CADILA HEALTHCARE LTD.,AHMEDABAD vs. DCIT, CIRCLE-1(1)(2), AHMEDABAD

आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

This is an appeal filed by the assessee against the order of the ld. Deputy Commissioner of Income Tax, Circle-1(1)(2) Ahmedabad vide order dated 31/10/2018 passed for the assessment year 2014-15.

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“Aggrieved by the order u/s. 143(3) r.w.s. 144C passed by the Assessing Officer, the Appellant wishes to raise the following Grounds of Appeal for the kind adjudication of the Hon'ble ITAT:

a. Addition of Rs. 17,44,51,548/- on account of Corporate Guarantee Charges,

b. Addition of Rs. 18,83,57,844/- on account of Interest Imputation on Optionally Convertible Loans advanced to Zydus International Pvt. Ltd.

c. Addition of Rs. 15,56,62,098/- on account of Reimbursement of Expenses.

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The appellant prays that leave may be granted to add, amend or alter any of the grounds at any time before the final hearing of the appeal.”

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Ground number 1(a): addition of � 17,44,51,548/- on account of corporate guarantee charges

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“10. We find that the stand taken by the Dispute Resolution Panel, granting relief to the assessee on this point, came up for consideration before a coordinate bench of this Tribunal, and, vide order dated 3rd March 2017, it has been upheld by the coordinate bench. The copies of these orders were placed before us as. As to what is a fair arm's length price for issuance of corporate guarantee for the group entities of the assessee group is a factual aspect, and once in the earlier years a coordinate bench has approved the stand that 1% is a reasonable guarantee commission, there is no reason for us to deviate from the said stand as parties to the guarantees are broadly the same and most of these guarantees are continuing guarantees. We, therefore, see no reasons to disturb the accepted past history of the case and disturb the corporate guarantee commission rate adopted by the assessee. As regards the TPO's observation that the concept of shareholder activity will apply only in respect of Zydus Netherlands as it was the holding company, and not the assessee company, all we can say is that admittedly the assessee company is the parent company for this holding company as well and the end beneficiary, therefore, is the assessee company. The observation made by the Assessing Officer is thus incorrect. In any case, the methodology adopted by the TPO for computation of arm's length price of these guarantees is wholly erroneous. The TPO has proceeded on the basis that the guarantee commission charges by the State Bank of India and Bank of India are static rates which held good in all circumstances, but then, in reality, the guarantee commission rates vary on a large number of factors and vary from client to client. The adoption of difference between coupon rate of A rated bonds and BB rated bonds is even more inappropriate and it proceeds on the assumption, an unrealistic assumption at that,

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pre issuance of corporate guarantee by the assessee for its AE, its credit equivalence is of BB rated bond, which gets converted into A rated bond upon issuance of assessee's corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm's length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval. There was thus, in any event, no sound basis for disturbing the arm's length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well. In view of these discussions, as also bearing in mind, we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment of Rs 10,45,32,855. The assessee gets the relief accordingly. 11. Ground no. 1 is thus allowed.”

6.1 In our view, since the issue is directly covered in favour of the assessee in its own case for assessment year 2012-13 and 2013-14, respectfully following the orders passed in the assessee’s own case, we hereby allowing this ground of appeal filed by the assessee.

Ground number 1(b): addition of � 18,83,57,844/- on account of interest imputation on optionally convertible loans advanced to Zydus International Private Limited (ZIPL):

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which no interest was charged. The TPO observed that although the assessee has categorised the above transaction as a loan transaction, it has claimed that these loans to be in the nature of quasi equity as the assessee has an option to convert the same into equity of ZIPL at par value. Since the assessee has not exercised any option, no interest has accrued to the assessee. The assessee has not charged any interest on this amount, although interest is inbuilt into the mechanism of the agreement. Therefore, it is clear that the instrument has been characterised as quasi-equity merely to pass it off as an equity instrument to ensure interest free loan to the AE. The TPO relied on the case of Perot Systems TPS v DCIT (ITAT Delhi) and held that since no benchmarking of the loan transaction has been done by the assessee company, transfer pricing study of this transaction carried out by the assessee was not found to be in conformity with the provisions of section 92C of the Act. The TPO placed reliance on the order of assessment year 2012-13 and held that in lines of the above order, this year too the interest on these loans is benchmarked at the contractual rate applicable to the said loans (6 month LIBOR comes to 0.376, one year LIBOR comes to 0.631 and 6 month E LIBOR comes to 0.281). The DRP confirmed the order of the TPO.

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reproduce the relevant extracts of the ruling for A.Y. 2013-14 for ready reference:

“17. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by decisions of the coordinate benches in assessee's own cases for the assessment years 2009-10 and 2010-11. Learned Departmental Representative, however, submits that even though the issue is covered in favour of the assessee, and to that extent that decision binds us, he nevertheless relies upon the stand of the Assessing Officer and would like to justify the same. We find that a coordinate bench, vide order dated 3rd March 2017 for the assessment year 2009-10, has, inter alia, observed as follows: 10. There is no dispute that the transactions in question are not of the transactions of lending money to the associated enterprises. The amounts advanced to the AEs are attached with the obligation of the AEs to issue share capital, in case the assessee exercise option for the same, on certain conditions, which are admittedly more favourable, and at an agreed price, which is admittedly much lower, vis-a-vis the conditions and prices which independent enterprise would normally agree to accept. The lending is thus in the nature of quasi capital in the sense that substantive reward, or true consideration, for such a loan transaction is not interest simplictor on amount advanced but opportunity to own capital on certain favourable terms. Contrast this reward of owning the capital in the borrower entity with interest simplictor, which is typically defined as "the reward of parting with liquidity for a specified period" (Prof Keynes) or as "a payment made by the borrower of capital by virtue of its productivity as a reward for his capitalist's abstinences" (Prof Wicksell). However, in the case of transactions like the one before us, there is something much more valuable which is given as a reward to the lender and that valuable thing is the right to own capital on certain favourable terms. Therefore, the true reward as we have noted earlier, is the opportunity and privilege to own capital of the borrower on certain favourable terms. It is for this reason that the

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transactions before us belong to a different genus than the act of simply giving the money to the borrower and fall in the category of 'quasi capital'.

'5.. ...... The question, however, arises as to what are the connotations of expression 'quasi capital’ in the context of the transfer pricing legislation.

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compared with. Under Rule 10B(l)(a), as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified, and then such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the o pen market. Usually loan transactions are benchmarked on the basis of interest rate applicable on the loan transactions simplictor which, under the transfer pricing regulations, cannot be compared with a transaction which is something materially different than a loan simplictor, for example, a non-refundable loan which is to be converted into equity. It is in this context that the loans, which are in the nature of quasi capital, are treated differently than the normal loan transactions.

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than the loan transactions simplicitor and that is what was decisive so far as determination of the arm's length price of such transactions was concerned. The reward for time value of money in these cases was opportunity to subscribe to the capital, unlike in a normal loan transaction where reward is interest, which is measured as a percentage of the money loaned or advanced.'

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of the US Tax Court, broadly at the same level of judicial hierarchy as this Tribunal. This decision deals with the limited question whether a particular transaction is required to be treated as debt or as equity. The precise question, which came up for consideration of the US Tax Court, were (1) whether advance agreements issued by Pepsi Co's Netherlands subsidiaries to certain Pepsi Co domestic subsidiaries and PPR are more appropriately characterized as debt than as equity; and, (2) if the advance agreements are characterized as debt, whether, and to what extent payments on the advance agreements constitute original issue discount, relating to contingent payment debt instruments under section 1.1275-4(c), Income Tax Regulations. This provision is a deduction provision and not a provision relating to determination of arm's length price. Nothing, therefore, turns on this decision. In any event, it is nobody's case that the transaction before us is of the debt. The case of the assessee is that since in consideration of this transaction, the assessee is entitled to own the capital at certain admittedly favourable terms, the true reward of this debt is the availability of such an option, and, therefore, it cannot be compared with a debt simplictor for the purpose of determining arm's length price. Nothing, therefore, turns on this decision, and whatever be its persuasive value, or lack thereof, the authorities below were in error even in relying upon this decision

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arm's length price, the fact that normally a parent company has a right to subscribe to the capital of the subsidiary at such price as suits the assessee is required to be ignored. An arm's length price is hypothetical price at which independent enterprises would have entered the transaction, and, as such, the impact of intra AE association cannot have any role to play in determination of arm's length price. The stand so taken by the TPO, which has met the approval of the DRP as well, does not, therefore, meet our approval.

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assesses. Unless that happens, there is not even a prima facie case made out for an ALP adjustment.

9.1 In our view, since the issue is directly covered in favour of the assessee in his own case for assessment years 2012-13, 2013-14, 2010-11, 2009-10 and 2008-09, respectfully following the orders passed on the assessee’s own case, we hereby allowing this ground of appeal filed by the assessee.

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Ground number 1(c): Addition of � 15,56,62,098/- on account of reimbursement of expenses: 11. The brief facts in relation to this ground of appeal are that during the year under consideration, the assessee had reimbursed expenses to three associated Enterprises: Zydus pharmaceuticals Mexico, Zydus France and Zydus Japan. The assessee’s contention is that all these expenses were made by way of reimbursement on cost of cost basis to these overseas associated enterprises. With respect to reimbursements made to Zydus Mexico, the assessee’s contention is that Zydus Mexico had incurred certain expenses related to clinical research and product registration for assessee’s products. The assessee’s contention is that the reimbursements have been made by the assessee for the products wherein the assessee is the IP owner and plays the role of entrepreneur whereas Zydus Mexico is only a distributor entity. With respect to reimbursement of expenses to Zydus France, the assessee submission was that the expenses have been reimbursed to Zydus France only for those matters where the assessee is acting as an entrepreneur (while the assessee admitted that for some products, he also acted as a contract manufacturer, but the assessee submitted that no reimbursements were made by the assessee to Zydus France in respect of the same). During the year, Zydus France had incurred certain expenses related to product submission and regulatory fees, control and testing fees, leaflet replacement cost and production sample cost for assessee’s products. These costs have been reimbursed by the assessee to Zydus France on cost to cost basis without any markup. Thirdly, the assessee also made reimbursements to Zydus Japan on

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cost to cost basis by way of reimbursement of certain expenses in the nature of insurance for clinical trial studies on behalf of the assessee for administrative convenience. The TPO as well as the DRP however took the view that there was contradiction in the FAR analysis in the transfer pricing report and the submissions made while justifying the reimbursement of expenses. This was also observed by the TPO in the orders for assessment year 2012-13 and assessment year 2013-14. In the FAR in transfer pricing report for transactions with AEs viz. Zydus France, Zydus Japan, the assessee has been classified as a contract manufacturer. Since the assessee company has been taken to be a contract manufacturer and benchmarked as such, then the expenses incurred by the Associated Enterprises cannot be taken to have been incurred on behalf of the assessee company. The TPO to the view that no contract manufacturer, in similar uncontrolled transactions, would reimburse the expenses of another/third-party. Contract manufacturing is a very limited risk activity with low rewards and hence does not require incurring expenses of such nature. In view of this, the arms- length price (ALP) was taken as “Nil” by the TPO.

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respect to assessee’s business interests in these jurisdictions. In respect of Zydus Mexico, the assessee filed submission dated 2ndJune 2022 and drew our attention to relevant extracts of the supply and distribution agreement between the assessee company and Zydus Mexico to demonstrate that in fact, assessee is the IP owner and therefore reimbursements were made in connection with protection of assessee’s interest outside of India. He further drew our attention to the Transfer Pricing Study Report at pages 48 and 49 of the paper book to reiterate that the assessee is acting as an entrepreneur/IP owner and Zydus Mexico is acting as its distributor. He further drew attention to pages 593 to 613 of the paper book by giving necessary supporting for expenses reimbursed to Zydus Mexico for clinical research and product registration. The assessee further submitted that similar expenses were reimbursed by the assessee to Zydus USA, who is acting as a limited risk distributor for the assessee. The assessee obtained a favourable order of ITAT for assessment year 2012-13 (copy annexed at pages 166 to 168 of paper book) in respect of these reimbursements made by the assessee to Zydus USA. With respect to payments made to Zydus France, the counsel for the assessee submitted that the fact that the assessee is acting as an entrepreneur/IP owner and Zydus France is acting as its low risk distributor (LRD) is evident from the transfer pricing report at pages 48-49 of the paper book. He drew attention to the supply and distribution agreement at pages 491-498 of the paper book to reiterate that the assessee is the IP owner. He further drew our attention to pages 505-592 of the paper book, to the supportings for expenses reimbursed by Zydus France for product submission and regulatory fees, control and testing fees, the leaflet replacement cost of product innovator sample costs. The assessee submitted

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that all these expenses have been reimbursed in respect of those expenses incurred by Zydus France where the assessee company is acting as the entrepreneur/IP owner and Zydus France is acting as low risk distributor. The assessee obtained a favourable order of ITAT for assessment year 2012- 13 (copy annexed at pages 166 to 168 of paper book) in respect of these reimbursements made by the assessee to Zydus USA, whereas the latter was acting as the low risk distributor for the assessee. With respect to cost to cost reimbursements made by the assessee to Zydus Japan, the assessee submitted that these were reimbursements made to Zydus Japan for insurance charges and he drew attention to pages 614-15 of the paper book. The assessee’s contention is that in all cases, the expenses were reimbursed on cost of cost basis to the overseas entities in respect of those expenses which were incurred by these overseas associated Enterprises on behalf the assessee company wherein the assessee was acting in the capacity of an entrepreneur/IP owner. Accordingly, the AO has erred in facts and in law computing the arm’s-length price at “Nil” in respect of these payments.

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respect to assessee’s business interests in these overseas jurisdictions. The TPO/DRP has not questioned/challenged the assertion of the assessee that these expenses were reimbursed on a cost to cost basis. We further note that the assessee for assessment year 2012-13 and assessment year 2013-14 had reimbursed similar expenses towards associated Enterprise in USA and the TPO had determined the arm’s-length price at “Nil”. In this respect, the key findings of the ITAT are reproduced below for reference.

“23. We find that the TPO has, in essence, proceeded to make disallowance under section 37(1) by holding that there was no commercial expediency in making these reimbursements. That is certainly travelling beyond the domain of his powers under the scheme of the Act. The TPO only has to ascertain arm's length price of a transaction in the sense that if the same transaction was to be incurred between unrelated parties as to what would theoretically have been an arm's length price of the transaction in question, and that exercise is to be carried out on the basis of a permissible method of ascertaining arm's length price of a transaction. Whether the transaction should have taken place or not is not any of the TPO's business. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [(2012) 345 ITR 241 (Del)] "Even Rule 10B(l)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". The very foundation of the action of the TPO is thus devoid of legally sustainable merits. We have also noted that there is no mark up in the reimbursement of expenses, and, as such, there is no question of making any ALP adjustment in respect of these reimbursements of expenses. We have further noted that similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015-16, but no such arm's length price adjustments were made in any of these

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years. Undoubtedly, there is no res judicata in tax proceedings but principles of consistency definitely have a crucial rule to play- particularly in respect of a factual matter which permeates through the different assessment years. Similar transactions have been accepted to have been entered into on arm's length basis in the preceding, as also succeeding, years. There is thus no justification for deviation in this particular assessment year. In any case, so far product liability insurance is concerned, the assessee has justified bearing the same on the ground that US AE is an LRD (limited risk distributor) with a targeted operated margin, and, therefore, under this business model, these costs are to be borne by the assessee company. We see no infirmity in this approach and this explanation. When AE is only doing distribution, it is entirely a commercial call of the assessee as to which type of product related expenses are to be borne by the assessee. These expenses thus clearly pertain to the assessee as the US AE is admittedly, and beyond dispute, only an LRD. The same is the position with respect to the legal expenses. It has been specifically explained by the assessee, and this explanation has not even been called into question, that the US AE was holding the ANDAs and patents, as a trustee and in fiduciary capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm's length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned by the company and in respect of which US AE is only an LRD. The expenses in question were thus clearly for the purpose of the business of the assessee, and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALP- something clearly contrary to the scheme of the Act, these expenses were fully admissible for deduction. In any case,

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there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 21,43,79,368- subject to necessary verifications about the figures. 24. Ground no. 3 is thus allowed.”

13.1 Respectfully following the observations of the ITAT in assessee’s own case for assessment year 2012-13 and assessment year 2013-14 in ITA number is 954/AHD/17 and 213/AHD/18, referred to above, we are of the considered view that the TPO has erred in fact and law in holding that the arm’s-length price in respect of these cost to cost reimbursements should be determined at “Nil”. Further, we also observed that the High Courts in various cases have held that the TPO cannot determine the arm’s-length price of transaction as “Nil” on ad- hoc basis without employing any of the prescribed methods as the same is against the scheme of the Act. [Johnson & Johnson Ltd (Bombay High Court) (ITA No. 1030 of 2014), Kodak India Private Limited (Bombay High Court) (ITA No. 15 of 2014), Merck Limited (Bombay High Court) (ITA No. 1272 of 2014)]. Further, the High Court’s have also held on various occasions that the TPO’s jurisdiction is limited to determine the arm’s-length price of a transaction and does not have the jurisdiction to examine the allowability of expenses as provided in section 37 of the Act. [Luwa India Pvt. Ltd (Karnataka High Court) (I.T. A.No.296 of 2017), Lumax Industries Limited (Delhi High Court) (ITA Nos. 102,103, 104 & 587/2014), Cushman and Wakefield (India) Pvt. Ltd. (Delhi High

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Court) (ITA No. 475 OF 2012), EKL Appliances Ltd. (Delhi High Court) (ITA No. 1068 & 1070 OF 2011), Hive Communication Private Ltd. (Delhi High Court) (ITA No. 306 OF 2011).]

Ground Number 2: Addition of � 27,39,58,741/- on account of product registration expenses/reimbursement of expenses for product registration support services:

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allowing depreciation on such disallowances, added the residual difference amounting to � 27,39,58,741/- as income of the assessee during the year under consideration.

“84. In ground no, 4 the assessee has raised the following grievance: That the learned Assessing Officer erred in law and on facts in making an Addition of Rs, 21,07,52,058/- by holding that the Product Registration Expenses and reimbursement of expenses for Product Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses. 85. Learned representative fairly agree that as an identical issue has come up before us in the appeal for the assessment year 2012-13, whatever we decide in the assessment year 2012-13 will apply mutatis mutandis for this assessment year as well As observed earlier in this consolidated, we have decided this issue in favour of the assessee and observed as follows:

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“42. To adjudicate on this grievance, only a few material facts need to be taken note of. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee was debited Rs 7,34,49,394 under the head product registration expenses and Rs 4,49,20,897 as product support services. The Assessing Officer was of the opinion that these expenses were capital in nature as was held by Ms predecessors all along. While he was alive to the fact that this issue is decided in favour of the assessee by the appellate authorities, he was equally alive to the fact that these orders have not been accepted by the income tax authorities and the matter in thus in appeal before the higher authorities, It was in this backdrop that he treated the aggregate amount of Ms 11,83,70,291 as capital expenditure, but allowed depreciation of Rs 1,99,68,460 thereon, and disallowed net amount of Rs 9,84,01,831 The assessee did raise objection against this treatment but without any success. The assessee is now in appeal before us.

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Ground number 3: Addition on account of trademark registration fees and patent fees of � 10,35,19,784/-:

During the year, the assessee had debited amount of � 12,62,44,079/- 19. comprising of trademark registration fees and patent fees. The assessee submitted that registration of trademarks was done to enable the assessee company speedy and less-expensive remedy against infringement of trademarks. Similarly, patented registration fees was incurred to grant the assessee company exclusive right to prevent others from making use of the patented invention without permission. Since both expenses were incurred wholly and exclusively for the purpose of the assessee’s business, the same are allowable under section 37 of the Act. However, the AO disallowed the above expenses as being “capital expenditure” and after allowing depreciation on such disallowances, added the residual difference amounting

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to � 10,35,19,784/-as income of the assessee during the year under consideration.

“88. In ground no, 5, the assesses has raised the following grievance: That the learned Assessing Officer erred in law and on. facts in making an addition of Rs, 6,95,33,042/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses.

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and observations made therein will apply mutatis mutandis for this assessment year as well. Respectfully following the same, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 6,95,33,042

Ground number 4: addition of � 32,43,28,000/- as non-eligible expenditure under section 35(2AB) of the Act: 23. The facts in relation to this ground of appeal are that the AO and DRP have made addition on the ground that the amount allowed by the DSIR was less as compared to deduction claimed by the assessee. The counsel for the assessee relied on the case of Crompton Greaves Ltd 111 Taxman.com 338 (ITAT Mumbai). In response, the DR relied on the observations made by the AO and the DRP.

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“Clause (b) to sub-rule (7A) has been substituted by IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, under which the prescribed authority has to furnish electronically its report (i) in relation to approval of in-house R & D facility in part A of form No.3CL and (ii) quantifying the expenditure incurred on in-house R & D facility by the company during the previous year and eligible for weighted deduction under sub-section 2AB of section 35 of the Act in part B of form No.3CL. In other words the quantification of expenditure has been prescribed vide IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016. Prior to this amendment, no such power was with DSIR i.e. after approval of facility.

Under the amended provisions, beside maintaining separate accounts of R & D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act.

The issue which is raised before us relates to pre-amended provisions and question is where the facility has been approved by the prescribed authority, can the deduction be denied to the assessee under section 35(2AB) of the Act for non issue of form No.3CL by the said prescribed authority or the power is with the Assessing Officer to look into the nature of expenditure to be allowed as weighted deduction under section 35(2AB) of the Act. The first issue which arises is the recognition of facility by the prescribed authority as provided in section 35(2AB) of the Act.

…..The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted

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deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below.”

“10. Therefore, there is categorical finding given by the Tribunal that the amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 1-7-2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No. 3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure/methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act. The case before us pertains to FY 2013-14 relevant to AY 2014-15 and therefore, facts and circumstances are absolutely identical in assessee’s case also. Therefore, respectfully, following the order of the Tribunal (supra.) on the same parity of reasoning and under same set of facts and circumstances, we find no reason to interfere with the findings of the Ld. CIT(Appeal) and relief provided to the assessee is hereby sustained. Thus, grounds raised by the Revenue are dismissed.”

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25.1 The Kolkota Tribunal in recent case of DCIT v. STP Ltd.[2021] 125 taxmann.com 97 (Kolkata - Trib.) held that Prior to 1-6-2016, only requirement to claim deduction under section 35(2AB) was to receive recognition from prescribed authority, since said recognition was obtained by assessee on 26-3-2013, deduction could not be denied merely because prescribed authority failed to send intimation in Form 3CL in respect of expenditure incurred by R&D unit for relevant assessment year.

25.2 In the case of ACIT v. Crompton Greaves Ltd.[2019] 111 taxmann.com 338 (Mumbai - Trib.), the Mumbai Tribunal held that since the mandate of approval of quantum of expenditure had been put in place only with effect from 1-7-2016, hence, non-approval of quantum of expenditure for assessment year 2009-10 did not entitle Assessing Officer to make disallowance under section 35(2AB) of the Act. The Mumbai ITAT in the above case made the following observations: “9. The operative phrase here is "on in-house research and development facility as approved by the prescribed authority …….", the word "facility" has been hereby show us to emphasis the point that it is the unit which requires approval of the prescribed authority under this provision. Further, in the memorandum, explaining the provision of section and the notes on the clauses issued at the time of insertion of section 35(2AB) in the Act, copies of both of which have been filed on record before us by the assessee, it has been clearly provided that the deduction would be available to the assessee's having an approved in-house R & D facility by the prescribed authority. Undisputedly, there is no mention or approval of the quantum of expenditure.

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High Court vide its decision reported at 250 taxmann 270, it has been held that the objective of Form 3CL is limited to the forwarding of the intimation of the approval of the unit; that Form No. 3CL is a mere report for intimation of approval of R & D facility. In this regard, as rightly pointed out, such aspect stands confirmed by sub-rule (7A) of Rule 6 of Income Tax Rules, as within subsisting (now amended w.e.f. 01.07.2016), to provide for quantification of expenditure as well. The Finance Act, 2015 as amended to sub section (3) of section 35 w.e.f. 01.04.2016, providing for furnishing of reports in the manner to be prescribed. It is, thus, w.e.f. 01.04.2016 that the provision has been made for approval of quantum of expenditure, for the first time.”

25.3 Again, the Mumbai Tribunal in the case of Omni Active Health Technologies Ltd. v. ACIT [2020] 117 taxmann.com 229 (Mumbai - Trib.) held that Once in-house R & D facility is recognized by prescribed authority, role of Assessing Officer is to allow expenditure incurred on in- house R&D facility as weighted deduction under section 35(2AB).

25.4 The Bangalore Tribunal in the case of Provimi Animal Nutrition India Pvt. Ltd. v PCIT [2021] 124 taxmann.com 73 (Bangalore - Trib.)held that prior to 1-7-2016, Form 3CL granting approval by prescribed authority in relation to quantification of weighted deduction under section 35 (2AB) had no legal sanctity and it was only with effect from 1-7-2016 with amendment to rule 6(7A)(b) that quantification of weighted deduction under section 35(2AB) has significance.

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there is no mention of approval of the ‘quantum’ of expenditure in the law as it stood prior to that date. The mandate of quantification of expenditure has been put in place only w.e.f. 01.07.2016. In view of the above observations, we allow this ground of appeal of the assessee.

Ground number 5: eligibility for weighted deduction under section 35(2AB) of the Act in connection with R&D expenses in respect of clinical trial and bio-equivalence study of � 38,98,08,000/-

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“101. In ground no. 7, the assessee has raised the following grievance:

That the learned Assessing Officer erred in, law and on facts in making an addition of Rs. 67,00,09,438 by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s 35(2 AB) in respect of Clinical Trial and Bio- equivalence Study.

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has been directed to adjudicate on the matter on merits. It was in this backdrop that he proposed to disallow Rs 39,3931,000 on account of R&D expenses. The assessee did raise objection against this treatment but without any success. The assesses is now in appeal before us.

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Ground number 6: disallowance of depreciation on Hummer car of � 6,60,491/-

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“105. In ground no. 8, the assessee has raised the following grievance:

That the learned Assessing Officer erred in law and on facts in disallowing depreciation of Rs. 7,77,048/- on the cost of Hummer H2 imported motor car, alleging that the vehicle was owned by the Director and not by the appellant. 106. Learned representatives fairly agree that this issue is also covered, in favour of the assessee, by a coordinate bench decision in assessee's own case for the assessment year 2010-11, In the said decision, the coordinate bench has, inter alia/ observed as follows: 130. In ground No. 7, the Assessing Officer has raised the following grievance:

The DRP has erred in allowing depreciation of Rs.12,65,293/- on Hummer Car despite the fact that the same was in the name of the Director and there was no evidence to show that the same was used wholly and exclusively for the purpose of business. The provisions of section 32 were therefore not satisfied.

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was used for the purpose of business and the Assessing Officer has himself allowed the running and maintenance expenses of this car. It has also been noted that the registration of car in the name of driver was a matter of convenience as it gave advantage to the assessee in terms of road tax. On these facts, as held by the t>RP7 the mere fact that the cat was not legally owned by the assesses company- particularly when beneficial ownership of this vehicle is not even in dispute,, the depreciation on car cannot be declined. Aggrieved, assessee is in appeal before us.

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Ground number 7: Adjustment of � 14,56,85,632/- in respect of disallowance under section 14A for computation of book profits under section 115JB

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“109. Ground no. 9, the assessee has raised the following grievance:

That the learned Assessing Officer erred in law and on facts in making an adjustment of Rs. 18,77,51,234/- to respect of disallowance u/s. 14A for purposes of computation of book profit u/s. 115JB.

112 Ground no, 11 is thus allowed. No other ground was pressed before us.”

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passed on the assessee’s own case, we are hereby allowing this ground of appeal filed by the assessee.

Order pronounced in the open court on 14-09-2022

Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 14/09/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद