THE DCIT, CIRCLE-2(1)(2),, AHMEDABAD vs. M/S. LAMBDA THERAPEUTIC RESEARCH LTD.,, AHMEDABAD

PER WASEEM AHMED ACCOUNTANT MEMBER:

The above appeals have been filed by the Assessee and the Revenue against the orders of ld.Commissioner of Income-Tax (Appeals) involving respective assessment years. Since the issues raised by the Assessee and the Revenue in all these appeals are common, we are inclined to pass a consolidated order for the sake of convenience and brevity.

First we take ITA 3492/Ahd/2015, an appeal by the Assessee for A.Y. 2010-11

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 3

information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.

The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the hearing.

The 1st issue raised by the assessee is that is that the Ld. CIT-A erred in 3. confirming the addition amounting to � 27,36,080/- made by the AO as proposed by the TPO considering the interest free loan and advances to its Associated Enterprises.

4.1 The assessee has not charged any interest from these associated enterprises on the amount of loans and advances provided to them on the reasoning that: i. It has not charged any interest from such associated enterprises in the earlier years.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 4

ii. It has provided loans to the associated enterprises as a measure of commercial expediency to set up the business, to meet the need of working capital requirement and for the repairs and renovations. As a result, the assessee has got the benefit from such associated enterprises by getting the business from the foreign markets besides getting the higher valuation of the AE. iii. In many cases these interest free loans were provided in the nature of quasi capital.

4.2 In view of the above, the assessee before the AO/TPO contended that there cannot be any adjustment of the notional interest under the provisions of section 92C read with rule 10B of the Income Tax Rules.

4.3 However, the AO/TPO disagreed with the contentions of the assessee by observing that the transaction of advancing the interest-free loans to the associated enterprises is an international transaction which requires to be determined at the arm length price in pursuance to the provisions of section 92C of the Act. The AO accordingly has worked out the amount of interest with respect to the AE’s based in USA at LIBOR plus 412 bps and with respect to the AE based in Europe EURIBOR plus 281 bps and made the upward adjustment aggregating to � 1,78,63,433/- to the total income of the assessee.

5.1 Furthermore, there was no cost incurred by the assessee on such loans and advances given to the foreign subsidiaries as there was surplus fund available with it.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 5

5.2 The assessee also submitted that it was able to achievelot of business from the countries outside India as a result of establishment of the foreign subsidiaries. Therefore, the transaction for advancing the loan to the foreign subsidiaries should not be seen in isolation rather the other benefits received by the assessee from these foreign countries should also be taken into consideration. As such, the interest-free loans and advances have been given as a measure of commercial expediency. In other words, the business transactions carried out by the assessee with these foreign subsidiaries have resulted the benefit exceeding the notional cost of interest as worked out by the AO/TPO. Had these foreign subsidiaries not been formed, then the assessee was supposed to take the services from other companies which would have resulted increase in cost and sharing of secret business information. As such the assessee was able to cut down its cost as well as to maintain the confidentiality of critical business information.

5.3 The assessee also contended that the AO himself in his order has admitted the fact that these subsidiaries were also engaged in the business of clinical research services to the pharmaceutical industries as these companies are special- purpose vehicle to carry out business activities of the assessee.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 6

6.1 The learned CIT (A) also found that the advances given to the AE namely “Lambda Therapeutic Research, SP. Z.O.O. Polland” were eventually partly converted into share capital. Thus it can be inferred that the advances were made by the assessee for acquiring the equity in the associated enterprise. Therefore, no further adjustment on account of interest is required to be made.

6.2 However, the learned CIT(A), with respect to the advance given to the associated enterprises namely “Lambda Therapeutic Ltd, UK” and “Lambda Therapeutic Research INC, USA” found that there was no benefit accrued to the assessee from such AEs. Accordingly, the learned CIT (A) confirmed the upward adjustment made by the AO/TPO for the interest amount to� 26,19,740/- and � 1,16,340/- respectively on account of interest free advances made to these AEs. Hence the learned CIT (A) allowed the grounds of appeal of the assessee in part.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 7

maintain the confidentiality of its business process. It was also contended by the learned AR that the loans and advances given to the foreign subsidiaries were in the nature of quasi capital. In view of the above, the learned AR contended that there cannot be any adjustment made on account of notional interest on the amount of interest free loans and advances given to the foreign subsidiaries.

9.1 Both the ld. DR and AR before us vehemently supported the order of the authorities below to the extent favorable to them.

10.1 From the preceding discussion, we find that the assessee along with its associated enterprises has been carrying out clinical research activities as a whole. These activities are interconnected with each other. These activities of clinical research can be understood better in the manner as detailed below:

Phase Primary goal Undertaken at Preclinical Testing of drug in non-human India, Canada, since Inception subjects, to gather efficacy, toxicity and pharmacokinetic information

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 8

Phase O Pharmacodynamics and India, Canada, and Poland Pharmacokinetics particularly since Inception oral bioavailability and half- time of the drug Phase I Testing of drug on healthy India, Canada and Poland volunteers for dose-ranging since Inception Phase II Testing of drug on patients to India, Canada and Poland assess efficacy and safety since Inception Phase III Testing of drug on patients to India, Canada and Poland assess efficacy, effectiveness since Inception and safety Phase IV Postmarketing surveillance- UK and India since Inception. watching drug use in public.

10.2 On perusal of the activities of the assessee along with its group associated enterprises, it is revealed that there are different activities which are carried out by the different associated enterprises. For example, the preclinical phase activity is carried out in India and Canada. Similarly, the phase-0 activities carried out in India, Canada and Poland so on and so forth. In other words, the project of the research activity can be ended upon the completion of process of the different phases as discussed above.

10.3 Once the activities of the assessee and its associated enterprises are so interrelated and interconnected then the transactions should be seen in aggregation for working out the ALP. In this regard we find Para 3.9 of OECD Transfer Pricing Guidelines which reiterates that though ideally the arm's length principles should be applied on a transaction by transaction basis, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. OECD guidelines provide a number of illustrations to substantiate 'closely linked or continuous' test which are as detailed under; 1. Ongoing business relations such as a long-term supply contract. 2. Right to use intangible property coupled with supply of components. 3. Transactions in a range of closely-linked products: This includes business strategy to have a portfolio approach i.e. goods with low and high margins may be transacted together in order to offer a full range of products to customers (cars and spare parts, printers and cartridges etc.).

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 9

10.4 We further find that the US Treasury Regulations also provide the similar view as under; “US Treasury Regulations even provide for aggregating transaction between different legal entities for benchmarking. Where a US parent has three overseas subsidiaries engaged in administration, marketing and distribution relating to a single product of US parent, then to ensure that economies of integration are well captured in comparability analysis, the regulations provide that the combined effect of all controlled transactions between these companies should be considered.” 10.5 We further find that the Para 3.13 of OECD Commentary also deals with the topic of Intentional set offs where it was mentioned that the Intentional set-offs generally occur between AEs in respect of controlled transactions wherein when one enterprise provides benefit to another enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return.

10.6 This view is also considered in the judgment of Hon’ble High Court of Delhi in the case of Sony Ericsson Mobile Communications India (P.) Ltd.vs. CIT reported in [2015] 55 taxmann.com 240 (Delhi) as under;

Bundled/Inter-Connected Transactions Clubbing of closely linked transactions, which would include continuous transactions, may be permissible and not excluded. Aggregation of closely linked transactions or segregation by the assessee should be tested by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/segregation by the assessee should be interfered in terms of the four clauses stipulated in section 92C(3), read with the rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm's length determination is affected or corrupted.[Para 82]

10.6 Now proceedings further, we find that the associated enterprise based in UK has got the business from the USA for which the clinical study was conducted

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 10

in India. The assessee for such activity received its service charges from the USA company. The details of the same stand as under:

S.N. Name of Study Drug Name Country Country No. of Currenc Quote Value Sponsor held of of Patient y on Origin Sponsor Enrolle d 1. Stason India Diclofenac UK USA Q80 USD USD 377,700 Pharma Epolamine Patch 2. Par India Mesalamine UK USA 250 INR USD Pharmac Tablets 1.2g 1,178,530 euticals, comparision INC with Placebo and Lialda 1.2

10.7 Indeed, the assessee has advanced interest-free loan to its associated enterprises based in the UK. Now the question arises whether any adjustment is required under the transfer pricing provision on account of such interest erosion advances. The answer stands in negative for the reason that the assessee got such huge business from its associated enterprises based in the USA. In the absence AE in UK the assessee would have taken services from third party which would have led to more cost than the notional interest income. In other words, the transaction for advancing the interest-free loans to the associated enterprises has to be seen in the context of the benefit received by it from such associated enterprises. As such the transaction of interest free loans/ advances viz a viz the benefit received by the assessee are intrinsically linked which has to be evaluated after aggregating both the transactions. The transaction of interest free advances cannot be viewed without considering the benefit derived by the assessee from the associated enterprises. On analyzing the notional interest added by the TPO under the transfer pricing adjustment with the benefit derived by the assessee, the interest cost appears to be negligible. The amount of interest cost stands at � 26,19,740/- whereas the amount of gross receipt generated by the assessee

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11

stands at USD 1,556,230 which is far more than the interest expenses after converting in India rupees.

10.8 Likewise, we also note that the assessee has derived the benefit from its associated enterprises namely Jina Pharmaceuticals located at USA for � 3.56 crores in the year under consideration against the interest expenses of � 1,14,87,233/-. The details stand as under: Revenue Details Year Wise Year Wise 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Project 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Grand Total Number

010-12 5,016,650 4,212,650 9,229,300

022-10 21,488,475 7,439,597 28,928,072

033-12 8,985,249 8,985.249

039-11 506,850 506,850

053-11 442,500 442,500

056-09 2,650,400 2,196,800 4,847,200

063-12 891,800 891,800 1,783,600

069-1 1 603,200 603,200

072-10 8,336,100 8,336,100

073-10 10,306,570 10,306,570

081-11 16,471,482 16,471,482

085-08 3,452,600 3,366,200 6,818,800

089-06 2,041,500 2,041,500

089-09 1,296,885

091-10 350,672 350,672

05-1 1 331,875 110,625 442.500

118-11 9,292,500 9,292,500

139-07 4,089,000 425,000 4,514,000

140-07 4,680,400 4,680,400

159-1 1 8,681,900 8,681,900

162-11 11,228,300 - 11,228,300

179-12 200,000 200,000

196-08 673,050 221,950 895,000

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11

238-08 18,223,340 (8,923,447) 9,299,893

250-13 3,019,285 3,019,285

277-09 902,565 902,565

294-07 1,487,860 1,487,860

296-12 200,000 200,000

305-12 736,800 736,800

326-07 3,182,700 1,118,500 4,301,200

Z 5,284,200 525,000 5,809,200

347-13 2,000,000 2,000,000

357-08 12,742,758 - 12,742,758

413-10 4,637,525 1,655,175 6,292,700

518-11 1,953,900 1,953,900

630-13 9,165,249 9,165,249

635-13 6,759,563 2,440,187 9,199,749

667-14 272,700 272,700

Grand 24,218,26 7,808,150 35,584,298 37,920,270 63,851,979 6,241,250 15,744,81 16,897,42 208,266,439 Total 0 2 1

10.9 However, we find that the assessee has not demonstrated any benefit derived from its associated enterprises namely Lambda USA whereas it has advanced interest free loan of EURO 49,999/-. Thus, the question arises whether there is a need to make any adjustment on account of notional interest under the provisions of section 92C of the Act. In this regard we note that admittedly there was no benefit accrued to the assessee in the year under consideration but considering the interrelated activities carried out by the assessee along with associate enterprises, in our considered view it is not necessary that the benefit will arise in the year in which such loans and advances were provided without interest. A drug normally takes 8 to 10 years’ time for its development. Furthermore, this associated enterprise was set up for the activities which are directly connected with the assessee as discussed/elaborated in the preceding paragraph. In our view, the generation of the benefit in terms of money in the year under consideration only cannot be a criteria for making any adjustment

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 13

under the transfer pricing provisions in the given facts and circumstances. Such income may arise in subsequent years.

10.10 It is also important to note that the assessee has given advances to Lambda Therapeutic Research Z.O.O. Poland which have been converted into equity. Thus, what is inferred is this that the loans and advances were given primarily as the investment in equity. In such cases there cannot be any adjustment on account of interest free loans/advances. In holding so we draw support and guidance from the order of this Hon’ble tribunal in the case of Micro Inks Ltd. vs. ACIT reported in [2013] 144 ITD 610 where it was held as under; “In the present case, there are two important factors pertaining to this interest free loan, and both these aspects deserve to be examined in detail. The first important aspect of this interest free advance is that the loan was said to be in the nature of quasi-capital, and it was so given out of EEFC (Exchange Earners Foreign Currency) account, because while the assessee could have given loan up to US $ 50 million, it was not open to the assessee to subscribe to the equity capital without the permission of the Reserve Bank of India. There was, thus, indeed a technical problem in subscribing to the capital directly. It is also important to note that immediately upon obtaining the permission of the Reserve Bank of India, which assessee did obtain at later stages, the advances were converted into shares. Except for an amount of US $10,000, entire advances received by the step down subsidiary were converted into shares. It is also not in dispute that when RBI permission to convert loan into equity was sought, it was sought effective from the date on which remittance was made. The second very important aspect of this interest free loan is that the entity receiving the interest free advances 'M' USA, existed only to facilitate the marketing of assessee's products in US markets. The relationship on account of lending of money cannot, thus, be considered in isolation without these crucial business considerations. [Para 15] It is only elementary legal position that what could not have been done directly could not have done indirectly also. There is, thus, not much of a merit in the stand of the revenue authorities that in the absence of a specific mention about conversion of loan into equity, it cannot be presumed that the interest free loans could not have been in the nature of quasi-capital. [Para 16]”

10.11 It is also significant to note that the Ld. CIT-A in his order has given a finding that there was no benefit derived by the assessee with respect to the amount of interest free loans and advances given to UK AE. However, on perusal of the details submitted by the assessee, we note that there was the benefit derived by the assessee from such associated enterprises which has been elaborated somewhere in the preceding paragraph. Thus, such finding of the Ld. CIT-A is factually incorrect. At the time of hearing the Ld. DR has also not controverted the fact of benefit derived by the assessee.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 14

10.12 In view of the above and after considering the facts in totality, we hold that no adjustment under the transfer pricing provisions is required to be made with respect to the interest free loans and advances by the assessee to its associated enterprises in the given facts and circumstances. Hence, the ground of appeal of the assessee is allowed and the ground of appeal of the revenue is dismissed.

12.1 The AO at the same time also made the disallowance of the same amount while determining the books profit under the provisions of section 115JB of the Act.

12.2 Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO under section 14A read with rule 8D while determining the income under normal computation of income. However the learned CIT (A) regarding the addition made while working out the book profit under section 115JB of the Act held that this issue does not require any separate adjudication in view of the fact that disallowance made under section 14A read with rule 8D under normal computation of income has been deleted. As such the

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 15

disallowance under section 115JB of the Act was based on the disallowance made under section 14A read with rule 8D for the normal computation of income. As the addition under normal computation of income has been deleted, accordingly the question of making the disallowance under section 115JB of the Act does not arise. Consequently, the learned CIT (A) held that the issue raised by the assessee for the addition made under section 115JB of the Act becomes infructuous. 13. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

16.1 As per the above clause the book profit shall increase by the amount of expenditure incurred by the assessee in relation to the income to which the provisions of section 10 applies. Indeed the income by way of dividend is exempt under subsection (34) of section 10 of the Act. Accordingly, subsection (34) of

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 16

section 10 of the Act applies to the dividend income and consequently the amount of expenses relatable to the exempted income needs to be added while determining the book profit. However, in the case on hand we note that there was no dividend income earned by the assessee in the year under consideration. Accordingly in our considered view the provisions as specified in clause (f) of explanation 1 to section 115JB of the Act cannot be applied in the case on hand. Accordingly the ground of appeal of the assessee is allowed.

16.2 The issues raised by the assessee in ground No. 4 to 6 are either general and consequential in nature or premature to decide. Accordingly we dismiss the same as infructuous.

16.3 In the result, the appeal filed by the assessee is partly allowed.

Coming to the ITA No. 3470/AHD/2015, an appeal by the Revenue for A.Y. 2010-11

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 17

The first issue raised by the Revenue is that the ld. CIT-A erred in deleting the addition made by the AO for �9,82,226/-on account of deduction u/s.80IB of the Act.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 18

25.1 Similarly, we also note that miscellaneous income represents the settlement of the advances given by the assessee to its employees. In other words such income also represents from the day to day activities of the assessee. Accordingly we hold that such income is eligible for deduction under section 80IB of the Act. Accordingly we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the revenue is dismissed.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 19

3492/ahd/2015 in favour of the assessee vide paragraph number 10 of this order. For the detailed discussion, please refer the relevant paragraph. Accordingly, we dismiss the ground of appeal raised by the revenue.

28.1 In the result the appeal filed by the Revenue is dismissed.

Coming to the ITA No. 2276/Ahd/2016 an appeal by the assessee for A.Y. 2011-12.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 20

The first issue raised by the assessee in ground Nos. 1 & 2 is that the ld. CIT-A erred in confirming the addition made by the AO for � 37,514/- under section 14A of the Act under normal and MAT computation of income.

At the outset, the learned AR for the assessee before us submitted that amount involved in the dispute raised by the assessee in its ground of appeal is not being pressed on account of smallness of the amount involved therein. Accordingly, we dismiss the same as not pressed.

32.1 In the result, appeal of the assessee is partly allowed

Coming to ITA No. 2293/AHD/2016, an appeal by the Revenue for A.Y 2011-12. 33. At the outset we find that in this appeal of Revenue, the tax in dispute is lower than the amount specified by the CBDT vide circular no 17 of 2019 dated 08-08-20019. Thus the appeal filed by the Revenue is not maintainable. Accordingly we dismiss the same on account of low tax effect.

Coming to ITA No. 2114/Ahd/2014 an appeal by the Revenue for A.Y. 2013-14

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 21

1.1 The Ld CIT(A) failed to appreciate that the initial assessment year as A.Y. 2003- 04 has been taken hy the assesses on his own accord, i.e. as per the return filed alongwith the Audit Form 10CCB for the A.Y.2003-04 and thereby 10 consecutiveyears expired in A.Y.2012 13 1.2 The Ld CIT(A) failed to appreciate that the "initial assessment year of deduction"1 as mentioned in Form 10CCB all through the \0 years (from A.Y. 03-04 to the A.Y112-13) was A.Y. 2003-04 only and therefore, the principle of consistency prevented the assessee from deviating from this settled position.

1.3 The Ld CIT(A) failed to appreciate that the assessee itself had claimed benefit U/s 80IB of the IT Act for the A.Y.2003-04 as the initial assessment year and now it says it was not legally allowed in that assessment year.

1.4 The LdCIT(A) has grossly erred in law hy admitting new /fresh evidences in the form of alleged letter by Apaji Amin & Co. IIP ( which has been reproduced ; at Page 77 of the Appellate order) which id in violation of Rule 46A of the IT Rules, and the impugned order is liable to be set aside on this ground alone. 1.5 The Ld CIT(A) failed to appreciate that violation of natural justice ,if any, cannot render the order a nullity, but can at best be a ground to set aside the impugned order to be done de-novo.

2.1 The LdCIT(A) has failed to appreciate that one of the activities carried out by the assessee during the year was clinical trial where there was no R&D work but the work assigned to the assessee was only to verify if the drug being administered (under testing) was equivalent to other drugs in the market and on such receipts (income), provisions of Section 80!B(8A) would not be applicable.

2.2 The LdCIT(A) has failed to appreciate that the work of the collation/collection of data undertaken by the assessee during the year were related to regulatory compliance by its customers and it had nothing to do with the any sort of R& D Work; Thus such receipts/ income were not relatable to provisions of Section 80IB(8A) were not eligible for deduction u/s 80IB.

2.3 The Ld. CIT(A) has failed to appreciate that in Clinical. Trails as undertaken by theassessee company there would be input on account of Research but there was no development work carried out by the assessee and therefore the assessee was not carrying out Research and Development.

2.4 The order of the LdCIT(A), in any case suffers, from non -application of mind and is .therefore, liable to be set aside on this ground alone.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 22

Pharmaceuticals, USA & Lambda Therapeutics, Canada. (Page 112 to 125 of the appellate order) .

3.1 The LdCIT(A) has erred in law and on facts by deleting the aforesaid adjustments by wrongly holding that such adjustments were, not needed as there was proximity to business connection.

3.2 The LdCIT(A) has erred in law by not appreciating that as per the I.T. law, all international transactions undertaken by the assessee with AEs, had to be benchmarked for being @ALP.

4.1 The LdCIT(A) has failed to appreciate that adding back the amount of Rs 23,52,607/- paid by the assessee company to the Axis Bank to its total income for guarantee commission does not serve the requirement of ALP; the entire amount of Rs 29,19,536/- had to be added as separate income and such income would not be eligible for the benefit LI/S 801B (8A) of the Act.

7.1 The LdCIT(A) has failed to appreciate that for making disallowance u/s 14A, actual earning of exempt income during the year is not required. (Page 159 of the appellate order). 8. The Ld CIT(A) has erred in deleting the addition made u/s 40a(ia) r.w.s 195 of the IT Act on account of non-deduction of TDS on payment ,of Rs 19,86,207/- made on account of consultancy fees to tax residents of USA & Canada without appreciating that such incomes were taxable in India in terms of Section 9(1)(vii) of the IT Act and also as per the provisions of respective DTAA's. ( Page166 of the appellate order).

8.1 In any case, the LdCIT(A) should have asked for a remand report from the AO so as to ascertain the exact nature of consultancy rendered by these Non-residents.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 23

entities and had substantial voting power in both theircompanies as per the requirement of Section 2(22)(e) of the IT Act. (Page 175 of the appellate order). 10.1 Whether the LdCIT(A) has failed to appreciate the law that for the purposes of deemed dividend, as enshrined in Section 2(22)(e) of the IT Act, it is not necessary that the receiving company should be a share holder of the giver company. 10.2 The LdCIT(A) has erred in law and on fact that there would be charge of deemed dividend even incases where there ate common share holders holding stipulated voting rights between the giver and receiver companies. 11 The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. The 1st issue raised by the Revenue is that the learned CIT (A) erred in 35. allowing the deduction to the assessee under section 80 IB(8) of the Act amounting to � 28,57,75,943/- only though the conditions as specified therein were not satisfied as alleged by the AO.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 24

report submitted by the assessee in form 10 CCB as well as from the assessment order framed under section 153A read with section 143(3) of the Act for the assessment year 2003-04. Thus it is implied that 10 consecutive assessment years came to an end in the assessment year 2012-13. Hence the assessee was not eligible for claiming the deduction under section 80 IB(8) of the Act for the year under consideration being the 11thyear of its deduction.

36.1 In view of the above, the AO disallowed the claim made by the assessee for the deduction claimed under section 80 IB (8) of the Act and added the same to the total income of the assessee.

38.1 The assessee also contended that DSIR has extended the approval to it vide letter dated 20th February 2012 as a commercial research and development company for the assessment year 2013-14. Furthermore, the assessee was

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 25

granted the approval by the DSIR beginning from assessment year 2004-05 for 10 consecutive assessment years which ends in the assessment year 2013-14. Accordingly the AO have no jurisdiction to hold that the assessee is not entitled for the deduction under section 80 IB(8) of the Act.

39.1 Regarding the deduction claimed by the assessee for the assessment year 2003-04, the learned CIT (A) observed that the deduction was claimed by the assessee on the basis of the application moved for the approval from the DSIR. But the same was not granted by the DSIR in that year. However the assessee claimed the deduction under the belief that it will get the approval from the DSIR. But, the assessee was not eligible for such deduction in the absence of the approval from the DSIR. However the Revenue has allowed the deduction which was not as per the provisions of the Act. In fact the assessee for the year under consideration fulfils all the conditions for claiming the deduction under section 80IB(8) of the Act.

39.2 Regarding the statement obtained during survey proceedings under section 133-A of the Act from Shri NareshKhemani, AGM Finance and purchase, the learned CIT (A) observed that he did not admit that the assessee is not engaged in the research and development activities. He mentioned that the assessee carries out the activity on bioavailability- bioequivalence based on which the DSIR

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 26

has granted the approval to the assessee. Furthermore, Shri NareshKhemani, AGM Finance and purchase is not a technical person with respect to the scientific research and development activities as he was looking after the finance and the purchases.

39.3 Likewise, learned CIT (A) also found that the statement obtained of Shri Jitesh Patel in the survey proceedings under section 133A of the Act is not relevant as he is not connected with the assessee. Rather, the statement of Shri Jitesh Patel supports the case of the assessee as he admitted that he has come on behalf of the client company to verify the clinical trials carried out by the assessee.

39.4 Similarly, the learned CIT (A) held that the statement of Shri Tausif Monif, President –Global Operations cannot be relied for the reason that he has joined the company in the year 2016 whereas the case of the assessee relates for the assessment year 2013-14. However, he has provided in the statement that the assessee undertakes clinical trials of pharmaceutical products and the assessee is registered with the DSIR for such activities as scientific research and development activities.

39.5 There were various clients of the assessee but no enquiry was conducted by the AO to arrive at the conclusion that the assessee is not carrying out any scientific and research development activities.

39.6 Furthermore, the learned CIT (A) also held that there was no opportunity provided to the assessee for the cross-examination of the statement recorded during the survey proceedings which is against the principles of natural justice.

39.7 Similarly, the learned CIT (A) further observed that the deduction claimed by the assessee under section 80 IB of the Act cannot be denied merely on the basis that a copy revised return was found during the survey proceedings wherein such claim was not made. Though the same was not filed with the department in this scenario that copy of return has no base for disallowing the deduction in view of the fact that all other conditions specified under the provisions of section 80

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 27

IB(8) of the Act have been duly complied with by the assessee. There was no adverse report brought on record by the AO evidencing that the assessee failed to comply the provisions of section 80 IB(8) of the Act. Accordingly the learned CIT (A) allowed the ground of appeal raised by the assessee.

42.1 The learned AR also contended that the Revenue has allowed the deduction to the assessee on its activities carried out in the earlier years. Furthermore, there was no change in the activities of the assessee for the year under consideration viz a viz the earlier assessment years. The learned AR vehemently supported the order of the learned CIT (A).

i. Carrying scientific research and development activity ii. Company Registered in India iii. Having main object of scientific and industrial research and development iv. Approved by the prescribed authority i.e. DSIR

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 28

43.1 The AO in his order framed under section 143(3) of the Act has nowhere alleged that the assessee has violated any of the provisions of section 80 IB(8) of the Act. As such the claim of the assessee was rejected by the AO on the reasoning that the assessee is not engaged in the activity of research and development activities as contemplated under the provisions of section 80 IB (8) of the Act. In this regard we note that the Government authority i.e. DSIR has approved the activities of the assessee as research and development activity which are eligible for the deduction under section 80 IB(8) of the Act. Thus the question arises whether the AO can go on to hold that the activities of the assessee are not in the nature of research and development activities which is against the approval granted by the DSIR. To our mind, the AO being a non- technical person in relation to the research and development activities carried on by the assessee has exceeded his jurisdiction in holding that the assessee is not engaged in the research and development activities, knowing fully well that the assessee has been approved by the DSIR and its claim has been allowed by the Revenue in the earlier assessment years. In other words, the AO cannot disallow the deduction of the assessee once the approval has been granted by the prescribed authority for the research and development activities as held by the Hon’ble Gujarat High Court in the case of Pr. CIT vs. BA Research India Ltd in tax appeal No. 233 and 234 of 2016 reported in [2016] 70 taxmann.com 268 [Guj] wherein it was held as under: Under the circumstances, once such authority grants approval and such approval holds the field, it would not be open for the Assessing Officer or any other revenue authority to go behind such approval certificate and re-examine for himself, the fulfilment of the conditions contained in rule 18DA(1). These conditions are prescribed in terms of clause (iv) of section 80-IB(8A). The Commissioner was, therefore, completely in error in observing that even though the assessee had valid approval issued by the prescribed authority, the Assessing Officer still had to examine whether such company had fulfilled the conditions referred to in clause (iv), as such other conditions as may be prescribed, reference to which we find in rule 18DA. Any other view would create conflict of decision- making process. Even revenue could not dispute that many of these requirements prescribed under rule 18DA are to be examined by the prescribed authority. If once the prescribed authority examines such conditions and upon being satisfied that the conditions are fulfilled, grants approval, can the Assessing Officer take a different view? The answer obviously has to be in the negative. First and foremost, the prescribed authority is a specialised body having expertise in the field of scientific research and development. The requirements are extremely complex scientific requirements and have therefore, been rightly placed in the hands of an expert body to judge. Secondly, there is no reason why once an authority which is prescribed under the rules for a specific purpose has been

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 29

invested with statutory functions, the Assessing Officer should be allowed to overrule the decision of the said body. Thirdly, there are multiple indications within the rules themselves. Under rule 18D(2), extension of approval once granted is subject to satisfactory performance of the company, to be judged on periodic review. Further, rule 18DA(3) gives wide powers to the prescribed authority to withdraw the approval if it is found that the same was to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders or that any provisions or the rules have been violated. Thus once again the task of judging whether the provisions or the rules have been violated or not, has entrusted to the prescribed authority with matching powers for withdrawal of the approval, if the authority is satisfied about such breach. [Para 18]

43.2 It is also significant to note that there being no change in the facts and under the provisions of law, the principles of consistency needs to be applied as held by the Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd reported in [2013] 358 ITR 295 (SC) where the Hon’ble court observed as under: Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason to take a different view unless there are very convincing reasons, none of which have been pointed out by the revenue. [Para 28] It appears from the record that in several assessment years, the revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the High Court but without any success. That being so, the Revenue cannot be allowed to flip- flop on the issue and it ought let the matter rest rather than spend the taxpayers' money in pursuing litigation for the sake of it. [Para 31]

43.3 We also find that during the survey proceedings statements of various persons were recorded which were used by the AO to hold that the assessee is not engaged in the research and development activities as envisaged under the provisions of section 80 IB(8) of the Act. First of all, we note that no reliance can placed on these statements in view of the fact that the opportunity of cross- examination was not afforded to the assessee which was mandatory in view of the judgment of Hon’ble Supreme Court in the case of Andaman Timber Industries vs. Commissioner of Central Excise Kolkata-II reported in [2015] 62 taxmann.com 3 (SC) where the Hon’ble apex court held as under: 6. According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 30

43.4 Furthermore, these statements were suffering from certain infirmities. Such as, the statement of Shri Naresh Khemani AGM Finance and purchase cannot be relied upon for the simple reason that he doesn’t have any technical knowledge about the scientific research and development activities of the assessee. Likewise, the statement of Shri Jitesh Patel being a person of the 3rd party cannot be referred to draw an inference that the assessee was not carrying out any research and development activities. Moving further, Shri Tausif Patel has joined the assessee company in the year 2016 only whereas the year under consideration is 2013-14. Therefore, such person was not connected with the affairs of the business of the assessee during the relevant time.

43.5 We have also seen the approvals granted by the DSIR, as recorded in the order of the learned CIT (A), we find that initial assessment year for the deduction under section 80 IB(8) of the Act was for the assessment year 2004-05. The approval from the prescribed authority is mandatory for claiming the deduction. Admittedly, the assessee has claimed deduction for the assessment year 2003-04 under section 80 IB(8) of the Act which was also allowed by the Revenue. Thus it appears that the assessee has wrongfully claimed the deduction under section 80 IB(8) of the Act for the assessment year 2003-04 under the bona fides believe that it will get the approval in that particular year. But the Revenue failed to take a note of such wrong deduction claimed by the assessee. Thus the question arises, whether the AO can disturb the deduction claimed by the assessee for the year under consideration by holding that it is the 11th year in the given facts and circumstances. In this regard, we are of the view that the inaction on the part of the revenue cannot disentitle the assessee for its rightful claim. Once the Revenue has missed the bus for disallowing the deduction for the assessment year 2003- 04, it cannot challenge the deduction on this reasoning in the year under consideration until and unless there was some violation of the provisions of law under section 80 IB(8) of the Act r.w. relevant rules i.e. rule 18D and 18DA of income tax rule. As we have already held that there was no violation of the provisions of section 80 IB(8) of the Act for the year under consideration, the

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 31

assessee cannot be denied for its rightful claim. In view of the above and after considering the facts in totality, we do not find any infirmity in the order of the learned CIT (A). Accordingly we uphold the same. Thus the AO is directed to allow the deduction to the assessee under the provisions of section 80IB of the Act. Hence the ground of appeal of the revenue is dismissed.

47.1 However the TPO observed that due the standby letter credit issued to the AE M/s Lambda Therapeutic Research Inc (Canada) got direct benefit and incurred low interest charges on loans taken from Canadian Imperial Bank of Commerce.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 32

Thus it is in the nature of financial services provided by the assessee to its AE for which it incurred cost in form of commission paid to Axis Bank India, therefore the same needs to be determined at arm length for the purpose of transfer pricing. Accordingly, the TPO worked margin of 24.1% on cost i.e. � 23,52,607/- by employing CPM as most appropriate method and made upward adjustment of � 29,19,586/- ( 23,52,607 + 24.1%) to the total income of the assessee.

3.12. In view of the aforesaid discussion, it is noticed that the appellant himself has made the disallowance of bank guarantee charges paid of Rs.23,52,607/- in the computation of income of the appellant company and therefore, the same cannot be once again considered for upward adjustment, otherwise it would tantamount to double taxation of the same amount. Further with regard to mark up on the guarantee charges worked out by the AO @ 24.1% which amounted to Rs.5,66,979/- is found correct and hence, the same is confirmed in view of the discussion made in the TPOs order, as it is clear that the provision of guarantee service is an international transaction which is required to be benchmarked by adopting the CPS method. Thus, the upward adjustment to the extent of Rs.5,66,979/- is confirmed and relief is granted for the balance amount.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 33

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 34

previous paragraph, therefore we are not inclined to repeat the same for the sake of brevity. Hence we proceed to adjudicate the same accordingly.

52.1 The provisions of section 92B of the Act defines the parameters of what constitutes an international transaction. Although the ambit of international transaction was wide enough, yet due to judicial interpretation, certain classes of transactions were being left out of the transfer pricing net. To tackle the same, by the Finance Act of 2012an Explanation to Section 92B[2] of the Act was brought on the statute with retrospective effect from 1st April 2002. The explanation is clarificatory in nature and addedcertain categories of transactions, inter alia, the transaction as specified under clause (c) of explanation (i) to section 92Bof the Act within the ambit of international transactions which is reproduced as under:

[Explanation.—For the removal of doubts, it is hereby clarified that— (i) the expression "international transaction" shall include— (a) *********** (b) ************* (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;

52.2 It can be seen that the guarantee was included within the ambit of international transaction vide the Finance Act 2012 with retrospective effect. Thus there remains no ambiguity to the fact that corporate guarantee extended by the assessee to its AE is an international transaction and therefore the same has to be benchmarked at the arm length price. However, we note that the different benches of the ITAT have taken different view. Some of them held that the transaction of corporate guarantee is an international transaction whereas some of them held that the transaction of corporate guarantee is outside the purview of the international transaction including the Ahmedabad tribunal in the case of Micro Ink Ltd. vs. Addl. CIT reported in [2015] taxmann.com 353, wherein it was held that the corporate guarantee is not international transaction. At the time of hearing, the learned AR heavy relied on this order of the tribunal.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 35

52.3 However, we find that the facts of the order of this tribunal in the case of Micro Ink Ltd. (Supra) are distinguishable from the facts of the case on hand. In that case, there was no cost incurred by the assessee (Micro Ink Ltd.) in providing the corporate guarantee to the AE. Furthermore the assessee (Micro Ink Ltd.) provided guarantee to its AE’s without involving any bank. Conversely, in the case on hand, the assessee has extended the guarantee by involving the Axis Bank of India after incurring the cost. Indeed, such cost was reimbursed by the AE of the assessee on actual basis and the same was added by the assessee in the computation of income. Thus, what is inferred is this that the assessee has given corporate guarantee to its AE after availing the services from the bank viz a viz incurring the cost there on which was given in the course of the business. Accordingly, we hold that the corporate guarantee given in the case on hand is the international transaction which requires to be benchmarked at the arm length price. In holding so we draw support and guidance from the order of Hyderabad Tribunal the case of Infotech Enterprises Ltd. vs. Addl. CIT reported in 41 taxmann.com 364 wherein it was held as under:

52.4 In this regard we also find support and guidance from the order of the Bangalore ITAT in case of Advanta India Ltd. vs. ACIT reported in 64 taxmann.com 251 where it was held as under:

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 36

the ambit of international transaction which could be subjected to arm's length price adjustment. That was a case in which the assessee had issued a comfort letter to the banker and it was the consideration for issuance of this comfort letter which was sought to be subjected to the ALP adjustments. 30. However, material facts of the case in the present case are different inasmuch as it is an admitted position that the assessee did incur costs on issuance of this guarantee (i.e. payment of Rs 4,39.005 to the ICICI Bank in this respect), and, for that reason, the issuance of guarantee indeed had a bearing on the profits and income of such enterprise. It cannot, therefore, be said that the issuance of guarantees, on the facts and in the circumstances of this case, did not constitute an 'international transaction'.

52.5 The next aspects arises for the determination of the benchmark in order to working out the ALP of the impugned international transaction. The AO in the case on hand has adopted CPM method for working out the ALP using the data of banks obtained from the money control.com. The relevant finding of the TPO/AO reads as under:

6.4 Since such services in the nature of guarantee fee etc falls in the domain of financial services, the functional profile of the assessee company and the risk assumed by the assessee company in the present facts of the case is thus similar to the entities engaged in the business of providing financial services. In the arm's length scenario, when the assessee company had incurred the cost to the tune of 0.71% of the credit extended, it would be expecting return equal to what is earned by such entities engaged in providing financial services. For the purpose of identifying the valid comparables, the Google database was queried to identify top 10 private sector entities engaged in extending banking and other financial services. Such entities were identified from information available at www.moneYControl.com. The average margin (OP/OC) of such entities was computed at 24.1 % using data available on Capitaline database as under:

SrNo. Company Total Income Profit Before Total Margin Name [201303] Tax|201303] Cost

1 KotakMah. 9203.15 1972.03 7231.12 27.3% Bank

2 KarurVysya 4694.99 72f.44 3969.55 18.3% Bank

3 Federal Bank 6832.01 1193.76 5638.25 21.2%

4 HDFC Bank 41917.49 9750.62 32166.8 30.3% 7

5 ICIC1 Bank 48421.3 11389.69 37031.6 30.8% 1

6 Induslnd 8346.19 1575.87 6770.32 23.3% Bank

7 Axis Bank 33733.68 7552.7 26180.9 28.8%

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 37

9 South ind. 4769.22 655.85 4113.37 15.9% Bank

10 City Union 2462.39 403.02 2059.37 19,6% Bank

12 Yes Bank 9551.43 1925.73 7625.7 25.3%

24.1%

6.5 Applying the mark-up of 24.1% on the amount of Rs 2352607/- paid to the Axis Bank, the ALP of international transaction of corporate guarantee extended to the AE was determined at Rs 29,19,586/- and accordingly, the assessee company was issued with the show-cause notice as mentioned in Para 3 of the order. 52.6 From the above, it is revealed that the TPO/AO has treated the assessee as if it was engaged in the business of financial services and accordingly the ALP was determined by comparing with the average margin earned by the banks on cost. Admittedly, the assessee is not carrying out any financial activity and therefore we are not convinced with the basis adopted by the authorities below.

52.7 Moving ahead, we note that there is no difference between the banks or a corporate entity as far as corporate guarantee is concerned. Both have to consider the functions performed, assets employed and risks assumed. In case of default by the borrower, the corporate guarantor is exposed to the same risk of a bank. In case of an AE the risk would not be as high as in case of an outsider. Therefore, the rate charged by the bank for providing the corporate guarantee should be a benchmarked for working out the ALP for the corporate guarantee extended by the assessee to its AE. In the case on hand, the bank has charged .79% of the amount of the corporate guarantee as fees from the assessee which has been reimbursed to the assessee by the AE. This fees in absolute amount works out at �23,52,607/- only. However, the assessee has not added any markup on this international transaction with its AE. In the interest of justice and fair play, we are of the view that a sum of � 1,17,630/- being 5% of the fees paid to the bank for the corporate guarantee of � 23,52,607/- will be sufficient to add as margin of the assessee.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 38

52.8 Regarding the revenue appeal, we note that the assessee has already made the disallowance of �23,52,607/- in its computation of income and further addition of the same amount to the total income of the assessee will lead to the double addition which is unwanted under the provisions of law. Accordingly, we are of the view that the decision of the learned CIT (A) for deleting the addition of �23,52,607/-does not require any interference. Hence, the ground of appeal of the assessee is partly allowed whereas the ground of appeal of the revenue is dismissed.

53.1 The assessee has written off the advances given as rent deposits which were not recovered. As per the assessee such loss has been incurred in the course of the business and therefore the same should be allowed as business loss. However the AO disallowed the same on the reasoning that such rent deposits represents the capital advance and therefore the same cannot be allowed as deduction.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 39

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 40

60.1 The assessee vide letter dated 5th December 2016 submitted that the invoices are raised as agreed in the terms of the contract but the revenue is booked based on the level of the work completed. In other words the payer deduct the TDS on the basis of the invoice issued by the assessee whereas the revenue is recognized in the books of accounts based on the work completed. Thus the differences are arising between the income shown by the assessee in the books of accounts viz a viz income shown in the form 26AS.

60.2 The assessee also submitted that all the transactions have been duly recorded in the books of accounts either as revenue or advance for the project which will be credited to the income on the completion of the work which may be next accounting year. The assessee in support of his contention filed the ledger copies of the parties along with the TDS reconciliation.

60.3 However, the AO found that the assessee failed to furnish the documentary evidence, reflecting the difference in the income as discussed above, to justify that it has shown such difference as income in the books of accounts in the subsequent year/s.

60.4 The AO also found that the payer have received services from the assessee and therefore they have credited the account of the assessee in the books of accounts. Accordingly, the assessee was to account for such income in its books of accounts based on mercantile system of accounting. In case, the assessee does not account for the full income in respect of services provided then the same should have been shown under the head work in progress but it has not been done so by the assessee.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 41

60.5 In view of the above the AO concluded that the assessee has suppressed its income by not showing the amount of � 4,00,89,104/- as evident from the difference in the income shown in the books of accounts viz a viz amount shown in form 26AS. Accordingly the AO added the same to the total income of the assessee.

60.6 The assessee before the learned CIT (A) submitted that it is following the practice of taking 50% advance of the contract value at the time of signing of the contract and the balance amount is received in phased manner depending upon the completion of the work. However, the assessee raises invoice to the party for the 50% of the contract value at the time of signing the contract which is shown as an advance in the books of accounts. Such advance will be recognized as revenue depending upon the completion of the work. However, the other party i.e. payer shows such payment to the assessee is an expense after deducting the TDS in its books of accounts. In effect, the entire amount of the project is offered to tax by showing it is income over a period of time. The assessee in support of its contention also filed the copy of the ledger of the parties.

60.7 The learned CIT (A) after considering the submission of the assessee observed that the project of the assessee spills over in various year/s and the income is recognized in each year depending upon the completion of the project. It is not the case that the assessee has not shown the income in the books of accounts rather the income of the assessee spreads in various years. Furthermore, the income of the assessee remains in the same bracket of taxes and therefore it was tax neutral.

60.8 The learned CIT (A) also observed that the amount received by the assessee from the party has either been shown as income or as liability in the books of accounts. The liability was subsequently accounted for as income of the assessee upon the level of work completed. This method of accounting of the assessee is in force since inception as per the accounting standard.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 42

60.9 The learned CIT (A) also found that there were instances where the assessee has shown more income than the amount shown in the form 26AS. But the AO has only selected those items where the income was shown less in the profit and loss account than the amount shown in form 26AS which is not correct method. If this factor is considered then the effective difference works out at � 85,43,113/- in place of � 4,00,89,104/- as observed by the AO in his order.

60.10 The learned CIT (A) also found that the assessee has filed the reconciliation statement between the income shown in the books of accounts viz a viz the amount of income reflected in form 26AS. Accordingly it was found that the income of the assessee has been spread over in various years and no difference was found out. Consequently, the learned CIT (A) directed the AO to allow the claim of the assessee subject to the verification of the reconciliation statement. 61. Being aggrieved by the order of the learned CIT (A), the Revenue is in appeal before us.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 43

63.1 The principles of accounting standard requires that the income should be booked by the assessee when it is certain to accrue whereas the expenditures are required to be recorded where there is a possibility of incurring the same. Similarly, the assessee also require to apply the matching concept. Once the assessee has received the advance but has not incurred any expense against such advances received for rendering any service. Then such advance cannot be accounted as income. In other words when the expenses are incurred by the assessee against such advances then both the income and the advance should be accounted for in the same proportion.

63.2 In the case on hand, there is no dispute to the fact that the AO has selected only those instances where the assessee has shown less income than the amount shown in form 26AS ignoring the cases where the assessee has shown more income in the books of accounts then the amount reflected in the form 26AS. In fact the AO has used the method favouring the revenue which is not correct as a matter of principle. As such the AO, should have taken only in the difference amounting to �85,43,113/- for working out the suppressed income. However, even the difference is not to be taken as income for the reason that this has already been offered to tax by the assessee in different years. For this purpose, the reconciliation statement was filed by the assessee before the learned CIT (A). Accordingly the learned CIT (A) allowed the ground of appeal of the assessee subject to verification of reconciliation statement. In fact, there is no ambiguity in the direction of the ld. CIT-A for the reason that, if the difference as highlighted by the AO, has been accounted for as income by the assessee any other year which will prove that the income of the assessee has suffered the tax otherwise the AO will make the addition to the total income of the assessee. The direction of the learned CIT (A) is very clear on the issue and therefore no interference is required. Hence the ground of appeal of the revenue is dismissed.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 44

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 45

read with rule 8D as held by the Hon’ble Gujarat High Court in the above stated case. Accordingly we do not find any reason to interfere in the finding of the learned CIT (A). Hence the ground of appeal of the Revenue is dismissed.

71.1 However the AO held that the assessee was liable to deduct taxes on payment of consultancy but the assessee failed to do so. Accordingly the AO disallowed the expenses under section 40(a)(i) of the Act and added to the total income of the assessee.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 46

of any details and evidences, the income arose in the hands of the recipient party is found to accrue outside India on which no TDS was liable to made in India. Thus, the disallowance made by the AO is found untenable and hence, the same is deleted. 72. Being aggrieved by the order of the learned CIT (A) the Revenue is in appeal before us.

The learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.

73.1 At the time of hearing, the learned DR has not brought any infirmity in the finding of the learned CIT (A). On the contrary, the learned AR before us has contended that the payment made by the assessee to the non-residents as discussed above is not chargeable to tax in India in terms of the provisions of DTAA. In view of the above, we do not find any infirmity in the order of the learned CIT (A). Hence the ground of appeal of the Revenue is dismissed.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 47

75.1 However, the assessee on question by the AO, contended that it is precondition to invoke the provisions of section 2(22)(e) of the Act that the recipient should be a shareholder in the company which has provided the loan. But the assessee in the case on hand is not a shareholder and therefore the provisions of section 2(22)(e) of the Act cannot be applied to such transaction.

75.2 However the AO disregarded the contention of the assessee and held that there are common shareholders in both the companies which satisfies the provisions of section 2(22)(e) of the Act. Accordingly, the AO made the addition to the total income of the assessee.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 48

loans taken by the appellant company from M/s. Epsillion Marketing and Cons Pvt. Ltd. was the deemed dividend in the hands of the appellant under 2(22) (e) of the I. T. Act and accordingly it made the addition in the hands of the appellant company.

5.4. On the other side, the appellant has claimed that it was not the share holder of M/s. Epsillion Marketing and Cons Pvt. Ltd. i.e. the lender company and did not hold any shares hence the provisions of Section 2(22) (e) of the I.T. Act are not attracted in its case. The provision of Section 2(22) (e) are attracted only in the hands of the share holders of the lenders company and not in case of any other persons. Merely Shri Binish H. Chudgar and Ms. Bindi B. Chudgar having substantial interest in appellant and in the lender company would not be enough to hold the application of provisions of section 2(22) (e) of the I. T. Act in the hands of appellant. In other words, merely because the share holders were common between the appellant and lender company, the loan received are no I luxable as dividend as the appellant company did not have the requisite shareholding. The A.R has relied upon various decisions of theauthorities in support of this proposition which are briefly noted in the written submission filed which is reproduced in the preceding paras of this order.

5.5. The Hon'ble Mumbai ITAT Special Bench in the case of ACIT Vs. BhaumikColour (P) Ltd. 313 ITR 146 (AT) of which decision was also subsequently affirmed by the Hon'ble Mumbai High Court in the case of CIT Vs. Universal Medicare (P) Ltd. 324 ITR 263. In both the judgments, it was observed that the intention of the various legislature is to tax dividend only in the hands of the share holder and not in the hands of the concern and therefore no dividend can be taxed in the hands of the appellant being not a share holder in any of the three lender companies. In the written submission various judgments have been cited.

5.6. Having considered the facts and the written submission, it is observed that the plea of the appellant is found correct for the reason I ha I deemed dividend can be taxed in the hands of the share holders only and not in the hands of any other person .as held by the Hon'ble ITAT Mumbai Special Bench in the case of ACIT vs. BhaumikColour (P) Ltd. 313 ITR 146. For the reference, the head notes of the decision are reproduced as under:-

"Section 2(22) of the Income-tax Act, 1961 - Deemed dividend -Assessment year 1997-98 - Whether deemed dividend can be assessed only in hands of a person who is a shareholder of lender company and not in hands of a person other than a shareholder - Held, yes, - Whether expression 'shareholder' referred to in section 2(22)(e) refers to both a registered shareholder and beneficial shareholder and, thus, if a person is a registered shareholder but not beneficial shareholder then provisions of section 2(22)(e) would not apply and similarly if a person is a beneficial shareholder but not a registered shareholder then also provisions ofsection 2(22)(e) would not apply - Held, yes - Whether deeming provision of section 2(22)(e) as it applies to case of loans or advances by a company to a concern in which its shareholder has substantial interest, is based on presumption that loan or advances would ultimately be made available to shareholders of company giving loan or advance, and, therefore, intention of Legislature is to tax dividend only in hands of shareholder and not in hands of concern."

5.7. Judgment of Hon'ble High Court of Gujarat in the case of Commissioner of Income-tax v. Daisy Packers (P.) Ltd. [ 2013 ] 40 taxmann.com 480 (Gujarat) is also relevant on this issue, whereby the Hon'ble Court has held the similar view. The head notes are as under:-

Section 2(22) of the Income-tax Act, 1961 - Deemed dividend [Loans and advances] - Whether where assessee had received a deposit from a company but it did own any share of said company, said deposit was an inter-corporate deposit

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 49

and could not be treated as deemed dividend - Held, yes [Para 2] [In favour of assessee] 5.8. Further the Hon'ble Mumbai High Court in the case of CIT Vs. Universal Medicare (P) Ltd. in 324 ITR 363 has also confirmed the proposition of the special bench decision referred above. The head notes of this judgment are reproduced as under:-

"Section 2(22J of the income-tax Act, 1961 - Deemed dividend -Assessment year 2003-04 - Certain amount was transferred from bank account of company 'CSPL' to bank account of assessee-company - One 'V, who was director of CSPL, held over 10 per cent of equity capital of CSPL and over 20 per cent of equity capital of assessee - Assessing Officer, relying upon provisions of section 2(22}(e), treated aforesaid amount as deemed dividend in hands of assessee and while doing so, he rejected assessee's contention that amount in question was neither an advance nor a loan to assessee but represented misappropriation of funds by vice- president (Finance) - On appeal. Tribunal found that as a matter of fact no loan or advance was granted to assessee, since amount in question had actually been defalcated and was not reflected in books of account of assessee and, therefore, first requirement of section 2(22)(e) of there being an advance or loan was no fulfilled and that even assuming that it was a dividend, if would have to be taxed not in hands of assessee but in hands of shareholder - Whether, on facts. Tribunal was justified in allowing assessee's appeal-Held - yes."

5.9. Further the Hon'ble Rajasthan High Court in the case of CIT, Udaipur Vs. Hotel Hilltop 313 ITR 116 has also propounded the said proposition as held by the Mumbai Special Bench. The head notes of the judgment are reproduced as under:-

"IT : Where assessee-firm had received an advances from a company and it was assessee's partners who were shareholders in said company and not assessee-firm, such an advance could not be taxed as deemed dividend in hands of assessee-f/rm.

Section 2(22) of the Income-tax Act, 1961 - Deemed dividend -Assessee- firm had received certain amount as an advance from a company under an agreement to hand over management of firm's hotel to said company - Parnters of assesse- firm were also shareholders in said company - Assessing Officer treated said amount received by assessee-firm as deemed dividend under section 2(22)(e) in hands ofassessee and assessed same to tax - Whether it was not assessee-firm which was shown to be shareholder of company but in fact it was its partners who were holding more than requisite amount of shareholding in company and were having requisite interest in firm - Held, yes - Whether, therefore, aforesaid amount received by assessee would not be deemed dividend in hands of assessee-firm, rather it would obviously be deemed dividend in hands of individuals (partners), on whose behalf, or on whose individual benefit, being such shareholders, amount was paid by company to concern- Held, yes"

5.10. The Hon'ble IT AT, Ahmedabad Bench 'A' in the case of Krupesh N. Patel Vs. DCIT, Central Circle-1, Vadodara has also taken the similar view. The head notes are reproduced as under:

"IT : Loans and advances shareholder, connotation of - Legal fiction created under section 2(22)(e) does not extend further for broadening concept of shareholder so as to tax loans or advances as 'deemed dividend' in hands of 'deeming shareholder"

5.11 Further, Hon'ble ITAT Mumbai in the case of SajjankumarDokania, Mumbai vs. Department of Income Tax in ITA No.7149/Mum/2011 vide order dtd. 5.10.2012 has also of the same view. Finding is briefly reproduced as under:-

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 50

"In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the decision of the Tribunal (supra) and keeping in view that the decision of the Special Bench of the tribunal in the case of BhaumikColour (P) Ltd. (supra) has been approved by the Hon'ble Bombay High Court in Universal Medicare (P.) Ltd. (supra) which is binding on us, we are of the view that the Id. CIT(A) was fully justified in deleting the addition made by the A.O. The grounds taken by the Revenue are, therefore, rejected"

5.13. Further, ITAT Mumbai in the case of Bijis Hotels (I) P. Ltd. Mumbai vs. 1 Department of Income Tax in ITA Np.3444/Mum/2011 dtd. 29.2.2012 has also taken the similar view. Finding is briefly reproduced as under:-

"9. Thus respectfully following the principle and ratio laid down i by fheHon'ble Special Bench in the case of ACIT vs. BhaumikColour (P) tl'd. (supra) and Hon'ble Jurisdictional High Court in the case of CIT vs. Universal Medicare Pvt. Ltd. (supra), the order of the learned CIT(Appeals) deleting the addition of Rs. 1,58,14,061/- on account of deemed dividends is thus upheld and accordingly the departmental appeal is dismissed."

5.14. Further, Hon'ble Supreme Court in the case of CIT Vs. C.P. SarathyMudaliar in Civil Appeal Nos.2242 and 2243 of 1968 dtd. 12.10.1971 has also taken the similar view. The head notes are reproduced a sunder:-

"Section 2(22} of the Income-tax Act, 1961 (Corresponding to section 2(6A)(e) of the Indian Income-tax Act, 1922) - Deemed dividend -Assessment years 1955-56 and 1956-57 - Members of assessee-HUF were shareholders of a company - Those shares were acquired from out of family funds - In relevant accounting years company advanced loans to assessee-HUF - Tribunal found as fact that loan in question had been granted to assessee-HUF and not to shareholders who were members of HUF - Whether HUF cannot be considered as a shareholder under section 2(6A)(e) of 1922 Act and hence, a loan given to HUF cannot be considered as a loan advanced to a 'shareholder' of a company - Held, yes - Whether since no loans had been advanced to a shareholders, they did not get any income and hence, section 2(6A)(e) became inapplicable - Held, yes"

5.15. Further the Hon'ble Gujarat High Court in the case of CIT Vs. Navinbhai N. Patel [2013] 35 taxmann.com 312 (Gujarat) as also taken the similar view. The head notes of the judgment are reproduced as under:-

"Section 2(22) of the Income-tax Act, 1961 - Deemed dividend '[Loans or advances to shareholder] - Assessment year 2006-07 - Whether requirement of section 2(22) is that loan or advance must be made by a company to its shareholder holding share representing 10 per cent voting power and he must be beneficial owner of said shares - Held, yes -Whether where assessee shareholder had already divested his interest in shares of a company in favour of a trust, assessee could no more be said to be beneficial owner of those shares and, thus, any sum advanced by company to assessee subsequently could not be treated as deemed dividend - Held, yes [Para 2] [In favour of assessee]"

5.16 Further the Hon'ble ITAT Hyderabad Bench 'A' in the case of MTAR Technologies (P.) Ltd. Vs. Asstt. Commissioner of Income-tax, Circle 14(2), (TDS), Hyderabad [2010] 39 SOT 465 (HYD.) has also taken the similar view. The head notes of the judgement are reproduced as under:- "Section 2(22) of the Income-tax Act, 1961 - Deemed dividend -Assessment years 2003-04 to 2005-06 - Whether under section 2(22)(e) only payment made by a company by way of advance or loan to a shareholder alone is to be considered for purpose of deemed dividend -Held, yes - Whether, therefore, deemed dividend under section 2(22)(e) can only be assessed in hands of person, who is shareholder of lender company and not in hands of a person other than shareholder - Held, yes".

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 51

5.17. In view of the above discussion, considering the facts of the case, written submissions and various judgments, it is observed that appellant was not the share holder in the aforesaid lender company from whom loans have been taken and therefore it does not attract the deemingprovisions of Section 2(22) (e) of the I.T. Act. It is worth to mention that the provisions of Section 2(22) (e) are deeming for the dividend but the same are not deeming for the shareholders. Merely Shri Binish H. Chudgar and Ms. Bindi 6. Chudgar, were common share holders in appellant company and lender company would not brought the appellant company into the deeming fiction of dividend u/s.2(22)(e). Moreover, for attracting the provisions conditions precedent are that the shareholders shall not only be registered shareholders but they should be beneficial shareholders. In the present case, the appellant is not even the shareholder of the lender company, hence the question of application of other conditions do not come into play. Hence, the provisions of section 2(22) (e) are not applicable on the same.

5.18. In view of the above discussion, the addition made by the A.O. is not warranted and same is deleted. The grounds of appeal are allowed."

8.5. In view of the above discussion, and the fact that the identical issue on similar facts has been decided by this office in A. Y. 2011-12, following I the same, the addition made by the A.O. in the year under consideration | is also not found correct and justified and hence the same is deleted.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 52 79.1 The 1st question before us arises whether the assessee company, which is not a registered shareholder obtains any loan from other company in which its shareholder also holding substantial share in such other company may be brought under the scanner of deemed dividend. In this regard we find pertinent to refer the provisions of section 2(22)(e) of the Act which reads as under: (22) "dividend" includes— (e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;

79.2 On perusal of above provision what inferred is that the provision of section 2(22)(e) of the Act can only be invoked in case of shareholder who is holding substantial interest. The provision of section 2(22)(e) of the act nowhere talks about taxing an entity/company who is not a shareholder holder in lender company but shareholder of such company holding substantial share in lender company. In this regard we find support and guidance from the judgment of Hon’ble Jurisdictional high court in Tax appeal no- 891 of 2016 in case of PCIT vs. Mahavir Inductomelt Pv.t Ltd where in similar facts the Hon’ble court held as under:

"50. Identical question came to be considered by the Division Bench of this Court in Tax Appeal No. 253 of 2015. After considering the decision of the Bombay High Court in the case of CIT vs. Impact Containers Private Limited &ors rendered in I TA No. 114 of 2012 and the decision of the Delhi High Court in thecase of CIT vs. AnkitechPvt Lt d reported in 340 ITR 14 (Del) and on interpreting Section 2(22)(e), in para 4 has observed and held as under: "4.Shri Bhatt, learned Counsel appearing on behalf of the revenue has as such tried to justify the decision of the Delhi Court in the case of Ankitech Pvt. Ltd. (Supra) and has vehemently submitted that the Delhi High Court has not considered the third category i.e. shareholder in the assessee Company holding not less than 10% of the voting power in the Company from whom the loan or advance is taken. However, on considering Section 2(22)(e) of the Act, we are not at all impressed with the aforesaid. If the contention on behalf of the revenue is accepted, in that case, it will be creating the third category / class, which is not permissible. What is provided under Section 2(22)(e) of the Act seems to be that the assessee company must be a shareholder in the Company from whom the loan or advance has been taken and should be holding not less than 10% of the voting power. It does not provide that any shareholder in the assessee- Company who had taken any loan

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 53

or advance from another Company in which such shareholder is also a shareholder having substantial interest, Section 2(22)(e) of the act may be applicable. 5.1. Considering the aforesaid decision of the Division Bench of this Court and the facts narrated herein above, more particularly,considering the fact that the assessee was not shareholder of Mahavir Rolling Mills Pvt Ltd to whom loan was given, it cannot be said that the learned Tribunal has committed any err or in deleting the addition made by the Assessing Officer on deemed dividend."

79.3 Coming to the case on hand admittedly the assessee company in not holding any shares or rights of M/s. Epsillion Marketing and Cons Pvt. Ltd. Thus considering the above discussion and judgment of Hon’ble court in case of Mahavir Inductomelt(Supra) the AO was not justified in invoking the provision of section 2(22)(e) of the Act in the present case. The learned CIT(A) rightly deleted the addition made by the AO.

79.4 In the result appeal of the Revenue is dismissed.

Coming to ITA No. 1751/Ahd/2017 an appeal of the assessee for A.Y. 2013-14:

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 54

considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 7. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s.234A/B/C of the Act. 8. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty u/s.271(l)(c) of the Act. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal. 81. The first issue raised by the assessee vide ground number 1 and 2 of its appeal is that the learned CIT (A) erred in sustaining the upward adjustment of � 49,88,829/- on account of interest free loan provided to AE.

85.1 In the result the appeal of the assessee is partly allowed.

ITA No.3492/Ahd/2015 and 5 others A.Y. 2010-11 55

Order pronounced in the Court on 12/04/2021at Ahmedabad.

Sd/- Sd/- (RAJPAL YADAV) (WASEEM AHMED) VICE PRESIDENT ACCOUNTANT MEMBER Ahmedabad; Dated 12/04/2021 TRUE COPY Manish/Tanmay आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad

Date of dictation : 25-03-2021 1. 2. Date on which the typed draft is placed before the Dictating Member 3. Date on which the approved draft comes to the Sr.P.S./P.S. - 4. Date on which the fair order is placed before the Dictating Member for Pronouncement ……………….. 5. Date on which the file goes to the Bench Clerk .. : 12-04-2021 6. Date on which the file goes to the Head Clerk……………………………. 7. The date on which the file goes to the Assistant Registrar for signature