2024 (5) TMI 440 - AT - Income Tax

TP adjustment - goods Exported to the Associated Enterprises (AE) located in South Africa and Mexico - TPO did not accept associated enterprises as tested party as financial year of the companies having foreign jurisdiction did not match with the financial year of the assessee herein and Due to use of database which have their own format and non- availability of Balance Sheet, financials containing proper figure of RPT and description of function, data base are not reliable - HELD THAT - In the facts of the present case, we are of the view that clause (d) of the above said Rule 10B(2) is applicable. As per Rule 10B(2), the factors such as, the market conditions of the concerned regions, their geographical location, size of markets, level of competition etc cannot be ignored. It is stated that the operations of Glenmark, Mexico has been started only during the year under consideration and the operations of Glenmark South Africa are in its initial years. Since both these AEs are in their initial years of operations, their respective profitability will be lower than the comparable companies in their respective region, since the AEs have to incur huge expenditure on marketing of products, while the comparable companies are established players. As noticed by us earlier, so far the assessee herein is concerned and qua the transfer pricing provisions, what is required to be seen is whether the price realized on export of products to their AEs is at arms length or not. The fact the profitability of AEs is lower than the profitability of comparable companies, would also show that the assessee has not under invoiced the sales. In the instant case, the details extracted in the table above matches with the above said criteria. Since the comparable companies selected in the respective Geographical locations are established players, the profit ratio of comparable companies are to required to be considered only to show that the profit ratio of the assessee was lower than their profit ratio. In this view of the matter, the difference in accounting period may not be that much relevant. As noticed that the above said methodology adopted by the assessee has been accepted by the TPO in the earlier years. The table above would show that the profitability of the assessee in exporting products to these two AEs is increasing year after year - there is no reason to ignore transfer pricing study conducted by the assessee should be accepted. Accordingly, we set aside the order passed by CIT(A) and direct the AO to delete the transfer pricing adjustment made in respect of exports made to M/s Glenmark, South Africa and M/s Glenmark, Mexico. Deduction claimed u/s 35(2AB) - exclusion of expenses not approved by DSIR for the purpose of computing deduction u/s 35(2AB) - HELD THAT - We notice that similar issue has been decided in favour of the assessee in the assessee s own case in AY 2013-14. We also notice that the Rule 6(7A), which requires approval of expenses also by DSIR has been brought into the statute w.e.f. 1.7.2016 and hence the same will not apply to AY 2014-15. With regard to the second issue relating to deduction of contract revenue, we notice that the said issue has also been decided in favour of the assessee in the case of Microlabs Ltd 2016 (4) TMI 219 - KARNATAKA HIGH COURT and Wokhardt Ltd. 2012 (5) TMI 823 - ITAT MUMBAI Since the ld CIT(A) has decided both these issues following the above said decisions, we do not find any reason to interfere with his order on both these issues. Verify the R D expenses , it is the contention of the assessee that the AO did not question the nature of expenses at all in the assessment order, i.e., the AO has accepted the nature of expenses as R D expenses. The AO has allowed expenses u/s 37(1) of the Act, but disallowed only weighted deduction due to non-availability of approval from DSIR. Accordingly, it is contended that there was no requirement to restore the issue to the file of AO for examining the expenses. On a perusal of the assessment order, we find the above said contentions of the assessee to be correct. It is not the case of the AO as to whether the R D expenses claimed by the assessee would fall under the category of Research Development expenses or not. Thus, we notice that the Ld CIT(A) has rendered his decision on a non-existing issue. Accordingly, we cancel the above said direction given by Ld CIT(A). Allocation of interest expenses to the units eligible for deduction u/s 80IC/80IE - HELD THAT - We notice that the assessee has furnished the Balance-sheet of Buddy I unit , Solan unit (Baddi-II) and Sikkim unit. On a Perusal of the balance-sheets of these three units, we notice that they have sufficient Reserves and surplus. Further, they have not taken any amount either from Head office. These units did not borrow money from other persons also. On the contrary, the Balance Sheets would show these units have given money to the Head office. Since these units have not taken money from Head office, the question of allocating interest expenses of the HO to these units will not arise. Hence, the reasoning given by the AO would fail in respect of these three units. Hence there is not necessity to allocate interest expenditure of Head office to the above said two units. Since all the facts are already available on record, there was no necessity for the Ld CIT(A) to restore the issue again for verification of factual aspects. Accordingly we modify the order passed the learned CIT(A) on this issue and direct the AO to delete the allocation of interest expenses made to these three units. Disallowance of Sales Promotion Expenses in the form of freebies to doctors and medical professionals u/s 37(1) - HELD THAT - We notice that the AO did not examine those break- up details and did not pin point the expenses which can be considered as expenses incurred in violation of MCI guidelines. Instead, the AO has proceeded to disallow 1.32% of the total turnover, as the similar disallowance made out of Sales promotion expenses in AY 2011-12 worked out to same percentage. We notice that, in AY 2011-12, the assessee itself has admitted that it has incurred expenses on freebies to the doctors and the disallowance was on the basis of said admission. In this year, there is no such admission - AO has computed the disallowance on the total turnover, whereas, the issue is related to Sales promotion expenses and disallowance to be made as per the Explanation to sec.37(1) of the Act. We notice that the CIT(A) has adopted a completely different approach, which was not at all the case of the AO, i.e., the AO did not suspect that the sales promotion expenses have not been wholly and exclusively incurred for the purposes of business. In our view, the CIT(A) has taken up a non-existing issue and proceeded to confirm the disallowance. In our view, the approach adopted by both tax authorities is not correct and accordingly set aside the same. There should not be any doubt that actual expenses incurred on freebies are required to be disallowed under section 37(1) of the Act. Accordingly we are of the view that this issue requires fresh examination at the end of the Assessing Officer. Accordingly we set aside the order of the learned CIT(A) passed on this issue and restore the same to the file of the AO. Disallowance u/s 32AC - HELD THAT - We hold that the actual cost of plant and machinery transferred during the year from Capital work in progress standing as on 01-04-2013 should also be considered for ascertaining the aggregate cost of assets acquired and installed during the year. In the instant case, the aggregate cost of assets transferred from Capital work in progress and the purchased during the year has exceeded the threshold limit of Rs. 100 crores. Hence, the deduction u/s 32AC of the Act claimed by the assessee is allowable. Accordingly, we set aside the order passed by CIT(A) on this issue and direct the AO to allow the deduction claimed by the assessee u/s 32AC of the Act. TP adjustment made on Corporate Guarantee commission - assessee had provided guarantee in favour of its Swiss subsidiary named Glenmark Holding S.A Switzerland - CIT(A) deleted adjustment made in respect of guarantee commission - HELD THAT - We notice that the Ld CIT(A) has followed the decisions rendered by the Hon ble jurisdictional Bombay High Court in the assessee s own case 2017 (2) TMI 1305 - BOMBAY HIGH COURT and the Tribunal passed in the assessee s own case in an identical issue and accordingly deleted the transfer pricing adjustment made in respect of guarantee commission. Hence, we do not find any reason to interfere with the order passed by Ld CIT(A) on this issue. Allocation of R D expenses to the units eligible for deduction u/s 80IC/80IE - HELD THAT - Tribunal in the assessee s own case in AY 2010-11 2019 (2) TMI 1067 - ITAT MUMBAI and accordingly remitted this issue to the file of AO. In our view, no prejudice is caused to the revenue by the decision of CIT(A), since the matter required factual verification. Accordingly, we uphold the order passed by CIT(A) on this issue. Disallowance made u/s 14A r.w.r. 8D - Expenses incurred earning exempt income - HELD THAT - As decided in Envestor Ventures Ltd. 2021 (1) TMI 922 - MADRAS HIGH COURT answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the assessee during the particular assessment year.

Summary

Issues Involved:
1. Transfer pricing adjustments
2. Disallowance of weighted deduction claimed u/s 35(2AB)
3. Allocation of interest expenses to units eligible u/s 80IC/80IE
4. Disallowance of sales promotion expenses u/s 37(1)
5. Disallowance of Investment Allowance u/s 32AC
6. Relief granted in respect of transfer pricing adjustment on Corporate Guarantee
7. Relief granted in respect of allocation of R & D expenditure
8. Relief granted in respect of addition made u/s 14A
9. Cross objection on disallowance of sales promotion expenses

Summary:

Transfer Pricing Adjustments:
The assessee's appeal included issues on transfer pricing adjustments for exports to Glenmark South Africa and Mexico. The TPO did not accept the assessee's transfer pricing study and made adjustments based on a 10.86% ALP margin. The CIT(A) upheld these adjustments. However, the Tribunal found that the methodology used by the assessee was consistent with previous years and accepted the assessee's explanation for low profits due to initial market penetration efforts. The Tribunal directed the AO to delete the transfer pricing adjustments.

Disallowance of Weighted Deduction u/s 35(2AB):
The assessee claimed a deduction of Rs. 85.38 crores u/s 35(2AB), which the AO reduced by Rs. 36.44 crores due to non-approval by DSIR and revenue from contract R&D. The CIT(A) allowed the deduction but remanded the issue for verification of expenses. The Tribunal upheld the CIT(A)'s decision on the non-approval issue but canceled the remand for verification, as the nature of expenses was not questioned by the AO.

Allocation of Interest Expenses u/s 80IC/80IE:
The AO allocated interest expenses to units eligible for deductions u/s 80IC/80IE, resulting in an addition of Rs. 7.37 crores. The CIT(A) remanded the issue for factual verification. The Tribunal found that the units had sufficient reserves and did not use head office funds, directing the AO to delete the allocation of interest expenses.

Disallowance of Sales Promotion Expenses u/s 37(1):
The AO disallowed Rs. 30.37 crores of sales promotion expenses under MCI guidelines. The CIT(A) confirmed the disallowance but the Tribunal set aside the orders of both authorities, directing the AO to re-examine the nature of expenses and disallow only those incurred in violation of MCI guidelines.

Disallowance of Investment Allowance u/s 32AC:
The AO disallowed Rs. 16.51 crores claimed u/s 32AC, as the assets were transferred from capital work in progress. The CIT(A) upheld the disallowance. The Tribunal, following precedents, held that assets transferred from capital work in progress should be considered for deduction and directed the AO to allow the claim.

Relief on Transfer Pricing Adjustment for Corporate Guarantee:
The TPO made adjustments for guarantee commission at 2% and 1.5%. The CIT(A) deleted the adjustments, following the Tribunal and High Court decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision.

Relief on Allocation of R & D Expenditure:
The AO allocated R&D expenses to certain units, reducing deductions u/s 80IC/80IE. The CIT(A) remanded the issue for verification. The Tribunal upheld the remand for factual verification.

Relief on Addition u/s 14A:
The AO disallowed Rs. 11.82 crores u/s 14A, while the CIT(A) limited the disallowance to the exempt income and excluded it from book profit u/s 115JB. The Tribunal upheld the CIT(A)'s decision, consistent with judicial precedents.

Cross Objection on Sales Promotion Expenses:
The Tribunal's decision on the disallowance of sales promotion expenses u/s 37(1) rendered the cross objection moot.

Conclusion:
The assessee's appeal was partly allowed, and the revenue's appeal and cross objection were dismissed. The Tribunal directed the AO to re-examine specific issues and delete certain disallowances based on the facts and judicial precedents.