2017 (9) TMI 1804 - AT - Income Tax

TP Adjustment - Addition on account of share application money advanced to Sun Pharma global Inc (SPGI) - TPO was of the opinion that the assessee should have charged interest at LIBOR plus basis - whethr assessee had sourced the application money to its AE out of the excess funds lying idle out of the issue of FCCB - contentions of the assessee did not find any favour with the AO/TPO who computed the arms length interest rate at average Libor plus 3.95% which included foreign exchange risk of 1% - HELD THAT - The decision of the Tribunal in assessee s own case and pointed out that the issue has been decided in favour of the assessee and against the revenue by the Bench the assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of time it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder- as is the factual position in this case. The nominal value of shares as long as all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of the adjustment made by the Assessing Officer is therefore wholly devoid of legally sustainable merits and factually correct assumptions. Interest on fully convertible optional debentures subscribed to Sun Pharma Global Inc (SPGI) - addition being the amount of interest on 0% OFCD subscribed to in SPGI. The AO/TPO has made the upward adjustment on the basis of Average six month LIBOR of 2.69% spread over LIBOR of 3.95% totaling to 6.64% - HELD THAT - OFCD were on beneficial terms as per facts mentioned above. Consequently no hesitation to follow earlier judgment in assessee s own case as a result we delete the impugned additions. Ground of assessee is allowed Addition on account of Corporate Guarantee Provided to associated enterprises Sun Pharmaceutical Bangladesh Ltd. - HELD THAT - As decided in assessee s own case 2017 (4) TMI 1434 - ITAT AHMEDABAD treated as allowed for statistical purpose. Addition on account of Sale of Pantoprazole to Sun Pharma Global BVI and Sun Pharma Global FZE - HELD THAT - No merit in the findings of the First Appellate Authority in accepting the application of PSM as the MAM in our understanding of the facts TNMM is the MAM on the given facts and the same is accepted as such. We set aside the findings of the ld. CIT(A) and direct to delete the addition. Addition on account of sale of drugs to SPG BVI and SPG FZE - HELD THAT - As mentioned elsewhere the reasoning given for making the addition are underline with the reasoning given for making similar additions in A.Y. 2008-09 for the sale of pantoprazole. The only distinguishing fact relates to the sale of certain drugs which are outside the Para IV filing drugs. It is seen that in respect of sales made to SPG BVI Amifostine & Venlafaxine are sold in US under Chapter IV filing. Similarly in respect of sales made to SPG FZE Gemicitabin is a Chapter IV drug. It is seen that the methodology followed in sale of these drugs is similar to the methodology followed in respect of pantoprazole which has been discussed elaborately by the Bench in A.Y. 2008-09 qua ground no. 5 of that appeal. Claim of weighted deduction u/s. 35(2AB) of revenue expenditure - expenses incurred on clinical trials patent trade mark registration charges - HELD THAT - There is no dispute that all the factual details were available before the lower authorities. The claim made by the assessee was purely legal claim as it is eligible for weighted deduction as per the provisions of Section 35(2AB) of the Act. Merely because the same was not claimed in the return of income nor through a revised return of income the same cannot be denied. A perusal of the aforementioned section clearly establishes that expenditure on scientific research is also eligible for weighted deduction. Considering the facts in totality in the light of the provision we set aside the findings of the ld. CIT(A) and direct the A.O. to allow weighted deduction. Ground Nos. 9 & 10 are accordingly allowed. Disallowance of weighted deduction u/s. 35(2AB) on trade mark charges Overseas Product Registration Charges - HELD THAT - As relying on assessee s own case 2015 (2) TMI 322 - ITAT AHMEDABAD we direct the A.O. to allow weighted deduction. Disallowance on account of R&D expenses incurred by the assessee for products manufactured by Sun Pharmaceuticals Industries - HELD THAT - Since the assessee is holding 97.5% of share in the partnership firm SPI it becomes the duty of the assessee to promote the business of the partnership firm in the capacity of the majority stake holders. 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. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee. Finding that the assessee is having 97.5% share in the profits of the firm SPI we do not find any merit in the disallowance made by the A.O. and confirmed by the First Appellate Authority. We accordingly direct the A.O. to delete the addition. Deduction of remuneration received from partnership firm for determination of Book Profits u/s. 115JB - HELD THAT - Section 115JB is a complete code in itself. Therefore if the remuneration is credited by the appellant company in its Profit and Loss account then the same could be reduced it specifically provided under the Explanation to Section 115JB of the Act which we find missing from the relevant provisions. We therefore do not find any merit in this claim of the assessee and accordingly we confirm the findings of the First Appellate Authority. Addition of selling and distribution expenses incurred on behalf of SPI disallowed u/s. 14A - HELD 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. We accordingly set aside the disallowance made by the First Appellate Authority and direct the A.O. to re-compute the disallowance as directed hereinabove. Re-characterizing remuneration as alleged royalty income from SPI for use of Trade mark Brand and Technology - HELD THAT - As decided in assessee s own case 2015 (2) TMI 322 - ITAT AHMEDABAD No doubt the profits of the partnership firm are exempt u/s. 80IB(4) of the Act. Even if the partnership firm had not charged Rs. 40.12 crores as remuneration to the appellant company the profits of the firm would have increased by this amount. Since the assessee is holding 97.5% share in the profits of the partnership firm this amount of 40.12 crores would have otherwise come to the assessee in the firm of share of profit which again is exempt from taxation u/s. 10(2A) of the Act. Therefore the allegation that it is a case of tax evasion is ill-founded. The fact of the matter is that such payments were never re-characterized as royalty in earlier assessment years and the action of the First Appellate Authority in the year under consideration is nothing but based upon assumptions and presumptions. No addition can be sustained which are based upon assumptions surmises or conjectures. We therefore set aside the findings of the ld. CIT(A) and direct the A.O. to delete the amount as re-characterized by the First Appellate Authority Set off of business loss against profits of the eligible undertaking before allowing deduction u/s. 10B - whether the loss should be set off first before allowing the claim of deduction u/s. 10B? - HELD THAT - We find force in the contention of the ld. counsel. Hon ble Supreme Court in the case of Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT had the occasion to consider a similar dispute after the amendment of Section 10A by Finance Act 2000 with effect from 01.04.2001 and it is held that though section 10A as amended is a provision for deduction the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and not at the stage of computation of the total income under Chapter VI. Thus we direct the A.O. to allow the claim of deduction u/s. 10B of the Act. Before setting off of business loss of Rs. 56.59 crores. Ground is allowed. Non consideration of un-realized export proceeds for computation of deduction u/s. 10B - HELD THAT - As relying on assessee s own case 2015 (2) TMI 322 - ITAT AHMEDABAD Tribunal had directed the A.O to apply the provisions of section 155(13) of the Act and decide the issue afresh. Nature of expenses - expenditure on repairs - revenue or capital expenditure - HELD THAT - Kiran Pumps purchase expenditure is treated as capital expenditure. Freeze Dryer Beta with accessories for the purposes of drying process of organic solvents. The assessee has also incurred labour charges on installation of this dryer. The factual matrix shows that new capital assets have come into existence and therefore the purchase cost and labour charges are treated as capital expenditure. Communica Aids appellant has purchased Tata Make IOX 160 EPBAX System with 16 trunk lines and 4 E &M Circuits. The configuration of this machine itself shows that it is capable of being used as independently and a new asset has come into existence the same has to be treated as capital expenditure. Copper Busbar 1 MTR for 3000 KVA Transformer and 2 panel boards for MCC (Motor Contrl Centre) items have been purchased to replace the electrical items damaged in fire. All these items form part of 3000 KVA Transformer and has no used independently. Therefore the same have to be treated as revenue in nature. Disallowance made u/s. 14A read with Rule 8D - HELD 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 of the Act.We accordingly set aside the disallowance made by the First Appellate Authority and direct the A.O. to re-compute the disallowance as directed hereinabove. MAT computation - addition of expenses disallowed u/s. 14A for computing book profit u/s. 115JB - HELD THAT - We direct the A.O. to delete the addition of expenses disallowed u/s. 14A for computing book profit u/s. 115JB of the Act. Our view is also fortified by the decision of the Special Bench in the case of Vireet Investment (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI Deletion of the provision of wealth tax for computation of book profit u/s. 115JB - HELD THAT - The ld. CIT(A) followed the decision of his predecessor for A.Y. 2008- 09 and directed the A.O. to exclude the provision of wealth tax from the computation of book profit u/s. 115JB. We find that the order of the ld. CIT(A) was confirmed by the Tribunal in 2015 (2) TMI 322 - ITAT AHMEDABAD Disallowance with respect to section 80IA(4) - HELD THAT - Since the grounds on which the A.O. denied the claim have been demolished by the factual and legal aspect relating to the facts in issue we do not find any error or infirmity in the findings of the ld. CIT(A). Addition on account of disallowance of expenditure incurred on behalf of its sister concern - HELD THAT - As decided in own case - 2015 (2) TMI 322 - ITAT AHMEDABAD we agree with the contention of the ld. counsel that no specific section has been mentioned in the assessment order for making the impugned additions. A perusal of the assessment order show that the additions have been made by treating the transactions u/s. 40A(2) of the Act. In that case we have to state that provisions of section 40A(2) are applicable only in respect of payments made to related parties mentioned therein. But the transaction before us is of credit in nature i.e. sales so provisions of section 40A(2) are not at all applicable.

Summary

Issues Involved:
1. Addition on account of share application money.
2. Addition on account of interest on fully convertible optional debentures.
3. Addition on account of corporate guarantee provided to associated enterprises.
4. Addition on account of sale of Pantoprazole.
5. Addition on account of sale of other drugs.
6. Disallowance of weighted deduction u/s 35(2AB) on clinical trials, patent, and trademark registration charges.
7. Disallowance of weighted deduction u/s 35(2AB) on trademark and overseas product registration charges.
8. Disallowance of R&D expenses incurred for products manufactured by a partnership firm.
9. Deduction of remuneration from partnership firm for book profits u/s 115JB.
10. Disallowance of selling and distribution expenses incurred on behalf of a partnership firm u/s 14A.
11. Re-characterization of remuneration as royalty income from a partnership firm.
12. Set off of business loss against profits of eligible undertaking before deduction u/s 10B.
13. Non-enhancement of deduction u/s 10B on account of R&D expenses allocated to a partnership firm.
14. Non-consideration of unrealized export proceeds for deduction u/s 10B.
15. Disallowance of expenditure on repairs treated as capital expenditure.
16. Disallowance u/s 14A read with Rule 8D.
17. Addition of expenses disallowed u/s 14A for computing book profit u/s 115JB.
18. Initiation of penalty proceedings u/s 271(1)(c).

Detailed Analysis:
1. Addition on Account of Share Application Money:
The Tribunal found that the share application money pending allotment was not liable to be recharacterized as loans merely due to a delay in allotment. The assessee’s 100% ownership in the subsidiary justified no interest charge. The addition of Rs. 4,00,64,965/- was directed to be deleted.

2. Addition on Account of Interest on Fully Convertible Optional Debentures:
The Tribunal upheld that the OFCDs were hybrid instruments and should not be recharacterized partly as loans. The conversion terms provided sufficient benefit, negating the need for interest. The addition of Rs. 17,32,96,800/- was deleted.

3. Addition on Account of Corporate Guarantee Provided to Associated Enterprises:
The Tribunal directed the AO to reconsider the issue in light of the jurisdictional High Court’s decision, treating the ground as allowed for statistical purposes.

4. Addition on Account of Sale of Pantoprazole:
The Tribunal found that the assessee was a contract manufacturer and applied TNMM as the most appropriate method. The addition of Rs. 103,87,52,830/- was directed to be deleted.

5. Addition on Account of Sale of Other Drugs:
The Tribunal followed its findings on Pantoprazole, directing the deletion of the addition of Rs. 123,577,944/-.

6. Disallowance of Weighted Deduction u/s 35(2AB) on Clinical Trials, Patent, and Trademark Registration Charges:
The Tribunal allowed the weighted deduction on the basis that the factual details were available, and the claim was a legal one. The disallowance was directed to be deleted.

7. Disallowance of Weighted Deduction u/s 35(2AB) on Trademark and Overseas Product Registration Charges:
Following earlier decisions, the Tribunal directed the AO to allow the weighted deduction, deleting the disallowance.

8. Disallowance of R&D Expenses Incurred for Products Manufactured by a Partnership Firm:
The Tribunal found no merit in the disallowance, stating that the expenses were for business purposes and should be allowed. The addition of Rs. 530,29,5255/- was directed to be deleted.

9. Deduction of Remuneration from Partnership Firm for Book Profits u/s 115JB:
The Tribunal upheld the denial of deduction, stating that Section 115JB is a complete code, and remuneration credited in the P&L account cannot be reduced unless specified.

10. Disallowance of Selling and Distribution Expenses Incurred on Behalf of a Partnership Firm u/s 14A:
The Tribunal directed the AO to compute the disallowance for administrative expenditure as per Rule 8D, treating the ground as allowed for statistical purposes.

11. Re-characterization of Remuneration as Royalty Income from a Partnership Firm:
The Tribunal found the re-characterization as based on assumptions and directed the deletion of the addition of Rs. 57,49,50,297/-.

12. Set Off of Business Loss Against Profits of Eligible Undertaking Before Deduction u/s 10B:
Following the Supreme Court’s decision in Yokogawa India Ltd., the Tribunal directed the AO to allow the deduction u/s 10B before setting off business loss.

13. Non-enhancement of Deduction u/s 10B on Account of R&D Expenses Allocated to a Partnership Firm:
The Tribunal dismissed this ground as infructuous, following its decision to delete the disallowance of R&D expenses.

14. Non-consideration of Unrealized Export Proceeds for Deduction u/s 10B:
The Tribunal restored the matter to the AO to apply Section 115(13) and decide afresh.

15. Disallowance of Expenditure on Repairs Treated as Capital Expenditure:
The Tribunal directed the AO to treat specific expenses as revenue and the balance as capital expenditure, re-computing depreciation accordingly.

16. Disallowance u/s 14A Read with Rule 8D:
The Tribunal directed the AO to compute the disallowance for administrative expenditure as per Rule 8D, treating the ground as allowed for statistical purposes.

17. Addition of Expenses Disallowed u/s 14A for Computing Book Profit u/s 115JB:
Following the jurisdictional High Court’s decision, the Tribunal directed the AO to delete the addition of expenses disallowed u/s 14A for computing book profit.

18. Initiation of Penalty Proceedings u/s 271(1)(c):
The Tribunal dismissed this ground as premature.

Conclusion:
The Tribunal provided detailed directions on each issue, often relying on precedents and jurisdictional High Court decisions to ensure a consistent application of the law. The assessee’s appeals were largely allowed, while the revenue’s appeals were dismissed or treated as allowed for statistical purposes.