ACIT, CIRCLE- 9(2), NEW DELHI vs. FRESENIUS KABI ONCOLOGY LTD., NEW DELHI

2. That on the facts and circumstances of the case and in law, the CIT(A) erred in not fully allowing set-off of brought forward business losses and unabsorbed depreciation against the income of the captioned assessment year under appeal.”

Taxable Business Income as 17,62,89,072 per revised return Add: Additions as discussed above On account of TPO 1,42,73,565 adjustments On account of disallowance of 36,209 ESI contribution for late deposit On account of treatment of 11,22,964 subsidy received On account of interest on 4,02,960 income tax refund On account of interest on 15,50,888 income tax refund On account of credits appearing in 26AS but not offered for taxation TOTAL 1,73,86,586 ADDITIONS Income from other sources 1,68,95,235 offered in revised ITR Total assessed income 21,05,70,893 Rounded off to 21,05,70,890 Book profit u/s 115JB of the 61,94,88,824 Act,

7. Aggrieved by the order of the CIT(A) dated 26/12/2017 as against the deletion on account of adjustment of Arm’s Length Price and on account of treatment of subsidy receipt, the Revenue has preferred the present . Further, as against disallowance of the deduction claimed u/s 80IC of the Act, the assessee has preferred C. O No. 17/Del/2021.

8.1. This issue has been already dealt by the Coordinate Bench of the Tribunal in assessee’s own cases for AY 2007-08 to 2010-11. In for A.Y 2007-08 (DCIT, Circle-11(1) New Delhi Vs. Fresenius Oncology Ltd.) vide order dated 03/10/2018 the Tribunal held as follows:-

“ 10.0 Coming to the department’s appeal for assessment year 2007-08, it is seen that the transfer pricing adjustment comprise of two limbs viz. corporate guarantee fee and interest on loan. As far as the issue of corporate bank guarantee is concerned, the issue arose because the assessee had failed to ITA No.3495/Del/2014 charge service fee for the corporate guarantee given to its UK subsidiary and the TPO, after obtaining information u/s 133(6) of the Act from State Bank of India regarding rate of bank guarantee, proposed the ALP adjustment at 4.75% as against nil being claimed by the assessee. It is well settled that providing bank guarantee is an international transaction and the same needs to be benchmarked as per provisions of Section 92(1) of the Act. The Ld. Commissioner of Income Tax (A) has also held so and thereafter he proceeded to compute the corporate guarantee fee @ 0.5%. While doing so, the Ld. Commissioner of Income Tax (A) observed that the assessee had given corporate guarantee to a foreign bank for providing loan to its foreign AE in foreign currency whereas the TPO had considered the quote for giving guarantee in India. The Ld. Commissioner of Income Tax (A) also took into account the fact that the assessee’s bank was ABN AMRO whereas the TPO had used the quote from the SBI. The Ld. Commissioner of Income Tax (A) thereafter placed reliance on the quote from Royal Bank of Scotland (RBS) (formerly ABN AMRO Bank) and held that there was a saving of 1% in this regard, the benefit of which was attributable both to the assessee ITA No.575/Del/2014 ITA No.3495/Del/2014 as well as the foreign AE. Thereafter by splitting the benefit between the two, the Ld.CIT (A) arrived at corporate bank fee of 0.5%. We agree with the observation of the Ld. Commissioner of Income Tax (A) that this letter from RBS Bank has more evidentiary value as it is from the very same bank which gave loan to Dabur UK. The Ld. Commissioner of Income Tax (A) has also recorded a finding that he has also examined the terms and conditions of the loan agreement dated 17.3.2006 between ABN AMRO Bank, Dabur UK and that Dabur UK has provided adequate security collaterals to the satisfaction of the Bank. The Ld. Commissioner of Income Tax (A) has also mentioned that the bank had the first charge on the assets of the borrower as security for the loan. The Department was not able to point out any factual infirmity in this categorical observation of the Ld. Commissioner of Income Tax (A). However, we do not fully agree with the findings of the Ld. Commissioner of Income Tax (A) in this regard that the benefit of interest saving of 1% should be shared between the AE and the assessee equally as no cogent reasoning has been given for the same and, accordingly, we deem it fit to modify the order of the Ld. Commissioner of Income Tax ITA No.3495/Del/2014 (A) in this regard to the extent that corporate guarantee fee @1% should be applied in the case of the assessee in place of 0.5% as has been applied by the Ld. Commissioner of Income Tax (A). We accordingly direct the Assessing Officer to re-compute the ALP for corporate guarantee fee @1%. Thus, this ground stands partly allowed.

10.1 Coming to the second limb of the transfer pricing adjustment which pertains to interest on loan, it is seen that the assessee had given loan to two foreign subsidiaries in UK and Thailand and had charged interest rate of LIBOR plus 1.1% and 7% respectively whereas the TPO had applied the interest rate at 14%. The reason for the TPO in applying interest rate of 14% was that since the assessee has chosen itself as the tested party, the rate to be applied was to be seen from the perspective of the tested party in the Indian bank and further for the reason that the loan advance of Dabur Thailand was from borrowed capital. While allowing relief to the assessee, the Ld. Commissioner of Income Tax (A) took into consideration the submission of the assessee that the loan advanced to the UK subsidiary was at ITA No.3495/Del/2014 LIBOR plus 1.1% and the loan taken by the UK subsidiary from ABM AMRO Bank was at LIBOR +1.5% with the corporate guarantee of the assessee and further the corporate guarantee loan was available to the UK subsidiary at LIBOR plus 1.5%. With respect to the loan to Dabur Thailand @7%, the Ld. Commissioner of Income Tax (A) was of the view that LIBOR plus 1.5% could be used as the basis for arriving at the ALP for the loan transaction. Accordingly, the Ld. Commissioner of Income Tax (A) held that interest of both the loans was to be charged at LIBOR plus1.5%. We also note that the Ld. DRP for immediately preceding assessment year 2006-07 has held that the foreign loan given to UK subsidiary was to be benchmarked at LIBOR plus 100 bps plus certain risk adjustment and accordingly, rate of LIBOR plus 300 bps was proposed by the Ld. DRP. Although the Ld. Commissioner of Income Tax (A) has duly made a mention of this direction of the Ld. DRP for assessment year 2006-07, it is apparent that he has not considered the directions of the Ld. DRP while deciding this issue. We also note that the assessee has not filed any appeal against this direction of the Ld. DRP for assessment year 2006-07. Accordingly, in view of the factual ITA No.575/Del/2014 ITA No.3495/Del/2014 matrix, this issue needs to be restored to the file of the Ld. Commissioner of Income Tax (A) to be decided afresh after considering the directions of the Ld. DRP in this regard in assessment year 2006-07 and after giving the assessee a proper opportunity present its case. Accordingly, this ground stands allowed for statistical purposes.”

8.2. Further, in for A.Y 2008-09 and ITA No. 6264/Del/2015 for A.Y 2009-10 (Asst. Commissioner of Income Tax Vs. Fresenius Oncology Ltd.) the Coordinate Bench of the Tribunal vide order dated 31/12/2018, wherein held as follows:-

“7. As regards to the issue relating to interest on the loan given to the associated enterprise, the ld. CIT(A) directed that the rate of interest charged for international transaction by the assessee at 7% was higher than the LIBOR PLUS 1.5% prevalent during the financial year 2007-08. He, therefore, directed the AO/TPO to delete the addition made in this regard. The relevant findings are given in para 6.6 of the impugned order which read as under:

Name of the AE to whom Currency Rate of Amount in Benchmarking in TP loan is given of Loan Interest INR Crores Study Dabur Oncology Plc, UK GBP 7% PA 143.35 Internal CUP @ (in short 'Dabur UK') 6.5%. Loan from Dabur Pharma (Thailand) THAI 7% PA 13.54 HSBC and ABN Amro Company Ltd., Thailand BHAT (PCFC) (in short 'Dabur Thailand') 156.89 The interest earned on the above loans is Rs 8,99,76,604/- The appellant has stated that the foreign loan given by the appellant was justified to be arm's length on the basis of internal CUP (availing loan from HSBC @6.50%PA) and complete details were provided to the TPO in the course of the assessment. However, the Fresenius Kabi Oncology Ltd. TPO disagreed with the approach of the appellant on the ground that while benchmarking the interest the appellant has not only taken the interest it is paying in India. The TPO has observed that in a situation when the Indian company has been chosen as the tested party, the comparables rates for benchmarking the interest have to be selected from the Indian domain and the rates charged by a third party to Dabur Oncology cannot be treated as CUP. The appellant has relied on different case laws and submitted that if internal CUP @ 6.5% based on loan from HSBC and ABN AMRO is not accepted, LIBOR Rates should be applied as a basis to benchmark the international transaction of loan in its case.

The appellant has relied on the Hon"ble Delhi ITAT in the case of Cotton Naturals (I) Pvt. Ltd. (supra) and argued that the rate charged for the international transaction of loan is 7% for the FY 2007-08 (AY 2008-09) which is higher than the external LIBOR Rates prevalent during the FY 2007-08 as per table below:

1-Month 3-Month 6-Month 12-Month LIBOR RATES-March 2008 2.8066% 2.7825% 2.6798% 2.5133% For AY 2007-08, the Ld CIT(A) XXIX has held as under:

".........I have also gone through various case laws relied upon by the appellant. It is noted that Hon'ble ITAT has laid down a principle that in case of foreign currency loan to a foreign subsidiary, domestic prime lending rate has no application and LIBOR comes into play.

10.5 Thus, I hold that, interest rate of 14% charged by the Ld. TPO is in contravention of the Rule 10(B)(2) and that interest for Dabur UK and Dabur Thailand shall be charged at LIBOR PLUS 1.5%. Accordingly, this ground is partly allowed in favour of the Appellant."

The appellant has relied on the decision of the Hon'ble Delhi ITAT in the case Cotton Naturals (supra) and other case laws wherein it has been held that LIBOR is the best measure for benchmarking loan to AE in respect of international transaction For AY 2007 08, the Ld CIT(A) XXIX has held that the interest Fresenius Kabi Oncology Ltd. rate of 14% charged by the TPO is in contravention of the Rule 10(B)(2) and that interest for Dabur UK and Dabur Thailand should be charged at LIBOR PLUS 1.5%. The facts of the present case are exactly similar to the facts as in AY 2007-08 The LIBOR RATE for F.Y 2007-08 was 2.5133%. In the instant case, the rate charged for the international transaction of loan is 7% for the FY 2007-08 (AY 2008-09) which is higher than LIBOR PLUS 1.5% prevalent during FY 2007-08 Respectfully following the decision of the Hon'ble Delhi ITAT in the case of Cotton Naturals (supra) and also the decision of the Ld CIT(A) XXIX for AY 2007-08, I hold that the interest charged by the appellant at 7% from its AEs, viz., (i) Dabur Oncology Pic, UK (in short 'Dabur UK") (ii) Dabur Pharma (Thailand) Company Ltd, Thailand (in short 'Dabur Thailand j satisfies the arm length principles. Accordingly, the AO/TPO is directed to delete the addition made in this regard. These grounds of appeal are allowed."

8. Now the department is in appeal. The ld. Counsel for the assessee at the very outset stated that this issue is covered by the earlier common order dated 03.10.2018 of this Bench of the ITAT in assessee's own case in & 3495/Del/2014 for the assessment years 2005-06 and 2007-08 respectively.”

8.3. Further, in for A.Y 2010-11 (ACIT, Circle -9 (2) Vs. Fresenius Oncology Ltd.) the Coordinate Bench of the Tribunal vide order dated 28/05/2019, wherein held as follows:-

“6. The Ld. AR submitted that Ground No. 1 is covered in favour of the assessee by Tribunal's order in Assessment Year 2008-09, 2009-10 being & 6264/Del/2015 order dated 31/12/2018. As regards Ground No. 2, the Ld. AR submitted that the investment in domestic bank was only 2.5 lakhs and total availability of assessee's own fund was approximately Rs. 2 crores. Thus, the CIT(A) has rightly directed the Assessing Officer to restrict the disallowance u/s 14A read with Rule 8D (3) being administrative cost. As regards Ground No.3, the Ld. AR submitted that the assessee has paid the ESI Contribution before the due date. Therefore, the CIT(A) has rightly deleted this addition.

"10.0 Coming to the department's appeal for assessment year 2007- 08, it is seen that the transfer pricing adjustment comprise of two limbs viz. corporate guarantee fee and interest on loan. As far as the issue of corporate bank guarantee is concerned, the issue arose because the assessee had failed to 32 charge service fee for the corporate guarantee given to its UK subsidiary and the TPO, after obtaining information u/s 133(6) of the Act from State Bank of India regarding rate of bank guarantee, proposed the ALP adjustment at 4.75% as against nil being claimed by the assessee. It is well settled that providing bank guarantee is an international transaction and the same needs to be benchmarked as per provisions of Section 92(1) of the Act. The Ld. Commissioner of Income Tax (A) has also held so and thereafter he proceeded to compute the corporate guarantee fee @ 0.5%. While doing so, the Ld. Commissioner of Income Tax (A) observed that the assessee had given corporate guarantee to a foreign bank for providing loan to its foreign AE in foreign currency whereas the TPO had considered the quote for giving guarantee in India. The Ld.

Commissioner of Income Tax (A) also took into account the fact that the assessee's bank was ABN AMRO whereas the TPO had used the quote from the SBI. The Ld. Commissioner of Income Tax (A) thereafter placed reliance on the quote from Royal Bank of Scotland (RBS) (formerly ABN AMRO Bank) and held that there was a saving of 1% in this regard, the benefit of which was attributable both to the assessee as well as the foreign AE. Thereafter by splitting the benefit between the two, the Ld.CIT (A) arrived at corporate bank fee of 0.5%. We agree with the observation of the Ld. Commissioner of Income Tax (A) that this letter from RBS Bank has more evidentiary value as it is from the very same bank which gave loan to Dabur UK. The Ld. Commissioner of Income Tax (A) has also recorded a finding that he has also examined the terms and conditions of the loan agreement dated 17.3.2006 between ABN AMRO Bank, Dabur UK and that Dabur UK has provided adequate security collaterals to the satisfaction of the Bank. The Ld. Commissioner of Income Tax (A) has also mentioned that the bank had the first charge on the assets of the borrower as security for the loan. The Department was not able to point out any factual infirmity in this categorical observation of the Ld. Commissioner of Income Tax (A). However, we do not fully agree with the findings of the Ld. Commissioner of Income Tax (A) in this regard that the benefit of interest saving of 1% should be shared Fresenius Kabi Oncology Ltd. between the AE and the assessee equally as no cogent reasoning has been given for the same and, accordingly, we deem it fit to modify the order of the Ld. Commissioner of Income Tax (A) in this regard to the extent that corporate guarantee fee @1% should be applied in the case of the assessee in place of 0.5% as has been applied by the Ld. Commissioner of Income Tax (A). We accordingly direct the Assessing Officer to re-compute the ALP for corporate guarantee fee @1%. Thus, this ground stands partly allowed.

10.1 Coming to the second limb of the transfer pricing adjustment which pertains to interest on loan, it is seen that the assessee had given loan to two foreign subsidiaries in UK and Thailand and had charged interest rate of LIBOR plus 1.1% and 7% respectively whereas the TPO had applied the interest rate at 14%. The reason for the TPO in applying interest rate of 14% was that since the assessee has chosen itself as the tested party, the rate to be applied was to be seen from the perspective of the tested party in the Indian bank and further for the reason that the loan advance of Dabur Thailand was from borrowed capital. While allowing relief to the assessee, the Ld. Commissioner of Income Tax (A) took into consideration the submission of the assessee that the loan advanced to the UK subsidiary was at LIBOR plus 1.1% and the loan taken by the UK subsidiary from ABM AMRO Bank was at LIBOR +1.5% with the corporate guarantee of the assessee and further the corporate guarantee loan was available to the UK subsidiary at LIBOR plus 1.5%. With respect to the loan to Dabur Thailand @7%, the Ld. Commissioner of Income Tax (A) was of the view that LIBOR plus 1.5% could be used as the basis for arriving at the ALP for the loan transaction. Accordingly, the Ld. Commissioner of Income Tax (A) held that interest of both the loans was to be charged at LIBOR plus1.5%. We also note that the Ld. DRP for immediately preceding assessment year 2006-07 has held that the foreign loan given to UK subsidiary was to be benchmarked at LIBOR plus 100 bps plus certain risk adjustment and accordingly, rate of LIBOR plus 300 bps was proposed by the Ld. DRP. Although the Ld. Commissioner of Income Tax (A) has duly made a mention of this direction of the Ld. DRP for assessment year 2006-07, it is apparent that he has not considered the directions of the Ld. DRP while deciding this issue. We also note that the assessee has not filed any appeal against this direction of the Ld. DRP for assessment year 2006-07. Accordingly, in view of the factual matrix, this issue needs to be restored to the file of the Ld. Commissioner of Income Tax (A) to be decided afresh after Fresenius Kabi Oncology Ltd. considering the directions of the Ld. DRP in this regard in assessment year 2006-07 and after giving the assessee a proper opportunity present its case. Accordingly, this ground stands allowed for statistical purposes."

8.4. In view of the above orders of the Tribunal, we inclined to restore the issue to the file of Ld. CIT(A) to decide afresh after considering the directions of Ld. DRP in this regard after giving assessee a proper opportunity of being heard. Accordingly the Ground No. 1 is allowed for statistical purpose.

9.1. After hearing both the parties, we are of the opinion that this issue was dealt by the Tribunal in assessee’s own case for AY 2007-08 in (DCIT, Circle-11 (1), New Delhi Vs. Fresenius Kabi Oncology Ltd.) vide order dated 03/10/2018 wherein held as follows:-

“10.2 Coming to the remaining issue which is the deletion of disallowance of Rs 20,92,221/- pertaining to capital subsidy, it is at the assessee had, in terms of West Bengal Incentive Scheme 2000, expanded its existing industrial unit at Kalyani, West Bengal and was accordingly eligible for a state investment subsidy of Rs. 1.50 crore in terms of the West Bengal industrial policy. This payment was received on 23.09.2006 and the assessee credited the same to its capital reserve account treating the same as capital receipt. However, the Assessing Officer treated the same as revenue receipt and reduced the same from the fixed cost of assets and, thereafter allowed depreciation post the offset of subsidy. The Ld. Commissioner of Income Tax (A) /has noted that he has examined the documents relating to West Bengal Incentive Scheme, 2000 and that further this subsidy is a one-time receipt. It has also been mentioned that nowhere on the perusal of the documents it was found that the subsidy was to be related to the reduction of the cost of fixed assets and, further the recipient of the subsidy was free to use the subsidy in any manner. We find that an identical issue had arisen before the Kolkata Bench of the ITAT in Bhagwati Sponge (P) Ltd. vs. DCIT reported in (2016) 72 taxmann.com 40 (Kolkata -Trib.) and the co-ordinate Bench held that the capital investment subsidy received from state government could not be reduced from the cost of capital asset for allowing depreciation. Accordingly, respectfully following the order of the co- ordinate Bench as aforesaid, we find no reason to interfere with the findings of the Ld. Commissioner of Income Tax (A) on this issue and we dismiss the grounds raised by the department in this regard.

9.2. Further in for A.Y 2008-09 and ITA No. 6264/Del/2015 A.Y 2009-10 (Asstt. Commissioner of Income Tax, Circle -9 (2), New Delhi Vs. Fresenius Kabi Oncology Ltd.) the Coordinate Bench of the Tribunal, vide order dated 31/12/2018 wherein held as follows:-

“13. The fact related to this issue in brief are that the assessee received a capital subsidy of Rs.1.50 crore under West Bengal Incentive Scheme, 2000 as part of interest fixed asset. The AO reduced the cost of the fixed assets by the capital subsidy and consequently reduced depreciation by Rs.17,94,174/-.

8.4 I have carefully considered the facts of the case. The issue whether subsidy of Rs.1.50 crores received by the appellant in FY 2006-07 is revenue or capital has already been decided by the Ld. CIT(A)-XXIX in AY 2007-08 in favour of the appellant. In AY 2007- 08 the Ld. CIT(A) has held that subsidy received by the appellant is in nature of capital receipt and it would not go to reduce cost of acquisition of fixed assets. In view of it, the AO is directed to delete the disallowance of depreciation of Rs.17,94,174/- in this regard. These grounds of appeal are allowed.

15. Now the department is in appeal. The ld. Counsel for the assessee at the very outset sated that this issue is squarely covered by the earlier order dated 03.10.2018 in & 3495/Del/2014 (supra).

10.2 Coming to the remaining issue which is the deletion of disallowance of Rs 20,92,221/- pertaining to capital subsidy, it is seen that the assessee had, in terms of West Bengal Incentive Scheme 2000, expanded its existing industrial unit at Kalyani, West Bengal and was accordingly eligible for a state investment subsidy of Rs. 1.50 crore in terms of the West Bengal industrial policy. This payment was received on 23.09.2006 and the assessee credited the same to its capital reserve account treating the same as capital receipt. However, the Assessing Officer treated the same as revenue receipt and reduced the same from the fixed cost of assets and, thereafter allowed depreciation post the offset of subsidy. The Ld. Commissioner of Income Tax (A) has noted that he has examined the documents relating to West Bengal Incentive Scheme, 2000 and that further this subsidy is a one-time receipt. It has also been mentioned that nowhere on the perusal of the documents it was found that the subsidy was to be related to the reduction of the cost of fixed assets and, further the recipient of the subsidy was free to use the subsidy in any manner. We find that an identical issue had arisen before the Kolkata Bench of the ITAT in Bhagwati Sponge (P) Ltd. vs. DCIT reported in (2016) 72 taxmann.com 40 (Kolkata - Trib.) and the co-ordinate Bench held that the capital investment subsidy received from state government could not be reduced from the cost of capital asset for allowing depreciation. Accordingly, respectfully following the order of the Fresenius Kabi Oncology Ltd. co-ordinate Bench as afore said, we find no reason to interfere with the findings of the Ld. Commissioner of Income Tax (A) on this issue and we dismiss the grounds raised by the department in this regard.

9.3. Therefore, respectfully following the above orders of the Coordinate Bench of this Tribunal, we dismissed the Ground No. 2 raised by the Department in this appeal.

C.O. No. 17/DEL/2021

14. Per contra, the Ld. DR submitted that, the claim of the assessee is contrary to Section 80AB & Section 80AC of the Act, the Ld. AR by relying on the findings and the conclusions of the AO and CIT(A), submitted that, this Tribunal need not interfere with the findings of the AO and CIT(A) in respect of denying the deduction claimed by the assessee u/s 80IC of the Act.

16. The Ground No. 2 is in respect of not fully disallowing the set of brought forward business losses and unabsorbed depreciation against the income of assessment year 2011-12.

17. During the year under consideration, the assessee brought forward business losses and unabsorbed depreciation amounting to Rs. 20,74,74,599/- and adjusted the same with a taxable income of the current assessment year in following manners:

Particular Business Income Other Sources Amount of taxable income Rs. 17,62,89,072/- Rs. 4,80,80,763/- Less: Set-off of brought forward (Rs. 17,62,89,072/- (Rs. 3,11,85,527/- losses and unabsorbed depreciation Net income Rs. NIL Rs. 1,68,95,236/- The Assessing Officer has disallowed the aforesaid set off brought forward losses and unabsorbed depreciation, on the ground that the additions made in the A.Y 2009-10 amounting to Rs. 18,88,18,052/- and in the assessment order for A.Y 2010-11 amounting to Rs. 5,77,27,695/- , need to be set off with brought forward business losses and unabsorbed depreciation. Accordingly, the Assessing Officer did not allowed set off brought forward business losses and unabsorbed depreciation as claimed by the assessee. The Ld. Counsel for the assessee contended that, the additions made in the Assessment Year 2009-10 and 2010- 11 have already been deleted by CIT(A), which has been confirmed by the Tribunal in (A.Y 2009-10) dated 31/12/2018 and ITA No. 1906/Del/2016 (A.Y 2010-11) dated 28/05/2019, therefore, the amount of brought forward business losses and unabsorbed depreciation as claimed by the appellant in the return of income shall be upheld.

18. The Ld. DR submitted that, the order of the AO and the CIT(A) are very well reasoned and requires no interference by the Tribunal and relied on the findings and conclusions of the AO and the CIT(A).