TaxTMI 
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2023 (11) TMI 196
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....als were taken up together for hearing. The appeal pertaining to A.Y 2013-14 was agreed by both the parties to be considered as the lead case and the decision rendered therein to apply paripassu to identical issues raised in A.Y 2014-15. We shall first be dealing with Assesses appeal for A.Y 2013-14. ITA 400/Ahd/2018 A.Y 2013-14 : ASSESSEE'S APPEAL 3. Giving a brief background of the assessee, learned Counsel for the assessee pointed out that the assessee-company is engaged in the business of manufacturing of pharmaceutical products. That the pharmaceutical products manufactured by it were sold outside country, to facilitate which wholly owned subsidiaries of the assessee company were incorporated in various foreign jurisdiction. The modus operandi being that the assessee made export sales to these subsidiaries, who in turn sold the goods in the foreign jurisdiction by obtaining all necessary approvals and registrations as required as per the laws of those countries. That in the course of transactions carried out with such subsidiaries, which qualified as Associate Enterprises of the assessee in terms of transfer pricing provisions in Chapter X of the Act, the assessee made adva....
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.... account of interest on advances given to AEs our attention was drawn to ground No.1(i) which reads as under:- 1 "i. Transfer pricing adjustment on interest on advances given to AEs - Rs. 2,59,90,049/- a) In the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the upward adjustment by AO/TPO by charging interest on business advances given out of commercial expediency to wholly owned AEs for setting up business by registering products with local authorities, working capital etc. The learned CIT(A) has disregarded the fact that the Appellant had already charged interest on these advances. Further, the CIT(A) failed to appreciate the commercial expediency of granting advances to the AEs. b) That in the facts and circumstances of the case and in law, the learned CIT(A) has failed to appreciate that the appellant company has justified the arm's length rate of interest on commercial advances under CUP methodology by comparing the interest charged by it to AEs at with rate of interest quoted to it by independent third party (Bank of Nova Scotia, Singapore) in the context of providing foreign currency loan. The learned CIT(A) has failed to ....
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.... made with respect to advances made to Accord Pharmaceutical Ltd. Brazil by the AO /TPO, he restricted the addition to Rs. 2.59 Crs 9. Before us, the ld.counsel for the assessee reiterated the arguments made before the lower authorities. Brief synopsis of the arguments made in writing was also filed before us. Briefly put, the limbs of the arguments made by the ld.counsel for the assessee against the upward adjustment was made as under: * The impugned advances have been made for the business purpose of the assessee, and they did not warrant any TP adjustment; * Internal CUP was applied by the assessee for determining the ALP of the transaction is a valid CUP and could not have been rejected; * That internal comparables are to be preferred over the external comparables, and therefore, the external comparables adopted by the TPO is to be rejected; and the assessee's internal comparable has to be accepted; * That the rate of interest to be applied for determining the ALP was to be the rate applicable to the currency in which the loan was taken or repaid and in the present case, being USD, the TPO had erred by adding mark ups to it based on the geographical location of the AE ....
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....e contended that the loans given by the assessee to its AE also being in USD, internal CUP of the assessee was the most appropriate for benchmarking the impugned transaction of interest on loans to the AE's. 12. Ld.Counsel for the assessee thereafter drew our attention to the basis of the TPO for rejecting the internal CUP of the assessee. He drew our attention to page no.6 of the TPO's order wherein the TPO had noted that the AE's being located in different geographical locations and internal comparable being located in one specific region only i.e. Singapore, this was not appropriate comparable since different geographical location of the AEs was not addressed by this comparable. He thereafter took us to the finding of the ld.CIT(A) for rejecting the internal CUP at page no.40 of the order para 3.7 & 3.8 as under: The appellant has argued that the internal CUP in the form of quotation obtained from Bank of Nova, Scotia (BNS), Singapore should be taken for benchmarking and relied upon various case laws including that of Honourable Gujarat High Court in the case of CIT Vs. Adani Wilmar Limited [363 !TR 338]. In the case before the Honourable High Court of Gujarat in the above ca....
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.... the public domain." 13. Referring to the above, he stated that the basis for the ld.CIT(A) for rejecting the internal CUP was that it was not authentic, which was based on the decision of Hon'ble Gujarat High Court in the case of CIT Vs. Adani Wilmar Limited, 363 ITR 338. The ld.counsel for the assessee contended that the reliance placed by the ld.CIT(A) on this decision was misplaced and distinguishable on facts. He stated that in the said case, the assessee had relied upon quotation published by the Oil Board, an independent organization, for benchmarking its international transactions adopting CUP method. Hon'ble High Court in the case had held that publication was authentic and reliable and could be treated as comparable for CUP analysis. The ld.counsel for the assessee pointed out that relying upon the said decision, the ld.CIT(A) held that quotation relied upon by the assessee in the present case was not a publication, and therefore, could not be relied upon as authentic and reliable. The ld.counsel for the assessee contended that this quotation of the assessee in any case could not have been a public document because it is a quotation on account of private agreement being ....
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.... there is no basis for doubting the authenticity of the quotation. Having said so, we agree with the ld. Counsel for the assessee that the decision of the Hon'ble Gujarat High Court in the case of Adani Wilmar (supra) supports the case of the assessee that the internal CUP being derived from an authentic document, cannot be rejected. In the light of the above, we hold that the basis with the ld. CIT(A) for rejecting the internal CUP of the assessee was not correct. Having held so, there is no doubt that the internal CUP is the best comparable which can be taken for comparability analysis as compared to external comparable and no deficiency having been found in the internal CUP, the external CUPs taken by the AO/TPO are rejected as not applicable for comparability analysis in the present case. 15. Since we have rejected the external CUP taken by the authorities below for the aforesaid reason, we do not consider it fit to deal with the other arguments of the ld. Counsel for the assessee against the same. In view of the above, we hold that the transactions of loans advanced to AEs by the assessee was adequately demonstrated by the assessee to be at Arm's Length Price based on the c....
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....ned Counsel for the assessee before us and, briefly put, his arguments against the adjustment so made were to the effect:- a) that the assessee had adopted TNMM method for determining the arm's length price of its international transactions of purchase and sales to Associate Enterprises after making working capital adjustment to the PLI adopted by it. That having done so, no further adjustment on account of outstanding receivables for notional interest thereon was required as held by the Hon'ble Delhi High Court in the case of Pr. CIT vs. Kusum Healthcare Pvt. Ltd. vide order dated 25.04.2017 in ITA No. 765/2016 and by the decision of ITAT Ahmedabad Bench in the case of Micro Ink Ltd. Vs. ACIT, reported in [2016] 157 ITD 132 ( ITAT-Ahd). b) Even otherwise the component of sales made by the assessee by way of exports to its AEs was 25% of the total sales turnover of the assessee and the receivables were outstanding for a period of only 45 days. The outstanding, therefore, clearly was not for substantial period and even otherwise could be attributed to commercial expediency, thus the outstanding could not be treated as loans or advances for the purposes of making any adjustment o....
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.... account of notional interest on outstanding receivables; the same having already been factored in by the working capital adjustment made to the profit level indicator of the comparables and the assessee while adopting the TNMM method for comparability analysis. 20. He thereafter drew our attention to the findings of the TPO at page No.41 of his order where the TPO began discussing the issue of benchmarking of receivables and finally to his findings at page No.52 wherein, drawing our attention to paragraph No.10.6 of his order, learned Counsel for the assessee pointed out that the TPO relied on the decision of the ITAT Ahmedabad Bench in the case of Ameriprise India Pvt. Ltd. Vs. ACIT in ITA No. 2575/Del/2014, holding that the outstanding receivables were to be treated as separate international transactions rejecting the contention of the assessee that the same stood demonstrated as at arm's length where TNMM method was adopted. 21. He thereafter drew our attention to the findings of the learned CIT(A) at page No.72, paragraph No.4.10 of the order pointing out that the learned CIT(A) relied on the order of the ITAT in the case of Bechtel India Pvt. Ltd. Vs. ACIT, in ITA No. 6530/....
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.... sales transactions made to AEs. The reasoning being that the working capital adjustment made to the PLI take care of the overdue outstanding receivables. The ld. DR has been unable to point out any contrary decision on the issue of either the jurisdictional High Court or of the Hon'ble Apex Court; nor was he able to distinguish the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. (supra) before us. 26. Having said so, we completely agree with the ld. Counsel for the assessee that the said decision squarely applies to the facts of the present case since the assessee in the present case had done the TP analysis of its international transactions using the TNMM method and after making working capital adjustment to its PLI. These facts were sufficiently demonstrated before us through relevant documents of the transfer pricing report as noted above by us and were not controverted by the ld. DR also before us. Therefore, in the present case, we hold that no upward adjustment of interest on the outstanding trade receivables of the assessee relating to its AEs was warranted in the present case and the adjustment, therefore, made amounting to Rs. 3,10,02,....
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.... that the AO/TPO has failed to find out appropriate comparable for IP Firm and benchmarked the IP Firm with entities whose Functions, Assets and Risk ('FAR') Analysis and business profile was more akin to the appellant company and which were used by the appellant company as comparable entity in its TP documentation. e) That in the facts and circumstances of the case and in law, the learned CIT(A) further erred in ignoring the fact that under secondary analysis, the appellant company has substantiated the ALP under internal Resale Price Method by benchmarking gross margin earned by it in reselling the products bought from IP Firm vis a vis the gross margin earned by it in reselling the products bought from third parties." 29. Giving brief background of the issue, the learned Counsel for the assessee contended that the assessee was a substantial partner in two partnership firms - one located in Dehradun and the other in Sikhim- from whom all purchases were made by the assessee in a sense these entities were the contract manufactures of the assessee. These two units were eligible for deduction under Section 80IC and 80IE of the Act respectively. The transactions of purchase....
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....mparables in the case of AE was not easily available and as per Rule 10C(2)(e) of the Income-tax Rules, 1962, such party whose comparables were not easily available could not be treated as a tested party. That even otherwise for determining the arm's length price of international transaction with AE, the assessee had been taken as a tested party and thus clearly the TPO was adopting double standards taking assessee as a tested party in transactions for determining the arm's length price of international transactions and AE as a tested party for transactions entered into with domestic entities. iv) That the TPO despite taking the AE as a tested party had still gone on to take the same entities as comparables which the assessee had selected taking itself as a tested party. The learned Counsel for the assessee contended that the AE being a contract manufacturer the assessee's comparables could not have been comparables of the AE of the assessee. v) That on a gross profit comparison on the transactions undertaken by the assessee with the AE and similar transactions undertaken by the independent parties, the assessee had earned more gross profit with its AE at 49.87% as opposed to t....
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....ffect as if the said transaction never qualified as specified domestic transactions . Reliance was also placed on the following case laws wherein the said proposition was followed,: vi) Texport Overseas Pvt Ltd vs. DCIT (Bangalore ITAT), IT(TP)A 1722/Bang/2017 vii) Yorkn Tech Pvt. Ltd. v DCIT (ITA No.635/Del/2021 ) viii) SKM-UMSL JV vs ITO ITA 229/CTK/2019) ix) Shree Sai Smelters (I) Ltd. vs ACIT 118 taxmann.com 350(Gauhati ITAT) x) Raipur Steel Casting India (P) Ltd v PCIT 117 taxmann.com 944 (Kolkatta Trib) xi) Swastik Coal Corporation V PCIT ITA 486/Ind/2018 (Indore ITAT) 34. On going through the facts of the case we find that the assessee had reported this transaction qualifying as specified domestic transaction u/s 92BA(i) of the Act as transactions relating to section 40A(2)(b) of the Act. The TPO has also accepted this fact which finds mention in his order. The proposition of law canvassed by the assessee has remained uncontroverted before us. Ld.DR was unable to distinguish the decisions relied upon by the assessee before us. 35. In view of the same, following the proposition of law laid down by the Hon'ble Karnataka High Court in the case of Texport (supra), ....
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.... took cognizance of the amount mentioned in form No.3CL and allowed weighted deduction with respect to the same only. With respect to the balance, being an amount of Rs. 4283 lakhs of Revenue expenditure and Rs. 809 lakhs of capital expenditure claimed by the assessee, the AO denied weighted deduction on the same and accordingly disallowed an amount of Rs. 5087 lakhs (Rs.4283/- lakhs plus Rs. 809 lakhs). 39. The ld.CIT(A) noted that out of the amount of claim disallowed to the assessee , Rs. 3474.70 lakhs pertained to clinical trial incurred to test and noting that this claim has been allowed to the assessee in its own appeal in the preceding assessment year right from A.Y 2007-08 to A.Y 2012-13, he allowed the claim of the assessee of weighted deduction on clinical trial expenses of Rs. 3474.70 lakhs . With respect to the balance, he upheld the order of the AO on the same reasons as that followed by the AO, that the said expenses had not been approved by the prescribed authority. 40. Both the assessee and the Revenue are aggrieved by order of the ld.CIT(A). 41. With respect to the contention made by the ld.counsel for the same, the same were to the following effect - i) The c....
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....estriction of claim of the assessee to weighted deduction under section 35(2AB) of the Act to the extent approved by the prescribed authority was in accordance with law. With respect to its grievance of the allowance of claim of weighted deduction to the expenditure incurred on clinical trial, the ld.DR reiterated its contentions that the assessee was only eligible to claim weighted deduction to the extent approved by the DSIR, and the ld.CIT(A), therefore had erred in allowing deduction to clinical trial which was not approved by the prescribed authority. 43. We have heard contentions of both the parties; perused he orders of the authorities below and gone through various case laws referred to before us. 44. The issue relates to claim of deduction on account of R&D expenditure incurred in in-house facility of the assessee; that the assessee is eligible to claim such weighted deduction is not disputed before us. The only issue in dispute is quantum to which the assessee is eligible. The claim of the department being that the assessee is eligible to claim deduction only on the expenditure approved by the prescribed authority in Form No.3CL and the assessee arguing otherwise. 45. ....
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....ranting approval. It is clear from the same, therefore, that the Form No.3CL is only for the purpose of intimating the concerned officer of the Department regarding grant of approval to an in-house R&D facility of assessee by the prescribed authority. The fact that this form no.3CL is required as per the Rule to be submitted to the DGIT within 60 days of grant of approval makes it clear that the only purpose is intimating the concerned officer within a reasonable period of time of grant of approval to the concerned assessee. Since this form no.3CL is to be submitted only once, as per the Rules, within 60 day of grant of approval, there can be no question of the prescribed authority approving the quantum of expenditure incurred by the assessee in R&D eligible for deduction under section 35(2AB) of the Act. This expenditure is incurred on a continuous basis from year to year, and there is no requirement for the prescribed authority, either in the section or Rules for issuing Form no.3CL every year. As noted above, sub-Rule 7(A) of Rule 6 requires Form no.3CL to be submitted only once by the prescribed authority, that too, within 60 days of grant of approval. 47. We have also perused....
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.... find, this reasoning of the ld.CIT(A) to be not in accordance with law, we hold that claim could not have been denied for this reason on the remaining amount. Even otherwise, we find on merit that the assessee has reasonably demonstrated that the remaining expenditure were also in relation to R&D activity. It has been repeatedly contended by the assessee, even before the lower authorities that, the expenditure relating to salary of R&D person of IBPL and capital expenditure relating to intangible of IBPL, were all in relation to R&D activity of an entity which since had merged with the assessee. For all purposes therefore, this expenditure pertained to that incurred by the assessee only, and therefore, the assessee is entitled to claim weighted deduction on the same, we hold. The issue is squarely covered by the decision of the ITAT in the case of Dr.Reddy's Laboratories Ltd. (supra) cited by the ld.counsel for the assessee before us. 52. As for the expenditure incurred on Exhibit Batches and other expenses, the explanation regarding nature of the expenditure being in relation to samples/prototype obtained for pilot studies and in relation to labour cost, staff training etc in th....
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....various decisions of Hon'ble High Courts and Hon'ble Apex Courts as under: * CIT v Arvind Mills Ltd (Gujarat High Court) (Tax Appeal 1407 of 2011) (Refer page 695 to 698 of Legal Paperbook) * Dr. K. Nedunchezhian v DCIT (Madras High Court) (153 taxman 183) (Refer page 699 to 701 of Legal Paperbook) * Jute Corporation of India Ltd vs CIT (Supreme Court) (53 taxman 85) (Refer page 702 to 707 of Legal Paperbook) * CIT vs Kanpur Coal Syndicate (Supreme Court) (53 ITR 225) (Refer page 708 to 713 of Legal Paperbook) * CIT vs Pruthvi Brokers & Shareholders Pvt Ltd (Bombay High Court) (23 taxmann.com 23) (Refer page 714 to 723 of Legal Paperbook) 57. Therefore, both the authorities below have wrongly denied the assessee's claim of deduction, for the simple reasoning that it does not make any difference that before the AO the assessee had made claim under section 35(1)(i), while before the ld.CIT(A) the assessee claimed under section 35(1)(iv) of the Act. What is pertinent is, whether the assessee is eligible to claim deduction in whichever section it qualifies. As long as the assessee is entitled to deduction, mere wrong quoting of section will not disentitle the claim of deduct....
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....ted the AO noted substantial investment made by the assessee in capital work-in-progress (CWIP) increasing from Rs. 94.58 crs as at the beginning of the year to Rs. 392.08 crs as at the end of the impugned year. He also found that the assessee had made huge payment of interest, to the tune of Rs. 47.48 crs during the year. The assesses explanation of investment in CWIP being made out of own funds was rejected by the AO since the assessee failed to establish nexus and establish that borrowed funds were utilized for giving capital advances for the purpose of CWIP. Accordingly he held that borrowed funds had been used for investing in CWIP and computing the funds so allegedly deployed on CWIP on the average CWIP for the year he worked out the interest attributable to the same on proportionate basis amounting to Rs. 15,11,66,895/-, which accordingly was disallowed in terms of section 36(1)(iii) of the Act. 63. The ld.CIT(A), however, noted that interest free funds owned by the assessee was much more than the interest free advances towards CWIP. He also noted, as a matter of fact, that the assessee company had earned sufficient profits for the purpose of making investment in CWIP durin....
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....e disallowance u/s 14A of the IT Act 4.1 The Ld CIT(A) has failed to appreciate that the onus lies on the assessee to demonstrate that it had interest free funds available with it for making such investment/-and not other way around. 4.2 The Ld CIT(A) has failed to appreciate that in the case of mixed funds, theory of apportionment of interest is applicable. Reference in this regard is made to the decision of the Hon'ble Supreme Court in the case of Maxopp Investment ltd. Vs. CIT (Civil Application NO.104-109 of 2018). 4.3 The ld.CIT(A) has failed to appreciate that as per section 106 of Evidence Act, when any fact is especially within the knowledge of any person, the burden of proving the fact is upon him." 67. The facts relating to the issue are that the assessee had suo moto made disallowance of Rs. 48,57,942/- on account of expenses incurred for the purpose of earning exempt income as per section 14A of the Act. The AO, however, observed that the assessee had failed to prove that no interest bearing funds have been used for the purpose of making investment in shares, income from which is exempt income tax. Accordingly, he invoked Rule 8D of the Income Tax Rules 1962 ....
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....e as per Rule 8D(2)(ii) is uncalled for." 70. Further it was brought to our notice that the Hon'ble apex court has laid down the law that where sufficient own interest free funds are available no disallowance of interest is called for u/s 14A of the Act. In this regard our attention was drawn to the following decision of the Hon'ble Apex Court: i) PCIT Vs. Sintex Industries Ltd., 93 taxmann.com 24 Since the Ld.DR was unable to controvert the findings of the Ld.CIT(A) both on facts and on law, we see no reason to interfere in the order of the ld.CIT(A) deleting the disallowance made by the AO of interest amounting to Rs. 76,81,058/- made u/s 14A of the Act. 71. The Ld.CIT(A) deleted disallowance of administrative expenses u/s 14A of the Act noting that the assessee had suo moto disallowed expenses more than what was computed by the AO as disallowable. His findings in this regard at para 8.5 of the order is as under: "8.5 Further, the AO has made the disallowance of administrative expenses of Rs. 23,43,548/- as per Rule 8D(2)(iii). However, as the appellant on his own has made disallowance u/s. 14A of Rs. 48,57,942/- no further disallowance is called." 72. The Ld.DR was unable....
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....ission earned by non-residents for acting as selling agent for Indian exporters cannot be said to accrue or arise in India when such non-resident was rendering services from outside India. Taking note of this proposition laid down by the Hon'ble Apex Court, he noted that in the facts of present case, as per the evidence filed by the assessee, and as noted by the AO also, all services were rendered by the agents outside India. Applying the decision of Hon'ble Apex Court therefor to the facts of the present case, he held that no TDS was liable to be deducted on the same and the commission expenses, therefore, could not be disallowed in terms provisions of section 40(A)(ia) of the Act. He relied on several other decisions of the Hon'ble High Courts and ITAT while deleting the disallowance, which are noted at para 9.12 of the impugned order. 76. We have heard both the parties. The Ld.CIT(A) has examined and decided the issue on two aspects - i) Whether the commission paid to foreign agents is taxable in India as per domestic law; ii) Whether the assessee ought to have deducted tax as per section 195(2) of the Act and if the same was not deductible he ought to have obtained a certi....
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....dia and the source of income was in India. There is no fact brought out by the AO in the order as well as observed by me during the course of appellate proceedings to indicate that the services have been rendered in India. 9.7. The judgment of honourable Supreme Court in the case of CIT vs. Toshoku Limited [125 ITR 525 (SC)] is important on the issue, whereby it has been held that commission earned by the non-resident for acting as the selling agent for the Indian exporter, wherein such non-resident was rendering services from outside India does not accrue in India. In the present case before me also, the foreign selling commission agents were of foreign country, from where the procurement service had been provided for which the commission has been paid, and therefore, the issue is directly and squarely covered by the Apex Court decision." He also dismissed the finding of the AO, that the income was deemed to accrue or arise in India in terms of section 9(1) of the Act, noting that neither any services were rendered by these agents in India nor did they have any business connection in India by way of permanent establishment or place of business in India. Reference was made to th....