TaxTMI 
TaxTMI 
2019 (5) TMI 1932
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....fficer on the basis of the order u/s.92CA(3) of the IT. Act passed by the Transfer Pricing Officer. 2. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of deduction of Rs. 10.02 lacs claimed by the assessee u/s.35(2AB) of the IT. Act @ 150% in respect of expenditure of Rs. 6.68 lacs incurred by the assessee company on purchase of motor vehicles. 3. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of deduction u/s.80-IC of the IT. Act to the extent of Rs. 2,55,341/- made by the Assessing Officer by changing the method of allocation of administrative expenses to the Indrad unit and Baddi unit. 4. The appellant craves leave to add, alter, amend and/or without any ground or grounds of appeal either before or during the course of hearing of the appeal." The first ground of appeal raised by the assessee is on account of confirmation of the addition by the ld. CIT (A) made by TPO/AO for guarantee fees of Rs. 60,16,500/- for providing a guarantee by the assessee on loan taken by its AEs during the year under consideration. 3. Briefly stated facts are ....
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.... submit that creditors were ready to provide the loan without any formal guarantee which suggests that the group company was not able to secure the loan on a standalone basis. 3.8 The TPO also observed that by giving guarantees, the assessee makes its fund costlier as assessee's assets get used for guarantee and raising capital would be costlier as the same assets are already in use. Therefore, the contention of the assessee is not tenable that no cost has been incurred. Further, in case of failure of AEs in repayment the assessee will have to pay the whole of the amount. 3.9 The TPO also relied on the judgment of General electric tax case in Canada dated 4th December 2009, wherein Canadian subsidiary had paid the guarantee fee which was disallowed by the tax authority of Canada. Subsequently, the Canadian court held that Canadian subsidiary benefitted from the better financing conditions of the parent company due to explicit guarantee. The court also held in the same case even in the absence of a formal guarantee subsidiary would have benefitted from the implicit group support. Accordingly, TPO held since the case on hand is reverse but that was against the tax authority; he....
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....w of the above assessee submitted that if these advantages are evaluated, then the adjustments made are only negligible adjustments. 4.2 Assessee also submitted that no financial involvement was there and no assets were pledged; therefore, there was no loss or transfer of profit from the assessee to subsidiary, and hence upward adjustment made was not justified. This fact is also evident from the letter of guarantee issued by the ABN Amro Bank and Banko Ita USA to the German Brazilian company respectively. 4.3 Assessee also submitted that assessee is not in the business of providing corporate guarantee; therefore; TPO wrongly compared the transaction of bank guarantee. Bank rate is not the correct method to determine the ALP looking to the nature of the business of the assessee. 4.4 Assessee also relied on the judgment of General electric tax case in Canada dated 4th December 2009 and contended that while computing ALP the implicit parent support and the relation of the assessee with subsidiaries should also be kept in mind. 4.5 Assessee also relied on ITAT Hyderabad in case of Four soft Ltd (ITA No. 1495/HYD/2010) and contended that in similar case it was held that cor....
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....porate guarantee furnished to the bank. 7. On the other hand the Ld. DR before us submitted as under: Ground No. 1: On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming audition of Rs. 60, 16, 500 made by the Assessing Officer on the basis of the order u/s.92CA(3) of the I.T. Act passed by the Transfer Pricing Officer. TPO's Comment: 2.1 This is general ground of appeal, however the facts of the case are as under:- In this case, a TP adjustment of Rs. 60. 16 lacks was made on account of non charging of corporate guarantees fees on the corporate guarantee given on behalf of the AEs as detailed below: - (1) Zao Torrent Pharma, Russia $ 3 million (2) Torrent Pharma Gmbh, Germany $ 5 million (3) Torrent Do Brazil Ltd., Brazil $ 6 million The adjustment computation of guarantee was made on the basis of actual loans availed by the AEs i.e. $ 6.3 million. TPO found that during F.Y.2006-07 guarantee fees window rates were ranging from 3% to 3.4 % per annum and banks were reducing these rates to \% for AAA+ credit rating companies. However, the assessee did not submit....
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....9;s decision with respect to the transaction being an international transaction but has held that the comparables used by the TPO with respect to this transaction are not proper. 2.4 The amendment made to section 92B through finance Act 2012 is reproduced as under:- In section 92B of the Income-tax Act, after sub-section (2), the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2002, namely:- Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) The purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licenses, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practi....
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....rofessional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (I) any other similar item that derives its value from its intellectual content rather than its physical attributes. 2.5 The memorandum to the Finance Act, 2012 goes on to explain that; Section 92B of the Act, provides an exclusive definition of International Transaction. Although, the definition is worded broadly, the current definition of International Transaction leaves scope for its misinterpretation. The definition by its concise nature does not mention all the nature and details of transactions, taking benefit of which large number of International Transactions are not being reported by taxpayers in transfer pricing audit report. In the definition, the term "intangible property" is included. Still, due to lack of clarity in respect of scope of intangible property, the taxpayer have not reported several such transactions. Certain judicial authorities have taken a view that....
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....plicability of the retrospective amendments introduced by Finance Act 2012, the Bombay High Court has held that once the amended provisions are on the statute, they cannot be ignored and have to be taken into account. The Hon'ble Bombay High court, in the case of Vodafone India Service (P.) Ltd. Union of India, Ministry of Finance, New Delhif 2013 1 37 taxmann.com 250 (Bombay) held that the effect of the amendment would have to be considered. It cannot be brushed aside. The relevant portion of the above judgment is reproduced as under:- "213. The amendment to section 2(47) raises several important questions of fact and of law. Whether or not it affects the proceedings which were the subject matter before the Supreme Court is not relevant for the purpose of this Writ Petition. But, whether it is relevant or not for the purpose of the assessment proceedings in respect of the petitioner which are the subject matter of this Writ Petition, is relevant. The effect of the amendment would have to be considered. It cannot be brushed aside. 214. Section 2(47), as amended, even on a cursory glance raises various issues. It is necessary to note four preliminary aspects of....
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....rice for the corporate guarantee provided by the assessee to its AE worked out the TP adjustment of Rs. 2,61,79,350/-. The DRP also rejected assessee's objection on the issue. 25. We have heard the parties and perused the material on record. The sum and substance of the submissions made by the learned AR is, the corporate guarantee provided by the assessee cannot be equated to bank guarantee and resultantly the commission rate for bank guarantee cannot be applied to the corporate guarantee. It was submitted that the corporate guarantee is nothing but an additional guarantee provided by the parent company and it does not involve any cost or risk to the shareholders. It was submitted that since the corporate guarantee was given keeping in view paramount business interest of the parent company it has to be allowed as business expenditure. It is the further submissions of the learned AR that the retrospective amendment effected to section 92B of the Act, by Finance Act, 2012 by insertion of Explanation (i)(c) to section 92B also has not enlarged the scope of the 'international transaction' to include the corporate guarantee in the nature provided by the assessee. T....
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....abad or the amended provision of the Act in this regard. If the Finance Bill of 2012 is passed by the Parliament amending the provisions of section 92B, with effect from 1st April, 2002, he will have to ignore the decision of the IT AT Hyderabad. In case section 92 B is not amended with retrospective effect, he should grant relief to the appellant. " 25.4 In the aforesaid view of the matter, we agree with the TPO that ALP of the corporate guarantee has to be determined as it falls within the scope and ambit of an international transaction after the retrospective amendment to section 92B. However, it appears that the TPO has applied the rate of 3.75%, which is applicable to bank guarantee issued by the bank. As the corporate guarantee is not in the nature of bank guarantee, the rate applicable to bank guarantee provided by the bank cannot be applied to corporate guarantee which is provided by a group company. In case of Glenmark Pharmaceutical Vs. ACIT in ITA No. 5031/Mum/2012, dated 13/11/2013, the Mumbai Bench of the Tribunal after analyzing the facts in that case had held that 0.53% corporate guarantee rate in that case was appropriate. The ITAT Hyderabad Bench in case o....
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....ability. Therefore ITAT held that provision of guarantee always involved risk and there was a service provided to AE in increasing its creditworthiness in obtaining loans in market, be from financial institutions or from others. Accordingly, ITAT held that TP provisions were invoked in this case, since there was a service rendered to AE by providing guarantees." 2.14 Further the honorable Delhi ITAT was not requested by the contesting parties to decide the issue as to whether provision of guarantee is a service or not. As I have already mentioned various Tribunal decisions have already held that provision of bank guarantee is a service and as such needs to be benchmarked. Whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international transaction. We know that allowing some body the use of a brand does not necessarily cause additional costs to the brand owner, still brand royalty is charged and has been held by various Tribunal and other decisions to be a legitimate charge. I do not think that any judicious person would hold that charge of brand royalty from a third party user of the brand is total....
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....T's decision with respect to the transaction being an international transaction. 2.17 From the above discussion it is clear that the corporate guarantee transaction is approved as international transaction covered by the provisions of section 92B by the Hon'ble Bombay High Court. 2.18 In view of the above facts, the ground of appeal raised by the appellant against adjustment on account of charging of guarantee commission fee deserves to be rejected. 8. We have heard the rival contention and perused the materials on record. The first contention raised by the ld. AR that corporate guarantee are not covered by the definition of international transaction given u/s 92B. In this regard, we note that the issue whether the corporate guarantee is covered by the definition of international transaction u/s 92B is settled by order of this Tribunal in case of Micro Ink Ltd vs. ACIT (63 taxmann.com 353). In the said order it was decided by the Hon'ble bench that guarantees is included in the definition by way of insertion of Explanation to Section 92B of the Act which is for the residuary clause of the definition under section 92B of the Act. As such it will be only ....
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....rm borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business." There is no dispute that this Explanation states that it is merely clarificatory in nature inasmuch as it is 'for the removal of doubts', and, therefore, one has to proceed on the basis that it does not alter the basic character of definition of 'international transaction' under Section 92B. Accordingly, this Explanation is to be read in conjunction with the main provisions, and in harmony with the scheme of the provisions, under Section 92B. Under this Explanation, five categories of transactions have been clarified to have been included in the definition of 'international transactions'. The first two categories of transactions, which are stated to be included in the scope of expression 'international transactions' by virtue of clause (a) and (b) of Explanation to Section 92B, are transactions with regard to purchase, sale, transfer, lease or use of tangible and intangible properties. These transactions were anyway covered by transactions 'in the....
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....utory provision is that while impact on " profit, income, losses or assets" is sine qua non, the mere fact that impact is not immediate, but on a future date, would not take the transaction outside the ambit of 'international transaction'. It is also important to bear in mind that, as it appears on a plain reading of the provision, this exclusion clause is not for "contingent" impact on profit, income, losses or assets but on "future" impact on profit, income, losses or assets of the enterprise. The important distinction between these two categories is that while latter is a certainty, and only its crystallization may take place on a future date, there is no such certainty in the former case. In the case before us, it is an undisputed position that corporate guarantees issued by the assessee to the various banks and crystallization of liability under these guarantees, though a possibility, is not a certainty. In view of the discussions above, the scope of the capital financing transactions, as could be covered under Explanation to Section 92B read with Section 92B(1), is restricted to such capital financing transactions, including inter alia any guarantee, deferred payment ....
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....1,90,02,575" 9.1 AO to verify such expenditure required the assessee to furnish a certificate of prescribed authority in Form No. 3CL as required u/s 35(2AB) of the Act. However, the assessee submitted that during the year it had not received Form No. 3CL from DSIR. Accordingly the AO issued SCN to disallow the weighted deduction claimed by the assessee on R&D expenses. 9.2 The assessee in response to the show cause notice submitted its reply as under: 1. The prescribed authority (i.e., DSIR) has approved the Torrent Research Centre (in short TRC), vide form 3CM issued by it. Accordingly, one of the pre-requisite conditions to claim the deduction has complied. 2. To claim the weighted deduction, all the other procedural requirement as laid down u/s 35(2AB) read with Rule 6 of the Act has also complied. 3. As per the provision of clause (b) to sub-rule (7A) of Rule 6, DSIR must submit its report in Form No. 3CL within the prescribed time to Director General (Income Tax Exemption), and accordingly, DSIR has responsibility to issue Form No. 3CL to the assessee. 4. Form No. 3CL has been continuously received from DSIR in the preceding year. The....
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.... detailed under: 1. The delay in issuance of Form No. 3CL was at the end of the DSIR, and it was beyond the control of the assessee. 2. The Hon'ble ITAT had allowed the deduction u/s 35(2AB) to the assessee on the same facts of the case in the earlier assessment year. 3. Accordingly, the weighted deduction cannot be disallowed to the assessee merely non-receipt of Form No. 3CL from the DSIR. 4. The recurring expenditure of Rs. 77.86 Lacs comprising of salary Rs. 73.27 Lacs and municipal taxes Rs. 4.59 Lacs disallowed by the DSIR has been allowed. As such the same issue has been decided in favor of the assessee in the immediately preceding year by the Ld. CIT (A) and also by the Hon'ble ITAT. 5. In respect of capital expenditure of Rs. 11.52 Lacs comprising of the motor car and civil work, the expenditure on the motor car would not be allowed as weighted deduction. However, it would be allowed as depreciation on the motor car and expenditure on civil work would be eligible for weighted deduction as decided in the immediately preceding A.Y. by the Ld. CIT (A). In view of the above, the ld. CIT-A allowed the ground of appeal of the assessee....
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....g expenditure incurred by the assessee-company on running and maintenance of car etc can be equated with salary payment to the employees but not the cost of car provided to the employees for traveling. Expenditure on purpose of car cannot be accepted as expenditure whether capital or revenue incurred on in-house research & development. In our considered opinion, capital expenditure for equipments to be used for in-house research is eligible for this benefit but not the motor car because whether the employees came into car provided by the employer or by public transport or hired car has no bearing on in-house research & development. 14.2 Now, we examine the applicability of the judgment of Hon'ble Apex Court cited by the Ld. AR of the assessee reported in 209 CTR (Statute) 89 case, the issue involved was regarding deduction u/s 35 (1)(iv) of the Act. When we examine the provisions of Section 35(1)(iv) of the Act, we find that these are materially different from the provisions of u/s. 35(2AB) of the Act because in Section 35(1), there is no condition that the expenditure on scientific research has to be incurred on in-house research & development facilities and there, al....
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.... assessee. In view of the matter, we do not find any infirmity into the order passed by Ld. CIT(A). Hence, this ground of Revenue's appeal is dismissed. 8. In the result, Revenue's appeal is dismissed." In view of the above, respectfully following the above order in the own case of the assessee, the ground of appeal of the Revenue is dismissed. 16. In view of the above, the ground of appeal of the assessee is dismissed and the ground of appeal of the Revenue is also dismissed. The 3rd issue raised by the assessee is that the ld. CIT-A erred in allocating the administrative expenses between the eligible and non-eligible unit based on the turnover. 17. The assessee in the year under consideration has allocated common administrative expenses based on the number of employees between Indrad Unit and Baddi Unit. However, the AO was of the view the basis adopted by the assessee for the location of the admin expenses is not proper. As per the AO, the administrative expenses required to be allocated based on the turnover of Indrad and Baddi unit. Accordingly, the AO allocated an additional sum of Rs. 2,55,341.00 to Baddi Unit which resulted in a reduction ....
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....essee reported in 209 CTR (Statute) 89 case, the issue involved was regarding deduction u/s 35 (1)(iv) of the Act. When we examine the provisions of Section 35(1 )(iv) of the Act, we find that these are materially different from the provisions of u/s. 35(2AB) of the Act because in Section 35(1), there is no condition that the expenditure on scientific research has to be incurred on in-house research & development facilities and there, all expenditures incurred on scientific research related to the business is eligible for deduction u/s. 35(1) and in clause (iv) of Section 35(1) is covered the expenditure of capital nature on scientific research related to the business carried on by the assessee and hence, in this clause also, there is no condition that such cost has been incurred on in-house scientific research facilities as in Section 35(2AB) of the Act and because of this reason, this judgment is not applicable in the present case. 14.3 In view of above discussion, we find that the capital expenditure incurred by the assessee on purchase of motor cars cannot be considered as expenditure incurred by the assessee on in-house research & development and therefore, the same i....
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....ese expenses are incurred by a company regardless of whether the company produces or sells anything, generates income or incurs a loss. Most of these expenses either are fixed or semi-fixed, and there is a limited scope to reduce them. The companies that have a centralized management system tend to have higher general and administrative expenses. On the contrary in the case of decentralizing system, certain functions are delegated to subsidiaries. 21.4 Similarly these expenses cannot be linked to any particular undertaking of the company in a case the assessee has more than one undertaking. Thus the dispute arises for the allocation of such expenses among the different unit/ undertaking of the assessee. Regarding the allocation, we are of the view that these expenses cannot be allocated based on the turnover. It is because the turnover of any undertaking is very much volatile and keep on changing depending upon the market forces, competition, Government policies, etc. There can be a situation that the turnover of one undertaking is very high in a particular year but in the subsequent year the turnover may go done or vice versa which will affect the pattern and consistency in the....
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....duce the claim of deduction u/s.80IC of the Act amounting to Rs. 29,82,93,291/-. 6). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance made by the Assessing Officer u/s.80G of the Act. 7). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. 8). It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad may be set-aside and that of the order of the Assessing Officer be restored." The first issue raised by the Revenue is that the ld. CIT-A erred in deleting the addition made by the AO for Rs. 17,22,481.00 on account of gardening expenses. 23. Assessee incurred garden expenses of Rs. 17,22,481/- for maintaining a good atmosphere within the factory premises as well as to comply with the direction of Gujarat pollution control board to avoid the pollution arises on account of the chemical process. 23.1 However, AO disallowed the said expenditure on the ground that it was disallowed in the preceding year and by incurring the subs....
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....the same as in modern era the human resources of any organization plays the most vital role for the success of the organization. 27.1 Assessee also submitted that it had made the provision in accordance with AS-15 issued by ICAI and against the provision of Rs. 73,05,713/- payment of Rs. 42,64,632/- has been made during the year under consideration. 27.2 Assessee in support of his contention also relied on the judgment of SupremeCourt in case of Bharat Earthmovers reported in 112 taxman 61 and contended that provision for leave encashment was allowed in that case. 27.3 Accordingly, the assessee claimed that the provision for ELTCP should be allowed. 27.4 However, the AO after considering the contention of the assessee allowed the amount of Rs. 42,64,632/- which was paid during the year under consideration and disallowed the balance provision of Rs. 30,41,081/- only. Accordingly the same was added to the total income of the assessee. 28. The aggrieved assessee preferred an appeal to ld. CIT (A) where the ld. CIT (A) deleted the addition made by the AO by following the order of AY 2006-07. Aggrieved by the order of ld. CIT (A) Revenue is in appeal before us. 2....
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....reciation at the rate of 60%. Accordingly, the assessee claimed depreciation at the rate of 60% on the equipment mentioned above. 31.1 However, the AO being dissatisfied with the claim of the assessee held that the item described above is an electronic item and eligible for depreciation at the rate of 15% only. Accordingly, the AO worked out the excessive depreciation claimed by the assessee for Rs. 1,06,886.00 and added to the total income of the assessee. 32. The aggrieved assessee preferred an appeal to the learned CIT (A) who has allowed the appeal of the assessee by allowing depreciation at the rate of 60% on the transformer. Being aggrieved by the order of the learned CIT (A) Revenue is in appeal before us. 33. Both the parties before us relied on the order of the authorities below as favorable to them. 34. We have heard the rival contentions and perused the materials available on record. At the outset we note that the issue has already been decided by the tribunal in the case of the assessee in its favor in ITA No. 238/Ahd/2012 pertaining to the AY 2006-07 vide order dated 15-01-2019 by observing as under: "5. First we would like to discuss the ground....
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....rder. Accordingly, we dismiss the ground of appeal raised by the Revenue. The fifth issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 29,82,93,291.00 on account of the deduction under section 80-IC of the Act. 36. The assessee in its ROI claimed a deduction of Rs. 110,63,63,648/- u/s 80-IC of the Act in respect of its unit located at Baddi. 36.1 However, the AO on perusal of record noted that assessee had incurred expenditure on R&D during the year as detailed under: "3.1 In this regards, it may be noted that the assessee company has incurred following expenses on R & D: Particulars Total Baddi Indrad TRC Revenue Expenses Discovery Cost Development Cost 250375644 489201101 0 243342098 0 245859004 250375644 0 739576745 243342098 245859004 250375644 Capital Expenses Building Other than building 149559812 199769593 149559812 199769593 349329405 349329405 TOTAL 1088906150 243342098 245859004 599705049 36.2 The AO further noted that the assessee di....
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....otal Baddi Indrad TRC Revenue Expenses Discovery cost Development Cost 375563466 733801653 186805268 365013147 188758198 368788506 0 0 1109365119 551818415 557546704 0 Capital Expenses Building Other than building 149559812 299654390 74391050 149048093 75168762 150606296 0 0 449214202 223439144 225775058 0 TOTAL 1558579321 775257559 783321762 0 36.7 The AO disagreed with the reply of the assessee by observing that it is not possible to enter into the development phase without completing the discovery phase. Therefore the assessee should also allocate the discovery research expenses as well as capital expenses to the Buddi unit. The AO further observed that if the assessee had only one eligible unit, then entire R&D expenditure would have allocated to such unit. But in the instant case assessee has charged the major part of the R&D expenditure to its non-eligible unit. 36.8 Hence AO allocated the R&D expenditure related to Discovery and capital expenditure while computing the income of the unit eligible for deduction u/s 80-IC, i.e. Bud....
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....tion u/s. 80IC in respect of income at Baddi Unit. The A. O. did not accept the allocation of research and development expenses made by the A. O. between the Ahmedabad Unit and Baddi Unit. He held that in addition to development expenditure, the discovery cost should also be proportionately allocated to Baddi Unit. Further, the capital expenditure related to building and other than building which has been incurred for R & D Unit should also be allocated to Baddi Unit. The appellant has submitted that the discovery and capital expenditure is allowed as deduction in terms of specific provisions of section 35(2AB) which is meant for promoting development of research work within the country. The same is to be allowed even if is a capital expenditure. Further, the discovery cost cannot be allocated as it had no benefit to the Baddi Unit production. The other expenses which relates to the development of the goods being produced at Baddi Unit have already been allocated by i the appellant himself in the accounts. The appellant has further drawn my attention to the decision of ITAT 'C' Bench in the appellant's own case in A. Ys. 1994-95 & 1995-96 [ITA No. 856/ Ahd/99 &....
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....penses discovery expenses and the development expenses are interlinked. Therefore the same should be allocated to both the units. The ld. DR vehemently supported the order of the AO. The learned AR before us reiterated the submission made before the authorities below. The ld. DR supported the order of the ld. CIT-A. 40. We have heard the rival contentions and perused the materials available on record. There is no dispute about the facts of the case. Therefore we are not inclined to repeat the same for the sake of brevity and convenience. The issue in the instant case relates whether the expenditure incurred by the assessee on research under the head discovery cost and capital cost is to be allocated to the unit eligible for deduction under section 80IC of the Act. 40.1 The provisions of section 80IC of the Act mandates to claim the deduction in respect of eligible unit considering the income from such unit as only the source of income. The assessee in the case on hand has allocated the cost of research expenditure which was directly connected with its eligible unit. The assessee besides the direct cost has also incurred the cost of scientific research activity which did no....
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....wing year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." After considering the facts in totality as discussed above, we do not find any infirmity in the order of the learned CIT-A. Hence we decline to interfere in his order. Thus the ground of appeal raised by the Revenue is dismissed. The next issue raised by the Revenue in the ground no. 6 is that the ld. CIT-A erred in deleting the disallowance made by the AO on account of the donation under section 80G of the Act. 41. The assessee in the year under consideration has made donation amounting to Rs. 80,00,000/- and accordingly claimed a deduction for Rs. 40,00,000/- being the eligible amount at the rate of 50% u/s 80G of the Act against the gross total income. However, the AO was of the view that the donation paid by the assessee is also to be allocated to the eligible unit as the HO paid such the donation. The AO accordingly allocated the amount donation of Rs.....
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.... favorable to them. 45. We have heard the rival contentions of both the parties and perused the materials available on record. The controversy in the case on hand relates whether the donation paid by the assessee under section 80G of the Act needs to be allocated to the unit eligible for deduction under section 80-IC of the Act. Regarding this, we note that the donation paid by the assessee has no connection with the unit eligible for deduction under section 80 IC of the Act. 45.1 The scheme of the Act provides to claim the deduction under section 80G of the Act after claiming all the deduction provided under chapter VI-A of the Income Tax Act. Therefore the assessee can claim the deduction on account of such donation only against the Gross Total Income after claiming all other deduction. 45.2 We further note that the donation paid by the assessee cannot be claimed as an expense in the profit and loss account as the same has not been incurred wholly and exclusively for the purpose of the business as provided under section 37(1) of the Act. Thus even if the assessee claimed the donation as an expense in the profit and loss account, then it has to be disallowed while computi....
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....of the case, the learned CIT(A) erred in confirming disallowance of deduction u/s.80-IC of the IT. Act on income of Rs. 21,60,380 being penalty received from suppliers, Rs. 1,33,426 being cash discount received from vendors on account of purchase and Rs. 35,97,000 being export benefits. The Id CIT(A) ought to have appreciated that such income has direct nexus with income earned by appellant from the eligible unit. 6. On the facts and in the circumstances of the case, the learned CIT(A) has grossly erred in dismissing Ground No. 10 of the appellant's appeal before him on the ground that levy of interest u/s. 234B, 234C & 234D was mandatory. 7. The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal." The first ground of appeal raised by the assessee is on account of confirming the addition by the Ld. CIT (A) made by TPO/AO comprising of interest on the loan to AE of Rs. 5,25,146/- and guarantee fees of Rs. 28,89,788/- on the guarantee provided by the assessee on loan taken by its AEs during the year under consideration. 47. At the outset, we note that the s....
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..... A minimum fixed asset cover of 1.1 times over these assets. vi. Net debt / EBIDTA to be not more than 4.5 times vii. Debt gearing not to exceed 1.65 times during the currency of facility. viii. Debt service cover ratio shall not be less than 1.33 times during the currency of facility. ix. Tangible net worth shall not be less than INR 3.4 billion at all times during the currency of the loan. x. Exposure to non-pharmaceutical group companies not to exceed 15% of tangible net worth, xi. Currency risk on the borrower. xi. The loan documents related to the loan drawn by Torrent Pharmaceuticals Ltd, the parent company at its own financial creditworthiness and rating." In view of the above, the TPO rejected the comparable considered by the assessee and proposed to compute the ALP at his own by using the CUP method considering that what rate assessee would have charged if such loans were given to unrelated party having the similar weak financial as of the AE of the assessee. 49.2 For calculation of interest rate at ALP, the TPO proposed to take the 6 Month average Libor rate as the assessee has given all the loans in dollars cur....
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....rates, TPO took into account the difference of rate charged by the lenders based upon the difference in BBB rating and AAA rating which comes to 3.72. However, TPO took a slightly lower rate of 3.5% than calculated rate ALP considering the lower rate and margin charged in the international market. 49.5 Accordingly, TPO made the upward adjustment of Rs. 5,25,146/- by taking the rate of Libor 6 Months plus 0.5% margin plus 3.5% risk i.e. Libor plus 4% 50. The aggrieved assessee preferred an appeal to Ld. CIT (A) where it submitted that factors considered by the TPO apply to only those entities whose main source of earning is the only interest which is not the case of the assessee. The assessee has also received a certain indirect benefit such as foreign market and increase in the brand name of "Torrent" etc. as they are solely engaged in the business of distributing the product of the assessee. 50.1 Assessee also submitted that during the year under consideration assessee has supplied to AEs good of worth Rs. 424 lacs at a margin of Rs. 288 lacs. Therefore the assessee got other benefits by supplying the goods to the AE's in the form of high margin, i.e. 68%. Therefore, the ....
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....ternal CUP wherein it has obtained foreign currency loan at LIBOR plus 62.5 bps per annum. Accordingly, the assessee has represented that it needs to charge interest at this rate only. The loan agreement which has been used by the company as a CUP has been perused and it is seen that it contains following clauses which are worth consideration: i. The loan has a commitment fee of 0.25% on the undrawn balance of the facilities i.e. the bank would be paid a fee even if the loan has not been availed. ii. The interest charged is Libor plus 62.50 bps per annum (Libor plus 0.625%) iii. Agreement fees @ 0.5% to be paid immediately on signing the documents. iv. Collateral security of all movable and immovable present and future properties of the company including manufacturing facilities, research facilities and office premises. v. A minimum fixed asset cover of 1.1 times over these assets. vi. Net debt / EBIDTA to be not more than 4.5 times vii. Debt gearing not to exceed 1.65 times during the currency of facility. viii. Debt service cover ratio shall not be less than 1.33 times during the currency of facility. ix. Tan....
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....he AEs, with their own financial conditions and much lower net worth, could not have received loans at above rates and conditions. In view of the discussion above, the action of the assessee in charging an interest rate of L1BOR plus 100 bps per annum is not found to be at arm's length in tune with CUP available internationally and hence rejected. Determination of arm's length interest rate: In light of the fact that the transfer pricing study conducted by the assessee company is rejected, the arm's length price of these transactions is determined as below. The arm's length interest is determined by following the CUP method, wherein the interest rate is determined under the circumstances in which the tax payer and its subsidiaries are operating i.e. what is the interest that would have been earned if such loans were given to unrelated parties in similar situation as that of subsidiaries. Since the loan has been taken by the associate enterprise, the reasonable rate of interest at which the other party, with its financial health and no collateral guarantee, could have obtained such a loan from an unrelated party with the same weak financial health a....
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....t rating fall. Although the AEs of the assessee company are not rated, the financial capacity of these corporate has been seen. The net worth of these companies has been submitted by the assessee. For the sake of deciding the risk rate, these entities are pegged conservatively at average rating of BBB although as per their fmancials, some of the AEs would fall much below this level. At this rating, the difference in interest rates between a triple A rated corporate would be 3.72% which would represent the risk margin charged by the bank while lending to the AE. This risk study with reference to the local bond markets would be effective in other markets also as we are not benchmarking the interest rates per se. For the purpose of interest rate, the Libor of the referred area is to be adopted which will be indicative of the local inter-bank interest rates. What has been quantified here is the 'risk factor' or 'risk spread' which would normally be charged by a third party. Such risk spread would be similar world over in respect of similarly placed corporate. Since the rate of interest as well as margins in the international markets are slightly lower than the ....
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....month average LIBOR rate which has not been disputed. But the TPO has added the credit risk at 3.50% and the margin @ .50% to determine the ALP of the interest which should have charged from the AE by the assessee. 53.3 Now the first controversy arises about the basis of charging 3.50% credit from the AE. Regarding the addition of 3.5% for credit Risk in 6 Month Libor rates we note that it represents the difference in the credit rating of AAA Indian companies which was obtained from the CRISIL in response to the notice issued under section 133(6) of the Act viz a viz the credit rating of BBB of the AE which was determined by the TPO on the basis of financial documents of the AE. 53.4 However, we note that the approach of the TPO suffers from certain infirmities as detailed under: i. Once the AE has taken as a tested party, then the comparables of AE should be obtained to determine the ALP. However, the TPO in the case compared the AE with the credit rating of Indian companies as discussed above. In our view, the comparables with the AE should have taken and not with the comparables available with the assessee. ii. The TPO at his own determined the credit rat....
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....he foreign currency. Even otherwise according to us the markup towards the transaction cost is exorbitant and comparison with the bank is also untenable. In view of this, we do not see any rational in the impugned in further cost and risk premium on the rate directed by the learned Dispute Resolution Panel. Accordingly we direct the learned Transfer Pricing Officer to not to charge any risk premium following the decision of the coordinate bench. In view of this, the transaction cost imputed of 300 basis points cannot be sustained." 53.7 Accordingly, we are also of the view that addition in the rate of interest on account the credit risk suggested by the TPO is not sustainable. 53.8 We also note that there was no addition on account of interest rate in the immediate preceding AY 2007-2008 though the assessment was framed under section 143(3) of the Act. 53.9 Now the second controversy arises about the basis of charging .50% margin from the AE. Regarding this, we note that the assessee is charging margin at 37.50 bps from the AE which appears quite low as even the bank charges from the company having high net worth a margin of .50%. Therefore we are inclined to uphold the fi....
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....re us. 64. The Ld. AR before us reiterated the submissions as made before the authorities below. On the other hand the Ld. DR vehemently supported the order of the authorities below. 65. We have heard the rival contention and perused the material available on the record. The issue in the instant case relates to the deduction claimed by the assessee under section 35(2AB) of the Act in respect of entertainment expenses. In this regard, we note that the provisions of section 35(2AB) of the Act provided that the expenditure incurred in connection with the scientific research other than the cost of land or building will be allowed the weighted deduction. 65.1 However, we note that the learned CIT (A) has held that entertainment expenses claimed by the assessee were not incurred in connection with the scientific research activity without adducing any reason thereon. As such the submission of the assessee filed before the learned CIT (A) stating that the entertainment expenditures were incurred in respect of the professionals who visited the research center, has not been challenged based on any reasoning. 65.2 Moreover, we also note that the AO has allowed 100% deduction in re....
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.... please refer the aforesaid Para of this order. Accordingly we dismiss the ground of appeal raised by the Revenue. ii. Regarding the issue of Administrative cost of Rs. 1,93,24,629/- : At the outset we note that the identical issue has already been decided by this tribunal in ITA 907/AHD/2012 in against of the assessee vide Paragraph No. 22 of this order wherein the appeal filed by the assessee is dismissed. For detailed discussion please refer the aforesaid Para of this order. Accordingly we allowed the ground of appeal raised by the Revenue. 67.2 Notice Pay - Rs. 8,71,267/- The assessee in support of the deduction claimed u/s 80IC in respect of Notice pay submitted that it was recovered from the employees who left the organization without giving notice. Therefore such amount recovered from the employee should be treated as business income on the ground that the salary paid to the employee was business expenditure. However the AO disagreed with the contention of the assessee as the said amount is recovered from the employee and it has no connection with manufacturing activity of the pharmaceutical product. Thus the AO accordingly excluded the said sum fr....
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.... export benefits for a sum of Rs. 35,97,000/- has been utilized for the import of materials. Accordingly, the assessee claimed that the utilization of DEPB licenses reduces the custom duty on such imports and ultimately it is utilized for manufacturing activity. The assessee also submitted that it has accounted the said sum on gross basis for the income and the expenditure. Thus the assessee claimed that the DEPB credit is directly linked with business activity. Therefore the same needs to be considered for eligible profit to work-out the deduction u/s 80-IC of the Act. 67.7 However the AO disagreed with the submission of the assessee by observing that the same is not derived from the activity of manufacturing. As such it is directly related to the exports of the Baddi unit, and the said income is liable to tax under the head of PGBP. Thus the AO observed that there is no direct nexus between the manufacturing activity and the income on account of export benefits. 67.8 The AO accordingly reduces the sum of Rs. 35,97,000/- from the eligible profit to deny the deduction claimed by the assessee u/s 80IC of the Act. 68. The aggrieved assessee preferred an appeal befor....
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....d out by the industrial undertaking eligible for deduction under section 80IC of the Act. Therefore we are of the considered view all the incomes are eligible for deduction under section 80A of the Act. Regarding this we find support and guidance from the judgment of Hon'ble High Court in the case of Metrochem Industries Ltd (supra) wherein the head note of the judgment reads as under: "I Section 80-I of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings, etc., after a certain date (Computation of deduction) - Assessment years 1994-95, 1996-97 and 1997-98 - Deduction under section 80-I is allowable in respect of Kasar, discount and sales-tax set off [In favour of assessee] I Deduction under section 80-I is allowable in respect of Kasar, discount and sales-tax set off. II Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings (Computation of deduction) - Assessment years 1994-95, 1996-97 and 1997-98 - Foreign exchange fluctuation and duty drawback is an income derived from industrial undertaking, eligible for deduction under sections 80-I and 80-IA [In favour of assess....
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....). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. 8). It is therefore, prayed that the order of the Ld. Commissioner of IncomeTax (Appeals)-XIV, Ahmedabad may be set-aside and that of the order of the Assessing Officer be restored." The 1st issue raised by the Revenue is that the Ld. CIT (A) erred in deleting the addition of Rs. 40,65,794/- on account of garden expenses. 75. At the outset, we note that the issue raised by the Revenue has already been adjudicated by us along with the ground no. 1 of appeal of the Revenue in ITA No. 938/AHD/2012 vide paragraph number 29 of this order wherein the appeal filed by the Revenue is dismissed. For detailed discussion please refer the aforesaid Para of this order. Accordingly we dismiss the ground of appeal raised by the Revenue. The 2nd issue raised by the Revenue is that the Ld. CIT (A) erred in deleting the disallowance amounting to Rs. 16,34,173/- on account of provision for Employee Long Term Compensation Plan. 76. At the outset, we note that the issue raised by the Revenue has already....
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....the F.Y. 2006-07 corresponding to the A.Y.2008-09. 80.1 The assessee further submitted that it has complied with all the condition as specified u/s 36(2) of the Act to claim the bad debts. 80.2 The assessee also submitted that the provision for doubtful debts which was created in the F.Y.2006-07 has been written back during the year. As such the same was added back to the book profit in the assessment order framed by the AO u/s 143(3) to compute the book profit as per the retrospective amendment of explanation to section 115JB of the Act. 80.3 Thus the amount of provision for bad debts written back during the year has been deducted to compute the book profit u/s 115JB of the Act as given in the first clause of the second of explanation 1 to section 115JB of the Act. 80.4 The AO after considering the submission made by the assessee was of the view that as per the amendment made by the Finance Act, the provision for doubtful debts written back during the year amounting to Rs. 3,65,65,634/- shall be reduced while computing book profit. 80.5 However the AO further observed that the assessee did not claim the amount of written back of the provision for doubtful debts by f....