AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2023 (4) TMI 1254
X X X X Extracts X X X X
X X X X Extracts X X X X
....suance of the directions of the ORP, erred in making an addition of Rs. 10,93,47,091/- on account of alleged shortfall in corporate guarantee fees on the corporate guarantees issued by the company on behalf of its Associated Enterprises namely Agile Pharma B.V. and Helix Healthcare B.V. being 100% subsidiaries of assessee. 3. The Learned DRP/AO ought to have appreciated the fact that corporate guarantee was given by the assessee company as a procedural compliance for availing of loan by its subsidiaries and for the overall benefit of the group and it was provided as part of the parental obligation to its subsidiaries and is in the nature of shareholder service. 4. Without prejudice to the above, the Learned DRP erred in adopting the corporate guarantee commission @1% without appreciating the fact that the guarantee fees charged by 581 from the assessee in respect of guarantees extended on its behalf was only 0.1%. b) Interest on Receivables from Associated Enterprises: 5. The Learned DRP/AO/TPO erred in law and on facts and circumstances of the case in treating Interest on Receivables as a separate International Transactions in terms of Sec 92B o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 14. The Learned DRP/AO erred in law and on facts and circumstances of the case in disallowing the weighed component of Research and Development expenditure which is not quantified by DSIR in Form No 3CL being Rs. 4,48,96,794/-." 3. Submissions of the Assessee on the grounds of appeal: A) Commission on Corporate Guarantee (CG) [Rs. 10,93,47,091/-]: The facts in brief in relation to this issue are that 'the company' had given corporate guarantee on behalf of its 100% subsidiaries Agile Pharma BV and Helix Healthcare and the loan amount outstanding as on 31st March, 2018 in respect of guarantees given on behalf of its AE's, Agile Pharma BV and Helix Healthcare B.V. is Rs. 238,38,21,250/- and Rs. 767,67,12,500/- respectively. In the Return of Income filed for the subject year, Assessee has made suo-motu adjustment @ 0.10% on the guarantee given to it's AEs amounting to Rs. 1,22,84,673/-. However, in the Draft Assessment Order u/s 143(3) read with sec. 144C of the Act dated 18th September, 2021, the TPO/AO proposed an adjustment of Rs.22,11,24,119/- u/s 92CA with regard to corporate guarantee fees adopting average rate of 1.8%, stated to have been f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ries for which corporate guarantees are extended and the details in this respect were furnished to the TPO/DRP. We submit that the corporate guarantee was extended to AEs to protect the interest of the assessee company since the assessee was holding 100% shares in AEs. Corporate guarantee was given by the assessee as a procedural compliance for availing credit facilities by its subsidiaries and for the overall benefit of the group and it was provided as part of the parental obligation to its subsidiaries and is in the nature of shareholder activity. It is the obligation of the assessee to extend its support to its 100% subsidiaries to improve the business and smooth running of the AEs without any financial impediment, which ultimately benefits the assessee company, being a holding company. We also submit that that no direct financial benefit was extended to the overseas subsidiaries on account of corporate guarantee nor any cost or expenditure was incurred by the assessee company on behalf of its subsidiaries in providing such guarantee. A liability could arise for the Assessee guarantor only if a default took place, but this is hypothetical situation and such default never occurre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. In the case of present assessee also, CG was given by the assessee on behalf of its 100% subsidiaries in its own commercial interest. The expectations from the provision of guarantee were not that of a guarantor i.e., to earn a guarantee fee but were rather of a shareholder. The guarantee was provided to protect its investment interest and obtain returns from investments by way of appreciation and dividends and therefore CG would not constitute an 'international transaction'. 3. In view of the foregoing, he submitted that when the Assessee has not incurred any costs or expenditure in providing corporate guarantee to its AES, it would not constitute 'International Transaction' even under amended law and consequently ALP adjustment on this ground is not warranted. 4. Without prejudice to above submission that TP adjustment in question is not warranted at all on the facts of the case, even in case an adjustment is considered necessary, the same at best should be restricted to the CG rate charged by SBI @0.10% as is evidenced by the Schedule of fees and Charges issued by State Bank of India to the assessee. (A copy of the Schedule is included in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se of the assessee for the earlier year. (vi) Godrej Consumer Products Ltd. v. Asst. CIT [2016] 69 taxmann.com 436 (Mumbai - Trib.)- The assessee Suo motu bench marked the commission chargeable on bank guarantee @ 0.25%. It was determined at 0.50%. 6 Thus, the Tribunals have by and large accepted rate of 0.25 to 0.50% of corporate guarantee as the ALP of the commission between two independent enterprises. But, ignoring all these precedents rendered in relation to corporate guarantee, the Ld. DRP after referring to June 2017 Notification of CBDT and the decision of ITAT, Hyderabad in the case of GOCL Corporation Ltd. vs. DCIT in ITA No. 579/Hyd/17 dated 11.05.2021 and the decision of ITAT, Mumbai in the case of Grindwell Norton Limited in ITA No. 523/Mum/2014 dated 30.09.2016 considered it appropriate to adopt 1% on the amount guaranteed as corporate guarantee commission. 7 We submit that apart from this guidance from CBDT in the Notification dated 07.06.2017 that lacks any scientific measure or formula to determine ALP rate on the facts of a particular case, there is no specific method of determining the arm's length price of corporate guaran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....guarantee issued by the assessee on behalf of its AE is an international transaction, the sequator to that is whether the corporate guarantee estimated by the DRP to the tune of 1% on the amount guaranteed as a corporate guarantee commission as against 0.10% was justified or not. 8.2 In this regard, the assessee had made elaborate submissions which are reproduced elsewhere and submitted that the assessee is taking the financial facilities from the SBI and is paying 0.10% as schedule of fees and charges to the bank. 8.3. We have considered the submissions and found that the charges paid by the assessee cannot be compared for the purposes of determining the ALP of corporate guarantee commission. In our view, no third party would provide similar type of services/corporate guarantee on behalf of its AE and expose itself to the risk of giving the corporate guarantee. Therefore, the charges paid by the assessee to SBI cannot be compared for the purpose of determining the ALP of corporate guarantee commission. The Co-ordinate Bench in the case of Vivimed Labs vide its decision dated 12-04-2022 had adjudicated corporate guarantee commission @ 0.5% qua the extent of the amount of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....products to the AE and therefore the same cannot be treated a separate international transaction. The arm's length price determination for the said consequential receivables is subsumed within the arm's length price determination of the principal international transaction itself. ii) When TNMM method has been applied to bench mark the transactions, it takes care of the interest income, if any, foregone by the assessee on account of late payment received from the associated enterprise. Once the TNMM method and its results are accepted, no further adjustment on account of notional interest from associated enterprise is warranted. iii) Company does not charge any interest on delayed realization even in the case of non-AE transactions. The credit period extended on sales to both AEs and Non-AEs ranges between 30 days and 270 days. The debts shall be outstanding from both AEs and Non-AEs purely because of business reasons and this is a common business practice prevailing in the industry. Hence without prejudice to the above submissions, even if receivables are considered as separate international transaction, interest on receivables can be benchmarked under Int....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the relevant agreement and documents. iii) With regard to rate of interest on so-called delayed receivables, DRP held that SBI short term fixed deposit interest rate may be the appropriate ALP rate to measure the interest compensation in these types of transactions. According to DRP, SBI short term deposit rate is an index rate adopted under Indian conditions to charge interest and accordingly the plea of the assessee to adopt L1BOR rate for the purpose of computing interest on outstanding receivables is rejected by DRP. iv) Credit period allowable should be as per the credit period agreed upon in the intercompany agreement or period/terms mentioned in the invoices wise. The plea of the assessee that a period of nine months should be allowed as the reasonable credit period, as allowed by RBI for export realisations is also brushed aside by DRP by stating that the purpose of RBI regulations is entirely different and the RBI regulations do not contemplate determination of arm's length price. Further, according to DRP, price is negotiated with reference to the agreed credit period, and the effect of extra credit is not factored in the price agreed and hence the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "11. We have considered the issue and examined the contentions. As seen from assessee's contentions, assessee is neither charging interest on any of the receivables outstanding. There is also no basis for adopting only two months as credit period. RBI itself allows a year for the amounts to be realised, if they are in foreign exchange. Whether it is AE or non-AE, it is in the interest of business that assessee receives the foreign exchange early so that it can claim deduction u/s. 10A. Therefore, in our view, putting a limit of two months of credit period itself is arbitrary..... Accordingly, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed". ii) Bartronics India Ltd. v. Dy. CIT [2017] 86 taxmann.com 254 (ITAT Hyd.) iii) GSS Infotech Ltd. v. Asstt. CIT [2016] 70 taxmann.com 356 (ITAT, Hyd.) Based on the above submissions, we urge the Hon'ble Bench not to consider trade receivables as a separate international transaction and even if it so considered, the addition/adjustment made on this ground in the assessment order may kindly be deleted in entirety as the realisations were made within the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... material available on record. This Tribunal while passing the decision in the case of Apache Footwear ITA No. 568/Hyd/2022 (supra) had considered the similar arguments raised by the assessee and thereafter, had decided the issue in the following manner: "9. We have heard the rival submissions and perused the material on record. From the perusal of the order passed by the TPO, it is clear that both the lower authorities have given an elaborate reasoning for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing hereinbelow the chart filed by the assessee which is to the following effect : APACHE FOOTWEAR INDIA PVT. LTD / AY 2018-19 Export Receivables Realisation pattern during A.Y. 2018-19 Particulars Total Number of Invoices during the A.Y. 2018-19 Amount Export Invoice value in Rs. % of invoices realized to total invoices raised during the year A) Realised within credit period 3,001 6,48,15,77,864 91.22 B) Realised beyond credit period of 60 days &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ind any error in the same. 13. The reliance of the assessee in the case of Betchal India Pvt Ltd (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec .92B of the Act and by virtue of which "payment or deferred payment or receivable or any other debt arising during the course of business" has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vide order dt. 16.05.2017 in the case of Betchal India Pvt. Ltd ITA No.6530/Del/2016 (supra) had decided the issue against the assessee. In view of the above, the decision relied upon by the assessee is of no help to assessee. 14. So far as the argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it's A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gral part of R&D activity and it is mandatory for obtaining product approvals, is also eligible for weighted deduction. In case of other two items of In-house R&D Revenue and capital expenditure, it was submitted that Form 3CL is only a report to be submitted by the prescribed authority to the Director General (Income Tax Exemptions) and simply because DSIR had not reported a particular amount, it should not be disallowed when the expenditure incurred by the company is wholly and exclusively for R&D and on its approved R&D facility. However, AO proposed addition of Rs.56,06,33,276/- in the draft order. Against the proposed additions on account of part disallowance of weighted deduction, Assessee filed objections before the DRP. 17. Submissions of the Assessee before DRP: Expenditure on clinical trials: Explanation to Section 35(2AB)(1) which was introduced by the Finance Act, 2001 with effect from 1.4.2002 as reads as under: "Explanation- For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory author....
X X X X Extracts X X X X
X X X X Extracts X X X X
....per DRP, the other condition required to be fulfilled for claiming deduction u/s. 35 (2AB) of the Act is that the prescribed authority has to quantify the items of the expenditure entitled for weighted deduction in Form 3CL post amendment of Rule 6(7A) and the expenditure on clinical trials outside approved R&D facility has been mentioned separately in Form 3CL next to row relating to quantification of expenditure eligible for weighted deduction and therefore the same is not eligible for deduction. It is also noted by DRP that the weighted deduction is given under this section, to encourage the research activity in the in-home facilities. In the opinion of DRP, if the clinical trials are done outside the in-house facility of assessee, the third-party clinical trial entity may also claim the weighted deduction depending on the approval from the competent authority. DRP further noted that the explanation may not enlarge the scope of main provision that the weighted deduction is restricted to the in-house expenses. DRP further observed that on the SLP of the Department, Hon'ble Supreme Court has set aside the decision of Gujarat High Court in the case of Cadila H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed research and development facility, it could not be a disqualification for allowance of weighted deduction. 35. The first observation of the DRP, while denying the weighted deduction on clinical trials expenditure, is that DSIR had issued Guidelines dated May 2014, which provides for approval of the R&D facility subject to fulfilment of certain conditions and one of the conditions for granting approval of the R&D facility is that the company should not claim expenses on clinical trials conducted outside the approved R&D facilities. We submit these guidelines were amended in 2017 and as per these guidelines only the following items of expenditure are excluded for deduction u/s 35(2AB). "x) Expenditure on manpower from departments, other than R&D centre, such as manufacturing, quality control, tool room etc. and expenses incurred on manpower engaged in non-R&D activities such as attending consultation meetings, ascertaining customer choice/response to new products under development and other liaison work shall not qualify for deduction under section 35(2AB) of IT. Act 1961. xi) Capital expenditure on R&D, eligible for weighted deduction will include only ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rat High Court and the decision holds good even now. The Hon'ble Supreme Court has referred additional three questions to Gujarat High Court and has not stayed or setaside the judgment already rendered as observed by the Hon'ble ITAT, Hyderabad in the decision rendered in assessee's own case for earlier years. In fact, in a subsequent and recent decision of Gujarat High Court in the case of PCIT vs. Sun Pharmaceuticals Industries Ltd. (R/TAX APPEAL No. 92 of 2020) dated 25.02.2020, Hon'ble Court affirmed that the issue same stands answered by this Court in CIT vs. Cadila Healthcare Ltd supra (APB-76). 38. As regards the third observation of the DRP that if the clinical trials are done outside the inhouse facility of assessee, the third-party clinical trial entity may also claim the weighted deduction depending on the approval from the competent authority, we submit that such an observation is totally misconceived and unwarranted for the reason that the expenditure incurred by the assessee for its business purposes cannot be claimed as an expenditure by a third party in its books of account, whether it is a basic R&D expenditure or weighted deduction. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company for Research & Development. 42. As per the DRP, the other condition required to be fulfilled for claiming deduction u/s. 35 (2AB) of the Act is that the prescribed authority has to quantify the items of the expenditure entitled for weighted deduction in Form 3CL post amendment of Rule 6(7A) and the expenditure on clinical trials outside approved R&D facility has been mentioned separately in Form 3CL next to row relating to quantification of expenditure eligible for weighted deduction and therefore the same is not eligible for deduction. This observation is also not tenable in law. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those were incurred outside, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. In the present case, it is not in dispute that the expenditure is quantified in Form 3CL as required under Rule 6(7A) and in view of Explanation to sec. 35(2AB) (1), we submit that expenditure on clinical trials, as quantified in Form 3CL, is also eligible for weighted deduction. In fact, following observations of Hon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion on other items of R&D expenditure also. 20. Per contra, the ld.DR for the Revenue relied upon the orders passed by the lower authorities. It was the contention of the ld.DR that the matter is sub judice before the Hon'ble High Court, hence the lower authorities have not followed the decision passed by the tribunal in the earlier assessment years. 21. We have heard the rival contentions of the parties and perused the material available on record. Admittedly the tribunal in its earlier order had decided this identical issue in favour of the assessee in ITA No.1604 & 1605/HYD/2016 for A.Ys. 2011-12 and 2012-13 decided on 20.07.2018 wherein it was held as under : "8.4 As noted above the sum of Rs.2,632.50 lakhs (Rs.3,400.02 lakhs in A.Y. 2012-13) added by the Assessing Officer includes a sum of Rs.1,72,91,656/- (Rs.1,28,31,395/- in AY. 2012-13) on other expenses like Rates & Taxes, Travelling Expenses, etc. The Ld. AR. relied upon the case of Intas Pharmaceuticals Ltd supra for the proposition that any revenue expenditure incurred in respect of the approved R&D facility is eligible for the weighted deduction. It is seen that the Hon'ble ITAT relied upon its earli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 32(2AB) which was approved by the Gujarat High Court. Since the decision has not considered the Explanation given, the decision need not be followed. It was further contended that when there are two possible views, the one which is in favour of the assessee should be followed as held by the Hon'ble Supreme Court in the case of CIT vs. Vegetables Products Ltd (88 ITR 192) (SC). It was the submission that the Hon'ble Supreme Court has referred additional three questions to Gujarat High Court and has not stayed or set-aside the judgment already given, on which the Ld. CIT(A) relied upon. He also submitted that the objects of the assessee R & D facility as stated in Form 3CM has been analysed by the Ld. CIT(A) and even though the expenditure was incurred outside for field trials, the expenditure has to be considered for the purpose of 'in-house' research. He supported the order of the Ld. CIT(A). 9. We have considered the rival contentions and perused the case law placed on record. In the decision of Concept Pharmaceuticals Ltd (supra) the Coordinate Bench did not allow the expenditure spent outside the R & D unit but the Bench has not considered the explana....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was examined by the Coordinate Bench which was subject matter of appeal before the Gujarat High Court and Gujarat High Court has approved the same. As seen from the order of the Supreme Court in Special Leave to Appeal (C) No. 770/2015, dated 13.10.2015, the grievance of Revenue with reference to non framing of three questions were considered by the Hon'ble Supreme Court as those three questions are considered to be 'substantial question of law' and referred to the Hon'ble High Court to hear the aforesaid three questions of law. However, the judgment already passed by the Gujarat High Court has not been set-aside. As Ld. CIT(A) has followed the Coordinate Bench decision, which was approved by the Gujarat High Court and as no contrary High Court judgment has been placed on record, we approve the order of the CIT(A) and reject the Revenue contentions." As the issue in both the years under consideration are materially identical to that of AYs 2011-12 and 2012-13, following the decision of the coordinate bench in those years, we uphold the order of the CIT(A) and dismiss the grounds raised by the revenue in both the years under consideration." 23. In the present case, undi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inding on all income tax authorities within its jurisdiction. 35. In Union of India v. Kamlakshi Finance Corporation Ltd. 1992 taxmann.com 16, Supreme Court held and reiterated that the principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not acceptable to the department, which in itself is an objectionable phrase, and is the subject matter of an appeal can be no ground for not following the appellate order unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to the assessee and chaos in administration of the tax laws. 36. Following the above decision, Supreme Court again in Collector of Customs v. Krishna Sales (P.) Ltd. 1994 Supp. (3) SCC 73, reiterated the proposition that mere filing of an appeal does not operate as a stay or suspension of the order appealed against. It was pointed out that if the authorities were of the opinion that the goods ought not to be released pending the appeal, the straight-forward cour....