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2015 (12) TMI 95 - AT - Income TaxAdjustment as interest on short term facility extended - TPA - Held that:- Considering the orders of the DRP in AY. 2006-07 and also order of ITAT in AY. 2008-09 in assessee's own case on the issue of adjustment towards interest and advance provided to AEs, we direct the AO/TPO to adopt EURIBOR + 2% rate of interest for making the adjustment under the provisions Adjustment in respect of share application money - Held that:- The investments are in the nature of equity then, they cannot be treated as 'loans and advances'. Since in this case, the investments are in the nature of equity and shares have been allotted after a period of four months, we are of the opinion that TPO cannot reclssify the amount as 'loans and advances'. Moreover, we have considered the appeal in AY. 2008-09 vide orders dt. 10-01-2014, wherein it is noticed that TPO has not made any adjustment from 1st April 2007 to the period of allotment. Therefore, keeping that factor also in mind, we are of the opinion that adjustment proposed by the TPO as confirmed by the DRP is not warranted. We direct the same to be deleted. Ground is allowed. Adjustment in respect of corporate guarantee extended - Held that:- There is a service rendered to AE by providing guarantees and therefore invoking provisions of TP does arise on the facts of the case. Considering case of M/s. Four Soft Ltd. [2011 (9) TMI 634 - ITAT HYDERABAD ] the adjustment made on the guarantee commission on the corporate guarantees provided by assessee to its AEs. However, as far as the rate at which the guarantee commission is to be considered, the adoption of 2% was not approved in various co-ordinate Bench decisions thus we direct the TPO to adopt 0.53% as the guarantee commission rate instead of 2% adopted by him Reducing the operating profits of the tax-payer company on account of income from settlement of patent infringement suit credited to Profit & Loss account and foreign exchange fluctuations (Credit) - Held that:- We agree with the finding of the Assessing Officer as held by the DRP that the income from settlement of patent infringement cannot become part of operating revenues either on bulk drug manufacturing (API) segment or on product development service (PDS) segment which are two different segments in which assessee is operating and accordingly we agree with the DRP's stand that this income falls under the category of 'other income' and not operating revenue. Not only that the income does not pertain to the relevant financial year nor the costs are incurred in the year under consideration. If without the cost, the income is included in the computation of operational profits, the same gets skewed because of inclusion of extraordinary items. It was decided in number of cases by the Tribunal that incomes of extraordinary nature are to be excluded and further extraordinary events in any company also make it non-comparable while doing exercise of FAR analysis for comparability purpose. For the reasons stated above, we agree with the Assessing Officer/DRP that this income from settlement of patent infringement cannot be considered as operational income while working out the segmental profits or as total profits of the assessee for the purpose of comparison. For credit of foreign exchange fluctuations this issue was already decided in favour of assessee holding that foreign exchange fluctuation gain/loss are part of operating margin of assessee as well as comparable companies while undertaking ALP adjustments. See case of Capital IQ Information Systems (India) (P.) Ltd. [2014 (3) TMI 626 - ITAT HYDERABAD ] Adjustment u/s. 92CA in respect of sales to Associated Enterprises determining the Arms-length price of Profit Level Indicator being operating profit margin at 27.34% (operating profit/cost) and 20.48% (operating profit/operating revenue) - selection of comparable - Held that:- On the reason that multiple year data was taken by assessee some of the companies selected by it are rejected. TPO should have considered data of this year. Moreover, when assessee made detailed objections before the DRP, DRP did not adjudicate the objection at all as can be seen from the order. Therefore, this forum is handicapped to that extent, in deciding the issue one way or the other. Since the objections are not examined by the DRP, we are of the opinion that that selection of comparables should be restored to the authorities. As can be seen from the objections raised, assessee objected selection of these two companies as comparables. This require re-examination by the TPO, as more data would have come by this time into the public domain. Therefore, we are of the opinion that the matter should go back to TPO who should consider selecting proper comparables, after appropriate FAR analysis and by giving due opportunity to assessee, to re-consider the comparability analysis Non deducting from the returned income, corresponding to adjustment u/s. 92CA made by Transfer Pricing Officer in Astrix Laboratories Limited - Held that:- there is no dispute with reference to the receipt of these amounts, one as an income i.e., management fee of ₹ 1.12 crores and other being the reimbursement of expenses of ₹ 1.05 crores. As far as the reimbursement of expenditure is concerned, we have already directed in the earlier ground to consider the nature of amount and exclude from the computation for the purpose of transfer pricing on verification. Therefore, to that extent, the claim will be a double claim. With reference to the management fee, we are not sure why there is an adjustment in another domestic transaction, if contentions of assessee are correct. If transaction is between two domestic companies transfer pricing regulations does not apply in the impugned year. If one domestic company paid to its AE and assessee receives from AE, the transactions are different in nature. Whether the same can be allowed in the hands of other domestic company or not has no bearing in the assessee's hands as the said amount was received and was accepted by the assessee to be taxed. We approve the DRP observation that taxability or otherwise of the amount in one hand does not affect the adjustment in other hand unless it is provided so in the Act. Therefore, this ground of the assessee is rejected Deduction claimed u/s. 10B of the Act in respect of Export Oriented Undertakings situated at Pashamylaram (Unit-7), and Jeedimetla (Unit-3.2) - Held that:- AO following the orders in earlier years did not allow the claim of assessee u/s. 10B on the said unit. DRP however, noticed that the issue is subject to revisional proceedings by the CIT and the WP is pending before the Hon'ble High Court of AP. DRP considered it fit not to interfere with a stand of AO, but however, directed the AO to follow the judgment of Hon'ble AP High Court as and when the issue was decided. It further suggested that the demand on account of disallowance of deduction be kept in abeyance till the decision of the Hon'ble High Court.Assessee has raised this issue but submitted that the matter is subjudice. Since DRP has already given clear directions on the issue, we uphold the directions of DRP with an observation that AO should follow the same as and when the issue is decided by the Hon'ble High Court. This ground is considered allowed for statistical purposes. Disallowance of Superannuation Contribution paid to LIC in respect of the working directors of the Company - Held that:- From the facts and materials on record, it is evident that the incurring of expenditure has not been doubted or disputed by AO. The only reason for which the AO disallowed the expenditure is since contribution to superannuation / gratuity fund is covered u/s 36(1)(iv) the same cannot be allowed u/s 37. The DRP has confirmed the disallowance solely for the reason that similar disallowance was upheld by CIT(A) for the AY 2005-06. However, on going through the facts and materials on record, we are of the view that the expenditure incurred is allowable as deduction if not u/s 36(1)(iv) but u/s 37 of the Act as it is exclusively incurred for the purpose of business. Moreover, it is not disputed that assessee has deducted tax at the time of making contribution to the fund and has treated it as part of salary of the concerned directors. That being the case, the expenditure incurred should be allowed as a deduction. Allowance of Employee Stock Option Scheme - Held that:- We restore this issue to the file of the Assessing Officer to examine the claim afresh in the light of decision of the Hon'ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (2014 (12) TMI 838 - ITAT BANGALORE). Rejection of basis for apportionment of common corporate overhead expense to all the units of the company including 100% Export Oriented undertakings eligible for deduction u/s. 10B and in the process reducing the benefit u/s. 10B - Held that:- Allocation of expenditure as was done by the assessee is more rationale and is in tune with the principles laid down by the Institute of Cost Accountants and also for the purpose of Company Law. Therefore, considering the detailed objections raised by the assessee as placed in the objections to the DRP, we are of the opinion that the allocation by the assessee is to be upheld. Assessing Officer is directed to accept the assessee's allocation of corporate overheads. Accordingly, ground is allowed. Weighted deduction at 150% U/s. 35(2AB) in respect of clinical drug trials carried out by it on the ground that it is incurred outside the ‘in-house R&D' - Held that:- As assessee is in a position to support and substantiate its claim by filing relevant documentary evidence and has urged that an opportunity may be given to the assessee for this purpose by sending the matter to the Assessing Officer we restore the issue to the file of AO with the same direction to examine assessee’s claim in respect of expenditure incurred for clinical trials outside India after giving assessee proper and sufficient opportunity to establish the case in regard to explanation to Section 37(2AB). Delete expenditure attributed under Rule 8D of Income tax Rules, 1962 for earning exempt dividend from Mutual funds - Held that:- The action of AO cannot be upheld. As seen from the order, he invoked Rule 8D which was not applicable for the impugned assessment year. However, DRP confirms the disallowance made under Rule 8D as ‘reasonable amount’. ITAT is holding an amount of 2% to 10% on the exempt income as ‘reasonable amount’ in the year prior to application of Rule 8D. Accordingly, we are of the opinion that an amount of ₹ 1,00,000/- can be considered as a reasonable amount incurred for earning the exempt income, considering that assessee has made investments and require personnel to monitor the same. For the same. AO is directed to disallow an amount of ₹ 1,00,000/- under the provisions of Section 14A. Depreciation @ 12.5% being 50% of normal depreciation in respect of non-compete fee - Held that:- The depreciation cannot be allowed on an amount of non-compete fee, which was in fact paid to the Managing Director of the Company for not taking any employment. This cannot be considered under section 32(1) as an intangible asset Depreciation on brought forward written down value in respect of non-compete fee paid - Held that:- Even though the assessee's claim was crystallized wherein the payment of fee was considered eligible for depreciation, the Assessing Officer did not grant the depreciation on the reason that reference application is pending before the Hon'ble High Court and the issue has not been finalized. This cannot be a reason for denying the depreciation claimed. Since, ITAT has already ordered the depreciation to be allowed in assessment year 2002- 2003, consequently, depreciation has to be allowed on WDV in this year. He is empowered to take rectification proceedings in case that order was not upheld by the Hon'ble High Court. In view of this, to that extent of claim of depreciation amounting to on brought forward written down value, Assessing Officer is directed to allow the depreciation after verifying the WDV figures. LTCG or STCG - difference between the market value for the purposes of levy of stamp duty while registering the sale deed and actual sale consideration per sale agreements for sale of Petbasheerbad land - Held that:- The capital gain is attracted the moment the property was handed over, the sale consideration was also received. So the capital gain is correctly offered by assessee in AY. 2006-07 itself.Provisions of Section 50C can be invoked but what AO did was to bringing to tax only the difference in SRO price and Sale Price to tax. He is bound to calculate the capital gains. He did not bring the capital gain offered in AY. 2006-07 to this year. There cannot be computation of capital gains in two assessment years on sale of one property. The action of AO is not according to the provisions of the Act.AO should have considered that the gains become Long Term Capital Gain as the same was purchased in April, 2003 and according to AO sold on 24-08-2006. But the same was brought to tax as Short Term Capital Gain. Even the DRP failed to consider the same when assessee pointed out. No direction was given to AO to treat it as Long Term Capital Gain.The order of AO in the reassessment proceedings indicate that AO did not reduce the capital gains offered in this year. This indicates that the action of assessee in offering Short Term Capital Gain was accepted. Even though, the provisions of Section 50C was amended to clarify that the SRO value as on date of agreement of sale has to be considered that need not be considered here as AO on facts accepted capital gain in AY. 2006-07 itself. Restricting the deduction under clause (II) of Explanation to Section 115JB in respect of export profits from the 100% export oriented undertaking eligible for deduction under sec. 10B - Held that:- Supreme Court in the case of Ajanta Pharma (2010 (9) TMI 8 - SUPREME COURT ) is against the Department and in favour of the assessee. The Apex Court laid down the law that for purposes of computing book prof it, the deduction to be allowed under clause (iv) of Explanation is the export prof its as computed with reference to book prof its. Sec. 115JB is a separate code for company assessees' for computing minimum tax payable in the absence / inadequacy of normal taxable income falling under the 5 heads of income. The minimum tax is to be computed with reference to book prof its as per the audited accounts of the company. Consequently the export prof its computed under the provisions of sec. 80HHC based on 'prof its of business or profession' cannot be substituted into the computation scheme as prescribed in sec. 115JB which is an alternative computation to the normal computation of income. The Court also held that the deduction under clause (iv) of Explanation for the export prof its should not be phased out as provided in sub-section (1B) of sec. 80HHC because, 115JB is an independent code and it covers full export prof its as the eligible prof its for the purposes of book prof its tax and no phasing is required to be carried out
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