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TMI Blog2019 (2) TMI 1067X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee that no disallowance should be made for interest, as the assessee has sufficient interest free funds, we note that the submission of the assessee has considerable cogency in view of the Hon’ble Jurisdictional High Court decision relied upon. Hence, we remit this issue to the file of the A.O. to examine the veracity of the submission and thereafter decide as per the decision of the Hon’ble Jurisdictional High Court as above. As regards the submission of the assessee that disallowance u/s. 14A should be restricted to the amount of the exempt income during the year, is also acceptable in view of the case laws relied herein above. The A.O. is directed to follow the proposition as above. As regards the other contention of the ld. Counsel of the assessee that for the purpose of disallowance u/s.14A, for the purpose of computing the average value of investment, only those investment should be computed on which exempt income is earned, is sustainable in view of the Special Bench decision in the case of ACIT v. Vireet Investments Private Limited [2017 (6) TMI 1124 - ITAT DELHI] as above. The A.O. is directed to follow the same. Disallowance for earning exempt income u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w is being used by the head office. In the balance sheet, the debit balance of Head Office account is ₹ 2,470,281,148/- as on 31.03.2010. There is no borrowing secured or unsecured for this unit. In fact, the balance sheet shows that the unit has huge reserve and surplus amounting to ₹ 3,920,730,627/- covering the entire assets of the unit. Thus when no loan is there for baddi unit and the unit is generating huge profits, the case law relied by the ld. Counsel of the assessee duly support the proposition that only the interest expenses which have direct nexus in earning the income of the tax exempt unit should be considered. Since the documentary evidence duly support the plea that there is no direct nexus between the expenses allocated by the A.O. to the unit, we do not find any infirmity in the order of the ld. CIT(A) in this regard. - Appeal filed by the Revenue stands partly allowed for statistical purpose. - ITA No. 1654/Mum/2016 - - - Dated:- 1-2-2019 - Shri Shamim Yahya, Accountant Member and Shri Ravish Sood, Judicial Member For The Appellant : Shi Rajesh Dumor For The Respondent : Shri Vijay Mehta and Shri Anuj Kisnadwala ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e s appeal, the learned CIT(A) deleted the same as similar disallowances made in earlier years have been deleted by the ITAT in assessee s own case. Against this order Revenue is in appeal before us. 5. We have heard both the parties and perused the record. We find that the addition under section 41(1) of the Act has been made by the AO without any cogent reason. No case has been made out that the AO has made any enquiry and found that these creditors are not payable. Just because the creditors are outstanding for more than three years, there is no universal rule that the balance has to date back under section 41(1) of the Act. We further note that similar addition in earlier was deleted by the ITAT. Accordingly we do not find any infirmity in the order of the CIT(A). 6. Apropos Ground No. 2 relating to disallowance under section 14A of the Act. On this issue the AO noted that the assessee has made huge investment but has made meagre disallowance of ₹ 75,022/- under section 14A of the Act. The AO proceeded to reject assessee s contention that investments were of strategic in nature and that the assessee s own funds were more than the investment made. He computed the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 14A of the Act. However, the learned counsel for the assessee Under Rule 27 of the ITAT Rules pleaded as under: 1. On the facts and circumstances of the case and in law, the learned CIT(A) ought to have held that additions made u/s 14A of the Income Tax Act, 1961 ( the Act ) should be restricted to ten percent of exempt income as upheld by the Hon'ble Mumbai Tribunal in assessee's own case. 2. On the facts and circumstances of the case and in law, the learned CIT(A) ought to have held that no interest disallowance can be made u/s 14A of the Act since assessee's own funds are sufficient to cover up the value of investments. 3. On the facts and circumstances of the case and in law., the learned CIT(A) ought to have held that disallowance u/ s 14A of the Act is to be restricted to the amount of exempt income earned by the assessee during the year. 4. On the facts and circumstances of the case and in law., the learned CIT(A) ought to have held that for the purpose of disallowance u/s.14A of the Act only those investments are to be considered from which exempt income has been received during the year. 5. On the facts and circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee that in prior years, disallowance was restricted to 10%, hence, the same can be accepted. We note that this plea is not sustainable. In view of the applicability of Rule 8D, the applicability of which for the current assessment year is upheld by the Hon ble Apex Court in the case of Godrej Boyce vs. CIT 328 ITR 81. 11. As regards the ld. Counsel of the assessee that no disallowance should be made for interest, as the assessee has sufficient interest free funds, we note that the submission of the assessee has considerable cogency in view of the Hon ble Jurisdictional High Court decision relied upon. Hence, we remit this issue to the file of the A.O. to examine the veracity of the submission and thereafter decide as per the decision of the Hon ble Jurisdictional High Court as above. 12. As regards the submission of the ld. Counsel of the assessee that disallowance u/s. 14A should be restricted to the amount of the exempt income during the year, is also acceptable in view of the case laws relied herein above. The A.O. is directed to follow the proposition as above. As regards the other contention of the ld. Counsel of the assessee that for the purpose of disallowance u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction. Upon assessee s appeal in this regard the CIT(A) concluded that charging guarantee commission @0.53% with regard to item 1 and 2 is fair and reasonable. In this regard he placed reliance on ITAT decision in assessee s own case. He concluded as under: - I hold that charging guarantee commission by the assessee at 0.53% is fair and reasonable and need to be accepted without any adjustment. Moreover, Hon'ble ITAT in the case of the assessee for A.Y. 2008-09 in respect of the same loan and guarantee in respect of the same loan, has upheld charging of guarantee commission adopted by the assessee @0.53%. The ITAT in appeal in respect of these 2 years has rejected the adjustment of 3% made by the TPO. Following the decision of the Hon'ble ITAT in assessee s own case I hold that no adjustment in respect of impugned guarantee commission is required as assessee has charged guarantee commission fairly and reasonably @0.53% (this is more than the average guarantee commission accepted by the ITAT in the case of Reliance Industries, Asian Paints Ltd., Everest Kento Cylinder and Nimbus Communication). Thus this ground of appeal of the appellant on this count is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven serves the purpose. We direct accordingly. 19. Apropos ground relating to transfer pricing adjustment of ₹ 1,17,11,449/- made by TPO by applying CUP method instead of TNMM used by the assessee. On this issue the transfer pricing officer noted that the The assessee manufacturers and exports pharmaceutical products to its various AE s. The assessee was asked to provide CUP details in respect of exports to Russia. In reply to the same, the assessee furnished the CUP details for al products exported to Russia vide letter dated 17.01.2014. Out of the total 26 products, details of two product were assessee s export price to Russia is lower as compared to export made to non-AE s were noted as under. Export to Russia Export to Other entities Conve rsion rate Difference in INR Description Quantity Rate Total in USD Rate Difference ASCORIL EXPECTORANT RUSSIA RU 200 ml 748560 1.29 965,642 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which adjustments are difficult or impossible to make. Typically, these differences cannot be valued and, as a consequence, a reasonably accurate quantification for variation in prices cannot be made. These include: Differences in the amount and type of the intangible property involved in the sale (the pharmaceutical products exported to AEs are branded); Differences with respect to the quality; Differences in the geographic markets; Differences in the level of market; Inability to differentiate a controlled transaction from an uncontrolled transaction. This contention of the assessee is academic as the TPO proposes to apply internal cup and so there is no question of applying external CUP. ( iv) According to the assessee, the identification of the above differences itself is a difficult task based on the level of information available in the public domain. Further, these differences cannot be quantified with reasonable accuracy (as required under Rule 10B(2) and Rule 10B(3) of the Rules), and accordingly CUP method cannot be applied in case of export of pharmaceutical products to the associated enterprise. The contention, as discussed in the above paragraph, cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have heard both the parties and perused the record. The ld. DR relied upon the order of the TPO. 23. Per contra, the ld. AR supported the order of the ld. CIT(A). The ld. Counsel of the assessee submitted that the assessee was consistently adopting the TNMM method for the computation of the arms length price in this regard, as Most Appropriate Method (MAM). The ld. Counsel of the assessee submitted that without any cogent reason, the TPO has rejected the TNMM method and adopted the CUP method. In this regard, the ld. Counsel of the assessee has placed reliance upon the ITAT decision in the case of Omni Active Health Technologies Ltd. Vs. Dy. CIT (in ITA Nos. 638 4643/Mum/2017 vide order dated 06.03.2018) for the proposition that consistently the applied method like TNMM cannot be rejected without any change in the facts and law of the case. Hence, the ld. Counsel of the assessee submitted that without any cogent reason, the TPO should not have rejected the TNMM method as MAM and adopted the CUP method instead. The ld. Counsel of the assessee made further following submissions: 4.1 During the year under consideration, GPL manufactured and exported pharmaceutical produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ask based on the level of information available in the public domain. Further, these differences could not be quantified with reasonable accuracy as required under Rule 10B (2) and Rule 10B (3) of the Rules. In the view of above, CUP method was not applied as the difference in price could not be correctly calculated/ measured. 4.3 Since the CUP method could not be applied, the assesse had in order to calculate the Arm's length price followed the Transactional Net Margin Method taking the AEs as the tested party as specified u/s 92C of the Act read with rule 1 OB 1 OC of the Income tax Rules. 4.4 During the course of transfer pricing proceeding, the assessee was asled to provide the CUP details in respect of exports to Russia. In reply to the same, the assessee provided all the products exported to Russia and to other Uncontrollable Entities (Non AEs) giving Description, quantity, Rate per unit and total value of sales in respect of export made to Russia and Other Entities. Out of the total 26 Products, exports of 24 products were made to Russia at higher price than the export made to other Uncontrollable Entities. The total Sale value of such 24 Products amounts to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 784,560 1.29 965,642 1.55 194,626 45.14 8,785,400 Relcer Tablets RU 1x10 s 122,305 0.97 118,636 1.50 64,822 45.14 2,926,049 Total 870,865 1,084,278 259,447 11,711,449 4.7 The Learned CIT(A), deleted the said addition and held that no adjustment was required in respect of export to Russia as TPO failed to consider the crucial difference of the geography and quantity involved. Accordingly, he held that CUP method cannot be applied and TNMM method adopted by the assessee was correct. Against this ground, the revenue has filed an appeal before the Hon'ble Tribunal. In this regard, it is humbly submitted that 4.8 TNMM method is more appropriate than CUP method It is submitted that GIL Russia is a low risk distributor for GPL for the sale of pharmaceutical products. The assessee has benchmarked the internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction is at Arm's Length Price as per the Indian TP regulations. C. Application of Internal TNMM In case of Internal TNMM the OM with respect to non AEs export is 22.37% as against 64.02% of GPL India in respect 1 2 to export to GIL, Russia. Therefore, in all the three situations the OM of assessee company with respect to export to GIL, Russia is very high. and therefore the assesse has complied with ALP regulation in respect of this transaction. 4.12 Export to All A.E's are at a higher price including Russia GPL manufactures and exports pharmaceuticals products to wholly owned subsidiaries, for distribution in different geographies like Philippines, Brazil, Nigeria, Russia, South Africa, Venezula and Argentina. During the year under reference, GPL exported pharmaceutical products to all its AEs for an aggregate amount of ₹ 65.05 crores, out of Total sales of ₹ 1029.68 crores. This comes to only 6.31% of total sales, which is very insignificant considering the total sales of the assessee. Operating Margin in case of ports to All AE's comes to 144.69% as against average margin of 15.99% at Entity level. Similarl perating Margin in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, there is no proper reason to apply CUP method and hence the TPO has erred in making an addition of Rs 117,11,449 in respect of the two pharmaceutical products exported to GIL Russia. 24. Per contra, the ld. Departmental Representative (ld. DR for short) relied upon the orders of the TPO. 25. Upon careful consideration, we note that the first objection of the ld. Counsel of the assessee is that the TPO has changed the consistently applied MAM of TNMM for bench marking the international transaction without any cogent reason. In this regard, we find that without noting any change in the facts and law, the TPO has proceeded to hold that CUP is better method than TNMM. We find that this reasoning of the TPO, is totally fallacious and not at all sustainable. In this regard, we note that this ITAT in the case of Omni Active Health Technologies Ltd. (supra) had an occasion to examine the similar issue. The Tribunal had held as under: 27. We have carefully considered the submissions and all the relevant records have been perused. We find that the first objection of the ld. Counsel of the assessee is that in the preceding years, for three years transactional net margin met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change in fact. It is also not the case that TNMM method which has been consistently applied in past was totally wrong method. In this regard, we may gainfully refer to the relevant provisions contended by the Transfer Pricing Officer as under: i. 92C Computation of arm s length price 2) The arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe namely :- ( a) comparable uncontrolled price method; ( b) resale price method; ( c) cost plus method; ( d) profit split method; ( e) transactional net margin method; ( f) such other method as may be prescribed by the Board. 3) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm s length price, in the manner as may be prescribed; Provided that where more than one price is determined by the most appropriate method, the arm s length price shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the same base; ( iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; ( iv) the net profit margin realised by the enterprise and referred to in subclause ( i) is established to be the same as the net profit margin referred to in sub-clause (iii); ( v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction 29. Thus from the above, it is evident that the arm s length price in relation to an international transaction is to be determined by one of the prescribed methods which is most appropriate method having regard to the nature of transaction, class of transaction, class of associated persons, functions to form by such person, or such other relevant factors. Section 92C(2) provides that it is only the appropriate method as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Since as per the same computation the assessee s margin was found to be at arm s length, we set aside the order of authorities below and decide the issue in favour of the assessee. Since we have already allowed the assessee s appeal on this issue, for lack of justification in changing the method of bench marking we are not dealing with the arguments on other aspects of merits of application of CUP method computation of arms length price by the Transfer Pricing Officer in this case. The case law referred by the ld. Departmental Representative are distinguishable on the facts of this case. 27. We find that the above case law is fully applicable on the facts of the present case. Here also, the TPO has changed over to CUP method as MAM by rejecting the TNMM method consistently being applied by the assessee without any change in facts and law. We note that the Tribunal after elaborately deliberating upon the provision of the law has expounded that in absence of any justification for change in facts or law, the TPO is not justified in rejecting the consistently applied TNMM method and applying the CUP method as MAM. The above proposition is fully applicable here. Hence, the adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35(2AB) R D as per Revised Return Nil Nil Nil Nil Vide questionnaire dated 11.06.2013, the assessee was asked to furnish details of R D expenses claimed in Baddi Solan Units and explain why their weighted deduction should not be adjusted against profit of these units. The assessee vide letter dated 29.01.2014 submitted as follows: A note on allocation of Research Development expenditure The assessee has 2 units eligible to claim deduction of profit u/s 80IC of the Act i.e. i)Baddi and ii) Solan In the original Return, the assessee claimed deduction of ₹ 1,381,861,388/- u/s 80IC of the act in respect of both the units i.e. in case of Baddi Unit ₹ 1,057,498,180/- and Solan Unit ₹ 324,363,208/- but restricted the deduction to the extent of Gross Total Income ₹ 1,298,123,164/-. Revised ROI was filed on 29.03.2012 to revise the claim for deduction of profit u/s 80IC of the Act by withdrawing allocation of R D expenses, in respect of 80I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and commercialization of product is approx. 4-7 years and thus it's not correct to do allocation on sales or any other basis considering the revenue- expenses matching principle. research expenses was on futuristic research; results of research are always uncertain; none of the items of research was forming part of qualifying undertakings; none of qualifying undertakings has benefited from the research Since the Research and Development expenses relates to new drugs, the same cannot be apportioned / allocated to the above units. This view has been accepted by the Hon'ble Mumbai High Court In case Zandu Pharmaceuticals Works Ltd v. CIT ( 2012) 80 DTR 322 (Bom). In this case jurisdictional high court held that Research and Development expenses which have no relevance to the industrial undertaking cannot be allocated to such units. (Copy of order attached). In view of the above facts, the Return of income was revised and allocation of Research and Development expenses were withdrawn to the above units. 30. However, the AO was not satisfied. He rejected assessee s contention and Baddi Unit Solan U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to apportion of R D expenses incurred at Mahape and Sinnar towards Baddi and Solan is not proper. Thus this ground of appeal of the appellant on this count is allowed. 32. We have heard the contentions of both parties and perused the material on record. We find that the ITAT in assessee's own case for A.Y. 2009-20 has restored identical issue to the file of the AO to give finding as to the utilization of R D expenditure with respect to these units. In this view of the matter, in our considered opinion, the doctrine of stare decisis mandates that we follow the ITAT s order of earlier year. Accordingly, following the same finding of the ITAT in the earlier year we remit the issue to the file of the AO with direction to the AO to decide the issue after granting reasonable opportunity of hearing to the assessee. 33. Apropos ground relating to addition of ₹ 11,88,53,122/- being interest expenditure allocated to Baddi Solan units on the basis of sales turnover while computing deduction under Section 80IC. Brief facts of the case are that in its original income, the assessee allocated interest expenses to its Baddi Solan units in the ratio of sales turnover as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is proper and does not require to be disturbed. 35. However, the AO was not satisfied. He observed that the assessee has a pool of funds which is being utilised by all units of the assessee company. Hence he held that allocation of interest on the basis of sales turnover was perfectly justified as the assessee has a general pool of fund. He found that rejection of allocation of ₹ 1,58,58,363/- is an afterthought and is not sustainable. He concluded as under: - 7.6 Accordingly, the assessee s contention is rejected and total disallowance is computed as follows: - Baddi Unit Solan Unit Total Interest as per Revised Return Nil 1,58,58,363 1,58,58,363 Interest Disallowed 9,88,78,321 1,99,74,801 11,88,53,122 Thus, deduction u/s 80IC of ₹ 11,88,53,122/- is hereby disallowed and added back to total income of the assessee. 36. Against this order assessee appealed before the learned CIT(A). The learned CIT(A) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction within purview of the words derived from . I, am of the view that profits of any industrial undertaking have to be computed after taking into account all the receipts and expenditure incurred by it what is true to the receipts is also equally applicable to the expenditure. As a natural corollary only those expenditures should be taken into considerations which have a direct nexus for carrying on the activity of such undertaking. In this context interest expenditure may have indirect or remote nexus with the manufacturing activity at Baddi on which deduction u/s 80-IC has been claimed and this interest expenditure need not be apportioned towards this unit in absence of any direct nexus, as laid down by the Apex Court while interpreting the expression derived from . I find that in the present case AO has failed to bring on record anything to suggest that part of the borrowed funds have been used for Baddi unit, no interest should be apportioned towards Baddi unit. The assessee has rightly followed this rationale has apportioned interest expense towards Solan unit where borrowed funds have been utilized. I find that ratio of decision of Catvision Products is squar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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