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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTA & MS. SUCHITRA RAGHUNATH KAMBLE
आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद "यायपीठ आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण अहमदाबाद "यायपीठ अहमदाबाद "यायपीठ ‘D’ अहमदाबाद। अहमदाबाद "यायपीठ अहमदाबाद। अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND MS. SUCHITRA RAGHUNATH KAMBLE, JUDICIAL MEMBER Assessment Year : 2015-16 Zydus Lifesciences Ltd. (Formerly Vs. The DCIT, Cir.1(1)(2) known as Cadila Healthcare Ltd., Ahmedabad. 4th Floor, D-Wing, Zydus Corporate Park, Scheme No.63, Survey No.536, Khoraj (Gandhinagar), Nr.Vaishnodvi Circle, SG Highway, Ahmedabad PAN : AAACC 6253 G (Applicant) (Responent) Assessee by : Shri Jigar Patel, AR Revenue by : Shri Sudhendu Das, CIT-DR सुनवाई क" तारीख/Date of Hearing : 29/11/2023 घोषणा क" तारीख /Date of Pronouncement: 23/02/2024 आदेश/O R D E R आदेश आदेश आदेश PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the assessee against order passed by the Transfer Pricing Officer/Assessing Officer dated 24.10.2019 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as "the Act" for short]for the Asst.Year 2015-16.
At the outset itself, it was submitted by the ld.counsel for the assessee that almost all issues raised in the grounds of appeal stand adjudicated by the ITAT/Hon’ble High Court in the case of the assessee itself in the preceding years. A chart giving summary of the 2 grounds raised before us and highlighting as to how the issues stand covered by orders passed by the ITAT/Hon’ble High Courts in the preceding years was filed before us. Further copies of all orders where the issues were originally decided in favour of the assessee by the ITAT/Hon’ble Gujarat High Court were filed before us to demonstrate that they were legacy issues decided from the origin itself in favour of the assessee and subsequently followed in later years . In this regard copies of the order of the ITAT in case of the assessee for A.Y 2006- 07, 2008-09, 2009-10, 2010-11 were filed alongwith copy of order of the Hon’ble Gujarat High Court for A.Y 2006-07 .
Taking note of the same, accordingly, the appeal was proceeded to be heard with the ld.counsel for the assessee, pointing out as to how the issue was dealt with by the appellate authorities in the earlier years, and with the ld.DR giving his counter to the same.
Taking up the ground no.1 first, the same reads as under:
“Aggrieved by the order u/s. 143(3) r.w.s. 144C passed by the Assessing Officer, the Appellant wishes to raise the following Grounds of Appeal for the kind adjudication of the Hon'ble ITAT:
1. That the learned Assessing Officer / Transfer Pricing Officer / Dispute Resolution Panel ('DRP') has erred in law and on facts in making following upward Transfer Pricing adjustments in respect of international transactions a. Addition of Rs.11,01,99,257/- on account of Corporate Guarantee Charges. b. Addition of Rs.13,54,90,598/- on account of Interest Imputation on Optionally Convertible Loans advanced to Zydus International Pvt. Ltd. c. Addition of Rs.2,94,40,667/- on account of Reimbursement of Expenses. 3
5. The issue raised in the above grounds relates to the Transfer Pricing adjustment made to various international transactions entered into by the assessee with its Associate Enterprises in terms of section 92B of the Act. We shall first take up the adjustment made to the arm’s length price (ALP) of the international transaction of corporate guarantee charges to the tune of Rs.11,01,99,257/-.
6. The contention of the ld.counsel for the assessee before us was that this issue stood adjudicated in the case of the assessee by the ITAT from Asst.Year 2009-10 onwards to the immediately preceding assessment years i.e. Asst.Year 2014-15. Our attention was drawn to relevant finding of the ITAT in the latest decision in Asst.Year 2014- 15 on the precise issue of TP adjustment made to the international transaction of bank guarantee provided by the assessee in its order passed in dated 14-09-22, copy of which was placed before us.
The ld.DR fairly agreed with the same, though, he relied heavily on the order of the TPO/AO.
Having heard contentions of both the parties, and having gone through the orders of the authorities below, we have noted from the same that the assessee was noted to have provided corporate guarantee fees to the AEs tabulated at para 5.3 (page no.12) of the TPO’s order. The assessee, we have noted from the facts, had charged corporate guarantee from 1% from all AEs, except Zydus International P. Ltd., Ireland. With regard to the said entity, it had suo moto made adjustment by charging 1% of corporate guarantee in the return of income filed, which is noted in the details tabulated by the AO also. 4 Thus is in a sense, the assessee had charged 1% corporate guarantee fees on all corporate guarantee provided to its AE enterprises. The TPO notes that majority of the corporate guarantees were given in earlier years, and continued to do so, and that the assessee’s contentions made were identical to those made in Asst.Year 2014-15. Thereafter, noting that in Asst.Year 2014-15 corporate guarantee was benchmarked taking 2.52% as the Arms Length Price (ALP),being the arithmetic mean of external CUPs in the form of corporate guarantee fees charged by State Bank of India at 2.75% per annum and Bank of India at 2.16% and the coupon rates of ‘A’ rated bonds and ‘BB’ rated bonds of 2.66%. the AO noted the average of all the corporate guarantees to be 2.52%, which he noted that, was applied to identical transaction in the preceding year also. Applying this rate, he proposed adjustment in respect of the corporate guarantees to the tune of Rs.18,51,34,751/-. The relevant finding of the TPO is at page no.13 (Para-5.3) of the order as under: 5 6 8. The assessee filed objection against the same to the DRP who directed the AO to consider at 1.5% to be an appropriate rate for charging corporate guarantee fees. The DRP noted that comparing corporate guarantee with bank guarantee was incorrect, and the bank guarantee was comparable to corporate guarantee only after downward adjustment. The ld.DRP noted that the ITAT, Mumbai Bench have held so in the case of Glenmark Pharmaceuticals Ltd. Vs. ACIT, dated 13.11.2013 and in the case of Everest Kanto Cylinder Ltd. Vs. DCIT, 23.11.2012. Following these judicial rulings, the ld.DRP held that adjustment to the naked quotes of the rates of bank guarantee needed to be done in the impugned year, while benchmarking the transactions. Further, noting that the bank guarantees varied between 1% to 3% giving an average of 2.0%, the ld.DRP held that it would appropriate to charge corporate guarantee of 1.5% from the AE. The ld.DRP, accordingly directed the TPO/AO to make adjustment to the ALP of the corporate guarantee fees by adopting rate of 1.5% as opposed to 1% adopted by the assessee. The relevant finding of the ld.DRP in this regard are page no.61 and 62 of its order as under:
In view of the detailed discussion above, following the recent decision of Hon’ble Bombay High Court in the case of Everest kanto, and Mumbai ITAT in Glenmark Pharmaceuticals Ltd. In dated 13.11.2013(A.Y. 2008-09), a downward adjustment to the naked quotes of the rates of bank Guarantee has been done in this year, while benchmarking the transaction. It is seen that the bank guarantee rates vary generally between 1% to 3% giving an average of about 2.0%. Accordingly, it would be appropriate to charge a corporate guarantee of 1.5% from the AE. In this cases the assessee itself has charged 1% on the Corporate Guarantee given for the AEs. In the given facts of the case, and respectfully following the ratio of the decision of the Hon'ble Supreme Court and the Hon'ble High Court as a above, we are of the considered view that the corporate guarantee at the rate of 1.5% is reasonable and, the same may be adopted. The TPO/AO is also directed to adjust the 7 adjustments already made by the assessee on this, account out of the total adjustments computed adopting the rate at 1.5% as above. The ground is accordingly partly allowed.”
We have gone through the orders of the ITAT in the case of the assessee itself in the immediately preceding year i.e. Asst.Year 2014- 15 in dated 14.9.2022, and we have noted that identical issue was dealt with at para 4.00 to 6.1 of its order, wherein as in the present case, the AO/TPO had proposed adjustment on account of corporate guarantee by applying rate of 2.52% which was confirmed by the DRP. The ITAT, however, noted that in the preceding assessment year 2012-13 and 2013-14, the ITAT had found no reason to reject the one percent fees charged by the assessee and found to be at ALP. Accordingly, the adjustment done by the AO was dismissed. The relevant finding of the ITAT at para 4 to 6.1 of its order is as under:
“4. The brief facts in relation to this ground of appeal are that the assessee has provided guarantees to banks with respect to borrowings of its Associated Enterprises (AEs). The TPO, following the orders of the past assessment years, held that the service rendered by the assessee by offering guarantees to financial institutions on behalf of its AEs is liable to be benchmarked at 2.52% of the guarantee given. The TPO held that in line with the benchmarking done assessment it 2013-14, the corporate guarantee fee is benchmarked at 2.52%, which is the arithmetic been of external CUPs in the form of corporate guarantee fees charged by State Bank of India @2.75% per annum and Bank of India @ 2.16% and the coupon rates of A rated bonds and BB rated bonds @ 2.66 %. Accordingly, an upward adjustment of 17,44,51,548/- was done on this count. The DRP confirmed addition proposed by the TPO.
Before us, the counsel for the assessee submitted that the issue is directly covered in favour of the assessee by the orders of the ITAT in the assessee's own case for assessment year 2012-13 and assessment year 2013- Cadila Healthcare Ltd. vs. DCIT
14. Accordingly, the Ld. Counsel for the assessee argued that addition on this count is liable to be dismissed.
For the sake of reference, it would be useful to reproduce the order of ITAT for assessment year 2012-13 and 2013-14 in ITA Number 954/Ahd/ 17 and 213/ Ahd/18: 8 "10. We find that the stand taken by the Dispute Resolution Panel, granting relief to the assessee on this point, came up for consideration before a coordinate bench of this Tribunal, and, vide order dated 3rd March 2017, it has been upheld by the coordinate bench. The copies of these orders were placed before us as. As to what is a fair arm's length price for issuance of corporate guarantee for the group entities of the assessee group is a factual aspect, and once in the earlier years a coordinate bench has approved the stand that 1% is a reasonable guarantee commission, there is no reason for us to deviate from the said stand as parties to the guarantees are broadly the same and most of these guarantees are continuing guarantees. We, therefore, see no reasons to disturb the accepted past history of the case and disturb the corporate guarantee commission rate adopted by the assessee. As regards the TPO's observation that the concept of shareholder activity will apply only in respect of Zydus Netherlands as it was the holding company, and not the assessee company, all we can say is that admittedly the assessee company is the parent company for this holding company as well and the end beneficiary, therefore, is the assessee company. The observation made by the Assessing Officer is thus incorrect. In any case, the methodology adopted by the TPO for computation of arm's length price of these guarantees is wholly erroneous. The TPO has proceeded on the basis that the guarantee commission charges by the State Bank of India and Bank of India are static rates which held good in all circumstances, but then, in reality, the guarantee commission rates vary on a large number of factors and vary from client to client. The adoption of difference between coupon rate of A rated bonds and BB rated bonds is even more inappropriate and it proceeds on the assumption, an unrealistic assumption at that, Cadila Healthcare Ltd. vs. DCIT pre issuance of corporate guarantee by the assessee for its AE, its credit equivalence is of BB rated bond, which gets converted into A rated bond upon issuance of assessee's corporate guarantee, and the said benefit belongs entirely to the assessee. A computation based on such assumptions can never qualify to be treated as an external CUP. None of the rates, described as external CUPs, can be treated as valid inputs for the computation of arm's length price on the facts of this case. Such crude and unscientific methods of determining ALPs of corporate guarantees cannot meet any judicial approval. There was thus, in any event, no sound basis for disturbing the arm's length computation of these corporate guarantees, issued by the assessee in favour of its AEs abroad, taken at 1% which has been approved for earlier assessment years as well. In view of these discussions, as also bearing in mind, we approve the plea of the assessee, direct the Assessing Officer to adopt the benchmarking @1% as done by the assessee, and delete the impugned ALP adjustment of Rs 10,45,32,855. The assessee gets the relief accordingly.
Ground no. 1 is thus allowed."
6.1 In our view, since the issue is directly covered in favour of the assessee in its own case for assessment year 2012-13 and 2013-14, respectfully following the orders passed in the assessee's own case, we hereby allowing this ground of appeal filed by the assessee.”
In view of the above, it is abundantly clear that in identical facts and circumstances, the ITAT had held, corporate guarantee fees charged at 1% on the international transaction with AEs was at ALP. 9 11. The ld.DR was unable to distinguish the decisions of the ITAT in the preceding years in any way before us; whether on facts or in law. In view of the same, the decision of the ITAT in the preceding years in the case of the assessee itself, will apply in the present case also, following which, we hold that the ALP of the bank guarantee charged by the assessee at the rate of 1% is justified. The adjustment, therefore, made to the same to the tune of Rs.11,01,99,257/- by adopting 1.5% rate is directed to be deleted.
Ground of appeal 1(a) is, accordingly, allowed.
12. Ground No.1(b) (reproduced above) is against adjustment made to the international transaction of Optionally Convertible Loans (OCL) issued by the assessee to its AE on account of charging of interest thereon to the tune of Rs.13,54,90,598/-.
This issue was also stated to be covered in favour of the assessee by the order of the ITAT in preceding years including immediately preceding year i.e. Asst.Year 2014-15. The ld.DR fairly agreed with the same, though, he heavily relied on the order of the AO, which was issued in accordance with directions of the DRP.
We have gone through the orders of the authority below, and we have noted from the order passed by the TPO proposing the impugned adjustment that he had noted the assessee to have advanced OCL to Zydus International P. Ltd., Ireland, subsidiary of the assessee- company on which no interest had been charged. The details of the convertible loans so advanced is reproduced in a table at para 6.3 of the TPO’s order. The AO noted the characteristic of these OCL to be comprising of five years loan tenure with the option for repayment or conversion of equity at par with the company any time during the 10 tenure, and in case of repayment cumulative interest is payable from the date of providing loans at a specified basis for it. The TPO held that the purpose of convertible loans was to enable ZIPL to make investment in subsidiary company out of funds borrowed by it, and noting that no option had been exercised during the year. He held that interest was to be charged on these loans. He rejected the assessee’s contention that these loans were quasi-capital in nature, noting the fact that the option to convert the loan into equity has not been exercised. Thereafter following identical adjustment made in the case of the assessee in Asst.Year 2012-13 to Asst.Year 2014-15, and adopting the same methodology followed therein, the TPO benchmarked the interest on these loans at the contractual rate applicable to the said loans, and arrived at adjustment to be made on account of interest to be charged on these loans at Rs.13,54,90,598/- . This finding of the TPO finds mention at para 6.4 of his order. It is obvious and patently clear that the TPO followed adjustment made in the case of the assessee in preceding assessment years i.e. Asst.Year 2012-13 to 2014-15 for making an impugned adjustment in the impugned year before us.
Going through the order of the DRP, wherein the issue is discussed at para 14.3 of its order, we find that the DRP followed the directions given consistently by it in Asst.Year 2013-14 and 2014-15, finding no change in material facts in the present year to uphold the adjustment proposed by the TPO. Thus, the DRP followed its directions in the case of the assessee in Asst.Year 2013-14 and 2014- 15 to confirm the adjustment proposed by the TPO for interest to be charged on convertible loans issued by the assessee to its AEs.
We have gone through the decision of the ITAT on this issue in Asst.Year 2014-15 which find mention at para 48 to 9.1 of its order, 11 and noted that the ITAT directed the deletion of the adjustment, following its decision in the case of the assessee from Asst.Year 2008- 09 to 2010-11 and 2012-13 and 2013-14. Going through the decision of the ITAT in the preceding year, which is reproduced in the order of the ITAT for Asst.Year 2014-15, we have noted that the ITAT held the convertible loans advanced to the assessee to be in the nature of quasi-capital in the sense that, substantive reward or true consideration for such loan was not interest simplicitor on the amount advanced, but was an opportunity to own the capital on certain favourable terms. Further, the ITAT also noted the fact that whenever the assessee’s right to exercise option on conversion of the loans into equity came to an end, it was entitled to interest on commercial rates and noting that it was not even the case of the authorities below that the interest so charged by the assessee in a situation in which the right of exercising the option had come to end, is not at an arm’s length; that ITAT held that in such facts and circumstances, where the loans given by the assessee was found to be in the nature of quasi- capital and in the scenario of non-conversion of the loans into equity, the assessee was entitled to interest at commercial rate which was at arm’s length, no TP adjustment on account of interest on such loans was warranted.
In view of the consistent finding of the ITAT in the case of the assessee itself, in the preceding assessment years, as noted by us, and in the light of the fact that no distinguishing facts has been brought to our notice by the Revenue, the issue, we hold, stands covered in favour of the assessee by the consistent decision of the ITAT, in its own case in preceding years.
The ground No.1(b) is accordingly allowed. 12 18. Ground No.1(c) (supra) relates to TP adjustment made to the income of the assessee on account of alleged reimbursement of expenses to its AE. This issue was also stated to be covered in favour of the assessee consistently by the decision of the ITAT in preceding assessment years.
The ld.DR fairly conceded, though, he vehemently relied on the orders of the authorities below.
The facts relating to the issue find mentions at para 7.2 to 4.5 of the order of the TPO and emanate from the same that the assessee during the year had reimbursed expenses to its AE’s Zydus Pharmaceuticals, Mexico & Zydus France. The assessee’s contention was that all these expenses were made by way of reimbursement on cost-to-cost basis to this overseas enterprises.
With respect to Zydus, France, the assessee had contended reimbursement of the product submissions and regulatory fees as also reimbursement of reprinting charges, while with respect to Zydus Pharmaceuticals, Mexico, the assessee had contended reimbursement of clinical research and product registration expenses. The assesee’s contention was that the reimbursement had been made for products wherein the assessee was intellectual owner and played role of entrepreneur whereas the associate entity was only a distributor. The TPO and the DRP took a view that there was a contradiction in FAR analysis in the TP report and submissions made by the assessee, while justifying the ALP expenses reimbursed. It was noted that the FAR analysis in the TP report, the assessee had been classified as contract manufacturer, and accordingly, both the TP and DRP held that in such circumstances, the AE cannot be said to have incurred expenses on behalf of the assessee-company. The case of the 13 TPO/DRP was that no contract manufacturer in similar uncontrolled transactions, would reimburse expenses of another third-party, since contract manufacturing is a limited risk activity with no rewards and does not require any other expenses of such nature to be incurred.
We have gone through the order of the ITAT for Asst.Year 2014- 15, wherein the issue has been dealt with at para 11 to 14 of its order. The relevant findings of the TPO are as under:
11. The brief facts in relation to this ground of appeal are that during the year under consideration, the assessee had reimbursed expenses to three associated Enterprises: Zydus pharmaceuticals Mexico, Zydus France and Zydus Japan. The assessee's contention is that all these expenses were made by way of reimbursement on cost of cost basis to these overseas associated enterprises. With respect to reimbursements made to Zydus Mexico, the assessee's contention is that Zydus Mexico had incurred certain expenses related to clinical research and product registration for assessee's products. The assessee's contention is that the reimbursements have been made by the assessee for the products wherein the assessee is the IP owner and plays the role of entrepreneur whereas Zydus Mexico is only a distributor entity. With respect to reimbursement of expenses to Zydus France, the assessee submission was that the expenses have been reimbursed to Zydus France only for those matters where the assessee is acting as an entrepreneur (while the assessee admitted that for some products, he also acted as a contract manufacturer, but the assessee submitted that no reimbursements were made by the assessee to Zydus France in respect of the same). During the year, Zydus France had incurred certain expenses related to product submission and regulatory fees, control and testing fees, leaflet replacement cost and production sample cost for assessee's products. These costs have been reimbursed by the assessee to Zydus France on cost to cost basis without any markup. Thirdly, the assessee also made reimbursements to Zydus Japan on Cadila Healthcare Ltd. vs. DCIT cost to cost basis by way of reimbursement of certain expenses in the nature of insurance for clinical trial studies on behalf of the assessee for administrative convenience. The TPO as well as the DRP however took the view that there was contradiction in the FAR analysis in the transfer pricing report and the submissions made while justifying the reimbursement of expenses. This was also observed by the TPO in the orders for assessment year 2012-13 and assessment year 2013-14. In the FAR in transfer pricing report for transactions with AEs viz. Zydus France, Zydus Japan, the assessee has been classified as a contract manufacturer. Since the assessee company has been taken to be a contract manufacturer and benchmarked as such, then the expenses incurred by the Associated Enterprises cannot be taken to have been incurred on behalf of the assessee company. The TPO to the view that no contract manufacturer, in similar uncontrolled transactions, would reimburse the expenses of another/third-party. Contract manufacturing is a very limited risk activity with low rewards and hence does not require incurring expenses of such nature. In view of this, the arms- length price (ALP) was taken as
12. Before us, the counsel for the assessee reiterated the arguments taken before TPO/DRP to the effect that the assessee had reimbursed the Associated Enterprises on cost to cost basis. The counsel for the assessee submitted that the TPO and DRP has erred in facts in coming to the conclusion that the assessee was acting as a contract manufacturer for the above entities and the cost to cost reimbursements to these entities were in respect of its activities as a contract manufacturer. He 14 submitted that the assessee was the IP owner and all the reimbursements were made with Cadila Healthcare Ltd. vs. DCIT respect to assessee's business interests in these jurisdictions. In respect of Zydus Mexico, the assessee filed submission dated 2ndJune 2022 and drew our attention to relevant extracts of the supply and distribution agreement between the assessee company and Zydus Mexico to demonstrate that in fact, assessee is the IP owner and therefore reimbursements were made in connection with protection of assessee's interest outside of India. He further drew our attention to the Transfer Pricing Study Report at pages 48 and 49 of the paper book to reiterate that the assessee is acting as an entrepreneur/IP owner and Zydus Mexico is acting as its distributor. He further drew attention to pages 593 to 613 of the paper book by giving necessary supporting for expenses reimbursed to Zydus Mexico for clinical research and product registration. The assessee further submitted that similar expenses were reimbursed by the assessee to Zydus USA, who is acting as a limited risk distributor for the assessee. The assessee obtained a favourable order of ITAT for assessment year 2012-13 (copy annexed at pages 166 to 168 of paper book) in respect of these reimbursements made by the assessee to Zydus USA. With respect to payments made to Zydus France, the counsel for the assessee submitted that the fact that the assessee is acting as an entrepreneur/IP owner and Zydus France is acting as its low risk distributor (LRD) is evident from the transfer pricing report at pages 48-49 of the paper book. He drew attention to the supply and distribution agreement at pages 491-498 of the paper book to reiterate that the assessee is the IP owner. He further drew our attention to pages 505-592 of the paper book, to the supportings for expenses reimbursed by Zydus France for product submission and regulatory fees, control and testing fees, the leaflet replacement cost of product innovator sample costs. The assessee submitted Cadila Healthcare Ltd. vs. DCIT that all these expenses have been reimbursed in respect of those expenses incurred by Zydus France where the assessee company is acting as the entrepreneur/IP owner and Zydus France is acting as low risk distributor. The assessee obtained a favourable order of ITAT for assessment year 2012- 13 (copy annexed at pages 166 to 168 of paper book) in respect of these reimbursements made by the assessee to Zydus USA, whereas the latter was acting as the low risk distributor for the assessee. With respect to cost to cost reimbursements made by the assessee to Zydus Japan, the assessee submitted that these were reimbursements made to Zydus Japan for insurance charges and he drew attention to pages 614-15 of the paper book. The assessee's contention is that in all cases, the expenses were reimbursed on cost of cost basis to the overseas entities in respect of those expenses which were incurred by these overseas associated Enterprises on behalf the assessee company wherein the assessee was acting in the capacity of an entrepreneur/IP owner. Accordingly, the AO has erred in facts and in law computing the arm's-length price at "Nil" in respect of these payments.
13. We have heard the rival contentions and perused the material on record. In our considered view, the assessee has been able to demonstrate that these expenses were incurred by way of reimbursement to its associated Enterprises-Zydus Mexico, Zydus France and Zydus Japan in respect of expenses incurred by these overseas Associated Enterprises on behalf of the assessee company, wherein the assessee were acting in the capacity is an entrepreneur/IP owner, on a cost to cost basis. The assessee has given supporting documents in respect of the nature of reimbursements, from which it can be inferred that the expenses were essentially incurred with Cadila Healthcare Ltd. vs. DCIT respect to assessee's business interests in these overseas jurisdictions. The TPO/DRP has not questioned/challenged the assertion of the assessee that these expenses were reimbursed on a cost to cost basis. We further note that the assessee for assessment year 2012-13 and assessment year 2013-14 had reimbursed similar expenses towards associated Enterprise in USA and the TPO had determined the arm's-length price at "Nil". In this respect, the key findings of the ITAT are reproduced below for reference. 15 "23. We find that the TPO has, in essence, proceeded to make disallowance under section 37(1) by holding that there was no commercial expediency in making these reimbursements. That is certainly travelling beyond the domain of his powers under the scheme of the Act. The TPO only has to ascertain arm's length price of a transaction in the sense that if the same transaction was to be incurred between unrelated parties as to what would theoretically have been an arm's length price of the transaction in question, and that exercise is to be carried out on the basis of a permissible method of ascertaining arm's length price of a transaction. Whether the transaction should have taken place or not is not any of the TPO's business. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [(2012) 345 ITR 241 (Del)] "Even Rule 10B(l)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". The very foundation of the action of the TPO is thus devoid of legally sustainable merits. We have also noted that there is no mark up in the reimbursement of expenses, and, as such, there is no question of making any ALP adjustment in respect of these reimbursements of expenses. We have further noted that similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015-16, but no such arm's length price adjustments were made in any of these Cadila Healthcare Ltd. vs. DCIT years. Undoubtedly, there is no res judicata in tax proceedings but principles of consistency definitely have a crucial rule to play- particularly in respect of a factual matter which permeates through the different assessment years. Similar transactions have been accepted to have been entered into on arm's length basis in the preceding, as also succeeding, years. There is thus no justification for deviation in this particular assessment year. In any case, so far product liability insurance is concerned, the assessee has justified bearing the same on the ground that US AE is an LRD (limited risk distributor) with a targeted operated margin, and, therefore, under this business model, these costs are to be borne by the assessee company. We see no infirmity in this approach and this explanation. When AE is only doing distribution, it is entirely a commercial call of the assessee as to which type of product related expenses are to be borne by the assessee. These expenses thus clearly pertain to the assessee as the US AE is admittedly, and beyond dispute, only an LRD. The same is the position with respect to the legal expenses. It has been specifically explained by the assessee, and this explanation has not even been called into question, that the US AE was holding the ANDAs and patents, as a trustee and in fiduciary capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm's length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned by the company and in respect of which US AE is only an LRD. The expenses in question were thus clearly for the purpose of the business of the assessee, and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALP- something clearly contrary to the scheme of the Act, these expenses were fully 16 admissible for deduction. In any case, Cadila Healthcare Ltd. vs. DCIT there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 21,43,79,368- subject to necessary verifications about the figures.
24. Ground no. 3 is thus allowed."
13.1 Respectfully following the observations of the ITAT in assessee's own case for assessment year 2012-13 and assessment year 2013-14 in ITA number is 954/AHD/17 and 213/AHD/18, referred to above, we are of the considered view that the TPO has erred in fact and law in holding that the arm's-length price in respect of these cost to cost reimbursements should be determined at "Nil". Further, we also observed that the High Courts in various cases have held that the TPO cannot determine the arm's-length price of transaction as "Nil" on ad- hoc basis without employing any of the prescribed methods as the same is against the scheme of the Act. [Johnson & Johnson Ltd (Bombay High Court) (ITA No. 1030 of 2014), Kodak India Private Limited (Bombay High Court) (ITA No. 15 of 2014), Merck Limited (Bombay High Court) (ITA No. 1272 of 2014)]. Further, the High Court's have also held on various occasions that the TPO's jurisdiction is limited to determine the arm's- length price of a transaction and does not have the jurisdiction to examine the allowability of expenses as provided in section 37 of the Act. [Luwa India Pvt. Ltd (Karnataka High Court) (I.T. A.No.296 of 2017), Lumax Industries Limited (Delhi High Court) (ITA Nos. 102,103, 104 & 587/2014), Cushman and Wakefield (India) Pvt. Ltd. (Delhi High Cadila Healthcare Ltd. vs. DCIT Court) (ITA No. 475 OF 2012), EKL Appliances Ltd. (Delhi High Court) (ITA No. 1068 & 1070 OF 2011), Hive Communication Private Ltd. (Delhi High Court) (ITA No. 306 OF 2011).]
14. In view of the above observations, ground number 1(c) of the assessee's appeal is allowed.”
We have noted from the above that the ITAT took note of the facts of the case, and found that the assessee had reasonably demonstrated through documents that the expenses were incurred in respect of the assessee’s business interest in the overseas jurisdiction and further noting that similar expenses reimbursed by AEs in Asst.Year 2012-13 and 2013-14 had been held to be at arm’s length by the ITAT in its order passed for the said year. Since no distinguishing facts have been pointed out by the ld.DR from the facts of the preceding years, the decision rendered by the ITAT in Asst.Year 2014-15 will apply to the impugned year also, following which, we 17 direct deletion of the adjustment made to the transaction of reimbursement of the expenses by AE to the assessee.
Ground No.1(c) of the assessee is, accordingly, allowed.
Next ground is ground no.3 and 4are now being dealt with by us, which read as under:
“3. That the learned Assessing Officer erred in law and on facts in making an addition of Rs.28,40,80,823/- by holding that the Product Registration Expenses and expenses product for Registration Support Services were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses.
4. That the learned Assessing Officer erred in law and on facts in making an addition of Rs.9,89,85,304/- by holding that the Trademark Registration Fees and Patent Registration Fees incurred by the appellant were capital in nature, merely eligible for depreciation u/s. 32 and liable to be disallowed as business revenue expenses.”
It was contended before us, that the above grounds related to the issue of expenses claimed by the assessee being treated as capital in nature. The expenses so treated are as under: i) Product Registration Expenses and Project Registration Support Service Expenses totaling to Rs.28,40,80,823/- ii) Trademark Registration Fees & Patent Fees of Rs.9,89,85,304/-
The contention of the ld.counsel for the assessee before us, with respect to both the grounds was that, these expenses had been held by the AO to be capital in nature following the stand taken in the case of the assessee in preceding years, and the AO not conforming with the decision of the ITAT, and the Hon’ble High Court rendered in favour of the assessee. That the addition had been stated to be made merely to keep the issue alive. His contention was that both the issues had been conclusively decided in favour of the assessee by the ITAT in Asst.Year 2006-07 to 2010-11 and 2012-13 to 2014-15 that even 18 the Hon’ble Gujarat High Court had decided that no question of law arose on this point in its order for Asst.Year 2006-07 to 2008-09. Since, the issue raised before us vis-à-vis both the grounds is to be argued on identical lines, therefore, both the grounds are being dealt with by us together. The said ground nos.3 and 4 have already reproduced above.
Before us, the ld.DR fairly agreed that these issues had been decided in favour of the assessee in the preceding assessment years, both by the ITAT and the Hon’ble Gujarat High Court, as pointed out by the ld.counsel for the assessee before us. However, he relied on the order of the AO/DRP, pointing out that the additions were confirmed to keep the issue alive.
In view of the above admission by the ld.DR that these issues have been decided in favour of the assessee in the preceding assessment years, including immediately preceding assessment years i.e. Asst.Year 2014-15, and no distinction having been made before us either on facts or on law by the Ld.DR we see no reason to confirm the order of the AO treating the impugned expenses as capital in nature. Ground Nos.3 and 4 are accordingly allowed.
Ground No.5 and 6 read as under: 5. That the learned Assessing Officer erred in law and on facts in making an addition of Rs.38,52,07,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) in respect of Clinical Trials and Bio-equivalence Study. 6. That the learned Assessing Officer erred in law and on facts in making an addition of Rs.42,37,38,000/- by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) being non-eligible expenditure.
The above grounds, it was pointed out, related to the issue of claim of weighted deduction on expenditure incurred on in-house 19 research and development in terms of section 35(2AB) of the Act denied by the AO/DRP on – i) Expenses incurred outside the R&D facility of the assessee in respect of clinical trials and bio-equivalent study conducted of Rs.38,52,07,000/-, and ii) Expenses on in-house R&D not approved by the designated authority for the purpose, i.e. Department of Scientific & Industrial Research (DSIR) amounting to Rs.42,37,38,000/-.
Argument of the ld.counsel for the assessee before us was to the same effect that an identical issue had been decided in favour of the assessee in the preceding assessment years, including immediately preceding assessment year i.e. Asst.Year 2014-15; that the issue relating to the claim of weighted deduction under section 35(2AB) of the Act on activities carried outside the R&D facility of the assessee pertaining to clinical trial and bio-equivalence study, had been allowed by the ITAT in Asst.Year 2006-07 to 2010-11, which order had been confirmed by the Hon’ble Gujarat High Court, holding that no question of law arose on the point.
The ld.DR fairly conceded that the issues were decided in favour of the assessee right upto the immediately preceding years i.e. Asst.Year 2014-15, though, he relied on the order of the AO/DRP.
Considering the admission of the ld.DR as above, and noting that no distinction, either on facts or law, were pointed by the ld.DR before us from the decision rendered in the case of the assessee in the preceding year by the ITAT and the Hon’ble High Court, we see no reason to confirm the order of the AO. Accordingly, additions of 20 Rs.38,52,07,000/- and Rs.42,37,38,000/- made under section 35(2AB) of the Act is directed to be deleted.
Ground Nos.5 & 6 of the assessee are accordingly allowed.
Ground Nos.7 & 8 raised by the assessee are as under:
“7. That the learned Assessing Officer erred in law and on facts in making a disallowance of Rs.10,98,60,824/- u/s 14A, instead of Rs.9,14,44,362/- being the correct disallowance as per Rule 8D r.w.s. 14A of the IT. Act, offered by the assessee in its Return of Income. Thus, erred in making an additional disallowance of Rs.1,84,16,462/- u/s.14A.
That the learned Assessing Officer erred in law and on facts in making an adjustment of Rs.10,98,60,824/- in respect of disallowance u/s.14A for purposes of computation of book profit u/s. 115JB.
The above grounds are in relation to the disallowance pertaining to earning of exempt income in terms of provisions of section 14A of eh Act. While, ground no.7, relates to the disallowance of such expenses, as per the provisions relating to computation of income from business and profession as provided under section 28 of the Act.
Ground No.8 pertains to the addition of expenses so disallowed to the book profits of the assessee for the purpose of payment tax thereon in terms of provisions of section 115JB of the Act.
Since both the grounds related to the same issue, they were taken up together for hearing.
Ground No.7 was stated not pressed before us for adjudication, and is therefore dismissed as not pressed.
With respect to issue raised in ground no.8, the contentions of the ld.counsel for the assessee before us was that the disallowance made under section 14A of the Act, could not have been added to the book profits of the assessee under section 115JB of the Act, as held 21 by the Special Bench of the ITAT in the case of ACIT Vs. Vireet Investment P. Ltd., 82 taxmann.com 415. It was also pointed out that identical issue had arisen in the case of the assessee for the immediately preceding year i.e. Asst.Year 2014-15, wherein the identical adjustment of expenses disallowed under section 14A of the Act to the book profits of the assessee was deleted by the ITAT following the decision of the Special Bench of the Tribunal in the case of Vireet Investment P. Ltd. (supra).
The ld.DR fairly agreed with the same, though, he relied on the order of the AO.
In view of the above, we have no reason to uphold the order of the AO in this regard, as the finding of the AO is not in consonance with the ratio laid down by the Special Bench in Vireet Investments (supra), nor with the decision of the ITAT in case of the assesse in the immediately preceding A.Y 14-15. Therefore, the addition made to the book profits of the assessee on account of expenses disallowed under section 14A of the Act amounting to Rs.10,98,60,824/- is directed to be deleted.
Ground No.8 is accordingly allowed.
Rest of the ground nos.9, 11, 12 were stated to be consequential in nature, and therefore not pressed for adjudication before us.