TaxTMI 
TaxTMI 
2019 (5) TMI 1932
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....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 that the assessee in the present case is a limited company and engaged in the....
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.... 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; hence the guarantee fee has been assessed in the hands of the assessee being the parent company. 3.10 TPO also observed that ....
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....ement 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 corporate guarantee does not fall within the definition of the international transaction. Therefore, no upward adjustment is warranted. 4.6 Apart from abovementioned submission assessee also reit....
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....ade 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 anyaetailsof pre and post credit ratings of its subsidiaries. In view of same average rate of 2% was applied as guarantee fees. Further adjustment of Rs. 3,46,500/- was made on account of recovery of expenses. The computation of adjustment is as under : - Total loans availed on which guarantee prov....
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....on 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 practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term 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; (d) Provision of services, including provis....
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....e 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 in cases of transactions of business restructuring etc. where even if there is an international transaction Transfer Pricing provisions would not be applicable if it does not have bearing on profits or loss of current year or impact on profit and loss account is not determinable under normal computation provisions other than transfer pricing regulations. The present scheme of Transfer pricing provisions does not require that international transaction should have bearing on profits or income of current year. Therefore, there is a ....
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.... 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 Explanation 2 to section 2(47). Firstly, as the opening words, "For the removal of doubts it is hereby clarified that ......", indicate it is a clariflcatory amendment. Secondly, it is an inclusive definition as is evident from the words " "transfer" includes ...... ". Thirdly, the amendment is with retrospective effect from 1st April, 1962. Fourthly, the Finance Act 2012 which introduced, inter-alia, the amendment to section 2(47) and section 92CA(2B) is a validating act in view of section 119 thereof. " 2.9 It is respectfully submitted that the constitutional validity of the retrospective ame....
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....st 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. The learned AR further contended that the issue is covered in favour of the assessee by virtue of the order passed by the Tribunal in assessee's own case for AY 2006-07 (supra). 25.1 The learned DR, on the other hand, submitted that by virtue of the amendment made to section 92B of the Act with retrospective effect from 01/04/2002, the corporate guarantee provided by the assessee is to be considered as an international transaction, and, therefore, the Assessing Officer was justified in determining arm's length price of such transaction. 25.2 Having considered the submissions of the parties, we are unable to accept the contention of the ....
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....uarantee 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 of Infotech Enterprises Ltd. in ITA No.ll5/Hyd/2011 and in ITA No. 2184/Hyd/2011, dated 16/01/2014 while considering identical issue of determining ALP of corporate guarantee provided by the assessee to its AE followed the ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra). 26. Since the issue in the present case is identical to the issue decided by the IT AT, Hyderabad Bench in case of Infotech Enterprises (supra), following the same, we also remit this issue to the file of the TPO to decide the quantum of ....
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....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 totally unjustified as the brand owner does not have to bear any additional costs for use of brand by the third party. If we accept the assesee's argument that any service which does not involve any direct additional cost to the service provider, cannot be charged, it would lead to unintended consequences like disallowances of all brand royalty, license fee, know how fee and so on. Apparently the assessee has put forth an unsustainable and unsound proposition and cannot be accepted merely because it this particular case it suits the assessee. 2.15 The Hon'ble ITAT Ahmedabad in the case of Micro Inc Ltd v/s ACIT (2015) 63 Taxmann.com 353 has held that "We have also held, taking note of the insertion of explanation to section ....
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....d 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 hit by the explanation when the guarantee has "bearing on profits, income, losses or assets". The relevant extract of the case (supra) is as under: "That is, in our considered view, purely fallacious logic. In our considered view, under Section 92B, corporate guarantees can be covered only under the residuary head i.e. "any other transaction having a bearing on the profits, income, losses or assets of such enterprise". It is for this reason that Section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in the residuary clause of def....
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....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 nature of purchase, sale or lease of tangible or intangible property'. The only additional expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the " provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service" which are anyway covered in "provision for services" and "mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility ....
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....sued 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 or receivable or any other debt during the course of business, as will have "a bearing on the profits, income, losses or assets or such enterprise". This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothe....
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....ovision 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. Therefore it had no reason to doubt that DSIR will not issue this form during this year. 5. Without prejudice to the above, the assessee also submitted that in case the report is not received from DSIR in form 3CL, then the deduction can be allowed considering the DSIR report of the earlier year and the expenses disallowed in the earlier year can also be disallowed for the year under consideration. 9.3 The AO after considering the reply of the assessee disallowed the weighted deduction claimed by the assessee amounting to Rs. 46,96,73,170/- only. The AO also rejected the alternative claim made by the assessee before him. 10. The aggrieved assessee preferred an appeal before the Ld. CIT (A). The assessee before the Ld. CIT (A) files Form No. 3CL dated 31-12-2010 and the details of various expenditures claimed by it. Accordingly the ld. CIT-A accepted the cla....
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....tely 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 in part. 10.3 Being aggrieved by the ld. CIT-A, both the assessee and the Revenue are in appeal before us. The assessee is in an appeal against the confirmation of the disallowance of the deduction in respect of motor car Rs. 6.68 lakhs. 11. On the other hand, the Revenue is in an appeal against the deletion of the disallowance of the deduction under section 35(2AB) of the Act by the learned CIT (A) for Rs. 46,93,39,170.00. 12. The Revenue has raised the following grounds of appeal in ITA No.938/Ahd/2012: "4. (a) The Ld CIT(A)-XIV, Ahmedabad has erred in law and on facts in admitting additional evidence in violation of Rule 46A of the I.T. Rules. (b) The Ld CIT(A)-XIV, Ahmedabad has erred in law and on facts in allowing part relief on the disallowance made u/s 35 (2AB) of the Act." 13. Both the learned AR and the learned DR before us relied on the order of the authorities below as favorable to them. 14. We have heard the rival contentions and perused the materials available on record. At the outset, we note that the issue raised by the assessee is covere....
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....rch 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 is not eligible for weighted deduction u/s. 35(2AB) of the Act. Similarly, capitalized interest on purchase of car is also not eligible for this benefit for same reasons because it is equal or similar to cost of car. Hence, this ground is rejected." In view of the above, respectfully following the above order in the own case of the assessee, the ground of appeal o....
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.... Baddi Unit which resulted in a reduction in the deduction under section 80IC of the Act by Rs. 2,55,341.00 only. 18. The aggrieved assessee preferred an appeal to the learned CIT (A). The assessee before the ld. CIT-A submitted that the administrative expenses mainly cover the salary, allowances and the perquisites given to the employees. Therefore the location of common administrative expenses based on the number of employees is just and proper. However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: 14.1 In the light of these facts as has been noted by Ld. CIT(A) in the above para, we examine the applicability of various contentions raised by Ld. AR of the assessee. First contention of Ld. AR of the assessee is this that since the salary to employee is eligible for deduction u/s 35(2AB) of the Act, acquisition of motor car for those employees should also be considered as eligible for this benefit. We do not find any merit in this contention of Ld. AR of the assessee. Simply because of this reason that motor cars are purchased or providing the employees of research & development wing of the assessee, it ....
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....efore, the same is not eligible for weighted deduction u/s. 35(2AB) of the Act. Similarly, capitalized interest on purchase of car is also not eligible for this benefit for same reasons because it is equal or similar to cost of car. Hence, this ground is rejected. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us. 19. The learned AR before us submitted that the assessment year 2008-09, the Revenue has accepted the basis of allocation based on number of employees. The learned AR before us further reiterated the submissions as made before the learned CIT (A). 20. The learned DR before us submitted that the impugned issue is not covered favour of the assessee by the order of the Revenue in the subsequent assessment year 2008-09. The learned DR vehemently supported the order of the authorities below. 21. We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the allocation of the said expenses between Indrad and Baddi unit. As per the assessee, the administrative expenses need to be allocated based on the number of employees working whereas the AO allocated the expenses based....
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....sentation of the financial statements for different years. Therefore we are of the considered view that the basis of the allocation of administrative expenses based on the turnover is not advisable. 21.5 The next controversy arises what should be the basis of the allocation of the said expenses in the given facts and circumstances. Generally, the human resources working in any of the undertakings of the assessee does not frequently change as the market forces do not regulate it, unlike the sales. Therefore in the given facts and circumstances, we are of the view that the allocation of the administrative expenses should be done based on the human resources engaged in the different undertaking of the assessee. 21.6 In view of the above, we reverse the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed. 22. Now we take up Revenue's appeal in ITA No.938/Ahd/2012 for Asst. Year 2007-08. The Revenue has raised the following grounds of appeal:- "1). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in dele....
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....he AO disallowed Rs. 17,22,481/- and added to the total income of the assessee. 24. The aggrieved assessee preferred an appeal to ld. CIT (A) and submitted that the AO made that same disallowance in Assessment Years 2003-04 to 2005-06 where ld. CIT (A) deleted the addition. Also for Assessment year 200506, Hon'ble ITAT dismissed the ground raised by the department. Considering the assessee's submission ld. CIT (A) deleted the addition made by the AO. 25. Aggrieved by the order of ld. CIT (A) Revenue is in appeal before us. Both the ld. DR and ld. AR relied on the order of authorities below as favorable to them. 26. We have heard the rival contentions and perused the material on records. In the instant case we note that the co-ordinate bench decided the identical issue in favor of assessee in ITA No. 1869/Ahd/2009 pertaining to the AY 2005-06 by observing as under: "4. Ground No.1 is against deletion of disallowance of garden expenses of Rs. 27,06,563/-. Ld. CIT-DR strongly supported the order passed by Assessing Officer and submitted that Ld. CIT(A) has wrongly deleted the disallowance made by Assessing Officer. On the contrary, Ld. Authorized Representative for the ass....
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....ble on records. In the instant case we note that the identical issue was decided by the co-ordinate bench in favor of assessee in its case in ITA No. 238 & 259/Ahd/2012 pertaining to the AY 2006-07 vide order dated 15-01-2019 by observing as under: "17. During the year under consideration, assessee has claimed Rs. 39,08,141/- in respect of provision made for Employee Long-term Compensation Plan and same provision was made in assessment year 2007-08 in respect of assessment year 2006-07 for the said amount relating to 2005-06. When lower authorities issued the notice to the assessee in reply, assessee stated that as the scheme of providing compensation to the employees was framed in the F.Y. 2006-11" w.e.f. F.Y. 2005-06, the provision for such expense was not made in the books of accounts. However, as the said provision pertained to the services rendered by the employees for the F.Y. 2005-06, therefore, assessee had claimed such expenses while computing taxable income under Income Tax Act. 18. As we can see, Id. A.O. had disallowed the provision for leave encashment as no payment has been made against the said provision during the year. In the case of Bharat Earth Movers Hon'....
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....tention for claim of depreciation @ 60% in respect of V-SAT is that the functioning of a V-sat. Very small aperture terminal consists of two parts namely a transceiver that is placed out doors in a direct line of site to a Satellite and a device that is place indoors to interface the transceiver with the end users connection device, such as a computer. The transceiver receives or sends the signals from ground station computer that acts as a hub for the system. Each and user is inter-connected with the hub station viz. Satellite forming a star apology and stated that same is entitled for depreciation @ 60%. 8. In support of its contention, assessee also cited an order of the Delhi High Court [2013] 358 ITR 47 (Del.) where in it is held that computer accessories and peripherals such as printers, scanners and server form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are part of the computer system, they are entitled to depreciation at the higher rate of 60%. 9. As we can see, V-SAT cannot function in isolation without the help of computer. Therefore, as per aforesaid Delhi High ....
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....ed as if it was the only source of income of the assessee. Therefore, the expenditure not incurred by the eligible unit cannot be allocated to it. Accordingly, the assessee has allocated the development cost based on turnover which comes to Rs. 24,33,42,098/- only to the unit eligible u/s 80-IC of the Act. The assessee further explained that in the case of discovery research expenditure there was no guarantee of success and once discovery research has passed the requisite pre-trials only after that it enters into the development phase. However, on some occasions, the discovery research phase may fail, and it becomes a sunk cost. 36.4 Accordingly the expenditure on discovery research cannot be said to have benefitted. Accordingly, there was no need to allocate such expenditure to Baddi unit. 36.5 The assessee subsequently follows the same logic to the Capital Expenditure on R&D and accordingly the same was not allocated to the unit eligible for deduction u/s 80-IC of the Act. 36.6 Without prejudice to the above, the assessee also submitted that if the entire R & D expenditure needs to be allocated, then it should be allocated in the manner as detailed below: "3.5 Without prejud....
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....d to the total income of the assessee. 37. The aggrieved assessee preferred an appeal before the Ld. CIT (A). The assessee before the learned CIT (A) submitted that the deduction on account of research activity is governed by the specific provisions of the Income Tax Act. As such the Government of India is promoting the research activity within the country. Therefore the assessee was entitled to a higher rate of deduction from the taxable profit including capital expenditures which are eligible for deduction the research activity. 37.1 The deduction was provided under section 80-IC of the Act in respect of those industries established in the backward areas. Thus in case, the assessee is denied the deduction in respect of the expenditure incurred on the research by allocating the expenses to the eligible unit, the purpose of providing the benefit to the assessee will be defeated. 37.2 Moreover, the provisions under section 80 IC of the Act and 35(2AB) of the Act are beneficial provisions. Therefore the same should be read liberally. Accordingly, the assessee claimed that the expenditure incurred by it under the head discovery cost and capital expenditure should not be allocated t....
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....bench has further held that while determining the profit of eligible industrial undertaking, the income and expenditure which has direct nexus with the industrial undertaking must be taken into account. The research centre was an independent centre and the main purpose of the research is to conduct research for the business carried on or to be carried on by the assessee and is, therefore, not directly linked with the eligible undertaking. I am inclined to agree with the submission given by the appellant. The facts and the issue are also covered by the decision of ITAT, Ahmedabad in the case of the appellant, though the claim of deduction was under different section but the principle of allocation decided by the Hon'ble Bench squarely applies to the present section also. The appellant has himself allocated the expenses which have been incurred for development and improvement of process. The other expenses have rightly not been allocated by it as it is not directly linked with the eligible undertaking. The A. O. has also not brought any specific evidence to show that the other expenses which have not been allocated by the appellant are related to manufacturing activity carried ....
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....he Act, in our considered view the principles laid down by the Tribunal are directly applicable to the facts of the case on hand. At this juncture we find important to refer the relevant extract of the order of this tribunal in the own case of the assessee (supra) which reads as under: 5. We have heard the rival submissions, perused the material available on record and the judgment cited by the parties. There is no dispute that the facts in the present case are identical with the facts of the case pertaining to A.Y. 2004-05. We have perused the order of the Hon'ble co-ordinate Bench in assessee's own case in ITA No.4356/Ahd/2007 (supra). The Hon'ble Tribunal following the decision of coordinate Bench in ITA No.1347/Ahd/2007 for A.Y. 2003-04 dismissed the ground of appeal raised by Revenue. In view of the fact that issue has already been decided by Hon'ble co-ordinate Bench in ITA No. 4356/Ahd/2007 for A.Y. 2004-05 and ITA No.1347/Ahd/2007 for A.Y. 2003-04 in assessee's own case. Respectfully following the order of the coordinate bench, this ground of Revenue's appeal is dismissed. 40.3 It is also important to note that, the AO in the subsequent assessment....
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....ssee preferred an appeal before the Ld. CIT (A). The assessee before the Ld. CIT (A) submitted that the object and purpose of the provision of section 80IC and 80G are different. The eligible profit is computed as per the provision of section 80IC of the Act, and accordingly the same was allowed as deduction u/s 80IC of the Act. Similarly the deduction u/s 80G is allowed from the Gross Total Income. There is no provision under the law which permits disallowance of claim u/s 80G of the Act only just because of the fact that the gross total income includes the profit of the eligible unit. 42.1 The assessee further submitted that the nature of donation is only for application of income for charitable or other philanthropic purposes. Hence the disallowance made by the AO should be deleted. 42.3 However the Ld. CIT (A) after considering the submissions and facts observed that the donation should not be allocated to the buddi unit as the profit eligible for deduction u/s 80IC has to be first computed then after that the donation will be considered for working out the deduction under section 80G of the Act. 42.4 The Ld. CIT (A) further observed that the deduction u/s 80G will be allowe....
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....nue is dismissed. 46. Now we take up assessee's appeal in ITA No.1634/Ahd/2012 for Asst. Year 2008-09. The Assessee has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming addition of Rs. 34,14,934/-, comprising of interest on loan to Associated Enterprises for Rs. 5,25,146 and guarantee fee charges for Rs. 28,89,788/- for providing corporate guarantees to Associated Enterprises, made by the Assessing Officer 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. 32.74 lacs claimed by the assessee u/s. 35(2AB) of the IT. Act @ 150% in respect of expenditure of Rs. 21.83lacs incurred by the assessee company on purchase of motor vehicles used by the personnel of the Research Department. 3 On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of deduction of Rs. 1.84 lacs claimed by the assessee u/s.35(2AB) of the IT. Act @ 50% in respect of entertainment expenditure of Rs. 3.68 lacs incu....
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....y Opening value Addition Deletion Closing Value Date of charge Zao Torrent Pharma, Russia USD 3,000,000 - - 3,000,000 Torrent Pharma GmbH, Germany Euro 5,000,000 2,500,000 - 7,500,000 31.12.2007 Torrent Do Brazil Ltd, Brazil USD 6,000,000 - 1,000,000 5,000,000 31.05.2007 Torrent Pharma Inc. USA USD - 100,000 - 100,000 09.05.2007 49.1 In response to SCN issued by TPO assessee submitted that it has provided short term finance to its AEs and charged interest at the rate of LIBOR plus 100 basis points p.a whereas it has taken the foreign currency term loan from BNP Paribas at the rate of LIBOR plus 62.5 basis points. Accordingly, the assessee contended that the interest charged from AEs is comparatively on higher side from interest paid to the third party and thus the interest charged from the AE is at ALP. However, TPO disregarded the contention of the assessee by observing that there are certain clauses in the Loan agreement which should be considered while determining the ALP as detailed under: 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....
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....ds we submit the available information as under: Annualized Average Yield Annualized Average Yield 2007-08 2008-09 Rating 1-2 yr. 2-3 yr. 5 yr Ratings 1-2 yr 2-3 yr. 5 yr. AAA 9.32% 9.38% 9.44% AAA 9.98% 10.02% 10.05% AA+ 9.56% 9.66% 9.73% AA+ 10.28% 10.34% 10.38% AA- 10.10% 10.12% 10.21% AA- 10.83% 10.81% 10.87% AA 9.71% 9.81% 9.88% AA 10.42% 10.51% 10.55% BBB+ 13.04% 13.24% 13.31% BBB+ 13.27% 13.42% 13.47% BBB- 15.68% 15.83% 15.89% BBB- 15.41% 15.52% 15.55% BBB 14.18% 14.33% 14.39% BBB 14.21% 14.32% 14.35% A+ 10.68% 10.68% 10.77% A+ 11.41% 11.37% 11.43% A- 12.22% 12.37% 12.42% A- 12.95% 13.05% 13.08% A 11.24% 11.29% 11.42% A 11.96% 11.97% 12.08% Note: A simple average of the yields for the whole financial year has been taken to arrive at the yields in the table above for the respective ratings. We hope above meets your requirement Thanking you, Yours faithfully, For Crisil Ltd., Sd/- (Pramendra Mehta) Manager Taxation 49.4 TPO considering the financial of AEs provided the rating of BBB to them. Considering the above-mentioned r....
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..../AO, the assessee is in appeal before us. 51. The Ld. AR before us submitted that it had charged interest on the loan given to AE's at the rate exceeding the interest cost incurred by it. 51.1 Moreover, the loan was given foreign currency which was returnable in the same currency. Therefore, there cannot be any loss to it on account of currency fluctuation. 52. On the other hand, the Ld. DR before us submitted as under: Benchmarking of Loans advanced to AEs The assessee has reported loans advanced to its AEs. The details of the loans as provided by the assessee as per its letter dated 19/8/2011 are as given below: Subsidiary Name Currency Opening value Addition Decision ClosingValue Date of change Zao Torrent Pharma, Russia USD 3,000,000 - - 3,000,000 Torrent Pharma GmbH, Germany Euro 5,000,000 2,500,000 7,500,000 31/12/07 Torrent Do Brazil Ltda, Brazil USD 6,000,000 1,000,000 5,000,000 31/5/07 Torrent Pharma Inc, USA USD - 100,000 - 100,000 9/5/07 In its submission, the assessee has provided an internal CUP wherein it has obtained foreign currency loan at LIBOR plus 62.5 bps per annum. Accordingly, the as....
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....d by the bank. In addition, the bank has further stipulated that the net worth of the company should not be less than Rs. 3.4 billion at any time during the loan tenure. None of the AEs of the assessee company meet these criteria and hence interest rate chargeable in the hands of the assessee company cannot be applied in the hands of its AEs. The CUP adopted by the assessee company is, therefore, rejected as a proper comparable. If at all, this represents a floor level interest rate for the AEs and not the ceiling rate. The interest rate, in the case of the assessee company is low on account of the high credit rating of the company and availability of sound assets to be kept as collateral security. In respect of a loan to the AE, such corporate guaranty is required generally from the parent failing which additional margins are placed on the loan being granted. The document submitted by the assessee merely serves as a bottom line document for benchmarking the loan given to its AEs. The 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 chargin....
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....ity. The lending rates vary as per the financial ratings of the corporate. Further, risk analysis of credit being advanced is similar across the banking fraternity and barring a small variation, risk costs are generally similar over the globe. Since financial analytical data is available for the financial markets locally, an indication of the financial risk carried by corporate and impact of such risk on the interest rate is given by study of different kind of bonds issued by Indian corporate and the interest paid on such papers. It is also understood that the high PLR in India would take care of the currency forward margins. To an AAA rated corporate, the banks would normally lend at a risk free premium which is generally in the range of LIBOR plus 0.5% spread. (Similar to the level also submitted by the assessee) Inquiries made with CRISIL reveal that as the ratings fall, there is a risk adjustment of at least 20% with each notch of credit 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, the....
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....an given by the assessee to its AE's. The first contention of ld. AR of the assessee before us is that in the given facts, it would be appropriate to accept internal CUP method, i.e., the rate at which the assessee had obtained foreign exchange borrowings at arm's length price under CUP method. 53.1 Regarding the contention of the assessee, we are of the view that the transaction of obtaining the loan is a different transaction from the lending even if both the loan transactions are in foreign currency. It is because the loan was accepted from the bank whereas the loan was advanced to the subsidiary company in the given facts & circumstances. Therefore, we disagree with the contention of ld. AR. 53.2 The TPO indeed has taken the AE as the testing party. Accordingly, the TPO has worked out the ALP taking 6 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....
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....pra) wherein it has been held that that when the Transfer Pricing Officer has taken the lender as the tested party and yet made adjustment for higher risk on account of assumed lack of security and increased risk of single party dealing is not based on any rational for adjustment on account of higher risk. Apparently, in this case the assessee, lender is a tested party and further the loan is advanced to 100% wholly owned subsidiary in Indonesia the facts of the case are clearly covered by the decision of coordinate bench. The Hon'ble Delhi High Court in Cotton Naturals (I) (P.) Ltd. (supra) has already held that the transaction cost of hedging cost is borne and paid by the borrower therefore transaction cost is not applicable in case in question the loan had to be repaid in the 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 t....
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....er, the AO observed that only the expenditures approved by the DSIR are eligible for weighted deduction u/s 35(2AB) of the Act. 61.3 Therefore, the AO disallowed the entertainment expenditure to the extent of the weighted portion of Rs. 1,83,770/- being 50% of Rs. 3,67,540/- and added to the total income of the assessee. 62. Aggrieved assessee preferred an appeal before the Ld. CIT (A). The assessee before the Ld. CIT (A) reiterated the same as before the AO. 63. However the Ld. CIT (A) observed that the entertainment expenditure of Rs. 3,67,540/- does no relate to the activity of research and development. Hence the Ld. CIT (A) accordingly confirmed the order of the AO. Being aggrieved the order of the Ld. CIT (A) the assessee is in appeal before 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, w....
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....Discount received from vendor - Rs. 1,33,426/- E. Export Benefits - Rs. 35,97,000/- 67.1 The assessee has also not allocated the following expenditure to the unit eligible for deduction under section 80IC of the Act. i. Discovery and capital expenditure cost Rs. 46,18,84,935/- ii. Administrative cost Rs. 1,93,24,629 i. Regarding the issue of Discovery and capital expenditure of Rs. 46,18,84,935/- : At the outset we note that the identical issue has already been decided by this tribunal in ITA 938/AHD/2012 in favour of the assessee vide Paragraph No. 47 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. 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 a....
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.... Therefore discount from the vendor is eligible for deduction u/s 80IC. However, the AO disagreed with the contentions of the assessee as the said amount is received on account of purchase from the vendors instead of manufacturing activity of the pharmaceutical product. Thus the AO accordingly excluded the said sum from the eligible profit u/s 80IC. 67.6 Export Benefits:- The assessee to justify the claim made u/s 80IC of the export benefits submitted that the DEPB income is against export sales made from the Baddi unit. As such DEPB can be utilized against the payments of custom duty or it can be sold in the market. Therefore 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 ....
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....turing activity is not eligible for deduction under section 80-IC of the Act. 72. Both the ld. AR & the DR relied on the order of authorities below as favourable to them. 73. We have heard the rival contention and perused the material available on record. The issue in the instant case is whether the miscellaneous income such as Penalty Received from Supplier, Discount Received from Vendors and Export Benefits are eligible for the deduction u/s 80IC of the Act. 73.1 It is an undisputed fact that all the aforesaid income or arising from the activities carried 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 a....
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....,86,287/- made u/s. 80G of the Act. 6). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts to set-aside the matter & directing the Assessing Officer to examine the matter which is not permitted under provision of Section 251(1)(a) of the Act as amended w.e.f. 01/10/1998, regarding reducing income computed u/s. 115JB of the Act which is not permitted under provision of Section 251(1 )(a) of the Act as amended w.e.f. 01/10/1998 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 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 wherei....
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....cordingly we dismiss the ground of appeal raised by the Revenue. The 7th issue raised by the Revenue is that the Ld. CIT (A) erred in setting aside the matter and directing to the AO as such it is not permitted u/s 251(1)(a) in respect of reducing the income computed u/s 115JB. 80. The assessee during the year under consideration has written-off bad debts amounting to Rs. 3,65,65,634/- against the provision for doubtful debts created in 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 sec....