2018 (6) TMI 751 - AT - Income Tax

TPA - International Transaction - Corporate guarantee provided by assessee company to it s A.Es - Held that - CIT(A) has relied upon the judgement in assessee s own case DR. REDDY S LABORATORIES LIMITED VERSUS ADDL. COMMISSIONER OF INCOME TAX, CIRCLE-1 (2) , HYDERABAD AND VICE-VERSA 2017 (5) TMI 529 - ITAT HYDERABAD it is held that 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 assessee has not incurred any cost to provide such guarantee and therefore it will not have any impact on profits or costs of the assessee - hence the order of the Ld. CIT(A) does not call for any interference - thus the appeal of revenue is rejected. Expenditure incurred towards ESOPs - whether an ascertained liability and hence revenue expenditure? - Held that - CIT(A) observed that identical issue was considered in the assessee s own case for the earlier years (AYs 2006-07 to 2008-09) 2015 (3) TMI 983 - ITAT HYDERABAD wherein it was held that the difference between the price of shares and their issuance price should be treated as an expenditure in the hands of the assessee - thus it is an ascertained liability and therefore treated as revenue expenditure allowable u/s 37(1) - hence order passed by the Ld. CIT(A) does not call for any interference since - appeal of revenue is rejected. Determination of ALP in respect of loans given to its Associated Enterprises - Held that - CIT(A) concluded that LIBOR provides the basis for price and interest rates of all kinds of financial products like interest swaps, interest futures, savings account and mortgages - thus he accordingly held that LIBOR should be taken as bench-mark for charging interest - Following the decision of the ITAT in the assessee s own case, A.O. was directed to adopt the LIBOR rate applicable for the years under consideration 200 basis points to arrive at the ALP - hence we uphold the order of the Ld. CIT(A) and reject the ground of assessee. Allowable deduction u/s 37 (1) - expenses incurred towards travel, stay etc., in the public conferences attended by the Doctors is to improve the knowledge of the Doctors on the latest developments - Held that - view taken in the assessee s own case in the earlier years, we hereby direct the Assessing Officer to verify the nature of expenditure and disallow only such expenditure which was not incurred for the purpose of business of the assessee. Deduction u/s 80-IC - Allocation of corporate overheads expenses - Held that - The corporate overheads should be allocated amongst all the units based on turnover of respective units but while allocating the expenditure only net expenditure should be allocated on the basis of turnover. A.O. is directed to re-consider the matter in line with the view taken by us in the assessee s own case for the earlier years. Tax Authorities were not justified in allocating R & D expenditure and ESOP cost against the profits of other eligible units wherein assessee claimed deduction u/s 80IC of the Act. See ZANDU PHARMACEUTICALS WORKS LIMITED VERSUS. THE COMMISSIONER OF INCOME TAX 2012 (9) TMI 620 - BOMBAY HIGH COURT

Issues Involved:
1. Corporate Guarantee as an International Transaction
2. Expenditure on Employee Stock Options (ESOPs)
3. Determination of Arm's Length Price (ALP) for Loans to Associated Enterprises (AEs)
4. Treatment of Expenditure for Repairs and Maintenance
5. Deductibility of Expenses Incurred for Public Conferences
6. Allocation of Corporate Overheads, ESOP, and R&D Expenditure to Units Eligible for Deduction

Issue-wise Detailed Analysis:

1. Corporate Guarantee as an International Transaction:
The Revenue contended that the corporate guarantee provided by the assessee to its foreign AEs should be considered an international transaction under section 92B of the Income Tax Act, 1961, warranting an ALP adjustment. The Assessing Officer (A.O.) made a TP adjustment by charging a 2% commission on the guarantee, resulting in an addition of ?26.34 Crs. The Ld. CIT(A) followed the assessee's own case rulings for earlier years, concluding that the corporate guarantee is not an international transaction as per section 92B, and hence, no ALP adjustment is warranted. The Tribunal upheld the Ld. CIT(A)'s decision, rejecting the Revenue's grounds.

2. Expenditure on Employee Stock Options (ESOPs):
The Revenue argued that the ESOP expenditure is not an ascertained liability and hence not allowable as revenue expenditure. The Ld. CIT(A) observed that this issue was previously considered in the assessee's favor, treating the ESOP expenditure as an ascertained liability and allowable under section 37(1). The Tribunal upheld the Ld. CIT(A)'s decision, rejecting the Revenue's ground.

3. Determination of Arm's Length Price (ALP) for Loans to Associated Enterprises (AEs):
The A.O. determined the ALP for loans given to AEs using an interest rate of 7%, resulting in an adjustment of ?6.50 Crs. The Ld. CIT(A) and the ITAT in earlier years adopted LIBOR + 200 basis points as the ALP. The Tribunal upheld the Ld. CIT(A)'s direction to adopt LIBOR + 200 basis points for the relevant years, rejecting the assessee's grounds.

4. Treatment of Expenditure for Repairs and Maintenance:
The assessee did not press this ground, and the Tribunal upheld the Ld. CIT(A)'s order rejecting the claim for repairs and maintenance expenditure.

5. Deductibility of Expenses Incurred for Public Conferences:
The assessee contended that expenses for doctors attending public conferences should be allowed as business expenses under section 37(1). The Tribunal directed the A.O. to verify the nature of the expenditure and disallow only those not incurred for business purposes, consistent with earlier years' rulings.

6. Allocation of Corporate Overheads, ESOP, and R&D Expenditure to Units Eligible for Deduction:
The assessee argued against allocating gross corporate overheads to units eligible for deduction under section 80-IC. The Tribunal directed the A.O. to allocate only net expenditure based on turnover, consistent with earlier years' rulings. For ESOP and R&D expenditure, the Tribunal, following the Bombay High Court's decision in Zandu Pharmaceutical Works Ltd, held that these should not be allocated to exempt units unless a direct nexus is established. The Tribunal concluded that the Tax Authorities were not justified in apportioning R&D and ESOP costs to units claiming deductions under sections 10B, 80IB, and 80IC.

Conclusion:
The appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was partly allowed. The Tribunal upheld the Ld. CIT(A)'s decisions on corporate guarantee, ESOP expenditure, and ALP for loans, while directing the A.O. to verify and allocate expenses appropriately for public conferences, corporate overheads, ESOP, and R&D expenditure.

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