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TMI Blog2017 (9) TMI 1804X X X X Extracts X X X X X X X X Extracts X X X X ..... to the addition on account of share application money advanced to Sun Pharma global Inc (SPGI) amounting to Rs. 4,00,64,965/-. 6. During the course of the scrutiny assessment proceedings, the AO/TPO noticed that as on 31.03.2009 the share application money pending allotment was Rs. 50.85 crores. The AO/TPO was of the opinion that the assessee should have charged interest at LIBOR plus basis. The assessee strongly objected to this proposition for TP adjustment stating that till the amount advanced for shares is actually adjusted towards allotment of equity shares, the amount is to be treated as advance towards share application money and the share application money shown as outstanding as on 31.03.2009 was subsequently converted into equity in A.Y. 2010-11. It was strongly contended that the assessee had sourced the application money to its AE out of the excess funds lying idle out of the issue of FCCB. The contentions of the assessee did not find any favour with the AO/TPO who computed the arms length interest rate at average Libor plus 3.95% which included foreign exchange risk of 1%. 7. The assessee carried the matter before the ld. CIT(A) who after considering the facts and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the characterization to the prejudice of assessee's position anyway. In our considered view, the percentage of ownership is the only material factor which remains at 100% prior to allotment and also post allotment. As the assessee is the only shareholder in it's 100% owned subsidiary company SPG BVI it should not make any difference merely because part of the share application money is converted into equity shares and the balance were allotted in subsequent assessment years. We, therefore, do not find any merit in the submissions of revenue in this behalf. This proposition, is reinforced by the decision of the Coordinate Bench in the case of Sterling Oil Resources (P.) Ltd. in ITA No. 1791/Mum/2014. The relevant part reads as under:- 9. There is one more aspect of the matter. In the present case, allotment of shares does not make any change to the position of the assessee, as the subsidiary' is admittedly a wholly owned subsidiary of the assessee. A delay in allotment of shares by the subsidiary company, as long as the subsidiary is a wholly owned subsidiary, does not prejudice the interests of the assessee. It is, therefore, wrong to even allege that an assessee does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom a situation in which the payment is made for subscription of share capital- as in this case, held that re-characterization of a transaction is possible in only two situations - i.e. (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of time, it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder- as is the factual position in this case. The nominal value of shares, as long as all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of the adjustment made by the Assessing Officer is, therefore, wholly devoid o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cadila Healthcare in ITA No. 2430/Ahd/2012 without appreciating the fact that in that case, the assessee has produced comparable data to show that independent parties had entered into agreements with similar terms (benefits) and not charged any interest thereon whereas in the case in hand, the assessee has not produced comparable data to justify that OFCDs were issued at arm's length price. It is strongly contended that since these facts have not been brought on record, therefore, the Bench should not follow its earlier decision. 20. Shri Soparkar ld. senior counsel replying to the submissions of revenue stated that the decision of the Hon'ble Supreme Court in the case of Sahara India Real Estate (Civil Application) No. 9813 of 2011 relied upon by the learned DR is not applicable to the issue before the Hon'ble ITAT. Even if it is held that OFCD is a hybrid instrument as laid down by the Supreme Court, in applying the Transfer Pricing Provisions, the entire instrument has to be considered and the same cannot be re-characterized partly as loan and partly as equity so as to enable any transfer pricing adjustment for the same. In this regard, we rely on the decisions cited e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso correct to state that, even if a particular issue has not been agitated earlier, or a particular argument was advanced, but was not considered, the said judgment does not lose its binding effect, provided that the point with reference to which an argument is subsequently advanced, has actually been decided. The decision therefore would not lose its authority, "merely because it was badly argued, inadequately considered or fallaciously reasoned". The case must be considered taking note of the ratio decidendi of the same i.e. the general reasons, or the genera! grounds upon which the decision of the court is based, or on the test or abstract, of the specific peculiarities of the particular case, which finally gives rise to the decision. (Vide Somawanti v. State of Punjab, Ballabhadas Mathurdas Lakhani v. Municipal Committee, Matkapui, Ambika Prasad Mishra v. State of U.P and Director of Settlements v. M.R. Apparao.) 24. The Hon'ble Jurisdictional High Court of Gujarat in the case of Core Healthcare Ltd. 251 ITR 61 has observed as under:- As laid down by the apex court in the case of Ambika Prasad Mishra v. State of U.P., AIR 1980 SC 1762 ; [1980] 3 SCC 719 (page 1764 of AIR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 92CA of the Act for computing of arms length price in relation to the transaction was made to Transfer Pricing Officer (TPO). TPO noted that the Assessee had entered into an agreement with Zydus International Pvt. Ltd. on 09.10.2007 for a convertible loan of U.S $ 27 Million which was subsequently utilized by the Ireland Company for acquiring shares in Zydus Healthcare, Brazil. As per the terms of agreement, no interest was payable if the amount was converted into equity. However, if the same is redeemed, interest was payable at Libor Plus 290 bps and the interest was to be computed at annual rates and payable at maturity that is 5 years from the date of first disbursement. The rupee value of the amount 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Co-ordinate Bench in the light of the ratio laid down by the Hon'ble Supreme Court and the Hon'ble Jurisdictional High Court of Gujarat (supra) and considering the fact that the OFCD were on beneficial terms as per facts mentioned above. Consequently, we have no hesitation to follow earlier judgment in assessee's own case as a result we delete the impugned additions. Ground No. 3 of assessee is allowed 14. Finding parity in the facts, respectfully following the findings of the Coordinate Bench, we direct the A.O. to delete the addition of Rs. 17,32,96,800/-. Ground no. 4 is accordingly allowed. 15. Ground no. 5 relates to the addition on account of Corporate Guarantee Provided to associated enterprises Sun Pharmaceutical Bangladesh Ltd. amounting to Rs. 21,90,400/-. 16. The AO/TPO noticed that the assessee has provided Corporate Guarantee to its AE Sun Pharmaceutical Bangladesh Ltd without charging any guarantee fees. Treating the same as an international transaction upward adjustment of Rs. 21,90,400/- was made. 17. Assessee assailed the addition before the ld. CIT(A) and the First Appellate Authority at Para 7.3 of his order observed that the facts are identical to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing Services (CRAMS) basis. The assessee in its Transfer Pricing Study report claimed that on the sale transactions with SPG, the net profit margin earned is 14.84%. To substantiate its claim, external TNMM was shown at 13.96%. The TPO rubbished the claim of most appropriate method as TNMM and adopted Profits Split Method (PSM) because he was of the strong belief that PSM is applied mainly to international transactions involving transfer of unique intangibles. The TPO as of the belief that the technology to manufacture Pantoprazole Sodium was originally developed by the assessee and was subsequently transferred to SPG indirectly. Therefore, the relevant international transactions involve transfer of unique intangibles. The TPO was of the opinion that a transactional profit split method may be the most appropriate method in cases where both parties to a transaction make unique and valuable contribution to the transaction, because in such a case independent parties might wish to share the profits in proportion to their respective contributions and a two-sided method might be more appropriate than a one sided method. 23. The assessee strongly objected to the findings of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch and Development business to SPARC. This is supported by the order of the Hon'ble High Court of Gujarat exhibited at pages 475 to 518 of the paper book. On 28.10.2007, SPARC sold a basket of 38 Technologies to SPG including ANDA for Pantoprazole Tablet, the consideration of which was USD 3 million for U.S. Market and USD 1.4 million for Europe Market. This is supported by the agreement for sale exhibited at pages 519 to 536 of the paper book. 77.By virtue of this agreement for sale, the Technology was purchased by SPG in the month of October, 2007 and immediately thereafter in the month of November, 2007, SPG enters into an agreement with appellant for manufacturing. Copy of supply agreement between SPG and SPIL is exhibited at pages 648 to 659 of the paper book. Relevant clauses of the supply agreement read as under:- AND WHEREAS SPGI is the owner of the various abbreviated new drug applications and is interested to market the products in United States of America and in Europe and is therefore interested to buy various products from side approved by US FDA. 1. SUPPLY AND PURCHASE ARRANGEMENTS. SPIL hereby agrees to sell and supply the Products to SGI and SPGI hereby agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed to by SPGI and SPIL. 3.2 Intellectual Property Representation: Except for the rights expressly under the terms of the Agreement this Agreement does not transfer any intellectual property rights, specifically with respect to the Products from SPGI to SPIL. SPGI represents and warrants that, to the best of the knowledge and belief of SPI , SPIL's fulfillment of the terms of this agreement to the' manufacturing of the Products will not infringe any third party intellectual property rights. Nevertheless, in case SPIL would be or named as a formal party by reason of an infringement of third party rights for the Products, SPIL shall promptly inform SPGI thereof. SPGI shall conduct any defense of such suit at its own expense and SPGI shad indemnify and hold SPIL harmless from and against any loss, claim, damage, expense or liability if any resulting from any such suit in accordance with Section 5. However, in any such litigation suit SPIL agrees to assist SPGI, without assuming any monetary obligation. 4.3 Legal Compliance. SPIL hereby undertakes to comply with all requirements of law for obtaining various licenses, approvals, permissions and no objection certificates for meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming Finished Products. 4.6.4 SPIL agrees to invoice and dispatch at SPGI's cost and risk, the finished products to SPGI or its nominees as specified by SPGI according to the orders placed by SPGI and instructions given by SPGI and accepted by SPIL. 5.1 SPGI Indemnification. SPGI shall indemnify and hold SPIL harmless from and against any loss, claim, damage, expense or liability, resulting from any misrepresentation, negligence, or intentional misconduct by SPGI in performing this agreement including for any claim, demand or suit alleging that the Product infringes any third party's patent, copyright, trademark, trade secret or other intellectual property right or any product liability. Notwithstanding anything to the contrary in this Agreement, in no event shall SPGI be liable to SPIL for any incidental, indirect, exemplary, special or consequential damages whatsoever (including, but not limited to, lost profits, loss of goodwill, or interruption of business) that may be suffered or incurred by SPIL as a result of SPGI's violation of this representation. 5.2 SPIL Indemnification. SPIL shall indemnify- and hold SPGI harmless from and against any loss, claim, damage, expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal form of tax evasion , the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. vs. Union of India and Another reported in 341 ITR 1 has laid down the ratio : "It is the task of the court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not adopt a dissecting approach. All tax planning is not illegal or illegitimate or impermissible". 81.The Hon'ble Supreme Court further held. :- (iv)The Income-tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies as economic entities with legal independence vis-a-vis their shareholders or participants. Consequently, the entities subject to income-tax are taxed on profits derived by them on standalone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders or participants. Furthermore, shareholders or participants, that are subject to (personal or corporate) income-tax, are generally taxed on profits derived in consideration of their shareholding or participations, such as capital gains. It is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary under their articles are the managers of the companies. They are not to be dictated by the parent company if it is not in the interests of those companies (subsidiaries). The fact that the parent company exercises shareholder's influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary's) directors. The decisive criteria is whether the parent company's management has such steering interference with the subsidiary's core activities that the subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors. (vii) A typical large business corporation consists of sub-incorporates. Such division is legal and recognized by company law, laws of taxation, takeover codes. The parent is the only group member that normally discloses financial results. Below the parent company are the subsidiaries which hold operational assets of the business and which often have their own subordinate entities that can extend layers. Subsidiaries are often created for tax or regulatory reasons. They at times come into existence from mergers and acquisitions. As group member, subsidiaries are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truments between associated enterprises in Part III, Section C of the Report on the Attribution of Profits to Permanent Establishments.2 A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate In view of the functional analysis of that party. See parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from the international transaction -[or the specified domestic transaction] in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction] : Provided that the combined net profit referred to in sub-clause (i) may, in the first insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such transfer from SPG BVI to SPIL), or in multiple international transaction which are so inter related that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction. This is also absent (in the case in hand as the appellant company has done only manufacturing of Pantoprazole Tablets for SPG BVI). 89. Coming to the application of TNMM, we find that the profit margin benchmark by the assessee at 21.57% on sales transactions is much higher than the margin shown by the assessee with Eli Lily. 90. The revenue authorities have compared the agreements of SPIL with Eli Lily and SPIL with SPG BVI and have come to the conclusion that a conspectus reading of the relevant clauses show that the assessee is not a contract manufacturer in the case of SPG BVI. This finding of the revenue authorities is not acceptable for the simple reason that they have compared the clauses of the respective agreements without considering the nature of work done by SPIL. It may be possible that certain terms and conditions may be absent in the agreement between the assessee and SPG BVI but that itself would not deny the assessee, the status of contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rer also will be wiped out. The PSM application may actually result in reduction of returned ALP working. Thus, considering the issues from all possible angles, the assessee has, undisputedly and as accepted by revenue, ultimately suffered losses which are not claimed in its books or tax purposes. Even the alternative application of PSM fails and would do no good to the Revenue . 92. To summarize in nutshell , by the order of the Hon'ble High Court Innovative Research and Development /division of the appellant company was demerged and given to Sun Pharma Advance Research company (SPARC) subsequently SPARC transferred ANDA rights to SPG BVI. SPG BVI has been entered into an agreement with the appellant company SPIL for the manufacturing of Pantoprazole. Pursuant to this agreement assessee manufactured Pantoprazole and sold the same to Caraco Ltd on the directions of SPG BVI. On such sale transaction, the appellant company had shown a net margin of 21.57% bench mark the same on transactional net margin method which was dismissed by the revenue authorities questioning firstly, the ANDA rights with SPG BVI and secondly, comparing the contract manufacturing agreement of SPIL with SPG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is seen that the margins earned in respect of these drugs by these companies is over 90% and 35% in respect of SPG BVI and SPG FZE respectively as compared to 14.84% in respect of SPIL. 9.1 Rejection of FAR and TP Study conducted by the assessees. The functions performed, risks assumed and assets deployed by both the companies have been examined. It is seen that SPIL has deployed substantial assets in the form of approved manufacturing setup without which sales could not have been effected. Further, it has played substantial role in preparation of ANDA as well as drawing up the sales plan in US in collaboration with Caraco and other entities. Further, the functions performed by' outside entities merely relate to marketing support. In light of this the transfer pricing study conducted by the assessee company treating SPIL as a mere contract manufacturer and conducting a TNMM to benchmark its profit margin is not found to be in line with the intent of section 92C and the Rules framed related to transfer pricing. Accordingly, the transfer pricing study conducted by the assessee with reference to benchmarking of the sale of drugs to Sun BVI and Sun FZE (other than pantoprazole) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing setup of SPIL is being used as the sale is generally through the local subsidiary of SPIL with underlying guarantee of SPIL. Hence, the role played SPIL in sale of such drugs is much higher. While SPIL has higher functional and asset related responsibility, Sun BVI/FZE do not have to carry the risk they were carrying in the case of Chapter IV drugs. These companies also do not carry any significant functional responsibility or use substantive assets except probably the financial exposure. To this extent, SPIL is found to be the main party contributing assets to the transaction. 10.3 In addition, although the sale agreement shave been entered into by Sun BVI/FZE, the guarantees in the sale agreements as well as in the filings before US PDA have been entered into by SPIL signifying its significant risk. Since SPIL is the manufacturer, it carries the associated risk as any problem associated with the drug will have to be borne by SPIL These drugs are not Chapter IV drugs and hence there is hardly any litigation and associated risk being carried by the seller. Hence, except a small portion of marketing risk being carried by Sun BVI/FZE, most of the risk is being carried by S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 0 0 0 4 Gross Profit 19956340.43 9397222 61684738 71081960 743379.95 743380 5 Other expenses (R&D , corporate & other exs.) 4085381.588 550720 3705777 4256497 53935 53935 6 Profit 15870958.84 8846502 57978961 66825463 689445 689445 7 Additional credit allowed on account of Return of goods 0 7a State difference/Returns accounted in FY 2008-2009 -18849.64 61572863 61554013.36 62008 62008 7b Rate difference accounted in FY 2009-2010 0 0 0 0 0 7c Returns / Short receipts accounted in F Y 2009-2010 0 2325264 2325264 0 0 7d Rate difference accounted in FY 2010-2011 « 0 0 0 0 0 7e Returns / Short receipts accounted in F Y 2010-2011 0 0 0 0 0 8 Additional expenses [litigation ] incurred by the company 0 0 0 0 0 9 Remaining profit [ 6 minus 7 minus 8 ] 8865352 -5919166 2946185 627437 627437 10 Remaining profit in Rs. (@ 45.95) 135347749 28824463 05$ rate = 45.94 45.94 Profit apportioned to SPIL 67673875 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f sale of Pantoprazole. After considering the facts and the submissions, the First Appellate Authority observed that the claim of appellant that is has manufactured pharma products as contract manufacturer in its US FDA Plant as per specifications of SPG AEs and also using technology owned by SPG only was found to be incorrect in detail analysis done in A.Y. 2008-09 by the ld. CIT(A)-4, Ahmedabad. The ld. CIT(A) further observed that the facts are identical in the year under consideration to that of A.Y. 2008-09. Accordingly, the arguments of the appellant hereby rejected relying upon the findings of the ld. CIT(A)-IV, Ahmedabad. The relevant findings of the ld. CIT(A) read as under;- 8.12. On careful consideration of the material available on record, it is noticed that the TPO has applied Residual Profit Split Method and accordingly determined adjusted profit from Para-IV filing drugs at Rs. 6,21,95,685/- and from generic drugs at Rs. 2,40,64,8487-by apportioning the profit in the ratio of 50:50 in case of Para-IV filing and 80:20 in case of generic drugs, between the appellant and its AEs, It is also noticed that the appellant has adopted same methodology as in the case of pant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gregate profit in the ratio of 80:20 between the appellant and AEs. Accordingly, the addition made by the AO/TPO on this account at Rs. 8,62,60,533/- was confirmed along with enhancement of income by Rs. 3,73,17,411/-. 33. Before us, the ld. Senior Counsel put forth the same arguments which were made for the sale of pantoprazole. It is the say of the ld. counsel that on identical set of facts, the Tribunal in A.Y. 2008-09 has not only deleted the additions made by the AO/TPO but has also deleted the enhanced income. 34. We have given a thoughtful consideration to the orders of the authorities below qua the issue. As mentioned elsewhere, the reasoning given for making the addition are underline with the reasonings given for making similar additions in A.Y. 2008-09 for the sale of pantoprazole. The only distinguishing fact relates to the sale of certain drugs which are outside the Para IV filing drugs. It is seen that in respect of sales made to SPG BVI, Amifostine & Venlafaxine are sold in US under Chapter IV filing. Similarly, in respect of sales made to SPG FZE, Gemicitabin is a Chapter IV drug. It is seen that the methodology followed in sale of these drugs is similar to the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim made by the assessee was purely legal claim as it is eligible for weighted deduction as per the provisions of Section 35(2AB) of the Act. Merely because the same was not claimed in the return of income nor through a revised return of income, the same cannot be denied. The relevant portion of Section 35(2AB) reads as under:- 35[2AB] (1) where a company engaged in the business of [bio-technology or in [any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule]] incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to [two] times of the expenditure] so incurred. [Explanation.- For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of R & D expenditure, the A.O found that the assessee has claimed weighted deduction @ 150% on - (a) Trade Mark Registration Charges : 2,42,56,296/- (b) Overseas Product Registration Charges : 2,00,00,508/- 12. The assessee was asked to justify its claim. Assessee filed a detailed reply justifying its claim of weighted deduction. It was explained that the expenditure incurred for product registration although named as Product Registration Expenditure is not merely an expenditure for registration of the product, but in large measure constitutes expenditure for validation and confirmation of the Research carried out. The A.O did not accept the claim of the assessee holding that these expenses were incurred for registration of drug patents in foreign countries. The A.O accordingly withdrew the weighted deduction and allowed only 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e filed by the partnership firm SPI, it was observed that it is showing huge profit margins and claiming deductions u/s. 80IC of the Act. It was observed by the A.O. that substantial part of this profit is coming back to the assessee. The A.O. was of the opinion that since the huge profit received by the assessee from the firm is exempt from tax. Therefore, the assessee has debited all the expenditure in its books of accounts whereas the partnership firm has not debited any expenditure under the head 'Research & Development'. 52. The A.O. was of the firm belief that the entire R&D expenditure claimed by the assessee in its books of accounts cannot be allowed in the hands of the assessee. 53. The assessee strongly objected to this proposition on the ground that R&D facility is wholly and exclusively owned by the assessee and is approved by the DCIR u/s. 35(2AB) of the Act. and the products developed by this R&D facility are owned up by the assessee. 54. The contentions of the assessee were dismissed by the A.O. who was of the firm belief that the assessee is incurring expenses at R&D activity on behalf of the partnership firm SPI in which the assessee has substantial interest. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the disallowance made by the A.O. and confirmed by the First Appellate Authority. We, accordingly, direct the A.O. to delete the addition of Rs. 5,30,29,5255/-. Ground no. 12 is accordingly allowed. 59. Ground no. 13 relates to the claim of deduction of remuneration received from partnership firm for determination of Book Profits u/s. 115JB of the Act. 60. This issue was also involved in the case of the appellant in A.Y. 2008-09 wherein the claim of deduction of remuneration received from the partnership firm SPI for the determination of Book Profits u/s. 115JB was denied by the revenue authorities. We find that when the matter was agitated before the Tribunal, the Tribunal also declined to interfere with the findings of the ld. CIT(A). The relevant findings of the Tribunal read as under:- 110. We have considered the facts, circumstances, relevant provisions and rival submissions,. A harmonious reading of the provisions of section 115JB of the Act reflects that in the case of a company subject to the provisions of Section 115JB of the Act has to prepare P&L statement in accordance with the provisions of part (ii) of Schedule (vi) of the Companies Act. 111. The relevant clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced it specifically provided under the Explanation to Section 115JB of the Act which we find missing from the relevant provisions. We, therefore, do not find any merit in this claim of the assessee and accordingly we confirm the findings of the First Appellate Authority. Ground no. 9 is dismissed. 61. As no distinguishing facts emerge from the order of the authorities below, respectfully following the findings of the Tribunal (supra), we decline to interfere. Ground no. 13 is accordingly dismissed. 62. Ground no. 14 relates to the addition of selling and distribution expenses incurred on behalf of SPI disallowed u/s. 14A. 63. While confirming the addition made by the A.O., the ld. CIT(A). at Para 18.3 of his order observed that this issue was also involved in A.Y. 2008-09. The ld. CIT(A) further observed that this issue was also considered by the Tribunal in assessee's own case in ITA NO. 1193 & 1287/Ahd/2008. 64. On finding similarity of facts, we have no hesitation in following the decision of the Tribunal given in earlier year and the relevant findings read as under:- 153. A similar issue was considered by the Bench in A.Y. 2007-08 in ITA No. 2076 & 2067/Ahd/2013 and the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Assessee vehemently challenged the enhancement notice but without any success. 69. The First Appellate Authority held as under:- 18.9. Since the facts are identical in this year also, I respectfully following the order of CIT(A)-IV, Ahmedabad and also considering the factual and legal position in this regard, hold that the appellant company has received a sum of Rs. 57,49,50,297/- from SPI as consideration for permitting use of all present and future trademark/brands, in the entire world, for the period of 5 years and for providing other managerial services. Thus, the so called "remuneration" as claimed by the appellant does not represent the remuneration at all. Further, this amount has no correlation with the expenses incurred by the appellant on behalf of the SPI and hence no set off can be given against the expenses disallowed out of selling and distribution expenses and salary and allowance to the field staff. Accordingly, I further hold that the so called "remuneration" received by the appellant from SPI represent the taxable income of the appellant for the year under consideration and accordingly the amount of Rs. 57,49,50,297/- is treated as the income of the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, in our considered opinion, the allegation that it is a case of tax evasion is ill-founded. The fact of the matter is that such payments were never re-characterized as royalty in earlier assessment years and the action of the First Appellate Authority in the year under consideration is nothing but based upon assumptions and presumptions. No addition can be sustained which are based upon assumptions, surmises or conjectures. We, therefore, set aside the findings of the ld. CIT(A) and direct the A.O. to delete the amount of Rs. 40.12 crores re-characterized by the First Appellate Authority. Ground no. 13 is allowed. 73. As no distinguishing fact emerge from the orders of the authorities below, respectfully following the findings of the Tribunal (supra), we direct the A.O. to delete the addition of Rs. 57,49,50,297/-. Ground no. 15 is allowed. 74. With Ground no. 16, the assessee objects to the set off of business loss against profits of the eligible undertaking before allowing deduction u/s. 10B of the Act. 75. During the course of the assessment proceedings, the A.O. noticed that the assessee company has claimed deduction u/s. 10B of the Act at Rs. 126.79 crores in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would, be prior to the commencement of the exercise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in section 10A as 'total income of the undertaking'. [Para 17] For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and not at the stage of computation of the total income under Chapter VI. [Para 18] 80. Respectfully following the decision of the Hon'ble Supreme Court (supra), we direct the A.O. to allow the claim of deduction u/s. 10B of the Act. Before setting off of business l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein 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. 139.Respectfully following the same, we direct the A.O. accordingly. Ground no. 18 is treated as allowed for statistical purpose. 88. We direct accordingly. 89. Ground No. 19 relates to the disallowance of expenditure on repairs of Rs. 8,64,686/- and treating them as capital expenditure. 90. During the assessment proceedings, the A.O noticed that the appellant company has claimed repairing expenses of Rs. 27,81,584/-. The A.O. after verifying the details formed a belief that the same are of capital in nature and after allowing depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, direct the A.O. to treat Rs. 13,74,725/- as revenue expenditure and the balance is confirmed as capital expenditure. The A.O. is directed to re-compute the claim of depreciation as per the provisions of the law. Ground no. 19 is partly allowed. 95. Ground no. 20 relates to the disallowance made u/s. 14A read with Rule 8D amounting to Rs. 4,63,12,589/-. 96. During the course of the assessment proceedings, the A.O. noticed that the assessee company has incurred interest expenditure of Rs. 2,77,23,736/- during the year under consideration. The A.O. further found that the assessee has earned exempt income of Rs. 1034.31 crores from the partnership firm. The A.O. was of the firm belief that disallowance u/s. 14A read with Rule 8d has to be made. The A.O. accordingly computed the disallowance of Rs. 40,34,830/- out of the interest expenditure and further disallowed a sum of Rs. 4,22,77,759/- being 0.5% of average value of investment resulting into exempt income. 97. When the matter was agitated before the ld. CIT(A). The ld. CIT(A) observed that a similar disallowance was also made in A.Y. 2008-09 and the ld. CIT(A)-IV, Ahmedabad vide Para 25.2 to 25.3 of order dated 14.10.2014 has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he disallowance for administrative expenditure as per the formula given under Rule 8D. Ground no. 17 is treated as allowed for statistical purpose. 100. Respectfully following the findings of the Tribunal (supra), we direct accordingly. Ground no. 20 is treated as allowed for statistical purpose. 101. Ground no. 21 relates to the addition of expenses disallowed u/s. 14A for computing book profit u/s. 115JB amounting to Rs. 4,63,12,589/-. 102. The A.O. while making disallowance u/s. 14A read with Rule 8D also considered the disallowance for the computation of book profit u/s. 115JB of the Act. 103. The ld. CIT(A) taking a leaf out of the decision of his predecessor given in A.Y. 2008-09 confirmed the action of the A.O. 104. The Tribunal in A.Y. 2008-09 in ITA No. 3297 & 3420/Ahd/2014 had the occasion to consider the dispute vide ground no. 10 of that appeal and held as under:- 119. We have considered the orders of the authorities below and have given a thoughtful consideration to the order of the Hon'ble Jurisdictional High Court in the case of Alembic Ltd. The Hon'ble High Court was seized, interalia, with the following substantial question of law:- (iii) whether on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. It was argued by the Revenue that while computing the book profit under Section 115JB of the Act, the disallowance of interest expenditure on exempt income was wrongly negative by both the authorities on the ground that it was not the liability for expenses, but a liability relating to assets. 6.5 We find no fault in the approach adopted by both the authorities. The addition under section 115JB of the Act of a sum of Rs. 1,14,43,040/- when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question no. 1, this deletion requires to be confirmed." 8. Taking into consideration the evidence on record and considering the division of this court in the case of Commissioner of Income-tax-1 vs. Gujarat State Fertilizers & Chemicals Ltd. (supra), we are of the opinion that issue Nos. (iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed. 117. Ground no. 5 relates to deletion of the disallowance of Lunch and Refreshment and brokerage paid for property agents for assisting and helping R&D unit employees u/s. 35(2AB). 118. The denial of the weighted deduction u/s. 35(2AB) of the Act has been allowed by the ld. CIT(A) by following the findings of his predecessor given for A.Y. 2008-09. The order of the ld. CIT(A) for A.Y. 2008-09 has been confirmed by the Tribunal in ITA No. 3420/Ahd/2014. The relevant findings read as under:- 159. At the very outset, the ld. Senior Counsel for the assessee brought to our notice that these issues have been considered and decided by the Bench in favour of the assessee and against the revenue in ITA No. 2067/Ahd/2013. We find force in the contention of the ld. Senior Counsel. The Co-ordinate Bench in ITA No. 2067/Ahd/2013 has decided the impugned issues as under:- 69. Ground no.1 relates to the deletion of the disallowance of Rs. 67,620/- claimed as weighted deduction u/s. 35(2AB) of the Act on gift expenses incurred for R & D employees. 70. This issue has been decided in favour of the assessee and against the revenue by the Co-ordinate Bench in ITA No. 1592/Ahd/2011 q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue was considered by the Tribunal in ITA Nos. 2076 & 2067/Ahd/2013 for A.Y. 2007-08 in assessee's own case. The relevant findings of the Tribunal read as under:- 61. In our considered opinion profits accrued to the assessee is not in the course of any trading activity but on account of appreciation on account of hedging in forex even if the same has been held for investment purposes. Therefore, such gains have to be treated as capital receipt. For this proposition, we draw support from the decision of the Hon'ble High Court of Bombay in the case of Homi Mehta Sons Pvt. Ltd. 222 ITR 528. We find that the forward contract in respect of investment in Caraco and OFCD in Global are on capital account and any profits received by assessee on cancellation of forward contract would not change its character same being in connection with a capital asset and, therefore, has to be treated as capital receipt. For this proposition, we draw support from the decision given in the case of Mahindra & Mahindra Ltd. 5 SOT 217 (Mum.). 62. Considering the facts in totality in the light of the nature of contract entered into by the assessee, we do not find any merit in the findings of the First Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in issue, we do not find any error or infirmity in the findings of the ld. CIT(A). Ground no. 8 is accordingly dismissed. 126. Respectfully following the findings of the Co-ordinate Bench (supra), we decline to interfere. Ground no. 7 is dismissed. 127. Ground no. 8 relates to the deletion of the provision of wealth tax for computation of book profit u/s. 115JB of the Act. 128. While computing the book profit u/s. 115JB of the Act, the A.O. was of the opinion that the wealth tax is of same nature as Income Tax. Taking a leaf out of his predecessor in A.Y. 2008-09, the A.O. considered wealth tax for the computation of book profit u/s. 115JB of the Act. 129. The ld. CIT(A) followed the decision of his predecessor for A.Y. 2008- 09 and directed the A.O. to exclude the provision of wealth tax from the computation of book profit u/s. 115JB. We find that the order of the ld. CIT(A) was confirmed by the Tribunal in ITA Nos. 3297 & 3420/Ahd/2014 vide ground no. 5 of that appeal. The relevant findings read as under:- 167. There is no dispute that Wealth Tax Act, 1957 imposes the charge of Wealth Tax on the 'net wealth' of every individual, HUF/company as on the valuation date. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered by the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008 and has decided the issue in favour of the assessee and against the revenue. This issue has been considered by the Tribunal qua ground no. 12 as under:- Ground no. 12 relates to the addition made on account of sales to Sun Pharmaceutical Industries. 83. This issue has been considered by the A.O at Para 12 of his order. A survey u/s. 133A of the Act was conducted on the assessee as well as its sister concern Sun Pharmaceutical Industries which is a partnership firm. During the course of the survey operations, it was noticed that the assessee has been selling certain raw materials /products to its sister concern at a lower rate than was sold to third parties and thereby diverting the profits. Assessee was asked to explain its stand. Assessee filed a detailed reply giving details of raw materials/products being sold to its sister concern and to third parties along with rates and quantity sold. On analysis of the reply, the A.O found that there were certain raw materials/products which were being sold to the sister concern at a lower rate than sold to third parties. The A.O proceeded by computing an additio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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