9911796707
TMI Blog2021 (12) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... ted bond upon issuance of assessee s corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm s length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval - no sound basis for disturbing the arm s length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well - we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment. The assessee gets the relief accordingly. Upward TP adjustment on account of notional interest computed on optionally convertible loans granted to its AE - As argued during the year under consideration, no interest has accrued to the Appellant in terms of the agreement with the AE - HELD THAT:- As fairly accepted by the learned Departmental Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses in question were thus clearly for the purpose of the business of the assessee, and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALP- something clearly contrary to the scheme of the Act, these expenses were fully admissible for deduction. In any case, there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment . TDS u/s 195 - Addition u/s 40(a)(i) - HELD THAT:- Payments made to the US based and Canada based entities, which are covered by make available clauses in both the Indo US as also Indo Canadian tax treaties- see item no. 1 to 7, are taken outside the ambit of disallowance under section 40(a)(i). Payments made to two Thailand bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for payment of exports commission - There are number of decisions of the coordinate benches, including in the case of DCIT Vs Welspun Corporation [ 2017 (1) TMI 1084 - ITAT AHMEDABAD] , which hold that such incomes in the hands of foreign commission agents cannot be taxable in India. We see no reasons to take any other view of the matter than the view so taken by the coordinate benches. Respectfully following the same, we hold that the assessee did not have any obligations to deduct tax at source from these payments, and, accordingly, disallowance under section 40(a)(i) does not come into play. Payment to Swiss Biogenic Ltd, Srilanka - claim of the assessee that the claim of the assessee is that it was for a market survey to find out product feasibility in the domestic markets - As contentions of the assessee concerned, Indo Srilanka DTAA does not have any make available clause in the provision for fees for technical services under article 12(3)(b). There is also no dispute that the payment is made for market survey services which are essentially covered by the broad scope of managerial, technical or consultancy services . The existence of PE has no relevance for this purpose. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly and exclusively for the purpose of business - HELD THAT:- As car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the DRP, the mere fact that the car was not legally owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the depreciation on car cannot be declined. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... Zydus Netherlands BV (Guarantee amount: US $ 32.5 million; Period: 365 days) and to Bank of Baroda in respect of Zydus Inc USA (Guarantee amount: US $ 30 million; Period: 42 days, US $ 20 million; 324 days, and US$ 66 million; 243 days). So far as these guarantees were concerned, the assessee did not charge any guarantee fees at all. The assessee's explanation for not charging any guarantee commission from these AEs was that these companies have availed loans from banks to make strategic acquisitions in furtherance of Cadila's inorganic expansion strategy" It was stated in the assessee's transfer pricing report that "issuance of guarantees to these AEs has benefitted Cadila itself rather than the AEs, and hence, keeping with the arm's length principle, no guarantee commission has been charged". Nevertheless, the assessee made a suo motu arm's length price adjustment of ₹ 1,68,18,208. The contention of the assessee was that arm's length price of these corporate guarantees was accepted @1% by the Assessing Officer himself, under directions of the Dispute Resolution Panel though, in the assessment year 2009-10 and 2010-11. The assessee made elabor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rance (SAS) BNP 6 Mio. Euro 21/12/2009 365 40,75,20,000 2.52% 10281648 6 Zydus Pharma Japan Co. Ltd, Japan BNP 500 Mio, JPY 200 Mio, JPY 300 Mio, JPY 50 Mio, JPY 1050 15/12/2009 22/07/2010 17/12/2010 25/11/2011 365 365 365 128 61,53,60,00 2.52% 16167496 7 Laboratories Combix. Spain BNP 4 Mio, Euro 4 Mio, Euro 03/06/2010 08/12/2011 64 (till 3/6/11) 1150 20,09,80,000 2.52% 3331778 8 Zydus Netherlands BV (ZNBV) ICICI 32.5 Mio, US$ 04/08/2008 365 130,37,20,000 2.52% 42381884 9 Zydus Pharma Inc. US BOB 30 Mio. US$ 20 Mio, US$ 66 Mio, US$ 86 Mio, US$ 05/12/2008 13/05/2011 01/08/2011 42(till13/5/11) 324 243 396,46,50,000 2.52% 84637791 10 Zydus Pharmaceutica ls Company, Mexico Lease Plan Mexico 0.51 Mio, MXP (letter of comfort) 01/08/2011 152 - 2.52% 33037 175615197 On the basis of above computation, upward adjustment of ₹ 10,45,32,855/- (Rs. 17,56,15,197/-(-) ₹ 6,96,88,570/- already offered by the assessee) is required to be made to the income of the assessee company on account of guarantee fee to be charged from the associate enterprises in addition to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of limitation placed by the statute. In this regard, we may refer to the decision of the Hon'ble Supreme Court of India in the case of Malabar Industrial Co.Ltd. vs. Commissioner of Income Tax (2000) 159 CTR 0001: (2000) 243 ITR 0083 (2000) 109 TAXMAN 0066 wherein it is observed that "The scheme of the Act is to ley and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue." Therefore, in order to protect the interest of the revenue, the DRP is of the considered opinion that the issue has to be kept alive and hence the addition made by the TPO needs to be sustained. 14.2.4 The ground of objection is thus disposed off accordingly 8. It was in this backdrop that the impugned arm's length price adjustment of ₹ 10,45,32,855 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us. 9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 10. We find that the stand taken by the Dispute Resolution Panel, granting relief to the assessee on this point, came up for consideration before a coor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sound basis for disturbing the arm's length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well. In view of these discussions, as also bearing in mind, we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment of ₹ 10,45,32,855. The assessee gets the relief accordingly. 11. Ground no. 1 is thus allowed. 12. In ground no. 2, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, the Learned AO / TPO has erred in and learned DRP has further erred in confirming an upward TP adjustment amounting to INR 9,97,52,304 on account of notional interest computed on optionally convertible loans granted to its AE, disregarding the fact that during the year under consideration, no interest has accrued to the Appellant in terms of the agreement with the AE. 13. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of proceedings before the Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which works out to exceptionally high operational income at 93%, the assessee has not been paid any interest. The TPO was also of the view that since conversion of this loan into equity has not taken place during the relevant previous year, this aspect of the matter is wholly irrelevant for levy of interest. It was also noted that "shares allotted will be of 100% subsidiary only, and as shares allotted will be of 100% subsidiary, paying low premium or high premium is not relevant as nobody else can take shares of subsidiary companies". The TPO further observed that "favourable conversion terms in 100% equity does not have any significance as it is only the assessee who can make investment in the subsidiary and use any mode of investment i.e. debt or equity" It was also noted that favourable conversion option is a misnomer since it does not carry any return to investor. It was also noted that these shares are not saleable in the open market and. As regards assessee's comparison with zero coupon convertible bonds in which entire premium is paid at the end of the term, it was noted that there is no quarrel with the proposition that the assessee can indeed iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bs). (iii) As far as debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy. Further, the "Master Circular on External Commercial Borrowings & Trade Credits" states that, PART I EXTERNAL COMMERCIAL BORROWINGS (ECB) At present, Indian companies are allowed to access funds from abroad in the following methods: (i) External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers' credit, suppliers' credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years. (ii) Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency. Further, the bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cket Nos.13676-09, 13677-09 on 20/9/2012, has come out with certain tests in order to find out whether the issue of debenture is in the nature of debt or equity. The issue of convertible loans by Cadila has been weighed on the scale specified by the US Supreme Court. It is seen that out of thirteen parameters specified by the Court, the instrument issued by Cadila falls in category of debt on ten parameters while in the remaining three parameters, no decision can be reached. However, in none of these tests, the instrument falls within the 'equity' category. In light of the predominantly 'debt' character of the instrument, it is liable to be treated as a debt and not equity:- Sr No Test Description Assessee's Comments TPO Comments 1 Names of labels given to the instruments Name given to the instrument In our case, the name of the instrument is convertible and is hence Neutral Optionally convertible loan points towards loan 2 Presence of absence of a fixed maturity date The presence of a fixed maturity date is virtually essential for a debt classification The convertible loan is for a period 5 years. Hence, the instrument takes the colour of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nated to obligations to other creditors bears on whether the taxpayer advancing the funds was acting as a creditor or an investor. We understand that taking a subordinate position to other creditors may suggest an equity investment. As stated earlier, ZIPL is an investment company which makes investments in various overseas subsidiaries in furtherance of our growth strategy. According, the convertible loan given in shareholders capacity will always be subordinated to the loan if any were taken by ZIPL from third parties. Hence, as per the said test, since the convertible loan taken a subordinate position to other creditors it flows in favour of Equity. No such items of subordination apparent in the loan document. No subordinate attached to the loan. On demand, payable at par with other loans. Character of Loan. Wrong to hold that it is given in shareholding capacity. 7 Intent of the parties The inquiry of a court in resolving the debt equity issue is primarily directed at ascertaining the intent of the parties. The intent of the parties, in turn, may be reflected by their subsequent acts, the manner in which the parties treat the instruments is relevant in determining their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advances is more likely to be characterized as equity. Since the loan has been given to fund acquisition and/ or for capital transactions, the same may be characterized as Equity. The purpose is for working capital requirements as well as acquisition. Acquisition is the business of ZIPL. So the amount utilized towards business. Character of loan. 12 Failure of debtor to replay The repayment of an advance may support its characterization as bona fide debt As stated in the said decision, till the time of actually exercising any option, it is premature to finally arrive at a conclusion whether it is in the nature of debt or equity. Thus, this test is neutral in our case. Assessee would have all means to recover in case of non-payment. Character of loan. 13 Risk involved in making advances. A significant consideration in the inquiry is whether the funds were advanced with reasonable expectations of repayment regardless of the success of the venture or were placed at the risk of the business. Several factors show the uncertainty of repayment like long and conditional maturity dates. Since the purpose of the funding was in furtherance of the inorganic growth stra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessees appeal in assessment year 2008-09 found that the options of converting the loan into equity had already been exercised and the entire loan had been converted into equity. The tribunal therefore confirmed the CIT(A)'s findings that no interest should be assessed in the case. 15.3.2 However the facts before us are slightly different. The assessee has not claimed that the loan has already been converted into equity. So far the alleged option has not been excised. Thus till date, the nature of the transaction remains that of loan, though the assessee has an option to convert the loan into equity. The Second important fact pointed out by the TPO in para 7.4.2 of his order is that the borrower company has and substantial interest on the same amount advance further to different parties. Thus the interest which should have been assessee's income by all means has been transferred to the AE without any consideration. As similar facts were not there before the honourable tribunal, the decision of the honourable tribunal in assessment year 2008-09 cannot be applied to this year. 15.3.3 We find from the facts of the case that the assessee is arguing that because he is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anced to the AEs are attached with the obligation of the AEs to issue share capital, in case the assessee exercise option for the same, on certain conditions, which are admittedly more favourable, and at an agreed price, which is admittedly much lower, vis-à-vis the conditions and prices which independent enterprise would normally agree to accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplictor on amount advanced but opportunity to own capital on certain favourable terms. Contrast this reward of owning the capital in the borrower entity with interest simplictor, which is typically defined as "the reward of parting with liquidity for a specified period" (Prof Keynes) or as "a payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist's abstinences" (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of these decisions throws any light on what constitutes 'quasi capital' in the context of transfer pricing and its relevance in ascertainment of the arm's length price of a transaction. Lest we may also end up contributing to, as Hon'ble Delhi High Court put it, "rote repetition of this reasoning without an independent analysis of the provisions of the Act and the Rules" let us take briefly deal with the connotations of 'quasi capital', and its relevance, under the transfer pricing regulations. 7. The relevance of 'quasi capital', so far as ALP determination under the transfer pricing regulation is concerned, is from the point of view of comparability of a borrowing transaction between the associated enterprises. 8. It is only elementary that when it comes to comparing the borrowing transaction between the associated enterprises, under the Comparable Uncontrolled Price (i.e. CUP) method, what is to be compared is a materially similar transaction, and the adjustments are to be made for the significant variations between the actual transaction with the A E and the transaction it is being compared with. Under Rule 10B(1)(a), as a first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey loaned or advanced.' 12. It is thus quite clear that the considerations for extending a loan simplictor are materially distinct and different from extending a loan which is given in consideration for, or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis-àvis the terms available, or, to put it more realistically, hypothetically available, to an independent enterprise. On a conceptual note, the entire purpose of the exercise of determination of arm's length price is to neutralize the impact of intra AE relationship in a transaction, the right comparable for such a transaction of quasi capital is a similar transaction of lending money on the same terms i.e. with an option to convert the loan into capital on materially similar terms. However, what the authorities below have held, and wrongly held for that reason, is that a quasi capital transaction like one before us can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional terms, because, in any case, the AE is a wholly owned subsidiary of the assessee and none else can subscribe to the AE's capital. What has been overlooked, however, in this process of reasoning is that the very concept of arm's length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm's length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm's length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such, the impact of intra AE association cannot have any role to play in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. 15. As regards the stand of the authorities below th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the revenue authorities, should have charged on the optionally convertible loan granted to the AEs. 18. The views so expressed by the coordinate bench were also followed for the assessment year 2010-11 as well. It is also an admitted position, as fairly accepted by the learned Departmental Representative, that all the material facts and circumstances are the same, and many of these loans are merely extensions of the earlier loans. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench in assessee's own case. Respectfully following the same, we uphold the plea of the assessee on this issue as well, and delete the impugned ALP adjustment of ₹ 9,97,52,304 as well. 19. Ground no. 2 is also thus allowed. 20. In ground no. 3, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, the Learned AO / TPO has erred in and learned DRP has further erred in confirming an upward TP adjustment amounting to INR 37,34,21,990 on account of reimbursement of expenses. 21. So far as this grievance of the assessee is concerned, we must, at the outset, note that the assessee has pressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S AE in relation to the drugs for which ANDA was owned by the assessee" and that these reports "prove that the legal expenses were incurred by the US AE in respect of patents/ ANDAs owned by it and by no stretch of imagination, the same can be said to be incurred for the business activity of the assessee company (and) therefore the ALP of this transaction is treated as NIL". As regards reimbursement of stability charges of ₹ 40,12,577, submission of the assessee was that "stability studies help to find out about the product quality, safety and efficacy of the products throughout the shelf life and are considered to be a pre-requisite for acceptance and approval of any pharmaceutical products" and that "since ZPU (i.e. US AE) undertakes the study on behalf of Cadila (i.e. the assessee) to distribute its products in US, Cadila reimburses these charges to the ZPU". The TPO nevertheless brushed aside this claim by observing that the invoices pertained to some packaging material and that, in any event, "there is no material on record to prove that the items were shipped to the assessee or used for the purpose of activities related to business of the assessee (and) therefore the AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [(2012) 345 ITR 241 (Del)] "Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". The very foundation of the action of the TPO is thus devoid of legally sustainable merits. We have also noted that there is no mark up in the reimbursement of expenses, and, as such, there is no question of making any ALP adjustment in respect of these reimbursements of expenses. We have further noted that similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015- 16, but no such arm's length price adjustments were made in any of these years. Undoubtedly, there is no res judicata in tax proceedings but principles of consistency definitely have a crucial rule to play- particularly in respect of a factual matter which permeates through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admissible for deduction. In any case, there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 21,43,79,368- subject to necessary verifications about the figures. 24. Ground no. 3 is thus allowed. 25. In ground no. 4, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making a disallowance of ₹ 17,91,43,844/- u/s 40(a)(i) without even confronting the appellant with a Show Cause Notice in respect of his proposal to do so and in clear violation of the directions given by the Hon'ble DRP in this regard 26. So far as this ground of appeal is concerned, the relevant material facts are as follows. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has made a number of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 1,844,477 22/09/2011 1,007,924 05/03/2012 1,636,845 26/03/2012 1,739,091 Total V 7,628,381 Grand Total (I + II+ III + IV + V) 179,143,844 27. The explanation of the assessee was that the payments were made by the assessee for clinical trials, biodiversity study and testing charges and that these payments to US, UK and Canada based entities were not taxable as the payments did not constitute fees for technical services and the payments could not be taxed as business profits as there was no PE of the recipients in India. It was also pointed out that the DRP itself has deleted similar disallowances for the assessment year 2010-11 in assessee's own case. As regards the Thai entity, it was pointed out by the assessee that there was no FTS clause in the India Thailand Double taxation Avoidance Agreement and since the Thai company admittedly did not have a PE in India, the amount paid to Thai company for this purpose could not be brought to tax. As regards payments for online access to database and publications, the assessee relied upon a number of judicial precedents in support of the contention that such an online access could not be taxed. As regards purchase of so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer in international tax wing decide what the DRP ought to have decided on its own. Simply because an ITO in the international tax wing decides that tax ought to have been deducted at source from certain payments to non-residents, it does not mean that the DRP must mechanically uphold the related disallowance under section 40(a)(i). What was before the DRP was the question as to disallowance under section 40(a)(i) has been correctly made or not, and essentially, therefore, the DRP was required to decide as to whether income embedded in these payments was taxable in India or not. This process of judicial scrutiny cannot be delegated to a lower functionary, but when DRP holds that, to the extent such a disallowance is supported by the stand that the ITO (International Taxation) takes, the disallowance is upheld, the DRP, in effect, decides the matter on the basis of scrutiny by a lower functionary. Upholding the disallowance only because the disallowance is in consonance with the stand taken by another lower functionary amounts to preferring to the guided by the wisdom of a lower authority without application of own mind. Such an approach is wholly unsustainable in law. It also res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the 'make available' exception applies in this case. 4 Hilltop Research (USA) 2,14,51,689 Fees for Clinical Trials/ Clinical Testing Remittance is made in respect of carrying out of clinical trials & testing. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the 'make available' exception applies in this case. 5 Impopharma Inc. (Canada) 23,36,320 Fees for Clinical Trials/ Clinical Testing Remittance is made in respect of carrying out of clinical trials & testing. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and Canada as the 'make available' exception applies in this case. 6 Lambda Therapeutic Research (Canada) 47,73,195 Fees for Clinical Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a PE in India, the question of taxability on such payment does not arise. 11 Elsevier B.V (Netherlands) 1,78,99,640 Subscription for access to Online Journal Remittance is made to the non-resident party in respect of journal subscription.The same is not in the nature of Royalty, either under Act or a per the DTAA with Netherlands. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 12 Thomson Reuters Inc. (USA) 31,75,380 Subscription for Journal Remittance is made to the non-resident party in respect of journal subscription.The same is not in the nature of Royalty, either under Act or a per Article 12 of the DTAA with USA. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 13 Cambridge Soft Corp. (USA) 18,74,364 Consultancy Services Remittance is made in respect of consultancy services. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) has erred in law and on facts in holding that technical knowledge, experience, skill, know how as envisaged in Article 12(13) of respective Indo-US, Indo Canada and Indo UK DTAAs were not made available to the assessee company by the Non-Residents, viz. Algorithme Pharma Inc., USA, Anapharm Inc., Bio Reliance, UK, Gateway Medical Research Inc., MDS Pharma Services, USA, AAI Pharma Inc., USA, inspite of substantial evidences to the contrary. 3. So far as this grievance of the Assessing Officer is concerned, the relevant material facts are like this. During the course of proceedings before the Assessing Officer, it was noticed that the assessee has made following payments to the non residents entities based in USA, Canada and UK: Sr. No. Name of the Payee Country of residence Nature of remittance Date Amount (Rs.) Nature of services 1 ALGORITHME PHARMA INC USA FTS 04.09.2009 11,35,398 Bioequivalenc e study 18.09.2009 11,35,398 2 ANAPHARM INC Now PHARMANET CANADA INC CANADA FTS 12.02.2010 24,46,032 Bio analysis 3 BIO RELIANCE UK FTS 15.10.2009 17,77,161 Bio analysis 23.12.2009 22,74,601 4 GATEWAY MEDICAL RESEARCH I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under the tax treaties, and, accordingly, deleted the impugned demand. While doing so, learned CIT(A) reasoned as follows: "7. I have carefully considered the facts of this case, the reasoning as contained in the order of the AO and the factual and legal submissions of the appellant. In the present case the key issue to be decided under appeal is whether the payments made to the non-residents attract liability for withholding tax in India under the provisions of Sec. 195 of the Income-tax Act. 8. With reference to the payments made by the appellant to the six nonresident parties viz. Algorithms Pharma Inc., Anapharm Inc., Bio Reliance U.K., Gateway Medical Research, MDS Pharma Services and AAI Pharma Services, the AR has contended that the same were not in the nature of 'fees for technical services.' The AR stated that Article 12 of the DTAAs with USA and Canada and Article 13 of the DTAA with U.K. is not applicable since the non-resident parties did not 'make available' any technical knowledge, skill, experience, know-how or process. 9. It is a matter of record that even the AO has not disputed the fact that none of the non-resident parties have any PE in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services and clinical trials payments, as in the case of the appellant, the jurisdictional ITAT has decided this issue in favour of the assessee, by holding as under: "From the above, it is evident that the Id.CIT(A) have given a finding on fact that the service which is technical in nature can be said to be "fees for included services" only when it has "made available" technical knowledge or skills to the recipient of services, i.e. recipient of services can apply the same on his own. We are in full agreement of the above view of the Id.CIT(A). In the present case, the assessee had sent samples to the experts outside India and those experts submitted their report. There is nothing on record suggesting that the services rendered to the assessee were made available to the assessee and also the assessee was able to apply the same of his own. In the absence of the same, such service would not fall within the ambit of the included service in the light of decision of the Authority for Advance Rulings (Income-tax), New Delhi in the case of Anapharm Inc., In re (supra), the decision of the Coordinate Bench in the case of Wockhardt Ltd. vs. ACIT (supra) and the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the appellant succeeds on the issue of chargeability of tax under the provisions of Sec. 201(1). 13. The AO has further held that the aforementioned payments are also covered under the wider meaning of fees for technical services as per the provisions of Sec. 9(1)(vii) of the I.T. Act. The appellant has contended that the provisions of Sec. 9(1) (vii) are not applicable to the facts of the appellant's case. As per the clear language of the provisions of Section 90(2), where there is a DTAA between India and any country outside India, the more favourable of the two provisions, viz., under the DTAA or under the I.T. Act, are to be applied in case of the assessee. However, in my view, the point as to whether the payments are in the nature of fees for technical services as per the provisions of section 9(1)(vii), does not require adjudication, since the appellant is in any case entitled to the benefit of the relevant articles as per the DTAAs, as discussed hereinbefore." 5. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ience, skill, knowhow, or processes, or consist of the development and transfer of a technical plan or technical design. 8. We find that the common thread in all these tax treaties is the requirement of 'make available' clause. As learned counsel rightly puts it, its not simply the rendition of a technical service which is sufficient to invoke the taxability of technical services under the make available clause. Additionally, there has to be a transfer of technology in the sense that the user of service should be enabled to do the same thing next time without recourse to the service provider. The services provided by non residents did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression 'make available'. 9. As for the connotations of make available clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Honble Delhi High Court in the case of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. The tests laid down by Hon'ble Court were clearly not satisfied. There mere fact that there were certain technical inputs or that the assessee immensely benefited from these services, even resulting in value addition to the employees of the assessee, is wholly irrelevant. The expression 'make available' has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meaning of this expression, as has been done by the Assessing Officer. We also find that the issue regarding taxability of these services is also covered, in favour of the assessee, by the order dated 30th November 2015 passed by a coordinate bench. In view of these discussions, and as we concur with the well reasoned findings of the learned CIT(A), we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter on this count as well. The order of the CIT(A) stands confirmed. 31. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench in assessee's own case. Respectfully following the same, the payments made to the US based and Canada based entities, which are covered by make available clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even though the Thai entity did not have any PE in India and, for that reason this amount could not have taxed in India under article 7, FTS could be taxed as 'other income' under article 22. Their Lordships, in this context, also observed that, "Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22 Of course, the question as to what really constitutes miscellaneous income, as visualized by Their Lordships, covered by Article 22 was left open- a question which we will endeavor to humbly address. As we deal with this aspect of the matter, and to explain the related principle in little more detail. Let us first take a look at the relevant treaty provision. The relevant treaty provisions are as follows: ARTICLE 22- Other income Items of income of a resident of a Contracting State, wherever arising, not expressly dealt with in the foregoing Articles may be taxed in that State. Such items of income may also be taxed in the Contracting State where the income arises. 9. To understand the scope of these treaty provisions, which are broadly in pari materia with the provisions of article 21 of UN Model Convention, we find gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility under article 22. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immoveable property in a third state, and damages (other than for loss of income covered by specific provisions of the treaty) etc. This is how UN Model Convention Commentary, which is referred to earlier in this order, also explains the scope of this article. In our humble understanding, therefore, article 22 does not apply to items of income which can be taxed in any situations under article 6-21 whether or not such an income is actually taxable under these articles. The question then arises whether income earned by the recipients in question, i.e. Fuji Asia Co Ltd-Thailand ad Auto Alliance Co Ltd-Thailand, can be said to in the nature of an income which is not expressly dealt with by other operative articles (i.e. article 6 to 21) of the treaty. The income earned by these entities was in the regular course of their business, and there is no dispute about this fundamental aspect. There cannot also be dispute about the fact that in the event of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technical services as well. With FTS article or without FTS article, the income by way of fees of technical services continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technical services. 10. In view of the above discussions, in our considered view, even though the remittances in question are in the nature of fees for technical services in the hands of Thai entities, the income embedded in these remittances is not taxable in India in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payment of any kind received as consideration for the use of, or the right to use, the industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8." 17. We find that as the treaty provision unambiguously requires, it is only when the use is of the copyright that the taxability can be triggered in the source country. In the present case, the payment is for the use of copyrighted material rather than for the use of copyright. The distinction bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es cannot be of such a nature. In this view of the matter, these services cannot be taxed under article 12 of the Indo US DTAA, and since, in any case, the US entity does not have any PE in India, or fixed place of business in India, the income in question cannot be taxed as a business profit or independent personal service, for this short reason alone. The disallowance under section 40(a)(i), in respect of this payment therefore, must stand deleted. 37. Item no. 14 refers to purchase of software for an amount of ₹ 3,16,81,125 from Cambridge Soft Corporation USA. This issue now stands concluded, in favour of the assessee, by Hon'ble Supreme Court's judgment in the case of Engineering Analysis Centre of Excellence Pvt Ltd Vs CIT [(2021) 125 taxmann.com 42 (SC)]. Although this decision has been rendered by Hon'ble Supreme Court after hearing in the present case was concluded, even prior thereto, this issue was covered, in favour of the assessee, by decisions of non-jurisdictional High Courts and coordinate benches of this Tribunal, and there was no decision, contrary thereto, by Hon'ble jurisdictional High Court. In view of these discussions, we are of the considered view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng grievance: That the learned Assessing Officer erred in law and on facts in making an addition of ₹ 9,84,01,831/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenditure. 42. To adjudicate on this grievance, only a few material facts need to be taken note of. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee was debited ₹ 7,34,49,394 under the head product registration expenses and ₹ 4,49,20,897 as product support services. The Assessing Officer was of the opinion that these expenses were capital in nature as was held by his predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the appellate authorities, he was equally alive to the fact that these orders have not been accepted by the income tax authorities and the matter in thus in appeal before the higher authorities. It was in this backdrop that he treated the aggregate amount of ₹ 11,83,70,291as capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alive to the fact that these orders have not been accepted by the income tax authorities and the matter in thus in appeal before the higher authorities. It was in this backdrop that he treated the aggregate amount of ₹ 10,40,19,542 as capital expenditure, but allowed depreciation of ₹ 1,79,92,917 thereon, and disallowed net amount of ₹ 8,60,25,625. The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us. 47. Having heard the rival submissions and having perused the material on record, we are of the considered view that the assessee does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee's own case and the additions have been made, so to say, keep the issue alive. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case, and Hon'ble High Court has declined to admit appeal against such decision, as in the esteemed views of Their Lordships, no question of law arises from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee's own case and the additions have been made, so to say, keep the issue alive in the hope that Hon'ble jurisdictional High Court, in this round of proceedings, may decide the issue in favour of the revenue. That does not, however, dilute the binding nature of judicial precedents, as on now, by the coordinate benches of this Tribunal. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case. These decisions hold good as on now, and we are respectfully bound by those decisions as on now. Of course, whatever we hold does, and shall always, remain subject to what Hon'ble Courts above decide- as and when that happens. In this view of the matter, we uphold the plea of the assessee, and direct the Assessing Officer to delete the impugned disallowance of ₹ 39,39,31,000. This disallowance must stand deleted as on now. The assessee gets the relief accordingly. 53. Ground no 8 is also thus allowed. 54. In ground no. 9, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispute that the vehicle was owned, in substance, by the assessee and the vehicle was used for the purposes of its business, there cannot be any legally sustainable reasons for declining the depreciation. ……….. 56. We see no reasons to take any other view of the matter than the view so taken by us, in assessee's own case, for the preceding year. We, therefore, uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of ₹ 9,14,174 on account of depreciation on Hummer car. The assessee gets the relief accordingly. 57. Ground no. 9 is thus allowed. 58. In ground no. 10, the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an addition of ₹ 142,00,00,000/- rejecting the claim of the appellant that the said amount, received by the appellant as partner's remuneration and which was disallowed in the case of the firm u/s. 40(b), was required to be excluded from the computation of Income as per the Proviso to Sec. 28(v) of the IT Act. That the learned Assessing Officer further erred in holding that "the assessee's claim for deduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in conducting the affairs of the business or profession on which he is a partner. He thus concluded that the assessee not being an individual, the assessee cannot be a working partner, and, accordingly, the receipt of ₹ 142 crores cannot be treated as covered by section 28(v). As for the assessee's objection against this path proposed to be taken by the Assessing Officer, learned DRP rejected these objections and approved the stand of the Assessing Officer by observing as follows: 12.3.1 We have carefully gone through the contention of the Assessing Officer and also considered the submissions made on behalf of the assessee. 12.3.2 The assessee company is a partner in the form M/s Zydus Healthcare Sikkim having 96% share in the said firm as per the partnership deed dated 01.03.2007. The said firm enjoys deduction of its income under section 80IE of the Act. Initially there was no provision tor payment or any remuneration to the partners in the partnership deed dated 01.03.2007. However as per addendum to partnership agreement dated 1 March 2007 executed on 1 April 2007, the partnership deed was modified, whereby the assessee company and treat and undertaken to discharge ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng officer in para-11.7 of the order has recorded that "11.7........ After the education of the partnership deed, the assessee company entered into and who you on 15/03/2008. According to the conditions of MOU, the assessee company market the products and provides all business or silly marketing services like consignment, says agent and after sales service of the product of the firm M/s Zydus Healthcare Sikkim for which the assessee company is entitled to get remuneration at the rate of 12.5% of the total turnover..... ......The assessee company, therefore, claim said remuneration received u/s 28(v) of the Act". 11.9....... In the original partnership date entered into with a firm there was no provision for payment of "remuneration'". The word "remuneration'" is added in the addendum/view brought on 15/03/2008. As stated above, the payment of ₹ 170 crore by the firm to the assessee is towards discharging of various functions related to marketing auxiliary and after sales services rendered. It is nothing to do with the agreement of the partnership. .....The firm while computing its income added back the expenditure of ₹ 170 crore b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is also aware that the assessee cannot be a working partner in the firm. 12.3.6 We find that the activities as described in Para 4 of addendum to partnership agreement dated 1 March 2007 executed on 1st April 2007, cannot be considered as the activities being carried out by the assessee in the capacity of a partner. The assessee is using its own assets independent of the assets of the firm to carry out these activities. The assets and apparatus used by the assessee do not form part of the assets of the partnership firm. Therefore, the functions performed by the assessee as per Para 4 of addendum to partnership agreement dated 1 March 2007 executed on 1 April 2007, are in the form of business and profession carried out by the assessee in its own capacity as a separate business entity and it would not tall in the purview of section 28(v) of the Act. On the contrary it will fall in the purview of section 28(1) of the Act. 12.3.7 At this juncture we may refer to the decision of the Hon'ble SUPREME COURT OF INDIA in the case of KEDARNATH JUTE MFG. CO. LTD. vs. COMMISSIONER OF INCOME TAX (1971) 82 ITR 0363 wherein it is held that "Whether the assessee is entitled to a partic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- and from SPS amounting to ₹ 1,82,91,92,838/-which has been reduced in computing the taxable profit under the normal provision of the Act. The assessee claimed that the remuneration paid to it by the firm was not allowed as a deduction in the hands of the partnership as mentioned earlier. 167.2 Accordingly, the assessee claimed that such remuneration is not taxable in its hands as per proviso to section 28(v) r.w.s. 40(b) of the Act. 168. However, the AO disregard the contention of the assessee by observing that the Ld. CIT (A) in its case for AY 2008-09 in similar facts and circumstances treated the remuneration as taxable income by holding that remuneration was nothing, but it was fee for the use of all present and future trademark/brands and technology of the partnership firms. Therefore the AO took a similar view in the year under consideration and treated the remuneration as taxable income amounting to ₹ 2,01,23,42,044/- and added to the total income of the assessee. 169. Aggrieved assessee carried the matter to Ld. CIT (A) who confirmed the order of the AO by observing as under: 21.1. As per the existing Agreement, the appellant company has permitted use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for use of trademark/brands and accordingly assessing the same under normal provisions of the Act. Thus Ground No. 18 is dismissed. 170. Being aggrieved by the order of the Ld.CIT (A) assessee is in appeal before us: 171. The Ld. AR before us submitted that in the identical facts and circumstances this ITAT in the own case of the assessee bearing ITA No. 1666/AHD/2016 for the AY 2009-10 vide order dated 08-09-2017 has deleted the addition made by the AO. Therefore there is no question for making the addition to the total income. 172. On the other hand the Ld. DR vehemently supported the order of the Lowe Authorities. 173. We have heard the rival contentions and perused the materials available on records. At the outset, we find that in the identical facts and circumstances in the own case of the assessee's (supra), the ITAT deleted the addition made by the AO. The relevant extract of the order is reproduced as under: 72. This issue was considered by the Tribunal in ITA Nos. 3297 & 3420/Ahd/2014 vide ground no. 13 of that appeal and the relevant findings of the Tribunal read as under:- 128. We have given a thoughtful consideration to the facts in issue. It is an undisput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed. 173.2 Moreover, we are bound to follow the order of this Tribunal in the own case of the assessee in the earlier year as the facts are identical in the impugned issue before us. Therefore respectfully following the same we delete the addition made the AO. 173.3 We also place our reliance on the judgment of Hon'ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977] 110 ITR 453 (Mad.). The relevant extract has been reproduced in the preceding paragraph. In the light of the ratio decide in the above-said judgment, we are of the considered opinion that the view adopted by the co-ordinate bench as discussed above shall be applied in the case on hand with full strength. The ld. DR and the ld. AR has not brought any decisions varying from similar or identical facts or circumstances. Therefore, the ratio decide rendered by the earlier order of the Tribunal has necessarily to be followed by us in line and tune with the judicial discipline and decorum. In view of the above and respectfully following the ITAT order as discussed above, the ground of appeal of the assessee is allowed. 63. Learned Departmental Representative could not point out any ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2013-14. 72. In ground no. 1, the assessee has raised the following grievance: 1. That the learned Assessing Officer erred in law and on facts in making upward adjustments on international transactions under the provisions relating to Transfer Pricing in respect of the following three issues: a. Addition of ₹ 13,96,47,918/- on account of Corporate Guarantee Charges. b. Addition of ₹ 17.63,42,711/- on account of Interest Imputation on Optionally Convertible Loans advanced to Zydus International Pvt. Ltd. c. Addition of ₹ 8,34,75,701/- on account of Reimbursement of Expenses. 73. So far as ground no. 1 (a) is concerned, learned representatives fairly agree that as all the material facts, barring the changes in figures and other peripheral and non-material aspects, are the same as in the assessment year 2012-13, and, therefore, whatever we decide for the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well. Vide our order above, and dealing with ground no. 1 in 2012-13, we have held as follows: 10. We find that the stand taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of determining ALPs of corporate guarantees cannot meet any judicial approval. There was thus, in any event, no sound basis for disturbing the arm's length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well. In view of these discussions, as also bearing in mind, we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment of ₹ 10,45,32,855. The assessee gets the relief accordingly. 74. We see no reasons to take any other view of the matter than the view so taken by us in the immediately preceding assessment year. Respectfully following the same, we uphold the plea of the assessee, and direct the Assessing Officer to delete impugned ALP adjustment of ₹ 13,96,47,918/- in respect of the corporate guarantee commission charges. The assessee gets the relief accordingly. 75. Ground no. 1 (a) is thus allowed. 76. So far as ground no. 1 (b) is concerned, learned representatives fairly agree that as all the material facts, barring the changes in figures and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for this reason that the transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of 'quasi capital'. 11. As for the connotations of 'quasi capital', in the context of determination of arm's length price under transfer pricing regulations, we may refer to the observations made by a coordinate bench of this Tribunal- speaking through one of us (i.e. the Accountant Member), in the case of Soma Textile & Industries Ltd. v. Asst.CIT [2015] 154 ITD 745/59 taxmann.com 152 (Ahd.), as follows: '5.. . . . . . . The question, however, arises as to what are the connotations of expression 'quasi capital' in the context of the transfer pricing legislation. 6. Hon'ble Delhi High Court, in the case Chryscapital Investment Advisors India Ltd. v. ACIT [(2015) 56 taxmann.com 417 (Delhi)], has begun by quoting the thought provoking words of Justice Felix Frankfurter to the effect that "A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a nonrefundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions. 9. The expression 'quasi capital', in our humble understanding, is relevant from the point of view of highlighting that a quasi-capital loan or advance is not a routine loan transaction simplictor. The substantive reward for such a loan transaction is not interest but opportunity to own capital. As a corollary to this position, in the cases of quasi capital loans or advances, the comparison of the quasi c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. 13. Let us, at this stage, take note of the US Tax Court decision, relied upon by the TPO, in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09, 13677-09; order dated 20th September 2012). It has been referred to by the TPO as decision of the US Supreme Court but in fact it is a decision of the US Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by Pepsi Co's Netherlands subsidiaries to certain Pepsi Co domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the advance agreements constitute original issue discount, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm's length consideration of raising the funds, unless profit sharing is implicit in the consideration for raising the funds itself- which is neither the normal commercial practice nor the case before us. The cost of raising funds is determined much before the returns from funds so raised is even known. To hold that cost of funds raised should have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm's length price of a transaction, it is immaterial as to what 'benefit' an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms indicated above. 81. In ground no. 2 and 3, the assessee has raised the following grievances: 2. That the learned Assessing Officer erred in law and on facts in making a disallowance of ₹ 9,65,93,941/- u/s 40(a)(i) without even confronting the appellant with a Show Cause Notice in respect of his proposal to do so and also without proper following the direction given by the Hon'ble DRP in this regard. It is respectfully submitted that the payments made to Non-residents, in respect of which the provisions of Sec.40(a)(i) were invoked, were clearly beyond the scope of withholding tax u/s.195 of the IT Act. 3. Without prejudice to the above and in the alternative, the learned Assessing Officer erred in law and on facts in making disallowance by grossing-up of the actual amount of foreign remittance of ₹ 8,69,34,007/- as determined by the DCIT. International Taxation, Ahmedabad, vide his Order u/s 201(1) & 201(1A) dated 28.11.2017 and thus, made excess disallowance u/s 40(a)(i) by ₹ 96,59,334/-. 82. Learned representatives fairly agree that so far as this ground of appeal in this appeal is concerned, since the related facts are said to have been discusse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 as product support services. The Assessing Officer was of the opinion that these expenses were capital in nature as was held by his predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the appellate authorities, he was equally alive to the fact that these orders have not been accepted by the income tax authorities and the matter in thus in appeal before the higher authorities. It was in this backdrop that he treated the aggregate amount of ₹ 11,83,70,291as capital expenditure, but allowed depreciation of ₹ 1,99,68,460 thereon, and disallowed net amount of ₹ 9,84,01,831. The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us. 43. Having heard the rival submissions and having perused the material on record, we are of the considered view that the assessee does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee's own case and the additions have been made, so to say, keep the issue alive. Learned representatives fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that this issue is decided in favour of the assessee by the appellate authorities, he was equally alive to the fact that these orders have not been accepted by the income tax authorities and the matter in thus in appeal before the higher authorities. It was in this backdrop that he treated the aggregate amount of ₹ 10,40,19,542 as capital expenditure, but allowed depreciation of ₹ 1,79,92,917 thereon, and disallowed net amount of ₹ 8,60,25,625. The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us. 47. Having heard the rival submissions and having perused the material on record, we are of the considered view that the assessee does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has admitted that the issue is covered by the binding judicial precedents in assessee's own case and the additions have been made, so to say, keep the issue alive. Learned representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case, and Hon'ble High Court has declined to admit appeal ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clinical trial expenses 6700.1 Others non-eligible expenses as per DSIR 2264.38 94. When the Assessing Officer proposed to disallow the amount so worked out at ₹ 22,64,38,000, the assessee raised objections before the DRP and made his submission. Submissions of the assessee, and the arguments of the Assessing Officer on this point, are reproduced below: The submissions filed by the assessee: 4.1 Under Paras 7.a. 1 to 7.a.3 of his draft Assessment Order the learned A.O. has disallowed an amount of ₹ 2264.38 Lakhs on ground that the same represented non-eligible expenditure as per DSIR, liable to be disallowed u/s. 35(2AB) of the IT Act. 4.2 During the course of the Assessment Proceedings no opportunity was given by the learned A.O. to the applicant to explain its point of view in this regard. Therefore, the applicant wishes to take this opportunity to present the correct facts in this submission. 4.3 During the relevant A.Y. 2013-14, the applicant had seven In-house R&D Facilities eligible for exemption u/s. 35(2AB) of the I.T Act. While five facilities were old and continuing facilities already enjoying approval for weighted deduction u/s. 35(2AB), there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pronounce on 04.08.2017 wherein the Hon'ble High Court relying on the ratio of the decision of the Gujarat High Court in the cat of CIT Es Claris Lifescienes Ltd. 326 ITR 251, held a under: "The settled position in law is that, for availing the benefit under section 35 (2AB) what it relevant is not the date of recognition or the cut-off date mentioned in the certificates of the DSIR or even the date of approval but the existence of the recognition. If a R&D Centre is not recognized it is not entitled to deduction but if it is recognized, it is entitled to the benefit. The Gujarat High Court in CIT vs. Claris Lifescienes Ltd. [2010] 326 ITR 251/[2008] 174 Taxman 113 has rightly observed that the date of approval of the R&D Centre, not being a part of the provision, extending benefit only from the date of recognition would amount to reading more in the law which is not expressly provided. [Para 40] Section 35 (2AB) clearly provides that any expenditure incurred by a party on its R&D facility except, insofar as it relates to land and building is liable to be allowed to be claimed as deduction (twice the amount of expenditure). A perusal of the scheme of the Act especially section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee before the said date that is during financial year 2012-13. The reliance raised by the assessee on the decisions of Honble Delhi High Court in the case of Maruti Suzauki India Ltd. pt is not applicable to the fact of this case as in the said case the approval of the DSIR was granted during the year for which it was claimed to be allowed whereas the case of the assessee even the approval is received subsequent to the assessment year under consideration. The AO is therefore, justified in not allowing the weigh deduction in respect of claim pertaining to the said two units. However, if the application is received in future in respect of this year assessee may be allowed the deduction. The objection is accordingly rejected. 96. The Assessing Officer thus proceeded with the disallowance. The Assessing Officer is aggrieved and is in appeal before us. 97. We have heard the rival contention, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 98. We find that this issue is now covered, by a decision of Hon'ble jurisdictional High Court in the case of Banco Products India Ltd Vs DCIT [(2018) 405 ITR 318 (Guj)], i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such deduction was one and one-half times of the expenditure incurred. Said section contains various conditions subject to which such deduction will be granted. However, the main requirements are that the expenditure should be on scientific research on in-house research and development facility as approved by the prescribed authority. As observed by this Court in case of Claris Lifesciences Ltd. (supra) and Delhi High Court in case of Maruti Suzuki India Ltd. (supra), this provision is aimed at encouraging in-house research and development facilities for specified purposes. The legislature recognised the weighted deduction on such expenditure. The approval of such facility by the prescribed authority is a prime condition. 10. In case of Claris Lifesciences Ltd. (supra), this Court examined a situation where the Tribunal had allowed the assessee's claim of deduction under section 35(2AB) of the Act when such expenditure was incurred during the period prior to the date of approval by the prescribed authority. The Court noted with approval the conclusion of the Tribunal that the provision is made for giving a boost to research and development facilities in India and once the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Maruti Suzuki India Ltd. (supra), would show that period during which the approval is granted is not relevant as long as such approval has been granted and expenditure has been incurred for the specified purpose. As noted, the provision is aimed at promoting development of in-house research and development facility which necessarily would require substantial expenditure which immediately may not yield desired results or could be co-related to generation of additional revenue. By the very nature of things, research and development is a hit and miss exercise. Much of the efforts, capital as well as human investment may go waste if the research is not successful. The legislature therefore, having granted special deduction for such expenditure, the same should be seen in light of the purpose for which it has been recognised. Research and development facility can be set up only after incurring substantial expenditure. The application for approval of such facility can be made only after setting up of the facility. Once an application is filed by the assessee to the prescribed authority, the assessee would have no control over when such application is processed and decided. Even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has claimed enhanced deduction @ 200% in respect of the same. The Assessing Officer was of the opinion that these expenses were to be excluded from enhanced deduction under section 35(2AB) as the expenses were incurred outside of the approved inhouse facilities, as was held by his predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the Tribunal and Hon'ble jurisdictional High Court has not admitted appeal against the same, he was equally alive to the fact that the stand so taken by the Hon'ble jurisdictional High Court has been reversed by Hon'ble Supreme Court inasmuch as Hon'ble jurisdictional High Court has been directed to adjudicate on the matter on merits. It was in this backdrop that he proposed to disallow ₹ 39,39,31,000 on account of R&D expenses. The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us. 52. Having heard the rival submissions and having perused the material on record, we are of the considered view that the assessee does indeed deserve to succeed on this point for the short reason that even the Assessing Officer has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 32 were therefore not satisfied. 131. As far as this grievance of the Assessing Officer is concerned, there is no dispute that the car was not legally owned by the assessee company but by the director, even though the payment for acquisition of this car was made by the assessee company and the car is used by the company. The beneficial ownership thus rests with the assessee company. The depreciation was proposed to be declined by the Assessing Officer mainly on the ground that the assessee did not own the vehicle in question. However, the assessee succeeded in the DRP in his objection to this proposal. We have noted that the DRP has given a categorical finding to the effect that the car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the DRP, the mere fact that the car was not legally owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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