TaxTMI 
TaxTMI 
2024 (7) TMI 397
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....e by the Company in the return of income. The assessee had preferred an appeal before the CIT(A) which was decided vide the impugned order. Aggrieved by the order of the CIT(A), both the assessee as well as the Revenue are in appeal before us. We will take up the appeal of the assessee first for adjudication. ITA No. 53/Ahd/2020 3. The assessee has raised the following grounds in this appeal: - "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming upward transfer pricing adjustment towards interest amounting to Rs 56,88,205/- by adopting rupee loan rate instead of LIBOR linked rate in respect of foreign currency loans advanced to subsidiary. 2. On the facts and circumstances of the case and in law the Ld CIT(A) erred in not allowing the additional claim of Rs 60,36,617 made by the Appellant for claiming weighted deduction under section 35(2AB) on gross research and development (R&D) expenditure without reducing contract research income amounting to Rs. 1,20,73,234 from the eligible R&D expenditure." 4. Ground Number-1: TP adjustment of interest 4.1 The first ground of the assessee is in respect of transfer pr....
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....T vs. Uniparts India Ltd. (150 taxmann.com 142) in this regard. 4.3 The ld. CIT.D.R. on the other hand supported the orders of the Assessing Officer and the ld. CIT(A) in respect of this ground. 4.4 We have carefully considered the rival submissions and the materials available on record. The contention of the assessee is that interest was charged from the AE at a rate of 7.08% as against average 12 months GBP LIBOR rate of 1.685% during the year and therefore, no further TP adjustment was required. The Ld. ITAT has held in the case of Uniparts India Ltd. (supra) that the rate of interest on loans advanced by assessee to AEs had to be in accordance with rate of interest prevailing in the country of residence of AEs wherein loan was availed and that the domestic PLR rate could not be applied in respect of loans advanced in foreign currency to AEs situated in USA and Europe. However, this finding was given in the context that the loan in that case was given out of own funds of the assessee. 4.5 There is no dispute to the fact that CUP method is the most appropriate method to ascertain ALP of the international transaction of interest received on loan. Where the transaction was....
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....as lying with the assessee, no interest could have been charged from the AE. Hence, the adjustment of Rs. 38,47,968/- in respect of Corporation Bank interest and of Rs. 6,78,168/- in respect of Allahabad Bank interest is not found correct as the amount was not advanced to the AE for entire 180 days period. Therefore, the TP adjustment of Rs. 38,47,968/- and Rs. 6,78,168/- in respect of interest is deleted. 4.8 In addition to the above amounts advanced to the AE out of loan obtained from the bank, the assessee had also granted loan of Rs. 9,87,14,044/- to its AE out of its own funds. The TPO considered six months LIBOR (which was 0.79% for this year) + 4.75% as the comparable uncontrolled price for this transaction and had accordingly worked out the interest required to be charged by the assessee from its AE as under:- 4.9 The Ld. AR submitted that the addition of Rs. 11,62,069/- in respect of adjustment of interest was not adjudicated by the Ld. CIT(A). It is found from the order of the Ld. CIT(A) that he had confirmed the upward adjustment of Rs. 38,47,968/- and Rs. 6,78,168/- to the interest charged by the assessee to its AE in respect of loans obtained from Corporation Ban....
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....aiming the weighted deduction u/s. 35(2AB) on gross R&D expenditure without netting off contract R&D income / CRO income from the amount of eligible R&D expenditure, is hereby rejected." 5.4 It is found that the ld. CIT(A) has not examined the claim of the assessee on merits. As per the provision of section 35(2AB) of the Act any expenditure on scientific research (other than cost of land and building) on in-house research and development facility as approved by the prescribed authority is eligible for weighted deduction. Therefore, the assessee was eligible for deduction of its entire expenditure on scientific expenditure without adjusting the income earned, if any, from such scientific research & development activity. As explained by the assessee, the income from contract research work was reduced from the amount of expense eligible for deduction u/s. 35(2AB) of the Act. The Assessing Officer is directed to verify this fact and thereafter allow deduction u/s. 35(2AB) of the Act on the gross expenditure on scientific research in accordance with the provisions of the Act. It is seen that this issue was also involved in the assessee's own case for A.Y. 2009-10 which was decided i....
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....by the assessee over the amount approved by DSIR (7) The CIT(A) has erred in facts and law in allowing the additional claim of Rs. 70,14,434/- which had been disallowed by the assessee suo-moto and which had never been examined by the AO (8) The CIT(A) has erred in facts and law in directing the AO to allow depreciation on R&D assets of Rs. 10.53.64.250/- ignoring that 100% deduction had already been claimed and without any verification of claim by the AO notwithstanding that such claim was not made in the ROI. (9) The CIT(A) has erred in facts and law in deleting the addition of Rs. 68.96,075/- and directing the AO to allow depreciation thereon. (10) The CIT(A) has erred in facts and law in directing the AO to allow additional claims without appreciating that such claims have not emanated from the assessment order. (11) The CIT(A) has erred in facts and law in deleting the product registration expenses of Rs. 1,76,84,264/- which are capital in nature. (12) The CIT(A) has erred in facts and law in restricting the addition of Rs. 72,74,923/-made by the AO u/s 14A to Rs. 5,208/-. (13) The CIT(A) has erred in facts and law....
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....eas AE constitutes an international transaction and would be subject to transfer pricing regulations. The Explanation to Section 92B of the Act defines 'lending or guarantee' as international transaction and by providing corporate guarantee the guarantor assumes certain risks for such provision, for which he ought to be compensated by way of sharing the benefit. The Ld. AR too fairly conceded that the corporate guarantee was an international transaction and adjustment was required to be made. The Ld. CIT-DR has relied upon the decision of this Tribunal in the case of Intas Pharmaceuticals Ltd. ACIT, [2024] 159 taxmann.com 429 (Ahmedabad-Trib.) and submitted that following the decision as taken in that case the adjustment for corporate guarantee should be made @ 0.8%. On the other hand, the Ld. AR relied upon the decision in the case of Rubamin Ltd. vs. DCIT, [2021] 131 taxmann.com 344 (Ahmedabad-Trib.) and in the case of Mastek Ltd. vs. DCIT, [2023] 152 taxmann.com 608 (Ahmedbad-Trib.) and submitted that adjustment may be restricted @ 0.5% only. 8.3 We have considered the rival submissions. It is found that in the case of Intas Pharmaceuticals Ltd. (supra), the assessee itself h....
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....en to associate concerns and that the assessee had diverted its interest-bearing funds as interest free advances. The Ld. CIT(A) deleted the addition following the decision of the ITAT in assessee's own case in A.Y. 2011-12 in ITA No. 848/Ahd/2016 and 918/Ahd/2016. He also noted that the appeal filed by the Revenue before the High Court against the above order was dismissed by the Hon'ble Jurisdictional High Court in Tax Appeal No.200-201 of 2018 vide order dated 04.04.2018. He further noted that the assessee had sufficient interest free funds to make business advances to its sister concerns. The Ld. CITDR was unable to controvert any of the factual findings as recorded by the Ld. CIT(A). The Ld. AR, on the other hand, supported the order of the Ld. CIT(A). 9.2 We have considered the rival submissions. The AO had made the disallowance of interest on the assumption that interest bearing funds were utilized for advancing interest free amounts to sister concern. However, no material has been brought on record to establish this nexus. On the other hand, the assessee has contended that it had sufficient interest free funds which were utilized for making advances to its sister concern....
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....s not in accordance with the provisions of the Act. Therefore, we do not find anything wrong with the order of Ld. CIT(A) deleting this addition following the decision of Co-ordinate Bench of this Tribunal in A.Y. 2011-12. The ground of appeal raised by the Revenue is dismissed. 10.4 Ground No.7 pertains to additional claim of Rs. 70,14,434/- under Section 35(2AB) of the Act. The assessee had made additional claim of Rs. 70,14,434/- being 50% of deduction in respect of expenses towards clinical trials carried outside R&D facility, which was suo motto disallowed by the assessee on a conservative basis. This claim was made in the course of assessment proceedings which was not allowed by the AO. The Ld. CIT(A), however, allowed the claim of the assessee following the decision of ITAT in assessee's own case for A.Y. 2011-12. The Ld. CIT-DR submitted that this additional claim of Rs. 70,14,434/- was not verified by the AO and, therefore the CIT(A) was not correct in allowing the claim. On the other hand, Ld. AR submitted that this issue was also involved in A.Y. 2009-10 and the additional claim of assessee was allowed to the assessee. 10.5 We have considered the rival submissions.....
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.... claim made by the assessee was Rs. 38,99,13,663/- @ 150% of the expense. Therefore, the Ld. CIT(A) had rightly directed the AO to allow weighted deduction @ 150% of the expense of R&D. We do not find anything wrong with the direction of the Ld. CIT(A). Therefore, the ground taken by the Revenue is dismissed. 11. Ground Number- 8 to 10: Depreciation on R&D Assets: 11.1 Ground Nos. 8 to 10 pertain to depreciation on R&D assets. It was explained that assets amounting to Rs. 10,53,64,250/- were removed out of the R&D facility in A.Y. 2009-10. The entire cost of these assets was originally claimed as 100% deduction but was offered as income in the year in which it was removed from R&D facility. Therefore, the assessee was eligible to claim proportionate depreciation on these assets. Accordingly, the Ld. CIT(A) had rightly allowed proportional depreciation on these assets. The AO had also made addition of Rs. 68,96,075/- under Section 35(2AB) of the Act towards the additional claim of depreciation made by the assessee in this regard. The Ld. CIT(A) has deleted this addition on the ground that this claim was made during the assessment proceedings and assessee had not claimed the sa....
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....ts which should be worked out on the reduced WDV for this year. The AO should carry out the verifications as directed above and should allow the claim of the assessee, if found correct. The grounds are allowed for statistical purposes. 12. Ground Number- 11: Product Registration Expense: 12.1 Ground No.11 pertains to product registration expenses of Rs. 1,76,84,264/. The AO treated this expenditure as capital in nature and allowed depreciation thereon. The Ld. CIT(A) deleted the addition following the decision of the ITAT in assessee's own case in the A.Y. 2011- 12. The Ld. AR submitted that this issue was also involved in the A.Y. 2008-09. 12.2 We find that the Co-ordinate Bench of this Tribunal in the assessee's own case for AY 2008-09 & 2009-10 and also in A.Y.2011-12 (supra) had upheld the findings of the Ld. CIT(A) that product registration expense was a revenue expenditure. In fact, appeal of the Revenue on this issue was also dismissed by the Hon'ble High Court in Tax Appeal No. 200-201 of 2018 vide order dt. 4.4.2018. We, therefore, do not find any reason to interfere with the order of the Ld. CIT(A) deleting the disallowance of product registration expense of Rs. ....
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....tion of net amount of Rs. 72,74,923/- was made by the AO. When the disallowance under Section 14A of the Act has been restricted to Rs. 5,208/- only, the addition of Rs. 2,82,07,492/- as made by the assessee in the computation of income was not justified and, therefore, the Ld. CIT(A) had rightly allowed the claim of the assessee. We don't find anything wrong with the direction of the ld. CIT(A). In view of these facts, the ground taken by the Revenue is rejected. 14. Ground Number- 14: Disallowance u/s 40a(ia): 14.1 Ground No.14 pertains to disallowance of Rs. 94,25,132/- under Section 40(a)(ia) of the Act. The AO found that assessee had made following payments to non-residents, which was in the nature of fees for technical services (FTS) and on which TDS was not deducted under Section 195 of the Act. Payment Amount (In) Legal Fees (International) 11,52,259/- Legal Fees (Chemicals) 43,43,345/- Legal Fees (Formulation) 37,41,683/- Consultancy Exp (Chemicals) 1,87,845/- Total 94,25,132/- The AO held that the above payments made to non-residents was FTS which was liable to TDS and accordingly he disallowed the entire amount under Section 4....
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.... 14.3 It is found that the issue involved in the current year is identical. Therefore, following the decision of the Co-ordinate Bench as referred above, we do not find any reason to interfere with the order of the Ld. CIT(A) on this issue. The ground taken by the Revenue is dismissed. 15. Ground Number- 15: Foreign Currency Loss: 15.1 Ground No.15 pertains to deletion of foreign currency loss of Rs. 29,22,90,000/-, which was treated as speculation loss in the assessment order. The Ld. CIT(A) had allowed the relief to the assessee following the decision of ITAT in assessee's own case for A.Y. 2011-12 in ITA No.848/Ahd/2016. The Ld. CIT-DR submitted that facts of the case were not correctly appreciated in the earlier order for A.Y. 2011-12. In this regard, he has made following submissions vide letter dated 19.06.2024: "Brief Note on the ground of foreign currency loss of Rs. 29.22,90,000/- The AO made an addition with respect to foreign currency loss amounting to Rs. 29,22,90,000/- on account of it being a speculative loss which was deleted by Ld. CIT(A) based on decisions of Hon'ble ITAT in previous assessment years in Assessee's own case. ....
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....rnover of the assessee company and not related to any specific sale or purchase transactions. Moreover the assessee company had already made an arrangement with two different banks (Bank of Baroda and Corporation Banki besides SBI to cover the foreign exchange fluctuation risk on sales and purchase i.e. each and every export bill was booked at the forward rate of exchange for the maturity due date of export documents, whereby the bank credited the amount as per the prevailing rate in the account of assessee as per Exchange Earners Foreign Currency (EEFC) and remitted according to the gain/loss as on date of remittance, this covered the risk to the extent of 200 Crores. Thus, the contract of assessee company with SBI is not based on any export contracts but rather on the total turnover and in addition to such it has already safeguarded the risk of export contracts with the other two banks. Thus, the loss incurred on the total turnover cannot be said to be incidental to the business of the assessee and hence are not business loss but rather speculative loss wherein the contract is settled without actual delivery or transfer of any commodity/scrips. Moreover, the nature of fo....
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.... (3) In order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchases. Thus, it can be clearly seen that the hedge contract undertaken by Assessee company is on the total turnover rather than that of the sales/purchases or outstanding receivable from exports because of which such contract cannot be termed as genuine hedge contract in the light of Pankaj Oil Mill case and the loss thereby incurred, too, cannot be verified as business loss. Hence, due to all these reasons it can safely be said that the said loss is a speculative loss and not a genuine business loss and the cases cited by Assessee do not resonate with the facts of the present case and are thus not applicable. In view of the above, department pleads before your honour to consider above facts which have not been considered in the earlier order passed by the Hon'ble ITAT in Assessee own case for Α.Υ 2011-12. 15.2 The Ld. AR, on the other hand, reiterated that....
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....also holds inter alia that hedging contracts; in order to be out of speculative transactions, must be in respect of raw materials only in manufacturers' cases though they could be both with regard to sales and purchases, such hedging contracts need not succeed the contract for sale and actual delivery of goods manufactured, but the latter could be subsequently entered into within reasonable time not exceeding the relevant assessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Learned Departmental Representative fails to indicate any distinction therein vis-à-vis those involved in the instant adjudication. We therefore direct the Assessing Officer to delete the impugned disallowance." 15.4 The nature of transactions in the current year was exactly similar to the nature of transaction as considered in the A.Y. 2011-12. Therefore, the contention of the Revenue that there was a difference in the material fact cannot be accepted. Sinc....