2022 (8) TMI 1443 - AT - Income Tax

TP Adjustment - Addition on account of Corporate Guarantee provided to Associated Enterprises - Whether international transaction? - HELD THAT - As in view of the discussion and latest development, we are of the opinion that the extension of corporate/guarantee to AEs is an international transaction and needs to be benchmark and in view of several order of the tribunal as referred above 0.5% of commission on the value of corporate/ bank guarantee will serve the justice to both the assessee and the Revenue. However in the case on hand, we have set aside the issue to the file of the AO for fresh adjudication in light of consistent view taken by the Tribunal in own case of the assessee for earlier Assessment Years with direction to decide the issue a fresh as per the outcome of appeal filed by the Revenue before Hon ble Gujarat High court 2017 (8) TMI 933 - GUJARAT HIGH COURT in own case of the assessee. But we are also conscious to latest development on the issue on hand as discussed above. Therefore, we direct the AO to also consider the judgment of Hon ble Madras High court 2020 (12) TMI 516 - MADRAS HIGH COURT at the time of fresh adjudication. Hence, the ground of appeal raised by both the assessee and Revenue is hereby allowed for statistical purposes. MAT computation - denying the deduction of remuneration received from partnership firm while computing book profit under section 115JB - HELD THAT - The definition of the income as discussed above under clause (ve) of section 2(24) of the Act has also made reference to the income chargeable to tax under clause (v) of section 28 of the Act. Thus, there remains no ambiguity to the fact that the amount of remuneration not allowed as deduction in the hands of the partnership firm cannot be made subject to tax in the hands of the partner. Thus, once the receipt is not taxable then the same cannot be made subject to tax under the provisions of MAT while calculating the profit under section 115JB of the Act. In view of the above, we do not find any reason to uphold the finding of the learned CIT-A. Accordingly we reverse the same and direct the AO to delete the addition made by him. Thus, the ground of appeal raised by the assessee is hereby allowed. Nature of expenses - repairs and maintenance expenses - Revenue or capital expenses - HELD THAT - As held by the CIT-A with respect to all the additions confirmed that all the fixed assets can function independently which has been controverted by the ld. AR for assessee based on cogent and documentary evidence. Accordingly, following the order of the coordinate bench, we hereby dismiss the ground of appeal of the assessee. Bogus purchases - AO during the assessment proceedings found that the assessee has claimed certain expenses by way of purchase of the material from the parties based in Mumbai, the VAT registration of which were cancelled by the Maharashtra VAT Department, thus the AO treated the same as bogus in nature - HELD THAT - There was no clue or information available with the income tax Department suggesting that the assessee has made bogus purchases. The entire thrust of the Revenue was based on the fact that the other parties were held as bogus by the Maharashtra VAT department. To our understanding, based upon the information received from the 3rd party, until and unless it is confronted to the assessee, no adverse inference can be drawn. There can be various reasons for the cancellation of the registration such as non-payment of VAT by the party, non-filing of VAT return, non-maintenance of requisite records but nothing brought on record suggesting that for what reason, the other parties registration were cancelled. Assessee has made the payment through the banking channel which can be verified from the submissions made by it before the authorities below. This fact has nowhere been doubted by the revenue. It is also significant note that considering the large volume of the business of the assessee, it is unexpected that the assessee having such high scale of business will indulge in such kind of practices for the purchase of 51,712./- only. In view of the above and after considering the facts in totality, we are not inclined to uphold the finding of the authorities below. Thus we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence, the ground of appeal raised by the assessee is hereby allowed. Disallowance of business promotion expense incurred in connection with doctors - AO was of the view that the above expenditure are not allowable under explanation 1 to section 37(1) of the Act as the same is incurred in violation of guideline issued by the Medical Council of India - HELD THAT - We find that the issue on hand is covered in favour of the assessee by order of this tribunal in own case of the assessee for A.Y. 2010-11 2019 (4) TMI 868 - ITAT AHMEDABAD . However we find that recently Hon ble Supreme Court in case of Apex Laboratories (P.) Ltd. 2022 (2) TMI 1114 - SUPREME COURT held that freebies provided to the doctor by the assessee engaged in pharmaceuticals business are covered under the explanation to section 37(1) of the Act being expenditure incurred which is prohibited by the law. Hence we deviate from the finding of the coordinate bench of this tribunal in own case of the assessee for earlier years and held that the assessee is not entitled to claim the deduction of the impugned expenses. Deduction of the cess paid - HELD THAT - As per amendment under the provisions of section 40(a)(ii) of the Act wherein an explanation has been inserted with retrospective effect i.e. assessment year 2005-06 there remains no ambiguity to the fact that the assessee cannot claim the deduction of the cess by treating the same as revenue expenditure. Thus, we do not find any merit in the additional ground of appeal raised by the assessee. TP Adjustment on account of interest free loans to AE - HELD THAT - We find that the issue on hand is covered in favour of the assessee by the order of this Tribunal in the own case of the assessee for AY 2008-09 held that 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 ny 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. Upward adjustment under the provision of Transfer Pricing on account of investment in 0% OFCD of the AE - HELD THAT - As decided in the own case of the assessee for the AY 2008-09 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 and 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. Decided against revenue. Upward adjustment on account profit attributed to the product Pantoprazole and other product - HELD THAT - As decided in the own case of the assessee for AY 2008-09 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. Disallowance of weighted deduction u/s 35(2AB) - AO was of the view that benefit under section 35(2AB) is only available for the expenditure incurred in product registration in India whereas assessee incurred Trademark registration and overseas product registration charges outside India - HELD THAT - Similarly the issue of eligibility of weighted deduction under section 35(2AB) of the Act, on expenses related to building repair, municipal tax, brokerage expenses and lunch and refreshment expenses is also covered in favour of the assessee by the order of this tribunal in own case of the assessee for A.Y. 2007-08 2017 (4) TMI 1434 - ITAT AHMEDABAD Disallowances of selling and distribution expenses pertaining to sister concerns - HELD THAT - As we find that the issue on hand is covered in favour of the assessee by order of this tribunal in the own case of the assessee for A.Y. 2007-08 2017 (4) TMI 1434 - ITAT AHMEDABAD 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. Disallowance u/s 14A r.w.r. 8D - HELD THAT - As per A.Y. 2007-08 2017 (4) TMI 1434 - ITAT AHMEDABAD 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. MAT computation for disallowance u/s 14A - We hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB - As there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore, in the given facts circumstances, we feel that ad-hoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the adhoc disallowance of Rs. 20 lacs as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restricted the disallowance 1% of the exempted income in other cases involving identical facts and circumstances in order to comply the clause (f) to Explanation-1 of Sec. 115JB of the Act. But we note that the assessee in the present case has earned exempted income more than Rs. 1000 crores and the disallowance will be worked out at ₹10 crores which appears not in commensurate as per the mandate provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore, we are of the view that the ad hoc disallowance as discussed above will render justice to the assessee and the revenue. Disallowances of R D expenditure incurred on behalf of partnership firm - HELD THAT - As decided in own case AY 2009-10 bearing ITA No. 1663 1666/Ahd/2016 2017 (9) TMI 1804 - ITAT AHMEDABAD 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. Re-characterization of remuneration received from the firm - HELD THAT - We find that the issue on hand is covered in favour of the assessee by the order of this Tribunal in the own case of the assessee for AY 2008-09 - 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, 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. Addition made on account of foreign exchange gain - HELD THAT - We find that the issue on hand is covered in favour of the assessee by the order of this Tribunal in the own case of the assessee for AY the 2007-08 2017 (4) TMI 1434 - ITAT AHMEDABAD 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. Disallowance for the weighted deduction claimed u/s 35(2AB) of the Act on account of expenses not approved by the DSIR - HELD THAT - As decided in 2017 (8) TMI 933 - GUJARAT HIGH COURT . Merely because the prescribed authority failed to send intimation in Form 3CL, would not be reason enough to deprive the assessee's claim of deduction under section 35(2AB) of the Act. However, in facts of the present case, it would be open for the Assessing Officer to verify the actual expenditure incurred by the assessee. Upward adjustment on account of on account of product development services to AEs. - HELD THAT - Price charged by the assessee from the associated enterprises at cost 10% is treated as at arm length price and therefore no adjustment is warranted. Hence, we reverse the order of the authorities below and direct the AO/TPO to delete the addition made by him considering the principles of consistency. Hence, the ground of appeal of the assessee is allowed. Downward adjustment in TP on account of power supplied to domestic AE - what should be the rate of the electricity generated by the assessee and supply for captive consumption? - HELD THAT - We set aside the finding of the learned CIT (A) and direct the AO to delete the downward adjustment in transfer pricing report in pursuance to the finding of this ITAT in the case of Gujarat Fluorochemicals Ltd. 2018 (8) TMI 857 - ITAT AHMEDABAD DR at the time of hearing has not brought anything on record contrary to the arguments advanced by the ld. AR for the assessee. Thus the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Corporate Guarantee provided to Associated Enterprises.
2. Deduction of Remuneration received from Partnership firms for determination of Book Profits under section 115JB.
3. Disallowance of expenditure incurred on repairs treating them as capital expenditure.
4. Disallowance on account of alleged Bogus Purchases.
5. Disallowance of expenditure incurred for doctors for promotion of business.
6. Interest on loans given to Associated Enterprise.
7. Interest on 0% Optionally Fully Convertible Debentures.
8. Transfer Pricing adjustment on sale of Pantoprazole and other products.
9. Weighted deduction under section 35(2AB) on various expenses.
10. Disallowance under section 14A and its impact on book profit under section 115JB.
11. Disallowance of proportionate R&D revenue and capital expenses incurred on behalf of partnership firms.
12. Recharacterization of remuneration received from partnership firms as royalty.
13. Foreign exchange gain.
14. Product Development Services given to AE.
15. Transfer of electricity by Captive Power Plant.
16. Additional ground regarding deduction of cess paid.

Detailed Analysis:

1. Corporate Guarantee provided to Associated Enterprises:
The assessee provided a corporate guarantee to its AE without charging any fees. The AO/TPO treated this as an international transaction and made an upward adjustment of Rs. 9,95,440/-. The CIT(A) deferred the decision pending the outcome of an appeal before the Hon'ble High Court. The ITAT restored the issue to the file of the AO for fresh adjudication in light of the High Court's decision and other relevant judgments, such as the Madras High Court's ruling in PCIT vs. Redington (India) Ltd.

2. Deduction of Remuneration received from Partnership firms for determination of Book Profits under section 115JB:
The assessee received remuneration from partnership firms and claimed it as a deduction while computing book profits under section 115JB. The AO and CIT(A) disallowed this deduction. The ITAT, following the Calcutta High Court's judgment in PCIT vs. M/s Ankit Metal & Power Ltd., held that remuneration not allowed as a deduction in the hands of the partnership firm cannot be taxed in the hands of the partner and directed the AO to delete the addition.

3. Disallowance of expenditure incurred on repairs treating them as capital expenditure:
The AO treated certain repair and maintenance expenses as capital in nature. The CIT(A) confirmed this disallowance. The ITAT upheld the CIT(A)'s decision, noting that the items in question were independent assets capable of functioning separately.

4. Disallowance on account of alleged Bogus Purchases:
The AO disallowed purchases from certain parties deemed bogus based on information from the Maharashtra VAT Department. The CIT(A) upheld this disallowance. The ITAT reversed the CIT(A)'s decision, noting that the purchases were made when the parties were active and registered, and payments were made through banking channels.

5. Disallowance of expenditure incurred for doctors for promotion of business:
The AO disallowed expenses incurred for providing gifts and freebies to doctors, citing violation of Medical Council of India regulations. The CIT(A) partly upheld this disallowance. The ITAT, following the Supreme Court's ruling in Apex Laboratories (P.) Ltd. vs. DCIT, held that such expenses are prohibited by law and not allowable as deductions.

6. Interest on loans given to Associated Enterprise:
The AO/TPO made an upward adjustment for interest on loans given to AE without charging interest. The CIT(A) deleted this adjustment, following the ITAT's decision in the assessee's case for earlier years. The ITAT upheld the CIT(A)'s decision, citing the principle of consistency.

7. Interest on 0% Optionally Fully Convertible Debentures:
The AO/TPO made an upward adjustment for interest on OFCDs issued to AE. The CIT(A) deleted this adjustment, following the ITAT's decision in the assessee's case for earlier years. The ITAT upheld the CIT(A)'s decision, citing the principle of consistency.

8. Transfer Pricing adjustment on sale of Pantoprazole and other products:
The AO/TPO applied the Profit Split Method, attributing higher profits to the assessee. The CIT(A) deleted this adjustment, following the ITAT's decision in the assessee's case for earlier years. The ITAT upheld the CIT(A)'s decision, confirming that the Transactional Net Margin Method (TNMM) was the most appropriate method.

9. Weighted deduction under section 35(2AB) on various expenses:
The AO disallowed weighted deductions on certain expenses, including trademark registration and overseas product registration charges. The CIT(A) allowed these deductions, following the ITAT's decision in the assessee's case for earlier years. The ITAT upheld the CIT(A)'s decision, citing the principle of consistency and relevant judicial precedents.

10. Disallowance under section 14A and its impact on book profit under section 115JB:
The AO made disallowances under section 14A and added them to the book profit under section 115JB. The CIT(A) deleted the disallowances under rule 8D(i) and (ii) but upheld the disallowance of administrative expenses under rule 8D(iii). The ITAT upheld the CIT(A)'s decision and directed an ad-hoc disallowance of Rs. 20 lakhs for book profit computation.

11. Disallowance of proportionate R&D revenue and capital expenses incurred on behalf of partnership firms:
The AO allocated R&D expenses to the partnership firms and disallowed them. The CIT(A) deleted this disallowance, following the ITAT's decision in the assessee's case for earlier years. The ITAT upheld the CIT(A)'s decision, citing the principle of consistency.

12. Recharacterization of remuneration received from partnership firms as royalty:
The AO recharacterized the remuneration received from partnership firms as royalty. The CIT(A) deleted this addition, following the ITAT's decision in the assessee's case for earlier years. The ITAT upheld the CIT(A)'s decision, confirming that the remuneration was not royalty.

13. Foreign exchange gain:
The AO treated the foreign exchange gain as taxable income. The CIT(A) deleted this addition, following the ITAT's decision in the assessee's case for earlier years. The ITAT upheld the CIT(A)'s decision, confirming that the gain was capital in nature.

14. Product Development Services given to AE:
The AO/TPO made an upward adjustment for product development services provided to AE, benchmarking it at a higher rate. The CIT(A) confirmed this adjustment. The ITAT reversed the CIT(A)'s decision, holding that the cost plus 10% markup agreed in the joint-venture agreement should be accepted as the arm's length price.

15. Transfer of electricity by Captive Power Plant:
The AO/TPO made a downward adjustment for the price of electricity transferred to domestic AE. The CIT(A) confirmed this adjustment. The ITAT reversed the CIT(A)'s decision, following the ITAT's ruling in Gujarat Fluorochemicals Ltd., and directed the AO to delete the adjustment.

16. Additional ground regarding deduction of cess paid:
The assessee claimed a deduction for cess paid on income tax. The ITAT dismissed this additional ground, citing the retrospective amendment to section 40(a)(ii) clarifying that "tax" includes cess.