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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
PER SAKTIJIT DEY, J.M.
Aforesaid cross appeals by the assessee and the Revenue arise out of order dated 28th April 2017, passed by the learned Commissioner (Appeals)–57, Mumbai, for assessment year 2008–09.
ITA no.5471/Mum./2017 Assessee’s Appeal
The assessee has raised eleven grounds.
Ground no.XIbeing general in nature does not require adjudication.
At the outset, the learned Sr. Counsel for the assessee submitted that ground no.I, in substance, has become infructuous. In view of such submissions, we dismiss ground no.1, as not pressed.
In ground no.II, the assessee has challenged the decision of the learned Commissioner (Appeals) in upholding disallowance of deduction claimed under section 80IC of the Income Tax Act, 1961 (for short “the Act”) in the final assessment order without such disallowance having been made in the draft assessment order.
3 M/s. Piramal Enterprises Ltd.
Brief facts are, the assessee an Indian company is engaged in the business of manufacturing and sale of Pharmaceutical products including bulk drugs, chemicals and skin care products. For the purpose of its manufacturing activity, the assessee has set–up units at Baddi, Pithampur, Mahad, Thane, Chennai and Medak. For the assessment year under dispute, the assessee filed its return of income on 29th September 2008, declaring total income of ` 58,66,63,489. In course of the assessment proceedings, the Assessing Officer, after calling for books of account and other information and verifying the same ultimately framed the draft assessment order under section 143(3) r/w 144C of the Income Tax Act, 1961 of the Act on 29th December 2011. While framing the draft assessment order, the Assessing Officer allowed deduction under section 80IC of the Act for an amount of ` 233,47,00,000. It is evident, the assessee did not raise any objection before the Dispute Resolution Panel (DRP) against draft assessment order. Thus, due to acceptance of the draft assessment order, the Assessing Officer proceeded to pass the final assessment order under section 143(3) r/w 144C of the Act on 29th February 2012. However, while doing so, the Assessing Officer totally disallowed assessee’s claim of deduction under section 80IC of the Act by deviating from the draft assessment order.
4 M/s. Piramal Enterprises Ltd.
The assessee challenged the disallowance of deduction claimed under section 80IC of the Act before learned Commissioner (Appeals), both on jurisdiction of the Assessing Officer to do so in the final assessment order in variation to draft assessment order as well as on merit. Before the first appellate authority, it was submitted by the assessee that as per the provisions of section 144C(3) of the Act, the Assessing Officer has to complete the final assessment on the basis of the draft assessment order if the assessee intimates the Assessing Officer about the acceptance of the variation or no objections are received within the period specified in sub–section (2) of the Act. It was submitted by the assessee, since, the assessee had accepted the decision of the Assessing Officer with regard to the deduction claimed under section 80IC of the Act in the draft assessment order, the Assessing Officer has to complete the final assessment order on the basis of the draft assessment order and he cannot make any variation therefrom. The learned Commissioner (Appeals) after considering the submissions of the assessee, however, did not find merit in them. He observed, after the framing of draft assessment order the Assessing Officer has made further enquiries with regard to eligibility of deduction claimed under section 80IC of the Act in respect of Baddi Unit and the assessee was given opportunity of hearing during the final assessment proceedings. The learned Commissioner (Appeals)
5 M/s. Piramal Enterprises Ltd.
observed, the provision of section 144C of the Act is silent about the circumstances which may occur between the date of forwarding of the draft assessment order to the assessee and the pendency of enquiry, if any. He observed, since, at the time of framing of draft assessment order enquiry was incomplete, the Assessing Officer could not have made addition on estimate basis. Therefore, after completion of enquiry, the Assessing Officer had made the addition / disallowance in the final assessment order after affording full opportunity of being heard to the assessee. Accordingly, he rejected assessee’s objection with regard to the variation made in the final assessment order in respect of deduction claimed under section 80IC of the Act.
Shri J.D. Mistry, learned Sr. Counsel appearing for the assessee drew our attention to the copy of the draft assessment order and submitted that the only disallowance made by the Assessing Officer with regard to the deduction claimed by the assessee under section 80IC of the Act is for an amount of ` 13.63 crore out of deduction claimed of ` 247.10 crore claimed by the assessee. In the process, the Assessing Officer allowed deduction of ` 233.47 crore under section 80IC of the Act while completing the draft assessment order. He submitted, against the draft assessment order so passed the assessee did not file any objection before the DRP and the Assessing Officer within the prescribed time as per sub-section (2) of section 144C of
6 M/s. Piramal Enterprises Ltd.
the Act. Drawing our attention to section 144C of the Act, the learned Sr. Counsel submitted, in a case where the assessee either accepts the variations proposed in the draft assessment order or does not file any objection before the DRP and Assessing Officer against the variations proposed in the draft assessment order as per sub–section (3) of section 144C of the Act, the Assessing Officer shall complete the assessment on the basis of draft assessment order. He submitted, the final assessment order shall be passed by the Assessing Officer within one month from the end of the month in which the acceptance of the assessee is received or the period of filing of objection under sub– section (2) expires. He submitted, the scheme of section 144C of the Act makes it clear that the Assessing Officer has to pass the final assessment order on the basis of the draft assessment order in a case where the variation made in the draft assessment order is either accepted or not objected to by the assessee before the DRP. The learned Sr. Counsel submitted, the provision of section 144C of the Act makes it clear that the Assessing Officer while completing final assessment order cannot deviate from the draft assessment order unless there is specific direction by the DRP. Thus, the learned Sr. Counsel submitted, the disallowance of deduction under section 80IC of the Act made in the final assessment order over and above the amount disallowed in the draft assessment order is without
7 M/s. Piramal Enterprises Ltd.
jurisdiction, hence, unsustainable. In support of such contention, he relied upon the following decisions:–
i) PCIT v/s Woco Motherson Advance Rubber Technologies Ltd., [2017] 80 taxmann.com 63 (Guj.); ii) PCIT v/s WocoMotherson Advance Rubber Technologies Ltd., [2018] 89 taxmann.com 007 (SC); and iii) CIT v/s Sanmina SCI India Pvt. Ltd., [2017] 85 taxmann.com 29.
Shri Jayant Kumar, learned Departmental Representative submitted, in course of the assessment proceedings the Assessing Officer has initiated enquiry with regard to the receipt shown in respect of the manufacturing unit at Baddi. He submitted, in this context notices under section 133(6) of the Act were sent to a number of persons including M/s. Abbott Health Care Ltd. to whom the assessee sold the drug unit at Baddi in financial year 2010–11. He submitted, at the time of framing of draft assessment, since, the information called for by the Assessing Officer was not received, he proceeded to frame the draft assessment order by disallowing an amount of ` 13.63 crore out of the deduction claimed under section 80IC of the Act. However, the Assessing Officer did mention in the draft assessment order that it is subject to the outcome of cross verification as per the notices issued under section 133(6) of the Act. Thus, he submitted, the disallowance of deduction under section 80IC
8 M/s. Piramal Enterprises Ltd.
of the Act made in the draft assessment order was not final and was subject to further enquiry. He submitted, subsequently, on the basis of information received under section 133(6) of the Act, the Assessing Officer having found that the assessee is not eligible to claim deduction under section 80IC of the Act in respect of Baddi unit, he disallowed the deduction in the final assessment order. However, he submitted, such disallowance made in the final assessment order is on the basis of discussions made by the Assessing Officer in the draft assessment order. The learned Departmental Representative submitted, in a case where the Assessing Officer has to pass the final assessment order in pursuance to the directions of the DRP, he cannot make any variation on his own, except, implementing the directions of the DRP. He submitted, the restrictions / conditions imposed under section 144C(13) of the Act, however, do not affect the power of the Assessing Officer under section 144C(3) of the Act. The learned Departmental Representative submitted, in any case of the matter, the Assessing Officer has passed the final assessment order on the basis of discussions made in the draft assessment order. Therefore, the objections of the assessee should not be entertained.
We have patiently and carefully heard the parties and considered their submissions with regard to the disputed issue. We have also applied our mind to the facts on record and decisions relied upon.
9 M/s. Piramal Enterprises Ltd.
Undisputedly, in the return of income filed for the impugned assessment year, the assessee had claimed deduction of ` 247.10 crore under section 80IC of the Act. In course of the assessment proceedings, the Assessing Officer examined assessee’s claim of deduction under section 80IC of the Act by calling for the books of account and various other information. It is also evident, the Assessing Officer conducted independent enquiry by issuing notices under section 133(6) of the Act. However, while framing the draft assessment order on 29th December 2011, the Assessing Officer disallowed an amount of ` 13.63 crore out of the total deduction claimed by the assessee under section 80IC of the Act, thereby, allowing deduction of ` 233.47 crore. Undisputedly, against the draft assessment order so passed, assessee did not file any objections before the DRP and the Assessing Officer within the prescribed time limit as per section 144C(2) of the Act. Thus, in absence of any objection from the assessee, the Assessing Officer proceeded to pass the final assessment order under section 143(3) r/w section 144C of the Act on 29th December 2012, as per section 144C(3) of the Act. However, while passing the final assessment order, the Assessing Officer disallowed the entire deduction claimed under section 80IC of the Act amounting to ` 247.10 crore, meaning thereby, he made a departure from the draft
10 M/s. Piramal Enterprises Ltd.
assessment order insofar as it relates to disallowance of deduction under section 80IC of the Act.
The core issue arising for consideration before us is, while passing the final assessment order whether the Assessing Officer is empowered to vary the draft assessment order? In other words, whether the Assessing Officer can make an addition / disallowance in the final assessment order which was not proposed in the draft assessment order? Before venturing to decide the issue, it is necessary to look into the provision of section 144C of the Act under which the Assessing Officer has proceeded in the instant case. Section 144C(1) of the Act empowers the Assessing Officer to pass a draft assessment order if he intends to make a variation in the income or loss returned by an assessee in whose case such variation arises as a consequence of the order of the Transfer Pricing Officer passed under sub–section (3) of section 92CA of the Act. Thus, it becomes clear, the Assessing Officer can pass a draft assessment order under section 144C(1) of the Act only in a case where he proposes to make addition on the basis of transfer pricing adjustment suggested by the Transfer Pricing Officer. Once such a draft assessment order is made, the assessee has the option to either object to the draft assessment order before the DRP and Assessing Officer or accept the variation made in the draft assessment order. Sub–section (2) of section 144C of the Act
11 M/s. Piramal Enterprises Ltd.
provides, if the assessee within 30 days of receipt of the draft assessment order files his acceptance of the variations made in the draft assessment order or if the assessee does not file any objection against the draft assessment order before the DRP and the Assessing Officer, the Assessing Officer shall complete the assessment on the basis of the draft assessment order within a period of one month from the end of the month in which the acceptance is received or the period of filing of objections against the draft assessment order expires. In a case, where the assessee objects to the draft assessment order before the DRP, the DRP in terms of sub–section (5) of section 144C of the Act will dispose off the objections. Sub–section (10) of section 144C of the Act makes it clear that the direction issued by the DRP while disposing off assessee’s objection shall be binding on the Assessing Officer. Sub–section (13) of section 144C of the Act provides that the Assessing Officer on receipt of the direction of the DRP shall pass the final assessment order in conformity with the directions of the DRP. Thus, the scheme of section 144C of the Act of the Act, which a code by itself, suggest that where the assessee either accepts the variation suggested in the draft assessment order or does not file any objection before the DRP and the Assessing Officer against the draft assessment order, the Assessing Officer shall pass the final assessment order on the basis of draft assessment order. However, in a case where the
12 M/s. Piramal Enterprises Ltd.
assessee files objections against the draft assessment order before the DRP, the Assessing Officer is duty bound to complete the final assessment in conformity with the directions of the DRP. Thus, on a reading of section 144C of the Act it is very much clear that only in a case where the final assessment order is passed in conformity with the directions of the DRP, the Assessing Officer can vary the draft assessment order in respect of any addition / disallowance as per the directions of the DRP. However, where the Assessing Officer passes the final assessment order under sub–section (3) of section 144C of the Act, he has no such power to deviate from the draft assessment order and can pass the final assessment order only on the basis of draft assessment order. This is so because if an addition or disallowance is made in the final assessment order which was not made in the draft assessment order, the assessee is deprived of objecting to the addition / disallowance made before the DRP. Thus, the assessee is divested of a valuable statutory right of challenging the addition / disallowance made, since, the DRP as per the scheme of section 144C functions like a first appellate authority. This is in complete violation of rules of natural justice. In such situation it is immaterial whether before making such addition / disallowance in the final assessment order, the assessee was given opportunity of being heard or not. What is material is, the assessee must be given a fair
13 M/s. Piramal Enterprises Ltd.
opportunity to redress its grievance as per the mechanism provided under the statute. Addition / disallowance of a item of income in final assessment order which was not proposed in the draft assessment order deprives the assessee from redressing its grievance before the appropriate authority as per the statutory provision. Statute provides sufficient time to the Assessing Officer to make assessment. Therefore, we are unable to accept the plea of the department that, since, at the time of passing of draft assessment order enquiry was incomplete, hence, Assessing Officer is competent to make addition/disallowance in variance with draft assessment order. That being the case, in our considered opinion, the Assessing Officer cannot make any addition or disallowance in the final assessment order which was not proposed in the draft assessment order. The Hon'ble Gujarat High Court in Woco Motherson Advance Rubber Technologies Ltd.(supra) while examining identical issue, after interpreting the provision contained under section 144C of the Act held as under:–
“13. Considering the aforesaid, it appears that there is complete machinery provided under Section 144C of the Act. In the entire scheme of Section 144C, it refers to the draft assessment order ie., variation in the income or loss returned proposed in the draft assessment order. Even the objections are required to be submitted by the assessee with respect to the variation proposed in the draft assessment order. Even, the DRP is also required to consider the objections raised by the assessee with respect to the variation proposed in the draft assessment order. The DRP is also required to issue directions with respect to the variation proposed in the draft draft assessment order and even considering the records relating to the draft order. Considering the entire scheme
14 M/s. Piramal Enterprises Ltd.
of Section 144C of the Act, it appears that in conformity with the principles of natural justice, the assessee is required to be given an opportunity to submit objections with respect to the variation proposed in the income or loss returned. Therefore, while passing the final assessment order, the Assessing Officer cannot go beyond what is proposed in the draft assessment order. If the submissions made on behalf of the Revenue are accepted that the Assessing Officer, while passing the final assessment order can also go beyond the variation proposed in the draft assessment order, then in that case, it can be said that the assessee shall not given any opportunity to raise objections against such additions or disallowances which were not even proposed in the draft assessment order. Therefore, the same can be considered to be in breach of the principles of natural justice. 13.1 At this stage, it is required to be noted that even while passing the regular assessment order, if the officer proposes to make any further addition and/or disallowances, in that case also, the Assessing Officer is required to issue required notice under Section 142 of the Act and the assessee is required to be given an opportunity to raise objection against such addition and/or disallowance. Under the circumstances, considering the entire scheme of Section 144C of the Act, the Assessing Officer cannot make any addition and/or disallowance then what is proposed in the draft assessment order. 14. The contention raised on behalf of the Revenue that the aforesaid lapse can be said to be a procedural lapse has also no substance. Such additions/disallowances other than those proposed in the draft assessment order cannot be said to be a mere procedural lapse. 14.1 Under the circumstances, we are of the opinion that the learned Tribunal has not committed any error in deleting the disallowance made by the Assessing Officer with respect to the claim of the assessee under Section 10AA of the Act, as the same was not proposed by the Assessing Officer in the draft assessment order and for which, no opportunity was given to the assessee to submit the objections against such disallowance.”
The Special Leave Petition filed by the Department against the aforesaid decision of the Hon'ble Gujarat High Court has been dismissed by the Hon'ble Supreme Court in PCIT v/s Woco Motherson Advance Rubber Technologies Ltd. (supra).
15 M/s. Piramal Enterprises Ltd.
The Hon'ble Madras High Court in Sanmina SCI India Pvt. Ltd. (supra) while dealing with identical issue has held as under:–
“8. The question posed relates essentially to whether the impugned order of Final Assessment dated 20.2.014 is an excess of jurisdiction by the Assessing Officer or within the powers granted to him in terms of s.144C of the Act. The answer reveals itself on an analysis of the Scheme itself. The tone is set in sub- section (1) thereof wherein the role of an Assessing Officer and the limits of his jurisdiction are demarcated, in that, the order of draft assessment is to set out the proposed variations and forward the same to the Assessee for response. Then again, sub-section (3) of 144C requires the Assessing Officer to complete the assessment on the basis of the draft order. In setting out the scope of the DRP to issue directions, sub-section (6) restricts the DRP to consideration of the draft order and the objections filed by the Assessee along with connected evidence, report, records, and enquiries. 9. It is only in sub-section (8) where the power of enhancement is granted to the DRP, that the scope of the variations as proposed under section 144C(1) stand expanded. The interests of both the Assessee and the Revenue to respond to the proposed variations has been protected and an opportunity to be heard has been specifically provided for under sub-section (11). Thus where Legislature provided for any variation in assessment over and above that proposed in the order of draft assessment, it has specifically provided for an opportunity of hearing prior thereto. Thereafter in terms of sub- section (13), the Assessing Officer is bound to conform to the directions given by the DRP and give effect to the same. Contrary to the mandate in sub-section (11), it has been thought unnecessary to grant an opportunity to the assessee prior to the passing of the final order. This leads to the inescapable conclusion that the Assessing Officer is not expected to, and shall not venture to raise any issue except the variations specified by him in 144C(1) in the order of draft assessment or any issue raised by the DRP by way of enhancement in terms of sub-section (8) of 144C. The scheme of s.144C would thus be wholly violated if the Assessing Officer takes it upon himself to include in the final order of assessment such additions/disallowance/variations that do not form part of the order of draft assessment. 10. Further, we do not agree with the submission of the Learned Counsel for the Appellant to the effect that since the provisions of
16 M/s. Piramal Enterprises Ltd.
s.10A have been dealt with in the order of assessment, albeit in another context, the Assessing Officer is at liberty to consider any and all aspects relating to s.10A including the issue of priority in the set off of losses at the stage of final assessment. The proposition sought to be put forth is too wide to be accepted and would distort the scheme of s.144 C as noted above. We now advert to the provisions of s.144B and the judgments cited at the Bar in support of their respective submissions.”
The ratio laid down in the aforesaid decisions, if applied to the facts of the present appeal, clinches the issue in favour of the assessee. Thus, in the aforesaid view of the matter we hold that the disallowance of deduction under section 80IC of the Act made by the Assessing Officer in the final assessment order, over and above the amount disallowed in the draft assessment order, should be deleted. The Assessing Officer is directed to do so. As regards the amount disallowed in the draft assessment order, we will deal with the issue separately while deciding ground no. VIII raised by the assessee. This ground is allowed.
In view of our decision in ground no.II, ground no.III has become redundant, hence, does not require adjudication.
In ground no.IV, assessee has challenged the disallowance of ` 2,35,81,000, paid to Piramal Enterprises Ltd. (PEL).
Brief facts are, during the assessment proceedings, the Assessing Officer while going through the audit report found that payments to
17 M/s. Piramal Enterprises Ltd.
the tune of ` 929.12 lakh has been made to Associate Enterprises which come within the purview of section 40(a)(2)(v) of the Act. After calling for necessary details and examining them, the Assessing Officer found that the assessee has made payment to PEL towards services claimed to have been rendered in respect of taxation management, fund management, accounts and finance, legal matter, secretarial matter, corporate matters, information technologies, etc. The Assessing Officer observed, the services claimed to have been received are quite general in nature and no one–to–one nexus could be established between the payments made and services provided. Therefore, he called upon the assessee to justify the payment made. In response, the assessee furnished copy of the agreement executed with PEL on 29th April 1995 along with documentary evidences like debit note, break–up of expenditure actually incurred by PEL and apportionment made with the group companies. The Assessing Officer after considering the submissions and perusing the documents filed before him observed that the total expenses incurred by PEL which is to be apportioned with the group companies is only ` 1,250 lakh whereas the actual apportionment made of service charges is ` 1,482 lakh, share of assessee being ` 822 lakh, which according to the Assessing Officer is contrary to the terms of agreement. The Assessing Officer observed, there is no valid basis for PEL to raise debit note in
18 M/s. Piramal Enterprises Ltd.
excess of ` 1,250 lakh to its group concern. Thus, he concluded that the payment made not being in conformity with the terms of the agreement, a part of it has to be disallowed. Accordingly, he disallowed an amount of ` 2,35,81,000 from the total claim on the reasoning that such expenditure is not for the purpose of business. The assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee, though, agreed with the assessee that the Assessing Officer has committed error while adopting the rate of percentage of allocation and the total service charges of ` 1,250 lakh between various group companies, however, he directed the Assessing Officer to examine assessee’s claim that out of expenditure of ` 1,250 lakh allocable to group companies, assessee’s share @ 54% comes to ` 675 lakh and the balance amount of ` 147 lakh was towards royalty. He also directed the Assessing Officer to examine whether such payments requires deduction of tax at source.
The learned Sr. Counsel for the assessee submitted, it is a composite payment made to PEL for reimbursement of expenses and royalty. Drawing our attention to the submissions made before the learned Commissioner (Appeals) the learned Sr. Counsel submitted,
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the payment made constitutes of reimbursement of expenses and royalty. He submitted, reimbursement of expenses is @ 54%, whereas, the balance amount of ` 147 lakh is towards royalty. He submitted, this is clearly provided in the agreement. The learned Sr. Counsel drawing our attention to the agreement with PEL, a copy of which is placed at Page–859 of the paper book, submitted that clause– 5(a) specifically deals with payment of royalty not exceeding 0.5% of the turnover of goods manufacture and traded by the assessee. He also drew our attention to the working of reimbursement of expenses and royalty, a copy of which is at Page–237 of the paper book. He submitted, while giving effect to the order of the Commissioner (Appeals), though, the Assessing Officer has allowed the claim of reimbursement of expenditure to PEL, however, he disallowed payment of royalty. Thus, learned Sr. Counsel submitted, the facts relating to the payment of reimbursement and royalty have been clearly brought out on record the disallowance made on misconception of facts should be deleted.
The learned Departmental Representative relying upon the observations of Assessing Officer and the learned Commissioner (Appeals) submitted, there is no mention of royalty in the debit note. Therefore, assessee’s claim cannot be accepted without proper verification.
20 M/s. Piramal Enterprises Ltd.
We have considered rival submissions and perused materials on record. On a reading of the agreement dated 29th April 1995 with PEL a copy of which is at Page–859 of the paper book, it is noticed that in addition to the reimbursement of expenses incurred by PEL on behalf of the assessee, the assessee was also required to pay to PEL royalty @ not exceeding 0.5% of his turnover of goods manufacture and traded. Thus, it is evident that the payment made of `822 crore to PEL constitutes both reimbursement of expenses and royalty. This fact is also clear from the working of reimbursement of expenses and royalty at Page–237 of the paper book, which indicates that an amount of ` 6.75 crore was for reimbursement of expenses and `1.47 crore towards royalty. From the assessment order, prima–facie, it appears that the Assessing Officer while concluding that PEL has charged more to the assessee towards reimbursement of expenses than what is contemplated in the agreement is under a misconception of fact. However, in the order giving effect to the direction of the Commissioner (Appeals), the Assessing Officer has allowed the payment made towards expenditure fully and disallowed the amount of ` 1.47 crore towards royalty. When the terms of the agreement specifically provide for payment of royalty and royalty was paid in compliance to such term, there is no justification for disallowance of royalty payment. Disallowance made is deleted.
21 M/s. Piramal Enterprises Ltd.
In ground no.V, the assessee has challenged the disallowance of deduction claimed under section 35(2AB) of the Act amounting to `.12,59,65,265 in respect of its research and development facility at Ennore and Goregaon.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed weighted deduction under section 35(2AB) of the Act called upon the assessee to furnish the approval of the R&D facility by the appropriate authority i.e., Department of Scientific and Industrial Research (DSIR) as required under the statute. In response, it was submitted by the assessee that the R&D facility has been approved by the DSIR. He also furnished copy of such approval before the Assessing Officer. However, the Assessing Officer called upon the assessee to furnish approval of the DSIR in Form no.3CM. As stated by the Assessing Officer the assessee expressed his inability to furnish the approval in Form no.3CM for the impugned assessment year. Thus, in the absence of the approval in Form no.3CM by the competent authority, the Assessing Officer disallowed assessee’s claim of deduction under section 35(2AB) of the Act at 150% of the expenditure and accordingly disallowed an amount of ` 12,59,65,265.
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Though, the assessee challenged the disallowance before the first appellate authority, however, the learned Commissioner (Appeals) upheld the disallowance made by the Assessing Officer on the reasoning that the assessee has failed to furnish approval from the competent authority in Form no.3CM.
The learned Sr. Counsel for the assessee submitted, though, assessee’s research and development facilities are approved by the competent authority, however, approval in Form no.3CM by the DSIR, is still awaited, though, the assessee has made application seeking such approval. He submitted, since, assessee’s application for approval is not rejected, deduction claimed should be allowed. In support of such contention, he relied upon the decision of the Tribunal, Hyderabad Bench, in Vivimed Labs Ltd. v/s DCIT, [2016] 66 taxmann.com 94 (Hyd.).
The learned Departmental Representative strongly relying upon the observations of the learned Commissioner (Appeals) and the Assessing Officer submitted that approval of the competent authority in the manner prescribed under the statute is a mandatory condition for availing deduction under section 35(2AB) of the Act. In support, he relied upon the decision of the Tribunal, Mumbai Bench, in PCP Chemicals Pvt. Ltd. v/s ITO, [2018] 168 ITD 26 (Mum.).
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We have considered rival submissions and perused materials on record. It is an undisputed fact that there is no approval by the competent authority in Form no.3CM in respect of the expenditure incurred towards the R&D facility. Section 35(2AB) of the Act mandates furnishing of approval in Form no.3CM for the purpose of availing deduction. It is the contention of the assessee that though, it has made application seeking approval in Form no.3CM, however, it is still awaited. As held by the Tribunal, Mumbai Bench, in case of PCP Chemicals Pvt. Ltd. (supra), approval by the competent authority in Form no.3CM is mandatory for claiming deduction under section 35(2AB) of the Act. The same view has also been expressed in Vivimed Labs Ltd. (supra). However, considering the contention of the learned Sr. Counsel that the assessee has applied for approval in Form no.3CM which is still pending, we are inclined to restore the issue to the Assessing Officer for providing an opportunity to the assessee to furnish the approval of the competent authority in the prescribed manner for claiming deduction under section 35(2AB) of the Act. This ground is allowed for statistical purposes.
In ground no.VI, the assessee has challenge disallowance of depreciation amounting to ` 20,60,508.
24 M/s. Piramal Enterprises Ltd.
Brief facts are, during the assessment proceedings, the Assessing Officer while examining assessee’s claim of depreciation found that the assessee has claimed depreciation on the assets taken over as part of the merger of Boehringer Mannheim India Ltd. (BMIL) with the assessee w.e.f. 1st April 1996. However, he observed, as per the schedule of depreciation the assessee has claimed depreciation on the written down value (WDV) without adjusting the depreciation allowable for assessment years 1995–96 and 1996–97 in the hands of BMIL. The Assessing Officer observed, BMIL had not opted to claim depreciation in assessment year 1995–96 and 1996–97, though, assets were used in the business. Therefore, the Assessing Officer concluded that depreciation being in the nature of deduction for wear and tear of the asset, it is mandatory to charge depreciation. Accordingly, he adjusted the depreciation chargeable for assessment years 1995–96 and 1996– 97 from the WDV and computed depreciation. This resulted in disallowance of depreciation amounting to ` 20,60,508. The assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals), however, agreed with the view expressed the Assessing Officer.
The learned Sr. Counsel for the assessee submitted that as per the provision of section 32 existing during the relevant assessment
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year the assessee was entitled to claim depreciation at its own option and computation of depreciation was not mandatory. Therefore, the Assessing Officer cannot notionally adjust unclaimed depreciation of preceding assessment years from the WDV. He submitted, the issue has been decided in assessee’s own case by the Tribunal, Mumbai Bench, which is reported in [2014] 147 ITD 675 (Mum.).
The learned Departmental Representative relied upon the reasoning of the learned Commissioner (Appeals) and the Assessing Officer.
We have considered rival submissions and perused materials on record. It is an undisputed fact that BIML before its merger had not claimed depreciation on the assets in the assessment year 1995–96 and 1996–97. The Assessing Officer has accepted this fact. After merger of BIML with the assessee, the assessee had claimed deprecation for the first time on the assets taken over from BMIL. Thus, it is a fact on record that no depreciation was claimed on the taken over assets earlier. The Assessing Officer has notionally computed depreciation on the said assets for the assessment year 1995–96 and 1996–97 and reduced it from the WDV for computing depreciation. As per the provisions of section 32 of the Act applicable to the relevant assessment year, the assessee was free to either claim
26 M/s. Piramal Enterprises Ltd.
or not claim depreciation as per its own option. Only after introduction of Explanation 5 to section 32 of the Act by Finance Act, 2001, w.e.f. 1st April 2002, computation of depreciation became mandatory whether or not the assessee claims it. That being the case, the Assessing Officer, in our considered opinion, was not justified in notionally reducing the depreciation for assessment year 1995–96 and 1996–97 from the WDV for computing depreciation for the impugned assessment year. This view has also been expressed by the Co– ordinate Bench, in Nicolas Piramal India Ltd. 147 ITD 675. In view of the aforesaid, we allow assessee’s claim of depreciation. This ground is allowed.
In ground no.VII, assessee has challenged disallowance of expenditure under section 14A r/w rule 8D.
Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee has earned exempt income by way of dividend, called upon the assessee to explain why it has not disallowed expenditure for earning exempt income in terms of section 14A of the Act. In response, it was submitted by the assessee that since the dividend earned of ` 2,00,52,200, was received from the investments made by the company in earlier years, no expenditure is attributable for earning of such exempt income. Without prejudice to
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the aforesaid submissions, it was also submitted that the assessee has sufficient interest free surplus fund to take care of the investment, hence, no disallowance should be made. The Assessing Officer, however, did not accept the claim of the assessee and proceeded to disallow interest expenditure of ` 2,52,83,000 under rule 8D(2)(ii) and administrative expenditure of ` 33,36,000 under rule 8D(2)(iii). Thus, the total disallowance made by the Assessing Officer was ` 2,86,19,000.
Though, the assessee challenged the aforesaid disallowance before the first appellate authority, however, he sustained the disallowance made by the Assessing Officer.
The learned Sr. Counsel for the assessee submitted that no interest disallowance under rule 8D(2)(ii) can be made since the assessee has sufficient interest free surplus fund available with it during the year. As regards the disallowance of administrative expenditure under rule 8D(2)(iii) is concerned, the learned Sr. Counsel submitted, only those investments which yielded dividend income during the relevant previous year should be considered for computing disallowance. In support of his contention, the learned Sr. Counsel relied upon the following decisions:–
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i) HDFC Bank Ltd. v/s DCIT, 383 ITR 529 (Bom.); ii) CIT v/s HDFC Bank Ltd., 366 ITR 505 (Bom.); iii) CIT v/s Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.); iv) ACB India Ltd. v/s ACIT, 374 ITR 108 (Del.); v) ACIT v/s Vireet Investments Pvt. Ltd. 83 ITR 103; vi) M/s. Toshvin Analytical Pvt. Ltd. v/s DCIT, ITA no.3089/ Mum./2013 (Mum.); vii) Sylvex Cable Co. Pvt. Ltd. v/s DCIT, ITA no.8581/ Mum./2011, (Mum.); and viii) S. Krishnamurthy v/s ACIT, ITA no.6207/Mum./2012 (Mum.).
The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals) and the Assessing Officer.
We have considered rival submissions and perused materials on record. We have also applied our mind to the decisions relied upon. As regards disallowance under rule 8D(2)(ii) is concerned, it has been specifically pleaded on behalf of the assessee that it had sufficient interest free surplus fund to make the investment in exempt income yielding assets. Notably, this plea was taken by the assessee not only before the Assessing Officer but also before the first appellate authority. However, assessee’s submissions have been rejected by the Departmental Authorities. Though, the learned Commissioner (Appeals) has observed that interest free funds and borrowed funds
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available with the assessee are mixed funds, however, he has concluded that in such circumstances, disallowance under section 14A of the Act has to be made under rule 8D. In our view, such decision of the learned Commissioner (Appeals) is inappropriate and against the settled legal principle. The Hon'ble Jurisdictional High Court inCIT v/s HDFC Bank Ltd., 366 ITR 505 (Bom.), following its own decision in CIT v/s Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.), has held that when an assessee has sufficient interest free fund available, no disallowance under rule 8D(2)(ii) r/w section 14A of the Act can be made. The same view was again expressed by the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. v/s DCIT, 383 ITR 529 (Bom.). In view of the ratio laid down in the decisions referred to above, we direct the Assessing Officer to verify assessee’s claim of availability of sufficient interest free fund for the purpose of making investment in exempt income yielding assets. After verification if assessee’s claim is found to be correct, no disallowance of interest expenditure can be made under rule 8D(2)(ii). As regards disallowance of administrative expenditure under rule 8D(2)(iii) is concerned, the learned Sr. Counsel has specifically pleaded that only those investments which have yielded exempt income during the relevant previous year can be considered as part of average value of investment for computing disallowance under rule 8D(2)(iii). We find
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merit in the aforesaid submissions of the learned Sr. Counsel. The Tribunal, Delhi Special Bench, in Vireet Investment Pvt. Ltd. (supra) has observed that only those investment which yielded income during the relevant previous year are to be considered for computing average value of investment for the purpose of rule 8D(2)(iii). In view of the aforesaid, we direct the Assessing Officer to exclude the investments which have not yielded any exempt income during the relevant previous year for computing disallowance under rule 8D(2)(iii) r/w section 14A of the Act. Pertinently, before us, the learned Sr. Counsel has submitted working of disallowance under rule 8D(2)(iii) after excluding investment which did not yield any exempt income during the relevant previous year. As per the said working, the disallowance works out to ` 2,18,250. The Assessing Officer is also directed to examine the working of the assessee and decide the issue accordingly after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
In ground no.VIII, the assessee has challenged the disallowance of `13.63 crore out of the deduction claimed under section 80IC.
Brief facts are, during the assessment proceedings, the Assessing Officer while examining assessee’s claim of deduction under section 80IC of the Act in respect of its manufacturing unit at Baddi, found
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that on the sales of ` 606.89 crore, the profit generated by the unit at Baddi has been shown at ` 253.97 crore. Whereas, on the sales of ` 1390.52 crore in respect of all other units, the profit generated has been shown at ` 78.79 crore. Thus, while the profit rate of Baddi unit is shown at ` 41.84%, in respect of other units the profit rate shown is 5.66%. Further, the entire interest expenditure of ` 17.30 crore has been allocated to the other units and nothing has been allocated to the unit at Baddi, which enjoys deduction under section 80IC of the Act. When the Assessing Officer called upon the assessee to explain why part of the interest expenditure should not be allocated to the Baddi unit, it was submitted by the assessee that the Baddi unit was set–up with the aid of internal accruals and no borrowed funds was utilized. The Assessing Officer however, did not accept the submissions of the assessee. The Assessing Officer observed, if source of fund is to be equated to application of fund on first in first out (FIFO) basis, most part of the interest expenditure would be related to the unit at Baddi, since, it is the last amongst all the units. Accordingly, he proceeded to allocate a part of the interest expenditure to the Baddi unit which works out to ` 5.25 crore. Similarly, the Assessing Officer noticing that out of the research and development expenses, the assessee has not allocated anything towards the Baddi unit, applying the same principal as in the case of interest expenditure, he allocated an amount of `
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8.38 crore to the Baddi unit out of the total research and development expenses of ` 27.59 crore. Thus, out of the deduction claimed under section 80IC of the Act by the assessee in respect of Baddi unit, the Assessing Officer reduced an amount of ` 13.63 crore which resulted in addition of an equal amount at the hands of the assessee. Notably, the aforesaid disallowance also forms part of the total disallowance made by the Assessing Officer in the final assessment order. Assessee challenged the aforesaid disallowance before the first appellate authority.
In course of proceedings before the learned Commissioner (Appeals), reiterating the submissions made before the Assessing Officer, it was submitted by the assessee, since, the Baddi unit was set–up entirely out of internal accrual and no borrowed funds were used, even a part of interest expenditure cannot be allocated to Baddi unit. As regards R&D expenses, the assessee submitted that such expenditure was incurred mainly in the process development for customs manufacturing (PDG) which has no relation directly or indirectly with the manufacturing activity carried out at Baddi unit. In support of its contention, assessee relied upon certain judicial precedents. However, the learned Commissioner (Appeals) did not find merit in the submissions of the assessee. He observed that the assessee was unable to substantiate its claim that the Baddi unit was
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set–up by utilizing assessee’s own fund and no borrowed fund was used. He observed, for claiming deduction under section 80IC of the Act, the assessee has shown more profit in respect of Baddi unit by allocating all expenditures to the other units. Referring to the profit rate shown in respect of Baddi unit and other units, he observed that the profit rate of other units is very low compared to Baddi unit. As regards R&D expenses, the learned Commissioner (Appeals) observed that the assessee could not explain whether custom manufacturing activity was its business activity or not and in case it is not the business activity of the assessee, why the assessee claimed deduction under section 35(2A) and under section 35(1)(iv) of the Act. Thus, ultimately, the learned Commissioner (Appeals) confirmed the disallowance made by the Assessing Officer.
The learned Sr. Counsel for the assessee relying upon the submissions made before the Departmental Authorities submitted that the Baddi unit was set–up entirely out of internal accruals and no borrowed fund was utilized. Referring to the submissions made before the Assessing Officer during the assessment proceedings, a copy of which is at Page–199 of the paper book, the learned Sr. Counsel submitted that the assessee had furnished all details in support of its claim that the Baddi unit was set–up through cash / fund generated by the assessee from its internal accrual and no borrowed funds were
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used. He submitted, the allocation of expenditure between Baddi and other units was made by the assessee on a rational basis supported by sound reasoning. He submitted that the basis for allocation of expenditure between the Baddi and other unit was also furnished before the Departmental Authorities. As regards research and development expenses, the learned Sr. Counsel submitted, the assessee has not undertaking such research and development activity for its own products but it is a contract manufacturing activity for others. Therefore, the R&D expenditure incurred towards such contract manufacturing activity has no relation either directly or indirectly with the manufacturing activity carried out at Baddi unit. Thus, he submitted, no part of either the interest expenditure or R&D expenditure can be allocated to the Baddi unit. In support of his contentions, the learned Sr. Counsel relied upon the following decisions:–
i) Proctor & Gamble Hygiene & Healthcare Ltd. v/s DCIT, ITA no.1499/Mum./2005, affirmed by Hon'ble Jurisdic- tional High Court in CIT v/s Procter & Gamble Hygeine and Healthcare Ltd., ITA(L) no.946 OF 2012); and ii) Wockhardt Ltd. v/s ACIT, ITA no.6323/Mum./2010.
The learned Departmental Representative submitted, onus is on the assessee to prove that borrowed fund was not utilized for setting–
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up the Baddi unit. Therefore, the assessee has to bring material on record to prove its claim. As regards research and development expenditure, the learned Departmental Representative submitted, facts relating to such expenditure are not clear as it needs to be verified for manufacturing which products the R&D expenditure was incurred. It also needs to be verified whether the facilities at Baddi unit was utilized for manufacturing such product. Thus, he submitted, since the issue requires factual verification it may be restored to the Assessing Officer.
We have considered rival submissions and perused materials on record. We have also applied our mind to the decisions relied upon. It is evident, from the assessment stage itself the assessee has consistently taken the stand that no part of the interest expenditure can be allocated to the Baddi unit as it was set–up through internal accruals and no borrowed fund was used. It is relevant to observe, in submission dated 14th November 2011 filed before the Addl. Commissioner, the assessee while making the aforesaid plea has furnished the details of availability of fund for utilization in setting–up of unit at Baddi. After perusing the orders of the Departmental Authorities, we are of the view that the claim of the assessee has not been properly verified with reference to facts and material brought on record. Similarly, assessee’s explanation with regard to R&D
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expenditure has not been verified factually. As it appears, part allocation of the interest and R&D expenditure to Baddi unit have been made on presumptive basis only because of disparity between the profit rate of Baddi unit and other units. However, before disallowing assessee’s claim the Department is required to bring on record cogent material to establish that the borrowed funds were utilised in setting– up the Baddi unit and further the R&D expenditure incurred was related to manufacturing activity carried out in Baddi unit. There is no clarity on the fact whether the assessee has maintained unit–wise accounts and the expenditure claimed is as per the accounts. Therefore, if the expenditure is allocated to each unit as per the account maintained such expenditures are backed by evidence, then, there is no reason why a part of it is to be allocated to Baddi unit. In view of the aforesaid, we restore the issue to the file of the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
In ground no.IX, the assessee has challenged the addition of ` 3,14,14,000 on account of transfer pricing adjustment on Corporate Guarantee given to the Banks by the assessee for the loans taken by the Associated Enterprises (AEs).
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Brief facts are,in course of proceedings before the Transfer Pricing Officer, he found that the assessee has provided Corporate Guarantee towards loan taken by the AEs from banks. The Transfer Pricing Officer observed that the assessee has not mentioned such transactions in the audit report filed in Form no.3CEB. When the Transfer Pricing Officer called upon the assessee to explain why an adjustment in respect of guarantee commission should not be made, the assessee submitted that since Corporate Guarantee does not come within the definition of international transaction, there is no need to benchmark it. The Transfer Pricing Officer, however, did not find merit in the submissions of the assessee. On the basis of information obtained under section 133(6) of the Act, he found that Allahabad Bank charges commission of 2.4% per annum for loans above ` 10 crore. On the basis of such information and further observing that considering the exchange rate risk, market risk and the AE risk, a mark–up of 0.6% has to be added to the rate of 2.4% for determining the arm's length price. Applying the rate of 3% to the Corporate Guarantee given on the loan availed by the AEs amounting to ` 314.14 crore, the Assessing Officer determined the arm's length price at `9,42,42,000, which was treated as adjustment to be made to the arm's length price. On the basis of the transfer pricing adjustment suggested by the Transfer Pricing Officer, the Assessing Officer framed
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the draft assessment order adding the amount of ` 9,42,42,000 which also formed part of the final assessment order. The assessee challenged the aforesaid addition on account of transfer pricing adjustment before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee, though, agreed with the Transfer Pricing Officer that provision of Corporate Guarantee comes within the definition of international transaction under section 92B of the Act, however, he was of the view that rate of commission at 3% worked out by the Transfer Pricing Officer is on the higher side. Accordingly, he reduced the commission to 1% which resulted in reduction of addition to ` 3,14,14,000.
The learned Sr. Counsel for the assessee, though, reiterated that provision of Corporate Guarantee does not come within the purview of international transaction as per section 92B of the Act, however, he submitted, charging of Guarantee Commission at 0.5% would suffice.
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. As regards the claim of the assessee that provision of
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Corporate Guarantee in respect of loans availed by the AEs do not form part of international transaction as per section 92B of the Act, we are unable to accept it in view of a number of decisions of different Benches of the Tribunal including Mumbai Benches rejecting such claim. However, we find merit in the alternative contention of the learned Sr. Counsel that commission rate of 0.5% should be applied to Corporate Guarantee. In this context, we refer to the following decisions:–
i) Everest Kanto Cylinder Ltd. v/s DCIT, 34 taxmann.com 19; approved by the Hon'ble Jurisdictional High Court in CIT v/s Everest Kanto Cylinder Ltd. 378 ITR 57; ii) CIT v/s Glenmark Pharmaceuticals Ltd., 85 taxmann.com 349 (Bom.); iii) Thomas Cook India Ltd. v/s DCIT, (49 191–212 ITR(T) 178 (Mum.); iv) Aditya Birla Minacs Worldwide Ltd. v/s JCIT, 75 taxmann.com 79 (Mum.); v) Videocon Industries Ltd. v/s DCIT, 168 TTJ 353 (Mum.); & vi) Girabal Alok Impex Ltd. v/s ACIT, ITA no.1776/Mum./ 2015 (Mum.).
Keeping in view the aforesaid decisions, we direct the Assessing Officer to charge commission on Corporate Guarantee @ 0.5%. This ground is partly allowed.
40 M/s. Piramal Enterprises Ltd.
In ground no.X, the assessee has challenged the disallowance made under section 14A r/w rule 8D while computing book profit under section 115JB of the Act.
The learned Sr. Counsel for the assessee submitted, while computing book profit under section 115JB of the Act, the Assessing Officer cannot make any disallowance under section 14A r/w rule 8D. In support, he relied upon the decision by the Tribunal, Special Bench, in Vireet Investments Ltd. (supra).
The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. We find substantial merit in the submissions of the learned Sr. Counsel that while computing book profit under section 115JB of the Act, the Assessing Officer cannot invoke the provisions of section 14A r/w rule 8D, as held by the Tribunal, Special Bench, Delhi, in Vireet Investments Ltd. (supra). Thus, to that extent, the disallowance made under section 14A r/w rule 8D while computing the book profit will not survive. However, the Assessing Officer is directed to compute the book profit in consonance with the provisions of section 115JB of the Act r/w Explanation–1(f) to the said provision. This ground is allowed for statistical purposes.
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In the result, assessee’s appeal is partly allowed.
ITA no.5583/Mum./2017 Revenue’s Appeal
The grounds no.1 to 3, the revenue has challenged the decision of the learned Commissioner (Appeals) with regard to the payment made to PEL towards reimbursement of expenses and royalty.
While deciding the corresponding ground raised by the assessee in its appeal being ground no.IV, we have deleted the addition made by the Assessing Officer. Therefore, these grounds have become infructuous, hence, dismissed.
In ground no.4, the Revenue has challenged the disallowance of expenditure of ` 2,42,85,714, claimed under section 35A of the Act.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of an amount of ` 2,42,85,714, being 1/14 of ` 34 crore towards deduction under section 35A of the Act called for necessary details. He found that the aforesaid expenditure was incurred by Sarabhai Piramal Pharmaceuticals Ltd. (SPPL) towards purchase of trade mark from Ambalal Sarabhai Enterprises (ASE) as per agreement dated 3rd October 1997. The Assessing Officer observed that the issue was
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deliberated in assessment year 1998–99 and the deduction claimed was denied earlier in case of SPPL and thereafter in case of assessee. However, he observed that the learned Commissioner (Appeals) and ITAT have allowed assessee’s claim in further appeal and the issue is pending before the Hon'ble Jurisdictional High Court. Thus, the Assessing Officer following the decision taken by the Assessing Officer in the earlier assessment years held that expenditure incurred towards trade mark will not come within the purview of section 35A of the Act. Accordingly, he disallowed assessee’s claim. Being aggrieved of such disallowance, assessee filed appeal before the first appellate authority.
The learned Commissioner (Appeals) considering the submissions of the assessee and taking note of the decisions of the Tribunal in assessee’s favour in earlier assessment years allowed assessee’s claim of deduction.
We have considered rival submissions and perused materials on record. Undisputedly, SPPL has paid an amount of ` 34 crore towards purchase of trade mark from ASE as per agreement dated 3rd October 1997. It is a fact on record that after making the aforesaid payment, SPPL and thereafter the present assessee have amortized the expenditure and claimed deduction of 1/14th of ` 34 crore paid in each subsequent year and such deduction claimed by the assessee have
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been allowed by the learned Commissioner (Appeals) and the Tribunal in the preceding assessment years. The first year of such claim was Assessment Year 1998–99 and the impugned assessment year is the 7th year in which the assessee has claimed such deduction. Pertinently, the Assessing Officer himself has accepted that in the preceding assessment years learned Commissioner (Appeals) and the Tribunal have allowed assessee’s claim. Still, the Assessing Officer following his view in the preceding assessment years disallowed the deduction claimed by the assessee on the reasoning that section 35A of the Act provides for amortization for patents and copy rights only and not for trade mark. It is relevant to observe, while deciding Revenue’s appeal on identical issue in case of SPPL for assessment year 1998–99, the Hon'ble Jurisdictional High Court in Income Tax Appeal no. 466 of 2007, dated 14th September 2011, has held as under:–
“5. As regards the second question is concerned, the assessing officer disallowed the expenditure incurred on acquisition of trade-mark under Section 35A of the Act on the ground that the said Section is restricted to the expenditure on acquisition of Patents and Copyrights Act and not to the expenditure on acquisition of trademark. The ITAT has allowed the claim of the assessee by holding that the trade-mark is not alien to the patent right as there is a direct link between the patent right and trade-mark. It is held that the patent right cannot be identified in a pharmaceutical field without its own name trademark, meaning thereby the trademark and patent right move together and if trademark is purchased, the patent right with respect to that particular trademark is also passed on to the buyer in the transactions in the pharmaceutical fields. The Tribunal has also considered the alternate argument of the assessee and held that even if the relief under Section 35A of the
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Act is not allowable to the assessee, then the relief would be allowable under Section 37 of the Act in the light of the judgment of the Apex court in the case of Alembic Chemical Works Co. Ltd. V/s. CIT reported in 177 1TR 377. Thus, by allowing the claim of the assessee under Section 35A, the assessee would get the relief in the assessment year to the extent of Rs.2,42,85,714/- out of the total expenditure of Rs.34 crores on acquisition of trademark and if the alternate argument of the assessee is accepted, then the assessee would be entitled to deduction of Rs.34 crores incurred on acquisition of trademark in the assessment year in question. Since the decision of the [TAT on the alternative claim of the assessee has not been challenged in the appeal, counsel for the revenue on instructions from the Officers Mr. Arun C. Bharat, CIT 7(1) and Mr. Ashish Pophare, DCIT 7(1) present in Court states that he is not pressing the second question, because in the facts of the present case, the revenue stands to loose if the decision of the ITAT on the applicability of Section 35A is set aside and the decision of the ITAT on the alternate claim is sustained. Accordingly, the second question cannot be entertained. However, it is made clear that the question as to whether deduction under section 35A is allowable on the expenditure on acquisition of trademark is kept open to be decided in an appropriate case.”
On a careful reading of the aforesaid extracted portion from the judgment of the Hon'ble Jurisdictional High Court, it is very much clear that while examining the allowability of identical deduction claimed by SPPL the Tribunal has allowed it claim by holding that trade mark is not alien to the patent right as there is a direct link between patent right and trade mark. Thus, the assessee is eligible to claim deduction under section 35A of the Act. Alternatively, the Tribunal also held that even if the assessee’s claim of deduction under section 35A of the Act is not allowable, still the deduction claimed has to be allowed under section 37 of the Act in view of the judgment of the Apex Court in Alembic Chemicals Works Co. Ltd. v/s CIT, [1988] 177 ITR 377 (SC).
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When the appeal of the Revenue on the disputed issue came up before the Hon'ble Jurisdictional High Court, the Revenue being conscious of the fact that if assessee’s claim is allowed under section 37 of the Act then the entire amount of ` 34 crore has to be allowed in one–go, therefore, the Revenue would be in a disadvantageous position, did not press its appeal on the issue of allowability of claim under section 35A of the Act. Therefore, considering the fact that in the preceding assessment years assessee’s claim of deduction under section 35A of the Act has been allowed, applying the rule of consistency also assessee’s claim of deduction in the impugned assessment year cannot be disallowed. Therefore, we uphold the decision of the learned Commissioner (Appeals) on this issue by dismissing the ground raised by the Revenue.
In ground no.5, the Revenue has challenged deletion of addition ` 26,76,631, made on account of adjustment to the arm's length price of interest on loans given to AE.
Brief facts are, during the proceedings before him the Transfer Pricing Officer noticed that the assessee has advanced short term loans to its AE in Switzerland during the relevant previous year and the amount outstanding as on 31st March 2008, was GBP 4,366,863. He also noticed that the assessee has charged interest @ 10.24%. The
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Assessing Officer being of the view that the assessee is located in India and the loans were given out of India where the prevailing Prime Lending Rate (PLR) during the financial year 2007–08 was 14.625% per annum, called upon the assessee to explain why arm's length price of the interest charged to the AE should not be determined by applying the PLR of 14.625%. In response, it was submitted by the assessee that the loan given to AE was in foreign currency. It was further submitted that while borrowing the funds the assessee has paid interest at the average rate of 8.5%, whereas, it has charged interest to the AE at 10.24%. The Assessing Officer, however, did not find merit in the submissions of the assessee and proceeded to determine the arm's length price of the interest charged to the AE by applying the rate of 11.57% resulting in upward adjustment of ` 26,76,631 to the ALP. The adjustment made by the Transfer Pricing Officer was added by the Assessing Officer.
When the issue came up in appeal, learned Commissioner (Appeals) after considering the submissions of the assessee deleted the addition made.
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer.
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The learned Sr. Counsel for the assessee strongly supporting the order of the learned Commissioner (Appeals) submitted that when the AE is situated in Switzerland and the loan was availed in the currency of the country of residence of the AE, PLR prevailing in India cannot be applied for determining the arm's length price of the interest chargeable to the A.E. In support of such contention, the learned Sr. Counsel relied upon the following decisions:–
i) CIT v/s Tata Autocomp Systems Ltd., 374 ITR 516 (Bom.); ii) CIT v/s Cotton Naturals (I) Pvt. Ltd., 231 taxmann.com 401 (Del.); iii) CIT v/s Aurinpro Solutions Ltd., ITA no.1869/2014 dated 06.09.2017 (Bom.); and iv) Everest Kanto Cylinder Ltd. v/s ACIT, 167 TTJ 204 (Mum.).
We have considered rival submissions and perused materials on record. Undisputedly, the AE of the assessee is located in Switzerland and the loan availed by the AE is also in the currency of its residence. It is well settled, in case of such loan availed by the AE in foreign currency, the appropriate method for bench marking the interest rate is by applying either LIBOR or EUROBOR. Therefore, the arm's length price of interest chargeable to the AE cannot be determined by applying Indian PLR as the loan given was not in Indian currency. This view of ours gets support from the decisions cited by the learned Sr. Counsel. In case of Tata Autocomp Systems Ltd. (supra), the Hon'ble
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Jurisdictional High Court held that when the AE is situated in Germany, rate of interest on the loan advanced to the AE has to be determined on the basis of rate of interest prevailing in Germany where the loan has been consumed. The Hon'ble Delhi High Court in Cotton Naturals (I) Pvt. Ltd. (supra) has also expressed similar view. The other decisions relied upon by the learned Sr. Counsel are also in the same line. Keeping in view the ratio laid down in the aforesaid decisions, we do not find any infirmity in the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground raised by the Revenue.
In ground no.6, the Revenue has challenged the decision of the learned Commissioner (Appeals) in determining the rate of commission on Corporate Guarantee @ 1%.
While deciding ground no.IX, raised by the assessee in ITA no. 5471/Mum./2017, which is on identical issue, we have directed the Assessing Officer to determine the arm's length price of the Corporate Guarantee by applying the commission rate of 0.5%. In view of the aforesaid, the ground raised by the Revenue has become redundant, hence, dismissed.
In the result, Revenue’s appeal is dismissed.
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To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 30.07.2018
Sd/- Sd/- MAJOJ KUMAR AGGARWAL SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 30.07.2018
Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Sr. Private Secretary) ITAT, Mumbai