Income Tax Appellate Tribunal - Ahmedabad
Sun Pharmaceuticals Industries Ltd.,, ... vs The Dy. Commissioner Of Income Tax, ... on 8 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "I" BENCH
(BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
& SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER)
ITA. Nos: 1666 & 1663/AHD/2016
(Assessment Year: 2009-10)
Sun Pharmaceutical V/S Deputy Commissioner of
Industries Ltd. SPARC, Income Tax Circle-2(1)(1),
Tandalja, Baroda-20 Baroda
Deputy Commissioner of V/S Sun Pharmaceutical
Income Tax Circle-2(1)(1), Industries Ltd. SPARC,
Baroda Tandalja, Baroda-20
(Appellant) (Respondent)
PAN: AADCS3124K
Appellant by : Shri S. N. Soparkar , Vartik
Choksi with Parin Shah
Respondent by : Shri R. M. Tiwari, CIT/ DR
(आदे श)/ORDER
Date of hearing : 05 -07-2017
Date of Pronouncement : 08 -09-2017
PER N.K. BILLAIYA, ACCOUNTANT MEMBER
2 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
1. ITA Nos. 1666 & 1663/Ahd/2016 are cross appeals by the Assessee and the Revenue preferred against the very same order of the Ld. CIT(A)- 2,Vadodara dated 31.03.2016 pertaining to A.Y. 2009-10.
2. Both these appeals were heard together and are disposed of by this common order for the sake of convenience and brevity.
3. At the very outset, the ld. Senior Counsel stated that the underlying issues in this cross appeals are identical to the issues decided by the Tribunal in earlier years. The ld. D.R. fairly conceded to this. On such concession, we proceed to take up assessee's appeal first.
4. Ground Nos. 1 & 2 is of general in nature and needs no separate adjudication.
5. Ground no. 3 relates to the addition on account of share application money advanced to Sun Pharma global Inc (SPGI) amounting to Rs. 4,00,64,965/-.
6. During the course of the scrutiny assessment proceedings, the AO/TPO noticed that as on 31.03.2009 the share application money pending allotment was Rs. 50.85 crores. The AO/TPO was of the opinion that the assessee should have charged interest at LIBOR plus basis. The assessee strongly objected to this proposition for TP adjustment stating that till the amount advanced for shares is actually adjusted towards allotment of equity shares, the amount is to be treated as advance towards share 3 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 application money and the share application money shown as outstanding as on 31.03.2009 was subsequently converted into equity in A.Y. 2010-11. It was strongly contended that the assessee had sourced the application money to its AE out of the excess funds lying idle out of the issue of FCCB. The contentions of the assessee did not find any favour with the AO/TPO who computed the arms length interest rate at average Libor plus 3.95% which included foreign exchange risk of 1%.
7. The assessee carried the matter before the ld. CIT(A) who after considering the facts and the submissions observed at Para 5.3 of his order that the facts in this year are identical to the facts of A.Y. 2008-09. However, at the same time, the ld. CIT(A) was of the opinion that no adjustment is required on account of foreign exchange risk and accordingly reduced the arm's length interest rate by 1% and confirmed the addition to the extent of Rs. 3,37,65,436/-.
8. Before us, the ld. Senior Counsel drew our attention, the decision of the Tribunal in assessee's own case in ITA No. 3297 & 3420/Ahd/2014 vide order dated 16.06.2017 and pointed out that the issue has been decided in favour of the assessee and against the revenue by the Bench. We find force in the contention of the ld. Senior Counsel. A similar issue was decided by the Tribunal (supra), and the relevant findings read as under:-
13. We have given a thoughtful consideration to the rival contentions qua the facts in issue before us.4 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
14. The crucial fact relates to the balance as at 31st March, 2007 shown under the head advances as share application money to Sun Pharma Global Inc. BVI at Rs. 1469.7 million and the same has been reflected as on 31.03.2008 at Rs.
1007.4 million. If these figures are considered it emerges that shares worth 462.3 million were allotted to the assessee company during the year under consideration and the balance were allotted in the subsequent financial years. This means that the balance of the application money remained so pending allotment. In our considered view, relevant provisions of Indian Companies Act will not be applicable to this case and deferent countries have separate laws/ regulation on such issue. Adjustment on account of notional interest on share application money which is not disputed be to be so are not liable to be re- characterized as loans only because there was a delay in allotment of share is not justifiable, more so when assesse has given plausible reason for such delay to avoid repetitive documentation and other regulatory exigencies. There is no dispute that the AE is a 100% subsidiary of the appellant company and the appellant company in its capacity as sole owner of the subsidiary ny subscribing to share capital is beneficiary of all the gains of the subsidiary company. Merely, because allotment of shares is delayed and in books share application money is reflected as advance for share application money till the allotment would not alter the characterization to the prejudice of assessee's position anyway. In our considered view, the percentage of ownership is the only material factor which remains at 100% prior to allotment and also post allotment. As the assessee is the only shareholder in it's 100% owned subsidiary company SPG BVI it should not make any difference merely because part of the share application money is converted into equity shares and the balance were allotted in subsequent assessment years. We, therefore, do not find any merit in the submissions of revenue in this behalf. This proposition, is reinforced by the decision of the Co- ordinate Bench in the case of Sterling Oil Resources (P.) Ltd. in ITA No. 1791/Mum/2014. The relevant part reads as under:-
5 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
9. There is one more aspect of the matter. In the present case, allotment of shares does not make any change to the position of the assessee, as the subsidiary' is admittedly a wholly owned subsidiary of the assessee. A delay in allotment of shares by the subsidiary company, as long as the subsidiary is a wholly owned subsidiary, does not prejudice the interests of the assessee. It is, therefore, wrong to even allege that an assessee does not behave in a commercially rationale manner, as expected in an arm's length situation, when the assessee does not ask for payment of interest for the period of delay in allotment of shares. We have noted that the TPO's stand that since the assessee was not issued shares during the period, the assessee did not derive any benefit from this investment and, for this reason, the arm's length price adjustment has been made for notional interest for the money which should be assessee's reward for the investment. What the TPO and DRP have overlooked is that since the assessee was only shareholder of the subsidiary company, the fruits of this investment belong to the assesse only and in entirety. On giving this money to the subsidiary and on use of this money by the subsidiary, the assessee, in its capacity as sole owner of the subsidiary, is beneficiary of all the gains of the subsidiary company. Whether the assessee was allotted these shares or not, the assessee was the only shareholder of the subsidiary company and beneficial owner of all the earnings and all the assets of the company. Non allotment of these shares, during the period of payment of share application money till the actual date of allotment, did not, therefore, prejudice assessee's position anyway. All the earnings of the subsidiary company belonged to the assessee in any situation. For example, if the funds available for dividend distribution for this year were say Rs 1,00,000 and the assessee had 100 shares before new allotment of shares and 1000 shares after the allotment, the assessee would be entitled to Rs 1,00,000 only the either way- whether as Rs 1,000 per share for 100 in pre new allotment situation or whether as Rs 100 per share for 1,000 shares in post new allotment situation. In absolute terms, the dividends remain the same. Whether the assessee is allotted more shares or not is wholly academic as the assessee is a single shareholder of the subsidiary company and the face value of shares does not affect the actual benefits of the assessee, the percentage of ownership is the only material factor- which remains at 100% pre new allotment as also post new allotment. In the case of CH v, EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi). Hon'ble Delhi High Court has, though in a very different context and which is materially different from a situation in which the payment is made for subscription of share capital- as in this case, held that re-characterization of a transaction is possible in only two 6 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 situations - i.e. (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of time, it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder- as is the factual position in this case. The nominal value of shares, as long as all the shares are held by the assessee is entirely benefit neutral from a commercial point of view. The very foundation of the adjustment made by the Assessing Officer is, therefore, wholly devoid of legally sustainable merits and factually correct assumptions.
15. Considering the facts in totality, we set aside the findings of the ld. CIT(A) and direct the A.O. to delete the addition of Rs. 6,56,60,828/-. Ground no. 2 is allowed.
9. Considering the fact that the First Appellate Authority himself has observed that the facts are identical, we do not find any reason to deviate from the findings given by the Bench in A.Y. 2008-09. We, accordingly direct the A.O. to delete the addition of Rs. 4,00,64,965/-. Ground no. 3 is allowed.
10.Ground no. 4 relates to the addition on account of interest on fully convertible optional debentures subscribed to Sun Pharma Global Inc (SPGI).
11. The AO/TPO has made addition of Rs. 17.32 crores being the amount of interest on 0% OFCD subscribed to in SPGI. The AO/TPO has made the 7 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 upward adjustment on the basis of Average six month LIBOR of 2.69% + spread over LIBOR of 3.95% totaling to 6.64%.
12.When the matter was agitated before the ld. CIT(A). At Para 6.3, the First Appellate Authority observed that the facts are identical to the facts of A.Y. 2008-09 and the appellant has also furnished identical submissions during the course of present appellate proceedings. Following the findings of his predecessor for A.Y. 2008-09, the First Appellate Authority confirmed the upward adjustment after giving a relief on account of 1% reduction in rate.
13.Before us, the ld. Senior Counsel stated that this issue has already been decided by the Tribunal in A.Y. 2008-09 vide order dated 16.06.2017 in ITA Nos. 3297 & 3420/Ahd/2014. We find force in the contention of the ld. counsel. The Tribunal has considered this issue vide ground no. 3 of the appeal wherein the Tribunal had followed the order of the Co-ordinate Bench for earlier years. The relevant findings of the Tribunal reads as under:-
19. Shri G.C. Shrivastava referred to the decision of the Hon'ble Supreme Court in the case of Sahara India Real Estate Corporation Ltd. in Civil Appeal No. 9813 of 2011. It is contended that the Hon'ble Supreme Court has explained the nature of OFCDs and have held that OFCDs are hybrid securities which remained in the nature of debentures till they are converted into equity, after which they take form of equity. Counsel further pointed out that in the earlier assessment years, the Bench has drawn support from the decision in the case of Cadila Healthcare in ITA No. 2430/Ahd/2012 without appreciating the fact that in that case, the assessee has produced comparable data to show that independent parties had 8 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 entered into agreements with similar terms (benefits) and not charged any interest thereon whereas in the case in hand, the assessee has not produced comparable data to justify that OFCDs were issued at arm's length price. It is strongly contended that since these facts have not been brought on record, therefore, the Bench should not follow its earlier decision.
20. Shri Soparkar ld. senior counsel replying to the submissions of revenue stated that the decision of the Hon'ble Supreme Court in the case of Sahara India Real Estate (Civil Application) No. 9813 of 2011 relied upon by the learned DR is not applicable to the issue before the Hon'ble ITAT. Even if it is held that OFCD is a hybrid instrument as laid down by the Supreme Court, in applying the Transfer Pricing Provisions, the entire instrument has to be considered and the same cannot be re-characterized partly as loan and partly as equity so as to enable any transfer pricing adjustment for the same. In this regard, we rely on the decisions cited earlier, which have been appropriately followed by the Hon'ble ITAT in A.Y. 2007-08 and the decision of the Supreme Court (supra) cited by the ld. DR does not in any way justify any departure from the decision laid down in A.Y. 2007-08.
21. Adverting to ld. DR's contention that the terms of OFCDs and comparables have not been submitted, it is contended that the terms of OFCDs were duly submitted before the lower authorities in the form of Annexure B which is part of the PB. Similarly the allegation that assessee has not brought on record any comparable transactions to show that non-charging of interest was at arms-
length and it got compensated by favorable terms similar to that offered by uncontrolled entities is also strongly refuted. It is contended all the relevant details and comparable were furnished as Annexure B in which it has been submitted that the conversion of OFCD into equity shares at a price of USD 21- USD 51 per share as against the net asset value of the shares at the relevant point in time being USD 87 per share. Thus it is clear that the OFCDs were convertible into shares at significant discount to the prevailing book value of the shares giving rise to sizeable benefit on OFCDs. It is also submitted that the 9 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 OFCDs have been converted into equity shares in the subsequent years; hence, the question of payment of any interest on the OFCDs would not arise, as the same is fully towards capital account. The Ld Senior counsel continued by saying that the Hon'ble ITAT in A.Y. 2007-08 and in earlier years has not committed any error whatsoever in coming to the conclusion, which is duly supported by other decisions and the position prevailing under Law. Hence no departure is called for much less due to the decision of Supreme Court in Sahara (supra).
22. We have given a thoughtful consideration to the rival submissions qua the issue. Adverting to the claim of revenue that in the earlier year, the bench has not considered certain facts while relying upon the decision of the Co-ordinate Bench in the case of Cadila Healthcare.
23. The Hon'ble High Court in the case of A.P.V. Kokkiliagada Meerayya, Masud Khan has laid down the following :
28. There can be no dispute with respect to the settled legal proposition that a judgment of this Court is binding, particularly, when the same is that of a coordinate Bench, or of a larger Bench. It is also correct to state that, even if a particular issue has not been agitated earlier, or a particular argument was advanced, but was not considered, the said judgment does not lose its binding effect, provided that the point with reference to which an argument is subsequently advanced, has actually been decided. The decision therefore would not lose its authority, "merely because it was badly argued, inadequately considered or fallaciously reasoned". The case must be considered taking note of the ratio decidendi of the same i.e. the general reasons, or the genera! grounds upon which the decision of the court is based, or on the test or abstract, of the specific peculiarities of the particular case, which finally gives rise to the decision.
(Vide Somawanti v. State of Punjab, Ballabhadas Mathurdas Lakhani v. Municipal Committee, Matkapui, Ambika Prasad Mishra v. State of U.P and Director of Settlements v. M.R. Apparao.)
24. The Hon'ble Jurisdictional High Court of Gujarat in the case of Core Healthcare Ltd. 251 ITR 61 has observed as under:-
10 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10 As laid down by the apex court in the case of Ambika Prasad Mishra v. State of U.P., AIR 1980 SC 1762 ; [1980] 3 SCC 719 (page 1764 of AIR 1980 SC):
"Every new discovery or/argumentative novelty cannot undo or compel reconsideration of a binding precedent . . .
a decision does not lose its authority 'merely because it was badly argued, inadequately considered and fallaciously reasoned' . . ."
Similarly in the case of Kesho Ram and Co. v. Union of India [1989] 3 SCC 151, it is stated by the Supreme Court thus (page 160):
"The binding effect of a decision of this court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision ..."
25. A similar view is again taken by the Hon'ble Jurisdictional High Court of Gujarat in the case of Nirma Industries Ltd. 283 ITR 402. Coming to the facts of the year under consideration, we do not find any distinction from the decision taken in earlier assessment year by the Bench and the relevant findings read as under:-
8. We have heard the rival contentions and have carefully perused the orders of the authorities below. At the very outset, we have to state that the revenue has no power to re-characterize the transaction. The Hon'ble High Court of Delhi in the case of Cotton Naturals India Pvt. Ltd. 276 CTR 445 at para 17 of its order has held that Chapter X and Transfer Pricing rules do not permit the Revenue authorities to step into the shoes of the assessee and decide whether or not a transaction should not be entered. It is for the assessee to take commercial decisions and decide how to conduct and carry on its business. Actual business transactions that are legitimate cannot be restructured. A similar view was taken by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. 345 ITR 241.
9. On identical set of facts, the Co-ordinate Bench had the occasion to consider similar issue in the case of Cadila Healthcare Ltd. in ITA No. 2430/Ahd/12 with C.O. No. 242/Ahd/12 in 146 ITR 502 wherein the first ground related to the adjustment made on account of notional interest on Optionally Convertible Debenture to Foreign Subsidiary. The Tribunal considered the following facts:-11 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
4. During the course of assessment proceedings, Assessing Officer noticed that Assessee had subscribed to Optionally Convertible Loan of U.S. $ 27 Million issued by Zydus International Pvt. Ltd., Ireland. Accordingly reference under Section 92CA of the Act for computing of arms length price in relation to the transaction was made to Transfer Pricing Officer (TPO). TPO noted that the Assessee had entered into an agreement with Zydus International Pvt. Ltd. on 09.10.2007 for a convertible loan of U.S $ 27 Million which was subsequently utilized by the Ireland Company for acquiring shares in Zydus Healthcare, Brazil. As per the terms of agreement, no interest was payable if the amount was converted into equity. However, if the same is redeemed, interest was payable at Libor Plus 290 bps and the interest was to be computed at annual rates and payable at maturity that is 5 years from the date of first disbursement.
The rupee value of the amount of loan as on 31.03.2008 was Rs. 108.32 crore. It was also noticed that Assessee has not shown any income from the aforesaid loan. In response, Assessee interalia submitted that Assessee had not opted for conversion of the loan during the year and therefore it was loan for the year and as per the terms of agreement, no interest accrued to the Assessee and therefore no income was considered. The TPO did not find the contention of the Assessee acceptable. He considered the Optionally Fully Convertible loan as debt and considering the average six month Euro Libor rate for the year @ 4.48% to which he added the interest rate of 2.90 basis point as per the agreement and thereafter considered the rate of interest to be @ 7.38% and accordingly computed the interest on Rs. 108.32 Crore for 171 days at 7.38%. The aforesaid adjustment made by the TPO was considered by the Assessing Officer and the addition of Rs. 3,99,74,4267- was made to the income. Aggrieved by the order of Assessing Officer, Assessee carried the matter before CIT(A). CIT(A) after considering the submissions made by the Assessee decided the issue in favour of Assessee.
10. And the Tribunal held as under:-
7. We have heard the rival submissions and perused the material on record. CIT(A) while deleting the addition has noted that as per the agreement, the interest was payable only if the conversion option was not exercised on the expiry of 5 year period. If at any time during the 5 year period conversion option was exercised and the loan was converted into 12 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 equity, no interest accrued or become payable. He further noted that the funds were provided by the Assessee as per RBI guidelines and in the immediately next year, the entire loan given to subsidiary was converted into equity shares of Zydus International Pvt. Ltd. He has further held that since the Assessee has converted the loan into equity in the immediate next year, there was no question of taxing notional interest. He has further held that Assessee had not granted interest free loan but invested in optionally convertible loan with a clause of interest in case, Conversion option was not exercised and further held the Assessee's transaction with subsidiary was at arms length. Before us, the Revenue could not controvert the findings of CIT(A) by bringing any contrary material on record. In view of these facts, we find no reason to interfere with the order of CIT(A).
11. Respectfully following the findings of the Hon'ble High court (supra) and the Co-ordinate Bench (supra), we direct the A.O to delete the impugned additions. Ground no. 2 is accordingly allowed.
26. Thus, the distinguishing facts as canvassed by the Shri Shrivastava do not culminate in to any proposition so as to convince us to take any divergence from earlier findings and the judicial discipline also guides us to follow the decision of the Co-ordinate Bench in the light of the ratio laid down by the Hon'ble Supreme Court and the Hon'ble Jurisdictional High Court of Gujarat (supra) and considering the fact that the OFCD were on beneficial terms as per facts mentioned above. Consequently, we have no hesitation to follow earlier judgment in assessee's own case as a result we delete the impugned additions. Ground No. 3 of assessee is allowed
14.Finding parity in the facts, respectfully following the findings of the Co- ordinate Bench, we direct the A.O. to delete the addition of Rs. 17,32,96,800/-. Ground no. 4 is accordingly allowed.
13 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
15.Ground no. 5 relates to the addition on account of Corporate Guarantee Provided to associated enterprises Sun Pharmaceutical Bangladesh Ltd. amounting to Rs. 21,90,400/-.
16.The AO/TPO noticed that the assessee has provided Corporate Guarantee to its AE Sun Pharmaceutical Bangladesh Ltd without charging any guarantee fees. Treating the same as an international transaction upward adjustment of Rs. 21,90,400/- was made.
17.Assessee assailed the addition before the ld. CIT(A) and the First Appellate Authority at Para 7.3 of his order observed that the facts are identical to the facts of A.Y. 2008-09 and in the same paragraph, the First Appellate Authority further observed that since the facts are similar in this year also in order to maintain consistency he followed the findings given by his predecessor in A.Y. 2008-09.
18. Before us, the ld. Senior Counsel drew our attention to the relevant findings of the Tribunal for A.Y. 2008-09 and the relevant findings read as under:-
33. Following our own findings given in A.Y. 2007-08 in ITA No. 2076 & 2067/Ahd/2013, we set aside this issue to the file of the ld. CIT(A) (to avoid any issue of limitation to give effect to ITAT order as apprehended by ld. CR) with a direction that this issue may be decided in accordance with Hon'ble Jurisdictional High Court of Gujarat and after giving adequate of hearing to the assessee . Ground no. 4 is accordingly treated as allowed for statistical purpose.14 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
19. Respectfully following the findings of the Co-ordinate Bench (supra), we hold accordingly. Ground no. 5 is treated as allowed for statistical purpose.
20.Ground no. 6 relates to the addition on account of Sale of Pantoprazole to Sun Pharma Global BVI and Sun Pharma Global FZE amounting to Rs.
103,87,52,830/-.
21.During the course of the Transfer Pricing proceedings, it came to the notice of the TPO that the assessee (SPIL) has sold medicine valued at Rs. 1507.50 lacs to its AE, SPG BVI and products worth Rs. 2101.77 lacs to SPG FZE. In the earlier year, SPG BVI was engaged in the marketing of pharmaceuticals formulations manufactured by the assessee company, a new company has been incorporated in Dubai as a 100% subsidiary of SPG BVI. The entire marketing business of SPG BVI has been transferred to this concern on a going concern basis in the month of December, 2008. SPIL has been treated as the contract manufacturer. The assessee as tested party conducted a TNMM analysis and has concluded that the margin earned by SPIL is at arm's length as a contract manufacturer and hence the transaction is at arm's length.
22.The basis of adopting TNMM as the most appropriate method was that SPG BVI and subsequently SPG FZE are the technology owners and are getting medicines manufactured by the assessee company. The AE was in possession of certain product technologies and wanted to sell products in the regulated markets of USA, Europe etc. Hence, it approached SPIL to 15 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 work on a Contract Research & Manufacturing Services (CRAMS) basis. The assessee in its Transfer Pricing Study report claimed that on the sale transactions with SPG, the net profit margin earned is 14.84%. To substantiate its claim, external TNMM was shown at 13.96%. The TPO rubbished the claim of most appropriate method as TNMM and adopted Profits Split Method (PSM) because he was of the strong belief that PSM is applied mainly to international transactions involving transfer of unique intangibles. The TPO as of the belief that the technology to manufacture Pantoprazole Sodium was originally developed by the assessee and was subsequently transferred to SPG indirectly. Therefore, the relevant international transactions involve transfer of unique intangibles. The TPO was of the opinion that a transactional profit split method may be the most appropriate method in cases where both parties to a transaction make unique and valuable contribution to the transaction, because in such a case independent parties might wish to share the profits in proportion to their respective contributions and a two-sided method might be more appropriate than a one sided method.
23.The assessee strongly objected to the findings of the TPO/AO before the ld. CIT(A) and reiterated its claim of TNMM as the most appropriate method.
24.After considering the facts and the submissions, the ld. CIT(A) at Para 8.4 of his order observed that the facts are identical in this year also and accordingly followed the order of ld. CIT(A)-IV, Ahmedabad and held that the assessee was not a "contract manufacturer" and hence for 16 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 benchmarking of the margin, TNMM cannot be applied under the facts and circumstances of the case. According to the ld. CIT(A), the Residual Profit Split Method is the most appropriate method. The ld. CIT(A) observed that the TPO while allocating the profit between the appellant and its AEs applied 50:50 ratio in splitting the residual profit. However, taking a leaf out of the findings of the ld. CIT(A), during the course of the appellate proceedings for A.Y. 2008-09, the ld. CIT(A) issued a notice of enhancement to disturb the sharing ratio from 50:50 to 80:20 and at Para 8.8 of his order, the ld. CIT(A) followed the findings of his predecessor for A.Y. 2008- 09 and enhanced the upward adjustment to Arm's Length Price works out to Rs. 103,87,52,830/-.
25.Aggrieved by this, the assessee is before us. The ld. Senior Counsel vehemently stated that the entire issue relating to the sale of Pantoprazole drug to SPG BVI has been considered at length by the Tribunal in A.Y. 2008- 09 wherein the Tribunal rejected the allegation of "brutal tax evasion" by the appellant company. The ld. Senior Counsel stated that the stand of the assessee is similar to what has been taken during the course of the proceedings of A.Y. 2008-09 and as there are no new facts brought on record by the revenue authorities. The findings of the Tribunal deserve to be followed.
26.We have given a thoughtful consideration to the orders of the authorities below. We agree with the contention of the ld. Senior Counsel that no new facts have been considered by the lower authorities. The facts are 17 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 identical to the facts considered by the Tribunal in A.Y. 2008-09 in ITA No. 3297 & 3420/Ahd/2014. The relevant part of the judgment of the Tribunal read as under:-
76. SPG BVI purchased the Technology to manufacture Pantoprazole Sodium from Sun Pharma Advance Research Company Ltd. (SPARC). SPARC was incorporated on 01.03.2006 as a research company. With effect from 28.02.2007, the appellant company demerged its Innovative Research and Development business to SPARC. This is supported by the order of the Hon'ble High Court of Gujarat exhibited at pages 475 to 518 of the paper book. On 28.10.2007, SPARC sold a basket of 38 Technologies to SPG including ANDA for Pantoprazole Tablet, the consideration of which was USD 3 million for U.S. Market and USD 1.4 million for Europe Market. This is supported by the agreement for sale exhibited at pages 519 to 536 of the paper book.
77.By virtue of this agreement for sale, the Technology was purchased by SPG in the month of October, 2007 and immediately thereafter in the month of November, 2007, SPG enters into an agreement with appellant for manufacturing. Copy of supply agreement between SPG and SPIL is exhibited at pages 648 to 659 of the paper book. Relevant clauses of the supply agreement read as under:-
AND WHEREAS SPGI is the owner of the various abbreviated new drug applications and is interested to market the products in United States of America and in Europe and is therefore interested to buy various products from side approved by US FDA.
1. SUPPLY AND PURCHASE ARRANGEMENTS.
SPIL hereby agrees to sell and supply the Products to SGI and SPGI hereby agrees to Purchase the Products from SPIL with the terms and conditions of this Agreement. It is understood by the parties that this Agreement in no way obliges SPGI to purchase or take any or all the said products or any part of SPGI's requirements thereof, manufactured. Processed and/or packed by SPIL only and does not preclude SPGI from making similar or alternative arrangements with one or more other parties at its sole discretion.
18 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10 2.1 SPIL agrees to sell and supply the product to SPGI at prices as agreed to between the parties. SUN will dispatch consignment of the PRODUCT within 45 (forty-five) days of acceptance by SUN of purchase order from SPGI or within such other time as may be mutually agreed upon. SPGI shall not be entitled to cancel any order placed by it and accepted by SPIL unless other wise agreed upon by the parties.
2.2 SPGI agrees to provide a forecast on agreed format to SPIL so as to facilitated SPIL to carry out production planning of the Products for sale and supply as per terms of this Agreement.
2.3 SPGI will be required to make payments in US Dollars against supplies of the PRODUCT within 75 days of the receipt of goods for the invoices raised by SPIL in this regard or within such other time as may be mutually agreed upon in this regard.
2.4 At the request of SPGI, SPIL shall supply the product ordered by SPGI by such carrier or carriers as SPGI may designate. Such delivery instructions shall be submitted by SPGI to SPIL well in advance SPIL agrees to dispatch at the cost of SPGI, the finished Product to SPGI or to its nominees within the time frames stipulated by SPGI from time to time as per the orders placed by SPGI and accepted by SPIL. SPIL further undertakes to supply the product with adequate packing and coverage to ensure that the Product reaches SPGI or its nominee adequately packed and acceptable as per CGMP guidelines.
3.1 SPGI's Technical Assistance,, SPGI shall supply on a continuing basis all necessary information relating to the manufacturing of the Products, including, but not limited to product specifications, packaging and labeling practices and processes regarding the production of Products, and such other information as SPGI deems to be reasonable and necessary, From time to time, SPGI at its own expense may send a representative to visit SPIL to provide such technical knowledge as shall be mutually agreed to by SPGI and SPIL. 3.2 Intellectual Property Representation: Except for the rights expressly under the terms of the Agreement this Agreement does not transfer any intellectual property rights, specifically with respect to the Products from SPGI to SPIL.
19 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10 SPGI represents and warrants that, to the best of the knowledge and belief of SPI , SPIL's fulfillment of the terms of this agreement to the' manufacturing of the Products will not infringe any third party intellectual property rights. Nevertheless, in case SPIL would be or named as a formal party by reason of an infringement of third party rights for the Products, SPIL shall promptly inform SPGI thereof. SPGI shall conduct any defense of such suit at its own expense and SPGI shad indemnify and hold SPIL harmless from and against any loss, claim, damage, expense or liability if any resulting from any such suit in accordance with Section 5. However, in any such litigation suit SPIL agrees to assist SPGI, without assuming any monetary obligation.
4.3 Legal Compliance. SPIL hereby undertakes to comply with all requirements of law for obtaining various licenses, approvals, permissions and no objection certificates for meeting all legal obligations in respect of any matter whatsoever, enabling it lawfully, to properly manufacture the Products Vibe execution, delivery and performance of this agreement by SPIL does not and will not violate any provision of applicable law or of any regulation, order decree of any court, arbitration or/.governmental authority or any other agreement to which SPIL Is a party, SPIL hereby indemnifies SPGI from any consequences whatsoever of any failure or lapses, or gross neglect or damage etc. on its part on account of legal liabilities or otherwise. SPGI hereby also undertakes to indemnify SPIL wherever found appropriate, on account of any failure or lapses, or neglect or damage etc. on its part on account of legal liabilities or otherwise arising out of non meeting its all legal obligation in respect of any matter whatsoever. 4.4 Quality control. If mutually agreed in writing, SPIL may conduct itself quality control tests pursuant to specifications, policies and/or procedures provided by SPGI in writing No production batch shall be released for sale unless it conforms to the SPGI specifications, practices and stipulations referred to in Section 4.1. SPGI will facilitate SPIL in curing deficiencies, to the extent acceptable to SPGI, of lots or batches of Product not meeting with SPGI specifications, practices or stipulations.
4.5 SPIL Warranty, SPIL warrants that the Finished Products manufactured and delivered to SPGI hereunder shall conform to the product specifications communicated by SPGI to SPIL. SPGI shall notify SPIL of any non-conforming manufactured Products within sixty days after receipt of Products or within sixty (60) days after any hidden defects are discovered. Any notification or non- conformance under this section shall include proof of non-conformity/defect. SPIL may, at its discretion, have the defective Product tested at any other reputable laboratory and SPGI shall accept the report thereof. In case of a disputed result 20 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 by such laboratory, the Product will be tested with an independent laboratory reasonably acceptable to both parties whose result shall be binding on both parties. SPIL shall replace all non-attributable to SPIL. SPIL shall also bear & reimburse to SPGI the cost of freight and insurance for such non-conforming Products Upon SPIL's instructions, SPGI shall destroy or return to SPIL at SPIL's cost, all non-conforming Finished Products.
4.6.4 SPIL agrees to invoice and dispatch at SPGI's cost and risk, the finished products to SPGI or its nominees as specified by SPGI according to the orders placed by SPGI and instructions given by SPGI and accepted by SPIL. 5.1 SPGI Indemnification. SPGI shall indemnify and hold SPIL harmless from and against any loss, claim, damage, expense or liability, resulting from any misrepresentation, negligence, or intentional misconduct by SPGI in performing this agreement including for any claim, demand or suit alleging that the Product infringes any third party's patent, copyright, trademark, trade secret or other intellectual property right or any product liability. Notwithstanding anything to the contrary in this Agreement, in no event shall SPGI be liable to SPIL for any incidental, indirect, exemplary, special or consequential damages whatsoever (including, but not limited to, lost profits, loss of goodwill, or interruption of business) that may be suffered or incurred by SPIL as a result of SPGI's violation of this representation.
5.2 SPIL Indemnification. SPIL shall indemnify- and hold SPGI harmless from and against any loss, claim, damage, expense or liability resulting from any misrepresentation, negligence or intentional misconduct by SPIL in performing this Agreement; provided however, that SPIL's obligation of indemnification shall not extend to any loss, claim, damage or expense or liability, resulting from SPGI's gross negligence or misconduct. Notwithstanding anything to the contrary in this Agreement, in no event shall SPIL be liable to SPGI for any incidental indirect, exemplary, special or consequential damages whatsoever (including but not limited to, lost profits, loss of goodwill, any patent/trademark infringement or interruption of business) that may be suffered or incurred by SPGI as a result of SPIL's violation of this representation. Notwithstanding anything to the contrary in this Agreement, it is agreed that SPIL's liability for indemnification under this Agreement will be limited for the Product containing manufacturing defect or the Product fist conforming to the product specifications communicated by SPGI to SPIL under this Agreement.
7.1.6 SPIL Shall not claim any right, title, or interest to the Products, product names and the rights attached with them under any of the trademarks, or patent laws, SPIL shall not manufacture and/or sell for sale in the market of United 21 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 States of America and in Europe during the term of this Agreement any Products under a trademark connected with the Products or under a name phonetically or otherwise similar to trade names connected with the products as mentioned in Appendix A. 7.1.7 SPIL shall not subcontract or delegate to any other persons, firm or body corporate the whole or any part of the manufacture, of the Products or assign this Agreement or any part thereof or deal in any manner whatsoever with the rights, benefits or obligations created hereunder without the prior consent in writing by SPGI.
78. Appendix-A of this agreement reads as under;-
No. NAME OF THE PRODUCT BULK PRODUCT
(Active Ingredient)
1 Pantoprazole Sodium Delayed Pantoprazole
Release Tablets 20Mg., 40mg. Sodium
2 Amifostine Inj. 500mg. Amifostine
79. Copy of Orange Book reflected title of ANDA of Pantoprazole Sodium with SPG BVI is exhibited at pages 569 & 570 of the paper book which conclusively proves that the ANDA rights were with SPG BVI.
80. Adverting to the allegations of Ld Shri Shrivastava that these arrangements by the assessee is a brutal form of tax evasion , the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. vs. Union of India and Another reported in 341 ITR 1 has laid down the ratio :
"It is the task of the court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not adopt a dissecting approach. All tax planning is not illegal or illegitimate or impermissible".
81.The Hon'ble Supreme Court further held. :-
22 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
(iv)The Income-tax Act, 1961, in the matter of corporate taxation, is founded on the principle of the independence of companies as economic entities with legal independence vis-a-vis their shareholders or participants. Consequently, the entities subject to income-tax are taxed on profits derived by them on stand- alone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders or participants. Furthermore, shareholders or participants, that are subject to (personal or corporate) income-tax, are generally taxed on profits derived in consideration of their shareholding or participations, such as capital gains. It is fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct taxpayers. The fact that a parent company exercises a shareholder's influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Where the subsidiary's executive directors' competences are transferred to other persons or bodies or where the subsidiary's executive directors' decision- making has become fully subordinate to the holding company with the consequence that the subsidiary's executive directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about. Whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction.
(v) Holding structures are recognized in corporate as well as tax laws. Special purpose vehicles and holding companies have a place in legal structures in India, be it in company law, the takeover code under the Securities and Exchange Board of India or even under the income-tax law. When it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structures. In the application of a judicial anti-avoidance rule, the Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the transaction in question is a sham or tax avoidant.
(vi) The legal position of any company incorporated abroad is that its powers, functions and responsibilities are governed by the law of its incorporation. Though it may be advantageous for parent and subsidiary companies to work as a group, each subsidiary will look to see whether there are separate commercial interests which should be guarded. Whether the parent company has "power" over the subsidiary depends on the facts of each case. In the case of 23 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 multinationals their subsidiaries have a great deal of autonomy in the country concerned except where subsidiaries are created or used as a sham. The directors of the subsidiary under their articles are the managers of the companies. They are not to be dictated by the parent company if it is not in the interests of those companies (subsidiaries). The fact that the parent company exercises shareholder's influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary's) directors. The decisive criteria is whether the parent company's management has such steering interference with the subsidiary's core activities that the subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors.
(vii) A typical large business corporation consists of sub-incorporates. Such division is legal and recognized by company law, laws of taxation, takeover codes. The parent is the only group member that normally discloses financial results. Below the parent company are the subsidiaries which hold operational assets of the business and which often have their own subordinate entities that can extend layers. Subsidiaries are often created for tax or regulatory reasons. They at times come into existence from mergers and acquisitions. As group member, subsidiaries are financially interlinked. Such grouping is based on the principle of internal correlation.
82. A thought full consideration of the aforementioned decision of the Hon'ble Supreme Court would show that even the Apex court have recognized that multinationals and multi entities group companies constitute subsidiaries in furtherance to their objects and to carry on their business smoothly in a competitive world . Moreover no person would arrange its affairs in such a manner which would culminate into huge losses to the extent of USD 506 millions as was suffered by the assessee group in this transaction.
83. Having established that the ownership of IPR/ANDA rights of Pantoprazole Sodium was with SPG BVI, now let us examine the applicability of the most appropriate method for determining the arm's length price.
84. OFCD guidelines for profits spilt method (PSM) states as under:-
C. Transactional profit split method C.1 In general 24 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 2.108 The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) by determining the division of profits that independent enterprises would have expected to realise from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the "combined profits"). References to "profits" should be taken as applying equally to losses. See paragraphs 2.124- 2.131 for a discussion of how to measure the profits to be split. It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. See paragraphs 2.132 -2.145 for a discussion/6f how to split the combined profits. C.2 Strengths and weaknesses 2.109 The main strength of the transactional profit split method is that it can offer a solution for highly integrated operations for which a one-sided method would not be appropriate. For example, see the discussion of the appropriateness and application of profit split methods to the global trading of financial instruments between associated enterprises in Part III, Section C of the Report on the Attribution of Profits to Permanent Establishments.2 A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate In view of the functional analysis of that party. See paragraphs 3.38-3.39 for a discussion of limitations in available comparables.
85. United Nations practical manual on transfer pricing states as under:-
25 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
6.3.13. Profit Split Method
6.3.13.1. The Profit Split Method is typically applied when both sides of the controlled transaction contribute significant intangible property. The profit is to be divided such as is expected in a joint venture relationship.
6.3.13.2. The Profit Split Method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that it is appropriate to aggregate) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions.
86. A perusal of the aforementioned guidelines shows that PSM can offer a solution for highly integrated operations for which a one sided method would not be appropriate. PSM may also found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions to the transaction. Considering the functions performed by the appellant company to SPG BVI, it is clear that SPIL has performed only one simple function and that is manufacturing of Pantoprazole Tablets. Except for this, there is no significant unique contribution by SPIL. For such simple functions as per OECD guidelines for transaction profit spilt method typically would not be appropriate of the functional analysis of that party.
87. The relevant agreement which is placed on record and has been dealt elsewhere clearly establishes that the appellant company SPIL is nothing but a contract manufacturer of SPG BVI. Now let us examine the relevant provisions of the Act read with Rules.
Determination of arm's length price under section 92C.
10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction --[or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:-
(d) profit split method, which may be applicable mainly in international transactions --[or specified domestic transactions]involving transfer or unique intangibles or in multiple international transactions [or specified domestic 26 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 transactions] which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which-
(i) the combined net profit of the associated enterprises arising from the international transaction --[or the specified domestic transaction] in which they are engaged, is determined;
(ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances;
(iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii);
(iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction] :
Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction --[or specified domestic transaction] in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction --[or the specified domestic transaction];
(e) Transactional net margin method, by which,--
(i) the net profit margin realized by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;27 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realized by the enterprise and referred to in sub-clause
(i) is established to be the same as the net profit margin referred to in sub-clause
(iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction];
88. PSM is applicable when the international transaction involved transfer of unique intangibles (in the case in hand there is no such transfer from SPG BVI to SPIL), or in multiple international transaction which are so inter related that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction. This is also absent (in the case in hand as the appellant company has done only manufacturing of Pantoprazole Tablets for SPG BVI).
89. Coming to the application of TNMM, we find that the profit margin benchmark by the assessee at 21.57% on sales transactions is much higher than the margin shown by the assessee with Eli Lily.
90. The revenue authorities have compared the agreements of SPIL with Eli Lily and SPIL with SPG BVI and have come to the conclusion that a conspectus reading of the relevant clauses show that the assessee is not a contract manufacturer in the case of SPG BVI. This finding of the revenue authorities is not acceptable for the simple reason that they have compared the clauses of the respective agreements without considering the nature of work done by SPIL. It may be possible that certain terms and conditions may be absent in the agreement between the assessee and SPG BVI but that itself would not deny the assessee, the status of contract manufacturer. In our considered opinion, the assessee has performed only one function and that is manufacturing of 28 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 Pantoprazole Sodium and for this, the demonstrative evidence is exhibited at pages 569 and 570 of the paper book, and as mentioned elsewhere, clearly establishes the ownership of ANDA with Sun Pharma Global. For the sake of completeness, it would not be out of place to mention that the print out of these documents were taken from the Website on 28.09.2011 and 27.09.2011 and the order of the First Appellate Authority is 14.10.2014 and yet the FAA has observed that the assessee did not furnish ANDA related documents filed by SPG. SPG may not have done any filing related to Pantoprazole Sodium patent to US FDA but the fact of the matter and which have been demonstrated successfully by the appellant company is that the IPR/ANDA rights became the property of SPG BVI by virtue of the agreement for sale between SPARC and SPG.
91. Adverting to assessee's alternate and without prejudice contention that even if PSM is held to be the most appropriate method for a moment than also the same has to be considered in the light of the sequence of events starting from the manufacturing and sales of the drug Pantoprazole and ending with the out of court settlement and the payment of settlement compensation of USD 506 million. The settlement is based on the cumulative profits earned by the AE till the date of settlement. here is no dispute and it has been accepted by both the lower authorities that after the out of court settlement of the litigation the assessee group has suffered losses which were based on the aggregate of profits earned by the group over all the year. With the settlement based on aggregate of yearly profits then even if the Profit Split Method is applied than the set off of each year losses has to be given for the corresponding year. The undisputed compensation being settled on the base of all yearly profits made by the AE during the exclusivity period PSM cannot be worked by divorcing the business realities. The contention of revenue that it is not concerned with the settlement which is pass event is untenable. Even if the PSM is applied the relatable losses which were so apparent by the time assessment was framed cannot be given a go by on unsustainable revenue stand. In such eventuality even the ALP offered 29 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 by assesse as a contract manufacturer also will be wiped out. The PSM application may actually result in reduction of returned ALP working. Thus, considering the issues from all possible angles, the assessee has, undisputedly and as accepted by revenue, ultimately suffered losses which are not claimed in its books or tax purposes. Even the alternative application of PSM fails and would do no good to the Revenue .
92. To summarize in nutshell , by the order of the Hon'ble High Court Innovative Research and Development /division of the appellant company was demerged and given to Sun Pharma Advance Research company (SPARC) subsequently SPARC transferred ANDA rights to SPG BVI. SPG BVI has been entered into an agreement with the appellant company SPIL for the manufacturing of Pantoprazole. Pursuant to this agreement assessee manufactured Pantoprazole and sold the same to Caraco Ltd on the directions of SPG BVI. On such sale transaction, the appellant company had shown a net margin of 21.57% bench mark the same on transactional net margin method which was dismissed by the revenue authorities questioning firstly, the ANDA rights with SPG BVI and secondly, comparing the contract manufacturing agreement of SPIL with SPG BVI and SPIL with ELI Lily. The revenue authorities ultimately applied profit spilt method and made the upward adjustment.
93. As demonstrated elsewhere, the IPR/ANDA rights were very much with SPG BVI who entered into an agreement with the appellant company for the manufacturing of the said drug. The application of Transactional Net Margin Method is the most appropriate method in such sale transaction and has been benchmarked by the assessee by showing it to be higher than the margin earned from the sales made to Eli Lily.
94. Considering the facts in totality in the light of the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. (supra) and on conspectus understanding of the facts as discussed elsewhere, we do not find any merit in the findings of the First Appellate Authority in accepting the 30 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 application of PSM as the MAM , in our understanding of the facts TNMM is the MAM on the given facts and the same is accepted as such. We set aside the findings of the ld. CIT(A) and direct to delete the addition of Rs. 612,03,39,468/-. Ground no. 5 of the assesse is allowed.
27.As mentioned elsewhere, the facts are identical; therefore, we do not find any reason why the findings of the Tribunal (supra) should not be followed. Respectfully following the findings, we direct the AO to delete the addition of Rs. 103,87,52,830/-. Ground no. 6 is accordingly allowed.
28.Ground nos. 7 & 8 relates to the addition on account of sale of drugs to SPG BVI and SPG FZE.
29.Facts in issue relate to the sale of pharmaceutical products other than Pantoprazole to its AEs SPG BVI and SPG FZE. These pharmaceutical products consisted of partly Para-IV filing drugs and partly generics drugs. The relevant findings of the Transfer Pricing Officer reads as under:-
"9. Benchmarking of transactions related to sale of other formulations to SPG BVI and -SPG FZEs In addition to the sale of pantoprazole sodium tablets, SPIL has sold other formulations to its AEs Sun BVI and Sun FZE. It is seen that the methodology relating to sale of such formulations is similar as discussed at para 8 in respect of pantoprazoie. Sun BVI and Sun FZE have been treated as technology owners and SPIL as contract manufacturer. The drugs have been supplied by SPIL at fixed pre-declded margins and the entire remaining profit has been appropriated by the foreign entity. It is seen that the margins earned in respect of these drugs by these companies is over 90% and 35% in respect of SPG BVI and SPG FZE respectively as compared to 14.84% in respect of SPIL. 9.1 Rejection of FAR and TP Study conducted by the assessees. The functions performed, risks assumed and assets deployed by both the companies have been examined. It is seen that SPIL has deployed substantial assets in the form of approved manufacturing setup without which sales could not have been effected. Further, it has played substantial role in preparation of ANDA as 31 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 well as drawing up the sales plan in US in collaboration with Caraco and other entities. Further, the functions performed by' outside entities merely relate to marketing support. In light of this the transfer pricing study conducted by the assessee company treating SPIL as a mere contract manufacturer and conducting a TNMM to benchmark its profit margin is not found to be in line with the intent of section 92C and the Rules framed related to transfer pricing. Accordingly, the transfer pricing study conducted by the assessee with reference to benchmarking of the sale of drugs to Sun BVI and Sun FZE (other than pantoprazole) is not found to be correct and is rejected u/s 29C(3) of the Income Tax Act.
10 Adoption of profit split method for benchmarking: During the year, the assessee has sold Alendronale, Amifostine and Venlafaxine to Sun BVI and Alendronale, leuprolide and Gemcitabine to Sun FZE. Venlafaxine appears to have been withdrawn subsequently as evident from the P&L account submitted by the assessee. Since the function-asset-risk profile renders TNMM as an unsuitable method for benchmarking. The benchmarking study conducted by the assessee in respect of this transaction is found to be unreliable and hence is rejected u/s 92C(3). The assessee was issued a show cause notice on the issue of rejection of TNMM study conducted by the assessee and adoption of another method for conducting the benchmarking study. The profit split method is found to be more suitable to the nature of these transactions. Accordingly, the method employed by the assessee company is rejected and profit split method is followed for benchmarking the transactions. Following points are noted with respect to export sale of these drugs.
10.1 SaSe of Para IV Drugs: It is seen that in respect of sales made to SPG BVI, Amiorstine and Velafaxine are sold in US under Chapter IV filing. Similarly, in respect of sales made to SPG FZE, Gemcitabine is a chapter IV drug. The issue related to these drugs has been examined and it is seen that the methodology followed in sale of these drugs is similar to the methodology followed in respect of pantoprazole which has been discussed elaborately in the preceding paragraphs. Hence, the function, asset and risk analysis carried out for the drug pantoprazole applies verbatim to these drugs also. Accordingly, the apportioning of profit is carried out in the matter discussed earlier. The profit earned by both the foreign AEs in respect of chapter IV drugs is apportioned in the ratio of 50:50 in light of the FAR of the two companies, the foreign AE being compensated dominantly for the risk coverage.
10.2 Sale of other drugs: Alendronale, sold to Sun BVI andAlendronale and Leuprolide sold to un FZE belong to this category. For sale of these drugs in foreign countries, especially in US, they need to be manufactured in an US FDA approved facility. The assessee, at significant cost, both initial and operational, has created such facility for manufacturing of these drugs. The marketing setup of SPIL is being used as the sale is generally through the local subsidiary of SPIL with 32 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 underlying guarantee of SPIL. Hence, the role played SPIL in sale of such drugs is much higher. While SPIL has higher functional and asset related responsibility, Sun BVI/FZE do not have to carry the risk they were carrying in the case of Chapter IV drugs. These companies also do not carry any significant functional responsibility or use substantive assets except probably the financial exposure. To this extent, SPIL is found to be the main party contributing assets to the transaction. 10.3 In addition, although the sale agreement shave been entered into by Sun BVI/FZE, the guarantees in the sale agreements as well as in the filings before US PDA have been entered into by SPIL signifying its significant risk. Since SPIL is the manufacturer, it carries the associated risk as any problem associated with the drug will have to be borne by SPIL These drugs are not Chapter IV drugs and hence there is hardly any litigation and associated risk being carried by the seller. Hence, except a small portion of marketing risk being carried by Sun BVI/FZE, most of the risk is being carried by SPIL. SPIL needs to be rewarded accordingly. In the case of pantoprazole, since the litigation risk was quite high, Sun BVI had been compensated at a higher level. Here, the compensation will also be quite low.
10.4 The main function in the entire sequence of manufacturing and saie of the drug is being performed by SPIL, As seen from the documents submitted by the assessee, It manufactures the drug and sends the consignment to the location of sale directly without SPG BVI/FZE even looking after logistics and other associated functions. The only positive contribution of the SPG BVI/FZE is the ownership of AN DA in their names. The functional analysis has been elaborated in detail at para 8 while discussing the sale of pantoprazole and it is similar in the case of these drugs also. Hence, It is found that the major functions are being performed by SPIL and not the other companies.
10.5 The FAR analysis conducted earlier is applicable to these transactions also minus the risk element. While the associate enterprises were exposed to considerable risk on account of litigation potential of chapter IV drugs, in the generic drugs, there is no such risk. The entire work Including ANDA exploitation, manufacturing, USFDA approval of manufacturing facility, dominant contribution to sales and marketing, warehousing, logistic support, R&D etc., all these activities are being conducted by the assessee company only. It is seen that in the case of other pharmaceutical companies, a profit split ration of 80:20 Is being followed in such cases. This ratio is found acceptable and reasonable. Hence, in this case also, a profit sharing ratio of 80:20 for the manufacturer - marketing entity is adopted as a reasonable way to allocate the total profits of the drug sale.
10.6 The computation of profit in line with above discussion is as below:
A: Sale of drugs to Sun Pharma Global BVI:33 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
Sr. Particulars Sun Pharma Sun Pharma Global BVI Amount in
No. [SPIL] Usd
Amount in Amifostine Venlafaxin Para IV Alendron Non Para IV
Rs. e Total at Total
Para IV Para IV
1 Total Sale Value 106947162 9495979 63898127 73394106 929989 929989
of other
formulations
sold
2 Cost of other 66114735.55 98757 2213389 2312146 186609 186609
formulations
sold
3 Manufacturing 20876086.02 0 0 0 0 0
Overheads
4 Gross Profit 19956340.43 9397222 61684738 71081960 743379.9 743380
5
5 Other expenses ( 4085381.588 550720 3705777 4256497 53935 53935
R&D , corporate
& other exs.)
6 Profit 15870958.84 8846502 57978961 66825463 689445 689445
7 Additional credit 0
allowed on
account of
Return of goods
7a State -18849.64 61572863 61554013.3 62008 62008
difference/Retur 6
ns accounted in F
Y 2008-2009
7b Rate difference 0 0 0 0 0
accounted in FY
2009-2010
7c Returns / Short 0 2325264 2325264 0 0
receipts •
accounted in F Y
2009-2010
7d Rate difference « 0 0 0 0 0
accounted in
FY 2010-2011
34 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
7e Returns / Short 0 0 0 0 0
receipts
accounted in F Y
2010-2011
8 Additional 0 0 0 0 0
expenses [
litigation ]
incurred by the
company
9 Remaining profit 8865352 -5919166 2946185 627437 627437
[ 6 minus 7
minus 8 ]
10 Remaining profit 135347749 28824463
in Rs. (@
45.95)
05$ rate = 45.94 45.94
Profit 67673875 23059571
apportioned to
SPIL
Less profit 7342699 948449
offered by SPIL
Net profit 60331176 22111122
apportioned to
SPIL
Sr. Particulars [SPIL] < Sun Pharma Global F2E- ~>
No,
Amount in Gemcitabin Para IV Leuprolide Alendron Non Para
Rs. e Total at e IV Total
Amount in US$
1 Total Sale Value of 187196713 1081301 1081301 176378 22511 198889
other formulations
sold
2 Cost of other 85211944 528090 528090 55777.5 13923 69700.5
formulations sold
3 Manufacturing 26900168 0 0 0 0 0
Overheads
35 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
4 Gross Profit 75084602 553211 553211 120600.5 8588 129188.5
5 Other expenses ( 5260227.6 198760.9 198760.9 32421.17 4137.891 36559.06
R&D corporate &
other exs.)
6 Profit 69824374 354450.1 354450,1 88179.33 4450.109 92629.44
7 Rate difference 0 0 3448 0 3448
accounted in FY
2010-2011
9 Remaining profit [ 6 354450 354450 84731 4450 89181
minus 7 minus 8 ]
10 Shared in equal 16283439 4096995
ration by both
associates
Usd rate = Ind 45.94 45.94
Rs.45.94
Amount attributed 8141720 3277596
to SPIL
Less profit already 6277211 1323870
offered by SPIL
Net profit 1864509 1953726
apportioned to SPIL
The total adjustment to the profits of SPIL is computed as below:
Chapter IV Generic Total
Sun Pharma Global BVI 60331176 22111122 82442298
Sun Pharma Global FZE 1864509 1953726 3818235
Total 62195685 24064848 86260533
Accordingly, an upward adjustment of Rs.8,62,60,533/- Is recommended on account of benchmarking of sale of other drugs to Sun Pharma Global BVI and Sun Pharma Global FZE."
30.The appellant company strongly agitated this upward adjustment before the First Appellate Authority. It was strongly contended that the technology 36 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 for manufacturing of these drugs pertained to the AEs and entire marketing has been also done by the AEs and accordingly, the appellant being a contract manufacturer, the prefixed margins have been charged.
31.The submissions of the assessee were similar to the submissions made by it and objecting the upward adjustment in respect of sale of Pantoprazole. After considering the facts and the submissions, the First Appellate Authority observed that the claim of appellant that is has manufactured pharma products as contract manufacturer in its US FDA Plant as per specifications of SPG AEs and also using technology owned by SPG only was found to be incorrect in detail analysis done in A.Y. 2008-09 by the ld. CIT(A)-4, Ahmedabad. The ld. CIT(A) further observed that the facts are identical in the year under consideration to that of A.Y. 2008-09. Accordingly, the arguments of the appellant hereby rejected relying upon the findings of the ld. CIT(A)-IV, Ahmedabad. The relevant findings of the ld. CIT(A) read as under;-
8.12. On careful consideration of the material available on record, it is noticed that the TPO has applied Residual Profit Split Method and accordingly determined adjusted profit from Para-IV filing drugs at Rs.6,21,95,685/- and from generic drugs at Rs.2,40,64,8487-by apportioning the profit in the ratio of 50:50 in case of Para-IV filing and 80:20 in case of generic drugs, between the appellant and its AEs, It is also noticed that the appellant has adopted same methodology as in the case of pantoprazole in respect of sale of other formulations to its AEs by considering itself a contract manufacturer. As already discussed, the FAR analysis carried out under I the similar facts and circumstances of the case in A.Y. 2008-09 by the CIT(A)-IV, Ahmedabad, revealed that the appellant has deployed / substantial assets in the form of US 37 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 PDA approved/ manufacturing setup, played a substantial role in preparation of ANDA and drawing marketing plans in USA. The only function performed outside was to provide market support. These findings are squarely applicable to the international transactions in respect of other drugs too. It is also noticed that no activities were carried out by the AEs for value addition in the drugs and accordingly, I hold that the Residual Profit Split Method was rightly applied by the AO/TPO in determining the ALP in respect of the International Transactions of other products. However, it is noticed that in respect of sale of generic drugs, the ratio of 80:20, has been applied for apportionment of the residual profit between/ appellant and AEs by the TPO/AO which is hereby confirmed. In any considered view, the same ratio has to be applied in respect of Para-IV filing drugs also because functions performed, assets deployed and risks assumed by the appellant are same as in the case/of generic drugs. Moreover, it is also noticed the other drugs under Para IV filing category are transacted under the facts and circumstances which are identical to the sale of pantoprazoie, and hence on this account also, ratio of 80:20 needs to be applied for appointment of aggregate profits between the appellant and AEs. Accordingly, an enhancement was proposed in the ALP of other products under Para-IV filing drugs resulting into a further upward adjustment of Rs. 3,73,17,411/- vide notice dated 29.03.2016.
32.Assessee filed a detailed reply to the notice of enhancement which was considered by the ld. CIT(A) who observed at Para 8.12.2 " The contentions made above are almost similar to those which have been made in response to the enhancement notice pertaining to sale of pantoprazole. For the similar reasons and the reasons discussed above in Para 8.11 & 8.12, the same rejected. The ld. CIT(A) concluded by enhancing the income by Rs. 3,73,17,411/- by making a further adjustment to ALP of other products 38 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 under Chapter IV filing drugs by apportioning the aggregate profit in the ratio of 80:20 between the appellant and AEs. Accordingly, the addition made by the AO/TPO on this account at Rs. 8,62,60,533/- was confirmed along with enhancement of income by Rs. 3,73,17,411/-.
33.Before us, the ld. Senior Counsel put forth the same arguments which were made for the sale of pantoprazole. It is the say of the ld. counsel that on identical set of facts, the Tribunal in A.Y. 2008-09 has not only deleted the additions made by the AO/TPO but has also deleted the enhanced income.
34.We have given a thoughtful consideration to the orders of the authorities below qua the issue. As mentioned elsewhere, the reasoning given for making the addition are underline with the reasonings given for making similar additions in A.Y. 2008-09 for the sale of pantoprazole. The only distinguishing fact relates to the sale of certain drugs which are outside the Para IV filing drugs. It is seen that in respect of sales made to SPG BVI, Amifostine & Venlafaxine are sold in US under Chapter IV filing. Similarly, in respect of sales made to SPG FZE, Gemicitabin is a Chapter IV drug. It is seen that the methodology followed in sale of these drugs is similar to the methodology followed in respect of pantoprazole which has been discussed elaborately by the Bench in A.Y. 2008-09 qua ground no. 5 of that appeal in ITA Nos. 3927 & 3420/Ahd/2014.
35.The relevant findings of the Tribunal have been elaborately extracted while deciding ground no. 6 of the present appeal. Therefore, to avoid repetition, 39 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 respectfully following the findings given while deciding ground no. 6 of the present appeal. We direct the A.O. to delete the addition of Rs. 123577944/-. Ground nos. 7 & 8 are accordingly allowed.
36. Ground Nos. 9 & 10 relates to the denial of the claim of weighted deduction u/s. 35(2AB) of revenue expenditure of Rs. 6.81 crores on expenses incurred on clinical trials, patent, trade mark registration charges.
37.Briefly stated the facts of the issue are that the appellant company has claimed total R&D expenses at Rs. 12389.29 lacs . Out of which Rs. 11699.11 lacs have been claimed as eligible of weighted deduction 150% u/s. 35(2AB). During the course of the assessment proceedings, the assessee has made a fresh claim that the expenses to the tune of Rs. 6.81 crores are also eligible for deduction at 150%. The A.O. disallowed the same mainly on the ground that this claim was not made in the return of income and the assessee has also not revised the return for claiming weighted deduction at 150%.
38.Before the First Appellate Authority, the assessee once again claimed weighted deduction on R&D expenses of Rs. 6.81 crores. The claim of the assessee did not find any favour with the ld. CIT(A) who was of the opinion as to whether fresh claim can be made without filing of revised return of income. The ld. CIT(A) accordingly denied the claim of weighted deduction.
39.Before us, the ld. counsel for the assessee vehemently stated that the legal claim made by the assessee was based upon the facts which were already 40 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 on record. Therefore, there is no reason why the assessee should not be allowed such legal claim. Strong reliance was placed on the decision of the Hon'ble High Court of Gujarat in the case of Mites Impex 46 taxmann.com
30.
40.Per contra, the ld. D.R. strongly supported the findings of the First Appellate Authority.
41.After giving a thoughtful consideration, we find force in the contention of the ld. Senior Counsel. There is no dispute that all the factual details were available before the lower authorities. The claim made by the assessee was purely legal claim as it is eligible for weighted deduction as per the provisions of Section 35(2AB) of the Act. Merely because the same was not claimed in the return of income nor through a revised return of income, the same cannot be denied. The relevant portion of Section 35(2AB) reads as under:-
35[2AB] (1) where a company engaged in the business of [bio-technology or in [any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule]] incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of [a sum equal to [two] times of the expenditure] so incurred.
[Explanation.- For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority 41 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 under any Central, State or Provincial Act and filing an application for a patent under the patents Act, 1970 (39 of 1970).]
42.A perusal of the aforementioned section clearly establishes that expenditure on scientific research is also eligible for weighted deduction. Considering the facts in totality in the light of the provision, we set aside the findings of the ld. CIT(A) and direct the A.O. to allow weighted deduction. Ground Nos. 9 & 10 are accordingly allowed.
43.Ground no. 11 relates to the disallowance of weighted deduction u/s. 35(2AB) on trade mark charges, Overseas Product Registration Charges .
44.During the course of the assessment proceedings, the A.O. noticed that the assessee has claimed weighted deduction for trade mark registration charges of Rs. 47,32,015/- and Overseas Product Registration Charges of Rs. 2,03,95,126/-. The A.O. was of the opinion that the assessee is not eligible for weighted deduction and accordingly disallowed a sum of Rs. 1,25,63570/-.
45.When the matter was agitated before the ld. CIT(A), the ld. CIT(A) observed at Para 10 of his order that the basis of disallowance and submissions of the appellants are similar to A.Y. 2008-09 and since the facts are identical in this year also, respectfully following the order of ld. CIT(A)-IV, Ahmedabad in A.Y. 2008-09, the action of the A.O. was upheld.
42 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
46.Before us, the ld. Senior Counsel drew our attention to the decision of the Tribunal in A.Y. 2008-09 and pointed out that the Tribunal has allowed the claim of weighted deduction to the assessee.
47.After carefully perusing the orders of the authorities below, we find force in the contention of the ld. Senior Counsel. The Tribunal has considered an identical issue vide ground no. 6 of the appeal in ITA No. 3297 & 3420/Ahd/2014 and the relevant findings of the Tribunal read as under:-
96. An identical issue was considered by the Bench in assessee's own case in ITA Nos. 2076 & 2067/Ahd/2013 wherein the Bench has followed the findings of the Co-ordinate Bench in ITA No. 1589/Ahd/2011 and the same reads as under:-
34. We find that an identical issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 1589/Ahd/2011 qua ground no. 3 wherein the Bench has followed its earlier decision in ITA No. 2430/Ahd/2009. The findings thereon read as under:-
Ground no. 4 relates to the disallowance of trade mark registration and overseas product registration charges u/s. 35(2AB).
11. On perusing the details of R & D expenditure, the A.O found that the assessee has claimed weighted deduction @ 150% on -
(a) Trade Mark Registration Charges : 2,42,56,296/-
(b) Overseas Product Registration Charges : 2,00,00,508/-
12. The assessee was asked to justify its claim. Assessee filed a detailed reply justifying its claim of weighted deduction. It was explained that the expenditure incurred for product registration although named as Product Registration Expenditure is not merely an expenditure for registration of the product, but in large measure constitutes expenditure for validation and confirmation of the Research carried out. The A.O did not accept the claim of the assessee holding that these expenses were incurred for registration of drug patents in foreign countries. The A.O accordingly withdrew the weighted deduction and allowed only 100% of the same as revenue expenditure.
13. Assessee carried the matter before the ld. CIT(A) but without any success. While dismissing the grievance of the assessee, the ld. CIT(A) followed the findings of his predecessor given in A.Y. 2002-03 to 2004-05. Before us, the ld.
43 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10 counsel for the assessee stated that the Tribunal in assessee's own case in earlier years has decided this issue in favour of the assessee and against the revenue in ITA No. 1558/Ahd/2006. The ld. D.R. could not bring any distinguishing decision in favour of the revenue.
14. We have given a thoughtful consideration to the order of the Tribunal in earlier years; we find that the Tribunal while deciding the issue in favour of the assessee has followed the decision of the Co-ordinate Bench, Mumbai in the case of USV Ltd. 54 SOT 615. Findings of the Tribunal read as under:-
24. We have carefully perused the orders of the authorities below. We find that the ld. CIT(A) has simply followed the findings of his predecessor for A.Y. 2000-01. We also find that the assessment order for A.Y. 2000-01 has been quashed by the Tribunal vide a ITA Nos. 1199 & 1279/Ahd/2006, which means that the basis for upholding the disallowance has been removed. We further find that on identical set of facts, the Mumbai Bench in the case of USV Ltd. (supra) has allowed the claim of the assessee in respect of expenditure incurred in respect of patent application.
Respectfully, following the findings of the co-ordinate Bench (supra), we direct the A.O to delete the disallowance of Rs. 44,71,906/-. Ground no. 10 is accordingly allowed.
15. Respectfully following the detailed findings given, we direct the A.O to allow the impugned weighted deduction. Ground no. 3 is accordingly allowed.
35.We direct accordingly. Ground no. 6 is allowed.
48.As no distinguishing fact has been considered by the lower authorities, respectfully following the decision of the Tribunal (supra), we direct the A.O. to allow weighted deduction. Ground no. 11 is allowed.
49.Ground no. 12 relates to the disallowance on account of R&D expenses incurred by the assessee for products manufactured by Sun Pharmaceuticals Industries.
50.During the course of the assessment proceedings and survey operation conducted u/s. 133A of the Act, it was found that the assessee is the 44 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 flagship company of Sun Pharma Group and it is carrying out the Research and Development work for the entire Sun Pharma group which includes Research & Development of the products which are manufactured by a firm called Sun Pharmaceuticals Industries (SPI) having manufacturing units at Jammu and Dadra. The A.O. found that the assessee is holding 97.5% share of the said firm SPI.
51.On perusal of the returns of income filed by the partnership firm SPI, it was observed that it is showing huge profit margins and claiming deductions u/s. 80IC of the Act. It was observed by the A.O. that substantial part of this profit is coming back to the assessee. The A.O. was of the opinion that since the huge profit received by the assessee from the firm is exempt from tax. Therefore, the assessee has debited all the expenditure in its books of accounts whereas the partnership firm has not debited any expenditure under the head 'Research & Development'.
52.The A.O. was of the firm belief that the entire R&D expenditure claimed by the assessee in its books of accounts cannot be allowed in the hands of the assessee.
53.The assessee strongly objected to this proposition on the ground that R&D facility is wholly and exclusively owned by the assessee and is approved by the DCIR u/s. 35(2AB) of the Act. and the products developed by this R&D facility are owned up by the assessee.
45 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
54.The contentions of the assessee were dismissed by the A.O. who was of the firm belief that the assessee is incurring expenses at R&D activity on behalf of the partnership firm SPI in which the assessee has substantial interest. Further, the substantial profit received from the firm SPI is exempt, therefore, the expenditure incurred by the assessee under the head R&D activity could not be said to have been incurred wholly and exclusively for the purpose of business of the assessee. The A.O. concluded by disallowing Rs. 5,3,02,95,255/-.
55.Aggrieved by this, the assessee carried the matter before the ld. CIT(A) but without any success.
56.Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the ld. counsel that in earlier years also, similar reasoning were given for disallowing certain expenditures on the allegation that the expenditures were incurred on behalf of Sun Pharmaceuticals Industries. The ld. counsel pointed out that the Tribunal had deleted those additions while deciding the appeal for A.Y. 2002-03, 2003-04 & 2004-05.
57.Per contra, the ld. D.R. supported the findings of the lower authorities.
58.We have given a thoughtful consideration to the facts in issue before us. There is no dispute that the assessee did incurred expenditure under the head "Research & Development" activity. The only dispute relates to the 46 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 allegation that part of such expenditure belong to the business activity of the partnership firm SPI. There is also no denying by the lower authorities that the entire Research and Development activities are done by the appellant company only being the flagship company of Sun Pharma Group. In our understanding of the facts, the appellant company had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Since the assessee is holding 97.5% of share in the partnership firm, SPI it becomes the duty of the assessee to promote the business of the partnership firm in the capacity of the majority stake holders. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee's business or the business of the partnership firm where the assessee is a majority stake holder. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee. Finding that the assessee is having 97.5% share in the profits of the firm SPI, we do not find any merit in the disallowance made by the A.O. and confirmed by the First Appellate Authority. We, accordingly, direct the A.O. to delete the addition of Rs. 5,30,29,5255/-. Ground no. 12 is accordingly allowed.
59.Ground no. 13 relates to the claim of deduction of remuneration received from partnership firm for determination of Book Profits u/s. 115JB of the Act.
47 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
60. This issue was also involved in the case of the appellant in A.Y. 2008-09 wherein the claim of deduction of remuneration received from the partnership firm SPI for the determination of Book Profits u/s. 115JB was denied by the revenue authorities. We find that when the matter was agitated before the Tribunal, the Tribunal also declined to interfere with the findings of the ld. CIT(A). The relevant findings of the Tribunal read as under:-
110. We have considered the facts, circumstances, relevant provisions and rival submissions,. A harmonious reading of the provisions of section 115JB of the Act reflects that in the case of a company subject to the provisions of Section 115JB of the Act has to prepare P&L statement in accordance with the provisions of part
(ii) of Schedule (vi) of the Companies Act.
111. The relevant clause of Explanation 1 reads as under:-
Explanation [1]- For the purposes of this section, "book profit" means the [profit] as shown in the [statement of profit and loss] for the relevant previous year prepared under sub-section (2), as increased by -
(f) the amount or amounts of expenditure relatable to any income to which [section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply; or]
112. And as reduced by :-
(ii) the amount of income to which any of the provisions of [section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply, if any such amount is credited to the [statement of profit and loss]; or
113. And section 10(2A) of the Act says that in the case of a person being a partner of a firm which is separately assessed as such his share in the total 48 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 income of the firm will not form part of total income. Explanation to Section 10(2A) provides that the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding, anything contained in any other law, to be an amount which bears to the total income of the firm, the same proportion as the amount of a share in the profits of the firm in accordance with the partners deed bears to such profits.
114. Thus, it is clear that firstly the profit and loss account of the company should be in accordance with the relevant provisions of the Companies Act.
Secondly, only specified items have to be added back as provided in various clauses to Explanation 1 and reduced by specific items provided thereon. The only specific amount of income which has to be reduced is the income to which provisions of Section 10, 11 or 12 apply, if any such amount is credited to the Profit and Loss account and Section 10(2A) defines such income as the share of profit of a partner from the partnership firm, the language is clear and unambiguous and needs no other insertion or deletion. The remuneration to partner may have the color of appropriation of profit of a partnership firm as held by the Hon'ble Supreme Court and Hon'ble High Courts in various decisions relied upon by the ld. Senior Counsel but as mentioned elsewhere, Section 115JB is a complete code in itself. Therefore, if the remuneration is credited by the appellant company in its Profit and Loss account then the same could be reduced it specifically provided under the Explanation to Section 115JB of the Act which we find missing from the relevant provisions. We, therefore, do not find any merit in this claim of the assessee and accordingly we confirm the findings of the First Appellate Authority. Ground no. 9 is dismissed.
61.As no distinguishing facts emerge from the order of the authorities below, respectfully following the findings of the Tribunal (supra), we decline to interfere. Ground no. 13 is accordingly dismissed.
49 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
62.Ground no. 14 relates to the addition of selling and distribution expenses incurred on behalf of SPI disallowed u/s. 14A.
63. While confirming the addition made by the A.O., the ld. CIT(A). at Para 18.3 of his order observed that this issue was also involved in A.Y. 2008-09. The ld. CIT(A) further observed that this issue was also considered by the Tribunal in assessee's own case in ITA NO. 1193 & 1287/Ahd/2008.
64.On finding similarity of facts, we have no hesitation in following the decision of the Tribunal given in earlier year and the relevant findings read as under:-
153. A similar issue was considered by the Bench in A.Y. 2007-08 in ITA No. 2076 & 2067/Ahd/2013 and the relevant findings read as under:-
52. Coming to the disallowance made u/s. 14A by the First Appellate Authority, it is an undisputed fact that the assessee was having sufficient own funds for making the investment in the partnership firm. It is also true that the assessee was on a contractual obligation to look after the marketing and distribution activities of the firm SPI as per the partnership deed read along with the supplementary deed to earn remuneration from the partnership firm. However, it is equally true that a reasonable disallowance of expenditure should be made for earning the exempt income so far as the share of profit from the partnership firm SPI is concerned. We are conscious about the fact that Rule 8D is not applicable for the year under consideration but at the same time for the computation of disallowance for administrative expenditures, the formula given under Rule 8D is the most appropriate method for the computation of the disallowance. We accordingly direct the A.O. to compute the disallowance so far as administrative expenditures are concerned as per Rule 8D of the ITAT Rules r.w.s. 14A of the Act.
We accordingly set aside the disallowance of Rs. 27,55,18,783/- made by the First Appellate Authority and direct the A.O. to re-compute the disallowance as directed hereinabove. Ground no. 8 is allowed in part for statistical purpose.
50 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
154. The only distinguishing fact for the year under consideration is that Rule 8D in fact is applicable for the year under consideration and, therefore, we direct the A.O. to compute the disallowance for administrative expenditure as per the formula given under Rule 8D. Ground no. 17 is treated as allowed for statistical purpose.
65.Respectfully following the findings of the Tribunal (supra), we direct the A.O. accordingly. Ground no. 14 is treated as allowed for statistical purpose.
66.Ground no. 15 relates to the addition on account of re-characterizing remuneration as alleged royalty income from SPI for use of Trade mark, Brand and Technology amounting to Rs. 57,49,50,297/-.
67.Taking a leaf out of the order of the ld. CIT(A) for A.Y. 208-09, the First Appellate Authority issued an enhancement notice for treating the remuneration of Rs. 5,74,950297/- as consideration received for use of Trade mark/Brand and accordingly directed the A.O. to consider the same under normal provisions of the Act.
68.Assessee vehemently challenged the enhancement notice but without any success.
69.The First Appellate Authority held as under:-
18.9. Since the facts are identical in this year also, I respectfully following the order of CIT(A)-IV, Ahmedabad and also considering the factual and legal position 51 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 in this regard, hold that the appellant company has received a sum of Rs.57,49,50,297/- from SPI as consideration for permitting use of all present and future trademark/brands, in the entire world, for the period of 5 years and for providing other managerial services. Thus, the so called "remuneration" as claimed by the appellant does not represent the remuneration at all. Further, this amount has no correlation with the expenses incurred by the appellant on behalf of the SPI and hence no set off can be given against the expenses disallowed out of selling and distribution expenses and salary and allowance to the field staff.
Accordingly, I further hold that the so called "remuneration" received by the appellant from SPI represent the taxable income of the appellant for the year under consideration and accordingly the amount of Rs.57,49,50,297/- is treated as the income of the appellant for the year. Since the Assessing Officer has added the remuneration only for the purposes of computation of book profit, he is directed to Include the same under regular provisions of the Income-tax Act resulting into enhancement of total income by Rs.57,49,50,297/-. The income is accordingly enhanced. Since the appellant has furnished inaccurate particulars of income m this regard, the penalty proceedings u/s. 271(l)(c) are hereby initiated in respect of a sum of Rs.57,49,50,297/-.
70.Aggrieved by this, the assessee is before us.
71.The ld. Senior Counsel drew our attention to the decision of the Tribunal for A.Y. 2008-09 and pointed out that the Tribunal has decided this issue in favour of the assessee and against the revenue. We find force in the contention of the ld. counsel. We also find that the First Appellate Authority has followed the findings of his predecessor given in A.Y. 2008-
09. 52 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
72.This issue was considered by the Tribunal in ITA Nos. 3297 & 3420/Ahd/2014 vide ground no. 13 of that appeal and the relevant findings of the Tribunal read as under:-
128. We have given a thoughtful consideration to the facts in issue. It is an undisputed fact that the remuneration has been paid by the firm SPI as per the partnership deed read with supplementary partnership deed. It is also an undisputed fact that the said partnership deed read with supplementary deed has not been treated as sham or unlawful deeds. The First Appellate Authority emphasized on the entire transaction as a device of tax evasion. The partnership firm SPI has claimed Rs. 40.12 crores as remuneration to the assessee company but at the same time, it did not claim the same as deduction as it was not paid to a whole time partner as provided in the Act. It is true that the appellant company has also not offered the same for taxation taking a shelter behind the provisions of Section 28(v) of the Act. No doubt, the profits of the partnership firm are exempt u/s. 80IB(4) of the Act. Even, if the partnership firm had not charged Rs. 40.12 crores as remuneration to the appellant company, the profits of the firm would have increased by this amount. Since the assessee is holding 97.5% share in the profits of the partnership firm, this amount of 40.12 crores would have otherwise come to the assessee in the firm of share of profit which again is exempt from taxation u/s. 10(2A) of the Act. Therefore, in our considered opinion, the allegation that it is a case of tax evasion is ill-founded. The fact of the matter is that such payments were never re-characterized as royalty in earlier assessment years and the action of the First Appellate Authority in the year under consideration is nothing but based upon assumptions and presumptions. No addition can be sustained which are based upon assumptions, surmises or conjectures. We, therefore, set aside the findings of the ld. CIT(A) and direct the A.O. to delete the amount of Rs. 40.12 crores re-characterized by the First Appellate Authority. Ground no. 13 is allowed.53 ITA Nos. 1666 & 1663/Ahd/2016
. A.Y. 2009-10
73.As no distinguishing fact emerge from the orders of the authorities below, respectfully following the findings of the Tribunal (supra), we direct the A.O. to delete the addition of Rs. 57,49,50,297/-. Ground no. 15 is allowed.
74.With Ground no. 16, the assessee objects to the set off of business loss against profits of the eligible undertaking before allowing deduction u/s.
10B of the Act.
75.During the course of the assessment proceedings, the A.O. noticed that the assessee company has claimed deduction u/s. 10B of the Act at Rs. 126.79 crores in respect of income of Panoli as well as Halol Export Oriented Units. The A.O. further noticed that there was a business los of Rs. 56.59 crores and, therefore, was of the opinion that the deduction should have been claimed after setting off of the business loss resulting into total income at Rs. 70.20 crores. The A.O. accordingly reduced the claim of deduction u/s. 10B of the Act.
76.The assessee agitated the matter before the ld. CIT(A) but without any success.
77.Before us, the ld. counsel for the assessee vehemently stated that the impugned dispute has now been settled by the Hon'ble Supreme Court in the case of Yokogawa India Ltd in Civil Appeals No. 8498 of 2013 77 taxmann.com 41.
54 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
78.The ld. D.R. could not bring any distinguishing decision in favour of the revenue.
79.We have given a thoughtful consideration to the orders of the authorities below. The dispute relates to whether the loss should be set off first before allowing the claim of deduction u/s. 10B of the Act. We find force in the contention of the ld. counsel. Hon'ble Supreme Court in the case of Yokogawa India Ltd. (supra) had the occasion to consider a similar dispute after the amendment of Section 10A by Finance Act 2000 with effect from 01.04.2001 and the Hon'ble Supreme Court held as under:-
From a reading of the relevant provisions of section 1OA it is more than clear that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non- eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794. dated 9-8- 2000. [Para 16] If the specific provisions of the Act provide [first proviso to sections 10A(1); 10A(1A) and 10A(4) that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore. immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would, be prior to the commencement of the exercise to be undertaken under Chapter VI 55 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in section 10A as 'total income of the undertaking'. [Para 17] For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and not at the stage of computation of the total income under Chapter VI. [Para 18]
80.Respectfully following the decision of the Hon'ble Supreme Court (supra), we direct the A.O. to allow the claim of deduction u/s. 10B of the Act.
Before setting off of business loss of Rs. 56.59 crores. Ground no. 16 is allowed.
81.Ground no.l7 relates to the Non enhancement of deduction u/s.10B on account of R&D expenses allocated to Sun Pharma Industries.
82.Vide ground no. 12 of the present appeal, we have directed the A.O. to delete the disallowance of expenditure of the appellant company alleged to have been incurred for products manufactured by Sun Pharma Industries debited in the books of the appellant. Since the disallowance have been directed to be deleted. The present grievance becomes infructuous. Ground No. 17 is dismissed as infructuous.
56 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
83.Ground no. 18 relates to the non consideration of un-realized export proceeds for computation of deduction u/s. 10B of the Act.
84.While scrutinizing the return of income, the A.O. noticed that the assessee company could not realize the sales proceeds in foreign exchange before the prescribed date amounting to Rs. 2,71,420/- and Rs. 9,39,896/- respectively in respect of Panoli and Halol units. Accordingly, on export sale proceeds which was not realized, the A.O. made disallowance of deduction u/s. 10B amounting to Rs. 4,46,557/-.
85.The assessee carried the matter before the ld. CIT(A) who while dismissing the grievance of the assessee at Para 19.21 of his order observed that under the similar facts and circumstances of the case, CIT-IV, Ahmedabad has also confirmed the disallowance vide Para21.3 of the order in A.Y. 2008-09.
86.Before us, the ld. counsel for the assessee drew our attention to the order of the Tribunal in A.Y. 2008-09 and pointed out that the Tribunal has restored the matter to the files of the A.O. with a direction to apply the provisions of Section 115(13) of the Act and decide the issue afresh.
87.We have considered the facts in issue carefully. The Tribunal in its order for A.Y. 2008-09 in ITA Nos. 3297 and 3420/Ahd/2014 had considered a similar issue vide ground no. 14 of that appeal and held as under:-
57 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
138. An identical issue was considered by the Bench in assessee's own case in ITA No. 1558/Ahd/2006 qua ground no. 3 of that appeal. The relevant findings read as under:-
Ground no. 3 relates to the reduction of unrealized export proceeds of Rs. 638.82 lacs from export turnover for the purpose of deduction u/s. 80HHC.
6. The ld. Counsel stated that an identical issue has been considered by the Tribunal in assessee's own case for A.Y. 2001-02 wherein the issue has been set aside to the files of the A.O. The ld. counsel prayed for a similar direction should be given for the year under consideration also. The ld. D.R. did not object to this.
We find that an identical issue was considered by the Tribunal in assessee's own case for A.Y. 2001-02 at Para 6 on page 12 of ITA Nos. 3289 & 3434/Ahd/2003 and at Para 6.3 the Tribunal had directed the A.O to apply the provisions of section 155(13) of the Act and decide the issue afresh.
7. Respectfully, following the decision of the co-ordinate Bench, we direct the A.O. accordingly. Ground no. 3 is treated as allowed for statistical purposes.
139.Respectfully following the same, we direct the A.O. accordingly. Ground no. 18 is treated as allowed for statistical purpose.
88.We direct accordingly.
89.Ground No. 19 relates to the disallowance of expenditure on repairs of Rs. 8,64,686/- and treating them as capital expenditure.
90.During the assessment proceedings, the A.O noticed that the appellant company has claimed repairing expenses of Rs. 27,81,584/-. The A.O. after verifying the details formed a belief that the same are of capital in nature and after allowing depreciation made net addition of Rs. 22,28,930/-.
58 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
91.Before the ld. CIT(A), the assessee claimed that the expenditure was incurred due to normal wear and tear of the machinery and hence the same was revenue in nature. After considering the facts and the submissions and after verifying/examining the related invoices/bills, the ld. CIT(A) found that only expenditure totaling to Rs. 13,74,725/- are of revenue in nature and directed the A.O. to treat the same as such and confirmed the balance as capital expenditure.
92.Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. The ld. D.R. strongly supported the findings of the A.O.
93.We have carefully considered the orders of the authorities below. We find that following expenses were incurred by the assessee -
(a)Kiran Pumps for Rs. 1,59,000/-:- The assessee has purchased LUTZ Pump FLP single motor which is capable of functioning independently without assistance of any other plant & machinery. Therefore, it can be said that a new capital assets has come into existence and hence the expenditure is treated as capital expenditure.
(b) Martin Christ GMBH of Rs. 5,53,436/-:- the appellant has purchased Freeze Dryer Beta with accessories for the purposes of drying process of organic solvents. The assessee has also incurred labour charges on installation of this dryer. The factual matrix shows that new capital assets 59 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 have come into existence and, therefore, the purchase cost and labour charges are treated as capital expenditure.
(c) Communica Aids of Rs. 1,52,250/-:- The appellant has purchased Tata Make IOX 160 EPBAX System with 16 trunk lines and 4 E &M Circuits. The configuration of this machine itself shows that it is capable of being used as independently and a new asset has come into existence the same has to be treated as capital expenditure.
(d) Purchases from Mutech Engineering & Ushail Sales and Services amounting to Rs. 2,33,734/-, Rs. 9,35,550/- and Rs. 2,05,441/-:- The appellant company has purchased Copper Busbar 1 MTR for 3000 KVA Transformer and 2 panel boards for MCC (Motor Contrl Centre). The details show that these items have been purchased to replace the electrical items damaged in fire. All these items form part of 3000 KVA Transformer and has no used independently. Therefore, the same have to be treated as revenue in nature.
94.We, accordingly, direct the A.O. to treat Rs. 13,74,725/- as revenue expenditure and the balance is confirmed as capital expenditure. The A.O. is directed to re-compute the claim of depreciation as per the provisions of the law. Ground no. 19 is partly allowed.
95.Ground no. 20 relates to the disallowance made u/s. 14A read with Rule 8D amounting to Rs. 4,63,12,589/-.
60 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
96.During the course of the assessment proceedings, the A.O. noticed that the assessee company has incurred interest expenditure of Rs. 2,77,23,736/- during the year under consideration. The A.O. further found that the assessee has earned exempt income of Rs. 1034.31 crores from the partnership firm. The A.O. was of the firm belief that disallowance u/s. 14A read with Rule 8d has to be made. The A.O. accordingly computed the disallowance of Rs. 40,34,830/- out of the interest expenditure and further disallowed a sum of Rs. 4,22,77,759/- being 0.5% of average value of investment resulting into exempt income.
97.When the matter was agitated before the ld. CIT(A). The ld. CIT(A) observed that a similar disallowance was also made in A.Y. 2008-09 and the ld. CIT(A)-IV, Ahmedabad vide Para 25.2 to 25.3 of order dated 14.10.2014 has confirmed the disallowance made by the A.O. Taking a leaf out of the findings given in A.Y. 2008-09, the ld. CIT(A) confirmed the action of the A.O. with a direction to exclude the remuneration of Rs. 57,49,50,297/- which has been separately taxed.
98.Before us, the ld. counsel for the assessee drew our attention to the decision of the Tribunal for A.Y. 2008-09 and pointed out that the Tribunal has set aside the matter to the files of the A.O. with certain directions and prayed for a similar direction.
61 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
99.After considering the facts in issue before us. We find that a similar issue was decided by the Tribunal in ITA Nos. 3297 and 3420/Ahd/2014 vide ground no. 17 of that appeal. The relevant findings read as under:-
153. A similar issue was considered by the Bench in A.Y. 2007-08 in ITA No. 2076 & 2067/Ahd/2013 and the relevant findings read as under:-
52. Coming to the disallowance made u/s. 14A by the First Appellate Authority, it is an undisputed fact that the assessee was having sufficient own funds for making the investment in the partnership firm. It is also true that the assessee was on a contractual obligation to look after the marketing and distribution activities of the firm SPI as per the partnership deed read along with the supplementary deed to earn remuneration from the partnership firm. However, it is equally true that a reasonable disallowance of expenditure should be made for earning the exempt income so far as the share of profit from the partnership firm SPI is concerned. We are conscious about the fact that Rule 8D is not applicable for the year under consideration but at the same time for the computation of disallowance for administrative expenditures, the formula given under Rule 8D is the most appropriate method for the computation of the disallowance. We accordingly direct the A.O. to compute the disallowance so far as administrative expenditures are concerned as per Rule 8D of the ITAT Rules r.w.s. 14A of the Act.
We accordingly set aside the disallowance of Rs. 27,55,18,783/- made by the First Appellate Authority and direct the A.O. to re-compute the disallowance as directed hereinabove. Ground no. 8 is allowed in part for statistical purpose.
154. The only distinguishing fact for the year under consideration is that Rule 8D in fact is applicable for the year under consideration and, therefore, we direct the A.O. to compute the disallowance for administrative expenditure as per the formula given under Rule 8D. Ground no. 17 is treated as allowed for statistical purpose.
100. Respectfully following the findings of the Tribunal (supra), we direct accordingly. Ground no. 20 is treated as allowed for statistical purpose.
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101. Ground no. 21 relates to the addition of expenses disallowed u/s. 14A for computing book profit u/s. 115JB amounting to Rs. 4,63,12,589/-.
102. The A.O. while making disallowance u/s. 14A read with Rule 8D also considered the disallowance for the computation of book profit u/s. 115JB of the Act.
103. The ld. CIT(A) taking a leaf out of the decision of his predecessor given in A.Y. 2008-09 confirmed the action of the A.O.
104. The Tribunal in A.Y. 2008-09 in ITA No. 3297 & 3420/Ahd/2014 had the occasion to consider the dispute vide ground no. 10 of that appeal and held as under:-
119. We have considered the orders of the authorities below and have given a thoughtful consideration to the order of the Hon'ble Jurisdictional High Court in the case of Alembic Ltd. The Hon'ble High Court was seized, interalia, with the following substantial question of law:-
(iii) whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s 14A of the Act in computation of book profit u/s 115JB of the Act is not as per law without appreciating that the amount disallowable under section 14A is covered under clause (f) of Explanation to section 115JB(2) and, thus, said amount has to be added back while computing amount of book profits?
120. Relevant findings of the Hon'ble High Court read as under:-
7. So far as issue Nos. (iii) and (iv) are concerned, the learned counsel for the assessee has relied on the decision of this court in the case of Commissioner of Income-tax-1 v. Gujarat State Fertilizers & Chemicals Ltd., reported in (2013) 63 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 358 ITR 323 (Gujarat) where this court has held in paragraph Nos. 6 to 6.5 this court has observed as under:
"6. So far as the fourth question is concerned, it pertains to addition of Rs.1,14,43,0407- under Section 115JB of the Act being the expenditure estimated on earning of dividend income under Section 14A of the Act. 6.1 The Assessing Officer on referring to the said provision of Section 115JB(2) of the Act added the said amount considering that any amount of expenditure relatable to the income exempted under Section 10 of the Act shall need to be added in the profit shown in the 'Profit and Loss Account'. 6.2 When the matter travelled to the CIT (Appeals), since it deleted the addition of Rs. 1,14,43,040/- while deciding the question no. 1, it consequently deleted such addition under section 115JB of the Act on the ground that this would not serve any purpose.
6.3 The Tribunal decided the said issue as follows:
"94. We have considered the rival submissions and we find that similar issue was raised by Revenue as per ground No.3 above in respect of regular assessment of income and while deciding that ground, we have already upheld that disallowance of Rs.5 lakh in respect of administrative expenses will meet the ends of justice and no disallowance is called for in respect of interest expenditure. Hence, for the purpose of computing book profit u/s 115 JB of the Act also, we hold accordingly and confirm the addition of Rs.5 lakh. This ground of Revenue's appeal is partly allowed."
6.4 As rightly held by both, the CIT (Appeals) and the Tribunal, this issue has a direct correlation with the first question. It was argued by the Revenue that while computing the book profit under Section 115JB of the Act, the disallowance of interest expenditure on exempt income was wrongly negative by both the authorities on the ground that it was not the liability for expenses, but a liability relating to assets.
6.5 We find no fault in the approach adopted by both the authorities. The addition under section 115JB of the Act of a sum of Rs. 1,14,43,040/- when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question no. 1, this deletion requires to be confirmed."
8. Taking into consideration the evidence on record and considering the division of this court in the case of Commissioner of Income-tax-1 vs. Gujarat State Fertilizers & Chemicals Ltd. (supra), we are of the opinion that issue Nos. (iii) and
(iv) required to be answered in favour of the assessee and against the revenue. In 64 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed.
121. Respectfully following the decision of the Hon'ble Jurisdictional High Court (supra), we direct the A.O. to delete the addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB of the Act.
105. Respectfully following the findings of the Tribunal (supra), we direct the A.O. to delete the addition of expenses disallowed u/s. 14A for computing book profit u/s. 115JB of the Act. Our view is also fortified by the decision of the Special Bench in the case of Vireet Investment (P) Ltd. 82 taxmann.com 415. Ground no. 21 is accordingly allowed.
106. Ground no. 22 relates to the initiation of penalty proceedings u/s. 271(1)(c) of the Act. This grievance is premature and is accordingly dismissed.
107. In the result, the appeal filed by the Assessee is partly allowed.
ITA No. 1663/Ahd/2016 Revenue's appeal108. Ground no. 1 relates to the part relief given in respect of 0% OFCD by 1% on account of country and foreign exchange risk.
109. This issue has been decided by us in assessee's appeal vide ground no. 4 (supra). For our detailed discussion therein, ground no. 1 is dismissed.
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110. Ground no. 2 relates to the reduction on account of ALP for corporate guarantee fees from 2.95% to 2%.
111. An identical issue has been considered and decided by us in assessee's appeal vide ground no. 5. For our detailed discussion therein, we direct accordingly. Ground no. 2 is treated as allowed for statistical purpose.
112. Ground no. 3 relates to the deletion of the addition on account of price difference on sales made to Sun Pharma Industries.
113. A.O. has made the addition of Rs. 28169944/- on account of sales effects by the appellant to SPI at lower price. While deciding this issue, the ld. CIT(A) has followed the order of the Tribunal in assessee's own case wherein the similar issue has been decided in favour of the assessee.
114. Since, the First Appellate Authority has followed the order of the Tribunal in ITA Nos. 1589/Ahd/2011 and 2430/Ahd/2009, therefore, we do not find any error or infirmity in the findings of the ld. CIT(A). Ground no. 3 is accordingly dismissed.
115. Ground no. 4 relates to the deletion of the addition by holding the capital expenditure as revenue expenditure.
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116. This issue has been decided by us in assessee's appeal vide ground no. 19 (supra). For our detailed discussion therein, ground no. 4 is dismissed.
117. Ground no. 5 relates to deletion of the disallowance of Lunch and Refreshment and brokerage paid for property agents for assisting and helping R&D unit employees u/s. 35(2AB).
118. The denial of the weighted deduction u/s. 35(2AB) of the Act has been allowed by the ld. CIT(A) by following the findings of his predecessor given for A.Y. 2008-09. The order of the ld. CIT(A) for A.Y. 2008-09 has been confirmed by the Tribunal in ITA No. 3420/Ahd/2014. The relevant findings read as under:-
159. At the very outset, the ld. Senior Counsel for the assessee brought to our notice that these issues have been considered and decided by the Bench in favour of the assessee and against the revenue in ITA No. 2067/Ahd/2013. We find force in the contention of the ld. Senior Counsel. The Co-ordinate Bench in ITA No. 2067/Ahd/2013 has decided the impugned issues as under:-
69. Ground no.1 relates to the deletion of the disallowance of Rs. 67,620/-
claimed as weighted deduction u/s. 35(2AB) of the Act on gift expenses incurred for R & D employees.
70. This issue has been decided in favour of the assessee and against the revenue by the Co-ordinate Bench in ITA No. 1592/Ahd/2011 qua ground no. 2 of that appeal. The relevant part reads as under:-
Ground no. 2 relates to the weighted deduction u/s. 35(2AB) on account of gifts to R & D employees on occasion of marriage.
44. We find that an identical issues has been decided in favour of the assessee and against the revenue in the case of Claries Lifesciences Ltd. 112 ITD 307 (Ahd.) which decision has been followed by the ld. CIT(A). The said decision of the Tribunal has been confirmed by the Hon'ble 67 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 Jurisdictional High Court in Tax Appeal No. 383 of 2008. Now, that the decision of the First Appellate Authority is well supported by the decision of the Hon'ble Jurisdictional High Court. No interference is called for. Ground no. 2 is dismissed.
71. Respectfully following the same, ground no. 1 is dismissed.
72. Ground no. 2 relates to the deletion of the disallowance of Rs. 42,46,000/- claimed u/s. 35(2AB) of the Act on repairs and municipal taxes paid for building utilized for R & D activity.
73. An identical issue was considered by the Co-ordinate Bench in ITA No. 1592/Ahd/2011 qua ground nos. 2 & 3 of that appeal. In ground no. 1 of the present appeal, we have extracted the relevant part of the decision of the Co- ordinate Bench. For the reasons given therein, ground no. 2 is also dismissed.
74. Ground no. 3 relates to the deletion of the disallowance of Rs. 7,91,222/- claimed u/s. 35(2AB) of the Act incurred for lunch, refreshment and brokerage paid for property used by R & D unit employees.
119. Respectfully following the findings of the Co-ordinate Bench (supra), ground no. 5 is dismissed.
120. Ground no. 6 relates to the deletion of the addition on account of foreign exchange gain.
121. While scrutinizing the return of income, the A.O. noticed that there was a foreign exchange fluctuation gain of Rs. 8.84 crores. The assessee contended that this gain was pertaining to the assets/liabilities being part of fixed capital and therefore was not liable to be taxed. The A.O. was not convinced with the contention of the assessee and treated the gain of Rs. 8.84 crores as taxable income.
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122. When the matter was agitated before the ld. CIT(A), the ld. CIT(A) found that an identical issue was decided by his predecessor in favour of the assessee in A.Y. 2008-09. Taking a leaf out of the findings of his predecessor, the ld. CIT(A) deleted the addition. We find that an identical issue was considered by the Tribunal in ITA Nos. 2076 & 2067/Ahd/2013 for A.Y. 2007-08 in assessee's own case. The relevant findings of the Tribunal read as under:-
61. In our considered opinion profits accrued to the assessee is not in the course of any trading activity but on account of appreciation on account of hedging in forex even if the same has been held for investment purposes. Therefore, such gains have to be treated as capital receipt. For this proposition, we draw support from the decision of the Hon'ble High Court of Bombay in the case of Homi Mehta Sons Pvt. Ltd. 222 ITR 528. We find that the forward contract in respect of investment in Caraco and OFCD in Global are on capital account and any profits received by assessee on cancellation of forward contract would not change its character same being in connection with a capital asset and, therefore, has to be treated as capital receipt. For this proposition, we draw support from the decision given in the case of Mahindra & Mahindra Ltd. 5 SOT 217 (Mum.).
62. Considering the facts in totality in the light of the nature of contract entered into by the assessee, we do not find any merit in the findings of the First Appellate Authority. We set aside the same and direct for the deletion of the addition of Rs. 14,33,80,289/-. Ground no. 9 is allowed.
123. Respectfully following the findings of the Co-ordinate Bench (supra), we decline to interfere. Ground no. 6 is dismissed.
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124. Ground no. 7 relates to the deletion of the disallowance of Rs. 20,97,048/- with respect to section 80IA(4) of the Act.
125. The A.O. made the impugned disallowance following the action of his predecessor for A.Y. 2008-09 and the ld. CIT(A) deleted the disallowance following the decision of his predecessor for A.Y. 2008-09. We find that the Tribunal in ITA Nos. 3297 & 3420/Ahd/2014 has confirmed the findings of the First Appellate Authority vide ground no. 8 of that appeal. The relevant findings read as under:-
178. We have given a thoughtful consideration to the orders of the authorities below and the reasons given by the A.O. as mentioned elsewhere. The details of year-wise profits generated in captive power plant are as under:-
Statement of Panoli CPP Panoli CPP Panoli CPP Panoli CPP Panoli CPP working of 08-09 07-08 06-07 05-06 04-05 deduction u/s 801A A Profit before tax 32,79,235 (9,53,471) 82,89,195 75,41,568 43,51,772 as per Profit & Loss A/c B) Add: Items disallowed / considered separately Depreciation 18,57,315 18,57,315 18,57,315 18,57,315 13,95,524 Disallowance 20,144 u/s 43 B-Bonus Disallowance - - 1,950 - -
u/s 43 B-Earned leave Total B 18,77,459 18,57,315 18,59,265 18,57,315 13,95,524 70 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 C) Less: Items allowable/ Exempt Depreciation 7,92,565 9,19,853 10,92,925 22,68,015 1,12,34,536 allowable Total C 7,92,565 9,19,853 10,92,925 22,68,015 1,12,34,536 Net Profit 43,64,129 (16,009) 90,55,535 71,30,868 (54,87,240) Previous Year (16,009) Profit / (Loss) Amount claimed 43,48,120 - 90,55,535
179. We further find that the First Appellate Authority has clearly distinguished the facts of the case in hand qua the facts in the case of Chettinad Cement Corporation Ltd. relied upon by the A.O. Since the grounds on which the A.O. denied the claim have been demolished by the factual and legal aspect relating to the facts in issue, we do not find any error or infirmity in the findings of the ld. CIT(A). Ground no. 8 is accordingly dismissed.
126. Respectfully following the findings of the Co-ordinate Bench (supra), we decline to interfere. Ground no. 7 is dismissed.
127. Ground no. 8 relates to the deletion of the provision of wealth tax for computation of book profit u/s. 115JB of the Act.
128. While computing the book profit u/s. 115JB of the Act, the A.O. was of the opinion that the wealth tax is of same nature as Income Tax. Taking a 71 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 leaf out of his predecessor in A.Y. 2008-09, the A.O. considered wealth tax for the computation of book profit u/s. 115JB of the Act.
129. The ld. CIT(A) followed the decision of his predecessor for A.Y. 2008- 09 and directed the A.O. to exclude the provision of wealth tax from the computation of book profit u/s. 115JB. We find that the order of the ld. CIT(A) was confirmed by the Tribunal in ITA Nos. 3297 & 3420/Ahd/2014 vide ground no. 5 of that appeal. The relevant findings read as under:-
167. There is no dispute that Wealth Tax Act, 1957 imposes the charge of Wealth Tax on the 'net wealth' of every individual, HUF/company as on the valuation date. While Income-tax is tax on income. Both Income-tax and Wealth Tax are governed by separate and distinct legislated laws. It is true that under the Explanation to Section 115JB of the Act, certain items have been mentioned which have to be added back for the computation of book profit. It is equally true that there is no mention of Wealth Tax provision. The provisions of the act are clear and unambiguous and require no addition/deletion of any items other than those mentioned in the provisions. We, therefore, do not find any infirmity in the findings of the ld. CIT(A). Ground no. 5 is dismissed.
130. Respectfully following the findings of the Tribunal (supra), ground no. 8 is dismissed.
131. Ground no. 9 relates to the deletion of the addition on account of disallowance of expenditure incurred on behalf of its sister concern.
132. A perusal of the order of the Co-ordinate Bench for earlier years shows that the Bench has considered similar issue in ITA Nos. 3297 & 72 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 3420/Ahd/2014 and has decided this issue in favour of the assessee and against the revenue. The Tribunal while deciding this issue had followed the decision of the Co-ordinate Bench in assessee's own case in ITA Nos. 1589 & 1592/Ahd/2011 wherein the decision given in ITA No. 2430/Ahd/2009 was followed. The relevant part reads as under;-
25. While scrutinizing the return of income, the A.O found that the assessee has sold raw materials/products to sister concern at lower rates. Assessee was asked to explain the transactions with its sister concern, Sun Pharmaceutical Industries.
Assessee filed a detailed reply giving exhaustive list of all the raw materials/products being sold to its sister concern vis-à-vis third parties along with the rates and quantity sold. The A.O was of the firm belief that the assessee has been selling products to its sister concern at a rate lower than sold to third parties. The A.O observed that since the assessee is holding 95% share in its sister concern and the sister concern is claiming 100% deduction u/s. 80IB on its profits. Therefore, in effect the assessee is indulged in diversion of profit and avoidance of tax by suppressing the sale price. The A.O accordingly made an addition of Rs. 21,25,278/-.
26. Assessee carried the matter before the ld. CIT(A) but without any success. Before us, the ld. counsel for the assessee stated that an identical issue was considered by the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008 and has decided the issue in favour of the assessee and against the revenue. This issue has been considered by the Tribunal qua ground no. 12 as under:-
Ground no. 12 relates to the addition made on account of sales to Sun Pharmaceutical Industries.
83. This issue has been considered by the A.O at Para 12 of his order. A survey u/s. 133A of the Act was conducted on the assessee as well as its sister concern Sun Pharmaceutical Industries which is a partnership firm. During the course of the survey operations, it was noticed that the assessee has been selling certain 73 ITA Nos. 1666 & 1663/Ahd/2016 . A.Y. 2009-10 raw materials /products to its sister concern at a lower rate than was sold to third parties and thereby diverting the profits. Assessee was asked to explain its stand. Assessee filed a detailed reply giving details of raw materials/products being sold to its sister concern and to third parties along with rates and quantity sold. On analysis of the reply, the A.O found that there were certain raw materials/products which were being sold to the sister concern at a lower rate than sold to third parties. The A.O proceeded by computing an addition of Rs.
19,49,930/- on account of unreasonably low selling price on sale of raw materials/products sold to its sister concern.
84. Aggrieved by this, assessee carried the matter before the ld. CIT(A) but without any success.
85. Before us, the ld. counsel for the assessee stated that it is not clear under which provision of the act additions have been made. Further the counsel stated that no 80IB deduction has been claimed by it which could justify the action of the A.O. Per contra, the ld. D.R. strongly supported the findings of the revenue authorities.
87. We have given a thoughtful consideration to the orders of the authorities below. We agree with the contention of the ld. counsel that no specific section has been mentioned in the assessment order for making the impugned additions. A perusal of the assessment order show that the additions have been made by treating the transactions u/s. 40A(2) of the Act. In that case, we have to state that provisions of section 40A(2) are applicable only in respect of payments made to related parties mentioned therein. But the transaction before us is of credit in nature i.e. sales so provisions of section 40A(2) are not at all applicable.
27. Respectfully following the findings of the Tribunal (supra), we direct the A.O to delete the addition of Rs. 21,25,278/-. Ground no. 9 is allowed.
124. Respectfully following the same, we direct the A.O. to delete the addition of Rs. 2,75,07,070/-. Ground no. 11 is allowed.
74 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
125. Ground no. 12 relates to the disallowance of Rs. 62,15,78,070/- made u/s. 37 of expenses incurred on behalf of Sun Pharmaceutical Industries.
126 An identical issue was considered by the Bench in assessee's own case in ITA NO. 1589/Ahd/2011 and ITA No. 2430/Ahd/2009. The relevant part of ITA No. 2430/Ahd/2009 has been extracted in ground no. 11 of this appeal. For similar reasons, we direct the A.O. to delete the disallowance of Rs. 62,15,78,070/-.
133. Respectfully following the decisions of the Co-ordinate Bench (supra), we decline to interfere. Ground no. 9 is dismissed.
134. Ground no. 10 relates to the restriction of the disallowance of R&D expenses after excluding export turnover for the purpose of computing allocation of R&D expenses.
135. The impugned issue has been considered at length in assessee's appeal vide ground nos. 9 to 11 (supra). For our detailed discussion therein, we do not find any reason to interfere. Ground no. 10 is dismissed.
136. Ground no. 11 relates to the direction to allow weighted deduction on the R&D expenses of Rs. 1124.60 lakh.
137. Similar issue has been considered and decided by us in assessee's appeal (supra) vide ground nos. 9 to 11 of that appeal. For our detailed discussion therein, ground no. 11 is dismissed.
75 ITA Nos. 1666 & 1663/Ahd/2016. A.Y. 2009-10
138. Ground no. 12 is of general in nature and needs no separate adjudication.
139. In the result, the appeal filed by the Revenue is partly allowed.
Order pronounced in Open Court on 08 - 09- 2017
Sd/- Sd/-
(RAJPAL YADAV) (N. K. BILLAIYA)
JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER
Ahmedabad: Dated 08/09/2017
Rajesh
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals) -
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT,Ahmedabad