Sun Pharmaceutical Industries Ltd. Vs ACIT (ITAT Ahmedabad)
Conclusion: Disallowance made under section 14A was not to be added for computing the book profit, therefore, AO had not erred in directing to exclude difference under section 14A for computing the big profit under section 115JB.
Held: Assessee-company was engaged in the business of manufacturing and sale of pharmaceutical products. It had also carried out R&D activities for developing new drugs and involved in quality control process etc. The company was also engaged in trading activity. In the case of assessee, draft assessment order u/s. 143(3) r.w.s.144C was passed and computed the total income at Rs. 9,16,04,08,572/-. Against the draft assessment order, assessee had filed objections before DRP. Thereafter, taking into consideration the direction issued by DRP, AO had passed assessment order u/s. 143(3) r.w.s. 92CA r.w.s. 144C(3) and total income was determined at Rs. 9,38,19,42,897/- against the order passed by AO. Revenue raised the issue that AO had erred in directing to exclude difference under section 14A for computing the big profit under section 115JB without appreciating that as per provision of clause (f) of Explanation (1) to section 115JB, the book profit was to be increased by the amount of amount of expenditure relatable to any income to which section 10 applies, which found support from the decision in the case of Dy. C.LT. Central Circle, Mumbai Vs. Viraj Profiles Ltd. reported in [2015] 64 Taxmann.com. 52 ()Mumbai Tribunal). It was held that following the decision of Co-ordinate Bench in the case of the Vinit Investment 165 ITD 27 (Del-SB), disallowance made u/s. 14A was not to be added for computing the income u/s. 115JB.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These two appeals filed by assessee and revenue for A.Y. 2011-12, arise from order of the Dispute Resolution Panel-2, New Delhi dated 23-112015, in proceedings under section 144C of the Income Tax Act, 1961; in short “the Act”.
2. The return of income was filed on 30thNov, 2011 declaring taxable income under normal computation at nil and carry forward on loss of Rs. 3,02,66,75,211/-. The profit u/s. 115JB of the Act was declared at Rs. 7,18,44,50,980/-. The case was selected for scrutiny through CASS and notice u/s. 143(2) of the Act was issued on 6th August, 2012. The assessee was having international transaction with associated enterprise as per form 3CEB report. Therefore, the case was referred to the transfer pricing officer and the TPO had passed order u/s. 92CA(3) of the Act on 30th January, 2015. The assessee company was engaged in the business of manufacturing and sale of pharmaceutical products. The assessee company has also carried out R & D activities for developing new drugs and involved in quality control process etc. The company was also engaged in trading activity. In the case of the assessee, draft assessment order u/s. 143(3) r.w.s.144C of the Income Tax Act, 1961 was passed and computed the total income at Rs. 9,16,04,08,572/-. Against the draft assessment order, the assessee has filed objections before the DRP. The DRP has issued direction vide their order u/s. 144C(5) of the Act on 23rd No, 2015. Thereafter, taking into consideration, the direction issued by the DRP, the Assessing Officer has passed assessment order u/s. 143(3) r.w.s. 92CA r.w.s. 144C(3) of the Act on 26th Jan, 2016 and total income was determined at Rs. 9,38,19,42,897/-against the order passed by the Assessing Officer. The assessee has filed appeal on the various issues as per grounds of appeal listed below against the order passed by the Assessing Officer on the direction of the DRP.
“1. Re: Order passed by the Assessing Officer on directions of Ld. DRP is bad in law :
1.1 The Directions given by DRP based on which the Assessing Officer passed the final order is bad in law being against the principal of natural justice, since additions / disallowances the have been upheld by DRP without providing any reason and by passing a non-speaking order. The Ld. DRP erred in passing the several grounds, solely on the observations made in the earlier year, without appreciating that grounds raised by Appellant were different for year under consideration as compared to earlier years.
1 .2 The Ld. DRP erred on the facts and in law in confirming the additions / disallowances proposed in the draft assessment order passed by the assessing officer, without judiciously considering the factual and legal objections filed against the said order.
1.3 The DRP erred on facts and in law in not directing the assessing officer to delete various additions / disallowance, which were squarely covered in favour of the Appellant by the order(s) of the appellate-authorities in Appellant own case for earlier years.
1.4 The DRP erred on facts and in law in not independently considering/ directing the assessing officer to consider certain claims for deduction / relief made by way of notes forming integral pan of the computation of income on the ground that the said claims were not. made in the return and no variation was proposed on the said claims in the draft assessment order.
Re: Contribution to Ranbaxy Community Healthcate Society (RCHS)- Rs30,992,839/:
2.1 The Ld. DRP erred both on facts and in law in nol directing the Assessing Officer TO allow the contribution made to Ranbaxy Community Healthcare Society (RCHS), under the provisions of section 37(1) of the Act without appreciating that the contribution was made in furtherance of business objective of the Appellant Company and the same has been decided in earlier years by the Delhi Income Tax Appellate Tribunal (ITA No 743/2009) for A Y 1997-98 in favour of the Appellant Company and the departments’ appeal before the Honourable High Court has not been admitted.
2.2 The L.d. Assessing Officer grossly erred in disallowing the amount by misconstruing the directions of the DRP without appreciating that in previous year the DRP had allowed the claim of the Appellant u/s 37(1), however the amount was eventually disallowed on the ground of non deduction of TDS u/s 40(a)(ia).
2.3 Without prejudice to the above, the Ld. Assessing Officer / DRP ought to have appreciated that since the payments had already been made during the year under consideration and nothing was payable as at the end of the relevant year, the provisions of section 40(a)(ia) of the Act were not applicable and consequently the entire amount was allowable as deduction u/s 37(1).
2.4 Without prejudice to the above, that the Ld. AO / DRP failed to appreciate that since the payments were not taxable in the hands of RCI IS, there was no requirement to make any disallowance under the provisions of section 40(a)(ia) of the Act.
2.5 Without prejudice to the abvoe, the Ld. AO / DRP grossly erred in not allowing deduction under section HOG in respect of contribution made to RCHS.
3. Re: Addition on aecount Transfer Pricing Rs 1,808,200,000/-:
3.1 The Ld. DRP erred both on facts and in law by not accepting the overseas Associated Enterprises (‘AEs1) as the tested party, being the least complex of the transacting entities and instead considering the Appellant as the tested patty, thus violating the basic principles of Transfer Pricing.
3.2 The Ld. DRP ought to have appreciated that Appellant had already entered into an Advance Pricing Agreement (APA) for AY 2014-15 with Central Board of Direct Taxes (CBDT) on the principal issue of selection of Foreign AF, as a tested party and hence the same principle being a legal principle ought to have been followed in the year under question as there were no changes in Functions, Assets and Risks (“FAR”) of the transacting parties.
3.3 The Ld. DRP grossly erred in upholding the actions of TPO / AO in disregarding I he ALP benchmarking process carried out by the Appellant in respect of Transfer Pricing documentation maintained by it in terms of Section 92D of the Act read with Rule 50D of the Income-tax Rules, 1962 (“Rules”):
By rejecting (he approach adopted by the Appellant of undertaking a regional benchmarking in the TP report which is in line with the globally accepted TP principles and also accepted by CBDT in the APA entered into with Appellant for AY 2014 15;
b. By holding that relevant and sufficient financial data is not available for the comparable companies selected by the Appellant and questioning the authenticity of the financial data of foreign comparables without appreciating that the database used by the Appellant was a globally accepted one; and
c. By disregarding the segmented financial statements of AKs as furnished by the Appellant, thereby holding that there is nothing on record to demonstrate that the margins earned by the AEs is due to the international transaction that needs to be benchmarked.
3.4 Without, prejudice to the above, the Ld. DRP grossly erred in upholding the actions of TPO / AO, while determining the ALP considering the Appellant as the tested party on the following counts.
a. In disregarding / modifying the filters applied by Appellant while determining the final list of comparables and denying commercial and economic adjustments applied by the Appellant while computing ALP, citing frivolous allegations;
b. In considering certain non-operating expenses as operating expense and certain operating income as non-operating income,
i. The AO grossly erred in disregarding the specific directions of Ld. DRP and considering unclaimed balance written back (23.1 Cr) and reversal of deferred employee compensation (0.33 Cr) as part of non-operating income. The AO ought to have appreciated that directions of ld. DRP are binding on AO.
c. In starting afresh the process of determining the comparables, without appreciating that the Appellant had carried out its supplementary analysis diligently and based on the available records, hence the same cannot be rejected.
d. In considering companies which are dissimilar in function in the final list of comparables.
c. In disregarding the approach adopted by the Appellant of using the multiple year/ prior available year’s data in the supplementary economic analysis and holding that current year (I.e. Financial Year 2010 11) data for comparable companies should be used despite the fact that [he same was not necessarily available to the Appellant at the time of preparing TP documentation, Further, in disregarding the CBDT Notification No. 83/2015 dated 19 October, 2015, allowing the Appellant to use multiple year data while carrying out comparability analysts.
4. Re: Disallowance u/s 14A – Rs 4,60,85,478/:
4.1 The Assessing Officer grossly erred in carrying out disallowance u/s 14 A, disregarding the specific directions of Ld. DRP, to compute the disallowance in accordance with the decision of the Hon’ble Delhi Court in case of Cheminvest Limited as per which the disallowance u/s. 14A could not be made in case there was no exempt income.
4.2 The Assessing Officer grossly erred in by passing the directions of the DRP which were binding on the Assessing Officer as per S. 144C(10) and holding that in view of the long term capital gains claimed as exempt u/s. 10(38), disallowance u/s. 14A could be made. The Assessing Officer failed to appreciate that ii was not open to the AC) to take a different stand to disregard the specific directions of the DUP on the matter.
4.3 Without prejudice to the above, the Assessing Officer erred in proceeding to disallow additional amount of Rs. 46,085,478 under section 14A of the Act, by applying the provisions of Rule 8D of Income Tax Rules, 1962, without appreciating that the Appellant had suo-moto disallowed a sum of Ks. 8,772,339 in its computation of income. Further, the AO grossly erred in applying Rule 8D automatically without arriving at the satisfaction with regard to the correctness of the expenses disallowed by the Appellant.
4.4 Without prejudice to the above, the Assessing Officer failed 10 appreciate that since Appellant had sufficient own funds to make the investments, presumption ought to be made that investments were made from interest free funds and not borrowed funds.
1.5 Without prejudice to the above, the AO grossly erred in considering strategic investments for the purpose of disallowance u/s. 14A by not appreciating that investments were strategic investment for furtherance of business objectives and not for the purpose of earning exempt income.
4.6 Without prejudice to the above, the AO grossly erred in computing the amount of disallowance u/s 14A r.w.r 8D.
5. Disallowance of deduction u/s 80IB / 80IC – Rs 819,857,681/-
5.1 The ld. DRP erred on facts and in law in not independently adjudicating the issue of eligibility to claim deduction under section 80TB ck 80-IC of the Act in the assessment year under consideration and merely relying on the findings of Ld. DRP for previous assessment year. The Ld. DRP ought to have appreciated that AO had misinterpreted the applicable legal provisions while proposing the disallowance of entire deduction under sections 8O-IB and 80-1C of the Act.
5.2 The AO grossly erred in stating that Appellant had not submitted balance sheet and profit and loss and hence was not eligible to claim deduction as per S. 80IA(7) of the Act r.w.r. 18BBB(2) of the Income Tax Rules, 1962, without appreciating that revised certificate in Form 10CCB submitted by Appellant already contained the requisite information and therefore requirement of S. 801A(7) of the Act r.w.r. 1 8BBB(2) of the Income Tax Rules, 1962 was fulfilled.
5.3 The Ld. DRP erred in law in upholding the actions of AO to deny the deduction u/s 80- IB & 80 1C of the Act, without appreciating that AO had exceeded jurisdiction and that on identical facts, deduction had always been allowed in the earlier year(s) (except for assessment years 2008 09, 2009-10 and 2010-11). The ld. DRP ought to have appreciated that determination of eligibility for allowance of deduction u/s 80-IB & 80-10 of the Act is relevant only in the first year and not in subsequent years of claim.
5.4 The ld. DRP grossly erred in law in not rejecting the actions of AO to deny the deduction and inter alia arriving at various conclusions which arc completely contrary to the facts and the law in as much as:
a. Appellant did not maintain separate books of accounts and did not submit the profit and loss and balance sheet of the new industrial undertakings, without appreciating that revised 10CCH submitted by the Appellant already contained the requisite information.
b. Selling and distribution activity constituted a separate profit centre and that for the purpose of working out the profits and gains of the new industrial undertakings the Appellant should have computed only the profits from the manufacturing activity;
c. Modifying the allocation of expenditures on an arbitrary basis without appreciating that detailed assumptions and justifications were submitted alongwith the Form 10CCB for allocating expenses to the new industrial undertakings;
d. In completely misinterpreting the provisions of S. 8WA(8) in holding that the- only profits from the manufacturing activity are eligible for deduction and alleging that the profits so computed would result in loss
5.5 The Ld. DRP grossly erred in law in not rejecting the actions of AO to deny the deduction on the alleged ground that the Appellant has used tax arbitrage by diverting expenses relating to deductible profits of the undertaking to taxable profits of the company and by diverting income not relating to deductible profit of the undertaking from taxable income of the Company to claim a higher deductible profits u/s 80IB & 80IC without appreciating the fact that during the year under consideration the Appellant had incurred loss under the head profits and gains from business and thus there was no tax arbitrage.
6. Re: Consideration of Marked to Market (MTM) Gain as taxable income – Rs. 1706.33 millions:
6.1 The Ld. DRP erred both on facts and in law in upholding the Mark to Market (‘MTM’) gain of Rs,1706.33 million as taxable ‘income’ of the Appellant under normal provisions without appreciating that the same was not consistent with the stand taken by the department in earlier years while: disallowing MTM loss in AY 200940. Further, the Ld. DRP ought to have appreciated that gain recognized during the year was merely reversal of MTM loss accounted in previous assessment years.
7. Re: Disallowance of Non-Compete fees (Expense)- Rs 10,00,000/-
7.1 The Ld. DRP erred both on facts and in law in in disallowing Rs.10,00,000/- being the amount of non-compete fee (expense) on the ground that it is capital in nature without appreciating that amount paid was for carrying out its business more efficiently and effectively.
8. Re: Disallowance of Premium paid on FCCB- Rs 5,945,459,801/-
8.1 The Ld. DRP erred both on facts and in law in disallowing the premium paid on redemption of Xero Coupon Convertible Bonds (“FCCB”) amounting as capital expenditure without appreciating that treatment given in books of accounts as per provisions of Companies Act cannot be considered as the basis for deciding the allowability of premium on FCCBs under the- Income Tax Act, 1961.
8.2 The Ld. DRP ought to have appreciated that the FCCBs were in nature of debt and once they were not converted into equity shares, any premium paid on redemption would be allowable as revenue expenditure and accordingly the action of the At) in treating the premium on the redemption of FCCB as akin to dividend on equity shares is completely contrary to the facts and the law.
8.3 The Ld, DRP grossly erred in upholding the additions by AO without appreciating that judicial pronouncements relied by AO were not applicable in facts of the present ease and the instant case was for FCCB which were “optionally convertible” and not “mandatorily convertible” and hence reliance on Circular No. 74 of Reserve Bank of India by AO was grossly erroneous and uncalled for.
9. Re: Disallowance of deduction u/s 35(2AB) – Rs 4,13,47,54,496/ :
9.1 The Ld. DRP erred both on facts and in law in disallowing the weighted deduction u/s 35(2AD) Rs. 4,13,-17,54,496/- merely on account of failure to produce Form 3C1. without appreciating that there was no onus or requirement under the relevant sections read with the rules on the Appellant to submit the said Form, The Ld, DRP ought to have appreciated that issue of certificate in Form 3CL was never the responsibility of the Appellant but of the prescribed authority and non-issue of the same by the prescribed authority cannot be attributed as non compliance by the Appellant.
9.2 The L.d. DRP failed to appreciate that the Appellant’s facilities were consistently recognised and approved by Department of Scientific and Industrial Research (DSIR) and that the Appellant had complied with all the conditions of Sec. 35(2AB) and Rule 6.
9.3 Without prejudice to the above, the Ld, DRP grossly erred in not directing the AO to allowing 100% deduction u/s 35(1) (iv) in respect of capital expenditure during the year.
9.4 Without prejudice to the above, the Ld. DRP grossly erred in not directing the AO to allow depreciation u/s 32(1) on capital R&D assets.
10. Re: Non-adjudication of claim of weighted deduction u/s 35(2AB) on cost of assets given to employees Rs. 1,64,23,930 /:
10.1 The Ld. DRP erred both on facts and in law in not adjudicating the claim of weighted deduction under section 35(2AB) of the Act, on the cost of assets provided to the employees working in approved Research & Development (R&D) facilities and engaged in execution of R&D activities, without giving any cogent reason for same.
10.2 The Ld. DRP failed to appreciate the fact that the Hon’ble High Court of Delhi in AY 1998 99 and Hon’ble Delhi ITAT in AY 1999-00, 2002-03 to 2005-06 have allowed the Appellant’s claim of weighted deduction in respect of capital assets provided to R&D employees.
11. Re: Non-adjudication of claim of hedging charges incurred Rs. 13,25,11,156/-
11.1 The Ld. DRP erred both on facts and in law in not adjudicating the claim of Rs. 10,00,30,513/- being hedging charges towards investment made by the Company in overseas subsidiary expenses incurred to protect against foreign exchange rate volatility as deductible under section 37(1) of the Act, without giving any cogent reason for same..
11.2 The Ld. DRP erred both on facts and in law in not adjudicating the claim of Rs 3,24,80,643/- on account of adjustment of hedging charges pertaining to the cost of fixed assets against their cost and allowing depreciation thereon under the provisions of the Act.
11.3 Without prejudice to the above, hedging charges amounting to Rs. 10,00,30,513/- incurred towards investment made by the Company in overseas subsidiary companies should be adjusted to the cost of acquisition of such investment.
12. Re: Double taxation of Income from Capital gains and other sources.:
12.1 The Assessing Officer grossly erred in taxing the long term capital gains of Rs, 14,27,71,965/- and income from other sources of Rs. 1,53,43,279/- without appreciating that the while considering the net business loss 3,02,66,75,122/-, the aforesaid incomes were already offered for tax and thereafter further adding the above incomes in computing the taxable income .
13. Re: Short grant of TDS Credit of Rs. 15,654/-
13.1 The Assessing Of fleer grossly erred in not all owing credit of TDS to the extent of Rs. 15,651/-.
14. Re: Interest u/s 234B and 234C :
14.1 The Assessing Officer grossly erred in computing interest u/s 2MB and 234C of the Act.
15. Re: Non grant of deduction u/s 80G of Rs 6,00,000/-
15.1 The Assessing Officer grossly erred in not granting deduction u/s 80G to the Appellant without appreciating that Appellant was eligible for the same.”
The Revenue has also filed appeal on the following grounds of appeal vide ITA 729/Ahd/2016 against the direction of the DRP to the Assessing Officer.
“1. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in law in directing the A.O. to exclude disallowance u/s. 14A of the Act for computing book profit u/s. 115JB of the Act without appreciating that as per provision of clause (f) of Explanation (1) to section 115JB of the Act, the book profit is to be increased by the amount of amount of expenditure relatble to any income to which section 10 applies, which finds support from the decision of Hon’ble I.T.A.T. Mumbai Bench “F”, Mumbai, in the case of Dy. C.LT. Central Circle, Mumbai Vs. Viraj Profiles Ltd. reported in [2015] 64 Taxmann.com. 52 ()Mumbai Tribunal)
2 On the facts and circumstances of the case and in law, the Hon’ble DRP erred in law in directing the A.O. to exclude disallowance u/s. 14A of the Act for computing book profit u/s. 115JB of the Act without appreciating that the A.O. had correctly computed book profit u/s. 115JB of the Act, since section 14A relates to disallowance of expenditure in respect of earning of exempt income referred to in section 10 of the Act.”
3. During the course of appellate proceedings before us, at the outset, the ld. counsel has submitted that all the issues in the grounds of appeals contested by the assessee in its appeal and contested by the revenue in their appeal are covered in favour of the assessee as per assessee’s own case adjudicated by the ITAT and also covered by the decision of Hon’ble Jurisdictional High Court and other courts. The ld. Departmental Representative is fair enough not to controvert these undisputed facts reported by the ld. counsel in its submission that all issues contested in the grounds of appeal are covered by the decision of ITAT and other courts in its favour. Taking into consideration the aforesaid facts and circumstances, the various grounds of appeal filed by the assessee and revenue are adjudicated as under:-
ITA No. 702/Ahd/2016 A.Y. 2011-12 filed by assessee
4. Ground No. 1 is of general nature of ground of appeal not specifically contested by the assessee, therefore, the same stands dismissed.
Ground No. 2.1 to 2.2 (contribution to Ranbaxy Community Healthcare Society (RCHS) of Rs. 30,992,839/- u/s. 37(1) of the Act and disallowing on the ground of non-deduction of TDS u/s. 40(a)(ia) of the Act)
5. During the year under consideration, the assessee has made contribution of Rs. 3,09,92,839/- to Ranbaxy Community Healthcare Society (RCHS). The assessee submitted before the Assessing Officer that this expenditure has been incurred for promoting its business, therefore, the same may be allowed as business expenditure u/s. 37 of the Act. The assessee has also submitted that ITAT Delhi has examined this issue of assessee’s appeal for the assessment year 1997-98, 2001-02, 2002-03, 2004-05 and 2005-06 in its own case and held that the contribution made to RCHS was an expenditure for the purpose of promoting its business and same was allowable as business expenditure u/s. 37 of the Income Tax Act. It was also submitted that Hon’ble High Court of Delhi had also rejected the revenue’s appeal against the aforesaid decision of the ITAT Delhi, for assessment year 1997-98, in ITA No. 743/2009 on 17th March, 2011. The Assessing Officer has not accepted the submission of the assessee stating that this issue has been contested in the past assessment year and the department has not accepted the decision of ITAT and filed appeal before the Hon’ble High Court of Delhi. The Assessing Officer stated that assessee was only entitled for deduction u/s. 80G on the amount computed and such contribution cannot be allowed as deduction u/s. 37 of the Act. The Assessing Officer has stated that assessee has also not deducted any TDS on the said amount and the same would automatically disallowed u/s. 40(a)(ia) of the act. The Assessing Officer also stated that assessee entitled for deduction u/s. 80G and the donation is a voluntary contribution without any benefit and cannot form a business expenditure u/s. 37(1) of the Act. Therefore, the Assessing Officer has treated the aforesaid contribution of Rs. 3,09,92,839/- as donation and only eligible for deduction u/s. 80G and not for deduction as business expenditure. The assessee has filed objection before the ld. DRP and the ld. DRP vide letter dated 23.11.2015 dismissed the objection of the assessee retreating the facts reported by the Assessing Officer. Consequently to the direction of the DRP, the Assessing Officer disallowed the said expenditure of Rs. 3,09,92,839/- as business expenditure u/s. 37 of the Act. During the course of appellate proceedings before us, the ld. counsel brought to our notice that identical issue on similar fact has been adjudicated in the case of the assessee itself in its favour by the Co-ordinate Bench of the ITAT Ahmedabad for assessment year 2009-10 vide ITA No 1782/Del/2014. The ld. Departmental Representative is fair enough not to controvert these undisputed facts that the instant issue in this ground of appeal is covered by the aforesaid cited decision of the ITAT. With the assistance of ld. representatives we have gone through the aforesaid cited decision of the Co-ordinate Bench of the ITAT and the relevant part of the decision is reproduced as under: –
“23. The issue raised by the assessee in ground no 7 is that the Ld. DRP erred in confirming the disallowance of deduction in respect of contribution of Rs. 22,50,000/- and Rs. 50,00,000/- made to Ranbaxy community healthcare society ( for short RCHS) and Ranbaxy Science Foundation (for short RCF).
24. The assessee company made a contribution of Rs.22,50,000/ to RCHS and Rs.50,00,000/- to RSF and claimed as deduction u/s 80G but the deduction has not been set off due to a loss in the return.
24.1. Further, the assessee claimed the same as business expenditure u/s 37/35 of the Act. The assessee in this connection submitted that the Hon’ble ITAT, New Delhi on the same issue in the assessee’s case had held that contribution made to RCF & RCHS are expenditure for the purpose of promoting the business of the company and is allowable as business expenditure u/s 37 of the Act.
24.2. However, the AO rejected the contention of the assessee by observing that the earlier year case is pending before the Hon’ble High Court of Delhi. Accordingly, the AO rejected the submission of the assessee and held that the assessee entitled for deduction u/s 80G of the Act. The AO further observed that the recipients did not show the amount as taxable receipts but accounted as donations.
24.3. The AO also noticed that the assessee has also not deducted TDS on such expenditure, therefore the same cannot be allowed as deduction u/s 40(a)(ia) of the Act. Hence, the AO disallowed the said expenditure as business expenditure u/s 37 of the Act.
25. The aggrieved assessee preferred an appeal before the Ld.DRP who has confirmed the order of the AO.
26. Being aggrieved by the order of the DRP, the assessee is in appeal before us:
27. The Ld. AR before us submitted that in the identical facts and circumstances in the own case of the assessee for the A.Y. 2008-09, ITAT Delhi Tribunal in ITA No. 196/Del/2013 dated 25.04.2016 has decided the impugned issue in its favor.
28. On the other hand, the Ld. DR before us vehemently supported the order of the authorities below.
29. We have heard the rival contentions of both the parties and perused the materials available on records. At the outset, we find that in the identical facts & circumstances in the own case of the assessee, the ITAT in the AY 2008-09 being ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 com322, held as under:
“6. We have carefully considered the rival contentions. In view of the decision of Hon’ble Delhi high court in case of assessee for AY 1997-98 order dated 17.03.2012 in ITA no.743/2008 and 20.11.2012 for AY 2002-03 to 2005-06, We reverse the decision of the AO and direct to delete the disallowance of Rs.47 lacs and Rs.1250000/- of contribution made by appellant to Ranbaxy Community Healthcare Society and Ranbaxy Science Foundation. Furthermore regarding failure to deduct tax on this sum, Ld. DR. could not point out particular section, which warrants deduction of tax at sources on this payment. Therefore, we also hold that in absence of specific section under which the tax is required to be deducted on such contribution without their being any service rendered by the recipient of the contribution disallowance u/s 40a(ia) also cannot be made. In the result ground no.9 of the appeal is allowed.”
30. In view of the identical issue raised before us in the ground of appeal no. 7 which has already been considered by the ITAT Delhi as discussed above, we are taking the same view. Accordingly, we allow the ground of appeal of the assessee.”
Respectfully following the decision of the Co-ordinate Bench of the ITAT on identical issue as cited above after taking the same view, we allow this ground of appeal of the assessee. In the result, this ground of appeal is allowed.
Ground No. 3 ( Erred in not considering overseas associated enterprise as tested party being the least complex of the transacting entities and instead considering assessee as tested party thus violating basic principles of transfer pricing)
6. During the course of assessment, the Assessing Officer stated that as per audit report in form no. 3CEB filed by assessee, the total value of international transaction entered into with its overseas AE’s were more than prescribed limit. Therefore, according to the provisions of section 92CA(1), the case of the assessee was referred to the additional director of income tax (transfer pricing officer) to determine the arms length price u/s. 92CA(3) of the Act. The TPO has passed order on 30th Jan, 2015 after considering the assessee as tested party. As per the detailed discussions made in the order passed u/s. 92CA(3) of the Income Tax Act, 1961 dated 30th Jan, 2015, the TPO has made upward adjustment of Rs. 1,80,82,00,000/- on the arms length price of international transaction. The assessee filed objection against this issue of the draft assessment order before the ld. DRP and the ld. DRP vide order dated 23.11.2015 dismissed the objection of the assessee. Consequently, following the direction of the DRP, the Assessing Officer made addition of Rs. 1,80,82,00,000/- to the total income of the assessee. During the course of appellate proceedings before us, the ld. counsel has submitted that identical issue on similar facts has been adjudicated by the Co-ordinate Bench of the ITAT in the case of the assessee itself for assessment year 2009-10 vide ITA no. 1782/Del/2014 in favour of the assessee. The ld. Departmental Representative is fair enough not to controvert these undisputed facts that issue in this ground of appeal is covered in favour of the assessee by the decision of the ITAT Ahmedabad in the case of the assessee itself as cited above. With the assistance of representatives, we have gone through order of ITAT Ahmedabad vide ITA No. 1782/Del/2014 for assessment year 2009-10. The relevant part of the decision on this issue is reproduced as under:-
“10. We have heard the rival contentions and perused the materials available on records. At the outset we find that in the identical facts & circumstances in the own case of the assessee, the ITAT Delhi Bench in the AY 2008-09 being ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 taxmann.com 322, held that AE’s are accepted as tested party being the least complex for comparability analysis of international transaction of the assessee. The relevant extract of the order is reproduced as under:
“18. We have carefully considered the rival contentions. We have also perused the relevant paragraphs of the several documents relied upon before us in the form of two paper book volumes, One supplementary paper book and one decision paper book on transfer pricing issues.
19. Generally, in transfer pricing comparability analysis, the tested party is usually the party participating in a transaction for which profitability most reliably can be ascertained and for which the reliable data of comparables can be found and the tested party will typically be the party with least intangibles.
20. As per section 92C(1) of the Act, ALP of the international transact is required to be determined using any of the profit based prescribed methods, being the Most Appropriate method (MAM) having regard to the nature of transaction or class of transactions. However, in order to determine the MAM for determining the ALP, it is first necessary to select the ‘tested party’. The transfer pricing legislation in India does not provide any guidance on the concept of ‘tested party’; however, there are some decisions on this issue, which can be of great help.
21. In order to understand the concept of tested party, one need to refer to the transfer pricing legislations of developed countries where the principles of transfer pricing have been in use for a long time and act as a guiding force for all the developing economies. The transfer pricing guidelines issued by the US Internal revenue services under section 482 provide and discuss the concept of transfer pricing. Section 1.482-5 of the US Transfer Pricing Regulations state that ‘the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. Thus, in a sense, the tested party would have lesser risk as compared to the other transacting party or the real entrepreneur.
22. As per the OECD Transfer Pricing Guidelines 2010, when applying a cost plus, resale price or transactional net margin method, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the least complex functional analysis.
23. As per UNTPM 2013,
“5.3.3. Selection of the Tested Party
5.3.3.1.When applying the Cost Plus Method, Resale Price Method or Transactional Net Margin Method it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the tested party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method.”
24. The OECD guidelines at Para no.3.18 provides as under:-
“3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rules, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found i.e. it will most often be the one that has the less complex functional analysis.
3.19 This can be illustrated as follows. Assume that company a manufactures two types of products, P1 and P2 that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical specification set by B. Assume that in this P1 transaction, A only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested part for the P2 transaction would most often be B.”
25. From the above guidance certain principles emerges in selection of tested party
(a) The choice available of tested party for comparability only in CUP method, TNMM and ‘Other method’, in other methods such as RPM and CPM choice of selecting a tested party is not available. In any case, it is not required in Profit split method.
(b) The tested party normally should be the least complex party to the controlled transactions.
(c) Availability of Most reliable data of tested party and requirement of minimum adjustments is also one of the most important aspects in selection of tested party.
(d) There is no bar against the selection of Tested party either Local party or Foreign party. Neither Income Tax Act and nor any guidelines on Transfer pricing provides so. Therefore selection of tested party is to further the object of comparability analysis by making it less complex and requiring fewer adjustments.
(e) There may be many circumstances where the data related to one party to the controlled transaction may be available easily, readily and in abundance. However the first step is to look at the FAR study of that party and if found to be complex than other party, then such party should be rejected as tested party and preference may be given to another entity which is least complex and is having reasonably reliable data for comparability. Therefore, the driving force in selection of tested party should be the least complex FAR of the party than the volume of comparable data.
In this background, we proceed to decide the issue.
26. Appellant has entered into advance pricing agreement under section 92CC of the Act on 07 August 2015 with CBDT for AY 2014-15. According to Para, 1(F) of that agreement tested party means associated parties as listed in Appendix 1. According to the annexure-1, it has been agreed between the parties that the TNMM with PLI of operating profit margin computed based on audited financials of AE, being the tested party, shall be the method to benchmark the covered transactions in the case. In order to select the comparables regional benchmarking shall be applied in case country-by-country benchmarking is not feasible the same shall be preferred over regional bench marking. In that appendix, CBDT has agreed to benchmark South African, Ireland and Romania AEs benchmarking region as Europe. In case of Nigeria, Malaysia and Morocco the regional benchmarking has been accepted of Asia. In case of South Africa, Peru the benchmarking of Europe and in case of Egypt, Brazil and Thailand benchmarking of Asia is accepted. According to Parano.5, it is also emphatically mentioned that foreign AEs are the tested parties. It is also important to notice that how this agreement has been reached between the parties. Page No 500 where in it is held that applicant i.e. appellant is an entrepreneur manufacturer where in the functions performed by it are
(a) R & D for both the products and processes
(b) Production and supply of formulations and APIs
(c) Provision of technical support and quality control process for the AEs
(d) Application for regulatory approvals from foreign governments
(e) Management support
In the risk assumed by appellant is discussed at page no 502 to 505 of the paper book. After that page no 505 to 523 the functions performed by each of the AEs and risk assumed is discussed. It shows that the functions performed by AEs are very limited and naturally, consequent risks assumed are less. After that at page no 525 and 526 of the paper book where in it is agreed that manner in which segmentation of the AEs would be computed being December/March year end which would be certified by the independent cost accountants. It is further provided that in case of AES are secondary manufacturers as well as low risk distributors margins would be computed separately. Therefore, APA has been agreed on the whole mechanism of computation of Alp of International transactions of the assessee.
27. It is also important
28. The issue that arises is though APA is signed for AY 2014-15 can it have any impact on the transactions for the year under appeal. According to The APA it shall apply in respect to previous year 2013-14 relevant to AY 2014-15, however principals laid down for comparability analysis in that does have a greater persuasive value. It is not the case of the assessee that APA should be applied for this year but it is the prayer that principles laid down by the highest revenue authority should be accepted by revenue at least for the purpose of starting the first step of comparability analysis for this year as the nature of international transactions, FAR of appellant and AEs respectively are similar. The availability of data is also on the similar lines as agreed in APA. Though the critical assumptions referred to a set of taxpayer related facts, it mentions that this APA would not have any effect on other years. May that be the case, but the concept and the methodology laid down in APA can have the guidance value for the revenue authorities for the purposes of comparability analysis. The main intent of the advance pricing agreements is to protect the fair share of the revenue of the states in simple and efficient manner and to protect the tax base. Need for Advance pricing agreements are emerging out of current global complex economic situations and its impact on revenue of tax compelling governments to intensify and streamline their transfer pricing compliance efforts to reduce the disadvantage in staking their claim for tax. Higher risk of disputes may be reduced by the advance pricing agreements. On the same intentions and objects, the ld. TPO is also required to compute the ALP of the International transactions of the Assessee for this year. Therefore, the agreement entered into by CBDT with the assessee, which has considered all the aspects of the manner of determination of ALP which are also similar for the this year, should be given highest sanctity and therefore mechanism suggest in that agreement should be necessarily followed in determining ALP of the transactions for this year.
29. Though in the APA signed by the assessee there is no “roll back provisions” for the year under appeal, however we analyses the circumstances, which provides for applying that rule. Rule 10MA of the Income tax Rules 1962 provides for the roll back provisions as under :—
’10MA. (1) Subject to the provisions of this rule, the agreement may provide for determining the arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person during the rollback year (hereinafter referred to as “rollback provision”).
(2) The agreement shall contain rollback provision in respect of an international transaction subject to the following, namely:—
(i) the international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies;
(ii) the return of income for the relevant rollback year has been or is furnished by the applicant before the due date specified in Explanation 2 to sub-section (1) of section 139;
(iii) the report in respect of the international transaction had been furnished in accordance with section 92E;
(iv) the applicability of rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant; and
(v) the applicant has made an application seeking rollback in Form 3CEDA in accordance with sub-rule (5);
(3) Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in respect of an international transaction for a rollback year, if,—
(i) the determination of arm’s length price of the said international transaction for the said year has been subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time before signing of the agreement; or
(ii) the application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year.’
On reading above rule, it is clear that if the International transactions are same in the year of APA and the year for which roll back is applied, roll back is allowed to the assessee on certain normal condition of filing return of income, Report of accountant and a request in specified format. Off course, it has also normal revenue safeguarding exclusion clauses of income going below the returned income and where ITAT has passed an order on the subject. Therefore even the rules provide that if the International Transactions are same in the year of APA and in the past year than both the parties, assessee and CBDT may agree for applying the agreements contained in APA agreed. In the present case, it is not disputed that the international transactions in both the years are not same. Therefore, we draw support from Rule 10 MA of Income tax Rules 1962 in applying the methodology as accepted in APA for the impugned year in appeal.
30. As the FAR Analysis of the year under APA as well as the year under appeal are similar and it is also an established fact that the tested parties selected by the APA i.e. foreign AEs are least complex and adequate financial data for comparison on region basis/country basis are available and further the financial transactions are same, we hold that based on APA for A Y 2014-15 the selection of tested party should be taken as Foreign AE for the current year too.
31. On looking at the TP Study report of the assessee placed at page Nos. 409 to 478 of Paper Book Volume-II as well as the order of TPO it is apparent that assessee has also adopted region based analysis and also country by country analysis of comparable where they are available. Therefore, in the TP study report as far as the tested party is concerned we do not agree with the observation of the TPO that no comparables are available. It runs contrary to the finding of the CBDT in APA.
32. Coming back to the order of coordinate bench in case of assessee for AY 2004-05 it is apparent that tribunal has accepted that least complex party to the transaction should be taken as tested party. In that year due to the weakness of the TP documentation of the assessee where assessee compared the operating margin of all the overseas AEs with reference to a single set of comparables selected from around the world without any regard to the functional and geographical dissimilarities. In that set of facts, coordinate bench has held that such comparability analysis is not appropriate and therefore in absence of comparable data there was no option but to uphold the appellant as a tested party. Therefore, coordinate bench has upheld the principle that tested party should be least complex but on the facts of the case for that year on non-availability of comparable data, it is so held. In the current year, the appellant has adduced reasonably comparative data based on region and country for comparing the foreign AEs. Therefore the facts in the present year are quite distinct than the year decided by ITAT i.e. A.Y. 2004-05. In view of this, we reject the reasons assigned by ld. TPO for rejecting the selection of overseas AE as the tested party.
33. AR has cited many decisions, which are on the principle of selection of tested party, which is least complex. We are of the view that there is no dispute on this principle as it is well recognized and well accepted in all those decisions. This too has been held by coordinate bench in the case of the assessee for A.Y. 2004-05. We have perused those decisions and applied the same in reasoning and our findings. For the sake of brevity we refer the decision of coordinate bench in General motors India (P.) Ltd. (supra) where in majority of the decisions were considered on the issue of selection of ‘tested party’ and it held as under :-
‘11.1. We shall now proceed to peruse the judicial views on the issue. The case laws relied on by the assessee is as under:
(i) Mastek Limited v. Addl. CIT in ITA No.3120/Ahd/2010 dt.29.02.2012:
In this case, the question came up for consideration before the earlier Bench of this Tribunal was as to whether a minute examination of functional profile is necessary for the selection of comparables and the answer given was that functional profile must be first examined and after that proceed to select the comparable. In this case, the comparables chosen by the assessee were discussed by the TPO and those were discarded for the basic reason that the companies those quoted by the assessee were dealing in product distribution whereas the TPO was of the view that the AE was nothing but ‘front office’ of the assessee and simply engaged in marketing activity. After due consideration of the issue, the Hon’ble Bench had observed thus:
“16.1 (on page 47) It is clear that arm’s length price is to be determined by taking result of comparable transactions and those transactions must be in comparable circumstances. It is therefore required to have a proper study of specific characteristics of controlled transaction. It is also required that there should be proper study of functions performed to match the identical situations under which functions have been performed. Then risk profile is also required to be compared. We may like to add that there are so many perspectives which were required to be compared and in this connection the Hon’ble Courts have also suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables etc. Hence, in the present case, it is necessary to consider an analysis that whether the comparables selected by the TPO had analogous functional profile to that of functional profile of the assessee. It is true that functional profile and assets and risk analysis was made available but that is to be correctly understood in the light of the nature of International transaction carried out by the assessee with the said AE. A similar problem was considered by ITAT Delhi Bench in the case of Bechtel India Pvt. Ltd. v. DCIT (2011-TII-07-ITAT-DEL-TP) where the assessee stated to be engaged in the business of providing electronic data support service to AE and the difficulty arose that the said function was compared with the companies engaged in the business of development of software. So the question was that whether a minute examination of functional profile is necessary for the purpose of selection of comparables and the answer given was that functional profile must be first examined and after that proceeds to select the comparables. Interestingly, in the present case now before us, comparables chosen by the assessee were discussed by the TPO and those were discarded. The basic reason for rejection of those comparables was that the companies those were quoted by the assessee were dealing in product distribution whereas the TPO was of the view that the AE was nothing but ‘front office’ of the assessee and simple engaged in marking activity. In this context, we are of the view that in order to determine the most appropriate method for determining the arm’s length price, first it is necessary to select the ‘tested party’ and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables.”
We are in agreement with the findings of the earlier Bench (supra) that such a selected party should be least complex and should not be unique.
(ii) Development Consultants (P.) Ltd. v. ACIT 136 TTJ 129 & followed by Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448/315 ITR 150 (Delhi):
The issue before the Tribunal was that the CIT (A) had confirmed the adjustments to the international transactions of the assessee with its AEs based at Bahamas, USA without considering the submissions and the financial of the AEs explaining the facts etc. In case of the merits of the case for international transactions entered by the assessee with TKC, the submission made on behalf of the assessee was as under:
“26, 1 to 3**
….4. TKS is the entrepreneur company and has created significant marketing intangibles over the years. It uses its marketing intangibles to generate the work and assumes all the market, price and product risks. TKC came out the work on its own, only parts of the job are sub-contracted to the assessee for its convenience. Futher, being an entrepreneur company, it is difficult to determine the profits of ATKC with respect to work downloaded to India (as the revenue received for work off-shored to India cannot be separately identified). Further, the revenue generated from the services provided by the assessee would form only a small part of the entire operations. The value of engineering drawing and design services rendered by the assessee to TKC for AY 2002-04 was Rs. 1,58,43,923/- and for AY 2004-05 it was Rs. 1,45,77,704/-. The value of service forms approximately 6% to 7% of the Cost of Sales to TKC. HENCE, THIS Shri Rahul Mitra argued, shows that testing the margins of TKC would not serve the purpose of determining the arm’s length nature of the transactions undertaken by the assessee with TKC. Hence, the recourse available to test the arm’s length price of the services rendered by the assessee to TKC is to test the margins from the Indian side. In view of the discussion on tested part earlier, the assessee was selected as the tested party being least complex of the two entities. Hence, the transfer pricing analysis in this case was done from the Indian side, wherein, the margins of the assessee with respect to services provided to TKC were compared internally with services provided to other third parties in foreign market. Taking into account the divergent submissions, the Hon’ble Tribunal had recorded its findings that –
“33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm’s length price of the international transaction with Datacore USA is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore US is at arm’s length for both the assessment years.”
(iii) In the case of Ranbaxy Laboratories Ltd. v. Addl. CIT110 ITD 428, the Hon’ble Delhi Tribunal had recorded its findings that –
“58. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer.”
In substance, a foreign entity (a foreign AE) could also be taken as a tested party for comparison.
11.2. At this juncture, we would like to refer to the United Nation’s Practical Manual on Transfer Pricing for Developing Countries wherein the selection of the tested party has been dealt with. This Manual has been the work of many authors which included India, Norway, Nigeria, Italy, USA, Netherlands, Brazil, China, OECD, Japan etc. For ready reference, the relevant portion of it observation is extracted as under:
“5.3.3. Selection of the Tested Party:
5.3.3.1. When applying the Cost Plus Method, Resale Price Method or Transactional Net Margin Method (see further Chapter 6) it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the test party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method.”
With regard to the challenges emerging in transfer pricing in India, it has been observed as under:—
“10.4. Emerging Transfer Pricing Challenges in India
10.4.1. Transfer pricing Regulations in India
10.4.1.3 The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprise is the less or least complex entity and requisite information is available about the tested party and comparables.
11.2.1 It was also vouched during the course of hearing by the learned Sr. Counsel that the financial details including operating margin of comparable companies along with the back-up computations were furnished before the TPO in the transfer pricing documentation [Source: Pages 113 to 210 of the Transfer Pricing Study]. This contradicts the assertion of the learned DR that the assessee had not furnished any financial information of the comparable companies.
11.2.2 The United Nation’s Practical Manual on Transfer Pricing also contradicts the TPO’s argument that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee doesn’t fall within his jurisdiction and he can neither call for any additional information nor scrutinize their books of accounts etc.,
11.2.3 However, we find inconsistency in the stand of the TPO to the effect that while rejecting the assessee’s approach for selecting GMDAT as the tested party by citing a reason that there was no reliable data available for both GMDAT and comparables and, therefore, GMDAT cannot be taken as the ‘tested party’, however, on the same breath, as rightly highlighted by the assessee, the TPO had taken GMDAT as the tested party while making adjustment to transaction relating to payment of royalty by GMI to GMDAT.
11.2.4 Rebutting the Revenue’s allegation made during the course of proceedings that the segmental financial statement of GMDAT was not reliable, the assessee reiterates that the segmental data relied upon for benchmarking international transactions relating to import of CKD Kits and components was completely reliable and was based on sound allocation keys. To substantiate its claim, the assessee has also furnished a report on factual findings certified by the statutory auditors – Deloitte Anjin LLC.
11.2.5 Moreover, we find that the DRP had not considered in great detail the plea of the assessee as to why GMDAT should not be selected as the tested party for analyzing the inter-company transactions. Instead, the DRP had, in a cryptic manner, concluded that the results of assessee have to be compared with the stand alone results of Mahindra & Mahindra in the automotive segment.
11.2.6 In this connection, we tend to recall the ruling of the Hon’ble Jurisdictional High Court [Special Civil Application No.8179 of 2010 dated 31.8.2010] in the case of AIA Engineering Ltd. v. Dispute Resolution Patel through Secretary-DRP & 1. After due consideration of rival submissions, the Hon’ble Court had ruled thus –
“16. . . . . .If the Dispute Resolution Panel was of the opinion that the application dated 22.4.2010 could not have been entertained, it should have considered the objections filed by the petition on merits. As a consequence of the impugned order, firstly the objections raised by the petitioner have not been decided, secondly, in view of the directions issued by the Dispute Resolution Panel, the petitioner would not be in a position to avail of the remedy of appeal before commissioner (Appeals) against the draft assessment order; and thirdly, in the light of the observation made by the dispute Resolution Panel that the petitioner has chosen to withdraw the objections, preferring any appeal against the impugned order before any forum would be an exercise in futility, as no appeal would be entertained against an order passed on a concession. Thus, the dispute Resolution Panel has virtually closed all doors for the petitioner. In the circumstances, impugned order of the Dispute Resolution Panel suffers from the vide of being contrary to the record as well as non-application of mind, in as much as the petitioner had never sought withdrawal of the objections filed by it. The impugned order also causes immense prejudice to the petitioner as recorded hereinabove. In the circumstances, the impugned order of the Dispute Resolution Panel, therefore, cannot be sustained. . . . . . .“
11.3 We shall now peruse the case laws on which the learned DR had placed reliance in the findings of the Hon’ble Mumbai Tribunals in the cases of (i) Aurionpro Solutions Ltd. v. Addl. CIT in ITA No.7872/Mum/2011 dated 12.4.2013; and (ii) M/s Onward Technologies Ltd. v. DCIT (OSD) in ITA No.7985/Mum/2010 dated 30.4.2013.
(i) In the case of Aurionpro Solutions Ltd. (supra), the issue before the Hon’ble Bench was that the assessee engaged in the business of software development and web designing services and that the assessee had lent loans to its AEs stationed at USA, Singapore and Bahrain. The assessee had claimed that the said loans as working capital advanced to its 100% subsidiary outside India. When the issue was referred to TPO, the TPO took a view that as in a third party comparable situation, advances would bear interest and, therefore, need to charge a markup as per CUP method. Accordingly, the TPO proposed to benchmark the loans at dollar denominated LIBO [London Inter Bank Operative] rate plus mark up of 3%. When the issue landed up before the DRP, the DRP had, after analyzing the issue, directed the AO/TPO to compute the interest on loans to AE @ 14% per annum thereby enhanced the transfer pricing adjustment. Aggrieved assessee took up the issue with the Tribunal. The Hon’ble Tribunal, after due consideration of the issue in depth and for the reasons recorded therein, directed the AO/TPO to determine the arm’s length interest at Libor plus 2% on the monthly closing balance of advances during the FY. We have, with due regards, perused the issue and the findings of the Hon’ble Bench in detail. Ironically, the main issue before the Bench was the percentage of the interest to be calculated on the loan advanced by the assessee to its foreign AEs. We are, therefore, of the view that this case is not directly applicable to the issue under dispute.
(ii) In the case of M/s. Onward Technologies Ltd. (supra) as relied on by the Revenue, it is observed that the assessee, a parent company had international transaction with its AEs. With regard to IT enabled services provide to its AEs, the assessee had chosen six comparables with its foreign AEs as a tested party. The TPO had ignored the working of the assessee whereby selecting 20 comparable cases. When the issue reached before the Tribunal for resolve, the Hon’ble Bench had, after having considered rival submissions, recorded its findings, among others, as under:
So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and its foreign AE. It can neither call for also roping in and taxing in India the margin from the activities undertaken by the foreign AE nor can it curtail the profit arising out of transaction between the Indian and foreign AE at arm’s length. The contention of the ld. AR in considering the profit of the foreign AE as ‘profit A’ for the purposes of comparison with profit or comparables, being ‘profit B’, to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of ‘internal transaction’ u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention is, therefore, repelled.”
With have duly perused the findings of the Hon’ble Bench cited supra. In this connection, we would like to point out that various Tribunals have taken divergent views in respect of selection of ‘tested party’. To illustrate, the earlier Bench of this Tribunal in the case of Mastek Limited ITA No.3096/Ahd/2010 (AY- 2006-07) (supra) had stressed that (at the cost of repetition)
“we are of the view that in order to determine the most appropriate method for determining the arm’s length price, first it is necessary to select the ‘tested party’ and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables”.
The Hon’ble Calcutta Tribunal in the case of Development Consultants (P.) Ltd. (supra) had recorded its findings that
“33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm’s length price of the international transaction with Datacore USA is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore US is at arm’s length for both the assessment years.”
Thirdly, the Hon’ble Delhi Tribunal in the case of Ranbaxy Laboratories Limited (supra) took a stand that—
‘If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration.’
Then, the United Nation’s Practical Manual on Transfer Pricing for Developing Countries had observed that—
“5.3.3.1. . . . . . The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration. . . . . .“
11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the ‘tested party’ either from local or foreign party and the United Nation’s Practical Manual on transfer pricing for developing countries had observed that ‘It may be the local or the foreign party’, we tend to agree with the same.’
34. Above decision reproduced by us covers many divergent views of the coordinate benches and after considering them coordinate bench has reiterated all the principles noted by us for selection of tested party. Hence, we also draw staunch support from that decision.
35. Therefore, for the reasons stated above, ground no 2.2 of the appeal is allowed with a direction that overseas associated enterprises are accepted as ‘tested party’ being the least complex of the transacting entity for the year for comparability analysis of international Transactions of the assessee-appellant.
36. As we have already decided the first step of comparability analysis in ground no 2.2 of the appeal we set aside other grounds nos. 2 to 7 except 2.2 to the file of TPO to compute ALP of the international transactions accordingly. In the result ground nos. 2 to 7 except ground no.2.2 are allowed for statistical purposes. Needless to say that ld. TPO/AO shall give due weightage to the Advance pricing agreement signed by the assessee with CBDT on other issues also (other than the issue of ‘selection of tested Party’) for determination of ALP and in case of any divergent view, the assessee shall be granted an adequate opportunity to substantiate any claim/arguments on the manner of determination of ALP.”
10.1. As the facts in the case on hand are identical to the facts of the case as discussed above, therefore we are bound to follow the same. We cannot change the stand with the view taken by the ITAT in the own case of the assessee. Regarding this we find support & guidance from the judgment of Hon’ble Madras High Court in the case of CIT v. L.G. Ramamurthi 1977 CTR (Mad.) 416 : [1977]110 ITR 453(Mad.) wherein it was held as under:
“No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts. It may be that the members who constituted the Tribunal and decided on the earlier occasion were different from the members who decided the case on the present occasion. But what is relevant is not the personality of the officers presiding over the Tribunal or participating in the hearing but the Tribunal as an institution. If it is to be conceded that simply because of the change in the personnel of the officers who manned the Tribunal, it is open to the new officers to come to a conclusion totally contradictory to the conclusion which had been reached by the earlier officers manning the same Tribunal on the same set of facts, it will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the Courts or the Tribunals and not reached objectively on the basis of the facts placed before the authorities.
If a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single Judge takes a view different from the one taken by another Judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly if a Division Bench differs from the view taken by another Division Bench it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a question of fact. If the Tribunal wants to take an opinion different from the one taken by an earlier Bench, it should place the matter before the President of the Tribunal, so that he could have the case referred to a Full Bench of the Tribunal consisting of three or more members for which there is provision in the IT Act itself.”
10.2. We also find that the Hon’ble supreme court case of Ambika Parsad Mishra Vs. State of U.P.and Others vide writ petition no 1543 of 1977 vide order dated 09-05-1980 has taken the similar view as taken by the Hon’ble High court (supra) as under:
“Thus we get the statutory perspective of agrarian reform and so, the constitutionality of the Act has to be tested on the touchstone of Art 31A which is the relevant protective armour for land reform laws. Even here, we must state that while we do refer to the range of constitutional immunity Art. 31Aconfers on agrarian reform measures we do not rest our decision on that provision. Independently ofArt. 31A, the impugned legislation can withstand constitutional invasion and so the further challenge to Art. 31A itself is of no consequence. The comprehensive vocabulary of that purposeful provision obviously catches within its protective net the present Act and, broadly speaking, the antiseptic effect of that Article is sufficient to immunise the Act against invalidation to the extent stated therein. The extreme argument that Art. 31A itself is void as violative of the basic structure of the Constitution has been negatived by my learned brother, Bhagwati, J. in a kindred group of cases of Andhra Pradesh. The amulet of Art. 31A is, therefore, potent, so far as it goes, but beyond its ambit it is still possible, as counsel have endeavoured, to spin out some sound argument to nullify one section or the other. Surely, the legislature cannot run amok in the blind belief that Art. 31A is omnipotent. We will examine the alleged infirmities in due course. It is significant that even apart from the many decisions upholding Art. 31A, Golak Nath’s case decided by a Bench of 11 Judges, while holding that the Constitution (First Amendment) Act exceeded the constituent power still categorically declared that the said amendment and a few other like amendments would be held good based on the doctrine of prospective over-ruling. The result, for our purpose, is that even Golak Nath’s case has held Art. 31A valid. The note struck by later cases reversing Golaknath does not militate against the vires of Art. 31A. Suffice it to say that in the Kesavananda Bharati’s case. Article 31A was challenged as beyond the amendatory power of Parliament and, therefore, invalid. But, after listening to the marathon erudition from eminent counsel, a 13 Judges Bench of this Court upheld the vires of Article 31A in unequivocal terms. That decision binds, on the simple score of stare decisis and the constitutional ground of Art. 141. Every now discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent. In this view, other submissions sparkling with creative ingenuity and presented with high-pressure advocacy, cannot persuade us to re-open, what was laid down for the guidance of the nation as a solemn pre-posion by the epic Fundamental Rights case. From Kameshwar Singh and Golak Nath (supra) through Kesavananda (supra) and Kanan Devan to Gwalior Rayons and after Art. 31A has stood judicial scrutiny although, as stated earlier, we do not base the conclusion on Art. 31A. Even so, it is fundamental that the nation’s Constitution is not kept in constant uncertainty by judicial review every season because it paralyses, by perennial suspense, all legislative and administrative action on vital issues deterred by the brooding threat of forensic blowup. This, if permitted, may well be a kind of judicial destabilisation of State action too dangerous to be indulged in save where national. crisis of great moment to the life, liberty and safety of this country and its millions are at stake, or the basic direction of the nation itself is in peril of a shakeup. It is surely wrong to prove Justice Roberts of the United States Supreme Court right when he said.”
10.3 We also note that the impugned issue has been admitted by the Hon’ble Gujarat High Court in Tax Appeal No. 853 of 2016 against the order of the ITAT Delhi Bench “I” New Delhi bearing ITA No. 196/DEL/2013 for the AY 2008-09. The relevant proposed question of law as framed before the Hon’ble Court reads as under:
[1] “ Whether on the facts and circumstances of the case and in law, the ITAT was justified in directing to delete the addition of Rs. 238.16 crores holding that overseas Associated Enterprise can be accepted as “tested party” where there is no instances of transactions between unrelated parties ?”
10.4 Thus the impugned issue is pending before the Hon’ble Gujarat High Court, therefore we do not find any reason to refer the matter to the Special Bench as argued by the ld. AR for the assessee.
10.5 In view of the identical issue raised before us in the ground of appeal no. 2 which has already been considered by the ITAT Delhi, we are taking the same view and accordingly the ground of appeal of the assessee is allowed for statistical purposes.
10.6 As we have restored the issue to the file of the TPO for fresh adjudication considering the AE’s as tested party, other grounds nos. 3 and 4 do not require to be adjudicated separately. Therefore, we dismiss the same.”
On considering the finding of the ITAT Ahmedabad and after taking the same view, we restore this issue to the file of the TPO for fresh adjudication considering A.E’s. as tested party. Therefore, this ground of appeal of the assessee is allowed for statistical purposes.
Ground No. 4 (Erred in confirming disallowance u/s. 14A of the Act of Rs. 4,60,85,478/-)
7. During the course of assessment the Assessing Officer noticed that assessee company has made investment of Rs. 601.22 crores in the shares of Indian companies and Rs. 3242.2 crores in its overseas subsidiaries as on 31st March, 2011. The Assessing Officer also stated that assessee has offered an income of Rs. 1,53,43,279/- as taxable income on these investments. The Assessing Officer was of the view that domestic investment yield exempt income to the assessee for which the income on transfer would be offered under the head capital gain. The Assessing Officer further stated that during the year, the assessee company has incurred administrative and financial cost to maintain and made new investment, therefore, the assessee was asked to explain why not disallowance of expenditure incurred towards earning exempt income be computed according to section 14A of the Act r.w.s rule 8D of the I.T. Rule 1962. In response, the assessee explained that it had not received any dividend income claimed as exempt u/s. 10(34) of the I.T. Act, 1961. However, in spite of these facts as abandoned caution the assessee has suo-moto disallowed Rs. 87,72,339/- u/s. 14A of the Act. The Assessing Officer has not accepted the submission of the assessee stating that assessee has failed to prove a nexus of surplus funds with investment and work out the disallowance of expenditure u/s. 14A r.w.s. 8D of the I.T. Rule, 1962 to the amount of Rs. 4,60,85,478/-. The assessee has filed objection before the DRP. The DRP has directed the Assessing Officer to compute the disallowance u/s. 14A in the light of the judgment of Delhi High Court in the case of Chem Investment Ltd. The Assessing Officer stated that in the case of Chem Investment Ltd., Hon’ble Delhi High Court held that section 14A will not apply if no exempt income was received or receivable during the relevant previous year. However, the Assessing Officer has stated that assessee was in receipt of long term capital gain of Rs. 225.50 crore as exempt and the assessee has itself admitted during the course of assessment that the investment in shares of Indian companies would yield dividend income that is exempt u/s. 10(34) of the act.
8. During the course of appellate proceedings before us, the ld. counsel submitted that assessee has not earned any dividend income during the year under consideration, therefore, no further disallowance u/s. 14A is required to be made in the case of the assessee as held by the Hon’ble High Court of Gujarat in the case of Corrtech Energy ltd. 372 ITR 97 (Guj). The ld. Departmental Representative could not controvert this undisputed finding of the Hon’ble High Court of Gujarat as contended by the ld. counsel. Respectfully following the decision of the Hon’ble High Court of Gujarat in the case of Corrtech Energy Ltd. 372 ITR 97 (Guj) wherein held that in case no dividend income is claimed as exempt no disallowance is to be made u/s. 14A of the Act. Therefore, following the decision of Hon’ble Gujarat High Court as cited above, this ground of appeal of the assessee is allowed.
Ground No. 5 (disallowance of deduction claimed u/s. 80IBand 80ICof the Act of Rs. 819,857,681)
9. During the course of assessment, the Assessing Officer noticed that assessee has claimed deduction u/s. 80IB/80IC of the act of Rs. 81,98,57,681/-. The assessee claimed these deductions in respect of undertakings located in backward area for deduction u/s. 80IB (Goa Unit) and for deduction u/s. 80IC (Paontashahib, Himachal Pradesh). On query, assessee explained that certificate of the chartered accountant in form 10CCB has already been filed vide letter dated 21stSep, 2012 as per the requirements of section 80IB and 80IC of the Act along with profit and loss account for the respective eligible new industrial undertakings (NIU). The assessee has also enclosed copy of these certificates as per annexure 1. The assessee has also filed revised certificate in form no. 10CCB along with profit and loss account and the balance sheet of the respective new industrial undertaking and submitted that there was no change in the profit or loss of the respective new industrial undertaking. The assessee has also submitted that it had maintained separate books of account in computerized environment which has been the basis for computing deduction u/s. 80IB and 80IC of the Act. The profit and gain are determined on the prices realized from the customer as adjusted with the direct or indirect cost. The assessee has filed a detailed submission in response to the query raised by the Assessing Officer produced at page no. 22 to 48 of the assessment order of the Assessing Officer. The same is reproduced as under:-
“On the query that units earlier setup by the assessee company (with deduction at lower percentage) is incurring losses as against the latest units set up by the company (entitled for deduction @ 100%), following merits your consideration:
