2021 (9) TMI 1164 - AT - Income Tax

TP Adjustment - upward adjustment made on account of international transaction with AE s by treating it (the assessee) as a tested party - HELD THAT - As t in the identical set of facts circumstances, the ITAT Delhi Bench, in the own case of the assessee, in the AY 2008-09 being 2016 (5) TMI 157 - ITAT DELHI has held that AE s should be accepted as tested party being the least complex for comparability analysis of international transaction with the assessee. We restore the issue to the file of the TPO for the determination of ALP of International Transactions with the AEs for fresh adjudication considering its AE s as the tested party. Hence, the ground of appeal of the assessee is allowed for statistical purposes Disallowance u/s 14A r.w.r. 8D - Suo moto disallowance made by assessee - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI findings recorded by the CIT (A) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his satisfaction clinches the issue in favour of the respondent assessee and against the Revenue. Adjustment while computing the book profit under section 115JB of the Act taking the amount of disallowance made u/s 14A r.w.r. 8D - HELD THAT - As decided in own case 2016 (12) TMI 1539 - ITAT AHMEDABAD we set aside the finding of the ld. DRP and direct the AO to delete the adjustment made by him under section 115JB of the Act. Hence, the ground of appeal of the assessee is allowed. Disallowance u/s 35(2AB) of the Act on the ground that the assessee had not filed form 3CL issued by the DSIR - HELD THAT - As decided in own case 2016 (12) TMI 1539 - ITAT AHMEDABAD expenses incurred before Form 3CM approval cannot be denied for the purpose of Section 35(2AB) weighted deduction. We follow the very reasoning to opine that facts of the instant case rather go a step further wherein the appellant has only claimed those expenses which relate to the time period as approved in the Form 3CM. We accordingly hold that the assessee is very much entitled for claiming the above capital and revenue expenses incurred on in house research and development Deduction for the contribution made to Ranbaxy community healthcare society (for short RCHS) and Ranbaxy Science Foundation (for short RCF) - HELD THAT - As decided in own case 2016 (5) TMI 157 - ITAT DELHI we delete the disallowance of contribution made by appellant to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation - regarding failure to deduct tax on this sum, Ld. DR. could not point out particular section, which warrants deduction of tax at sources on this payment. Therefore, we also hold that in absence of specific section under which the tax is required to be deducted on such contribution without their being any service rendered by the recipient of the contribution disallowance u/s 40a(ia) also cannot be made. Deduction u/s 80IB/IC - plants located in Goa and Himachal Pradesh - AO in addition to the above also observed that the assessee had not provided the financial statements of the eligible undertakings separately as required under rule 18BBB(2) of Income Tax Rules - assessee has just provided the income and expenditure account which is nothing but self-serving document. - HELD THAT - As relying on assessee own case 2016 (5) TMI 157 - ITAT DELHI the order of the ITAT Delhi where the deduction claimed by the assessee under section 80IB/80IC was allowed based on reasoning as discussed above. Hence the ground of appeal of the assessee is allowed. Addition for the payment made by the assessee to Teva Pharmaceuticals, Israel by treating the payment made by the assessee to Teva Pharmaceuticals as clandestine payment - HELD THAT - The revised agreement was entered by the assessee with TEVA USA to avoid the manufacturing rights being conferred to the TEVA as per the original agreement dated 7-12-2010. As such the assessee wanted to manufacture the product at its own in order to build its goodwill in the US Market. We are also conscious to the fact that there was no clause in the original agreement dated 7th December 2010 under which the assessee could have opted to get out from such agreement. It was possible when the other party was not able to honour the conditions of the agreement whereas the other party has fulfilled all the conditions as prescribed in the agreement. Whether the assessee was authorized to make the payment to TEVA Israel whereas the original agreement as well as the amended agreement dated 7th December 2010 and 7th December 2011 respectively were made between the assessee, RPI and TEVA USA? - As revenue cannot accept part of the agreement favouring to it and reject part of the agreement without assigning any valid reasons. The Revenue either should have accepted the entire agreement or should have rejected the same in entirety. It is not expected from the revenue to accept part of the agreement and reject part of the agreement which is not a good practice. The settlement agreement which is giving rise to the compensation paid by the assessee was entered dated 7th of December 2011 i.e. within the financial year under consideration corresponding to the assessment year 2012-13. Therefore, it cannot be said that the liabilities incurred against such contracts/agreement by the assessee were contingent in nature. The learned DR at the time of hearing has relied on various judgments, but the same are distinguishable from the facts of the case on hand. In those judgments as well there was no denial for denying the deduction if the expenditure has been incurred for the purpose of the business. We hold that the payment to the TEVA Israel has been made by the assessee as a matter of commercial expediency which is wholly and exclusively for the purpose of the business. Thus the ground appeal of the assessee is allowed. Disallowance for settlement agreement AND Plea agreement under section 37 of the Act on account of payment made to US FDA for the settlement - HELD THAT - There is no dispute to the fact that the assessee has been doing the business in the US market since many years. However, the business of the assessee came to halt once there was an Alert notice issued by the US FDA with regard to import of drugs/product manufactured at assessee certain facilities in India. In fact the assessee by making the impugned payment was able to resume its business. Therefore it cannot be said that the assessee has got any benefit of enduring nature. Therefore the impugned payment cannot be treated as capital in nature. We also agree with the contention of the learned AR that the TPO and the AO has taken different stand with respect to the amount paid in dispute as discussed above. TPO while working out the profit level indicator of the assessee has treated the said amount y as operating expenses whereas the AO has disallowed the same is not eligible for deduction under section 37 of the Act. In our considered view the TPO and the AO are part of the income tax Department and therefore there has to be consistency in the approaches of both the authorities. As such the authorities should not take different stand while determining the taxable income of the assessee otherwise it would lead to the double addition which is not desirable under the provisions of the Act. Assessee is entitled for the deduction for the payment made by it as a result of settlement agreements as discussed above under the provisions of section 37(1) of the Act. The impugned payment not be treated as penalty in the nature of provided under explanation 1 to section 37(1) of the Act. Hence the ground of appeal of the assessee is allowed. Disallowance while computing the profit u/s 115JB of the Act by treating the payment made by the assessee to US FDA as unascertained liabilities - lower authorities have disallowed the provision made by the assessee in the books of account under section 115JB of the Act on reasoning that such provision is not ascertained liability - HELD THAT - We have allowed the claim of the assessee treating the provisions as the cost incurred in the course of the business in the year under consideration under normal computation of income. Thus there remains no ambiguity to the fact that the amount was crystalized in the year under consideration. The reasoning for holding the amount was crystalized in the year under consideration has already been discussed in preceding paragraph of this order while dealing with ground no. 10 of the assessee. Accordingly we set aside the order of the ld. DRP and direct the AO to delete the disallowance made under section 115JB of the Act for the eligible amount as per the law. Hence, the ground of appeal of the assessee is allowed. Addition of expenses incurred on doctors for promotion of business - HELD THAT - Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation as discussed above. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any Allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is not applicable upon Pharma companies, then, in our considered view, there was no violation of the provisions of section 37(1) of the Act. As CBDT Circular No. 5/2012 dated 01.08.2012 is applicable for the assessment year 2013-14 whereas the year under consideration pertains to the assessment year 2012-13. Therefore the circular issued by the CBDT cannot be applied for the year under consideration -disallowance cannot be made in the year under consideration on account of freebies given to the medical practitioners being the AY 2012-13. Hence, the ground of appeal of the assessee is allowed. Disallowing the hedging charges on hedging contracts and interest swap expenditure claimed by way of note to protect the ECB loans by treating it capital expenditure - HELD THAT - In the present case the question of claiming the depreciation does not arise for the reason that the issue relates to the investment made in the foreign subsidiaries. As such the investment in shares of foreign subsidiary does not attract the provisions of section 32 of the Act. We also note that the assessee in its submission before the AO has already made alternate contention to treat the hedging expenditure as capital expenditure which has been accepted by the Revenue. Thus it appears there is no grievance to the assessee. However, the interest swap requires reconsideration by the AO. Disallowance of compensation on ESOP - as per assessee ESOP is a revenue expenses and incurred wholly and exclusively for the purpose of business - HELD THAT - As relying on own case 2016 (5) TMI 157 - ITAT DELHI we allow the deduction of the ESOP expenses

Summary

Issues Involved:
1. Jurisdictional defect in assessment order on a dissolved/amalgamating company.
2. Validity of assessment order passed under section 143(3) r.w.s. 144C.
3. Transfer Pricing adjustments and selection of tested party.
4. Disallowance under section 14A read with Rule 8D.
5. Addition of disallowed expenses under section 14A in computing book profit under section 115JB.
6. Disallowance of deduction under section 35(2AB).
7. Disallowance of contributions to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation.
8. Disallowance of deduction under sections 80-IB and 80-IC.
9. Disallowance of amounts paid to Teva Pharmaceutical Industries Limited.
10. Disallowance of amounts paid to US FDA.
11. Addition of amounts paid to US FDA while computing book profit under section 115JB.
12. Disallowance of expenditure incurred for doctors for promotion of business.
13. Disallowance of Mark to Market Loss.
14. Disallowance of hedging charges treating it as capital loss.
15. Non-allowance of Interest Rate Swap as revenue expenditure.
16. Non-allowance of weighted deduction under section 35(2AB) on cost of assets incurred.
17. Non-allowance of deduction of employee compensation (ESOP) expenses under section 37(1).
18. Computation of interest under sections 234B and 234C.
19. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Jurisdictional Defect in Assessment Order on a Dissolved/Amalgamating Company:
The Tribunal dismissed the ground as infructuous, holding that no separate adjudication is required for general and consequential issues.

2. Validity of Assessment Order Passed Under Section 143(3) r.w.s. 144C:
The Tribunal dismissed the ground as infructuous, holding that no separate adjudication is required for general and consequential issues.

3. Transfer Pricing Adjustments and Selection of Tested Party:
The Tribunal held that the assessee's AEs should be accepted as the tested party, being the least complex for comparability analysis of international transactions. This decision was based on the ITAT Delhi Bench's order in the assessee's own case for AY 2008-09. The Tribunal restored the issue to the TPO for fresh adjudication, considering the AEs as the tested party.

4. Disallowance Under Section 14A Read with Rule 8D:
The Tribunal held that no further disallowance under section 14A can be imputed beyond what the assessee had already disallowed. The AO did not record satisfaction regarding the correctness of the assessee's disallowance, which is a prerequisite for invoking Rule 8D. The Tribunal directed the AO to delete the additional disallowance made under section 14A.

5. Addition of Disallowed Expenses Under Section 14A in Computing Book Profit Under Section 115JB:
The Tribunal held that no addition under section 115JB is warranted for the amount disallowed under section 14A. This decision was based on the ITAT Delhi Bench's order in the assessee's own case for AY 2008-09. The Tribunal directed the AO to exclude the amount of disallowance under section 14A while computing the book profit under section 115JB.

6. Disallowance of Deduction Under Section 35(2AB):
The Tribunal allowed the deduction claimed by the assessee under section 35(2AB), holding that the furnishing of Form No. 3CM was sufficient for claiming the deduction. The Tribunal followed its own decision in the assessee's case for AY 2009-10, which was upheld by the Hon’ble Gujarat High Court.

7. Disallowance of Contributions to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation:
The Tribunal allowed the deduction, holding that the contributions were made in furtherance of business objectives and had been decided in the assessee's favor in earlier years by the Delhi High Court. The Tribunal also held that there was no requirement to deduct tax at source on these payments.

8. Disallowance of Deduction Under Sections 80-IB and 80-IC:
The Tribunal allowed the deduction, holding that the issue was covered by the ITAT Delhi Bench's order in the assessee's own case for AY 2008-09. The Tribunal noted that the deduction had been allowed in earlier years and there was no change in facts or law.

9. Disallowance of Amounts Paid to Teva Pharmaceutical Industries Limited:
The Tribunal allowed the deduction, holding that the payment was made as a matter of commercial expediency and was wholly and exclusively for the purpose of the business. The Tribunal also noted that the TPO had treated the payment as an operating expenditure.

10. Disallowance of Amounts Paid to US FDA:
The Tribunal allowed the deduction, holding that the payment was made to resolve an ongoing litigation and was not an offense or prohibited by law. The Tribunal also noted that the liability had crystallized in the year under consideration.

11. Addition of Amounts Paid to US FDA While Computing Book Profit Under Section 115JB:
The Tribunal directed the AO to delete the disallowance made under section 115JB, holding that the liability had crystallized in the year under consideration.

12. Disallowance of Expenditure Incurred for Doctors for Promotion of Business:
The Tribunal allowed the deduction, holding that the Medical Council of India regulations were not applicable to pharmaceutical companies and the CBDT circular was not applicable for the year under consideration.

13. Disallowance of Mark to Market Loss:
The Tribunal dismissed the ground as not pressed by the assessee.

14. Disallowance of Hedging Charges Treating It as Capital Loss:
The Tribunal restored the issue to the AO for fresh adjudication, following the ITAT Delhi Bench's order in the assessee's own case for AY 2008-09.

15. Non-Allowance of Interest Rate Swap as Revenue Expenditure:
The Tribunal restored the issue to the AO for fresh adjudication, following the ITAT Delhi Bench's order in the assessee's own case for AY 2008-09.

16. Non-Allowance of Weighted Deduction Under Section 35(2AB) on Cost of Assets Incurred:
The Tribunal restored the issue to the AO for fresh adjudication, following the ITAT Delhi Bench's order in the assessee's own case for AY 2008-09.

17. Non-Allowance of Deduction of Employee Compensation (ESOP) Expenses Under Section 37(1):
The Tribunal allowed the deduction, following the ITAT Delhi Bench's order in the assessee's own case for AY 2008-09, holding that the ESOP expenses were an ascertained liability and allowable as revenue expenditure.

18. Computation of Interest Under Sections 234B and 234C:
The Tribunal did not specifically address this issue in the detailed analysis.

19. Initiation of Penalty Proceedings Under Section 271(1)(c):
The Tribunal did not specifically address this issue in the detailed analysis.