TMI Blog2023 (4) TMI 1254X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction and, therefore, the same has rightly been held so by the lower authorities. Whether the corporate guarantee estimated by the DRP to the tune of 1% on the amount guaranteed as a corporate guarantee commission as against 0.10% was justified or not? - In our view, no third party would provide similar type of services/corporate guarantee on behalf of its AE and expose itself to the risk of giving the corporate guarantee. Therefore, the charges paid by the assessee to SBI cannot be compared for the purpose of determining the ALP of corporate guarantee commission. The Co-ordinate Bench in the case of Vivimed Labs [ 2022 (4) TMI 1514 - ITAT HYDERABAD] had adjudicated corporate guarantee commission @ 0.5% qua the extent of the amount of the assessee s corporate guarantee actually utilised in these four assessment years. Thereafter, similar view had been taken by various Tribunals restricting the addition to 0.5% of the amount guaranteed as corporate guarantee commission. Thus we partly allow the ground of the assessee and restrict the addition to the tune of 0.5% on the amount guaranteed as corporate guarantee commission. Interest on Receivables - assessee had outstandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V. and Helix Healthcare B.V. being 100% subsidiaries of assessee. 3. The Learned DRP/AO ought to have appreciated the fact that corporate guarantee was given by the assessee company as a procedural compliance for availing of loan by its subsidiaries and for the overall benefit of the group and it was provided as part of the parental obligation to its subsidiaries and is in the nature of shareholder service. 4. Without prejudice to the above, the Learned DRP erred in adopting the corporate guarantee commission @1% without appreciating the fact that the guarantee fees charged by 581 from the assessee in respect of guarantees extended on its behalf was only 0.1%. b) Interest on Receivables from Associated Enterprises: 5. The Learned DRP/AO/TPO erred in law and on facts and circumstances of the case in treating Interest on Receivables as a separate International Transactions in terms of Sec 92B of the Income Tax Act, 1961. 6. The Learned TPO/AO, in pursuance of the directions of the DRP, erred in making an addition of Rs. 3,34,24,193/- in respect of notional interest on delayed receipt of trade receivables from Associated Enterprises. 7. The Learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) Commission on Corporate Guarantee (CG) [Rs. 10,93,47,091/-]: The facts in brief in relation to this issue are that 'the company had given corporate guarantee on behalf of its 100% subsidiaries Agile Pharma BV and Helix Healthcare and the loan amount outstanding as on 31st March, 2018 in respect of guarantees given on behalf of its AE's, Agile Pharma BV and Helix Healthcare B.V. is Rs. 238,38,21,250/- and Rs. 767,67,12,500/- respectively. In the Return of Income filed for the subject year, Assessee has made suo-motu adjustment @ 0.10% on the guarantee given to it's AEs amounting to Rs. 1,22,84,673/-. However, in the Draft Assessment Order u/s 143(3) read with sec. 144C of the Act dated 18th September, 2021, the TPO/AO proposed an adjustment of Rs.22,11,24,119/- u/s 92CA with regard to corporate guarantee fees adopting average rate of 1.8%, stated to have been fixed by Indian bankers for financial guarantees. Against the proposed adjustment in the draft order, assessee filed objections in Form 35A before the DRP. Submissions of the Assessee before DRP: i) It is the onerous responsibility of the assessee company to provide guarantee to meet t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as a procedural compliance for availing credit facilities by its subsidiaries and for the overall benefit of the group and it was provided as part of the parental obligation to its subsidiaries and is in the nature of shareholder activity. It is the obligation of the assessee to extend its support to its 100% subsidiaries to improve the business and smooth running of the AEs without any financial impediment, which ultimately benefits the assessee company, being a holding company. We also submit that that no direct financial benefit was extended to the overseas subsidiaries on account of corporate guarantee nor any cost or expenditure was incurred by the assessee company on behalf of its subsidiaries in providing such guarantee. A liability could arise for the Assessee guarantor only if a default took place, but this is hypothetical situation and such default never occurred during the relevant year. Even if there is an impact as observed by DRP in its order, such an impact on profits, income, losses or assets has to be on a real basis, whether in the present or in the future, and not on a contingent or a hypothetical basis, and there has to be some material on record to indica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tect its investment interest and obtain returns from investments by way of appreciation and dividends and therefore CG would not constitute an 'international transaction'. 3. In view of the foregoing, he submitted that when the Assessee has not incurred any costs or expenditure in providing corporate guarantee to its AES, it would not constitute 'International Transaction' even under amended law and consequently ALP adjustment on this ground is not warranted. 4. Without prejudice to above submission that TP adjustment in question is not warranted at all on the facts of the case, even in case an adjustment is considered necessary, the same at best should be restricted to the CG rate charged by SBI @0.10% as is evidenced by the Schedule of fees and Charges issued by State Bank of India to the assessee. (A copy of the Schedule is included in the assessee paper book compilation for immediate reference APB-53). Since the assessee has already made a suo-moto adjustment in the Return of Income @0.10%, we submit that no further adjustment on this ground is warranted. 5. Without prejudice to the above plea of the assessee that no TP adjustment is called f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee as the ALP of the commission between two independent enterprises. But, ignoring all these precedents rendered in relation to corporate guarantee, the Ld. DRP after referring to June 2017 Notification of CBDT and the decision of ITAT, Hyderabad in the case of GOCL Corporation Ltd. vs. DCIT in ITA No. 579/Hyd/17 dated 11.05.2021 and the decision of ITAT, Mumbai in the case of Grindwell Norton Limited in ITA No. 523/Mum/2014 dated 30.09.2016 considered it appropriate to adopt 1% on the amount guaranteed as corporate guarantee commission. 7 We submit that apart from this guidance from CBDT in the Notification dated 07.06.2017 that lacks any scientific measure or formula to determine ALP rate on the facts of a particular case, there is no specific method of determining the arm's length price of corporate guarantee transactions in the Act. We also submit that the decision in the case of GOCL Corporation Ltd. dated 11.05.2021 was rendered in a situation where assessee has not submitted any comparable or precedent for corporate guarantee commission ALP rates. Whereas in the present case, Assessee cited several precedents hereinbefore wherein Tribunals have by and large a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced elsewhere and submitted that the assessee is taking the financial facilities from the SBI and is paying 0.10% as schedule of fees and charges to the bank. 8.3. We have considered the submissions and found that the charges paid by the assessee cannot be compared for the purposes of determining the ALP of corporate guarantee commission. In our view, no third party would provide similar type of services/corporate guarantee on behalf of its AE and expose itself to the risk of giving the corporate guarantee. Therefore, the charges paid by the assessee to SBI cannot be compared for the purpose of determining the ALP of corporate guarantee commission. The Co-ordinate Bench in the case of Vivimed Labs vide its decision dated 12-04-2022 had adjudicated corporate guarantee commission @ 0.5% qua the extent of the amount of the assessee s corporate guarantee actually utilised in these four assessment years. Thereafter, similar view had been taken by various Tribunals restricting the addition to 0.5% of the amount guaranteed as corporate guarantee commission. Recently, Delhi Tribunal in the case of Havells India Ltd. Vs. ACIT (LTU) in ITA No.6509/Del/2018 dt.09.05.2022 had also echoed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, it takes care of the interest income, if any, foregone by the assessee on account of late payment received from the associated enterprise. Once the TNMM method and its results are accepted, no further adjustment on account of notional interest from associated enterprise is warranted. iii) Company does not charge any interest on delayed realization even in the case of non-AE transactions. The credit period extended on sales to both AEs and Non-AEs ranges between 30 days and 270 days. The debts shall be outstanding from both AEs and Non-AEs purely because of business reasons and this is a common business practice prevailing in the industry. Hence without prejudice to the above submissions, even if receivables are considered as separate international transaction, interest on receivables can be benchmarked under Internal CUP and hence, no adjustment shall be made accordingly. iv) Reserve Bank of India permits realization in respect of export of goods or services up to a period of nine months from the date of exports. The relevant extract of RBI Master Circular issued in this regard is included in the Paper Book compilation for ready reference (APB-42). Since the credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd accordingly the plea of the assessee to adopt L1BOR rate for the purpose of computing interest on outstanding receivables is rejected by DRP. iv) Credit period allowable should be as per the credit period agreed upon in the intercompany agreement or period/terms mentioned in the invoices wise. The plea of the assessee that a period of nine months should be allowed as the reasonable credit period, as allowed by RBI for export realisations is also brushed aside by DRP by stating that the purpose of RBI regulations is entirely different and the RBI regulations do not contemplate determination of arm's length price. Further, according to DRP, price is negotiated with reference to the agreed credit period, and the effect of extra credit is not factored in the price agreed and hence the entire issue of imputing interest arises when the amount is not realized within the agreed credit period. v) With the above observations, DRP directed the TPO to verify the credit period invoice-wise and charge the interest wherever there is delay beyond the credit period mentioned therein by applying SBI short term deposit rate. 11. Aggrieved by the aforesaid directions of DRP to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee receives the foreign exchange early so that it can claim deduction u/s. 10A. Therefore, in our view, putting a limit of two months of credit period itself is arbitrary .. Accordingly, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed . ii) Bartronics India Ltd. v. Dy. CIT [2017] 86 taxmann.com 254 (ITAT Hyd.) iii) GSS Infotech Ltd. v. Asstt. CIT [2016] 70 taxmann.com 356 (ITAT, Hyd.) Based on the above submissions, we urge the Hon'ble Bench not to consider trade receivables as a separate international transaction and even if it so considered, the addition/adjustment made on this ground in the assessment order may kindly be deleted in entirety as the realisations were made within the time allowed by RBI for export proceeds realisations as is evident from sale invoices. Without prejudice to the above submission, even if the Hon'ble Bench consider the trade receivables as a separate international transaction, we pray the Hon'ble Bench to consider average LI BOR rate for calculation of interest since the adjustment is in respect of international trade receivables in view of the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing hereinbelow the chart filed by the assessee which is to the following effect : APACHE FOOTWEAR INDIA PVT. LTD / AY 2018-19 Export Receivables Realisation pattern during A.Y. 2018-19 Particulars Total Number of Invoices during the A.Y. 2018-19 Amount Export Invoice value in Rs. % of invoices realized to total invoices raised during the year A) Realised within credit period 3,001 6,48,15,77,864 91.22 B) Realised beyond credit period of 60 days 10 days 241 36,27,20,363 5.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, who is similarly situated, would render the same kind of services at the same or similar price to a third party or not. If we examine the issue in the above-said 21 Apache Footwear India Pvt. Ltd. context, it would be clear that the assessee would charge bank interest or any other interest with a view to compensate itself on account of delay in making the payment. Hence, we do not find any error in the same. 13. The reliance of the assessee in the case of Betchal India Pvt Ltd (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec .92B of the Act and by virtue of which payment or deferred payment or receivable or any other debt arising during the course of business has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vide order dt. 16.05.2017 in the case of Betchal India Pvt. Ltd ITA No.6530/Del/2016 (supra) had decided the issue against the assessee. In view of the above, the decision relied upon by the assessee is of no help to assessee. 14. So far as the argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital R D expenditure Rs. 5,18,71,194/- 16. In respect of expenditure on clinical drug trials, it was submitted before the AO that in view of Explanation to sec. 35(2AB)(I) inserted by the Finance Act, 2001 and decision of Hon'ble ITAT, Hyd. in assessee's own case for Asst Year 2011-12 to Asst Year 2014-15, the expenditure on clinical trials, which is an integral part of R D activity and it is mandatory for obtaining product approvals, is also eligible for weighted deduction. In case of other two items of In-house R D Revenue and capital expenditure, it was submitted that Form 3CL is only a report to be submitted by the prescribed authority to the Director General (Income Tax Exemptions) and simply because DSIR had not reported a particular amount, it should not be disallowed when the expenditure incurred by the company is wholly and exclusively for R D and on its approved R D facility. However, AO proposed addition of Rs.56,06,33,276/- in the draft order. Against the proposed additions on account of part disallowance of weighted deduction, Assessee filed objections before the DRP. 17. Submissions of the Assessee before DRP: Expenditure on clinical trials: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain conditions. It was pointed out that one of the conditions for granting approval of the R D facility is that the company should not claim expenses which are specifically not permissible as per the DSIR Guidelines, which according to DRP, include expenses incurred on clinical trials conducted outside the approved R D facilities. As per DRP, the other condition required to be fulfilled for claiming deduction u/s. 35 (2AB) of the Act is that the prescribed authority has to quantify the items of the expenditure entitled for weighted deduction in Form 3CL post amendment of Rule 6(7A) and the expenditure on clinical trials outside approved R D facility has been mentioned separately in Form 3CL next to row relating to quantification of expenditure eligible for weighted deduction and therefore the same is not eligible for deduction. It is also noted by DRP that the weighted deduction is given under this section, to encourage the research activity in the in-home facilities. In the opinion of DRP, if the clinical trials are done outside the in-house facility of assessee, the third-party clinical trial entity may also claim the weighted deduction depending on the approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a new formulation, possible reaction etc. Extensive clinical trials are an intrinsic part of development of any new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. Merely because such trial is carried out outside its approved research and development facility, it could not be a disqualification for allowance of weighted deduction. 35. The first observation of the DRP, while denying the weighted deduction on clinical trials expenditure, is that DSIR had issued Guidelines dated May 2014, which provides for approval of the R D facility subject to fulfilment of certain conditions and one of the conditions for granting approval of the R D facility is that the company should not claim expenses on clinical trials conducted outside the approved R D facilities. We submit these guidelines were amended in 2017 and as per these guidelines only the following items of expenditure are excluded for deduction u/s 35(2AB). x) Expenditure on manpower from departments, other than R D centre, such as manufacturing, quality control, tool room etc. and expenses incurred on manpower engaged in non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s case as the order has been reversed by Hon'ble Supreme Court in as much as Hon'ble High Court has been directed to adjudicate the matter on merits. However, this observation of DRP is not tenable since the decision of Hon'ble Supreme Court does not dilute the judgment of the Gujarat High Court and the decision holds good even now. The Hon'ble Supreme Court has referred additional three questions to Gujarat High Court and has not stayed or setaside the judgment already rendered as observed by the Hon'ble ITAT, Hyderabad in the decision rendered in assessee's own case for earlier years. In fact, in a subsequent and recent decision of Gujarat High Court in the case of PCIT vs. Sun Pharmaceuticals Industries Ltd. (R/TAX APPEAL No. 92 of 2020) dated 25.02.2020, Hon'ble Court affirmed that the issue same stands answered by this Court in CIT vs. Cadila Healthcare Ltd supra (APB-76). 38. As regards the third observation of the DRP that if the clinical trials are done outside the inhouse facility of assessee, the third-party clinical trial entity may also claim the weighted deduction depending on the approval from the competent authority, we submit that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e studies are conducted outside facility duly approved for this purpose. The Expenditure on Bio-Analytical and Bio-Equivalence Studies is part of the clinical drug trials and is a must for obtaining product approvals. Also, the expenditure is wholly and exclusively incurred by the company for Research Development. 42. As per the DRP, the other condition required to be fulfilled for claiming deduction u/s. 35 (2AB) of the Act is that the prescribed authority has to quantify the items of the expenditure entitled for weighted deduction in Form 3CL post amendment of Rule 6(7A) and the expenditure on clinical trials outside approved R D facility has been mentioned separately in Form 3CL next to row relating to quantification of expenditure eligible for weighted deduction and therefore the same is not eligible for deduction. This observation is also not tenable in law. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those were incurred outside, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. In the present case, it is not in dispute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding the position that a part of the R D expenditure was not quantified and reported in Form 3CL. 19. In view of the above submissions, learned AR of the assessee requested to direct the AO to delete the additions made on account of disallowance of weighted deduction on other items of R D expenditure also. 20. Per contra, the ld.DR for the Revenue relied upon the orders passed by the lower authorities. It was the contention of the ld.DR that the matter is sub judice before the Hon ble High Court, hence the lower authorities have not followed the decision passed by the tribunal in the earlier assessment years. 21. We have heard the rival contentions of the parties and perused the material available on record. Admittedly the tribunal in its earlier order had decided this identical issue in favour of the assessee in ITA No.1604 1605/HYD/2016 for A.Ys. 2011-12 and 2012-13 decided on 20.07.2018 wherein it was held as under : 8.4 As noted above the sum of Rs.2,632.50 lakhs (Rs.3,400.02 lakhs in A.Y. 2012-13) added by the Assessing Officer includes a sum of Rs.1,72,91,656/- (Rs.1,28,31,395/- in AY. 2012-13) on other expenses like Rates Taxes, Travelling Expenses, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 251) (Guj) and (v) CIT vs. Sandan Vikas (India) Ltd (335 ITR 117) (Guj) 8. Referring to the decision of Concept Pharmaceuticals Ltd (supra) it was submitted that the later decision of the ITAT has analysed the Explanation to section 32(2AB) which was approved by the Gujarat High Court. Since the decision has not considered the Explanation given, the decision need not be followed. It was further contended that when there are two possible views, the one which is in favour of the assessee should be followed as held by the Hon'ble Supreme Court in the case of CIT vs. Vegetables Products Ltd (88 ITR 192) (SC). It was the submission that the Hon'ble Supreme Court has referred additional three questions to Gujarat High Court and has not stayed or set-aside the judgment already given, on which the Ld. CIT(A) relied upon. He also submitted that the objects of the assessee R D facility as stated in Form 3CM has been analysed by the Ld. CIT(A) and even though the expenditure was incurred outside for field trials, the expenditure has to be considered for the purpose of 'in-house' research. He supported the order of the Ld. CIT(A). 9. We have considered the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch facility as they require cooperation from the Medical Doctors, Hospitals, Volunteers and patients, therefore such expenditure has to be necessarily spent outside the facility, but for the purpose of inhouse research. This issue was examined by the Coordinate Bench which was subject matter of appeal before the Gujarat High Court and Gujarat High Court has approved the same. As seen from the order of the Supreme Court in Special Leave to Appeal (C) No. 770/2015, dated 13.10.2015, the grievance of Revenue with reference to non framing of three questions were considered by the Hon ble Supreme Court as those three questions are considered to be substantial question of law and referred to the Hon ble High Court to hear the aforesaid three questions of law. However, the judgment already passed by the Gujarat High Court has not been set-aside. As Ld. CIT(A) has followed the Coordinate Bench decision, which was approved by the Gujarat High Court and as no contrary High Court judgment has been placed on record, we approve the order of the CIT(A) and reject the Revenue contentions. As the issue in both the years under consideration are materially identical to that of AYs 2011-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceptable; and that since it has been appealed against, the issue of allowability of depreciation on goodwill has not attained finality. Unless there is a stay, order/decision of the jurisdictional Income Tax Appellate Tribunal is binding on all income tax authorities within its jurisdiction. 35. In Union of India v. Kamlakshi Finance Corporation Ltd. 1992 taxmann.com 16, Supreme Court held and reiterated that the principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not acceptable to the department, which in itself is an objectionable phrase, and is the subject matter of an appeal can be no ground for not following the appellate order unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to the assessee and chaos in administration of the tax laws. 36. Following the above decision, Supreme Court again in Collector of Customs v. Krishna Sales (P.) Ltd. 1994 Supp. (3) SCC 73, reiterated the proposition that mere filing of an ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity as it still has to be placed before the Dispute Resolution Panel and therefore, in the circumstances, we feel that interfering at this stage may not be justified as it would pre-empt decision-making by the high-powered Dispute Resolution Panel. However, we hope and trust that the Dispute Resolution Panel shall look into all aspects of the matter, more particularly, the discussions made above while passing appropriate order(s) under sub-section (8) of section 144C of the Act, and if necessary further personal hearing shall be afforded to the petitioner. 42. We make it clear that we have not expressed any opinion on merit. However, the Dispute Resolution Panel shall look into and consider the objections raised by the petitioner more particularly, about the decision of the Income Tax Appellate Tribunal in its own case for the Assessment Year 2014-15 and the judgment of the Supreme Court in SMIFS (1 supra) keeping in mind the discussions made above. 27. In the light of the above, respectfully following the decision of the Co-ordinate Bench of the Tribunal in the case of assessee for the earlier years and more particularly when the approval in Form 3CL had been granted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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