CADILA HEALTHCARE LTD.,,AHMEDABAD vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(2),, AHMEDABAD

Per Bench:

1 These two appeals pertain to the assessee, involve some common issues and were heard together. As a matter of convenience, therefore, both these appeals are being disposed of by way of this consolidated order.

Assessment year 2012-13:

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and US$ 66 million; 243 days). So far as these guarantees were concerned, the assessee did not charge any guarantee fees at all. The assessee's explanation for not charging any guarantee commission from these AEs was that these companies have availed loans from banks to make strategic acquisitions in furtherance of Cadila's inorganic expansion strategy" It was stated in the assessee's transfer pricing report that "issuance of guarantees to these AEs has benefitted Cadila itself rather than the AEs, and hence, keeping with the arm's length principle, no guarantee commission has been charged". Nevertheless, the assessee made a suo motu arm’s length price adjustment of Rs 1,68,18,208. The contention of the assessee was that arm’s length price of these corporate guarantees was accepted @1% by the Assessing Officer himself, under directions of the Dispute Resolution Panel though, in the assessment year 2009-10 and 2010-11. The assessee made elaborate submissions in respect of the stand so taken by the assessee in treating 1% as arm’s length price guarantee commission, taking into account internal cup of .5% for obtaining such guarantees from the banks. None of the submissions impressed the TPO. The TPO was of the view that there is significant benefit passed on to the AEs and the assessee has taken significant risks by issuance of such guarantees. While TPO agreed that there could be circumstances in which the value of corporate guarantee will be NIL, but that will only be the situation in which no funds are actually raised against such guarantees. That is not the case here, and, therefore, guarantee is to be suitably benchmarked. As regards the shareholder activity service being rendered to the AEs, the TPO rejected the same on the ground that the Zydus Netherlands is the holding company and not the assessee company. He noted that Zydus Netherlands has earned € 1.5 million in profits, and not the assessee company, on account of these acquisitions abroad. Learned TPO also noted that the order of the DRP is in appeal and has not thus attained finality. Using the three External CUPs, namely (i) SBI guarantee commission rates at 2.75%, (ii) Bank of India guarantee commission rates at 2.16%, and (iii) difference between coupon rates of A rated bonds and BB rated bonds at 2.66%, the TPO proceeded to take an average of these external comparable rates, which worked out to 2.52%, the TPO proceeded to make an ALP adjustment as follow:

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Sr. Name of the AE Bank Amount Date on Days for Outstanding AEP Amount No to whom Guarantee which which amount in Rate as guarantee guarantee guarant INR guarantee provided given ee fee in INR continue d 1 Zydus BNP 1 Mio, US$ 24/08/20071 365 13,08,20,000 2.52% 3791244 Healthcare 2 Mio, US$ 5/09/2009 365 Brazil Ltd, 3Mio, Brazil 2 Quimica E BNP 2.60 Mio, US$ 24/08/20071 365 13,08,20,000 2.52% 379124 Pharmaceutica 0.40 Mio, US$ 5/09/2009 365 Brazil 3.00 1.0 Mio US$ 3 Simayala SCB 07/082008 365 25,40,30,000 2.52% 95556294 Pharmaceutica 1.50 Mio, US$ 22/10/2008 365 ls (Pty.) South 2.50 Mio, US$ 11/09/2009 365 Africa 3.00 Mio, US$ 30/05/2011 307 8.00 4 Zydus Pharma Citi 2.00 Mio US$ 08/04/2005 365 15,27,00,000 2.52% 5054901 Inc US 2.00 Mio US$ 19/09/2005 365 4.00 5 Zydus France BNP 6 Mio. Euro 21/12/2009 365 40,75,20,000 2.52% 10281648 (SAS) 6 Zydus Pharma BNP 500 Mio, JPY 15/12/2009 365 61,53,60,00 2.52% 16167496 Japan Co. Ltd, 200 Mio, JPY 22/07/2010 365 Japan 300 Mio, JPY 17/12/2010 365 50 Mio, JPY 25/11/2011 128 1050 7 Laboratories BNP 4 Mio, Euro 03/06/2010 64 (till 20,09,80,000 2.52% 3331778 Combix. Spain 4 Mio, Euro 08/12/2011 3/6/11) 1150 8 Zydus ICICI 32.5 Mio, US$ 04/08/2008 365 130,37,20,000 2.52% 42381884 Netherlands BV (ZNBV) 9 Zydus Pharma BOB 30 Mio. US$ 05/12/2008 42(till13 396,46,50,000 2.52% 84637791 Inc. US 20 Mio, US$ 13/05/2011 /5/11) 66 Mio, US$ 01/08/2011 324 86 Mio, US$ 243 10 Zydus Lease 0.51 Mio, MXP 01/08/2011 152 - 2.52% 33037 Pharmaceutica Plan (letter of ls Company, Mexico comfort) Mexico 175615197 On the basis of above computation, upward adjustment of Rs. 10,45,32,855/- (Rs. 17,56,15,197/-(-) Rs. 6,96,88,570/- already offered by the assessee) is required to be made to the income of the assessee company on account of guarantee fee to be charged from the associate enterprises in addition to the amount already charged as guarantee fee by the assessee. (Upward adjustment of Rs. 10,45,32,835/-)

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has been decided in favour of the assessee for preceding years but confirmed the action of the Assessing Officer to keep the issue alive. It was also noted that the stand of the DRP has been challenged before the Income Tax Appellate Tribunal and thus the matter is yet to reach finality. While rejecting the cross objections raised by the assessee, the Dispute Resolution Panel observed as follows:

14.2.1 However, we find that the Department has not accepted the decision of the DRP for AY 2010- 11. The Department has raised the following issue before the Hon'ble 1TAT, Ahmedabad. 14.2.2 We may observe here that the DRP is a continuation of assessment proceeding as it is only the draft assessment order which is being challenged before it. The final assessment order is yet to be passed by the assessing officer. Hence, the DRP is not an appellate authority and the proceeding before the DRP is continuation or assessment proceedings. This view is fortified by the decision of the division bench of the Hon'ble High Court of Bombay in the Writ Petition No. 1877 of 2013 in the case of Vodafone India Services Pvt. Ltd. vs. Additional Commissioner of Income Tax & Ors. (2014) 264 CTR 0030 (Bom): (2013) 96 DTR 0193 (Bom): (2014) 361 1TR 0531 (Bom) (2014) 221 Taxman 0166 (Bom); wherein with regard to functioning of the DRP, the Hon'ble High Court of Bombay held that The proceeding before the DRP 1s not an appeal proceeding but a continuation of the Assessment proceedings till such time a final order of assessment which 1s appealable 1s passed by the Assessing Officer. 14.2.3 As discussed earlier, the above issue is being contested by the Revenue before the Hon'ble ITAT, Ahmedabad. The issue has not yet attained the finality and the possibility that the issue is decided in favour of revenue, cannot be ruled out. However, at the stage when the issue attains the finality, it is likely that the remedial measures available to levy and collect tax on account of this issue, may not be available to the Revenue on account of limitation placed by the statute. In this regard, we may refer to the decision of the Hon'ble Supreme Court of India in the case of Malabar Industrial Co.Ltd. vs. Commissioner of Income Tax (2000) 159 CTR 0001: (2000) 243 ITR 0083 (2000) 109 TAXMAN 0066 wherein it is observed that "The scheme of the Act is to ley and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue." Therefore, in order to protect the interest of the revenue, the DRP is of the considered opinion that the issue has to be kept alive and hence the addition made by the TPO needs to be sustained.

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14.2.4 The ground of objection is thus disposed off accordingly

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assumption at that, pre issuance of corporate guarantee by the assessee for its AE, its credit equivalence is of BB rated bond, which gets converted into A rated bond upon issuance of assessee’s corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm’s length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval. There was thus, in any event, no sound basis for disturbing the arm’s length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well. In view of these discussions, as also bearing in mind, we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment of Rs 10,45,32,855. The assessee gets the relief accordingly.

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million (2nd February 2010; conditional interest rate USD LIBOR + 550 bps), US $ 5 million (26th August 2010; conditional interest rate 6m Euro LIBOR + 400 bps) and US $ 3 million (7th February 2011; conditional interest rate 6m Euro LIBOR+275 bps). All these loans were for five year tenures, all these loans were optionally convertible into equity capital at par anytime during the loan tenure, and all these loans were to enable the Irish subsidiary to make investments in step down subsidiaries out of funds so provided to the subsidiary. In case of repayments, however, the assessee was to get interest at the rates agreed to, as mentioned above, from the subsidiary. In none of the cases option for conversion was not exercised, and no interest was charged. The TPO was of the view that the assessee has given loans to the AE in the form of quasi equity, and such a recharacterization for, what the TPO termed as, “self-benefit” is not permissible. It was explained by the assessee that the convertible loan is at the option of the assessee at any time till the date of maturity, that it has been used for acquisition of step down subsidiaries, that intrinsic value of the shares was much more than the conversion rate and that by not charging the interest, the assessee has kept its option of conversion intact which is beneficial to the company. None of these submissions, however, impressed the TPO. He was of the view that the mere fact that the loan has been converted into equity does not alter its character as loan as on the relevant point of time, and once that is so, the benchmarking of loan is to be done as per the prevailing market rate. It was also noted that while the Irish subsidiary, i.e. ZIPL, had received Rs 6.90 crores in the relevant previous year as interest and dividend from the various entities to which the monies were given as capital or loan, which works out to exceptionally high operational income at 93%, the assessee has not been paid any interest. The TPO was also of the view that since conversion of this loan into equity has not taken place during the relevant previous year, this aspect of the matter is wholly irrelevant for levy of interest. It was also noted that "shares allotted will be of 100% subsidiary only, and as shares allotted will be of 100% subsidiary, paying low premium or high premium is not relevant as nobody else can take shares of subsidiary companies". The TPO further observed that "favourable conversion terms in 100% equity does not have any significance as it is only the assessee who can make investment in the subsidiary and use any mode of

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investment i.e. debt or equity" It was also noted that favourable conversion option is a misnomer since it does not carry any return to investor. It was also noted that these shares are not saleable in the open market and. As regards assessee's comparison with zero coupon convertible bonds in which entire premium is paid at the end of the term, it was noted that there is no quarrel with the proposition that the assessee can indeed issue such bonds, but once the assessee himself agrees that interest is payable on cumulative basis in the event of option of conversion not being exercised, all that is required to be done is to ascertain an arm's length interest on the said transaction. As regards the claim of the assessee that no arm's length price can be attributed when no income has arisen, it was observed that Section 92 is not a substitute to Section 5; it is not a charging section, but it gives the TPO an authority to go behind a related party transaction which has an impact on the profits of the assessee ad if there has been a mispricing resulting into improper allocation of profits to the two parties, he has authority to change such an allocations". The TPO then observed that "on this case, ZIPL (i.e. the AE) has benefitted unduly from this transaction as the balance sheet and profit and loss account of ZIPL indicates" and that 'the company has allowed significant fund to flow to the subsidiary under the garb of a convertible loan. The TPO then referred to the decision of US Supreme Court in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09, 13677-09; order dated 20th September 2012) which is said to have come out with certain tests on whether the debentures are in the nature of debt or equity, he applied these tests on the facts of this case and concluded that the character of the instrument is predominantly debt rather than equity. His analysis was as follows:

7.4.6 The treatment of such instruments by the Reserve Bank of India gives an insight into their characterisation. All optionally convertible instruments are treated as loan as per the directions issued by RBI in this regard. As per the RBI Master Circular on Foreign Investment in India, the various types of instruments are defined as below: "4. Type of instruments

(i) Indian companies can issue equity shares, fully and mandatorily convertible debentures and fully and mandatorily convertible preference shares subject to the pricing guidelines/valuation norms and reporting

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requirements amongst other requirements as prescribed under FEMA Regulations.

(ii) Issue of other types of preference shares such as, non- convertible, optionally convertible or partially convertible, have to be in accordance with the guidelines applicable for External Commercial Borrowings (ECBs).

(iii) As far as debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy. Further, the "Master Circular on External Commercial Borrowings & Trade Credits" states that,

PART I EXTERNAL COMMERCIAL BORROWINGS (ECB) At present, Indian companies are allowed to access funds from abroad in the following methods:

(i) External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers' credit, suppliers' credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.

(ii) Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency. Further, the bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993", and subscribed by a non- resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments. The ECB policy is applicable to FCCBs. The issue of FCCBs is also required to adhere to the provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from time to time."

7.4.7 The above categorization clearly indicates that only fully and mandatorily convertible preference shares are to be treated at par with equity and would follow the route prescribed for 'Investments". Other categories of debentures/loans are in the nature of debts and are to be as per guidelines applicable for "External Commercial Borrowings". This categorisation gives us a tool to analyse the character of an instrument, whether inbound or outbound. In light of such clear guidelines, the averment made by the assessee that the convertible loans have passed muster of RBI are of no consequence. The assessee has produced no document to show that the loan has been accepted by RBI to be in the

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nature of equity. Worse still, it clearly fails the test of equity in light of the guidelines issued by RBI. The contention of the assessee that RBI has different yardsticks for the inbound and outbound investments/loans is not borne out of the guidelines issued by it.

7.4.8 While funds advanced by the parents to their subsidiaries have to be examined for the purpose of intent in each case separately, the actual stated nature of the instrument is one of the main criteria for establishing its nature. Prima facie, an optionally convertible loan can be recalled at any time by the holder and the borrowing company is liable to pay the amount. The rules related to such remittances are less stringent as these instruments are treated as debts and not equity. On the contrary, repatriation of equity holding requires much elaborate mechanism and approvals in the resident state of the subsidiary.

7.4.9 The issue of convertible loan being hybrid instruments, in the nature of debt or equity has been debated at judicial forums in US. Acknowledging the importance of characterization of such instruments, the US Supreme Court, in their order in the case of Pepsi Cola Bottling Company of Puerto Rico Inc. Docket Nos.13676-09, 13677-09 on 20/9/2012, has come out with certain tests in order to find out whether the issue of debenture is in the nature of debt or equity. The issue of convertible loans by Cadila has been weighed on the scale specified by the US Supreme Court. It is seen that out of thirteen parameters specified by the Court, the instrument issued by Cadila falls in category of debt on ten parameters while in the remaining three parameters, no decision can be reached. However, in none of these tests, the instrument falls within the 'equity' category. In light of the predominantly 'debt' character of the instrument, it is liable to be treated as a debt and not equity:-

Sr Test Description Assessee’s TPO Comments No Comments 1 Names of Name given to the In our case, the Optionally labels given instrument name of the convertible loan to the instrument is points towards instruments convertible and is loan hence Neutral 2 Presence of The presence of a The convertible loan Loan absence of a fixed maturity date is is for a period 5 fixed virtually essential for years. Hence, the maturity a debt classification instrument takes date the colour of a loan. 3 Source of A taxpayer willing to We have the option No relation with payments condition the to either convert the well being of the repayment of an loan into equity at AE before advance on the par or opt for conversion. Till

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financial well-being repayment. In case time of of the receiving of repayment which conversion, in company acts as a can be exercised any nature of loan. capital investor and time during the not as a creditor tenure of the loan expecting to be repaid not exceeding five regardless of the years, we would get company’s success or interest failure. We retrospectively. understand that if the Thus it can be that repayment is possible we have considered only out of corporate the financial well earnings, the being of the AE. transaction has the Thus the nature of appearance of equity instrument is in the contribution but if nature of Equity as the repayment is not per this test. dependent upon earning, the transaction reflects a loan. 4 Right to A definite obligation In our case, if we The amount can enforce to repay an advance, exercise the option be redeemed any payments including interest of repayment, there time. This is fixed thereon, suggests a is a definite rate of loan obligation. We obligation on ZIPL contractual understand that if a to repay the loan interest payable instrument does not along with interest. on repayment. provide its holder Thus the nature of with any means to the instrument is in ensure payment of the nature of a loan interest, it is a strong as per this test. indication of a equity contribution rather than debt. 5 Participation The right of the entity This test flows in The loan does not in advancing funds to favour of Equity enable any management participate in the since we hold 100% participation in as a result of management of the share holding in the management the advances receiving entity’s ZIPL and can of the company, business participate in their Assessee happens demonstrates but the management, if we to the parent so it advance may not choose to. is participating have been bona fide in management. debt and instead was No specific intended as an equity details given by investment the assesse to

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prove participation in management of AE. Characterization in nature of loan. 6 Status of the Whether an advance As stated earlier, No such items of advances in is subordinated to ZIPL is an subordination relation to obligations to other investment apparent in the regular creditors bears on company which loan document. corporate whether the taxpayer makes investments No subordinate creditors advancing the funds in various overseas attached to the was acting as a subsidiaries in loan. On demand, creditor or an furtherance of our payable at par investor. We growth strategy. with other loans. understand that According, the Character of taking a subordinate convertible loan Loan. Wrong to position to other given in hold that it is creditors may suggest shareholders given in an equity investment. capacity will shareholding always be capacity. subordinated to the loan if any were taken by ZIPL from third parties. Hence, as per the said test, since the convertible loan taken a subordinate position to other creditors it flows in favour of Equity. 7 Intent of the The inquiry of a court The intent of the None of the parties in resolving the debt parties is clear from convertible loans equity issue is the fact that with during the primarily directed at respect to the present period ascertaining the convertible loan of have been intent of the parties. USD 27 Mn it has converted. Hence, The intent of the been converted into the intention will parties, in turn, may equity in the year manifest in be reflected by their under consideration. future. However, subsequent acts, the As per this test, the for the present, manner in which the instrument takes non-conversion parties treat the the character of reveals a loan instruments is Equity. character for the relevant in amounts. With determining their respect of the

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character. loan of USD 8 Mn the intention will manifest only in subsequent years. Hence this factor is Neutral. 8 Identity of If advances are made Not Applicable to Not made in interest by stockholders in the facts of our case. proportion to between proportion to their stockholder. creditor and respective stock Character of stockholder ownership, an equity loan. capital contribution is indicated. We understand that the test applied when there is a consortium of lenders 9 “ thinness” of The purpose of We submit that the Loan. The AE is capital examining the debt to capital of ZIPL at sufficiently structure in equity ratio in the time the loan of capitalized. relation to characterizing an USD 27 Mn was debt advance is to granted was INR determine whether a 119.33 crores as corporation is so compared to the thinly capitalized loan of INR 120.25 that repayment crores. Thus, this would be unlikely. test flows towards We understands that Loan. loan to a thinly capitalized company would be indicative of equity rather than a loan. 10. Ability of the The touchstone of ZIPL is an Equity corporation economic reality is investment to obtain whether an outside company. We credit from lender would have maintain that it outside made the payments would not have sources in the same form and been possible to get on the same terms. funding from We understand that outside lenders on if it is not possible to the terms and get the funding from conditions that an outsider lender on prevailed between similar terms, the us and ZIPL. A instrument would lender would

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take the character of neither wait receive equity. interest after 5 years nor would he be interested in converting the loan to Equity and bear risks of and Entrepreneur. Hence this test also suggests that the instrument was Equity. 11 Use to which Where a corporation Since the loan has The purpose is for advances uses an advance of been given to fund working capital were put funds to acquire acquisition and/ or requirements as capital assets, the for capital well as advances is more transactions, the acquisition. likely to be same may be Acquisition is the characterized as characterized as business of ZIPL. equity. Equity. So the amount utilized towards business. Character of loan. 12 Failure of The repayment of an As stated in the said Assessee would debtor to advance may support decision, till the have all means to replay its characterization time of actually recover in case of as bona fide debt exercising any non-payment. option, it is Character of premature to finally loan. arrive at a conclusion whether it is in the nature of debt or equity. Thus, this test is neutral in our case. 13 Risk A significant Since the purpose of Equity involved in consideration in the the funding was in making inquiry is whether furtherance of the advances. the funds were inorganic growth advanced with strategic of Cadila reasonable the risk was expectations of comparatively repayment regardless higher and hence as of the success of the per this test, the venture or were instrument takes placed at the risk of the character of

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the business. Several Equity. factors show the uncertainty of repayment like long and conditional maturity dates.

As explained above, on 11 counts, the loan comes out as a loan and only on two counts, it can be adopted as equity. The dominant nature of the convertible loan is loan and not equity.

7.5 In light of the above discussion, the amounts advances to ZIPL are treated as loan and are benchmarked as proposed in the show cause notice. However, the 6 month LIBOR come to 0.58 one year LIBOR come to 0.90 to 6 month E LIBOR come to 1.636. Accordingly, the correct interest is computed as below.

AE Loans Loan Duration Rate of Int. Rate of Durati Arm’s in (Conditional) Interest on Length INR Interest (cr) Conv USD 8 m 39.98 26/12/2008 6m US libor + 6.08% 365 24307840 loan to 550 ZIPL Conv USD 10 m 49.72 13/05/2009 US libor+ 550 6.40% 365 31820800 loan to ZIPL Conv Euro 1.3 m 8.94 12/12/2009 6m E libor+ 5.636% 365 5038584 loan to 400 ZIPL Conv Euro 5.5 m 37.30 12/12/2009 6m E libor + 5.636% 365 21022280 loan to 400 ZIPL Conv US$ 13.87 02/02/2010 US libor+550 6.40% 265 8876800 loan to 3 m ZIPL Conv US$ 5 m 23.33 26/08/2010 6m E libor + 5.636% 217 7817224 loan to 400 ZIPL Conv US$ 3m 13.66 07/02/2011 6m E libor+ 4.38% 53 868776 loan to 275 ZIPL Total 9,97,52,304

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7.6 In light of the above discussion, an upward adjustment of Rs. 9,97,52,304/- is required to be made to the income of the assessee company on account of the optionally convertible loans given to the AE. (Upward adjustment of 9,97,52,304)

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unless and until it is converted into equity. This again brings us to the point that the interest, which would be payable on such a loan in an uncontrolled scenario, has been forgone to have the option to convert the loan into equity at a future date. The assessee then must establish that arm's-length price of such an option is equivalent to the interest forgone. This has not been done. 15.5.5 To conclude we reject the assessee's objection. 15.3.6 The facts of the case remain the same during the year under reference. The options of converting the loan into equity has not been exercised during the year and the loan has not been converted into equity Hence, there is no reason to deviate from the decision of the DRP tor the preceding year. 15.3. In view of the foregoing, the objection raised by the assessee is rejected.

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payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist's abstinences" (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason that the transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of 'quasi capital'.

'5.. . . . . . . The question, however, arises as to what are the connotations of expression 'quasi capital' in the context of the transfer pricing legislation.

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us take briefly deal with the connotations of 'quasi capital', and its relevance, under the transfer pricing regulations.

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what was decisive so far as determination of the arm's length price of such transactions was concerned. The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.' 12. It is thus quite clear that the considerations for extending a loan simplictor are materially distinct and different from extending a loan which is given in consideration for, or mainly in consideration for, option to convert the same into capital on certain terms which are favourable vis-à- vis the terms available, or, to put it more realistically, hypothetically available, to an independent enterprise. On a conceptual note, the entire purpose of the exercise of determination of arm's length price is to neutralize the impact of intra AE relationship in a transaction, the right comparable for such a transaction of quasi capital is a similar transaction of lending money on the same terms i.e. with an option to convert the loan into capital on materially similar terms. However, what the authorities below have held, and wrongly held for that reason, is that a quasi capital transaction like one before us can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis. 13. Let us, at this stage, take note of the US Tax Court decision, relied upon by the TPO, in the case of Pepsi Cola Bottling Co of Puerto Rico Inc (Docket Nos. 13676-09, 13677-09; order dated 20th September 2012). It has been referred to by the TPO as decision of the US Supreme Court but in fact it is a decision of the US Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by Pepsi Co's Netherlands subsidiaries to certain Pepsi Co domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the advance agreements constitute original issue discount, relating to contingent payment debt instruments under section 1.1275-4(c), Income Tax Regulations. This provision is a deduction provision and not a provision relating to determination of arm's length price. Nothing, therefore, turns on this decision. In any event, it is nobody's case that the transaction before us is of the debt. The case of the assessee is that since in consideration of this transaction, the assessee is entitled to own the capital at certain admittedly favourable terms, the true reward of this debt is the

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availability of such an option, and, therefore, it cannot be compared with a debt simplictor for the purpose of determining arm's length price. Nothing, therefore, turns on this decision, and whatever be its persuasive value, or lack thereof, the authorities below were in error even in relying upon this decision 14. We have noted that, as noted by the TPO, it is wholly immaterial as to whether or not the assessee, by the virtue of this transaction, is entitled to subscribe to capital of the AE on certain concessional terms, because, in any case, the AE is a wholly owned subsidiary of the assessee and none else can subscribe to the AE's capital. What has been overlooked, however, in this process of reasoning is that the very concept of arm's length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm's length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm's length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such, the impact of intra AE association cannot have any role to play in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval. 15. As regards the stand of the authorities below that Irish subsidiary has shown huge profits and high operational profits @ 93%, and this fact shows that the assessee should have charged interest on commercial rates, we are unable to even understand, much less approve, this line of reasoning. It is incomprehensible as to what role profits earned from the funds raised can have in determining arm's length consideration of raising the funds, unless profit sharing is implicit in the consideration for raising the funds itself- which is neither the normal commercial practice nor the case before us. The cost of raising funds is determined much before the returns from funds so raised is even known. To hold that cost of funds raised should have been higher because the returns from funds employed by the enterprise is higher is putting cart before the horse. In the commercial world, interest does not represent any participation of profits, and it does not vary because of the profits made by the borrower from monies so raised. In any event, while determining arm's length price of a transaction, it is immaterial as to what 'benefit' an AE subsequently derives from such a transaction. What is to be determined is the consideration of a transaction in a hypothetical situation, in which AEs are independent of each other, and not the benefit that AEs derive from such transactions. It is not even the case of the authorities below that in the event of hypothetically dealing with an independent enterprise, no independent enterprise would not have given him an interest free loans even if there was an option, coupled with such a deal, to subscribe to the capital of the AE on the terms as offered by the AE to the

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assessee. Unless that happens, there is not even a prima facie case made out for an ALP adjustment. 16. We have also noted that, in any event, whenever the assessee's right to exercise the option of converting the loan into equity comes to an end, the assessee is entitled to interest on the commercial rates. It is not even the case of the authorities below that the interest so charged by the assessee, in a situation in which the right to exercise the option has come to an end, is not an arm's length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment of Rs. 5,00,35,270 in respect of interest which, according to the revenue authorities, should have charged on the optionally convertible loan granted to the AEs.

On the facts and in the circumstances of the case and in law, the Learned AO / TPO has erred in and learned DRP has further erred in confirming an upward TP adjustment amounting to INR 37,34,21,990 on account of reimbursement of expenses.

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extent of Rs 18,05,58,681 in respect of reimbursement of legal expenses, to the extent of Rs 40,12,577 in respect of reimbursement of stability charges and to the extent of Rs 10,11,443 in resect of reimbursement of analytical and testing charges. When he probed the matter further, he found that so far as the product liability insurance charges were concerned, the supporting evidence included debit notes from Marsh USA Inc, and the policyholder indicated therein was the US AE of the assessee- i.e. Zydus Pharmaceutical (USA) Inc, and that there was nothing to show that these expenses were incurred for the business of the assessee levied in e. The claim of the assessee that “Cadila has reimbursed insurance costs to its AE since the product liability claim would be levied in case of manufacturing and quality issues which is responsibility of Cadila” and that “being a limited risk distributor with a targeted operating margin, the distributor entities cannot be expected to bear the product liability and quality risks”, were simply brushed aside. These expenses, the TPO held, “donot relate to the business activity of the assessee company (and) therefore the ALP of this transaction is taken as NIL”. As regards legal expenses of Rs 18,05,58,681, it was explained by the assessee that “all product IPs belong to Cadila (i.e. the assessee)”, that US AE holds Abbreviated New Drug Applications (ANDA) and Product Registrations, granted by the FDA-USA, in trust and that “as per the inter company distribution arrangement, Cadila, being the entrepreneur, is required to reimburse the legal expenditure incurred by its limited risk distributors in defending against any patent infringement”. The TPO examined the nature of expenses at length, referred to some press reports and concluded that these reports show “clearly disprove the claim of the assessee that legal expenses were incurred by the US AE in relation to the drugs for which ANDA was owned by the assessee” and that these reports “prove that the legal expenses were incurred by the US AE in respect of patents/ ANDAs owned by it and by no stretch of imagination, the same can be said to be incurred for the business activity of the assessee company (and) therefore the ALP of this transaction is treated as NIL”. As regards reimbursement of stability charges of Rs 40,12,577, submission of the assessee was that “stability studies help to find out about the product quality, safety and efficacy of the products throughout the shelf life and are considered to be a pre-requisite for

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acceptance and approval of any pharmaceutical products” and that “since ZPU (i.e. US AE) undertakes the study on behalf of Cadila (i.e. the assessee) to distribute its products in US, Cadila reimburses these charges to the ZPU”. The TPO nevertheless brushed aside this claim by observing that the invoices pertained to some packaging material and that, in any event, “there is no material on record to prove that the items were shipped to the assessee or used for the purpose of activities related to business of the assessee (and) therefore the ALP of this transaction is treated as NIL”. The arm’s length price of all these reimbursements of expenses was thus taken at NIL. As regards reimbursement to the extent of Rs 10,11,443 in respect to analytical and testing charges, it was noted that the reimbursement of US$ 31,632.48 was for destroying the Meloxicam batch and US $ 19,871.18 was for international lab charges. As for the first component, the TPO held the same to be at NIL arm’s length price without any specific discussions, and, as for the second component, the TPO allowed the same as an arm’s length expense. The ALP adjustment was thus restricted to Rs 3,90,071. We may also add that, as pointed out by the assessee, similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015-16, but no such arm’s length price adjustments were made in any of these years. Aggrieved, assessee raised the objections before the DRP on this issue as well, but without any success. Learned DRP confirmed the action of the TPO and held that there is no res judicata in the tax proceedings, and, therefore, similar expenses having been allowed in past and future would not mean that the same treatment is to be accorded in this year. Accordingly, the Assessing Officer proceeded to make this ALP adjustment of Rs 21,43,79,368. The assessee is aggrieved and is in appeal before us.

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transaction in the sense that if the same transaction was to be incurred between unrelated parties as to what would theoretically have been an arm’s length price of the transaction in question, and that exercise is to be carried out on the basis of a permissible method of ascertaining arm’s length price of a transaction. Whether the transaction should have taken place or not is not any of the TPO’s business. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [(2012) 345 ITR 241 (Del)] "Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". The very foundation of the action of the TPO is thus devoid of legally sustainable merits. We have also noted that there is no mark up in the reimbursement of expenses, and, as such, there is no question of making any ALP adjustment in respect of these reimbursements of expenses. We have further noted that similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015- 16, but no such arm’s length price adjustments were made in any of these years. Undoubtedly, there is no res judicata in tax proceedings but principles of consistency definitely have a crucial rule to play- particularly in respect of a factual matter which permeates through the different assessment years. Similar transactions have been accepted to have been entered into on arm’s length basis in the preceding, as also succeeding, years. There is thus no justification for deviation in this particular assessment year. In any case, so far product liability insurance is concerned, the assessee has justified bearing the same on the ground that US AE is an LRD (limited risk distributor) with a targeted operated margin, and, therefore, under this business model, these costs are to be borne by the assessee company. We see no infirmity in this approach and this explanation. When AE is only doing distribution, it is entirely a commercial call of the assessee as to which type of product related expenses are to be borne by the assessee. These expenses thus clearly pertain to the assessee as the US AE is admittedly, and beyond dispute, only an LRD. The same is the position

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with respect to the legal expenses. It has been specifically explained by the assessee, and this explanation has not even been called into question, that the US AE was holding the ANDAs and patents, as a trustee and in fiduciary capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm’s length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned by the company and in respect of which US AE is only an LRD. The expenses in question were thus clearly for the purpose of the business of the assessee, and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALP- something clearly contrary to the scheme of the Act, these expenses were fully admissible for deduction. In any case, there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 21,43,79,368- subject to necessary verifications about the figures.

That the learned Assessing Officer erred in law and on facts in making a disallowance of Rs. 17,91,43,844/- u/s 40(a)(i) without even confronting the appellant with a Show Cause Notice in respect of his proposal to do so and

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in clear violation of the directions given by the Hon'ble DRP in this regard

Particulars Date of Rs. Rs. Remittance I. Clinical Trails, Bio-availability, Study and testing services Algoritheme Pharma Inc., USA 12/05/2011 18,691,080 20/06/2011 9,924,684 21/07/2011 9,904,692 23/08/2011 4,199,024 25/11/2011 2,601,367 Sub total (a) 45,320,847 Pharmanet Canada Inc., (Earlier Anapharm 25/11/2011 1,154,412 Inc., Canada) 15/03/2012 1,507,489 Sub total (b) 2,661,901 Cetero Research, USA 11/10/2011 5,615,817 Sub total (c) 5,615,817 Hilltop Research, USA 10/10/2011 5,443,832 19/10/2011 3,807,832 08/12/2011 6,208,215 23/03/2012 5,991,810 Sub total (d) 21,451,689 Impopharma Inc., Canada 21/02/2012 2,336,320 Sub total (e) 2,336,320 Lambda Therapeutic Research, Canada 03/06/2011 4,773,195 Sub total (f) 4,773,195 Bio Innvoa and Synchron Co. Ltd., Thailand 20/10/2011 8,600,122 8,600,122 Sub total (g)

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Novum Pharmaceuticals Research, USA 20/06/2011 1,554,864 27/07/2011 2,320,320 02/09/2011 4,599,427 14/09/2011 4,178,616 11/11/2011 1,438,933 23/03/2012 4,728,123 Sub total (h) 18,820,283 International Bio Services Co. Ltd., Thailand 20/10/2011 1,091,782 Sub total (i) 1,091,782 Total I (a to i) 110,671,956 II. Online access to publication/ database and journal Chemical Abstract Services, USA 02/03/2012 3,385,992 Sub total (j) 3,385,992 Elsevier B.V. Netherlands 13/07/2011 8,321,500 02/03/2012 9,578,140 Sub total (k) 17,899,640 Thomson Reuters (Scientific) Inc., USA 10/10/2011 3,175,380 Sub total (l) 3,175,380 Total II (j to l) 24,461,012 III. Purchase of Productivity Tool Cambridge Soft Corp., USA 23/05/2011 15,096,375 12/10/2011 16,584,750 16/12/2011 1,874,364 Total III 33,555,489 IV. Export Commission Millies International Limited, UK 16/11/2011 1,435,103 09/02/2012 1,391,903 Total IV 2,827,006 V. Reimbursement of market survey/development expenses Swiss Biogenics Ltd., Sri Lanka 22/04/2011 1,400,044 08/07/2011 1,844,477 22/09/2011 1,007,924 05/03/2012 1,636,845 26/03/2012 1,739,091 Total V 7,628,381 Grand Total (I + II+ III + IV + V) 179,143,844

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assessee was liable to deduct tax at source under section 195 of the Income Tax Act, as per order passed by the ITO (International Taxation)-1, Ahmedabad, on the taxability and liability to deduct tax on foreign remittances on all the transactions under consideration, and delete the remaining expenditure disallowed under section 40(a)(i)”. The Assessing Officer, in this background and on the basis of inputs from the ITO (International Taxation), proceeded to disallow Rs 17,91,43,844 under section 40(a)(i). The assessee is aggrieved and is in appeal before us.

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the proceedings under section 201(1) is concerned, many of these issues have come up before coordinate benches of this Tribunal, in assessee's own cases, and the stand taken by the ITO has not been approved by several coordinate benches in judicial scrutiny. We have also noted that the assessee has made detailed submissions about these sixteen sets of foreign remittances, which are reproduced at pages 174 to 177 of the paper-book filed before us, but the authorities below have simply declined to deal with the matter or, for that purpose, decline to deal with the factual elements embedded therein. These submissions are reproduced below for ready reference:

SUMMARY CHART IN CONECTION WITH ISSUE RELATING TO DISALLOWANCE U/S. 40(a)(i)- BREAK-UP OF PAYMENTS

Sr. Name of Party & Amount (in Nature of Gist of Reasons for Non-Deduction of No Country Rs.) Payment Tax 1 Algorithme Pharma 4,53,20,847 Fees of Clinical Remittance is made in respect of carrying Inc. (USA) Trials/ Clinical out of clinical trials & testing. It does not Testing involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the ‘make available’ exception applies in this case. 2 Pharmanet Canada 26,61,901 Fees for Clinical Remittance is made in respect of carrying (Earlier Anapharm Trials/ Clinical out of clinical trials & testing. It does not Inc.) Testing involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and Canada as the ‘make available’ exception applies in this case. 3 Cetero Research 56,15,817 Fees for Clinical Remittance is made in respect of carrying (USA) Trials/ Clinical out of clinical trials & testing. It does not Testing involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the ‘make available’ exception applies in this case. 4 Hilltop Research 2,14,51,689 Fees for Clinical Remittance is made in respect of carrying Trials/ Clinical out of clinical trials & testing. It does not

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(USA) Testing involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the ‘make available’ exception applies in this case. 5 Impopharma Inc. 23,36,320 Fees for Clinical Remittance is made in respect of carrying (Canada) Trials/ Clinical out of clinical trials & testing. It does not Testing involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and Canada as the ‘make available’ exception applies in this case. 6 Lambda Therapeutic 47,73,195 Fees for Clinical Remittance is made in respect of carrying Research Trials/ Clinical out of clinical trials & testing. It does not Testing involve any transfer of technical (Canada) knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and Canada as the ‘make available’ exception applies in this case. 7 Novum 1,88,20,283 Fees for Clinical Remittance is made in respect of carrying Pharmaceuticals Trials/ Clinical out of clinical trials & testing. It does not (USA) Testing involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA in entered into between India and United States as the ‘make available’ exception applies in this case. 8 Bio innova & 86,00,122 Fees for Clinical Remittance is made in respect of carrying Synchron Co. Trials/ Clinical out of clinical trials & testing. The said Testing payment is not in the nature of Royalty (Thailand) and there is no article on FTS under the India-Thailand DTAA. In the absence of any specific article in the DTAA covering such services, the said payments would be covered under article 7 (Business Profits) of the DTAA with Thailand. Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 9 International Bio 10,91,782 Fees for Clinical Remittance is made in respect of carrying Services Co. Ltd. Trials/ Clinical out of clinical trials & testing. The said payment is not in the nature of Royalty

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(Thailand) Testing and there is no article on FTS under the India-Thailand DTAA. In the absence of any specific article in the DTAA covering such services, the said payments would be covered under article 7 (Business Profits) of the DTAA with Thailand. Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 10 Chemical Abstract 33,85,992 Online access to Remittance is made to the non-resident Services (USA) Publication/ party in respect of online access to Database publication/database. The same is not in the nature of Royalty, either under Act or a per Article 12 of the DTAA with USA. The payment would be covered under Article 7 (Business Profits). Since the non- resident does not have a PE in India, the question of taxability on such payment does not arise. 11 Elsevier B.V 1,78,99,640 Subscription for Remittance is made to the non-resident (Netherlands) access to Online party in respect of journal Journal subscription.The same is not in the nature of Royalty, either under Act or a per the DTAA with Netherlands. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 12 Thomson Reuters 31,75,380 Subscription for Remittance is made to the non-resident Inc. Journal party in respect of journal subscription.The same is not in the nature (USA) of Royalty, either under Act or a per Article 12 of the DTAA with USA. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on such payment does not arise. 13 Cambridge Soft 18,74,364 Consultancy Remittance is made in respect of Corp. (USA) Services consultancy services. It does not involve any transfer of technical knowledge, information or providing any technical know-how. Hence, it is not in the nature of Fees for technical services under Article 12 of DTAA entered into between India and USA as the ‘ make- available’ exception applies in this case. 14 Cambridge Soft 3,16,81,125 Purchase of Remittance is made to the non-resident Corp. (USA) Software party in respect of purchase of software. The same is not in the nature of Royalty as

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per Article 12 of the DTAA with USA. The payment would be covered under Article 7 (Business Profits). Since the non-resident does not have a PE in India, the question of taxability on payment does not arise. 15 Millies Internationl 28,27,006 Commission for Remittance is made to the non-resident Ltd. (U.K) Export party in respect of commission for export, in connection with the Sri Lankan market. Therefore, the payment made to non- resident party in respect of commission for export for services rendered by such party outside India is not liable to tax u/s. 9 of the I.T Act. Since the non-resident party does not have any PE in India, the payment is not business Profits either under the Act or the DTAA with U.K 16 Swiss Biogenics Ltd. 76,28,381 Reimbursement Remittance is towards reimbursement of (Sri Lanka) of Market market survey/development expenses Survey/ incurred by the non-resident party. The Development services have been rendered in Sri Lanka Expenses for the purpose of utilization of the same in Sri Lanka, as the objective of the said survey was to find out the market feasibility for our products in Sri Lanka. Since the services were both rendered as well as utilized outside India, the same is clearly not liable to tax u/s. 9 of the I.T Act, even within the meaning of the language of the retrospective amendment introduced by way of Explanation to Sec. 9(2). It is also a matter of record that the non- resident party does not have any PE in India and therefore, the payment is not Business Profits under Article 7 of the DTAA with Sri Lanka. TOTAL 17,91,43,844

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The Id. CIT(A) has erred in law and on facts in holding that technical knowledge, experience, skill, know how as envisaged in Article 12(13) of respective Indo-US, Indo Canada and Indo UK DTAAs were not made available to the assessee company by the Non-Residents, viz. Algorithme Pharma Inc., USA, Anapharm Inc., Bio Reliance, UK, Gateway Medical Research Inc., MDS Pharma Services, USA, AAI Pharma Inc., USA, inspite of substantial evidences to the contrary.

Sr. Name of the Country Nature of Date Amount Nature of No. Payee of remittance (Rs.) services residence 1 ALGORITHME USA FTS 04.09.2009 11,35,398 Bioequivalenc PHARMA INC e study 18.09.2009 11,35,398 2 ANAPHARM CANADA FTS 12.02.2010 24,46,032 Bio analysis INC

Now PHARMANET CANADA INC 3 BIO RELIANCE UK FTS 15.10.2009 17,77,161 Bio analysis 23.12.2009 22,74,601 4 GATEWAY USA FTS 24.12.2009 12,55,400 Bio analysis MEDICAL and bio RESEARCH INC availability 5 MDS PHARMA USA FTS 22.03.2010 32,53,036 Bio analysis SERVICES, USA 6 AAIPHARMA USA FTS 11.09.2009 16,52,877 Bioequivalenc INC, USA e study

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observed that “the ‘make available’ clause is not to be applied merely with respect to technical knowledge but also with respect to experience, skill and process” as well, and, therefore, “even if experience or skill is made available to the assessee, the make available clause would be satisfied and the nature of service would be liable to be treated as fee for included services”. It was in this backdrop that the Assessing Officer proceeded to hold that the assessee had obligation to deduct tax at source from these payments, as these amounts were taxable in India in the hands of non-residents, under section 195 of the Act. Accordingly, tax withholding demand under section 201 r.w.s 195 was raised on the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) who held that none of these services satisfied the ‘make available’ clause under the tax treaties, and, accordingly, deleted the impugned demand. While doing so, learned CIT(A) reasoned as follows:

“7. I have carefully considered the facts of this case, the reasoning as contained in the order of the AO and the factual and legal submissions of the appellant. In the present case the key issue to be decided under appeal is whether the payments made to the non-residents attract liability for withholding tax in India under the provisions of Sec. 195 of the Income-tax Act. 8. With reference to the payments made by the appellant to the six non- resident parties viz. Algorithms Pharma Inc., Anapharm Inc., Bio Reliance U.K., Gateway Medical Research, MDS Pharma Services and AAI Pharma Services, the AR has contended that the same were not in the nature of 'fees for technical services.' The AR stated that Article 12 of the DTAAs with USA and Canada and Article 13 of the DTAA with U.K. is not applicable since the non-resident parties did not 'make available' any technical knowledge, skill, experience, know-how or process. 9. It is a matter of record that even the AO has not disputed the fact that none of the non-resident parties have any PE in India. Considering the facts of the case and the submissions and decisions as relied upon by the appellant, I am of the view that the services rendered in this case, although technical in nature, can be said to be 'fees for included services’, only if they "make available" technical knowledge or skill to the recipient of the service or where the recipient can apply the same on its own in future, without recourse to the service provider. In this connection, the ratio as laid down by the ITAT Hyderabad in the case of Dr. Reddy's Laboratories Ltd. 35 taxmann.com 339 squarely applies to the facts of the appellant's case, since it relates to rendering of Bio-Analytical services by the non-resident party and under the framework of the same language of Article 12(4)(b) of the India-USA and India-Canada DTAAs: "In this case, as rightly considered by the learned CIT(A), the assessee was conducting clinical trials through the CROs in USA to comply with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to the assessee company. In fact, the assessee company did not get any benefit out of the said

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services in USA and assessee was only getting a report in respect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need to deduct tax at source. Similar issue was analysed and considered by the AAR in the case of Anapharm Inc. (supra), which is one of the recipients in the assessee's case also." 10. The appellant has also placed reliance on a recent decision of the ITAT Ahmedabad Bench in the case of AO International Taxation II vs. B.A. Research India Pvt. Ltd. ITA No. 3106/Ahd/2011, decided on 30-11-2015, wherein in respect of bio-analytical services and clinical trials payments, as in the case of the appellant, the jurisdictional ITAT has decided this issue in favour of the assessee, by holding as under:

"From the above, it is evident that the Id.CIT(A) have given a finding on fact that the service which is technical in nature can be said to be "fees for included services" only when it has "made available" technical knowledge or skills to the recipient of services, i.e. recipient of services can apply the same on his own. We are in full agreement of the above view of the Id.CIT(A). In the present case, the assessee had sent samples to the experts outside India and those experts submitted their report. There is nothing on record suggesting that the services rendered to the assessee were made available to the assessee and also the assessee was able to apply the same of his own. In the absence of the same, such service would not fall within the ambit of the included service in the light of decision of the Authority for Advance Rulings (Income-tax), New Delhi in the case of Anapharm Inc., In re (supra), the decision of the Coordinate Bench in the case of Wockhardt Ltd. vs. ACIT (supra) and the decision of Hon'ble High Court of Karnataka in the case of CIT vs. De Beers India Minerals (P.) Ltd. (supra). The Revenue has not placed any material on record to rebut the findings of the Id. CIT(A) that the services were actually made available to the assessee and would be taxable. Under these facts, we do not see any reason to interfere with the findings of the Id.CIT(A), same is hereby upheld. Thus, ground raised by the Revenue is rejected."

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includes bio-technical services as one of them, technical knowledge etc. has been made available to the appellant. In this connection, the appellant has relied on the ratio of ITAT Delhi in DCIT vs. PanAmSat International Systems Inc. 103 TTJ 861, wherein the ITAT has held as under:

"What the MOU does is to give examples of areas or fields in which it is possible for the parties to agree to transfer technology. Communication through satellite or otherwise is one such area, given as example, in which transfer of technology is possible...

The example given in the MOU cannot be understood to mean that wherever a satellite is used in relation to the rendering of a service, it must be assumed that there is a transfer of technology relating to the area of communication through satellite. Thus the payment does not fall within art. 12(4) (b) as 'fees for included services'."

The appellant has contended that the Memorandum is merely providing a suggestive list of examples of the areas in which, depending on the actual facts, it is possible for the parties to agree to transfer technology and that on the clear facts of its case the same is not applicable. I find merit in the appellant's argument and the reliance place on the aforesaid ITAT decision, which has effectively dealt with this issue. Therefore, the appellant succeeds on the issue of chargeability of tax under the provisions of Sec. 201(1).

India UK tax treaty

Article 13: Royalty and fees for included services

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any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or

(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.

India Canada tax treaty

Article 12: Royalty and fees for included services

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know- how, or processes or consist of the development and transfer of a technical plan or technical design.

Indo US tax treaty Article 12- Royalty and fees for included services

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design.

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technical services under the make available clause. Additionally, there has to be a transfer of technology in the sense that the user of service should be enabled to do the same thing next time without recourse to the service provider. The services provided by non residents did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression ‘make available’.

The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it.

The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.

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treaties and there is, thus, no need to adopt the day to day meaning of this expression, as has been done by the Assessing Officer. We also find that the issue regarding taxability of these services is also covered, in favour of the assessee, by the order dated 30th November 2015 passed by a coordinate bench. In view of these discussions, and as we concur with the well reasoned findings of the learned CIT(A), we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter on this count as well. The order of the CIT(A) stands confirmed.

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income, we cannot say that such income will automatically become business income of the recipient. In our opinion, when DTAA is silent on an aspect, the provisions of the Act has to be considered and applied." However, nothing turns on this decision as the principle laid down therein find favour with the jurisdictional High Court. In the case of Bangkok Glass Industry (P.) Ltd. v. Asstt. CIT [2013] 34 taxmann.com 77/215 Taxman 116 (Mad.) (Mag.), Hon'ble Madras High Court rejected this school of thought and dealing with India Thailand tax treaty, which does not have FTS clause, rejected the claim of the revenue that even though the Thai entity did not have any PE in India and, for that reason this amount could not have taxed in India under article 7, FTS could be taxed as 'other income' under article 22. Their Lordships, in this context, also observed that, "Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22 Of course, the question as to what really constitutes miscellaneous income, as visualized by Their Lordships, covered by Article 22 was left open- a question which we will endeavor to humbly address. As we deal with this aspect of the matter, and to explain the related principle in little more detail. Let us first take a look at the relevant treaty provision. The relevant treaty provisions are as follows:

ARTICLE 22- Other income Items of income of a resident of a Contracting State, wherever arising, not expressly dealt with in the foregoing Articles may be taxed in that State. Such items of income may also be taxed in the Contracting State where the income arises.

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independent personal services cannot be taxed in the source state as minimum threshold limit of fixed base is not satisfied, such a treaty concession cannot be nullified by invoking article 21. When a particular nature of income is dealt with in the treaty provisions, and its taxability fails because of the conditions precedent to such taxability and as specified in that provision are not satisfied, that is the end of the road for taxability in the source state. It is also important to bear in mind the fact that article 21 states that it applies to the "items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement". Therefore, it is not the fact of non taxability under the operative articles (i.e. article 6 to 21) which leads to taxability under residuary clause in article 22, but the fact of income of that nature being covered by those articles which can lead to taxability under article 22. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immoveable property in a third state, and damages (other than for loss of income covered by specific provisions of the treaty) etc. This is how UN Model Convention Commentary, which is referred to earlier in this order, also explains the scope of this article. In our humble understanding, therefore, article 22 does not apply to items of income which can be taxed in any situations under article 6-21 whether or not such an income is actually taxable under these articles. The question then arises whether income earned by the recipients in question, i.e. Fuji Asia Co Ltd-Thailand ad Auto Alliance Co Ltd-Thailand, can be said to in the nature of an income which is not expressly dealt with by other operative articles (i.e. article 6 to 21) of the treaty. The income earned by these entities was in the regular course of their business, and there is no dispute about this fundamental aspect. There cannot also be dispute about the fact that in the event of these entities satisfying the conditions regarding existence of permanent establishment in India, the amounts so received by these entities would have been taxable as business income. The income in question is thus clearly dealt with by article 7 read with article 5 and the reason why it has not been taxed is that the entities concerned did not have permanent establishments in India. Clearly, therefore, the income in question is covered by the provisions of the Indo Thai tax treaty but is not taxable on the facts of the case before us as the recipients did not have a PE in India. Once we come to the conclusion that the income embedded in the payments in question is of such a nature which is covered by articles 6 to 21 of the treaty but is not taxable in India as the condition precedent for the taxability under the related article is not satisfied, it is an inevitable corollary of this finding that article 22 cannot be pressed into service in respect of the said income. As we hold so, we are alive to the fact that there is no specific taxability provision, under India Thailand tax treaty with respect to taxability of fees for technical services. Profits earned by rendering fees for technical services are only a species of business profits just as the profits any other economic activity. However, without the character of such receipts in the nature of business receipts

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being altered, the fee for technical services is dealt with separately in some treaties for the reason because, under those treaties the related contracting states proceed on the basis that even in the absence of the permanent establishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for permanent establishment or fixed base, as the case may be, is satisfied, the taxability shifts on net basis as business profits or professional (independent personal services) income. The business receipts or professional receipts thus cannot be seen in isolation with the fees for technical services. Its only the fact of, and mode of, taxation in the absence of PE or fixed base, which gets affected as a result of the fees for technical services. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technical services as well. With FTS article or without FTS article, the income by way of fees of technical services continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technical services.

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taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either.

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taxmann.com 225. In this case all that the assessee gets right is to access the copyrighted material and there is no dispute about. As a matter of fact, the AO righty noted that 'royalty' has been defined as "payment of any kind received as a consideration for the use of, or right to use of, any copyright of literary, artistic or scientific work" and that the expression "literary work", under section 2(o) of the Copyright Act, includes 'literary database' but then he fell in error of reasoning inasmuch as the payment was not for use of copyright of literary database but only for access to the literary database under limited non exclusive and non transferable licence. Even during the course of hearing before us, learned Departmental Representative could not demonstrate as to how there was use of copyright. In our considered view, it was simply a case of copyrighted material and therefore the impugned payments cannot be treated as royalty payments. This view is also supported by Hon'ble Bombay High Court's judgment in the case of DIT (International Taxation) v. Dun & Bradstreet Information Services India (P.) Ltd. [2011] 338 ITR 95/[2012] 20 taxmann.com 695.

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concerned, Indo Srilanka DTAA does not have any make available clause in the provision for fees for technical services under article 12(3)(b). There is also no dispute that the payment is made for market survey services which are essentially covered by the broad scope of ‘managerial, technical or consultancy services’. The existence of PE has no relevance for this purpose. As for taxation under the domestic law, since the payment is for conducting the market survey, which are covered by equally wide scope of managerial, technical or consultancy services under Section 9(i)(vii), it is clearly taxable under the domestic law. On this point, therefore, we reject the plea of the assessee and hold that disallowance under section 40(a)(i) was justified.

That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 9,84,01,831/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenditure.

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That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 8,60,25,625/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenditure.

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expenditure, but allowed depreciation of Rs 1,79,92,917 thereon, and disallowed net amount of Rs 8,60,25,625. The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us.

That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 39,39,31,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) in respect of Clinical Trial and Bio-equivalence Study

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Rs 39,39,31,000 on account of research and development expenses incurred outside inhouse approved facilities, and that the assessee has claimed enhanced deduction @ 200% in respect of the same. The Assessing Officer was of the opinion that these expenses were to be excluded from enhanced deduction under section 35(2AB) as the expenses were incurred outside of the approved inhouse facilities, as was held by his predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the Tribunal and Hon’ble jurisdictional High Court has not admitted appeal against the same, he was equally alive to the fact that the stand so taken by the Hon’ble jurisdictional High Court has been reversed by Hon’ble Supreme Court inasmuch as Hon’ble jurisdictional High Court has been directed to adjudicate on the matter on merits. It was in this backdrop that he proposed to disallow Rs 39,39,31,000 on account of R&D expenses. The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us.

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That the learned Assessing Officer erred in law and on facts in making an addition of Rs.142,00,00,000/- rejecting the claim of the appellant that the said amount, received by the appellant as partner's remuneration and which was disallowed in the case of the firm u/s. 40(b), was required to be excluded from the computation of Income as per the Proviso to Sec. 28(v) of the IT Act.

That the learned Assessing Officer further erred in holding that “the assessee's claim for deduction of Rs.142 crore u/s. 28(v) is found to be not in accordance with law and the same is rejected and accordingly treated as Income u/s.56 of IT Act".

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Healthcare Sikkim, and that there is no provision, under any law, which prohibits any company from paying remuneration to any company, or prohibiting receipt of any remuneration by any company, for the services rendered as a partner in the partnership firm. It was also pointed out that genuineness of services rendered by the assessee company, as an active partner, has not even been called into question. It was also submitted that once an income, remuneration as partner, is specifically covered under any provision, such as 28(v) in this case, it can not be open to the taxing authorities to invoke any general provision, such as for taxing the agency income, in respect of the same. The Assessing Officer was, however, far from impressed. He referred to, and relied upon, stand of the revenue authorities, as reflected in the assessment order for 2011-12, on this point. He also observed that, in terms of Explanation 4 to Section 40(b), a working partner has been defined as an individual who is actively engaged in conducting the affairs of the business or profession on which he is a partner. He thus concluded that the assessee not being an individual, the assessee cannot be a working partner, and, accordingly, the receipt of Rs 142 crores cannot be treated as covered by section 28(v). As for the assessee’s objection against this path proposed to be taken by the Assessing Officer, learned DRP rejected these objections and approved the stand of the Assessing Officer by observing as follows:

12.3.1 We have carefully gone through the contention of the Assessing Officer and also considered the submissions made on behalf of the assessee. 12.3.2 The assessee company is a partner in the form M/s Zydus Healthcare Sikkim having 96% share in the said firm as per the partnership deed dated 01.03.2007. The said firm enjoys deduction of its income under section 80IE of the Act. Initially there was no provision tor payment or any remuneration to the partners in the partnership deed dated 01.03.2007. However as per addendum to partnership agreement dated 1 March 2007 executed on 1 April 2007, the partnership deed was modified, whereby the assessee company and treat and undertaken to discharge certain functions relating to procurement of inputs, marketing and distributions, after sales services and collection of dues from customers in respect of the products manufactured by the firm and provide assistance in other areas for business activities of the firm. With a view to carry out more efficient operations of

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the business of the firm. The relevant clause of the addendum reads as under 4) with the object of enabling the firm to market and distribute its products more efficiently, to enable the firm to expand its market share and improve overall sales and earnings (so as to earn higher profits for the firm and thereby enjoying has shares in the profit of the firm as its partner), the party of the 1st part as part of the firm has added to discharge the following functions as an active partner for and on behalf of the firm: a. Providing services relating to promotions and marketing of the firm's products including providing of marketing infrastructure, product development and promotion, information database, and other system support and inventory and supply chain management for the same. b. Functioning as 'consignment and sales agent of the firm tor storage, sales and distillation of Farms products throughout India and tor the proper the sales tax/VAT is; either directly or through the clearing, forwarding and handling agents of the party of the first part throughout India; c. Collection of the moneys due to the firm for sales of products made by an on be halt of the firm: d. after sales services to the customers of the sum from e. Selecting and appointing stockist for distribution of the firm's products f. Guiding and helping intro comments of inputs such as raw materials, packing materials, consumables, plant and machinery equipments for the firm: g. Providing legal technical and managerial assistance for the smooth and efficient conduct of the business of the firm. (5) in consideration of discharging the functions as mentioned herein before, the party of the 1st part shall be entitled to receive such reasonable remuneration as may be mutually agreed-upon from time to time, keeping in view the current business of the firm and the scope and extent of the actual services rendered by the party of the 1st part. 12.3.3 We find that the similar issue was cropped up in the earlier assessment year a wide 2011-12 and the assessing officer in para-11.7 of the order has recorded that "11.7........

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After the education of the partnership deed, the assessee company entered into and who you on 15/03/2008. According to the conditions of MOU, the assessee company market the products and provides all business or silly marketing services like consignment, says agent and after sales service of the product of the firm M/s Zydus Healthcare Sikkim for which the assessee company is entitled to get remuneration at the rate of 12.5% of the total turnover..... ......The assessee company, therefore, claim said remuneration received u/s 28(v) of the Act”. 11.9....... In the original partnership date entered into with a firm there was no provision for payment of “remuneration'". The word "remuneration'" is added in the addendum/view brought on 15/03/2008. As stated above, the payment of Rs. 170 crore by the firm to the assessee is towards discharging of various functions related to marketing auxiliary and after sales services rendered. It is nothing to do with the agreement of the partnership. .....The firm while computing its income added back the expenditure of Rs. 170 crore being remuneration paid to the assessee on the ground that the assessee company is not a working partner. In the return of income the assessee company, therefore claim the said amount of Rs. 170 crore is allowable under the proviso to section 28 (v) of the Act. 11.11..... .....The amount of Rs. 170 crore paid by the firm M/s Zydus Healthcare Sikkim repairers towards services rendered by the assessee for business or silly marketing services, after sales services et cetera and not a recommendation to the partner....... .....It is also pertinent to point out here that when the assessee company was not eligible as a working partner, the addendum brought on to the partnership authorising remuneration to the partner i.e. the assessee company is beyond comprehension when the original partnership deed does not provide any clause to provide remuneration to partner which is aligned with destination-4 to section 40 (b) of the act which reads-a "working partner”means an individual who is actively engaged in conducting the affairs of the business profession of the firm of which is a partner. 12.3.4 Therefore, the AO rejected the assessee's claim deduction of Rs. 170 crore under and treated the same as income under section 56 of the Act. The facts of the case remained the same during the year under consideration, therefore, the AO disallowed assessee's claim of deduction

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of Rs. 140 crore u/s 28(v) of the Act and treated the same as income under section 56 of the Act. 12.3.5 After taking into consideration the facts narrated by the assessing officer as discussed above, we find that the stand taken by the assessee is inconsistent. Whereas in the addendum to partnership agreement dated 1 March 2007 executed on 1st April 2007, the assessee is described as an active partner, the firm while computing its income added back the expenditure of Rs. 170 crore being remuneration paid to the assessee on the ground that the assessee company 1s not a working Partner. Which clearly shows that the firm is aware that the assessee cannot be an active partner in the firm. As per the objects incidental or as lead to attainment of main objects forming part of memorandum of Association of Cadila health care Ltd, as described in clause 5, "the assessee can enter into partnership or into any arrangements tor sharing profits or losses Hence the assessee is also aware that the assessee cannot be a working partner in the firm. 12.3.6 We find that the activities as described in Para 4 of addendum to partnership agreement dated 1 March 2007 executed on 1st April 2007, cannot be considered as the activities being carried out by the assessee in the capacity of a partner. The assessee is using its own assets independent of the assets of the firm to carry out these activities. The assets and apparatus used by the assessee do not form part of the assets of the partnership firm. Therefore, the functions performed by the assessee as per Para 4 of addendum to partnership agreement dated 1 March 2007 executed on 1 April 2007, are in the form of business and profession carried out by the assessee in its own capacity as a separate business entity and it would not tall in the purview of section 28(v) of the Act. On the contrary it will fall in the purview of section 28(1) of the Act. 12.3.7 At this juncture we may refer to the decision of the Hon'ble SUPREME COURT OF INDIA in the case of KEDARNATH JUTE MFG. CO. LTD. vs. COMMISSIONER OF INCOME TAX (1971) 82 ITR 0363 wherein it is held that “Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter”. 12.3.8 We may also refer to the decision of the Hon'ble SUPREME COURT OF INDIA in the case of COMMISSIONER OF INCOME TAX vs. DURGA PRASAD MORE wherein it is held that: “10. Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that an apparent must be considered real until it is shown that there are reasons to believe

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that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, other-wise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document ether executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding Circumstances to find out the reality of the recitals made in those documents”. 12.3.9 In view of the foregoing, the objection raised by the assessee is rejected.

167.1 The assessee in the year under consideration has received remuneration from the partnership firm namely SPI amounting to Rs. 18,31,49,206/- and from SPS amounting to Rs. 1,82,91,92,838/-which has been reduced in computing the taxable profit under the normal provision of the Act. The assessee claimed that the remuneration paid to it by the firm was not allowed as a deduction in the hands of the partnership as mentioned earlier. 167.2 Accordingly, the assessee claimed that such remuneration is not taxable in its hands as per proviso to section 28(v) r.w.s. 40(b) of the Act. 168. However, the AO disregard the contention of the assessee by observing that the Ld. CIT (A) in its case for AY 2008-09 in similar facts and

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circumstances treated the remuneration as taxable income by holding that remuneration was nothing, but it was fee for the use of all present and future trademark/brands and technology of the partnership firms. Therefore the AO took a similar view in the year under consideration and treated the remuneration as taxable income amounting to Rs. 2,01,23,42,044/- and added to the total income of the assessee. 169. Aggrieved assessee carried the matter to Ld. CIT (A) who confirmed the order of the AO by observing as under: 21.1. As per the existing Agreement, the appellant company has permitted user of trademark/brands by SPI/SPS for a token consideration of Rs.1/- for the period of 5 years. The Assessing Officer, in the assessment order of SPI has discussed this issue and he has valued the royalty of Jammu and Dadra plant at a substantial sum, and noticed that the SPI has not paid any management fees to the appellant I company although three of its Directors and Key Management personnel | viz. Shri Dilip Sanghvi, Shri Sudhir Valia and Shri Shailesh Desai, have been i looking after the business of appellant as well as SPI/SPS. Accordingly, the I management fees for Jammu & Dadra and Sikkim units, respectively, was | estimated and accordingly was reduced from the profit of SPI/SPS for computation of deduction u/s. 80IB(13). As a matter of fact, the appellant has not charged any royalty from SPI/SPS for allowing use off | various trademark/brands and technology. A copy of Trademark license/user Agreement dated 10.04.2003 between the appellant and SPI was collected and examined during the course of appellate proceedings for A.Y. 2008-09 by the CIT(A)-IV, Ahmedabad. After considering the terms of the agreement, it has been held in A.Y. 2008-09 that the so called "remuneration" was nothing but it was fee for permitting use of all present and future trademark/brands and technology to SPI. The relevant findings are recorded by the CIT(A)-IV, Ahmedabad in this regard in paras-20.5 to 20.5.1. Following the order of CIT(A)-IV, Ahmedabad and also considering the factual and legal position in this regard, in A.Y. 2009-10, I also held that the appellant company had 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 but fee for above mentioned services and accordingly income was enhanced by Rs.57,49,50,297/-. The business arrangements of appellant with SPS firm are identical to SPI. 21.2. Since the facts are identical in this year also, I respectfully following the order of CIT(A)-IV, Ahmedabad in A.Y. 2008-9 and my own order in A.Y.2009-10, hold that Assessing Officer is justified in treating the remuneration of Rs.201,23,42,044/- as consideration

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received for use of trademark/brands and accordingly assessing the same under normal provisions of the Act. Thus Ground No. 18 is dismissed. 170. Being aggrieved by the order of the Ld.CIT (A) assessee is in appeal before us: 171. The Ld. AR before us submitted that in the identical facts and circumstances this ITAT in the own case of the assessee bearing ITA No. 1666/AHD/2016 for the AY 2009-10 vide order dated 08-09-2017 has deleted the addition made by the AO. Therefore there is no question for making the addition to the total income. 172. On the other hand the Ld. DR vehemently supported the order of the Lowe Authorities. 173. We have heard the rival contentions and perused the materials available on records. At the outset, we find that in the identical facts and circumstances in the own case of the assessee’s (supra), the ITAT deleted the addition made by the AO. The relevant extract of the order is reproduced as under: 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

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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. 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.” 173.1 As the facts in the case on hand are identical to the facts of the case as discussed above, therefore respectfully following the same we set aside the order of ld. CIT-A. Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

173.2 Moreover, we are bound to follow the order of this Tribunal in the own case of the assessee in the earlier year as the facts are identical in the impugned issue before us. Therefore respectfully following the same we delete the addition made the AO.

173.3 We also place our reliance on the judgment of Hon’ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977] 110 ITR 453 (Mad.). The relevant extract has been reproduced in the preceding paragraph. In the light of the ratio decide in the above-said judgment, we are of the considered opinion that the view adopted by the co-ordinate bench as discussed above shall be applied in the case on hand with full strength. The ld. DR and the ld. AR has not brought any decisions varying from similar or identical facts or circumstances. Therefore, the ratio decide rendered by the earlier order of the Tribunal has necessarily to be followed by us in line and tune with the judicial discipline and decorum. In view of the above and respectfully following the ITAT order as discussed above, the ground of appeal of the assessee is allowed.

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That the learned Assessing Officer erred in law and on facts in making an adjustment of Rs. 14,31,53,793/- in respect of disallowance u/s.14A for purposes of computation of book profit u/s. 115JB.

Assessment year 2013-14 70. We will now take up the ITA No 213/Ahd/18, i.e. the appeal filed by the assessee for the assessment year 2013- 14.

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proceeded on the basis that the guarantee commission charges by the State Bank of India and Bank of India are static rates which hold good in all circumstances, but then, in reality, the guarantee commission rates vary on a large number of factors and vary from client to client. The adoption of difference between coupon rate of A rated bonds and BB rated bonds is even more inappropriate and it proceeds on the assumption, an unrealistic assumption at that, pre issuance of corporate guarantee by the assessee for its AE, its credit equivalence is of BB rated bond, which gets converted into A rated bond upon issuance of assessee’s corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm’s length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval. There was thus, in any event, no sound basis for disturbing the arm’s length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well. In view of these discussions, as also bearing in mind, we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment of Rs 10,45,32,855. The assessee gets the relief accordingly.

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own cases for the assessment years 2009-10 and 2010-11. Learned Departmental Representative, however, submits that even though the issue is covered in favour of the assessee, and to that extent that decision binds us, he nevertheless relies upon the stand of the Assessing Officer and would like to justify the same. We find that a coordinate bench, vide order dated 3rd March 2017 for the assessment year 2009-10, has, inter alia, observed as follows: 10. There is no dispute that the transactions in question are not of the transactions of lending money to the associated enterprises. The amounts advanced to the AEs are attached with the obligation of the AEs to issue share capital, in case the assessee exercise option for the same, on certain conditions, which are admittedly more favourable, and at an agreed price, which is admittedly much lower, vis-à-vis the conditions and prices which independent enterprise would normally agree to accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplictor on amount advanced but opportunity to own capital on certain favourable terms. Contrast this reward of owning the capital in the borrower entity with interest simplictor, which is typically defined as "the reward of parting with liquidity for a specified period" (Prof Keynes) or as "a payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist's abstinences" (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason that the transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of 'quasi capital'.

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"A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a legal formula, undiscriminatingly used to express different and sometimes contradictory ideas". The reference so made to the words of Justice Frankfurter was in the context of the concept of "super profits" but it is equally valid in the context of concept of "quasi capitals" also. As in the case of the super profits, to quote the words of Their Lordships, "many decisions of different benches of the ITAT indicate a rote repetition (in the words of Felix Frankfurter J, quoted in the beginning of this judgment a "lazy repetition") of this reasoning, without an independent analysis of the provisions of the Act and the rules" the same seems to be the position with regard to "quasi capitals" There are several decisions of this Tribunal, including in the cases of Perot Systems TSI v. DCIT [(2010) 130 TTJ 685 (Del)]., Micro Inks Ltd. v. ACIT [(2013) 157 TTJ 289 (Ahd)], Four Soft Pvt. Ltd. v. DCIT [(2014) 149 ITD 732 (Hyd.)], Prithvi Information Solutions Pvt. Ltd. v. ACIT [(2014) 34 ITR (Tri) 429 Hyd.] , which refer to the concept of 'quasi capital' but none of these decisions throws any light on what constitutes 'quasi capital' in the context of transfer pricing and its relevance in ascertainment of the arm's length price of a transaction. Lest we may also end up contributing to, as Hon'ble Delhi High Court put it, "rote repetition of this reasoning without an independent analysis of the provisions of the Act and the Rules" let us take briefly deal with the connotations of 'quasi capital', and its relevance, under the transfer pricing regulations.

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transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non- refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions.

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on the same terms i.e. with an option to convert the loan into capital on materially similar terms. However, what the authorities below have held, and wrongly held for that reason, is that a quasi capital transaction like one before us can be compared with a simple loan transaction where sole motivation and consideration for the lender is the interest on such loans. In the case before us, the consideration for having given the loan is, as we have noted earlier, opportunity and privilege of owning capital of the borrower on certain favourable terms. If at all the comparison of this transaction was to be done with other loan transaction, the comparison should have been done with other loans giving rise to similar privilege and opportunity to the lender. The very foundation of impugned ALP adjustment is thus devoid of legally sustainable basis.

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has been overlooked, however, in this process of reasoning is that the very concept of arm's length price is based on the assumption of hypothetical independence between AEs. Essentially, what is, therefore, required is visualization of a hypothetical situation in which AEs are independent of each other, and, as such, impact of intra AE association on pricing of transaction is neutralized. Once we do so, as is the compulsion of hypothesis involved in arm's length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm's length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such, the impact of intra AE association cannot have any role to play in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval.

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to an end, the assessee is entitled to interest on the commercial rates. It is not even the case of the authorities below that the interest so charged by the assessee, in a situation in which the right to exercise the option has come to an end, is not an arm's length price. Keeping in mind all these factors, as also entirety of the case, we deem it fit and proper to delete the arms length price adjustment of Rs. 5,00,35,270 in respect of interest which, according to the revenue authorities, should have charged on the optionally convertible loan granted to the AEs.

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That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 21,07,52,058/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses.

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following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 21,07,52,058.

That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 6,95,33,042/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses.

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question of law arises from these decisions. The relief granted to the assessee on this point in past has thus achieved finality. In this view of the matter, we uphold the plea of the assessee, and direct the Assessing Officer to treat the product registration expenses and product support service expenses as revenue expenditure, and to, therefore, delete the impugned disallowance of Rs 9,84,01,831. The assessee gets the relief accordingly.

That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 22,64,38,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s 35(2AB) being non-eligible expenditure.

Particulars Amount (Rs. In Lakh) Revenue expenditure claimed in the Return 37875.20 Total expenditure (including Capital exp.) 32280.28

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approved by the DSIR. Less: Capital exp. (approved by DSIR) 3369. 56 Balance revenue expenditure approved by DSIR 28910.72 Excess of approved over claimed 8964.48 Less: Clinical trial expenses 6700.1 Others non-eligible expenses as per DSIR 2264.38

The submissions filed by the assessee: 4.1 Under Paras 7.a. 1 to 7.a.3 of his draft Assessment Order the learned A.O. has disallowed an amount of Rs. 2264.38 Lakhs on ground that the same represented non-eligible expenditure as per DSIR, liable to be disallowed u/s. 35(2AB) of the IT Act.

4.2 During the course of the Assessment Proceedings no opportunity was given by the learned A.O. to the applicant to explain its point of view in this regard. Therefore, the applicant wishes to take this opportunity to present the correct facts in this submission. 4.3 During the relevant A.Y. 2013-14, the applicant had seven In-house R&D Facilities eligible for exemption u/s. 35(2AB) of the I.T Act. While five facilities were old and continuing facilities already enjoying approval for weighted deduction u/s. 35(2AB), there were two new facilities viz. Pharmaceutical Technological Centre (PTC) at Ahmedabad and Vaccine Technology Centre (VTC) at Changodar. The physical applications for recognition of the above two In-house R&D units and the for approval u/s. 35(2AB) were duly made on 21.06.2012 (for PTC) and 16.07.2012 (for VTC) 4.4 On the basis of the above physical applications, DSIR granted recognition to the respective units on 20.11.2012. However, as regards approval u/s. 35(2AB) the applicant was advised to file online applications which came to be filed on 21.06.2013. Thereafter, the approval u/s. 35(2AB) was finally granted on 09.10.2013. 4.5 The applicant was under the bonafide understanding that since its physical application bad been made in June/July 2012 and even recognition for both the units were grunted in November 2012, it would be given approval with effect from the dale of its application being June/ July 2012. However, the approval u/ s 35(2AB) for PTC & VTC came to be granted by DSIR only with effect from 01.04.2013.

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4.6 Immediately on receipt of the DSIR order dated 09.10.2013, the applicant addressed a letter dated 20.10.2013 to the DSIR (attached herewith-as Annexure B) explaining that on facts and in the circumstances of its case as narrated hereinabove, it should be granted recognition for the two new additional facilities with effect from 01.04.2012. On the basis of the same the applicant also claimed deduction u/s. 35(2AB) for the expenditure incurred in respect of these two new units being Rs. 2264.38 Lakhs. However, the said request was not entertained until the time of the assessment proceedings which came to be finalised in December 2015 and therefore, the learned A.0. has disallowed the aforesaid amount bas been non-eligible expenses as per DSIR 4.7 In the above scenario the applicant respectfully prays that the Hon'ble DRP may be pleased to direct the A.O. that if the DSIR accepts the plea of the applicant granting approval with effect from 01.04.2012 or the date of application u/s. 35 (2AB) in June/ July 2012, the disallowance may be suitably deleted or modified." Submissions of the Assessing Officer before the DRP: 4.9 In the above regard the applicant wishes to rely the direct ratio of the very recent decision of the Hon'ble Delhi High Court in the case of Maruti Suzuki India Ltd v Union of India 84 tasxmann.com 45 pronounce on 04.08.2017 wherein the Hon’ble High Court relying on the ratio of the decision of the Gujarat High Court in the cat of CIT Es Claris Lifescienes Ltd. 326 ITR 251, held a under: “The settled position in law is that, for availing the benefit under section 35 (2AB) what it relevant is not the date of recognition or the cut-off date mentioned in the certificates of the DSIR or even the date of approval but the existence of the recognition. If a R&D Centre is not recognized it is not entitled to deduction but if it is recognized, it is entitled to the benefit. The Gujarat High Court in CIT vs. Claris Lifescienes Ltd. [2010] 326 ITR 251/[2008] 174 Taxman 113 has rightly observed that the date of approval of the R&D Centre, not being a part of the provision, extending benefit only from the date of recognition would amount to reading more in the law which is not expressly provided. [Para 40] Section 35 (2AB) clearly provides that any expenditure incurred by a party on its R&D facility except, insofar as it relates to land and building is liable to be allowed to be claimed as deduction (twice the amount of expenditure). A perusal of the scheme of the Act especially sections 35 (2AB), 35A and 35AB reveals in no uncertain terms, that the purpose behind these provisions is to provide impetus for research, development of new technologies, obtaining patent rights, copyrights and know-how. [Para 41]”.

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4.10 It is pertinent to point out that in the facts before the Hon’ble Delhi High Court the approval was directed to be effective, from the date of application. Even though the same fell in the year preceding the year, during w0hich recognition was grranted by the DSIR. It is respectfully submitted that facts in the case of the applicant being identical the ratio of the aforesaid judicial pronouncement of the Hon’ble Delhi High Court would be squarely applicable for the present issue under consideration before the Hon’ble DRP"

9.3.1 In respect of Ground No. 4A, we have considered the submission of the assessee and the reply received from the AO as remand report. It is an admitted fact that the approval u/s. 35(2AB) of the Act for PTC & VTC had came from the DSIR only w.e.f. 01.04.20.13 and despite of the request made by the assessee to the DSIR to grant approval in respect of these units from 01.04.2012, no such approval have been received till the completion of the assessment proceedings. The AR's of the assessee could not produce such revised approval from the DSIR before the DRP as well. As such the situation even as on date is that the approval in respect of the said two units from DSIR has to be treated as w.e.f. 01.04.2013.

9.3.2 A perusal of the provision of section 35(2AB) makes it very evident that where a company engaged in the eligible business incurs any expenditure on scientific research on in house research and development facility approved by the prescribed authority, then there shall be allowed a deduction of a sum equal to one and one-halt times of the expenditure so incurred. The prescribed authority for this purpose is DSIR. It is therefore, evident that the facility in respect of which the expenditure is to be allowed under these sections has to be allowed by the prescribed authority which is DSIR. In this case, since the facility of the assessee, which is the said two units, were approved from 01.04.2015, the deduction was not available to the assessee before the said date that is during financial year 2012-13. The reliance raised by the assessee on the decisions of Honble Delhi High Court in the case of Maruti Suzauki India Ltd. pt is not applicable to the fact of this case as in the said case the approval of the DSIR was granted during the year for which it was claimed to be allowed whereas the case of the assessee even the approval is received subsequent to the assessment year under consideration. The AO is therefore, justified in not allowing the weigh deduction in respect of claim pertaining to the said two units. However, if the application is received in future in respect of this year assessee may be allowed the deduction. The objection is accordingly rejected.

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any expenditure on scientific research (excluding the expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority. At the relevant time, such deduction was one and one-half times of the expenditure incurred. Said section contains various conditions subject to which such deduction will be granted. However, the main requirements are that the expenditure should be on scientific research on in-house research and development facility as approved by the prescribed authority. As observed by this Court in case of Claris Lifesciences Ltd. (supra) and Delhi High Court in case of Maruti Suzuki India Ltd. (supra), this provision is aimed at encouraging in-house research and development facilities for specified purposes. The legislature recognised the weighted deduction on such expenditure. The approval of such facility by the prescribed authority is a prime condition. 10. In case of Claris Lifesciences Ltd. (supra), this Court examined a situation where the Tribunal had allowed the assessee's claim of deduction under section 35(2AB) of the Act when such expenditure was incurred during the period prior to the date of approval by the prescribed authority. The Court noted with approval the conclusion of the Tribunal that the provision is made for giving a boost to research and development facilities in India and once the facility is approved, entire expenditure so incurred in developing the same has to be allowed by way of deduction. It may be that as pointed out by the Revenue, all events i.e. incurring of expenditure, applying for approval and grant of approval happened in the same financial year. However, this was not the basis on which the Court has confirmed the decision of the Tribunal. There is nothing in the said judgment to suggest that had these events fallen in different years, the view of the Court would have been any different. 11. Judgment of this Court in case of Claris Lifesciences Ltd. (supra) was followed by Delhi High Court in case of Maruti Suzuki India Ltd. (supra) in order to grant the assessee's claim of deduction under section 35(2AB) of the Act. The Court held that for availing deduction under section 35(2AB) of the Act, what is relevant is not the date of recognition or the cut-off date mentioned in the certificate of the prescribed authority or even the date of approval, but the existence of recognition. The Court observed as under :

"41. Section 35(2AB) clearly provides that any expenditure incurred by a party on its R&D facility, except, insofar as it relates to land and building is liable to be allowed to be claimed as deduction (twice the amount of expenditure). A perusal of the scheme of the Act especially Sections 35(2AB), 35A and 35AB reveals in no uncertain terms, that the purpose behind these provisions is to provide impetus for research, development of new technologies, obtaining patent rights, copyrights and know-how."

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deduction under section 35(2AB) of the Act. Shorn of any controversy, documents on record would suggest that at any rate, the assessee had applied for approval of research and development facility to the prescribed authority on 22.12.2006 and such approval was granted on 22.10.2008. The Assessing Officer and CIT (Appeals) restricted the assessee's claim for deduction in relation to such expenditure which was incurred prior to 1.4.2008 on the ground that the approval was granted for two years between 1.4.2008 to 31.3.2010. Combined reading of the judgment of this Court in case of Claris Lifesciences Ltd. (supra) and judgment of Delhi High Court in case of Maruti Suzuki India Ltd. (supra), would show that period during which the approval is granted is not relevant as long as such approval has been granted and expenditure has been incurred for the specified purpose. As noted, the provision is aimed at promoting development of in-house research and development facility which necessarily would require substantial expenditure which immediately may not yield desired results or could be co-related to generation of additional revenue. By the very nature of things, research and development is a hit and miss exercise. Much of the efforts, capital as well as human investment may go waste if the research is not successful. The legislature therefore, having granted special deduction for such expenditure, the same should be seen in light of the purpose for which it has been recognised. Research and development facility can be set up only after incurring substantial expenditure. The application for approval of such facility can be made only after setting up of the facility. Once an application is filed by the assessee to the prescribed authority, the assessee would have no control over when such application is processed and decided. Even if therefore, the application is complete in all respects and the assessee is otherwise eligible for grant of such approval, approval may take some time to come by. The claim for deduction cannot be defeated on the ground that such approval was granted in the year subsequent to the financial year in which the expenditure was incurred. No such indication was given by this Court in case of Claris Lifesciences Ltd. (supra), none appears from the judgment of the Delhi High Court in case of Maruti Suzuki India Ltd. (supra). 13. In the result, appeal is allowed. Question is answered in favour of the assessee. Decision of Assessing Officer to restrict the assessee's claim for deduction on the expenditure which was incurred prior to 1.4.2008 is set aside. The Assessing Officer shall recompute such deduction and give its effect to the assessee for the relevant assessment year.

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That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 67,00,09.438 by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s 35(2AB) in respect of Clinical Trial and Bio-equivalence Study.

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representatives fairly agree that this issue is settled in favour of the assessee by decisions of the coordinate benches in assessee's own case. These decisions hold good as on now, and we are respectfully bound by those decisions as on now. Of course, whatever we hold does, and shall always, remain subject to what Hon’ble Courts above decide- as and when that happens. In this view of the matter, we uphold the plea of the assessee, and direct the Assessing Officer to delete the impugned disallowance of Rs 39,39,31,000. This disallowance must stand deleted as on now. The assessee gets the relief accordingly.

That the learned Assessing Officer erred in law and on facts in disallowing depreciation of Rs. 7,77,048/- on the cost of Hummer H2 imported motor car, alleging that the vehicle was owned by the Director and not by the appellant.

ITA Nos. 954/Ahd/17 and 213/Ahd/18 Assessment years: 2012-13 and 2013-14 Page 84 of 85

the assessee did not own the vehicle in question. However, the assessee succeeded in the DRP in his objection to this proposal. We have noted that the DRP has given a categorical finding to the effect that the car was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the DRP, the mere fact that the car was not legally owned by the assessee company- particularly when beneficial ownership of this vehicle is not even in dispute, the depreciation on car cannot be declined. Aggrieved, assessee is in appeal before us. 132. Having heard the rival contentions and having perused the material on record, we are not inclined to disturb very well reasoned findings of the DRP and the conclusions arrived at by the DRP. Once it is not in dispute that the vehicle was owned, in substance, by the assessee and the vehicle was used for the purposes of its business, there cannot be any legally sustainable reasons for declining the depreciation. ………..

That the learned Assessing Officer erred in law and on facts in making an adjustment of Rs. 18,77,51,234/- in respect of disallowance u/s.14A for purposes of computation of book profit u/s. 115JB.

ITA Nos. 954/Ahd/17 and 213/Ahd/18 Assessment years: 2012-13 and 2013-14 Page 85 of 85

112 Ground no. 11 is thus allowed. No other ground was pressed before us.

Sd/- Sd/-

Pramod Kumar Justice P P Bhatt (Vice President) (President)

Ahmedabad, dated the 17th day of August, 2021 Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File

By order etc.