TMI Blog2018 (6) TMI 512X X X X Extracts X X X X X X X X Extracts X X X X ..... such article or thing and consideration thereof brought into India within the time permissible under the foreign exchange regulations are fulfilled and accordingly allowable. We allow this issue of assessee’s appeal. Not computing the deduction under section 10B undertaking wise and thereby not allowing the deduction in respect of Beta lactam Division (BLD) and Star Unit - Held that:- We direct the AO to recompute the deduction as claimed by assessee under section 10B in term of the decision of Hon’ble Supreme Court in the case of Yokogawa India Ltd. (2016 (12) TMI 881 - SUPREME COURT). The second proviso to section 10B(1) of the Act was only for assessment year 2003-04 and not for other years. The AO will verify the facts of the case and accordingly, will allow the claim of the assessee. This issue of assessee’s appeal is set aside to the file of the Assessing Officer. Disallowing deduction under section 10B for the unbilled Revenue recorded by Star Unit - Held that:- income has not accrued as agreed by both the sides. Hence, the assessee is not entitled for deduction under section 10B of the Act on unbilled Revenue recorded on the basis of internal accounting policy but we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latable to exempt income under section 14A - Held that:- As disallowance cannot exceed the exempt income. Respectfully, following the Hon’ble Delhi High Court in Cheminvest Ltd.[2015 (9) TMI 238 - DELHI HIGH COURT] we restrict the disallowance under section 14A at ₹ 600/- i.e. to the extent of dividend income. We direct the AO accordingly. Levy of interest under section 234B and 234D - Held that:- charging of interest under section 234B and 234D is consequential in nature and AO will charge interest as per the provisions of the Act at the time of giving appeal effect to the order of the Tribunal. As the issue is consequential, we direct the AO to charge interest as per law. TPA - appropriate interest rate applicable to the international transactions relating to advancement of interest free loan / extended credit facility to the overseas A.E - Held that:- We direct the AO to compute the disallowance by taking LIBOR rate plus 300 basis point. We direct the AO accordingly. - ITA No. 8614/Mum/2011 - - - Dated:- 8-6-2018 - SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM For The Assessee : Percy J. Pardiwala And Nitesh Josi, ARs For The Revenue : Jayant Kumar And ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee claimed deduction for an amount of ₹ 14,22,28,554/-. The AO asked the assessee to furnish the details of items manufactured by assessee s contract manufacturing and research division including various agreements for export entered into by the said unit of the assessee. The assessee furnished the details but according to the AO, assessee s activity constituted development of generic version of pharmaceuticals product as pro-type and compiling of the data relating to such product as dossier, which is used for getting sanction from regulatory authorities and assessee claimed that it is producing the dossier which is to be considered as goods and hence it falls within the definition of manufacture or production of article or thing and thus the same is eligible for claim of deduction under section 10B of the Act. The AO rejected the claim of the assessee by observing in Para 6.5 as under: - 6.5 The above submission of the assessee has been carefully considered and the same, cannot be accepted for the following reasons: The assessee's activity comprises of development of a 'process' which is neither an article of thing, but only a method of manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;License and Supply Agreement', 'Co-operation and Supply Agreement', Development, Licensing and Supply Agreement' and these titles are tell-tale. It is clear, what the assessee is ultimately obligated to provide is the license for manufacturing a product by using a process. The immediate nexus of the income on which deduction u/s 108 has been claimed is thus with the license and not with the dossier. Consequently, the immediate nexus being with the license, the issue to be examined remains whether or not license is a product in terms of Section 10B. 3.3.1 Tested on this, in no case can license be treated as 'manufacture or production of an article or thing and export thereof 'and accordingly, the nexus of the receipt of the fee being with the right (license) which is not a product or manufacture of an article or thing, the deduction is not allowable. It is now established law that to be eligible for deductions and exemptions, the 'first degree nexus' with the eligible income is sine-qua-non. This stands eloquently propositioned by the Apex Court in its decision in the case Liberty India vs. CIT 317 ITR 218. Enumerating in the context of eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of imported non-duty paid goods and materials should be exported with permissible wastage and wastes arising out of in bond manufacturing operations shall be disposed of as provided under Section 65 of the Customs Act, 1962. 3. The manufacture and other operations may be carried out during day time between the Regular working days of the factory. Working beyond the stipulated period should be with the permission of the Superintendent of Customs. Further the learned Counsel referred to page 50-53 of assessee s paper book, wherein the assessee has been certified as manufacturer of the product, pharmaceuticals business process outsourcing facility in R and D, Analytical Method Development, stability studies, clinical studies, validation method etc. valid upto 17-08-2009 . The Assistant Development Commissioner Cochin Special economic zone, Ministry of Commerce and Industry, vide order dated 18-08-2004 allowed permission under 100% export oriented unit for manufacture and export of pharmaceuticals business process outsourcing facility in R and D Analytical Method Development, Stability Studies, Clinical Studies, Validation Method etc. and specifically mentioned all items ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pen Pharmacare Holdings Limited (in short ASPEN ). The learned Counsel for the assessee also drew our attention to page 297 of the assessee s paper book wherein agreement with ASPEN and clause 1.3.27 and 1.3.28 of the agreement clearly states the data prepared by assessee which reads as under: - 1.3.27 STRIDES DATA' means the data prepared by STRIDES in relation to each of the PRODUCTS. In the case of the Republic of South Africa this shall be in the form of the data pack required by the MCC for the registration of the PRODUCT concerned. In the case of the United Kingdom, this shall be in the form of a CID (Common Technical Document) dossier as required by the MHRA for the registration of the PRODUCT concerned, it shall also include such supporting data and reference documents which may be required from time to time by the REGULATORY AUTHORITIES in the United Kingdom and the Republic of South Africa; 1.3.28 SADC means the Southern African Development Community as constituted at the SIGNATURE DATE; 7. The learned Counsel for the assessee further stated that product development activities include collecting and correlation of various data inputs by conducting st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO and DRP has considered this issue and noted that the assessee has tried to establish that the preparation of the dossier tantamount to production of article or thing in terms of Section 10B of the Act. The AO noted that the immediate source of the fee being paid for granting of the license and the dossier being only a process and not the source of the receipt of the fee, deduction is not allowable. Considering these two positions, he argued that the preparation of the dossier is only a regulatory and intermediary process and not an end - product in itself in so far as the assessee's main claim is concerned. As the contracts indicate, the assessee is finally not selling the dossier, which is only a process of manufacture, but is granting the license in respect of the manufacture of pharmaceutical products by utilizing the process in certain territories. The deliverable under the contracts is granting of the license and not the preparation of the dossiers. Ld CIT Dr explained the same with the help of example that the agreements are titled 'License and Supply Agreement', 'Co-operation and Supply Agreement', Development, Licensing and Supply Agreement' an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the denial of deduction u/s 10B of the Act is justified. 9. We have heard rival submissions on this issue and gone through facts and circumstances of the case. The facts of the case are that the assessee company is engaged in the business of manufacturing and marketing of pharmaceutical products. The assessee has four 100% Export Oriented Units (EOU) registered with the Office of the Development Commissioner, Cochin Special Economic Zone. Sterile Products division is a non deduction unit being expiry of 10 years of EOU benefit period, which is into manufacture of pharmaceutical products and the other three units called Oral Dossage 'Forms (ODF), Beta Lactum Division (BLD) and Research Development Division (STAR). ODF is into manufacture of solid/oral dosage form, manufacture of HIV / AIDS, and anti TB drugs. Further, the plant has a dedicated Anti-TB facility. BLD is into manufacture of Dry Powder Injections and tablets and capsules. STAR is into the activity of development of generic version of products by re-formulating an existing innovator product. During the course of the assessment stage and during objection stage before DRP the assessee was asked to furnish the det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exhibit batch manufacturing takes place in the regular production plant under supervision of the R D team. The dossier is prepared for a particular product and the same is sold, for certain markets or all. For each market, a separate dossier is prepared and is generally required to be supported by additional activity and data besides manufacturing of exhibit and commercial batch. The process of preparing dossier cannot be completed without completing the process of manufacture of exhibit batches. The Exhibit batch is a commercial size batch which is a final product and is in a finished form capable of being sold. Exhibit batch belongs to the customer. Further, the assessee sells the dossier to customers. The cost associated with developing of dossier is borne by Assessee and the customer does not give any grant or subsidy for the same. The cost incurred is recovered from the customer which is a commercial price for sale of dossier. In case the contract provides for payment of advance, the advances paid will be adjusted against the final price for realization. However, the company treats the gross amount as income. Further, some of the contract provides that in case the registra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different from the ingredients which were used to create it. That for the purpose of Section 10A, definition of the term manufacture is having a much wider ambit than its normal connotation and takes its colour from Chapter IX of Exim Policy is clearly brought out by Hon'ble Kerala High Court in the case of Girnar Industries (supra). This view has been affirmed by Hon'ble Jurisdictional High Court in the case of Tata Elxsi v. ACIT [IT Appeal No. 411 of 2008, dated 20-10-2014]. 20. However the third scenario requires a deeper analysis. To decide whether the research documentation can be said to be the result of production and whether they can fall within the meaning of an article or thing calls for a good understanding of those terms as it has come out of the judicial wisdom of higher courts . The first and foremost of these is the judgment of the Hon'ble Apex court itself in the case of CIT v. N C Budharaja Co. [1993] 204 ITR 412/70 Taxman 312. The question before their Lordship was whether a dam can be considered as an article or thing manufactured or produced in the context of a claim for investment allowance. The meaning of the term produce used in juxtaposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or thing . This view was upheld by Hon'ble Calcutta High Court. 23. Research conclusions can be considered as documentations of the analysis and steps done during the research process. Or in other words the end result is the analysis and presentation of data in a desired format. Hon'ble Madras High court had an occasion to consider the issue as to whether data processing done with the help of computer resulting in end product which was analysis and presentation of data in prescribed format was a product of new article in the case of CIT v. Comp-Help Services (P.) Ltd. [2000] 246 ITR 722 (Mad.). Claim of the assessee was for investment allowance. Their Lordships held as under at paras 4 to 9 of the judgment. 4. When data is processed with the aid of computers and the processing involves complicated steps which can only be performed with speed in a computer and the end-product is the analysis and presentation of data in the desired format such as balance sheet, it can be said in broad terms that there is production. It was pointed out by the Supreme Court in the case of CIT v. N.C. Budharaja Co. Anr. (1993) 114 CTR (SC) 420 : (1994) 204 ITR 412 (SC) : TC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing amounts to production. The data processing company must be held to be an industrial company engaged in the production of articles. 7. In the case of CIT v. IBM Word Trade Corporation (1981) 130 ITR 739 (Bom) : TC 28R.211 the Bombay High Court elaborately examined as to what a computer is and what is does, for the purpose of deciding as to whether it is merely an office machine or some thing more. The Court held that in view of the varied functions which the computer system is capable of performing data processing machines, cannot be classified as office appliances and are eligible for development rebate under s. 33(1) of the IT Act. 8. In the case of CIT v. Datacons (P) Ltd. (1985) 47 CTR (Kar) 162 : (1985) 155 ITR 66 (Kar) : TC 24R.231 the Karnataka High Court held that when as a result of data processing, balance sheets, stock accounts, sales analysis, etc. are printed as per the requirements of the customers, processing was involved and therefore, the data processing company is an industrial company entitled to the concessional rate of taxation under s. 2(7)(c) of Finance No. 2 Act, 1977. The Court further observed that the activities involved in a da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ientific tests and calculations into scientific data which subsequently has been further changed into logs printed on the papers or recorded on the magnetic tapes, that the character and identity of end product and final product is not distinct. We are unable to uphold such a proposition. It is a clear case where the legal proposition that If an operation/process renders a commodity or article fit for use for which it is otherwise not fit, the operation/process falls within the meaning of the word 'manufacture' applies. At this juncture, we re-emphasize on the observations made by his Lordship S.H. Kapadia, J. (as his Lordship was then) in CIT v. Oracle Software India Ltd. (supra) that the Department needs to take into account the ground realities of the business and sometimes over simplified tests create confusion, particularly, in modern times when technology grows each day.' 25. The assessee here had done research using sophisticated machinery and the end product was either research documents in the nature of experimental records or compound. Just because these were intermediary things which would find use only in later stages of development of industrially us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange regulations are fulfilled and accordingly allowable. We allow this issue of assessee s appeal. 13. The next issue in this appeal of assessee is against the order of DRP and the AO in not computing the deduction under section 10B of the Act undertaking wise and thereby not allowing the deduction in respect of Beta lactam Division (BLD) and Star Unit. For this assessee has raised the following ground No. 2:- Ground No. 2: Deductions under section 10B to be computed undertaking-wise. Without prejudice to the Ground 1 above, and notwithstanding the inadvertent errors made by the appellant in the return of income lie claiming section 1OB deduction on the basis of consolidated/ profits after setting off profits and losses of 10B units as against undertaking wise deduction and claiming deduction at 90% of profits. The Hon ble DRP and Ld. AO erred in: Not computing section 10B deduction undertaking wise and thereby. not allowing deduction in respect of Beta Lactam Division (BLD) which is a recognized EOU as well as a 106 manufacturing unit Restricting deduction under section 10B at 90% on the profits of eligible units as claimed by the Appellant instead of 100% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d subsequent years : Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139. 15. In view of the above provision, the learned Counsel for the assessee referred to the decision of Hon ble Supreme Court in the case of CIT vs. Yokogawa India Ltd. [2017] 77 taxmann.com 41 (SC), wherein the entire proviso is considered and finally held as under: - 16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Orient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Sr. Departmental Representative only relied on the order of DRP and that of the Assessing Officer. 17. After considering the submissions of the assessee and going through the facts of the case, we direct the AO to recompute the deduction as claimed by assessee under section 10B in term of the decision of Hon ble Supreme Court in the case of Yokogawa India Ltd. (supra). The second proviso to section 10B(1) of the Act was only for assessment year 2003-04 and not for other years. The AO will verify the facts of the case and accordingly, will allow the claim of the assessee. This issue of assessee s appeal is set aside to the file of the Assessing Officer. 18. The next issue in this appeal of assessee is against the order of DRP and AO in disallowing the claim of deduction under section 10B of the Act for the unbilled Revenue recorded by Star Unit. For this assessee has raised the following grounds: - 3. The Hon ble DRP and Ld AO erred in disallowing section 106 deduction for the unbilled revenue recorded by the STAR unit on the following grounds without appreciating facts of the case: - the unbilled revenue is recognized on the milestones achieved by the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble foreign exchange does not arise and the claim of deduction under section 10B of the Act cannot be allowed. The DRP also held that the Revenue from sale of goods is recognized when all significant risk and research of ownership stand transferred to the buyers and there is no uncertainty as regards to the consideration to be derived from such a sale. Invoicing is the acknowledgement of the initial performance of the sale and its acceptance by the buyer. Approval of sale as per terms and conditions, when there being no invoices, the transaction cannot be said to have completed. Accordingly, the DRP confirmed the action of the Assessing Officer. Aggrieved, assessee is in appeal before Tribunal. 21. Before us, the learned Counsel for the assessee argued that it is following progressive billing approach for recognition of Revenue. For this purpose, a detailed note was enclosed in paper book 2 volume 1 at pages 79 to 85 explaining the difference stages of development of a dossier and the milestones adopted by it for accrual of income based on progress achieved. Apart from this, the learned Counsel for the assessee argued that the assessee company has raised invoices on its custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions, we set aside this issue to the file of the Assessing Officer. 23. The next issue in this appeal of assessee is against the order of DRP and AO in reworking of deduction under section 10B of the Act. 24. At the outset, the learned Counsel for the assessee stated that he has instructions from the assessee not to press this issue and hence the same is dismissed as not pressed. 25. The next issue in this appeal of assessee is against the order of DRP and AO in disallowing the claim of weighted deduction under section 35(2AB) of the Act. For this assessee has raised the following ground No. 5: - 7. The Hon ble DRP and Ld. AO erred in disallowing the claim of weighted deduction under section 35(2AB) of the Act on the ground that the Appellant has failed to submit Form No. 3CL and Form No 3CM without appreciating the fact that the application is pending before the Prescribed Authority i.e. Department of Scientific and Industrial Research (DSIR) and submission of Form No. 3CL and Form No. 3CM is only a procedural requirement which is beyond the control of the Appellant. 26. Briefly stated facts are that the assessee during the assessment year has incurred th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 251 (Guj), wherein it is held as under: 3.4. We have gone through the submissions made by both the sides as well as facts of the case and the position of law emerging out from the decisions relied upon by the parties before us. The brief facts are that deduction u/s 35(2AB) was claimed by the assessee in respect of research and development expenses incurred at New Mangalore and KRS Gardens research centre. Application was made with DSIR dated 28.03.2001, copy of which is enclosed at pages 37 to 68 of the paper book. The recognition of the research unit was granted by the DSIR vide its letter dated 03.07.2002 for New Mangalore unit (copy available at P.B. 68) and letter dated 04.12.2002 for KRS Gardens research unit ( copy available at page no.69 of the paper book). In view of these facts, it clearly emerges out that assessee had made the applications well in time. Thereafter, granting of approval by the competent authority was not in the control of the assessee. It has been further brought to our notice that there was no delay on the part of the assessee in supplying any information to the approval authority, if and when asked by it. In other words, the delay, in the give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the assessee fulfils the conditions laid down in the aforesaid provisions. The discussion, which is undertaken by the Gujarat High Court while interpreting the aforesaid provisions, is extracted below: 7. .........The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the research and development facility, expenditure so incurred is eligible for weighted deduction. 8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of: (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is DSIR; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee. 9. The provisions nowhere suggest or imply that research and development facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B). In this regard also we have noted that the assessee has made requisite compliance as has been required by the prescribed competent authority and compliance of all the procedural requirements has been examined by the competent authority while granting approval. In our considered view, we should look substantive compliance of the provisions. Documentation in any particular format and its approval in a particular manner is not object of this action. In any case, all these aspects have been examined by the competent authority while granting approval, thus the AO should not have denied benefit of deduction on his whims and fancies. We find that the assessee has rightly placed reliance on the judgment of coordinate bench in the case of ACIT vs. Meco Instruments (supra) and Sri Biotech Laboratories India Ltd., supra, in support of his claim. 29. In view of the above order of Tribunal in assessee s own case and even in AY 2003-04 in ITA No. 641/Mum/2007 and in AY 2004-05 in ITA No. 4063/Mum/2010 order dated 29.04.2016, same deductions were allowed exactly on identical facts, respectfully following a consistent view and the given facts of the case, we direct the AO to allow the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as far higher compared to the year 1995 (Mr. Narayan Raju/ Mr. Bhaskar Raju). It had increased three fold in the ten years. The class of building (structure) and the quality of the structure in case of Chayadeep is far superior compared to that of the buildings extensively used in case of chayadeep Properties. Consequently, the cost per sq. ft. for the building in case of Chayadeep is significantly higher. No security deposit was given to Chayadeep, whereas interest free security deposit of ₹ 10 lakhs was paid to Mr. Narayan Raju and Bhaskar Raju in 1995 and has remained so. The initial rentals in case of Mr. Narayan Raju/Mr. Bhaskar Raju was very low and was frozen in the first 7 years. In view of the above, the learned Counsel for the assessee claimed the expenses but the AO and DRP has not agreed that the submissions and disallowed the rental expenditure paid by assessee to Chayadeep Properties Pvt. Ltd. Aggrieved, now assessee is in appeal before Tribunal. 32. We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the entire cost of the construction of the building was borne by the related p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of FCCB on the ground that: Such expenditure is capital in nature without appreciating that the premium on FCCBs are equivalent to interest on loans and the FCCB funds were utilized wholly and exclusively for the purpose of business; The premium on redemption of FCCB is only a notional expenditure and contingent liability without appreciating the fact that the Appellant has actually redeemed the FCCBs in April 2010 as per the terms stipulated in the offer document. 36. The assessee claimed 1/5th of FCCB premium amounting to ₹ 12,80,23,824/- and 1/5th of the FCCB issued expenses amounting to ₹ 98,97,774/- as deduction. The AO noticed from the annual report of the assessee that it has adjusted an amount of ₹ 5,04,08,369/- under the head expenses related to issue of FCCB in the balance sheet against securities premium account in AY 2006-07. The AO required the assessee to explain how it is allowable as revenue expenditure. The AO after considering the explanation of the assessee noted that the FCCB issued is capital expenditure in nature and cannot be allowed under section 37 of the Act. According to AO, the premium of redemption is neither due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness activities. The amounts so obtained are used by the Company for the purposes of its business. Hence the liability to pay the additional amount would therefore be revenue expenditure. The additional amount is nothing but an interest computed at 6.8% p.a. We find that the assessee also relied on the decision of Hon ble Bombay High Court in the case of CIT vs. SM Holding and Finance Pvt. Ltd. 2003 264 ITR 370 Bombay. Before the Hon ble Bombay High Court in the question raised was regarding the claim of 1/5th of premium of redeemable debentures and the question referred before the Hon ble High Court was as under: - Whether, on the facts and in the circumstances of the case and in law, the Hon ble Tribunal has erred in deleting the addition of ₹ 54,75,000 made on account of 1/5th (1/10th) of premium on the redeemable debentures without considering the fact that no liability had accrued during the year under appeal and it was a contingent liability which was payable only after the expiry of 10 years and directed the Assessing Officer to follow the decision of Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802(SC) where f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP and Ld AO ought to have appreciated the fact that the substantial portion of investments held as on 31 March 2007 was in foreign subsidiaries and dividend income from \ overseas entities are taxable in India. 41. At the outset, the learned Counsel for the assessee stated the fact that dividend received is ₹ 600 and which was claimed as exempt. The learned Counsel for the assessee stated that the assessee has no objection in case disallowance is restricted exempt income in view of the decision of the Hon ble Delhi High in the case of Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Delhi). The decision of Delhi High Court in the case of Cheminvest Limited (supra), reads as under: - 23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression does not form part of the total income‟ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve erred in imputing notional interest on the outstanding advance balances and upholding the above transfer pricing adjustment. 14. The DRP TPO and the AO have erred in characterizing the year end debit balances of advances which has been incurred / paid in the ordinary course of business operations as loan and in doing so failed to understand the business rationale behind such advances and distinguish between a loan and an advance transaction. 13.4. The DRP, TPO and AO have failed to appreciate that only real income can be brought within the ambit of taxation. In this case, no income has been earned or can be said to have been earned by the Appellant and imputing hypothetical interest on the balances outstanding would be unwarranted and unjustified. 13.5 Without prejudice to the argument of the Appellant that no interest should be charged on the advances, the DRP. TPO and AO have erred in arbitrarily applying interest rate on the advances outstanding. 46. The learned Counsel for the assessee stated that this issue is covered in regard to adjustment of such notional interest and according to him the same cannot exceed the LIBOR plus 300 in view of assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; 40. On a plain reading of clause (c) of Explanation (i) to section 92B, it is evident that any type of advance payment or deferred payment or receivable or any other debt arising during the course of business including capital financing would come within the scope of ―International Transaction‖. Thus, the assessee having incurred expenditure on behalf of its overseas A.Es which are receivables from the A.Es comes within the meaning of ―International Transactions‖. Therefore, contention of the learned Authorised Representative that receivables on account of expenditure incurred on behalf of A.E. are not international transaction or no computation can be made is not acceptable in view of specific statutory provisions. The next contention of the learned Authorised Representative is, the assessee has long standing business relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent benches of the Tribunal have consistently held that in such type of international transaction, domestic PLR rate cannot be applied and the rate of interest has to be quantified either with reference to LIBOR or EURIBOR depending upon the country and currency in which the transaction has taken place. Considering the facts of the present case, we are of the considered opinion that LIBOR rate of 1.698% plus 300 basis point would be the appropriate interest rate applicable to the international transactions relating to advancement of interest free loan / extended credit facility to the overseas A.E. Accordingly, we direct the Assessing Officer / Transfer Pricing Officer to compute the interest on the interest free advances paid to the A.E. Ground no.5, is partly allowed. 47. The learned Departmental Representative has also stated that the issue is also been dealt with in earlier and exactly on the same lines, the directions can be given. 48. We find that the issue is squarely covered and respectfully following and taking a consistent view, we direct the AO to compute the disallowance by taking LIBOR rate plus 300 basis point. We direct the AO accordingly. 49. In the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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