2017 (4) TMI 462 - AT - Income Tax

Addition on upward adjustment on international transactions - addition on Interest on loans to AEs - Held that - To hold that cost of funds raised should have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm s length price of a transaction, it is immaterial as to what benefit an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from such transactions. It is not even the case of the authorities below that in the event of hypothetically dealing with an independent enterprise, no independent enterprise would not have given him an interest free loans even if there was an option, coupled with such a deal, to subscribe to the capital of the AE on the terms as offered by the AE to the assessee. Unless that happens, there is not even a prima facie case made out for an ALP adjustment. Whenever the assessee s right to exercise the option of converting the loan into equity comes to an end, the assessee is entitled to interest on the commercial rates. It is not even the case of the authorities below that the interest so charged by the assessee, in a situation in which the right to exercise the option has come to an end, is not an arm s length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arm s length price adjustment in respect of interest which, according to the revenue authorities, should have charged on the optionally convertible loan granted to the AEs. - Decided in favour of assessee Corporate guarantee charges - Held that - We uphold the grievance of the assessee, and direct the Assessing Officer to delete the ALP adjustment taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have bearing on profits, income, losses or assets , it did not constitute an international transaction, under section 92B, in respect of which an arm s length price adjustment can be made. In this view of the matter,we have to delete the impugned ALP adjustment. Liaison services - Held that - We have noticed that what has been held to be arm s length price in this case is the price at which transaction has taken place between the assessee and its AE, to the extent it has been accepted to be at an arm s length price in the assessment year 2006-07. In effect, thus the basis of determining ALP of this transaction is another intra AE transaction at an earlier point of time. That is not acceptable. The approach adopted by the TPO is devoid of legally sustainable merits. A comparable, by definition, has to be in respect of an uncontrolled transaction. That is what the law states so unambiguously. What decides the ALP of a transaction is answer to the question that if that the tested party was to be enter into the same transaction with an independent enterprises, i.e. rank outsider, what would have been consideration for the same. Profit is not a reward for risk alone, it is also a reward for the functions performed as also the assets employed in rendition of service. The TPO has examined only the risk factor, in FAR analysis, and ignored the functions and assets. That approach cannot be approved. However, as the matter regarding appropriate comparables has not been discussed in reasonable detail and as the discussions in the orders of the authorities below have been somewhat at superficial level, we deem it fit and proper to remit the matter to the stage of the DRP for fresh adjudication on this issue, in accordance with the law, in the light of our observations above after giving a reasonable opportunity of hearing to the assessee, and by way of a speaking order TDS u/s 195 - payments to non residents without any tax deduction at source - Held that - The assessee has made elaborate arguments, on merits, in respect of these payments. The total payments made by the assessee were as many as 1,193 payments, out of which a large number of payments have been disallowed under section 40(a)(ia). Much as learned counsel urges us to examine these payments individually, and decide the disallowance under section 40(a)(i) on merits, we donot think that will be appropriate on the facts of this case. DRP has not examined the matter on merits at all. The discussions by the Assessing Officer in respect of these payments have also been inadequate, superficial and without sufficient application of mind, and a reasonable case has not been made out for invoking the disallowance under section 40(a)(i) by meeting the arguments of the assessee and demonstrating that the income embedded in these payments is indeed taxable in India. It is equally true that the Assessing Officer cannot decide taxability of income embedded in these payments on the basis of sweeping generalizations either. Essentially, therefore, the DRP also must decide the matter on the same parameters and in the same manner. While doing so, the DRP may also call for, and take into account, specific case by case comments of the Assessing Officer on each of, or each set of- as may be appropriate, the payment. The DRP may also take into account decisions of the coordinate benches, on the taxability of income embedded in such payments, in assessee s own case as indeed in other similarly situated cases, as also other binding judicial precedents. Thus we deem it fit and proper to remit the matter to the file of the DRP for adjudication de novo on merits Disallowance as per Rule 8D r.w.s, 14A - Held that - As pointed out that rectification petition under section 154 is pending in respect of these adjustments, and that he will be content by our direction to the Assessing Officer to look into these two issues. We see merits in the plea. It is beyond controversy that dividends from companies abroad do not enjoy the tax exempt status, and, as a corollary thereto, the related investments must therefore be kept out of investments yielding tax exempt income for the purpose of rule 8D. As for the correct figure of interest paid, it is purely a factual issue and the Assessing Officer is, therefore, directed to look into the contention of the assessee by way of a speaking order after giving an opportunity of hearing to the assessee. To the extent, disallowance under section 14A r.w.r. 8D stands reduced as a result of the above, the assessee will get relief. The balance addition stands confirmed as no grievance is raised in respect of that portion of disallowance. With these directions, the matter stands restored to the file of the Assessing Officer. Availability of the amount of Carried Forward MAT Credit u/s. 115JAA - Held that - As in the view of Hon ble Supreme Court s judgment in the case of CIT Vs Manmohan Das 1965 (11) TMI 33 - SUPREME Court , in the year of carry forward only quantification of a set off claim is to be seen. The question as to its entitlement for being set off is to be examined in the year in which set off is claimed. Grievance of the assessee is premature and is dismissed as such. eligible for deduction u/s 80IC on the entire profit allowed. Deduction of share of profit from firm (Zydus Healthcare Sikkim) u/s. 10(2A)- double taxation - Held that - The scheme of taxation of firm, as evident from the above circular, supports our preceding analysis about true connotations of the expression total income appearing in section 10(2A). As is quite clear from the CBDT circular above, the point of taxation in the case of partnership firm is assessment of income of the firm, and once that exercise is carried out, that is the end of the matter so far as taxation of income of the firm is concerned. It cannot once again be brought to tax in the hands of the partners. As a corollary to this undisputed position, when an income is found to be not taxable in the hands of the partnership firm, it cannot be brought to tax in the hands of the partners on the ground that it was not actually taxed in the hands of the partnership firm. If it is found to be not taxable in the hands of the partnership firm, it is not taxable at all, because so far as income of the partnership firm is concerned, that is the only point when such an income, if at all and to whatever extent, can be taxed. We have also noted that in the subsequent assessment year the Assessing Officer himself has not made such additions in the course of assessment proceedings, and the above interpretation, as such, stands accepted by the field authorities. Yet, ironically, when DRP grants this relief on the same point, the Assessing Officer is in appeal before us. This fact shows how frivolous is this appeal. In view of the above discussions, in our considered view, the DRP was quite justified in granting the impugned relief. Trademark Registration and Patent fee considered as revenue expenses Expenses incurred outside the approved R&D facility is also eligible for weighted deduction in contravention of section 35(2AB) Depreciation on Hummer car - Held that - Once it is not in dispute that the vehicle was owned, in substance, by the assessee and the vehicle was used for the purposes of its business, there cannot be any legally sustainable reasons for declining the depreciation. Learned Departmental Representative could not bring on record any material to dislodge the findings of the DRP. Foreign exchange derivative loss allowance - Held that - The expression expenditure as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee.To this extent, the Assessing Officer was clearly in error in treating the loss on foreign exchange as a notional loss not deductible in computation of business income, as long as the related transaction is on revenue account- as aspect which is not in dispute. The relief granted by the DRP was thus justified. In any case, learned Departmental Representative has not pointed out any reasons or arguments for not confirming the action of the DRP. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at on the facts of this case. DRP is right in deleting the addition to Book Profit being addition u/s 14A. Carry forward only quantification of a set off claim is to be seen. The question as to its entitlement for being set off is to be examined in the year in which set off is claimed. Grievance of the assessee is premature and is dismissed as such. TDS liability Addition u/s. 40(a)(i) - commission on export, legal and professional fees and clinical trial and analytical and testing charges - Held that - We find that so far as the taxability of commission payments made to non residents agents is concerned, the same stands concluded, in favour of the assessee, by a coordinate bench decision in the case of DCIT Vs Welspun Corporation Ltd 2017 (1) TMI 1084 - ITAT AHMEDABAD . Respectfully following the said decision, we confirm findings of the CIT(A) on that point As regards the payments to professional law firms and consultancy fees, there is no dispute that these professionals did not have any fixed base available to them in India, as is the condition precedent for taxing fees for independent personal services in India under the respective treaty provisions. As regards the clinical and analytical testing charges, the issue stands covered in favour of the assessee in assessee s own case as also in the case of Reddy Laboratories(2013 (11) TMI 304 - ITAT HYDERABAD). Learned Departmental Representative has not pointed out any distinguishing features or disputed this position. Thus we approve the conclusions arrived at by the DRP and decline to interfere in the matter. As we do so we may also add that, for the sake of brevity, we are not adding reproductions from the orders relied upon by us and these orders will be deemed to be attached and forming part of this order.

Summary

Issues Involved:
1. Upward adjustment on international transactions involving Transfer Pricing provisions.
2. Disallowance under section 40(a)(i) for non-deduction of TDS on payments to non-residents.
3. Disallowance under section 14A for expenses related to tax-exempt income.
4. Eligibility for deduction under section 80IC.
5. Treatment of product registration expenses.
6. Treatment of trademark registration and patent fees.
7. Allowability of weighted deduction under section 35(2AB).
8. Depreciation on a vehicle registered in the name of a director.
9. Addition to book profit under section 115JB.

Detailed Analysis:

1. Upward Adjustment on International Transactions Involving Transfer Pricing Provisions:
- Interest on Loans to AEs: The TPO made an ALP adjustment of ?5,00,35,270 on the grounds that the assessee did not charge interest on optionally convertible loans to its AEs. The Tribunal found that the loans were quasi-capital in nature, and the true reward for the loans was the opportunity to own capital on favorable terms. Therefore, the ALP adjustment was deleted.
- Corporate Guarantee Charges: The TPO proposed an ALP adjustment of ?4,19,22,177 for not charging guarantee fees on corporate guarantees issued to AEs. The Tribunal referenced the decision in Micro Ink Ltd and held that corporate guarantees were in the nature of shareholder activities and not services, leading to the deletion of the ALP adjustment.
- Liaison Services: The TPO rejected the comparables selected by the assessee for product registration services, leading to an ALP adjustment. The Tribunal remitted the matter back to the DRP for fresh adjudication, emphasizing that the TPO must provide valid comparables.

2. Disallowance under Section 40(a)(i) for Non-Deduction of TDS on Payments to Non-Residents:
- The Assessing Officer disallowed ?18,18,96,302 under section 40(a)(i) for non-deduction of TDS on payments for clinical trials, bio-analysis, consultancy, and legal fees. The Tribunal noted that the DRP had not examined the matter on merits and remitted the issue back to the DRP for fresh adjudication, directing them to consider specific case-by-case comments from the Assessing Officer.

3. Disallowance under Section 14A for Expenses Related to Tax-Exempt Income:
- The Assessing Officer disallowed ?16,06,73,002 under section 14A, while the assessee had offered ?3,89,21,994. The Tribunal directed the Assessing Officer to reconsider the disallowance, taking into account the assessee's objections regarding the inclusion of investments abroad and the correct figure of interest paid.

4. Eligibility for Deduction under Section 80IC:
- The DRP allowed the assessee's claim for deduction under section 80IC on the entire profit, including the profit from marketing the same products. The Tribunal upheld the DRP's decision, noting that the issue was covered by earlier decisions in the assessee's favor.

5. Treatment of Product Registration Expenses:
- The Assessing Officer treated product registration expenses as capital expenditure, while the assessee claimed them as revenue expenses. The Tribunal upheld the DRP's decision to treat these expenses as revenue, referencing earlier decisions in the assessee's favor.

6. Treatment of Trademark Registration and Patent Fees:
- The Assessing Officer classified trademark registration and patent fees as intangible assets, while the assessee claimed them as revenue expenses. The Tribunal upheld the DRP's decision to treat these expenses as revenue, referencing earlier decisions in the assessee's favor.

7. Allowability of Weighted Deduction under Section 35(2AB):
- The Assessing Officer disallowed weighted deduction for expenses incurred outside the approved R&D facility. The Tribunal upheld the DRP's decision to allow the deduction, referencing earlier decisions in the assessee's favor.

8. Depreciation on a Vehicle Registered in the Name of a Director:
- The Assessing Officer disallowed depreciation on a vehicle registered in the name of a director. The Tribunal upheld the DRP's decision to allow the depreciation, noting that the vehicle was used for business purposes and beneficial ownership rested with the assessee company.

9. Addition to Book Profit under Section 115JB:
- The Assessing Officer added ?16,06,73,002 to book profit under section 115JB, corresponding to the disallowance under section 14A. The Tribunal upheld the DRP's decision to delete the addition, referencing earlier decisions in the assessee's favor.

Conclusion:
- The appeals were partly allowed or dismissed based on the detailed analysis and findings of the Tribunal, with several issues remitted back to the DRP for fresh adjudication.