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TMI Blog2023 (4) TMI 1254X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of alleged shortfall in corporate guarantee fees on the corporate guarantees issued by the company on behalf of its Associated Enterprises namely Agile Pharma B.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t quantified by DSIR in Form No 3CL being Rs. 4,48,96,794/-." 3. Submissions of the Assessee on the grounds of appeal: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was holding 100% shares in AEs. Corporate guarantee was given by the assessee 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 contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee fee but were rather of a shareholder. The guarantee was provided to protect 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 prejudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 0.25 to 0.50% of corporate guarantee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are reproduced 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 credit period e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 the Assessing Officer to charge of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of ITAT, Hyd. in the case of M/s. Vivimed Labs Limited vs. ACIT, ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national 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 10-20 days 204 18,88,04,889 2.66 20-30 days 45 7,11,80,351 1.00 30-45 days -- -- -- 45-60 days -- -- -- >=60 days 29 11,63,338 0.02 Sub total (B) 519 62,38,68,941 Total (A) + (B) 3520 7,10,54,46,805 10. From the perusal of the Chart, it is absolutely clear that there were 519 invoices valued at Rs.62,38,68,941/- for which the payments were due beyond the credit period 60 days. In our view, the lower authorities have comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the above, the decision relied upon by the assessee is of no help to assessee. 14. So far as the argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it's A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the product / services to it's A.E. at Arm's Length Price or not ? If by providing the services / goods at a discounted rate or permitting the assessee to receive the payment after a long period of 60 days or 90 days, then it will amount to permitting the A.E. to use the working capital of the assessee for the purposes of earning the profit. No prudent business man would venture into 22 Apache Footwear India Pvt. Ltd. this kind of activity and permit a third party to use the working capital of the assessee and earn profit thereon. In the present case, though the assessee was required to maintain the T.P. Study and file the same before the TPO to show that the assessee's transactions with it's A.E. were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP. 17. Submissions of the Assessee before DRP: Expenditure on clinical trials: Explanation to Section 35(2AB)(1) which was introduced by the Finance Act, 2001 with effect from 1.4.2002 as reads as under: "Explanation- For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970)." It was submitted before DRP that Expenditure on Bio-Analytical and Bio-Equivalence Studies is part of the clinical drug trials and is a must for obtaining product approvals. Further, the company's inhouse R&D facilities are duly approved by the prescribed authority DSI R and Form No. 3CMs were already submitted. Also, the expenditure is wholly and exclusively incurred by the company for Research & Development. In support of the claim, attention of the DRP was also drawn to the decision of Hon'ble ITAT, Hyd. in assessee's own case for the earlier years. Other R&D Expenditure not quantified in Form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the weighted deduction depending on the approval from the competent authority. DRP further noted that the explanation may not enlarge the scope of main provision that the weighted deduction is restricted to the in-house expenses. DRP further observed that on the SLP of the Department, Hon'ble Supreme Court has set aside the decision of Gujarat High Court in the case of Cadila Health Care Ltd. (2013) 87 DTR 56 vide order No. SLP(Cl NO. 771/2015 dated 13.10.2015 with the following observations: "We have considered the materials on record and the reasons set out in the impugned order. It is our considered view that the three questions extracted are substantial questions of law which needed to be heard in the appeal(s) filed by the revenue. In expressing the above view, we should not be understood to have expressed any opinion on the merits of the contentions raised on the questions extracted above. We accordingly allow these appeals and request the High Court to hear the aforesaid three questions of law in the appeal(s) filed by the revenue along with the questions of law formulated by it in the appeal(s)." DRP accordingly upheld the action of the AO to deny the weighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in non-R&D activities such as attending consultation meetings, ascertaining customer choice/response to new products under development and other liaison work shall not qualify for deduction under section 35(2AB) of IT. Act 1961. xi) Capital expenditure on R&D, eligible for weighted deduction will include only plant and equipment or any other tangible item. Capitalized expenditure of intangible nature and expenditure reported as Capital Work in Progress (CWIP) will not be eligible for weighted deduction. Company to submit list of capital equipment, with date of purchase/installation & cost. Vehicles purchased for reference & testing purpose will not be admissible. xii) Grants/Gifts, donations, presents and payments obtained by the company for sponsored research in the approved in-house R&D centres shall be shown as credit to the R&D accounts for the purpose of Section 35(2AB) of IT. Act, 1961, and the R&D expenditure claimed for deduction under the sub-section shall be reduced to that extent. xiii) Expenditure of general nature, such as, expenditure on production, maintenance and quality control departments, manufacturing overheads/depreciation/interest/lease rental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n observation is totally misconceived and unwarranted for the reason that the expenditure incurred by the assessee for its business purposes cannot be claimed as an expenditure by a third party in its books of account, whether it is a basic R&D expenditure or weighted deduction. 39. Further, as submitted before the DRP, Explanation to Section 35(2AB)(1) which was introduced by the Finance Act, 2001 with effect from 01.04.2002 reads as under: "Explanation- For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970)." 40. As per the above Explanation, expenditure on scientific research in relation to drug and pharmaceuticals shall include expenditure incurred on clinical drug trial and for obtaining approval from regulatory authorities. The expenditure to be incurred for obtaining approval from any regulatory authority cannot be incurred in-house and if this condition regarding inhouse incurring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantified in Form 3CL as required under Rule 6(7A) and in view of Explanation to sec. 35(2AB) (1), we submit that expenditure on clinical trials, as quantified in Form 3CL, is also eligible for weighted deduction. In fact, following observations of Hon'ble Gujarat High Court in Sun pharma's case (supra) squarely cover this point: "18 We are, therefore, of the opinion that the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the inhouse facility and those were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises." 43. Further, in this regard, we would like to submit that the above issue was settled in favour of the assessee for the AYs 2011-12, 2012-13, 2013- 14 and 2014-15 by the Ld.CIT(A) which has also been uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmaceuticals Ltd supra for the proposition that any revenue expenditure incurred in respect of the approved R&D facility is eligible for the weighted deduction. It is seen that the Hon'ble ITAT relied upon its earlier decision in the case of ACIT v. Torrent Pharmaceuticals Ltd, ITA No. 3569/Ahd/2004 dt.13.11.2009 in the context of the fact that there was no dispute that the assessee had actually incurred the impugned expenditure on building repairs and maintenance. In this light of the matter this amount of Rs.1,72,91,656/- (Rs.1,28,31,395/- in AY. 2012-13) will be examined for broad account heads and the fact of which research unit the expenditure pertains to. To the extent it is a revenue expenditure pertaining to the approved R&D facility the assessee is eligible for weighted deduction. Alternatively, the claim will be allowed in terms of section 37 if actually incurred. Subject to this factual verification the claim is allowed." 6. It was the submission of the Ld. CIT-DR that the decision relied upon by the Ld. CIT(A) was set-aside by the Hon'ble Supreme Court as the Court has not considered Revenue question that ITAT has not followed the decision in the case of Conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Concept Pharmaceuticals Ltd (supra) the Coordinate Bench did not allow the expenditure spent outside the R & D unit but the Bench has not considered the explanation introduced with reference to 'Clinical Trials'. By very nature, the Clinical Trials cannot alone be done within research 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 'in-house' 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 follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld the order of the CIT(A) and dismiss the grounds raised by the revenue in both the years under consideration." 23. In the present case, undisputedly, the facts of the assessee are identical to the facts of the earlier years. The DRP in its order had acknowledged that the assessee is having the requisite certificate from the DSIR form no 3CL dated 15.7.2021 mentioning therein that the eligible R&D expenditure for the assessment year 2018 - 19 was Rs. 33509.81 lakhs (para 2.15.5 and para 2.15.6). The Assessing Officer as well as the DRP after noticing the above said fact also mentioned in Para 2.15.11 though the order of the Tribunal in the assessee's own case is available for earlier years, however, the DRP had mentioned that the order passed by the hon'ble Gujarat High Court in the case of Cadella has been remanded back by the Hon'ble Supreme Court, hence, DRP is not granting relief to the assessee for this year before it. 24. Admittedly, the Revenue had preferred appeal against the order of the Tribunal in the case of the assessee for A.Ys. 2011-12 to 2014-15 before the Hon'ble High Court and the same are pending for adjudication before the Hon'ble High Court. 25. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e authorities were of the opinion that the goods ought not to be released pending the appeal, the straight-forward course for them is to obtain an order of stay or other appropriate direction from the Tribunal or the Supreme Court, as the case may be. Without obtaining such an order they cannot refuse to implement the order under appeal. 37. Following the above decisions of the Supreme Court, a Division Bench of the Bombay High Court in Ganesh Benzoplast Ltd. v. Union of India 2020 (374) ELT 552 held that non-compliance of orders of the appellate authority by the subordinate original authority is disturbing to say the least as it strikes at the very root of administrative discipline and may have the effect of severely undermining the efficacy of the appellate remedy provided to a litigant under the statute. Principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. 38. This principle has been reiterated by the Bombay High Court in Himgiri Buildcon & Industries Ltd. v. Union of India 2021 (376) ELT 257. 39. Therefore, the stand taken by the Assessing Officer that since the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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