TMI Blog2022 (9) TMI 1560X X X X Extracts X X X X X X X X Extracts X X X X ..... in a situation in which the right to exercise the option has come to an end, is not an arm's length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment in respect of interest which, according to the revenue authorities, should have charged on the optionally convertible loan granted to the AEs. Addition on account of Reimbursement of Expenses - HELD THAT:- Respectfully following the observations of the ITAT in assessee s own case for assessment year 2012-13 and assessment year 2013-14 [ 2021 (12) TMI 200 - ITAT AHMEDABAD] we are of the considered view that the TPO has erred in fact and law in holding that the arm s-length price in respect of these cost to cost reimbursements should be determined at Nil . High Courts in various cases have held that the TPO cannot determine the arm s-length price of transaction as Nil on ad- hoc basis without employing any of the prescribed methods as the same is against the scheme of the Act.High Court s have also held on various occasions that the TPO s jurisdiction is limited to determine the arm s-length price of a transaction and does not have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position is clear that prior to amendment introduced w.e.f. 01/07/2016, the deduction u/s 35(2AB) of the Act would be available to an assessee having an approved in-house R D facility by the prescribed Authority Act and there is no mention of approval of the quantum of expenditure in the law as it stood prior to that date. The mandate of quantification of expenditure has been put in place only w.e.f. 01.07.2016. In view of the above observations, we allow this ground of appeal of the assessee. Eligibility for weighted deduction u/s 35(2AB) - R D expenses in respect of clinical trial and bio-equivalence study - HELD THAT:- As per ruling for assessment year 2013-14 [ 2021 (12) TMI 200 - ITAT AHMEDABAD] held that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case, These decisions hold good as on now, and we are respectfully bound by those decisions as on now, Of course,, whatever we hold does, and shall always, remain, subject to what Hon'ble Courts above decide as and when that happens, In this view of the matter, we uphold the plea of the assessee, and, direct the Assessing Officer to delete the impugned disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Imputation on Optionally Convertible Loans advanced to Zydus International Pvt. Ltd. c. Addition of Rs. 15,56,62,098/- on account of Reimbursement of Expenses. 2. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 27,39,58,741/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses. 3. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 10,35,19,784/- 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. 4. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 32,43,28,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) being non-eligible expenditure. 5. That the learned Assessing Officer erred in law and on fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee charges 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. The DRP confirmed addition proposed by the TPO. 5. Before us, the counsel for the assessee submitted that the issue is directly covered in favour of the assessee by the orders of the ITAT in the assessee s own case for assessment year 2012-13 and assessment year 2013-14. Accordingly, the Ld. Counsel for the assessee ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 by the assessee, and delete the impugned ALP adjustment of Rs 10,45,32,855. The assessee gets the relief accordingly. 11. Ground no. 1 is thus allowed. 6.1 In our view, since the issue is directly covered in favour of the assessee in its own case for assessment year 2012-13 and 2013-14, respectfully following the orders passed in the assessee s own case, we hereby allowing this ground of appeal filed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessment years 2009-10 and 2010-11. Learned Departmental Representative, however, submits that even though the issue is covered in favour of the assessee, and to that extent that decision binds us, he nevertheless relies upon the stand of the Assessing Officer and would like to justify the same. We find that a coordinate bench, vide order dated 3rd March 2017 for the assessment year 2009-10, has, inter alia, observed as follows: 10. There is no dispute that the transactions in question are not of the transactions of lending money to the associated enterprises. The amounts advanced to the AEs are attached with the obligation of the AEs to issue share capital, in case the assessee exercise option for the same, on certain conditions, which are admittedly more favourable, and at an agreed price, which is admittedly much lower, vis-a-vis the conditions and prices which independent enterprise would normally agree to accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplictor on amount advanced but opportunity to own capital on certain favourable terms. Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(l)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression 'quasi capital', in our humble unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. 13. Let us, at this stage, take note of the US Tax Court decision, relied upon by the TPO, in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09, 13677-09; order dated 20th September 2012). It has been referred to by the TPO as decision of the US Supreme Court but in fact it is a decision of the US Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. 15. As regards the stand of the authorities below that Irish subsidiary has shown huge profits and high operational profits @ 93%, and this fact shows that the assessee should have charged interest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm's length consideration of raising the funds, unless profit sharing is implicit in the consideration for raising the funds itself-which is neither the normal commercial practice nor the case before us. The cost of raising funds is determined much before the returns from funds so raised is even known. To hold that cost of funds raised should have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s passed on the assessee s own case, we hereby allowing this ground of appeal filed by the assessee. 10. In the result, ground number 1(b) of the assessee s appeal is allowed. Ground number 1(c): Addition of ₹ 15,56,62,098/- on account of reimbursement of expenses: 11. The brief facts in relation to this ground of appeal are that during the year under consideration, the assessee had reimbursed expenses to three associated Enterprises: Zydus pharmaceuticals Mexico, Zydus France and Zydus Japan. The assessee s contention is that all these expenses were made by way of reimbursement on cost of cost basis to these overseas associated enterprises. With respect to reimbursements made to Zydus Mexico, the assessee s contention is that Zydus Mexico had incurred certain expenses related to clinical research and product registration for assessee s products. The assessee s contention is that the reimbursements have been made by the assessee for the products wherein the assessee is the IP owner and plays the role of entrepreneur whereas Zydus Mexico is only a distributor entity. With respect to reimbursement of expenses to Zydus France, the assessee submission was that the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract manufacturer. He submitted that the assessee was the IP owner and all the reimbursements were made with respect to assessee s business interests in these jurisdictions. In respect of Zydus Mexico , the assessee filed submission dated 2ndJune 2022 and drew our attention to relevant extracts of the supply and distribution agreement between the assessee company and Zydus Mexico to demonstrate that in fact, assessee is the IP owner and therefore reimbursements were made in connection with protection of assessee s interest outside of India. He further drew our attention to the Transfer Pricing Study Report at pages 48 and 49 of the paper book to reiterate that the assessee is acting as an entrepreneur/IP owner and Zydus Mexico is acting as its distributor. He further drew attention to pages 593 to 613 of the paper book by giving necessary supporting for expenses reimbursed to Zydus Mexico for clinical research and product registration. The assessee further submitted that similar expenses were reimbursed by the assessee to Zydus USA, who is acting as a limited risk distributor for the assessee. The assessee obtained a favourable order of ITAT for assessment year 2012-13 (copy a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee were acting in the capacity is an entrepreneur/IP owner, on a cost to cost basis. The assessee has given supporting documents in respect of the nature of reimbursements, from which it can be inferred that the expenses were essentially incurred with respect to assessee s business interests in these overseas jurisdictions. The TPO/DRP has not questioned/challenged the assertion of the assessee that these expenses were reimbursed on a cost to cost basis. We further note that the assessee for assessment year 2012-13 and assessment year 2013-14 had reimbursed similar expenses towards associated Enterprise in USA and the TPO had determined the arm s-length price at Nil . In this respect, the key findings of the ITAT are reproduced below for reference. 23. We find that the TPO has, in essence, proceeded to make disallowance under section 37(1) by holding that there was no commercial expediency in making these reimbursements. That is certainly travelling beyond the domain of his powers under the scheme of the Act. The TPO only has to ascertain arm's length price of a transaction in the sense that if the same transaction was to be incurred between unrelated parties as to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the US AE is admittedly, and beyond dispute, only an LRD. The same is the position with respect to the legal expenses. It has been specifically explained by the assessee, and this explanation has not even been called into question, that the US AE was holding the ANDAs and patents, as a trustee and in fiduciary capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm's length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned by the company and in respect of which US AE is only an LRD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F 2011), Hive Communication Private Ltd. (Delhi High Court) (ITA No. 306 OF 2011).] 14. In view of the above observations, ground number 1(c) of the assessee s appeal is allowed. Ground Number 2: Addition of ₹ 27,39,58,741/- on account of product registration expenses/reimbursement of expenses for product registration support services: 15. The brief facts in relation to this ground of appeal are that the assessee debited a sum of ₹ 26,24,72,651/- under the head product registration expenses and ₹ 5 70,03,770/- under the head product registration services . During the course of assessment, the assessee submitted that before any pharmaceutical company can sell its products in any foreign country, it is essential to obtain registration for its pharmaceutical products from the Government Drug Regulatory Authority of that country. During the year under consideration, the assessee has got various products registered in foreign countries. Moreover, expenses have also been incurred for registration of products the local bodies of medical associations of various States in India. Since by incurring the expenditure on product registration, the assessee has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese expenses were capital in nature as was held by Ms predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the appellate authorities, he was equally alive to the fact that these orders have not been accepted by the income tax authorities and the matter in thus in appeal before the higher authorities, It was in this backdrop that he treated the aggregate amount of Ms 11,83,70,291 as capital expenditure, but allowed depreciation of Rs 1,99,68,460 thereon, and disallowed net amount of Rs 9,84,01,831 The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us. 43. Having heard the rival submissions and having perused the material on record, we are of the considered view that the assesses does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assesaee's own case and the additions have been made, so to say, keep the issue alive. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee submitted that the issue is decided by the ITAT in favour of the assessee, the assessee s own case for assessment years 2006-07 to 2010-11 and assessment years 2012-13 and 2013-14. The counsel for the assessee further submitted that the Gujarat High Court has further decided that no question of law arises on this point in its orders for assessment years 2006-07 to 2008-09. In response, the Ld. DR relied upon the observations made in the assessment order. 21. We have heard the rival contentions and perused the material on record. It would be useful to reproduce the relevant extracts of the ITAT, Ahmedabad ruling for assessment year 2013-14 on this issue: 88. In ground no, 5, the assesses has raised the following grievance: That the learned Assessing Officer erred in law and on. facts in making an addition of Rs, 6,95,33,042/- 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. 89. Learned representative fairly agree that as an identical issue has come up before us in the appeal for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee gets the relief accordingly. 90. We see no reasons to take any other view of the matter than the view so taken by us for the immediately preceding assessment year, and observations made therein will apply mutatis mutandis for this assessment year as well. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 6,95,33,042 91. Ground no 5 is thus allowed. 22. In our view, since the issue is directly covered in favour of the assessee in his own case for assessment years for assessment years 2006-07 to 2010-11 and assessment years 2012-13 and 2013-14, respectfully following the orders passed in the assessee s own case by the ITAT, Ahmedabad, we are hereby allowing this ground of appeal filed by the assessee. Ground number 4: addition of ₹ 32,43,28,000/- as non-eligible expenditure under section 35(2AB) of the Act: 23. The facts in relation to this ground of appeal are that the AO and DRP have made addition on the ground that the amount allowed by the DSIR was less as compared to deduction claimed by the assessee. The counsel for the assessee relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. 25. We also note that the ITAT Pune Tribunal in the case of DCIT v. Force Motors 133 taxmann.com 71 (Pune - Trib.) while dealing with identical issue held that prior to amendment in 2016, section 35(2AB) does not provide any methodology of approval to be granted by prescribed authority vis-a-vis expenditure from year to year and therefore, order of Assessing Officer in curtailing expenditure and consequent weighted deduction claimed under section 35(2AB) on ground that deduction cannot exceed claims approved by prescribed authority, had rightly been set aside. The Pune ITAT, while passing the order, observed as below: 10. Therefore, there is categorical finding given by the Tribunal that the amendment brought in by the IT (Tenth Amendment) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both of which have been filed on record before us by the assessee, it has been clearly provided that the deduction would be available to the assessee's having an approved in-house R D facility by the prescribed authority. Undisputedly, there is no mention or approval of the quantum of expenditure. 10. Then, as observed by the Ahmedbad Bench of the Tribunal in the case of Sun Pharmaceutical Industries Ltd. v. Pr.CIT [2017] 77 taxmann.com 202/162 ITD 484 as approved by the Hon'ble Gujarat High Court vide its decision reported at 250 taxmann 270, it has been held that the objective of Form 3CL is limited to the forwarding of the intimation of the approval of the unit; that Form No. 3CL is a mere report for intimation of approval of R D facility. In this regard, as rightly pointed out, such aspect stands confirmed by sub-rule (7A) of Rule 6 of Income Tax Rules, as within subsisting (now amended w.e.f. 01.07.2016), to provide for quantification of expenditure as well. The Finance Act, 2015 as amended to sub section (3) of section 35 w.e.f. 01.04.2016, providing for furnishing of reports in the manner to be prescribed. It is, thus, w.e.f. 01.04.2016 that the provision ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee further submitted that the Gujarat High Court has further decided that no question of law arises on this point in its orders for assessment years 2006-07 to 2008-09. In response, the Ld. DR relied upon the observations made in the assessment order. 30. We have heard the rival contentions and perused the material on record. It would be useful to reproduce the relevant extracts of the ITAT, Ahmedabad ruling for assessment year 2013-14 on this issue: 101. In ground no. 7, the assessee has raised the following grievance: That the learned Assessing Officer erred in, law and on facts in making an addition of Rs. 67,00,09,438 by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s 35(2 AB) in respect of Clinical Trial and Bio-equivalence Study. 102. Learned representative fairly agree that as an identical issue has come tip before us in the appeal for the assessment year 2012-13, whatever we decide in the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well As observed earlier in this consolidated, we have decided this issue in favour of the and observed as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter, we uphold the plea of the assessee, and, direct the Assessing Officer to delete the impugned disallowance of Rs 39,39,31,000. This disallowance must stand deleted as on now. The assessee gets the relief accordingly. 103. We see no reasons to take any other view of the matter than the view so taken by us for the immediately preceding assessment year/ and observations made therein will apply mutatis mutandis for this assessment year as well. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 67,00,09,138. 104. Ground no 7 is thus allowed. 31. In our view, since the issue is directly covered in favour of the assessee in his own case for assessment years for assessment years 2006-07 to 2010-11 and assessment years 2012-13 and 2013-14, respectfully following the orders passed on the assessee s own case, we hereby allowing this ground of appeal filed by the assessee. Ground number 6: disallowance of depreciation on Hummer car of ₹ 6,60,491/- 32. The facts of this case are that on verification, during the course of assessment proceedings, the AO observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the assessee company and the car is used by the company. The beneficial ownership thus rests with the assessee company. The depreciation was proposed to be declined by the Assessing Officer mainly on the ground that the assessee did not own the vehicle in question. However, the assessee succeeded in the DRP in his objection to this proposal. We have noted that the DRP has given a categorical finding to the effect that the car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the t RP7 the mere fact that the cat was not legally owned by the assesses company- particularly when beneficial ownership of this vehicle is not even in dispute,, the depreciation on car cannot be declined. Aggrieved, assessee is in appeal before us. 132. Having heard the rival contentions and having perused the material on record, we are not inclined to disturb very well reasoned findings of the DRP and the conclusions arrived at b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and perused the material on record. It would be useful to reproduce the relevant extracts of the ITAT, Ahmedabad ruling for assessment year 2013-14 on this issue: 109. Ground no. 9, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an adjustment of Rs. 18,77,51,234/- to respect of disallowance u/s. 14A for purposes of computation of book profit u/s. 115JB. 110. As regards this grievances of the assessee, learned representatives fairly agree that the issue is covered, in favour of the assessee, by a coordinate bench in assessee's own case for the assessment year 2008-09, which in turn has followed the assessment years 2006-07 and 2007-8. The DRP itself has noted this factual position, and yet confirmed the action of the Assessing Officer, in making this adjustment, so as to keep the issue alive. Aggrieved, the assessee is in appeal before us. 111 . Having heard the rival submissions and having perused the material on record, we are of the considered view that the assesses does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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