THE ACIT, CIRCLE-2(1)(1), AHMEDABAD vs. M/S. INTAS PHARMACEUTICALS LTD., AHMEDABAD

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A). The learned CIT(A), vide order dated 04.08.2021, partly allowed the appeal by granting relief on some issues while confirming the balance additions/disallowances made by the AO.

We shall first take up the appeal filed by the assessee for adjudication. The assessee has raised various grounds of appeal challenging the order passed by the CIT(A). The principal issues raised in the assessee’s appeal pertain to transfer pricing adjustments on interest on advances to associated enterprises, transfer pricing adjustment on notional interest on outstanding receivables, disallowance of weighted deduction under section 35(2AB), and an additional legal ground regarding allowability of deduction for education cess under section 40(a)(ii) of the Act. We shall now proceed to adjudicate the assessee’s appeal issue-wise as under.

The assessee had during the year under consideration advanced loans to its Associated Enterprises (AEs) in foreign currency aggregating Rs.5,85,87,394/-. These advances were made to five AEs across different jurisdictions and were uniformly charged interest at the rate of 3.22%, determined on the basis of an internal CUP, i.e., a loan quotation obtained from Bank of Nova Scotia, Singapore at 6-month USD LIBOR + 2.60%. The assessee contended that the advances were made for commercial expediency, namely for facilitating product registration, marketing, and distribution infrastructure in foreign jurisdictions where the AEs were responsible for securing necessary regulatory approvals to market the assessee’s products. The advances were thus stated to be intrinsically linked to the assessee’s core business operations and adequately compensated through the rate charged. The TPO, however, held that the benchmarking using a single internal CUP across AEs situated in different jurisdictions was not appropriate. The TPO also held that the assessee’s benchmarking lacked a geographical and economic comparability analysis. The TPO observed that external Comparable Uncontrolled Price (CUP) using "Loan Connector" database, filtered for borrower region, tenor, unsecured status, and purpose (working capital), yielded higher ALP interest rates for certain AEs. Additionally, the TPO made an ad hoc addition of 100 basis points to cover forex and country risk, leading to an upward adjustment of Rs.53,93,893/-.

The Ld. CIT(A) in the current assessment year upheld the TPO’s adjustment of Rs.53,93,893/- on account of undercharging of interest on loans to AEs. In doing so, the CIT(A) primarily relied on the decisions rendered in the assessee's own case for Assessment Years (AY) 2013–14 and 2014–15, where similar issues were adjudicated. In those earlier years, the CIT(A) had rejected the assessee's benchmarking approach, which was based on an internal CUP method using a quotation from Bank of Nova Scotia, Singapore. The CIT(A) held that the quotation did not constitute a valid internal CUP, as it was not a binding commitment or an actual transaction. Furthermore, the CIT(A) accepted the TPO's application of an external CUP method, which included a forex risk adjustment of 100 basis points, considering the funds were advanced from India and repayments were subject to foreign exchange fluctuations. The CIT(A) also referred reliance of AO on the decision in Perot Systems TSI (India) Ltd. v. DCIT [37 SOT 358 (Del)], which emphasized that all international transactions with AEs must be benchmarked at Arm's Length Price (ALP), regardless of the commercial expediency claimed by the assessee.

The Authorised Representative (AR) of the assessee stated that the issue is covered by the decision of Co-ordinate Bench in assessee’s own case for the A.Y. 2013-14 (ITA No. 400/Ahd/2028). The AR took us through the operative part of the said decision.

We have carefully considered the rival submissions, the findings of the lower authorities, and the material placed on record. It is pertinent to note that the issue involved stands squarely covered in favour of the assessee by the decision of the Coordinate Bench in assessee’s own case for Assessment Year 2013–14, in order dated 31.10.2023. In the said decision, after considering similar facts and identical contentions, the Bench held that the internal CUP adopted by the assessee, based on the quotation received from Bank of Nova Scotia, Singapore, constituted a valid and authentic comparable. The Bench observed that the quotation, although not a public domain publication, was obtained from an internationally reputed financial institution and there was no material brought on record by the Revenue to doubt its authenticity. The Bench further held that merely because the quotation was not a public domain document, it could not be disregarded for benchmarking purposes. Distinguishing the reliance placed by the CIT(A) on the decision of the Hon’ble Gujarat High Court in CIT v. Adani Wilmar Ltd. (363 ITR 338), the Bench observed that what is relevant is the authenticity of the document and not necessarily its public domain status. Accordingly, the Bench accepted the assessee’s internal CUP benchmarking and rejected the external CUPs relied upon by the TPO. It was further held that no ad-hoc addition of 100 basis points towards forex risk was warranted, as there was no evidence of significant forex risk affecting the assessee's transactions. Following the binding precedent laid down by the Coordinate Bench in assessee’s own case for Assessment Year 2013–14 (supra), and there being no distinguishing facts brought on record for the year under consideration, we respectfully apply the same ratio to the present case. Consequently, we hold that the benchmarking done by the assessee based on internal CUP is valid, and the adjustment of Rs.53,93,893/- made by the TPO and confirmed by the CIT(A) on account of alleged undercharging of interest on advances to AEs is unsustainable. We accordingly direct the deletion of the addition of Rs.53,93,893/-.

The next issue arising for our consideration pertains to the transfer pricing adjustment made by imputing notional interest on delayed realization of export proceeds from AEs, resulting in an addition of Rs.14,64,47,827/-.

During the year under consideration, the assessee exported pharmaceutical products to its AEs. In the transfer pricing study, the assessee benchmarked the international transactions relating to sale of finished goods using the Transaction Net Margin Method (TNMM), which was accepted by the TPO in principle. However, the TPO separately benchmarked the delay in realization of trade receivables and treated the outstanding balances beyond 180 days as a deemed loan extended to the AEs. Accordingly, the TPO imputed notional interest income by applying LIBOR plus margin, along with an additional 100 basis points for forex risk, resulting in an upward adjustment of Rs.14,64,47,827/-. The assessee contended that receivables are closely linked to the primary international transaction (sale of goods) and are not independent international transactions under section 92B of the Act and the TNMM already benchmarks the net profit margins considering the level of working capital employed, which subsumes the impact of receivables. Therefore, no separate adjustment for receivables is warranted when working capital adjustment is already factored. The assessee also stated that the assessee does not charge interest on delayed realization from either AEs or non-AEs, following a uniform policy. The CIT(A), however, confirmed the adjustment made by the TPO/AO, holding that delayed receivables from AEs constituted a separate international transaction requiring separate benchmarking. While doing so the CIT(A) relied on the decision of CIT(A) in assessee’s own case in earlier years and the CIT(A) also noted that the matter is pending before the Tribunal.

The Authorised Representative (AR) of the assessee stated that the issue is covered by the decision of Co-ordinate Bench in assessee’s own case for the A.Y. 2013-14 (ITA No. 400/Ahd/2028). The AR took us through the operative part of the said decision.

The learned DR strongly supported the findings of the Assessing Officer and the TPO as upheld by the CIT(A). It was contended by the learned DR that the prolonged credit period granted to AEs amounts to providing them an unsecured loan or financing facility, which requires independent benchmarking under Chapter X of the Act.

We have carefully considered the rival submissions, perused the orders of the authorities below, and duly examined the material available on record.

The issue relates to the transfer pricing adjustment made by the TPO and confirmed by the CIT(A) by imputing notional interest on receivables outstanding from AEs beyond a credit period of 180 days, resulting in an upward adjustment of Rs.14,64,47,827/-. It is not disputed that the assessee had benchmarked its international transactions of export of finished goods to AEs under the TNMM, and that working capital adjustment had been undertaken while computing the Profit Level Indicator (PLI). The assessee contended that the receivables are incidental and intrinsically linked to the primary international transaction of sale of goods. The assessee also stated that the working capital adjustment duly captures the impact of credit terms, and therefore, a separate adjustment on outstanding receivables would lead to double taxation and the assessee maintained a uniform policy of not charging interest on delayed payments from both AEs and non-AEs. In assessee’s own case for Assessment Year 2013–14 (ITA No. 400/Ahd/2018), the Coordinate Bench has categorically held that where TNMM has been applied and working capital adjustment has been given while benchmarking the main international transaction, no separate upward adjustment is warranted for notional interest on outstanding receivables. The Bench relied upon the decision of the Hon'ble Delhi High Court in Pr. CIT v. Kusum Healthcare Pvt. Ltd. [(2017) 398 ITR 66 (Del)], where it was held that once working capital adjustment is made under TNMM, no separate addition for outstanding receivables is justified. The Bench rejected the reliance placed by the Revenue on the earlier ITAT rulings (such as Bechtel India Pvt. Ltd. and Ameriprise India Pvt. Ltd.) which were rendered prior to Kusum Healthcare’s decision. It was specifically noted that the DR in that case could not show any distinguishing facts nor cite any contrary High Court or Supreme Court decision. In the present case also, it is not in dispute that the assessee applied TNMM for benchmarking the sale transactions, working capital adjustment was made to the profit level indicator (PLI) and no contrary decision has been cited by the DR. It was also noted that the assessee submitted the documentary evidence before lower authorities relating to instances of transactions with non-AEs of not charging interest on late realisations of receivables.

In view of the foregoing and respectfully following the decision of the Coordinate Bench in assessee’s own case for A.Y. 2013-14 (supra), we hold that the receivables are merely an extension of the main international transaction of sale of goods and do not constitute a separate international transaction warranting independent adjustment. We, therefore, direct deletion of the addition of Rs. 14,64,47,827/- made towards notional interest on delayed receivables from AEs.

The Assessing Officer noted that the assessee had claimed weighted deduction under section 35(2AB) of the Act amounting to Rs.399,01,05,709/-, comprising Rs.6,30,74,642/- towards capital expenditure and Rs.199,50,52,854/- towards revenue expenditure. However, upon verification of Form 3CL issued by the DSIR, it was noticed that only Rs. 134,40,71,603/- of the revenue expenditure was approved by the DSIR for weighted deduction purposes. Consequently, the Assessing Officer proposed to disallow the balance revenue expenditure of Rs.65,09,81,251/- not approved by the DSIR, which included Rs.53,84,83,069/- towards clinical trials incurred outside the in-house R&D facility, Rs. 9,69,28,906/- towards exhibit batches taken in the plant area, Rs.21,91,031/- towards certain other revenue expenses, and Rs.1,33,78,245/- pertaining to expenses of erstwhile Celestial Ltd. incurred prior to 18.12.2014. The AO issued a show cause notice requiring the assessee to explain why the disallowance should not be made for these items not forming part of the DSIR certification. In response, the assessee contended that it maintained separate books for its R&D facilities approved by the DSIR and that the entire expenditure pertained to in-house scientific research eligible for deduction. Detailed justifications were also furnished explaining the regulatory necessity and the scientific nature of clinical trials and exhibit batches. However, the AO was not satisfied and proceeded to disallow the amount of Rs.65,09,81,251/- on the ground that the deduction under section 35(2AB) was allowable only to the extent of the expenditure approved and quantified by the DSIR in Form 3CL. In doing so, the AO also placed reliance on the assessment orders passed in earlier years, as noted in para 27.4 of the order, wherein similar claims of the assessee for expenses not approved by DSIR had been disallowed. Since no fresh facts or changes were brought to justify a different view, the AO held that consistency warranted the disallowance in the present year as well.

The learned CIT(A) noted that the Assessing Officer disallowed the claim of deduction under section 35(2AB) of the Act to the extent of Rs.56,64,29,291/-, holding that the Department of Scientific and Industrial Research (DSIR) had not approved such expenditure in Form No. 3CL. The details of the expenditure, amounting to Rs.56,64,29,291/-, so disallowed by the Assessing Officer are as under:

Before the CIT(A) the assessee submitted that the disallowance of expenditure incurred on clinical trials outside the factory was contrary to settled judicial position. It was contended that the DSIR is only required to approve the in-house research and development facility, and not to quantify each item of expenditure incurred. Reliance was placed on the decisions of the Co-ordinate Bench in the assessee’s own cases for A.Ys. 2002-03, 2004- 05, and 2008-09, as well as CIT(A)’s decisions for A.Ys. 2007-08 to 2013- 14, wherein the claim in respect of clinical trial expenses had been consistently allowed. With respect to other disallowed expenses, it was submitted that the assessee had duly obtained approval for its in-house R&D units, and that the DSIR’s certification was not conclusive in restricting the claim of deduction under section 35(2AB), particularly when the expenditure was otherwise connected with approved research activities. The assessee also relied on several binding judicial precedents. The CIT(A) accepted the assessee’s contention insofar as clinical trial expenses were concerned. Following the binding precedents, including the decision of the jurisdictional ITAT in the assessee’s own case, the CIT(A) allowed the claim of deduction under section 35(2AB) in respect of clinical trial expenses to the extent of Rs.45,21,26,793/-. However, the CIT(A) upheld the disallowance of Rs.9,69,28,906/- relating to exhibit batches taken in the plant area and Rs.21,91,031/- towards other expenses, observing that the claim was not supported by DSIR certification and pertained to expenditure not carried out within the approved R&D facility. In respect of claim for revenue expenses aggregating Rs. 1,33,78,245/- incurred by the erstwhile Celestial Biologicals Ltd., the CIT(A) noted that the claim was not approved in Form No. 3CL and had not been allowed in earlier years as well. Therefore, for consistency, the disallowance of the said amount was also confirmed. Accordingly, the CIT(A) granted relief to the assessee to the extent of Rs.53,84,83,069/- and sustained the disallowance of Rs.11,24,98,182/-, thereby partly allowing the appeal of the assessee.

Aggrieved by the order of the learned CIT(A) to the extent it sustained the disallowance of Rs.11,24,98,182/-, the assessee is in appeal before us.

The learned AR, reiterating the submissions made before the lower authorities, contended that the entire expenditure disallowed by the Assessing Officer and sustained by the CIT(A) was incurred wholly and exclusively for the purpose of scientific research carried out in connection with the assessee’s in-house R&D facilities duly approved by the Department of Scientific and Industrial Research (DSIR) under section 35(2AB) of the Act. The AR strongly relied on the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013-14 and A.Y. 2014-15, in order dated 31.10.2023, wherein under identical facts, the Tribunal had allowed similar claims of deduction under section 35(2AB). The AR submitted that the expenditure on exhibit batches was incurred in the course of regulatory compliance and validation processes required by international drug regulators and was an integral part of R&D activities, as held in earlier years by both the CIT(A) and the Tribunal. Similarly, the other revenue expenses, including salaries of R&D personnel and legal and professional charges, were necessary and incidental to the functioning of the R&D facility. As regards the expenditure incurred by erstwhile Celestial Biologicals Ltd., it was submitted that the DSIR had approved the R&D facility and recognized the amalgamation with the assessee company. The AR submitted that merely because DSIR had not issued a separate Form 3CL for the period prior to 18.12.2014, the deduction cannot be denied when the scientific research activities were carried on in a DSIR-recognized facility.

We have carefully considered the rival submissions and perused the material placed on record. The issue involved in this ground relates to the disallowance of weighted deduction under section 35(2AB) of the Act to the extent of Rs.11,24,98,182/-, which comprises of disallowance in respect of expenditure on exhibit batches taken in the plant area, salary and expenses of Celestial Biologicals Ltd., and certain other overheads. The Assessing Officer had restricted the claim of the assessee to the amount certified by the Department of Scientific and Industrial Research (DSIR) in Form 3CL, and disallowed the balance, holding that such balance had not been approved by the prescribed authority. The learned CIT(A) partly allowed the assessee’s claim, granting relief in respect of clinical trial expenses, following the appellate orders for earlier years from A.Y. 2007–08 onwards, but upheld the disallowance of the remaining components on the ground that they were not approved by DSIR in Form 3CL.

Before us, the learned Authorised Representative has reiterated that the DSIR’s role under section 35(2AB), prior to the amendment of Rule 6(7A) with effect from 01.07.2016, was limited to approval of the in-house R&D facility, and not the quantification or approval of each item of expenditure. It was further submitted that the entire expenditure incurred was in the course of scientific research, carried out in duly approved in-house R&D units, and the same cannot be disallowed merely for want of reflection in Form 3CL. Reliance was placed on the decisions of the Coordinate Bench in assessee’s own case for A.Ys. 2013–14 and 2014–15 in as well as on the decisions of the Hon’ble Gujarat High Court in Claris Lifesciences Ltd. [(2010) 326 ITR 251 (Guj)] and Cadila Healthcare Ltd. [(2013) 31 taxmann.com 300 (Guj)].

In the said decision in assessee’s own case, the Co-ordinate Bench has extensively examined the scope of DSIR’s authority, the applicability of Rule 6(7A), and the evidentiary value of Form 3CL. It has been held that the Form 3CL merely reflects intimation of cost of in-house R&D facility to the Income Tax Department and is not a statutory approval of allowable expenditure. It has also been held that in the absence of any statutory requirement for the DSIR to quantify or approve each expense prior to 01.07.2016, the claim of weighted deduction under section 35(2AB) cannot be restricted to the amount mentioned in Form 3CL. This view stands fortified by judicial precedents cited above.

On merits, we also find that the nature of disallowed expenditure has been explained by the assessee to be integrally related to scientific research. The expenditure on exhibit batches was incurred for the purpose of regulatory filings and validation studies essential for commercialisation and has been consistently held to be eligible in earlier years. The other expenses amounting to Rs.1,33,78,245/- pertained to expenditure incurred by erstwhile Celestial Biologicals Ltd., which had merged with the assessee company w.e.f. 1.4.2012 as its in house R and D Centre. This clam was made on the basis of recognition issued by the DSIR to erstwhile Celestial Biologicals Ltd. for the period of three years from 1.4.2013. The Co-ordinate Bench, in its order for A.Y. 2013–14, has already accepted such claims as allowable u/s 35(2AB), following the decision of the Hyderabad Bench in Dr. Reddy’s Laboratories Ltd. [ITA No. 2229/Hyd/2011].

Respectfully following the decision of the Coordinate Bench in assessee’s own case (supra), and the binding precedents of the Hon’ble jurisdictional High Court, we hold that the expenditure disallowed by the Assessing Officer and confirmed by the CIT(A) is eligible for weighted deduction under section 35(2AB) of the Act. The disallowance of Rs.11,24,98,182/- is, therefore, directed to be deleted.

Ground No. 3 raised by the assessee relates to a general allegation that the lower authorities failed to properly consider the facts and submissions made during the course of proceedings. Ground No. 4 challenges the initiation of penalty proceedings under section 271(1)(c) of the Act. Having considered the record, we find that both the assessment order and the appellate order are reasoned and speak to the issues raised by the assessee. No specific instance has been pointed out to demonstrate any material submission having been overlooked. As regards Ground No. 4, it is well settled that initiation of penalty proceedings is not appealable at the stage of quantum proceedings unless the penalty order is passed. The ground is thus premature. Accordingly, both grounds are dismissed.

We now proceed to deal with the grounds in appeal No. ITA 281/Ahd/2021 filed by the Revenue for the assessment year under consideration.

Under this main ground the revenue has raised multiple grounds challenging the action of the CIT(A) in deleting the disallowance of depreciation on goodwill arising pursuant to amalgamation. It is contended that the goodwill was not existing in the books of the amalgamating company and was artificially created in the books of the amalgamated company, and hence, no depreciation was allowable under section 32(1)(ii). The Revenue further argues that the actual cost of such goodwill should be treated as nil in view of Explanation 7 to section 43(1) and Explanation 2 to section 43(6), and that the assessee’s method of allocation lacked identifiable assets or commercial rights. Reliance is also placed on various statutory provisions governing amalgamation, including sections 2(1B), 32(1), 43(1), and 49. We proceed to examine the facts and the correctness of the order passed by the CIT(A) in light of the submissions and applicable legal position.

During the course of assessment proceedings, the Assessing Officer noted that the assessee-company had claimed depreciation of Rs.227,92,50,000/- at the rate of 25% on goodwill amounting to Rs.9,11,70,00,000/- in its return of income for the year under consideration. The goodwill in question had arisen pursuant to the amalgamation of Intas Life Sciences Pvt. Ltd. (ILPL) with the assessee- company in terms of a scheme of amalgamation sanctioned by the Hon’ble Gujarat High Court. The AO observed that the said goodwill had been recorded only in the books of the amalgamated company and not in the books of the amalgamating company (ILPL) prior to amalgamation, and that the goodwill was not acquired by incurring any cost or through any identifiable business or commercial rights transferred in the process of amalgamation. It was further recorded that the goodwill was recognized in the books merely as the excess of purchase consideration (computed notionally by valuing equity shares issued) over the net book value of assets taken over from ILPL, and there was no evidence of acquisition of specific intangible assets such as brand value, know-how, or clientele that would support such goodwill.

The AO also referred to Explanation 7 to section 43(1) and Explanation 2 to section 43(6)(c), which provide that in case of a transfer of a capital asset in a scheme of amalgamation, the actual cost to the amalgamated company shall be the same as it would have been in the hands of the amalgamating company if the latter had continued to hold the asset. Since the goodwill was not in existence in the books of ILPL, its cost was taken to be NIL. The AO also placed reliance on the sixth proviso to section 32(1) (earlier fifth proviso), which restricts depreciation in the case of amalgamation to the amount that would have been allowable had the amalgamation not taken place. Thus, where the amalgamating company had claimed no depreciation on goodwill prior to amalgamation due to its non-existence, no depreciation could be claimed by the amalgamated company either.

The AO further noted that the transaction was between two entities belonging to the same group, with ILPL being 96% held by the assessee- company and the remaining 4% by its shareholders. The amalgamation was thus entirely within the group and the AO concluded that the goodwill was self-generated by mere revaluation and book entries, not supported by actual cash outflow or identifiable intangible assets. The AO also emphasized that the scheme was approved by the Hon’ble High Court with an express stipulation that it would be subject to the provisions of section 2(1B) of the Income Tax Act, and, in case of any inconsistency, the scheme would be read down to align with tax law. In this backdrop, the AO held that the assessee had artificially created goodwill and claimed depreciation with the objective of reducing its taxable income.

Further, it was noted that the goodwill so recorded in the books of the amalgamated company was allocated to its tax-exempt units at Dehradun and Sikkim, which were eligible for deduction under section 80-IC and 80- IE respectively. The AO observed that since the goodwill did not represent any new asset acquired or intangible right transferred in amalgamation, but only arose due to revaluation, the claim of depreciation on such goodwill, particularly when allocated to exempt units, amounted to indirect revaluation of existing assets. In conclusion, the AO held that the goodwill was not eligible for depreciation under section 32, and accordingly, disallowed the entire claim of Rs. 227,92,50,000/-, adding it back to the total income of the assessee.

During the appellate proceedings, the CIT(A) examined the issue relating to claim of depreciation on goodwill created on account of amalgamation in great detail. The CIT(A) noted that the Assessing Officer had disallowed the depreciation primarily on the ground that no cost was incurred for acquiring the goodwill and that the goodwill was not recorded in the books of the amalgamating company prior to amalgamation. The AO held that such goodwill arose merely on account of accounting adjustments and hence no depreciation was allowable under section 32 of the Act. The CIT(A), however, took note of the binding decision of the Hon’ble Supreme Court in the case of CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)] which held that goodwill qualifies as an intangible asset eligible for depreciation under clause (b) of Explanation 3 to section 32(1) of the Act.

The CIT(A) further referred to the statutory definition of “amalgamation” under section 2(1B) of the Act, which mandates that all properties and liabilities of the amalgamating company must vest in the amalgamated company, and shareholders of the amalgamating company must become shareholders of the amalgamated company to the extent of at least 75%. Reference was also made to Accounting Standard-14 issued by the ICAI, which permits recognition of goodwill in a purchase method of accounting where consideration paid exceeds the net assets acquired. In the instant case, it was found as a matter of fact that the assessee-company acquired all the assets and liabilities of its group company, ILPL, under a duly approved scheme of amalgamation sanctioned by the Hon’ble Gujarat High Court vide order dated 24.07.2015 (effective from 01.04.2014). In exchange for 90,000 shares of ILPL, the assessee issued 4.5 crore equity shares at a face value of Rs.10 and premium of Rs. 113.50 per share, thereby paying total consideration of Rs. 555.75 crore. Against this, the net book value of assets and liabilities acquired stood at Rs.87.01 crore, resulting in excess consideration of Rs. 486.73 crore, which was recognized as goodwill.

The CIT(A) also observed that the Income Tax Department had been invited to raise objections to the scheme of amalgamation under the mandatory notice requirements laid down under section 394A of the Companies Act, 1956, and Circular No. 1/2014 of the Ministry of Corporate Affairs. Despite such opportunity, the Department did not raise any objection either before the Hon’ble Gujarat High Court or the Regional Director, MCA. The scheme was sanctioned after due verification and satisfaction that it was not prejudicial to public interest. In support, reference was made of the decision of the Hon’ble Mumbai Bench of the NCLT in Ajanta Pharma Ltd. (CPS No.995 and 996/2017), where amalgamation was denied on objection from Revenue when facts suggested tax avoidance. In contrast, in the present case, no such objection was raised.

Further, the CIT(A) examined the AO’s allegation that the transaction was a colourable device. It was held that both amalgamating and amalgamated companies were distinct legal entities, separately registered and filing returns, and all disclosures regarding control and management, valuation, mode of payment and accounting treatment were made in the scheme approved by the High Court. The CIT(A) held that the AO had failed to discharge the onus of establishing that the transaction was colourable. It was noted that the purchase consideration was paid in the form of equity shares, which is an accepted mode of payment. The valuation was supported by a report of an approved valuer and no reference was made to the Departmental Valuation Officer by the AO to rebut the valuation.

The CIT(A) further noted that under section 32(1), depreciation is allowable on intangible assets, including “any other business or commercial rights of similar nature,” and that goodwill falls within this expression, as confirmed in Smifs Securities (supra). It was also noted that Explanation 3 to section 32(1) does not exclude goodwill, and that even if goodwill was not recorded in the books of the amalgamating company, what was relevant was the cost incurred by the amalgamated company in acquiring such business rights, which in the instant case was evidenced by excess consideration paid.

In support of the view, reliance was also placed on the decisions of Hon’ble Hyderabad ITAT in AP Paper Mills Ltd. v. ACIT [(2009) 128 TTJ 596 (Hyd)] and Hon’ble Delhi ITAT in Aricent Technologies (Holdings) Ltd. v. DCIT in dated 26.07.2019. The latter had reiterated that the actual cost of goodwill in the hands of the amalgamated company is the same as it would have been in the hands of the amalgamating company had it continued to hold the asset. However, the CIT(A) distinguished these by holding that in the present case, the assessee had paid a determinable purchase consideration over and above the net asset value, and hence, such excess was rightly capitalised as goodwill.

The CIT(A) then referred to the decision of Hon’ble Gujarat High Court in PCIT v. Zydus Wellness Ltd. [(2017) 87 taxmann.com 82], where depreciation on goodwill arising on amalgamation was held to be allowable following the ratio in Smifs Securities, and noted that the SLP filed by the Department against the same was dismissed by the Hon’ble Supreme Court. The CIT(A) held that the amendments made in Finance Act, 2021, to deny depreciation on goodwill with effect from 01.04.2021 were prospective in nature and not applicable to the assessment year under consideration.

The CIT(A) concluded that the assessee had incurred a determinable cost for acquiring the business on amalgamation, which resulted in recording of goodwill in its books of account, and that such goodwill qualifies as an intangible asset under section 32(1) of the Act. Accordingly, the CIT(A) directed the Assessing Officer to delete the entire disallowance of Rs.227,92,50,000/- made on account of depreciation on goodwill and allowed the related grounds of appeal in favour of the assessee.

During the course of hearing, the Ld. DR supported the findings of the Assessing Officer and submitted that the depreciation on goodwill claimed by the assessee was rightly disallowed in the assessment order. The DR submitted that the entire transaction was intra-group and lacked commercial substance, as the amalgamating company, ILPL, was wholly owned and controlled by the assessee-company. It was pointed out that there was no real cash outflow in the hands of the assessee and the goodwill recorded in the books was created merely by way of an accounting entry, unsupported by actual acquisition of any independent business or commercial rights. The DR further contended that the goodwill had been created as a result of the revaluation of assets through an arbitrary valuation method and not based on the Net Asset Value (NAV) method. It was argued that the valuation was artificially inflated and did not reflect the intrinsic worth of the business, especially in view of the fact that ILPL had no independent customer base and derived its entire revenue from the assessee alone. The DR submitted that there was no addition of brand value, no acquisition of new clients, and no market expansion as a result of the amalgamation. Therefore, the so-called goodwill did not represent any commercial or economic value transferred to the assessee. The DR placed reliance on the observations of the Assessing Officer at page 101 of the assessment order, wherein the AO had distinguished the facts of the present case from those in CIT v. Smifs Securities Ltd.(supra).

The Ld. AR relied primarily on the order passed by the Ld. CIT(A) and submitted that the depreciation claimed on goodwill amounting to Rs.227,92,50,000/- had been rightly allowed by the CIT(A) in accordance with law and settled judicial precedents. The AR submitted that the goodwill had arisen pursuant to a scheme of amalgamation between the assessee and its wholly owned subsidiary (ILPL), which was duly sanctioned by the Hon’ble Gujarat High Court under sections 391–394 of the Companies Act, 1956, with the appointed date being 01.04.2014. It was emphasised that the scheme of amalgamation was scrutinised by the Regional Director, Ministry of Corporate Affairs, who had invited comments from the Income Tax Department in terms of Circular No. 1/2014 dated 15.01.2014, and that no objection had been raised by the Department at the time of court proceedings.

The AR submitted that the goodwill arose as a result of amalgamation of ILPL with the assessee-company pursuant to the approved scheme sanctioned by the Hon’ble Gujarat High Court vide order dated 03.10.2015 with effect from 01.04.2014. Under the approved scheme, 3,07,692 equity shares of Rs. 10/- each were issued to the shareholders of ILPL, and the 48,00,000 shares of ILPL held by the assessee were cancelled. As a result of this amalgamation, the assessee acquired all the assets and liabilities of ILPL and accounted for the excess of consideration over the net book value of assets as goodwill in its books of account. The total goodwill so recognized amounted to Rs. 911.70 crore, out of which Rs. 301.14 crore was allocated to the Dehradun unit and Rs. 601.56 crore to the Sikkim unit. The AR submitted that the goodwill was recognized in accordance with the purchase method of accounting prescribed under Accounting Standard–14 (AS-14) issued by the ICAI. It was submitted that such goodwill represented a determinable cost arising on account of excess consideration paid over the book value of net assets acquired in a lawful amalgamation. The AR contended that the goodwill so recognized qualifies as an intangible asset within the meaning of Explanation 3(b) to section 32(1) of the Act, and therefore, depreciation claimed thereon is fully allowable in law.

In support of the allowability of depreciation, the AR placed reliance on the judgment of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], wherein it was held that goodwill is an intangible asset falling within the expression “any other business or commercial rights of similar nature” and is eligible for depreciation under section 32. The AR also referred to the judgment of the Hon’ble Gujarat High Court in PCIT v. Zydus Wellness Ltd. [(2017) 87 taxmann.com 82 (Guj)], wherein the High Court, following Smifs Securities Ltd., upheld the allowability of depreciation on goodwill arising from amalgamation. It was also pointed out that the Special Leave Petition filed by the Revenue in the said case had been dismissed by the Hon’ble Supreme Court, thereby settling the issue in favour of the assessee. During the course of hearing before us the AR also placed reliance on the decision of Co-ordinate Bench in case of Suzlon Energy Ltd. Vs. DCIT, Circle 4(1)(1), Ahmedabad (ITA no. 198 & 199/Ahd/2023 dated 12.11.2024).

We have carefully considered the rival submissions, perused the orders of the lower authorities, the scheme of amalgamation sanctioned by the Hon’ble Gujarat High Court, and the judicial precedents relied upon by both parties. We have also carefully perused the order of the Ld. CIT(A). The CIT(A) has recorded a detailed and reasoned finding that the goodwill of Rs. 911.70 crore arose due to excess of consideration over the net book value of assets and liabilities taken over by the assessee pursuant to a scheme of amalgamation sanctioned by the Hon’ble Gujarat High Court. It is not in dispute that the scheme was scrutinized by the Regional Director, Ministry of Corporate Affairs, and the Income Tax Department was duly invited to submit objections in accordance with General Circular No. 1/2014 dated 15.01.2014, read with section 394A of the Companies Act, 1956. The Department, however, did not raise any objections at that stage. The scheme was sanctioned on 03.10.2015 with the appointed date being 01.04.2014.

The CIT(A) observed that in accordance with the purchase method of accounting under AS-14, the difference between the consideration paid and the net book value of the amalgamating company's assets was recognised as goodwill. Out of the total goodwill of Rs. 911.70 crore, Rs. 301.14 crore was allocated to the Dehradun unit and Rs. 601.56 crore to the Sikkim unit. The CIT(A) further noted that depreciation of Rs. 227.92 crore was claimed on the said goodwill at the applicable rate of 25%. After referring to the binding decisions of the Hon’ble Supreme Court in Smifs Securities Ltd., and the Hon’ble Gujarat High Court in PCIT v. Zydus Wellness Ltd. [(2017) 87 taxmann.com 82], the CIT(A) held that goodwill qualifies as an intangible asset under Explanation 3(b) to section 32(1) and is eligible for depreciation. The CIT(A) also noted that the SLP filed by the Department against Zydus Wellness Ltd. was dismissed by the Hon’ble Supreme Court, giving finality to the issue.

On the question of cost, the CIT(A) rightly held that the goodwill arose as a result of an actual transaction supported by a court-sanctioned scheme and a valuation report, and not merely by accounting jugglery. The CIT(A) distinguished Explanation 7 to section 43(1) and Explanation 2 to section 43(6) by observing that they apply to tangible assets transferred in amalgamation but not to goodwill which arises afresh in the books of the transferee as a balancing figure when the consideration exceeds net assets. The CIT(A) further held that the Assessing Officer’s suspicion regarding the valuation was unsubstantiated as no reference was made to the Departmental Valuation Officer and the valuation was supported by a report from a professional valuer. Relying on the decision of the Co-ordinate Bench of the Tribunal in Urmin Marketing Pvt. Ltd.(ITA 1806/Ahd/2019), the CIT(A) found that similar contentions had been rejected in earlier proceedings involving comparable facts.

We are in agreement with the view taken by the Ld. CIT(A). Once the scheme of amalgamation has been sanctioned by the Hon’ble High Court, and no objection has been raised by the Department at the appropriate stage, the consequential accounting recognition of goodwill in the books of the amalgamated company cannot be brushed aside as a colourable device. The consideration paid by way of share allotment constitutes valid consideration for the purpose of recognising goodwill. The Hon’ble Delhi High Court in CIT v. Mira Exim Ltd. [(2013) 359 ITR 70] has affirmed that share allotment as consideration constitutes "payment" in kind and satisfies the requirement for depreciation claim under section 32.

As regards the DR’s reliance on the fact that ILPL had no independent customers and that the entirety of its business was dependent on transactions with the assessee itself, we are of the considered view that such an observation, even if factually correct, does not in itself negate the existence or allowability of goodwill as an intangible asset. It is now well settled in law that the term “goodwill” is not limited to a customer list or an externally acquired brand. It encompasses a broad range of commercial attributes including the reputation of the business, expected future earnings, access to supply and distribution networks, management synergies, and benefits of operational integration. The value of goodwill is often derived from the expectation of continuing business advantage, and may even arise internally from economies of scale, vertical integration, or enhanced production efficiencies. Therefore, even in cases where the amalgamating entity does not possess third-party clientele, the commercial reality of future economic benefits arising from the merger—particularly where business functions, personnel, licenses, or assets are integrated— can result in the generation of goodwill. In the present case, the scheme of amalgamation was a court-approved transaction involving complete transfer of business, assets, liabilities, and workforce from ILPL to the assessee. The excess of consideration paid over the net book value of assets taken over has been duly recognised in the books of the assessee as goodwill under the purchase method of accounting as per AS-14. This recognition was not arbitrary or notional but supported by an independent valuation report prepared by a registered valuer. No contrary valuation has been placed on record by the Revenue nor was the matter referred to the Departmental Valuation Officer. In any event, the presence or absence of third-party clients cannot be the sole criterion to determine whether goodwill was acquired. The Hon’ble Supreme Court in Smifs Securities Ltd. has held that goodwill falls within the expression “any other business or commercial rights of similar nature” as appearing in Explanation 3(b) to section 32(1) and is therefore eligible for depreciation. The statute does not require such rights to arise only from external dealings or unrelated parties. Once the transaction satisfies the requirements of section 2(1B), which defines amalgamation to include even group company mergers where 100% shareholding may vest with the amalgamated company, the legal form and accounting consequences must be respected.

Coming to the assessee’s contention regarding the allocation of goodwill to the tax-exempt units in Sikkim and Dehradun, we find that the issue was duly considered by the CIT(A) in para 5.10 of the appellate order. As per the assessee’s accounting treatment, the total goodwill of Rs.911.70 crore was allocated as follows:

The assessee contended that even if depreciation on such goodwill were to be disallowed, the disallowance would correspondingly enhance the profit of the eligible units, thereby increasing the quantum of deduction under Chapter VI-A, in view of CBDT Circular No. 37/2016 dated 02.11.2016. The CIT(A) accepted this contention in principle, holding that any disallowance of depreciation on goodwill relating to the Sikkim unit would automatically result in an equivalent increase in eligible profits, making the disallowance revenue neutral. The AO had not disturbed the allowability or quantification of deduction under section 80-IE, and therefore no disallowance attributable to the Sikkim unit was sustained by the CIT(A). However, in the case of the Dehradun unit, which was eligible for only 30% deduction under section 80-IC, the CIT(A) rightly held that 70% of the depreciation claimed—representing the portion not eligible for deduction—would be an effective addition to income. Accordingly, the CIT(A) restricted the disallowance to Rs.52,69,97,415/-, being 70% of the depreciation claimed in respect of goodwill allocated to the Dehradun unit. This computation was consistent with the guidance in CBDT Circular No. 37/2016, which clarified that in computing eligible profits under Chapter VI-A, disallowances under the head "business income" should not result in denial of deduction on the enhanced income. The Revenue has not challenged this working, nor has it shown that any portion of depreciation relating to the Sikkim unit was ineligible.

We have considered the objections raised by the Departmental Representative regarding the computation and recognition of goodwill in the present case. The primary contention of the Revenue is that the goodwill was artificially created in the books of the amalgamated company without any actual commercial basis, and that the valuation was not based on the Net Asset Value (NAV) method. It is seen, however, from the record that the assessee had engaged KPMG for a detailed valuation of both the amalgamating and amalgamated companies as part of the court-sanctioned scheme of amalgamation. The valuation was carried out using recognized income and market approaches, namely the Discounted Cash Flow (DCF) and Comparable Companies Multiples (EV/EBITDA and PE ratios), in accordance with global best practices. The equity value per share for Intas Pharmaceuticals Ltd. (the amalgamated company) was determined at Rs.147.65, while the equity value per share for ILPL (the amalgamating company) was arrived at Rs.96.56. Based on this, the swap ratio was recommended at 100:65, i.e., 100 shares of the amalgamated company were to be issued for every 65 shares of the amalgamating company held. As regards the estimation of goodwill, the summary of working as derived from the KPMG valuation report is tabulated below:

The estimated goodwill of Rs.9,117 million arises as the residual value representing excess consideration paid over the net book value of identifiable assets and liabilities acquired. This goodwill is accounted for in the books under the purchase method of accounting as per Accounting Standard–14 (AS-14) and is stated to represent future economic benefits arising from the amalgamation.

While it is an undisputed fact that Intas Lifesciences Pvt. Ltd. (ILPL), the amalgamating company, did not maintain an independent customer base and that its revenues were almost exclusively derived from transactions with the assessee-company, such a factual matrix, by itself, does not invalidate the recognition of goodwill for tax purposes. In modern commercial jurisprudence, and as acknowledged by a long line of judicial precedents, the concept of “goodwill” is not confined to the presence of external clientele or tradable intellectual property. Rather, goodwill is a composite intangible, often representing a spectrum of commercial advantages and strategic benefits which accrue to the acquiring entity as a result of the amalgamation. It is well-settled that goodwill may encompass diverse elements such as the continuity of trained workforce, access to regulatory licenses, embedded operational systems, management expertise, optimized supply chain alignment, intra-group cost efficiencies, shared infrastructure, and even the mere continuity of profitable operations. These elements, though not individually valued or transferable, together constitute an economic benefit which the transferee entity expects to realize over time. The Courts have consistently upheld that the absence of independent third-party customers or standalone brand assets does not, per se, disentitle the acquirer from recognizing goodwill, where the consideration paid exceeds the net book value of the assets acquired and is duly supported by a professional valuation. Further, goodwill arising from amalgamation between group entities, where there may be common control or overlapping ownership, is specifically contemplated under section 2(1B) of the Act. The legal permissibility of such amalgamations is not dependent on the existence of arms-length operations or unrelated party dealings. The character of goodwill remains intact, so long as the excess consideration paid is bonafide, attributable to commercial intent, and not a colourable device, and where the valuation is backed by objective and auditable parameters, as is evident in the present case from the KPMG valuation report. Accordingly, we do not agree with the DR’s contention that goodwill must necessarily arise only where identifiable third-party rights or clientele are acquired. The jurisprudence laid down in Smifs Securities Ltd. and consistently followed thereafter recognizes that “business or commercial rights of similar nature” under Explanation 3(b) to section 32(1) covers a wide ambit of intangible assets including goodwill that is recognized through proper valuation in a scheme of amalgamation.

We also note that both the AO and the DR have attempted to distinguish the assessee’s case from the facts of Smifs Securities Ltd. on the premise that ILPL lacked independent clients, the goodwill was created within the same group, and there was no real transfer of business value. However, such a distinction, in our considered view, does not undermine the binding nature of the ratio laid down by the Hon’ble Supreme Court in Smifs Securities Ltd. (supra), wherein it was categorically held that goodwill arising out of amalgamation is a depreciable intangible asset under Explanation 3(b) to section 32(1). The test laid down is whether goodwill is acquired at a cost and recorded in the books pursuant to a valid transaction; it is not contingent on the nature of clientele or independence of operations of the amalgamating entity. The CIT(A), in our view, has correctly rejected the distinction made by the AO and upheld the allowability of depreciation on goodwill, following binding judicial precedents. We endorse this conclusion.

We have also noted the reliance placed by the Ld. AR on the decision of the Co-ordinate Bench in the case of Suzlon Energy Ltd. vs. DCIT, & 199/Ahd/2023 for A.Ys. 2016–17 and 2017–18, wherein the Tribunal allowed the claim of depreciation on goodwill arising on amalgamation of wholly-owned subsidiaries. In that case, the goodwill had been recorded in the books of the amalgamated company as the difference between the consideration paid and the net book value of the assets and liabilities acquired under a scheme of amalgamation duly sanctioned by the Hon’ble NCLT. The Co-ordinate Bench, after considering the provisions of section 32(1)(ii) read with Explanation 3(b) and relying on the binding precedent of the Hon’ble Supreme Court in CIT v. Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], held that such goodwill constitutes an intangible asset eligible for depreciation under the Act. We find the reasoning adopted by the Co-ordinate Bench in Suzlon Energy Ltd. to be legally sound and applicable to the present case. Here too, the goodwill arose as a consequence of the amalgamation of ILPL with the assessee, was recognised in the books of the assessee as per the purchase method of accounting under AS-14 and represents a determinable excess of consideration over the net asset value. The transaction was sanctioned by the Hon’ble Gujarat High Court, and the goodwill so arising was not self-generated, but traceable to a valid and binding scheme of arrangement. We are therefore in agreement with the view taken in Suzlon Energy Ltd. that such goodwill qualifies as a depreciable intangible asset under section 32(1)(ii), and that the depreciation claimed thereon has to be allowed in accordance with law.

In view of the above, we are unable to accept the DR’s argument that the goodwill lacks substance merely because the business of ILPL was functionally integrated or wholly dependent on the assessee. The principles of commercial reality, as recognised in Smifs Securities, Urmin Marketing, and Zydus Wellness Ltd., support the view that goodwill may arise even in intra-group amalgamations when excess consideration is paid and booked transparently. We thus uphold the conclusion of the CIT(A) that the goodwill so recognised constitutes a valid depreciable asset within the meaning of section 32(1)(ii), and that depreciation claimed thereon is allowable in law, subject only to the proportionate restriction of Rs.52,69,97,415/- in respect of the Dehradun unit as correctly computed and sustained by the first appellate authority.

We shall now proceed to deal with the revised grounds raised by the Revenue in light of our detailed analysis above:

The Revenue contends that depreciation on goodwill is not allowable as there was no goodwill recorded in the books of the amalgamating company and the same was created only in the books of the amalgamated company. We find this contention devoid of merit. As held by the Hon’ble Supreme Court in Smifs Securities Ltd. [(2012) 348 ITR 302 (SC)], goodwill arising as a balancing figure from excess consideration over net asset value is a depreciable intangible asset under section 32(1)(ii), irrespective of its prior existence in the books of the amalgamating company. The CIT(A) has correctly appreciated this legal position, and we find no infirmity in his conclusion.

The Department argues that goodwill is a self-acquired asset with nil cost in the hands of the amalgamated company, and hence the WDV should be taken as nil under Explanation 2 to section 43(6). This contention ignores the fact that in the present case, goodwill was acquired at a determinable cost, being the excess consideration paid under a High Court sanctioned scheme of amalgamation. The cost so paid forms the actual cost for purposes of depreciation. The CIT(A) has rightly rejected this ground by holding that the goodwill was not self-generated but arose from a lawful acquisition transaction, supported by valuation.

The Revenue contends that the CIT(A) erred in holding that no objection was raised by the Department during High Court proceedings, and that the scheme’s compliance with section 2(1B) should have been more strictly interpreted. We note that the Department was duly served notice under section 394A of the Companies Act and was given an opportunity to object under Circular No. 1/2014 issued by the Ministry of Corporate Affairs. No such objection was filed. The Hon’ble High Court sanctioned the scheme after full compliance. The CIT(A) has not held that mere lack of objection precludes scrutiny but has rightly drawn support from the judicial sanctity of the scheme and its procedural compliance.

It is contended that depreciation on goodwill should not be allowed as there was no actual allocation of shares to the shareholders of ILPL during the year, and hence no actual consideration paid. We find this ground misconceived. The scheme provides for the cancellation of shares held by the assessee and issuance of shares to the remaining shareholders. The share swap ratio was determined through an approved valuation report. Consideration paid through allotment of shares is recognised in law as valid consideration (CIT v. Mira Exim Ltd. [(2013) 359 ITR 70 (Del)]). There is no requirement under section 32 for cash outflow.

The DR argues that the method adopted by the assessee was effectively the pooling of interest method and not the purchase method under AS-14, and therefore the excess should have been credited to capital reserve. We do not find any merit in this argument. The assessee has clearly followed the purchase method as permitted by AS-14, whereby the difference between consideration and net asset value is to be recorded as goodwill. The accounting method has been consistently applied and supported by audit and judicial approval of the scheme. The AO has not brought any evidence to show that pooling of interest was applied or that the accounting treatment was incorrect.

The Revenue contends that the goodwill was created merely by netting the consideration against net assets without identifying specific assets or rights. This argument is also misplaced. The Hon’ble Supreme Court in Smifs Securities Ltd. held that even unidentified commercial rights can constitute goodwill eligible for depreciation. In the present case, the goodwill represents the expected future economic benefits arising from business consolidation, synergy, and operational continuity — all recognized aspects of goodwill under law.

The Department seeks to apply Explanation 7 to section 43(1), sixth proviso to section 32(1), section 49(1)(iii)(e), and Explanation 2 to section 43(6), asserting that the cost or WDV in the hands of the amalgamating company should be taken as nil. We find that these provisions apply to tangible assets transferred in amalgamation, not to newly recognised intangible assets like goodwill which arises as a balancing figure under a recognised accounting method. The CIT(A) has dealt with these statutory provisions in detail and rightly held them inapplicable to self-arising goodwill in the hands of the amalgamated company.

The final ground pertains to the allocation of goodwill to Dehradun and Sikkim units and the allegation that the goodwill represents revaluation of existing assets. We find this argument factually and legally unsustainable. The CIT(A) has accepted the assessee’s contention that the goodwill was allocated to both units as per internal allocation policies. He applied CBDT Circular No. 37/2016 to correctly restrict the disallowance to Rs.52,69,97,415/- (i.e., 70% of depreciation on Dehradun unit, which enjoyed 30% deduction under section 80-IC). Since Sikkim unit enjoys 100% deduction under section 80-IE, disallowance of depreciation would only result in corresponding enhancement of eligible profit and hence would be revenue-neutral. The AO has not disturbed the computation of deduction under section 80-IE. The goodwill recorded in the books has not been shown to be revaluation of existing tangible assets, and therefore, the ground is without merit.

In light of the above discussion, we do not find any error in the order of the Ld. CIT(A) allowing the depreciation on goodwill. The facts have been thoroughly verified, the legal position is supported by binding precedents, and the Revenue has failed to demonstrate that the transaction lacks commercial substance or that the claim falls afoul of any specific bar under the Act. All the revised grounds of appeal raised by the Revenue stand rejected.

The issue under this ground relates to the action of the learned CIT(A) in deleting the disallowance of Rs.10,19,24,003/-, which was made by the Assessing Officer by allocating a portion of common research and development (R&D) expenses to units of the assessee claiming deduction under sections 10AA, 80-IC, and 80-IE of the Act. The Assessing Officer observed that the assessee had claimed weighted deduction under section 35(2AB) in respect of in-house R&D expenditure incurred at the corporate level, without allocating any part of such expenses to its tax-exempt units. The Assessing Officer was of the view that failure to allocate such common expenditure resulted in excessive deduction under section 35(2AB), while simultaneously inflating the profits of the tax-exempt undertakings. Accordingly, he reworked the allocation of R&D expenses in the ratio of turnover and disallowed the weighted deduction under section 35(2AB) on the amount of Rs.10,19,24,003/- which, in his view, was relatable to tax- exempt units.

The learned CIT(A), after considering the detailed submissions of the assessee, deleted the said disallowance. The CIT(A) found that the assessee had maintained separate books of account for each eligible unit, and that the in-house R&D expenditure in question was incurred at a centralized R&D facility, which was duly approved by the DSIR and was not related to any of the tax-exempt undertakings. It was further observed that the deduction under section 35(2AB) is governed by satisfaction of specific conditions prescribed in the provision, and there is no statutory bar on claiming such deduction merely because the assessee also operates profit- linked undertakings under Chapter VI-A or section 10AA. The CIT(A) also noted that no part of the R&D expenditure had been debited to the tax- exempt units in the books of account, and the Assessing Officer had not pointed to any direct nexus between the R&D activity and the exempt undertakings.

During the course of hearing, the learned DR relied upon the findings of the Assessing Officer as set out in the assessment order. In response, the learned Authorised Representative (AR) supported the order of the learned CIT(A).

We have carefully considered the rival submissions and perused the material available on record, including the assessment order, the detailed written submissions of the assessee, and the findings of the learned CIT(A). The assessee, during the course of assessment as well as appellate proceedings, contended that the said undertakings maintain separate books of account, and unit-wise Profit and Loss Accounts are independently prepared and audited. It was submitted that all direct expenses, including employee benefits and selling and distribution expenses (such as commission on sales, freight, forwarding, marketing incentives, etc.), are duly accounted for and debited in the respective unit accounts based on actuals or appropriate turnover-based allocation keys. The assessee further explained that the SEZ unit, being export-oriented, is not required to bear selling and distribution expenses related to domestic sales, and that each of the undertakings had separate borrowings, thereby obviating any requirement for further allocation of finance cost. The assessee placed reliance on the decision of the Co-ordinate bench in the case of Cibatul Ltd. v. DCIT (ITA No. 3259/Ahd/1992) and other judicial precedents, to submit that indirect or common expenses cannot be mechanically allocated to profit-linked deduction units unless a clear nexus exists with the income derived from such units. It was argued that a mere apportionment without factual justification leads to unwarranted disallowance and duplication, particularly when the direct expenditures have already been absorbed in the unit’s own audited accounts.

The CIT(A), having examined the assessee’s contentions and verified the books of account, accepted that the common expenses sought to be allocated by the Assessing Officer had, in fact, already been accounted for in the unit-wise financials prepared and audited separately for each eligible undertaking. The CIT(A) observed that any further allocation of such expenses would result in double disallowance and would not reflect the correct profit derived from the respective eligible undertakings. The CIT(A) further took note of the fact that the methodology adopted by the assessee was consistent and in accordance with accepted accounting practices, and that in earlier years, the same treatment had been accepted by the Department without dispute.

We find merit in the reasoning given by the learned CIT(A). The Assessing Officer, while reallocating the common expenses, did not rebut the factual position that the concerned cost heads—such as audit fees, finance charges, legal and professional charges, and other indirect expenses—had already been accounted for in the Profit and Loss Accounts of the respective undertakings. The Assessing Officer also failed to demonstrate any specific instance where the assessee had claimed deduction in excess of its entitlement under the provisions of section 80IC, 80IE, or 10AA by reason of not allocating common costs.

In our considered view, while computing the profits eligible for deduction under sections 80IC, 80IE, and 10AA of the Act, it is essential to confine the computation to those expenses which have a direct and proximate nexus with the operations of the eligible undertaking. Any attempt to allocate general or common expenses that are not specifically relatable to the activities of such undertaking would distort the true profits derived therefrom. The principle that governs such computation is one of factual linkage, and unless the expense can be clearly identified as incurred for the functioning of the eligible unit, it cannot be brought into the computation for the purposes of determining the deduction under the said provisions.

In view of the above discussion, we find no infirmity in the conclusion of the learned CIT(A) in deleting the disallowance of Rs. 10,19,24,003/- on account of allocation of common expenses to the Dehradun, Sikkim, and SEZ units. The accounting treatment adopted by the assessee is based on separate books and verifiable entries, and the disallowance made by the Assessing Officer is not sustainable in the facts and circumstances of the case. We accordingly uphold the order of the CIT(A) on this issue. This ground of the Revenue is dismissed.

This ground pertains to the action of the learned CIT(A) in deleting the disallowance of Rs.53,84,83,069/- made under section 35(2AB) of the Act. The Assessing Officer had disallowed the claim of weighted deduction on this amount on the ground that it pertained to revenue expenditure not certified by the Department of Scientific and Industrial Research (DSIR) in Form No. 3CL. The said amount primarily included expenses incurred by the assessee on clinical trials conducted outside the approved R&D facility, which the DSIR had not quantified in the Form 3CL. The learned CIT(A), however, allowed the assessee’s claim, following the consistent appellate orders in assessee’s own case in earlier years, holding that clinical trial expenditure, though incurred outside the in-house facility, forms an integral part of pharmaceutical R&D and qualifies for deduction under section 35(2AB).

This issue has already been adjudicated in detail while dealing with Ground No. 2 of the assessee’s appeal, wherein we have held, following the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2013– 14 (ITA No. 400/Ahd/2018, order dated 31.10.2023), that prior to the amendment of Rule 6(7A) with effect from 01.07.2016, the DSIR had no authority to quantify the eligible expenditure in Form 3CL, and the deduction under section 35(2AB) could not be denied solely on that basis. We have accordingly upheld the assessee’s claim and confirmed the deletion of the disallowance made by the Assessing Officer.

In view of our detailed findings already recorded in the preceding part of this order, no separate adjudication is required on these grounds. Accordingly, Ground No. 5 (Original) and Revised Ground No. 10 of the Revenue’s appeal are dismissed.

The Assessing Officer disallowed a sum of Rs.11,29,21,996/- under section 36(1)(iii) of the Act on the ground that the assessee had made substantial additions to capital work-in-progress (CWIP) during the year, but no proportionate interest cost was capitalised in its books. The AO noted that the assessee had not established the day-to-day availability of interest- free funds and the nexus between surplus funds and utilisation for CWIP. The disallowance calculated by the AO is tabulated below: Particulars Amount (Rs.) Borrowed funds as on 01-04-2014 5,64,83,58,495 Borrowed funds as on 31-03-2015 4,90,73,90,195 Average Borrowed Funds (A) 5,27,78,74,345 Interest paid during the year (B) 16,29,76,690 CWIP funds as on 01-04-2014 3,27,70,97,484 CWIP funds as on 31-03-2015 4,03,66,85,957 Average CWIP Funds (C) 3,65,68,91,720 Proportionate Interest Disallowance (B × C) ÷ A Amount Disallowed u/s 36(1)(iii) Rs. 11,29,21,996

Before the CIT(A), the assessee submitted that the disallowance was unjustified and that it had substantial interest-free funds available throughout the year, far in excess of the average CWIP balance. It was submitted that as on 31.03.2015, the assessee had own funds comprising share capital and reserves aggregating Rs.4198.37 crores and as on 31.03.2014, Rs.2803.45 crores, against which the average CWIP for the year was only Rs.365.69 crores. It was also contended that the interest was not capitalised in the books as per consistent accounting policy, and the entire interest was claimed as revenue expenditure, having nexus with the business. The assessee placed reliance on several judicial precedents including:

The CIT(A), after considering the submissions and following consistent orders in assessee’s own case for earlier years (A.Ys. 2011–12 to 2014–15), deleted the disallowance. The CIT(A) recorded that the assessee had interest-free funds far exceeding the CWIP, had earned sufficient operating profit during the year, and that no direct nexus was established by the AO to show deployment of borrowed funds to CWIP.

During the course of hearing, the learned Departmental Representative relied upon the reasoning and conclusions drawn by the Assessing Officer, contending that the assessee had failed to demonstrate a nexus between interest-free funds and the capital work-in-progress (CWIP). On the other hand, the learned Authorised Representative placed strong reliance on the decision of the Coordinate Bench in assessee’s own case for the A.Y. 2013–14 in where a similar disallowance made under section 36(1)(iii) was deleted on identical facts.

We have carefully considered the rival contentions and perused the assessment order, the detailed written submissions filed before the CIT(A), the impugned appellate order, and the binding judicial precedents relied upon by the assessee. It is not in dispute that the Assessing Officer disallowed interest expenditure of Rs.11,29,21,996/- under section 36(1)(iii) of the Act by applying a proportionate formula based on average CWIP and average borrowings during the year, without establishing any direct nexus between the borrowed funds and the deployment thereof in CWIP. The disallowance was computed merely by adopting a mechanical approach as set out in para 28.8 of the assessment order.

Before the CIT(A), the assessee demonstrated on the basis of audited financial statements and break-up of reserves and surplus that it had substantial own interest-free funds throughout the year under consideration. As noted by the CIT(A), the share capital and reserves stood at Rs. 4,198.37 crores as on 31.03.2015 and Rs. 2,803.45 crores as on 31.03.2014. Against this, the average CWIP during the year stood only at Rs. 365.69 crores. These facts clearly establish that the assessee had sufficient interest-free funds for making any capital investment in CWIP and there was no necessity for applying borrowed funds for such purposes.

The Co-ordinate Bench in assessee’s own case for A.Y. 2013–14 in has after noting identical facts and relying on authoritative decisions of the Hon’ble Apex Court in the case of CIT Vs. Reliance Industries Ltd., 410 ITR 466(SC) categorically held that where interest-free funds are available in excess of the amount deployed in capital advances or CWIP, the presumption must be drawn that such investments were made out of own funds. The Co-ordinate Bench therein has further observed that in absence of any controvert findings of the Ld. CIT(A) both on facts as well as law by the Revenue, the disallowance under section 36(1)(iii) cannot be sustained.

In the present year as well, the AO has not brought any material to demonstrate that borrowed funds were actually utilised for CWIP. The CIT(A), after recording detailed facts and after following the settled legal position as also the earlier appellate orders in assessee’s own case for A.Ys. 2011–12 to 2014–15, has deleted the disallowance made under section 36(1)(iii). The assessee has also placed reliance on its consistent accounting policy to capitalise interest cost only when directly attributable to acquisition of qualifying capital assets, which has been accepted in earlier years and remains unchanged.

In light of the overwhelming factual matrix demonstrating availability of substantial own funds and in view of consistent judicial precedents on the issue, including the detailed findings of the Co-ordinate Bench in assessee’s own case for A.Y. 2013–14, we find no infirmity in the decision of the learned CIT(A) in deleting the disallowance of Rs.11,29,21,996/- made by the Assessing Officer under section 36(1)(iii) of the Act. Accordingly, this ground of appeal raised by the Revenue stands dismissed.

The Assessing Officer, during the course of assessment, observed that the assessee had made substantial investments in shares of group companies and subsidiaries such as Accord Healthcare Ltd., Intas Medi Devices Ltd., Alvi-Intas Medical Devices Pvt. Ltd., and Prime Pediatrics Pvt. Ltd., aggregating to Rs. 10.55 crores. Although the assessee had not earned any dividend or other exempt income during the previous year, the AO invoked the provisions of section 14A read with Rule 8D to disallow expenditure allegedly incurred in relation to such investments. The assessee submitted before the AO that no disallowance under section 14A was warranted in the absence of exempt income, relying on various judicial decisions including those of the jurisdictional High Court. It was further contended that the investments were old and made for strategic business purposes out of interest-free funds and that no part of the interest expenditure or administrative expenses could be attributed to earning exempt income. However, the AO rejected the explanation furnished by the assessee, holding that the assessee failed to substantiate its claim with fund flow statements or any other supporting evidence. He accordingly computed the disallowance under Rule 8D by applying Rule 8D(2)(ii) for proportionate interest at Rs.3,42,992/- and Rule 8D(2)(iii) for administrative expenses at Rs. 5,27,755/-, aggregating to Rs. 8,70,747/-. This disallowance was added to the assessee’s total income under the normal computation and also considered as an adjustment to the book profit under section 115JB, thereby giving rise to Ground No. 8 of the appeal.

Before the CIT(A), the assessee reiterated its contention that in the absence of any exempt income during the relevant year, no disallowance under section 14A could be made. The assessee placed reliance on a number of decisions, including CIT v. Corrtech Energy Pvt. Ltd. [(2014) 223 Taxman 130 (Guj.)], CIT v. Chettinad Logistics (P.) Ltd. [(2017) 80 taxmann.com 221 (Madras)], and PCIT v. IL & FS Energy Development Co. Ltd. [(2017) 84 taxmann.com 186 (Delhi)], to contend that the provisions of section 14A cannot be invoked in the absence of exempt income. The assessee also submitted that the investments were strategic and long- standing in nature, with no fresh investments made during the year under consideration. It was also pointed out that the assessee had sufficient interest-free own funds to cover the investments, and hence, there was no occasion for invoking Rule 8D(2)(ii) or (iii). Notably, unlike the preceding assessment year where the assessee itself had made a suo motu disallowance under Rule 8D(iii), no such disallowance was offered by the assessee in the current year, considering the factual position.

The CIT(A) accepted the assessee’s submission and deleted the disallowance of Rs.8,70,747/- made under section 14A read with Rule 8D. He held that in the absence of any exempt income, the disallowance was not sustainable in law, particularly in light of the binding precedents cited. The CIT(A) also noted that all the four investee companies were dormant, and no expenditure could be said to have been incurred in the relevant year in connection with earning exempt income. The CIT(A) placed reliance on a catena of judicial decisions. In conclusion, he deleted the disallowance made both under the normal provisions and under section 115JB.

During the course of hearing before us, the learned Departmental Representative supported the findings of the Assessing Officer. On the other hand, the learned Authorised Representative placed reliance on the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case for the A.Y. 2013–14 in ITA No. 704/Ahd/2018. The AR submitted that on identical facts, the Co-ordinate Bench had deleted the disallowance made under section 14A.

We have carefully considered the rival submissions and perused the orders of the lower authorities as well as the material placed on record. The Assessing Officer disallowed a sum of Rs.8,70,747/- under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962. The disallowance comprised Rs.3,42,992/- under Rule 8D(2)(ii) towards proportionate interest and Rs.5,27,755/- under Rule 8D(2)(iii) being 0.5% of average value of investments. It is an admitted position that the assessee did not earn any exempt income during the relevant previous year. This fact is also recorded in the assessment order and not disputed by the Revenue.

The primary issue for consideration is whether disallowance under section 14A read with Rule 8D is sustainable in a year when the assessee has not earned any exempt income. The Hon’ble Gujarat High Court in the case of CIT v. Corrtech Energy Pvt. Ltd. [(2014) 223 Taxman 130] has categorically held that in absence of any exempt income, no disallowance under section 14A is warranted. This legal position has been consistently affirmed by several High Courts including the Madras High Court in CIT v. Chettinad Logistics Pvt. Ltd. [(2017) 80 taxmann.com 221] and by the Hon’ble Delhi High Court in PCIT v. IL & FS Energy Development Co. Ltd. [(2017) 84 taxmann.com 186]. The Hon’ble Supreme Court has also dismissed SLPs filed against these decisions, thereby lending finality to the proposition that earning of exempt income is a sine qua non for invoking section 14A.

In the instant case, the learned CIT(A) has correctly appreciated this principle and deleted the disallowance under section 14A in its entirety. This conclusion is also supported by the fact that no fresh investments were made during the year and the assessee had substantial interest-free own funds available, far in excess of the amount of investments. The ratio of interest free funds to total investment stood at 7.62 times as on 31 March 2015 and 4.94 times as on 31 March 2014.

The learned Departmental Representative has relied on the order of the AO, whereas the Authorised Representative has drawn our attention to the decision of the Co-ordinate Bench in assessee’s own case for A.Y. 2013– 14 in where, under similar facts, the Co-ordinate Bench held that in the absence of exempt income and in the presence of old investments funded out of interest-free funds, no disallowance under Rule 8D(2)(ii) was warranted. Respectfully following the binding jurisdictional High Court judgment and the decision of the Co-ordinate Bench in assessee’s own case, we find no reason to interfere with the CIT(A)'s decision in deleting the disallowance made under Rule 8D(2)(ii).

Coming to the disallowance of Rs.5,27,755/- under Rule 8D(2)(iii), we note that unlike the earlier year where the assessee had made a suo motu disallowance under Rule 8D(iii), no such disallowance has been made by the assessee in the current year. However, it remains a settled position in law, following the same line of decisions, that if no exempt income is earned, even the disallowance under Rule 8D(2)(iii) cannot survive. This view is consistently upheld in Chettinad Logistics (supra), Corrtech Energy (supra), and by the Co-ordinate Bench in DCIT v. Asian Granito India Ltd. [(2020)

Accordingly, we uphold the deletion of the disallowance of Rs.8,70,747/- made by the learned CIT(A) under section 14A read with Rule 8D, including both components under Rule 8D(2)(ii) and 8D(2)(iii). Consequently, the adjustment made by the Assessing Officer to the book profit under section 115JB on account of section 14A disallowance is also directed to be deleted. The grounds of appeal raised by the Revenue are, therefore, dismissed.

During the course of assessment proceedings, the Assessing Officer observed that the assessee had made payment of commission to certain non-resident agents without deducting tax at source under section 195 of the Act. On verification of the details, the AO noted that the said payments were in the nature of commission for services rendered by non-residents outside India in connection with sales promotion or procuring orders for the assessee in foreign markets. The assessee claimed that these payments were not chargeable to tax in India and hence not liable for deduction of tax under section 195. The Assessing Officer rejected the assessee’s contention and held that commission payments made to non-residents fall within the scope of “income deemed to accrue or arise in India” under section 9(1)(i) of the Act. He placed reliance on Explanation 2 to section 9(1)(i), inserted by the Finance Act, 2010 with retrospective effect from 1 April 1962, and concluded that the payments represented income of the non-resident accruing from a business connection in India. The AO took the view that though the services of the non-resident agents were rendered abroad, the right to receive commission arose in India when the export orders were executed by the assessee in India. It was further observed by the AO that Circular No. 23 dated 23.07.1969, which provided certain clarifications regarding taxability of commission paid to non-residents, had since been withdrawn by CBDT Circular No. 7 of 2009 dated 22.10.2009. The AO held that the assessee’s reliance on erstwhile Circular No. 786 dated 07.02.2000 was misplaced as that too stood withdrawn. The AO emphasized that in the absence of any certificate under section 195(2), and in view of the deeming provisions of section 9, the assessee was under an obligation to deduct tax at source. Since no tax was deducted at source under section 195, the AO invoked section 40(a)(i) and disallowed the entire expenditure incurred towards such commission payments.

The assessee carried the matter in appeal before the Ld. CIT(A). In its detailed written submissions, the assessee reiterated that the commission payments were made to non-resident agents for services rendered wholly outside India. The agents did not have any place of business, permanent establishment, or business connection in India. The assessee submitted a tabulated statement (page 248 of the CIT(A)’s order) detailing the list of non- resident agents, amounts paid, nature of service, and mode of payment. It was further pointed out that the issue was squarely covered by the binding judgment of the Hon’ble Supreme Court in CIT v. Toshoku Ltd. [(1980) 125 ITR 525 (SC)], wherein it was held that commission paid to a non-resident agent for services rendered outside India does not accrue or arise in India and is, therefore, not chargeable to tax in India. Reliance was also placed on the judgment of the Hon’ble Gujarat High Court in DCIT v. Jay Chemical Industries Ltd. [(2016) 422 ITR 449 (Guj)], as well as decisions of ITAT Ahmedabad in the assessee’s own case for A.Ys. 2013-14 and 2014-15, where similar disallowances were deleted.

The Ld. CIT(A) carefully considered the submissions and evidence, including the copies of Form 15CA/15CB, tax residency certificates, and previous communications with the ITO (International Taxation), Ahmedabad. The CIT(A) held that the assessee had demonstrated that the agents were operating from outside India and were not rendering any services in India. It was further noted that the department had accepted the assessee’s position in earlier years after verification by the International Taxation wing. The CIT(A) held that no income was accruing or arising to the non-resident agents in India under section 9(1)(i), and therefore, there was no obligation to deduct tax at source under section 195. Since the primary condition for invoking section 40(a)(i) was absent, the disallowance made by the Assessing Officer was not justified. The CIT(A) also distinguished the decisions relied upon by the AO, including SKF Boilers and Cheminor Drugs, on facts. The CIT(A) accepted that the decision of Hon’ble Supreme Court in case of CIT Vs. Toshoku Ltd (supra) prevails. The operative conclusion clearly stated that the commission could not be deemed to have accrued or arisen in India merely because the sales orders were executed by the assessee in India. Accordingly, the disallowance of Rs.23,71,88,037/- was directed to be deleted and the ground was allowed.

During the course of hearing before us, the Ld. Departmental Representative placed reliance on the findings recorded by the Assessing Officer in the assessment order, contending that the commission paid to non-resident agents was deemed to accrue or arise in India in terms of section 9(1)(i) of the Act, and accordingly, the assessee was under an obligation to deduct tax at source under section 195. On the other hand, the Ld. Authorised Representative for the assessee placed reliance on the decision of the Co-ordinate Bench in assessee’s own case for Assessment Year 2013–14 in ITA No. 704/Ahd/2018.

We have carefully considered the rival contentions advanced during the hearing, perused the assessment order, the impugned order of the CIT(A), and the material placed on record. We have also duly taken note of the judicial authorities cited before us by the parties. The Assessing Officer, in the assessment order dated 19.12.2018, disallowed commission expenditure of Rs.23,71,88,037/- paid by the assessee to various non- resident commission agents on the ground that no tax was deducted at source under section 195 of the Act. The AO held that in view of section 5(2)(b) read with section 9(1)(i) of the Act, the income in the hands of such agents was deemed to accrue or arise in India, particularly since the execution of export contracts and the accrual of right to commission occurred in India. The AO thus concluded that the assessee was liable to deduct TDS and, having failed to do so, was liable for disallowance under section 40(a)(i) of the Act. The AO placed reliance on the decision of the AAR in the case of Rajiv Malhotra (284 ITR 564) and that of SKF Boilers & Driers (P.) Ltd. (18 taxmann.com 325) and took note of the withdrawal of erstwhile Circular No. 23 of 1969 by CBDT Circular No. 7 of 2009. In appeal, the Ld. CIT(A) recorded a categorical finding of fact that all services were rendered by the non-resident agents from outside India. Relying upon the landmark decision of the Hon’ble Supreme Court in the case of CIT v. Toshoku Ltd. [(1980) 125 ITR 525 (SC)], the CIT(A) held that commission earned by non- resident agents for services rendered abroad cannot be deemed to accrue or arise in India and is not taxable under the Act. He distinguished the factual matrix from the decisions relied upon by the AO and emphasized that none of the agents had any business connection, fixed place, or permanent establishment in India.

We have gone through the order of the Co-ordinate Bench in detail. It was noted that the AO had disallowed export commission paid to non- resident agents under section 40(a)(ia) for non-deduction of TDS, alleging that income had accrued in India under section 5(2)(b) r.w.s. 9(1)(i). However, the Co-ordinate Bench rejected this view and upheld the order of the CIT(A), who had followed the Supreme Court’s decision in Toshoku Ltd. (supra) and categorically held that all services were rendered outside India. The Co-ordinate Bench held that the CIT(A) had rightly decided the issue on the twin aspects: (i) taxability under section 5(2)(b) r.w.s. 9(1)(i), and (ii) whether section 195(2) obligated the assessee to obtain a nil deduction certificate. The Co-ordinate Bench approved the CIT(A)’s factual finding that no part of the activity took place in India, the services were rendered abroad, and hence, income did not accrue or arise in India.

The Co-ordinate Bench’s conclusion in the earlier year was unambiguous: where commission agents operate entirely outside India and do not have a PE or business connection in India, commission paid to them for facilitating export sales is not taxable in India. Hence, there is no requirement to deduct tax under section 195, and consequently, section 40(a)(i) is not attracted. This binding decision in assessee’s own case for an earlier year squarely covers the facts of the present assessment year, which are materially identical. We also find merit in the CIT(A)’s reliance on the judgment of the Hon’ble Gujarat High Court in DCIT v. Jay Chemical Industries Ltd. [(2020) 422 ITR 449 (Guj)], where identical payments to foreign agents for export facilitation were held to be outside the scope of income deemed to accrue or arise in India. Similarly, in GE India Technology Centre (P) Ltd. v. CIT [(2010) 327 ITR 456 (SC)], the Hon’ble Apex Court held that the obligation under section 195 arises only if the payment is chargeable to tax in India.

We further note that the Revenue has not brought any material on record to establish that the agents had a business connection in India within the meaning of section 9(1)(i), or that services were rendered in India. The mere fact that the contracts were executed in India does not render the commission taxable in India when the source of income – namely, the activity of soliciting and securing export orders – occurred entirely outside India. The situs of income in such cases is the place where the services are rendered, as consistently held in judicial precedents.

In view of the above discussion, we uphold the well-reasoned order of the Ld. CIT(A) and respectfully follow the binding decision of the Co-ordinate Bench in assessee’s own case for A.Y. 2013–14. The disallowance made under section 40(a)(i) on account of commission paid to non-resident agents without deduction of TDS is therefore not sustainable. Accordingly, this ground raised by the Revenue is dismissed. and 222/Ahd/2021 54 107. In the combined result, the appeal filed by the assessee (ITA No. 222/Ahd/2021) is partly allowed as per our findings above. The appeal filed by the Revenue ( ) is dismissed.