TMI Blog2024 (2) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee) would not alter such advance as being in the nature of quasi capital. Commercial Expediency/ availability of interest free funds - As noted earlier, if the argument of commercial expediency were to be accepted as a guiding tool for non-applicability of transfer pricing adjustments to international transactions, then no transfer pricing adjustment can be made in respect to almost all international transactions between Associated Enterprises, since mostly such transactions are based on the principles of commercial expediency. Further, transfer pricing provisions are special provisions have been introduced specifically to ensure that there is no tax base erosion at the India level and profits are not shifted outside of India by way of certain pre-arranged transactions between associated enterprises. Therefore, the arguments that the advances were given out of one interest-free funds or that the transactions between the associated enterprises were guided by commercial principles, in our considered view, are irrelevant considerations for the purpose of computing arms length Price between associated enterprises, since transfer pricing provisions are special provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - disallowance of expenditure on non-clinical trials on the ground that the DSIR (Department of Scientific and Industrial Research) in the report in Form 3CL has granted approval for a lesser amount as against the claim made by the assessee - AO observed that the DSIR had granted a short approval in respect of clinical trials and accordingly, no weighted deduction thereupon @ 50% was liable to be granted - HELD THAT:- As per the observations made by ITAT in assessee s own case for preceding assessment years [ 2015 (8) TMI 763 - ITAT AHMEDABAD] and the observations made by the Jurisdictional High Court in the case of Cadila Healthcare Ltd. [ 2013 (3) TMI 539 - GUJARAT HIGH COURT] as held held that Explanation to Section 35(2AB)(1) does not require that expenses included in said Explanation are essentially to be incurred inside an approved in-house research facility. - we are of the considered view that Ld. CIT(A) has not erred in facts and in law in making any disallowance with respect to the aforesaid issue. Claim of deduction u/s 35(2AB) towards weighted deduction relating to expenditure on accepted batches, building maintenance and patent filing fees - HELD THAT:- As rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee did not derive any dividend income from these companies - HELD THAT:- We observe that Ld. CIT(A) has given a categorical finding that firstly, with respect to investment in partnership firm, the assessee s own interest free funds were far in excess of the investments made in the partnership, yielding exempt income and accordingly, no disallowance is called for. Further, in respect of the other three companies, the Ld. CIT(A) observed that since no exempt income was earned by the assessee during the impugned year under consideration, there is no question of disallowance under Section 14A of the Act. Accordingly, in view of the instant facts and the judicial precedents on the subject and the observations made by the Ld. CIT(A), we find no infirmity in the order of Ld. CIT(A), so as to call for any interference. Disallowance in respect of increase in authorized share capital - AO made disallowance of expenses towards ROC fees paid for increasing the authorized share capital for the reason that these expenses were capital in nature - HELD THAT:- In our considered view, after going through the facts of the instant case, Ld. CIT(A) has duly considered and distinguished the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5(1)(vi) relating to expenditure incurred on intangibles - HELD THAT:- On going through the instant facts and the decision cited by the assessee, we are of the considered view that in the interest of justice, the matter may be referred to the file of A.O. for consideration of the claim made by the assessee for deduction under Section 35(1)(i). TDS u/s 195 - disallowance u/s 40(a)(ia) towards commission paid outside India to non-resident agents - HELD THAT:- Before us, assessee submitted that the assessee has a good case on merits on the issue of non-deduction of TDS with respect to sales commission paid to non-resident commission agents and accordingly, in the interest of justice, the matter may be restored to the file of A.O. for de-novo consideration. Thus, in the interest of justice, the issue is restored to the file of A.O. for de-novo consideration, after giving due opportunity of hearing to the assessee. - SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER For the Appellant : Shri S. N. Soparkar, Sr. Advocate For the Respondent : Dr. Darsi Suman Ratnam, CIT D.R. ORDER PER SIDDHARTHA NAUTIYAL, JM: These bun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case and in law, without prejudice to above, the learned CIT(A) ought to have appreciated that the comparable entities are accounting such expenses in its books of accounts in India on the ground that incurrence of such expenditure is the requirement of entities in India. Further the comparable companies are claiming deduction of such expenses in India and it has been allowed by the Revenue Authorities. (g) Without prejudice to Ground No. 1(1) to (f), in the facts and circumstances of the case and in las, the learned CIT(A) while confirming the upward adjustment of Rs. 80,34,261/-, has failed to appreciate that the arm's length rate of interest determined by the TPO was worked out after increasing interest rate by adhoc additional 100 basis points towards foreign exchange risk. 2. (a) In the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming disallowance to the extent of Rs. 12,12,20,245/- by rejecting books of accounts and on the ground that the appellant company failed to fully controvert the justification for lower gross profit rate (GP rate) and net profit rate (NP rate) as compared to GP rate and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he products of the appellant firm does not mean that each and every deficiencies found in the case of the firm would call for the adverse inference in the case of the appellant company. (e) That in the facts and circumstances of the case and in law, the learned CIT(A) has further erred in confirming disallowance of Rs. 12,12,20,245/- even after observing that the appellant company made a gross profit of 53% on products purchases for trading from partnership as compared to gross profit of 44% on trading of products purchased from third party, which negates the allegation of the AO that some expense has been shifted from the hands of the firm to the hands of the appellant company. (f) Without prejudice to Ground No. 3(a) to 3(e) above, in the facts and circumstances of the case and in law, the learned CIT(A) while comparing the NP rate of appellant company vis-a-vis partnership firm, has erred in granting benefits of tax incentives under excise and VAT laws at 10% in place of 13.8%. (g) Without prejudice to Ground No. 3(a) to 3(e) above, in the facts and circumstances of the case and in law, the learned CIT(A) while comparing selling and distribution expenses has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccord UK and Accord Canada in whose case loans and advances have been converted int equity and advances were of nature of business advances. 2. The Ld.CIT(A) has erred in law and on facts in restricting the disallowance of expenses incurred by the assessee on behalf of its subsidiary firm 'Intas Pharmaceuticals from Rs 39,62,30,463/- to Rs 12,12,20,435 /- without properly appreciating the facts of the case and the material brought on record. 3. The Ld.CIT(A) has erred in law and on facts in allowing the deduction u/s 35(2AB) on the basis of expense claim made by the assessee in the ROI instead of granting deduction on the amount approved by DSIR in Form 3CL 4. The Ld.CIT(A) has erred in law and on facts in deleting the addition of expense of Rs 39,62,30,463/- incurred by the assessee to earn exempt income u/s 10(2A) on behalf of Intas Pharma (IP) to the Book Profits u/s 115JB of the Act. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 6. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contention, the assessee relied on the case of Micro Inks Ltd. vs. ACIT 36 taxmann.com 50 (Ahmedabad) and Lambda Therapeutic Research Ltd. (ITA No. 3492/Ahd/2015), besides other cases. The Ld. CIT(A) gave part relief to the assessee in respect of advances given to three of it s Associated Enterprises namely Accord Healthcare Inc. Canada, Accord Healthcare Ltd., UK and Accord Healthcare NZ Ltd., NZ, on the ground that the loans were converted into equity in the subsequent year and hence the upward adjustments of Rs. 45,09,699/- made in respect of these three entities was deleted. With respect to other foreign Associates Enterprises, Ld. CIT(A) observed that there was no conversion of loans and advances made into equity, and therefore, the upward adjustment to the tune of Rs. 80,34,261/- was confirmed. While passing the order Ld. CIT(A) made the following observations:- 3.16. In view of the aforesaid discussion and following the decision of Honourable ITAT, the upward adjustments of Rs. 45,09,699/- made in respect of interest on the loans and advances to the aforesaid .three AEs in whose case loans and advances have been converted into equity and advances were in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territories. Further, the advances were given by the assessee to the Associated Enterprises were inextricably linked with the export sale of finished goods by the assessee company. It was further argued that the advances were made out of own interest free funds available with the assessee and therefore, no interest can be imputed in the instant facts. Therefore, the aforesaid advances are purely commercial in nature and had been given during the course of business transactions. 7. In response, the Ld. D.R. placed reliance in the case of Soma Textile Industries Ltd. 59 taxmann.com 152 (Ahmedabad Tribunal) has held that comparable uncontrolled price of quasi-capital loan, cannot be nil, unless it is only for a transitory period and de facto reward for said value of money is opportunity for capital investment or such other benefit. 8. We have heard the rival contentions and perused the material on record. 9. We shall take up both the appeal of the assessee and the Department on this issue since the issues are connected. We shall briefly discuss the arguments taken up by the parties and our views on the same in light of the facts of the assessee s case. Advances bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been contributed as capital originally if it was actually meant to be capital contribution. If the assessee s contention that whenever interest free loan is granted to associated enterprises, there should not be any adjustment is accepted, it will tantamount to taking out such transactions from the realm of section 92(1) and section 92B of the IT Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm s length price. Section 92B defines international transaction as under:- 92B(1) For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-resident, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erted into shares. However, in the facts of the assessee s case, the assessee has not pointed out to any particular technical glitch/problem in subscribing to the share capital of the associated enterprises directly. Accordingly, in our considered view, the facts of the Micro inks ruling are not applicable to the assessee s set of facts. Further, the counsel for the assessee has also placed reliance on several decisions, which have been rendered on a different set of facts and hence would not be applicable to the assessee s case. Further, the aforesaid decision are also not applicable to the assessee s set of facts, since in the instant facts, we observe that the nature of loans given to associated enterprises are not cause quasi capital in nature. 14. It would be useful to refer to the case of Soma Textile Industries Ltd. 59 taxmann.com 152 (Ahmedabad Tribunal) wherein the Tribunal made the following observations on the quasi capital nature of advances: Usually loan transactions are benchmarked on the basis of interest rate applicable on said transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is someth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transactions between Associated Enterprises are primarily guided by the principles of commercial expediency. If the argument of commercial expediency were to be accepted as a guiding tool for non-applicability of transfer pricing adjustments to international transactions, then no transfer pricing adjustment can be made in respect of all / most of the international transactions between Associated Enterprises. The primary underlying principle governing transfer pricing adjustments is that what could be the price / remuneration that could be charged in case similar transactions were to be carried out between two independent / unrelated parties. Accordingly, we are unable to accept the above arguments of the Ld. Counsel for the assessee that in case of commercial transactions, the transfer pricing principles are not applicable. 17. Further, the fact that the amounts advanced by the assessee to it s AEs are inextricably linked with export sale of finished goods or such advances have yielded the economic benefits to the assessee including increase in export turnover or that the advances were given out of interest free funds available with the assessee, in our view, are ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n income on an arm's length basis. The legislative intent behind the introduction of detailed transfer pricing provisions is brought out in para 55.6 of CBDT Circular No. 14/2001 on provisions relating to Finance Act, 2001, which interalia states: The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the Country's tax base. Sec. 92 of the Act lays down that any income arising from an international transaction shall be computed having regard to the arm's length price. The charge to tax under the Act is on the total income computed in accordance with the provisions of the Act. Sec. 28 of the Act lays down the categories of income that are assessed as income from business or profession. Sec. 29 lays down the manner of computation of income from business or profession. These are general provisions for computation of income from business applicable to all class of assessees. Provisions of Sec.92 in particular and Chapter X in general are special provisions dealing with computation of income in an international transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has not commented upon the correct amount of interest to be charged by the assessee from it s AEs 20. Another argument advanced by the assessee was that the Ld. CIT(A) has not commented upon the correct amount of interest to be charged by the assessee from it s AEs. We are in agreement with the contention of the Counsel for the assessee that the Ld. CIT(A) should have given a precise finding with respect to the correct amount of interest to be charged by the assessee from it s AEs. 21. We agree with the alternate contention taken by the counsel for the assessee and the matter is referred to the Ld. CIT(A) to give a specific finding on the correct amount of interest to be charged by the assessee from it s AEs. The assessee is at liberty to furnish it s submissions / supporting documents to assist the Ld. CIT(A) in this regard. 22. Accordingly, in light of the aforesaid discussion, Ground No.1 of the Department s appeal is allowed and Ground No. 1 of the assessee s appeal is partly allowed for statistical purposes. Ground No. 2 of the assessee s appeal and Ground No. 2 of the Department s appeal (disallowance of expenses incurred by the assessee on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores which are 4.68% of the total turnover. In view of the above, the Assessing Officer was of the view that many expenses which were otherwise of the partnership firm have been charged to the Profit Loss Account of the assessee company and thereby leading to reduction of it s profit. Accordingly, the Assessing Officer was of the view that the expenses have been diverted from the partnership firm to the assessee company and double tax deduction has been claimed, once in the hands of the partnership firm the income was claimed exempt and then again in the hands of the assessee company, the expenses have been claimed as an allowable expenses. Accordingly, the Assessing Officer held that there was leakage of revenue in the hands of the assessee company. 24. In appeal, the Ld. CIT(A) restricted the additions to Rs. 12,12,20,245/- by working out the revised net profit rate of the partnership firm @18.64% and the difference of the revised net profit rate of the partnership firm and the net profit rate of the assessee company (11.15%) was confirmed in the hands of the assessee. 25. Both the assessee and the Department are in appeal against the order passed by Ld. CIT(A). W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing and selling of pharmaceuticals product. The entire sale was made by the assessee to its holding company namely Intas pharmaceuticals Ltd. 3. The AO during the assessment proceedings found that the assessee was claiming only few expenses against the sale of its products. The assessee, though engaged in the manufacturing unit, has incurred small expense under the head research and development which is 0.73% of the total expenses. Likewise, the assessee has also not furnished the supporting documents for packaging expenses incurred by it. 4. As per the AO, the assessee was showing higher amount of gross as well as net profit being a unit eligible for deduction under section 80IC of the Act which is nothing but the inflated profit. As such the assessee has not claimed various expenses and diverted them to other group companies. Thus the AO rejected the books of accounts and determined the profit at Rs. 40,04,60,962.00 being 25% of the turnover. However, the AO was pleased to grant the deduction under section 80 IC of the Act for the amount of profit determined by him. 5. Aggrieved assessee preferred an appeal to the learned CIT (A) who has enhanced the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g into the instant facts, we are of the considered view that the Ld. AO has erred in facts and in law in coming to the conclusion that there has been diversion of profits from the partnership firms, claiming exemption under Section 80IE(i) and 80IC(3)(ii) of the Act and thereby diverting expenses to the assessee company. 31. In view of the aforesaid discussion, Ground No. 2 of the assessee s appeal is allowed and the Ground No. 2 of the Department s appeal is dismissed. Ground No. 3 of Department s appeal (Deduction under Section 35 (2AB) of the Act) (A.Y. 2009-10) 32. The brief facts in relation to this ground of appeal are that the Assessing Officer made disallowance of expenditure on non-clinical trials amounting to Rs. 1492.86 lakhs on the ground that the DSIR (Department of Scientific and Industrial Research) in the report in Form 3CL has granted approval for a lesser amount as against the claim made by the assessee. The Assessing Officer observed that the DSIR had granted a short approval in respect of clinical trials and accordingly, no weighted deduction thereupon @ 50% was liable to be granted. Accordingly, the Assessing Officer made a disallowance of Rs. 149 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurs expenses on clinical trials for developing its pharmaceutical products outside a lab facility approved by the prescribed authority (the DS1R), the impugned weighted deduction has to be granted as purpose of this beneficial provision is to encourage scientific research. The Revenue does not point out any distinction on facts and law. Nor does it highlight any factual infirmity in assessee's claim that the impugned: sum has not been incurred on clinical research. We reject the Revenue's corresponding ground accordingly in A.Y. 2007-08. Revenue's appeal IT(SS)A No. 38/Ahd/2011 is accordingly dismissed. 36. Further, it would be useful to reproduce the relevant extracts of the ruling by Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd. 31 taxmann.com 300 (Gujarat), wherein Gujarat held that Explanation to Section 35(2AB)(1) does not require that expenses included in said Explanation are essentially to be incurred inside an approved in-house research facility. The relevant extract of the ruling are reproduced for ready reference:- 16. The whole idea thus appears to be to give encouragement to scientific research. By the very nature of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act towards weighted deduction relating to expenditure on accepted batches, building maintenance and patent filing fees. 40. In appeal, Ld. CIT(A) dismissed the appeal of the assessee on this issue by following the order passed by Ld. CIT(A) and ITAT in assessee s own case for A.Ys. 2007-08 and 2008-09, with the following observations:- 6.14. However, with regard to the expenditure in the nature of exhibit batches and other expenses taken in plant area at Rs. 207.55 lacs, certain building maintenance expenses at Rs. 0.87 lacs and foreign patent filing expenses under capital expenditure at Rs. 0.19 lacs totalling to Rs. 208.61 lacs which were not approved by the DSIR. It has been noticed that in the preceding years, there is no precedence for this issue in favour of the appellant or rather the CIT(A) and the ITAT has decided against the appellant in A. Y. 2007-08 2008-09. Since the DSIR has not approved these expenditures for grant of weighted deductions, and therefore, the denial of the AO of granting the weighted deduction @ 50% works out to Rs. 104.31 lacs in respect of these fouritems of expenditures is found correct and justified, and hence, the same is confirme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istration of appellant's product in respective territories and related matter to Associated Enterprises (AEs) namely Accord Farmaceutical, Brazil, Accord Farma, SA, Accord Mexico, Accord Healthcare SAC, Peru and Accord Healthcare, USA. (b) That in the facts and circumstances of the case, the learned CIT(A) has failed to appreciate that all the aforesaid AEs were incorporated as marketing and distribution company for marketing and distribution of appellant's products in respective territories. (c) That in the facts and circumstances of case and in law, the learned CIT(A) has also failed to appreciate that as per local regulations prevalent in respective territories, every pharmaceutical product is required to be registered with local regulatory authorities before its sale in the territories. As the AEs of the appellant company are in start-up phase and also not engaged in independent business activities, the advances were given out of commercial expediency to ensure that the AEs can obtain necessary regulatory approval in time for marketing and distribution of appellant's products in respective territories. (d) That on the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and circumstances of case and in law, the learned CIT(A) has failed to appreciate that GP rate of partnership of 66% is higher than the GP rate of appellant company of 46.42% mainly due to tax incentive of around 10% available to the partnership firm under excise and VAT laws together with low cost of labour, power etc. (c) That on facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating and understanding the FAR as well as business models of the appellant and partnership firm and the industry in which both operates and thereby further erred in observing that broadly the functions performed, the activities carried out, assets employed and risk deployed by the appellant company and firm in relation to manufacturing of various products are similar. (d) That on facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance to the extent of Rs. 19,42,12,611/- even after recording following observations'. The comparison of net margins of six companies taken as base for working out the diversion of profits of the appellant company to the firm does not get substantiated. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. (f) Without prejudice to Ground No. 3(a) to 3(e) above, in the facts and circumstances of the case and in law, the learned CIT(A) while comparing selling and distribution expenses has also erred in excluding freight and forwarding expenses on sales from the selling and distribution expenses of the appellant company. 4. In the facts and circumstances of the case, the learned CIT(A) has erred in disallowing claim of deduction amounting to Rs. 1,59,65,500/- (50% of Rs. 317.73 lacs + Rs. 1.58 lacs) under section 35(2AB) of the IT. Act towards weighted portion relating to expenditure on exhibit batches and certain other expenses. The above grounds are independent and without prejudice to each other. The Appellant prays for leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal. 47. The Department has raised the following grounds of appeal:- 1. The Ld.CIT(A) has erred in law in deleting the upward adjustment of Rs 23859025/-made in respect of interest on loans and advances to Accord Newzeland, Accord UK and Accord Canada in whose case loans and advances have been converted int equity and adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. The assessee had given corporate guarantee to Citi Bank, India, to enable Citi Bank, Mexico to give guarantee to Accord, Mexico to purchase shares of Pharma Farmaiot Mexico. The Assessing Officer made an upward adjustment of Rs. 5,68,800/- pertaining to guarantee under taken by the assessee to be at arm s length. 49. The assessee filed appeal before Ld. CIT(A) who restricted the corporate guarantee fees @ 0.8% on the basis of submissions made by the assessee before the TPO/AO, with the following observations:- 4.11 Since the appellant himself has accepted to charge the guarantee fee @ 0.8% before the AO in the assessment proceedings which has been elaborately reproduced by the AO at Page 20 of the assessment order, therefore, the adjustment on account of guarantee commission made @ 0.8% on the US $ Rs. 6 lacs which comes to Rs. 2,27,520/- is confirmed. Thus, the guarantee commission adjustment of Rs. 2,27,520/- is confirmed and relief is granted for the balance amount of Rs. 3,41,280/- 50. Both the Department and Assessee are in appeal before us against the order passed by Ld. CIT(A), partly allowing the appeal of the assessee. 51. In our considered view, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be said to be capital expenditures. In fact debentures are in the nature of loans only (not the equity) which have been raised to fulfill the working capital requirements of the company and the-expenditures related to them are routine business expenditures which are allowable u/s. 37(1) of the I. T. Act. Those cannot be termed as capital expenditures. Thus, the disallowance made by the AO is uncalled for and hence the same is deleted. Reliance in this regard is placed on the following decisions:- o Commissioner of Income-tax V. Udaipur Secure Meters Ltd. [2008] 175 TAXMAN 567 (RAJ.) In view of catena of decisions, the expenditure incurred in issuing any debentures and raising loan as debentures is admissible, obviously because the debenture is also a loan. As the debenture, when issued, is a loan, whether it is convertible, or non-convertible,, it does not militate against the nature of the debenture, being loan. Therefore, the expenditure incurred would be admissible as revenue expenditure o Commissioner of Income-tax V. Havells India Ltd. [2012] 21 taxmann.com 476 (Delhi) It is well-settled that expenditure incurred in connection with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respective territories and related matter to Associated Enterprises (AEs) namely Accord Farmaceutical, Brazil, Accord Farma, SA, Accord Mexico, Accord Healthcare SAC, Peru and Accord Healthcare, USA. (b) That in the facts and circumstances of the case, the learned CIT(A) has failed to appreciate that all the aforesaid AEs were incorporated as marketing and distribution company for marketing and distribution of appellant's products in respective territories. (c) That in the facts and circumstances of case and in law, the learned CIT(A) has also failed to appreciate that as per local regulations prevalent in respective territories, every pharmaceutical product is required to be registered with local regulatory authorities before its sale in the territories. As the AEs of the appellant company are in start-up phase and also not engaged in independent business activities, the advances were given out of commercial expediency to ensure that the AEs can obtain necessary regulatory approval in time for marketing and distribution of appellant's products in respective territories. (d) That on the facts and circumstances of the case and in law, the learned CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the learned CIT(A) has failed to appreciate that GP rate of partnership of 60.02% is higher than the GP rate of appellant company of 50.18% mainly due to tax incentive of around 10% available to the partnership firm under excise and VAT laws together with low cost of labour, power etc. (c) That on facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating and understanding the FAR as well as business models of the appellant and partnership firm and the industry in which both operates and thereby further erred in observing that broadly the functions performed, the activities carried out, assets employed and risk deployed by the appellant company and firm in relation to manufacturing of various products are similar. (d) That on facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming the disallowance to the extent of Rs. 16,64,18,930/- even after recording following observations'. The comparison of net margins of six companies taken as base for working out the diversion of profits of the appellant company to the firm does not get substantiated. Companies selected by AO are more co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 3(a) to 3(e) above, in the facts and circumstances of the case and in law, the learned CIT(A) while comparing selling and distribution expenses has also erred in excluding freight and forwarding expenses on sales from the selling and distribution expenses of the appellant company. 4. In the facts and circumstances of the case, the learned CIT(A) has erred in disallowing claim of deduction amounting to Rs. 5,04,56,906/- (Rs.409.55 lacs + Rs. 95.01 lacs) under section 35(2AB) of the IT. Act towards weighted portion relating to expenditure on exhibit batches and certain other expenses. 5. (a) In the facts and circumstances of the case and in law, the learned CIT(A) erred in rejecting the claim of Rs. 12,86,51,799/- under section 35(1)(iv) of the Act (relating to expenditure incurred during the year on intangibles and accounted under capital work in progress on which no depreciation has been claimed later on) made by appellant company. (b) That in the facts and circumstances of the case and in law, the learned CIT(A) failed to appreciate that Article 265 of the Constitution of India lays down that no tax shall be levied except by authority of law. Hence onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction on the amount approved by DSIR in Form 3CL 5. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance u/s 14A of Rs 5,53,94,595/- without properly appreciating the facts of the case and the material brought on record. 6. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance of Rs 35,50,000/- in respect of increase in authorized share capital without properly appreciating the facts of the case and , the material brought on record. 7. The Ld.CIT(A) has erred in law and on facts in deleting the disallowance u/s 36(1)(iii) of Rs 37700339/- without properly appreciating the facts of the case and the material brought on record. 8. The Ld.CIT(A) has erred in law and on facts in deleting the ^disallowance u/s 40A(2)(b) of Rs 1,79,46,654/- without properly appreciating the facts of the case and the material brought on record. 9. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 10. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 11. The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een utilized in making investments in shares on which the income is exempt. As per the Assessing Officer, the assessee was required to prove that at the time of making investments, the assessee had interest free funds and that there was no diversion of interest bearing funds for non-business purposes. 65. In appeal, CIT(A) deleted the additions made by the Assessing Officer on the ground that the assessee had made investments in subsidiary companies namely Intas Biopharmaceuticals Ltd., Intas Pharma SEZ Ltd. and Astron Research Ltd. and the assessee did not derive any dividend income from these companies. Therefore, in absence of any exempt income, no disallowance was warranted in the hands of the assessee under Section 14A of the Act. Secondly, with respect to capital employed in partnership firm namely Intas Pharmaceuticals from which the assessee had derived share of profit, which was exempt under law, the CIT(A) observed that the investments made in the partnership amounting to Rs. 31.20 crores as on 31.03.2011 was much less than the average reserves and surplus funds of Rs. 710.84 crores. Accordingly, Ld. CIT(A) held that capital employed in the partnership firm has been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of capital employment in the partnership firm. 66. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A). 67. On going through the facts of the instant case, we observe that Ld. CIT(A) has given a categorical finding that firstly, with respect to investment in partnership firm, the assessee s own interest free funds were far in excess of the investments made in the partnership, yielding exempt income and accordingly, no disallowance is called for. Further, in respect of the other three companies, the Ld. CIT(A) observed that since no exempt income was earned by the assessee during the impugned year under consideration, there is no question of disallowance under Section 14A of the Act. Accordingly, in view of the instant facts and the judicial precedents on the subject and the observations made by the Ld. CIT(A), we find no infirmity in the order of Ld. CIT(A), so as to call for any interference. 68. In the result, Ground No. 5 of the Department s appeal is dismissed. Ground No.6 (Ld. CIT(A) erred in deleting disallowance of Rs. 35,50,000/- in respect of increase in authorized share capital 69. The brief facts in relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 and the same has been given effect in the final audited accounts by increasing the authorised share capital, consequently the issued capital through the corresponding transfer from the general reserve for the same. Thus, the expenditure incurred in the nature of stamp duty and fees etc. paid to ROC were ascertained liabilities which have been paid by the appellant in the year under consideration, thus the same is allowable deduction u/s. 37(1) of the I.T. Act. Since there was no inflow of funds, rather transfer of the reserve funds from the accumulated profits to the share capital in the form of bonus shares, and hence, the AOs reliance upon the judgment of Brooke Bond India Ltd. is misplaced. In fact the judgment of Hon'ble Court in the case of Brooke Bond India Ltd. was in respect of the expenses incurred on the issue of fresh share capital with inflow of funds, however, in the instant case, the facts are not similar as there was no inflow of funds in respect of issue of bonus shares, but it was the transfer of the accumulated profits into the share capital by issue of bonus shares. Thus, the direct judgment of Hon'ble Supreme Court in the case of General Insurance Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the capital advances were made for the purpose of Plant Machinery, Electric Installation and for other fixed assets. The Assessing Officer held that in absence of any evidences it was established that the assessee utilized borrowed funds for giving capital advances for the purpose of Capital WIP. Accordingly, the Assessing Officer held that interest on borrowed funds to the extent of advances utilized for the purpose of CWIP was to be capitalized and hence is disallowable under Section 36(1)(iii) of the Act. 77. In appeal before CIT(A), the assessee contended that CWIP advances were made for the purpose of business. The assessee submitted that it had sufficient interest free funds available in the form of share capital and reserves and surplus for purpose of giving CWIP advances to various parties. Ld. CIT(A) after going through the facts of the case and the judicial precedents cited by the assessee deleted the additions with the following observations:- 12.5. It is apparent that the appellant had granted the CWIP advances of Rs. 86,53,04,054/- while it had the interest free own funds of Rs. 599,67,89,9277- as on 31/03/2011 and Rs. 822,02,05,153/- as on 31/03/2010. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artment. The assessee's equity share capital Rs. 3.85 cores and reserve and surplus of Rs. 5.52 crores also were noted by the Tribunal. It found that the interest-free funds available with the assessee was far greater than the loan advanced to the sister concerns and as a corollary to that, it concluded that the borrowed money was not utilized for the purpose of advance to the sister concerns, as had been noted by the Assessing Officer. What had weighed with the Tribunal is the fact that the entire interest-free funds included owner's own capital and accumulated profits and other interest-free credits and loans and if the total interest-free advances including the debit balance of the partners did not exceed the total interest-free funds available with the assessee, interest was not disallowable merely on account of the utilization of the funds for non-business purposes. Thus, as can be seen the Tribunal actually relied on the findings given in case of Torrent Financiers (supra) and furthermore there was nothing contrary that could be brought on record by the Department for it to hold otherwise. Factually, it found huge funds were available without any interest liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial question of law arise with respect to deletion of the disallowance made by the AO under section 36(1)(iii) of the IT Act. (iv) The Hon ble Supreme Court in case of Munjal Sales Corporation 298 ITR 298 has also observed that when assessee has sufficient interest free funds to grant advances to sister concern, no disallowance of interest is justified. (v) The Hon ble Ahmedabad I.T.A.T. in case of Paresh Lal Chand Shah in ITA no 3408/Ahm/2010 vide its order dated 29th April 2013 has decided the similar issue in favour of assessee after considering the decision of Raghuvir Synthetics Limited referred supra. (vi) S. A. Builders Ltd. Vs. CIT (Appeals) ANR 288 ITR 1 (SC) wherein it has been held as under:- Interest on borrowed funds cannot be disallowed if the assessee has advanced interest free loan to a sister concern as a measure of commercial expediency; what is to be seen is business purpose and what the sister concern did with the money advanced. (vii) CIT Vs. Reliance Utilities Power Ltd., 313 ITR 340 (2009) (Bom.) wherein it has been held as under:- Tribunal having recorded a clear finding that the assessee possessed su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceed the loans and advances made to the three concerns. The percentage of loans and advances in relation to the own funds of the assessee company would be 0.012 percent as on 1st April 1994 and 0.0135 percent as on 31st march 1995, as per details furnished. In other words where sufficient funds available with the company on which no interest was paid and out of which the loans and advances to the above said concerns could be made. There is no clear evidence that the interest bearing loans taken by the assessee company for the purpose of its own business have been diverted for non business purpose, no direct nexus has been proved either by the AO or by the CIT(A) between the interest bearing loans taken and the interest free advances given. In this view of the matter, the AO is directly to delete the addition ShahibaugEnterprenuers v. ITO [1994] 49 TTJ (Ahd) 554; (1994) 50 ITD 113 (AMD) Durametalic India vs. I Ac (1991) 38 ITD 211 (Mad.) 209; (1993) 46 ITD 389 (Mad.) 138 ITR 45 (Guj) CIT vs. Hotel Severa (1998) 148 CTR (Mad.) 585 and Regal Theatre vs. CIT (1998) 100 Taxman 116 (Del.) relied on . x) ITO Vs. Anjani Synthetics Ltd. [2012] 20 Taxmann. com 121 (Ahd. ITAT) dated 07/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of payments to parties under Section 40A(2)(b) of the Act has not been established. The A.O. was of the view that the assessee did not furnish any comparative bills and in absence of production of specific evidences of purchase from outside parties, the payment in respect of purchases made from related parties was excessive having regard to the Fair Market Value of the services in view of the provisions of Section 40A(2)(b) of the Act. Accordingly, a lumpsum disallowance @ 2.5% of the purchase / payments was disallowed by the A.O. and added to the income of the assessee. 81. In appeal before Ld. CIT(Appeals), the assessee submitted that it has made payments towards R D clinical expenses of Rs. 49,89,38,734/- to Lambda Therapeutic Research Ltd. for clinical trials which was essential before launching any products in the market. The assessee submitted that due to various factors, comparison of payment towards clinical trials is not possible and further it was submitted that Lambda is also under the same tax bracket as the assessee, and therefore, there was no reason to make any excessive payments. Further, the assessee submitted that it made payment towards Research Developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificate of Financial Broker, Fakhari JabirbhaiJambughodawala of Dahod dated 14-09-2009 wherein prevailing market rate of interest on deposits during F. Y. 2000-01 to 2004-05 has been confirmed to be 12% to 18 and during F. Y. 2005- 06 and 2006-07 the same has been confirmed to be 127o to 15%. We also find that ITAT Ahmedabad A Bench in the case of M/s. Krishna Terene Pvt. Ltd. in ITA No.775/And/2010 dated 30-03-2012 wherein the similar issue was decided in favour of the assessee and against the revenue. The relevant portion of the findings of the Tribunal in the above case is reproduced herein below: 3. We have considered the rival submissions and perused the orders of the AO and the learned CIT(A) and also the orders of the AO and the learned CIT(A) in the immediately preceding Assessment Year 2004-05. We find that in similar facts the addition made u/s 40A(2)(b) of the Act on account of IT (SS) A No. 50, 51 and 521 A/2010 (AY: 2001-02 to 2003-04) 6 Laxmi Pulse Rice Roller Mills, Vs ACIT, CC-1, Baroda excessive interest in the immediately preceding assessment year 2004-05 was deleted by the learned CIT(A) in the case of the assessee vide his order dated 29-01-2008. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t value of the facilities, for which the payment had been made, before concluding that expenditure was excessive or unreasonable. We are of the opinion that disallowance under s. 40A(2) is to be considered vis - a -vis the market value of the services or facilities or an fulfillment of any of the other ingredients mentioned hereinbefore and not the individual action of the assessee in charging or paying interest. In view therefore, we are not inclined to interfere with the conclusion drawn by the Ld. CIT (A). Therefore, ground nos. 1 2 in this appeal are dismissed. Hon'ble ITAT Ahmedabad in the case of DC/T Vs. M/s Cama Hotels Ltd. ITA No. 1834/Ahd/2012, where in it is held that, It has avoided a lot of formalities by taking loans from the associate concern. In our opinion, the payment of interest at a little higher rate to the persons even if covered u/s.40A(2)(b) cannot be termed as exorbitant when the fair market value of such interest cost is being considered. The assessee has paid interest commensurate with the interest rate prevailing in the open market. An order of the ITAT, Ahmedabad in ITA No.869/Ahd/2010 rendered in case of Vipul Y. Mehta vs. AC IT h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low this ground of appeal of the assessee. 14.9. Even the AO has not given any reason or justification for adopting this rate of 2.5% and neither he has given any specific or comparable instance to show that payment made to these parties were not reasonable or not as per the prevalent fair market value. Thus, the disallowance was made on adhoc basis on pure estimate and hence not sustained. Thus, the disallowance is deleted. 82. On going through the facts of the instant case we are of the considered view that Ld. CIT(A) has correctly observed that the A.O. was not justifying in adopting a lumpsum rate of 2.5% of such expenses as being excessive and there was no basis or rationale for arriving at such ad-hoc percentage for making disallowance under Section 40A(2)(b) of the Act. Further, we are also of the considered view that Ld. CIT(A) has correctly observed that the Assessing Officer has also not given any specific comparable instances to show that payment made to these parties was not reasonable or not as per prevalent Fair Market Value. Accordingly, we find no infirmity in the order of the Ld. CIT(A) so as to call for any interference. 83. In the result, Ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee relied on the decision of CIT vs. Mitesh Impex 46 taxmann.com 30 (Gujarat) and submitted that the Gujarat High Court has held that the Tribunal is within its power to entertain a new claim for the first time even though the same has not been made before the A.O. In this case the Gujarat High Court has held that income tax proceedings are not strictly speaking adversarial in nature and the intention of Revenue would be to tax real income. The Counsel for the assessee submitted that the assessee is eligible for claim of deduction as under Section 35(1)(i) of the Act and in the interest of justice, the matter may be referred to the file of A.O. for consideration of the claim of the assessee on this issue. 87. On going through the instant facts and the decision cited by the assessee, we are of the considered view that in the interest of justice, the matter may be referred to the file of A.O. for consideration of the claim made by the assessee for deduction under Section 35(1)(i) of the Act. 88. In the result, Ground No. 5 of the assessee s appeal is allowed for statistical purposes. Ground No. 6 (CIT(A) erred in not admitting additional ground raised by assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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