TMI Blog2021 (12) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm s length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval - no sound basis for disturbing the arm s length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well - we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment. The assessee gets the relief accordingly. Upward TP adjustment on account of notional interest computed on optionally convertible loans granted to its AE - As argued during the year under consideration, no interest has accrued to the Appellant in terms of the agreement with the AE - HELD THAT:- As fairly accepted by the learned Departmental Representative, that all the material facts and circumstances are the same, and many of these loans are merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALP- something clearly contrary to the scheme of the Act, these expenses were fully admissible for deduction. In any case, there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment . TDS u/s 195 - Addition u/s 40(a)(i) - HELD THAT:- Payments made to the US based and Canada based entities, which are covered by make available clauses in both the Indo US as also Indo Canadian tax treaties- see item no. 1 to 7, are taken outside the ambit of disallowance under section 40(a)(i). Payments made to two Thailand based entities - These payments are admittedly for clinical trials and testing. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber of decisions of the coordinate benches, including in the case of DCIT Vs Welspun Corporation [ 2017 (1) TMI 1084 - ITAT AHMEDABAD] , which hold that such incomes in the hands of foreign commission agents cannot be taxable in India. We see no reasons to take any other view of the matter than the view so taken by the coordinate benches. Respectfully following the same, we hold that the assessee did not have any obligations to deduct tax at source from these payments, and, accordingly, disallowance under section 40(a)(i) does not come into play. Payment to Swiss Biogenic Ltd, Srilanka - claim of the assessee that the claim of the assessee is that it was for a market survey to find out product feasibility in the domestic markets - As contentions of the assessee concerned, Indo Srilanka DTAA does not have any make available clause in the provision for fees for technical services under article 12(3)(b). There is also no dispute that the payment is made for market survey services which are essentially covered by the broad scope of managerial, technical or consultancy services . The existence of PE has no relevance for this purpose. As for taxation under the domestic law, since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd exclusively for the purpose of business - HELD THAT:- As car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the DRP, the mere fact that the car was not legally owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the depreciation on car cannot be declined. - Decided in favour of assessee. - ITA Nos. 954/Ahd/2017 And 213/Ahd/2018 - - - Dated:- 17-8-2021 - Justice P P Bhatt, President, And Pramod Kumar, Vice President For the Appellant : Mukesh Patel along with Prashant Maheshwari For the Respondent : Mohd Usman ORDER PER BENCH: 1 These two appeals pertain to the assessee, involve some common issues and were heard together. As a matter of convenience, therefore, both these appeals are being disposed of by way of this consolidated order. 2. We will first take up ITA No. 954/Ahd/17. Assessment year 2012-13: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on @ 1% from the respective AEs. The assessee also issued corporate guarantees to ICICI Bank in respect of Zydus Netherlands BV (Guarantee amount: US $ 32.5 million; Period: 365 days) and to Bank of Baroda in respect of Zydus Inc USA (Guarantee amount: US $ 30 million; Period: 42 days, US $ 20 million; 324 days, and US$ 66 million; 243 days). So far as these guarantees were concerned, the assessee did not charge any guarantee fees at all. The assessee's explanation for not charging any guarantee commission from these AEs was that these companies have availed loans from banks to make strategic acquisitions in furtherance of Cadila's inorganic expansion strategy It was stated in the assessee's transfer pricing report that issuance of guarantees to these AEs has benefitted Cadila itself rather than the AEs, and hence, keeping with the arm's length principle, no guarantee commission has been charged . Nevertheless, the assessee made a suo motu arm s length price adjustment of ₹ 1,68,18,208. The contention of the assessee was that arm s length price of these corporate guarantees was accepted @1% by the Assessing Officer himself, under directions of the Dispute Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmaceutica Brazil BNP 2.60 Mio, US$ 0.40 Mio, US$ 3.00 24/08/20071 5/09/2009 365 365 13,08,20,000 2.52% 379124 3 Simayala Pharmaceutica ls (Pty.) South Africa SCB 1.0 Mio US$ 1.50 Mio, US$ 2.50 Mio, US$ 3.00 Mio, US$ 8.00 07/082008 22/10/2008 11/09/2009 30/05/2011 365 365 365 307 25,40,30,000 2.52% 95556294 4 Zydus Pharma Inc US Citi 2.00 Mio US$ 2.00 Mio US$ 4.00 08/04/2005 19/09/2005 365 365 15,27,00,000 2.52% 5054901 5 Zydus France (SAS) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of guarantee fee to be charged from the associate enterprises in addition to the amount already charged as guarantee fee by the assessee. (Upward adjustment of ₹ 10,45,32,835/-) 7. When the Assessing Officer proposed this ALP adjustment in the draft assessment order, assessee raised objections, inter alia against this adjustment, before the Dispute Resolution Panel, but without any success. The DRP noted that the issue has been decided in favour of the assessee for preceding years but confirmed the action of the Assessing Officer to keep the issue alive. It was also noted that the stand of the DRP has been challenged before the Income Tax Appellate Tribunal and thus the matter is yet to reach finality. While rejecting the cross objections raised by the assessee, the Dispute Resolution Panel observed as follows: 14.2.1 However, we find that the Department has not accepted the decision of the DRP for AY 2010- 11. The Department has raised the following issue before the Hon'ble 1TAT, Ahmedabad. 14.2.2 We may observe here that the DRP is a continuation of assessment proceeding as it is only the draft assessment order which is being challenged before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute Resolution Panel, granting relief to the assessee on this point, came up for consideration before a coordinate bench of this Tribunal, and, vide order dated 3rd March 2017, it has been upheld by the coordinate bench. The copies of these orders were placed before us as. As to what is a fair arm s length price for issuance of corporate guarantee for the group entities of the assessee group is a factual aspect, and once in the earlier years a coordinate bench has approved the stand that 1% is a reasonable guarantee commission, there is no reason for us to deviate from the said stand as parties to the guarantees are broadly the same and most of these guarantees are continuing guarantees. We, therefore, see no reasons to disturb the accepted past history of the case and disturb the corporate guarantee commission rate adopted by the assessee. As regards the TPO s observation that the concept of shareholder activity will apply only in respect of Zydus Netherlands as it was the holding company, and not the assessee company, all we can say is that admittedly the assessee company is the parent company for this holding company as well and the end beneficiary, therefore, is the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is concerned, the relevant material facts are like this. During the course of proceedings before the Transfer Pricing Officer, it was noticed that the assessee has given several optionally convertible loans to its Irish subsidiary, Zydus International Pvt Ltd. These loans were for US $ 8 million (26th December 2008; conditional interest rate 6m USD LIBOR + 550 bps), US$ 10 million (13th May 2009; conditional interest rate USD LIBOR+ 550 bps), 1.3 million (12th December 2009; conditional interest rate 6m Euro LIBOR+400 bps), 5.5 million (12th December 2009; conditional interest rate 6m Euro LIBOR+400 bps), US $ 3 million (2nd February 2010; conditional interest rate USD LIBOR + 550 bps), US $ 5 million (26th August 2010; conditional interest rate 6m Euro LIBOR + 400 bps) and US $ 3 million (7th February 2011; conditional interest rate 6m Euro LIBOR+275 bps). All these loans were for five year tenures, all these loans were optionally convertible into equity capital at par anytime during the loan tenure, and all these loans were to enable the Irish subsidiary to make investments in step down subsidiaries out of funds so provided to the subsidiary. In case of repayments, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm, it was noted that there is no quarrel with the proposition that the assessee can indeed issue such bonds, but once the assessee himself agrees that interest is payable on cumulative basis in the event of option of conversion not being exercised, all that is required to be done is to ascertain an arm's length interest on the said transaction. As regards the claim of the assessee that no arm's length price can be attributed when no income has arisen, it was observed that Section 92 is not a substitute to Section 5; it is not a charging section, but it gives the TPO an authority to go behind a related party transaction which has an impact on the profits of the assessee ad if there has been a mispricing resulting into improper allocation of profits to the two parties, he has authority to change such an allocations . The TPO then observed that on this case, ZIPL (i.e. the AE) has benefitted unduly from this transaction as the balance sheet and profit and loss account of ZIPL indicates and that 'the company has allowed significant fund to flow to the subsidiary under the garb of a convertible loan. The TPO then referred to the decision of US Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme viz., Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993 , and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments. The ECB policy is applicable to FCCBs. The issue of FCCBs is also required to adhere to the provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from time to time. 7.4.7 The above categorization clearly indicates that only fully and mandatorily convertible preference shares are to be treated at par with equity and would follow the route prescribed for 'Investments . Other categories of debentures/loans are in the nature of debts and are to be as per guidelines applicable for External Commercial Borrowings . This categorisation gives us a tool to analyse the character of an instrument, whether inbound or outbound. In light of such clear guidelines, the averment made by the assessee that the convertible loans have passed muster of RBI are of no consequence. The assessee has produced no document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly convertible loan points towards loan 2 Presence of absence of a fixed maturity date The presence of a fixed maturity date is virtually essential for a debt classification The convertible loan is for a period 5 years. Hence, the instrument takes the colour of a loan. Loan 3 Source of payments A taxpayer willing to condition the repayment of an advance on the financial well-being of the receiving company acts as a capital investor and not as a creditor expecting to be repaid regardless of the company s success or failure. We understand that if the repayment is possible only out of corporate earnings, the transaction has the appearance of equity contribution but if the repayment is not dependent upon earning, the transaction reflects a loan. We have the option to either convert the loan into equity at par or opt for repayment. In case of repayment which can be exercised any time during the tenure of the loan not exceeding five years, we would get interest retrospectively. Thus it can be that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubordinated to the loan if any were taken by ZIPL from third parties. Hence, as per the said test, since the convertible loan taken a subordinate position to other creditors it flows in favour of Equity. No such items of subordination apparent in the loan document. No subordinate attached to the loan. On demand, payable at par with other loans. Character of Loan. Wrong to hold that it is given in shareholding capacity. 7 Intent of the parties The inquiry of a court in resolving the debt equity issue is primarily directed at ascertaining the intent of the parties. The intent of the parties, in turn, may be reflected by their subsequent acts, the manner in which the parties treat the instruments is relevant in determining their character. The intent of the parties is clear from the fact that with respect to the convertible loan of USD 27 Mn it has been converted into equity in the year under consideration. As per this test, the instrument takes the character of Equity. None of the convertible loans during the present period have been converted. Hence, the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital assets, the advances is more likely to be characterized as equity. Since the loan has been given to fund acquisition and/ or for capital transactions, the same may be characterized as Equity. The purpose is for working capital requirements as well as acquisition. Acquisition is the business of ZIPL. So the amount utilized towards business. Character of loan. 12 Failure of debtor to replay The repayment of an advance may support its characterization as bona fide debt As stated in the said decision, till the time of actually exercising any option, it is premature to finally arrive at a conclusion whether it is in the nature of debt or equity. Thus, this test is neutral in our case. Assessee would have all means to recover in case of non-payment. Character of loan. 13 Risk involved in making advances. A significant consideration in the inquiry is whether the funds were advanced with reasonable expectations of repayment regardless of the success of the venture or were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.87 02/02/2010 US libor+550 6.40% 265 8876800 Conv loan to ZIPL US$ 5 m 23.33 26/08/2010 6m E libor + 400 5.636% 217 7817224 Conv loan to ZIPL US$ 3m 13.66 07/02/2011 6m E libor+ 275 4.38% 53 868776 Total 9,97,52,304 7.6 In light of the above discussion, an upward adjustment of ₹ 9,97,52,304/- is required to be made to the income of the assessee company on account of the optionally convertible loans given to the AE. (Upward adjustment of 9,97,52,304) 15. Aggrieved by the addition proposed by the Assessing Officer, on the basis of above findings of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint that the interest, which would be payable on such a loan in an uncontrolled scenario, has been forgone to have the option to convert the loan into equity at a future date. The assessee then must establish that arm's-length price of such an option is equivalent to the interest forgone. This has not been done. 15.5.5 To conclude we reject the assessee's objection. 15.3.6 The facts of the case remain the same during the year under reference. The options of converting the loan into equity has not been exercised during the year and the loan has not been converted into equity Hence, there is no reason to deviate from the decision of the DRP tor the preceding year. 15.3. In view of the foregoing, the objection raised by the assessee is rejected. 16. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 17. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by decisions of the coordinate benches in assessee s own cases for the assessment years 2009-10 and 2010-11. Learned Departmental Representative, however, submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws: '5.. . . . . . . The question, however, arises as to what are the connotations of expression 'quasi capital' in the context of the transfer pricing legislation. 6. Hon'ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd. v. ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas . The reference so made to the words of Justice Frankfurter was in the context of the concept of super profits but it is equally valid in the context of concept of quasi capitals also. As in the case of the super profits, to quote the words of Their Lordships, many decisions of different benches of the ITAT indicate a rote repetition (in the words of Felix Frankfurter J, quoted in the beginning of this judgment a lazy repetition ) of this reasoning, without an independent analysis of the provisions of the Act and the rules the same seems to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression 'quasi capital', in our humble understanding, is relevant from the point of view of highlighting that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of 'quasi capital', these cases referred to the situations in which (a) advances were made as capital could not subscribed to due to regulatory issues and the advancing of loans was only for the period till the same could be converted into equity, and (b) advances were made for subscribing to the capital but the issuance of shares was delayed, even if not inordinately. Clearly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by Pepsi Co's Netherlands subsidiaries to certain Pepsi Co domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the advance agreements constitute original issue discount, relating to contingent payment debt instruments under section 1.1275-4(c), Income Tax Regulations. This provision is a deduction provision and not a provision relating to determination of arm's length price. Nothing, therefore, turns on this decision. In any event, it is nobody's case that the transaction before us is of the debt. The case of the assessee is that since in consideration of this transaction, the assessee is entitled to own the capital at certain admittedly favourable terms, the true reward of this debt is the availability of such an option, and, therefore, it cannot be compared with a debt simplictor for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm's length price of a transaction, it is immaterial as to what 'benefit' an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from such transactions. It is not even the case of the authorities below that in the event of hypothetically dealing with an independent enterprise, no independent enterprise would not have given him an interest free loans even if there was an option, coupled with such a deal, to subscribe to the capital of the AE on the terms as offered by the AE to the assessee. Unless that happens, there is not even a prima facie case made out for an ALP adjustment. 16. We have also noted that, in any event, whenever the assessee's right to exercise the option of converting the loan into equity comes to an end, the assessee is entitled to intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter further, he found that so far as the product liability insurance charges were concerned, the supporting evidence included debit notes from Marsh USA Inc, and the policyholder indicated therein was the US AE of the assessee- i.e. Zydus Pharmaceutical (USA) Inc, and that there was nothing to show that these expenses were incurred for the business of the assessee levied in e. The claim of the assessee that Cadila has reimbursed insurance costs to its AE since the product liability claim would be levied in case of manufacturing and quality issues which is responsibility of Cadila and that being a limited risk distributor with a targeted operating margin, the distributor entities cannot be expected to bear the product liability and quality risks , were simply brushed aside. These expenses, the TPO held, donot relate to the business activity of the assessee company (and) therefore the ALP of this transaction is taken as NIL . As regards legal expenses of ₹ 18,05,58,681, it was explained by the assessee that all product IPs belong to Cadila (i.e. the assessee) , that US AE holds Abbreviated New Drug Applications (ANDA) and Product Registrations, granted by the FDA-U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015-16, but no such arm s length price adjustments were made in any of these years. Aggrieved, assessee raised the objections before the DRP on this issue as well, but without any success. Learned DRP confirmed the action of the TPO and held that there is no res judicata in the tax proceedings, and, therefore, similar expenses having been allowed in past and future would not mean that the same treatment is to be accorded in this year. Accordingly, the Assessing Officer proceeded to make this ALP adjustment of ₹ 21,43,79,368. The assessee is aggrieved and is in appeal before us. 22. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 23. We find that the TPO has, in essence, proceeded to make disallowance under section 37(1) by holding that there was no commercial expediency in making these reimbursements. That is certainly travelling beyond the domain of his powers under the scheme of the Act. The TPO only has to ascertain arm s length price of a transaction in the sense t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. These expenses thus clearly pertain to the assessee as the US AE is admittedly, and beyond dispute, only an LRD. The same is the position with respect to the legal expenses. It has been specifically explained by the assessee, and this explanation has not even been called into question, that the US AE was holding the ANDAs and patents, as a trustee and in fiduciary capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm s length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20/06/2011 9,924,684 21/07/2011 9,904,692 23/08/2011 4,199,024 25/11/2011 2,601,367 Sub total (a) 45,320,847 Pharmanet Canada Inc., (Earlier Anapharm Inc., Canada) 25/11/2011 1,154,412 15/03/2012 1,507,489 Sub total (b) 2,661,901 Cetero Research, USA 11/10/2011 5,615,817 Sub total (c) 5,615,817 Hilltop Research, USA 10/10/2011 5,443,832 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,385,992 Sub total (j) 3,385,992 Elsevier B.V. Netherlands 13/07/2011 8,321,500 02/03/2012 9,578,140 Sub total (k) 17,899,640 Thomson Reuters (Scientific) Inc., USA 10/10/2011 3,175,380 Sub total (l) 3,175,380 Total II (j to l) 24,461,012 III. Purchase of Productivity Tool Cambridge Soft Corp., USA 23/05/2011 15,096,375 12/10/2011 16,584,750 16/12/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in support of the contention that such an online access could not be taxed. As regards purchase of software from US based entity, assessee once again referred to several judicial precedents in support of its contention that the same could not be taxed in India. Similarly, as regards exports commission and survey expenses, it was pointed out that the work was entirety done outside India, without involving any taxability in India even under the domestic law, and that similar disallowances have been deleted in the assessment year 2010-11 in assessee s own case by DRP itself. The Assessing Officer noted certain contentions of the assessee, and rejected the same. In particular, he noted that the payments made to Millies International Ltd UK and Swiss Biogenics Ltd, Srilanka, were for conducting market survey about products of the assessee. He was apparently of the view that the tax under section 195 was deductible from these payments nevertheless. It was in this backdrop that the Assessing Officer. Yet, the Assessing Officer proceeded to disallow these payments under section 40(a)(i) read with Section 195. Aggrieved, assessee carried the mater in appeal, and the DRP directed that onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a lower authority without application of own mind. Such an approach is wholly unsustainable in law. It also results in a situation that the view taken at the assessment stage travels in appeal directly to us, without independent scrutiny of the same by the CIT(A) or the DRP. That is much less than an ideal situation, and it does not meet our approval. We have noted that, so far as the stand taken by the ITO (International Taxation) in the proceedings under section 201(1) is concerned, many of these issues have come up before coordinate benches of this Tribunal, in assessee's own cases, and the stand taken by the ITO has not been approved by several coordinate benches in judicial scrutiny. We have also noted that the assessee has made detailed submissions about these sixteen sets of foreign remittances, which are reproduced at pages 174 to 177 of the paper-book filed before us, but the authorities below have simply declined to deal with the matter or, for that purpose, decline to deal with the factual elements embedded therein. These submissions are reproduced below for ready reference: SUMMARY CHART IN CONECTION WITH ISSUE RELATING TO DISALLOWANCE U/S. 40(a)(i)- BREAK-UP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplies in this case. 5 Impopharma Inc. (Canada) 23,36,320 Fees for Clinical Trials/ Clinical Testing Remittance is made in respect of carrying out of clinical trials testing. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and Canada as the make available exception applies in this case. 6 Lambda Therapeutic Research (Canada) 47,73,195 Fees for Clinical Trials/ Clinical Testing Remittance is made in respect of carrying out of clinical trials testing. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and Canada as the make available exception applies in this case. 7 Novum Pharmaceuticals (USA) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Elsevier B.V (Netherlands) 1,78,99,640 Subscription for access to Online Journal Remittance is made to the non-resident party in respect of journal subscription.The same is not in the nature of Royalty, either under Act or a per the DTAA with Netherlands. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 12 Thomson Reuters Inc. (USA) 31,75,380 Subscription for Journal Remittance is made to the non-resident party in respect of journal subscription.The same is not in the nature of Royalty, either under Act or a per Article 12 of the DTAA with USA. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 13 Cambridge Soft Corp. (USA) 18,74,364 Consultancy Services Remittance is made in respect of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17,91,43,844 30. The payments at item no. 1 to 7 deal with payments for clinical trials and testing to USA and Canada based entities. While dealing with the same issue for the assessment year 2010-11 in assessee s own case, a coordinate bench has, vide order dated 3rd January 2017, has decided this issue, in favour of the assessee, and held as follows: 2. In the first ground of appeal, the assessee has raised the following grievance: The Id. CIT(A) has erred in law and on facts in holding that technical knowledge, experience, skill, know how as envisaged in Article 12(13) of respective Indo-US, Indo Canada and Indo UK DTAAs were not made available to the assessee company by the Non-Residents, viz. Algorithme Pharma Inc., USA, Anapharm Inc., Bio Reliance, UK, Gateway Medical Research Inc., MDS Pharma Services, USA, AAI Pharma Inc., USA, inspite of substantial evidences to the contrary. 3. So far as this grievance of the Assessing Officer is concerned, the relevant material facts are like this. During the course of proceedings before the Assessing Officer, it was noticed that the assessee has made fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as it additionally requires that the service provider should also make available his technical knowledge, experience, skill, know how etc, known to the recipient of the service as to equip him to independently perform the technical function himself in future, without the help of service provider . However, this plea was not and rejected. The Assessing Officer analyzed the nature of services in great detail and observed that the tests are highly technical in nature and generate considerable technical information about the drugs being tested which are extremely valuable in subsequent phases of the drug commercialization . In addition to elaborate discussion about the nature of services and as to how technical these services are, the Assessing Officer also observed that the make available clause is not to be applied merely with respect to technical knowledge but also with respect to experience, skill and process as well, and, therefore, even if experience or skill is made available to the assessee, the make available clause would be satisfied and the nature of service would be liable to be treated as fee for included services . It was in this backdrop that the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... language of Article 12(4)(b) of the India-USA and India-Canada DTAAs: In this case, as rightly considered by the learned CIT(A), the assessee was conducting clinical trials through the CROs in USA to comply with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to the assessee company. In fact, the assessee company did not get any benefit out of the said services in USA and assessee was only getting a report in respect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices as per the relevant articles of the DTAAs with USA, U.K. and Canada. 12. Another contention raised by the AO in her Order is that since the Memorandum to the DTAA with USA makes reference to certain services, which may make technical knowledge etc. available to the recipient and includes bio-technical services as one of them, technical knowledge etc. has been made available to the appellant. In this connection, the appellant has relied on the ratio of ITAT Delhi in DCIT vs. PanAmSat International Systems Inc. 103 TTJ 861, wherein the ITAT has held as under: What the MOU does is to give examples of areas or fields in which it is possible for the parties to agree to transfer technology. Communication through satellite or otherwise is one such area, given as example, in which transfer of technology is possible... The example given in the MOU cannot be understood to mean that wherever a satellite is used in relation to the rendering of a service, it must be assumed that there is a transfer of technology relating to the area of communication through satellite. Thus the payment does not fall within art. 12(4) (b) as 'fees for included services'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scribed in paragraph 3(a) of this article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. India Canada tax treaty Article 12: Royalty and fees for included services 4. For the purposes of this Article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, knowhow, or processes or consist of the development and transfer of a technical plan or technical design. Indo US tax treaty Article 12- Royalty and fees for included services 4. For purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology making available , the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te bench decision in the case of DCIT Vs Ford India Ltd [(2017) 56 ITR(T) 433 (Chennai)], wherein the coordinate bench has, inter alia, observed as follows: 7. There is no dispute that there is no specific provision for taxation of fees for technical services in India Thailand tax treaty. There is also no dispute that Fuji Asia Co Ltd Thailand and Auto Alliance Co Ltd Thailand did not have any permanent establishments in India. 8. The stand of the Revenue, however, is that the income embedded in the amounts received by the assessee could anyway be taxed as 'other income' under the respective tax treaties. There is a decision of a coordinate bench of this Tribunal, in the case of Dy. CIT v. TVS Electronics Ltd. [2012] 52 SOT 287/22 taxmann.com 215 (Chennai)], which support this school of thought and holds that Admittedly, Chapter III of DTAA between India and Mauritius did not provide for taxing any fees paid for technical services. Only for a reason that DTAA is silent on a particular type of income, we cannot say that such income will automatically become business income of the recipient. In our opinion, when DTAA is silent on an aspect, the provisions of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontracting state by carrying on business in the other contracting state. When, for example, article 5 provides that the income of resident of a contracting state, from carrying on business in the other contracting state, cannot be taxed in the source state unless such a resident has a permanent establishment in the other contracting state, i.e. source state, it cannot be open to the tax administration of source state to contend that even if it cannot be taxed as business income, it can be taxed as 'other income' nevertheless. It is important to bear in mind the import of expression 'not expressly dealt with in the foregoing articles'. Similarly, if independent personal services cannot be taxed in the source state as minimum threshold limit of fixed base is not satisfied, such a treaty concession cannot be nullified by invoking article 21. When a particular nature of income is dealt with in the treaty provisions, and its taxability fails because of the conditions precedent to such taxability and as specified in that provision are not satisfied, that is the end of the road for taxability in the source state. It is also important to bear in mind the fact that article 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India as the condition precedent for the taxability under the related article is not satisfied, it is an inevitable corollary of this finding that article 22 cannot be pressed into service in respect of the said income. As we hold so, we are alive to the fact that there is no specific taxability provision, under India Thailand tax treaty with respect to taxability of fees for technical services. Profits earned by rendering fees for technical services are only a species of business profits just as the profits any other economic activity. However, without the character of such receipts in the nature of business receipts being altered, the fee for technical services is dealt with separately in some treaties for the reason because, under those treaties the related contracting states proceed on the basis that even in the absence of the permanent establishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also take note of the landmark Special Bench decision in the case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269/147 Taxman 39 (Delhi) (SB) wherein the Tribunal had, inter alia, observed that DTAA is only an alternate tax regime and not an exemption regime and, therefore, the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA . Quite clearly, when there is no taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either. 33. Viewed thus, the payments made to Thai entities, in respect of clinical trials and testing charges, cannot be said to be taxable in India. The disallowance under section 40(a)(i) for item no. 8 and 9 in the chart reproduced earlier thus must stand deleted. We direct so. 34. Item no. 10, 11 and 12 pertain to the access to online database and journals, as paid to US and Dutch entities. It is an agreed position that the relevant treaty provisions in the India Netherlands tax treaty and Indo US tax treaty are materially similar, and that, dealing with Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iterary database but only for access to the literary database under limited non exclusive and non transferable licence. Even during the course of hearing before us, learned Departmental Representative could not demonstrate as to how there was use of copyright. In our considered view, it was simply a case of copyrighted material and therefore the impugned payments cannot be treated as royalty payments. This view is also supported by Hon'ble Bombay High Court's judgment in the case of DIT (International Taxation) v. Dun Bradstreet Information Services India (P.) Ltd. [2011] 338 ITR 95/[2012] 20 taxmann.com 695. 35. Respectfully following the coordinate bench decision in assessee s own case, we uphold the plea of the assessee to the effect that disallowance under section 40(a)(i) could not have been made for payments on account of access to online publications and database etc to Chemical Abstract Services, USA, Elsevier BV, Netherlands and Thompson Reuters Inc USA. The disallowances of ₹ 33,85,992, ₹ 1,78,99,640 and ₹ 31,75,380, appearing at item nos. 10, 11 and 12 are thus deleted. 36. Item no. 13 pertains to payment of ₹ 3,16,81,125 on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance under section 40(a)(i) does not come into play. 39. Finally, so far as payment of ₹ 76,28,381 to Swiss Biogenic Ltd, Srilanka, is concerned, we have noted the claim of the assessee that the claim of the assessee is that it was for a market survey to find out product feasibility in the domestic markets. The claim of the assessee is that the services were wholly rendered outside India, and for the purpose of business outside India, and as such rendition of these services will not result in taxation of related income in India. It is also pointed out that the assessee does not have any PE in India, and, for this reason, the payment for these services cannot be taxed in India. On this issue, the contentions of the assessee concerned, Indo Srilanka DTAA does not have any make available clause in the provision for fees for technical services under article 12(3)(b). There is also no dispute that the payment is made for market survey services which are essentially covered by the broad scope of managerial, technical or consultancy services . The existence of PE has no relevance for this purpose. As for taxation under the domestic law, since the payment is for conducting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inate benches in assessee's own case, and Hon'ble High Court has declined to admit appeal against such decision, as in the esteemed views of Their Lordships, no question of law arises from these decisions. The relief granted to the assessee on this point in past has thus achieved finality. In this view of the matter, we uphold the plea of the assessee, and direct the Assessing Officer to treat the product registration expenses and product support service expenses as revenue expenditure, and to, therefore, delete the impugned disallowance of Ts 9,84,01,831. The assessee gets the relief accordingly. 44. Ground no is thus allowed. 45. In ground no. 6, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an addition of ₹ 8,60,25,625/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenditure. 46. To adjudicate on this grievance as well, only a few material facts need to be taken note of. During the course of the scrutin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,39,31,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) in respect of Clinical Trial and Bio-equivalence Study 51. The facts relating to this ground of appeal are also somewhat similar, in many respects, to the preceding two grounds of appeal. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee was debited ₹ 39,39,31,000 on account of research and development expenses incurred outside inhouse approved facilities, and that the assessee has claimed enhanced deduction @ 200% in respect of the same. The Assessing Officer was of the opinion that these expenses were to be excluded from enhanced deduction under section 35(2AB) as the expenses were incurred outside of the approved inhouse facilities, as was held by his predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the Tribunal and Hon ble jurisdictional High Court has not admitted appeal against the same, he was equally alive to the fact that the stand so taken by the Hon ble jurisdictional High Court has been reversed by Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 12,65,293/- on Hummer Car despite the fact that the same was in the name of the Director and there was no evidence to show that the same was used wholly and exclusively for the purpose of business. The provisions of section 32 were therefore not satisfied. 131. As far as this grievance of the Assessing Officer is concerned, there is no dispute that the car was not legally owned by the assessee company but by the director, even though the payment for acquisition of this car was made by the assessee company and the car is used by the company. The beneficial ownership thus rests with the assessee company. The depreciation was proposed to be declined by the Assessing Officer mainly on the ground that the assessee did not own the vehicle in question. However, the assessee succeeded in the DRP in his objection to this proposal. We have noted that the DRP has given a categorical finding to the effect that the car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 28 (v) read with proviso thereto. The Assessing Officer was of the view that while addendum dated 1st April 2007 to the partnership deed dated 1st March 2007 does provide that the company has agreed to discharge functions as an active partner and be thus entitled to remuneration, a company is not entitled to remuneration from a firm in which the company is a partner, and the addendum to the partnership deed is only a device to camouflage the nature of receipt of the firm . The assessee was put to notice as to why this receipt of income not be brought to tax as income by way of agency services. The stand of the assessee was that the assessee company was an active partner in Zydus Healthcare Sikkim, and that there is no provision, under any law, which prohibits any company from paying remuneration to any company, or prohibiting receipt of any remuneration by any company, for the services rendered as a partner in the partnership firm. It was also pointed out that genuineness of services rendered by the assessee company, as an active partner, has not even been called into question. It was also submitted that once an income, remuneration as partner, is specifically covered under a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm as its partner), the party of the 1st part as part of the firm has added to discharge the following functions as an active partner for and on behalf of the firm: a. Providing services relating to promotions and marketing of the firm's products including providing of marketing infrastructure, product development and promotion, information database, and other system support and inventory and supply chain management for the same. b. Functioning as 'consignment and sales agent of the firm tor storage, sales and distillation of Farms products throughout India and tor the proper the sales tax/VAT is; either directly or through the clearing, forwarding and handling agents of the party of the first part throughout India; c. Collection of the moneys due to the firm for sales of products made by an on be halt of the firm: d. after sales services to the customers of the sum from e. Selecting and appointing stockist for distribution of the firm's products f. Guiding and helping intro comments of inputs such as raw materials, packing materials, consumables, plant and machinery equipments for the firm: g. Providing legal technical and managerial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tner, the addendum brought on to the partnership authorising remuneration to the partner i.e. the assessee company is beyond comprehension when the original partnership deed does not provide any clause to provide remuneration to partner which is aligned with destination-4 to section 40 (b) of the act which reads-a working partner means an individual who is actively engaged in conducting the affairs of the business profession of the firm of which is a partner. 12.3.4 Therefore, the AO rejected the assessee's claim deduction of ₹ 170 crore under and treated the same as income under section 56 of the Act. The facts of the case remained the same during the year under consideration, therefore, the AO disallowed assessee's claim of deduction of ₹ 140 crore u/s 28(v) of the Act and treated the same as income under section 56 of the Act. 12.3.5 After taking into consideration the facts narrated by the assessing officer as discussed above, we find that the stand taken by the assessee is inconsistent. Whereas in the addendum to partnership agreement dated 1 March 2007 executed on 1st April 2007, the assessee is described as an active partner, the firm while com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, other-wise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document ether executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding Circumstances to find out the reality of the recitals made in those documents . 12.3.9 In view of the foregoing, the objection raised by the assessee is rejected. 60. The Assessing Officer thus proceeded with the addition so proposed. The assessee is aggrieved by the addition of ₹ 142 crores so made by the Assessing Officer, and is in appeal before us. 61. We have heard the rival contentions, perused the material on record and duly co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sikkim units, respectively, was | estimated and accordingly was reduced from the profit of SPI/SPS for computation of deduction u/s. 80IB(13). As a matter of fact, the appellant has not charged any royalty from SPI/SPS for allowing use off | various trademark/brands and technology. A copy of Trademark license/user Agreement dated 10.04.2003 between the appellant and SPI was collected and examined during the course of appellate proceedings for A.Y. 2008-09 by the CIT(A)-IV, Ahmedabad. After considering the terms of the agreement, it has been held in A.Y. 2008-09 that the so called remuneration was nothing but it was fee for permitting use of all present and future trademark/brands and technology to SPI. The relevant findings are recorded by the CIT(A)-IV, Ahmedabad in this regard in paras-20.5 to 20.5.1. Following the order of CIT(A)-IV, Ahmedabad and also considering the factual and legal position in this regard, in A.Y. 2009-10, I also held that the appellant company had received a sum of ₹ 57,49,50,297/- from SPI as consideration for permitting use of all present and future trademark/brands, in the entire world/ for the period of 5 years and for providing other managerial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true that the appellant company has also not offered the same for taxation taking a shelter behind the provisions of Section 28(v) of the Act. No doubt, the profits of the partnership firm are exempt u/s. 80IB(4) of the Act. Even, if the partnership firm had not charged ₹ 40.12 crores as remuneration to the appellant company, the profits of the firm would have increased by this amount. Since the assessee is holding 97.5% share in the profits of the partnership firm, this amount of 40.12 crores would have otherwise come to the assessee in the firm of share of profit which again is exempt from taxation u/s. 10(2A) of the Act. Therefore, in our considered opinion, the allegation that it is a case of tax evasion is ill-founded. The fact of the matter is that such payments were never re-characterized as royalty in earlier assessment years and the action of the First Appellate Authority in the year under consideration is nothing but based upon assumptions and presumptions. No addition can be sustained which are based upon assumptions, surmises or conjectures. We, therefore, set aside the findings of the ld. CIT(A) and direct the A.O. to delete the amount of ₹ 40.12 crores re- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses of computation of book profit u/s. 115JB. 66. As regards this grievances of the assessee, learned representatives fairly agree that the issue is covered, in favour of the assessee, by a coordinate bench in assessee's own case for the assessment year 2008-09, which in turn has followed the assessment years 2006-07 and 2007-08. The DRP itself has noted this factual position, and yet confirmed the action of the Assessing Officer, in making this adjustment, so as to keep the issue alive. Aggrieved, the assessee is in appeal before us. 67. Having heard the rival submissions and having perused the material on record, we are of the considered view that the assessee does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee s own case and the additions have been made, so to say, keep the issue alive. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own cases. In this view of the matter, and respectfully following the coordinate benches, we uphold the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble guarantee commission, there is no reason for us to deviate from the said stand as parties to the guarantees are broadly the same and most of these guarantees are continuing guarantees. We, therefore, see no reasons to disturb the accepted past history of the case and disturb the corporate guarantee commission rate adopted by the assessee. As regards the TPO s observation that the concept of shareholder activity will apply only in respect of Zydus Netherlands as it was the holding company, and not the assessee company, all we can say is that admittedly the assessee company is the parent company for this holding company as well and the end beneficiary, therefore, is the assessee company. The observation made by the Assessing Officer is thus incorrect. In any case, the methodology adopted by the TPO for computation of arm s length price of these guarantees is wholly erroneous. The TPO has proceeded on the basis that the guarantee commission charges by the State Bank of India and Bank of India are static rates which hold good in all circumstances, but then, in reality, the guarantee commission rates vary on a large number of factors and vary from client to client. The adoption of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 2010-11. Learned Departmental Representative, however, submits that even though the issue is covered in favour of the assessee, and to that extent that decision binds us, he nevertheless relies upon the stand of the Assessing Officer and would like to justify the same. We find that a coordinate bench, vide order dated 3rd March 2017 for the assessment year 2009-10, has, inter alia, observed as follows: 10. There is no dispute that the transactions in question are not of the transactions of lending money to the associated enterprises. The amounts advanced to the AEs are attached with the obligation of the AEs to issue share capital, in case the assessee exercise option for the same, on certain conditions, which are admittedly more favourable, and at an agreed price, which is admittedly much lower, vis- -vis the conditions and prices which independent enterprise would normally agree to accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplictor on amount advanced but opportunity to own capital on certain favourable terms. Contrast this reward of owning the capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis of the provisions of the Act and the rules the same seems to be the position with regard to quasi capitals There are several decisions of this Tribunal, including in the cases of Perot Systems TSI v. DCIT [(2010) 130 TTJ 685 (Del)]., Micro Inks Ltd. v. ACIT [(2013) 157 TTJ 289 (Ahd)], Four Soft Pvt. Ltd. v. DCIT [(2014) 149 ITD 732 (Hyd.)], Prithvi Information Solutions Pvt. Ltd. v. ACIT [(2014) 34 ITR (Tri) 429 Hyd.] , which refer to the concept of 'quasi capital' but none of these decisions throws any light on what constitutes 'quasi capital' in the context of transfer pricing and its relevance in ascertainment of the arm's length price of a transaction. Lest we may also end up contributing to, as Hon'ble Delhi High Court put it, rote repetition of this reasoning without an independent analysis of the provisions of the Act and the Rules let us take briefly deal with the connotations of 'quasi capital', and its relevance, under the transfer pricing regulations. 7. The relevance of 'quasi capital', so far as ALP determination under the transfer pricing regulation is concerned, is from the point of view of comparability of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the issuance of shares was delayed, even if not inordinately. Clearly, the advances in such circumstances were materially different than the loan transactions simplicitor and that is what was decisive so far as determination of the arm's length price of such transactions was concerned. The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.' 12. It is thus quite clear that the considerations for extending a loan simplictor are materially distinct and different from extending a loan which is given in consideration for, or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis- -vis the terms available, or, to put it more realistically, hypothetically available, to an independent enterprise. On a conceptual note, the entire purpose of the exercise of determination of arm's length price is to neutralize the impact of intra AE relationship in a transaction, the right comparable for such a transaction of quasi capital is a similar transaction of le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, and, therefore, it cannot be compared with a debt simplictor for the purpose of determining arm's length price. Nothing, therefore, turns on this decision, and whatever be its persuasive value, or lack thereof, the authorities below were in error even in relying upon this decision 14. We have noted that, as noted by the TPO, it is wholly immaterial as to whether or not the assessee, by the virtue of this transaction, is entitled to subscribe to capital of the AE on certain concessional terms, because, in any case, the AE is a wholly owned subsidiary of the assessee and none else can subscribe to the AE's capital. What has been overlooked, however, in this process of reasoning is that the very concept of arm's length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm's length price, the fact that normally a parent company has a right to subscribe to the cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the loan into equity comes to an end, the assessee is entitled to interest on the commercial rates. It is not even the case of the authorities below that the interest so charged by the assessee, in a situation in which the right to exercise the option has come to an end, is not an arm's length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment of ₹ 5,00,35,270 in respect of interest which, according to the revenue authorities, should have charged on the optionally convertible loan granted to the AEs. 18. The views so expressed by the coordinate bench were also followed for the assessment year 2010-11 as well. It is also an admitted position, as fairly accepted by the learned Departmental Representative, that all the material facts and circumstances are the same, and many of these loans are merely extensions of the earlier loans. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench in assessee s own case. Respectfully following the same, we uphold the plea of the assessee on this issue as well, and delete the impugned ALP adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r we have decided in our order thereon, as set out earlier, the difficulty preventing our adjudication on merits at this stage is that a parallel proceeding on the same issue, under section 201 r.w.s. 195 has taken place, and the details of the same have not been produced before us. In these circumstances, the matter being remitted to the file of the Assessing Officer for fresh adjudication will be more appropriate. We, accordingly, remit the matter to the file of the Assessing Officer for adjudication de novo on merits, by way of a speaking order, in accordance with the law and after affording a fair and reasonable opportunity of hearing to the assessee. Ordered, accordingly. 83. Ground nos. 2 and 3 are thus allowed for statistical purposes in the terms indicated above. 84. In ground no. 4, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an addition of ₹ 21,07,52,058/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration expenses and product support service expenses as revenue expenditure, and to, therefore, delete the impugned disallowance of ₹ 9,84,01,831. The assessee gets the relief accordingly. 86. We see no reasons to take any other view of the matter than the view so taken by us for the immediately preceding assessment year, and observations made therein will apply mutatis mutandis for this assessment year as well. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of ₹ 21,07,52,058. 87. Ground no 4 is thus allowed. 88. In ground no. 5, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an addition of ₹ 6,95,33,042/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses. 89. Learned representative fairly agree that as an identical issue has come up before us in the appeal for the assessment year 2012-13, whatever we d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee gets the relief accordingly. 90. We see no reasons to take any other view of the matter than the view so taken by us for the immediately preceding assessment year, and observations made therein will apply mutatis mutandis for this assessment year as well. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of ₹ 6,95,33,042 91. Ground no 5 is thus allowed. 92. In ground no. 6, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an addition of ₹ 22,64,38,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s 35(2AB) being non-eligible expenditure. 93. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed revenue expenses on account of research and development to the tune of ₹ 37,875.20 lakhs, and claimed 200% deduction in respect of the same as per the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there were two new facilities viz. Pharmaceutical Technological Centre (PTC) at Ahmedabad and Vaccine Technology Centre (VTC) at Changodar. The physical applications for recognition of the above two In-house R D units and the for approval u/s. 35(2AB) were duly made on 21.06.2012 (for PTC) and 16.07.2012 (for VTC) 4.4 On the basis of the above physical applications, DSIR granted recognition to the respective units on 20.11.2012. However, as regards approval u/s. 35(2AB) the applicant was advised to file online applications which came to be filed on 21.06.2013. Thereafter, the approval u/s. 35(2AB) was finally granted on 09.10.2013. 4.5 The applicant was under the bonafide understanding that since its physical application bad been made in June/July 2012 and even recognition for both the units were grunted in November 2012, it would be given approval with effect from the dale of its application being June/ July 2012. However, the approval u/ s 35(2AB) for PTC VTC came to be granted by DSIR only with effect from 01.04.2013. 4.6 Immediately on receipt of the DSIR order dated 09.10.2013, the applicant addressed a letter dated 20.10.2013 to the DSIR (attached herewith-as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act especially sections 35 (2AB), 35A and 35AB reveals in no uncertain terms, that the purpose behind these provisions is to provide impetus for research, development of new technologies, obtaining patent rights, copyrights and know-how. [Para 41] . 4.10 It is pertinent to point out that in the facts before the Hon ble Delhi High Court the approval was directed to be effective, from the date of application. Even though the same fell in the year preceding the year, during w0hich recognition was grranted by the DSIR. It is respectfully submitted that facts in the case of the applicant being identical the ratio of the aforesaid judicial pronouncement of the Hon ble Delhi High Court would be squarely applicable for the present issue under consideration before the Hon ble DRP 95. None of these submissions, however, impressed the DRP. Learned DRP confirmed the action of the Assessing Officer, and, while doing so, observed as follows: 9.3.1 In respect of Ground No. 4A, we have considered the submission of the assessee and the reply received from the AO as remand report. It is an admitted fact that the approval u/s. 35(2AB) of the Act for PTC VTC had came from the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Ltd Vs DCIT [(2018) 405 ITR 318 (Guj)], in favour of the assessee. In this decision, while dealing with a materially identical question i.e. whether or not the expenses incurred prior to the date of approval can be allowed deduction under section 35 (2AB), Their Lordships have observed as follows: 7. The record would thus show that the assessee claimed weighted deduction under section 35(2AB) of the Act on the expenditure incurred for setting up research and development facility. This was backed by the approval granted by the concerned authority with respect to such facility. The Revenue authorities i.e. the Assessing Officer and the CIT (Appeals) were of the opinion that such deduction cannot be granted for the period prior to the effective date of approval. The Tribunal however, thought that the facts are somewhat contradictory. It was not clear when the application for approval was made and when actually approval was granted. The Tribunal therefore, remanded the proceedings for fresh consideration by the Assessing Officer. 8. The assessee has challenged this decision of the Tribunal on the basis of two judgments. One of this Court in case of Claris Lifesciences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research and development facilities in India and once the facility is approved, entire expenditure so incurred in developing the same has to be allowed by way of deduction. It may be that as pointed out by the Revenue, all events i.e. incurring of expenditure, applying for approval and grant of approval happened in the same financial year. However, this was not the basis on which the Court has confirmed the decision of the Tribunal. There is nothing in the said judgment to suggest that had these events fallen in different years, the view of the Court would have been any different. 11. Judgment of this Court in case of Claris Lifesciences Ltd. (supra) was followed by Delhi High Court in case of Maruti Suzuki India Ltd. (supra) in order to grant the assessee's claim of deduction under section 35(2AB) of the Act. The Court held that for availing deduction under section 35(2AB) of the Act, what is relevant is not the date of recognition or the cut-off date mentioned in the certificate of the prescribed authority or even the date of approval, but the existence of recognition. The Court observed as under : 41. Section 35(2AB) clearly provides that any expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er when such application is processed and decided. Even if therefore, the application is complete in all respects and the assessee is otherwise eligible for grant of such approval, approval may take some time to come by. The claim for deduction cannot be defeated on the ground that such approval was granted in the year subsequent to the financial year in which the expenditure was incurred. No such indication was given by this Court in case of Claris Lifesciences Ltd. (supra), none appears from the judgment of the Delhi High Court in case of Maruti Suzuki India Ltd. (supra). 13. In the result, appeal is allowed. Question is answered in favour of the assessee. Decision of Assessing Officer to restrict the assessee's claim for deduction on the expenditure which was incurred prior to 1.4.2008 is set aside. The Assessing Officer shall recompute such deduction and give its effect to the assessee for the relevant assessment year. 99. Respectfully following the esteemed views of Hon ble jurisdictional High Court, we hold that the expenses incurred even prior to the date of approval, though after the date of application for approval, are to be allowed as deduction under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee s own case and the additions have been made, so to say, keep the issue alive in the hope that Hon ble jurisdictional High Court, in this round of proceedings, may decide the issue in favour of the revenue. That does not, however, dilute the binding nature of judicial precedents, as on now, by the coordinate benches of this Tribunal. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case. These decisions hold good as on now, and we are respectfully bound by those decisions as on now. Of course, whatever we hold does, and shall always, remain subject to what Hon ble Courts above decide- as and when that happens. In this view of the matter, we uphold the plea of the assessee, and direct the Assessing Officer to delete the impugned disallowance of ₹ 39,39,31,000. This disallowance must stand deleted as on now. The assessee gets the relief accordingly. 103. We see no reasons to take any other view of the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the depreciation on car cannot be declined. Aggrieved, assessee is in appeal before us. 132. Having heard the rival contentions and having perused the material on record, we are not inclined to disturb very well reasoned findings of the DRP and the conclusions arrived at by the DRP. Once it is not in dispute that the vehicle was owned, in substance, by the assessee and the vehicle was used for the purposes of its business, there cannot be any legally sustainable reasons for declining the depreciation. .. 107. We see no reasons to take any other view of the matter than the view so taken by us, in assessee s own case, for the preceding year. We, therefore, uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of ₹ 7,77,048 on account of depreciation on Hummer car. The assessee gets the relief accordingly. 108. Ground no. 8 is thus allowed. 109. In ground no. 9, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an adjustment o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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