2017 (4) TMI 1434 - AT - Income Tax

Interest on Loan to AEs at LIBOR plus rate - interest on 0% OFCD - HELD THAT - As decided in assessee s own case 2016 (2) TMI 924 - ITAT AHMEDABAD issue to be decided in favour of assessee since the Assessee has converted the loan into equity in the immediate next year, there was no question of taxing notional interest. He has further held that Assessee had not granted interest free loan but invested in optionally convertible loan with a clause of interest in case, Conversion option was not exercised and further held the Assessee s transaction with subsidiary was at arms length.Revenue could not controvert the findings of CIT(A) by bringing any contrary material on record. Addition on account of interest on short term business advances - HELD THAT - We find that in the immediately preceding assessment year, the First Appellate Authority himself has taken the interest rate at LIBOR plus 0.25%. We also find that even that plus rate taken by the First Appellate Authority did not find any favour with the Tribunal Supra . Taking a leaf out of the findings of the Co-ordinate Bench in A.Y. 2006-07, in our considered opinion, upward adjustment at LIBOR rate should meet the ends of justice. We, accordingly, direct the A.O. to charge interest at LIBOR rate. This ground is partly allowed. Interest on Optionally Fully Convertible Debentures subscribed to in sun Pharma Global Inc. - HELD THAT - Isuue to be decided in favour of the assessee and against the revenue in 2016 (2) TMI 924 - ITAT AHMEDABAD CIT(A) while deleting the addition has noted that as per the agreement, the interest was payable only if the conversion option was not exercised on the expiry of 5 year period. If at any time during the 5 year period conversion option was exercised and the loan was converted into equity, no interest accrued or become payable - funds were provided by the Assessee as per RBI guidelines and in the immediately next year, the entire loan given to subsidiary was converted into equity shares of Zydus International Pvt. Ltd.- since the Assessee has converted the loan into equity in the immediate next year, there was no question of taxing notional interest. Assessee had not granted interest free loan but invested in optionally convertible loan with a clause of interest in case, Conversion option was not exercised and further held the Assessee s transaction with subsidiary was at arms length. Revenue could not controvert the findings of CIT(A) Corporate Guarantee provided to associated enterprises - HELD THAT - We restore this issue to the files of the A.O. with a direction that the same must be considered afresh after the decision from the MICRO INKS LTD. 2016 (7) TMI 1461 - GUJARAT HIGH COURT and after giving a fresh opportunity of being heard to the assessee. Ground no. 5 is treated as allowed for statistical purpose. Trade mark registration and overseas product registration charges u/s. 35(2AB) - HELD THAT - On identical set of facts, the Mumbai Bench in the case of USV Ltd. 2012 (9) TMI 43 - ITAT MUMBAI has allowed the claim of the assessee in respect of expenditure incurred in respect of patent application. Respectfully, following the findings of the co-ordinate Bench (supra), we direct the A.O to delete the disallowance Allowable expenditure u/s 37 - expenses on business of the partnership firm - HELD THAT - Understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee and not for the purposes of earning profit. As per the agreement between the assessee company and the partnership firm, the assessee had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Thus, it cannot be said that the expenditure incurred by the assessee are not for the purposes of its business. Since the assessee is holding 95% in the partnership firm it becomes the duty of the assessee to promote the business of the partnership firm, in the capacity of the majority stake holder. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee s business or the business of the partnership firm where the assessee is a majority stake holder. Therefore, in our considered opinion, the expenditures incurred by the assessee company deserves to be allowed and we direct the A.O to delete the addition - no disallowance should be made u/s. 37 (1) of the Act. Disallowance made u/s. 14A - expenditure made for earning the exempt income - HELD THAT - Reasonable disallowance of expenditure should be made for earning the exempt income so far as the share of profit from the partnership firm SPI is concerned. We are conscious about the fact that Rule 8D is not applicable for the year under consideration but at the same time for the computation of disallowance for administrative expenditures, the formula given under Rule 8D is the most appropriate method for the computation of the disallowance. We accordingly direct the A.O. to compute the disallowance so far as administrative expenditures are concerned as per Rule 8D of the ITAT Rules r.w.s. 14A Foreign Exchange Fluctuation Gain as taxable income - HELD THAT - Profits accrued to the assessee is not in the course of any trading activity but on account of appreciation on account of hedging in forex even if the same has been held for investment purposes. Therefore, such gains have to be treated as capital receipt. For this proposition, we draw support from the decision of the Hon ble High Court of Bombay in the case of Homi Mehta Sons Pvt. Ltd. 1994 (3) TMI 2 - BOMBAY HIGH COURT . We find that the forward contract in respect of investment in Caraco and OFCD in Global are on capital account and any profits received by assessee on cancellation of forward contract would not change its character same being in connection with a capital asset and, therefore, has to be treated as capital receipt. Disallowance of provision for Leave Encashment u/s. 43B - HELD THAT - Once again both sides conceded that the Hon ble Supreme Court is seized with an identical issue in the case of Exide Industries Ltd. 2009 (5) TMI 894 - SUPREME COURT . Therefore, it would be appropriate to restore this issue to the files of the A.O. The A.O. is directed to decide this issue afresh after the decision of the Hon ble Supreme Court and after giving a reasonable opportunity of being heard to the assessee. Ground no allowed for statistical purpose. Disallowance of depreciation on motor car @ 30% instead of 15% as per provisions of law - HELD THAT - It is true that the main business of the assessee is manufacturing of bulk drugs as well as formulation products. It is equally true that the assessee is also in the business of leasing and finance activity. There is no dispute that the Hire charges have been assessed as business income. Therefore, we do not find any reason why the higher rate of depreciation should not be allowed. In our considered opinion, once the basic conditions are duly satisfied, there is no bar for claiming higher depreciation. Moreover, this issue is now well settled in favour of the assessee and against the revenue by the Hon ble Supreme Court in the case of ICDS Ltd. 2013 (1) TMI 344 - SUPREME COURT Deduction of FBT provision while calculating book profit u/s. 115JB - HELD THAT - An identical issue has been considered in the case of ASB International P. Ltd. 2012 (8) TMI 335 - ITAT MUMBAI Excess deduction while calculating book profit u/s. 115JB for deduction u/s. 10B - HELD THAT - This s issue is no more res integra because the Hon ble Supreme Court in the case of Ajanta Pharma Limited 2010 (9) TMI 8 - SUPREME COURT has decided this issue in favour of the assessee and against the revenue. The Hon ble Supreme Court has laid down the ratio that 100% of the export profits earned by the assessee as computed u/s. 80HHC(3) was eligible for deduction under clause (iv) of the Explanation to section 115JB Allowable revenue expenses u/s 37 - purchase of batteries - HELD THAT - The impugned expenditures are for the purpose of preserving and maintaining the already existing assets. The expenditures are for the purpose of replacement of defective parts of main machine or they are incurred on repairs and maintenance and have not resulted into creation of any new asset leading to any new advantage. Insofar as the purchase of 206 batteries for UPS is concerned, such batteries are used in the normal course of business and are required to be replaced after regular interval for efficient functioning of the UPS. Therefore, the purchase of batteries cannot be considered as creation of any new asset.

Summary

Issues Involved:
1. Addition on account of interest on loans to associated enterprises.
2. Addition on account of interest on short-term business advances.
3. Addition on account of interest on Optionally Fully Convertible Debentures (OFCD).
4. Addition on account of corporate guarantee fees.
5. Disallowance of weighted deduction claimed under section 35(2AB).
6. Disallowance under section 14A for expenses incurred on behalf of Sun Pharmaceutical Industries.
7. Taxability of foreign exchange fluctuation gain.
8. Reduction of unrealized export proceeds for deduction under section 10B.
9. Disallowance of provision for leave encashment under section 43B.
10. Disallowance of weighted deduction on gift expenses for R&D employees.
11. Disallowance of depreciation on motor cars.
12. Allowance of deduction of FBT provision while calculating book profit under section 115JB.
13. Addition on account of sales to Sun Pharma Industries.
14. Addition on account of foreign exchange gain.
15. Disallowance of expenses under section 40(a)(ia).
16. Disallowance of certain repair expenses as capital expenditure.

Detailed Analysis:

1. Addition on Account of Interest on Loans to Associated Enterprises:
The Tribunal directed the AO to delete the addition of ?5,21,70,765/- on account of interest on loans to Sun Pharma Global Inc. The Tribunal referenced its own decision in the assessee's case for A.Y. 2006-07, where it was held that the revenue has no power to re-characterize the transaction and that the interest rate charged at LIBOR was justified.

2. Addition on Account of Interest on Short-Term Business Advances:
The Tribunal directed the AO to charge interest at the LIBOR rate for short-term business advances to Sun Pharmaceuticals U.K. Ltd., Sun Pharmaceuticals Ltd., and Sun Pharmaceuticals Peru SAC, reducing the addition from ?12,55,719/-.

3. Addition on Account of Interest on OFCD:
The Tribunal followed its earlier decision and directed the AO to delete the addition of ?33,16,53,612/- on account of interest on OFCD subscribed to in Sun Pharma Global Inc.

4. Addition on Account of Corporate Guarantee Fees:
The Tribunal restored the issue regarding the addition of ?39,48,000/- for corporate guarantee fees to the AO for fresh consideration after the decision from the Hon’ble Jurisdictional High Court of Gujarat.

5. Disallowance of Weighted Deduction Claimed under Section 35(2AB):
The Tribunal directed the AO to allow the weighted deduction on trade mark charges and overseas product registration charges, following its earlier decisions in the assessee's case.

6. Disallowance under Section 14A for Expenses Incurred on Behalf of Sun Pharmaceutical Industries:
The Tribunal directed the AO to recompute the disallowance for administrative expenditures as per Rule 8D of the ITAT Rules r.w.s. 14A of the Act, setting aside the disallowance of ?27,55,18,783/- made by the First Appellate Authority.

7. Taxability of Foreign Exchange Fluctuation Gain:
The Tribunal directed the deletion of the addition of ?14,33,80,289/- on account of foreign exchange gain, treating the gains as capital receipts.

8. Reduction of Unrealized Export Proceeds for Deduction under Section 10B:
The Tribunal directed the AO to follow the decision in the assessee's own case for A.Y. 2001-02, applying the provisions of section 155(13) and deciding the issue afresh.

9. Disallowance of Provision for Leave Encashment under Section 43B:
The Tribunal restored the issue to the AO to decide afresh after the decision of the Hon’ble Supreme Court in the case of Exide Industries Ltd.

10. Disallowance of Weighted Deduction on Gift Expenses for R&D Employees:
The Tribunal dismissed the ground as not pressed by the assessee due to the smallness of the amount involved.

11. Disallowance of Depreciation on Motor Cars:
The Tribunal upheld the allowance of higher depreciation @ 30% on motor vehicles used for hire, following the Hon’ble Supreme Court's decision in the case of ICDS Ltd.

12. Allowance of Deduction of FBT Provision while Calculating Book Profit under Section 115JB:
The Tribunal upheld the allowance of deduction of FBT provision while calculating book profit, following the decision of the Hon’ble High Court of Bombay in the case of ASB International P. Ltd.

13. Addition on Account of Sales to Sun Pharma Industries:
The Tribunal directed the AO to delete the addition of ?1,16,56,762/- made on account of sales to Sun Pharma Industries, following its earlier decision in the assessee's case.

14. Addition on Account of Foreign Exchange Gain:
The Tribunal directed the deletion of the addition, treating the foreign exchange gain as a capital receipt.

15. Disallowance of Expenses under Section 40(a)(ia):
The Tribunal restored the issue to the AO to decide afresh after considering the decision of the Tribunal Mumbai Benches.

16. Disallowance of Certain Repair Expenses as Capital Expenditure:
The Tribunal upheld the deletion of the disallowance of ?23,68,918/- made on account of certain repair expenses, treating them as revenue expenditure.

Conclusion:
The Tribunal provided detailed directions on various additions and disallowances, often referencing its own decisions and higher court rulings. The key issues revolved around the proper characterization of interest, foreign exchange gains, and the applicability of specific sections of the Income Tax Act. The Tribunal emphasized the need for proper benchmarking and adherence to judicial precedents.