TaxTMI 
TaxTMI 
2024 (2) TMI 1279
X X X X Extracts X X X X
X X X X Extracts X X X X
....ders passed by the ITAT/Hon'ble High Courts in the preceding years was filed before us. Further copies of all orders where the issues were originally decided in favour of the assessee by the ITAT/Hon'ble Gujarat High Court were filed before us to demonstrate that they were legacy issues decided from the origin itself in favour of the assessee and subsequently followed in later years . In this regard copies of the order of the ITAT in case of the assessee for A.Y 2006- 07, 2008-09, 2009-10, 2010-11 were filed alongwith copy of order of the Hon'ble Gujarat High Court for A.Y 2006-07 . 3. Taking note of the same, accordingly, the appeal was proceeded to be heard with the ld.counsel for the assessee, pointing out as to how the issue was dealt with by the appellate authorities in the earlier years, and with the ld.DR giving his counter to the same. 4. Taking up the ground no.1 first, the same reads as under: "Aggrieved by the order u/s. 143(3) r.w.s. 144C passed by the Assessing Officer, the Appellant wishes to raise the following Grounds of Appeal for the kind adjudication of the Hon'ble ITAT: 1. That the learned Assessing Officer / Transfer Pricing Officer ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the assessee's contentions made were identical to those made in Asst. Year 2014-15. Thereafter, noting that in Asst. Year 2014-15 corporate guarantee was benchmarked taking 2.52% as the Arms Length Price (ALP),being the arithmetic mean of external CUPs in the form of corporate guarantee fees charged by State Bank of India at 2.75% per annum and Bank of India at 2.16% and the coupon rates of 'A' rated bonds and 'BB' rated bonds of 2.66%. the AO noted the average of all the corporate guarantees to be 2.52%, which he noted that, was applied to identical transaction in the preceding year also. Applying this rate, he proposed adjustment in respect of the corporate guarantees to the tune of Rs. 18,51,34,751/-. The relevant finding of the TPO is at page no.13 (Para-5.3) of the order as under: 8. The assessee filed objection against the same to the DRP who directed the AO to consider at 1.5% to be an appropriate rate for charging corporate guarantee fees. The DRP noted that comparing corporate guarantee with bank guarantee was incorrect, and the bank guarantee was comparable to corporate guarantee only after downward adjustment. The ld.DRP noted that the ITAT, Mumbai Bench have h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onfirmed by the DRP. The ITAT, however, noted that in the preceding assessment year 2012-13 and 2013-14, the ITAT had found no reason to reject the one percent fees charged by the assessee and found to be at ALP. Accordingly, the adjustment done by the AO was dismissed. The relevant finding of the ITAT at para 4 to 6.1 of its order is as under: "4. The brief facts in relation to this ground of appeal are that the assessee has provided guarantees to banks with respect to borrowings of its Associated Enterprises (AEs). The TPO, following the orders of the past assessment years, held that the service rendered by the assessee by offering guarantees to financial institutions on behalf of its AEs is liable to be benchmarked at 2.52% of the guarantee given. The TPO held that in line with the benchmarking done assessment it 2013-14, the corporate guarantee fee is benchmarked at 2.52%, which is the arithmetic been of external CUPs in the form of corporate guarantee fees charged by State Bank of India @2.75% per annum and Bank of India @ 2.16% and the coupon rates of A rated bonds and BB rated bonds @ 2.66 %. Accordingly, an upward adjustment of 17,44,51,548/- was done on this count....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... coupon rate of A rated bonds and BB rated bonds is even more inappropriate and it proceeds on the assumption, an unrealistic assumption at that, Cadila Healthcare Ltd. vs. DCIT pre issuance of corporate guarantee by the assessee for its AE, its credit equivalence is of BB rated bond, which gets converted into A rated bond upon issuance of assessee's corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm's length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval. There was thus, in any event, no sound basis for disturbing the arm's length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well. In view of these discussions, as also bearing in mind, we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... time during the tenure, and in case of repayment cumulative interest is payable from the date of providing loans at a specified basis for it. The TPO held that the purpose of convertible loans was to enable ZIPL to make investment in subsidiary company out of funds borrowed by it, and noting that no option had been exercised during the year. He held that interest was to be charged on these loans. He rejected the assessee's contention that these loans were quasi-capital in nature, noting the fact that the option to convert the loan into equity has not been exercised. Thereafter following identical adjustment made in the case of the assessee in Asst. Year 2012-13 to Asst. Year 2014-15, and adopting the same methodology followed therein, the TPO benchmarked the interest on these loans at the contractual rate applicable to the said loans, and arrived at adjustment to be made on account of interest to be charged on these loans at Rs. 13,54,90,598/- . This finding of the TPO finds mention at para 6.4 of his order. It is obvious and patently clear that the TPO followed adjustment made in the case of the assessee in preceding assessment years i.e. Asst. Year 2012-13 to 2014-15 for making ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in favour of the assessee by the consistent decision of the ITAT, in its own case in preceding years. The ground No.1(b) is accordingly allowed. 18. Ground No.1(c) (supra) relates to TP adjustment made to the income of the assessee on account of alleged reimbursement of expenses to its AE. This issue was also stated to be covered in favour of the assessee consistently by the decision of the ITAT in preceding assessment years. The ld.DR fairly conceded, though, he vehemently relied on the orders of the authorities below. 19. The facts relating to the issue find mentions at para 7.2 to 4.5 of the order of the TPO and emanate from the same that the assessee during the year had reimbursed expenses to its AE's Zydus Pharmaceuticals, Mexico & Zydus France. The assessee's contention was that all these expenses were made by way of reimbursement on cost-to-cost basis to this overseas enterprises. 20. With respect to Zydus, France, the assessee had contended reimbursement of the product submissions and regulatory fees as also reimbursement of reprinting charges, while with respect to Zydus Pharmaceuticals, Mexico, the assessee had contended reimbursement of clinical research a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s France in respect of the same). During the year, Zydus France had incurred certain expenses related to product submission and regulatory fees, control and testing fees, leaflet replacement cost and production sample cost for assessee's products. These costs have been reimbursed by the assessee to Zydus France on cost to cost basis without any markup. Thirdly, the assessee also made reimbursements to Zydus Japan on Cadila Healthcare Ltd. vs. DCIT cost to cost basis by way of reimbursement of certain expenses in the nature of insurance for clinical trial studies on behalf of the assessee for administrative convenience. The TPO as well as the DRP however took the view that there was contradiction in the FAR analysis in the transfer pricing report and the submissions made while justifying the reimbursement of expenses. This was also observed by the TPO in the orders for assessment year 2012-13 and assessment year 2013-14. In the FAR in transfer pricing report for transactions with AEs viz. Zydus France, Zydus Japan, the assessee has been classified as a contract manufacturer. Since the assessee company has been taken to be a contract manufacturer and benchmarked as such, then the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t that the assessee is acting as an entrepreneur/IP owner and Zydus France is acting as its low risk distributor (LRD) is evident from the transfer pricing report at pages 48-49 of the paper book. He drew attention to the supply and distribution agreement at pages 491-498 of the paper book to reiterate that the assessee is the IP owner. He further drew our attention to pages 505-592 of the paper book, to the supportings for expenses reimbursed by Zydus France for product submission and regulatory fees, control and testing fees, the leaflet replacement cost of product innovator sample costs. The assessee submitted Cadila Healthcare Ltd. vs. DCIT that all these expenses have been reimbursed in respect of those expenses incurred by Zydus France where the assessee company is acting as the entrepreneur/IP owner and Zydus France is acting as low risk distributor. The assessee obtained a favourable order of ITAT for assessment year 2012- 13 (copy annexed at pages 166 to 168 of paper book) in respect of these reimbursements made by the assessee to Zydus USA, whereas the latter was acting as the low risk distributor for the assessee. With respect to cost to cost reimbursements made by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied out on the basis of a permissible method of ascertaining arm's length price of a transaction. Whether the transaction should have taken place or not is not any of the TPO's business. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [(2012) 345 ITR 241 (Del)] "Even Rule 10B(l)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". The very foundation of the action of the TPO is thus devoid of legally sustainable merits. We have also noted that there is no mark up in the reimbursement of expenses, and, as such, there is no question of making any ALP adjustment in respect of these reimbursements of expenses. We have further noted that similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015-16, but no such arm's....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee, and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALP something clearly contrary to the scheme of the Act, these expenses were fully admissible for deduction. In any case, Cadila Healthcare Ltd. vs. DCIT there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 21,43,79,368- subject to necessary verifications about the figures. 24. Ground no. 3 is thus allowed." 13.1 Respectfully following the observations of the ITAT in assessee's own case for assessment year 2012-13 and assessment year 2013-14 in ITA number is 954/AHD/17 and 213/AHD/18, referred to above, we are of the considered view that the TPO has erred in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in making an addition of Rs. 28,40,80,823/- by holding that the Product Registration Expenses and expenses product for Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses. 4. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 9,89,85,304/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses." 24. It was contended before us, that the above grounds related to the issue of expenses claimed by the assessee being treated as capital in nature. The expenses so treated are as under: i) Product Registration Expenses and Project Registration Support Service Expenses totaling to Rs. 28,40,80,823/- ii) Trademark Registration Fees & Patent Fees of Rs. 9,89,85,304/- 25. The contention of the ld.counsel for the assessee before us, with respect to both the grounds was that, these expenses had been held by the AO to be capital in nature following the stand tak....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 35(2AB) of the Act denied by the AO/DRP on - i) Expenses incurred outside the R&D facility of the assessee in respect of clinical trials and bio-equivalent study conducted of Rs. 38,52,07,000/-, and ii) Expenses on in-house R&D not approved by the designated authority for the purpose, i.e. Department of Scientific & Industrial Research (DSIR) amounting to Rs. 42,37,38,000/-. 30. Argument of the ld.counsel for the assessee before us was to the same effect that an identical issue had been decided in favour of the assessee in the preceding assessment years, including immediately preceding assessment year i.e. Asst. Year 2014-15; that the issue relating to the claim of weighted deduction under section 35(2AB) of the Act on activities carried outside the R&D facility of the assessee pertaining to clinical trial and bio-equivalence study, had been allowed by the ITAT in Asst. Year 2006-07 to 2010-11, which order had been confirmed by the Hon'ble Gujarat High Court, holding that no question of law arose on the point. The ld.DR fairly conceded that the issues were decided in favour of the assessee right upto the immediately preceding years i.e. Asst. Year 2014-15....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the immediately preceding year i.e. Asst. Year 2014-15, wherein the identical adjustment of expenses disallowed under section 14A of the Act to the book profits of the assessee was deleted by the ITAT following the decision of the Special Bench of the Tribunal in the case of Vireet Investment P. Ltd. (supra). The ld.DR fairly agreed with the same, though, he relied on the order of the AO. 37. In view of the above, we have no reason to uphold the order of the AO in this regard, as the finding of the AO is not in consonance with the ratio laid down by the Special Bench in Vireet Investments (supra), nor with the decision of the ITAT in case of the assesse in the immediately preceding A.Y 14-15. Therefore, the addition made to the book profits of the assessee on account of expenses disallowed under section 14A of the Act amounting to Rs. 10,98,60,824/- is directed to be deleted. Ground No.8 is accordingly allowed. 38. Rest of the ground nos.9, 11, 12 were stated to be consequential in nature, and therefore not pressed for adjudication before us. 39. In the result, the appeal of the assessee is partly allowed in above terms. Order pronounced in the Court on 23rd Febr....