TMI Blog2017 (9) TMI 1804X X X X Extracts X X X X X X X X Extracts X X X X ..... s all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of the adjustment made by the Assessing Officer is, therefore, wholly devoid of legally sustainable merits and factually correct assumptions. Interest on fully convertible optional debentures subscribed to Sun Pharma Global Inc (SPGI) - addition being the amount of interest on 0% OFCD subscribed to in SPGI. The AO/TPO has made the upward adjustment on the basis of Average six month LIBOR of 2.69% + spread over LIBOR of 3.95% totaling to 6.64% - HELD THAT:- OFCD were on beneficial terms as per facts mentioned above. Consequently, no hesitation to follow earlier judgment in assessee’s own case as a result we delete the impugned additions. Ground of assessee is allowed Addition on account of Corporate Guarantee Provided to associated enterprises Sun Pharmaceutical Bangladesh Ltd. - HELD THAT:- As decided in assessee's own case [2017 (4) TMI 1434 - ITAT] AHMEDABAD] treated as allowed for statistical purpose. Addition on account of Sale of Pantoprazole to Sun Pharma Global BVI and Sun Pharma Global FZE - HELD THAT:- No merit in the findings of the First Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty of the assessee to promote the business of the partnership firm in the capacity of the majority stake holders. 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. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee. Finding that the assessee is having 97.5% share in the profits of the firm SPI, we do not find any merit in the disallowance made by the A.O. and confirmed by the First Appellate Authority. We, accordingly, direct the A.O. to delete the addition. Deduction of remuneration received from partnership firm for determination of Book Profits u/s. 115JB - HELD THAT:- Section 115JB is a complete code in itself. Therefore, if the remuneration is credited by the appellant company in its Profit and Loss account then the same could be reduced it specifically provided under the Explanation to Section 115JB of the Act which we find missing from the relevant provisions. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SUPREME COURT] had the occasion to consider a similar dispute after the amendment of Section 10A by Finance Act 2000 with effect from 01.04.2001 and it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and not at the stage of computation of the total income under Chapter VI. Thus we direct the A.O. to allow the claim of deduction u/s. 10B of the Act. Before setting off of business loss of ₹ 56.59 crores. Ground is allowed. Non consideration of un-realized export proceeds for computation of deduction u/s. 10B - HELD THAT:- As relying on assessee's own case [2015 (2) TMI 322 - ITAT AHMEDABAD] Tribunal had directed the A.O to apply the provisions of section 155(13) of the Act and decide the issue afresh. Nature of expenses - expenditure on repairs - revenue or capital expenditure - HELD THAT:- Kiran Pumps purchase expenditure is treated as capital expenditure. Freeze Dryer Beta with accessories for the purposes of drying process of organic solvents. The assessee has also incurred labour charges on installation of this dryer. The f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r infirmity in the findings of the ld. CIT(A). Addition on account of disallowance of expenditure incurred on behalf of its sister concern - HELD THAT:- As decided in own case - 2015 (2) TMI 322 - ITAT AHMEDABAD we agree with the contention of the ld. counsel that no specific section has been mentioned in the assessment order for making the impugned additions. A perusal of the assessment order show that the additions have been made by treating the transactions u/s. 40A(2) 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. - ITA. Nos: 1666 & 1663/AHD/2016 (Assessment Year: 2009-10) - - - Dated:- 8-9-2017 - Shri Rajpal Yadav And Shri N.K. Billaiya, JJ. Appellant by : Shri S. N. Soparkar , Vartik Choksi with Parin Shah Respondent by : Shri R. M. Tiwari, CIT/ DR ORDER N.K. Billaiya, 1. ITA Nos. 1666 1663/Ahd/2016 are cross appeals by the Assessee and the Revenue preferred against the very same order of the Ld. CIT(A)- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and against the revenue by the Bench. We find force in the contention of the ld. Senior Counsel. A similar issue was decided by the Tribunal (supra), and the relevant findings read as under:- 13. We have given a thoughtful consideration to the rival contentions qua the facts in issue before us. 14. The crucial fact relates to the balance as at 31st March, 2007 shown under the head advances as share application money to Sun Pharma Global Inc. BVI at ₹ 1469.7 million and the same has been reflected as on 31.03.2008 at ₹ 1007.4 million. If these figures are considered it emerges that shares worth 462.3 million were allotted to the assessee company during the year under consideration and the balance were allotted in the subsequent financial years. This means that the balance of the application money remained so pending allotment. In our considered view, relevant provisions of Indian Companies Act will not be applicable to this case and deferent countries have separate laws/ regulation on such issue. Adjustment on account of notional interest on share application money which is not disputed be to be so are not liable to be recharacterized as loans only because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder of the subsidiary company, the fruits of this investment belong to the assesse only and in entirety. On giving this money to the subsidiary and on use of this money by the subsidiary, the assessee, in its capacity as sole owner of the subsidiary, is beneficiary of all the gains of the subsidiary company. Whether the assessee was allotted these shares or not, the assessee was the only shareholder of the subsidiary company and beneficial owner of all the earnings and all the assets of the company. Non allotment of these shares, during the period of payment of share application money till the actual date of allotment, did not, therefore, prejudice assessee's position anyway. All the earnings of the subsidiary company belonged to the assessee in any situation. For example, if the funds available for dividend distribution for this year were say ₹ 1,00,000 and the assessee had 100 shares before new allotment of shares and 1000 shares after the allotment, the assessee would be entitled to ₹ 1,00,000 only the either way- whether as ₹ 1,000 per share for 100 in pre new allotment situation or whether as ₹ 100 per share for 1,000 shares in post new allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the addition on account of interest on fully convertible optional debentures subscribed to Sun Pharma Global Inc (SPGI). 11. The AO/TPO has made addition of ₹ 17.32 crores being the amount of interest on 0% OFCD subscribed to in SPGI. The AO/TPO has made the upward adjustment on the basis of Average six month LIBOR of 2.69% + spread over LIBOR of 3.95% totaling to 6.64%. 12. When the matter was agitated before the ld. CIT(A). At Para 6.3, the First Appellate Authority observed that the facts are identical to the facts of A.Y. 2008-09 and the appellant has also furnished identical submissions during the course of present appellate proceedings. Following the findings of his predecessor for A.Y. 2008-09, the First Appellate Authority confirmed the upward adjustment after giving a relief on account of 1% reduction in rate. 13. Before us, the ld. Senior Counsel stated that this issue has already been decided by the Tribunal in A.Y. 2008-09 vide order dated 16.06.2017 in ITA Nos. 3297 3420/Ahd/2014. We find force in the contention of the ld. counsel. The Tribunal has considered this issue vide ground no. 3 of the appeal wherein the Tribunal had followed the order of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable transactions to show that non-charging of interest was at armslength and it got compensated by favorable terms similar to that offered by uncontrolled entities is also strongly refuted. It is contended all the relevant details and comparable were furnished as Annexure B in which it has been submitted that the conversion of OFCD into equity shares at a price of USD 21- USD 51 per share as against the net asset value of the shares at the relevant point in time being USD 87 per share. Thus it is clear that the OFCDs were convertible into shares at significant discount to the prevailing book value of the shares giving rise to sizeable benefit on OFCDs. It is also submitted that the OFCDs have been converted into equity shares in the subsequent years; hence, the question of payment of any interest on the OFCDs would not arise, as the same is fully towards capital account. The Ld Senior counsel continued by saying that the Hon'ble ITAT in A.Y. 2007-08 and in earlier years has not committed any error whatsoever in coming to the conclusion, which is duly supported by other decisions and the position prevailing under Law. Hence no departure is called for much less due to the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to which the argument is advanced subsequently was actually decided in the earlier decision 25. A similar view is again taken by the Hon ble Jurisdictional High Court of Gujarat in the case of Nirma Industries Ltd. 283 ITR 402. Coming to the facts of the year under consideration, we do not find any distinction from the decision taken in earlier assessment year by the Bench and the relevant findings read as under:- 8. We have heard the rival contentions and have carefully perused the orders of the authorities below. At the very outset, we have to state that the revenue has no power to re-characterize the transaction. The Hon ble High Court of Delhi in the case of Cotton Naturals India Pvt. Ltd. 276 CTR 445 at para 17 of its order has held that Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should not be entered. It is for the assessee to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured. A similar view was taken by the Hon ble Delhi High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee carried the matter before CIT(A). CIT(A) after considering the submissions made by the Assessee decided the issue in favour of Assessee. 10. And the Tribunal held as under:- 7. We have heard the rival submissions and perused the material on record. CIT(A) while deleting the addition has noted that as per the agreement, the interest was payable only if the conversion option was not exercised on the expiry of 5 year period. If at any time during the 5 year period conversion option was exercised and the loan was converted into equity, no interest accrued or become payable. He further noted that the funds were provided by the Assessee as per RBI guidelines and in the immediately next year, the entire loan given to subsidiary was converted into equity shares of Zydus International Pvt. Ltd. He has further held that since the Assessee has converted the loan into equity in the immediate next year, there was no question of taxing notional interest. He has further held that Assessee had not granted interest free loan but invested in optionally convertible loan with a clause of interest in case, Conversion option was not exercised and further held the Assessee's transaction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e this issue to the file of the ld. CIT(A) (to avoid any issue of limitation to give effect to ITAT order as apprehended by ld. CR) with a direction that this issue may be decided in accordance with Hon ble Jurisdictional High Court of Gujarat and after giving adequate of hearing to the assessee . Ground no. 4 is accordingly treated as allowed for statistical purpose. 19. Respectfully following the findings of the Co-ordinate Bench (supra), we hold accordingly. Ground no. 5 is treated as allowed for statistical purpose. 20. Ground no. 6 relates to the addition on account of Sale of Pantoprazole to Sun Pharma Global BVI and Sun Pharma Global FZE amounting to ₹ 103,87,52,830/-. 21. During the course of the Transfer Pricing proceedings, it came to the notice of the TPO that the assessee (SPIL) has sold medicine valued at ₹ 1507.50 lacs to its AE, SPG BVI and products worth ₹ 2101.77 lacs to SPG FZE. In the earlier year, SPG BVI was engaged in the marketing of pharmaceuticals formulations manufactured by the assessee company, a new company has been incorporated in Dubai as a 100% subsidiary of SPG BVI. The entire marketing business of SPG BVI has been transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the ld. CIT(A), the Residual Profit Split Method is the most appropriate method. The ld. CIT(A) observed that the TPO while allocating the profit between the appellant and its AEs applied 50:50 ratio in splitting the residual profit. However, taking a leaf out of the findings of the ld. CIT(A), during the course of the appellate proceedings for A.Y. 2008-09, the ld. CIT(A) issued a notice of enhancement to disturb the sharing ratio from 50:50 to 80:20 and at Para 8.8 of his order, the ld. CIT(A) followed the findings of his predecessor for A.Y. 2008- 09 and enhanced the upward adjustment to Arm s Length Price works out to ₹ 103,87,52,830/-. 25. Aggrieved by this, the assessee is before us. The ld. Senior Counsel vehemently stated that the entire issue relating to the sale of Pantoprazole drug to SPG BVI has been considered at length by the Tribunal in A.Y. 2008- 09 wherein the Tribunal rejected the allegation of brutal tax evasion by the appellant company. The ld. Senior Counsel stated that the stand of the assessee is similar to what has been taken during the course of the proceedings of A.Y. 2008-09 and as there are no new facts brought on record by the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply the product to SPGI at prices as agreed to between the parties. SUN will dispatch consignment of the PRODUCT within 45 (forty-five) days of acceptance by SUN of purchase order from SPGI or within such other time as may be mutually agreed upon. SPGI shall not be entitled to cancel any order placed by it and accepted by SPIL unless other wise agreed upon by the parties. 2.2 SPGI agrees to provide a forecast on agreed format to SPIL so as to facilitated SPIL to carry out production planning of the Products for sale and supply as per terms of this Agreement. 2.3 SPGI will be required to make payments in US Dollars against supplies of the PRODUCT within 75 days of the receipt of goods for the invoices raised by SPIL in this regard or within such other time as may be mutually agreed upon in this regard. 2.4 At the request of SPGI, SPIL shall supply the product ordered by SPGI by such carrier or carriers as SPGI may designate. Such delivery instructions shall be submitted by SPGI to SPIL well in advance SPIL agrees to dispatch at the cost of SPGI, the finished Product to SPGI or to its nominees within the time frames stipulated by SPGI from time to time as per the orders pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re or lapses, or gross neglect or damage etc. on its part on account of legal liabilities or otherwise. SPGI hereby also undertakes to indemnify SPIL wherever found appropriate, on account of any failure or lapses, or neglect or damage etc. on its part on account of legal liabilities or otherwise arising out of non meeting its all legal obligation in respect of any matter whatsoever. 4.4 Quality control. If mutually agreed in writing, SPIL may conduct itself quality control tests pursuant to specifications, policies and/or procedures provided by SPGI in writing No production batch shall be released for sale unless it conforms to the SPGI specifications, practices and stipulations referred to in Section 4.1. SPGI will facilitate SPIL in curing deficiencies, to the extent acceptable to SPGI, of lots or batches of Product not meeting with SPGI specifications, practices or stipulations. 4.5 SPIL Warranty, SPIL warrants that the Finished Products manufactured and delivered to SPGI hereunder shall conform to the product specifications communicated by SPGI to SPIL. SPGI shall notify SPIL of any non-conforming manufactured Products within sixty days after receipt of Products or withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special or consequential damages whatsoever (including but not limited to, lost profits, loss of goodwill, any patent/trademark infringement or interruption of business) that may be suffered or incurred by SPGI as a result of SPIL's violation of this representation. Notwithstanding anything to the contrary in this Agreement, it is agreed that SPIL s liability for indemnification under this Agreement will be limited for the Product containing manufacturing defect or the Product fist conforming to the product specifications communicated by SPGI to SPIL under this Agreement. 7.1.6 SPIL Shall not claim any right, title, or interest to the Products, product names and the rights attached with them under any of the trademarks, or patent laws, SPIL shall not manufacture and/or sell for sale in the market of United States of America and in Europe during the term of this Agreement any Products under a trademark connected with the Products or under a name phonetically or otherwise similar to trade names connected with the products as mentioned in Appendix A. 7.1.7 SPIL shall not subcontract or delegate to any other persons, firm or body corporate the whole or any part of the manufa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the State in which the parent company resides. Where the subsidiary's executive directors' competences are transferred to other persons or bodies or where the subsidiary's executive directors' decisionmaking has become fully subordinate to the holding company with the consequence that the subsidiary's executive directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about. Whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. (v) Holding structures are recognized in corporate as well as tax laws. Special purpose vehicles and holding companies have a place in legal structures in India, be it in company law, the takeover code under the Securities and Exchange Board of India or even under the income-tax law. When it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structures. In the application of a judicial ant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies constitute subsidiaries in furtherance to their objects and to carry on their business smoothly in a competitive world . Moreover no person would arrange its affairs in such a manner which would culminate into huge losses to the extent of USD 506 millions as was suffered by the assessee group in this transaction. 83. Having established that the ownership of IPR/ANDA rights of Pantoprazole Sodium was with SPG BVI, now let us examine the applicability of the most appropriate method for determining the arm s length price. 84. OFCD guidelines for profits spilt method (PSM) states as under:- C. Transactional profit split method C.1 In general 2.108 The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) by determining the division of profits that independent enterprises would have expected to realise from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action contribute significant intangible property. The profit is to be divided such as is expected in a joint venture relationship. 6.3.13.2. The Profit Split Method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that it is appropriate to aggregate) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. 86. A perusal of the aforementioned guidelines shows that PSM can offer a solution for highly integrated operations for which a one sided method would not be appropriate. PSM may also found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions to the transaction. Considering the functions performed by the appellant company to SPG BVI, it is clear that SPIL has performed only one simple function and that is manufacturing of Pantoprazole Tablets. Except for this, there is no significant unique contribution by SPIL. For such simple functions as per OECD guidelines for transaction profit spilt method typically would not be appropriate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction -[or the specified domestic transaction]; (e) Transactional net margin method, by which,- (i) the net profit margin realized by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, clearly establishes the ownership of ANDA with Sun Pharma Global. For the sake of completeness, it would not be out of place to mention that the print out of these documents were taken from the Website on 28.09.2011 and 27.09.2011 and the order of the First Appellate Authority is 14.10.2014 and yet the FAA has observed that the assessee did not furnish ANDA related documents filed by SPG. SPG may not have done any filing related to Pantoprazole Sodium patent to US FDA but the fact of the matter and which have been demonstrated successfully by the appellant company is that the IPR/ANDA rights became the property of SPG BVI by virtue of the agreement for sale between SPARC and SPG. 91. Adverting to assessee s alternate and without prejudice contention that even if PSM is held to be the most appropriate method for a moment than also the same has to be considered in the light of the sequence of events starting from the manufacturing and sales of the drug Pantoprazole and ending with the out of court settlement and the payment of settlement compensation of USD 506 million. The settlement is based on the cumulative profits earned by the AE till the date of settlement. here is no di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t company for the manufacturing of the said drug. The application of Transactional Net Margin Method is the most appropriate method in such sale transaction and has been benchmarked by the assessee by showing it to be higher than the margin earned from the sales made to Eli Lily. 94. Considering the facts in totality in the light of the decision of the Hon ble Supreme Court in the case of Vodafone International Holdings B.V. (supra) and on conspectus understanding of the facts as discussed elsewhere, we do not find any merit in the findings of the First Appellate Authority in accepting the application of PSM as the MAM , in our understanding of the facts TNMM is the MAM on the given facts and the same is accepted as such. We set aside the findings of the ld. CIT(A) and direct to delete the addition of ₹ 612,03,39,468/-. Ground no. 5 of the assesse is allowed. 27. As mentioned elsewhere, the facts are identical; therefore, we do not find any reason why the findings of the Tribunal (supra) should not be followed. Respectfully following the findings, we direct the AO to delete the addition of ₹ 103,87,52,830/-. Ground no. 6 is accordingly allowed. 28. Ground nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onale, leuprolide and Gemcitabine to Sun FZE. Venlafaxine appears to have been withdrawn subsequently as evident from the P L account submitted by the assessee. Since the function-asset-risk profile renders TNMM as an unsuitable method for benchmarking. The benchmarking study conducted by the assessee in respect of this transaction is found to be unreliable and hence is rejected u/s 92C(3). The assessee was issued a show cause notice on the issue of rejection of TNMM study conducted by the assessee and adoption of another method for conducting the benchmarking study. The profit split method is found to be more suitable to the nature of these transactions. Accordingly, the method employed by the assessee company is rejected and profit split method is followed for benchmarking the transactions. Following points are noted with respect to export sale of these drugs. 10.1 SaSe of Para IV Drugs: It is seen that in respect of sales made to SPG BVI, Amiorstine and Velafaxine are sold in US under Chapter IV filing. Similarly, in respect of sales made to SPG FZE, Gemcitabine is a chapter IV drug. The issue related to these drugs has been examined and it is seen that the methodology follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in the entire sequence of manufacturing and saie of the drug is being performed by SPIL, As seen from the documents submitted by the assessee, It manufactures the drug and sends the consignment to the location of sale directly without SPG BVI/FZE even looking after logistics and other associated functions. The only positive contribution of the SPG BVI/FZE is the ownership of AN DA in their names. The functional analysis has been elaborated in detail at para 8 while discussing the sale of pantoprazole and it is similar in the case of these drugs also. Hence, It is found that the major functions are being performed by SPIL and not the other companies. 10.5 The FAR analysis conducted earlier is applicable to these transactions also minus the risk element. While the associate enterprises were exposed to considerable risk on account of litigation potential of chapter IV drugs, in the generic drugs, there is no such risk. The entire work Including ANDA exploitation, manufacturing, USFDA approval of manufacturing facility, dominant contribution to sales and marketing, warehousing, logistic support, R D etc., all these activities are being conducted by the assessee company only. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 7a State difference/Returns accounted in FY 2008-2009 -18849.64 61572863 61554013.36 62008 62008 7b Rate difference accounted in FY 2009-2010 0 0 0 0 0 7c Returns / Short receipts accounted in F Y 2009-2010 0 2325264 2325264 0 0 7d Rate difference accounted in FY 2010-2011 0 0 0 0 0 7e Returns / Short receipts accounted in F Y 2010-2011 0 0 0 0 0 8 Additional expenses [litigation ] incurred by the company 0 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Other expenses (R D corporate other exs.) 5260227.6 198760.9 198760.9 32421.17 4137.891 36559.06 6 Profit 69824374 354450.1 354450,1 88179.33 4450.109 92629.44 7 Rate difference accounted in FY 2010-2011 0 0 3448 0 3448 9 Remaining profit [ 6 minus 7 minus 8 ] 354450 354450 84731 4450 89181 10 Shared in equal ration by both associates 16283439 4096995 Usd rate = Ind ₹ 45.94 45.94 45.94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;- 8.12. On careful consideration of the material available on record, it is noticed that the TPO has applied Residual Profit Split Method and accordingly determined adjusted profit from Para-IV filing drugs at ₹ 6,21,95,685/- and from generic drugs at ₹ 2,40,64,8487-by apportioning the profit in the ratio of 50:50 in case of Para-IV filing and 80:20 in case of generic drugs, between the appellant and its AEs, It is also noticed that the appellant has adopted same methodology as in the case of pantoprazole in respect of sale of other formulations to its AEs by considering itself a contract manufacturer. As already discussed, the FAR analysis carried out under I the similar facts and circumstances of the case in A.Y. 2008-09 by the CIT(A)-IV, Ahmedabad, revealed that the appellant has deployed / substantial assets in the form of US PDA approved/ manufacturing setup, played a substantial role in preparation of ANDA and drawing marketing plans in USA. The only function performed outside was to provide market support. These findings are squarely applicable to the international transactions in respect of other drugs too. It is also noticed that no activities were carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given for making the addition are underline with the reasonings given for making similar additions in A.Y. 2008-09 for the sale of pantoprazole. The only distinguishing fact relates to the sale of certain drugs which are outside the Para IV filing drugs. It is seen that in respect of sales made to SPG BVI, Amifostine Venlafaxine are sold in US under Chapter IV filing. Similarly, in respect of sales made to SPG FZE, Gemicitabin is a Chapter IV drug. It is seen that the methodology followed in sale of these drugs is similar to the methodology followed in respect of pantoprazole which has been discussed elaborately by the Bench in A.Y. 2008-09 qua ground no. 5 of that appeal in ITA Nos. 3927 3420/Ahd/2014. 35. The relevant findings of the Tribunal have been elaborately extracted while deciding ground no. 6 of the present appeal. Therefore, to avoid repetition, respectfully following the findings given while deciding ground no. 6 of the present appeal. We direct the A.O. to delete the addition of ₹ 123577944/-. Ground nos. 7 8 are accordingly allowed. 36. Ground Nos. 9 10 relates to the denial of the claim of weighted deduction u/s. 35(2AB) of revenue expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to [two] times of the expenditure] so incurred. [Explanation.- For the purposes of this clause, expenditure on scientific research , in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the patents Act, 1970 (39 of 1970).] 42. A perusal of the aforementioned section clearly establishes that expenditure on scientific research is also eligible for weighted deduction. Considering the facts in totality in the light of the provision, we set aside the findings of the ld. CIT(A) and direct the A.O. to allow weighted deduction. Ground Nos. 9 10 are accordingly allowed. 43. Ground no. 11 relates to the disallowance of weighted deduction u/s. 35(2AB) on trade mark charges, Overseas Product Registration Charges . 44. During the course of the assessment proceedings, the A.O. noticed that the assessee has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd confirmation of the Research carried out. The A.O did not accept the claim of the assessee holding that these expenses were incurred for registration of drug patents in foreign countries. The A.O accordingly withdrew the weighted deduction and allowed only 100% of the same as revenue expenditure. 13. Assessee carried the matter before the ld. CIT(A) but without any success. While dismissing the grievance of the assessee, the ld. CIT(A) followed the findings of his predecessor given in A.Y. 2002-03 to 2004-05. Before us, the ld. counsel for the assessee stated that the Tribunal in assessee s own case in earlier years has decided this issue in favour of the assessee and against the revenue in ITA No. 1558/Ahd/2006. The ld. D.R. could not bring any distinguishing decision 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the entire R D expenditure claimed by the assessee in its books of accounts cannot be allowed in the hands of the assessee. 53. The assessee strongly objected to this proposition on the ground that R D facility is wholly and exclusively owned by the assessee and is approved by the DCIR u/s. 35(2AB) of the Act. and the products developed by this R D facility are owned up by the assessee. 54. The contentions of the assessee were dismissed by the A.O. who was of the firm belief that the assessee is incurring expenses at R D activity on behalf of the partnership firm SPI in which the assessee has substantial interest. Further, the substantial profit received from the firm SPI is exempt, therefore, the expenditure incurred by the assessee under the head R D activity could not be said to have been incurred wholly and exclusively for the purpose of business of the assessee. The A.O. concluded by disallowing ₹ 5,3,02,95,255/-. 55. Aggrieved by this, the assessee carried the matter before the ld. CIT(A) but without any success. 56. Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the ld. counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Book Profits u/s. 115JB was denied by the revenue authorities. We find that when the matter was agitated before the Tribunal, the Tribunal also declined to interfere with the findings of the ld. CIT(A). The relevant findings of the Tribunal read as under:- 110. We have considered the facts, circumstances, relevant provisions and rival submissions,. A harmonious reading of the provisions of section 115JB of the Act reflects that in the case of a company subject to the provisions of Section 115JB of the Act has to prepare P L statement in accordance with the provisions of part (ii) of Schedule (vi) of the Companies Act. 111. The relevant clause of Explanation 1 reads as under:- Explanation [1]- For the purposes of this section, book profit means the [profit] as shown in the [statement of profit and loss] for the relevant previous year prepared under sub-section (2), as increased by (f) the amount or amounts of expenditure relatable to any income to which [section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply; or] 112. And as reduced by :- (ii) the amount of income to which any of the provisions of [sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition of selling and distribution expenses incurred on behalf of SPI disallowed u/s. 14A. 63. While confirming the addition made by the A.O., the ld. CIT(A). at Para 18.3 of his order observed that this issue was also involved in A.Y. 2008-09. The ld. CIT(A) further observed that this issue was also considered by the Tribunal in assessee s own case in ITA NO. 1193 1287/Ahd/2008. 64. On finding similarity of facts, we have no hesitation in following the decision of the Tribunal given in earlier year and the relevant findings read as under:- 153. A similar issue was considered by the Bench in A.Y. 2007-08 in ITA No. 2076 2067/Ahd/2013 and the relevant findings read as under:- 52. Coming to the disallowance made u/s. 14A by the First Appellate Authority, it is an undisputed fact that the assessee was having sufficient own funds for making the investment in the partnership firm. It is also true that the assessee was on a contractual obligation to look after the marketing and distribution activities of the firm SPI as per the partnership deed read along with the supplementary deed to earn remuneration from the partnership firm. However, it is equally true that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the period of 5 years and for providing other managerial services. Thus, the so called remuneration as claimed by the appellant does not represent the remuneration at all. Further, this amount has no correlation with the expenses incurred by the appellant on behalf of the SPI and hence no set off can be given against the expenses disallowed out of selling and distribution expenses and salary and allowance to the field staff. Accordingly, I further hold that the so called remuneration received by the appellant from SPI represent the taxable income of the appellant for the year under consideration and accordingly the amount of ₹ 57,49,50,297/- is treated as the income of the appellant for the year. Since the Assessing Officer has added the remuneration only for the purposes of computation of book profit, he is directed to Include the same under regular provisions of the Income-tax Act resulting into enhancement of total income by ₹ 57,49,50,297/-. The income is accordingly enhanced. Since the appellant has furnished inaccurate particulars of income m this regard, the penalty proceedings u/s. 271(l)(c) are hereby initiated in respect of a sum of ₹ 57,49,50,29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings of the ld. CIT(A) and direct the A.O. to delete the amount of ₹ 40.12 crores re-characterized by the First Appellate Authority. Ground no. 13 is allowed. 73. As no distinguishing fact emerge from the orders of the authorities below, respectfully following the findings of the Tribunal (supra), we direct the A.O. to delete the addition of ₹ 57,49,50,297/-. Ground no. 15 is allowed. 74. With Ground no. 16, the assessee objects to the set off of business loss against profits of the eligible undertaking before allowing deduction u/s. 10B of the Act. 75. During the course of the assessment proceedings, the A.O. noticed that the assessee company has claimed deduction u/s. 10B of the Act at ₹ 126.79 crores in respect of income of Panoli as well as Halol Export Oriented Units. The A.O. further noticed that there was a business los of ₹ 56.59 crores and, therefore, was of the opinion that the deduction should have been claimed after setting off of the business loss resulting into total income at ₹ 70.20 crores. The A.O. accordingly reduced the claim of deduction u/s. 10B of the Act. 76. The assessee agitated the matter before the ld. CIT(A) but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression total income of the assessee in section 10A as 'total income of the undertaking'. [Para 17] For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and not at the stage of computation of the total income under Chapter VI. [Para 18] 80. Respectfully following the decision of the Hon ble Supreme Court (supra), we direct the A.O. to allow the claim of deduction u/s. 10B of the Act. Before setting off of business loss of ₹ 56.59 crores. Ground no. 16 is allowed. 81. Ground no.l7 relates to the Non enhancement of deduction u/s.10B on account of R D expenses allocated to Sun Pharma Industries. 82. Vide ground no. 12 of the present appeal, we have directed the A.O. to delete the disallowance of expenditure of the appellant company alleged to have been incurred for products manufactured by Sun Pharma Industries debited in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the A.O to apply the provisions of section 155(13) of the Act and decide the issue afresh. 7. Respectfully, following the decision of the co-ordinate Bench, we direct the A.O. accordingly. Ground no. 3 is treated as allowed for statistical purposes. 139.Respectfully following the same, we direct the A.O. accordingly. Ground no. 18 is treated as allowed for statistical purpose. 88. We direct accordingly. 89. Ground No. 19 relates to the disallowance of expenditure on repairs of ₹ 8,64,686/- and treating them as capital expenditure. 90. During the assessment proceedings, the A.O noticed that the appellant company has claimed repairing expenses of ₹ 27,81,584/-. The A.O. after verifying the details formed a belief that the same are of capital in nature and after allowing depreciation made net addition of ₹ 22,28,930/-. 91. Before the ld. CIT(A), the assessee claimed that the expenditure was incurred due to normal wear and tear of the machinery and hence the same was revenue in nature. After considering the facts and the submissions and after verifying/examining the related invoices/bills, the ld. CIT(A) found that only expenditure totaling to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting to ₹ 4,63,12,589/-. 96. During the course of the assessment proceedings, the A.O. noticed that the assessee company has incurred interest expenditure of ₹ 2,77,23,736/- during the year under consideration. The A.O. further found that the assessee has earned exempt income of ₹ 1034.31 crores from the partnership firm. The A.O. was of the firm belief that disallowance u/s. 14A read with Rule 8d has to be made. The A.O. accordingly computed the disallowance of ₹ 40,34,830/- out of the interest expenditure and further disallowed a sum of ₹ 4,22,77,759/- being 0.5% of average value of investment resulting into exempt income. 97. When the matter was agitated before the ld. CIT(A). The ld. CIT(A) observed that a similar disallowance was also made in A.Y. 2008-09 and the ld. CIT(A)-IV, Ahmedabad vide Para 25.2 to 25.3 of order dated 14.10.2014 has confirmed the disallowance made by the A.O. Taking a leaf out of the findings given in A.Y. 2008-09, the ld. CIT(A) confirmed the action of the A.O. with a direction to exclude the remuneration of ₹ 57,49,50,297/- which has been separately taxed. 98. Before us, the ld. counsel for the assessee dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose. 101. Ground no. 21 relates to the addition of expenses disallowed u/s. 14A for computing book profit u/s. 115JB amounting to ₹ 4,63,12,589/-. 102. The A.O. while making disallowance u/s. 14A read with Rule 8D also considered the disallowance for the computation of book profit u/s. 115JB of the Act. 103. The ld. CIT(A) taking a leaf out of the decision of his predecessor given in A.Y. 2008-09 confirmed the action of the A.O. 104. The Tribunal in A.Y. 2008-09 in ITA No. 3297 3420/Ahd/2014 had the occasion to consider the dispute vide ground no. 10 of that appeal and held as under:- 119. We have considered the orders of the authorities below and have given a thoughtful consideration to the order of the Hon ble Jurisdictional High Court in the case of Alembic Ltd. The Hon ble High Court was seized, interalia, with the following substantial question of law:- (iii) whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s 14A of the Act in computation of book profit u/s 115JB of the Act is not as per law without appreciating that the amount disallowable unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses, but a liability relating to assets. 6.5 We find no fault in the approach adopted by both the authorities. The addition under section 115JB of the Act of a sum of ₹ 1,14,43,040/- when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question no. 1, this deletion requires to be confirmed. 8. Taking into consideration the evidence on record and considering the division of this court in the case of Commissioner of Income-tax-1 vs. Gujarat State Fertilizers Chemicals Ltd. (supra), we are of the opinion that issue Nos. (iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed. 121. Respectfully following the decision of the Hon ble Jurisdictional High Court (supra), we direct the A.O. to delete the addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB of the Act. 105. Respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the weighted deduction u/s. 35(2AB) of the Act has been allowed by the ld. CIT(A) by following the findings of his predecessor given for A.Y. 2008-09. The order of the ld. CIT(A) for A.Y. 2008-09 has been confirmed by the Tribunal in ITA No. 3420/Ahd/2014. The relevant findings read as under:- 159. At the very outset, the ld. Senior Counsel for the assessee brought to our notice that these issues have been considered and decided by the Bench in favour of the assessee and against the revenue in ITA No. 2067/Ahd/2013. We find force in the contention of the ld. Senior Counsel. The Co-ordinate Bench in ITA No. 2067/Ahd/2013 has decided the impugned issues as under:- 69. Ground no.1 relates to the deletion of the disallowance of ₹ 67,620/- claimed as weighted deduction u/s. 35(2AB) of the Act on gift expenses incurred for R D employees. 70. This issue has been decided in favour of the assessee and against the revenue by the Co-ordinate Bench in ITA No. 1592/Ahd/2011 qua ground no. 2 of that appeal. The relevant part reads as under:- Ground no. 2 relates to the weighted deduction u/s. 35(2AB) on account of gifts to R D employees on occasion of marriage. 44. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur considered opinion profits accrued to the assessee is not in the course of any trading activity but on account of appreciation on account of hedging in forex even if the same has been held for investment purposes. Therefore, such gains have to be treated as capital receipt. For this proposition, we draw support from the decision of the Hon ble High Court of Bombay in the case of Homi Mehta Sons Pvt. Ltd. 222 ITR 528. We find that the forward contract in respect of investment in Caraco and OFCD in Global are on capital account and any profits received by assessee on cancellation of forward contract would not change its character same being in connection with a capital asset and, therefore, has to be treated as capital receipt. For this proposition, we draw support from the decision given in the case of Mahindra Mahindra Ltd. 5 SOT 217 (Mum.). 62. Considering the facts in totality in the light of the nature of contract entered into by the assessee, we do not find any merit in the findings of the First Appellate Authority. We set aside the same and direct for the deletion of the addition of ₹ 14,33,80,289/-. Ground no. 9 is allowed. 123. Respectfully following the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,92,925 22,68,015 1,12,34,536 Total C 7,92,565 9,19,853 10,92,925 22,68,015 1,12,34,536 Net Profit 43,64,129 (16,009) 90,55,535 71,30,868 (54,87,240) Previous Year Profit / (Loss) (16,009) Amount claimed 43,48,120 - 90,55,535 179. We further find that the First Appellate Authority has clearly distinguished the facts of the case in hand qua the facts in the case of Chettinad Cement Corporation Ltd. relied upon by the A.O. Since the grounds on which the A.O. denied the claim have been demolished by the factual and legal aspect relating to the facts in issue, we do not find any error or infirmity in the findings of the ld. CIT(A). Ground no. 8 is accordingly dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under;- 25. While scrutinizing the return of income, the A.O found that the assessee has sold raw materials/products to sister concern at lower rates. Assessee was asked to explain the transactions with its sister concern, Sun Pharmaceutical Industries. Assessee filed a detailed reply giving exhaustive list of all the raw materials/products being sold to its sister concern vis- -vis third parties along with the rates and quantity sold. The A.O was of the firm belief that the assessee has been selling products to its sister concern at a rate lower than sold to third parties. The A.O observed that since the assessee is holding 95% share in its sister concern and the sister concern is claiming 100% deduction u/s. 80IB on its profits. Therefore, in effect the assessee is indulged in diversion of profit and avoidance of tax by suppressing the sale price. The A.O accordingly 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 favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of ₹ 21,25,278/-. Ground no. 9 is allowed. 124. Respectfully following the same, we direct the A.O. to delete the addition of ₹ 2,75,07,070/-. Ground no. 11 is allowed. 125. Ground no. 12 relates to the disallowance of ₹ 62,15,78,070/- made u/s. 37 of expenses incurred on behalf of Sun Pharmaceutical Industries. 126 An identical issue was considered by the Bench in assessee s own case in ITA NO. 1589/Ahd/2011 and ITA No. 2430/Ahd/2009. The relevant part of ITA No. 2430/Ahd/2009 has been extracted in ground no. 11 of this appeal. For similar reasons, we direct the A.O. to delete the disallowance of ₹ 62,15,78,070/-. 133. Respectfully following the decisions of the Co-ordinate Bench (supra), we decline to interfere. Ground no. 9 is dismissed. 134. Ground no. 10 relates to the restriction of the disallowance of R D expenses after excluding export turnover for the purpose of computing allocation of R D expenses. 135. The impugned issue has been considered at length in assessee s appeal vide ground nos. 9 to 11 (supra). For our detailed discussion therein, we do not find any reason to interfere. Ground no. 10 is dismissed. 136. Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
