Income Tax Appellate Tribunal - Ahmedabad
Sun Pharmaceuticals Industries Ltd.,, ... vs Dy.Cit., Cent.Circle-1,, Baroda on 27 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "I" BENCH
(BEFORE SHRI R.P. TOLANI, VICE PRESIDENT
& SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER)
ITA. Nos: 2076 & 2067/AHD/2013
(Assessment Year: 2007-08)
Sun Pharmaceutical V/S Deputy Commissioner of
Industries Ltd. SPARC, Income Tax, Central
Tandalja, Baroda-20 Circle-1, Baroda
Deputy Commissioner of V/S Sun Pharmaceutical
Income Tax, Central Industries Ltd. SPARC,
Circle-1, Baroda Tandalja, Baroda-20
(Appellant) (Respondent)
PAN: AADCS 3124K
Appellant by : Shri S.N. Soparkar, Parin Shah
& Vartik Choksi, A.R.
Respondent by : Shri Ram Mohan Tiwari, CIT/DR
(आदे श)/ORDER
Date of hearing : 12 -04-2017
Date of Pronouncement : 27 -04-2017
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:
2 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
1. ITA Nos. 2076 & 2067/Ahd/2013 are cross appeals by the assessee and the revenue preferred against the very same order of the Ld. CIT(A)-IV, Ahmedabad dated 20.05.2013 pertaining to A.Y. 2007-08.
2. As both these appeals were heard together, they are disposed of by this common order for the sake of convenience and brevity.
3. We have heard the submissions of the representatives from both sides at length and with the assistance of the ld. Senior Counsel, we have gone through the relevant documentary evidences brought on record in the form of a paper book and the relevant judicial decisions relied upon in the light of Rule 18(6) of the ITAT Rules.
ITA No. 2076/Ahd/2013 Assessee's Appeal for A.Y. 2007-084. The first ground is of general in nature and calls for no adjudication.
5. Ground no. 2 relates to the addition of Rs. 5,21,70,765/- on account of interest on loans given to Sun Pharma Global Inc.
6. During the course of the scrutiny assessment proceedings, when A.O. found that certain International Transactions have to be considered by the TPO, the matter was remitted to the Transfer Pricing Officer who proposed to make following additions in respect of International Transactions relating to loans to associated enterprises:
3 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
(1) Interest on Loan to AEs at LIBOR plus rate Rs. 5,34,26,484/-
(2) Interest on 0% OFCD Rs. 33, 16, 53, 612/-
(3) Corporate Guarantee Fees Rs. 39,48,000/-
7. Taking a leaf out of the proposed additions from the order of the TPO, the A.O. made the impugned additions.
8. Assessee assailed the additions before the First Appellate Authority but could not succeed.
9. We find that an identical issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 1589 & 1592/Ahd/2011 for A.Y. 2006-07 in so far they relate to the addition on account of interest on loan to AE at LIBOR plus rate and interest on 0% OFCD is concerned and the Tribunal has decided the issue in favour of the assessee and against the revenue. The relevant part of the order reads as under:-
3. Ground no. 2 relates to the addition on account of interest on loans given to Sun Pharma Global Inc. & Sun Pharmaceutical Industries Inc. as well as Optionally Fully Convertible Debentures subscribed to in Sun Pharma Global Inc.
4. During the course of the scrutiny assessment proceedings, when A.O found that certain International Transactions have to be considered by the TPO, the matter was remitted to the Transfer Pricing Officer who proposed to make following additions in respect of International Transactions relating to investment/loans to Associated Enterprises-
(1) Interest on Loan to AEs at LIBOR plus rate allowed to AEs Rs. 7,83,82,483/- (2) Interest on 9% OFCD Rs. 21,08,42,301/-
Total Rs. Rs. 28,92,24,784/-
4 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
5. Assessee was asked to explain why this amount should not be added to the total income. Assessee filed a detailed reply explaining that the assessee had sourced the loans to AE out of the excess funds lying idle out of the issue of FCCBs. Certain portion of the FCCB proceeds were deployed in fixed deposits in overseas banks. It was brought to the notice of the A.O that the assessee has charged interest to the AEs at 3.81% being the 12 month LIBOR rate. The assessee strongly objected to the charge of LIBOR+ rate of interest. In so far as, the money raised through Foreign Currency Convertible Bonds, it was explained that since money raised through FCCB was not permitted to be parked/brought in India unless it was actually deployed for permitted capital expansions/acquisitions, therefore, it was decided to invest money on the wholly owned subsidiary being an Associated Enterprise.
6. The claim of the assessee on both these counts was dismissed by the A.O who proceeded by making an addition of Rs. 28,92,24,784/-.
7. Assessee carried the matter before the ld. CIT(A) and reiterated its claim. After considering the facts and the submissions, the ld. CIT(A) reduced the interest to LIBOR+0.25% from LIBOR+2%. The assessee is disputing the LIBOR+0.25% and the revenue is in dispute for the deletion of 1.75%.
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 241.5 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
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:-
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 6 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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 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).7 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
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.
10.As no distinguishing decision has been brought by the ld. D.R. in favour of the revenue, respectfully following our own decision given in A.Y. 2006-07 (supra). We direct theA.O.to delete the impugned addition. Ground no. 2 is allowed.
11.Ground no. 3 relates to the addition on account of interest on short term business advances to Sun Pharmaceuticals U.K. Ltd., Sun Pharmaceuticals Ltd., Sun Pharmaceuticals Peru SAC, Rs. 12,55,719/-.
12.The A.O. noticed that the assessee has not charged interest on these advances. In support its claim, the assessee contended that advances were short term business advances and were exclusively for business purposes and for mutual benefit, therefore no interest was charged. It was pleaded that the business growth of these AEs will further result in greater business opportunities for the assessee in the years to come. The long term commercial benefits will outweigh the smaller interest that the Assessee would have charged to these AEs. It was explained that ultimately it is the assessee which would derive the benefits of growth of subsidiaries in the form of appreciation of its shareholdings particularly since the Associated Enterprises are wholly owned subsidiaries of the assessee. This contention of the assessee was dismissed by the A.O. who proceeded by making addition of Rs. 12,55,719/- on this account.
8 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
13.The assessee could not convince the First Appellate Authority and the additions were confirmed.
14.While dismissing the appeal of the assessee, the ld. CIT(A), interalia, observed as under:-
5.4.10 The TPO is of the considered view that the assessee has charged lower interest rate from its subsidiary by charging interest at LIBOR rate or Nil rate whereas prevailing rate at that point of time LIBOR Plus should have been charged. The rate prevailing at that point of time was LIBOR rate i.e. 5.401% + 200 basis point which comes to 7.401%. This rate is almost equal to the prime interest rate or American Bank lending rate. The prime interest rate is the interest rate charged by banks to their most creditworthy customers and this rate is almost the same amongst the major banks. Accordingly by applying interest rate of LIBOR 5.401% + 2% (7.401%), total upward adjustment has been determined by the TPO at Rs.5,34,26,4847-. The TPO has not specifically factored the foreign exchange risk in the above loan transactions considering the fact that there has been severe fluctuations in the foreign exchange and the foreign exchange risk has been substantial. A 100 basis point increase on account of country and foreign exchange risk is found to be normal. However, it is noted that interest determined by the TPO at LIBOR + 2% would take care of such foreign exchange risk also
15.Before us, the ld. counsel for the assessee vehemently stated that at the most chargeable interest should be @ LIBOR. It is the say of the ld. counsel that there is no justification in further adjusting the LIBOR rate with additional basis point.
9 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
16.Per contra, the ld. D.R. supported the orders of the revenue authorities.
17.We have carefully considered the facts in issues before us. We find that in the immediately preceding assessment year, the First Appellate Authority himself has taken the interest rate at LIBOR plus 0.25%. We also find that even that plus rate taken by the First Appellate Authority did not find any favour with the Tribunal in ITA No. 1589/Ahd/2011. Taking a leaf out of the findings of the Co-ordinate Bench in A.Y. 2006-07, in our considered opinion, upward adjustment at LIBOR rate should meet the ends of justice. We, accordingly, direct the A.O. to charge interest at LIBOR rate. This ground is partly allowed.
18.Ground no. 4 relates to the addition on account of interest on Optionally Fully Convertible Debentures subscribed to in sun Pharma Global Inc. amounting to Rs. 33,16,53,612/-.
19.We find that this issue has been already settled by the Co-ordinate Bench in favour of the assessee and against the revenue in ITA No. 1589 & 1592/Ahd/2011. The relevant part reads 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 10 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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:-
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 11 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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 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).12 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
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.
20.As the dispute stands settled in favour of the assessee by the decision of the Co-ordinate Bench (supra), respectfully following the same. We direct the A.O. to delete the addition of Rs. 33,16,53,612/-. Ground no. 4 is allowed.
21.Ground no. 5 relates to the addition on account of Corporate Guarantee provided to associated enterprises Sun Pharmaceuticals Industries Inc. and Sun Pharmaceuticals Bangladesh Ltd. amounting to Rs. 39,48,000/-.
22.During the year under consideration, the assessee has given corporate guarantees to banks on behalf of associated enterprises Sun Pharmaceuticals Industries Inc. and Sun Pharmaceuticals Bangladesh Ltd. The assessee had contended that since it has not incurred any expenses/losses on account of giving corporate guarantees, therefore, it has not charged any commission/fee to the subsidiaries. The corporate guarantees were given to promote and nurture subsidiaries and it was in the interest of the appellant as it would secure long term commercial advantages. The Transfer Pricing Officer brushed aside the submissions made by the assessee and held that 2% of corporate guarantee should be charged as fees/commission for giving guarantees. Taking a leaf out of this, the A.O. had made the impugned additions.
13 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
23.Before the First Appellate Authority, the assessee strongly objected to the additions made on account of corporate guarantee provided by it. In alternative, it was contended that the addition of 2% of corporate guarantee is excessive and should be substantially reduced.
24.It was brought to the notice of the First Appellate Authority that the assessee is a cash rich company. It does not have any major debts in its balance sheet. In the presence of huge cash surplus and liquid assets, there was no need for the assessee to incur any costs in respect of guarantees given nor was it affecting any borrowing limits of the Assessee. It was further brought to the notice of the ld. CIT(A) that no charges have been levied by the banks to the assessee for providing the guarantees. It was also submitted that the guarantees provided to the AE are only a notional liability for the assessee. The assessee would be required to meet its obligation only in the event of a default by the AE.
25.After considering the facts and the submissions, the ld. CIT(A) was of the opinion that after the retrospective amendment of section 92B by inserting Explanation, in particular Clause (c) of explanation to this section vide finance Act 2012 made applicable w.e.f. 01.04.2002, such corporate guarantee is clarified to be an international transaction in terms of section 92B of the Act. Drawing support from this amendment, the First Appellate Authority observed that the business prudence or necessity of providing such guarantee to its AEs is not relevant for computing Arm's Length Price in unrelated party transactions. The ld. CIT(A) further observed that since 14 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 the assessee has not charged any fee from its AE, the transaction has to be tested with a situation, had the assessee provided the guarantee on behalf of an unrelated third party and thereby the income, which would have been earned by the assessee is expected to have been earned from the transaction of providing corporate guarantee on behalf of its AEs. Since the assessee has not bench marked the transactions relating to providing the corporate guarantee on behalf of its AE, the First Appellate Authority confirmed the upward adjustment of Rs. 39,48,000/- made by the TPO/AO by charging 2% guarantee fee on the total amount of guarantee given by the assessee to its AEs.
26.Having heard the rival submissions, we have given a thoughtful consideration to the facts in issues before us. It is true that by Finance Act of 2012, the legislature has inserted explanation to section 92B of the Act giving it a retrospective effect from 01.04.2002. In our considered opinion, the assessee cannot bench mark its transaction retrospectively. The transaction relates to the assessment year under consideration whereas the amendment was brought by Finance Act of 2012.
27."Lex non cogit ad impossibilia" meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform. The assessee cannot bench mark a transaction which has been done during the year under consideration when the amendment is brought by Finance Act of 2012.
15 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
28.The ld. counsel for the assessee drew our attention to the decision of the Co-ordinate Bench in the case of Micro Inks Ltd. in ITA No. 2873/Ahd/2010 157 ITD 132. The ld. D.R. vehemently stated that since there are conflicting decisions of the Co-ordinate Benches on this issue, the same must be transferred to a Special Bench for its determination. In support, the ld. D.R. submitted a request for the constitution of a Special Bench to decide this issue.
29.We will first adhere to the formal request made by the ld. D.R. We find that in one of the earlier occasion, a similar request was declined by the Co- ordinate Bench made in the case of Micro Inks Ltd. (supra). The relevant part of the order of the Co-ordinate Bench reads as under:-
47. However, within less than four months of this decision having been rendered, the Finance Act 2012 came up with an Explanation to Section 92B stating that "for the removal of doubts", as we have noted earlier in this decision, "clarified"
that international transactions include, inter alia, capital financing by way of guarantee. This legislative clarification did indeed go well beyond what a coordinate bench of this Tribunal held to be the legal position and we are bound by the esteemed views of the coordinate bench. We are, therefore, of the opinion that the Explanation to Section 92B did indeed enlarge the scope of definition of 'international transaction' under section 92B, and it did so with retrospective effect. If, for argument sake, it is assumed that the insertion of Explanation to Section 92B did not enlarge the scope of definition, there cannot obviously be any occasion to deviate from the decision that the coordinate bench took in Four Soft Ltd. case (supra), but if the scope of the provision was indeed enlarged, as is our opinion, the question that really needs to be addressed whether, given the peculiar nature and purpose of transfer pricing provision, is it at all a workable 16 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 idea to enlarge the scope of transfer pricing provisions with retrospective effect There can be little doubt about the legislative competence to amend tax laws with retrospective effect, and, in any case, we are not inclined to be drawn into that controversy either. On the issue of implementing the amendment in transfer pricing law with retrospective effect, in the case of Bharti Airtel Ltd. (supra), a coordinate bench had observed as follows:
"34. There is one more aspect of the matter. The Explanation to Section 92B has been brought on the statute by the Finance Act 2012. If one is to proceed on the basis that the provisions of Explanation to Section 92B enlarges the scope of Section 92B itself, even as it is modestly described as 'clarificatory' in nature, it is an issue to be examined whether an enhancement of scope of this anti avoidance provision can be implemented with retrospective effect. Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti- avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis-a-vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced. However, as we have decided the issue in favour of the assessee on merits and even after taking into account the amendments brought about by Finance Act 2012, we need not deal with this aspect of the matter in greater detail."
48. In the present case, we have held that the issuance of corporate guarantees were in the nature of shareholder activities- as was the uncontroverted claim of the assessee, and, as such, could not be included in the 'provision for services' under the definition of 'international transaction' under section 92B of the Act. We have also held, taking note of the insertion of Explanation to Section 92B of the Act, that the issuance of corporate guarantees is covered by the residuary clause of the definition under section 92B of the Act but since such issuance of corporate guarantees, on the facts of the present case, did not have "bearing on profits, income, losses or assets", it did not constitute an international 17 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 transaction, under section 92B, in respect of which an arm's length price adjustment can be made. In this view of the matter, and for both these independent reasons, we have to delete the impugned AEP adjustment. The question, which was raised in Bharti Airtel's case (supra) but left unanswered as the assessee had succeeded on merits, reamins unanswered here as well. However, we may add that in the case of Krishnaswamy SPD v. Union of India [2006] 281 ITR 305/151 Taxman 286 (SC), wherein Their Lordships had, inter alia, observed that "the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. It was for this reason that a coordinate bench of this Tribunal, in the case of C 'humid Guide India Ltd. v. Asstt. CIT[2012] 139 ITB 49/25 taxmann.com 25 (Mum.), held that even though the assessee had not deducted the applicable tax at source under section 195, the disallowance could not be made under section 40(a)(i) since the taxability was under the provisions which were amended, post the payment having been made by the assessee, with retrospective effect. All this only shows that even when law is specifically stated to have effect from a particular date, its being implemented in a fair and reasonable manner, within the framework of judge made law, may require that date to be tinkered with. When a proviso is introduced with effect from a particular date specified by the legislature, the judicial forums, including this Tribunal, at times read it as being effect from a date much earlier than that too. One such case, for example, is CIT v. Ansal Landmark Township (P.) Ltd. [2015] 377 ITR 635/234 Taxman 825/61 taxmann.com 45 (Delhi), wherein Hon'ble Delhi High Court confirmed the action of the Tribunal in holding that the provision, though stated to be effective from 1st April 2013 must be held to be effective from 1st April 2005. Whether such an exercise can be done in the present case is, of course, something to be examined and our observations should not be 18 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 construed as an expression on merits of that aspect of matter. Given the fact that the assessee has succeeded on merits in this case, it would not really be necessary to deal with that aspect of the matter.
49. The second issue is this. We must deal with the question whether in this case the matter should have been referred to a larger bench. The parties before us were opposed to the matter being sent for consideration by the special bench, and at least one of the reasons for which the grievance of the assessee is upheld, i.e. guarantees being in the nature of shareholder activity and excludible from the scope of services for that reason alone, is an area which had come up for consideration for the first time. In effect. Therefore, there was no conflict on this issue of and the other issues, given decision on the said issue, were wholly academic. It cannot be open to refer the academic questions to the special bench. No doubt, some decisions of the coordinate benches which have reached the different conclusions. There is, however, no conflict in the reasoning. Four Soft Ltd. decision (supra] had decided the issue in favour of the assessee but that was with respect to the law prior to insertion to Explanation to Section 92B. As for the post-amendment law and the impact of amendment in the definition of 'international transaction', the matter was again decided in favour of the assessee by Bharti Airtel Ltd. decision (supra] on the peculiar facts of that case. The decisions like Everest Kento Cylinders Ltd. (supra) and Aditya Birla Minacs Worldwide (supra) were decisions in which the assessee had charged the fees and, for that reason, such cases are completely distinguishable as discussed above. In Prolific Corp Ltd. case (supra), as indeed in any other case so far, it was not the case of the assessee that corporate guarantees are quasi-capital, or shareholder activity, in nature, and, for that reason, excludible from chargeable services, even if these are held to be services in nature. That plea has been specifically accepted in the present case. Therefore, the question whether issuance of corporate guarantee per se in general constitutes a 'international transaction' under section 92B would have been somewhat academic question on 19 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 the facts of this case. In any event, in Prolific' Corp Ltd. case (supra), an earlier considered decision on the same issue by coordinate bench of equal strength was simply disregarded and that fact takes this decision out of the ambit of binding judicial precedents. We have also noted that in view of the decision a coordinate bench, in the case of JKT Fabrics v. Dy. CIT (2005] 4 SOT 84 (Mum.) and following the Full bench decision of Hon'ble AP High Court in the case of CIT v. BR Constructions [1993] 202 ITR 222 [1994] 73 Taxman 473 (AP), a decision disregarding an earlier binding precedent on the issue is per incurium. Such decisions cannot be basis for sending the matters to special bench since occasion for reference to special bench arises when binding and conflicting judicial precedents from coordinate benches come up for consideration. That was not the case here. All these factors taken together, in our considered view, it was not possible in this case to refer the matter for constitution of a special bench. In any case, whatever we decide is, and shall always remain, subject to the judicial scrutiny by Hon'ble Courts above and our endeavour is to facilitate and expedite, within our inherent limitations, that process of such a judicial scrutiny, if and when occasion comes, by analyzing the issues in a comprehensive and holistic manner.
50. In the light of the detailed discussions above, and for the detailed reasons set out above, we uphold the grievance raised by the assessee. The impugned ALP adjustment of Rs 2,23,62,603, thus stands deleted. As we do so, however, we must add that, in our considered view, the way forward, to avoid such issues being litigated and to ensure satisfactorily resolution of these disputes, must include a clear and unambiguous legislative guidance on the transfer pricing implications of the corporate guarantees as also on the methodology of determining its ALP, if necessary. Of course, no matter how good is the legislative framework, the importance of a very comprehensive analysis, in the transfer pricing study, of the nature of corporate guarantees issued by the assessees, can never be overemphasized. The sweeping generalizations, vague statements and 20 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 evasive approach in the transfer pricing study reports, which are quite common in most of the transfer pricing reports, cannot do good to a reasonable cause. When judicial calls on the complex transfer pricing issues are to be taken, utmost clarity in the legislative framework and a comprehensive analysis of relevant facts, in the transfer pricing documentation, are basic inputs. Unfortunately, both of these things leave a lot to be desired. We can only hope, and we do hope, that things will change for better.
30.We find that the revenue has preferred an appeal u/s. 260A of the Act before the Hon'ble High Court of Gujarat and the same has been admitted in Tax Appeal No. 567 of 2016. The relevant substantial question of law admitted by the Hon'ble High Court reads as under:-
[B] "Whether on the facts and circumstances of the case, the ITAT is right in deleting the addition (i.e. adjustment) to the arm's length price of international transaction amounting to Rs. 2,32,62,603/- as corporate guarantee not amounting to international transactions and not liable for upward adjustment ?"
31. A perusal of the above clearly shows that the rejection of the request for the constitution of larger bench was never challenged before the Hon'ble High Court. We, therefore, do not find any reason why this issue has been raised once again before us when the same has not been challenged before the Hon'ble High Court. Moreover, when a superior court is seized with a substantial question of law on this very issue, it would be improper for an inferior court to constitute a special bench to decide the same issue.
32.Considering the issue in totality in the light of the admission of the appeal before the Hon'ble High Court of Gujarat, in all fairness, in our considered 21 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 view and understanding of the law, we restore this issue to the files of the A.O. with a direction that the same must be considered afresh after the decision from the Hon'ble Jurisdictional High Court of Gujarat and after giving a fresh opportunity of being heard to the assessee. Ground no. 5 is treated as allowed for statistical purpose.
33.The next ground relates to the disallowance of the weighted deduction claimed u/s. 35(2AB) on Trade Mark Charges and Overseas Product Registration Charges.
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 22 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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. 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.
23 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
36.Ground no. 7 relates to the non allowance of weighted deduction u/s. 35(2AB) on expenses incurred on Corporate Advertisement amounting to Rs. 27,000/-.
37.Without going into the merits of this issue, the ld. Senior Counsel fairly conceded that due to the smallness of the amount involved he is not pressing this grievance. Therefore the same is dismissed as not pressed.
38.Ground no. 8 relates to the disallowance of Rs. 27,55,18,784/- u/s. 14A of expenses incurred on behalf of Sun Pharmaceutical Industries.
39.During the course of the scrutiny assessment proceedings and on perusal of the copy of partnership deed between the assessee and Sun Pharmaceuticals Industries (SPI) along with a copy of supplementary partnership deed dated 15.04.2003, the A.O. noticed that as per the impugned deeds, the assessee was liable to perform the following functions on behalf of SPI:
" SPI will provide the technical assistance in the manufacturing activities carried out and/or to be carried out at the firm's plants and advice on the products stability and product positioning of the products manufactured/ to be manufactured by the partnership firm. In addition the party of the first part shall look after the entire marketing and distribution of the products of the partnership firm without any additional cost of the firm".24 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
40.The A.O. further found that the assessee was entitled to draw "yearly remuneration of 15%/5% [revised afterwards] of the net profits of the partnership firm." It was observed that the assessee had received 5% of net profits of SPI i.e. Rs. 29,79,26,967/- as per the agreement under the head remuneration.
41.However, SPI did not debit this remuneration to its Profit and Loss account because of the provisions of section 40(b) of the Act qua explanation 4 which says that "working partner" means an individual. Though, the assessee was a working partner of SPI but because of the explanation it was not entitled for remuneration as it is not an individual. Therefore, such remuneration paid to the working partner could not have been allowed as deduction u/s. 40(b) of the Act.
42.Taking recourse to section 28(v) of the Act, since the remuneration was not allowable in the hands of the SPI, the assessee had not offered the same for taxation. The A.O. was of the firm belief that the assessee has avoided paying tax on the amount of Rs. 29,79,26,967/-. The A.O. was also of the opinion that the assessee has incurred expenditure on behalf of SPI which it has debited in its books of accounts. Taking recourse to the provisions of section 37 of the Act, the A.O. was of the opinion that only those expenses are allowable to be deducted which are incurred wholly and exclusively for the purpose of running of its business and since the assessee has debited those expenses which have been incurred on behalf of a separate entity i.e. SPI, therefore, the same is not allowable as deduction.25 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
43.The A.O. found that the following expenditures were directly related to the functions performed by the assessee on behalf of SPI-
(i) Selling and distribution expenses Rs. 71,09,32,484/-
(ii) Salary and allowance to field staff Rs. 46,18,42,352/-
Total Rs. 1,17,27,74,836/-
44.The A.O. divided the abovementioned total expenditure between the assessee and SPI in the ratio of total turnover of both the concerns and came to the conclusion that Rs. 47,18,93,873/- has to be disallowed u/s. 37 of the Act.
45.Assessee assailed the assessment before the ld. CIT(A). It was strongly contended that in respect of marketing and distribution of the products manufactured by the firm, the assessee has not incurred any expenses for the partnership firm nor for discharging the said role since the entire activity was already well established for its own business. It was brought to the notice of the ld. CIT(A) that the assessee merely facilitated the business of the firm in its capacity as a working partner of the firm. In other words, the main contention of the assessee was that it has not incurred any expenditure for the firm since the entire marketing activity was already part of its pre existing set up.
46.After considering the facts and the submissions and considering the allowability of deduction u/s. 37(1) of the Act, the ld. CIT(A) was convinced that the expenditure incurred by the assessee as a partner on behalf of its 26 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 firm for looking after the business of the firm is for the purpose of business and is therefore an allowable expenditure and consequential disallowance made by the A.O. u/s. 37 of the Act is not justified. However, the ld. CIT(A) was of the opinion that on the given facts disallowance has to be made u/s.
14A of the Act for earning income which is exempt from tax. Accordingly, a show cause notice was issued to the assessee, asking it to show cause why disallowance u/s. 14A should not be made since expenditure has been incurred for earning non-taxable income.
47.The assessee vehemently challenged the proposed disallowance u/s. 14A of the Act claiming that it has large network and own funds running into crores of rupees and hence the investment in the partnership firm is out of own funds. It was contended that since no borrowed funds have been utilized, no disallowance u/s. 14A is warranted. The contentions of the assessee were dismissed by the First Appellate Authority who was of the opinion that the object of section 14A is to ensure that so much of the expenditure incurred for earning income that do not constitute total income of the assessee should not be allowed, when income is outside the tax net, expenditure incurred for earning such income also should not be allowed to be set off in the computation of taxable income. The ld. CIT(A) was of the firm belief that the assessee has earned share of profit which is exempt u/s. 10(2A) of the Act as well as remuneration which was taxed as business income u/s. 28(v) of the Act. Therefore, proportionate disallowance of expenditure incurred for earning exempt income has to be made u/s. 14A of the Act. The ld. CIT(A) was convinced that the expenditure 27 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 incurred by the assessee for earning of share of profit/remuneration from the firm is at Rs. 27,55,18,783/- as against Rs. 47,18,93,873/- determined by the A.O. The ld. CIT(A) confirmed the disallowance to the extent of Rs. 27,55,18,783/-.
48.Before us, the ld. Senior Counsel once again contended that section 14A has no application on the facts of the case. It is the say of the ld. Senior Counsel that remuneration paid to the partner is not an exempt income in its hand. Ld. Senior Counsel further pointed out that in the hands of the assessee because of the specific provisions of section 40(b) of the act read with explanation, the remuneration was disallowed in the hands of the partnership firm and, therefore, it was not offered for taxation in the hands of the assessee. Insofar as the share of profit is concerned, the ld. counsel reiterated that the assessee had sufficient own funds for making the investment in the partnership firm. Therefore, the disallowance made by the ld. CIT(A) u/s. 14A of the Act is uncalled for.
49.Per contra, the ld. D.R. strongly supported the findings of the A.O. In alternative, the ld. D.R. claimed that the alternative disallowance made by the First Appellate Authority is correct in law.
50.After giving a thoughtful consideration to the orders of the authorities below, in our considered opinion, so far as the disallowance made by the Assessing Officer is concerned, we find that this issue has been decided in favour of the assessee and against the revenue by the Co-ordinate Bench in 28 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 assessee's own case in ITA No. 2430 & 2400/Ahd/2009 wherein the bench has followed the decision of the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008. The relevant part in ITA No. 1193/Ahd/2008 is as under:-
Ground no. 13 relates to the disallowance of expenses incurred on behalf of Sun Pharmaceutical Industries.
88. This issue has been discussed by the A.O at para 13 of his order wherein he has mentioned that during the course of survey operations. A copy of partnership deed between the assessee and Sun Pharmaceutical Industries (SPI) was found along with a copy of supplementary partnership deed. The A.O further observed that as per the partnership deed, the assessee was entitled to draw yearly remuneration of 15% of the net profits of the partnership firm. The A.O further observed that the assessee had received 15% of net profits of SPI Rs.
15,75,55,219/- as per the agreement of partnership. However, the A.O noticed that the partnership firm has not debited this remuneration paid to the assessee by taking recourse to the provisions of section 40(b) wherein remuneration is allowed to a working partner who is an individual.
89. The A.O further noticed that though the remuneration was not offered for taxation by the assessee but it has debited the expenditure incurred on behalf of the partnership firm in its books of account. The A.O was of the firm belief that these expenditures are not related to the earning of income and accordingly disallowed - (a) selling and distribution expenses 25,68,21,928/- salary and allowance to field staff 24,12,98,724/- totaling to Rs. 49,81,20,652/-. The A.O proceeded by disallowing Rs. 8,49,79,383/- based on the ratio of the total turnover of the assessee and the partnership firm SPI.
90. Aggrieved by this, the assessee carried the matter before the ld. CIT(A). Ld. CIT(A) has considered this grievance at para 26 vide ground no. 25 before him. After considering the facts and the submissions, the ld. CIT(A) was of the opinion that the assessee already had an existing sales and distribution network in the 29 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 form of C & F agent, etc. Therefore the assessee was not required to incur any additional/extra expenses for undertaking the marketing function for and on behalf of partnership firm. The ld. CIT(A) further observed that most of the expenses incurred by the assessee for the sales were in the nature of fixed expenses. However, there were similar additional expenses incurred by the assessee for carrying out the sales for and on behalf of the partnership firm. The ld. CIT(A) finally concluded by holding that the incremental expenses incurred by the assessee in excess what was incurred in the preceding year towards the marketing and distribution should be allocated and accordingly directed the A.O to recalculate the disallowance.
91. Aggrieved by this finding of the ld.CIT(A) both assessee and the revenue are in appeal before us. The ld. D.R. strongly stated that since the assessee has not shown any income from remuneration from the partnership firm. The assessee was not entitled for the claim of deduction. The ld. D.R. further stated that no bifurcation have been provided by the assessee to show the expenses incurred for the purpose of the business of the partnership firm and for the assessee company. The D.R. concluded by saying that there is no error in the findings of the A.O. Per contra, the ld. counsel for the assessee reiterated the claim and stated that there is no basis for allocating the expenses pro rata. The ld. counsel further stated that the First Appellate Authority further erred in disallowing the expenditure on pro rata basis only on incremental expenses. It is the say of the ld. counsel that the disallowance is unjustifiable.
92. We have carefully perused the orders of the authorities below. We have also given a thoughtful consideration to the rival submissions. There is no denying that the partnership deed has a provision for the payment of remuneration to the whole time working partner by virtue of which the assessee was entitled for the remuneration. There is also no denying that as per the provisions of section 40(b) of the act, the remuneration is payable to a whole time working partner who is an individual and the assessee is a limited company. Therefore the assessee could 30 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 not have shown this remuneration as part of its computation of income. It is also a fact that the partnership firm has also not debited this remuneration to its Profit and Loss account. However, the assessee company using its network has incurred certain expenditure which according to the revenue authorities are not directly related to earning of income. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee and not for the purposes of earning profit. As per the agreement between the assessee company and the partnership firm, the assessee had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Thus, it cannot be said that the expenditure incurred by the assessee are not for the purposes of its business. Since the assessee is holding 95% in the partnership firm it becomes the duty of the assessee to promote the business of the partnership firm, in the capacity of the majority stake holder. 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. Therefore, in our considered opinion, the expenditures incurred by the assessee company deserves to be allowed and we direct the A.O to delete the addition of Rs. 8,49,79,383/-.
51.Respectfully following the findings of the Co-ordinate Bench (supra), no disallowance should be made u/s. 37 (1) of the Act.
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 31 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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.
53.Ground no. 9 relates to the Foreign Exchange Fluctuation Gain as taxable income amounting to Rs. 14,33,80,289/-.
54.While scrutinizing the revised computation of normal business income, the A.O. noticed that the assessee has treated exchange rate gain of Rs. 30,87,40,379/- as a capital receipt. The assessee was asked to show cause why the same should not be taxed as normal business income. The assessee strongly objected to the proposed action of the A.O. In support of its contention, the assessee relied upon the various decisions namely Homi 32 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 Mehta Sons Pvt. Ltd. 22 ITR 528 (Bom.), Sutlej Cotton Mills Ltd. 116 ITR 1 (SC), Tata Iron & Steel Co. Ltd. 231 ITR 285 (SC), Padamjee Pulp & Paper Mills Ltd. 210 ITR 801 (Bom.)
55.The contentions of the assessee were dismissed by the A.O. who was of the firm belief that the receipt in the case on hand is nothing but a revenue receipt. The A.O. accordingly taxed the same as revenue receipt.
56.Assessee carried the matter before the ld. CIT(A) and reiterated what has been stated during the course of the assessment proceedings.
57.After considering the facts and the submissions, the ld. CIT(A) was of the considered opinion that the assessee has entered into forward contracts to safeguard the value of investments made by the assessee in its subsidiary against the adverse forex fluctuation and to that extent the ld. CIT(A) restricted the addition to Rs. 14,33,80,289/-.
58.Insofar as the loans received by way of ECG/FCCB, the ld. CIT(A) was of the opinion that these borrowings were for the purpose of capital expansion of the business since the proceeds can be used for capital purposes only. Therefore, there is no case for any addition on account of forex gain in respect of reinstatement of FCCB and conversion of FCCB into equity shares as well as repayment of ECB since these gains/receipts are held as capital receipt only. The ld. CIT(A) confirmed the addition of Rs. 14,33,80,289/-
33 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08 being forex gain in respect of rolling over of forward contract for safeguarding investment in Caraco and OFCD in Global.
59.Before us, the ld. Senior Counsel once again heavily relied upon the very same decisions which were relied upon before the lower authority. Per contra, the ld. D.R. supported the findings of the revenue authorities.
60.We have given a thoughtful consideration to the factual matrix. The main particulars of foreign exchange gain are as under:-
S. No. Particulars of Foreign Exchange gain Amount (Rs.)
(i) Forward Contracts in respect of investment in Caraco and OFCD in 14,33,80,289/-
Global
(ii) Reinstatement of FCCB and Exchange gain on conversion of FCCB 29,62,23,740/-
into equity shares
(iii) Repayment of ECB 13,78,089/-
The other particulars relating to foreign exchange loss are on account of reinstatement of bank balance/bank deposit out of FCCB proceeds and reinstatement of loan given to subsidiaries out of FCCB proceeds/reinstatement of investment in mutual funds out of FCCB proceeds. The appellant has treated the forex loss in respect of the above also as capital loss. Thus, the net forex gain treated as Capital receipt is reported at Rs. 31,03,51,524/-.
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 34 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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.
63.Ground no. 10 relates to the reduction of unrealized export proceeds of Rs. 6,35,631/- from export turnover for purpose of deduction u/s. 10B of the Act.
64.Both sides agreed that an identical issue was considered and decided by the Co-ordinate Bench in assessee's own case in ITA No. 1558/Ahd/2006 qua ground no. 3 of that appeal. On such concession, we have considered the decision of the Co-ordinate Bench (supra). The relevant part reads 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 35 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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.
65.Respectfully following the findings of the Co-ordinate Bench, we direct accordingly. This ground is treated as allowed for statistical purpose.
66.Ground no. 11 relates to the disallowance of provision for Leave Encashment u/s. 43B of the Act amounting to Rs. 1,83,33,509/-.
67.Once again both sides conceded that the Hon'ble Supreme Court is seized with an identical issue in the case of Exide Industries Ltd. Therefore, it would be appropriate to restore this issue to the files of the A.O. The A.O. is directed to decide this issue afresh after the decision of the Hon'ble Supreme Court and after giving a reasonable opportunity of being heard to the assessee. Ground no. 11 is allowed for statistical purpose.
68.In the result, the appeal filed by the Assessee is partly allowed.
ITA No. 2067/Ahd/2013 Revenue's appeal69.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.
36 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
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 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.
37 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
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.
75.This issue is identical to the issues covered by ground nos. 1 & 2 hereinabove. For the reasons given therein, ground no. 3 is dismissed.
76.Ground no. 4 relates to the deletion of the disallowance of depreciation on motor car @ 30% instead of 15% as per provisions of law.
77.The assessee has claimed depreciation on certain motor vehicles owned by it on hire. The assessee has claimed depreciation on such motor vehicles @ 30% amounting to Rs. 34,69,434/- . Since the assessee is not in the business of giving motor vehicles on hire, the A.O. allowed depreciation @ 15% accordingly excess depreciation amounting to Rs. 17,34,717/- was disallowed.
78.Before the First Appellate Authority, the assessee reiterated its claim of depreciation @ 30%. After considering the facts and the submissions, the ld. CIT(A) found that the main business of the assessee is manufacturing of bulk drugs as well as formulation products. However, the ld. CIT(A) found that the assessee is also in the business of leasing and financing activity. The ld. CIT(A) was convinced that the assessee has fulfilled all the basic requirements for claiming higher depreciation @ 30%. The ld. CIT(A) accordingly directed the A.O. to allow higher rate of depreciation.
38 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
79.Before us, the ld. D.R. supported the assessment order and the ld. Senior Counsel reiterated what has been stated before the First Appellate Authority. It is true that the main business of the assessee is manufacturing of bulk drugs as well as formulation products. It is equally true that the assessee is also in the business of leasing and finance activity. There is no dispute that the Hire charges have been assessed as business income. Therefore, we do not find any reason why the higher rate of depreciation should not be allowed. In our considered opinion, once the basic conditions are duly satisfied, there is no bar for claiming higher depreciation. Moreover, this issue is now well settled in favour of the assessee and against the revenue by the Hon'ble Supreme Court in the case of ICDS Ltd. 350 ITR 527. We decline to interfere. Ground no. 4 is dismissed.
80.Ground no. 5 relates to the allowance of deduction of FBT provision of Rs. 1,09,77,278/- while calculating book profit u/s. 115JB of the Act.
81.We find that in identical issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 1592/Ahd/2011 qua ground no. 7 of that appeal and the same reads as under:-
Ground no. 7 relates to the exclusion of provision for FBT for computing book profit.
54. An identical issue has been considered by the Hon'ble High Court of Bombay in the case of ASB International P. Ltd. 26 taxmann.com 87. Respectfully following the decision of the Hon'ble High Court (supra), we confirm the directions of the ld. CIT(A). Ground no. 7 is dismissed.39 ITA Nos. 2076 & 2067/Ahd/2013
. A.Y. 2007-08
82.Respectfully following the same, we decline to interfere. Ground no. 5 is dismissed.
83.Ground no. 6 relates to the deletion of the addition of Rs. 66,18,485/- made on account of excess deduction while calculating book profit u/s. 115JB for deduction u/s. 10B of the Act.
84. During the course of the scrutiny assessment proceedings, the A.O. noticed that the assessee has considered the amount of Rs. 5,11,63,871/- for determination of book profits u/s. 115JB of the Act. The A.O. was of the opinion that the correct figure should have been 4,45,45,386/-. The assessee's contention was that the amount of income to which provisions of section 10, 10A, 10B apply, if any such amount is credited to the profit and loss account is to be reduced while computing the book profits under Explanation 2 section 115JB (2) of the Act and, therefore, Rs. 5,11,63,871/-
ought to have been reduced by the A.O. The contention of the assessee did not find any favour with the A.O. who disallowed the claim of excess deduction of Rs. 66,18,485/- and added back in the working of book profit u/s. 115JB of the Act.
85.The assessee succeeded before the ld. CIT(A) because of which the revenue is before us. We find that this issue is no more res integra because the Hon'ble Supreme Court in the case of Ajanta Pharma Limited 327 ITR 305 has decided this issue in favour of the assessee and against the revenue. The Hon'ble Supreme Court has laid down the ratio that 100% of the export 40 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 profits earned by the assessee as computed u/s. 80HHC(3) was eligible for deduction under clause (iv) of the Explanation to section 115JB of the Act.
86.Respectfully following the same, we do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 6 is dismissed.
87.Ground no. 7 relates to the deletion of the addition of Rs. 1,16,56,762/- made on account of sales to Sun Pharma Industries.
88.Both sides agreed that a similar issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 1589/Ahd/2011. We find that the Co-ordinate Bench in ITA No. 1589/Ahd/2011 has followed the findings given in ITA No. 2430/Ahd/2009, 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 41 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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 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 42 ITA Nos. 2076 & 2067/Ahd/2013 . A.Y. 2007-08 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.
89.Respectfully following the findings of the Co-ordinate Bench (supra), we do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 7 is dismissed.
90.Ground no. 8 relates to restricting of the addition to the extent of Rs. 27,55,18,783/- made on account of selling & distribution expenses on basis of ratio of turnover of assessee and Sun Pharma Industries.
91.A similar issue was considered by the Co-ordinate Bench in ITA No. 1589/Ahd/2011 wherein the Bench has followed its earlier decision in ITA No. 2430/Ahd/2009. A related issue has been considered by us in assessee's appeal in ITA No. 2076/Ahd/2013 (supra) qua ground no. 8 of that appeal. For our detailed discussion therein, this ground is dismissed.
92.Ground no.9 relates to the deletion of the addition of Rs. 29,76,01,829/- made on account of foreign exchange gain.
93.A related issue has been considered by us in assessee's appeal in ITA No. 2076/Ahd/2013 qua ground no. 9 of that appeal. For our detailed discussion therein, we decline to interfere. Ground no. 9 is dismissed.
43 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
94.Ground no. 10 relates to the deletion of the disallowance of Rs. 4,26,71,216/- made on account of expenses u/s. 40(a)(ia) of the Act.
95.We find that an identical issue was considered by the Co-ordinate Bench in ITA No. 1589/Ahd/2011 vide ground no. 11 of that appeal. The relevant part reads as under:-
Ground no. 11 relates to the disallowance u/s. 40(a)(ia) for non deduction of tax on foreign payments.
37. At the very outset, the ld. counsel for the assessee drew our attention to the appellate order dated 29.05.2009 passed by the CIT(A)-31, Mumbai for A.Y. 2006- 07 in the case of Sun Pharmaceutical Industries Ltd. It is the say of the ld. counsel that on identical set of facts appeal is pending before the Tribunal Mumbai Benches.
38. We have given a thoughtful consideration to the contentions of the ld.
counsel. We accordingly restore this issue to the files of the A.O. The A.O is directed to decide the issue afresh after considering the decision of the Tribunal Mumbai Benches and after affording an opportunity of being heard. Ground no. 11 is treated as allowed for statistical purpose.
96.As the Co-ordinate Bench has restored the issue to the files of the A.O., we direct the A.O. to follow the similar direction in this year also. Ground no. 10 is treated as allowed for statistical purpose.
97.Ground no. 11 relates to the deletion of the disallowance of Rs. 23,68,918/- claimed as revenue expenses.
44 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
98.While scrutinizing the return of income, the A.O. found that the assessee has incurred Rs. 224.7 million towards repairing expenses. On scrutinizing the ledger copies of the said repairing expenses, the A.O. was of the opinion that certain repairing expenses need to be capitalized. Therefore, the assessee was asked to show cause why such repairing expenses should not be capitalized and added back to the total income.
99.The assessee filed a detailed reply explaining the nature of expenditure and contending that all the impugned expenditures are in the nature of repairs and maintenance and, therefore, should be allowed as revenue expenditure. The detailed submission of the assessee did not find any favour with the A.O. who was of the opinion that out of total repairing expenses, amount of Rs. 28,51,291/- has to be disallowed as capital expenditure. The A.O. allowed depreciation as per the provisions of the law and made disallowance of Rs. 23,68,918/-.
100. Assessee strongly agitated the issue before the ld. CIT(A). After considering the facts and the submissions, the ld. CIT(A) was of the opinion that the A.O. has merely given the finding in respect of various expenditures for purchase of various items that the items purchased are capital assets. The ld. CIT(A) found that the A.O. has not given any reasons as to how the purchase of various items made by the assessee has resulted into bringing any new asset into existence or obtain a new advantage. The ld. CIT(A) accordingly deleted the disallowance of Rs. 23,68,918/-.
45 ITA Nos. 2076 & 2067/Ahd/2013. A.Y. 2007-08
101. Before us, the ld. D.R. strongly supported the assessment order. The ld. Senior Counsel drew our attention to the details of the relevant expenditures and strongly contended that the expenditures are of revenue in nature.
102. We have carefully perused the factual matrix. We have also gone through carefully the details of the expenditures. In our considered opinion, the impugned expenditures are for the purpose of preserving and maintaining the already existing assets. The expenditures are for the purpose of replacement of defective parts of main machine or they are incurred on repairs and maintenance and have not resulted into creation of any new asset leading to any new advantage. Insofar as the purchase of 206 batteries for UPS is concerned, such batteries are used in the normal course of business and are required to be replaced after regular interval for efficient functioning of the UPS. Therefore, the purchase of batteries cannot be considered as creation of any new asset. Considering the facts in totality, we do not find any error or infirmity in the findings of the ld. CIT(A). Ground no. 11 is accordingly dismissed.
103. In the result, the appeal filed by the Revenue is partly allowed.
Order pronounced in Open Court on 27 - 04- 2017
Sd/- Sd/-
(R. P. TOLANI) (N. K. BILLAIYA)
VICE PRESIDENT True Copy ACCOUNTANT MEMBER
Ahmedabad: Dated 27/04/2017