2021 (12) TMI 200 - AT - Income Tax

Upward TP adjustment on account of corporate guarantee - considering the charge of 2.52 percent for the guarantee provided by the Appellant to the banks for the loans availed by Associated Enterprises ('AE') - HELD THAT - Methodology adopted by the TPO for computation of arm s length price of these guarantees is wholly erroneous - TPO has proceeded on the basis that the guarantee commission charges by the State Bank of India and Bank of India are static rates which hold good in all circumstances, but then, in reality, the guarantee commission rates vary on a large number of factors and vary from client to client. The adoption of difference between coupon rate of A rated bonds and BB rated bonds is even more inappropriate and it proceeds on the assumption, an unrealistic assumption at that, pre issuance of corporate guarantee by the assessee for its AE, its credit equivalence is of BB rated bond, which gets converted into A rated bond upon issuance of assessee s corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm s length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval - no sound basis for disturbing the arm s length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well - we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment. The assessee gets the relief accordingly. Upward TP adjustment on account of notional interest computed on optionally convertible loans granted to its AE - As argued during the year under consideration, no interest has accrued to the Appellant in terms of the agreement with the AE - HELD THAT - As fairly accepted by the learned Departmental Representative, that all the material facts and circumstances are the same, and many of these loans are merely extensions of the earlier loans. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench in assessee s own case 2017 (4) TMI 462 - ITAT AHMEDABAD . Respectfully following the same, we uphold the plea of the assessee on this issue as well, and delete the impugned ALP adjustment. Upward TP adjustment on account of reimbursement of expenses - TPO proceeded to make disallowance under section 37(1) by holding that there was no commercial expediency in making these reimbursements - HELD THAT - So far product liability insurance is concerned, the assessee has justified bearing the same on the ground that US AE is an LRD (limited risk distributor) with a targeted operated margin, and, therefore, under this business model, these costs are to be borne by the assessee company. We see no infirmity in this approach and this explanation. When AE is only doing distribution, it is entirely a commercial call of the assessee as to which type of product related expenses are to be borne by the assessee. These expenses thus clearly pertain to the assessee as the US AE is admittedly, and beyond dispute, only an LRD. The same is the position with respect to the legal expenses. As been specifically explained by the assessee, and this explanation has not even been called into question, that the US AE was holding the ANDAs and patents, as a trustee and in fiduciary capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm s length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned by the company and in respect of which US AE is only an LRD. The expenses in question were thus clearly for the purpose of the business of the assessee, and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALP- something clearly contrary to the scheme of the Act, these expenses were fully admissible for deduction. In any case, there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment . TDS u/s 195 - Addition u/s 40(a)(i) - HELD THAT - Payments made to the US based and Canada based entities, which are covered by make available clauses in both the Indo US as also Indo Canadian tax treaties- see item no. 1 to 7, are taken outside the ambit of disallowance under section 40(a)(i). Payments made to two Thailand based entities - These payments are admittedly for clinical trials and testing. As learned counsel for the assessee rightly contends, there is no FTS clause in the India Thailand DTAA, and, therefore, in the absence of a PE of the recipient companywhich is admittedly not the case here, the income embedded in payments made to Thai entities cannot be taxed in India. This issue is also covered, in favour of the assessee, by a coordinate bench decision in the case of DCIT Vs Ford India Ltd 2017 (4) TMI 459 - ITAT CHENNAI - payments made to Thai entities, in respect of clinical trials and testing charges, cannot be said to be taxable in India. The disallowance under section 40(a)(i) for item no. 8 and 9 in the chart reproduced earlier thus must stand deleted. Access to online database and journals, as paid to US and Dutch entities - As relying on own case 2017 (4) TMI 462 - ITAT AHMEDABAD we uphold the plea of the assessee to the effect that disallowance under section 40(a)(i) could not have been made for payments on account of access to online publications and database etc to Chemical Abstract Services, USA, Elsevier BV, Netherlands and Thompson Reuters Inc USA. The disallowances is deleted. Payment on account of consultancy charges paid to Cambridge Soft Corporation USA - HELD THAT - As not even the case of the revenue, and rightly so, that these consultancy services satisfy make available clause in the Indo US tax treaty and are of such a nature that by providing this consultancy service the US entity has enabled the assessee to provide these services without recourse to the US entity; inherently, the consultancy services cannot be of such a nature. In this view of the matter, these services cannot be taxed under article 12 of the Indo US DTAA, and since, in any case, the US entity does not have any PE in India, or fixed place of business in India, the income in question cannot be taxed as a business profit or independent personal service, for this short reason alone. The disallowance under section 40(a)(i), in respect of this payment therefore, must stand deleted. Purchase of software from Cambridge Soft Corporation USA - This issue now stands concluded, in favour of the assessee, by Hon ble Supreme Court s judgment in the case of Engineering Analysis Centre of Excellence Pvt Ltd Vs CIT 2021 (3) TMI 138 - SUPREME COURT Payment to Millies International Ltd for payment of exports commission - There are number of decisions of the coordinate benches, including in the case of DCIT Vs Welspun Corporation 2017 (1) TMI 1084 - ITAT AHMEDABAD , which hold that such incomes in the hands of foreign commission agents cannot be taxable in India. We see no reasons to take any other view of the matter than the view so taken by the coordinate benches. Respectfully following the same, we hold that the assessee did not have any obligations to deduct tax at source from these payments, and, accordingly, disallowance under section 40(a)(i) does not come into play. Payment to Swiss Biogenic Ltd, Srilanka - claim of the assessee that the claim of the assessee is that it was for a market survey to find out product feasibility in the domestic markets - As contentions of the assessee concerned, Indo Srilanka DTAA does not have any make available clause in the provision for fees for technical services under article 12(3)(b). There is also no dispute that the payment is made for market survey services which are essentially covered by the broad scope of managerial, technical or consultancy services . The existence of PE has no relevance for this purpose. As for taxation under the domestic law, since the payment is for conducting the market survey, which are covered by equally wide scope of managerial, technical or consultancy services under Section 9(i)(vii), it is clearly taxable under the domestic law. On this point, therefore, we reject the plea of the assessee and hold that disallowance under section 40(a)(i) was justified. Nature of expenses - Product Registration Expenses and reimbursement of expenses for Product Registration Support Services - Trademark Registration Fees and Patent Registration Fees incurred - HELD THAT - As assessee does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee s own case and the additions have been made, so to say, keep the issue alive. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case, and Hon'ble High Court has declined to admit appeal against such decision, as in the esteemed views of Their Lordships, no question of law arises from these decisions. The relief granted to the assessee on this point in past has thus achieved finality. In this view of the matter, we uphold the plea of the assessee, and direct the Assessing Officer to treat the product registration expenses and product support service expenses as revenue expenditure, and to, therefore, delete the impugned disallowance. Weighted deduction for expenditure on Scientific Research u/s. 35(2AB) in respect of Clinical Trial and Bio-equivalence Study - HELD THAT - Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case. These decisions hold good as on now, and we are respectfully bound by those decisions as on now. Of course, whatever we hold does, and shall always, remain subject to what Hon ble Courts above decide- as and when that happens. In this view of the matter, we uphold the plea of the assessee, and direct the Assessing Officer to delete the impugned disallowance of ₹ 39,39,31,000. This disallowance must stand deleted as on now. The assessee gets the relief accordingly. Depreciation on Hummer Car - Car was in the name of the Director and there was no evidence to show that the same was used wholly and exclusively for the purpose of business - HELD THAT - As car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the DRP, the mere fact that the car was not legally owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the depreciation on car cannot be declined. - Decided in favour of assessee.

Summary

Issues Involved:
1. Upward Transfer Pricing (TP) adjustment on account of corporate guarantee.
2. Upward TP adjustment on account of notional interest on optionally convertible loans.
3. Upward TP adjustment on account of reimbursement of expenses.
4. Disallowance under Section 40(a)(i) for non-deduction of tax at source on foreign remittances.
5. Disallowance of product registration expenses as capital expenditure.
6. Disallowance of trademark and patent registration fees as capital expenditure.
7. Disallowance of weighted deduction under Section 35(2AB) for scientific research expenses.
8. Disallowance of depreciation on Hummer H2 car.
9. Addition of partner's remuneration under Section 28(v).
10. Adjustment under Section 14A for computation of book profit under Section 115JB.

Detailed Analysis:

1. Upward TP Adjustment on Account of Corporate Guarantee:
The assessee charged a 1% guarantee fee for corporate guarantees provided to Associated Enterprises (AEs). The TPO, however, applied a rate of 2.52% based on external CUPs, leading to an upward adjustment of ?10,45,32,855. The Tribunal upheld the assessee's rate of 1%, citing past decisions and the inappropriate methodology of the TPO. The adjustment was deleted.

2. Upward TP Adjustment on Account of Notional Interest on Optionally Convertible Loans:
The TPO recharacterized optionally convertible loans as debt and imputed interest, leading to an adjustment of ?9,97,52,304. The Tribunal held that these loans were quasi-equity, and the true reward was the option to convert into equity. Following past decisions, the adjustment was deleted.

3. Upward TP Adjustment on Account of Reimbursement of Expenses:
The TPO disallowed reimbursements to US-based AEs, amounting to ?21,43,79,368, treating them as non-arm's length. The Tribunal noted that similar expenses were allowed in other years and that the TPO overstepped his authority by questioning commercial expediency. The adjustment was deleted.

4. Disallowance Under Section 40(a)(i) for Non-Deduction of Tax at Source on Foreign Remittances:
The AO disallowed ?17,91,43,844 for non-deduction of tax on foreign remittances. The Tribunal found that many payments were not taxable in India under relevant DTAA provisions. The matter was remitted to the AO for fresh adjudication, considering judicial precedents.

5. Disallowance of Product Registration Expenses as Capital Expenditure:
The AO disallowed ?9,84,01,831, treating product registration expenses as capital expenditure. The Tribunal noted that past decisions allowed these as revenue expenses. The disallowance was deleted.

6. Disallowance of Trademark and Patent Registration Fees as Capital Expenditure:
The AO disallowed ?8,60,25,625, treating trademark and patent registration fees as capital expenditure. The Tribunal followed past decisions treating these as revenue expenses. The disallowance was deleted.

7. Disallowance of Weighted Deduction Under Section 35(2AB) for Scientific Research Expenses:
The AO disallowed ?39,39,31,000 for expenses incurred outside approved R&D facilities. The Tribunal noted that past decisions allowed such expenses under Section 35(2AB). The disallowance was deleted.

8. Disallowance of Depreciation on Hummer H2 Car:
The AO disallowed ?9,14,174, arguing the car was owned by a director. The Tribunal found the car was beneficially owned and used by the assessee for business purposes. The disallowance was deleted.

9. Addition of Partner's Remuneration Under Section 28(v):
The AO added ?142 crores, rejecting the assessee's claim under Section 28(v). The Tribunal followed a coordinate bench decision allowing such remuneration as non-taxable under Section 28(v). The addition was deleted.

10. Adjustment Under Section 14A for Computation of Book Profit Under Section 115JB:
The AO made an adjustment of ?14,21,53,793 under Section 14A for book profit computation. The Tribunal noted that past decisions in the assessee's favor disallowed such adjustments. The adjustment was deleted.

Conclusion:
The Tribunal ruled in favor of the assessee on most issues, deleting significant disallowances and adjustments made by the AO and TPO. The matters were decided based on past judicial precedents and interpretations of relevant legal provisions.