TaxTMI 
TaxTMI 
2023 (11) TMI 326
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....re provided below. 2. Imputation of interest on the Share application money pending allotment - INR 9,25,35,248 [Page 3 and 4 of the Final Assessment Order] The learned AO/ the learned TPO and the Hon'ble DRP erred in facts and in law in imputing the interest on share application money, pending allotment, and in doing so have grossly erred 2.1 In failing to appreciate: 2.1.1 that re-characterization of the transactions is not permissible under the transfer pricing provisions. 2.1.2 the fact that only real income can be brought within the ambit of taxation and imputing interest on unearned income is unwarranted and unjustified. 2.2 In ignoring the fact that investments have been made as share application money to the Associated Enterprises ("AES") of the Appellant and hence, the amount remitted as share application money (and invested by the Appellant) could not be deemed as granting of loan. 2.3 In ignoring the fact that subsequently corresponding shares were allotted as against such payment of share application money. Further, such payment is also capital account. transaction and provision of Chapter X is not appli....
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.... no interest-bearing funds have been utilized for making such investments. 4.2.2 that the said investments were made out of commercial expediency and entirely for business reasons and not to earn dividend income. 4.3 The Hon'ble DRP and the learned AD erred in not following the decisions of Hon'ble Mumbai ITAT in Appellant's own case for AYs 2001-02/ AY 2002-03/ 2006-07 wherein the Mumbai ITAT deleted the disallowance under section 14A of the Act. Further, the same have also erred in not relying on the decision of Hon'ble Mumbai ITAT in Appellant's own case for AY 2014-15 and not restricting the disallowance (if, any) to INR 2,52,50,670 based on the specific directions given by the Hon'ble ITAT in the order passed for AY 2014-15. 4.4 Without prejudice to the above argument of the Appellant, disallowance, (if any) under Section 14A should be computed based on the methodology provided under Rule 8D of the Rules as amended by Notification No. 50 1949(E) [F.NO.370142/7/2016-TPL]. 5. Disallowance under Section 36(1)(iii), Section 37 and Section 38 of the Act amounting to INR 15,34,55,236 (Page 9 to 18 of the Final Assessment Or....
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.... 6.3 Which relates only to the exempt income and not otherwise. The Hon'ble DRP and the learned AO erred in disregarding the decision of Mumbai ITAT in the Appellant's own case for AY 2014-15 wherein the Hon'ble ITAT has deleted the addition made to the book profit under Section 1151B of the Act by the learned AO 6.4 The Hon'ble DRP and the learned AO erred in disregarding the decision of Special Bench of the ITAT in the case of ACIT Vs. Vireet Investment Pvt. Ltd. [2017] ITA No. 502/ Del/2012 (Delhi Tribunal), which squarely applies to the Appellant's case. 6.5 The Hon'ble DRP and the learned AO erred in disregarding the decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC), wherein the Hon'ble Court has held that the AO does not have the jurisdiction to go beyond the net profit shown in the audited profit and loss account except to the extent provided in the explanation to section 115JB of the Act 7. Disallowance of weighted deduction amounting to INR 17,54,78,992 claimed under Section 35(2AB) of the Act (Page 25 & 26 of the Assessment Order] The Hon'ble DRP and ....
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....come tax computation Form along with Final Assessment Order] The learned AO erred in levying interest under Section 2348 of the Act amounting to INR 3,46,58,553 without taking cognizance of the fact that the Appellant had paid more than 90 percent of the assessed tax as advance tax. 10. Initiation of penalty proceedings under Section 271(1)(c) of the Act (Page 29 of the Final Assessment Order] The learned AO erred in law and facts in initiating penalty proceedings under Section 274 read with Section 271(1)(c) of the Act, as no case is made out by the AO that the Appellant has concealed any particulars of income/ furnished inaccurate particulars to the learned AO either in the tax return or during the assessment proceedings. The appellant craves to add, alter, amend, or delete all or any of the grounds of appeal before or during the course of Hearing before the Honorable ITAT. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be granted. 3. Assessee is a company engaged in integrated manufacturing and export of pharmaceutical dosages forms. It markets and supply pharm....
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....ous subsidiaries such as Cyprus, Singapore, United Kingdom, Nigeria and Malaysia are available. He therefore held that the outstanding amount due and recoverable as on 31st of March 2015 in case of 8 associated enterprises amounting to Rs. 430,920,620 is outstanding on which the interest of Rs. 3,307,842 should have been charged by the assessee and therefore the adjustment was made towards interest on advances receivable to assessee from its associated enterprises. ii. LD TPO further noted that assessee has invested in share application money in two foreign companies situated at Singapore and United Kingdom. In Singapore entities the assessee has invested a sum of Rs. 2,814,042,859 and in the United Kingdom associated enterprise assessee has invested Rs. 1,578,339,875/- as share application money. In the earlier years, the above sum was treated as loan by the TPO and interest was charged, according to the direction of the learned dispute resolution panel. Therefore the learned assessing officer noted that where there is a delay of more than six months between the payment of share application money and the issue of shares by the foreign associated Enterprises , share applic....
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....he business of manufacturing and selling pharmaceutical products wherein the assessee has debited Rs. 152,013,488 under the head business promotion expenses in the profit and loss account. The assessee has booked a sum of Rs. 15,199,296/- out of the above expenditure on account of sale promotion activities to be distributed to the field staff, dealers, distributors and doctors in the form of various products such as bags, watches, travel bags, earphones, study lamp, Wallet, coffee Mixtures , books, stationery, pen etc. The assessee submitted that these are the sales promotion activities and incurred expenses for promotion of the name and brand of the company. The learned TPO held that the above expenditure incurred by the assessee is against the notification issued by the Medical Council of India on 10/12/2009. The learned AO asked the assessee to submit details of the expenditure however; assessee has merely furnished the breakup of the expenses. Therefore, the learned assessing officer considering the guidelines of the Indian Medical Council, circular number 5/2012 dated 1/8/2012 has disallowed the sum of Rs. 15,199,296 as expenditure incurred but prohibited by law. iv. ....
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....tion panel - 2, Mumbai - 2 (the learned DRP) who issued directions on 18/3/2021. The learned DRP: - i. On the issue of imputation of interest of Rs. 330,700,842/- on advances receivable by the assessee from the associated enterprises, upheld the action of the AO following the direction of the learned dispute resolution panel in earlier years. ii. On the issue of computation of interest amounting to Rs. 92,535,248 on share application money pending allotment with various foreign associated Enterprises, the learned dispute resolution panel following its direction in earlier years confirms the action of the learned AO. iii. With respect to the disallowance of business promotion expenditure of Rs. 15,199,296/- under section 37 (1) of the act, the learned DRP followed its earlier direction and the assessing officer was directed to restrict the disallowance to the 50% of the expenses incurred similarly Provided in the earlier years. iv. With respect to disallowance under section 14 A of the act of Rs. 153,455,236/-, the learned DRP following the direction of dispute resolution panel in earlier years confirm the disallowance. v. With respect to....
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.... stands squarely covered in favour of the assessee. He further submitted that there is no difference in the facts and circumstances of the case as covered in the earlier years as well as in this year, this is also recorded by the learned dispute resolution panel and the learned transfer pricing officer because both of them have made and confirmed directions based on their findings of the earlier year in the case of the assessee. 14. The learned departmental representative vehemently supported the order of the learned transfer pricing officer and direction of the learned dispute resolution panel stating that assessee has issued loan to its associated concerns in the garb of share application money and therefore, it is a capital financing transaction that should have been benchmarked for the interest imputation. 15. We have carefully considered the rival contention and perused the orders of the lower authorities. We find that identical issue arose in the case of the assessee for assessment year 2014 - 15 and 2015 - 16 wherein adjustment proposed by the learned TPO and confirmed by the learned dispute resolution panel were this deleted by the coordinate bench. We find that for a....
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....of funds. Thus, the repayment of part of share application money by the A.Es is part of the process relating to share allotment. The assessee on without prejudice basis further submitted that if at all any interest is to be imputed the interest rate to be calculated with reference to LIBOR rate. The TPO vide order dated 25-10-2018, passed under section 92CA(3) of the Act at the outset noted that interest adjustment on similar issue was made in earlier years i.e., in assessment years 2011-12, 2012-13, 2013-14 and 2014-15 and the same was upheld by the Dispute Resolution Panel ("DRP"). Following the approach adopted in the earlier years, the TPO rejected the contention of the assessee and held that imputation of interest on share application money is justified as there has been a delay of more than six months between the payment of share application money and the issue of shares by the foreign A.Es for which no interest was charged by the assessee from its A.Es. The TPO further noted that in respect of share application money invested by the assessee during the relevant assessment year interest imputation is not required as either the investment was itself made in March 2015, or the ....
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....ondly, the remittance of the said share application money was approved and supervised by the RBI and the purpose of remittance as approved was investment in share capital. As such, there is no dispute to the fact that the amounts paid were on account of investment in share capital of the associates or subsidiaries. We further note that even otherwise the transaction of issue of shares is a capital account transaction and not a revenue account transaction and therefore could not be said to result in any income per se. We further notice that the co-ordinate benches of the Tribunal have also taken a view that no imputation of interest could be made on a transaction of share application money paid to subsidiaries. The coordinate bench of Mumbai Tribunal in the case of Aries Agro Ltd. v. DCIT - ITA No. 1452/Mum/17(supra) has been held as follows : "18. We have heard the rival submissions of both the parties and perused the material on record. The undisputed facts are that the assessee has advanced money as share application money to Golden Harvest a foreign AE to set up a plant in free trade zone in Sharjah. It is also undisputed that the AE could not convert the share applicat....
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....nsaction of issue of shares to its associated enterprises, is not disclosed as an international transaction. This the petitioner was obliged to do as the transaction is an international transaction. This was in fact done by the petitioners in Vodafone IV. This stand by the Revenue is a little curious as in Vodafone IV the Revenue contended that as the petitioners therein had filed Form 3CEB in respect of issue of shares to its associated enterprise, they had submitted to the jurisdiction of Chapter X of the Act and cannot now contend that the proceeding to tax such shortfall on capital account is without jurisdiction. In this case, an exactly opposite stand is being taken by the State. The State is expected to be consistent and not change its stand from case to case. Be that as it may, the petitioner herein had not disclosed the transaction in Form 3CEB as, according to the petitioner, it was not an international transaction for the reason that it did not give no rise to any income. The fact that the petitioner chose not to declare issue of shares to its non-resident associated enterprises in Form 3CEB as in its understanding it fell outside the scope of Chapter X of the Act now st....
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.... tax the arm's length price of the share issued by the petitioner to its non-resident associated enterprises and also deemed interest which is sought to be brought to tax on the ground of non-receipt of the consideration equivalent to the arm's length price by the petitioner on issue of equity shares. It is further clarified that the petitioner's objection before the Dispute Resolution Panel filed on April 25, 2013, on all issues save and except the issue covered by this order would be considered by the Dispute Resolution Panel on its own merits." 19. The Hon'ble Bombay High Court further in the case of Equinox Business Parks (P.) Ltd. v. Union of India has held as under : "This has been accepted by the Revenue and is evident from the order of DRP dated 30 October 2014 in Petitioner's case for A.Y. 2010-11. In the A.Y.2010-11 also the Petitioner had issued CCDs and equity-shares and the basis was identical to the present Petition. The Revenue sought to tax the Petitioner in terms of Chapter X of the Act. However, the Petitioner objected to the Draft Assessment order before DRP. On 30 October 2014, DRP issued directions under section 144C(5) of ....
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.... 10. The learned D.R. could not show us any reason to deviate from the aforesaid order and no change in facts and law were alleged in the relevant assessment year. Thus, respectfully following the order passed by the Co- ordinate Bench of the Tribunal in assessee's own case cited supra, we direct the Assessing Officer/TPO to delete the adjustment towards notional interest on share application money for delayed allotment of shares. Accordingly, ground no. 2, raised in assessee's appeal is allowed." 16. As the issue is squarely covered in favour of the assessee, in earlier years on identical facts and circumstances, respectfully following the decision of the coordinate bench we direct the learned AO to delete the adjustment on account of interest imputed on share application money. Accordingly, ground number 2 of the appeal of the assessee is allowed. 17. Ground number 3 of the appeal of the assessee is against the interest imputed by the learned transfer-pricing officer on advance recoverable from associated enterprises. The assessee submitted that this issue is decided in favour of the assessee by the coordinate bench in case of the assessee itself for earlier years....
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.... Officer passed the draft ITA No. 7992/Mum./2019 assessment order dated 20-12-2018, inter-alia, on the basis of adjustment proposed by the TPO. 13. The DRP vide directions dated 30-9-2019, following the directions issued in the assessment year 2014-15 rejected the objections filed by the assessee. Being aggrieved, the assessee is in appeal before us. 14. During the course of hearing, the learned A.R. submitted that similar issue has been decided by the Co-ordinate Bench of the Tribunal in assessee's own case for the earlier assessment year. 15. The learned D.R. vehemently relied on the orders passed by the lower authorities. 16. We have considered the rival submissions and perused the material available on record. We find that the Co-ordinate Bench of the Tribunal in assessee's own case in StridesPharmaScienceLtd. (supra) has decided the issue by holding that the interest on advances recoverable from the A.Es to be calculated by applying LIBOR plus 300 basis points by observing as under :- '19. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. On considerat....
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....dustrial 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 provision of market research, market development, ITA No.8614/Mum/2011 marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; 40. On a plain reading of clause (c) of Explanation-(i) to section 92B, it is evident that any type of advance payment or deferred payment or receivable or any other debt arising during the course of business including capital f....
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....ge interest rate of domestic credit facility availed by the assessee. However, it is seen from the material on IT A No. 8 6 14/Mum/2011 record, the entire expenditure incurred by the assessee on behalf of the overseas subsidiary are on foreign currency (dollar), therefore, domestic PLR rate in terms of Indian rupee cannot be applied. It has been brought to our notice through the working submitted before the Departmental Authorities that the average cost of borrowings to the assessee is 4.84%. The learned Authorised Representative has also submitted a working showing the average LIBOR rate of financial year 2002-03 at 1.698%. In a number of decisions, different benches of the Tribunal have consistently held that in such type of international transaction, domestic PLR rate cannot be applied and the rate of interest has to be quantified either with reference to LIBOR or EURIBOR depending upon the country and currency in which the transaction has taken place. Considering the facts of the present case, we are of the considered opinion that LIBOR rate of 1.698% plus 300 basis point would be the appropriate interest rate applicable to the international transactions relating to advancement....
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....he assessee for assessment year 2014 - 15 in ITA number 7370/M/2018 wherein the coordinate bench has dealt with this issue and further this issue arose in the case of the assessee for assessment year 2015 - 16 wherein following the decision of the coordinate bench in assessee's own case for assessment year 2014 - 15 the issue was decided in favour of the assessee. Therefore, in absence of any change in the facts and circumstances of the case, the issue needs to be decided based on the above two decisions. It was further stated that the honourable Karnataka High Court has held that in case no expenditure is directly incurred in earning exempt income since the entire exempt income is directly credited in the bank account of the assessee hence no disallowance is sustainable in Canada bank versus ACIT 265 CTR 385, identical facts exists in the case of the assessee also and therefore no disallowance should be made. 22. The learned departmental representative vehemently submitted that argument raised placing reliance on the decision of the honourable Karnataka High Court does not have any relevance in the case of the assessee as the assessee has invested into various companies and is ....
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....al before us. 22. During the course of hearing, the learned A.R. submitted that Co-ordinate Bench of the Tribunal in assessee's own case for preceding years has restored the issue to the file of the Assessing Officer. 23. On the other hand, the learned D.R. vehemently relied on the orders of the authorities below. 24. We have considered the rival submissions and perused the material available on record. We find that the assessee during the course of assessment proceedings, has raised the following submissions :- (i) The assessee has made investment in domestic companies and mutual funds out of the cash generated from its business operations and not from loan funds; (ii) The assessee has not incurred any interest or any other expenditure for making the aforesaid investment; (iii) The assessee has not earned any exempt income from its equity investments during the year; and (iv) The disallowance under section 14A of the Act should not exceed the actual expenditure incurred by the assessee (and debited to Profit & Loss Account) for earning the exempt income. 25. We find that while making a further disallowance....
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....with respect to the disallowance of interest and other expenditure holding that same has not been incurred by the assessee for the purposes of the business, the learned authorized representative submitted that that the learned assessing officer has not considered the observation of the coordinate bench in assessee's own case for assessment year 2014 - 15 wherein disallowance under section 14 A of the act has been adjudicated and further the learned AO has grossly ignored the submission of the assessee that not borrowed funds were utilized for the purpose of investment and in view of the judgment of the honourable Bombay High Court in case of CIT versus reliance utilities and power limited 313 ITR 340, no disallowance of interest can be made. 26. The learned departmental representative vehemently supported the order of the learned assessing officer stating that where there is no nexus proved by the assessee of the borrowed fund and interest refund viz a viz investment in the non-interest-bearing investments, the theory of appropriation should be applied. 27. We have carefully considered the rival contention and perused the orders of the lower authorities. We find that when the....
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....e of Rs. 112,445,642 totalling to Rs. 627,182,992 on the basis of application made by the assessee with DSIR certified by the auditor of the company. On this basis the assessee has claimed deduction at the rate of 200% of the expenditure amounting to Rs. 1,254,365,984. When form number 3CL is issued by the authority, they approved revenue expenditure of Rs. 439,695,000 and capital expenditure of Rs. 12,009,000/- totaling to Rs. 451,704,000. Accordingly, there was a shortfall of revenue expenditure of Rs. 75,042,350 and capital expenditure of Rs. 100,436,642 in the expenses reported by the assessee and the expenses approved by the DSIR in form number 3CL.. Therefore AO held that assessee has made the higher claim and disallowed the amount of Rs. 175,478,992 being the excess claim of 100% allowing 100% of such expenditure as deductible under section 37 (1) of the act. The assessee has also raised an objection before the DSIR that there are certain materials consumed in the process of conducting clinical trials et cetera that has not been considered by the DSIR, certain expenditure of conducting buyer study by week study for evaluating the safety of the drugs are not considered. There....