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TMI Blog2017 (4) TMI 1434X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-08 4. The first ground is of general in nature and calls for no adjudication. 5. Ground no. 2 relates to the addition of Rs. 5,21,70,765/- on account of interest on loans given to Sun Pharma Global Inc. 6. During the course of the scrutiny assessment proceedings, when A.O. found that certain International Transactions have to be considered by the TPO, the matter was remitted to the Transfer Pricing Officer who proposed to make following additions in respect of International Transactions relating to loans to associated enterprises: (1) Interest on Loan to AEs at LIBOR plus rate Rs. 5,34,26,484/- (2) Interest on 0% OFCD Rs. 33, 16, 53, 612/- (3) Corporate Guarantee Fees Rs. 39,48,000/- 7. Taking a leaf out of the proposed additions from the order of the TPO, the A.O. made the impugned additions. 8. Assessee assailed the additions before the First Appellate Authority but could not succeed. 9. We find that an identical issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 1589 & 1592/Ahd/2011 for A.Y. 2006-07 in so far they relate to the addition on account of interest on loan to AE at LIBOR plus rate and interest on 0% OFCD is concerned an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. The Hon'ble High Court of Delhi in the case of Cotton Naturals India Pvt. Ltd. 276 CTR 445 at para 17 of its order has held that Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should not be entered. It is for the assessee to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured. A similar view was taken by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. 345 ITR 241. 9. On identical set of facts, the Co-ordinate Bench had the occasion to consider similar issue in the case of Cadila Healthcare Ltd. in ITA No. 2430/Ahd/12 with C.O. No. 242/Ahd/12 in 146 ITR 502 wherein the first ground related to the adjustment made on account of notional interest on Optionally Convertible Debenture to Foreign Subsidiary. The Tribunal considered the following facts:- 4. During the course of assessment proceedings, Assessing Officer noticed that Assessee had subscribed to Optionally Convertible Loan of U.S. $ 27 Million issued by Zydus International Pvt. Ltd., Ireland. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er RBI guidelines and in the immediately next year, the entire loan given to subsidiary was converted into equity shares of Zydus International Pvt. Ltd. He has further held that since the Assessee has converted the loan into equity in the immediate next year, there was no question of taxing notional interest. He has further held that Assessee had not granted interest free loan but invested in optionally convertible loan with a clause of interest in case, Conversion option was not exercised and further held the Assessee's transaction with subsidiary was at arms length. Before us, the Revenue could not controvert the findings of CIT(A) by bringing any contrary material on record. In view of these facts, we find no reason to interfere with the order of CIT(A). 11. Respectfully following the findings of the Hon'ble High court (supra) and the Co-ordinate Bench (supra), we direct the A.O to delete the impugned additions. Ground no. 2 is accordingly allowed. 10. As no distinguishing decision has been brought by the ld. D.R. in favour of the revenue, respectfully following our own decision given in A.Y. 2006-07 (supra). We direct theA.O.to delete the impugned addition. Ground no. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... normal. However, it is noted that interest determined by the TPO at LIBOR + 2% would take care of such foreign exchange risk also 15. Before us, the ld. counsel for the assessee vehemently stated that at the most chargeable interest should be @ LIBOR. It is the say of the ld. counsel that there is no justification in further adjusting the LIBOR rate with additional basis point. 16. Per contra, the ld. D.R. supported the orders of the revenue authorities. 17. We have carefully considered the facts in issues before us. We find that in the immediately preceding assessment year, the First Appellate Authority himself has taken the interest rate at LIBOR plus 0.25%. We also find that even that plus rate taken by the First Appellate Authority did not find any favour with the Tribunal in ITA No. 1589/Ahd/2011. Taking a leaf out of the findings of the Co-ordinate Bench in A.Y. 2006-07, in our considered opinion, upward adjustment at LIBOR rate should meet the ends of justice. We, accordingly, direct the A.O. to charge interest at LIBOR rate. This ground is partly allowed. 18. Ground no. 4 relates to the addition on account of interest on Optionally Fully Convertible Debentures subscrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of loan as on 31.03.2008 was Rs. 108.32 crore. It was also noticed that Assessee has not shown any income from the aforesaid loan. In response, Assessee interalia submitted that Assessee had not opted for conversion of the loan during the year and therefore it was loan for the year and as per the terms of agreement, no interest accrued to the Assessee and therefore no income was considered. The TPO did not find the contention of the Assessee acceptable. He considered the Optionally Fully Convertible loan as debt and considering the average six month Euro Libor rate for the year @ 4.48% to which he added the interest rate of 2.90 basis point as per the agreement and thereafter considered the rate of interest to be @ 7.38% and accordingly computed the interest on Rs. 108.32 Crore for 171 days at 7.38%. The aforesaid adjustment made by the TPO was considered by the Assessing Officer and the addition of Rs. 3,99,74,4267- was made to the income. Aggrieved by the order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) after considering the submissions made by the Assessee decided the issue in favour of Assessee. 10. And the Tribunal held as under:- 7. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it would secure long term commercial advantages. The Transfer Pricing Officer brushed aside the submissions made by the assessee and held that 2% of corporate guarantee should be charged as fees/commission for giving guarantees. Taking a leaf out of this, the A.O. had made the impugned additions. 23. Before the First Appellate Authority, the assessee strongly objected to the additions made on account of corporate guarantee provided by it. In alternative, it was contended that the addition of 2% of corporate guarantee is excessive and should be substantially reduced. 24. It was brought to the notice of the First Appellate Authority that the assessee is a cash rich company. It does not have any major debts in its balance sheet. In the presence of huge cash surplus and liquid assets, there was no need for the assessee to incur any costs in respect of guarantees given nor was it affecting any borrowing limits of the Assessee. It was further brought to the notice of the ld. CIT(A) that no charges have been levied by the banks to the assessee for providing the guarantees. It was also submitted that the guarantees provided to the AE are only a notional liability for the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. D.R. vehemently stated that since there are conflicting decisions of the Co-ordinate Benches on this issue, the same must be transferred to a Special Bench for its determination. In support, the ld. D.R. submitted a request for the constitution of a Special Bench to decide this issue. 29. We will first adhere to the formal request made by the ld. D.R. We find that in one of the earlier occasion, a similar request was declined by the Coordinate Bench made in the case of Micro Inks Ltd. (supra). The relevant part of the order of the Co-ordinate Bench reads as under:- 47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that "for the removal of doubts", as we have noted earlier in this decision, "clarified" that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarification did indeed go well beyond what a coordinate bench of this Tribunal held to be the legal position and we are bound by the esteemed views of the coordinate bench. We are, therefore, of the opinion that the Explanation to Section 92B did indeed enlarge the sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition of 'international transaction' under section 92B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "bearing on profits, income, losses or assets", it did not constitute an international transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned AEP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnaswamy SPD v. Union of India [2006] 281 ITR 305/151 Taxman 286 (SC), wherein Their Lordships had, inter alia, observed that "the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. decision (supra] had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post-amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel Ltd. decision (supra] on the peculiar facts of that case. The decisions like Everest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific Corp Ltd. case (supra), as indeed in any other case so far, it was not the case of the assessee that corporate guarantees are quasi-capital, or shareholder activity, in nature, and, for that reason, excludible from chargeable services, even if these are held to be services in nature. That plea has been specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eremphasized. The sweeping generalizations, vague statements and evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better. 30. We find that the revenue has preferred an appeal u/s. 260A of the Act before the Hon'ble High Court of Gujarat and the same has been admitted in Tax Appeal No. 567 of 2016. The relevant substantial question of law admitted by the Hon'ble High Court reads as under:- [B] "Whether on the facts and circumstances of the case, the ITAT is right in deleting the addition (i.e. adjustment) to the arm's length price of international transaction amounting to Rs. 2,32,62,603/- as corporate guarantee not amounting to international transactions and not liable for upward adjustment ?" 31. A perusal of the above clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 100% of the same as revenue expenditure. 13. Assessee carried the matter before the ld. CIT(A) but without any success. While dismissing the grievance of the assessee, the ld. CIT(A) followed the findings of his predecessor given in A.Y. 2002-03 to 2004-05. Before us, the ld. counsel for the assessee stated that the Tribunal in assessee's own case in earlier years has decided this issue in favour of the assessee and against the revenue in ITA No. 1558/Ahd/2006. The ld. D.R. could not bring any distinguishing decision in favour of the revenue. 14. We have given a thoughtful consideration to the order of the Tribunal in earlier years; we find that the Tribunal while deciding the issue in favour of the assessee has followed the decision of the Co-ordinate Bench, Mumbai in the case of USV Ltd. 54 SOT 615. Findings of the Tribunal read as under:- 24. We have carefully perused the orders of the authorities below. We find that the ld. CIT(A) has simply followed the findings of his predecessor for A.Y. 2000-01. We also find that the assessment order for A.Y. 2000-01 has been quashed by the Tribunal vide a ITA Nos. 1199 & 1279/Ahd/2006, which means that the basis for upholding the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation 4 which says that "working partner" means an individual. Though, the assessee was a working partner of SPI but because of the explanation it was not entitled for remuneration as it is not an individual. Therefore, such remuneration paid to the working partner could not have been allowed as deduction u/s. 40(b) of the Act. 42. Taking recourse to section 28(v) of the Act, since the remuneration was not allowable in the hands of the SPI, the assessee had not offered the same for taxation. The A.O. was of the firm belief that the assessee has avoided paying tax on the amount of Rs. 29,79,26,967/-. The A.O. was also of the opinion that the assessee has incurred expenditure on behalf of SPI which it has debited in its books of accounts. Taking recourse to the provisions of section 37 of the Act, the A.O. was of the opinion that only those expenses are allowable to be deducted which are incurred wholly and exclusively for the purpose of running of its business and since the assessee has debited those expenses which have been incurred on behalf of a separate entity i.e. SPI, therefore, the same is not allowable as deduction. 43. The A.O. found that the following expenditures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the object of section 14A is to ensure that so much of the expenditure incurred for earning income that do not constitute total income of the assessee should not be allowed, when income is outside the tax net, expenditure incurred for earning such income also should not be allowed to be set off in the computation of taxable income. The ld. CIT(A) was of the firm belief that the assessee has earned share of profit which is exempt u/s. 10(2A) of the Act as well as remuneration which was taxed as business income u/s. 28(v) of the Act. Therefore, proportionate disallowance of expenditure incurred for earning exempt income has to be made u/s. 14A of the Act. The ld. CIT(A) was convinced that the expenditure incurred by the assessee for earning of share of profit/remuneration from the firm is at Rs. 27,55,18,783/- as against Rs. 47,18,93,873/- determined by the A.O. The ld. CIT(A) confirmed the disallowance to the extent of Rs. 27,55,18,783/-. 48. Before us, the ld. Senior Counsel once again contended that section 14A has no application on the facts of the case. It is the say of the ld. Senior Counsel that remuneration paid to the partner is not an exempt income in its hand. Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm in its books of account. The A.O was of the firm belief that these expenditures are not related to the earning of income and accordingly disallowed - (a) selling and distribution expenses 25,68,21,928/- salary and allowance to field staff 24,12,98,724/- totaling to Rs. 49,81,20,652/-. The A.O proceeded by disallowing Rs. 8,49,79,383/- based on the ratio of the total turnover of the assessee and the partnership firm SPI. 90. Aggrieved by this, the assessee carried the matter before the ld. CIT(A). Ld. CIT(A) has considered this grievance at para 26 vide ground no. 25 before him. After considering the facts and the submissions, the ld. CIT(A) was of the opinion that the assessee already had an existing sales and distribution network in the form of C & F agent, etc. Therefore the assessee was not required to incur any additional/extra expenses for undertaking the marketing function for and on behalf of partnership firm. The ld. CIT(A) further observed that most of the expenses incurred by the assessee for the sales were in the nature of fixed expenses. However, there were similar additional expenses incurred by the assessee for carrying out the sales for and on behalf of the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Thus, it cannot be said that the expenditure incurred by the assessee are not for the purposes of its business. Since the assessee is holding 95% in the partnership firm it becomes the duty of the assessee to promote the business of the partnership firm, in the capacity of the majority stake holder. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee's business or the business of the partnership firm where the assessee is a majority stake holder. Therefore, in our considered opinion, the expenditures incurred by the assessee company deserves to be allowed and we direct the A.O to delete the addition of Rs. 8,49,79,383/-. 51. Respectfully following the findings of the Co-ordinate Bench (supra), no disallowance should be made u/s. 37 (1) of the Act. 52. Coming to the disallowance made u/s. 14A by the First Appellate Authority, it is an undisputed fact that the assessee was having sufficient own funds for maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into forward contracts to safeguard the value of investments made by the assessee in its subsidiary against the adverse forex fluctuation and to that extent the ld. CIT(A) restricted the addition to Rs. 14,33,80,289/-. 58. Insofar as the loans received by way of ECG/FCCB, the ld. CIT(A) was of the opinion that these borrowings were for the purpose of capital expansion of the business since the proceeds can be used for capital purposes only. Therefore, there is no case for any addition on account of forex gain in respect of reinstatement of FCCB and conversion of FCCB into equity shares as well as repayment of ECB since these gains/receipts are held as capital receipt only. The ld. CIT(A) confirmed the addition of Rs. 14,33,80,289/- being forex gain in respect of rolling over of forward contract for safeguarding investment in Caraco and OFCD in Global. 59. Before us, the ld. Senior Counsel once again heavily relied upon the very same decisions which were relied upon before the lower authority. Per contra, the ld. D.R. supported the findings of the revenue authorities. 60. We have given a thoughtful consideration to the factual matrix. The main particulars of foreign exchange gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to the reduction of unrealized export proceeds of Rs. 638.82 lacs from export turnover for the purpose of deduction u/s. 80HHC. 6. The ld. Counsel stated that an identical issue has been considered by the Tribunal in assessee's own case for A.Y. 2001-02 wherein the issue has been set aside to the files of the A.O. The ld. counsel prayed for a similar direction should be given for the year under consideration also. The ld. D.R. did not object to this. We find that an identical issue was considered by the Tribunal in assessee's own case for A.Y. 2001-02 at Para 6 on page 12 of ITA Nos. 3289 & 3434/Ahd/2003 and at Para 6.3 the Tribunal had directed the A.O to apply the provisions of section 155(13) of the Act and decide the issue afresh. 7. Respectfully, following the decision of the co-ordinate Bench, we direct the A.O. accordingly. Ground no. 3 is treated as allowed for statistical purposes. 65. Respectfully following the findings of the Co-ordinate Bench, we direct accordingly. This ground is treated as allowed for statistical purpose. 66. Ground no. 11 relates to the disallowance of provision for Leave Encashment u/s. 43B of the Act amounting to Rs. 1,83,33,509/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by ground nos. 1 & 2 hereinabove. For the reasons given therein, ground no. 3 is dismissed. 76. Ground no. 4 relates to the deletion of the disallowance of depreciation on motor car @ 30% instead of 15% as per provisions of law. 77. The assessee has claimed depreciation on certain motor vehicles owned by it on hire. The assessee has claimed depreciation on such motor vehicles @ 30% amounting to Rs. 34,69,434/- . Since the assessee is not in the business of giving motor vehicles on hire, the A.O. allowed depreciation @ 15% accordingly excess depreciation amounting to Rs. 17,34,717/- was disallowed. 78. Before the First Appellate Authority, the assessee reiterated its claim of depreciation @ 30%. After considering the facts and the submissions, the ld. CIT(A) found that the main business of the assessee is manufacturing of bulk drugs as well as formulation products. However, the ld. CIT(A) found that the assessee is also in the business of leasing and financing activity. The ld. CIT(A) was convinced that the assessee has fulfilled all the basic requirements for claiming higher depreciation @ 30%. The ld. CIT(A) accordingly directed the A.O. to allow higher rate of depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115JB (2) of the Act and, therefore, Rs. 5,11,63,871/- ought to have been reduced by the A.O. The contention of the assessee did not find any favour with the A.O. who disallowed the claim of excess deduction of Rs. 66,18,485/- and added back in the working of book profit u/s. 115JB of the Act. 85. The assessee succeeded before the ld. CIT(A) because of which the revenue is before us. We find that this issue is no more res integra because the Hon'ble Supreme Court in the case of Ajanta Pharma Limited 327 ITR 305 has decided this issue in favour of the assessee and against the revenue. The Hon'ble Supreme Court has laid down the ratio that 100% of the export profits earned by the assessee as computed u/s. 80HHC(3) was eligible for deduction under clause (iv) of the Explanation to section 115JB of the Act. 86. Respectfully following the same, we do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 6 is dismissed. 87. Ground no. 7 relates to the deletion of the addition of Rs. 1,16,56,762/- made on account of sales to Sun Pharma Industries. 88. Both sides agreed that a similar issue was considered by the Co-ordinate Bench in assessee's own case in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third parties. The A.O proceeded by computing an addition of Rs. 19,49,930/- on account of unreasonably low selling price on sale of raw materials/products sold to its sister concern. 84. Aggrieved by this, assessee carried the matter before the ld. CIT(A) but without any success. 85. Before us, the ld. counsel for the assessee stated that it is not clear under which provision of the act additions have been made. Further the counsel stated that no 80IB deduction has been claimed by it which could justify the action of the A.O. Per contra, the ld. D.R. strongly supported the findings of the revenue authorities. 87. We have given a thoughtful consideration to the orders of the authorities below. We agree with the contention of the ld. counsel that no specific section has been mentioned in the assessment order for making the impugned additions. A perusal of the assessment order show that the additions have been made by treating the transactions u/s. 40A(2) of the Act. In that case, we have to state that provisions of section 40A(2) are applicable only in respect of payments made to related parties mentioned therein. But the transaction before us is of credit in nature i.e. sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical purpose. 96. As the Co-ordinate Bench has restored the issue to the files of the A.O., we direct the A.O. to follow the similar direction in this year also. Ground no. 10 is treated as allowed for statistical purpose. 97. Ground no. 11 relates to the deletion of the disallowance of Rs. 23,68,918/- claimed as revenue expenses. 98. While scrutinizing the return of income, the A.O. found that the assessee has incurred Rs. 224.7 million towards repairing expenses. On scrutinizing the ledger copies of the said repairing expenses, the A.O. was of the opinion that certain repairing expenses need to be capitalized. Therefore, the assessee was asked to show cause why such repairing expenses should not be capitalized and added back to the total income. 99. The assessee filed a detailed reply explaining the nature of expenditure and contending that all the impugned expenditures are in the nature of repairs and maintenance and, therefore, should be allowed as revenue expenditure. The detailed submission of the assessee did not find any favour with the A.O. who was of the opinion that out of total repairing expenses, amount of Rs. 28,51,291/- has to be disallowed as capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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