WOCKHARDT LIMITED,,AURANGABAD vs. ASSISTAMT COMMISSIONER OF INCOME TAX, CIRCLE -3,, AURANGABAD

Briefly, the facts of the case are that the assessee namely Wockhardt Ltd. is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of undertaking Research & Development in pharmaceutical. The return of income for the assessment year 2013-14 was filed on 29.11.2013 declaring total income of Rs.742,20,29,380/-. Against the said return of income, assessment was completed by the Assessing Officer (AO) vide order dated 25.01.2017 passed u/s 143(3) r.w.s. 92CA(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). While doing so, the AO made TP adjustment as suggested by the Transfer Pricing Officer (TPO) of Rs.109,81,22,628/-, disallowance of excess claim of deduction u/s 80IC of Rs.9,61,86,526/-, disallowance under provisions of section 35(2AB) of Rs.65,55,77,068/-, disallowance of Freebies to Doctors of Rs.1,19,82,100/-, disallowance u/s

Now, we shall take up assessee’s appeal. The appellant has raised the following grounds of appeal:

The grounds of appeal No.1 to 3 challenges the decision of ld. CIT(A) disallowing weighted deduction u/s 35(2AB) amounting to Rs.62,60,65,990/-.

However, the balance expenditure incurred outside R&D Centre of Rs.36,69,69,768/- and the difference between the amount certified by DSIR and the amount claimed of Rs.25,90,95,222/- was disallowed on the ground that the amount not certified by the DSIR cannot be allowed as deduction. Being aggrieved by the decision of ld. CIT(A), the appellant is in appeal before us.

It is contended before us that the expenditure is closely linked with R&D activity, though incurred outside the approved R&D Centre are eligible for weighted deduction u/s 35(2AB). Reliance in this regard is placed on the decision of Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd. (31 taxmann.com 300). Thus, it is prayed that the expenditure incurred of Rs.36,69,69,762/- should held to be eligible for weighted deduction. It is further submitted that no disallowance u/s 35(2AB) can be made for the reason that the expenditure was not certified by DSIR. It is submitted that it is only with effect from 01.07.2016, DSIR was vested with the power to certify the expenditure, the expenditure should be allowed as deduction once the DSIR had approved R&D facility. Thus, it is prayed that no disallowance u/s 35(2AB) can be made for the reason that the expenditure was not certified by DSIR. Reliance in this regard was placed on the decisions of Pune Bench in the cases of Cummins India Limited (2018) (ITA No.308/PUN/2014) and ACIT vs. Cooper Corporation Pvt. Ltd. (ITA No.621 & 652/PUN/2015). It is further submitted that in the earlier year, this Tribunal had remanded the matter to the file of AO to examine the allowability of claim based on the ratio of judgment of Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd. (supra).

On the other hand, the ld. CIT-DR placing reliance on the orders of lower authorities submits that expenditure incurred outside R&D facility is not eligible for weighted deduction u/s 35(2AB). Similarly, it is submitted that the expenditure which is not certified by DSIR is also not eligible for weighted deduction.

We have heard the rival contentions and perused the record. The issue in the present grounds of appeal relate to the allowability of weighted deduction u/s 35(2AB) on the revenue expenditure incurred on R&D of Rs.1,89,08,37,068/-. The AO disallowed the weighted deduction u/s 35(2AB) in respect of expenditure incurred on outside the approved R&D facilities and the expenditure which is not approved by DSIR in Form No.3CL. On appeal before the ld. CIT(A), the expenses incurred in respect of Foreign patent filing expenses, Clinical trial expenses for activities carried outside the approved facilities, Bio-studies expenses and Pivotal Bio-studies expenses for activities carried outside the approved facilities, Foreign consultancy (Legal and professional expenses), Building maintenance, municipal taxes and rental charges, Director travelling charges and expenditure incurred at Wockhardt plant other than R&D center for test production batches totaling Rs.23,57,00,078/- was allowed and the balance addition was confirmed. We find from the material on record that in the earlier years in A.Ys. 2006-07, 2007-08, 2008-09 and 2010-11, the issue relating to the eligibility of expenditure incurred outside the approved R&D center by way of outsourcing or otherwise, is restored to the file of AO for fresh adjudication in the light of decision rendered by the Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd. (supra). Therefore, on the principle of consistency, we restore this issue to the file of AO for de novo adjudication in accordance with law after giving an opportunity of being heard to the assessee. On the similar line as indicated in the Tribunal order for assessment year 2010-11, ITA No.438/PUN/2018, dated 13.12.2021. Thus, the grounds of appeal No.1 to 3 stands partly allowed for statistical purposes.

The grounds of appeal No.4 and 5 challenges the finding of ld. CIT(A) confirming the disallowance of distribution of freebies to Doctors. This issue is now stands covered against the assessee by the decision of Hon'ble Supreme Court in the case of Apex Laboratories vs. DCIT [442 ITR 1 (SC)]. Accordingly, the grounds of appeal No.4 and 5 stands dismissed.

In the result, appeal filed by the assessee is partly allowed for statistical purposes.

Now, we shall take up the Revenue’s appeal in ITA No.775/PUN/2019. The Revenue has raised the following grounds of appeal: 1. The Ld. CIT(A) erred in both on facts and in law in passing the order. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 9.10 crore on account of Guarantee Fee income by holding that corporate guarantee is not an international transaction ignoring the fact that the assessee itself had considered guarantee as international transaction and offered Rs. 10.40 crore as a suo-moto transfer pricing adjustment on account of Guarantee Fee? 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 9.10 crore on account of Guarantee Fee income by holding that corporate guarantee is not an international transaction ignoring the decisions in case of Prolifics Corporation Ltd. vs. DCIT (TS-I-ITAT-2015 (HYD)-TP] and Commissioner of Income Tax vs. M/s. Everest Kento Cylinders Ltd (ITA No. 542/Mum/2012- A.Y. 2007-08) in which corporate guarantee has been held as an international transaction. 4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs. 9.10 crore relying on the Hon. Mumbai Bench of ITAT in assessee's own case for AY 2007-08 which in turn relied on the decision of Commissioner of Income Tax vs. M/s. Everest Kento Cylinders Ltd (ITA No. 542/Mum/2012^A.Y. 2007-08) ignoring the fact that TPO in para 7.9 of its own order for AY 2013-14 had considered the decision in M/s. Everest Kento Cylinders (Supra) and had worked out the rate of 1.5 as corporate guarantee rate accordingly in para 7.9 of his order. 5. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the 'addition of Rs. 1.60 crore on account of interest to be charged from AEs by accepting benchmarking

The ground of appeal No.1 is general in nature, requires no adjudication.

The grounds of appeal No.2 to 4 challenges the decision of ld. CIT(A) holding that the transaction of guarantee is not an international transaction, placing reliance on the decision of Prolifics Corporation Ltd. vs. DCIT (TS-I-ITAT-2015 (HYD)-TP) and CIT vs. M/s. Everest Kento Cylinders Ltd. (ITA No.542/Mum/2012, A.Y. 2007-08).

The factual background of the case is that the assessee company had provided Corporate guarantee for loans availed by its Associated enterprise Wockhardt Bio AG, Switzerland. The assessee company did not charge any guarantee fees or commission for providing such corporate guarantee during the previous year relevant to the assessment under consideration. However, the appellant had suo motu offered to tax guarantee commission @ 0.8%. However, the TPO determined the Arm's length price of guarantee commission @ 1.5% p.a. On appeal before the ld. CIT(A), the ld. CIT(A) held that the transaction of corporate guarantee is not an international transaction. This finding of ld. CIT(A) cannot be sustained in the eyes of law as it is plainly contrary to the provisions of section 92B which defines the international transaction to include the transaction of lending or guarantee under Explanation to sub-clause (c) of clause (i) to sub-section (2) of section 92B. However, the approach adopted by TPO for the purpose of determining Arm's length price of guarantee commission is also not sustainable for the reason that the TPO adopted

The grounds of appeal No.5 to 7 challenges the decision of ld. CIT(A) deleting the addition towards transfer pricing adjustment on account of interest received on loans given to AEs. During the previous year relevant to the assessment under consideration, the assessee company received interest on loans advanced to AEs. In the TP study report the assessee company sought to benchmark the international transactions by using CUP method as follows:

However, the TPO proceeded to benchmark the above international transactions by applying fixed rate of 6.41% for Wockhardt Holdings and 4.902% or Wockhardt Bio and made an adjustment of Rs.1.6 crore. On appeal before the ld. CIT(A), the ld. CIT(A) held that interest charged by the assessee company is more than LIBOR + 2% in the case of Wockhardt Holdings, USA and LIBOR + 0.75% in the case of Wockhardt Bio AG, Switzerland. The Coordinate Bench of Tribunal in the case of DCIT vs. iGate Global Solutions Ltd. (2019) 109 taxmann.com 48 (Pune-Trib.) held as follows: “9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. Therefore, LIBOR, as such, can also not be construed as a comparable uncontrolled transaction. The Hon’ble Bombay High Court in CIT Vs. Aurionpro Solutions Ltd. (2017) 99 CCH 0070 MUM-HC approved the action of the Tribunal in considering LIBOR +2% as the arm’s length rate as against the TPO applying LIBOR plus 3%. Drawing an analogy from this position, we hold that EURIBOR+2% should be considered as arm’s length rate of interest for determining the ALP of the international transaction of interest received by the assessee from Mascot Systems GmbH, Germany.”

Applying the above legal position to the facts of the present case and admittedly, in the present case, the appellant has charged interest higher than the LIBOR + 2%, therefore, we hold that the transaction of receipt of interest from its AEs is at Arm's length price, no adjustment is required to be made. Thus, we do not find any illegality in the order of ld. CIT(A). Accordingly, grounds of appeal No.5 to 7 stands dismissed.

The ground of appeal No.8 challenges the decision of ld. CIT(A) granting relief in respect of disallowance of excess claim of deduction u/s 80IC. The AO made disallowance of excess claim for deduction u/s 80IC of Rs.9,61,86,526/- on the ground that the appellant while computing profits for the purpose of allowance u/s 80IC had not allocated R&D expenditure. While allocating this common expenditure, the AO also taken into consideration the statement of Vice President of the company recorded u/s 131 on 11.11.2000 wherein it is stated that the R&D work is also used by the production unit, thus, R&D expenditure is incurred only in connection with the business purposes. The ld. CIT(A) relying on the decision of Zandu Pharmaceuticals Works Ltd. vs. CIT (350 ITR 366) and CIT vs. Glenmark Pharmaceuticals Ltd. (supra) allowed exemption u/s 80IC without allocation of R&D expenditure.

We have carefully gone through the decisions rendered by the Hon’ble Bombay High Court in the cases of Zandu Pharmaceuticals Works Ltd. vs. CIT (supra) and CIT vs. Glenmark Pharmaceuticals Ltd. (supra). The decision of Hon’ble Bombay High Court is based on the finding of fact that R&D expenditure have no direct nexus with the unit, profits of which

The grounds of appeal No.9 and 10 relate to R&D expenditure. In the assessee’s appeal, we restored this issue to the file of AO on the lines indicated in the earlier paras on principle of consistency. Accordingly, these grounds 9 and 10 are also restored to the file of AO.

The grounds 11 and 12 challenging the decision of ld. CIT(A), no addition u/s 14A is warranted. We find that admittedly, in the present case, there is no exempt income during the previous year relevant to the assessment under consideration, the appellant had not earned any exempt income. Now, it is a settled position of law that in the absence of any exempt income, resort to provision of section 14A cannot be made, in view of the decision of following Hon’ble High Courts: (i) Redington (India) Ltd. vs. Addl. CIT, 392 ITR 633 (Mad); (ii) CIT vs. Celebrity Fashion Ltd., 428 ITR 470 (Mad); (iii) CIT vs. Chettinad Logistics Pvt. Ltd., 80 taxmann.com 221 (Mad) (Against which the SLP filed by the Department was dismissed by the Hon’ble Supreme Court in the case of CIT vs. Chettinad Logistics P. Ltd., 95 taxmann.com 250 (SC); (iv) CIT vs. Continuum Wind Energy (India) Pvt. Ltd., 430 ITR 52 (Mad); (v) PCIT vs. Kohinoor Project Pvt. Ltd., 425 ITR 700 (Bom.); (vi) Cheminvest Ltd. vs. CIT, 378 ITR 33 (Delhi); (vi) MAN Infraprojects Ltd. (ITA No.259 of 2017 dated 09.04.2019) (Bom.)

In the light of above legal position, we do not find any illegality in the finding of ld. CIT(A) in holding that provisions of section 14A have no application in the absence of any exempt income. Accordingly, this ground stands dismissed.

At the outset, the ld. AR submitted that he wishes to withdraw the Cross Objection filed by the assessee. Accordingly, we dismiss the Cross Objection filed by assessee as withdrawn.

In the result, the appeal filed by Revenue is partly allowed, the appeal filed by assessee is partly allowed and the CO filed by assessee is dismissed as withdrawn.