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TMI Blog2022 (2) TMI 1402X X X X Extracts X X X X X X X X Extracts X X X X ..... - AR stated that the revenues from the international transaction constitute only 29.85% of the total revenue, therefore, as submitted that the TP adjustment if at all ought to be restricted to that extent - HELD THAT:- The action of the TPO is wholly erroneous and contrary to the provisions of the Act and the Rules made there under. A.O. has to refer the matter to the TPO for computation of ALP only in relation to the international transactions and the TPO is empowered to compute ALP only in respect of the said international transactions. In the case of IKA India (P.) Limited [ 2018 (10) TMI 49 - ITAT BANGALORE] had decided an identical issue and held that the transfer pricing adjustment is to be limited only to the international transactions entered by the assessee with its AEs. In the instant case, the assessee claims that the revenue from the international transactions constitute only 29.84% of the total revenue. TPO is directed to rework the TP adjustment only in respect of the international transaction undertaken by the assessee with its AEs. Disallowance u/s 14A - assessee had made sou moto disallowance for expenditure attributable to earning of exempted income - HELD THAT:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order dated 20.09.2018 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2014-2015. 2. The brief facts of the case are as follows: The assessee is a company engaged in manufacture of healthcare products. The products manufactured by the assessee are either sold directly to the customers or to its Associate Enterprises (AEs) in different countries. During the relevant assessment year, the assessee sold the products manufactured by it to its AE, Abba Pharma Limited and recognized net cost plus margin of 7.54% from its operation. For the assessment year 2014-2015, the return of income was filed on 29.11.2014 declaring total income of Rs.4,29,48,320 and book profits was shown at Rs.3,18,72,671. The return was selected for scrutiny by issuance of notice u/s 143(2) of the I.T.Act. During the course of assessment proceedings, the Assessing Officer made a reference to the TPO for determination of Arm s Length Price (ALP) of the international transactions undertaken by the assessee with its AEs. The TPO passed an order dated 31.10.2017 u/s 92CA of the I.T.Act determining the TP adjustment of Rs.3,40,85,922 in respect of international transaction of sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost as capital in nature, has erred in not allowing with consequential depreciation on such payments under section 32 of the Act. 12. The ld.AO has erred in not granting appropriate MAT credit available to the assessee under section 115JAA of the Act for set off. 5. Since the learned AR has raised limited issues as regards the TP adjustment, the assessee s profile, the TP study undertaken by the assessee, TP adjustment made by the TPO etc. are not discussed in detail. We shall adjudicate the grounds / issues as under: A. TRANSFER PRICING ADJUSMTNET INTEREST ON DELAYED RECEIVABLE [GROUND 6(d)] 6. The TPO in the order passed u/s 92CA of the I.T.Act, determined the TP adjustment of Rs.16,99,773 (notional interest) in respect of delayed receivable from its AEs. The DRP rejected the contention of the assessee that the adjustment is not required in this regard, since it is not an international transaction. However, the DRP directed the TPO to recompute the interest by taking into consideration the credit period granted by the assessee in the invoices. Pursuant to the DRP s directions, the interest was reworked to Rs.8,91,560. The TPO determined the notional interest by adopting the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.6(d) is allowed. TP ADJUSTMENT TO BE CONFINED TO INTERNATIONAL TRANSACTION (GROUND 7) 7. The learned AR stated that the revenues from the international transaction constitute only 29.85% of the total revenue. Therefore, it was submitted that the TP adjustment if at all ought to be restricted to that extent. In this context, the learned AR relied on the judgment of the Hon ble Bombay High Court in the case of CIT v. Phoenix Mecano (India) Pvt. Ltd. (judgment dated 07.06.2017 in ITA No.1182/2014). The learned AR further placed reliance on the following orders of the Tribunal:- (a) IKA India (P.) Ltd. v. DCIT reported in (2018) 98 taxmann.com 312 (Bangalore Tribunal) (b) IL Jin Electronics (I) Pvt. Ltd. v. ACIT reported in (2010) 36 SOT 227 (Delhi) (c) CIT v. Petro Araldite Pvt. Ltd. reported in (2018) 93 taxmann.com 438 (Bombay) (d) DCIT v. Starlite reported in 113 TTJ 425 (Mum.) 7.1 The learned DR was duly heard. 7.2 We have heard rival submissions and perused the material on record. The action of the TPO is wholly erroneous and contrary to the provisions of the Act and the Rules made there under. The A.O. has to refer the matter to the TPO for computation of ALP only in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Hon ble Bombay High Court was challenged by the Revenue by filing an SLP before the Hon ble Apex Court and the Hon ble Apex Court vide judgment dated 05.02.2018 in SLP No.4205/2018 dismissed the SLP. In the instant case, the assessee claims that the revenue from the international transactions constitute only 29.84% of the total revenue. The TPO is directed to rework the TP adjustment only in respect of the international transaction undertaken by the assessee with its AEs. It is ordered accordingly. 7.4 In the result, ground 7 is allowed for statistical purposes. B. CORPORATE TAX ISSUES DISALLOWANCE U/S 14A OF THE I.T.ACT (GROUND 10) 8. In the return of income filed, the assessee had made sou moto disallowance of Rs.15,48,462 for expenditure attributable to earning of exempted income. The Assessing Officer by invoking the provisions of section 14A r.w. Rule 8D(2)(ii) and Rule 8D(2)(iii) made an additional disallowance of Rs.47,69,154. 8.1 The objections raised by the assessee before the DRP was rejected. 8.2 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the Assessing Officer has not recorded his dissatisfaction as rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant case, the assessee had received dividend income of Rs.91,79,588, which is exempted from tax. The assessee while filing the return of income had suo moto worked out the disallowance u/s 14A of the Act amounting to Rs.15,48,462. On a careful reading of the assessment order, it is clear that the Assessing Officer has not recorded his dissatisfaction as regards the correctness of the claim made by the assessee. The working of suo moto disallowance of Rs.15,48,462 is on record. The A.O. has not pointed out any specific reasons having regard to the accounts of the assessee for rejecting the suo moto disallowance by the assessee. Moreover, the assessee has sufficient own funds and borrowed funds were not used for the purpose of making investment. In fact, as per the statutory Auditors report (clause No.16 and 17), all the borrowed funds have been utilized for the purpose for which it has been borrowed. Further, on perusal of the financials, it is clear that the assessee has sufficient own funds which exceeds the investments. Therefore, by placing reliance on the judgment of the Hon ble Apex Court in the case of CIT v. Reliance Industries Ltd. (supra) and the judgment of the Hon ble ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alore Bench of the Tribunal in assessee s own case, reads as follows:- 7. The admitted factual position is that the assessee is manufacturing pharmaceutical products. Those products have been branded with their distinctive trademarks. By the registration of the product the assessee has safeguard against infringement of its patent. By the registration of trademark and patent the assessee has exclusive right of use. By incurring the said expenditure the assessee has protection of its running business, It is argued that patent is a set of exclusive rights granted by a state to an inventor for a limited period of time for a public disclosure of an invention. The exclusive right granted to a patentee in most countries is the right to prevent others from making or using the patented invention without permission. The expenses incurred by us for carrying out various patent registration formalities including statutory fees prescribed in different countries are duly reflected in the copy of accounts, as above. All that the registration of patents did was to enable the Assessee Company to obtain a speedy and less expensive remedy against the infringement of the patent rights. It gives benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced any thing contrary. It is an admitted fact that the assessee was already in the business of manufacturing of pharmaceutical products, and that the assessee also carries on scientific research work. For the protection of the result of the research the assessee has to get the patent registered. Enduring benefit is not the only criteria. An enduring benefit has to be coupled with the acquisition of an asset. There is nothing on record placed by the revenue to establish that there was a new product that was patented or in respect of which trade mark was registered by assessee during the years under consideration. 9. On perusal of ledger accounts placed at page 110 to 242 revels that payments have been made to statutory bodies either for approval or as statutory maintenance in foreign nations. Assessee has also made payments being annual fees to the Medical agencies in foreign nations. All these are recurring in nature. We are thus of the opinion that these payments are inextricably linked to the business of the assessee. Hon'ble Supreme Court in the case of Finlay Mills Ltd. (supra) opined as under: The contention of the revenue was fallacious. The machinery which acquires a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis that the sum would ultimately be exhausted when the object for which it was paid was attained. The House of Lords held that this payment was in the nature of capital expenditure and was therefore not an admissible deduction. Although in the opinions expressed by the different members of the House of Lords the line of approach is not completely the same, the principle stated by Lord Cave in his speech has been accepted as a safe test to distinguish capital expenditure from revenue expenditure. It was recognised that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of business, may yet be expended wholly and exclusively for the purposes of the trade. The Lord Chancellor observed that the question appeared to be a question of fact which was proper to be decided by the Commissioners upon the evidence brought before them in each case. The test that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing that is going to recur every year was considered an use ..... X X X X Extracts X X X X X X X X Extracts X X X X
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