TaxTMI 
TaxTMI 
2024 (5) TMI 440
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....id issues are dismissed as not pressed. 3. The 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 reve....
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....g study of the assessee, the TPO took the view that the transfer pricing study of the assessee is not proper and accordingly, he did not accept the same. 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 deci....
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....r consideration only. The Glenmark, South Africa is in its initial stages and making efforts to penetrate the local market. Since both these AEs are new in their respective Geographical 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 l....
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.... 1.89% to 3.11% 1.61% to 3.16% 6 Mean Operating margin of comparables -3.02% 37.39% 23.37% 7 Operating margin earned by assessee on export of goods to AE (OP/TC) 0.07% 3.85% Accordingly, the Ld A.R contended that the international transactions of export of goods to its AEs located in South Africa 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....
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....nces of the case, we are of the view that there is no reason to ignore transfer pricing study conducted by the assessee should be accepted. Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to delete the transfer pricing adjustment made in respect of exports made to M/s Glenmark, South Africa and M/s Glenmark, Mexico. 9. The next issue relates to the deduction 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. ....
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....xpenses. The Tribunal had set aside the revision order so passed by Ld CIT. Accordingly, the Ld CIT(A) held that only cost of Contract R & D expenses should be reduced for the purpose of computing deduction u/s 35(2AB) of the Act. The revenue is aggrieved. 9.5 We heard the parties on this issue and perused the record. With regard to the first issue of exclusion of expenses not approved 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 ....
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....e. The Assessing Officer, however, did not accept the contentions of the assessee. Accordingly, he allocated interest expenses to all the four units in the ratio of sales, which resulted in enhancement of income by 7.37 crores. 10.3 The learned CIT(A) noticed that an identical addition was made by the AO in the preceding years and the said issue has been decided in favour of the assessee by the 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 fu....
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....; (Rs. In crores) PARTICULARS Baddi-I Rs. Solan (Baddi-II) Rs. Sikkim Rs. Reserves & Surplus 1219.38 645.85 186.98 (Amount given to HO) (963.86) (495.68) (59.33) Since these units have not taken money from Head office, the question of allocating interest expenses of the HO to these units will not arise. Hence, the reasoning given by the AO would fail in respect of these three units. Hence there 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 Regulat....
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....ness purposes. In this view of the matter, the Ld CIT(A) held that the disallowance of Rs. 30.37 crores made by the AO is reasonable, as the same constitutes only 7.70% of the sales promotion expenses claimed by the assessee. 11.3 The contentions of the assessee in this regard are given as under in the written submissions: - "30) At the outset, it is submitted that expenses incurred as freebies given to doctors are not allowable as deduction 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,....
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.... by the CIT(A) is on higher side. It is humbly prayed that reasonable percentage may be estimated on the balance expenditure of Rs. 164,93,43,6397- that could have been incurred on account of freebie paid to doctors and in violation of MCI guidelines." The Ld A.R also invited our attention to the code conduct for doctors dated 10th December, 2009 issued by the Medical Council of India, wherein it is stated that "a medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext". Accordingly, the Ld A.R submitted that 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 p....
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.... u/s 32AC of the Act. Under the provisions of sec.32AC of the Act, a deduction @ 15% of the actual cost of new assets acquired and installed is allowable (a) if the aggregate cost of new assets exceed one hundred crores of rupees and (b) further they should have been acquired and installed after 31st Day of March, 2013 but before 1st day of April, 2015. The assessee claimed deduction u/s 32AC of the Act during the year under consideration. 12.1 The facts relating to this issue are that the AO noticed that the assessee has claimed deduction on a value of Rs. 110.07 crores, out of which a sum of Rs. 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. According....
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....grounds: "i. The word "and" signifies that both acquisition and installation of assets should be after 31/03/2013 and not merely the installation ii. The assets which are eligible for 100% depreciation even though put to use for less than 180 days are not eligible for investment allowance in view of provisions of section 32AC(4)(v)." 228. On further appeal, the LD CIT(A) has upheld the order of the AO with regard to deduction claimed in respect of cost of components of plant or machinery lying as Capital Work In Progress (CWIP) as on 1 April 2013 amounting to 248,65,65,041/- but allowed the claim amounting to Rs. 8,32,42,289/- with respect to assets 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 pla....
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....o deduction under this sub-section shall be allowed for the assessment year commencing on the 1st day of April, 2015 to the assessee, which is eligible to claim deduction under sub-section (1) for the said assessment year. (1B) No deduction under sub-section (1A) shall be allowed for any assessment year commencing on or after the 1st day of April, 2018..............................." 231. The intention behind introduction of section 32AC can be discerned from the speech of the Hon'ble Finance Minister while presenting the Finance Bill 2013, wherein the Hon'ble Minister stated as under: "New Investments 59. To attract new investment and to quicken the implementation of projects, I propose to introduce an investment allowance 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 prov....
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....n new assets (plant and machinery) during the period beginning from 1st April, 2013 and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16. As growth of the manufacturing sector is crucial for employment generation and development of an economy, it is proposed to extend the deduction available under section 32AC of the Act for investment made in plant and machinery up to 31.03.2017. Further, in order to simplify the existing provisions of section 32AC of the Act and also to make medium size investments in plant and machinery eligible for deduction, it is also proposed that the deduction under section 32AC of the Act shall be allowed if the company on or after 1st April, 2014 invests more than Rs. 25 crores in plant and machinery 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 investme....
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....sidered in light of the nature of various plants the assessee was constructing. The plant is acquired only when all the components of machinery are assembled and commissioned together. 238. In this regard it is worth noting the first proviso to sub-section (1A) of section 32AC. It is provided that where installation of the new assets are in a year other than the year of acquisition, the deduction under this sub-section shall be allowed in the year in which new assets are installed. This amendment was brought by the Finance Act, 2016. We are of the view that the intention of the legislature was to cure the discrepancy in the provision and to obviate the unintended hardship faced by the taxpayers in completing both the condition of "acquisition" and "installation" in the same year. Therefore, such proviso being curative in nature must apply retrospectively. 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: ....
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....kes very long time because of the sheer volume of the work to be carried out. If an assessee is not successful in installing P&M in one year and carries forward the installation work in subsequent year / years it cannot be denied any benefit on the ground that it had acquired the P&M in earlier year. The intent of the legislature was to attract investment, so in our opinion the section can be termed as benevolent provision. In the case under consideration production started from 01.01.2006. Before that fabrication and completion of P& M was going on. Treatment given by the assessee in the books of accounts to the P&M was in accordance with the Accounting Standards (AS) and the AO has not denied the fact that the assessee was following AS. Therefore, in our opinion, assessee was entitled to claim additional depreciation @10%." 242. Again, the Coordinate Bench of this Tribunal in the case of 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....
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....r 31- 03-2005 and commercial production of the new coke production plant being set up by the assessee company started in April 2005 i.e. in financial year 2005-06 when the new coke production plant set up by the assessee company became operational, which is an admitted position by the Revenue. The assessee company was incorporated on 2nd September 2004 i.e. in the financial year 2004-05, and was engaged in setting up new industrial unit being coke production plant for the setting up of which new plant and machineries were acquired by the assessee company starting from financial year 2004-05, which process of acquiring plant and machineries also continued in the financial year 2005-06 as an integrated activity with the sole and common objective for setting up new industrial unit of coke production plant and finally concluded with the completion of installation of the said new plant and machineries in April 2005 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 whi....
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....coke in April 2005 when the new coke production plant become operational and their acquisition which concluded in financial year 2005-06 is to be seen in composite manner rather than in itemized manner as in an itemized capacity said new plant and machineries are not capable of producing the desired articles/products being LAM coke. It is pertinent to mention that on perusal of the Balance Sheet for financial year 2004-05 and 2005-06 (placed in paper book) will reveal that the assessee company has purchased new plant and machinery in financial year 2004-05 which is undisputed and the same was shown in the Balance Sheet as at 31- 03- 2005 under the head 'Capital Work in Progress' and the same was capitalized in financial year 2005- 06 along with those new plant and machineries which were acquired in financial year 2005-06 and the assessee company has not claimed any depreciation in the financial year 2004-05 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 ....
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....ant and machinery and to give a boost to the manufacturing sector by allowing additional depreciation deduction. Thus, as rightly held by the Tribunal the provisions of section 32(1)(iia) are required to be interpreted reasonably and purposively as the strict and literal reading of section 32(1)(iia) would lead to an absurd result denying the additional depreciation to the assessee though admittedly the assessee has installed new plant and machinery. Under the circumstances, no error has been committed by the Tribunal in allowing the additional depreciation at the rate of 20 per cent on the plant and machinery installed by the assessee after 31- 3-2005 i.e. the year under consideration." 244. As can be noted, the Hon'ble Gujarat High Court and the Hon'ble Bench of Coordinate Bench of this Tribunal have consistently taken a view that the twin condition of "acquired and installed" have to be read in the manner to 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....
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....s Court in Sahara India (Firm), Lucknow (supra) that the word "and" is used in the conjunctive sense. Undoubtedly the expression "and" in subsection (2A) has been held to the conjunctive, while delineating the circumstances on the basis of which an opinion can be arrived at by the assessing officer. This would not necessarily furnish an index to how the expression "and" in the proviso to subsection (2C) should be construed. The interpretation of the expression must be based on the context in which it is used. In the proviso to sub-section (2C), the expression "and" is used in connection with the grant of an extension of time and not in the context of the formation of an opinion for ordering a special audit." 247. We are, therefore, inclined to accept the contention of the AR of the assessee that the words "acquired and installed" have to be read as "acquired or installed" to give effect to the intention of the legislature. 248. We refer to the 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....
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....zerland. Most of the loans were availed by the above said subsidiary in the earlier years and brought forward during the year under consideration. During the year under consideration, some more loans were availed by the subsidiary. The assessee had also provided comfort guarantee to other AEs. The assessee charged 1% of loan amounts as guarantee fee. The assessee selected 'other method' as most appropriate method and adopted 'interest saved approach' for determining ALP of guarantee given. Under this method, the savings made by the subsidiary in the interest rate on account of guarantee given by the assessee is determined. The analysis carried out under 'interest saved approach' revealed that there is savings of 29.78 bps, 113.78 bps and 6.33 bps for 3 loans and NIL savings in respect of remaining loans. However, the average savings rate was less than the commission of 1% charged by the assessee. Accordingly, the assessee contended that the same is at arms length. 13.2 The TPO did not accept 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 @....
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....his issue to the file of AO. In our view, no prejudice is caused to the revenue by the decision of Ld CIT(A), since the matter required factual verification. Accordingly, we uphold the order passed by Ld CIT(A) on this issue. 15. The Last issue urged by the revenue relates to the disallowance made u/s 14A of the Act. During the year under consideration, the assessee earned exempt dividend income and it disallowed 10% of dividend income u/s 14A of the Act, i.e., the assessee disallowed a sum of Rs. 14,011, being 10% of exempt dividend income. Before the AO, the assessee agreed for disallowance of Rs. 6,88,054/-. However, the assessing officer computed disallowance as per Rule 8D of I T Rules and disallowed a sum of Rs. 11.82 crores, consisting of interest disallowance of Rs. 7.14 crores and expenditure disallowance of Rs. 4.68 crores. The AO adopted the same amount for adding u/s 115JB of the Act. 15.1 Before Ld CIT(A), the assessee took an additional ground contending that the disallowance u/s 14A should not exceed exempt income. In this regard, the assessee placed its reliance on the decision rendered by Hon'ble Delhi High Court in the cases of Joint Investment Pvt Ltd (372 ....