TMI Blog2017 (1) TMI 1109X X X X Extracts X X X X X X X X Extracts X X X X ..... we set aside the findings of the ld. CIT(A) and direct the A.O. to delete the entire transfer pricing adjustment made by it. -Ths we direct the A.O to delete the entire Transfer Pricing adjustment made by it - Decided in favour of assessee Disallowance of deduction u/s. 10B of the Act in respect of Ahmednagar Unit - Held that:- As during the year under consideration, both the lower authorities have adjudicated the issue; therefore, there is no reason why the matter should be sent back for fresh adjudication. However, we find the LOP has been cancelled vide order dated 25.07.2006 which pertains to F.Y. 2007-08. Therefore, we do not find any reason why the exemption should be denied for the year under consideration. Since in earlier years, the exemption was allowed. Therefore, we direct the A.O to allow the claim of deduction u/s. 10B of the Act for the year under consideration.- Decided in favour of assessee Disallowance of trade mark registration and overseas product registration charges u/s. 35(2AB) - Held that:- Tribunal in earlier years while deciding the issue in favour of the assessee has followed the decision of the Co-ordinate Bench, Mumbai in the case of USV Ltd. [201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. In that case, we have to state that provisions of section 40A(2) are applicable only in respect of payments made to related parties mentioned therein. But the transaction before us is of credit in nature i.e. sales so provisions of section 40A(2) are not at all applicable. Disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries - Held that:- As per the agreement between the assessee company and the partnership firm, the assessee had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Thus, it cannot be said that the expenditure incurred by the assessee are not for the purposes of its business. Since the assessee is holding 95% in the partnership firm it becomes the duty of the assessee to promote the business of the partnership firm, in the capacity of the majority stake holder. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee’s business or the business of the partnership firm where the assessee is a majority stake holder. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinizing the return of income, the A.O noticed that the assessee has paid export commission of ₹ 5,17,21,555/- to M/s. Sun Pharma Global Inc., an associate enterprise of the assessee. This issue was referred to the Transfer Pricing Officer for determination of Arm s Length Price under section 92CA(1) of the Act. The TPO vide order dated 17.03.2008 has determined ALP at Nil. Thus, the difference amount of ₹ 5,17,21,555/- was treated as excess commission paid by the assessee to its AE which needs to be disallowed. Assessee was asked to explain the nature of transactions and whether the payment is within Arm s Length Price. Assessee filed a detailed and elaborate reply to substantiate its claim that the payment is at Arm s Length Price. It was brought to the notice of the A.O that in earlier assessment years i.e. A.Ys. 2002-03, 2003-04 2004-05, the ld. CIT(A) has accepted the normal commission paid to the AE and the only ground which the ld. CIT(A) has rejected is the payment of overriding commission wherein the ld. CIT(A) has directed that only in those cases where the overriding commission paid together with the existing commission paid is in excess of 3% of the turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the commission paid by it to nonrelated parties. It was brought to the notice of the TPO that the weighted average rate of commission works out to 7.84% on total sales and on similar arrangement in India, the assessee has paid commission @ 11% . Therefore the payment is at arm s length. After considering the facts and the submissions, the TPO observed that the assessee has not submitted any documentary evidence in respect of its arrangements with any of these persons. The TPO also observed that the assessee had failed to establish the arms length nature of the transaction under the CUP method. Accordingly, the assessee was asked to provide the documentary evidence in support of the various services rendered by the AE. The assessee was also asked to provide the details of expenses incurred in various locations of the world by the AE to establish the services rendered by them. The assessee was also asked to provide the details of persons employed by the AE along with their qualification; the assessee filed the necessary details. The TPO at Para 9 of his order had observed that the assessee failed to justify the margin of the subsidiary company by comparing it with other compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed on the sales made through non -related parties where commission is paid @ 3% and overriding commission is not to be allowed where commission is more than 3% to the non- related enterprises. 30.Aggrieved by this findings of the ld. CIT(A) both assessee and the revenue are in appeal before us. The ld. counsel for the assessee vehemently stated that the action of the revenue authorities is beyond the scope of the provisions contained in Chapter 10 of the Act. It is the say of the ld. counsel that under Chapter 10 the only power of the revenue authorities is to see whether the international transaction entered into by the assessee are at arm s length or not. The ld. counsel further stated that it is not open to the revenue authorities under Chapter 10 to see whether any services have been rendered by the AE or not. The ld. counsel concluded by saying that if the revenue authorities are of the opinion that no services have been rendered the disallowance can be made under other provisions of the Act. Per contra, the ld. D.R. strongly supported the findings of the A.O. 31. We have given a thoughtful consideration to the orders of the authorities below. We have also gon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 8. Vide letter dated 24.08.2007 was explained that the said order of the Development Commissioner has cancelled LOP for Ahmednagar Unit only. Further, it was brought to the notice of the A.O that the assessee has preferred an appeal against the said order of the Development Commissioner. 9. Taking a leaf out of this reply of the assessee, the A.O disallowed the claim of deduction u/s. 10B in respect of Ahmednagar Unit amount to ₹ 23,45,24,639/-. 10. Assessee carried the matter before the ld. CIT(A) but without any success. The ld. CIT(A) while deciding this grievance of the assessee observed that his predecessor has allowed the claim of exemption in respect of Panoli Unit in earlier assessment years i.e. 2002-03, 2003-04 2004-05 and accordingly directed the A.O to allow the claim in respect of Panoli Unit. However, in respect of Ahmednagar Unit, the ld. CIT(A) observed that since the LOP has been cancelled exemption u/s. 10B in respect of Ahmednagar Unit cannot be allowed. Before us, the ld. counsel for the assessee stated that in earlier years, the Tribunal has restored this issue to the files of the A.O to be decided afresh. We have carefully perused the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in favour of the revenue. 14. We have given a thoughtful consideration to the order of the Tribunal in earlier years; we find that the Tribunal while deciding the issue in favour of the assessee has followed the decision of the Co-ordinate Bench, Mumbai in the case of USV Ltd. 54 SOT 615. Findings of the Tribunal read as under:- 24. We have carefully perused the orders of the authorities below. We find that the ld. CIT(A) has simply followed the findings of his predecessor for A.Y. 2000-01. We also find that the assessment order for A.Y. 2000-01 has been quashed by the Tribunal vide a ITA Nos. 1199 1279/Ahd/2006, which means that the basis for upholding the disallowance has been removed. We further find that on identical set of facts, the Mumbai Bench in the case of USV Ltd. (supra) has allowed the claim of the assessee in respect of expenditure incurred in respect of patent application. Respectfully, following the findings of the co-ordinate Bench (supra), we direct the A.O to delete the disallowance of ₹ 44,71,906/-. Ground no. 10 is accordingly allowed. 15. Respectfully following the findings of the Co-ordinate Bench (supra), we direct the A.O to delete th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D Revenue Expenditure of ₹ 110,99,69,871/- and R D Capital Expenditure of ₹ 59,79,84,814/- totaling to ₹ 170,79,54,685/-. The A.O further found that the assessee has allocated only ₹ 4,34,25,000/- on account of R D expenses in Silvassa II Unit. The A.O was not convinced with the allocation and accordingly asked the assessee to explain why the expenses should not be reallocated in the ratio of turnover. Assessee explained that it has allocated the revenue expenditure across all its units whether manufacturing bulk drugs or formulation drugs and whether claiming any special deduction under the Act or not. Assessee filed a detailed working of the allocation of expenses. The reply of the assessee did not find any favour with the A.O who was of the firm belief that R D expenses are basically pertaining to the head office expenses which are not directly relatable to a particular unit. According to the A.O, if the expenses are not scientifically distribute, it may lead to excess deduction u/s. 80IB or 10A or 10B of the Act. Taking a leaf out of the earlier assessment years, the A.O reallocated further expenses of ₹ 4,27,59,003/- to the Silvassa II Unit. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces. Therefore, respectfully following the decision of the Co-ordinate Bench (supra), we hold accordingly. Ground no 6 is treated as allowed for statistical purpose. 22. With ground no. 7, the assessee claims that the ld. CIT(A) erred in not admitting and adjudicating grievance relating to the treatment of foreign exchange fluctuation gain. The ld. counsel straightway drew our attention to the decision of the Tribunal given in ITA No. 1558/Ahd/2006 and pointed out that since in earlier years also. The ld. CIT(A) has not adjudicated on this issue and unless the issue is adjudicated upon in earlier years. There cannot be any separate finding for the year under consideration. We find that the Tribunal at para 38 of its order has made the following observations:- 38. While discussing the grievance of the assessee at Para 30.3 and also at Para 32.2 of his order, the ld. CIT(A) has observed that these grounds of appeal are not emanating from the action of the A.O. hence, cannot be entertained at this stage. Before us, the ld. counsel for the assessee stated that legal issues can be taken up at any stage and the appellate authorities are bound to consider such legal issues. We fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly made an addition of ₹ 21,25,278/-. 26. Assessee carried the matter before the ld. CIT(A) but without any success. Before us, the ld. counsel for the assessee stated that an identical issue was considered by the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008 and has decided the issue in favour of the assessee and against the revenue. This issue has been considered by the Tribunal qua ground no. 12 as under:- Ground no. 12 relates to the addition made on account of sales to Sun Pharmaceutical Industries. 83. This issue has been considered by the A.O at Para 12 of his order. A survey u/s. 133A of the Act was conducted on the assessee as well as its sister concern Sun Pharmaceutical Industries which is a partnership firm. During the course of the survey operations, it was noticed that the assessee has been selling certain raw materials /products to its sister concern at a lower rate than was sold to third parties and thereby diverting the profits. Assessee was asked to explain its stand. Assessee filed a detailed reply giving details of raw materials/products being sold to its sister concern and to third parties along with rates and quantity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax only if the same is allowed as deductible from the profits of the firm and since the same is not allowed in the hands of the firm, the same cannot be taxed in the hands of the assessee. The A.O found that though the remuneration has not been included by the assessee but it has debited all the related expenditure in its books of account. The A.O accordingly disallowed the expenditure so debited treating the same as expenditure not incurred wholly or exclusively for the purpose of business. 29. Assessee carried the matter before the ld. CIT(A). After considering the facts and circumstances and drawing support from the findings given in A.Y. 2004-05 directed the A.O to recalculate the disallowance. 30. Aggrieved by this, the assessee is before us. Ld. counsel for the assessee pointed out that an identical issue have been considered by the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008 and has decided the issue in favour of the assessee and against the revenue. We have carefully considered the facts in issues relating to this ground of appeal. We find force in the contention of the ld. counsel. An identical issue has been considered by the Tribunal in ITA No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on behalf of the partnership firm. The ld. CIT(A) finally concluded by holding that the incremental expenses incurred by the assessee in excess what was incurred in the preceding year towards the marketing and distribution should be allocated and accordingly directed the A.O to recalculate the disallowance. 91. Aggrieved by this finding of the ld.CIT(A) both assessee and the revenue are in appeal before us. The ld. D.R. strongly stated that since the assessee has not shown any income from remuneration from the partnership firm. The assessee was not entitled for the claim of deduction. The ld. D.R. further stated that no bifurcation have been provided by the assessee to show the expenses incurred for the purpose of the business of the partnership firm and for the assessee company. The D.R. concluded by saying that there is no error in the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated the claim and stated that there is no basis for allocating the expenses pro rata. The ld. counsel further stated that the First Appellate Authority further erred in disallowing the expenditure on pro rata basis only on incremental expenses. It is the say of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal purpose. ITA No. 2400/Ahd/2009 Revenue s appeal for A.Y. 2005-06 Ground no. 1 relates to the direction to rework Arm s Length Price with regard to commission paid to AE. 33. An identical issue has been decided by us in favour of the assessee and against the revenue in assessee s appeal in ITA No. 2430/Ahd/2009 qua ground no. 2 of that appeal. For our detailed discussion therein, ground no. 1 is dismissed. Ground no. 2 relates to the direction to grant of exemption u/s. 10B in respect of Panoli Unit. 34. We find that the First Appellate Authority has followed the findings given in A.Y. 2002-03 to 2004-05 which have been confirmed by the Tribunal in ITA No. 1287/Ahd/20008. The Tribunal has decided this issue qua ground no. 2 in that appeal as under:- Ground no. 2 relates to the grant of exemption u/s. 10B to Panoli and Ahmednagar unit. 97.This issue has been accepted by the revenue in A.Y. 2002-03, therefore, we do not find any merit in this grievance of the revenue. Further we find that in the grounds of appeal itself, the reference given by the revenue relates to the order dated 25.07.2006 which pertains to F.Y. 2006-07 and A.Y. 2007-08 whereas we are in A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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