TMI Blog2019 (5) TMI 1932X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s. 35(2AB) of the Act. Similarly, capitalized interest on purchase of car is also not eligible for this benefit for same reasons because it is equal or similar to cost of car. Administrative expenses between the eligible and non-eligible unit based on the turnover - HELD THAT:- These expenses are incurred by a company regardless of whether the company produces or sells anything, generates income or incurs a loss. Most of these expenses either are fixed or semi-fixed, and there is a limited scope to reduce them. The companies that have a centralized management system tend to have higher general and administrative expenses. On the contrary in the case of decentralizing system, certain functions are delegated to subsidiaries. Similarly these expenses cannot be linked to any particular undertaking of the company in a case the assessee has more than one undertaking. Thus the dispute arises for the allocation of such expenses among the different unit/ undertaking of the assessee. Regarding the allocation, we are of the view that these expenses cannot be allocated based on the turnover. It is because the turnover of any undertaking is very much volatile and keep on cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the source of income. The assessee in the case on hand has allocated the cost of research expenditure which was directly connected with its eligible unit. The assessee besides the direct cost has also incurred the cost of scientific research activity which did not materialize. Therefore the same was not allocated to the eligible unit as the same was not directly connected with the eligible unit. In our considered view the cost which is directly connected with the eligible unit is eligible for deduction while determining the deduction under section 80 IC of the Act. AO in the subsequent assessment year 2008-09 has not allocated the cost on scientific research under the head discovery and capital cost to the eligible unit. Thus in our considered view the principle of consistency needs to be applied in the case on hand as held by the Hon ble apex court in the case of Radhaswoami Satsang [ 1991 (11) TMI 2 - SUPREME COURT] . Disallowance on account of the donation under section 80G - whether the donation paid by the assessee under section 80G of the Act needs to be allocated to the unit eligible for deduction under section 80-IC? - HELD THAT:- The scheme of the Act provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred in connection with the business activities of the assessee. Such claim of the assessee was allowed under section 35(2AB) of the Act but at the rate of 100% instead of 150% i.e. weighted deduction. Therefore we are not inclined to uphold the finding of the authorities below. Hence we reverse the order of the learned CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Deduction u/s 80IC - whether the miscellaneous income such as Penalty Received from Supplier, Discount Received from Vendors and Export Benefits are eligible for the deduction u/s 80IC? - HELD THAT:- We hold that the assessee is eligible for deduction in respect of the income as discussed above under section 80 IC of the Act. Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed, and the Revenue is dismissed. - ITA No. 907/Ahd/2012, 938/Ahd/2012, 1634/Ahd/2012, 1725/Ahd/2012 - - - Dated:- 15-5-2019 - SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND MS. MADHUMITA ROY, JUDICIAL MEMBER For the Assessee : Shri S. N. Soparkar Parin Shah, A.R. For the Revenue : Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Zao Torrent Pharma, Russia $ 3 million 2. Torrent Pharma Gmbh, Germany $ 5 million 3. Torrent Do Brazil Ltd., Brazil $ 6 million 3.1 The assessee has not charged any guarantee fees from any of its AEs and not computed any ALP of guarantee provided to them. Therefore, the TPO issued SCN to the assessee for computing ALP by using CUP method. 3.2 In response assessee submitted that AE situated in Russia had not taken any loan and AE in Germany has availed loan of only of US$ 3,00,000/-. Therefore, the question of charging any fees does not arise in case of guarantee provided and loan not taken. 3.3 The assessee also submitted that these guarantees were not provided in the form of primary securities; rather it was additional security as per international banking practice. 3.4 The assessee also submitted that all the AEs are subsidiary of the assessee, therefore, if guarantee had not been given then assessee would have to infuse funds in the form of equity then there would not have been any question of any guarantee fees. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the above, the TPO held that charging of guarantee fee is the same as charging notional interest and it has to be benchmarked according to the transaction between independent parties. The contention of the assessee that benchmarking is not possible in the absence of no internal CUP available is not tenable as where no internal CUP is available external CUP should be used for benchmarking. Accordingly, the TPO took the data from the websites of Indian banks and found that in the financial year 2006-07 the guarantee fee rates were ranging between 3% to 3.4% per annum according to their credit ratings. Since the assessee has not provided any pre and post credit rating of subsidiaries TPO applied an average rate of 2% and calculated the ALP as under: Total loans availed on which guarantee provided $ 6.3 million Guarantee fees @ 2% $ 1,26,000 @ ₹ 45 per dollar (A) ₹ 56,70,000 Guarantee providing expenses on $ 3 million + 4.7 million Expenses @ 0.1% $ 7700 @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction. Therefore, no upward adjustment is warranted. 4.6 Apart from abovementioned submission assessee also reiterated its most of the submission made before TPO. 5. However, the ld. CIT (A) disregarded the contention of the assessee and held as under: (i) Banks have sanctioned the loan only after taking the guarantee into account which is also mentioned in the loan agreement. (ii) The basic principle of determining the ALP is that what would be the consideration if the same nature of transaction had been entered with an independent party. There is no doubt that if the similar transaction had been carried out with independent parties, then some fee would have been charged. Therefore, the contention of the assessee that guarantee is given to the subsidiary only to promote the business of the assessee is not tenable. (iii) The assessee has entered into the similar transaction of providing a bank guarantee to its AEs. Therefore, the risk of assessee and bank is almost similar. (iv) The assessee has given guarantee in writing. Therefore, it is clear that the implicit parent support of assessee was not sufficient and it is a case of explicit parent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee did not submit anyaetailsof pre and post credit ratings of its subsidiaries. In view of same average rate of 2% was applied as guarantee fees. Further adjustment of ₹ 3,46,500/- was made on account of recovery of expenses. The computation of adjustment is as under : - Total loans availed on which guarantee provided $ 6.3 million Guarantee fees @ 2% $ 1,26,000 @ ₹ 45 per dollar (A) ₹ 56,70,000 Guarantee providing expenses on $ 3 million + 4.7million Expenses @ 0.1% $7700 @ ₹ 45 per dollar (B) ₹ 3,46,500 Total (A+B) ₹ 60,16,500 2.2 The Ld. CIT(A) confirmed the action of AO/TPO on the ground that appellant did not provide any details related to the act of providing the guarantee and also above pre and post credit rating of its subsidiary, therefore the appellant's submission that Yield Curb Approach Method is best method was not accepted by the Ld CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licenses, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) Provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or re-organization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (ii) The expression intangible property shall include- (a) Marketing related in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty, the taxpayer have not reported several such transactions. Certain judicial authorities have taken a view that in cases of transactions of business restructuring etc. where even if there is an international transaction Transfer Pricing provisions would not be applicable if it does not have bearing on profits or loss of current year or impact on profit and loss account is not determinable under normal computation provisions other than transfer pricing regulations. The present scheme of Transfer pricing provisions does not require that international transaction should have bearing on profits or income of current year. Therefore, there is a need to amend the definition of international transaction in order to clarify the true scope of the meaning of the term, international transaction and to clarify the term intangible property used in the definition. It is, therefore, proposed to amend section 92B of the Act, to provide for the explanation to clarify meaning of international transaction and to clarify the term intangible property used in the definition of international transaction and to clarify that the 'international transaction' shall include a transaction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssues. It is necessary to note four preliminary aspects of Explanation 2 to section 2(47). Firstly, as the opening words, For the removal of doubts it is hereby clarified that ...... , indicate it is a clariflcatory amendment. Secondly, it is an inclusive definition as is evident from the words transfer includes ...... . Thirdly, the amendment is with retrospective effect from 1st April, 1962. Fourthly, the Finance Act 2012 which introduced, inter-alia, the amendment to section 2(47) and section 92CA(2B) is a validating act in view of section 119 thereof. 2.9 It is respectfully submitted that the constitutional validity of the retrospective amendment to section 92B has not been challenged before any of the competent court and considering the judgment of Hon'ble Bombay High Court, in the case of Vodafone referred above, the effect of retrospective amendment cannot be ignored. 2.10 The coordinate bench of the Delhi ITAT in the case of Mahindra and Mahindra (2013) 40 taxmann.com 522 (Mumbai - Trib.) upheld levy of guarantee commission of 3% in line with the earlier year while holding that; 44. After carefully considering the rival submissions and also the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided by the assessee. The learned AR further contended that the issue is covered in favour of the assessee by virtue of the order passed by the Tribunal in assessee's own case for AY 2006-07 (supra). 25.1 The learned DR, on the other hand, submitted that by virtue of the amendment made to section 92B of the Act with retrospective effect from 01/04/2002, the corporate guarantee provided by the assessee is to be considered as an international transaction, and, therefore, the Assessing Officer was justified in determining arm's length price of such transaction. 25.2 Having considered the submissions of the parties, we are unable to accept the contention of the learned AR that corporate guarantee of the nature provided by the assessee will not come within the meaning of international transaction in terms with section 92B of the Act. It is not disputed that section 92B of the Act has been amended by the Finance Act, 2012 with the insertion of Explanation I (c) with retrospective effect from 01/04/2002. Explanation (i)(c) to section 92B, reads as under: capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprises Ltd. in ITA No.ll5/Hyd/2011 and in ITA No. 2184/Hyd/2011, dated 16/01/2014 while considering identical issue of determining ALP of corporate guarantee provided by the assessee to its AE followed the ratio laid down in case of Glenmark Pharmaceuticals Vs. ACIT (supra) and remitted the issue back to the TPO to decide the quantum of corporate guarantee rate by following the method adopted in case of Glenmark Pharmaceuticals (supra). 26. Since the issue in the present case is identical to the issue decided by the IT AT, Hyderabad Bench in case of Infotech Enterprises (supra), following the same, we also remit this issue to the file of the TPO to decide the quantum of corporate guarantee rates accordingly. If the assessee is able to bring on record any comparables with regard to corporate guarantee, the TPO may also consider the same while determining ALP of corporate guarantee. The TPO must provide a reasonable opportunity of being heard to the assessee before deciding the issue. This ground is allowed for statistical purposes. 2.12 Similarly we have various cases such as Mahindra and Mahindra (Delhi ITAT); Glenmark Pharma, Nimbus Communications, Everest Kanto etc wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to bear any additional costs for use of brand by the third party. If we accept the assesee's argument that any service which does not involve any direct additional cost to the service provider, cannot be charged, it would lead to unintended consequences like disallowances of all brand royalty, license fee, know how fee and so on. Apparently the assessee has put forth an unsustainable and unsound proposition and cannot be accepted merely because it this particular case it suits the assessee. 2.15 The Hon'ble ITAT Ahmedabad in the case of Micro Inc Ltd v/s ACIT (2015) 63 Taxmann.com 353 has held that We have also held, taking note of the insertion of explanation to section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the fact of the present case did not have bearing on profits, income, losses or assets, it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made . However, the decision of Hon'ble ITAT, Ahmedabad is in contradiction with the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets . The relevant extract of the case (supra) is as under: That is, in our considered view, purely fallacious logic. In our considered view, under Section 92B, corporate guarantees can be covered only under the residuary head i.e. any other transaction having a bearing on the profits, income, losses or assets of such enterprise . It is for this reason that Section 92B, in a way, expands the scope of international transaction in the sense that even when guarantees are issued as a shareholder activity but costs are incurred for the same or, as a measure of abundant caution, recoveries are made for this non-chargeable activity, these guarantees will fall in the residuary clause of definition of international transactions under section 92B. As for the learned Departmental Representative's argument that whether the service has caused any extra cost to the assessee should not be the deciding factor to determine whether it is an international and then gives an example of brand royalty to make his point. What, in the process, he overlooks is that Section 92B(1) specifically covers sale or lease of tangible or intangible property . The expression bearing on the profits, inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expression in the clarification is 'use' as also illustrative and inclusive descriptions of tangible and intangible assets. Similarly, clause (d) deals with the provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service which are anyway covered in provision for services and mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises . That leaves us with two clauses in the Explanation to Sect ion 92B which are not covered by any of the three categories discussed above or by other specific segments covered by Section 92B, namely borrowing or lending money. The remaining two items in the Explanation to Section 92B are set out in clause (c) and (e) thereto, dealing with (a) capital financing and (b) business restructuring or reorganization. These items can only be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits, income, losses or assets or such enterprise . This precondition about impact on profits, income, losses or assets of such enterprises is a precondition embedded in Section 92B(1) and the only relaxation from this condition precedent is set out in clause (e) of the Explanation which provides that the bearing on profits, income, losses or assets could be immediate or on a future date. These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be so, is only a hypothetical situation, which are, as discussed above, excluded. When an assessee extends an assistance to the associated enterprise, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed time to Director General (Income Tax Exemption), and accordingly, DSIR has responsibility to issue Form No. 3CL to the assessee. 4. Form No. 3CL has been continuously received from DSIR in the preceding year. Therefore it had no reason to doubt that DSIR will not issue this form during this year. 5. Without prejudice to the above, the assessee also submitted that in case the report is not received from DSIR in form 3CL, then the deduction can be allowed considering the DSIR report of the earlier year and the expenses disallowed in the earlier year can also be disallowed for the year under consideration. 9.3 The AO after considering the reply of the assessee disallowed the weighted deduction claimed by the assessee amounting to ₹ 46,96,73,170/- only. The AO also rejected the alternative claim made by the assessee before him. 10. The aggrieved assessee preferred an appeal before the Ld. CIT (A). The assessee before the Ld. CIT (A) files Form No. 3CL dated 31-12-2010 and the details of various expenditures claimed by it. Accordingly the ld. CIT-A accepted the claim approved by the DSIR as under: (Rs. in lakhs) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts as detailed under: 1. The delay in issuance of Form No. 3CL was at the end of the DSIR, and it was beyond the control of the assessee. 2. The Hon ble ITAT had allowed the deduction u/s 35(2AB) to the assessee on the same facts of the case in the earlier assessment year. 3. Accordingly, the weighted deduction cannot be disallowed to the assessee merely non-receipt of Form No. 3CL from the DSIR. 4. The recurring expenditure of ₹ 77.86 Lacs comprising of salary ₹ 73.27 Lacs and municipal taxes ₹ 4.59 Lacs disallowed by the DSIR has been allowed. As such the same issue has been decided in favor of the assessee in the immediately preceding year by the Ld. CIT (A) and also by the Hon ble ITAT. 5. In respect of capital expenditure of ₹ 11.52 Lacs comprising of the motor car and civil work, the expenditure on the motor car would not be allowed as weighted deduction. However, it would be allowed as depreciation on the motor car and expenditure on civil work would be eligible for weighted deduction as decided in the immediately preceding A.Y. by the Ld. CIT (A). In view of the above, the ld. CIT-A allowed the ground of appeal of the assessee in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred by the assessee-company on running and maintenance of car etc can be equated with salary payment to the employees but not the cost of car provided to the employees for traveling. Expenditure on purpose of car cannot be accepted as expenditure whether capital or revenue incurred on in-house research development. In our considered opinion, capital expenditure for equipments to be used for in-house research is eligible for this benefit but not the motor car because whether the employees came into car provided by the employer or by public transport or hired car has no bearing on in-house research development. 14.2 Now, we examine the applicability of the judgment of Hon'ble Apex Court cited by the Ld. AR of the assessee reported in 209 CTR (Statute) 89 case, the issue involved was regarding deduction u/s 35 (1)(iv) of the Act. When we examine the provisions of Section 35(1)(iv) of the Act, we find that these are materially different from the provisions of u/s. 35(2AB) of the Act because in Section 35(1), there is no condition that the expenditure on scientific research has to be incurred on in-house research development facilities and there, all expenditures incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter, we do not find any infirmity into the order passed by Ld. CIT(A). Hence, this ground of Revenue's appeal is dismissed. 8. In the result, Revenue's appeal is dismissed. In view of the above, respectfully following the above order in the own case of the assessee, the ground of appeal of the Revenue is dismissed. 16. In view of the above, the ground of appeal of the assessee is dismissed and the ground of appeal of the Revenue is also dismissed. The 3rd issue raised by the assessee is that the ld. CIT-A erred in allocating the administrative expenses between the eligible and non-eligible unit based on the turnover. 17. The assessee in the year under consideration has allocated common administrative expenses based on the number of employees between Indrad Unit and Baddi Unit. However, the AO was of the view the basis adopted by the assessee for the location of the admin expenses is not proper. As per the AO, the administrative expenses required to be allocated based on the turnover of Indrad and Baddi unit. Accordingly, the AO allocated an additional sum of ₹ 2,55,341.00 to Baddi Unit which resulted in a reduction in the deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the issue involved was regarding deduction u/s 35 (1)(iv) of the Act. When we examine the provisions of Section 35(1 )(iv) of the Act, we find that these are materially different from the provisions of u/s. 35(2AB) of the Act because in Section 35(1), there is no condition that the expenditure on scientific research has to be incurred on in-house research development facilities and there, all expenditures incurred on scientific research related to the business is eligible for deduction u/s. 35(1) and in clause (iv) of Section 35(1) is covered the expenditure of capital nature on scientific research related to the business carried on by the assessee and hence, in this clause also, there is no condition that such cost has been incurred on in-house scientific research facilities as in Section 35(2AB) of the Act and because of this reason, this judgment is not applicable in the present case. 14.3 In view of above discussion, we find that the capital expenditure incurred by the assessee on purchase of motor cars cannot be considered as expenditure incurred by the assessee on in-house research development and therefore, the same is not eligible for weighted deduction u/s. 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , generates income or incurs a loss. Most of these expenses either are fixed or semi-fixed, and there is a limited scope to reduce them. The companies that have a centralized management system tend to have higher general and administrative expenses. On the contrary in the case of decentralizing system, certain functions are delegated to subsidiaries. 21.4 Similarly these expenses cannot be linked to any particular undertaking of the company in a case the assessee has more than one undertaking. Thus the dispute arises for the allocation of such expenses among the different unit/ undertaking of the assessee. Regarding the allocation, we are of the view that these expenses cannot be allocated based on the turnover. It is because the turnover of any undertaking is very much volatile and keep on changing depending upon the market forces, competition, Government policies, etc. There can be a situation that the turnover of one undertaking is very high in a particular year but in the subsequent year the turnover may go done or vice versa which will affect the pattern and consistency in the allocation of the administrative expenses and distort the presentation of the financial statements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance made by the Assessing Officer u/s.80G of the Act. 7). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. 8). It is therefore, prayed that the order of the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad may be set-aside and that of the order of the Assessing Officer be restored. The first issue raised by the Revenue is that the ld. CIT-A erred in deleting the addition made by the AO for ₹ 17,22,481.00 on account of gardening expenses. 23. Assessee incurred garden expenses of ₹ 17,22,481/- for maintaining a good atmosphere within the factory premises as well as to comply with the direction of Gujarat pollution control board to avoid the pollution arises on account of the chemical process. 23.1 However, AO disallowed the said expenditure on the ground that it was disallowed in the preceding year and by incurring the substantial expenditure assessee has derived the enduring benefit. Therefore, the same should be treated as capital expenditure. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27.1 Assessee also submitted that it had made the provision in accordance with AS-15 issued by ICAI and against the provision of ₹ 73,05,713/- payment of ₹ 42,64,632/- has been made during the year under consideration. 27.2 Assessee in support of his contention also relied on the judgment of SupremeCourt in case of Bharat Earthmovers reported in 112 taxman 61 and contended that provision for leave encashment was allowed in that case. 27.3 Accordingly, the assessee claimed that the provision for ELTCP should be allowed. 27.4 However, the AO after considering the contention of the assessee allowed the amount of ₹ 42,64,632/- which was paid during the year under consideration and disallowed the balance provision of ₹ 30,41,081/- only. Accordingly the same was added to the total income of the assessee. 28. The aggrieved assessee preferred an appeal to ld. CIT (A) where the ld. CIT (A) deleted the addition made by the AO by following the order of AY 2006-07. Aggrieved by the order of ld. CIT (A) Revenue is in appeal before us. 29. Both the ld. DR and ld. AR before us relied on the order of authorities below as favorable to them. 30. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 31.1 However, the AO being dissatisfied with the claim of the assessee held that the item described above is an electronic item and eligible for depreciation at the rate of 15% only. Accordingly, the AO worked out the excessive depreciation claimed by the assessee for ₹ 1,06,886.00 and added to the total income of the assessee. 32. The aggrieved assessee preferred an appeal to the learned CIT (A) who has allowed the appeal of the assessee by allowing depreciation at the rate of 60% on the transformer. Being aggrieved by the order of the learned CIT (A) Revenue is in appeal before us. 33. Both the parties before us relied on the order of the authorities below as favorable to them. 34. We have heard the rival contentions and perused the materials available on record. At the outset we note that the issue has already been decided by the tribunal in the case of the assessee in its favor in ITA No. 238/Ahd/2012 pertaining to the AY 2006-07 vide order dated 15-01-2019 by observing as under: 5. First we would like to discuss the ground related to depreciation @ 60% on equipments connected to V-SAT. 6. Ld. A.O. has discussed this issue at page no. 2 3 in Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleting the addition made by the AO for ₹ 29,82,93,291.00 on account of the deduction under section 80-IC of the Act. 36. The assessee in its ROI claimed a deduction of ₹ 110,63,63,648/- u/s 80-IC of the Act in respect of its unit located at Baddi. 36.1 However, the AO on perusal of record noted that assessee had incurred expenditure on R D during the year as detailed under: 3.1 In this regards, it may be noted that the assessee company has incurred following expenses on R D: Particulars Total Baddi Indrad TRC Revenue Expenses Discovery Cost Development Cost 250375644 489201101 0 243342098 0 245859004 250375644 0 739576745 243342098 245859004 250375644 Capital Expenses Building Other than building 149559812 199769593 149559812 199769593 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 739576745 367878943 371697803 0 Capital Expenses Building Other than building 149559812 199769593 74391050 99365396 75168762 100404197 0 0 349329405 173756446 175572959 0 TOTAL 1088906150 541635389 547270762 0 Even following the stand taken by your honour, the Weighted deduction in respect of Baddi unit and Indrad Unit works out as under: Particulars Total Baddi Indrad TRC Revenue Expenses Discovery cost Development Cost 375563466 733801653 186805268 365013147 188758198 368788506 0 0 1109365119 551818415 5575467 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a higher rate of deduction from the taxable profit including capital expenditures which are eligible for deduction the research activity. 37.1 The deduction was provided under section 80-IC of the Act in respect of those industries established in the backward areas. Thus in case, the assessee is denied the deduction in respect of the expenditure incurred on the research by allocating the expenses to the eligible unit, the purpose of providing the benefit to the assessee will be defeated. 37.2 Moreover, the provisions under section 80 IC of the Act and 35(2AB) of the Act are beneficial provisions. Therefore the same should be read liberally. Accordingly, the assessee claimed that the expenditure incurred by it under the head discovery cost and capital expenditure should not be allocated to the unit eligible for deduction under section 80-IC of the Act. 37.3 The assessee further submitted that the tribunal in the own case of the assessee in ITA No. 856/AHD/99 and 1141/AHD/99 pertaining to the assessment year 1994-95 and 1995-96 had decided the issue in its favor involving similar kind of facts and circumstances. 38. The learned CIT (A) after considering the submission o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not directly linked with the eligible undertaking. I am inclined to agree with the submission given by the appellant. The facts and the issue are also covered by the decision of ITAT, Ahmedabad in the case of the appellant, though the claim of deduction was under different section but the principle of allocation decided by the Hon'ble Bench squarely applies to the present section also. The appellant has himself allocated the expenses which have been incurred for development and improvement of process. The other expenses have rightly not been allocated by it as it is not directly linked with the eligible undertaking. The A. O. has also not brought any specific evidence to show that the other expenses which have not been allocated by the appellant are related to manufacturing activity carried on by the eligible industrial undertaking. Further, a capital expenditure cannot be allocated to work out the profit of any undertaking. The provisions of section 35 allow deduction on capital expenditure in a special circumstances. In view of above facts and circumstances, the allocation of expenditure made by the A. O. is directed to be set aside and the addition is directed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment cited by the parties. There is no dispute that the facts in the present case are identical with the facts of the case pertaining to A.Y. 2004-05. We have perused the order of the Hon'ble co-ordinate Bench in assessee's own case in ITA No.4356/Ahd/2007 (supra). The Hon'ble Tribunal following the decision of coordinate Bench in ITA No.1347/Ahd/2007 for A.Y. 2003-04 dismissed the ground of appeal raised by Revenue. In view of the fact that issue has already been decided by Hon'ble co-ordinate Bench in ITA No. 4356/Ahd/2007 for A.Y. 2004-05 and ITA No.1347/Ahd/2007 for A.Y. 2003-04 in assessee's own case. Respectfully following the order of the coordinate bench, this ground of Revenue's appeal is dismissed. 40.3 It is also important to note that, the AO in the subsequent assessment year 2008-09 has not allocated the cost on scientific research under the head discovery and capital cost to the eligible unit. Thus in our considered view the principle of consistency needs to be applied in the case on hand as held by the Hon ble apex court in the case of RadhaswoamiSatsang v/s CIT reported in 193 ITR 221 wherein it was held as under: 13. We are awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 80G is allowed from the Gross Total Income. There is no provision under the law which permits disallowance of claim u/s 80G of the Act only just because of the fact that the gross total income includes the profit of the eligible unit. 42.1 The assessee further submitted that the nature of donation is only for application of income for charitable or other philanthropic purposes. Hence the disallowance made by the AO should be deleted. 42.3 However the Ld. CIT (A) after considering the submissions and facts observed that the donation should not be allocated to the buddi unit as the profit eligible for deduction u/s 80IC has to be first computed then after that the donation will be considered for working out the deduction under section 80G of the Act. 42.4 The Ld. CIT (A) further observed that the deduction u/s 80G will be allowed after allowing all other deduction of chapter VIA. The Ld. CIT (A) accordingly deleted the addition made by the AO. Being aggrieve by the order of the Ld. CIT (A), Revenue is in appeal before us. 43. The Ld. DR before us submitted that the amount of donation needs to be allocated to the Baddi Unit. 44. On the other hand, The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan to Associated Enterprises for ₹ 5,25,146 and guarantee fee charges for ₹ 28,89,788/- for providing corporate guarantees to Associated Enterprises, made by the Assessing Officer on the basis of the order u/s.92CA(3) of the IT. Act passed by the Transfer Pricing Officer. 2. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of deduction of ₹ 32.74 lacs claimed by the assessee u/s. 35(2AB) of the IT. Act @ 150% in respect of expenditure of ₹ 21.83lacs incurred by the assessee company on purchase of motor vehicles used by the personnel of the Research Department. 3 On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of deduction of ₹ 1.84 lacs claimed by the assessee u/s.35(2AB) of the IT. Act @ 50% in respect of entertainment expenditure of ₹ 3.68 lacs incurred by the assessee company for various professional visit at the research centre of it for supporting and guiding research activity. 4. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming disallowance of deduction u/s.80-IC of the IT. Act to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USD 3,000,000 - - 3,000,000 Torrent Pharma GmbH, Germany Euro 5,000,000 2,500,000 - 7,500,000 31.12.2007 Torrent Do Brazil Ltd, Brazil USD 6,000,000 - 1,000,000 5,000,000 31.05.2007 Torrent Pharma Inc. USA USD - 100,000 - 100,000 09.05.2007 49.1 In response to SCN issued by TPO assessee submitted that it has provided short term finance to its AEs and charged interest at the rate of LIBOR plus 100 basis points p.a whereas it has taken the foreign currency term loan from BNP Paribas at the rate of LIBOR plus 62.5 basis points. Accordingly, the assessee contended that the interest charged from AEs is comparatively on higher side from interest paid to the third party and thus the interest charged from the AE is at ALP. However, TPO disregarded the contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Room No. 303 Drum shaped Building, IP Estate, New Delhi. Sir, Re: Crosil Ltd. (PAN : AAACT 3151 E) Sub: Information u/s 133(6) of the Act We have received letter F. No. Addl. CIT/TPO1(3)/2010-11/362 dated 17.01.2011 on 18.01.2011 asking us to furnish certain information. In this regards we submit the available information as under: Annualized Average Yield Annualized Average Yield 2007-08 2008-09 Rating 1-2 yr. 2-3 yr. 5 yr Ratings 1-2 yr 2-3 yr. 5 yr. AAA 9.32% 9.38% 9.44% AAA 9.98% 10.02% 10.05% AA+ 9.56% 9.66% 9.73% AA+ 10.28% 10.34% 10.38% AA- 10.10% 10.12% 10.21% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest which is not the case of the assessee. The assessee has also received a certain indirect benefit such as foreign market and increase in the brand name of Torrent etc. as they are solely engaged in the business of distributing the product of the assessee. 50.1 Assessee also submitted that during the year under consideration assessee has supplied to AEs good of worth ₹ 424 lacs at a margin of ₹ 288 lacs. Therefore the assessee got other benefits by supplying the goods to the AE s in the form of high margin, i.e. 68%. Therefore, the rate applicable to money lending entities cannot be compared with the assessee in the given facts circumstances. 50.2 In addition to the above, the assessee also submitted that it had given the entire loan in USD and during the year under consideration earned huge gain on account of Forex fluctuation. As such the assessee earned an additional income of 6-9 % over the loan tenure. Thus if such interest income is considered, then the actual rate would be even higher than the rate of interest in Indian currency. Therefore, on this account, the benchmarking done by TPO is not justified and need to be deleted. 50.3 However, the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent which has been used by the company as a CUP has been perused and it is seen that it contains following clauses which are worth consideration: i. The loan has a commitment fee of 0.25% on the undrawn balance of the facilities i.e. the bank would be paid a fee even if the loan has not been availed. ii. The interest charged is Libor plus 62.50 bps per annum (Libor plus 0.625%) iii. Agreement fees @ 0.5% to be paid immediately on signing the documents. iv. Collateral security of all movable and immovable present and future properties of the company including manufacturing facilities, research facilities and office premises. v. A minimum fixed asset cover of 1.1 times over these assets. vi. Net debt / EBIDTA to be not more than 4.5 times vii. Debt gearing not to exceed 1.65 times during the currency of facility. viii. Debt service cover ratio shall not be less than 1.33 times during the currency of facility. ix. Tangible net worth shall not be less than INR 3.4 billion at all times during the currency of the loan. x. Exposure to non-pharmaceutical group companies not to exceed 15% of tangible net worth. xi. Currency risk on the borrower. xii. The loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length in tune with CUP available internationally and hence rejected. Determination of arm's length interest rate: In light of the fact that the transfer pricing study conducted by the assessee company is rejected, the arm's length price of these transactions is determined as below. The arm's length interest is determined by following the CUP method, wherein the interest rate is determined under the circumstances in which the tax payer and its subsidiaries are operating i.e. what is the interest that would have been earned if such loans were given to unrelated parties in similar situation as that of subsidiaries. Since the loan has been taken by the associate enterprise, the reasonable rate of interest at which the other party, with its financial health and no collateral guarantee, could have obtained such a loan from an unrelated party with the same weak financial health as that of the tax payer's AE is considered. As mentioned above, under the CUP method, the interest that is charged between unrelated parties under similar circumstances would be the arm's length interest. The main issue is to decide the interest rate at which the tax paye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lthough as per their fmancials, some of the AEs would fall much below this level. At this rating, the difference in interest rates between a triple A rated corporate would be 3.72% which would represent the risk margin charged by the bank while lending to the AE. This risk study with reference to the local bond markets would be effective in other markets also as we are not benchmarking the interest rates per se. For the purpose of interest rate, the Libor of the referred area is to be adopted which will be indicative of the local inter-bank interest rates. What has been quantified here is the 'risk factor' or 'risk spread' which would normally be charged by a third party. Such risk spread would be similar world over in respect of similarly placed corporate. Since the rate of interest as well as margins in the international markets are slightly lower than the Indian rates, a risk rate of 3.5% was rightly adopted for computing the arm's length interest. In light of the above discussion, LIBOR plus 0.5% margin plus 3.5% risk rate is adopted as the arm's length interest rate which should have been charged from the AE. The annual average of six month UBOR is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n from the lending even if both the loan transactions are in foreign currency. It is because the loan was accepted from the bank whereas the loan was advanced to the subsidiary company in the given facts circumstances. Therefore, we disagree with the contention of ld. AR. 53.2 The TPO indeed has taken the AE as the testing party. Accordingly, the TPO has worked out the ALP taking 6 month average LIBOR rate which has not been disputed. But the TPO has added the credit risk at 3.50% and the margin @ .50% to determine the ALP of the interest which should have charged from the AE by the assessee. 53.3 Now the first controversy arises about the basis of charging 3.50% credit from the AE. Regarding the addition of 3.5% for credit Risk in 6 Month Libor rates we note that it represents the difference in the credit rating of AAA Indian companies which was obtained from the CRISIL in response to the notice issued under section 133(6) of the Act viz a viz the credit rating of BBB of the AE which was determined by the TPO on the basis of financial documents of the AE. 53.4 However, we note that the approach of the TPO suffers from certain infirmities as detailed under: i. Once th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wned subsidiary in Indonesia the facts of the case are clearly covered by the decision of coordinate bench. The Hon ble Delhi High Court in Cotton Naturals (I) (P.) Ltd. (supra) has already held that the transaction cost of hedging cost is borne and paid by the borrower therefore transaction cost is not applicable in case in question the loan had to be repaid in the foreign currency. Even otherwise according to us the markup towards the transaction cost is exorbitant and comparison with the bank is also untenable. In view of this, we do not see any rational in the impugned in further cost and risk premium on the rate directed by the learned Dispute Resolution Panel. Accordingly we direct the learned Transfer Pricing Officer to not to charge any risk premium following the decision of the coordinate bench. In view of this, the transaction cost imputed of 300 basis points cannot be sustained. 53.7 Accordingly, we are also of the view that addition in the rate of interest on account the credit risk suggested by the TPO is not sustainable. 53.8 We also note that there was no addition on account of interest rate in the immediate preceding AY 2007-2008 though the assessment was fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee before the Ld. CIT (A) reiterated the same as before the AO. 63. However the Ld. CIT (A) observed that the entertainment expenditure of ₹ 3,67,540/- does no relate to the activity of research and development. Hence the Ld. CIT (A) accordingly confirmed the order of the AO. Being aggrieved the order of the Ld. CIT (A) the assessee is in appeal before us. 64. The Ld. AR before us reiterated the submissions as made before the authorities below. On the other hand the Ld. DR vehemently supported the order of the authorities below. 65. We have heard the rival contention and perused the material available on the record. The issue in the instant case relates to the deduction claimed by the assessee under section 35(2AB) of the Act in respect of entertainment expenses. In this regard, we note that the provisions of section 35(2AB) of the Act provided that the expenditure incurred in connection with the scientific research other than the cost of land or building will be allowed the weighted deduction. 65.1 However, we note that the learned CIT (A) has held that entertainment expenses claimed by the assessee were not incurred in connection with the scientific r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - ₹ 35,97,000/- 67.1 The assessee has also not allocated the following expenditure to the unit eligible for deduction under section 80IC of the Act. i. Discovery and capital expenditure cost ₹ 46,18,84,935/- ii. Administrative cost ₹ 1,93,24,629 i. Regarding the issue of Discovery and capital expenditure of ₹ 46,18,84,935/- : At the outset we note that the identical issue has already been decided by this tribunal in ITA 938/AHD/2012 in favour of the assessee vide Paragraph No. 47 of this order wherein the appeal filed by the Revenue is dismissed. For detailed discussion please refer the aforesaid Para of this order. Accordingly we dismiss the ground of appeal raised by the Revenue. ii. Regarding the issue of Administrative cost of ₹ 1,93,24,629/- : At the outset we note that the identical issue has already been decided by this tribunal in ITA 907/AHD/2012 in against of the assessee vide Paragraph No. 22 of this order wherein the appeal filed by the assessee is dismissed. For d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that discount received from the vendor is on account of purchase made from them and thereby discount on purchase reduces the cost of purchase. Therefore discount from the vendor is eligible for deduction u/s 80IC. However, the AO disagreed with the contentions of the assessee as the said amount is received on account of purchase from the vendors instead of manufacturing activity of the pharmaceutical product. Thus the AO accordingly excluded the said sum from the eligible profit u/s 80IC. 67.6 Export Benefits:- The assessee to justify the claim made u/s 80IC of the export benefits submitted that the DEPB income is against export sales made from the Baddi unit. As such DEPB can be utilized against the payments of custom duty or it can be sold in the market. Therefore export benefits for a sum of ₹ 35,97,000/- has been utilized for the import of materials. Accordingly, the assessee claimed that the utilization of DEPB licenses reduces the custom duty on such imports and ultimately it is utilized for manufacturing activity. The assessee also submitted that it has accounted the said sum on gross basis for the income and the expenditure. Thus the assessee claimed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70. The Ld. AR before us submitted that all the income as discussed above are arising in the course of the business of the industrial undertaking eligible for deduction under section 80 IC of the Act. Therefore all the incomes are eligible for deduction under section 80 IC of the Act in view of the judgment of this jurisdictional High Court in the case of CIT Vs. Metrochem Industries Ltd reported in 79 taxman.com 440. 71. On the other hand, the Ld. DR submitted that the income not arising from the manufacturing activity is not eligible for deduction under section 80-IC of the Act. 72. Both the ld. AR the DR relied on the order of authorities below as favourable to them. 73. We have heard the rival contention and perused the material available on record. The issue in the instant case is whether the miscellaneous income such as Penalty Received from Supplier, Discount Received from Vendors and Export Benefits are eligible for the deduction u/s 80IC of the Act. 73.1 It is an undisputed fact that all the aforesaid income or arising from the activities carried out by the industrial undertaking eligible for deduction under section 80IC of the Act. Therefore we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of provision for Employee Long-term Compensation Plan (ELTCP). 3). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in partly allowing the relief on disallowance made u/s.35(2AB) of the Act. 4). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in partly allowing the relief on disallowance made u/s.80IC of the Act. 5). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance of ₹ 27,86,287/- made u/s. 80G of the Act. 6). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts to set-aside the matter directing the Assessing Officer to examine the matter which is not permitted under provision of Section 251(1)(a) of the Act as amended w.e.f. 01/10/1998, regarding reducing income computed u/s. 115JB of the Act which is not permitted under provision of Section 251(1 )(a) of the Act as amended w.e.f. 01/10/1998 7). On the facts and in the circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y we dismiss the ground of appeal raised by the Revenue. The 5th issue raised by the revenue is that the Ld. CIT (A) erred in deleting the disallowance of ₹ 27,86,287/- on account of donation made u/s 80G. 79. At the outset, we note that the issue raised by the revenue has already been adjudicated by us along with the ground no. 6 of appeal of the Revenue in ITA No. 938/AHD/2012 vide paragraph number 53 of this order wherein the appeal filed by the Revenue is dismissed. For detailed discussion please refer the aforesaid Para of this order. Accordingly we dismiss the ground of appeal raised by the Revenue. The 7th issue raised by the Revenue is that the Ld. CIT (A) erred in setting aside the matter and directing to the AO as such it is not permitted u/s 251(1)(a) in respect of reducing the income computed u/s 115JB. 80. The assessee during the year under consideration has written-off bad debts amounting to ₹ 3,65,65,634/- against the provision for doubtful debts created in the F.Y. 2006-07 corresponding to the A.Y.2008-09. 80.1 The assessee further submitted that it has complied with all the condition as specified u/s 36(2) of the Act to claim the bad deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act as alleged by the Revenue. The ld. AR vehemently supported the order of the ld. CIT-A. 85. We have heard the rival contentions of both the parties and perused the materials available on record. It is not in doubt that the ld. CIT-A has no power to restore the issue to the file of the AO. Therefore he cannot set aside the issue to the file of the AO. Rather the ld. CIT-A has the power to call the remand report from the AO on the points as prescribed under the provisions of the law. 85.1 However, in the case before us we note that the ld. CIT-A has not restored the issue to the file of the AO for fresh or de-novo assessment, but it was set aside with the unambiguous direction to adjudicate the issue after examination of the related/certain facts. Thus in our considered view, there is no contravention of the provisions as alleged by the Revenue. Hence we do not find any reason to disturb the finding of the ld. CIT-A. Accordingly, we dismiss the ground of appeal raised by the Revenue. 86. The issues raised by the Revenue in ground No. 7 and 8 are either general or consequential in nature. Therefore no separate adjudication is required. Therefore the grounds raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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