2024 (2) TMI 223 - ITAT AHMEDABAD

TP Adjustment - amount advanced to it’s Associated Enterprises - whether Advances being quasi capital in nature, thus no transfer pricing adjustment is called for? - HELD THAT:- In our considered view, in the light of the assessee’s facts, the Ld. CIT(A) has erred in facts and in law in coming to the conclusion that the nature of advances given by the assessee to it’s subsidiaries / Associated Enterprises as quasi capital in nature. The nature of advances, whether it is quasi capital in nature or not, has to be seen at the time of granting of advance / loan to the subsidiary. In the instant facts there was nothing to suggest that at a time of advancement of such loan to the Associated Enterprises the nature of such advances was quasi capital in nature and fact that in the subsequent year, such amounts have been converted into equity (at the option of the assessee) would not alter such advance as being in the nature of quasi capital.

Commercial Expediency/ availability of interest free funds - As noted earlier, if the argument of commercial expediency were to be accepted as a guiding tool for non-applicability of transfer pricing adjustments to international transactions, then no transfer pricing adjustment can be made in respect to almost all international transactions between Associated Enterprises, since mostly such transactions are based on the principles of commercial expediency. Further, transfer pricing provisions are special provisions have been introduced specifically to ensure that there is no tax base erosion at the India level and profits are not shifted outside of India by way of certain pre-arranged transactions between associated enterprises. Therefore, the arguments that the advances were given out of one interest-free funds or that the transactions between the associated enterprises were guided by commercial principles, in our considered view, are irrelevant considerations for the purpose of computing arms length Price between associated enterprises, since transfer pricing provisions are special provisions introduced with an aim of checking tax base erosion.

CIT(A) has not commented upon the correct amount of interest to be charged by the assessee from it’s AEs - We are in agreement with the contention of the Counsel for the assessee that the Ld. CIT(A) should have given a precise finding with respect to the correct amount of interest to be charged by the assessee from it’s AEs.

We agree with the alternate contention taken by the counsel for the assessee and the matter is referred to the Ld. CIT(A) to give a specific finding on the correct amount of interest to be charged by the assessee from it’s AEs. The assessee is at liberty to furnish it’s submissions / supporting documents to assist the Ld. CIT(A) in this regard.

Disallowance of expenses incurred by the assessee on behalf of it’s firm - Disallowance has been worked out by the AO being the difference of the net profit rate of 49.05% shown by the partnership firm and the estimated net profit rate taken by the Assessing Officer at 25% - CIT(A) restricted the additions to Rs. 12,12,20,245/- by working out the revised net profit rate of the partnership firm @18.64% and the difference of the revised net profit rate of the partnership firm and the net profit rate of the assessee company (11.15%) was confirmed in the hands of the assessee - HELD THAT:- As in the instant case, there is no concrete materials / evidence to come to the conclusion that there has been diversion of profits from the partnership firm to the assessee company. Admittedly, the Department has not challenged the sale price at which products have been sold by the partnership firm to the assessee company. Further, the Ld. CIT(A) has also made a specific observation that the products of the assessee company involved substantial innovation, whereas the products of the partnership firm are generic in nature and do not require substantial innovation. Further, there is no mistake in the books of accounts of the assessee much has been pointed out by the Assessing Officer. Accordingly, looking into the instant facts, we are of the considered view that the Ld. AO has erred in facts and in law in coming to the conclusion that there has been diversion of profits from the partnership firms, claiming exemption under Section 80IE(i) and 80IC(3)(ii) of the Act and thereby diverting expenses to the assessee company.

Deduction u/s 35 (2AB) - disallowance of expenditure on non-clinical trials on the ground that the DSIR (Department of Scientific and Industrial Research) in the report in Form 3CL has granted approval for a lesser amount as against the claim made by the assessee - AO observed that the DSIR had granted a short approval in respect of clinical trials and accordingly, no weighted deduction thereupon @ 50% was liable to be granted - HELD THAT:- As per the observations made by ITAT in assessee’s own case for preceding assessment years [2015 (8) TMI 763 - ITAT AHMEDABAD] and the observations made by the Jurisdictional High Court in the case of Cadila Healthcare Ltd. [2013 (3) TMI 539 - GUJARAT HIGH COURT] as held held that Explanation to Section 35(2AB)(1) does not require that expenses included in said Explanation are essentially to be incurred inside an approved in-house research facility. - we are of the considered view that Ld. CIT(A) has not erred in facts and in law in making any disallowance with respect to the aforesaid issue.

Claim of deduction u/s 35(2AB) towards weighted deduction relating to expenditure on accepted batches, building maintenance and patent filing fees - HELD THAT:- As relying on SUN PHARMACEUTICAL INDUSTRIES LTD. [2017 (6) TMI 1323 - ITAT AHMEDABAD] appeal of the assessee is partly allowed to the extent of weighted deduction with respect to foreign patent filing expenses under capital expenditure amounting to Rs. 0.19 lakhs. However, with respect to the balance amount, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference.

TP Adjustment - Upward adjustment towards guarantee fees / commission - HELD THAT:- It is well settled law that the transaction of furnishing corporate guarantee to overseas Associated Enterprises constitutes an international transaction and would be subject to Transfer Pricing regulations. Further, we observe that the assessee during the course of assessment proceedings has himself accepted to charge guarantee fee @ 0.8% as observed by Ld. CIT(A) in the appellate order. Accordingly, in view of the judicial precedents on the subject and the assessee’s own acceptance placed on record before the AO / TPO, we find no infirmity in the order of CIT(A) so as to call for any interference. We are also of the considered view that charging of corporate guarantee fee @ 0.8% is justified by the assessee in view of various judicial precedents on this issue and accordingly no further upward adjustment is called for as prayed by the Department. Accordingly, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference.

Nature of expenses - Expenses towards issue of debentures - whether Ld. CIT(A) erred in disallowing expenses towards issue of debenture as revenue expenses instead of treating the expenses as capital expenditure? - HELD THAT:- We observe that we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. The Ld. CIT(A) has given a specific finding that the funds received on issue of debentures were used by the assessee company in the course of business, these funds have not been deployed in any new projects and that the debentures are purely in the nature of loans which have been raised to fulfill the working capital requirements of the company and accordingly, the aforesaid expenses are allowable under Section 37(1) of the Act.

Disallowance u/s 14A - Investments in subsidiary companies - CIT(A) deleted the additions made by AO on the ground that the assessee had made investments in subsidiary companies and the assessee did not derive any dividend income from these companies - HELD THAT:- We observe that Ld. CIT(A) has given a categorical finding that firstly, with respect to investment in partnership firm, the assessee’s own interest free funds were far in excess of the investments made in the partnership, yielding exempt income and accordingly, no disallowance is called for. Further, in respect of the other three companies, the Ld. CIT(A) observed that since no exempt income was earned by the assessee during the impugned year under consideration, there is no question of disallowance under Section 14A of the Act. Accordingly, in view of the instant facts and the judicial precedents on the subject and the observations made by the Ld. CIT(A), we find no infirmity in the order of Ld. CIT(A), so as to call for any interference.

Disallowance in respect of increase in authorized share capital - AO made disallowance of expenses towards ROC fees paid for increasing the authorized share capital for the reason that these expenses were capital in nature - HELD THAT:- In our considered view, after going through the facts of the instant case, Ld. CIT(A) has duly considered and distinguished the facts of the instant case from the case of Brooke Bond India Ltd. (1997 (2) TMI 11 - SUPREME COURT) and has taken a view that this is not a case of increase in share capital simplicitor and hence the facts and issues for consideration in the instant case are different from the facts before the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. (supra). Accordingly, in light of the facts of the case, the observations made by Ld. CIT(A) we find no infirmity in the order Ld. CIT(A) so as to call for any interference.

Disallowance u/s 36(1)(iii) - disallowance of interest on proportionate basis on the Capital Work-In-Progress on the average CWIP - AO held that interest on borrowed funds to the extent of advances utilized for the purpose of CWIP was to be capitalized and hence is disallowable under Section 36(1)(iii) - CIT(A) deleting the additions - HELD THAT:- We are of the considered view that the issue is directly covered in favour of the assessee by the decision of CIT vs. Raghuvir Synthetics Ltd. [2013 (7) TMI 806 - GUJARAT HIGH COURT] wherein the Courts have held that where huge funds were available without any interest liability with assessee and there was no evidence to hold that borrowed money was utilized for purpose of advance to sister concerns, no disallowance of interest was warranted. We observe that Ld. CIT(A) has, after a detailed discussion on the facts of the case and judicial precedents as the subject decided this issue in favour of the assessee. Accordingly, we find no infirmity in the order of Ld. CIT(A), so as to call for any interference.

Disallowance under Section 40A(2)(b) - Addition in respect of purchases made and payment of services to related parties - HELD THAT:- CIT(A) has correctly observed that the A.O. was not justifying in adopting a lumpsum rate of 2.5% of such expenses as being excessive and there was no basis or rationale for arriving at such ad-hoc percentage for making disallowance under Section 40A(2)(b) of the Act. Further, we are also of the considered view that Ld. CIT(A) has correctly observed that the Assessing Officer has also not given any specific comparable instances to show that payment made to these parties was not reasonable or not as per prevalent Fair Market Value. Accordingly, we find no infirmity in the order of the Ld. CIT(A) so as to call for any interference.

Disallowance u/s 35(1)(vi) relating to expenditure incurred on intangibles - HELD THAT:- On going through the instant facts and the decision cited by the assessee, we are of the considered view that in the interest of justice, the matter may be referred to the file of A.O. for consideration of the claim made by the assessee for deduction under Section 35(1)(i).

TDS u/s 195 - disallowance u/s 40(a)(ia) towards commission paid outside India to non-resident agents - HELD THAT:- Before us, assessee submitted that the assessee has a good case on merits on the issue of non-deduction of TDS with respect to sales commission paid to non-resident commission agents and accordingly, in the interest of justice, the matter may be restored to the file of A.O. for de-novo consideration. Thus, in the interest of justice, the issue is restored to the file of A.O. for de-novo consideration, after giving due opportunity of hearing to the assessee.