2024 (7) TMI 397 - AT - Income Tax

TP adjustment of interest - CIT(A) confirming upward adjustment towards interest by adopting rupee loan rate instead of LIBOR linked rate in respect of foreign currency loans advanced to subsidiary - contention of the assessee is that interest was charged from the AE at a rate of 7.08% as against average 12 months GBP LIBOR rate of 1.685% during the year and therefore, no further TP adjustment was required - HELD THAT - There is no dispute to the fact that the loan of Rs. 45 crores from Corporation Bank and Rs. 10 crores from Allahabad Bank taken by the assessee was utilized for providing short term financial assistance to its AE. In the course of the proceedings before the TPO, it was submitted by the assessee that the entire interest charge incurred on the borrowings made from Allahabad Bank and Corporation bank was recovered in full. The interest on short term loan from Corporation Bank was Rs. 2,16,72,580/- whereas the interest of STL from Allahabad Bank was Rs. 40,06,764/-. This interest was worked out on the basis of the actual lending period for which the amount was advanced to the AE. The TPO in his working has, however, considered the entire period of 180 days to work out the ALP interest. The interest from the AE can be charged only for the period for which the amount was actually advanced. The assessee might have obtained the loan from the banks for the entire 180 days period but the loan was advanced to the AE in installments. Therefore, the period for which the loan amount was lying with the assessee, no interest could have been charged from the AE. Hence, the adjustment in respect of Corporation Bank interest and in respect of Allahabad Bank interest is not found correct as the amount was not advanced to the AE for entire 180 days period. Therefore, the TP adjustment in respect of interest is deleted. Loan granted to its AE out of its own funds - TPO considered six months LIBOR (which was 0.79% for this year) 4.75% as the comparable uncontrolled price for this transaction and had accordingly worked out the interest required to be charged by the assessee from its AE - HELD THAT - It is found from the order of the Ld. CIT(A) that he had confirmed the upward adjustment to the interest charged by the assessee to its AE in respect of loans obtained from Corporation Bank and Allahabad Bank. However, the adjustment of Rs. 11,62,069/-, the working of which was reproduced at Page No.7 of his order, had not been adjudicated. Therefore, the matter is set aside to the file of the AO for read-judication of adjustment of Rs. 11,62,069/- in respect of interest on loan advanced to the AE ought of its own fund, on the basis of the principle as enunciated in Para 4.5 of this order. Deduction u/s 35(2AB) - additional claim of assessee for weighted deduction u/s 35(2AB) on gross research and development (R D) expenditure, without reducing contract research income from eligible R D expense - HELD THAT - It is found that the ld. CIT(A) has not examined the claim of the assessee on merits. As per the provision of section 35(2AB) of the Act any expenditure on scientific research (other than cost of land and building) on in-house research and development facility as approved by the prescribed authority is eligible for weighted deduction. Therefore, the assessee was eligible for deduction of its entire expenditure on scientific expenditure without adjusting the income earned, if any, from such scientific research development activity. As explained by the assessee, the income from contract research work was reduced from the amount of expense eligible for deduction u/s. 35(2AB) - AO is directed to verify this fact and thereafter allow deduction u/s. 35(2AB) of the Act on the gross expenditure on scientific research in accordance with the provisions of the Act. It is seen that this issue was also involved in the assessee s own case for A.Y. 2009-10 which was decided in favour of the assessee by the Coordinate Bench of this Tribunal in 2024 (4) TMI 1140 - ITAT AHMEDABAD - The ground taken by the assessee is, therefore, allowed. TP adjustment of corporate guarantee fee - assessee had provided corporate guarantee to its AE but no guarantee fee was charged - HELD THAT - The adjustment of corporate guarantee has to be done in accordance with the guarantee fee paid in respect of third-party transaction and a fair yardstick for such adjustment would be what the assessee would have paid as guarantee commission, if the guarantee was obtained from a bank. Accordingly, the rate of commission charged by the Bank should be applied to determine the ALP. In the case of Rubamin Ltd. 2021 (10) TMI 506 - ITAT AHMEDABAD the rate of 0.5% of guarantee commission was on the basis of average rate of commission charged by the Banks. Accordingly, we direct that guarantee commission adjustment in this case may be restricted @ 0.5% on the corporate guarantee amount - The grounds of Revenue are allowed in part. Disallowance u/s 36(1)(iii) - interest free advance - disallowance was made in respect of loans and advances given to all associated companies of the assessee - HELD THAT - AO had made the disallowance of interest on the assumption that interest bearing funds were utilized for advancing interest free amounts to sister concern. However, no material has been brought on record to establish this nexus. On the other hand, the assessee has contended that it had sufficient interest free funds which were utilized for making advances to its sister concerns. No merit in the addition as made by the AO. An identical issue was involved in the A.Y. 2011-12, 2017 (9) TMI 727 - ITAT AHMEDABAD which was decided against the Revenue by the Co-ordinate Bench of this Tribunal as already referred earlier. We, therefore, do not find any reason to interfere with the order of Ld. CIT(A) deleting the disallowance of interest under Section 36(1)(iii). Excess claim u/s 35(2AB) over the amount approved by the DSIR - HELD THAT -There was no requirement of law that R D expenditure should be approved by the DSIR. The provision of section 35(2AB) was amended w.e.f. 01.04.2016 whereby the quantum of eligible expenditure incurred on in-house research and development facility was required to be quantified by the prescribed authority i.e. DSIR. Prior to 01-04-2016, there was no such requirement for quantification of the eligible expenditure by the DSIR for claiming the deduction. Merely because DSIR had quantified such expenditure in the current year, which is prior to 01-04-2016, the same was not binding on the revenue authorities. Therefore Revenue was not correct in restricting the deduction u/s. 35(2AB) of the Act on the basis of the amount quantified by the DSIR in their approval. The disallowance as made by the AO was not in accordance with the provisions of the Act. Thus no wrong with the order of Ld. CIT(A) deleting this addition. Additional claim of weighted deduction u/s 35(2AB) in respect of expenses towards clinical trials carried - HELD THAT - We do not find anything wrong with the order of the Ld. CIT(A) allowing this claim in this year. The only issue is about verification of actual expenses towards clinical trials carried out outside R D facility. This issue is not found discussed by the AO in the assessment order and verification of this expense doesn t appear to have been made. Therefore, the matter is set aside to the file of the AO for limited purpose of verification of actual expense incurred on clinical trials carried out outside R D facility. On verification, the claim of the assessee should be allowed as directed above. The ground is treated as dismissed for statistical purpose. Weighted deduction u/s 35(2AB) of the Act @150% on expenditure - HELD THAT - There is no dispute with the fact that the assessee was entitled to weighted deduction of 150% under Section 35(2AB) of the Act in respect of expenses on account of R D. The finding of the CIT(A) that the AO had committed an error in granting this deduction @ 100% only is found to be correct. In computation of income, the AO had considered deduction under Section 35(2AB) of the Act at Rs. 25,99,42,442/- only, which was 100% of R D expenses, whereas, the claim made by the assessee was Rs. 38,99,13,663/- @ 150% of the expense. Therefore, the Ld. CIT(A) had rightly directed the AO to allow weighted deduction @ 150% of the expense of R D. We do not find anything wrong with the direction of the Ld. CIT(A). Therefore, the ground taken by the Revenue is dismissed. Depreciation on R D Assets - entire cost of these assets was originally claimed as 100% deduction but was offered as income in the year in which it was removed from R D facility, thus the assessee was eligible to claim proportionate depreciation on these assets - HELD THAT - The facts regarding this claim are not coming out clearly from the assessment order and from the order of the Ld. CIT(A). The contention of the assessee is that the entire cost of machinery taken out from R D facility Rs. 10,53,64,250/- was offered as income in the A.Y. 2009-10. The AO is directed to verify this fact from the records of A.Y. 2009-10. If the claim of the assessee is found to be correct, then the assessee is entitled to depreciation on this amount and accordingly depreciation on opening WDV of this asset should be allowed to the assessee in this year. Disallowance of depreciation - If the assets were not taken to block of assets, then the depreciation on this asset could not have been part of the depreciation claim in the return of income. The AO may also verify as the how the claim of this additional depreciation was made by the assessee. There is no dispute that if the assets were not capitalized to block of assets, the assessee is entitled for separate claim of depreciation on these assets which should be worked out on the reduced WDV for this year. The AO should carry out the verifications as directed above and should allow the claim of the assessee, if found correct. The grounds are allowed for statistical purposes. Nature of expenses - Product Registration Expense - revenue or capital expenditure - HELD THAT - We find that the Co-ordinate Bench of this Tribunal in the assessee s own case for AY 2008-09 2009-10 2024 (4) TMI 1140 - ITAT AHMEDABAD and also in A.Y.2011-12 (supra) 2017 (9) TMI 727 - ITAT AHMEDABAD had upheld the findings of the Ld. CIT(A) that product registration expense was a revenue expenditure. In fact, appeal of the Revenue on this issue was also dismissed by the Hon ble High Court 2018 (4) TMI 1985 - GUJARAT HIGH COURT , 2018 (4) TMI 1984 - GUJARAT HIGH COURT - We, therefore, do not find any reason to interfere with the order of the Ld. CIT(A) deleting the disallowance of product registration expenses. Disallowance u/s 14A - CIT(A) has restricted the disallowance equal to the exempt income earned during the year - HELD THAT - No reason to interfere with the order of the Ld. CIT(A) restricting the disallowance u/s 14A of the Act to the extent of exempt income earned by the assessee following the decision of the Co-ordinate Bench of this Tribunal on this issue in the earlier years. The ground raised by the Revenue is dismissed. TDS u/s 195 - Disallowance u/s 40(a)(ia) - payments to non-residents, which was in the nature of fees for technical services (FTS) and on which TDS was not deducted - HELD THAT - Identical issue was involved in the assessee s own case in A.Y. 2008-09 and the Coordinate Bench of this Tribunal in 2024 (4) TMI 1140 - ITAT AHMEDABAD wherein found no reason to interfere in the order of the ld. CIT(A) deleting the disallowance made under section 40(a)(i) pertaining to legal and professional services rendered from entities based in USA with respect to the fact of services rendered not involving any transfer of technical knowledge, skill or know-how etc. as also with respect to Article 12 of the DTAA between India and USA restricting the scope of FTS such services which made available technical knowledge, skill or know-how etc. - Decided against revenue. Foreign Currency Loss - treated as speculation loss - HELD THAT - The nature of transactions in the current year was exactly similar to the nature of transaction as considered in the A.Y. 2011-12 2017 (9) TMI 727 - ITAT AHMEDABAD Therefore, the contention of the Revenue that there was a difference in the material fact cannot be accepted. Since, the findings of the Co-ordinate Bench of this Tribunal in A.Y. 2011-12 has been upheld by the Hon ble High Court, we do not find any reason to interfere with the order of the Ld. CIT(A) on this issue. Therefore, the ground taken by the Revenue is dismissed to hold losses arising from similar foreign exchange contracts to be business losses than speculative ones. Their lordships conclude that such exchange transactions are hedging transactions instead of being speculative transactions in nature. Forward contracts in the nature of hedging transactions in course of normal import export activities to cover up losses on account of foreign exchange valuation difference results in business losses and not speculative one. Adjustment u/s 115JB for addition u/s 14A - HELD THAT - Since, the addition under Section 14A of the Act has been deleted as discussed earlier, there cannot be any question of adjustment under Section 115JB of the Act.

Summary

Issues Involved:
1. Transfer Pricing Adjustment of Interest
2. Deduction under Section 35(2AB)
3. Transfer Pricing Adjustment of Corporate Guarantee Fee
4. Disallowance under Section 36(1)(iii)
5. Depreciation on R&D Assets
6. Product Registration Expenses
7. Disallowance under Section 14A
8. Disallowance under Section 40(a)(ia)
9. Foreign Currency Loss
10. Adjustment under Section 115JB

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of Interest:
The assessee contested the upward transfer pricing adjustment of Rs. 56,88,205/- towards interest by adopting the rupee loan rate instead of the LIBOR linked rate for foreign currency loans advanced to its subsidiary. The Tribunal held that the interest should be charged based on the rate prevailing in the country of the AE's residence. Since the loan was advanced from bank borrowings, the interest paid to the banks must be recovered from the AE. The Tribunal deleted the adjustment of Rs. 38,47,968/- and Rs. 6,78,168/- for interest from Corporation Bank and Allahabad Bank, respectively, as the loan was not advanced for the entire period considered by the TPO. The adjustment of Rs. 11,62,069/- was remanded to the AO for re-adjudication.

2. Deduction under Section 35(2AB):
The assessee claimed an additional deduction of Rs. 60,36,617/- for weighted deduction on gross R&D expenditure without reducing contract research income. The Tribunal directed the AO to verify the claim and allow the deduction on the gross expenditure as per the provisions of the Act. The Tribunal also addressed the excess claim of Rs. 2,94,52,415/- over the DSIR-approved amount, stating that prior to 01-04-2016, there was no requirement for DSIR approval for the quantum of eligible expenditure. The Tribunal upheld the CIT(A)'s decision to allow the deduction. The additional claim of Rs. 70,14,434/- for clinical trials outside the R&D facility was also allowed, subject to verification by the AO.

3. Transfer Pricing Adjustment of Corporate Guarantee Fee:
The Revenue's appeal on the upward adjustment of Rs. 61,27,088/- for corporate guarantee fees was partly allowed. The Tribunal held that corporate guarantees are international transactions subject to transfer pricing regulations. The adjustment was restricted to 0.5% of the guarantee amount, following the decision in Rubamin Ltd. vs. DCIT.

4. Disallowance under Section 36(1)(iii):
The AO disallowed Rs. 99,06,570/- on account of interest-free advances to associated companies. The CIT(A) deleted the disallowance, noting that the assessee had sufficient interest-free funds. The Tribunal upheld the CIT(A)'s decision, finding no merit in the AO's assumption that interest-bearing funds were utilized for the advances.

5. Depreciation on R&D Assets:
The Tribunal directed the AO to verify the claim that the entire cost of assets removed from the R&D facility in A.Y. 2009-10 was offered as income. If verified, the assessee is entitled to depreciation on the opening WDV of these assets. The disallowance of Rs. 68,96,075/- was also remanded to the AO for verification.

6. Product Registration Expenses:
The AO treated product registration expenses of Rs. 1,76,84,264/- as capital in nature. The CIT(A) deleted the addition, following the Tribunal's decision in earlier years that such expenses are revenue in nature. The Tribunal upheld the CIT(A)'s decision.

7. Disallowance under Section 14A:
The CIT(A) restricted the disallowance under Section 14A to Rs. 5,208/-, equal to the exempt income earned during the year. The Tribunal upheld this decision. The additional claim of Rs. 2,82,07,492/- suo motto disallowed by the assessee was also allowed, as the disallowance under Section 14A was restricted.

8. Disallowance under Section 40(a)(ia):
The AO disallowed Rs. 94,25,132/- for payments to non-residents without TDS deduction. The CIT(A) deleted the addition, noting that the payments were for lodging, boarding, and technical services not subject to withholding as per the Act or DTAA. The Tribunal upheld the CIT(A)'s decision, following the Tribunal's decision in A.Y. 2008-09.

9. Foreign Currency Loss:
The AO treated the foreign currency loss of Rs. 29,22,90,000/- as speculative. The CIT(A) allowed the relief, following the Tribunal's decision in A.Y. 2011-12. The Tribunal upheld the CIT(A)'s decision, noting that the nature of transactions was similar to those considered in A.Y. 2011-12.

10. Adjustment under Section 115JB:
The adjustment of Rs. 3,54,82,415/- under Section 115JB was deleted by the CIT(A) as it was based on the disallowance under Section 14A, which was deleted. The Tribunal upheld the CIT(A)'s decision.

Conclusion:
Both the assessee's and Revenue's appeals were partly allowed. The Tribunal provided detailed directions for verification and re-adjudication on specific issues, ensuring compliance with legal provisions and precedents.