STRIDES PHARMA SCIENCE LTD.,NAVI MUMBAI vs. THE DY CIT -5(1)(2), MUMBAI
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Income Tax Appellate Tribunal, “J” BENCH,
Before: SHRI PRASHANT MAHARISHI, AM & SHRI SANDEEP SINGH KARHAIL, JM
IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI SANDEEP SINGH KARHAIL, JM ITA No. 1004/Mum/2021 (Assessment Year: 2016-17 ) Strides Pharma Science Ltd. DCIT 15(1)(2) 201, Devavrata, Sector-17, Aayakar Bhavan, M K Road, Vs. Vashi, Navi Mumbai, 400703 Mumbai 400020 (Appellant) (Respondent) PAN No. AADCS8104P
: Shri Nishant Gandh, AR Assessee by Revenue by : Ms Samruddhi Hande SR DR, Aditya M Rai Sr AR, Suresh Gaikwad SR AR Date of hearing: 17-02-023,23/06/2023 and 07/07/2023 Date of pronouncement : 05.10.2023 O R D E R PER PRASHANT MAHARISHI, AM: 1. This Appeal, ITA No. 1004/Mum/2021 for assessment Year 2016-17 is filed by Strides Pharma Science Ltd. [ The Assessee/ Appellant] against the assessment order passed u/s 143(3) r.w.s 144C of the Income Tax Act (hereinafter ”the Act”), dated 31.10.2019 determining the total income of the assessee at Rs. 673,72,86,723/-/. 2. The assessee is aggrived with the obove order and has preferred order before us, raising following 10 grounds;
2.3 In ignoring the fact that subsequently corresponding shares were allotted as against such payment of share application money. Further, such payment is also capital account. transaction and provision of Chapter X is not applicable. 2.4 In disregarding the binding judgment of Mumbai ITAT in Appellant's own case for AY 2014-15 wherein the Hon'ble ITAT has deleted the interest adjustment on same matter. Further, there are various other binding judgments of the jurisdictional
3.1 In failing to appreciate:
3.1.1 that re-characterization of the transactions is not permissible under the transfer pricing provisions 3.1.2 the fact that only real income can be brought within the ambit of taxation and imputing interest on unearned income is unwarranted and unjustified. 3.2 In ignoring the fact that advance recoverable is on account of "delay in receipt of amounts referred above and hence, such amounts recoverable cannot be deemed/ considered as granting of loan.
II Corporate Tax
4 Disallowance under Section 14A of the Act amounting to INR 15,34,55,236 [Page 4 to 8 of the Final Assessment Order] 4.1 The Hon'ble DRP and the learned AO erred in law and on facts by invoking Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (" the Rules") while determining expenditure in relation to earning of exempt income. 4.2 The Hon'ble DRP and the learned AO ought to have appreciated: 4.2.1 that the investments in domestic companies and Mutual Funds from internal accruals and no interest-bearing funds have been utilized for making such investments.
4.2.2 that the said investments were made out of commercial expediency and entirely for business reasons and not to earn dividend income. 4.3 The Hon'ble DRP and the learned AD erred in not following the decisions of Hon'ble Mumbai ITAT in Appellant's own case for AYs 2001-02/ AY 2002-03/ 2006-07 wherein the Mumbai ITAT deleted the disallowance under section 14A of the Act. Further, the same have also erred in not relying on the decision of Hon'ble Mumbai ITAT in Appellant's own case for AY 2014-15 and not restricting the disallowance (if, any) to INR 2,52,50,670 based on the specific directions given by the Hon'ble ITAT in the order passed for AY 2014-15. 4.4 Without prejudice to the above argument of the Appellant, disallowance, (if any) under Section 14A should be computed based on the methodology provided under Rule 8D of the Rules as amended by Notification No. 50 1949( E) [F.NO.370142/7/2016-TPL]. 5. Disallowance under Section 36(1)(iii), Section 37 and Section 38 of the Act amounting to INR 15,34,55,236 (Page 9 to 18 of the Final Assessment Order)
5.4 In disallowing the interest on borrowing under Section 36(1)(ii) of the Act without appreciating the fact that the investments were made during the current/past years out of its own funds/ internal accruals. 6 Re-computation of book profits under Section 115JB of the Act INR 15,34,55,236 [Page 4 to 8 of the Assessment Order]
Assessee is a company engaged in integrated manufacturing and export of pharmaceutical dosages forms. It markets and supply pharmaceutical products. Assessee filed return of income on 28/11/2016 showing income of ₹ 534,925,020/–. The return of income was picked up for scrutiny. As assessee has entered into international transactions, reference under section 92CA (1) of the act was made by the learned assessing officer to The Assistant Commissioner Of Income Tax, Transfer Pricing, 4 (1) (2), Mumbai (the learned TPO) to examine arm’s-length price of those international transactions.
i. On verification of Form No. 3CEB, the TPO noted that assessee has given advance recoverable from the foreign associated enterprise amounting to ₹ 430,920,620. The majority of such advances are outstanding guarantee commission receivable and reimbursement of expenses. Assessee did not charge any interest on any of these advances outstanding as on 31st of March 2016. Therefore, the assessee was asked to explain the same. The assessee submitted that the payment of advances only incidental to normal course of business but not a separate transaction by itself, those advances are neither loans nor are in the nature of transaction of capital financing. Assessee submitted that it has not charged interest on advances from non-associated enterprises as well. It further stated that the learned Dispute Resolution Panel for assessment year 2014 – 15, 13 – 14 and 11 – 12 has deleted the similar adjustment made by the TPO with respect to the export receivables. Assessee stated that if at all an interest is to be imputed, interest rate should be calculated with reference to LIBOR only. The learned TPO rejected the contention of the assessee and held that it is an international transaction under section 92B of the act and as per clause ( c) of the explanation , it specifically covers all type of advances/payments/deferred payments etc. in the course of the business and therefore these international transactions are required to be benchmarked appropriately. The learned TPO further held that as the facts in this case are similar to the
ii. LD TPO further noted that assessee has invested in share application money in two foreign companies situated at Singapore and United Kingdom. In Singapore entities the assessee has invested a sum of ₹ 2,814,042,859 and in the United Kingdom associated enterprise assessee has invested ₹ 1,578,339,875/– as share application money. In the earlier years, the above sum was treated as loan by the TPO and interest was charged, according to the direction of the learned dispute resolution panel. Therefore the learned assessing officer noted that where there is a delay of more than six months between the payment of share application money and the issue of shares by the foreign associated Enterprises , share application money becomes the loan i.e. capital financing transaction. Therefore, the imputation of interest on share application money is justified. As the assessee has not charged,
Consequently the order under section 92CA (3) of the act was passed on 31/10/2019 wherein the above adjustment totaling to ₹ 95,843,090 was proposed.
The learned assessing officer further examined the corporate tax issue and found that:-
i. Assessee has investments, income of which is not forming part of the total income and therefore the expenses are disallowable under section 14 A of the act. In the computation of total income they assessee has disallowed ₹ 6,996,212/– the AO was not satisfied with the disallowance made by the assessee and therefore the assessee was asked to explain the disallowance. Assessee submitted that (1) no disallowance should be made where own funds utilized for making investment, (2) no disallowance of expenditure in the absence of the actual expenditure incurred by the company, (3) nexus between the exempt income and expenditure disallowed under section 14 A of the act needs to be established and the assessee has disallowed on its own , ₹ 6,996,212 which is computed on a rational basis and therefore the disallowance should be accepted. Assessee
ii. Alternatively, the learned AO held that above sum of ₹ 153,455,236/– is disallowable under section 37 (1) under section 36 (1) (iii) and section 38 of the act.
iii. The AO found that assessee is engaged in the business of manufacturing and selling pharmaceutical products wherein the assessee has debited ₹ 152,013,488 under the head business promotion expenses in the profit and loss account. The assessee has booked a sum of ₹ 15,199,296/– out of the above expenditure on account of sale promotion activities to be distributed to the field staff, dealers, distributors and doctors in the form of various products such as bags, watches, travel bags, earphones, study lamp, Wallet, coffee Mixtures , books, stationery, pen etc. The assessee submitted that these are the sales promotion activities and incurred expenses for promotion of the name and brand of the company. The learned TPO held that the above expenditure incurred
iv. The learned assessing officer further noted that assessee has incurred expenditure in the form of provision of expenses, audit fees amounting to ₹ 29,802,989/– on which tax deduction at source has not been made and therefore 30% of same is disallowable under section 40a (ia) of the act, accordingly ₹ 8,940,897/– being 30% of ₹ 29,802,989 was disallowed.
v. Assessee has claimed deduction under section 35 (2AB) of the act at the rate of 200% of such expenditure incurred of ₹ 627,182,992 (deduction claimed of ₹ 1,254,365,984). The assessee was asked to furnish the form number 3CL wherein it was found that DSIR has approved the revenue expenditure only of ₹ 439,695,000 whereas the assessee has shown the revenue expenditure of ₹ 514,737,350 and capital expenditure of Rs. 120,09,000 where the assessee has incurred capital expenditure of ₹ 112,445,642/–. Accordingly, in the revenue expenditure there was a
vi. The learned assessing officer also noted that the book profit shown by the assessee under section 115JB of ₹ 1,529,452,860 – which is also required to be increased by the disallowance on account of section 14 A ₹ 153,455,236/– and accordingly the net book profit was computed at ₹ 1,622,908,042/–.
Accordingly, the draft assessment order under section 144C of the income tax act was passed on 28/12/2019 wherein the income of the assessee was computed as per the normal computation at ₹ 980,205,253. The book profit was determined at ₹ 1,622,908,042/–.
i. On the issue of imputation of interest of ₹ 330,700,842/– on advances receivable by the assessee from the associated enterprises, upheld the action of the AO following the direction of the learned dispute resolution panel in earlier years.
ii. On the issue of computation of interest amounting to ₹ 92,535,248 on share application money pending allotment with various foreign associated Enterprises, the learned dispute resolution panel following its direction in earlier years confirms the action of the learned AO.
iii. With respect to the disallowance of business promotion expenditure of ₹ 15,199,296/– under section 37 (1) of the act, the learned DRP followed its earlier direction and the assessing officer was directed to restrict the disallowance to the 50% of the expenses incurred similarly Provided in the earlier years.
iv. With respect to disallowance under section 14 A of the act of ₹ 153,455,236/–, the learned DRP following the direction of dispute resolution panel in earlier years confirm the disallowance.
v. With respect to the adjustment to the book profit under section 115JB of the act of the same amount disallowed
vi. On the issue of deduction under section 35 (2AB) of the act of disallowance of ₹ 175,478,992/–, following the CBDT notification number 29/2016 dated 28 April 2016 that there was no such provision in the notification which says that prior to the amendment the AO cannot rely upon form number 3CA issued by DSIR. The learned DRP stated that DSIR is highly accredited agency and deserves due attention for the form number 3CL issued by it and therefore the disallowance was upheld.
Based on the direction of the learned dispute resolution panel the learned assessing officer passed the final assessment order under section 143 (3) read with section 144C (13) read with section 143 (3A) and 143 (3B) of the act on 13 April 2021 computing the total income of the assessee under section 115JB of the act of ₹ 1,622,908,043/–. In the normal computation of total income total disallowance of ₹ 424,777,318/– was made. The assessee before us along with the adjustment to the book profit challenged the same.
The Ld. Authorised Representative has submitted a chart. accroding to that chart, all the issues in this appeal are covered by decision of Cordinate Bench in assessee’s own case for earlier years.
The ground no. 1 of the appeal merely challenges the transfer pricing adjustment and is general in nature , as each Ground has been dealt with separately on merits, this ground of appeal is dismissed.
Ground number 2 of the appeal of the assessee is against the interest imputation on share application money paid to the associated enterprises. The learned authorized representative submitted that the identical issue arose in case of the assessee which has also been referred to by the learned dispute resolution panel wherein the coordinate bench when the assessment order travelled to the tribunal, for assessment year 2014 – 15 and 2015 – 16 has decided this issue in favour of the assessee and therefore, this issue stands squarely covered in favour of the assessee. He further submitted that there is no difference in the facts and circumstances of the case as covered in the earlier years as well as in this year, this is also recorded by the learned dispute resolution panel and the learned transfer pricing officer because both of them have made and confirmed directions based on their findings of the earlier year in the case of the assessee.
The learned departmental representative vehemently supported the order of the learned transfer pricing officer and direction of the learned dispute resolution panel stating that assessee has issued loan to its associated concerns in the garb of share application money and therefore, it is a capital financing transaction that should have been benchmarked for the interest imputation.
“3. The issue arising in ground no. 2, in assessee's appeal is with regard to imputation of interest on share application money paid to the Associated Enterprises ("A.Es"). 4. The brief facts of the case pertaining to this issue as emanating from the record are: During the relevant assessment year, the assessee had invested as share application money in two A.Es namely Strides Pharma Asia Pte. Ltd., Singapore, and Strides Pharma International Ltd., Cyprus. The share application money was remitted to its A.Es from time-to-time during the relevant assessment year. In addition to this, during the earlier years, the assessee had invested the share application money in following A.Es which was outstanding as on 31-3-2014. Sl. No. Name of A.E. Amount outstanding as on 31st March 2014 1. StridesPharma Asia Rs.144,48,94,320 Pte. Ltd., Singapore 2. Aglia Rs.141,35,85,582
As the issue is squarely covered in favour of the assessee, in earlier years on identical facts and circumstances, respectfully following the decision of the coordinate bench we direct the learned AO to delete the adjustment on account of interest imputed on share application money. Accordingly, ground number 2 of the appeal of the assessee is allowed.
Ground number 3 of the appeal of the assessee is against the interest imputed by the learned transfer-pricing officer on advance recoverable from associated enterprises. The assessee submitted that this issue is decided in favour of the assessee by the coordinate bench in case of the assessee itself for earlier years in ITA number 7370/M/2018 for assessment year 2014 – 15 and in ITA number 7992/M/2019 for assessment year 2015 – 16. Therefore, the issue is squarely covered in favour of the assessee and there is no change in the facts and circumstances of the case.
The learned departmental representative vehemently supported the order of the learned transfer-pricing officer and the direction of the learned dispute resolution panel.
We have considered the rival contention, perused the order of the lower authorities, and considered the decision of the coordinate bench in assessee’s own case for the above to assessment year cited before us. We find that coordinate bench
“12. The brief facts of the case pertaining to this issue as emanating from the record are: During the course of proceedings before the TPO, it was observed that the assessee has advances recoverable from the foreign A.Es amounting to Rs. 14,06,59,329. It was further noted that the assessee has not charged any interest on any of these advances outstanding as on 31-3-2015. Accordingly, the assessee was asked to explain the same. In reply, the assessee submitted that the payment of advances was only incidental to normal course of business and thus not a separate transaction by itself. The assessee further submitted that the advances were neither loan nor in the nature of loan and, therefore, no interest was charged from the A.Es. Similarly, no interest was also charged from the non-A.Es on advances. The TPO vide order dated 25-10- 2018, noted that the adjustment on account of delayed realization of advance recoverable was also made in assessment year 2014-15, wherein the delayed receipt of advances were treated as loan and interest was imputed thereon. The TPO further noted that the DRP in earlier year has held that the adjustment in respect of advances recoverable should be calculated after allowing the credit period of 180 days as per the agreement. Following the approach, which was followed in earlier years (as per the directions issued by the DRP), the TPO made an adjustment of Rs. 31,26,172, towards interest on advances recoverable from its A.Es. The Assessing Officer passed the draft ITA No. 7992/Mum./2019 assessment order dated 20-12-2018, inter-alia, on the basis of adjustment proposed by the TPO. 13. The DRP vide directions dated 30-9-2019, following the directions issued in the assessment year 2014-15 rejected the objections filed by the assessee. Being aggrieved, the assessee is in appeal before us.
Ground number 4 is with respect to the disallowance under section 14 A of the act the learned authorized representative submitted that the identical issue arose in the case of the assessee for assessment year 2014 – 15 in ITA number 7370/M/2018 wherein the coordinate bench has dealt with this issue and further this issue arose in the case of the assessee for
The learned departmental representative vehemently submitted that argument raised placing reliance on the decision of the honourable Karnataka High Court does not have any relevance in the case of the assessee as the assessee has invested into various companies and is also nurture in and periodically reviewing the above investment and therefore that decision does not apply.
We have carefully considered the rival contention and perused the orders of the lower authorities. The learned authorized representative stated that identical issue arose in the case of the assessee for the earlier years. The latest year is assessment year 2015 – 16 wherein the coordinate bench has dealt with this issue as under:-
During the relevant assessment year, the assessee has made suo motu disallowance of expenditure under section 14A of the Act to an extent of Rs. 46,77,100, while computing its income. During the course of assessment proceedings, the assessee was asked to explain as to why expenditure attributable to earning of exempt income should not be disallowed under section 14A of the Act r/w rule 8D of the Rules. In reply, the assessee submitted that it has made investment in domestic companies and mutual funds out of the cash generated from its business operations and not from loan funds. The assessee further submitted that it has not incurred any interest or any other expenditure for making the aforesaid investment. The assessee also submitted that it has not earned any exempt income from its equity investments during the year. The assessee further submitted that the disallowance under section 14A of the Act should not exceed the actual expenditure incurred by the assessee (and debited to Profit & Loss Account) for earning the exempt income. The assessee on without prejudice basis has suo motu disallowed an amount of Rs. 46,77,100, which was computed on a rational basis and was offered as disallowance under section 14A of the Act. The Assessing Officer vide draft assessment order dated 20-12-2018, rejected the contentions of the assessee and made disallowance of Rs. 2,94,18,763, under section 14A of the Act r/w rule 8D of the Rules. 21. The DRP vide directions dated 30-9-2019, inter-alia, rejected the objections filed by the assessee. The DRP, however, directed the Assessing Officer to allow suo- motu disallowance of Rs. 46,77,100, made by the assessee under section 14A of the Act. Being aggrieved, the assessee is in appeal before us.
In view of the similar facts and circumstances, and as it is claimed that issue is covered in favour of the assessee by the decision of the coordinate bench in assessee’s own case which has not been disputed by the learned CIT DR, we restore this ground of appeal back to the file of the learned assessing officer with similar direction as were given by the coordinate bench in
Ground number 5 is the alternative disallowance under section 36 (1) (iii) made by the learned assessing officer with respect to the disallowance of interest and other expenditure holding that same has not been incurred by the assessee for the purposes of the business, the learned authorized representative submitted that that the learned assessing officer has not considered the observation of the coordinate bench in assessee’s own case for assessment year 2014 – 15 wherein disallowance under section 14 A of the act has been adjudicated and further the learned AO has grossly ignored the submission of the assessee that not borrowed funds were utilized for the purpose of investment and in view of the judgment of the honourable Bombay High Court in case of CIT versus reliance utilities and power limited 313 ITR 340, no disallowance of interest can be made.
The learned departmental representative vehemently supported the order of the learned assessing officer stating that where there is no nexus proved by the assessee of the borrowed fund and interest refund viz a viz investment in the non-interest- bearing investments, the theory of appropriation should be applied.
We have carefully considered the rival contention and perused the orders of the lower authorities. We find that when the assessee is having higher non-interest-bearing funds available with the assessee in the form of share capital and interest free
Ground number 6 is with respect to the disallowance under section 14 A of the act whether it needs to be imputed on increased to the book profit computed under section 115JB of the act has already been decided by the honourable Bombay High Court in CIT versus JSW energy Limited {2015 SCC ONLINE BOM 52432015 ITR 379 362015 TAXMANNCOM BOMBAY 60 3032015 TAXMAN BOMBAY 234 1332015 ITR BOMBAY 379 36 ], therefore the issue squarely covered in favour of the assessee, therefore ground number six of the appeal is allowed and the learned AO is directed to delete the increase of the book profit under section 115JB of the act by the disallowance under section 14 A of the act.
Ground number 8 of the assessee is with respect to the short credit of tax deduction at source of ₹ 5,012,276 which has not been granted by the learned assessing officer despite making a rectification application dated 19 August 2021 and 29 April 2022. In view of the above fact, after hearing both the parties we direct the learned assessing officer to dispose of the application of rectification dated 19 August 2021 and 29 April 2022 in accordance with the law. This is also the request of the assessee. Accordingly, ground number eight of the appeal is allowed with above direction.
In the result ITA number 1004/M/2021 filed by the assessee for assessment year 2016 – 17 is allowed.
Order pronounced in the open court on 5.10.2023.
Sd/- Sd/- (SANDEEP SINGH KARHAIL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 5.10.2023
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai
