2017 (1) TMI 1390 - AT - Income Tax

TPA - determining arm s length interest rate in international transactions - adopting interest rate of 14 per cent. as applicable to corporate bonds - TPO ignoring LIBOR as a benchmark for determining arm s length price - Held that - In the assessee s own case for the assessment year 2006-07 the Tribunal has taken note of the LIBOR at 4.42 per cent. rate and has observed that the assessee has accepted 7 per cent. in earlier years which is equivalent to LIBOR 2 per cent. Therefore the Tribunal has directed the Transfer Pricing Officer to adopt 7 per cent. For the year before us also the facts and circumstances being similar we direct that the Transfer Pricing Officer/Assessing Officer to adopt LIBOR 2 per cent. or 7 per cent. whichever is higher as the arm s length price interest. The assessee s ground of appeal No. 1 is therefore treated as allowed for statistical purposes. Disallowing the claim for transitional liability of leave encashment - Held that - We find that the actual payment made by the assessee towards the leave encashment to the employees is an allowable expenditure under section 43B(f) of the Act. Admittedly the assessee has not paid a sum of 2, 74, 08, 816 and has only debited it to the profit and loss appropriation account. As regards the sum of 5, 42, 92, 558 which is claimed to have been paid to the employees we deem it fit and proper to remand the issue to the file of the Assessing Officer for verification of the assessee s claim and if it is found to be correct then the Assessing Officer shall allow the claim of the assessee. Accordingly ground No. 2 is treated as allowed for statistical purposes. Disallowing amortisation of deferred stock compensation (ESOP cost) on the ground that the expenditure is notional and capital in nature - Held that - We find that this issue is covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Biocon Ltd. v. Deputy CIT (2013 (8) TMI 629 - ITAT BANGALORE ) wherein it was held that the ESOPs discount is a deductible discount at the time of vesting of the option. Thus the issue is remanded to the file of the Assessing Officer with a direction to work out the deduction keeping in mind the principles laid down by the Special Bench in the above case after giving an opportunity of hearing to the assessee. Disallowing the expenditure incurred in connection with cyto project - revenue or capital - Held that - We find that the assessee is in the business of research development and manufacture of pharmaceuticals. The process of research includes trial run of a new drug. Therefore the assessee s experiments on a new drug cannot be said to be a new line of business. We find that during the assessment year 1999-2000 the assessee had incurred pre-operative expenses on Biotechnology Division and the Assessing Officer therein had treated this expenditure as capital expenditure. We find that the facts in the present case are similar i.e. the expenses are for a new product in the existing diagnostic and formulation business and are not for a new business of the assessee. We hold that the expenditure incurred by the assessee towards cyto products is allowable as revenue expenditure. See Glaxo Smith Kline Consumer Healthcare Ltd. v. Asst. CIT 2007 (3) TMI 300 - ITAT CHANDIGARH-A . This ground of appeal is therefore is allowed Disallowing the expenditure incurred in connection with ADS issue - the expenditure is incurred in connection with increase in the capital base of the company and capital in nature - Held that - we are of the opinion that the Assessing Officer and the Dispute Resolution Panel ought to have verified the said expenditure before making the disallowance. In view of the same we deem it fit and proper to remand the issue to the file of the Assessing Officer for de novo consideration in accordance with the law more particularly in view of the decision of the Delhi Bench of the Income-tax Appellate Tribunal in the case of Chinatrust Commercial Bank v. Addl. DIT (International Taxation) 2007 (1) TMI 293 - ITAT DELHI and also case of India Cements Ltd. v. CIT 1965 (12) TMI 22 - SUPREME Court . Therefore the ground of Appeal No. 5 is partly allowed for statistical purposes. Payment to Institute of Life Sciences ( ILS ) for research project - deduction claimed under section 35(1)(ii) - Held that - The assessee has not brought on record either before the Dispute Resolution Panel or before this Tribunal as to how the assessee is being benefited in any way by the results of the research carried on by the ILS. Therefore the commercial expediency of the donation to ILS has not been established by the assessee. In the assessee s own case for the assessment year 2003-04 the Tribunal without giving elaborate reasons has held that the donation given to the institutions mentioned therein are incurred in the course of business and allowable under section 37(1) of the Act. For the assessment year 2006-07 the Tribunal has only remanded the issue to examine the allowability of donation to ILS under section 37(1) of the Act. Therefore there is no finding about the allowability of the same by the Tribunal. In view of the same we do not see any reason to interfere with the assessment order on this issue and the ground of appeal No. 6 is rejected. Depreciation on goodwill - company by name American Remedies Ltd. had got merged with the assessee - Held that - Having regard to the rival contentions and the material on record and respectfully following the decision of the Hon ble Supreme Court in the case of CIT v. Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) wherein it has been held that goodwill is also an intangible asset eligible for depreciation thereon we direct the Assessing Officer to allow depreciation on goodwill. Weighted deduction of 150 per cent. under section 35(2AB) in respect of expenditure on scientific research incurred by Perlecan in the assessee s facility - Held that - As pointed out by the learned counsel for the assessee the in-house research and development facility of the assessee is approved by the DSIR as provided under section 35(2AB). From page 485 of the paper book it is seen that the expenditure approved by the DSIR includes a sum of 1054.314 lakhs on account of Perlecan Pharma Pvt. Ltd. Copy of Form 3CL is placed on record. By virtue of merger with effect from June 1 2006 all the activities of the Perlecan are also the activities of the assessee. As the facility and also the expenditure has already been approved by the relevant authority we are of the opinion that post merger the said expenditure cannot be reduced while allowing the deduction under section 35(2AB) of the Act. Therefore in our opinion the deduction under section 35(2AB) is allowable even on the expenditure incurred on Perlecan Pharma after January 1 2006 i.e. the date of its merger. Allowance of expenditure as per section 35(1)(i) and section 35(1)(iv) - Held that - The assessee is eligible for deduction under section 35(1)(i) and 35(1)(iv) of the Act of 100 per cent. of the expenditure incurred by the assessee on research and development centres not approved by DSIR. In view of the same we set aside the issue to the file of the Assessing Officer to reconsider the same in accordance with law. It has also been brought to our notice by the learned counsel for the assessee that for the assessment years 2003-04 and 2004-05 the Commissioner of Income-tax (Appeals) has allowed deduction on clinical trials by orders dated November 18 2013 in the appeals filed by the assessee against the order under section 154 of the Act dated March 26 2005. The Assessing Officer shall also consider these orders also while allowing the expenditure incurred by the assessee on clinical trials. Ground of appeal No. 9 is accordingly treated as allowed for statistical purposes. Disallowing the expenditure in connection with doctors business promotion gifts - whether the expenditure is incurred in connection with the business - Held that - We set aside the issue to the file of the Assessing Officer with a similar direction to verify the nature of the expenditure and disallow only such expenditure which is not incurred for the business purposes of the assessee. This ground is accordingly treated as allowed for statistical purposes. TDS u/s 195 - payments towards technical services - non deduction of TDS - Held that - Only providing final results to its Indian clients by using highly sophisticated bio-analytical know-how without providing any access whatsoever to the clients to such know- how fee received by it is business income and not fee for technical/included services or royalty and applicant having no permanent establishment in India such income would not be taxable in India by virtue of relevant provisions of the Double Taxation Avoidance Agreement between India and Canada . The amounts paid by the assessee-company for technical services are not taxable in India. That being so there is no need for the assessee to deduct tax at source. Allocate corporate overhead while computing deduction under section 10B for Paidibhimavaram unit - Held that - We find that in the assessee s own case for the assessment year 2006-07 the co-ordinate Bench of this Tribunal at Mumbai has considered this issue at paragraph 12.5 and following the decision of the assessee s own case for the assessment year 2003-04 this issue is set aside to the file of the Assessing Officer for re-examination of the claim on similar lines.The learned counsel for the assessee submitted that it is only the net expenditure and not the gross expenditure which should be allocated amongst all the units. We agree with the contention of the assessee and direct the Assessing Officer to allocate the only net expenditure of the corporate entity amongst all the units on the basis of the turnover. Thus the alternate contention of the assessee is allowed. Addition of interest - loan to its subsidiary in Cyprus - Double Taxation Avoidance Agreement with Cyprus - Held that - We deem it fit and proper to remand the issue to the file of the Assessing Officer to verify whether the taxpayer has paid tax on interest income in India and if so to allow the deduction of the tax admitted to have been paid under article 25(2) of the Double Taxation Avoidance Agreement read with article 25(4) of the Act of the Double Taxation Avoidance Agreement. This ground of appeal is therefore treated as allowed for statistical purposes. Nature of expenditure - expenditure of implementation of ERP package - Held that - Expenses on ERP implementation has been held to be revenue . Laying of road though it gives enduring benefit to the assessee we find that it can only be for facilitating the assessee to carry on the business of the assessee effectively and hence is revenue in nature. Expenditure on furniture the details of such furniture is not placed on record and therefore it is not possible to give any finding on the nature of such expenditure. Further the break-up of expenditure of roads as well as furniture is also not given. Therefore with a finding that the ERP implementation charges and the laying of road be treated as revenue expenditure the issue of the nature of expenditure on furniture only is set aside to the file of the Assessing Officer for de novo consideration.

Summary

Issues Involved:
1. Determination of arm's length interest rate in international transactions.
2. Disallowance of transitional liability for leave encashment.
3. Disallowance of amortization of deferred stock compensation (ESOP cost).
4. Disallowance of expenditure incurred on cyto project.
5. Disallowance of expenditure on ADS issue.
6. Disallowance of payment to Institute of Life Sciences (ILS).
7. Disallowance of depreciation on goodwill.
8. Disallowance of weighted deduction under section 35(2AB).
9. Disallowance of expenditure under section 35(1)(i) and 35(1)(iv).
10. Treatment of repair and maintenance expenditure.
11. Disallowance of expenditure on doctors, business promotion, gifts.
12. Disallowance of payments for technical services due to non-deduction of tax at source.
13. Allocation of corporate overheads for deduction under section 10B.
14. Disallowance of withholding tax credit under Indo-Cyprus Double Taxation Avoidance Agreement.
15. Jurisdiction of Dispute Resolution Panel under section 144C(8).
16. Charge of interest under sections 234B, 234C, and 234D.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Interest Rate:
The Transfer Pricing Officer (TPO) adopted a 14% interest rate based on corporate bonds to determine the arm's length price (ALP) for interest on loans given to subsidiaries. The assessee argued for a LIBOR-based rate. The Tribunal directed the TPO to adopt LIBOR + 2% or 7%, whichever is higher, as the ALP interest rate, aligning with previous decisions in similar cases.

2. Disallowance of Transitional Liability for Leave Encashment:
The assessee claimed a transitional liability for leave encashment under AS-15, which was disallowed by the Assessing Officer (AO) for not being debited to the profit and loss account. The Tribunal remanded the issue to the AO to verify the actual payment made and allow the claim accordingly, following precedents that allow such deductions under section 43B(f).

3. Disallowance of Amortization of Deferred Stock Compensation (ESOP Cost):
The AO disallowed the ESOP cost as notional and capital in nature. The Tribunal referred to the Special Bench decision in Biocon Ltd. v. Deputy CIT, which allows ESOP discounts as deductible expenses. The issue was remanded to the AO to work out the deduction in line with the Special Bench's principles.

4. Disallowance of Expenditure on Cyto Project:
The AO treated trial run expenses for cancer drugs as capital expenditure. The Tribunal held that such expenses are revenue in nature, as they pertain to the existing business of research and development in pharmaceuticals. The expenditure was allowed as revenue expenditure.

5. Disallowance of Expenditure on ADS Issue:
The AO disallowed the ADS issue expenses as capital expenditure. The Tribunal upheld the disallowance but remanded the issue to the AO for reconsideration under section 35D, following the decision in Chinatrust Commercial Bank v. Addl. DIT.

6. Disallowance of Payment to Institute of Life Sciences (ILS):
The AO disallowed the payment to ILS for lack of approval under section 35(1)(ii). The Tribunal upheld the disallowance, as the assessee failed to establish the commercial expediency of the payment.

7. Disallowance of Depreciation on Goodwill:
The AO disallowed depreciation on goodwill. The Tribunal directed the AO to allow depreciation, following the Supreme Court's decision in CIT v. Smifs Securities Ltd., which recognizes goodwill as an intangible asset eligible for depreciation.

8. Disallowance of Weighted Deduction under Section 35(2AB):
The AO disallowed the weighted deduction for research and development expenditure incurred by Perlecan Pharma, a merged entity. The Tribunal held that post-merger, the expenditure incurred by Perlecan is eligible for deduction under section 35(2AB), as the research facility was already approved by DSIR.

9. Disallowance of Expenditure under Section 35(1)(i) and 35(1)(iv):
The AO disallowed the deduction for research and development expenditure not approved by DSIR. The Tribunal allowed 100% deduction under sections 35(1)(i) and 35(1)(iv) for such expenditure and remanded the issue to the AO for verification.

10. Treatment of Repair and Maintenance Expenditure:
The assessee did not press this ground, and the Tribunal rejected it as not pressed.

11. Disallowance of Expenditure on Doctors, Business Promotion, Gifts:
The AO disallowed these expenses as personal in nature. The Tribunal remanded the issue to the AO to verify the nature of the expenditure and allow only those incurred for business purposes.

12. Disallowance of Payments for Technical Services Due to Non-Deduction of Tax at Source:
The AO disallowed payments for technical services to foreign companies for non-deduction of TDS. The Tribunal allowed the claim, following the decision in the assessee's own case, which held that such payments are not taxable in India under the Double Taxation Avoidance Agreement.

13. Allocation of Corporate Overheads for Deduction under Section 10B:
The Dispute Resolution Panel directed the allocation of corporate overheads to eligible units. The Tribunal remanded the issue to the AO to allocate only net expenditure on the basis of turnover.

14. Disallowance of Withholding Tax Credit under Indo-Cyprus Double Taxation Avoidance Agreement:
The AO disallowed the tax credit for interest received from a Cyprus subsidiary. The Tribunal remanded the issue to the AO to verify if the interest was taxed in India and allow the deduction accordingly.

15. Jurisdiction of Dispute Resolution Panel under Section 144C(8):
The Tribunal found the ground premature as it was an observation, not a direction, and rejected it.

16. Charge of Interest under Sections 234B, 234C, and 234D:
The Tribunal directed the AO to give consequential relief based on the Tribunal's order.

Conclusion:
The appeals were partly allowed, with several issues remanded to the AO for reconsideration and verification in accordance with the Tribunal's directions and relevant legal precedents.