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TMI Blog2024 (2) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction of Optionally Convertible Loans (OCL) issued by the assessee to its AE on account of charging of interest - HELD THAT:- Going through the decision of the ITAT in the preceding year, which is reproduced in the order of the ITAT for AY 2014-15 [ 2022 (9) TMI 1560 - ITAT AHMEDABAD] we have noted that the ITAT held the convertible loans advanced to the assessee to be in the nature of quasi-capital in the sense that, substantive reward or true consideration for such loan was not interest simplicitor on the amount advanced, but was an opportunity to own the capital on certain favourable terms. ITAT also noted the fact that whenever the assessee s right to exercise option on conversion of the loans into equity came to an end, it was entitled to interest on commercial rates and noting that it was not even the case of the authorities below that the interest so charged by the assessee in a situation in which the right of exercising the option had come to end, is not at an arm s length; that ITAT held that in such facts and circumstances, where the loans given by the assessee was found to be in the nature of quasi-capital and in the scenario of non-conversion of the loans into equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn by the Special Bench in Vireet Investments [ 2017 (6) TMI 1124 - ITAT DELHI] nor with the decision of the ITAT in case of the assesse in the immediately preceding A.Y 14-15. Therefore, the addition made to the book profits of the assessee on account of expenses disallowed under section 14A of the Act is directed to be deleted. Decided in favour of assessee. - Smt. Annapurna Gupta, Accountant Member And Ms. Suchitra Raghunath Kamble, Judicial Member For the Assessee : Shri Jigar Patel, AR For the Revenue : Shri Sudhendu Das, CIT-DR ORDER PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the assessee against order passed by the Transfer Pricing Officer/Assessing Officer dated 24.10.2019 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as the Act for short]for the Asst. Year 2015-16. 2. At the outset itself, it was submitted by the ld.counsel for the assessee that almost all issues raised in the grounds of appeal stand adjudicated by the ITAT/Hon ble High Court in the case of the assessee itself in the preceding years. A chart giving summary of the grounds raised before us and highlighting as to how the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 on the precise issue of TP adjustment made to the international transaction of bank guarantee provided by the assessee in its order passed in ITA No.17/Ahd/2019 dated 14-09-22, copy of which was placed before us. The ld.DR fairly agreed with the same, though, he relied heavily on the order of the TPO/AO. 7. Having heard contentions of both the parties, and having gone through the orders of the authorities below, we have noted from the same that the assessee was noted to have provided corporate guarantee fees to the AEs tabulated at para 5.3 (page no.12) of the TPO s order. The assessee, we have noted from the facts, had charged corporate guarantee from 1% from all AEs, except Zydus International P. Ltd., Ireland. With regard to the said entity, it had suo moto made adjustment by charging 1% of corporate guarantee in the return of income filed, which is noted in the details tabulated by the AO also. Thus is in a sense, the assessee had charged 1% corporate guarantee fees on all corporate guarantee provided to its AE enterprises. The TPO notes that majority of the corporate guarantees were given in earlier years, and continued to do so, and that the assessee s contentions made we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween 1% to 3% giving an average of about 2.0%. Accordingly, it would be appropriate to charge a corporate guarantee of 1.5% from the AE. In this cases the assessee itself has charged 1% on the Corporate Guarantee given for the AEs. In the given facts of the case, and respectfully following the ratio of the decision of the Hon'ble Supreme Court and the Hon'ble High Court as a above, we are of the considered view that the corporate guarantee at the rate of 1.5% is reasonable and, the same may be adopted. The TPO/AO is also directed to adjust the adjustments already made by the assessee on this, account out of the total adjustments computed adopting the rate at 1.5% as above. The ground is accordingly partly allowed. 9. We have gone through the orders of the ITAT in the case of the assessee itself in the immediately preceding year i.e. Asst. Year 2014- 15 in ITA No.17/Ahd/2019 dated 14.9.2022, and we have noted that identical issue was dealt with at para 4.00 to 6.1 of its order, wherein as in the present case, the AO/TPO had proposed adjustment on account of corporate guarantee by applying rate of 2.52% which was confirmed by the DRP. The ITAT, however, noted that in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and most of these guarantees are continuing guarantees. We, therefore, see no reasons to disturb the accepted past history of the case and disturb the corporate guarantee commission rate adopted by the assessee. As regards the TPO's observation that the concept of shareholder activity will apply only in respect of Zydus Netherlands as it was the holding company, and not the assessee company, all we can say is that admittedly the assessee company is the parent company for this holding company as well and the end beneficiary, therefore, is the assessee company. The observation made by the Assessing Officer is thus incorrect. In any case, the methodology adopted by the TPO for computation of arm's length price of these guarantees is wholly erroneous. The TPO has proceeded on the basis that the guarantee commission charges by the State Bank of India and Bank of India are static rates which held good in all circumstances, but then, in reality, the guarantee commission rates vary on a large number of factors and vary from client to client. The adoption of difference between coupon rate of A rated bonds and BB rated bonds is even more inappropriate and it proceeds on the assumptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally Convertible Loans (OCL) issued by the assessee to its AE on account of charging of interest thereon to the tune of Rs. 13,54,90,598/-. 13. This issue was also stated to be covered in favour of the assessee by the order of the ITAT in preceding years including immediately preceding year i.e. Asst. Year 2014-15. The ld.DR fairly agreed with the same, though, he heavily relied on the order of the AO, which was issued in accordance with directions of the DRP. 14. We have gone through the orders of the authority below, and we have noted from the order passed by the TPO proposing the impugned adjustment that he had noted the assessee to have advanced OCL to Zydus International P. Ltd., Ireland, subsidiary of the assesseecompany on which no interest had been charged. The details of the convertible loans so advanced is reproduced in a table at para 6.3 of the TPO s order. The AO noted the characteristic of these OCL to be comprising of five years loan tenure with the option for repayment or conversion of equity at par with the company any time during the tenure, and in case of repayment cumulative interest is payable from the date of providing loans at a specified basis for it. The TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the ITAT also noted the fact that whenever the assessee s right to exercise option on conversion of the loans into equity came to an end, it was entitled to interest on commercial rates and noting that it was not even the case of the authorities below that the interest so charged by the assessee in a situation in which the right of exercising the option had come to end, is not at an arm s length; that ITAT held that in such facts and circumstances, where the loans given by the assessee was found to be in the nature of quasi-capital and in the scenario of non-conversion of the loans into equity, the assessee was entitled to interest at commercial rate which was at arm s length, no TP adjustment on account of interest on such loans was warranted. 17. In view of the consistent finding of the ITAT in the case of the assessee itself, in the preceding assessment years, as noted by us, and in the light of the fact that no distinguishing facts has been brought to our notice by the Revenue, the issue, we hold, stands covered in favour of the assessee by the consistent decision of the ITAT, in its own case in preceding years. The ground No.1(b) is accordingly allowed. 18. Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce and Zydus Japan. The assessee's contention is that all these expenses were made by way of reimbursement on cost of cost basis to these overseas associated enterprises. With respect to reimbursements made to Zydus Mexico, the assessee's contention is that Zydus Mexico had incurred certain expenses related to clinical research and product registration for assessee's products. The assessee's contention is that the reimbursements have been made by the assessee for the products wherein the assessee is the IP owner and plays the role of entrepreneur whereas Zydus Mexico is only a distributor entity. With respect to reimbursement of expenses to Zydus France, the assessee submission was that the expenses have been reimbursed to Zydus France only for those matters where the assessee is acting as an entrepreneur (while the assessee admitted that for some products, he also acted as a contract manufacturer, but the assessee submitted that no reimbursements were made by the assessee to Zydus France in respect of the same). During the year, Zydus France had incurred certain expenses related to product submission and regulatory fees, control and testing fees, leaflet replaceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, assessee is the IP owner and therefore reimbursements were made in connection with protection of assessee's interest outside of India. He further drew our attention to the Transfer Pricing Study Report at pages 48 and 49 of the paper book to reiterate that the assessee is acting as an entrepreneur/IP owner and Zydus Mexico is acting as its distributor. He further drew attention to pages 593 to 613 of the paper book by giving necessary supporting for expenses reimbursed to Zydus Mexico for clinical research and product registration. The assessee further submitted that similar expenses were reimbursed by the assessee to Zydus USA, who is acting as a limited risk distributor for the assessee. The assessee obtained a favourable order of ITAT for assessment year 2012-13 (copy annexed at pages 166 to 168 of paper book) in respect of these reimbursements made by the assessee to Zydus USA. With respect to payments made to Zydus France, the counsel for the assessee submitted that the fact that the assessee is acting as an entrepreneur/IP owner and Zydus France is acting as its low risk distributor (LRD) is evident from the transfer pricing report at pages 48-49 of the paper book. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not questioned/challenged the assertion of the assessee that these expenses were reimbursed on a cost to cost basis. We further note that the assessee for assessment year 2012-13 and assessment year 2013-14 had reimbursed similar expenses towards associated Enterprise in USA and the TPO had determined the arm's-length price at Nil . In this respect, the key findings of the ITAT are reproduced below for reference. 23. We find that the TPO has, in essence, proceeded to make disallowance under section 37(1) by holding that there was no commercial expediency in making these reimbursements. That is certainly travelling beyond the domain of his powers under the scheme of the Act. The TPO only has to ascertain arm's length price of a transaction in the sense that if the same transaction was to be incurred between unrelated parties as to what would theoretically have been an arm's length price of the transaction in question, and that exercise is to be carried out on the basis of a permissible method of ascertaining arm's length price of a transaction. Whether the transaction should have taken place or not is not any of the TPO's business. It is not his job to decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm's length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned by the company and in respect of which US AE is only an LRD. The 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 som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of the case, and found that the assessee had reasonably demonstrated through documents that the expenses were incurred in respect of the assessee s business interest in the overseas jurisdiction and further noting that similar expenses reimbursed by AEs in Asst. Year 2012-13 and 2013-14 had been held to be at arm s length by the ITAT in its order passed for the said year. Since no distinguishing facts have been pointed out by the ld.DR from the facts of the preceding years, the decision rendered by the ITAT in Asst. Year 2014-15 will apply to the impugned year also, following which, we direct deletion of the adjustment made to the transaction of reimbursement of the expenses by AE to the assessee. Ground No.1(c) of the assessee is, accordingly, allowed. 23. Next ground is ground no.3 and 4are now being dealt with by us, which read as under: 3. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 28,40,80,823/- by holding that the Product Registration Expenses and expenses product for Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses. 4. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned expenses as capital in nature. Ground Nos.3 and 4 are accordingly allowed. 28. Ground No.5 and 6 read as under: 5. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 38,52,07,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) in respect of Clinical Trials and Bio-equivalence Study. 6. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 42,37,38,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) being non-eligible expenditure. 29. The above grounds, it was pointed out, related to the issue of claim of weighted deduction on expenditure incurred on in-house research and development in terms of section 35(2AB) of the Act denied by the AO/DRP on i) Expenses incurred outside the R D facility of the assessee in respect of clinical trials and bio-equivalent study conducted of Rs. 38,52,07,000/-, and ii) Expenses on in-house R D not approved by the designated authority for the purpose, i.e. Department of Scientific Industrial Research (DSIR) amounting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for the purpose of payment tax thereon in terms of provisions of section 115JB of the Act. 34. Since both the grounds related to the same issue, they were taken up together for hearing. 35. Ground No.7 was stated not pressed before us for adjudication, and is therefore dismissed as not pressed. 36. With respect to issue raised in ground no.8, the contentions of the ld.counsel for the assessee before us was that the disallowance made under section 14A of the Act, could not have been added to the book profits of the assessee under section 115JB of the Act, as held by the Special Bench of the ITAT in the case of ACIT Vs. Vireet Investment P. Ltd., 82 taxmann.com 415. It was also pointed out that identical issue had arisen in the case of the assessee for the immediately preceding year i.e. Asst. Year 2014-15, wherein the identical adjustment of expenses disallowed under section 14A of the Act to the book profits of the assessee was deleted by the ITAT following the decision of the Special Bench of the Tribunal in the case of Vireet Investment P. Ltd. (supra). The ld.DR fairly agreed with the same, though, he relied on the order of the AO. 37. In view of the above, we have no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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