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TMI Blog2021 (4) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... s group associated enterprises, it is revealed that there are different activities which are carried out by the different associated enterprises. For example, the preclinical phase activity is carried out in India and Canada. Similarly, the phase-0 activities carried out in India, Canada and Poland so on and so forth - the project of the research activity can be ended upon the completion of process of the different phases. Once the activities of the assessee and its associated enterprises are so interrelated and interconnected then the transactions should be seen in aggregation for working out the ALP. OECD Transfer Pricing Guidelines which reiterates that though ideally the arm's length principles should be applied on a transaction by transaction basis, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. As assessee got such huge business from its associated enterprises based in the USA. In the absence AE in UK the assessee would have taken services from third party which would have led to more cost than the notional interest income. In other words, the transaction for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed. Disallowance under section 115JB of the Act on account of exempted income - AO in the year under consideration found that the assessee has made investments in its subsidiary companies - assessee has incurred interest expenses on the borrowed fund thus AO invoked the provisions of section 14A read with rule 8D - HELD THAT:- As per explanation (1) to section 115 JB book profit shall increase by the amount of expenditure incurred by the assessee in relation to the income to which the provisions of section 10 applies. Indeed the income by way of dividend is exempt under subsection (34) of section 10 of the Act. Accordingly, subsection (34) of section 10 of the Act applies to the dividend income and consequently the amount of expenses relatable to the exempted income needs to be added while determining the book profit. However, in the case on hand we note that there was no dividend income earned by the assessee in the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue. Thus it appears that the assessee has wrongfully claimed the deduction under section 80 IB(8) of the Act for the assessment year 2003-04 under the bona fides believe that it will get the approval in that particular year. But the Revenue failed to take a note of such wrong deduction claimed by the assessee. Thus the question arises, whether the AO can disturb the deduction claimed by the assessee for the year under consideration by holding that it is the 11th year in the given facts and circumstances. In this regard, we are of the view that the inaction on the part of the revenue cannot disentitle the assessee for its rightful claim. Once the Revenue has missed the bus for disallowing the deduction for the assessment year 2003- 04, it cannot challenge the deduction on this reasoning in the year under consideration until and unless there was some violation of the provisions of law under section 80 IB(8) of the Act r.w. relevant rules i.e. rule 18D and 18DA of income tax rule. As we have already held that there was no violation of the provisions of section 80 IB(8) of the Act for the year under consideration, the assessee cannot be denied for its rightful claim. In view of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the assessee has not added any markup on this international transaction with its AE. In the interest of justice and fair play, we are of the view that a sum of ₹ 1,17,630/- being 5% of the fees paid to the bank for the corporate guarantee of ₹ 23,52,607/- will be sufficient to add as margin of the assessee. We note that the assessee has already made the disallowance in its computation of income and further addition of the same amount to the total income of the assessee will lead to the double addition which is unwanted under the provisions of law. Accordingly, we are of the view that the decision of the learned CIT (A) for deleting the addition does not require any interference. Hence, the ground of appeal of the assessee is partly allowed whereas the ground of appeal of the revenue is dismissed. Addition of advances with respect to the premises taken on rent - assessee has written off the advances given as rent deposits which were not recovered - AO disallowed the same on the reasoning that such rent deposits represents the capital advance and therefore the same cannot be allowed as deduction - CIT (A) deleted the addition HELD THAT:- There is no dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition to the total income of the assessee. The direction of the learned CIT (A) is very clear on the issue and therefore no interference is required. Hence the ground of appeal of the revenue is dismissed. Addition under the provisions of section 14A read with rule 8D of Income Tax Rule - HELD THAT:- Undisputedly, there was no income earned by the assessee being exempted from tax and therefore no disallowance under section 14A read with rule 8D is required to be made in terms of the judgment of Hon ble Gujarat High Court in the case of CIT vs. Corrtech Energy Private Ltd [ 2014 (3) TMI 856 - GUJARAT HIGH COURT] TDS u/s 195 - non deduction of TDS under section 40(a)(i) on payment with respect to consultancy expenses in foreign currency to Holter Clinical Outsourcing Corporation (USA) and Grigoria Mavrogeorgis (Canada) - CIT (A) deleted the addition made by the AO by observing that the payment made by the assessee to the non-residents based in USA and Canada are not chargeable to tax in India in terms of the Article 12 of the DTAA with both the countries - HELD THAT:- As per the learned CIT (A), the payment made by the assessee was the consultancy charges falls under claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PER WASEEM AHMED ACCOUNTANT MEMBER: The above appeals have been filed by the Assessee and the Revenue against the orders of ld.Commissioner of Income-Tax (Appeals) involving respective assessment years. Since the issues raised by the Assessee and the Revenue in all these appeals are common, we are inclined to pass a consolidated order for the sake of convenience and brevity. First we take ITA 3492/Ahd/2015, an appeal by the Assessee for A.Y. 2010-11 2. The assessee has raised the following grounds of appeal: 1. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in treating the transaction of granting quasi capital interest free contribution to Lambda Therapeutic Ltd., UK and Lambda Therapeutic Research INC, USA as international transaction falling within the purview of Chapter X of the Act. 2. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in making addition of ₹ 27,36,080/- as proposed by TPO being interest free loan advances to Lambda Therapeutic Ltd., UK and Lambda Therapeutic Research INC, USA. 3. The Id. CIT(A) has erred in law and on facts in not adjudicating upon the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,504 4. Loan given to meet marketing and business development expenditure Lambda Therapeutic, USA 23,69,453 4.1 The assessee has not charged any interest from these associated enterprises on the amount of loans and advances provided to them on the reasoning that: i. It has not charged any interest from such associated enterprises in the earlier years. ii. It has provided loans to the associated enterprises as a measure of commercial expediency to set up the business, to meet the need of working capital requirement and for the repairs and renovations. As a result, the assessee has got the benefit from such associated enterprises by getting the business from the foreign markets besides getting the higher valuation of the AE. iii. In many cases these interest free loans were provided in the nature of quasi capital. 4.2 In view of the above, the assessee before the AO/TPO contended that there cannot be any adjustment of the notional interest under the provisions of section 92C read with rule 10B of the Income Tax Rules. 4.3 However, the AO/TPO disagreed with the contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research services to the pharmaceutical industries as these companies are special purpose vehicle to carry out business activities of the assessee. 6. The learned CIT (A) after considering the submission of the assessee and the assessment order, observed that the associated enterprises were set up for the development of the business and reducing its cost on the technical clinical research work which resulted the benefit to the assessee. Further the purpose of advancing loan to such AEs was to hold and control of equity and gaining businesses from them. Accordingly the learned CIT-A was pleased to delete the addition made by the AO on account of adjustment for the interest on the advances given to the AEs namely Jina Pharmaceuticals, INC USA and Lambda Therapeutic Research, SP Z.O.O Poland by observing that the assessee was able to generate the business and income from such AEs which is more than the notional interest cost on advances. 6.1 The learned CIT (A) also found that the advances given to the AE namely Lambda Therapeutic Research, SP. Z.O.O. Polland were eventually partly converted into share capital. Thus it can be inferred that the advances were made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn subsidiaries were in the nature of quasi capital. In view of the above, the learned AR contended that there cannot be any adjustment made on account of notional interest on the amount of interest free loans and advances given to the foreign subsidiaries. 9. On the other hand, the Ld. DR contended that the transaction of advancing interest-free loans to the associated enterprises should be seen as separate and independent transaction and the same should not be seen in the context of the revenue generated by the assessee through the associated enterprises. It is because each transaction entered between the assessee and the associated enterprises has to be evaluated to determine the ALP independently and separately. 9.1 Both the ld. DR and AR before us vehemently supported the order of the authorities below to the extent favorable to them. 10. We have heard the rival contentions of both the parties and perused the materials available on record. The dispute in the case on hand before us revolves whether the amount of interest free loans and advances provided to the associated enterprises should be subject to the adjustment on account of notional interest under the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king out the ALP. In this regard we find Para 3.9 of OECD Transfer Pricing Guidelines which reiterates that though ideally the arm's length principles should be applied on a transaction by transaction basis, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. OECD guidelines provide a number of illustrations to substantiate 'closely linked or continuous' test which are as detailed under; 1. Ongoing business relations such as a long-term supply contract. 2. Right to use intangible property coupled with supply of components. 3. Transactions in a range of closely-linked products: This includes business strategy to have a portfolio approach i.e. goods with low and high margins may be transacted together in order to offer a full range of products to customers (cars and spare parts, printers and cartridges etc.). 4. Routing of a transaction through another associated enterprise (AE). OECD guidelines suggests that it may be more appropriate to consider the transaction (of which the routing is a part) in its entirety, rather than considering the individual parts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Patient Enrolled Currency Quote Value 1. Stason Pharma India Diclofenac Epolamine Patch UK USA Q80 USD USD 377,700 2. Par Pharmaceuticals, INC India Mesalamine Tablets 1.2g comparision with Placebo and Lialda 1.2 UK USA 250 INR USD 1,178,530 10.7 Indeed, the assessee has advanced interest-free loan to its associated enterprises based in the UK. Now the question arises whether any adjustment is required under the transfer pricing provision on account of such interest erosion advances. The answer stands in negative for the reason that the assessee got such huge business from its associated enterprises based in the USA. In the absence AE in UK the assessee would have taken services from third party which would have led to more cost than the notional interest income. In other words, the transaction for advancing the interest-free loans to the associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 506,850 506,850 053-11 442,500 442,500 056-09 2,650,400 2,196,800 4,847,200 063-12 891,800 891,800 1,783,600 069-1 1 603,200 603,200 072-10 8,336,100 8,336, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,228,300 - 11,228,300 179-12 200,000 200,000 196-08 673,050 221,950 895,000 238-08 18,223,340 (8,923,447) 9,299,893 250-13 3,019,285 3,019,285 277-09 902,565 902,565 294-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 272,700 272,700 Grand Total 24,218,260 7,808,150 35,584,298 37,920,270 63,851,979 6,241,250 15,744,812 16,897,421 208,266,439 10.9 However, we find that the assessee has not demonstrated any benefit derived from its associated enterprises namely Lambda USA whereas it has advanced interest free loan of EURO 49,999/-. Thus, the question arises whether there is a need to make any adjustment on account of notional interest under the provisions of section 92C of the Act. In this regard we note that admittedly there was no benefit accrued to the assessee in the year under consideration but considering the interrelated activities carried out by the assessee along with associate enterprises, in our considered view it is not necessary that the benefit will arise in the year in which such loans and advances were provided without interest. A drug normally takes 8 to 10 years time for its development. Furthermore, this associated enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is only elementary legal position that what could not have been done directly could not have done indirectly also. There is, thus, not much of a merit in the stand of the revenue authorities that in the absence of a specific mention about conversion of loan into equity, it cannot be presumed that the interest free loans could not have been in the nature of quasi-capital. [Para 16] 10.11 It is also significant to note that the Ld. CIT-A in his order has given a finding that there was no benefit derived by the assessee with respect to the amount of interest free loans and advances given to UK AE. However, on perusal of the details submitted by the assessee, we note that there was the benefit derived by the assessee from such associated enterprises which has been elaborated somewhere in the preceding paragraph. Thus, such finding of the Ld. CIT-A is factually incorrect. At the time of hearing the Ld. DR has also not controverted the fact of benefit derived by the assessee. 10.12 In view of the above and after considering the facts in totality, we hold that no adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned AR before us contended that the learned CIT (A) instead of holding the issue raised by the assessee for the disallowance made under section 15JB of the Act as infructuous, he should have adjudicated the same on merit in the light of the order of the Hon ble special bench of ITAT in the case of ACIT Vs Vireet investments private Ltd reported in 165 ITD 27. 15. On the other hand the learned DR vehemently supported the order of the authorities below. 16. We have heard the rival contentions of both the parties and perused the materials available on record. There are certain specified adjustments which needs to be made to work out the book profit as provided in the explanation (1) to section 115 JB of the Act. Clause (f) of explanation (1) of section 115 JB of the Act deals with the issue on hand which reads as under: Explanation 1.-For the purposes of this section, book profit means the profit as shown in the statement of profit and loss for the relevant previous year prepared under subsection (2), as increased by- ************** (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revenue is that the learned CIT (A) erred in including the income on account of notice pay and miscellaneous income while working out the deduction under section 80IB(8) of the Act. 9. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. The first issue raised by the Revenue is that the ld. CIT-A erred in deleting the addition made by the AO for ₹ 9,82,226/-on account of deduction u/s.80IB of the Act. 18. The AO during the assessment proceedings found that the income from the notice pay and miscellaneous income amounting to ₹ 9,62,549 and ₹ 18,677/- respectively are not arising from the eligible business activities and therefore such income is not subject for deduction under section 80IB (8) of the Act. Accordingly the AO added the same to the total income of the assessee. 19. Aggrieved assessee preferred an appeal to the learned CIT (A) who allowed the ground of appeal of the assessee by observing that both the income are related to the business activities of the assessee. The income shown under the head notice pay goes to reduce the salary expenses incurred by the assessee and therefore the same is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me also represents from the day to day activities of the assessee. Accordingly we hold that such income is eligible for deduction under section 80IB of the Act. Accordingly we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed. 26. The next issue raised by the Revenue in ground No. 2 and 3 is that the learned CIT (A) erred in deleting the addition made by the AO to the extent of ₹ 1,51,27,353/- on account of upward adjustment on the interest-free advances given to the associated enterprises. 27. At the outset we note that the issue raised by the revenue has already been decided along with the appeal filed by the assessee bearing ITA No. 3492/ahd/2015 in favour of the assessee vide paragraph number 10 of this order. For the detailed discussion, please refer the relevant paragraph. Accordingly, we dismiss the ground of appeal raised by the revenue. 28. The issues raised by the revenue in ground No. 4 to 6 are general in nature and no separate adjudication is required. Accordingly we dismiss the same as infructuous. 28.1 In the result the appeal filed by the Revenue is dismissed. Coming to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot pressed. 30. The second issue raised by the assessee in ground No. 3 is that the learned CIT (A) erred in confirming the upward adjustment with respect to interest on account of interest free loans and advances provided to the AE. 31. At the outset we note that the identical issue has been raised by the assessee in ITA No. 3492/Ahd/2015 which has been decided in the favour of the assessee vide paragraph number 10 of this order. For the detailed discussion, please refer the relevant paragraph. Accordingly, we allow the ground of appeal raised by the assessee. 32. The issue raised by the assessee in ground 4, 5 and 6 in its appeal are general, consequential and premature to adjudicate. According we dismiss the same being general, consequential and premature to adjudicate as infructuous. 32.1 In the result, appeal of the assessee is partly allowed Coming to ITA No. 2293/AHD/2016, an appeal by the Revenue for A.Y 2011-12. 33. At the outset we find that in this appeal of Revenue, the tax in dispute is lower than the amount specified by the CBDT vide circular no 17 of 2019 dated 08-08-20019. Thus the appeal filed by the Revenue is not maintainable. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), provisions of Section 80!B(8A) would not be applicable. 2.2 The LdCIT(A) has failed to appreciate that the work of the collation/collection of data undertaken by the assessee during the year were related to regulatory compliance by its customers and it had nothing to do with the any sort of R D Work; Thus such receipts/ income were not relatable to provisions of Section 80IB(8A) were not eligible for deduction u/s 80IB. 2.3 The Ld. CIT(A) has failed to appreciate that in Clinical. Trails as undertaken by theassessee company there would be input on account of Research but there was no development work carried out by the assessee and therefore the assessee was not carrying out Research and Development. 2.4 The order of the LdCIT(A), in any case suffers, from non -application of mind and is .therefore, liable to be set aside on this ground alone. 3. The LdCIT(A) has erred in law and on facts by deleting the adjustment made by the AO/TPO on account of interest in the case of loans and advances made to Jina Pharmaceuticals, USA Lambda Therapeutics, Canada. (Page 112 to 125 of the appellate order) . 3.1 The LdCIT(A) has erred in law and on facts by deleting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y case, the LdCIT(A) should have asked for a remand report from the AO so as to ascertain the exact nature of consultancy rendered by these Non-residents. 9. The LdCIT(A) has erred in deleting the addition made u/s 40(a)(ia) r.w.s 195 Act for non deduction of IDS on payment made for subscription of software from Portugal without appreciating that such payments would constitute royalty payment in terms of Section 9(1 )(vi) of the IT Act and also the relevant provisions of DTAA. 10. TheLdCIT(A) had erred in law and on facts in deleting the addition2(22)(e) without considering the fact that the therewere share holders which were common in both these entities and had substantial voting power in both theircompanies as per the requirement of Section 2(22)(e) of the IT Act. (Page 175 of the appellate order). 10.1 Whether the LdCIT(A) has failed to appreciate the law that for the purposes of deemed dividend, as enshrined in Section 2(22)(e) of the IT Act, it is not necessary that the receiving company should be a share holder of the giver company. 10.2 The LdCIT(A) has erred in law and on fact that there would be charge of deemed dividend even incases where there ate co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred an appeal to the learned CIT (A). 38. The assessee before the learned CIT (A) submitted that it is acting as a partner to pharmaceutical and biotech companies in the drug development program. It provides various services such as clinical research, clinical laboratory, data management, biostatistics, medical and scientific affairs, quality assurance, regulatory affairs, and bio-equivalence / bioavailability studies. All the services have been accepted by the Revenue as scientific and industrial research and development for the purpose of deduction under section 80 IB(8) of the Act in the earlier assessment years. There being no change in the aforesaid services in the year under consideration viz a viz the acceptance of DSIR, the deduction under section 80IB(8) of the Act cannot be denied merely on the reasoning that the assessee does not render the specified services. Once the services of the assessee have been accepted by the DSIR, the same cannot be denied based on the statements recorded during the survey proceedings under section 133A of the Act. Furthermore, the survey statements were not provided to the assessee for the cross examination. Accordingly no reliance can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity on bioavailability- bioequivalence based on which the DSIR has granted the approval to the assessee. Furthermore, Shri NareshKhemani, AGM Finance and purchase is not a technical person with respect to the scientific research and development activities as he was looking after the finance and the purchases. 39.3 Likewise, learned CIT (A) also found that the statement obtained of Shri Jitesh Patel in the survey proceedings under section 133A of the Act is not relevant as he is not connected with the assessee. Rather, the statement of Shri Jitesh Patel supports the case of the assessee as he admitted that he has come on behalf of the client company to verify the clinical trials carried out by the assessee. 39.4 Similarly, the learned CIT (A) held that the statement of Shri Tausif Monif, President Global Operations cannot be relied for the reason that he has joined the company in the year 2016 whereas the case of the assessee relates for the assessment year 2013-14. However, he has provided in the statement that the assessee undertakes clinical trials of pharmaceutical products and the assessee is registered with the DSIR for such activities as scientific research and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed AR vehemently supported the order of the learned CIT (A). 43. We have heard the rival contentions of both the parties and perused the materials available on record. For claiming the deduction under section 80 IB(8) of the Act, the assessee has to comply with the conditions as detailed under: i. Carrying scientific research and development activity ii. Company Registered in India iii. Having main object of scientific and industrial research and development iv. Approved by the prescribed authority i.e. DSIR 43.1 The AO in his order framed under section 143(3) of the Act has nowhere alleged that the assessee has violated any of the provisions of section 80 IB(8) of the Act. As such the claim of the assessee was rejected by the AO on the reasoning that the assessee is not engaged in the activity of research and development activities as contemplated under the provisions of section 80 IB (8) of the Act. In this regard we note that the Government authority i.e. DSIR has approved the activities of the assessee as research and development activity which are eligible for the deduction under section 80 IB(8) of the Act. Thus the question arises whether the AO can go on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no reason why once an authority which is prescribed under the rules for a specific purpose has been invested with statutory functions, the Assessing Officer should be allowed to overrule the decision of the said body. Thirdly, there are multiple indications within the rules themselves. Under rule 18D(2), extension of approval once granted is subject to satisfactory performance of the company, to be judged on periodic review. Further, rule 18DA(3) gives wide powers to the prescribed authority to withdraw the approval if it is found that the same was to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders or that any provisions or the rules have been violated. Thus once again the task of judging whether the provisions or the rules have been violated or not, has entrusted to the prescribed authority with matching powers for withdrawal of the approval, if the authority is satisfied about such breach. [Para 18] 43.2 It is also significant to note that there being no change in the facts and under the provisions of law, the principles of consistency needs to be applied as held by the Hon ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development activities of the assessee. Likewise, the statement of Shri Jitesh Patel being a person of the 3rd party cannot be referred to draw an inference that the assessee was not carrying out any research and development activities. Moving further, Shri Tausif Patel has joined the assessee company in the year 2016 only whereas the year under consideration is 2013-14. Therefore, such person was not connected with the affairs of the business of the assessee during the relevant time. 43.5 We have also seen the approvals granted by the DSIR, as recorded in the order of the learned CIT (A), we find that initial assessment year for the deduction under section 80 IB(8) of the Act was for the assessment year 2004-05. The approval from the prescribed authority is mandatory for claiming the deduction. Admittedly, the assessee has claimed deduction for the assessment year 2003-04 under section 80 IB(8) of the Act which was also allowed by the Revenue. Thus it appears that the assessee has wrongfully claimed the deduction under section 80 IB(8) of the Act for the assessment year 2003-04 under the bona fides believe that it will get the approval in that particular year. But the Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch Inc (Canada). The assessee claimed that the corporate guarantee provided to AE is in the nature of Shareholder activity and an intragroup activity carried out because of ownership interest. Therefore the provision of transfer pricing will not apply in the case on hand. 47.1 However the TPO observed that due the standby letter credit issued to the AE M/s Lambda Therapeutic Research Inc (Canada) got direct benefit and incurred low interest charges on loans taken from Canadian Imperial Bank of Commerce. Thus it is in the nature of financial services provided by the assessee to its AE for which it incurred cost in form of commission paid to Axis Bank India, therefore the same needs to be determined at arm length for the purpose of transfer pricing. Accordingly, the TPO worked margin of 24.1% on cost i.e. ₹ 23,52,607/- by employing CPM as most appropriate method and made upward adjustment of ₹ 29,19,586/- ( 23,52,607 + 24.1%) to the total income of the assessee. 48. Aggrieved assessee preferred to appeal to the learned CIT (A), who partly deleted the upward adjustment made by the AO by observing as under: 3.11. The appellant's contention that as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is confirmed and relief is granted for the balance amount. 49. Being aggrieved by the order of the learned CIT (A) both the Revenue and the assessee are in appeal before us. The Revenue is in appeal against the relief provided for ₹ 23,52,607/- whereas the assesse is in appeal for addition sustained of ₹ 5,66,979/- only by the ld. CIT-A. The relevant ground of the assessee s appeal in ITA No 1751/Ahd/2017 reads as under: 3. The learned CIT(A) has erred both in law and on the facts of the case in holding that Corporate Guarantee given to associate enterprise is an international transaction falling within the purview of transfer pricing provisions. 4. The learned CIT(A) has erred both in law and on the facts of the case in holding that direct and binding decision of jurisdictional Tribunal which has considered all the earlier judgments on the issues in the case of Micro Ink Limited vs ACIT (2015)(63 taxmann.com 353) is not to be followed, despite the same being applicable on the facts of the case. 5. The learned CIT(A) has erred both in law and on the facts of the case in confirming the upward adjustment to the extent of ₹ 5,66,979/-@ 24.1% mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect from 1st April 2002. The explanation is clarificatory in nature and addedcertain categories of transactions, inter alia, the transaction as specified under clause (c) of explanation (i) to section 92Bof the Act within the ambit of international transactions which is reproduced as under: [Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression international transaction shall include- (a) *********** (b) ************* (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; 52.2 It can be seen that the guarantee was included within the ambit of international transaction vide the Finance Act 2012 with retrospective effect. Thus there remains no ambiguity to the fact that corporate guarantee extended by the assessee to its AE is an international transaction and therefore the same has to be benchmarked at the arm length price. However, we note that the different benches of the ITAT have taken different view. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Township Development Co. (supra) (Tax Sutra) was in an altogether different factual matrix concerning the assessee (an Indian Joint Venture) reimbursing corporate guarantee fees paid by its Malaysian AE. We draw support from the order of Mumbai Tribunal in Glenmark Pharmaceuticals v. Asstt. CIT [ITA No.5031/Mum/2012 dated 13-11-2013) which has analyzed this issue in detail and held that 0.53% corporate guarantee rate in that case was appropriate. We therefore set aside the issue to the TPO to decide the quantum of corporate guarantee rates in the instant case following the method adopted in Glenmark Pharmaceuticals (supra). 52.4 In this regard we also find support and guidance from the order of the Bangalore ITAT in case of Advanta India Ltd. vs. ACIT reported in 64 taxmann.com 251 where it was held as under: 29. In the case of Bharti Airtel Ltd. (supra), it was an undisputed position that the issuance of the guarantee did not cost the assessee anything and it was for this reason that the coordinate bench concluded that the issuance of guarantee did not have any bearing on the profits, income, losses or assets or such enterprise thus taking it out of the ambit of internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1972.03 7231.12 27.3% 2 KarurVysya Bank 4694.99 72f.44 3969.55 18.3% 3 Federal Bank 6832.01 1193.76 5638.25 21.2% 4 HDFC Bank 41917.49 9750.62 32166.87 30.3% 5 ICIC1 Bank 48421.3 11389.69 37031.61 30.8% 6 Induslnd Bank 8346.19 1575.87 6770.32 23.3% 7 Axis Bank 33733.68 7552.7 26180.98 28.8% 9 South ind. Bank 4769.22 655.85 4113.37 15.9% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the disallowance of ₹ 23,52,607/- in its computation of income and further addition of the same amount to the total income of the assessee will lead to the double addition which is unwanted under the provisions of law. Accordingly, we are of the view that the decision of the learned CIT (A) for deleting the addition of ₹ 23,52,607/-does not require any interference. Hence, the ground of appeal of the assessee is partly allowed whereas the ground of appeal of the revenue is dismissed. 53. The next issue raised by the revenue is that the learned CIT (A) erred in deleting the addition made by the AO for an amount of ₹ 2,33,374/- representing the advances with respect to the premises taken on rent. 53.1 The assessee has written off the advances given as rent deposits which were not recovered. As per the assessee such loss has been incurred in the course of the business and therefore the same should be allowed as business loss. However the AO disallowed the same on the reasoning that such rent deposits represents the capital advance and therefore the same cannot be allowed as deduction. 54. Aggrieved assessee preferred an appeal to the learned CIT (A) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the same cannot be treated as capital advance as held by the AO. Any expense incurred by the assessee for the purpose of the business is allowable expenses under section 37(1) of the Act, if it is not capital in nature viz a viz personal in nature. In the case on hand, such advance was neither capital in nature nor personal in nature. In other words, the premises were taken for the purpose of the business and therefore any rent deposits with respect to such rented premises are allowable as deduction as business loss. Accordingly we do not find any infirmity in the order of the learned CIT (A). Hence, the ground of appeal of the Revenue is dismissed. 59. The next issue raised by the Revenue in ground No. 6 is that the learned CIT (A) erred in deleting the amount reflecting in form 26AS which was not shown as income of the assessee. 60. The AO during the assessment proceedings found that there is a mismatch in the amount of income shown by the assessee in the books of accounts viz a viz the amount recorded in form 26AS. As such the assessee has shown less amount in the books of accounts by ₹ 4,00,89,104/- than the amount recorded in form 26AS. Accordingly, the AO sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act which is shown as an advance in the books of accounts. Such advance will be recognized as revenue depending upon the completion of the work. However, the other party i.e. payer shows such payment to the assessee is an expense after deducting the TDS in its books of accounts. In effect, the entire amount of the project is offered to tax by showing it is income over a period of time. The assessee in support of its contention also filed the copy of the ledger of the parties. 60.7 The learned CIT (A) after considering the submission of the assessee observed that the project of the assessee spills over in various year/s and the income is recognized in each year depending upon the completion of the project. It is not the case that the assessee has not shown the income in the books of accounts rather the income of the assessee spreads in various years. Furthermore, the income of the assessee remains in the same bracket of taxes and therefore it was tax neutral. 60.8 The learned CIT (A) also observed that the amount received by the assessee from the party has either been shown as income or as liability in the books of accounts. The liability was subsequently accounted for as inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the income should be booked by the assessee when it is certain to accrue whereas the expenditures are required to be recorded where there is a possibility of incurring the same. Similarly, the assessee also require to apply the matching concept. Once the assessee has received the advance but has not incurred any expense against such advances received for rendering any service. Then such advance cannot be accounted as income. In other words when the expenses are incurred by the assessee against such advances then both the income and the advance should be accounted for in the same proportion. 63.2 In the case on hand, there is no dispute to the fact that the AO has selected only those instances where the assessee has shown less income than the amount shown in form 26AS ignoring the cases where the assessee has shown more income in the books of accounts then the amount reflected in the form 26AS. In fact the AO has used the method favouring the revenue which is not correct as a matter of principle. As such the AO, should have taken only in the difference amounting to ₹ 85,43,113/- for working out the suppressed income. However, even the difference is not to be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed that where the assessee did not make any claim for exemption, section 14A could have no application. 69.1 As there is no income to the assessee by way of dividend in the year under consideration, there cannot be any disallowance of expenses under section 14A read with rule 8D as held by the Hon ble Gujarat High Court in the above stated case. Accordingly we do not find any reason to interfere in the finding of the learned CIT (A). Hence the ground of appeal of the Revenue is dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the learned CIT (A) the Revenue is in appeal before us. The learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them. 73. We have heard the rival contentions of the parties and perused the materials available on record. In the case on hand, the AO made the disallowance on the consultancy expenses paid by the assessee to a non-resident on the reasoning that the assessee failed to deduct TDS under section 195 of the Act. Accordingly the AO made the disallowance by invoking the provisions of section 40(a)(i) of the Act. However, the learned CIT (A) deleted the addition made by the AO by observing that the payment made by the assessee to the non-residents based in USA and Canada are not chargeable to tax in India in terms of the Article 12 of the DTAA with both the countries. As per the learned CIT (A), the payment made by the assessee was the consultancy charges falls under clause 7 of the DTAA which requires that the payee should have permanent establishment and business connection in India for holding that the income is accruing or arising in India. In other words, if the payee being a non-resident does not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Order No.CII(A)-2/l/l/DC. Cir. 2(1)(2)/2015-16 dated 28/06/2016 whereby Ihe issue has been decided in favour of the appellant-. The relevant extract of the decision is reproduced hereunder:- 5.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the addition of ₹ 27,00,000/- in respect of loans taken from M/s. Epsillion Marketing and Cons Pvt. Ltd. to the extent of accumulated profits in the hands of the aforesaid company. It is worth here to mention that Shri Binish H. Chudgar and Ms. Bindi B. Chudgar were holding 21% and 47% shares respectively in the appellant company. They were also holding the shares of 75% and 25% respectively in the lender company namely; M/s. EpsillionMarketing and Cons Pvt. Ltd. Thus, AO hold that the loans taken by the appellant company from M/s. Epsillion Marketing and Cons Pvt. Ltd. was the deemed dividend in the hands of the appellant under 2(22) (e) of the I. T. Act and accordingly it made the addition in the hands of the appellant company. 5.4. On the other side, the appellant has claimed that it was not the share holder of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder and, thus, if a person is a registered shareholder but not beneficial shareholder then provisions of section 2(22)(e) would not apply and similarly if a person is a beneficial shareholder but not a registered shareholder then also provisions of section 2(22)(e) would not apply - Held, yes - Whether deeming provision of section 2(22)(e) as it applies to case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on presumption that loan or advances would ultimately be made available to shareholders of company giving loan or advance, and, therefore, intention of Legislature is to tax dividend only in hands of shareholder and not in hands of concern. 5.7. Judgment of Hon'ble High Court of Gujarat in the case of Commissioner of Income-tax v. Daisy Packers (P.) Ltd. [ 2013 ] 40 taxmann.com 480 (Gujarat) is also relevant on this issue, whereby the Hon'ble Court has held the similar view. The head notes are as under:- Section 2(22) of the Income-tax Act, 1961 - Deemed dividend [Loans and advances] - Whether where assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - firm were also shareholders in said company - Assessing Officer treated said amount received by assessee-firm as deemed dividend under section 2(22)(e) in hands ofassessee and assessed same to tax - Whether it was not assessee-firm which was shown to be shareholder of company but in fact it was its partners who were holding more than requisite amount of shareholding in company and were having requisite interest in firm - Held, yes - Whether, therefore, aforesaid amount received by assessee would not be deemed dividend in hands of assessee-firm, rather it would obviously be deemed dividend in hands of individuals (partners), on whose behalf, or on whose individual benefit, being such shareholders, amount was paid by company to concern- Held, yes 5.10. The Hon'ble IT AT, Ahmedabad Bench 'A' in the case of Krupesh N. Patel Vs. DCIT, Central Circle-1, Vadodara has also taken the similar view. The head notes are reproduced as under: IT : Loans and advances shareholder, connotation of - Legal fiction created under section 2(22)(e) does not extend further for broadening concept of shareholder so as to tax loans or advances as 'deemed dividend' in hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yes - Whether since no loans had been advanced to a shareholders, they did not get any income and hence, section 2(6A)(e) became inapplicable - Held, yes 5.15. Further the Hon'ble Gujarat High Court in the case of CIT Vs. Navinbhai N. Patel [2013] 35 taxmann.com 312 (Gujarat) as also taken the similar view. The head notes of the judgment are reproduced as under:- Section 2(22) of the Income-tax Act, 1961 - Deemed dividend '[Loans or advances to shareholder] - Assessment year 2006-07 - Whether requirement of section 2(22) is that loan or advance must be made by a company to its shareholder holding share representing 10 per cent voting power and he must be beneficial owner of said shares - Held, yes -Whether where assessee shareholder had already divested his interest in shares of a company in favour of a trust, assessee could no more be said to be beneficial owner of those shares and, thus, any sum advanced by company to assessee subsequently could not be treated as deemed dividend - Held, yes [Para 2] [In favour of assessee] 5.16 Further the Hon'ble ITAT Hyderabad Bench 'A' in the case of MTAR Technologies (P.) Ltd. Vs. Asstt. Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s favourable to them. 79. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the shareholder of the assessee namely Shri Binish H. Chudgar and Smt. Bindi B. Chudgarare holding 21 % and 47% share in assessee company and also holding 75% and 25% share in M/S Epsillion Marketing and Cons Pvt Ltd. from where assessee has received unsecured loan of ₹ 26 Lakh. Accordingly the AO in the case on hand has treated the amount of ₹ 26 Lakh as deemed dividend in the hands of the assessee on the reasoning that the transactions of advancing loan to the companies as discussed above falls within the purview of the provisions of section (2)(22)(e) of the Act. However, the learned CIT (A) was pleased to delete the addition made by the AO for the reasons as discussed in the aforesaid paragraphs. 79.1 The 1st question before us arises whether the assessee company, which is not a registered shareholder obtains any loan from other company in which its shareholder also holding substantial share in such other company may be brought under the scanner of deemed dividend. In this regard we find pertinent to refer the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m whom the loan or advance is taken. However, on considering Section 2(22)(e) of the Act, we are not at all impressed with the aforesaid. If the contention on behalf of the revenue is accepted, in that case, it will be creating the third category / class, which is not permissible. What is provided under Section 2(22)(e) of the Act seems to be that the assessee company must be a shareholder in the Company from whom the loan or advance has been taken and should be holding not less than 10% of the voting power. It does not provide that any shareholder in the assessee- Company who had taken any loan or advance from another Company in which such shareholder is also a shareholder having substantial interest, Section 2(22)(e) of the act may be applicable. 5.1. Considering the aforesaid decision of the Division Bench of this Court and the facts narrated herein above, more particularly,considering the fact that the assessee was not shareholder of Mahavir Rolling Mills Pvt Ltd to whom loan was given, it cannot be said that the learned Tribunal has committed any err or in deleting the addition made by the Assessing Officer on deemed dividend. 79.3 Coming to the case on hand admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore deserves to be quashed. 7. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s.234A/B/C of the Act. 8. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty u/s.271(l)(c) of the Act. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. 81. The first issue raised by the assessee vide ground number 1 and 2 of its appeal is that the learned CIT (A) erred in sustaining the upward adjustment of ₹ 49,88,829/- on account of interest free loan provided to AE. 82. At the outset we note issue on hand has already been decided along with ground number 3 of Revenue s appeal bearing ITA No. 2114/Ahd/2017 vide paragraph number 45 of this order in favor of the assessee. Accordingly, the ground of appeal of the assessee is allowed. 83. The second issue raised by the assessee vide ground Nos. 3 to 6 is that the learned CIT (A) erred in holding corporate guarantee as international transaction in pursuance to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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