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2017 (5) TMI 529 - AT - Income TaxTPA - International Transaction - Corporate guarantee provided by assessee company to it s A.Es - Held that - The Explanation to Section 92B cannot be applied retrospectively and for the years under consideration the assessee having not incurred any costs in providing corporate guarantee it would not constitute International Transaction within the meaning of Section 92B of the Act and consequently, ALP adjustment is not warranted on this aspect. Since we are of the opinion that it falls outside the ambit of International Transaction the alternative contention urged before us need not be taken into consideration. Suffice to say, that each year being independent, merely because the assessee has accepted in the earlier year it would not come in the way of the assessee to urge the same issue in a subsequent year. Additional interest on loans given to A.Es. - Held that - The principle that emerges from the decisions cited by the Learned Counsel for the Assessee particularly in assessee s own case for the earlier years, show that benchmarking of ALP should be LIBOR 200 basis points and TPO should not determine the ALP by taking into consideration the market rate prevailing in the respective countries. Even for A.Y. 2008-2009, the Hyderabad Bench accepted in principle that LIBOR 200 basis points can be adopted as ALP. Under these circumstances, we set aside the matter to the file of the A.O. who is directed to adopt the LIBOR rate applicable for the years under consideration 200 basis points to arrive at the ALP. This issue is disposed of accordingly. Allowability of claim of depreciation on goodwill - Held that - It is not in dispute that this very issue was considered by the ITAT in assessee s own case for the A.Y. 2007-08 wherein the Bench allowed the plea of the assessee to allow depreciation on goodwill. Allowability of business expenditure - Held that - We direct the A.O. to verify the nature of the expenditure and disallow only such expenditure which was not incurred for the purpose of business of the assessee. This ground is accordingly treated as allowed for statistical purposes. Allocation of corporate overheads expenses to tax holiday units - Held that - We direct the A.O. to allocate net expenditure of the corporate entity amongst all the units on the basis of turnover. This ground is disposed of accordingly. Jurisdiction of the DRP considering the matter of allowability of deduction referrable to profit share with DRL Swiss - Held that - Even the matters not agitated by the assessee before the DRP can be considered for the purpose of enhancement. In fact, the DRP had issued a notice to assessee in 2013 by which time the Explanation to section 144C(8) was already in force. The case of the Revenue is also supported by the decisions of Tribunal referred to by the Ld. D.R. in the written submissions. Under the circumstances, we uphold the plea of the Ld. CIT-D.R. and hold that the DRP is well within its competence to consider the issue pertaining to profit sharing between DRL India and DRL SA. Correctness of disallowance of the claim of sharing of profits - Held that - The sharing of profits between DRL, India and DRL SA is for bonafide business purposes and therefore, assessee is entitled to claim deduction on this count. It may not be out of place to mention that the A.O. was of the view that the assessee has a major role in product development and therefore, in the process of sharing profits between DRL US and DRL, India, assessee is entitled to larger share i.e., 60%. It is not in dispute that the DRL, US has undertaken the responsibility of warehousing and marketing the product in US territory which is the main role that requires to be played in selling a drug during the exclusivity period. Despite that assessee having initially done the Research and filed an abbreviated new drug application for the drug namely Sumatripton and got approval to manufacture and develop the product in India and to sell the same in USA, there was an agreement between DRL, US and DRL, India to share the profits equally. Under these circumstances, we are of the view that the DRP was justified in holding that the sharing of profits between India and US at 50%-50% cannot be questioned. As out of 50% share that the assessee earned it had to part with a portion of the profit with the DRL SA for the detailed reasons set-out in the above paras. Having regard to the circumstances of the case and in the backdrop of the principles laid down by the Hon ble Supreme Court in the case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT we are of the firm view that the agreement between DRL, India and DRL SA cannot be doubted. We direct the A.O. accordingly.
Issues Involved:
1. Jurisdiction of the DRP to consider new issues. 2. Determination of ALP for loans given to AEs. 3. Corporate guarantee charges. 4. Disallowance of ESOP expenses. 5. Depreciation on goodwill. 6. Weighted deduction under section 35(2AB). 7. Maintenance expenditure classification. 8. Expenditure on doctors' meetings and sponsorships. 9. Allocation of corporate overheads. 10. Profit sharing with DRL Switzerland. Issue-Wise Detailed Analysis: 1. Jurisdiction of the DRP to Consider New Issues: The DRP's jurisdiction to consider new issues was challenged by the assessee, arguing that the DRP can only address matters emanating from the orders passed by the A.O./TPO. However, the Revenue argued that the Explanation to Section 144C(8) of the Act, inserted by the Finance Act, 2012 with retrospective effect from 01.04.2009, allows the DRP to consider any matter arising out of the assessment proceedings relating to the draft order. The Tribunal upheld the Revenue’s view, affirming the DRP's competence to consider new issues. 2. Determination of ALP for Loans Given to AEs: The TPO benchmarked the interest rates for loans given to Lacock Holdings and Falcon Mexico at 6.5% and 12% respectively, while the assessee had charged 5% and 9.5%. The Tribunal directed the A.O. to adopt the LIBOR rate plus 200 basis points for determining the ALP, consistent with the principle accepted in earlier years. 3. Corporate Guarantee Charges: The A.O. adopted 1.3% as corporate guarantee charges, while the DRP directed it to be limited to 0.7%. The Tribunal held that corporate guarantee charges do not constitute an "International Transaction" under Section 92B of the Act for the years under consideration, as the assessee had not incurred any costs in providing the guarantee. 4. Disallowance of ESOP Expenses: The A.O. disallowed the ESOP expenses, treating them as capital in nature. The DRP, following the decision of the ITAT, Special Bench, Bangalore in the case of Biocon Ltd., held that ESOP expenses are revenue in nature. The Tribunal upheld this view, confirming the DRP’s decision. 5. Depreciation on Goodwill: The A.O. disallowed the depreciation on goodwill, treating it as not an intangible asset. The DRP followed its earlier order for A.Y. 2008-09 and rejected the assessee's contention. The Tribunal, consistent with its decision in the assessee’s own case for A.Y. 2007-08, directed the A.O. to allow depreciation on goodwill. 6. Weighted Deduction under Section 35(2AB): The A.O. disallowed the weighted deduction under Section 35(2AB) due to the absence of a report from DSIR. The DRP directed the A.O. to consider Form 3CL and allow the weighted deduction as per law. The Tribunal upheld the DRP’s direction. 7. Maintenance Expenditure Classification: The A.O. treated certain maintenance expenses as capital in nature. The DRP rejected the assessee’s objection due to lack of details. The Tribunal dismissed the assessee’s grounds, noting that the A.O. had allowed depreciation on the capitalized expenditure. 8. Expenditure on Doctors' Meetings and Sponsorships: The A.O. disallowed the expenditure on doctors' meetings and sponsorships, treating it as against public policy. The DRP confirmed the disallowance, following its decision for A.Y. 2008-09. The Tribunal directed the A.O. to verify the nature of the expenditure and disallow only such expenditure not incurred for business purposes. 9. Allocation of Corporate Overheads: The A.O. allocated corporate overheads to tax holiday units, reducing the exemption claimed. The DRP upheld the allocation. The Tribunal directed the A.O. to allocate only the net expenditure of the corporate entity among all units based on turnover, consistent with its decision for earlier years. 10. Profit Sharing with DRL Switzerland: The DRP disallowed the profit share to DRL Switzerland, treating it as a profit-shifting arrangement. The Tribunal, after detailed consideration, held that the sharing of profits between DRL India and DRL Switzerland was for bona fide business purposes. It directed the A.O. to allow the deduction, affirming the DRP’s decision on the profit-sharing ratio between DRL India and DRL USA. Conclusion: The Tribunal provided a comprehensive analysis on each issue, upholding the DRP’s decisions on most counts while directing specific adjustments and verifications by the A.O. The appeals filed by the assessee were partly allowed, while the Revenue's appeal was dismissed.
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