ACIT 10(1), MUMBAI vs. WOCKHARDT LTD, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य ,राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER RAJENDRA, AM- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the orders of the CIT(A)-15 and CIT(A)-21, Mumbai dated 21/06/2012 and 01/ 03/2012 respectively,the Assessing Officers(AO.s)have filed the above appeals.Assessee- company,engaged in the business of manufacturing and trading of pharmaceutical products, filed its return on 1/11/2007 declaring total income of Rs.5 crores.the AO completed the assessment u/s.143(3),on 31/3/2010,determining the income of the assessee at Rs.117,07,19, 060/-. Later on,the AO passed an order u/s.154 of the Act on 24/08/2011.The First Appellate Authority(FAA)allowed the appeal,filed by the assessee,against the revisionary order.The AO has challenged the order of the FAA cancelling the order passed u/s.154 of the Act.Thus, there are two appeals for the same AY. ITA/5557/Mum/2012: 2.First Ground of appeal is about deleting the addition of Rs.2.17 crores made by the AO,on account of guarantee fee income.During the assessment proceedings the AO found that the assessee had entered into International Transactions(IT.s)with its Associated Enterprises (AE) for the year under consideration.He made a reference to the Transfer Pricing Officer (TPO) to determine the Arm’s length Price (ALP) of the IT.s. During the TP proceedings,the TPO found that the AE of the assessee ,namely CP Pharma (CPP),had acquired loans from HSBC,Bank,UK of 14 million pounds (£), that the assessee 4156/M/12;5557/M/12- Wockhardt Ltd.

4156/M/12;5557/M/12- Wockhardt Ltd. “….the considerations which applied for issuance of a corporate guarantee are distinct and separate from those in a case of bank guarantee and, accordingly, the commission charged could not be called in question, in the manner the Transfer Pricing Officer had done. The comparison was not between like transactions but between guarantees issued by commercial banks as against a corporate guarantee issued by holding company for the benefit of its associated enterprise, a subsidiary company. Therefore, no transfer pricing adjustment could be made in respect of the commission charged.….” Respectfully following thejudgments/order,relied upon by the assessee including the that of Everest Kento,we dismiss the first Ground of appeal raised by the AO. 3.Ground No.2 deals with deletion of notional interest of Rs.72.13 lakhs. During the asst proceedings,the AO found that Wockhardt Europe Ltd. (WEL) had brought back 80.22 lakhs ordinary shares from the assessee at the book value of British Pound of 64.57 lakhs,that WEL was incorporated in 1999-2000 in British Virgin Islands,that it was a wholly owned subsidiary of the assessee, that the in the year under consideration WEL had bought back the shares from assessee company at NAV of the company, that the investment was made @

1. British pound per share, that after investment the net-worth of WEL had gone down ,that the shares were bought back at the rate of British Pound 0.80 per share,the AO directed the assessee to furnish further details in that regard and asked it to show cause as to why transaction should not be treated as financial facility and why interest should not be charged on the fund invested in the shares.After considering the submission of assessee,the AO held that apparent was not real,that the design and device of any planning had to be judged on the reality aspect of the assessee,that no document in respect of the decision and assessment of future profitability was filed,that assessee wanted to provide financial support to its AE without any financial consideration, that assessee had not earned any profit,that it had sold shares at lesser value, that loss had occurred to Wockhardt Ltd.,that the whole transaction was a colourable device used by the assessee to support WEL, that the foreign entity required funds for establishing its business in Europe.Finally,the TPO held that the transact - tion in question was a loan transaction in the garb of share investment,that the amount in respect of bought back shares was remitted to 10th July, that the number of days involved was 101,that the rate of interest had to be applied at 5.07 per annum from Espharma – Germany.The same rate of in the took as benchmark in view of geographical location. Accordingly he calculated rate of interest as under :-

The investment made in wockhardt Europe for 80,22,217 shares Rs.51,41,84,190/- Number of days (Amt. remitted on 10th July) 101 Interest rate 5.07% Interest for the whole year Rs.2,60,69,138/- Interest for 101 days Rs.72,13,652/- 4156/M/12;5557/M/12- Wockhardt Ltd. After receiving the order of TPO,the AO made upward adjustment of Rs.72.13 lakhs under the head buy-back shares by WEL. 3.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA and made elaborate submissions.After considering the available material,he held that the TPO held that buy back of shares was a sham transaction,that he considered the same to be a loan transaction,that the TPO further held that interest rate of 5.07% was reasonable rate for charging interest for the transaction,that the TPO had not disputed the valuation of shares either at the time of acquisition of sales by the assessee or at the time of the sale of shares,that the shares were valued by professionals as per the exchange control legislation, that restructuring of business investment in subsidiaries or disinvest -ment from subsidiaries was a common business activity of multinational entities,that the disputed transaction was related to buy back of shares by the AE from the assessee,that the TPO had not disputed the valuation of shares, that he had been guided by the fact that the acquisition price was higher as compared to the buyback price per share,that the valuation done of shares and submitted during TP proceedings had neither been commented upon nor has been disputed as accept - able,that TPO was not justified in treating the transaction as interest free loan to the subsidiary. 3.2.Before us,the DR relied upon the order of the AO.The AR stated that there was no basis of charging interest,that the TPO had not disputed the valuation of shares,that the valuation was in conformity with the exchange control regulations,that it was appropriate for the purpose of benchmarking,following CUP method.

3.3.We have heard the rival submissions.We find that WEL was incorporated in the AY. 2000-01,that the assessee had invested into WEL,that investment , consequent to bring WEL into existence,was for the purpose of further exploration of business,that investment by the assessee was @1 pound per share of WEL,that during the year under consideration WEL bought back the shares from the assessee@ 0.8 pound per share, .that the TPO had presumed that buy back of shares was not a normal business transaction, that he treated it as advancing of interest free loan by the assessee to the AE,that he charged notional interest not only for the year under consideration but upto the date of remittance, that the assessee had furnished the report of the professionals i.e. CA.s who had valued the shares in dispute,that the TPO had not stated that as to what were the defects in the calculation of the professionals in valuing the shares 4156/M/12;5557/M/12- Wockhardt Ltd.

Purchasing the share @ 1pound per share and selling at @0.8 pound per share cannot be the basis for presuming that the transaction was not a genuine transaction-especially when the valuation was as per the exchange regulations.Buying back of share at par or at higher or lower rate than the purchase price is one of the very common practice of the business world.Until and unless it is proved that such a transaction was not based on scientific basis or was against the provisions of exchange manual/regulation,it should be accepted.We find that the FAA has given a categorical finding that the TPO had not doubted the valuation.In these circumstances,we hold that there was no justification for the TPO to charge notional interest. As the order of the FAA does not suffer from any legal or factual infirmity,so,confirming the same,we decide ground no.2 against the AO. 4.Ground No.3 deals with allocation of R&D expense to the 80-IB and 80-IC qualifying units.It was brought to our notice that identical issue was decided by the Tribunal against the AO while adjudicating the appeal for the AY.2005-06(ITA/7383/M/2010 dated 13/04/2012). We are reproducing the relevant portion of the order and it reads as under: “10. Ground No.1: regarding allocation of R&D expenses and interest expenses to units eligible for deduction U/s. 80 IB, is covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for the assessment year 2001-02, 2002-03 and 2003-04 of IT 3991/M/2005 the Tribunal has at para No.14 of this order held as follows: “After considering the submissions and perusing other material on record, WE found that the assessee deserves to succeed in this ground. WE have noted that the assessee is claiming deduction on account of R&D for last so many years and they were not disturbed neither any disallowance was made. WE further note that the deduction in respect of R&D expenditure has been claimed by the Head Office and a statutory deduction has been claimed U/s.

discharge it by bringing some positive evidence to establish that some part of the expenditure on account of R&D and on account of interest has been incurred on these units because Assessing Officer, who is alleging that some part of expenditure incurred on R&D and interest are related to the units on which deduction U/s. 801B has been claimed. This onus has not been discharged, therefore, allocation of the proportionate expenses at the end of the Assessing Officer, in our considered view were not justified. The CIT(A) was also not justified in confirming the action of the Assessing Officer. In case of Ponds India Ltd., decided in the Tribunal vide its order dt. 28-05-2002 has held as under: “The next issue is with reference to the claim of deduction Under Sections 80HH and 80-I by considering part of the head-office expenses in working out the profit of the industrial unit. The head office of any industry, which has units spread over at various places, monitors the requirements of finances and such other actions that are necessary in running of the unit as such. These are administrative expenses though related and relatable to the various units and also be said to be expenditure incurred in the general management of the business as such. From this stand point of view,We are of the opinion that the assessee was justified in making the claim that the head office expenses should not be treated as incurred on any unit on any proportion, namely turnover or any other basis. WE accordingly uphold the claim of the assessee”. In the case of Vanaz Engineers Ltd., decided on 15-07-1994 in and 35/PN/1989, the Pune Bench held as under: “The assessee had claimed deductions U/s. 80HH and U/s. 801 in respect of its newly set up industrial unit. The Assessing Officer was of the view that even the head office expenses of the assessee should be proportionately deducted from the profit of the new unit. The assessing officer accordingly, proportionately reduced the allowance U/s. 80HH and U/s.

.” Considering the above,ground no.3 is decided against the AO. 5.Next ground of appeal is about allowing the claim of weighted deduction,made by the assessee u/s.35(2AB)of the Act.In order to examine the correctness of the claim necessary details of expenses,incurred by the assessee for in-house scientific research,were obtained by the AO.He observed that the deduction u/s. 35was already available to the assessee in respect of expenditure on scientific research,that deduction u/s. 35. (2AB) was introduced with a very specific purposei.e., to promote in-house research and development, that if deduction @150% was to be allowed on expenditure outside the assessee’s unit the whole purpose of giving incentive would be defeated,that the assessee had not carried out any clinical trials/bio- studies,that it had not created any infrastructure/facility, that all trials/studies were conducted through third parties.Finally, he held that assessee was not entitled to deduction u/s. 35. (2AB) of the Act.He made a disallowance of Rs.6.25 crores (foreign consultancy expenses-Rs.13.08 lakhs(+)foreign legal exepenses-Rs.87.83 lakhs(+)analysis charges-Rs.3.89 crores(+)clinical trial expenses-Rs.1.31crores(+)bio-study-Rs.4.12lakhs).The AO further mentioned that weighted deduction of Rs.6.25 crores would not be allowed on the above expenditure of Rs.3.12 crores. 5.1.During the appellate proceedings before the FAA the assessee made detailed submissions. It also placed reliance on the orders of the FAA for the earlier years,wherein the FAA had directed the AO to delete the disallowance where Form 3CL was issued by the Deptt.of Science and Industrial Research (DSIR)was received by the assessee after completion of the assessment order.Following the orders of earlier years,the FAA deleted the disallowance made in respect of weighted deduction for clinical trial. 5.2.Before us,the DR stated that the Tribunal had decided the issue against the assessee in the earlier year holding that deduction was available for in house trials and RD research only.The AR contended that while deciding the issue in favour of the department,the Tribunal had followed decision of Concept Pharma,that the said decision stands over-ruled by a series of orders of the Tribunal and judgment of the Hon’ble Gujarat High Court in the case Cadilla Healthcare (214taxmann 672).He relied upon the cases of Cadilla (67SOT 110);Cadilla (56SOT89);Tejas Network Ltd. (60taxmann.com 309); Mastek Ltd. (210 Taxman 432) and Electronics Corporation of India Ltd. (140ITD221).

4156/M/12;5557/M/12- Wockhardt Ltd. 5.3.We have heard the rival submissions and perused the material available before us.We are of the opinion that mater needs further verification. Therefore, we are remitting back the issue to the file of AO for deciding the issue afresh,.He is directed to afford reasonable opportunity of hearing to the assessee and after considering the case laws relied upon by the assessee before us.Ground No.4 is partly allowed. 6.Fifth Ground also deals with disallowance of weighted deduction u/s. 35(2AB) of the Act on the ground that Form 3CL was not submitted by the assessee.The AO had denied the deduction,claimed by assessee u/s.35(2AB)of the Act,as the approval of appropriate authority i.e.DSIR was not submitted by the assessee .It was stated that assessee had made the application to the prescribe authority in time. 6.1.It was brought to our notice that other appeal filed by the AO is about the same issue. Therefore,we would deal with the issue of Form No.3CL in later part of our order. 7.Ground No.6 deals with deleting the addition of Rs.5.55crores, made by AO u/s.40(a)(i) of the Act.During the assessment proceedings,the AO found that the assessee was making payment to non residents on account of pilot-bio study and clinical research,that it had not deducted tax at source before making payment. He directed assessee to file details in that regard and asked it as to why the expenditure should not be disallowed u/s. 40(a)(i) of the Act. After considering the submission of the assessee ,he held that issue of deducting tax at source had to be decided by the international taxation division, that in the AY.s 2005-06 and 2006-07,the AO of international taxation had passed order u/s.201 of the Act and 201(1A), that the assessee was treated as an assessee in default. Referring to those orders,he made a disallowance of Rs.5,55,47,000/- u/s. 40(a) of the Act. 7.1.Before the FAA,during the appellate proceedings,the assessee made detailed submissions. After considering available material,he held that the issue of deducting tax at source for the payments made to non- resident entity was decided in favour of the assessee by the Tribunal, while deciding the appeal for AY 2007-08. Referring to the said order of the Tribunal and order of the FAA for the earlier years,he deleted the addition made by the AO. 7.2.Before us,the DR stated that matter could be decided on merits and the AR supported the order of the FAA. 7.3.We find that the Tribunal vide its order dated 30/06/2012 (ITA/4757/Mum /2009 and order dated 13/4/2012 (ITA/7383/Mum/2010) has dealt the issue and decide it in favour of 4156/M/12;5557/M/12- Wockhardt Ltd. the assessee.We are reproducing the relevant portion i.e. para -13 of the order of Tribunal (ITA/7383/Mum/10) and it reads as under:- “13. The Hon'ble Bombay High Court in the case of CAT Vs. Kotak Securities ltd., 62 DTR (BOM) 339 held that transaction charges paid by the assessee to the stock exchange constituted fee for technical services covered U/s. 194 (J). It further held that from the year 1995 to the year 2005, the assessee as well as the revenue, proceeded on the footing that the assessee is not liable to deduct tax at source and hence no fault can be found with the assessee for not deducting tax at source, as it was under a bonafide belief that no tax need be deducted at source on this payment. In the case on hand, the assessee paid charges for testing at laboratories of CRO which used their own skills and equipments etc., to prepare the report. The Tribunal came to conclusion that there is no parting of skills or know-how by CRO and hence the service is not technical in nature, but was only a commercial service. Consisting with the view taken therein, we up-hold the finding of the first appellate authority and dismissed this ground of revenue. In the result the appeal of the revenue is allowed in part. ” Respectfully following the above,we decide the last Ground of appeal against the AO. ITA/4156/Mum/2012 : 8.As stated earlier(Paragraph-6.1),the AO had rejected the application filed by the assessee u/s. 154 of the Act.The assessee had filed return of income,claiming deduction u/s. 35(2AB) @150% of the capital expenditure of Rs.22.50 crores and revenue-expenditure of Rs.175 crores for in-house R&D units.As per the provisions of section 35(2AB) in-house R&D facility has to be approved by the prescribed authority i.e. govt. of India Ministry of Science and Technology,DSIR.At the time of assessment the assessee had not received approval from DSIR,so,the AO asked the assessee to explain as to why deduction claimed by it should not be disallowed.After considering the submission of the assessee, dtd. 16/11/2009,the AO disallowed claim made by the assessee u/s.35(2AB).Vide its letter dt. 15/12/2012 the assessee filed an application for rectification u/s. 154 of the Act and requested him to allow the deduc -tion.However,the AO rejecting the application and held that no mistake was apparent from record. 8.1.Aggrieved by the order of the AO,the assessee filed appeal before the FAA and made elaborate submissions.After considering the available material,the FAA held that for claiming deduction the approval of the prescribed authority, in the Form No.3CL was required to be enclosed with the return of income, that the assessee had applied for such approval, that till date of assessment order it did not receive the approval from prescribed authority, that AO had disallowed the claim made by the assessee,that in the assessment order he himself had stated that claim made by the assessee would be accepted as soon as it would received approval in Form No.3CL,that AO had also stated that demand arising on that issue would not be collected arising out of the addition made regarding 35(2AB),that after passing of the assessment order the assessee had received approval from DSRI,that approval in Form 3CL 10 4156/M/12;5557/M/12- Wockhardt Ltd. was submitted to AO, that obtaining approval from DSRI was not in the hands of the assessee,that it could only apply well in time to prescribed authority , that the assessee could not be penalised for the delay attributable to Govt. Deptt. in issuing the approval,that the AO himself had admitted the fact of pendency of approval,that it was a mistake apparent from record,that he was not justified in rejecting the rectification application of the assessee. He further held that the direction of carrying out necessary rectification was limited to issue of non submission of Form 3CL only,that AO should allow claim of the assessee of deduction of section 35(2AB) of the Act so far as it related to submission /non submission of approval of prescribed authority , that disallowance of the claim u/s. 35(2AB) by the AO on any other ground was not covered by the order. 8.2.Before us,the DR stated that Form 3CL was not filed before the AO in time. The AR supported the order of the FAA and relied upon the cases of Sun Pharmaceuticals Ltd. (85taxmann.com 80);Shrikar Hotels Pvt.Ltd. (79taxmann.com63);Famy Care Ltd.(67 SOT 85);Ferment Biotech Ltd.(64SOT246) and Sri Biotech laboratories India Ltd.(69 taxmann. com 361) 8.3.We have heard the rival submissions.We find that DSRI had not issued the Form 3CLin time,that the assessee could not file the same before the AO during the assessment proceed - ings, that the Form was submitted before the AO after DSRI issued the same,that AO himself had mentioned in the order deduction would be allowable on production of Form 3CL.In these circumstances,we are of the opinion that he was not justified in rejecting the application filed by assessee u/s. 154 of the Act.We would like to reproduce the relevant portion of the order of the Tribunal in case of Famy Care Ltd (supra)and it reads as under: “2.1. We have considered the rival submissions and perused the material available on record. ……… During the year under consideration, the assessee claimed research and development expenditure u/s 35(2AB) of the Act, relating to its in-house division, amounting to Rs.16,41,80,309/-.The assessee claimed weighted deduction u/s 35(2AB) of the Act @ 150% of the capital expenses of Rs.3,76,48,919/- and revenue expenses of Rs.7,18,04,620/-.The ld. Assessing Officer disallowed the claimed deduction on the plea that the assessee did not submit the approval from the prescribed authority. On appeal, before the ld. Commissioner of Income tax (Appeals), the issue was decided in favour of the assessee. The relevant finding/conclusion is reproduced hereunder for ready reference from the impugned order. “I have considered the facts of the case and submission of the assessee. It was beyond the control of the assessee to file Form No.3CL, because it is issued by the Secretary, DSIR, Government of India and it was not issued till the time of assessment order i.e. 30/12/2011 because Form No.3CL is dated 30/03/2012, a copy of which has been filed as per Form No.3CL and Form No.3CM, assessee is eligible for weighted deduction u/s 35(2AB). Therefore, A.O. is directed to verify Form No.3CM and Form No.3CL and accordingly allow weighted deduction to the assessee u/s 35(2AB) on revenue expenditure as well as capital expenditure claimed by the assessee. Assessee is directed to file a copy of Form No.3CL and Form No.3CM before the A.O. for giving necessary effect to this order. In result, the ground of appeal is treated as allowed. 11 4156/M/12;5557/M/12- Wockhardt Ltd.

2.2. We note that for granting approval u/s 35(2AB) of the Act, the assessee made application, with the prescribed authority, in accordance with section 35(2AB)(3) r.w. Rule 6(4) of the Income-tax Rules, 1962 (hereinafter the Rules), on 11/12/2007. The prescribed authority approved/granted in-house research and development facility u/s 35(2AB) of the Act on 04/03/2009 for a period from October 19, 2007 to 31st March 2010 in Form no. 3CM, in accordance with Rule 6(5A) of the Rules. This approval was produced before the Assessing Officer during assessment proceedings i.e. before framing the assessment on 30/12/2011.The prescribed authority sent Form no. 3CL to the Income-tax Department on 22nd November 2010 (A.Y. 2008-09) in accordance with section 35(2AB)(4) read with Rule 6(7A)(b) of the Rules. As the approval of the entire period was given once i.e. by way of Form no. 3M, thus, in our view, the assessee complied with the conditions for claim of deduction as required u/s 35(2AB) of the Act. We are reproducing hereunder the relevant provision of section 35(2AB) of the Act for ready reference. XXXXX 3. If the aforesaid section is analyzed then the deduction shall be allowed of a sum equal to two times of the expenditure so incurred and the prescribed authority is to submit its report of such approval/facility to the Director General on a prescribed form within specified time, meaning thereby, the authority concerned has to submit the report to the Director General. However, if the totality of facts are analyzed, as mentioned earlier, the assessee made application for such approval on 11/12/2007 with the prescribed authority and such approval was granted on 04/03/2009, therefore, the assessee cannot be denied the claimed deduction u/s 35(2AB) of the Act merely on the ground that the prescribed authority did not submit form no. 3CL in time to the Income-tax Department. The assessee cannot be penalized for the fault, if any, of the Department. The Assessing Officer cannot be expected to be too technical rather is to take practical approach under the facts narrated hereinabove, because, it was beyond the control of the assessee to direct the authority to submit the prescribed form on Form no.3CL to the Department. Section 35(2AB) of the Act, nowhere suggest that the date of approval of research and development facility will be cut off date for eligibility of weighted deduction under this section on expenses incurred from that date onwards; Once facility is approved, entire expenditure so incurred on development of research and development facility has to be allowed for such weighted deduction u/s 35(2AB) of the Act and thus it would be sufficient to hold that assessee has fulfilled the conditions as laid down in the section. Even otherwise, the ld. Commissioner of Income tax (Appeals) directed the Assessing Officer to verify the Form No.3CM and 3CL and then allowed weighted deduction, as claimed by the assessee. We find no infirmity in the conclusion and the direction in the impugned order. It is affirmed.” Considering the above,we decide Effective Ground of appeal against the AO. As a result,ITA/5557/Mum/2012 is partly allowed and ITA/4156/Mum/2012 stands dismissed. फलतःआ.अ. /5557/मुंबई/2012 अंशतःमंजूर क� जाती है और आ.अ. /4156//मुंबई/2012 नामंजूर क� जाती है. Order pronounced in the open court on 05th January, 2018. आदेश क� घोषणा खुले �यायालय म� �दनांक 05 जनवरी ,2018 को क� गई । Sd/- Sd/- (राम लाल नेगी राम लाल नेगी राम लाल नेगी / Ram Lal Negi) (राजे�� / Rajendra) राम लाल नेगी �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई Mumbai; �दनांक/Dated : 05. 01.2018. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ�

2. Respondent /��यथ� 12