TaxTMI 
TaxTMI 
2019 (2) TMI 1067
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....n the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the TP adjustment of Rs. 17,10,92,000/- made by TPO to the extent of 3% of the amount of guarantee given by the assessee on behalf of AE's? 4 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the TP adjustment of Rs. 1,17,11,449/- made by the TPO by applying CUP method instead of TNMM used by assessee. 5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 10,04,36556/- being R & D expenses allocated to Baddi & Solan Unit of the assessee. 6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 11,88,53,122/-, being interest expenditure allocated to Baddi & Solan units on the basis of sales turnover ratio, while computing deduction u/s 80IC. 7. The appellant prays that the order of the ld. CIT(A) on the above ground be set aside and that of the Assessing Officer restored." 3. Apropos ground relating to disallowance us 41(1) of Income Tax Act, 1961 (hereinafter "the ....
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....decision of ITAT Mumbai in the Garware Wall Ropes Limited & JM Financial United are applicable to the facts of the present case as investment in subsidiary companies Is not for earning the exempt income (dividend) but for the purposes of having control of me subsidiary and mis investment is purely for "business purpose". Further, the AO has not brought anything on record to show that the assessee has incurred this expenditure on investment in subsidiary companies for purposes other than "business purpose" or to earn exempt income. No disallowance out of interest paid is called for in respect of this investment in subsidiary companies u/s 14A r.w. rule 8D, I also find that appellant has not been able to show that no borrowed funds have been used to earn exempt income. I, therefore hold that remaining investment of Ks. 26.11 lacs cannot be considered to have been made for purposes of business as this investment has been made to earn exempt income & consequently would attract disallowance u/s 14A. Keeping in mind the facts of the case and following principles laid down in the above-mentioned judgements and following principle of judicial discipline this ground of appeal of the appella....
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.... * CIT vs. HDFC Bank Ltd ( 2014) 366 ITR 505 (Bom.)(HC). Furthermore, the ld. CIT(A) has pleaded that the ld. CIT(A) ought to have hled that the disallowance u/s. 14A should be restricted to the amount of exempt income earned. For this, the ld. Counsel of the assessee has placed reliance upon the following case laws: * Joint Investments vs. CIT [372 ITR 694] (Del); * Pr. CIT vs. State Bank of Patiala [393 ITR 476] (P&H) * M/s. Delux Polymers Pvt. Ltd. vs. Asst. CIT (ITA No.4138/Mum/2016) dated 07.09.2017 Further, the ld. CIT(A) pleaded that for the purpose of computation of disallowance u/s.14A, only those investments should have been considered from which exempt income has been earned. For this, the ld.counsel of the assessee placed reliance upon the decision of the ITAT Special Bench decision in the case of ACIT v. Vireet Investments Private Limited [165 ITD 27]. Lastly, the ld. Counsel of the assessee submitted that the ld. CIT(A) ought to have held that disallowance u/s. 14A while computing the income u/s.115JB is consequential. Hence, the disallowance made under normal provisions should be considered for the purpose of disallowance while....
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....e by the TOP to the extent of 3% of the amount of guarantee given by the assessee on behalf of Associated Enterprises (AE). On this issue the TPO noted that the assessee has given the following corporate guarantees:- S. No. Details Guarantee Given (Rs.) 1 Corporate Guarantees given to Citi Bank on behalf of Glenmark Holding SA, Switzerland (full year) 451,40,00,000 2 Corporate Guarantees given to ICICI Bank on behalf of Glenmark Holding SA, Switzerland (full year) 64,55,02,000 3 Corporate Guarantees given to Citi Bank on behalf of Glenmark Holding SRL, Romania (full year) 52,04,000 4 Corporate Guarantees given to ALD Automative on behalf of Glenmark Impex LLC Russia (full year) 9,80,26,000 5 Corporate Guarantees given to Citi Bank on behalf of Glenmark Pharmaceuticals Ltd. Brazil 9,02,80,000 6 Corporate Guarantees given to Paul Royalty Holding Fund on behalf of Glenmark Generics Inc. USA (full year) (USD 27 million) 121,87,80,000 15. The TPO noted that the assessee has charged guarantee commission of 0.53% from the AEs at Sl. No. 1 and 2 and no guarantee commission has been charged by the assessee on the AEs liste....
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....s 4 AEs ie. Glenmark Impex LLC Russia, Glenmark Pharmaceuticals S.R.L Romania, Glenmark Generics Inc. USA and Glenmark Farmaceutica Ltd., Brazil. The adjustment made by the TPO in respect of these comfort guarantees on behalf of 4 AEs is not called for and thus this ground of appeal of the appellant on this count is allowed." 17. Against the said order Revenue is in appeal before us. We have heard both the counsels and perused the record. The learned counsel for the assessee submitted that the issue is squarely covered in favour of the assessee by the ITAT decision in assessee's own case in earlier years wherein the 0.53% was held to be chargeable for the guarantee commission. In this regard the learned counsel for the assessee also submitted that against the order ITAT for A.Y. 2008-09 Revenue has filed appeal before the Hon'ble Jurisdictional High Court and the Hon'ble Jurisdictional High Court has upheld the same vide order dated 02.02.2017. Furthermore the ITAT for A.Y. 2009-10 vide order dated 07.02.2018 has similarly held that 0.53% was chargeable. Hence, he prayed that guarantee commission of 0.53% may be charged on the entire guarantee given. 18. Respectfu....
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....ducts from GPL and GPL does not sell the same product to any other third party in the countries in which AE's are situated. This contention of the assessee cannot be accepted. The fact remains that the assessee is manufacturing the formulations and selling it to various geographies as well as to local market. Hence the cup can be used to compare the prices and local market with those in the export market, although on FOB basis. Thus the contention of the assessee on this point cannot be accepted. (iii) As regards External CUP assessee submitted that: "the same cannot be used to determine a reliable arm's length benchmark because neither does it have any such comparable data nor have we been given comparable data by TPO. Even if such data were to be made available to us there would be differences in respect of which adjustments are difficult or impossible to make. Typically, these differences cannot be valued and, as a consequence, a reasonably accurate quantification for variation in prices cannot be made. These include: Differences in the amount and type of the intangible property involved in the sale (the pharmaceutical products exported to AEs are branded); Diff....
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....nt is required in respect of export to Russia. The TPO based on 2 products sold to non-AEs located in Mauritius and West Indies has made adjustment without taking in to account the crucial difference of the geography involved and the quantity involved. I agree with the argument of the assessee that quantity of the product sold has a major bearing on the price charged. Without considering the aspects adjustment made by the TPO is not warranted in the facts of the case. I am of the view that CUP method cannot be applied on these 2 products and TNMM method adopted by the assessee is correct in the facts and circumstances of the case. No adjustment is therefore, required in respect of export to Russia, thus this ground of appeal of the appellant on this count is allowed. 22. Against the above order, the Revenue is in appeal before us. We have heard both the parties and perused the record. The ld. DR relied upon the order of the TPO. 23. Per contra, the ld. AR supported the order of the ld. CIT(A). The ld. Counsel of the assessee submitted that the assessee was consistently adopting the TNMM method for the computation of the arms length price in this regard, as Most Appropriate Me....
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....neither did the assessee have any such comparable data nor assessee had been given such comparable data by the TPO. Even if such data were to be made available, there would be differences in respect of which adjustments would be difficult or impossible to make. Typically, these differences could not be valued and, as a consequence, a reasonably accurate quantification for variation in prices could not be made. These include: a. Differences in the amount and type of the intangible property involved in the sale (the pharmaceutical products exported to AEs are branded); b. Differences with respect to the quality; c. Differences in the geographic markets; d. Differences in the level of market; e. Inability to differentiate a controlled transaction from an uncontrolled transaction. The identification of the above differences itself was a difficult task based on the level of information available in the public domain. Further, these differences could not be quantified with reasonable accuracy as required under Rule 10B (2) and Rule 10B (3) of the Rules. In the view of above, CUP method was not applied as the difference in price could ....
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....fference in INR Description Qty Rate Total in USD Rate Difference Ascoril ExpectorantRussia RU 200 ml 784,560 1.29 965,642 1.55 194,626 45.14 8,785,400 Relcer Tablets RU 1x10's 122,305 0.97 118,636 1.50 64,822 45.14 2,926,049 Total 870,865 1,084,278 259,447 11,711,449 4.7 The Learned CIT(A), deleted the said addition and held that no adjustment was required in respect of export to Russia as TPO failed to consider the crucial difference of the geography and quantity involved. Accordingly, he held that CUP method cannot be applied and TNMM method adopted by the assessee was correct. Against this ground, the revenue has filed an appeal before the Hon'ble Tribunal. In this regard, it is humbly submitted that 4.8 TNMM method is more appropriate than CUP method It is submitted that GIL Russia is a low risk distributor for GPL for the sale of pharmaceutical products. The assessee has benchmarked the international transaction by applying TNMM method. One of strengths of the TNMM is that net margins (e.g. returns on assets, operati....
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....ication of Internal TNMM In case of Internal TNMM the OM with respect to non AEs export is 22.37% as against 64.02% of GPL India in respect 1 2 to export to GIL, Russia. Therefore, in all the three situations the OM of assessee company with respect to export to GIL, Russia is very high. and therefore the assesse has complied with ALP regulation in respect of this transaction. 4.12 Export to All A.E's are at a higher price including Russia GPL manufactures and exports pharmaceuticals products to wholly owned subsidiaries, for distribution in different geographies like Philippines, Brazil, Nigeria, Russia, South Africa, Venezula and Argentina. During the year under reference, GPL exported pharmaceutical products to all its AEs for an aggregate amount of Rs. 65.05 crores, out of Total sales of Rs. 1029.68 crores. This comes to only 6.31% of total sales, which is very insignificant considering the total sales of the assessee. Operating Margin in case of ports to All AE's comes to 144.69% as against average margin of 15.99% at Entity level. Similarl perating Margin in case of Exports made to other Uncontrollable parties comes to 28.82% only as against ....
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....NMM. We find that this reasoning of the TPO, is totally fallacious and not at all sustainable. In this regard, we note that this ITAT in the case of Omni Active Health Technologies Ltd. (supra) had an occasion to examine the similar issue. The Tribunal had held as under: 27. We have carefully considered the submissions and all the relevant records have been perused. We find that the first objection of the ld. Counsel of the assessee is that in the preceding years, for three years transactional net margin method was used to bench mark the international transaction. In the present assessment year, the Transfer Pricing Officer noted that the assessee has adopted transactional net margin method for determining the arms length price for export of finalised goods to the Associate Enterprises. During the course of assessment proceedings, the Transfer Pricing Officer proceeded with the same and also asked the assessee to provide an updated margin of the comparable selected. The updated margin was given to the Transfer Pricing Officer. From the computation of updated margin also, the PLI of the assessee come to 15.21% which was higher than the PLI of the two comparable companies. H....
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.... (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. 3) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed; Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices. ii. Rule 10C of the Income-tax Rules, 1962 ("Rules") states that: (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction provides the most reliable measure of an arm's length price in relation to the international transaction. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction; ....
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....in thus established is then taken into account to arrive at an arm's length price in relation to the international transaction 29. Thus from the above, it is evident that the arm's length price in relation to an international transaction is to be determined by one of the prescribed methods which is most appropriate method having regard to the nature of transaction, class of transaction, class of associated persons, functions to form by such person, or such other relevant factors. Section 92C(2) provides that it is only the appropriate method as referred to in section 92C(1) which can be applied for determining arm's length price in the prescribed manner. The choice of method on the basis of which arm's length price is determined has to be exercised on the touch stone of principles governing selection of most appropriate method set out in section 92C(1). The legislature does not provide for an order of preference of method of determining of arm's length price. Now once an appropriate method for determining the arms length price has been chosen and accepted by the Revenue consistently over a number of years, there has to be some cogent reason to make it departure from th....
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....aw is fully applicable on the facts of the present case. Here also, the TPO has changed over to CUP method as MAM by rejecting the TNMM method consistently being applied by the assessee without any change in facts and law. We note that the Tribunal after elaborately deliberating upon the provision of the law has expounded that in absence of any justification for change in facts or law, the TPO is not justified in rejecting the consistently applied TNMM method and applying the CUP method as MAM. The above proposition is fully applicable here. Hence, the adjustment made by the TPO is liable to be set aside. 28. Furthermore, we note that on merit also, the ld. Counsel of the assessee has made a good case that the CUP method adopted by the TPO is not correct. Out of 26 products, 24 products exported to Russia were at higher price. The T.P.O. has only picked up 2 products where prices are lower and has compared the rate adopted for Mauritius and West Indies to that of Russia. Here, the plea of the assessee is cogent that these are crucial difference of the geography as well as quantity involved. The quantity exported to Russia is huge (approximately 80 times) as compared to that expo....
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.... to the extent of Gross Total Income Rs. 1,298,123,164/-. Revised ROI was filed on 29.03.2012 to revise the claim for deduction of profit u/s 80IC of the Act by withdrawing allocation of R&D expenses, in respect of 80IC Unit i.e. at Baddi and Solan and also some other changes. As per revised return, the claim for deduction of profit u/s 80IC of the Act has been revised to Rs. 1,567,672,213 of both the units, but deduction is restricted to the extent of Gross Total Income of Rs. 1,247,957,350/-. Under the provision of Income Tax Act, Research and Development expenses are not allocable to 80IC units. These R&D expenses are directly or indirectly not connected with the manufacturing operation carried out at the above units. The Research and Development expenses incurred had no connection with the business of the above 2 units nor any benefit is received by them from the said research. All the Research and Development expenses were incurred at approved R&D Centres situated at Mahpe and Sinnar and not at 80IC Units. The Research and Development expenses incurred at the above approved centres had nothing to do anything with the above 2 units. The Resea....
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....as revised and allocation of Research and Development expenses were withdrawn to the above units." 30. However, the AO was not satisfied. He rejected assessee's contention and Baddi Unit Solan Unit Total Interest as per Revised Return Nil Nil Nil Nil Interest Disallowed 4,91,47,000 1,78,10,704 6,69,57,704 10.04,36,556 Against the above order assessee appealed before the learned CIT(A). 31. The learned CIT(A) noted that the ITAT in assessee's own case in A.Y. 2009-10 directed AO to give the findings on the basis of the decision of the Hon'ble Bombay High Court in the case of Zandu Pharmaceutical Works Ltd. vs. CIT 350 ITR 366. From this he inferred that the ITAT has not upheld the sand of the Revenue. The learned CIT(A) proceeded to refer to the decision of the Hon'ble Madras High Court in the case of CIT vs. Brakes 161 Taxman 47 and the decision of the Hon'ble Bombay High Court in the case Zandu Pharmaceutical Works Ltd. (supra) and he deleted the addition by concluding as under: - "It can be seen that AO in the present case went by assumptions that research carried out at Mahape and Sinnar was....
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....of sales turnover as follows: - Baddi Unit Solan Unit Total Interest Expenses 9,88,78,321 3,58,33,164 13,47,11,485 However, in its revised return of income, the assessee reduced allocation of interest expenses to its Baddi & Solan Units as follows: - Baddi Unit Solan Unit Total Interest as per Revised Return Nil 1,58,58,363 1,58,58,363 During the course of assessment proceedings, the assessee was asked to justify the reduction in allocation of interest expenses to its Baddi & Solan Units. 34. The assessee responded as under: "The assessee has two units which are eligible for 80IC deduction, i.e. Baddi and Solan. i) Baddi Unit (a) This unit is in existence since the year 2006-07 which has huge accumulated profits of the unit and such operational cash flow is being used by HO. As per the Balance Sheet, Baddi unit has accumulated profits of the unit used by HO at Rs.261.83 crores. There is no borrowing whether secured or unsecured at Baddi Unit. (b) No money is borrowed for Baddi unit which is evident from Audited balance sheet of Baddi unit as of 31.03.2010. No loan appears in b....
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....et, Baddi unit has accumulated profits of the unit used by HO at Rs. 261.83 crores. There is no borrowing whether secured to unsecured at Baddi Unit. - No money is borrowed for Baddi unit which is evident from Audited balance sheet of Baddi unit as of 31.03.2010 . No loan appears in balance sheet of Baddi unit. - From the above, it is clear that Baddi unit has neither borrowed funds nor used funds of HO, hence no interest is allocable to Baddi unit. - The assessee company acquired industrial unit situated at Solan as going concern from "M/s. Acme Formulation Private Ltd." vide business transfer agreement dated 23.03.2009 with effect from 01.04.2009. - The assessee has allocated interest expenses of Rs. 1,58,58,363/- to this unit. Allocation was done on the basis of the average interest cost for the year multiplied by the average fund invested on the setup and operation of the Unit (Working attached. Refer allocation ratio) The assessee has properly allocated the interest expense to this unit." Considering the submission the learned CIT(A) held as under: - "Section 80-IC used the expression "derived from" which is quite ....