TaxTMI 
TaxTMI 
2021 (12) TMI 200
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....ent the grievances in, what he perceives as, more appropriate manner. With the consent of the parties, we take up these revised grounds of appeal. 5. In the first ground of appeal, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, the Learned AO / TPO has erred in and learned DRP has further erred in confirming an upward TP adjustment amounting to INR 10,45,32,855 on account of corporate guarantee by considering the charge of 2.52 percent for the guarantee provided by the Appellant to the banks for the loans availed by Associated Enterprises ('AE'). 6. Briefly stated, the relevant material facts are as follows. The assessee before us is a leading name in pharmaceutical, diagnostics and allied businesses in India, and it has its presence, through a number of associated enterprises, in several countries around the world. During the course of the proceedings before the Transfer Pricing Officer, it was noticed that the assessee has extended corporate guarantees, on behalf of its AEs abroad, and charged a guarantee fees of 1%. These corporate guarantees included guarantees extended to BNP, in respect of ....
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....sessee has taken significant risks by issuance of such guarantees. While TPO agreed that there could be circumstances in which the value of corporate guarantee will be NIL, but that will only be the situation in which no funds are actually raised against such guarantees. That is not the case here, and, therefore, guarantee is to be suitably benchmarked. As regards the shareholder activity service being rendered to the AEs, the TPO rejected the same on the ground that the Zydus Netherlands is the holding company and not the assessee company. He noted that Zydus Netherlands has earned EUR 1.5 million in profits, and not the assessee company, on account of these acquisitions abroad. Learned TPO also noted that the order of the DRP is in appeal and has not thus attained finality. Using the three External CUPs, namely (i) SBI guarantee commission rates at 2.75%, (ii) Bank of India guarantee commission rates at 2.16%, and (iii) difference between coupon rates of A rated bonds and BB rated bonds at 2.66%, the TPO proceeded to take an average of these external comparable rates, which worked out to 2.52%, the TPO proceeded to make an ALP adjustment as follow: Sr. No Name of the AE to ....
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....nt of Rs. 10,45,32,835/-) 7. When the Assessing Officer proposed this ALP adjustment in the draft assessment order, assessee raised objections, inter alia against this adjustment, before the Dispute Resolution Panel, but without any success. The DRP noted that the issue has been decided in favour of the assessee for preceding years but confirmed the action of the Assessing Officer to keep the issue alive. It was also noted that the stand of the DRP has been challenged before the Income Tax Appellate Tribunal and thus the matter is yet to reach finality. While rejecting the cross objections raised by the assessee, the Dispute Resolution Panel observed as follows: 14.2.1 However, we find that the Department has not accepted the decision of the DRP for AY 2010- 11. The Department has raised the following issue before the Hon'ble 1TAT, Ahmedabad. 14.2.2 We may observe here that the DRP is a continuation of assessment proceeding as it is only the draft assessment order which is being challenged before it. The final assessment order is yet to be passed by the assessing officer. Hence, the DRP is not an appellate authority and the proceeding before the DRP is cont....
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....d March 2017, it has been upheld by the coordinate bench. The copies of these orders were placed before us as. As to what is a fair arm's length price for issuance of corporate guarantee for the group entities of the assessee group is a factual aspect, and once in the earlier years a coordinate bench has approved the stand that 1% is a reasonable guarantee commission, there is no reason for us to deviate from the said stand as parties to the guarantees are broadly the same and most of these guarantees are continuing guarantees. We, therefore, see no reasons to disturb the accepted past history of the case and disturb the corporate guarantee commission rate adopted by the assessee. As regards the TPO's observation that the concept of shareholder activity will apply only in respect of Zydus Netherlands as it was the holding company, and not the assessee company, all we can say is that admittedly the assessee company is the parent company for this holding company as well and the end beneficiary, therefore, is the assessee company. The observation made by the Assessing Officer is thus incorrect. In any case, the methodology adopted by the TPO for computation of arm's length price of th....
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.... given several optionally convertible loans to its Irish subsidiary, Zydus International Pvt Ltd. These loans were for US $ 8 million (26th December 2008; conditional interest rate 6m USD LIBOR + 550 bps), US$ 10 million (13th May 2009; conditional interest rate USD LIBOR+ 550 bps), EUR 1.3 million (12th December 2009; conditional interest rate 6m Euro LIBOR+400 bps), EUR 5.5 million (12th December 2009; conditional interest rate 6m Euro LIBOR+400 bps), US $ 3 million (2nd February 2010; conditional interest rate USD LIBOR + 550 bps), US $ 5 million (26th August 2010; conditional interest rate 6m Euro LIBOR + 400 bps) and US $ 3 million (7th February 2011; conditional interest rate 6m Euro LIBOR+275 bps). All these loans were for five year tenures, all these loans were optionally convertible into equity capital at par anytime during the loan tenure, and all these loans were to enable the Irish subsidiary to make investments in step down subsidiaries out of funds so provided to the subsidiary. In case of repayments, however, the assessee was to get interest at the rates agreed to, as mentioned above, from the subsidiary. In none of the cases option for conversion was not exercised, ....
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.... on cumulative basis in the event of option of conversion not being exercised, all that is required to be done is to ascertain an arm's length interest on the said transaction. As regards the claim of the assessee that no arm's length price can be attributed when no income has arisen, it was observed that Section 92 is not a substitute to Section 5; it is not a charging section, but it gives the TPO an authority to go behind a related party transaction which has an impact on the profits of the assessee ad if there has been a mispricing resulting into improper allocation of profits to the two parties, he has authority to change such an allocations". The TPO then observed that "on this case, ZIPL (i.e. the AE) has benefitted unduly from this transaction as the balance sheet and profit and loss account of ZIPL indicates" and that 'the company has allowed significant fund to flow to the subsidiary under the garb of a convertible loan. The TPO then referred to the decision of US Supreme Court in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09, 13677-09; order dated 20th September 2012) which is said to have come out with certain tests on whether t....
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.... and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments. The ECB policy is applicable to FCCBs. The issue of FCCBs is also required to adhere to the provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from time to time." 7.4.7 The above categorization clearly indicates that only fully and mandatorily convertible preference shares are to be treated at par with equity and would follow the route prescribed for 'Investments". Other categories of debentures/loans are in the nature of debts and are to be as per guidelines applicable for "External Commercial Borrowings". This categorisation gives us a tool to analyse the character of an instrument, whether inbound or outbound. In light of such clear guidelines, the averment made by the assessee that the convertible loans have passed muster of RBI are of no consequence. The assessee has produced no document to show that the loan has been accepted by RBI to be in the nature of equity. Worse still, it clearly fails the test of equ....
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.... Source of payments A taxpayer willing to condition the repayment of an advance on the financial well-being of the receiving company acts as a capital investor and not as a creditor expecting to be repaid regardless of the company's success or failure. We understand that if the repayment is possible only out of corporate earnings, the transaction has the appearance of equity contribution but if the repayment is not dependent upon earning, the transaction reflects a loan. We have the option to either convert the loan into equity at par or opt for repayment. In case of repayment which can be exercised any time during the tenure of the loan not exceeding five years, we would get interest retrospectively. Thus it can be that we have considered the financial well being of the AE. Thus the nature of instrument is in the nature of Equity as per this test. No relation with well being of the AE before conversion. Till time of conversion, in nature of loan. 4 Right to enforce payments A definite obligation to repay an advance, including interest thereon, suggests a loan obligation. We understand that if a instrument does not provide its holder with any means to ensure paym....
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....ining their character. The intent of the parties is clear from the fact that with respect to the convertible loan of USD 27 Mn it has been converted into equity in the year under consideration. As per this test, the instrument takes the character of Equity. None of the convertible loans during the present period have been converted. Hence, the intention will manifest in future. However, for the present, non-conversion reveals a loan character for the amounts. With respect of the loan of USD 8 Mn the intention will manifest only in subsequent years. Hence this factor is Neutral. 8 Identity of interest between creditor and stockholder If advances are made by stockholders in proportion to their respective stock ownership, an equity capital contribution is indicated. We understand that the test applied when there is a consortium of lenders Not Applicable to the facts of our case. Not made in proportion to stockholder. Character of loan. 9 " thinness" of capital structure in relation to debt The purpose of examining the debt to equity ratio in characterizing an advance is to determine whether a corporation is so thinly capitalized that repayment would be un....
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....g was in furtherance of the inorganic growth strategic of Cadila the risk was comparatively higher and hence as per this test, the instrument takes the character of Equity Equity. As explained above, on 11 counts, the loan comes out as a loan and only on two counts, it can be adopted as equity. The dominant nature of the convertible loan is loan and not equity. 14. On this basis, the TPO concluded that the transaction was of debt rather than that of equity. He thus proceeded to make an ALP adjustment as computed below: 7.5 In light of the above discussion, the amounts advances to ZIPL are treated as loan and are benchmarked as proposed in the show cause notice. However, the 6 month LIBOR come to 0.58 one year LIBOR come to 0.90 to 6 month E LIBOR come to 1.636. Accordingly, the correct interest is computed as below. AE Loans Loan in INR (cr) Duration Rate of Int. (Conditional) Rate of Interest Duration Arm's Length Interest Conv loan to ZIPL USD 8 m 39.98 26/12/2008 6m US libor +550 6.08% 365 24307840 Conv loan to ZIPL USD 10 m 49.72 13/05/2009 US libor+ 550 6.40% 365 31820800 Conv lo....
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.... there before the honourable tribunal, the decision of the honourable tribunal in assessment year 2008-09 cannot be applied to this year. 15.3.3 We find from the facts of the case that the assessee is arguing that because he is an option to convert the loan into equity, he has not charged and interest from the AE. In other words as per the assessee the option given to the assessee is worth the interest income forgone. The assessee has however not furnish any facts to establish that the so-called option, at arm's length, would be worth the interest income forgone. 15.3.4 The next issue to be seen is it the assessee decides to exercise the option after 5 years and decides to become a shareholder, whether the option will be effective from the date of advance. We think no. The assessee will not be issued shares retrospectively. The loan will remain a loan only unless and until it is converted into equity. This again brings us to the point that the interest, which would be payable on such a loan in an uncontrolled scenario, has been forgone to have the option to convert the loan into equity at a future date. The assessee then must establish that arm's-length pr....
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....nences" (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason that the transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of 'quasi capital'. 11. As for the connotations of 'quasi capital', in the context of determination of arm's length price under transfer pricing regulations, we may refer to the observations made by a coordinate bench of this Tribunal- speaking through one of us (i.e. the Accountant Member), in the case of Soma Textile & Industries Ltd. v. Asst.CIT [2015] 154 ITD 745/59 taxmann.com 152 (Ahd.), as follows: '5.. . . . . . . The question, however, arises as to what are the connotations of expression 'quasi capital' in the context of the transfer pricing legislation. 6. Hon'ble D....
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.... materially similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(1)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression 'quasi capital', in o....
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.... compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. 13. Let us, at this stage, take note of the US Tax Court decision, relied upon by the TPO, in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09, 13677-09; order dated 20th September 2012). It has been referred to by the TPO as decision of the US Supreme Court but in fact it is a decision of the US Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for considerat....
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....ation cannot have any role to play in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. 15. As regards the stand of the authorities below that Irish subsidiary has shown huge profits and high operational profits @ 93%, and this fact shows that the assessee should have charged interest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm's length consideration of raising the funds, unless profit sharing is implicit in the consideration for raising the funds itselfwhich is neither the normal commercial practice nor the case before us. The cost of raising funds is determined much before the returns from funds so raised is even known. To hold that cost of funds raised should have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits mad....
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....rred in and learned DRP has further erred in confirming an upward TP adjustment amounting to INR 37,34,21,990 on account of reimbursement of expenses. 21. So far as this grievance of the assessee is concerned, we must, at the outset, note that the assessee has pressed this ground only to the extent of Rs. 21,43,79,368 in respect of reimbursement of expenses to US based AEs. We will, therefore, keep our discussions confined to this ALP adjustment only. During the course of proceedings before the Transfer Pricing Officer, it was noticed that the assessee has reimbursed its US based AE, i.e. Zydus Pharmaceuticals (USA) Inc to the extent of Rs. 2,94,18,039 in respect of reimbursement of product liability insurance charges, to the extent of Rs. 18,05,58,681 in respect of reimbursement of legal expenses, to the extent of Rs. 40,12,577 in respect of reimbursement of stability charges and to the extent of Rs. 10,11,443 in resect of reimbursement of analytical and testing charges. When he probed the matter further, he found that so far as the product liability insurance charges were concerned, the supporting evidence included debit notes from Marsh USA Inc, and the policyholder indicated....
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....s pertained to some packaging material and that, in any event, "there is no material on record to prove that the items were shipped to the assessee or used for the purpose of activities related to business of the assessee (and) therefore the ALP of this transaction is treated as NIL". The arm's length price of all these reimbursements of expenses was thus taken at NIL. As regards reimbursement to the extent of Rs. 10,11,443 in respect to analytical and testing charges, it was noted that the reimbursement of US$ 31,632.48 was for destroying the Meloxicam batch and US $ 19,871.18 was for international lab charges. As for the first component, the TPO held the same to be at NIL arm's length price without any specific discussions, and, as for the second component, the TPO allowed the same as an arm's length expense. The ALP adjustment was thus restricted to Rs. 3,90,071. We may also add that, as pointed out by the assessee, similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015-16, but no such arm's length price adjustments were made in any of these years. Aggrieved, assessee raised the o....
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....ade in any of these years. Undoubtedly, there is no res judicata in tax proceedings but principles of consistency definitely have a crucial rule to play- particularly in respect of a factual matter which permeates through the different assessment years. Similar transactions have been accepted to have been entered into on arm's length basis in the preceding, as also succeeding, years. There is thus no justification for deviation in this particular assessment year. In any case, so far product liability insurance is concerned, the assessee has justified bearing the same on the ground that US AE is an LRD (limited risk distributor) with a targeted operated margin, and, therefore, under this business model, these costs are to be borne by the assessee company. We see no infirmity in this approach and this explanation. When AE is only doing distribution, it is entirely a commercial call of the assessee as to which type of product related expenses are to be borne by the assessee. These expenses thus clearly pertain to the assessee as the US AE is admittedly, and beyond dispute, only an LRD. The same is the position with respect to the legal expenses. It has been specifically explained by t....
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....this regard 26. So far as this ground of appeal is concerned, the relevant material facts are as follows. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has made a number of foreign remittances to the nonresidents, without deducting any tax at source. The matter was referred to the Income Tax Officer (International Taxation) having jurisdiction over the assessee, and based on his report, the Assessing Officer concluded that the following overseas payments have been made without complying with the mandatory requirements of Section 195: Particulars Date of Remittance Rs. Rs. I. Clinical Trails, Bio-availability, Study and testing services Algoritheme Pharma Inc., USA 12/05/2011 18,691,080 20/06/2011 9,924,684 21/07/2011 9,904,692 23/08/2011 4,199,024 25/11/2011 2,601,367 Sub total (a) 45,320,847 Pharmanet Canada Inc., (Earlier Anapharm Inc., Canada) 25/11/2011 1,154,412 15/03/2012 1,507,489 ....
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....Reimbursement of market survey/development expenses Swiss Biogenics Ltd., Sri Lanka 22/04/2011 1,400,044 08/07/2011 1,844,477 22/09/2011 1,007,924 05/03/2012 1,636,845 26/03/2012 1,739,091 Total V 7,628,381 Grand Total (I + II+ III + IV + V) 179,143,844 27. The explanation of the assessee was that the payments were made by the assessee for clinical trials, biodiversity study and testing charges and that these payments to US, UK and Canada based entities were not taxable as the payments did not constitute fees for technical services and the payments could not be taxed as business profits as there was no PE of the recipients in India. It was also pointed out that the DRP itself has deleted similar disallowances for the assessment year 2010-11 in assessee's own case. As regards the Thai entity, it was pointed out by the assessee that there was no FTS clause in the India Thailand Double taxation Avoidance Agreement and since the Thai company admittedly did not have a PE in India, t....
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....ed the material on record, and duly considered facts of the case in the light of the applicable legal position. 29. We must, at the outset, express our anguish at the evasive approach adopted by the DRP. They have simply declined to examine the matter on merits and preferred to let the Income-tax Officer in international tax wing decide what the DRP ought to have decided on its own. Simply because an ITO in the international tax wing decides that tax ought to have been deducted at source from certain payments to non-residents, it does not mean that the DRP must mechanically uphold the related disallowance under section 40(a)(i). What was before the DRP was the question as to disallowance under section 40(a)(i) has been correctly made or not, and essentially, therefore, the DRP was required to decide as to whether income embedded in these payments was taxable in India or not. This process of judicial scrutiny cannot be delegated to a lower functionary, but when DRP holds that, to the extent such a disallowance is supported by the stand that the ITO (International Taxation) takes, the disallowance is upheld, the DRP, in effect, decides the matter on the basis of scrutiny by a lowe....
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....ndia and Canada as the 'make available' exception applies in this case. 3 Cetero Research (USA) 56,15,817 Fees for Clinical Trials/ Clinical Testing Remittance is made in respect of carrying out of clinical trials & testing. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the 'make available' exception applies in this case. 4 Hilltop Research (USA) 2,14,51,689 Fees for Clinical Trials/ Clinical Testing Remittance is made in respect of carrying out of clinical trials & testing. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the 'make available' exception applies in this case. 5 Impopharma Inc. (Canada) 23,36,320 Fees for Clinical Trials/ Clinical Testing Remittance is made in respect of carrying out of clinical trials & testing. It does not involve any ....
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....ct Services (USA) 33,85,992 Online access to Publication/Database Remittance is made to the non-resident party in respect of online access to publication/database. The same is not in the nature of Royalty, either under Act or a per Article 12 of the DTAA with USA. The payment would be covered under Article 7 (Business Profits). Since the nonresident does not have a PE in India, the question of taxability on such payment does not arise. 11 Elsevier B.V (Netherlands) 1,78,99,640 Subscription for access to Online Journal Remittance is made to the non-resident party in respect of journal subscription.The same is not in the nature of Royalty, either under Act or a per the DTAA with Netherlands. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 12 Thomson Reuters Inc. (USA) 31,75,380 Subscription for Journal Remittance is made to the non-resident party in respect of journal subscription.The same is not in the nature of Royalty, either under Act or a per Article 12 of the DTAA with USA. The payment would be covered under Artic....
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.... 30. The payments at item no. 1 to 7 deal with payments for clinical trials and testing to USA and Canada based entities. While dealing with the same issue for the assessment year 2010-11 in assessee's own case, a coordinate bench has, vide order dated 3rd January 2017, has decided this issue, in favour of the assessee, and held as follows: 2. In the first ground of appeal, the assessee has raised the following grievance: The Id. CIT(A) has erred in law and on facts in holding that technical knowledge, experience, skill, know how as envisaged in Article 12(13) of respective Indo-US, Indo Canada and Indo UK DTAAs were not made available to the assessee company by the Non-Residents, viz. Algorithme Pharma Inc., USA, Anapharm Inc., Bio Reliance, UK, Gateway Medical Research Inc., MDS Pharma Services, USA, AAI Pharma Inc., USA, inspite of substantial evidences to the contrary. 3. So far as this grievance of the Assessing Officer is concerned, the relevant material facts are like this. During the course of proceedings before the Assessing Officer, it was noticed that the assessee has made following payments to the non residents entities based in USA, ....
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....ailable to the assessee, the make available clause would be satisfied and the nature of service would be liable to be treated as fee for included services". It was in this backdrop that the Assessing Officer proceeded to hold that the assessee had obligation to deduct tax at source from these payments, as these amounts were taxable in India in the hands of non-residents, under section 195 of the Act. Accordingly, tax withholding demand under section 201 r.w.s 195 was raised on the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) who held that none of these services satisfied the 'make available' clause under the tax treaties, and, accordingly, deleted the impugned demand. While doing so, learned CIT(A) reasoned as follows: "7. I have carefully considered the facts of this case, the reasoning as contained in the order of the AO and the factual and legal submissions of the appellant. In the present case the key issue to be decided under appeal is whether the payments made to the non-residents attract liability for withholding tax in India under the provisions of Sec. 195 of the Income-tax Act. 8. With reference to the payments made by the....
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....view of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need to deduct tax at source. Similar issue was analysed and considered by the AAR in the case of Anapharm Inc. (supra), which is one of the recipients in the assessee's case also." 10. The appellant has also placed reliance on a recent decision of the ITAT Ahmedabad Bench in the case of AO International Taxation II vs. B.A. Research India Pvt. Ltd. ITA No. 3106/Ahd/2011, decided on 30-11-2015, wherein in respect of bio-analytical services and clinical trials payments, as in the case of the appellant, the jurisdictional ITAT has decided this issue in favour of the assessee, by holding as under: "From the above, it is evident that the Id.CIT(A) have given a finding on fact that the service which is technical in nature can be said to be "fees for included services" only when it has "made available" technical knowledge or skills to the recipient of services, i.e. recipient of services can apply the same on his own. We are in full agreement of the above view....
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.... a service, it must be assumed that there is a transfer of technology relating to the area of communication through satellite. Thus the payment does not fall within art. 12(4) (b) as 'fees for included services'." The appellant has contended that the Memorandum is merely providing a suggestive list of examples of the areas in which, depending on the actual facts, it is possible for the parties to agree to transfer technology and that on the clear facts of its case the same is not applicable. I find merit in the appellant's argument and the reliance place on the aforesaid ITAT decision, which has effectively dealt with this issue. Therefore, the appellant succeeds on the issue of chargeability of tax under the provisions of Sec. 201(1). 13. The AO has further held that the aforementioned payments are also covered under the wider meaning of fees for technical services as per the provisions of Sec. 9(1)(vii) of the I.T. Act. The appellant has contended that the provisions of Sec. 9(1) (vii) are not applicable to the facts of the appellant's case. As per the clear language of the provisions of Section 90(2), where there is a DTAA between India and any ....
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....ed; or (b) make available technical knowledge, experience, skill, knowhow, or processes or consist of the development and transfer of a technical plan or technical design. Indo US tax treaty Article 12- Royalty and fees for included services 4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, knowhow, or processes, or consist of the development and transfer of a technical plan or technical design. 8. We find that the common thread in all these tax treaties is the requirement of 'make available' clause. As learned counsel rightly puts it, its not simply the rendition of a technical service which is sufficient to invoke the taxability of technical services under the make available cla....
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.... fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 10. As we have noted earlier, it is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The tests laid down by Hon'ble Court were clearly not satisfied. There mere fact that there were certain technical inputs or that the assessee immensely benefited from these services, even resulting in value addition to the employees of the assessee, is wholly irrelevant. The expression 'make available' has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meanin....
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.... between India and Mauritius did not provide for taxing any fees paid for technical services. Only for a reason that DTAA is silent on a particular type of income, we cannot say that such income will automatically become business income of the recipient. In our opinion, when DTAA is silent on an aspect, the provisions of the Act has to be considered and applied." However, nothing turns on this decision as the principle laid down therein find favour with the jurisdictional High Court. In the case of Bangkok Glass Industry (P.) Ltd. v. Asstt. CIT [2013] 34 taxmann.com 77/215 Taxman 116 (Mad.) (Mag.), Hon'ble Madras High Court rejected this school of thought and dealing with India Thailand tax treaty, which does not have FTS clause, rejected the claim of the revenue that even though the Thai entity did not have any PE in India and, for that reason this amount could not have taxed in India under article 7, FTS could be taxed as 'other income' under article 22. Their Lordships, in this context, also observed that, "Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22 Of course, the question as to what really constitutes miscel....
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....cle 21. When a particular nature of income is dealt with in the treaty provisions, and its taxability fails because of the conditions precedent to such taxability and as specified in that provision are not satisfied, that is the end of the road for taxability in the source state. It is also important to bear in mind the fact that article 21 states that it applies to the "items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement". Therefore, it is not the fact of non taxability under the operative articles (i.e. article 6 to 21) which leads to taxability under residuary clause in article 22, but the fact of income of that nature being covered by those articles which can lead to taxability under article 22. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immoveable property in a third state, and damages (other than for loss of income covered by specific provisions of the treaty) etc. This is how UN Model Convention Commentary, whi....
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....tablishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for permanent establishment or fixed base, as the case may be, is satisfied, the taxability shifts on net basis as business profits or professional (independent personal services) income. The business receipts or professional receipts thus cannot be seen in isolation with the fees for technical services. Its only the fact of, and mode of, taxation in the absence of PE or fixed base, which gets affected as a result of the fees for technical services. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxe....
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....uced earlier thus must stand deleted. We direct so. 34. Item no. 10, 11 and 12 pertain to the access to online database and journals, as paid to US and Dutch entities. It is an agreed position that the relevant treaty provisions in the India Netherlands tax treaty and Indo US tax treaty are materially similar, and that, dealing with Indo US tax treaty provision in assessee's own case for the assessment year 2010-11 and in assessee's own case- reported as ITO Vs Cadila Healthcare Limited [(2017) 162 ITD 575 (Ahd)], a coordinate bench has held as follows: 16. We find that under article 12(3) of the Indo US tax treaty, 'royalty' has been define as follows "3. The term 'royalties' as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific exp....
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....on account of access to online publications and database etc to Chemical Abstract Services, USA, Elsevier BV, Netherlands and Thompson Reuters Inc USA. The disallowances of Rs. 33,85,992, Rs. 1,78,99,640 and Rs. 31,75,380, appearing at item nos. 10, 11 and 12 are thus deleted. 36. Item no. 13 pertains to payment of Rs. 3,16,81,125 on account of consultancy charges paid to Cambridge Soft Corporation USA. It is not even the case of the revenue, and rightly so, that these consultancy services satisfy 'make available' clause in the Indo US tax treaty and are of such a nature that by providing this consultancy service the US entity has enabled the assessee to provide these services without recourse to the US entity; inherently, the consultancy services cannot be of such a nature. In this view of the matter, these services cannot be taxed under article 12 of the Indo US DTAA, and since, in any case, the US entity does not have any PE in India, or fixed place of business in India, the income in question cannot be taxed as a business profit or independent personal service, for this short reason alone. The disallowance under section 40(a)(i), in respect of this payment therefore, must st....
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....12(3)(b). There is also no dispute that the payment is made for market survey services which are essentially covered by the broad scope of 'managerial, technical or consultancy services'. The existence of PE has no relevance for this purpose. As for taxation under the domestic law, since the payment is for conducting the market survey, which are covered by equally wide scope of managerial, technical or consultancy services under Section 9(i)(vii), it is clearly taxable under the domestic law. On this point, therefore, we reject the plea of the assessee and hold that disallowance under section 40(a)(i) was justified. 40. Ground no. 4 is thus partly allowed in the terms indicated above. 41. In ground no. 5, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 9,84,01,831/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenditure. 42. To adjudicate on this grievance, only a few material facts nee....
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....Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenditure. 46. To adjudicate on this grievance as well, only a few material facts need to be taken note of. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee was debited Rs. 56,69,871 under the head trademark registration expenses and Rs. 9,83,49,671 as patent registration expenses. The Assessing Officer was of the opinion that these expenses were capital in nature as was held by his predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the appellate authorities, he was equally alive to the fact that these orders have not been accepted by the income tax authorities and the matter in thus in appeal before the higher authorities. It was in this backdrop that he treated the aggregate amount of Rs. 10,40,19,542 as capital expenditure, but allowed depreciation of Rs. 1,79,92,917 thereon, and disallowed net amount of Rs. 8,60,25,625. The assessee did raise objection against this treatment but without any success. The assessee is n....
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....d in favour of the assessee by the Tribunal and Hon'ble jurisdictional High Court has not admitted appeal against the same, he was equally alive to the fact that the stand so taken by the Hon'ble jurisdictional High Court has been reversed by Hon'ble Supreme Court inasmuch as Hon'ble jurisdictional High Court has been directed to adjudicate on the matter on merits. It was in this backdrop that he proposed to disallow Rs. 39,39,31,000 on account of R&D expenses. The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us. 52. Having heard the rival submissions and having perused the material on record, we are of the considered view that the assessee does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee's own case and the additions have been made, so to say, keep the issue alive in the hope that Hon'ble jurisdictional High Court, in this round of proceedings, may decide the issue in favour of the revenue. That does not, however, dilute the binding nature of judicial precedents, as on now, by t....
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....siness and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the DRP, the mere fact that the car was not legally owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the depreciation on car cannot be declined. Aggrieved, assessee is in appeal before us. 132. Having heard the rival contentions and having perused the material on record, we are not inclined to disturb very well reasoned findings of the DRP and the conclusions arrived at by the DRP. Once it is not in dispute that the vehicle was owned, in substance, by the assessee and the vehicle was used for the purposes of its business, there cannot be any legally sustainable reasons for declining the depreciation. ........... 56. We see no reasons to take any other view of the matter than the view so taken by us, in assessee's own case, for the preceding year. We, therefore, uphold the plea of the assessee and direct the Assessing Officer....
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.... pointed out that genuineness of services rendered by the assessee company, as an active partner, has not even been called into question. It was also submitted that once an income, remuneration as partner, is specifically covered under any provision, such as 28(v) in this case, it can not be open to the taxing authorities to invoke any general provision, such as for taxing the agency income, in respect of the same. The Assessing Officer was, however, far from impressed. He referred to, and relied upon, stand of the revenue authorities, as reflected in the assessment order for 2011-12, on this point. He also observed that, in terms of Explanation 4 to Section 40(b), a working partner has been defined as an individual who is actively engaged in conducting the affairs of the business or profession on which he is a partner. He thus concluded that the assessee not being an individual, the assessee cannot be a working partner, and, accordingly, the receipt of Rs. 142 crores cannot be treated as covered by section 28(v). As for the assessee's objection against this path proposed to be taken by the Assessing Officer, learned DRP rejected these objections and approved the stand of the Asses....
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....ppointing stockist for distribution of the firm's products f. Guiding and helping intro comments of inputs such as raw materials, packing materials, consumables, plant and machinery equipments for the firm: g. Providing legal technical and managerial assistance for the smooth and efficient conduct of the business of the firm. (5) in consideration of discharging the functions as mentioned herein before, the party of the 1st part shall be entitled to receive such reasonable remuneration as may be mutually agreed-upon from time to time, keeping in view the current business of the firm and the scope and extent of the actual services rendered by the party of the 1st part. 12.3.3 We find that the similar issue was cropped up in the earlier assessment year a wide 2011-12 and the assessing officer in para-11.7 of the order has recorded that "11.7........ After the education of the partnership deed, the assessee company entered into and who you on 15/03/2008. According to the conditions of MOU, the assessee company market the products and provides all business or silly marketing services like consignment, says agent and after sales s....
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....onsideration the facts narrated by the assessing officer as discussed above, we find that the stand taken by the assessee is inconsistent. Whereas in the addendum to partnership agreement dated 1 March 2007 executed on 1st April 2007, the assessee is described as an active partner, the firm while computing its income added back the expenditure of Rs. 170 crore being remuneration paid to the assessee on the ground that the assessee company 1s not a working Partner. Which clearly shows that the firm is aware that the assessee cannot be an active partner in the firm. As per the objects incidental or as lead to attainment of main objects forming part of memorandum of Association of Cadila health care Ltd, as described in clause 5, "the assessee can enter into partnership or into any arrangements tor sharing profits or losses Hence the assessee is also aware that the assessee cannot be a working partner in the firm. 12.3.6 We find that the activities as described in Para 4 of addendum to partnership agreement dated 1 March 2007 executed on 1st April 2007, cannot be considered as the activities being carried out by the assessee in the capacity of a partner. The assessee is using....
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.... by the assessee is rejected. 60. The Assessing Officer thus proceeded with the addition so proposed. The assessee is aggrieved by the addition of Rs. 142 crores so made by the Assessing Officer, and is in appeal before us. 61. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 62. Learned representatives have agreed that the issue is now covered in favour of the assessee, by a coordinate bench decision in the case of DCIT Vs Sun Pharmaceuticals Industries Ltd and vice versa (ITA No 922 and 1234/Ahd/17; order dated 29th March 2019), wherein the coordinate bench, dealing with a materially identical issue, has held as follows: 167.1 The assessee in the year under consideration has received remuneration from the partnership firm namely SPI amounting to Rs. 18,31,49,206/- and from SPS amounting to Rs. 1,82,91,92,838/-which has been reduced in computing the taxable profit under the normal provision of the Act. The assessee claimed that the remuneration paid to it by the firm was not allowed as a deduction in the hands of the partnership as mentioned earlier. 1....
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....factual and legal position in this regard, in A.Y. 2009-10, I also held that the appellant company had received a sum of Rs. 57,49,50,297/- from SPI as consideration for permitting use of all present and future trademark/brands, in the entire world/ for the period of 5 years and for providing other managerial services. Thus, the so called "remuneration" as claimed by the appellant does not represent the remuneration at all but fee for above mentioned services and accordingly income was enhanced by Rs. 57,49,50,297/-. The business arrangements of appellant with SPS firm are identical to SPI. 21.2. Since the facts are identical in this year also, I respectfully following the order of CIT(A)-IV, Ahmedabad in A.Y. 2008-9 and my own order in A.Y.2009-10, hold that Assessing Officer is justified in treating the remuneration of Rs. 201,23,42,044/- as consideration received for use of trademark/brands and accordingly assessing the same under normal provisions of the Act. Thus Ground No. 18 is dismissed. 170. Being aggrieved by the order of the Ld.CIT (A) assessee is in appeal before us: 171. The Ld. AR before us submitted that in the identical facts and circumsta....
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....llate Authority in the year under consideration is nothing but based upon assumptions and presumptions. No addition can be sustained which are based upon assumptions, surmises or conjectures. We, therefore, set aside the findings of the ld. CIT(A) and direct the A.O. to delete the amount of Rs. 40.12 crores re-characterized by the First Appellate Authority. Ground no. 13 is allowed. 73.As no distinguishing fact emerge from the orders of the authorities below, respectfully following the findings of the Tribunal (supra), we direct the A.O. to delete the addition of Rs. 57,49,50,297/-. Ground no. 15 is allowed." 173.1 As the facts in the case on hand are identical to the facts of the case as discussed above, therefore respectfully following the same we set aside the order of ld. CIT-A. Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. 173.2 Moreover, we are bound to follow the order of this Tribunal in the own case of the assessee in the earlier year as the facts are identical in the impugned issue before us. Therefore respectfully following the same we delete the addition made the AO. ....
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....tions have been made, so to say, keep the issue alive. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own cases. In this view of the matter, and respectfully following the coordinate benches, we uphold the plea of the assessee, and direct the Assessing Officer to delete the aforesaid adjustment of Rs. 14,21,53,793. The assessee gets the relief accordingly. 68. Ground no. 11 is thus allowed. No other ground was pressed before us. 69. In the result, appeal of the assessee for the assessment year 2012-13 is partly allowed in the terms indicated above. Assessment year 2013-14 70. We will now take up the ITA No 213/Ahd/18, i.e. the appeal filed by the assessee for the assessment year 2013- 14. 71. By way of this appeal, the assessee appellant has challenged correctness of the order dated 30th November 2017, in the matter of assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2013-14. 72. In ground no. 1, the assessee has raised the following grievance: 1. That the learned Assessing Officer erred in law and on fact....
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....oceeded on the basis that the guarantee commission charges by the State Bank of India and Bank of India are static rates which hold good in all circumstances, but then, in reality, the guarantee commission rates vary on a large number of factors and vary from client to client. The adoption of difference between coupon rate of A rated bonds and BB rated bonds is even more inappropriate and it proceeds on the assumption, an unrealistic assumption at that, pre issuance of corporate guarantee by the assessee for its AE, its credit equivalence is of BB rated bond, which gets converted into A rated bond upon issuance of assessee's corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm's length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval. There was thus, in any event, no sound basis for disturbing the arm's length computation of these corporate guarantees, issued by the ass....
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....o accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplictor on amount advanced but opportunity to own capital on certain favourable terms. Contrast this reward of owning the capital in the borrower entity with interest simplictor, which is typically defined as "the reward of parting with liquidity for a specified period" (Prof Keynes) or as "a payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist's abstinences" (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason that the transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of 'quasi capital'. 11. As for the connotati....
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....les" let us take briefly deal with the connotations of 'quasi capital', and its relevance, under the transfer pricing regulations. 7. The relevance of 'quasi capital', so far as ALP determination under the transfer pricing regulation is concerned, is from the point of view of comparability of a borrowing transaction between the associated enterprises. 8. It is only elementary that when it comes to comparing the borrowing transaction between the associated enterprises, under the Comparable Uncontrolled Price (i.e. CUP) method, what is to be compared is a materially similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(1)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, whic....
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.... more realistically, hypothetically available, to an independent enterprise. On a conceptual note, the entire purpose of the exercise of determination of arm's length price is to neutralize the impact of intra AE relationship in a transaction, the right comparable for such a transaction of quasi capital is a similar transaction of lending money on the same terms i.e. with an option to convert the loan into capital on materially similar terms. However, what the authorities below have held, and wrongly held for that reason, is that a quasi capital transaction like one before us can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable ba....
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.... required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm's length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm's length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such, the impact of intra AE association cannot have any role to play in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. 15. As regards the stand of the authorities below that Irish subsidiary has shown huge profits and high operational profits @ 93%, and this fact shows that the assessee should have charged interest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm&#....
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....acts and circumstances are the same, and many of these loans are merely extensions of the earlier loans. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench in assessee's own case. Respectfully following the same, we uphold the plea of the assessee on this issue as well, and delete the impugned ALP adjustment of Rs. 9,97,52,304 as well. 77. We see no reasons to take any other view of the matter than the view so taken by us in the immediately preceding assessment year. Respectfully following the same, we uphold the plea of the assessee, and direct the Assessing Officer to delete impugned ALP adjustment of Rs. 17,63,42,711 respect of the notional interest imputation in respect of optionally convertible loans to the AE. The assessee gets the relief accordingly. 78. Ground no. 1 (b) is thus allowed. 79. Ground no. 1(c) is not pressed and is thus dismissed for want of prosecution. 80. Ground no. 1 is thus partly allowed in the terms indicated above. 81. In ground no. 2 and 3, the assessee has raised the following grievances: 2. That the learned Assessing Officer erred in law and on facts in making a disallowance o....
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....at the learned Assessing Officer erred in law and on facts in making an addition of Rs. 21,07,52,058/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses. 85. Learned representative fairly agree that as an identical issue has come up before us in the appeal for the assessment year 2012-13, whatever we decide in the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well. As observed earlier in this consolidated, we have decided this issue in favour of the assessee and observed as follows: 42. To adjudicate on this grievance, only a few material facts need to be taken note of. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee was debited Rs. 7,34,49,394 under the head product registration expenses and Rs. 4,49,20,897 as product support services. The Assessing Officer was of the opinion that these expenses were capital in nature as was held by his predecessors all along. While he was alive to the fa....
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....rred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses. 89. Learned representative fairly agree that as an identical issue has come up before us in the appeal for the assessment year 2012-13, whatever we decide in the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well. As observed earlier in this consolidated, we have decided this issue in favour of the assessee and observed as follows: 46. To adjudicate on this grievance as well, only a few material facts need to be taken note of. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee was debited Rs. 56,69,871 under the head trademark registration expenses and Rs. 9,83,49,671 as patent registration expenses. The Assessing Officer was of the opinion that these expenses were capital in nature as was held by his predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the appellate authorities, he was equally alive to the fact that these orders have not been accepted by the income tax authorities a....
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....course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed revenue expenses on account of research and development to the tune of Rs. 37,875.20 lakhs, and claimed 200% deduction in respect of the same as per the provisions of Section 35(2AB) at Rs. 75,750.41 lakhs. It was also noted that as per the certificate issued by the DSIR, in form 3CL, revenue expenditure incurred in the inhouse R&R facility was shown at Rs. 32,280.28 lakhs and expenses relating to clinical trials outside of the approved R&D facility is shown at Rs. 6,700.10 lakhs. The information given by the assessee, in this regard, was as tabulated below: Particulars Amount (Rs. In Lakh) Revenue expenditure claimed in the Return 37875.20 Total expenditure (including Capital exp.) 32280.28 approved by the DSIR. Less: Capital exp. (approved by DSIR) 3369. 56 Balance revenue expenditure approved by DSIR 28910.72 Excess of approved over claimed 8964.48 Less: Clinical trial expenses 6700.1 Others non-eligible expenses as per DSIR 2264.38 94. When the Assessing Off....
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....hereinabove, it should be granted recognition for the two new additional facilities with effect from 01.04.2012. On the basis of the same the applicant also claimed deduction u/s. 35(2AB) for the expenditure incurred in respect of these two new units being Rs. 2264.38 Lakhs. However, the said request was not entertained until the time of the assessment proceedings which came to be finalised in December 2015 and therefore, the learned A.0. has disallowed the aforesaid amount bas been non-eligible expenses as per DSIR 4.7 In the above scenario the applicant respectfully prays that the Hon'ble DRP may be pleased to direct the A.O. that if the DSIR accepts the plea of the applicant granting approval with effect from 01.04.2012 or the date of application u/s. 35 (2AB) in June/ July 2012, the disallowance may be suitably deleted or modified." Submissions of the Assessing Officer before the DRP: 4.9 In the above regard the applicant wishes to rely the direct ratio of the very recent decision of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd v Union of India 84 tasxmann.com 45 pronounce on 04.08.2017 wherein the Hon'ble High Court rel....
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....assessee to the DSIR to grant approval in respect of these units from 01.04.2012, no such approval have been received till the completion of the assessment proceedings. The AR's of the assessee could not produce such revised approval from the DSIR before the DRP as well. As such the situation even as on date is that the approval in respect of the said two units from DSIR has to be treated as w.e.f. 01.04.2013. 9.3.2 A perusal of the provision of section 35(2AB) makes it very evident that where a company engaged in the eligible business incurs any expenditure on scientific research on in house research and development facility approved by the prescribed authority, then there shall be allowed a deduction of a sum equal to one and one-halt times of the expenditure so incurred. The prescribed authority for this purpose is DSIR. It is therefore, evident that the facility in respect of which the expenditure is to be allowed under these sections has to be allowed by the prescribed authority which is DSIR. In this case, since the facility of the assessee, which is the said two units, were approved from 01.04.2015, the deduction was not available to the assessee before the said....
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.... Court in case of Maruti Suzuki India Ltd. v. Union of India [2017] 397 ITR 728/250 Taxman 113/84 taxmann.com 45 (Delhi). Revenue however contends that both these judgments are distinguishable on facts. It was canvassed that in case of Claris Lifesciences Ltd. (supra), the expenditure, application and approval, all three occurred in the same year which is not the case in the present appeal. With respect to Maruti Suzuki India Ltd. (supra), it was canvassed that point of distinction according to the Revenue is that the application for approval was made in the same year during which the expenditure was incurred, may be order of approval was passed in the later year. 9. Section 35 of the Act pertains to expenditure on scientific research. Subsection (2AB) thereof grants weighted deduction to a company engaged in the business of bio-technology or manufacture or production of any article or thing, except those specified in the Eleventh Schedule, where it incurs any expenditure on scientific research (excluding the expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority. At the relevant time....
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....far as it relates to land and building is liable to be allowed to be claimed as deduction (twice the amount of expenditure). A perusal of the scheme of the Act especially Sections 35(2AB), 35A and 35AB reveals in no uncertain terms, that the purpose behind these provisions is to provide impetus for research, development of new technologies, obtaining patent rights, copyrights and know-how." 12. In view of above-referred two decisions and by applying the same to the facts on hand, we have no hesitation in allowing the assessee's claim for deduction under section 35(2AB) of the Act. Shorn of any controversy, documents on record would suggest that at any rate, the assessee had applied for approval of research and development facility to the prescribed authority on 22.12.2006 and such approval was granted on 22.10.2008. The Assessing Officer and CIT (Appeals) restricted the assessee's claim for deduction in relation to such expenditure which was incurred prior to 1.4.2008 on the ground that the approval was granted for two years between 1.4.2008 to 31.3.2010. Combined reading of the judgment of this Court in case of Claris Lifesciences Ltd. (supra) and judgment of Delh....
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....ly granted. The disallowance must thus stand deleted. Ordered, accordingly. 100. Ground no. 6 is thus allowed. 101. In ground no. 7, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 67,00,09.438 by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s 35(2AB) in respect of Clinical Trial and Bio-equivalence Study. 102. Learned representative fairly agree that as an identical issue has come up before us in the appeal for the assessment year 2012-13, whatever we decide in the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well. As observed earlier in this consolidated, we have decided this issue in favour of the assessee and observed as follows: 51. The facts relating to this ground of appeal are also somewhat similar, in many respects, to the preceding two grounds of appeal. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee was debited Rs. 39,39,31,000 on account of research and development expenses incurred outside inhous....
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....ng assessment year, and observations made therein will apply mutatis mutandis for this assessment year as well. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs. 67,00,09,438. 104. Ground no 7 is thus allowed. 105. In ground no. 8, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in disallowing depreciation of Rs. 7,77,048/- on the cost of Hummer H2 imported motor car, alleging that the vehicle was owned by the Director and not by the appellant. 106. Learned representatives fairly agree that this issue is also covered, in favour of the assessee, by a coordinate bench decision in assessee's own case for the assessment year 2010-11. In the said decision, the coordinate bench has, inter alia, observed as follows: 130. In ground No. 7, the Assessing Officer has raised the following grievance: The DRP has erred in allowing depreciation of Rs. 12,65,293/- on Hummer Car despite the fact that the same was in the name of the Director and there was no evidence to show that the same was used wholly and ex....