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TMI Blog2024 (2) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... verted into equity (at the option of the assessee) would not alter such advance as being in the nature of quasi capital. Commercial Expediency/ availability of interest free funds - As noted earlier, if the argument of commercial expediency were to be accepted as a guiding tool for non-applicability of transfer pricing adjustments to international transactions, then no transfer pricing adjustment can be made in respect to almost all international transactions between Associated Enterprises, since mostly such transactions are based on the principles of commercial expediency. Further, transfer pricing provisions are special provisions have been introduced specifically to ensure that there is no tax base erosion at the India level and profits are not shifted outside of India by way of certain pre-arranged transactions between associated enterprises. Therefore, the arguments that the advances were given out of one interest-free funds or that the transactions between the associated enterprises were guided by commercial principles, in our considered view, are irrelevant considerations for the purpose of computing arms length Price between associated enterprises, since transfer pricing pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 35 (2AB) - disallowance of expenditure on non-clinical trials on the ground that the DSIR (Department of Scientific and Industrial Research) in the report in Form 3CL has granted approval for a lesser amount as against the claim made by the assessee - AO observed that the DSIR had granted a short approval in respect of clinical trials and accordingly, no weighted deduction thereupon @ 50% was liable to be granted - HELD THAT:- As per the observations made by ITAT in assessee s own case for preceding assessment years [ 2015 (8) TMI 763 - ITAT AHMEDABAD] and the observations made by the Jurisdictional High Court in the case of Cadila Healthcare Ltd. [ 2013 (3) TMI 539 - GUJARAT HIGH COURT] as held held that Explanation to Section 35(2AB)(1) does not require that expenses included in said Explanation are essentially to be incurred inside an approved in-house research facility. - we are of the considered view that Ld. CIT(A) has not erred in facts and in law in making any disallowance with respect to the aforesaid issue. Claim of deduction u/s 35(2AB) towards weighted deduction relating to expenditure on accepted batches, building maintenance and patent filing fees - HELD THAT:- As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve any dividend income from these companies - HELD THAT:- We observe that Ld. CIT(A) has given a categorical finding that firstly, with respect to investment in partnership firm, the assessee s own interest free funds were far in excess of the investments made in the partnership, yielding exempt income and accordingly, no disallowance is called for. Further, in respect of the other three companies, the Ld. CIT(A) observed that since no exempt income was earned by the assessee during the impugned year under consideration, there is no question of disallowance under Section 14A of the Act. Accordingly, in view of the instant facts and the judicial precedents on the subject and the observations made by the Ld. CIT(A), we find no infirmity in the order of Ld. CIT(A), so as to call for any interference. Disallowance in respect of increase in authorized share capital - AO made disallowance of expenses towards ROC fees paid for increasing the authorized share capital for the reason that these expenses were capital in nature - HELD THAT:- In our considered view, after going through the facts of the instant case, Ld. CIT(A) has duly considered and distinguished the facts of the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on intangibles - HELD THAT:- On going through the instant facts and the decision cited by the assessee, we are of the considered view that in the interest of justice, the matter may be referred to the file of A.O. for consideration of the claim made by the assessee for deduction under Section 35(1)(i). TDS u/s 195 - disallowance u/s 40(a)(ia) towards commission paid outside India to non-resident agents - HELD THAT:- Before us, assessee submitted that the assessee has a good case on merits on the issue of non-deduction of TDS with respect to sales commission paid to non-resident commission agents and accordingly, in the interest of justice, the matter may be restored to the file of A.O. for de-novo consideration. Thus, in the interest of justice, the issue is restored to the file of A.O. for de-novo consideration, after giving due opportunity of hearing to the assessee. - SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER For the Appellant : Shri S. N. Soparkar, Sr. Advocate For the Respondent : Dr. Darsi Suman Ratnam, CIT D.R. ORDER PER SIDDHARTHA NAUTIYAL, JM: These bunch of appeals have been filed by the Assessee and the Revenue against the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable entities are accounting such expenses in its books of accounts in India on the ground that incurrence of such expenditure is the requirement of entities in India. Further the comparable companies are claiming deduction of such expenses in India and it has been allowed by the Revenue Authorities. (g) Without prejudice to Ground No. 1(1) to (f), in the facts and circumstances of the case and in las, the learned CIT(A) while confirming the upward adjustment of Rs. 80,34,261/-, has failed to appreciate that the arm's length rate of interest determined by the TPO was worked out after increasing interest rate by adhoc additional 100 basis points towards foreign exchange risk. 2. (a) In the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming disallowance to the extent of Rs. 12,12,20,245/- by rejecting books of accounts and on the ground that the appellant company failed to fully controvert the justification for lower gross profit rate (GP rate) and net profit rate (NP rate) as compared to GP rate and NP rate of M/s Intas Pharmaceuticals (partnership firm). (b) That in the facts and circumstances of case and in law, the learned CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances of the case and in law, the learned CIT(A) has further erred in confirming disallowance of Rs. 12,12,20,245/- even after observing that the appellant company made a gross profit of 53% on products purchases for trading from partnership as compared to gross profit of 44% on trading of products purchased from third party, which negates the allegation of the AO that some expense has been shifted from the hands of the firm to the hands of the appellant company. (f) Without prejudice to Ground No. 3(a) to 3(e) above, in the facts and circumstances of the case and in law, the learned CIT(A) while comparing the NP rate of appellant company vis-a-vis partnership firm, has erred in granting benefits of tax incentives under excise and VAT laws at 10% in place of 13.8%. (g) Without prejudice to Ground No. 3(a) to 3(e) above, in the facts and circumstances of the case and in law, the learned CIT(A) while comparing selling and distribution expenses has also erred in excluding freight and forwarding expenses on sales from the selling and distribution expenses of the appellant company. 2. In the facts and circumstances of the case, the learned CIT(A) has erred in disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IP) to the Book Profits u/s 115JB of the Act. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 6. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 7. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. Ground No.1 of the Assessee s Appeal (in ITA No. 1334/Ahd/2017) and Ground Number 1 of Department s Appeal (in ITA No. 1644/Ahd/2017)(A.Y. 2009-10):- 4. The brief facts in relation to this ground of appeal are that during the course of assessment proceedings, the Assessing Officer observed that the assessee is having international transactions with its Associated Enterprises. As per the transfer pricing study, the assessee had advanced amounts for the purpose of using the same towards filing of registration and other activities in overseas jurisdictions. The assessee did not charge any interest on such advances given to its Associated Enterprises. The assessee was of the view that since obtaining registration for assessee s products was essential for selling it s p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id discussion and following the decision of Honourable ITAT, the upward adjustments of Rs. 45,09,699/- made in respect of interest on the loans and advances to the aforesaid .three AEs in whose case loans and advances have been converted into equity and advances were in the nature of business advances as discussed above is uncalled for and the same is deleted. 3.17. With regard to the other foreign AEs namely; Accord Farmaceutical, Brazil, Accord Farma, SA, Accord Mexico, Accord Healthcare SAC, Peru, and Accord Healthcare, USA etc. there were no conversion of loans and advances made to them in the equity. Thus, it cannot be said that the loans and advances were granted to those AEs to have the management and control over the same. Although from some of these concerns, the appellant has realized the revenue by making exports to them but merely realisation of revenue in 4he form of sale proceeds is not the sole criteria for no upward adjustments. In view of the decision of Hon'ble ITAT,Ahmedabad in the case of Micro Inks Limited (supra), both the conditionsare to be satisfied i.e. the realisation of revenue by way of exports along with conversion of the loans and advances into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal of the assessee and the Department on this issue since the issues are connected. We shall briefly discuss the arguments taken up by the parties and our views on the same in light of the facts of the assessee s case. Advances being quasi capital in nature 10. The issue for consideration is whether since the amount which has been advanced to it s Associated Enterprises is quasi capital in nature, no transfer pricing adjustment is called for. 11. Looking into the instant facts, we are of the considered view that Ld. CIT(A) has erred in holding that the advances given by the assessee to three of it s Associated Enterprises is quasi capital on the ground that in the subsequent year the advance / loan has been converted into equity by the assessee. In our considered view, the test for determine whether the advanced / loan given by the assessee to it s Associated Enterprises is quasi capital in nature has to be seen at the time of granting of loan i.e. the nature of loan, whether it is quasi capital in nature or not has to be seen at the time of advancement of loan by the assessee to it s Associated Enterprises . In the case of Bialkhia Holdings Pvt. Ltd. vs. Additional Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transactions are determined in substance between such other person and the associated enterprise. 12. From the above, it is clear that lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether the same is at arm s length price has to be considered. The question of rate interest on the borrowing loan is an integral part of arm s length price of determination in this context. Thus, clearly the assessee contention seeks to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest rate applicable on said 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 non-refundable loan which is to be converted into equity. It is in this context that the loan, which is in the nature of quasi- capital, is treated differently than the normal loan transactions. [Para 8] The expression 'quasi-capital' 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-capital loans is not with the commercial borrowings but with the loans or advances which are given in the same or similar situations. In all the decisions of the coordinate benches, wherein references have been made to the advances being in the nature of 'quasi-capital', these cases referred to the situations in which (a) advances were made as capital could not be subscribed to due t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt turnover or that the advances were given out of interest free funds available with the assessee, in our view, are irrelevant consideration while deciding the issue of charging of interest by the assessee from it s AEs, since Transfer Pricing is a special provision for computing arm s length price in respect of international transactions between Associated Enterprises, with a view to ensure that there is no tax base erosion at the India level and shifting of profits to an overseas jurisdiction with a view to avoid taxes. 18. It would be useful to refer to the case of Tata Autocomp Systems Ltd. 21 taxmann.com 6 (Mumbai) wherein the ITAT has thrown light on this issue and observed that transaction of granting interest free loans by the assessee to it s non-resident Associated Enterprise comes within the ambit of international transaction and thus, such a transaction can be a subject matter of Arm s Length Price under Section 92 of the Act. Even in the aforesaid case, the issue for consideration before ITAT was that loan granted to the Associated Enterprise was in the nature of quasi equity and thus, whether notional interest could be computed. While passing the decision, the ITAT m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial provisions dealing with computation of income in an international transaction. Those provisions will prevail over the general provisions. Generalia Specialibus Non Derogant (general provisions must yield to the specific provisions). Generally speaking, the sections in the Act do not overlap one another and each section deals with the matter specified therein and goes no further. If a case appears to be governed by either of two provisions, it is clearly the right of the Assessee to claim that he should be assessed under the one, which leaves him with a lighter burden. When there is a conflict between a general provision and special provision, the latter shall prevail. 16. Interest-free loan extended to the associated concerns as at arm's length lending or borrowing money between two associated enterprises comes within the ambit of international transaction and whether the same is at arms length price has to be considered. The question of rate of interest on the borrowing loan is an integral part of arms length price redetermination in this context. The fact that the loan has the RBI's approval does not put a seal of approval on the true character of the transaction f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses incurred by the assessee on behalf of it s firm Intas Pharmaceuticals ) 23. The brief facts in relation to this ground of appeal are that the Assessing Officer made disallowance of certain expenses claimed by the assessee on the ground that same were pertaining to partnership firm namely M/s. Intas Pharmaceuticals in which assessee was a partner. Disallowance has been worked out by the Assessing Officer at Rs. 39,62,30,463/- being the difference of the net profit rate of 49.05% shown by the partnership firm namely M/s. Intas Pharmaceuticals and the estimated net profit rate taken by the Assessing Officer at 25%. The Assessing Officer was of the view that expenditures in the nature of Research and Development, packing expenses, financial expenses and selling and distribution expenses pertaining to the partnership firm have been expended by the assessee company and claimed in the Profit Loss Account of the assessee company, which resulted in deduction of the net profit of the assessee company. The Assessing Officer observed that the partnership firm in which the assessee is a partner has two units, one at Dehradun and another at Sikkim, which were claiming deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by Ld. CIT(A). We shall first take up the assessee s appeal. 26. Before us, the Counsel for the assessee at the outset submitted that this issue has been decided in favour of the assessee in assessee s own case for A.Ys. 2009-10 to 2011-12 in ITA Nos. 2377 to 2379/Ahd/2018 vide order dated 30.07.2021. Further, the Counsel for the assessee drew our attention to Page 78, Para 5.18 of the order passed by Ld. CIT(A) and submitted that the Department has not questioned the sale price at which the sales have been made by the partnership firm to the assessee company. Further, the Counsel for the assessee also drew our attention to Page 82 of the Ld. CIT(A) order in which Ld. CIT(A) has observed that the partnership firm has produced generic medicine for which no innovations / formulations have to be researched, whereas the assessee company has manufactured various products, where innovation is required. Further, the Counsel for the assessee has submitted that simply because the partnership firm have earned a higher profit rate as compared to the assessee company, cannot itself be a ground for coming to the conclusion that expenses of the partnership firm have been diverted in the han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 67,96,17,810 and simultaneously allowed the deduction under section 80-IC of the Act. 6. Being aggrieved by the order of the learned CIT (A), both the Revenue and the assessee are in appeal and the CO before us. 7. At the outset the learned AR before us submitted that appeals filed by the Revenue are not maintainable for the reason that whatever amount has been determined as income of the assessee, the same was allowed as deduction under section 80-IC of the Act, raising nil demand of tax. Accordingly the learned AR contended that the appeals filed by the Revenue should be dismissed in limine. 8. On the contrary, the learned DR agreed to the proposition projected by the learned AR for the assessee that the appeals filed by the Revenue are not maintainable. 9. The learned AR in his rejoinder submitted that if the appeals of the Revenue are not maintainable, then he doesn t want to press the issue raised by the assessee in the CO. 10. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, there is no effect on the tax liability on the assessee on account of the reduction made in the deduction claimed under section 80 IC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, during the impugned year under consideration. 33. The assessee filed appeal before Ld. CIT(A) on this issue and submitted that clinical trials are an essential activity for a pharmaceuticals company to market it s products and these trials are conducted by Clinical Research Organization (in short CRO ). Hence, a pharma company has to do clinical trials outside the organization. The assessee also relied upon the decision in it s favour by ITAT in assessee s own case for A.Ys. 2002-03 to 2004-05 and 2008-09 in IT(SS)A No. 807 809/Ahd/2010 and 20/Ahd/2011 dated 14.08.2015 and contended that this issue is squarely covered in favour of the assessee by the observations made by ITAT in assessee s own case, on similar set of facts. Accordingly, in light of the submissions made by the assessee, the Ld. CIT(A) allowed the appeal of the assessee on this issue with the following observations:- 6.13 Having considered the facts and the decision of CIT(A0 for the A.Y. 2007-08 2008-09, the clinical trials have been held to be an allowable expenditure u/s. 35(2AB) of the Act and subsequently, the Hon ble ITAT has also approved the findings of the CIT(A) referred above. Respectfully following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility provided by the assessee and approved by the prescribed authority. Before a pharmaceutical drug could be put in the market, the regulatory authorities would insist on strict tests and research on all possible aspects, such as possible reactions, effect of the drug and so on. Extensive clinical trials, therefore, would be an intrinsic part of development of any such new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. If we give such restricted meaning to the term expenditure incurred on in-house research and development facility, we would on one hand be completely diluting the deduction envisaged under sub-section (2AB) of section 35 and on the other, making the explanation noted above quite meaningless. We have noticed that for the purpose of the said clause in relation to drug and pharmaceuticals, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for pate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee drew our attention to the observations made by ITAT Ahmedabad in the case of Sun Pharmaceuticals Industries Ltd. vs. ACIT 84 taxmann.com 217 (Ahmedabad Tribunal) on the issue of weighted deduction with respect to product registration expenses / patent application (Pages 177 to 178 of the Paper Book). The Counsel for the assessee also relied upon certain other judicial precedents in support of claim of aforesaid expenditure, which in our considered view are distinguishable on facts. Accordingly, in light of observations made by Ld. CIT(A), the appeal of the assessee is partly allowed to the extent of weighted deduction with respect to foreign patent filing expenses under capital expenditure amounting to Rs. 0.19 lakhs. However, with respect to the balance amount, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. 42. In the result, Ground No. 3 of the assessee s appeal for A.Y. 2009- 10 is partly allowed. Ground No. 4 of the Department s appeal (deletion of expenses of Rs. 39.62 crores incurred by the assessee to earning exempt income under Section 10 (2A) on behalf of Intas Pharma, partnership firm to the book profit under Section 115JB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (e) That in the facts and circumstances of the case and in law, the learned CIT(A) has erred in not appreciating the fact that the activities performed by AEs have yielded numerous economic benefits to the appellant including increase in export turnover. (f) That in the facts and circumstances of the case and in law, without prejudice to above, the learned CIT(A) ought to have appreciated that the comparable entities are accounting such expenses in its books of accounts in India on the ground that incurrence of such expenditure is the requirement of entities in India. Further the comparable companies are claiming deduction of such expenses in India and it has been allowed by the Revenue Authorities. (g) Without prejudice to Ground No. 1(1) to (f), in the facts and circumstances of the case and in las, the learned CIT(A) while confirming the upward adjustment of Rs. 2,03,71,479/-, has failed to appreciate that the arm's length rate of interest determined by the TPO was worked out after increasing interest rate by adhoc additional 100 basis points towards foreign exchange risk ignoring the fact that during the year under consideration rupee appreciated against the US dollar. 2. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar range. Thus the comparison made by the AO by taking the average of the six company is not correct and the same is rejected. In the assessment order of the partnership firm or of the appellant company, the sale proceeds of the firm have not been doubted by the AO, therefore, there is no case of inflated profit on account of inflation of sale proceeds. The disallowance is based on the observation of the AO in respect of expenditures such as R D expenditure, selling and distribution expenses, packing expenses and financial cost belonging to the appellant firm but debited as expenses in the P L Account of appellant company which is not based on any specific details and evidences brought on record by AO. The AO has only guess worked the reasons of low NP rate of the appellant company vis-a-vis high NP rate of firm and supported the same with the theory of reducing the tax liability in the hands of appellant company. It is apparent that the firm has debited the various expenditures as noted above which were pertaining to it in its P L Account and hence, the AOs observation that it has incurred only manufacturing cost expenses is factually incorrect. As per the Income Tax provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its subsidiary firm 'Intas Pharmaceuticals from Rs 74,98,32,361/- to Rs 19,42,13,611 /- without properly appreciating the facts of the case and the material brought on record. 4. The Ld.CIT(A) has erred in law and on facts in allowing the deduction u/s 35(2AB) on the basis of expense claim made by the assessee in the P L Account instead of granting deduction on the amount approved by DSIR in Form 3CL 5. The Ld.CIT(A) has erred in law and on facts in deleting the addition of expense of Rs 74,98,32.361/- incurred by the assessee to earn exempt income u/s 10(2A) on behalf of Intas Pharma (IP) to the the Book Profits u/s 115JB of the Act 6. The Ld.CIT(A) has erred in law and on facts in allowing the expense of Rs 13,20,119/-incurred by the assessee towards issue of debentures as revenue expense instead of the treating the expense as capital expense 7. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 8. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 9. The appellant craves leave to amend or alter any ground o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s own acceptance placed on record before the AO / TPO, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. Further, we are also of the considered view that charging of corporate guarantee fee @ 0.8% is justified by the assessee in view of various judicial precedents on this issue and accordingly no further upward adjustment is called for as prayed by the Department. Accordingly, we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. 52. In the result, Ground No. 2 of the Department s appeal and Ground No. 2 of the Assessee s appeal are dismissed. Ground No. 6 of the Department s appeal (Expenses of Rs. 13,20,119/- towards issue of debentures) 53. The brief issue for consideration before us is whether Ld. CIT(A) erred in disallowing expenses of Rs. 13,20,119/- towards issue of debenture as revenue expenses instead of treating the expenses as capital expenditure. 54. The brief facts of the case are that the Assessing Officer made disallowance of debenture issue expenses for the reason that these expenses were incurred before the issue of debentures which are in the nature of legal expenses and services charges and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the assessee, in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue, a different view cannot be taken. o Commissioner of Income-tax V. ITC Hotels Ltd. [2010] 190 Taxman 430 (Karnataka) The honourable high court came to the conclusion that even if the debenture were to be converted into share at a later date, the expenditure incurred on such convertible debenture has to be. treated as a revenue expenditure. The ground of appeal is allowed. 55. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(A) on this issue. 56. On going through the facts of the case and the judicial precedents on the subject, we observe that we find no infirmity in the order of Ld. CIT(A) so as to call for any interference. The Ld. CIT(A) has given a specific finding that the funds received on issue of debentures were used by the assessee company in the course of business, these funds have not been deployed in any new projects and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble entities are accounting such expenses in its books of accounts in India on the ground that incurrence of such expenditure is the requirement of entities in India. Further the comparable companies are claiming deduction of such expenses in India and it has been allowed by the Revenue Authorities. (g) Without prejudice to Ground No. 1(1) to (f), in the facts and circumstances of the case and in las, the learned CIT(A) while confirming the upward adjustment of Rs. 1,48,92,713/-, has failed to appreciate that the arm's length rate of interest determined by the TPO was worked out after increasing interest rate by adhoc additional 100 basis points towards foreign exchange risk ignoring the fact that during the year under consideration rupee appreciated against the US dollar. 2. (a) In the facts and circumstances of the case and in law, the learned CIT(A) has erred in confirming upward adjustment to the extent of Rs. 28,050/- towards guarantee fees/commission. (b) That in the facts and circumstances of the case and in law, the learned CIT(A) failed to appreciate that corporate guarantee does not fall in the ambit of international transaction as it has no bearing on profit, loss or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO in respect of expenditures such as R D expenditure, selling and distribution expenses, packing expenses and financial cost belonging to the appellant firm but debited as expenses in the P L Account of appellant company which is not based on any specific details and evidences brought on record by AO. The AO has only guess worked the reasons of low NP rate of the appellant company vis-a-vis high NP rate of firm and supported the same with the theory of reducing the tax liability in the hands of appellant company. It is apparent that the firm has debited the various expenditures as noted above which were pertaining to it in its P L Account and hence, the AOs observation that it has incurred only manufacturing cost expenses is factually incorrect. As per the Income Tax provisions, the appellant company is different from the firm and their taxability are separately decided as per their business activities. Merely the appellant company has purchased majority of the products of the appellant firm does not mean that each and every deficiencies found in the case of the firm would call for the adverse inference in the case of the appellant company. (e) That in the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before them indicate that some refund or relief is due to him . 6. In the facts and circumstances of the case and in law, the learned CIT(A) erred in not admitting the additional ground raised by the appellant company relating to disallowance under section 40(a)((ia) of the Act towards commission paid outside India to non-resident agents operating outside India. The above grounds are independent and without prejudice to each other. The Appellant prays for leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal. 59. The Department has raised the following grounds of appeal:- 1. The Ld.CIT(A) has erred in law in deleting the upward adjustment of Rs 21563844/-made in respect of interest on loans and advances to Accord Newzeland, Accord UK and Accord Canada in whose case loans and advances have been converted int equity and advances were of nature of business advances. 2. The Ld.CIT(A) has erred in law and on facts in deleting the upward adjustment of Rs 42076/- made on account of charging of benchmark guarantee fees for the counter guarantee given on behalf of AEs. 3. The Ld.CIT(A) has erred in law and on facts in restricting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t s appeal for A.Y. 2010-11. Ground No. 3 (Restricting disallowance of expense incurred by assessee on behalf of its subsidiary firm Intas Pharmaceuticals ) 62. We observe that this issue has already been dismissed in Department s appeal for A.Y. 2009-10 in ITA No. 1644/Ahd/2017. Accordingly, this ground is dismissed as per directions given in Ground No. 2 of the Department s appeal for A.Y. 2009-10. Ground No. 4 (Disallowance under Section 35(2AB) on the basis of expense claim made by assessee in P L Account) 63. We observe that this issue has already been dismissed in Department s appeal for A.Y. 2009-10 in ITA No. 1644/Ahd/2017. Accordingly, this ground is dismissed as per directions given in Ground No. 3 of the Department s appeal for A.Y. 2009-10. Ground No. 5 (Ld. CIT(A) erred in deleting disallowance under Section 14A amounting to Rs. 5,53,94,595/-) 64. The brief facts in relation to this ground of appeal are that the Assessing Officer worked out a disallowance under Section 14A of the Act amounting to Rs. 6,07,22,166/- which includes the interest disallowance under Rule 8D(ii) at Rs. 4,89,00,633/- and administrative expenses under Rule 8D(2)(iii) at Rs. 1,18,21,533/-. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd income on investment in share of these companies, but for the strategic purposes. Since the appellant did not derive any dividend income from these companies, therefore, in absence of any exempt income, no disallowance in this regard is warranted as has been held by the Hon ble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd., Hon ble Punjab Haryana High Court in the case of CIT vs. Winsom Textile Ltd. and many more other decision / judgments discussed below. . 9.15 In view of the aforesaid discussion, the disallowance made by the AO invoking the provisions of section 14A of the Act is not correct and justified on the investment made in the shares on which no dividend income has been derived by the appellant. Hence, same is deleted except to the following discussion. . 9.17 Further, it has been noticed that the appellant had the capital employed in the partnership firm namely; Intas Pharmaceuticals in which it has derived the share of profit which was exempt as per the provisions of law. Since the investment in the said partnership firm was at Rs. 31,20,00,000/- as on 31/03/2011 as against Rs. 31,01,26,458/- as on 31/03/2010 which was much less than the average reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on 31.03.2010. Thus there was increase in the authorised share capital to the tune of Rs. 6500 lakhs in the year under consideration. Consequently, there was increase in the issued capital also because of the issuance of bonus shares of Rs. 5173.84 lakhs. Therefore, the issued capital increased from Rs. 5173.83 lakhs as on 31.03.2010 to Rs. 10347.67 lakhs as on 31.03.2011. This increase in share capital was on account of capitalisation of the general reserve for issuance of the fully paid bonus shares. The appellant claimed that these expenditures were directly linked to the increase in authorised capital for issue of bonus shares. The assessee company did not receive any enduring benefit by issue of bonus shares. No fresh capital was increased nor there was any inflow of new money in form of share capital in to the company. Thus, all the expenses incurred are allowable u/s. 37 of the Act. In support of its claim of expenditure, the appellant relied upon the judgment of Hon'ble Apex Court in the case of CIT Vs. M/s. General Insurance Corporation [286 ITR 23]. 71. In light of the submissions made by the assessee, the Ld. CIT(A) allowed the appeal of the assessee with the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay), which has again held that expenses incurred for issue of bonus shares are to be allowed as revenue expenditure. 74. We have heard the rival contentions and perused the material on record. In our considered view, after going through the facts of the instant case, Ld. CIT(A) has duly considered and distinguished the facts of the instant case from the case of Brooke Bond India Ltd. (supra) and has taken a view that this is not a case of increase in share capital simplicitor and hence the facts and issues for consideration in the instant case are different from the facts before the Hon ble Supreme Court in the case of Brooke Bond India Ltd. (supra). Accordingly, in light of the facts of the case, the observations made by Ld. CIT(A) we find no infirmity in the order Ld. CIT(A) so as to call for any interference. 75. In the result, Ground No. 6 of the Department s appeal is dismissed. Ground No. 7 of the Department s appeal (Disallowance of Rs. 3,77,00,339/- under Section 36(1)(iii) of the Act) 76. The brief facts in relation to this ground of appeal are that the Assessing Officer made disallowance of interest of Rs. 3,77,00,339/- on proportionate basis on the Capital Work-In-Progre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Pvt. Ltd. in Tax Appeal No. 620 to 625 of 2006 dated 17/12/2014, whereby the Hon'ble Gujarat High Court has held that when the interest free funds were available with the appellant then disallowance of interest u/s. 36(1) (iii) of the Act was unwarranted. (ii) CIT Vs. Raghuveer Synthetics Ltd. [(2013) 354 ITR 222]. The Hon'ble Gujarat High Court has held as under:- As can be noted from the order of the Tribunal, the Assessing Officer disallowed the interest solely on the ground that the assessee had given interest-free loans to the associate concerns, viz., R. R. Family Trust and Sagar Textile Mills and this disallowance, in appeal the Commissioner of Income-tax (Appeals) deleted by holding that the amount advanced to both R. R. Family Trust and Sagar Textiles Mils were not given during the year under consideration, but the same was given in the earlier years. The Commissioner of Income-tax (Appeals) had also taken note of the fact that there was sufficient funds available with the assessee-respondent on which there was no interest liability that had been incurred. In such circumstances, relying on the case of Torrent Financiers (supra), it found that the disallowance wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court has held that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments and therefore, interest was deductible. Similar view has been taken by the Division Bench of this Court in the case of CIT v. Gujarat State Fertilizers Chemicals Ltd. [2013] 358 ITR 323/36 taxmann.com 230/217 Taxman 229 (Guj.). Applying the ratio/law laid down by the Bombay High Court in the case of Reliance Utilities Power Ltd. (supra) as well as Division Bench of this Court in the case of Gujarat State Fertilizers Chemicals Ltd. (supra) to the facts of the case on hand and when it has been found that the assessee was having interest- free funds far in excess of investments and therefore, it can be said that the investments are made out of interest-free funds and therefore, the AO was not justified in making additions and/or making disallowance under section 36(1)(iii) of the IT Act. Under the circumstances, no error and/or illegality has been committed by the learned ITAT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance of proportionate interest by the Assessing Officer cannot be upheld. Thus where the assessee borrowed money for the purpose of the business and the interest paid thereon was disallowed proportionately by the Assessing Officer on the ground that the assessee did not charge interest on amounts receivable by it from its subsidiary company and others but the assessing officer had not shown any nexus or close relation between the loans obtained and the loans advanced free of interest, it was held that the disallowance was not justified ix) Gujarat Narmada Valley Fertilizers Co. Ltd. Vs. DCIT ITAT, Ahmedabad - A Bench [73 TTJ 787] Business expenditure interest on borrowed capital diversion of interest bearing advances to associate concerns without interest sufficient funds available with assessee on which no interest was paid no evidence to link the interest bearing loan obtained by assessee with interest free advances made to associate concerns addition deleted. Held On going through the figure in the balance sheet of the assessee company as on 1st April, 1994 and 31st March, 1995 it found that the share capital and the reserves and surplus together with the accumulated depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was no evidence to hold that borrowed money was utilized for purpose of advance to sister concerns, no disallowance of interest was warranted. We observe that Ld. CIT(A) has, after a detailed discussion on the facts of the case and judicial precedents as the subject decided this issue in favour of the assessee. Accordingly, we find no infirmity in the order of Ld. CIT(A), so as to call for any interference. 79. In the result, Ground No. 7 of the Department s appeal is dismissed. Ground No. 8 (Disallowance under Section 40A(2)(b) of Rs. 1,79,46,654/-) 80. The brief facts in relation to this ground of appeal are that during the course of assessment, the A.O. made a disallowance of Rs. 1,79,46,654/- in respect of purchases made and payment of services to related parties. The A.O. was of the view that the assessee has failed to furnish comparative evidences in respect of similar items of purchases from the group companies and from outside parties, so that reasonableness of payment in terms of provisions of Section 40A(2)(b) of the Act could be verified. The A.O. was of the view that the onus of the assessee to prove the genuineness and reasonableness of payments to parties under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he excessive payment on lumpsum basis @ 2.5% of the payments to them without any base. Even the AO has not given any basis showing that some excessive payments have been made by the appellant to the related parties. The onus wasupon the AO to prove the details and evidences that some excessive payments have been made and in the instant case, the appellant has tailed to provide such details. In this regard, reference is made to the judgments / decision of Hon'ble Courts briefly discussed as under:- (i) CIT Vs. Aditya Medisales Ltd. (Tax Appeal No. 559 of 2009dated 04/05/2000) (ii) Vipul Mehta Vs. ACIT (ITA No.869/Ahd/2010 dated 09/07/2010) (ITAT, Ahmedabad) (iii) Laxmi Pulse Rice And Roller Flour... vs Assessee on 1 August, 2012 by the Hon'ble INCOME TAX APPELLATE TRIBUNAL 'C BENCH - AHMEDABAD - IT(SS)A No.50, 51 and 52/Ahd/2010 - A.Y.: 2001-02, 2002-03 and 2003-04 The relevant extract of the decision is reproduced hereunder.- 5. We have heard the rival submissions, carefully perused the orders of the revenue and gone through the paper book submitted by the learned AR along with the certificate of Financial Broker, Fakhari JabirbhaiJambughodawala of Dahod dated 14-09-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcessive interest is not justified and is deleted accordingly and the ground of appeal No.1 is allowed. 5.1 In view of the above discussions, keeping consistency with the decision taken in similar facts and circumstances by our Co-ordinate Bench, we hereby allow the appeal of the assessee in IT(SS)A No.50/Ahd/2010 for AY 2001-02. 5.2 Since, the facts and issue involved in case of the assessee for AY 2002-03 and 2003-04 are similar to that of AY 2001-02 and both the sides requested the Bench that the decision taken in the case of the assessee in AY 2001-02 may be followed in AY 2002-03 and IT (SS) A No.50, 51 and 52/A/2010 (AY: 2001-02 to 2003-04) 7 Laxmi Pulse Rice Roller Mills, Vs ACIT, CC-1, Baroda 2003-04, we hereby allow both the appeals of the assessee in IT(SS)A No.51 and 52/Ahd/2010 for AY 2002-03 and 2003-04. Hon'ble ITAT A Bench, Ahmedabad in the case of ACIT Vs. M/sBudhalal Co. ITA No. 47/Ahd./2011 where in it is held that, there is nothing to suggest that the AO ever brought ant material on record on this aspect in respect of the fair market value of the facilities, for which the payment had been made, before concluding that expenditure was excessive or unreasonable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured loan is a bit higher than the rate of interest prevalent in respect of secured loan. Thus, as rate of interest in respect of secured loan from the bank in the case of the assessee was 16.5%, rate of interest in respect of unsecured loan @ 18% cannot be held as excessive or unreasonably higher than the market rate. Further, simply because the assessee could make a better bargain with some parties and could secure unsecured loan at a lower rate of interest, it does not imply that the market rate of interest was lower. In the instant case market rate of interest in respect of secured loan is evident by the bank loan taken by the assessee on which interest @ 16.5% was charged in respect ofactual borrowing and therefore interest of 18% in respect of unsecured loan cannot be held as excessive or unreasonable than the market rate so as to warrant any disallowance by invoking provisions of Section 40A(2) of the Act. In view of the above, we delete the disallowance of interest of Rs. 3,67,271/- and allow this ground of appeal of the assessee. 14.9. Even the AO has not given any reason or justification for adopting this rate of 2.5% and neither he has given any specific or comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) dismissed the appeal of the assessee with the following observations:- However, the appellant has not providing any explanation / details for eligibility of such claim not made in the return of income, but claimed through the letter in the assessment proceedings. Further, the appellant has claimed the deduction u/s. 35(12)(i) of the Act in the letter submitted to the AO, while in the grounds of appeal and submission, it has claimed the deduction u/s. 35(1)(iv) of the Act. Therefore, the justification of allowability of such expenditure has not been proved by the appellant either in the assessment proceedings or in the present appellate proceedings. Thus, the claim of the appellant cannot be said to be found eligible for deduction, and hence, no deduction is granted to the appellant. Thus, the ground of appeal is dismissed. 86. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(A) on this issue. Before us, the Counsel for the assessee relied on the decision of CIT vs. Mitesh Impex 46 taxmann.com 30 (Gujarat) and submitted that the Gujarat High Court has held that the Tribunal is within its power to entertain a new claim for the first time even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of good reasons for omission of such ground in original appeal memo - failure of assessee to give any reason, the additional ground could not be entertained - Held in the case of Batliboy Co. Ltd. Vs. DCIT [ITAT, MUM] 67 ITD 397, S. Kumar's Tyre Manufacturing Co. Ltd. Vs. DCIT [ITAT, Indore] 61 ITD 326. - Question of law can be raised afresh before ITAT if the relevant facts are on record - Appellant to satisfy that the ground raised was bonafide and the same could not have been raised earlier for good reasons. Held in the case of National Thermal Power Co. Ltd, Vs. CIT [SC] 229 ITR 383. 19.4. In view of the aforesaid discussion, the additional ground raised by the appellant does not deserve to be admitted and hence, the same is rejected and the ground of appeal is dismissed. 90. Before us, the Counsel for the assessee submitted that the assessee has a good case on merits on the issue of non-deduction of TDS with respect to sales commission paid to non-resident commission agents and accordingly, in the interest of justice, the matter may be restored to the file of A.O. for de-novo consideration. 91. On going through the facts of the instant case, and the arguments put by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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