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2022 (9) TMI 526 - AT - Income TaxTP adjustment made in respect of goods sold to its associated enterprise - Selection of MAM - Application of CUP method - HELD THAT - Assessee himself stated that CUP method may not be appropriate and adopted profit split method for the reason that the basket of product approach is not acceptable to the revenue. Even in those cases, the learned transfer-pricing officer is applied CUP method. Merely because invoices are prepared in a particular manner, they do not prove that goods sold in those products are inextricably linked with each other. We confirm the action of the lower authorities in making a transfer pricing adjustment with respect to sale of pharmaceutical products in Nigeria to associated enterprises - The ground number 1 of the appeal to that extent is dismissed. TP adjustments because of interest on interest free advances charged at 8.25% - Admittedly, in this case assessee states that it has not incurred the cost for borrowing the above funds, which have been lent to the associated enterprises. However, here the comparable rates are available. The argument of the assessee that it has not incurred any cost of borrowing does not have any relevance. The second argument of the assessee is that that the advances given to the two of the recipient subsidiaries have utilize the money advanced to them by the assessee for further investment in the shares of step down subsidiaries of the assessee company and therefore the advances are quasi equity and no interest is required to be charged. The advances given to the subsidiaries. The subsidiaries might have utilize the funds for any purpose but for the purpose of benchmarking of the interest the transaction is that assessee has given a loan to its associated enterprise. Further when we looked at the RBI permissions for overseas direct investment it is coupled with equity and loan. It cannot be said that it is a quasi equity. With respect to the rate of interest we find that AO charged the interest at the rate of 14.39% which is been reduced by the CIT- A to 8.25%. Loans are given in foreign jurisdiction. LIBOR 200 points is the correct benchmarking for the interest. Accordingly, we direct TPO to benchmark the interest as directed. Allowance of depreciation on account of foreign exchange Gain variance - claim of the AO is that the written down value (WDV) of the assets to the extent of foreign exchange gain should be reduced from the actual cost and consequent depreciation claim of the assessee is required to be reduced - HELD THAT - Undisputedly, assessee has earned foreign exchange fluctuation gain at the time of actual payment of external commercial borrowing, which was taken for acquisition of capital assets in India. As there is no acquisition of capital assets from outside India, there is no application of the provision of Section 43A of the Act. Therefore, foreign exchange fluctuation gain cannot be reduced from the actual cost of assets purchase in India. Accordingly, there is no infirmity in the order of he learned Commissioner of Income tax (Appeals). Accordingly, ground no. 2 of the appeal is dismissed. Additional depreciation disallowed by the learned Assessing Officer but allowed by the learned Commissioner of Income tax (Appeals) - HELD THAT - We have heard the rival parties; we find that the issue is squarely covered by the decision of the Hon'ble Madras High Court in CIT vs. Shri. TP Textiles Pvt. Ltd 2017 (3) TMI 739 - MADRAS HIGH COURT - In view of this, we do not find any infirmity in the order of the learned CIT (A) in deleting the disallowance. Accordingly, ground no. 3 of the appeal is dismissed. Employees Stock Option Scheme under Section 37(1) - HELD THAT - We find that the issue is squarely covered in favour of the assessee by the decision of Hon'ble Karnataka High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT wherein the decision of the Special Bench of ITAT in case of Biocon Limited 2013 (8) TMI 629 - ITAT BANGALORE has been upheld. In view of this, we do not find any infirmity in the order of the learned CIT (A) in allowing the claim of the assessee on deduction of employees stock option scheme discount. Ground no.4 of the appeal is dismissed. Adjustment on account of interest free advances to hundred percent subsidiaries at the rate of 3.38% only - adjustment in respect of goods exported to National Drugs (Pty) Ltd - HELD THAT - TP Officer rejected the CUP method but applied cost plus method and proposed the adjustment. The learned CIT (A) examined the transaction and upheld the CUP method. It is examined that assessee has sold Pacimol tablets to its Associated Enterprises as well as unrelated parties both are in South Africa, quantity sold as is more or less and some sales are also pertaining to the same period and the overall different between the average price charged to Associated Enterprises and non-Associated Enterprises is merely 1.74%. Therefore, benchmarking the analysis of the assessee was upheld. Further, the Associated Enterprises supplies the goods to the local Government on tender basis for which the price are fixed. Therefore, there is no reason to uphold that benchmarking analysis by the assessee adopting CUP method is not proper. We do not find any infirmity in the order of the learned CIT (A). Hence, ground of the appeal of the learned Assessing Officer is dismissed. Benchmarking of interest on interest free advances good to the subsidiary companies - HELD THAT - CUP method is required to be applied where the services are supplied in similar conditions. In the present case, the cost borrowing of the assessee does not have any relevance. Associated Enterprises have made the borrowing in foreign jurisdiction, therefore, the cost of borrowing of the assessee in India cannot be held to be an internal CUP. TPO has adopted the Libor plus 300 basis points for working of interest. We find that several judicial precedents at the appropriate interest rate uphold Libor plus 200 basis points. In view of this we confirm the order of the learned AO to charge interest on the advances given to foreign associate enterprise at Libor plus 200 basis point and confirmed the finding of the learned CIT(A) that interest is required to be computed only for the period the money is advanced and not for the full year. Accordingly, ground no. 2 of the appeal of the learned AO is partly allowed and ground no. 1 of the appeal of the assessee is dismissed. Deduction under Section 80IB and 80IC - HELD THAT - Identical to ground of appeal of the assessee for A.Y. 2008-09, wherein we have held that sale of empty containers is part of the profit derived from the business of the undertaking and therefore, is eligible for deduction under these respective sections. Accordingly, we allow of the appeal of the assessee and directing the learned Assessing Officer to grant deduction on account of sale of empty containers under Section 80IB and 80IC of the Act. Disallowance u/s 40A (3) - HELD THAT - We find that lifetime road tax of ₹25,810/- is paid to the government and therefore, it cannot be considered for disallowance. Further, the various attestation charges paid to foreign embassy amounting to ₹1,08,755/- which is covered under Rule 6DD(b) of the Income Tax, Rules 1962. Accordingly, the disallowance to the extent of ₹21,800/- out of total disallowance of ₹1,56,365/- is upheld and Assessing Officer is directed to delete the balance disallowance. Accordingly, ground no.4 of the appeal is partly allowed. Adjustment in respect of interest free advances 200% subsidiaries - We find that the interest of 18% charged to the Nigerian associated enterprises by the assessee or the SBI prime lending rate of 11.75% cannot be said to be the comparable price for charging of interest on loans from Mexico, China and USA unit. The loans were advanced to the associated enterprise in foreign jurisdiction and therefore the rate of interest should be applied as applicable in that jurisdiction. Therefore, assessee has correctly applied the LIBOR 350 base points. Accordingly we direct the learned transfer pricing officer to delete the adjustment on account of interest on interest free advances to subsidiaries - Accordingly ground number one of the appeal is partly allowed.
Issues Involved:
1. Addition on account of Arm's Length Price (ALP) under Section 92CA(3) of the Income Tax Act. 2. Deduction under Section 80IB and 80IC of the Income Tax Act. 3. Disallowance of depreciation on account of foreign exchange gain. 4. Disallowance of additional depreciation on assets acquired in the previous year. 5. Deduction in respect of Employees Stock Option Scheme (ESOP). 6. Disallowance under Section 40A(3) of the Income Tax Act. Detailed Analysis: 1. Addition on Account of Arm's Length Price (ALP) under Section 92CA(3): The primary contention revolves around the method employed to determine the ALP for transactions between the assessee and its associated enterprises (AEs). The assessee used a "basket of products" approach, aggregating the prices of multiple products sold to AEs to demonstrate that the overall transaction was at arm's length. However, the Transfer Pricing Officer (TPO) and the Assessing Officer (AO) insisted on a product-by-product comparison, rejecting the basket approach. The Tribunal upheld the TPO's method, emphasizing that each product's price must be individually compared to the ALP, as there was no substantial evidence showing interdependence among the products sold. 2. Deduction under Section 80IB and 80IC: The assessee claimed deductions for profits derived from the sale of empty containers, arguing that these sales were directly related to the profits of the industrial undertakings. The AO and CIT(A) disallowed these claims, but the Tribunal found in favor of the assessee, citing precedents that allowed such deductions, as the sale of empty containers was considered part of the business of the industrial undertaking. 3. Disallowance of Depreciation on Account of Foreign Exchange Gain: The AO disallowed depreciation on foreign exchange gain related to assets purchased in India, arguing that the gain should reduce the actual cost of the assets. The CIT(A) deleted this addition, and the Tribunal upheld this decision, clarifying that Section 43A applies only to assets acquired from outside India, not domestic purchases. 4. Disallowance of Additional Depreciation on Assets Acquired in the Previous Year: The assessee claimed additional depreciation on assets put to use for less than 180 days in the previous financial year. The AO disallowed this claim, but the CIT(A) and the Tribunal allowed it, referencing judicial precedents that supported the assessee's entitlement to claim the balance depreciation in the subsequent year. 5. Deduction in Respect of Employees Stock Option Scheme (ESOP): The assessee claimed a deduction for expenses related to ESOPs, which the AO disallowed, treating it as a capital receipt. The CIT(A) allowed the deduction, and the Tribunal upheld this decision, referencing the Karnataka High Court's ruling in Biocon Ltd., which recognized ESOP expenses as deductible under Section 37(1) of the Income Tax Act. 6. Disallowance under Section 40A(3): The AO disallowed certain expenses under Section 40A(3) for payments made in cash exceeding the prescribed limit, which were not covered under exceptions provided by Rule 6DD. The Tribunal partly upheld the disallowance, allowing exceptions for payments made to government agencies and foreign embassies, which were covered under Rule 6DD. Conclusion: The Tribunal's judgment addressed multiple complex issues, emphasizing the importance of adhering to established methods for determining ALP, recognizing legitimate business deductions, and allowing claims based on judicial precedents. The decisions reflect a balanced approach, ensuring compliance with statutory provisions while acknowledging practical business considerations.
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