connection with: (i) 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 ....
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....ithstanding that, it is well known fact that the Pharma companies normally enter into insurance contract with the insurance companies to insure their drug products, rather than enter into agreement with their sister concerns or AEs. It is an admitted fact that DRL SA has no experience or expertise in insuring the drug / products as it came into existence only in FY 2007-08 and it has no wherewithal to take the risks involved with regard to product liability. Further, the said company is located in Switzerland rather than in USA. As such, the assessee should have entered into an agreement with renowned insurance companies or any of the companies located in USA rather than assigning the insurance functions to its AE i.e. DRL SA. xvii. Similarly, the assessee's contention that the agreement with DRL SA includes fall in price risk is also not tenable inasmuch as any fall in price post 180 days exclusivity distribution period would 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, the....
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....nsaction, business/legitimate requirement of entering into such transactions, actual incurring of expenditure in connection with such transaction and reasonableness of the expenditure incurred thereof. All these conditions should be fulfilled cumulatively. Further, these conditions are stipulated as per the provisions of Sec. 37(1) and Sec. 40A(2)(b). However, in the instant case, the assessee has not fulfilled any of these conditions. To be precise, the assessee has failed to disclose the transaction itself either before the AO or before the TPO. Further, there is no evidence to show that the assessee had incurred any liability towards post sale liability, development of product, legal cost, fall in price etc. in connection with marketing, distribution and sale of the products. xxi. Accordingly, the assessee has not fulfilled the above mentioned conditions envisaged u/s. 37(1) and Sec. 40A(2)(b) in order to claim deduction towards payment made to DRL SA. However, 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 i....
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....he purpose of business. Hence, the said decision is not applicable. 15. In the case of Hero Cycles Ltd. (supra), the issue is once again with regard to the reasonableness of the expenditure wherein the Hon'ble Supreme Court held that the authorities must not look at the matter from their point view, but that of prudent businessman. In the instant case, from the view point of a prudent business man itself, it is crystal clear that there is no requirement of incurring 50% of the profit share as the AE has not performed any of such functions mentioned in the MoU. Further, the assessee has not submitted any details with regard to the basis for quantifying the value/price of the said services rendered by DRL SA @ 50% of their profit share received from DRL USA. No Scientific methodology adopted in this regard with supporting documentary evidences have been furnished by the assessee. Similarly, no breakup of expenditure incurred by the AE towards various functions assigned to it is furnished, 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 Cem....
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....ed the existence of an agreement between him and his agents and an actual payment therein, it Would not take away the jurisdiction or the discretion of the Assessing officer to consider whether the expenditure was genuinely and exclusively incurred for the purpose of the business and whether the expenditure was commercially expedient. The relevant portion of the same is reproduced below: "The question whether on amount claimed as an expenditure Was laid out or expended wholly and exclusively for the purpose of the business has to be decided on the facts and in the light of the circumstances in each case. The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as 'commission, assuming there was such payment, did not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such on agreement in existence and the payments might have been mode, it was 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 ....
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....el for the Assessee are as under : a. The Ld. DR claimed that the Appellant has failed to disclose the said transaction with DRL Swiss in the financials, Income-tax Return filed by the Appellant and Form 3CEB for the year under consideration. Further in the written submissions filed by the DR, it is stated that that the payment of profit share to DRLSA has not been reported in the report issued u/s 44AB as it was made to persons covered u/s 40A(2)(b). b. With respect to the above contention of Ld. DR, we request your honours kind attention to :- * Page no 103 of Paper Book Volume-I - Profit & Loss account for the AY 2009-10 the amount is disclosed under licence fees, net. * Page no. 127 of Paper Book Volume-I - Related Party Disclosures V. Licence fees, net Dr. Reddy's Laboratories Inc., USA 1,597 * Page no. 130 of Paper Book Volume-I - Related Party Disclosures(Continued) iii. Due to related parties ( included in current liabilities) Dr. Reddy's Laboratories SA, Switzerland 1,464 * Page no. 272 of Paper Book Volume-I to for the AY 2009-10 wherein the transaction with DRL Swiss is made available in the ....
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....ference to assignment of Insurance and shelf-stock adjustment. Hence, we submit before your honours that there is no restriction on part of the Appellant to enter into an agreement with other parties to assign/transfer the liability of insurance. Further it may be noted that if there is an assignment, it is not an assignment of rights but assignment of liability only. g. The Ld. DR contended that the there is no requirement on the part of Appellant to undertake product liability insurance by referencing para 8.1 of pg. 697 of (Supply & Distribution agreement between DRL India, DRL US & GSK) of Volume-II to paper book filed for the AY 2009-10 wherein it specifies that GSK is responsible for product claims arising out of a manufacturing defect of GSK supplied products. h. In response to the above, we draw your honours attention to para 8.4 of Pg. 701 of volume-II of paper book, where in it is mentioned that DRL is sole responsible to undertake Insurance. The relevant paragraph from the supply and distribution agreement between DRL India, DRL USA and GSK is reproduced below for your ease reference:- Insurance. For the Term and for a period of five (5) years after the expir....
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....DRL Swiss i.e. share for product development costs, share for legal expenses, share for undertaking the insurance and share of 50% of shelf stock adjustment. He also pointed out that the 50% of shelf stock adjustment assigned to DRL Swiss is bogus, as no adjustment was made for shelf stock costs in the AY 2009-10. m. In this regard, we would like to submit before your good self that the DRL Swiss is compensated only for rendering two services namely share for undertaking the insurance risk and shelf stock adjustment. Further, we also submit that the adjustment for shelf-stock adjustment will only arise after the end of exclusive period of 6 months which has ended in the year AY 2010-11 and hence no adjustment has been made on amount payable to DRL Swiss in the AY 2009-10. In this regard, we request your honours attention to page no. 3 of our written submission made on profit share on 24 January 2017, wherein the 50% price fall adjustment was borne by DRL Swiss and not by DRL India. n. Further, the Ld DR argued that the Appellant has not submitted any evidence towards post sales liability, development of product, legal cost, fall in price in connection with marketing, distribu....
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....ced relevant agreements, proof of payment were filed before the AO in support of its claim. q. In the written submissions filed by the DR before the ITAT, it is stated that the agreement has not been approved by RBI/ Ministry of Industry or any other Government Authority. r. In this regard, we submit that there is no obligation/any regulatory requirement on the part of the Appellant to get approval from any Government bodies to enter into an agreement with the AE. However, it may be noted that the Appellant has transferred the funds only after getting the approval from RBI through the Authorized Dealer banks. The proof for approval and transfer of the funds are filed before your honours vide petition for additional evidence dated 23 January 2017, which is enclosed herewith for ready reference Annexure -2 s. In the written submissions filed by the DR before the ITAT, it is stated that the Appellant should have entered into an agreement with renowned insurance companies or any companies located in USA rather than assigning the insurance functions to its AE. t. In this regard, we submit that the decision of the Appellant should be viewed in....
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....v) We submit before your honours that the attempt made by the AO by way of requesting the panel to examine the issue is against the law. There is no power to the AO to make such request to DRP after the completion of assessment proceedings under any provisions of the Act. We submit that every action of AO should have legislature sanction and in the absence of legislative sanction AO cannot exercise any power. It should also be noted that DRP does not have any provisions for cross objection and only assesse has a right to appeal and AO has no right of whatsoever to make a plea or raise cross objection or to request DRP for enhancement. In the absence of such provisions enhancement by DRP at the behest of AO is null and void. (v) In this regard we rely on the judgement of Jauamal Jayantilal Thakore Vs Chief Commissioner of Income- tax [230 ITR 142], where in the Hon'ble High Court of Gujarat held that " It will, thus, be seen that the Assessing Officers have important statutory functions to discharge. It can never be said that their powers to make assessment or to ascertain whether there has been full and true disclosure are powers which are not coupled with duty, to discharge tho....
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....ection 92CA provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arm's length price in relation to an international transaction to the TPO. Sub-section (3) of section 92CA provides that the TPO after taking into account the material available with him shall, by an order in writing, determine the arm's length price in accordance with subsection( 3) of section 92C. (viii) Further, it may be noted that the DRP has not given an opportunity of being heard before making addition under section 92CA as show-cause notice was issued under section 37(1) of the Act. (ix) Considering all the above, the appellant submits that the entire adjustment made by DRP is not sanctioned any provisions of Income-tax Act and hence the appellant submits that adjustment made by DRP should be considered as null and void. 53. We have carefully perused the rival contentions and perused the record. In respect of A.Y. 2009-2010 assessee raised a preliminary objection with regard to the jurisdiction of the DRP in considering the matter of allowability of deduction referrable to profit share with DRL Swiss. The case of the assessee is that t....
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.... the product as an authorised generic agent. Further, Dr. Reddy's Laboratories were required to undertake the product liability insurance for not less than USD 25 Million and price fall risk as per the agreement. 57. The main plea of the assessee is that it does not have any marketing net work in USA whereas DRL US has a strong distribution net work and therefore, they market the product manufactured by GSK. Therefore, DRL, USA was entitled to 50% share of profit. Assessee i.e., DRL, India was allowed to get a compensation of 50% profit for loosing the manufacturing facility of the drug developed by it. However, to protect itself from running into losses DRL, India approached DRL, Swiss to take product liability insurance and Shelf Stock Adjustment (in short "SSA") risk. It is not in dispute that assessee entered into an agreement with DRL Swiss whereby DRL Swiss had undertaken the insurance for product liability and SSA risks. It is also not in dispute that DRL Swiss paid an amount of 22 Million Dollars towards 50% of legal and development cost incurred by DRL, India. DRL, SA had also incurred expenditure to the extent of 13 Million dollars towards SSA. As rightly pointed out b....
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....aken a decision to enter into an agreement with DRL SA for sharing of profits. Such being the case, Revenue is not entitled to analyse the business decision from it's perspective. 58.4. In the case of S.A. Builders Limited (supra), the Hon'ble Supreme Court observed that the Revenue authorities should not sit in the arm chair of businessman to decide as to how much is reasonable expenditure having regard to the circumstances of the case. This principle was reiterated in number of cases which were referred to by the Learned Counsel for the Assessee. 59. The Ld. D.R. has relied upon several decisions but the same are rendered in the peculiar set of facts emanating in those cases. Whether the expenditure is genuine or not, has to be considered by taking into consideration the facts in its entirety. In the instant case, in the later part of the exclusivity period there was price fall which resulted in sharing of loss between DRL, US and DRL, India and because of the understanding between DRL, India and DRL, SA, the liability amounting to Rs. 57 crores was adjusted by DRL, SA which could be noticed from the following observations of the A.O. in the assessment order for the A.Y. 20....
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....t be proper to treat the agreement as bogus. DRL, SA is compensated for rendering two services i.e., for undertaking insurance and SSA. In fact, legal and development costs were also shared by DRL, SA and those details were duly furnished and recorded in the T.P. order for the A.Y. 2010-2011. 61. It is not out of place to mention that the 'Tripartite Agreement' between DRL, US, GSK and DRL, India took place in 2006 but the need to enter into an agreement with DRL, SA arose only during the period of introduction of the drug i.e., before November/December, 2008. There is no dispute with regard to the fact that prior to that date the assessee already entered into an agreement with DRL, SA. It is thus seen that there is sufficient evidence to show that the assessee entered into an agreement with DRL, SA in the interests of business and once it is established that an expenditure is incurred for the purpose of business it is not always necessary to prove that assessee is assured of getting more profit than what is expended. In the instant case, assessee had not actually incurred any expenditure. On the contrary, DRL, SA come forward to share R & D expenditure and legal costs and also ....