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TMI Blog2024 (7) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation Bank was Rs. 2,16,72,580/- whereas the interest of STL from Allahabad Bank was Rs. 40,06,764/-. This interest was worked out on the basis of the actual lending period for which the amount was advanced to the AE. The TPO in his working has, however, considered the entire period of 180 days to work out the ALP interest. The interest from the AE can be charged only for the period for which the amount was actually advanced. The assessee might have obtained the loan from the banks for the entire 180 days period but the loan was advanced to the AE in installments. Therefore, the period for which the loan amount was lying with the assessee, no interest could have been charged from the AE. Hence, the adjustment in respect of Corporation Bank interest and in respect of Allahabad Bank interest is not found correct as the amount was not advanced to the AE for entire 180 days period. Therefore, the TP adjustment in respect of interest is deleted. Loan granted to its AE out of its own funds - TPO considered six months LIBOR (which was 0.79% for this year) + 4.75% as the comparable uncontrolled price for this transaction and had accordingly worked out the interest required to be char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arantee was obtained from a bank. Accordingly, the rate of commission charged by the Bank should be applied to determine the ALP. In the case of Rubamin Ltd. [ 2021 (10) TMI 506 - ITAT AHMEDABAD] the rate of 0.5% of guarantee commission was on the basis of average rate of commission charged by the Banks. Accordingly, we direct that guarantee commission adjustment in this case may be restricted @ 0.5% on the corporate guarantee amount - The grounds of Revenue are allowed in part. Disallowance u/s 36(1)(iii) - interest free advance - disallowance was made in respect of loans and advances given to all associated companies of the assessee - HELD THAT:- AO had made the disallowance of interest on the assumption that interest bearing funds were utilized for advancing interest free amounts to sister concern. However, no material has been brought on record to establish this nexus. On the other hand, the assessee has contended that it had sufficient interest free funds which were utilized for making advances to its sister concerns. No merit in the addition as made by the AO. An identical issue was involved in the A.Y. 2011-12, [ 2017 (9) TMI 727 - ITAT AHMEDABAD] which was decided against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO had considered deduction under Section 35(2AB) of the Act at Rs. 25,99,42,442/- only, which was 100% of R D expenses, whereas, the claim made by the assessee was Rs. 38,99,13,663/- @ 150% of the expense. Therefore, the Ld. CIT(A) had rightly directed the AO to allow weighted deduction @ 150% of the expense of R D. We do not find anything wrong with the direction of the Ld. CIT(A). Therefore, the ground taken by the Revenue is dismissed. Depreciation on R D Assets - entire cost of these assets was originally claimed as 100% deduction but was offered as income in the year in which it was removed from R D facility, thus the assessee was eligible to claim proportionate depreciation on these assets - HELD THAT:- The facts regarding this claim are not coming out clearly from the assessment order and from the order of the Ld. CIT(A). The contention of the assessee is that the entire cost of machinery taken out from R D facility Rs. 10,53,64,250/- was offered as income in the A.Y. 2009-10. The AO is directed to verify this fact from the records of A.Y. 2009-10. If the claim of the assessee is found to be correct, then the assessee is entitled to depreciation on this amount and accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaining to legal and professional services rendered from entities based in USA with respect to the fact of services rendered not involving any transfer of technical knowledge, skill or know-how etc. as also with respect to Article 12 of the DTAA between India and USA restricting the scope of FTS such services which made available technical knowledge, skill or know-how etc. - Decided against revenue. Foreign Currency Loss - treated as speculation loss - HELD THAT:- The nature of transactions in the current year was exactly similar to the nature of transaction as considered in the A.Y. 2011-12 [ 2017 (9) TMI 727 - ITAT AHMEDABAD] Therefore, the contention of the Revenue that there was a difference in the material fact cannot be accepted. Since, the findings of the Co-ordinate Bench of this Tribunal in A.Y. 2011-12 has been upheld by the Hon ble High Court, we do not find any reason to interfere with the order of the Ld. CIT(A) on this issue. Therefore, the ground taken by the Revenue is dismissed to hold losses arising from similar foreign exchange contracts to be business losses than speculative ones. Their lordships conclude that such exchange transactions are hedging transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber-1: TP adjustment of interest 4.1 The first ground of the assessee is in respect of transfer pricing adjustment towards interest . The assessee has obtained short term loan of Rs. 45 crores from Corporation Bank and Rs. 10 crores from Allahabad Bank at the rate of interest of 11.5% and 9.5% respectively. This loan amount was provided as short term financial assistance to its associated enterprise (AE) Satellite Overseas Holding Ltd. to enable the AE to make acquisition related business investment. In return for this financial assistance, the assessee had charged interest of Rs. 2,56,79,344/- from its AE at the average interest rate of 7.08%. In the course of assessment proceeding the matter was referred by the AO to the TPO to ascertain the arm s length price (ALP) of this international transaction. The TPO found that assessee had not recovered the full amount of interest from this AE. Accordingly, the differential amount of interest was considered for adjustment to make the recovery of interest from the AE at arm s length. The adjustment in respect of loan from Corporation Bank and Allahabad Bank was worked out by the TPO as under:- In addition, an adjustment of Rs. 11,62,068.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transaction of interest received on loan. Where the transaction was of lending money in foreign currency to its foreign subsidiary, the comparable transaction would be foreign currency tended by unrelated parties. This will be applicable in the situation where the loan is advanced to AE out of its own fund. However, in a case where the loan is advanced to AE out of loan taken from banks, this principle will not apply. In such a situation, the interest paid by the assessee to the banks must be recovered from the foreign AE. In case the interest charged by the assessee from the AE is less than the rate of interest paid to the banks, it would benefit the assessee by shifting profits outside India and principle of BEPS would be applicable to such transactions. Therefore, our approach has to be two-fold to assessee whether the transaction was at ALP: (i) Where the loan is advanced to AE by obtaining loan from the banks, whether the interest paid by the assessee to the banks was recovered from the AE. (ii) Where the loan is advanced to AE out of its own funds, whether the interest recovered was in accordance with the rate of interest prevailing in country of residence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts AE in respect of loans obtained from Corporation Bank and Allahabad Bank. However, the adjustment of Rs. 11,62,069/-, the working of which was reproduced at Page No.7 of his order, had not been adjudicated. Therefore, the matter is set aside to the file of the AO for read-judication of adjustment of Rs. 11,62,069/- in respect of interest on loan of Rs. 9,87,14,044/- advanced to the AE ought of its own fund, on the basis of the principle as enunciated in Para 4.5 of this order. 4.10 The ground taken by the assessee is allowed in part. 5. Ground Number-2: Deduction u/s 35(2AB) 5.1 The second ground pertains to additional claim of Rs. 60,36,617/- made by the assessee for weighted deduction u/s 35(2AB) of the Act on gross research and development (R D) expenditure, without reducing contract research income amounting to Rs. 1,20,73,234/- from eligible R D expense. The ld. A.R. explained that the assessee had made additional claim of Rs. 60,36,617/- being 50% of weighed deduction in respect of return towards CRO realization, which was suo moto disallowed by the assessee on a conservative basis. He explained that the assessee had earned certain income from contract research carried for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-10 which was decided in favour of the assessee by the Coordinate Bench of this Tribunal in ITA No. 52/Ahd/2020 dated 17-04-2024. The ground taken by the assessee is, therefore, allowed. 5.5 In the result, the appeal of the assessee is partly allowed. ITA No. 74/Ahd/2020 6. We now take up the Revenue s cross appeal being ITA No.74/Ahd/2020. At the outset the ld. AR submitted that most of the grounds taken by the Revenue are covered by the decision of the ld. ITAT, Ahmedabad in the assessee s own case for the A.Y. 2008-09 2009-10 vide Combined order in ITA No. 51 52/Ahd/2020 and ITA No.73and 76/Ahd/2020 dated 17/04/2024 as well as by the order for the A.Y. 2008-09 2011-12 in ITA No. 848 918/Ahd/2016 dated 11.09.2017 . The ld. CIT-DR while admitting this fact submitted that the Revenue is in appeal before the higher forum and that the facts in respect of some of the grounds were not properly appreciated. 7. The Revenue has raised the following grounds in this appeal: (1) That the Ld. CIT(A) has erred in law and on facts of the case by deleting the upward adjustment of Rs. 6127088/- on account of corporate guarantee tees made by the TPO. (2) That the Ld. CIT(A) has erred in law and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notwithstanding that no such claim was made in the ROI and does not emanate from the assessment order. (14) The CIT(A) has erred in facts and law in deleting the disallowance of Rs. 94.25.132/-u/s 40(a) (ia) of the Act. (15) The CIT(A) has erred in facts and law in deleting the foreign currency loss of Rs. 29.22.90.000/- which were treated as speculation loss based on the findings in the assessment order. (16) The CIT(A) has erred in facts and law in deleting the adjustment of Rs. 3.54,82.415/- made u/s 115JB of the Act. (17) The CIT(A) has erred in facts and law in directing the AO to allow weighted deduction @ 150% on expenditure of Rs. 25.99.42.442/- (18) It is, therefore, prayed that the order of Id. CIT(A) may be set aside and that of the Assessing Officer be restored. 8. Ground Number-1 to 4: TP adjustment of corporate guarantee fee 8.1 Ground Nos. 1 to 4 pertain to upward adjustment of Rs. 61,27,088/- in respect of corporate guarantee fees. The assessee had provided corporate guarantee to its AE but no guarantee fee was charged. The quantum of guarantee provided was Rs. 49,41,20,000/-. The assessee did not quantify the benefit accruing to the AE on account of pledge of share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. It is also not apparent as on what basis figure of 0.8% was arrived in the case of Intas Pharmaceuticals Ltd. (supra) . In the case of Mastek Ltd. (supra), the issue involved was performance guarantee and not corporate guarantee. Therefore, the facts of that case are found to be distinct and separate. In the case of Rubamin Ltd. (supra), the issue involved was guarantee commission and the adjustment was restricted to 0.5% of the guarantee amount, which was on the basis of average rate of commission for the guarantee obtained from Bank. The TP adjustment in international transaction has to be benchmarked on the basis of independent third-party transaction. Therefore, the adjustment of corporate guarantee has to be done in accordance with the guarantee fee paid in respect of third-party transaction and a fair yardstick for such adjustment would be what the assessee would have paid as guarantee commission, if the guarantee was obtained from a bank. Accordingly, the rate of commission charged by the Bank should be applied to determine the ALP. In the case of Rubamin Ltd. (supra), the rate of 0.5% of guarantee commission was on the basis of average rate of commission charged by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, do not find any reason to interfere with the order of Ld. CIT(A) deleting the disallowance of interest under Section 36(1)(iii) of the Act amounting to Rs. 99,06,570/-. The ground taken by the Revenue is dismissed. 10. Ground Number- 6, 7 17: Disallowance u/s 35(2AB) of the Act: 10.1 These three grounds pertain to claim of the assessee u/s 35(2AB) of the Act, hence, are dealt together. 10.2 Ground No.6 is regarding excess claim of Rs. 2,94,52,415/- under Section 35(2AB) of the Act over the amount approved by the DSIR. The assessee had claimed weighted deduction of Rs. 38,99,13,663/- which was 150% of actual expenses of Rs. 25,99,42,442/- on account of Research and Development (R D) expenditure. The AO found that the DSIR had approved total cost of Rs. 2112.84 lacs only in respect of in-house R D expenditure. The AO, therefore, disallowed the differential amount of Rs. 2,94,52,415/- by concluding that deduction was admissible only if such expenditure was approved by the DSIR. The Ld. CIT(A) deleted this addition following the decision of the ITAT in assessee s own case for A.Y. 2011-12 (supra). 10.3 We do not find any merit in the ground as taken by the Revenue. The AO had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in A.Y. 2011-12 as well as in A.Y 2009-10 (supra). Therefore, we do not find anything wrong with the order of the Ld. CIT(A) allowing this claim in this year. The only issue is about verification of actual expenses towards clinical trials carried out outside R D facility. This issue is not found discussed by the AO in the assessment order and verification of this expense doesn t appear to have been made. Therefore, the matter is set aside to the file of the AO for limited purpose of verification of actual expense incurred on clinical trials carried out outside R D facility. On verification, the claim of the assessee should be allowed as directed above. The ground is treated as dismissed for statistical purpose. 10.6 Ground No.-17 pertains to allowing of weighted deduction under Section 35(2AB) of the Act @150% on expenditure of Rs. 25,99,42,442/-. As mentioned earlier the assessee had claimed weighted deduction of Rs. 38,99,13,663/- (150%) under Section 35(2AB) of the Act on expense of Rs. 25,99,42,442/- on R D expense. In the assessment, the AO disallowed the claim of the assessee to the extent of Rs. 3,63,48,490/-. The assessee has taken separate grounds against these disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the entire cost of machinery was offered to tax in A.Y. 2009- 10 and, therefore, the assessee was eligible for additional depreciation of Rs. 68,96,075/-. The Ld. AR further submitted that the assessee had not claimed this depreciation in the return of income. Therefore, the addition of this claim by the AO resulted into double disallowance. 11.2 We have considered the rival submissions. The facts regarding this claim are not coming out clearly from the assessment order and from the order of the Ld. CIT(A). The contention of the assessee is that the entire cost of machinery taken out from R D facility Rs. 10,53,64,250/- was offered as income in the A.Y. 2009-10. The AO is directed to verify this fact from the records of A.Y. 2009-10. If the claim of the assessee is found to be correct, then the assessee is entitled to depreciation on this amount and accordingly depreciation on opening WDV of this asset should be allowed to the assessee in this year. 11.3 As regard disallowance of depreciation of Rs. 68,96,075/-, the assessee has contended that this amount was not claimed in the return of income. It appears that this depreciation of Rs. 68,96,075/- was claimed as set off in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance under Section 14A of the Act to Rs. 5,208/- equal to the exempt income earned during the year. The Ld. CIT(A) has followed the decision of the Tribunal on this issue in assessee s own case in the earlier years (supra). It is a settled position that the disallowance u/s 14A of the Act can t exceed the exempt income earned. We, therefore, do not see any reason to interfere with the order of the Ld. CIT(A) restricting the disallowance under Section 14A of the Act to the extent of exempt income earned by the assessee following the decision of the Co-ordinate Bench of this Tribunal on this issue in the earlier years. The ground raised by the Revenue is dismissed. 13.2 Ground No.13 pertains to additional claim of Rs. 2,82,07,492/- suo motto disallowed by the assessee under Section 14A of the Act. It is found from the assessment order that the AO has worked out total disallowance of Rs. 3,54,82,415/- under Section 14A r.w.s. Rule 8D. Since the assessee had suo motto disallowed Rs. 2,82,07,492/- in the computation of income, the AO had made addition of differential amount of Rs. 72,74,923/- only in the assessment order. As already discussed earlier in Ground No.12, the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FTS as the make available clause of the DTAA was not satisfied in this case. Considering these facts, the Ld. CIT(A) deleted the addition. The Ld. CIT-DR submitted that the CIT(A) had deleted the addition without properly appreciating the facts of the case. On the other hand, the Ld. AR submitted that this issue was also involved in the A.Y. 2008-09 and the Ld. ITAT had granted relief on this ground. 14.2 We have considered rival submissions. It is found that identical issue was involved in the assessee s own case in A.Y. 2008-09 and the Coordinate Bench of this Tribunal in ITA No.73/Ahd/2020 dated 17.04.2024 had given the following finding: 54. A bare perusal of the above would reveal that the disallowance was deleted by the ld.CIT(A), noting that the services rendered by the afore-noted entities all based in USA were characterized by the AO to be in the nature of fee for technical services, and further noting that the DTAA with USA restricted the scope of taxability of FTS in the source country only with respect to such services, which made available any technical knowledge, skill or know-how . The ld. CIT(A) noted that the assessee having obtained legal or professional services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of difference is exchange valuations. It was held that this would not amount to be a speculative activity but instead business activity. 2) Friends and Friends Shipping (P) Ltd - [2013] 35 taxmann.com 553 (Gui) In this case Assessee was an exporter who had entered into foreign exchange contracts to hedge against loss arising due to fluctuation where in some cases exports could not be executed and assessee had to pay certain charges to banks. It was held that where forward contracts were incidental to assessee's business, loss could not be called speculative in nature. 3). Boderadas Gauridu (P) Ltd [2004] 134 taxman 376 (Bombay) In this case Assessee was an exporter who had booked foreign exchange in forward market with bank in order to hedge against losses but some contracts failed due to which it had to pay a certain amount which was debited from its P I account and was claimed as business loss. It was held that such claim was entitled to be deducted in respect of loss suffered by assessee as a business loss. 4) Ssoraimall Nagarmull [1981] 5 taxman 289 (Calcutta) In this case Assessee was an exporter who had entered into foreign exchange contract for 1 lakhs pounds but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange were to be settled on a particular day of month on basis of underline exposure which was 4 Million USD per month and when converted into INR it works out to be 200 Crores a year which is more or less equivalent to its total turnover exposure, thus assessee was not to produce documents related to actual exports but instead base on total turnover. An exposure of 200Crs a year would bring the monthly exports to around 16 Crores at the same time it can safely be assumed that not all exports remain without payment or incur losses. Even if the payment is made for only half i.e. exports worth around 8 crores the exposure should have been to cover the remaining half i.e. around 8 crores INR monthly. However, here the monthly cover is taken almost twice to what could be the actual exports. In addition to this it is also pertinent to mention that the dollar rate over the year fluctuates hardly on the lines of 1 or 2 INR for which even the bank would charge minuscule interest. Thus, exposure of over 200 crores (ie. the total export turnover), in addition to the parallel arrangement with 2 other banks with a hedging contract which does not stand on equal footing, is a complete and ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign currency exposure in import/export transactions with public sector banks to cover fluctuation risk upto Rs. 200 crores. One of the bank namely Bank of Baroda is stated to have issued a certificate dated 12.02.2015 claiming realization of Rs. 123,71,57,417/- which could be realized to the tune of Rs. 111,72,18,092/- as on 31.03.2011. Its SBI contract enabled it to book losses against the above unrealized bills. Lower authorities as well as learned Departmental Representative do not rebut this factual position. The assessee claims to have been inter alia recording its sales to overseas clients on the day of transaction in its books in Indian currency at the rate prevailing on the very day, it would lodge conversion claim upon payment of its consideration money by said customers, this currency settlement took time after lodgment to be realized resulting in fluctuation loss as is the case herein. We notice in this backdrop that hon ble jurisdictional high court s decision in CIT vs. Friends Friends Shipping Pvt. Ltd. (2013) 35 taxmann.com 553 (Guj) holds losses arising from similar foreign exchange contracts to be business losses than speculative ones. Their lordships conclude that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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