TaxTMI 
TaxTMI 
2017 (4) TMI 1434
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.... 2076/Ahd/2013 Assessee's Appeal for A.Y. 2007-08 4. The first ground is of general in nature and calls for no adjudication. 5. Ground no. 2 relates to the addition of Rs. 5,21,70,765/- on account of interest on loans given to Sun Pharma Global Inc. 6. During the course of the scrutiny assessment proceedings, when A.O. found that certain International Transactions have to be considered by the TPO, the matter was remitted to the Transfer Pricing Officer who proposed to make following additions in respect of International Transactions relating to loans to associated enterprises: (1) Interest on Loan to AEs at LIBOR plus rate Rs. 5,34,26,484/- (2) Interest on 0% OFCD Rs. 33, 16, 53, 612/- (3) Corporate Guarantee Fees Rs. 39,48,000/- 7. Taking a leaf out of the proposed additions from the order of the TPO, the A.O. made the impugned additions. 8. Assessee assailed the additions before the First Appellate Authority but could not succeed. 9. We find that an identical issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 1589 & 1592/Ahd/2011 for A.Y. 2006-07 in so far they relate to the addition on account of int....
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....the orders of the authorities below. At the very outset, we have to state that the revenue has no power to re-characterize the transaction. The Hon'ble High Court of Delhi in the case of Cotton Naturals India Pvt. Ltd. 276 CTR 445 at para 17 of its order has held that Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should not be entered. It is for the assessee to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured. A similar view was taken by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. 345 ITR 241. 9. On identical set of facts, the Co-ordinate Bench had the occasion to consider similar issue in the case of Cadila Healthcare Ltd. in ITA No. 2430/Ahd/12 with C.O. No. 242/Ahd/12 in 146 ITR 502 wherein the first ground related to the adjustment made on account of notional interest on Optionally Convertible Debenture to Foreign Subsidiary. The Tribunal considered the following facts:- 4. During the course of assessment proceedings, Assessing Office....
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.... was exercised and the loan was converted into equity, no interest accrued or become payable. He further noted that the funds were provided by the Assessee as per RBI guidelines and in the immediately next year, the entire loan given to subsidiary was converted into equity shares of Zydus International Pvt. Ltd. He has further held that since the Assessee has converted the loan into equity in the immediate next year, there was no question of taxing notional interest. He has further held that Assessee had not granted interest free loan but invested in optionally convertible loan with a clause of interest in case, Conversion option was not exercised and further held the Assessee's transaction with subsidiary was at arms length. Before us, the Revenue could not controvert the findings of CIT(A) by bringing any contrary material on record. In view of these facts, we find no reason to interfere with the order of CIT(A). 11. Respectfully following the findings of the Hon'ble High court (supra) and the Co-ordinate Bench (supra), we direct the A.O to delete the impugned additions. Ground no. 2 is accordingly allowed. 10. As no distinguishing decision has been brought by the....
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....evere fluctuations in the foreign exchange and the foreign exchange risk has been substantial. A 100 basis point increase on account of country and foreign exchange risk is found to be normal. However, it is noted that interest determined by the TPO at LIBOR + 2% would take care of such foreign exchange risk also 15. Before us, the ld. counsel for the assessee vehemently stated that at the most chargeable interest should be @ LIBOR. It is the say of the ld. counsel that there is no justification in further adjusting the LIBOR rate with additional basis point. 16. Per contra, the ld. D.R. supported the orders of the revenue authorities. 17. We have carefully considered the facts in issues before us. We find that in the immediately preceding assessment year, the First Appellate Authority himself has taken the interest rate at LIBOR plus 0.25%. We also find that even that plus rate taken by the First Appellate Authority did not find any favour with the Tribunal in ITA No. 1589/Ahd/2011. Taking a leaf out of the findings of the Co-ordinate Bench in A.Y. 2006-07, in our considered opinion, upward adjustment at LIBOR rate should meet the ends of justice. We, accordingly, direct ....
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.... same is redeemed, interest was payable at Libor Plus 290 bps and the interest was to be computed at annual rates and payable at maturity that is 5 years from the date of first disbursement. The rupee value of the amount of loan as on 31.03.2008 was Rs. 108.32 crore. It was also noticed that Assessee has not shown any income from the aforesaid loan. In response, Assessee interalia submitted that Assessee had not opted for conversion of the loan during the year and therefore it was loan for the year and as per the terms of agreement, no interest accrued to the Assessee and therefore no income was considered. The TPO did not find the contention of the Assessee acceptable. He considered the Optionally Fully Convertible loan as debt and considering the average six month Euro Libor rate for the year @ 4.48% to which he added the interest rate of 2.90 basis point as per the agreement and thereafter considered the rate of interest to be @ 7.38% and accordingly computed the interest on Rs. 108.32 Crore for 171 days at 7.38%. The aforesaid adjustment made by the TPO was considered by the Assessing Officer and the addition of Rs. 3,99,74,4267- was made to the income. Aggrieved by the order o....
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....enses/losses on account of giving corporate guarantees, therefore, it has not charged any commission/fee to the subsidiaries. The corporate guarantees were given to promote and nurture subsidiaries and it was in the interest of the appellant as it would secure long term commercial advantages. The Transfer Pricing Officer brushed aside the submissions made by the assessee and held that 2% of corporate guarantee should be charged as fees/commission for giving guarantees. Taking a leaf out of this, the A.O. had made the impugned additions. 23. Before the First Appellate Authority, the assessee strongly objected to the additions made on account of corporate guarantee provided by it. In alternative, it was contended that the addition of 2% of corporate guarantee is excessive and should be substantially reduced. 24. It was brought to the notice of the First Appellate Authority that the assessee is a cash rich company. It does not have any major debts in its balance sheet. In the presence of huge cash surplus and liquid assets, there was no need for the assessee to incur any costs in respect of guarantees given nor was it affecting any borrowing limits of the Assessee. It was furthe....
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....e year under consideration when the amendment is brought by Finance Act of 2012. 28. The ld. counsel for the assessee drew our attention to the decision of the Co-ordinate Bench in the case of Micro Inks Ltd. in ITA No. 2873/Ahd/2010 157 ITD 132. The ld. D.R. vehemently stated that since there are conflicting decisions of the Co-ordinate Benches on this issue, the same must be transferred to a Special Bench for its determination. In support, the ld. D.R. submitted a request for the constitution of a Special Bench to decide this issue. 29. We will first adhere to the formal request made by the ld. D.R. We find that in one of the earlier occasion, a similar request was declined by the Coordinate Bench made in the case of Micro Inks Ltd. (supra). The relevant part of the order of the Co-ordinate Bench reads as under:- 47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that "for the removal of doubts", as we have noted earlier in this decision, "clarified" that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarifi....
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....detail." 48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "bearing on profits, income, losses or assets", it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned AEP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnaswamy SPD v. Union ....
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....lder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect. Therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. decision (supra] had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post-amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel Ltd. decision (supra] on the peculiar facts of that case. The decisions like Everest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific Corp Ltd. case (supra), as indee....
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....rantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assessees, can never be overemphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better. 30. We find that the revenue has preferred an appeal u/s. 260A of the Act before the Hon'ble High Court of Gujarat and the same has been admitted in Tax Appeal No. 567 of 2016. The relevant substantial question of law admitted by the Hon'ble High Court reads as under:- [B] "Whether on the facts and circumstances of....
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.... of the product, but in large measure constitutes expenditure for validation and confirmation of the Research carried out. The A.O did not accept the claim of the assessee holding that these expenses were incurred for registration of drug patents in foreign countries. The A.O accordingly withdrew the weighted deduction and allowed only 100% of the same as revenue expenditure. 13. Assessee carried the matter before the ld. CIT(A) but without any success. While dismissing the grievance of the assessee, the ld. CIT(A) followed the findings of his predecessor given in A.Y. 2002-03 to 2004-05. Before us, the ld. counsel for the assessee stated that the Tribunal in assessee's own case in earlier years has decided this issue in favour of the assessee and against the revenue in ITA No. 1558/Ahd/2006. The ld. D.R. could not bring any distinguishing decision in favour of the revenue. 14. We have given a thoughtful consideration to the order of the Tribunal in earlier years; we find that the Tribunal while deciding the issue in favour of the assessee has followed the decision of the Co-ordinate Bench, Mumbai in the case of USV Ltd. 54 SOT 615. Findings of the Tribunal read a....
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.... "yearly remuneration of 15%/5% [revised afterwards] of the net profits of the partnership firm." It was observed that the assessee had received 5% of net profits of SPI i.e. Rs. 29,79,26,967/- as per the agreement under the head remuneration. 41. However, SPI did not debit this remuneration to its Profit and Loss account because of the provisions of section 40(b) of the Act qua explanation 4 which says that "working partner" means an individual. Though, the assessee was a working partner of SPI but because of the explanation it was not entitled for remuneration as it is not an individual. Therefore, such remuneration paid to the working partner could not have been allowed as deduction u/s. 40(b) of the Act. 42. Taking recourse to section 28(v) of the Act, since the remuneration was not allowable in the hands of the SPI, the assessee had not offered the same for taxation. The A.O. was of the firm belief that the assessee has avoided paying tax on the amount of Rs. 29,79,26,967/-. The A.O. was also of the opinion that the assessee has incurred expenditure on behalf of SPI which it has debited in its books of accounts. Taking recourse to the provisions of section 37 of the Act,....
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....allenged the proposed disallowance u/s. 14A of the Act claiming that it has large network and own funds running into crores of rupees and hence the investment in the partnership firm is out of own funds. It was contended that since no borrowed funds have been utilized, no disallowance u/s. 14A is warranted. The contentions of the assessee were dismissed by the First Appellate Authority who was of the opinion that the object of section 14A is to ensure that so much of the expenditure incurred for earning income that do not constitute total income of the assessee should not be allowed, when income is outside the tax net, expenditure incurred for earning such income also should not be allowed to be set off in the computation of taxable income. The ld. CIT(A) was of the firm belief that the assessee has earned share of profit which is exempt u/s. 10(2A) of the Act as well as remuneration which was taxed as business income u/s. 28(v) of the Act. Therefore, proportionate disallowance of expenditure incurred for earning exempt income has to be made u/s. 14A of the Act. The ld. CIT(A) was convinced that the expenditure incurred by the assessee for earning of share of profit/remuneration fr....
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....of partnership. However, the A.O noticed that the partnership firm has not debited this remuneration paid to the assessee by taking recourse to the provisions of section 40(b) wherein remuneration is allowed to a working partner who is an individual. 89. The A.O further noticed that though the remuneration was not offered for taxation by the assessee but it has debited the expenditure incurred on behalf of the partnership firm in its books of account. The A.O was of the firm belief that these expenditures are not related to the earning of income and accordingly disallowed - (a) selling and distribution expenses 25,68,21,928/- salary and allowance to field staff 24,12,98,724/- totaling to Rs. 49,81,20,652/-. The A.O proceeded by disallowing Rs. 8,49,79,383/- based on the ratio of the total turnover of the assessee and the partnership firm SPI. 90. Aggrieved by this, the assessee carried the matter before the ld. CIT(A). Ld. CIT(A) has considered this grievance at para 26 vide ground no. 25 before him. After considering the facts and the submissions, the ld. CIT(A) was of the opinion that the assessee already had an existing sales and distribution network in the for....
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....to its Profit and Loss account. However, the assessee company using its network has incurred certain expenditure which according to the revenue authorities are not directly related to earning of income. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee and not for the purposes of earning profit. As per the agreement between the assessee company and the partnership firm, the assessee had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Thus, it cannot be said that the expenditure incurred by the assessee are not for the purposes of its business. Since the assessee is holding 95% in the partnership firm it becomes the duty of the assessee to promote the business of the partnership firm, in the capacity of the majority stake holder. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee's business or the business of the partnership firm where the assessee is a majority stake holder. Therefore, in ....
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....s of the assessee were dismissed by the A.O. who was of the firm belief that the receipt in the case on hand is nothing but a revenue receipt. The A.O. accordingly taxed the same as revenue receipt. 56. Assessee carried the matter before the ld. CIT(A) and reiterated what has been stated during the course of the assessment proceedings. 57. After considering the facts and the submissions, the ld. CIT(A) was of the considered opinion that the assessee has entered into forward contracts to safeguard the value of investments made by the assessee in its subsidiary against the adverse forex fluctuation and to that extent the ld. CIT(A) restricted the addition to Rs. 14,33,80,289/-. 58. Insofar as the loans received by way of ECG/FCCB, the ld. CIT(A) was of the opinion that these borrowings were for the purpose of capital expansion of the business since the proceeds can be used for capital purposes only. Therefore, there is no case for any addition on account of forex gain in respect of reinstatement of FCCB and conversion of FCCB into equity shares as well as repayment of ECB since these gains/receipts are held as capital receipt only. The ld. CIT(A) confirmed the addition of Rs....
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....,289/-. Ground no. 9 is allowed. 63. Ground no. 10 relates to the reduction of unrealized export proceeds of Rs. 6,35,631/- from export turnover for purpose of deduction u/s. 10B of the Act. 64. Both sides agreed that an identical issue was considered and decided by the Co-ordinate Bench in assessee's own case in ITA No. 1558/Ahd/2006 qua ground no. 3 of that appeal. On such concession, we have considered the decision of the Co-ordinate Bench (supra). The relevant part reads as under:- Ground no. 3 relates to the reduction of unrealized export proceeds of Rs. 638.82 lacs from export turnover for the purpose of deduction u/s. 80HHC. 6. The ld. Counsel stated that an identical issue has been considered by the Tribunal in assessee's own case for A.Y. 2001-02 wherein the issue has been set aside to the files of the A.O. The ld. counsel prayed for a similar direction should be given for the year under consideration also. The ld. D.R. did not object to this. We find that an identical issue was considered by the Tribunal in assessee's own case for A.Y. 2001-02 at Para 6 on page 12 of ITA Nos. 3289 & 3434/Ahd/2003 and at Para 6.3 the Tribunal had directed the A.O to....
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....ivity. 73. An identical issue was considered by the Co-ordinate Bench in ITA No. 1592/Ahd/2011 qua ground nos. 2 & 3 of that appeal. In ground no. 1 of the present appeal, we have extracted the relevant part of the decision of the Co-ordinate Bench. For the reasons given therein, ground no. 2 is also dismissed. 74. Ground no. 3 relates to the deletion of the disallowance of Rs. 7,91,222/- claimed u/s. 35(2AB) of the Act incurred for lunch, refreshment and brokerage paid for property used by R & D unit employees. 75. This issue is identical to the issues covered by ground nos. 1 & 2 hereinabove. For the reasons given therein, ground no. 3 is dismissed. 76. Ground no. 4 relates to the deletion of the disallowance of depreciation on motor car @ 30% instead of 15% as per provisions of law. 77. The assessee has claimed depreciation on certain motor vehicles owned by it on hire. The assessee has claimed depreciation on such motor vehicles @ 30% amounting to Rs. 34,69,434/- . Since the assessee is not in the business of giving motor vehicles on hire, the A.O. allowed depreciation @ 15% accordingly excess depreciation amounting to Rs. 17,34,717/- was disallowed. 78. Befor....
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....lating book profit u/s. 115JB for deduction u/s. 10B of the Act. 84. During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has considered the amount of Rs. 5,11,63,871/- for determination of book profits u/s. 115JB of the Act. The A.O. was of the opinion that the correct figure should have been 4,45,45,386/-. The assessee's contention was that the amount of income to which provisions of section 10, 10A, 10B apply, if any such amount is credited to the profit and loss account is to be reduced while computing the book profits under Explanation 2 section 115JB (2) of the Act and, therefore, Rs. 5,11,63,871/- ought to have been reduced by the A.O. The contention of the assessee did not find any favour with the A.O. who disallowed the claim of excess deduction of Rs. 66,18,485/- and added back in the working of book profit u/s. 115JB of the Act. 85. The assessee succeeded before the ld. CIT(A) because of which the revenue is before us. We find that this issue is no more res integra because the Hon'ble Supreme Court in the case of Ajanta Pharma Limited 327 ITR 305 has decided this issue in favour of the assessee and against the revenue. The Ho....
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....Industries which is a partnership firm. During the course of the survey operations, it was noticed that the assessee has been selling certain raw materials /products to its sister concern at a lower rate than was sold to third parties and thereby diverting the profits. Assessee was asked to explain its stand. Assessee filed a detailed reply giving details of raw materials/products being sold to its sister concern and to third parties along with rates and quantity sold. On analysis of the reply, the A.O found that there were certain raw materials/products which were being sold to the sister concern at a lower rate than sold to third parties. The A.O proceeded by computing an addition of Rs. 19,49,930/- on account of unreasonably low selling price on sale of raw materials/products sold to its sister concern. 84. Aggrieved by this, assessee carried the matter before the ld. CIT(A) but without any success. 85. Before us, the ld. counsel for the assessee stated that it is not clear under which provision of the act additions have been made. Further the counsel stated that no 80IB deduction has been claimed by it which could justify the action of the A.O. Per contra, the....
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.... 37. At the very outset, the ld. counsel for the assessee drew our attention to the appellate order dated 29.05.2009 passed by the CIT(A)-31, Mumbai for A.Y. 2006- 07 in the case of Sun Pharmaceutical Industries Ltd. It is the say of the ld. counsel that on identical set of facts appeal is pending before the Tribunal Mumbai Benches. 38. We have given a thoughtful consideration to the contentions of the ld. counsel. We accordingly restore this issue to the files of the A.O. The A.O is directed to decide the issue afresh after considering the decision of the Tribunal Mumbai Benches and after affording an opportunity of being heard. Ground no. 11 is treated as allowed for statistical purpose. 96. As the Co-ordinate Bench has restored the issue to the files of the A.O., we direct the A.O. to follow the similar direction in this year also. Ground no. 10 is treated as allowed for statistical purpose. 97. Ground no. 11 relates to the deletion of the disallowance of Rs. 23,68,918/- claimed as revenue expenses. 98. While scrutinizing the return of income, the A.O. found that the assessee has incurred Rs. 224.7 million towards repairing expenses. On scrutinizing the ledg....