TaxTMI 
TaxTMI 
TaxTMI 
2024 (5) TMI 440
X X X X Extracts X X X X
X X X X Extracts X X X X
....he remaining grounds urged by the assessee give rise to the following issues:- (a) Addition on account of Transfer pricing adjustment (i) in respect of export to Glenmark South Africa (ii) in respect of export to Mexico (b) Disallowance of weighted deduction claimed u/s 35(2AB) of the Act. (c) Allocation of interest expenses of Rs. 7.37 crores to units eligible u/s 80IC/80IE of the Act. (d) Disallowance of sales promotion expenses of Rs. 30.37 crores u/s 37(1) of the Act. (e) Disallowance of Investment Allowance of Rs. 16.51 crores u/s 32AC of the Act. 4. The revenue is in appeal on the following issues:- (a) Relief granted in respect of transfer pricing adjustment made in respect of Corporate Guarantee. (b) Relief granted in respect of deduction claimed u/s 35(2AB) of the Act. (c) Relief granted in respect of allocation of R & D Expenditure. (d) Partial relief granted in respect of allocation of interest expenditure. (e) Relief granted in respect of addition made u/s 14A of the Act. 5. The Cross objection filed by the revenue is objecting to the observation made by Ld CIT(A) that the reason for disallowance u/s 37(1) based on MCI guidelines and CBDT Circu....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Hence, he asked the assessee to benchmark the international transactions by taking the "assessee" itself as tested party and adopting internal TNM method as most appropriate method. 8.2 The OP/OC of Formulations, both domestic and Export sales made to non-AEs was 10.86% and the same was adopted as ALP margin by TPO. The TPO accepted ALP of all transactions of exports to various Countries except the exports made to South Africa, Thailand and Mexico. In this appeal, we are concerned with the exports made to South Africa and Mexico. The OP/OC of exports made to South Africa and Mexico was 3.85% and (-) 3.02% respectively, which was below the ALP rate of 10.86%. The assessee offered certain explanations with regard to low profit/loss earned/incurred in the above two countries. It was also submitted that the TPO had accepted 'Associated Enterprises' as tested party in the preceding two assessment years and hence, under the principles of consistency, the said methodology should not be disturbed. The assessee also relied upon the decision rendered by Hon'ble Supreme Court in the case of Radhasoami Satsang (1992 AIR 377) in support of the Principle of Consistency. 8.3 But the TPO did n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....graphical jurisdictions, they have to incur huge expenditure to make inroads into the local market. Further, it is known to everyone that the turnover will be low during the initial years and it would take some years to break-even. Till that time, they are bound to incur huge losses in their initial years of operation. The Ld A.R submitted that, because of this peculiar situation, the assessee has selected both the foreign AEs as tested parties and compared their profitability with the profitability of foreign comparable companies. Since the AEs are buying products from the assessee company, their profitability would increase, if the assessee sells products to them at lower rates. If the assessee sells at higher prices, then their profitability will fall. Hence, for the purpose of transfer pricing provisions qua the assessee, the AEs should earn profit less than the profitability of comparable companies, which would mean that the assessee has not under invoiced its products, i.e., the sale to AEs is at arms length. It is the submission of Ld A.R, this methodology was adopted by the assessee to determine the ALP of various AEs in the earlier years and the same has been accepted in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rica and Mexico should be considered to be at arms length. 8.8 We have heard Ld D.R and perused the record. We may refer to the provisions of Rule 10B(2) which reads as under:- "(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eduction claimed u/s 35(2AB) of the Act. This is a common issue urged in appeal before us by both the parties. 9.1 The facts relating to this issue are that the assessee had claimed deduction of Rs. 85.38 crores u/s 35(2AB) of the Act, being 200% of R & D expenses incurred by it. The AO noticed that the DSIR has not approved expenses to the extent of Rs. 11.43 crores. Hence the AO took the view that the expenses, which are not approved by DSIR, are not eligible for deduction u/s 35(2AB) of the Act. Accordingly, he rejected the claim u/s 35(2AB) of the Act, but allowed the same u/s 37(1) of the Act. U/s 35(2AB), the assessee is eligible for deduction of 200% of R & D expenses incurred. Hence, the said action of AO resulted in denial of weighted deduction, meaning, the AO made addition of Rs. 11.43 crores. 9.2 The AO also noticed that the assessee has done R & D works on contract basis for M/s Glenmark Pharmaceuticals, SA (GPSA). It incurred a sum of Rs. 58.10 crores as expenditure and received revenue of Rs. 83.10 crores from GPSA. While computing deduction u/s 35(2AB) of the Act, the assessee reduced the cost of Rs. 58.10 crores from R & D expenses. However, the AO took the view ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by DSIR for the purpose of computing deduction u/s 35(2AB) of the Act, we notice that similar issue has been decided in favour of the assessee in the assessee's own case in AY 2013-14. We also notice that the Rule 6(7A), which requires approval of expenses also by DSIR has been brought into the statute w.e.f. 1.7.2016 and hence the same will not apply to AY 2014-15. With regard to the second issue relating to deduction of contract revenue, we notice that the said issue has also been decided in favour of the assessee by Hon'ble Karnataka High Court in the case of Microlabs Ltd (supra) and by Mumbai bench of Tribunal in the case of Wokhardt Ltd (supra). Since the ld CIT(A) has decided both these issues following the above said decisions, we do not find any reason to interfere with his order on both these issues. 9.6 With regard to the direction of Ld CIT(A) to verify the R & D expenses, it is the contention of the assessee that the AO did not question the nature of expenses at all in the assessment order, i.e., the AO has accepted the nature of expenses as R & D expenses. The AO has allowed expenses u/s 37(1) of the Act, but disallowed only weighted deduction due to non-availabilit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tribunal in assessee's own case in A.Y. 2010-11 to 2013- 14. However, the learned CIT(A) took the view factual aspects relating to this issue require verification. Accordingly, the Ld CIT(A) restored the issue to the file of the Assessing Officer for the limited purpose of verifying that the eligible unit had sufficient accumulated profits and did not use borrowed funds. The Revenue is aggrieved by the relief granted by the learned CIT(A) and the assessee is aggrieved by the decision of Ld CIT(A) in restoring the matter to the file of the Assessing Officer for carrying out verification. 10.4 We heard the parties and perused the record. We noticed that the Assessing Officer has allocated interest expenditure to the units on the generalized reasoning that the said units would be using funds by the head office. The learned CIT(A) has noticed that the Tribunal has considered an identical issue in the assessee's own case in A.Y. 2010-11 (ITA No. 1654/Mum/2016 dated 1.2.2019), wherein a factual finding has been given by the Tribunal that the Buddy unit (Baddi-I) and Solan unit (Baddi-II) did borrow loan and they have used their Reserves and surplus only. It is pertinent to note that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is not necessity to allocate interest expenditure of Head office to the above said two units. Since all the facts are already available on record, there was no necessity for the Ld CIT(A) to restore the issue again for verification of factual aspects. Accordingly we modify the order passed the learned CIT(A) on this issue and direct the AO to delete the allocation of interest expenses made to these three units. 11. The next issue urged by the assessee relates to the disallowance of Sales Promotion Expenses in the form of freebies to doctors and medical professionals u/s 37(1) of the Act. The assessee had claimed sales promotion expenses of Rs. 392.87 crores. The AO proposed to disallow the expenses which are in violation of Medical Council Regulations, as they will be covered by the Explanation to sec.37(1) of the Act. The Explanation to sec. 37(1) states that the expenses incurred for a purpose which is either an offence or prohibited by law is not allowable as deduction. In this regard, the AO also took support of the Circular No.5/2012 dated 01-08-2012 issued by CBDT. 11.1 In response thereto, the assessee furnished break-up details of sales promotion expenses, which have bee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion u/s. 37 of the Act in view of the judgment of the Hon'ble Supreme Court in the case of Apex Laboratories v. CIT (442 ITR 1). However, on perusal of the chart reproduced on pg nos. 30 and 31 of the order, it is evident that there are certain expenses which are in the nature of routine business expenses and not in the nature of freebies given to doctors or in violation of MCI guidelines. Eg: expenditure on sales promotion prints/literatures, customer relationship management, man power- cost for export marketing, travelling of directors and staff, etc. The details of the same are as under: Sr. No. Particulars Amount 1. Export promotion expenses 22,47,27,539 2. Sales promotion prints/ literatures 33,45,42,890 3. Export expenses-Others 10,44,37,593 4. Internal workshop expense 2,40,94,906 5. Man power cost - Export marketing 21,17,61,608 6. Man power expenses - Export marketing 5,59,37,133 7. Product registration export 21,02,57,864 8. Foreign travelling expenses directors 47,41,396 9. Filed staff travelling expenses 67,33,85,814 10. Travel expenses- directors 8,24,893 11. Advertisement and publicity 15,55,45,291 Total (A) 200,02,56,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the hospitality provided to doctors, who are participants of the medical conference, would not be hit by the above mentioned Code of conduct. 11.4 The Ld D.R submitted that the decision rendered by Hon'ble Supreme Court in the case of Apex Laboratories Ltd (supra) would override the decision relied upon by the Ld CIT(A). He submitted that the freebies given to the doctors in violation of code of conduct issued by MCI shall be liable to be disallowed. 11.5 We have heard rival contentions and perused the record. We noticed earlier that the assessee has furnished break-up details of sales promotion expenses and the same is extracted by the AO at pages 30 & 31 of the assessment order. We notice that the AO did not examine those break- up details and did not pin point the expenses which can be considered as expenses incurred in violation of MCI guidelines. Instead, the AO has proceeded to disallow 1.32% of the total turnover, as the similar disallowance made out of Sales promotion expenses in AY 2011-12 worked out to same percentage. We notice that, in AY 2011-12, the assessee itself has admitted that it has incurred expenses on freebies to the doctors and the disallowance was on th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 81.35 crores has been transferred from opening balance of "Capital work in progress". The assessee had claimed a sum of Rs. 16.51 crores as deduction u/s 32AC of the Act on the aggregate value of Rs. 110.07 crores. The AO took the view that, as per the provisions of sec.32AC of the Act, the word "acquire" used therein should be interpreted as purchase of new asset. Accordingly he held that amount transferred from opening balance of 'Capital Work in Progress' amounting to Rs. 81.35 crores cannot be considered as "acquired" by the assessee after 01.04.2013. Accordingly, the AO held that the assessee has not complied with the conditions prescribed in sec. 32AC of the Act, since the aggregate value of assets acquired and installed after 1.4.2013 was less than the threshold limit of Rs. 100 crores. Accordingly, the AO disallowed the claim of Rs. 16.51 crores made by the assessee u/s 32AC of the Act. The Ld CIT(A) upheld the disallowance. 12.2 We notice that an identical issue has been examined by the co- ordinate bench in the case of Ultratech Cement Ltd vs. DCIT (ITA Nos. 1412, 1413, 2461 & 2462/Mum/2018 dated 14-12-2021 relating to AYs 2012-13, 2011-12, 2013-14 and 2014-15). The rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which were eligible for depreciation at the rate of 100 per cent but installed and put to use for less than 180 days and hence claimed at 50%. The dispute therefore relates to only value of component of plant and machinery lying in capital work in progress as on 1st April 2013. 229. The learned AR submitted that assessee is entitled to deduction under section 32AC of the Act as: i. The term 'plant' has to be read in the manner in which it is generally understood and accordingly, a plant can be said to have been acquired on or after 1st April 2013 since it came into existence only after all the machinery and components were assembled and commissioned together. The plant was brought into existence from the components lying in CWIP only after 1st April 2013 when it was assembled and installed. Thus, according to the AR of the assessee, plants were acquired and installed after 1st April 2013. ii. The word "acquired and installed" has to be interpreted as "acquired or installed" since it is impossible to acquire and also install any plant or machinery valuing Rs. 100 crores or more in a span of one year. Such a situation is not intended by the legislature and therefore t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce for new high value investments. A company investing `100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 percent of the investment. This will be in addition to the current rates of depreciation. There will be enormous spill-over benefits to small and medium enterprises." Thus, the intention behind introduction of section 32AC and provide investment allowance was to attract new investment as well as to quicken the implementation of projects. 232. The explanation regarding introduction of this new section in the Memorandum explaining the provisions of the Finance Bill, 2013 was stated under the head "Measures to Promote Socio-Economic Growth" and the opening portion of the relevant clause of the Memorandum read as under: "Incentive for acquisition and installation of new plant or machinery by manufacturing company" In order to encourage substantial investment in plant and machinery, it is proposed to insert a new section 32AC in the income tax Act...." [clause 5]. 233. It is also worth noting that section 32AC was further amended by Finance Act, 2014 whereby subsection (1A) was intro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in a previous year. It is also proposed that the assessee who is eligible to claim deduction under the existing combined threshold limit of Rs. 100 crores for investment made in previous years 2013-14 and 2014- 15 shall continue to be eligible to claim deduction under the existing provisions contained in sub-section (1) of section 32AC even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of Rs. 25 crores during the previous year. [Clause 11]" 235. The Finance Minister's Speech and the Explanatory Memorandum, at the time of introduction of the incentive in 2013 as well as while extending the benefit w.e.f. 1 April, 2015, stressed on the term "investment" in new "plant" or "machinery". The intention was to give impetus to the manufacturing sector making substantial investment including in the stalled projects. 236. The term 'acquire' used in section 32AC has to be read in conjunction with the term 'assets', i.e. 'plant' or 'machinery', and not in isolation. A new 'plant' or 'machinery' can be said to have been acquired when the individual components of the plants are aggregated and i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ively. 239. An analogy can also be drawn from the second proviso to section 32(1) which restricts the claim of depreciation to 50% in case of assets "acquired during the previous year" and "put to use" for a period of less than 180 days in that previous year. The provisions of second proviso are reproduced as under: "Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be". 240. For the purpose of second proviso to section 32, the plant is considered as "acquired" only after all the machines and components are assembled and commissioned together and the plant is ready for use. The Revenue has never allowed depreciation on any individual component of plant/machine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f JCIT vs. Lotus Energy (India) Ltd [2016] 68 taxmann.com 364 upheld the view of the taxpayer to allow additional depreciation in the year of installation. It was observed as under: "10. We have heard the rival contentions and also perused the material available on record. We have observed that Section 32(1)(iia) of the Act was amended by Finance Act, 2005. It is stated in the Memorandum to the Finance Bill 2005 that the provisions are amended in order to encourage new investment, the initial depreciation on new machinery and plant was proposed to be increased to 20 per cent from the existing level of 15 percent and consequently the initial depreciation will be available to all new plant and machineries except those referred to in the proviso to the clause (iia) of section 32 of the Act. The requirement of creating a minimum increase of 10 percent in installed capacity for availing the initial depreciation is also proposed to be eliminated. We have also observed that section 32(1)(iia) of the Act stipulates that new machinery and plant should be acquired and installed after 31-3-2005 by an tax-payer and a further sum equal to twenty percent of the actual cost of such machinery or....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and commencement of the commercial production of LAM coke in April 2005 i.e. financial year 2005-06 when new coke production plant became operational. Once a new industrial project is initiated by an enterprise to be set up, then the entire composite plant and machineries which are acquired and installed are an integrated activities as the said plant and machineries can only function when they are integrated together as per technical requirements and specifications which can there-after lead to successful commissioning of the project to produce or manufacture the desired products/articles. The plant and machineries so acquired cannot be visualized and seen in the individual and itemized context as they are in- capable of production or manufacture of desired products/articles unless these itemized plant and machineries are integrated together as per technical requirements and specifications to achieve the manufacturing or production of desired products. Since, the assessee company was engaged in setting up new coke production plant which activity of setting up new industrial unit started in financial year 2004 - 05 and concluded in financial year 2005-06, the entire set of new mach....
X X X X Extracts X X X X
X X X X Extracts X X X X
....04-05 on these new plant and machineries so acquired in financial year 2004- 05. Thus, acquisition of the entire set of new machineries and plant whether acquired prior to or post 31-03-2005 was an integrated event in the chain of activity undertaken with common and sole goal of setting up new coke production plant by the assessee company which process got completed in April 2005 i.e. financial year 2005-06 with the completion of installation of the entire new machineries and plant as composite, so acquired by the assessee company whether pre or post 31-03-2005 with the commencement of the production of coke production plant becoming operational in April 2005. We find that the conditions as stipulated u/s 32(1)(iia) of the Act are duly complied with by the assessee company and the assessee company cannot be denied the benefit of the claim of additional depreciation merely because new plant and machinery was acquired partly prior to 31-3-2005 and partly post 31-03-2005 as the entire activity of acquisition of new plant and machinery was an integrated and composite activity in the chain of events with the common and sole objective of setting up new coke production plant by the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....give it a meaningful, reasonable and purposive interpretation. The twin condition can be said to have been satisfied on the day these huge plant and machineries are installed and become useful for production. Since, the language of section 32AC is similar to the language used in section 32(1)(iia), the ratio laid down in the above cases squarely applies to the facts of the instant case in the context of section 32AC. 245. The AR of the assessee also contended that if a strict interpretation is adopted for the word "and" used in the term "acquired and installed", to understand it in its normal grammatical sense, i.e. a conjunctive, then there may be a large number of instances where the assessee, even after making required investment in plant and machinery, would not be able to claim deduction under section 32AC of the Act. The assessee may invest in designs, plans, drawings, bottles, books, etc. which are considered as "plant" for the purpose of section 32 of the Act. If the interpretation of the Revenue is accepted that only plant acquired and installed is eligible for deduction under section 32AC of the Act then, it would lead to absurd results as the aforesaid assets which hav....
X X X X Extracts X X X X
X X X X Extracts X X X X
....decision in the case of Jupiter Radios vs. DCIT [2017] 88 taxmann.com 93 (Delhi) relied upon by the DR during the course of hearing. We have gone through the case but find no relevance to the issue before us. The Hon'ble Delhi High Court in that case was concerned with the issue relating to availability of development rebate/ allowance under section 32A/ 34(3) the language in which are not pari materia with the provisions of section 32AC of the Act. Secondly, the Court was not at all concerned with the interpretation of the words "acquired and installed" and the question before the High Court was whether the partnership firm can continue to claim deduction under section 34A/ 34(3) of the Act if the plant and machinery is given to a partner on his retirement from the firm during the statutory holding period of 8 years. Therefore, the aforesaid decision is not relevant to decide the issues involved in the present appeal. 249. In view of the above we have no hesitation to hold that the assessee is entitled to deduction u/s 32AC of the Act on the value of cost of components of plant or machinery lying as CWIP as on 1 April 2013 but installed during the financial year 2013-14. We ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pt the workings given by the assessee. The TPO followed the decision taken in AY 2012-13 and took that the guarantee commission @ 2% for the fresh loans given to the subsidiaries by banks and @ 1.50% for the loans granted in the earlier years. Accordingly, he made transfer pricing adjustment of Rs. 14.73 crores in respect of guarantee given on behalf of Glenmark Holding S.A, Switzerland. In respect of comfort guarantee given to other subsidiaries also, the TPO adopted same rates and accordingly made transfer pricing adjustment of Rs. 2.49 crores. 13.3 The Ld CIT(A) noticed that the Tribunal has accepted the rate of guarantee commission charged @ 1% to be at arms length in the assessee's own case in AY 2013-14. The Hon'ble High Court of Bombay has also upheld guarantee commission charged @ 0.53% in the assessee's own case in (ITA No.321 of 2013 dated 04-02-2015, ITA No.1302 of 2014 dated 02-02-2017 and ITA No.834 of 2016 dated 10-12-2018 relating to AY 2006-07, 2008-09 and 2009-10 respectively. Accordingly, the Ld CIT(A) deleted the transfer pricing adjustment made in respect of guarantee commission. 13.4 We heard the parties on this issue and perused the record. We notice that th....