2017 (6) TMI 1323 - AT - Income Tax

Addition on account of interest on share application money advanced to Sun Pharma Global Inc. - TPO/AO noted that the assessee has given share application money towards subscription of shares in its associated enterprise - TPO was of the opinion that the assessee should have charged interest at LIBOR plus basis and that arm's length price would be the LIBOR charged by the assessee 200 basis points - HELD THAT - Adjustment on account of notional interest on share application money which is not disputed be to be so are not liable to be re-characterized as loans only because there was a delay in allotment of share is not justifiable, more so when assessee has given plausible reason for such delay to avoid repetitive documentation and other regulatory exigencies. There is no dispute that the AE is a 100% subsidiary of the appellant company and the appellant company in its capacity as sole owner of the subsidiary my subscribing to share capital is beneficiary of all the gains of the subsidiary company. Merely, because allotment of shares is delayed and in books share application money is reflected as advance for share application money till the allotment would not alter the characterization to the prejudice of assessee's position anyway. In our considered view, the percentage of ownership is the only material factor which remains at 100% prior to allotment and also post allotment. As the assessee is the only shareholder in it's 100% owned subsidiary company SPG BVI it should not make any difference merely because part of the share application money is converted into equity shares and the balance were allotted in subsequent assessment years. We, therefore, do not find any merit in the submissions of revenue in this behalf. As relying on STERLING OIL RESOURCES (P.) LTD 2016 (4) TMI 163 - ITAT MUMBAI direct the A.O. to delete the addition - Decided in favour of assessee. Addition on account of interest on Optional Fully Convertible Debentures (OFGD) subscribed to in Sun Pharma Global Inc. - HELD THAT - As decided in own case 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. He further noted that the 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. He has further held that 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 field the Assessee's transaction with subsidiary was at arms length. Before us, the Revenue could not controvert the findings of CIT (A) by bringing any contrary material on record. In view of these facts, we find no reason to interfere with the order of CIT (A). Addition on account of Corporate Guarantee provided to associated enterprises Sun Pharmaceutical Bangladesh Ltd. - HELD THAT - When the bench has already taken a considered view in assessee's own case in the A.Y. 2007-08 2017 (4) TMI 1434 - ITAT AHMEDABAD and set aside the matter to follow Hon'ble High Court judgment in assessee's own case, we see no convincing reason not to follow our own order. Addition on account of Sale of Pantoprazole to Sun Pharma Global - TPO was of the belief that the TNMM method applied by the assessee was not the most appropriate method and Profit Split Method (PSM) was the most appropriate method - main reason taken by ld. TPO to for rejecting assessee's TP working was view that it was not a contract manufacturer - HELD THAT - No basis whatsoever to carry out any enhancement on account of profits on Sale of Pantoprazole for the detailed submissions made above and further as no profit has been earned on it after claim of infringement payment. Rather, we once again pray that the relief sought by the appellant in the appeal be granted and the entire addition made by the TPO / Assessing Officer be deleted. To that extent we request your good self to either delete the addition or reduce/ reallocate the profit allocation made to the Appellant and oblige. PSM can offer a solution for highly integrated operations for which a one-sided method would not be appropriate. PSM may also found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions to the transaction - Considering the functions performed by the appellant company to SPG BVI, it is clear that SPIL has performed only one simple function and that is manufacturing of Pantoprazole Tablets. Except for this, there is no significant unique contribution by SPIL. For such simple functions as per OECD guidelines for transaction profit split method typically would not be appropriate of the functional analysis of that party. By the order of the Hon'ble High Court Innovative Research and Development /division of the appellant company was demerged and given to Sun Pharma Advance Research company (SPARC) subsequently SPARC transferred ANDA rights to SPG BVI. SPG BVI has been entered into an agreement with the appellant company SPIL for the manufacturing of Pantoprazole. Pursuant to this agreement assessee manufactured Pantoprazole and sold the same to Caraco Ltd on the directions of SPG BVI. On such sale transaction, the appellant company had shown a net margin of 21.57% benchmark the same on transactional net ,margin method which was dismissed by the revenue authorities questioning firstly, the ANDA rights with SPG BVI and secondly, comparing the contract manufacturing agreement of SPIL with SPG BVI and SPIL with ELI Lily. The revenue authorities ultimately applied profit split method and 'made the upward adjustment. As demonstrated elsewhere, the IPR/ANDA rights were very much with SPG BVI who entered into an agreement with the appellant company for the manufacturing of the said drug. The application of Transactional Net Margin Method is the most appropriate method in such sale transaction and has been benchmarked by the assessee by showing it to be higher than the margin earned from the sales made to Eli Lily. Considering the facts in totality in the light of the decision of the Hon'ble Supreme Court In the case of Vodafone International Holdings B.V. 2012 (1) TMI 52 - SUPREME COURT and on conspectus understanding of the facts as discussed elsewhere, we do not find any 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 - Ground of the assessee is allowed. Denial of weighted deduction u/s. 35(2AB) on trademark charges, overseas product registration charges - HELD THAT - Basis for upholding the disallowance has been removed. We further find 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. Deduction of remuneration received from partnership firm for determination of book profit u/s. 115JB - HELD THAT - Firstly the profit and loss account of the company should be in accordance with the relevant provisions of the Companies Act. Secondly, only specified items have to be added back as provided in various clauses to Explanation 1 and reduced by specific items provided thereon. The only specific amount of income which has to be reduced is the income to which provisions of Sections 10, 11 or 12 apply, if any such amount is credited to the Profit and Loss account and Section 10(2A) defines such income as the share of profit of a partner from the partnership firm, the language is clear and unambiguous and needs no other insertion or deletion. The remuneration to partner may have the colour of appropriation of profit of a partnership firm as held by the Hon'ble Supreme Court and Hon'ble High Courts in various decisions relied upon by the ld. Senior Counsel but as mentioned elsewhere, 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. Addition of expense disallowed u/s, 14A for computing book profit u/s. 115JB - HELD THAT - we direct the A.O. to delete the addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB of the Act. Addition u/s 40A - HELD 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. See 2016 (5) TMI 1306 - ITAT AHMEDABAD Addition on account of re-characterizing remuneration as alleged royalty income from the partnership firm SPI for use of Trademark, Brand and Technology - HELD THAT - The partnership firm SPI has claimed ₹ 40.12 crores as remuneration to the assessee company but at the same time, it did not claim the same as deduction as it was not paid to a whole time partner as provided in the Act. It is true that the appellant company has also not offered the same for taxation taking a shelter behind the provisions of Section 28(v) of the Act. No doubt, the profits of the partnership firm are exempt u/s. 80-IB(4) of the Act, Even, if the partnership firm had not charged ₹ 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, in our considered opinion, 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 Id. CIT (A) and direct the A.O. to delete the amount as re-characterized by the First Appellate Authority. Ground allowed. Disallowance of expenditure treating them as capital expenditure - HELD THAT - First Appellate Authority after considering the bills/vouchers has given a categorical finding that the extruder purchased by the assessee was an asset independently capable of producing article or thing. Even, it is accepted that the extruder was in replacement of old extruder yet it was a new asset and cannot be considered as repairs. We, therefore, decline to interfere with the findings of the ld. CIT (A). The A.O. has already allowed depreciation as per the provisions of the law. Therefore, no interference is called for addition to the extent of ₹ 10,17,500/- is confirmed, Ground No.15 is dismissed. Payment to Nile Ltd. is concerned, we find that the First Appellate Authority has given a categorical finding after verifying the purchase order that this item has replaced damaged bottom body which is also supported by the Excise Challah. Such categorical finding cannot be brushed aside lightly. We, therefore, do not find any error or infirmity in the findings of the First Appellate Authority. Items purchased for effluent treatment systems - First Appellate Authority have given a categorical finding that the effluent treatment systems after regular intervals requires maintenance and upgradation and the expenditure incurred during the year is on existing machines and did not bring into existence any new asset or added advantage to the assessee. As this factual finding has not been controverted before us, we do not find any reason to interfere with the findings of the First Appellate Authority. Disallowance of provision for leave encashment u/s 43B - HELD THAT - Restore the issue to the files of the A.O. with a direction to decide the issue afresh after decision of M/S EXIDE INDUSTRIES LTD. ANR. 2009 (5) TMI 894 - SC ORDER Addition u/s 14A r.w.r. 8D - HELD THAT - The only distinguishing fact for the year under consideration is that Rule 8D in fact is applicable for the year under consideration and therefore, We direct the A.O. to compute the disallowance for administrative expenditure as per the formula given under Rule 8D. Diisallowance of depreciation on motor car @ 30% claimed by the assessee and allowed by the A.O. @ 15%. - 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 Addition of provision of Wealth Tax u/s. 115JB - HELD THAT - There is no dispute that Wealth Tax Act, 1957 imposes the charge of Wealth Tax on the 'net wealth' of every individual, HUF/company as on the valuation date. While Income-tax is tax on income. Both Income-tax and Wealth Tax are governed by separate and distinct legislated laws. It is true that under the Explanation to Section 115JB of the Act, certain items have been mentioned which have to be added back for the computation of book profit. It is equally true that there is no mention of Wealth Tax provision. The provisions of the Act are clear and unambiguous and require no addition/deletion of any items other than those mentioned in the provisions.

Summary

Issues Involved:
1. Addition on account of interest on share application money advanced to Sun Pharma Global Inc.
2. Addition on account of interest on Optional Fully Convertible Debentures (OFCD) subscribed to in Sun Pharma Global Inc.
3. Addition on account of Corporate Guarantee provided to associated enterprises.
4. Addition on account of Sale of Pantoprazole to Sun Pharma Global.
5. Denial of weighted deduction u/s. 35(2AB) on various expenses.
6. Claim of deduction of remuneration received from partnership firm for determination of book profit u/s. 115JB.
7. Addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB.
8. Addition on sales made to Sun Pharmaceuticals Industries.
9. Disallowance of expenses incurred on behalf of Sun Pharmaceuticals Industries.
10. Re-characterizing remuneration as alleged royalty income from the partnership firm.
11. Reduction of unrealized export proceeds from export turnover for the purpose of deduction u/s. 10B.
12. Disallowance of expenditure on repairs treating them as capital expenditure.
13. Disallowance of provision for leave encashment u/s. 43B.
14. Disallowance made u/s. 14A read with Rule 8D.
15. Claim u/s. 35(2AB) on revenue expenditure incurred for the purpose of research and development not considered for weighted deduction.
16. Allowance of weighted deduction u/s. 35(2AB) in respect of various expenses.
17. Allowance of depreciation on motor car @ 30%.
18. Deletion of the addition of provision of Wealth Tax u/s. 115JB.
19. Deletion of the addition made on account of price difference on sales made to SPI partnership Firm.
20. Claim of the assessee allowed u/s. 80-IA(4) in respect of captive power plant.

Detailed Analysis:

1. Addition on account of interest on share application money advanced to Sun Pharma Global Inc.:
The Tribunal found that the share application money advanced to Sun Pharma Global Inc. cannot be treated as a loan or advance for the purpose of Transfer Pricing (TP) adjustment. The Tribunal held that the amount was paid towards equity infusion in the assessee's 100% subsidiary and therefore, there was no justification for attributing any TP adjustment to the amount advanced for allotment of shares. The Tribunal directed the AO to delete the addition of ?6,56,60,828/-.

2. Addition on account of interest on Optional Fully Convertible Debentures (OFCD) subscribed to in Sun Pharma Global Inc.:
The Tribunal noted that similar issues had been decided in favor of the assessee in earlier assessment years. The Tribunal held that the revenue has no power to re-characterize the transaction and directed the AO to delete the addition of ?202.5 crore.

3. Addition on account of Corporate Guarantee provided to associated enterprises:
The Tribunal observed that a similar issue was set aside to be decided after the outcome of the decision of the Hon'ble Jurisdictional High Court of Gujarat in earlier years. The Tribunal followed its own order and set aside the issue to the file of the CIT (A) with a direction to decide in accordance with the Hon'ble Jurisdictional High Court's decision.

4. Addition on account of Sale of Pantoprazole to Sun Pharma Global:
The Tribunal held that the Transactional Net Margin Method (TNMM) was the most appropriate method for determining the arm's length price of the sale transaction of Pantoprazole. The Tribunal found that the assessee had performed only the function of manufacturing and that the ownership of IPR/ANDA rights was with Sun Pharma Global. The Tribunal directed the AO to delete the addition of ?612,03,79,468/-.

5. Denial of weighted deduction u/s. 35(2AB) on various expenses:
The Tribunal followed its earlier decision and directed the AO to allow the weighted deduction on trademark charges, overseas product registration charges, corporate advertisement, and revenue expenditures incurred for research and development.

6. Claim of deduction of remuneration received from partnership firm for determination of book profit u/s. 115JB:
The Tribunal held that Section 115JB is a complete code in itself and only specified items mentioned in the Explanation to Section 115JB can be added back or reduced. The Tribunal found no merit in the claim of the assessee and confirmed the findings of the First Appellate Authority.

7. Addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB:
The Tribunal followed the decision of the Hon'ble Jurisdictional High Court of Gujarat in the case of Alembic Ltd. and directed the AO to delete the addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB.

8. Addition on sales made to Sun Pharmaceuticals Industries:
The Tribunal followed its earlier decision and directed the AO to delete the addition of ?2,75,07,070/-.

9. Disallowance of expenses incurred on behalf of Sun Pharmaceuticals Industries:
The Tribunal followed its earlier decision and directed the AO to delete the disallowance of ?62,15,78,070/-.

10. Re-characterizing remuneration as alleged royalty income from the partnership firm:
The Tribunal found that the payment of remuneration was as per the partnership deed and supplementary deed and that such payments were never re-characterized as royalty in earlier assessment years. The Tribunal set aside the findings of the CIT (A) and directed the AO to delete the amount of ?40.12 crores re-characterized by the First Appellate Authority.

11. Reduction of unrealized export proceeds from export turnover for the purpose of deduction u/s. 10B:
The Tribunal followed its earlier decision and directed the AO to apply the provisions of section 155(13) of the Act and decide the issue afresh.

12. Disallowance of expenditure on repairs treating them as capital expenditure:
The Tribunal upheld the findings of the CIT (A) that the purchase of extruder was a new asset and treated the amount of ?10,17,500/- as capital expenditure. The Tribunal also upheld the deletion of ?8,59,000/- as the items purchased were for maintenance and upgradation and did not bring any new asset into existence.

13. Disallowance of provision for leave encashment u/s. 43B:
The Tribunal restored the issue to the files of the AO with a direction to decide the issue afresh after the decision of the Hon'ble Supreme Court in the case of Exide Industries.

14. Disallowance made u/s. 14A read with Rule 8D:
The Tribunal directed the AO to compute the disallowance for administrative expenditure as per the formula given under Rule 8D.

15. Claim u/s. 35(2AB) on revenue expenditure incurred for the purpose of research and development not considered for weighted deduction:
The Tribunal set aside the issue to the files of the FAA with a direction to decide the same as per the provisions of the law considering the earlier decisions of the Co-ordinate Bench.

16. Allowance of weighted deduction u/s. 35(2AB) in respect of various expenses:
The Tribunal followed its earlier decision and declined to interfere with the findings of the First Appellate Authority.

17. Allowance of depreciation on motor car @ 30%:
The Tribunal followed its earlier decision and upheld the allowance of depreciation on motor car @ 30%.

18. Deletion of the addition of provision of Wealth Tax u/s. 115JB:
The Tribunal upheld the findings of the CIT (A) that there is no specific clause for adding back the provision for Wealth Tax for the computation of book profit u/s. 115JB.

19. Deletion of the addition made on account of price difference on sales made to SPI partnership Firm:
The Tribunal followed its earlier decision and upheld the deletion of the addition.

20. Claim of the assessee allowed u/s. 80-IA(4) in respect of captive power plant:
The Tribunal upheld the findings of the CIT (A) that the claim of deduction u/s. 80-IA(4) in respect of profits from captive power plant was allowable.