M/s. Wockhardt Ltd, Mumbai V. Assistant Commissioner of Income-tax, Circle - 3, Aurangabad

CO 16/PUN/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6502 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 6 month(s) 12 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 12-12-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 30-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gift; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Question of law; Wholly owned subsidiary; Arm length price; Block assessment; Notional interest; Capital receipt; Commercial expediency; Rule 8D; Set aside; Liquidation
• Section: 131; 92C; 92; 92B; 14A; 115JB; 80IB; 37(1); 195; 250; 80IC; 192; 80IC; 43; 13; 22

Judgement Text

आयकर अपीलीय अधधकरण “सी” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI R.S.SYAL, VP AND SHRI PARTHA SARATHI CHAUDHURY, JM आयकर अपील सं. / ITA No. 438/PUN/2018 धनधाारण वषा / Assessment Year : 2010-11 Wockhardt Limited Wockhardt R & D Centre, D-4, MIDC Chikalthana, Aurangabad, Maharashtra Pin-431 006 PAN : AAACW2472M .......अपीलाथी / Appellant बनाम / V/s. The Assistant Commissioner of Income Tax, Circle-3, Aurangabad. ......प्रत्यथी / Respondent आयकर अपील सं. / ITA No. 453/PUN/2018 धनधाारण वषा / Assessment Year : 2010-11 The Assistant Commissioner of Income Tax, Circle-3, Aurangabad. .......अपीलाथी / Appellant बनाम / V/s. M/s. Wockhardt Limited Wockhardt Towers, Bandra Kurla Complex, Bandra ( East), Mumbai-400 051 PAN : AAACW2472M ......प्रत्यथी / Respondent 2 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 प्रत्याक्षेप सं./CO.No.16/PUN/2019 धनधाारण वषा/Assessment Year : 2010-11 (Arising out of ITA No. 453/PUN/2018) M/s. Wockhardt Limited Wockhardt R & D Centre, D-4, MIDC Chikalthana, Aurangabad, Maharashtra Pin-431 006 PAN : AAACW2472M ..... प्रत्याक्षेपक/ Cross objector बनाम / V/s. The Assistant Commissioner of Income Tax, Circle-3, Aurangabad. .........प्रत्यथी / Respondent Assessee by : Shri Rajan Vora & Shri Rajendra Agiwal Revenue by : Shri Rajeev Kumar सुनवाई की तारीख / Date of Hearing : 07.12.2021/08.12.2021 घोषणा की तारीख / Date of Pronouncement : 13.12.2021 आदेश / ORDER PER PARTHA SARATHI CHAUDHURY, JM: These cross-appeals (ITA Nos.438/PUN/2018 & 453/PUN/2018) preferred by the assessee and the Revenue emanates from the common order of the Ld. CIT(Appeals)-55, Mumbai dated 14.12.2017 for the assessment year 2010-11 as per the grounds of appeal on record. The assessee has preferred cross objection (CO No.16/PUN/2019) against the appeal filed by the Revenue in ITA No.453/PUN/2018. 3 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 2. In ITA No.438/PUN/2018, the assessee has raised following grounds of appeal in appeal memo along with additional grounds of appeal: “Ground No. I : Treating Equity Investment in overseas subsidiary as deemed loan and thereby making addition of notional interest income at Libor Rate: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Transfer Pricing Officer (TPO)/Assessing Officer (AO) in treating the investment in equity shares of the foreign subsidiary as an international transaction u/s.92B(1) and re-characterizing the investment in overseas subsidiary as deemed loan and thereby affirming the addition of notional interest in LIBOR rate. 2. The Appellant prays that arm‟s length adjustment made by TPO/AO and duly altered by the CIT(A) be deleted or be appropriately reduced. Ground No.II : Treading share application money in overseas subsidiary as an international transaction and thereby proposing an addition of notional interest income at LIBOR Rate: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding the action of the Transfer Pricing Officer (TPO)/Assessing Officer (AO) in treating the share application money in foreign subsidiary as an international transaction u/s.92B(1) and re-characterizing the share application money as a loan and thereby affirming the addition of notional interest at LIBOR Rate. 2. The Appellant prays that arm‟s length adjustment made by TPO/AO and duly altered by the CIT(A) be deleted or be appropriately reduced. Ground No. III : Disallowance u/s.14A of the Act r.w.r.8D of the Income Tax Rules, 1962 (“the Rules”) amounting to Rs.72,64,463/- 1. On the facts and in the circumstances of the case and in law, the Hon‟ble CIT(A) erred in upholding the action of the AO in disallowing a sum of Rs.72,64,463/- u/s.14A of the Act r.w.r. 8D of the Rules on the alleged ground that they were the expense being incurred towards earning exempt income even when no exempt income was earned by the Appellant during the year. 2. The appellant prays the disallowance u/s.14A of the Act r.w.r. 8D of the Rules of Rs.72,64,463/- made by the AO and affirmed by the CIT(A) be deleted or be appropriately reduced.” Additional Ground Nos. 4 to 5: Equity investment recharacterized as deemed loan in AY 2008-09 4 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11  The appellant vide Ground No.1 of WL‟s appeal has contested against the recharacterization of equity investment into deemed loan by the Learned Transfer Pricing Officer (TPO) in AY 2008-09 and the imputation of notional interest.  The Appellant wishes to file these additional ground to contest the LIBOR rate upheld by the Hon‟ble CIT(A) and the ad-hoc mark-up applied by the Learned TPO/Assessing Officer (AO) in the order giving effect (OGE) to the Hon‟ble CIT(A)‟s order without appreciating that the Associated Enterprises (AE) [ Wockhardt EU Operation (Swiss) AG] is located in Switzerland. Additional Ground Nos. 6 to 7: Share Application money recharacterized as deemed loan in AY 2010-11 due to delay in allotment:  The Appellant vide Ground No.2 of WL‟s appeal has contested against the recharacterization of share application money into deemed loan due to delay in allotment of shares and the imputation of notional interest thereon.  The Appellant wishes to file these additional ground to contest the LIBOR rate upheld by the Hon‟ble CIT(A) and the ad-hoc mark-up applied by the Learned TPO/Assessing Officer (AO) in the order giving effect (OGE) to the Hon‟ble CIT(A)‟s order without appreciating that the Associated Enterprises (AE) [ Wockhardt EU Operation (Swiss) AG] is located in Switzerland. Additional Ground Nos. 8 to 9 : Corporate guarantee provided for the loan facility availed by Wockhardt EU Operation ( Swiss) AG  It is submitted that during the year 2014-15, the same guarantee arrangement existed between the Appellant and its AEs on account of retrospective amendment in the definition of international transaction vide Finance Act, 2012, the Appellant suo moto charged and recovered guarantee commission from its AE at the rate of 0.8% per annum cumulatively including guarantee commission amount for AY 2010-11. The said guarantee commission recovered by the appellant has been offered to tax in AY 2014-15.  Accordingly, if the adjustment for the year under consideration is upheld then the same would amount to double taxation of the same income.  In view of the above, the appellant wishes to file these additional grounds to restrict the Learned TPO/AO from taxing the same income twice. Additional Ground Nos. 10 To 13 : Interest received on loans advanced to AEs.  The Hon‟ble CIT(A) in its order has directed the Learned AO/TPO to accept the Appellant‟s LIBOR + Mark-up approach. However, in the OGE to CIT(A)‟s order, the learned AO/TPO has applied an ad hoc rate for making an adjustment without providing any basis or opportunity to the Appellant to rebut the same. 5 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11  In view of the above, to contest the ad hoc approach followed by the Learned AO/TPO for determining arm‟s length interest rate, the Appellant wishes to file these additional grounds of appeal. Additional Ground Nos. 14 To 16 : Disallowance u/s.14A of the Act  The appellant vide ground No.3 of WL‟s appeal has contested against the disallowance made under section 14A of the Act.  The appellant wishes to file additional ground on the following points: - Restricting the disallowance under section 14A to the extent of exempt income earned - Considering only those investments which have yielded exempt income during the year for making disallowance under Rule 8D - Non recording of satisfaction. Additional Ground Nos. 17: Deduction of education cess  Appellant wishes to file additional ground for allowing deduction of education cess in view of the recent decision of the Bombay High Court in the case of Sesa Goa Ltd. Vs. Joint Commissioner of Income Tax ( Tax Appeal No.17 and 18 of 2013) dated 28 th February, 2020. In view of the above, the Appellant wishes to file additional grounds of appeal (enclosed as Appendix 1). We request your Honour to kindly admit the additional grounds of appeal and decide the issue on merits. In respect of the above proposition, the Appellant relies on the following decisions:  National Thermal Power Company Limited [ 229 ITR 383 (SC)  Jute Corporation of India Limited [187 ITR 688] (SC)  Ahmedabad Electricity Company Limited [199 ITR 351 ] ( Bom.) 3. In ITA No.453/PUN/2018, the Revenue has raised following grounds of appeal: “1. The Ld. CIT(A) erred both on the facts of the case and in law in passing the order. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs.4,56,517/ - on account of Guarantee Fee income received in relation to guarantee provided on loans to its AE, CK Pharma, UK and in holding that rate of corporate guarantee fee at 0.75% based on private quote given by HSBC, Mumbai to assessee is the ALP rate ignoring the rate of 2.5% adopted by the TPO based on rate of 2.20% being charged by HSBC UK and 2% 6 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 being charged by SBI UK published on their websites and copy of which is annexed to the TP order ( para 4.1 of the order) which were available in public domain? 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs.28,10,62,500/- on account of Guarantee Fee income received in relation to guarantee provided on loans to its AE, Wockhardt EU Operations( Swiss) AG in Europe by holding that the assessee had recovered corporate guarantee fee for AY 2010-11 in AY 2014-15 and suo moto charged and offered to tax the corporate guarantee fee @ 0.8% without appreciating the fact that the corporate guarantee fee accrued to the assessee in AY 2010-11 and ought to have been taxed in the same year and not in AY 2014-15 ? 4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.28,10,62,500/- on account of Guarantee Fee income received in relation to guarantee provided on loans to its AE, Wockhardt EU Operations( Swiss) AG in Europe by holding that the assessee had recovered corporate guarantee fee for AY 2010-11 in A Y 2014-15 and suo- moto charged and offered to tax the corporate guarantee fee @ 0.8% without appreciating the fact that the assessee had charged uniform rate of 0.8% based on private quotes for corporate guarantee fee from AY 2007-08 to AY 2014-15 which is arbitrary ignoring the rate of 2.5% adopted by the TPO based on rate of 2.20% being charged by HSBC UK and 2% being charged by SBI UK published on their websites and copy of which is annexed to the TP order ( para 4.1 of the order) which were available in public domain? 5. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in directing the TPO / AO to accept the LIBOR rate + Mark-Up approach of the assessee in respect of the interest on loans given to AE without appreciating the finding of the TPO in para 5.4 of his order that even if the assessee refers to LIBOR/EURIBOR rates, for its own guidance in determining the rate of interest, it should make further adjustments towards currency risks, country risks and forex market fluctuations before fixing the rate of interest chargeable to AEs? 6. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the entire addition made by the TPO on account of benchmarking of interest on loans given to AE, without giving an opportunity to the TPO, when CIT(A) decided to uphold the assessee's benchmarking of interest on LIBOR+ basis instead of benchmarking of interest on rupee denominated loans adopted by the TPO ignoring the finding of the TPO in para 5.4 of his order that assessee should make further adjustments towards currency risks, country risks and forex market fluctuations etc. before fixing the rate of loan charged from AEs which required an opportunity to be given to the TPO for finding an appropriate external CUP in scientific manner which take into consideration vanous factors such cost of capital, currency risks, forex risks etc.? 7. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the TPO / AO to accept the LIBOR rate + Mark-Up approach of the assessee in respect of the interest on delay in allotment of shares without appreciating the finding of the TPO in para 5.4 of his order that even if the assessee refers to LIBOR/EURIBOR rates, for its own guidance in determining the rate of interest, it should 7 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 make further adjustments towards currency risks, country risks and forex market fluctuations before fixing the rate of loan chargeable to AEs? 8. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the entire addition made by the TPO on account of benchmarking of interest on delay in allotment of shares, without giving an opportunity to the TPO, when CIT(A) decided to uphold the assessee's benchmarking of interest on LIBOR+ basis instead of benchmarking of interest on rupee denominated loans adopted by the TPO ignoring the finding of the TPO in para5.4 of his order that assessee should make further adjustments towards currency risks, country risks and forex market fluctuations etc. before fixing the rate of loan charged for AEs which required an opportunity to be given to the TPO for finding an appropriate external CUP in scientific manner which take into consideration various factors such cost of capital, currency risks, forex risks etc.? 9. The Ld.CIT(A) erred in holding that the benchmarking of interest rates on foreign currency loans would be LIBOR based and not rupee loan based thereby overlooking the high opportunity cost lost by the assessee company through foreign AE lending as against other competitive domestic lending in respect of interest deemed loans and share application amounting to Rs.16,17,00,000/- and Rs.49,30,196/- respectively. 10. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the addition of Rs.10,74,00,000/- on account of interest charged on outstanding receivables relying on the judgment of Bombay High Court in the case of CIT v. Indo American Jewellery Ltd. (223 Taxman 8) wherein the High Court upheld the order of ITAT deleting the addition on account of charging of interest on outstanding receivables of AEs observing that there was complete uniformity in the assessee's act of not charging interest from both AE and Non-AE debtors and the delay in realisation of export proceeds in both cases is same ignoring the facts of this case wherein there is difference in average credit period for the AEs and Non- AEs and addition I adjustment has been made by the TPO only in respect of differential excess credit period of 3.5 months only? 11. The Ld. CIT(A) erred in deleting the addition of Rs.19,48,515/ - being excess claim of deduction u/s.80lB and excess claim of Rs.4,28,51,047/- u/s.80lC disallowed by the AO. While deleting the addition, the Ld.CIT(A) has taken only one ground that the relief on this issue is given to the assessee in earlier years i.e. A.Y. 2002-03 to A.Y. 2009-10, ignoring the fact that the excess benefit cannot be given to the assessee which resulted from non-allocation of expenses. Non-allocation of expenses on R & D results in excess deduction under chapter VIA and the department contested the issue in further appeal for A.Y. 2010-11. 12. The CIT(A) erred in deleting the disallowance of weighted deduction of Rs.3,87,90,070/ - under section 35(2AB) as deduction is available only on in house expenditure incurred on R&D as certified by DSIR. Further the department has contested the issue in further appeal for the above for A.Y. 2009-10. 8 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 13. The Ld CIT(A) erred in deleting the disallowance of freebies ix]«. 37(1) amounting to Rs.1,15,52,790/-stating that circular 5/2012 of CBDT is applicable from AY 2013-14. The underlying IMC notification was issued in 2009 according to which no freebies could be accepted by doctors. Accordingly, although Board's circular came in the year 2012, section 37(1) bars such expenditure right from year 2009 subsequent to notification issued by Medical Council of India. 14. The Ld.CIT(A) erred in deleting addition of disallowances amounting to Rs.72,64,463/ -under section 14A for calculation of book profit under section 115JB of the Act as there are number of ITAT decisions in which it is held that 14A disallowance shall be added in computing the Book profit for the purpose of calculation of MAT liability. 15. The order of the CIT(A) be vacated and the order of the AO be restored. 16. The appellant craves leave to add, amend or alter any Grounds of appeal.” 4. In Cross Objection No.16/PUN/2019, the assessee has raised following grounds: “Rejection of corporate guarantee benchmarking undertaken by the Respondent 1. erred in treating the provision of guarantee to a third party for the loans borrowed by the subsidiary of the Respondent as an 'international transaction' u/s. 928(1) and thereby computed ALP u/s 92C(3) by making addition of notional guarantee fee of INR 4,56,517 on loan borrowed by CP Pharma and INR 2,81,06,250 on loan borrowed by Wockhardt EU Operations (Swiss) AG. 2. failed to appreciate and ought to have held that: 2.1 the Respondent had given corporate guarantee to its wholly owned subsidiary for the purpose of doing overseas acquisition, the commercial benefit of the same was ultimately beneficial to the Respondent. 2.2 corporate guarantee given to subsidiary company is a matter of commercial prudence primarily to protect the business interest of the group by fulfilling the shareholder's obligation as any financial in incapacitation of the subsidiary Erred in treating outstanding debtors balance as an international transaction 3. Erred in treating the outstanding debtors balance as international transaction u/s.92B(1) and thereby computed arm‟s length price u/s.92C(3) by making addition of notional interest of INR 74,00,000. 9 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 4. failed to appreciate and ought to have held that: 4.1 the continuing debit balance with an AE does not constitute an international transaction as defined U/s.92B of the Act. 4.2 without prejudice to the above, erred in making a separate transfer pricing adjustment on account of the outstanding debtors balance which is associated with the international transaction of export of FDF which have been considered to be at arm's length. 5. without prejudice to the above, the Respondent wishes to submit that the interest charged on such outstanding receivables from the AEs should be benchmarked using the LlBOR/ EURIBOR rates. Disallowance under section 14A of the Income Tax Act, 1961 („the Act‟) while calculating book profit as per the provisions of Section 115JB of the Act ( INR 72,64,463) 6. without prejudice to the claim of the respondent that provisions the disallowance under section 14A read with rule 8D of the Income- tax Rules 1962 ('the Rules') cannot be made while computing book profits under section 115JB of the Act, the learned Commissioner of Income Tax (Appeals) ['the CIT(A)'] ought to have appreciated that no disallowance under section 14A can be made when no exempt income was earned by the respondent during the year. 7. without prejudice, ought to have appreciated the fact that own funds (i.e. capital and reserves) of the Respondent were sufficient to cover the investments capable of earning tax-free/exempt income and therefore no disallowance of interest expenditure under section 14A is called for; 8. without prejudice, ought to have appreciated the fact that in order to make disallowance under section 14A of the Act there should be direct nexus between actual expenditure incurred for earning tax-free income; Disallowance under section 14A of the Act while calculating income under regular provisions of the Act (INR 72,64,463) 9. without prejudice to the claim of the Respondent that no disallowance under section 14A of the Act can be made when no exempt income has been earned, ought to have appreciated that own funds (i.e. capital and reserves) of the Respondent were sufficient to cover the investments capable of earning tax-free/ exempt income and therefore no disallowance of interest expenditure under section 14A is called for; 10. without prejudice, ought to have appreciated the fact that in order to make disallowance under section 14A of the Act there should be direct nexus between actual expenditure incurred for earning tax-free income; Disallowance of Freebies under section 37(1) of the Act (INR 1,15,52, 790) 11. without prejudice to the claim of the Respondent that no disallowance 10 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 under section 37(1) of the Act should be have been made for expenses amounting to Rs.1,15,52,799/- alleged as "freebies" pursuant to Circular No.5/2012 issued by Central B03Tdof Direct taxes ('CBDT') as the same is effective from AY 2013-14 and therefore not applicable to the year under appeal, ought to have appreciated that violation of guidelines, if any, is by the Doctors/ medical practitioner who are governed by such guidelines and not by the Respondent; 12. Without prejudice, ought to have appreciated that the Respondent has incurred expenditure wholly and exclusively for the purpose of business. Deduction under section 80IB and 80IC restricted to business income: 13. ought to have held that the quantum of deduction under section 80- IB and 80-le of the Act ought not be restricted to the business income and that the deduction under section 80-IB of the Act ought to have been allowed to the extent of Gross total income.” Ground No.1 & Additional Ground Nos. 4 to 5 read with Ground Nos. 7 to 9 of Department‟s Appeal : 5. These grounds pertains to re-characterization of equity investment to deemed loan in A.Y. 2008-09 and interest imputation thereon. 6. The brief facts on this issue are that during assessment year 2008-09, Wockhardt Invested INR 142.58 Crores into the equity shares of its wholly owned subsidiary, Wockhardt EU Operations (Swiss) AG, Switzerland ( Wockhardt Swiss) on 29 th May, 2007 and 22 nd October, 2007. The shares were allotted to Wockhardt on 7 th December. In assessment year 2008-09, the TPO recharacterized the equity investment as a deemed loan and imputed notional interest on such equity investment. Similar adjustment was made in assessment year 2009-10. Following its order for the assessment years 2008- 09 & 2009-10, the TPO made a transfer pricing adjustment in this year by imputing notional interest on the deemed loan for the whole year at the rate of 11.34% per annum (i.e. Wockhardt‟s cost of debt plus 2% mark up). However, the Ld. CIT(Appeals) directed the Assessing Officer/TPO to impute 11 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 interest at LIBOR rates. The Assessing Officer/TPO in its OGE has imputed interest at LIBOR+375bps without providing basis for the same. The Department has challenged LIBOR + markup approach adopted by the Ld. CIT(Appeals) without making adjustment for risks, non-grant of opportunity to TPO to undertake benchmarking and overlooking the high opportunity cost by the company. 7. The Ld. CIT(Appeals) has held regarding these issues from page 16 of her order wherein the action of the Assessing Officer/TPO has been reproduced as follows: “AO/TPO‟s order : In AY 2008-09, taking into consideration, the facts and circumstances particularly the fact that Wockhardt EU Operation (Swiss) AG, Switzerland was a newly incorporated entity having no financial standing on its own, the Investment of Rs.142.58 Cr. was held to be money lent to the AE, on which the assessee should have charged interest. The assessee had invested Rs.142.58 Cr into equity shares of the subsidiary on 29 th May, 2007 and 22 nd October 2007. The actual shares were allotted to the assessee by subsidiary on 7 th December, 2007. Share valuation was not disturbed by TPO. The learned CIT(A) deleted the adjustment made by the TPO and held that interest shall be charged only for the period, for which money was invested into subsidiary + 15 days and till the time of allotment of shares. However, again adjustment was made by the TPO in A Y 2008-09 and A Y 2009-10 on the ground that investment in equity shares of Wockhardt EU Operations (Swiss) AG without any commensurate return has a bearing upon the profitability and asset base of the asseessee. The Revenue is in appeal against order of CIT(A) in A.Y. 2008-09. Hence, interest is charged on this continuing deemed loan at the rate of 11.34%. As the above said amount of Rs.142.58 Cr. was treated as loan, the assessee is liable to be charged interest Rs.11.34 p.a and accordingly, the interest amount on the said loan of Rs.142.S8 Crores Rs.11.34 p.a., which comes to Rs.l6. 17Crores. Thus an amount of Rs.16. 17crores is adjusted to the transactions of the assessee. ( Adjustment of Rs.16,17,00,000) It was seen from the financials that share application money was paid on 4th November 2008 in FY 2008-09. But the shares were allotted in FY 2009-10 on 4th September 2009. Accordingly interest is charged for the period of four months i.e. after six months of payment of share applications money and until receipt of shares @ 11.34% as under: 12 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Sr. No. Particulars Amount (Rs.) 1 Investment made into equity shares of Wockhardt EU operations (Swiss) AG 13,04,28,466 2 Rate of interest chargeable for full year 11.34% 3 Interest chargeable for the period of 4 months 49,30,196 8. Thereafter, the assessee submitted before the Ld. CIT(Appeals) as follows: “Appellant’s submission for Ground No. 6 & 7 : The Appellant would like to state that addition on account of re- characterization shows that the addition is made in a pre-conceived manner without any base and even without a whisper as to how an investment in capital can be re-characterized as 'loan'. Further the Appellant would also like to submit that there exists an inherent distinction between a "loan" and "capital contribution" by way of equity. In this regard, the Assessee relied upon the decision of the Hon'ble Punjab & Haryana High Court in the case of Pepsu Road Transport Co v. CIT (130 ITR 18) (Refer Page No. 298 to 300 of LPB), wherein it was held as under: "Though an element of refund or repayment is inherent in the concept of borrowing, in the instant case, the RTCA not only provided nothing for the repayment of the impugned loan, but it also made distinction between the "capital provided" and the "capital borrowed" and the ass~ssee's case-fell under the former head. The word "borrow" has not been defined in the statute and, therefore, its dictionary meaning has to be looked up. The meaning of the word "borrow" as given in the Shorter Oxford Dictionary (3rd edn.), is "to take (a thing) on or an equivalent". Reference in this respect may also be made to CEPT v. Bhartia Electric Steel Co. Ltd. [1954] 25 ITR 192 (Cal). In this also, the question was whether it was "money had and received"; or "borrowed money". It was held that there has to be a positive act of lending coupled with acceptance by the other side of the money, as a loan. Thus, it is clear that an element of refund or repayment is inherent in the concept of borrowing." (Emphasis Supplied) Further for the year under consideration, in the absence of thin capitalization rules and specific anti-abuse provisions, there is no scope I jurisdiction to reclassify the investment as loan. In this regard, reliance is placed on the decision of the Hon'ble Jurisdictional Tribunal in the case of Be six Kier Dabhol SA (134 ITJ 513) wherein it has been held as under: 13 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 "it is thus not even necessary to examine whether or not the finance structure in question constituted colourable device or sort of subterfuge. As long as finance structure adopted by the assessee was not specifically prohibited by the applicable tax treaty provisions, and as long as there was no specific anti abuse provision to deal with the same in the tax treaty itself, the effect of the finance structure could not be ignored." Further, the Appellant would like to state that the aforesaid decision has been affirmed by the Hon'ble Bombay High Court in the case of DIT v. Besix Kier Dabhol SA(26 taxmann.com 169). Further the Appellant would also like to rely upon the following judicial pronouncements: The Hon'ble Jurisdictional Tribunal has in the case of Aegis Limited v. Addl. CIT (ITA No. 1213/Mum/2014) wherein similar issue was involved by following the decision of Jurisdictional High Court in the case of Besix (supra) has held as under: "The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon'ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 20 II order dated 30th August, 2012 and by various other decisions, as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer.” The Hon‟ble Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Addl. CIT ( 368 ITR 1) held as under: "The transaction on capital account or on account of restructuring would become taxable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP price. It is not a tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order." (Emphasis Supplied) Following the decision of the Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (supra) the Hon'ble Jurisdictional Tribunal has in the case of PMP Auto Components Pvt. Ltd. v. DCIT (7724IMum/2014, AY 201O-ll)(Refer Page No. 301 to 318 of LPB) held that: 14 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 "17. The aforesaid principles and ratio will equally apply to out bound investment also, because it is investment on shares, which is purely on capital field and there is no income which needs to be benchmarked in this year for making any kind of transfer pricing adjustment. Thus, respectfully following the decision of Hon'ble Jurisdictional High Court, we hold that transfer pricing adjustment made cannot be sustained ... " The abovementioned decision of the Hon'ble Jurisdictional Tribunal has been followed in the case of PMP Auto Components Pvt. Ltd. v. DCIT (1484/Mum/2014, A Y 2009-10, MA recalled order)(Refer Page No. 649 to 657 of LPB). Further, the Hon'ble Jurisdictional Tribunal has in the case of M/s. All Cargo Global Losgistics Ltd. v. ACIT (150 ITD 651)(Refer Page No. 336 to 341 of LPB)held that transactions involving payment of share application money could not be treated as international transactions of loan given by assessee company to its AE merely because there was delay in allotment of shares. The Appellant would further like to submit that similar view has been taken in the following judicial pronouncements:  Parle Biscuits Pvt. Ltd. Vs. DCIT ( 46 Taxmann.com 11) ( Mum.. Trib)  M/s. Hill Country Properties Ltd. Vs. ACIT ( ITA No.1404/Hyd/2013) (Hyd)  Bharati Airtel Ltd. Vs. Addl. CIT ( 161 TTJ 428) ( Del. Trib.) The Appellant would also like to submit that with respect to the issue of reclassification of investment as loan for initial investment of Rs.142,58,00,000/- has been decided in favour of appellant by Ld. CIT(A) in A Y 2008-09(Refer Page No. 196 to 275 of the LPB) and 2009-10 (Refer Page No. 675 to 7470fthe LPB). Further, during AY 2012-13, department suo-moto dropped this adjustment. The Appellant therefore prays that the addition of Rs.16,66,30, 196/- u/s.92(C) of the Act be deleted. Without Prejudice to the above the Appellant submits as under: The Appellant had invested Rs.1,42,58,00,000/- in the equity shares of Wockhardt EUO (which is a 100% subsidiary of the Appellant company) in AY 2008-09.The Appellant made a further investment of Rs. 13,04,28,466/- in the equity shares of Wockhardt EUO on November 4, 2008. The equity shares were allocated to the Appellant on September 4, 2009 i.e. in AY 2010-11. The Appellant submits that in case the action of Ld. AO/Ld. TPO of treating investment in subsidiary/ share application money allotted after delay, is treated as loan then the interest rate applicable on such loan should be LIBOR rate as the loan was given in foreign currency. For this reliance is placed on the following judicial pronouncements:  CIT v. Tata Autocomp Systems Ltd. (374 ITR 516) (Bom.) (Refer Page No. 276 to 279 of the LPB)  CIT v. Cotton Naturals (1.) Pvt. Limited (231 Taxman 401) (Del HC) (Refer Page No. 280 to 297 of the LPB) 15 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11  CIT vs. Aurinpro Solutions Ltd. (ITA No. 1869/2014 dated June 9, 2017) (Born.)  Hinduja Global Solutions v. ACIT (145 ITD 361) (Mum.)  Marico Ltd. v. ACIT (70 taxmann.com 214) (Mum.)  Shrenuj& Co. Ltd. v. ACIT (57 taxmann.com 274) (Mum.)  Videocon Industries Ltd. v. ACIT (55 taxmann.com 263) (Mum.)  DCIT v Geodesic Ltd. (62 taxmann.com 383) (Mum.)  Everest Kanto Cylinder Ltd. v. ACIT (167 ITJ 204) (Mum.)  VVF Ltd. v. DCIT (ITA No. 6731M12006) (Mum.)  DCIT v. Tech Mahindra Ltd. (46 SOT 141) (Mum.)  PMP Auto Components Pvt Ltd v. DCIT (ITA No. 14841Mum/2014) (Mum.)(Refer Page No. 319 to 335 of LPB)  PMP Auto Components Pvt Ltd v. DCIT (ITA No. 7724IMum/2014) (Mum.)(Refer Page No. 301 to 318 of LPB) In view of the foregoing the Appellant submits that the interest rate to be charged, if any should be the Euro/LIB OR rate.” 9. The Ld. CIT(Appeals) after considering the submissions of the assessee and assessment order has held as follows: “DECISION FOR GROUND NO. 6 & 7 : I have gone through the submissions of appellant and order of the TPO. I agree with the TPO order treating investment in subsidiary/share applications money allotted after delay is treated as loan. I also agree with appellant‟s submission that the interest rate should be applicable in such loan at LIBOR rate at the loan is given or foreign currency. The appeal is partly allowed.” 10. The Ld. Counsel for the assessee submitted that this issue has been dealt with by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.4866/Mum/2013 & ITA No.5378/Mum 2013 for the assessment year 2008-09 dated 09.03.2020 wherein the Tribunal on the issue has held and observed as follows: “11. Ground No. 3 in revenues appeal and Ground No. II & III in assessee's appeal relates to notional interest income on infusion of additional funds in wholly owned subsidiary. The ld AR for the assessee submits that the assessee made investment in its overseas subsidiary in the form of equity in Wockhardt EU of Rs. 142, 57,00,000/-. It was further submitted that there was delay in allotment of shares. The TPO 16 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 reclassified the investment in equity share as loan and suggested addition of Rs. 17,82,00,000/-. The ld. AR for the assessee submits that no income arises on account of making application for shares and subscribing to the capital. To support his submissions the ld AR for the assessee relied on the decision of Bombay High Court in Vodafone India Services (P) Ltd Vs ACIT (368 ITR 1Bom). In alternative submissions the ld. AR submits that share application money cannot be classified as loan. In support of his submissions the ld AR for the assessee relied on the decision of Tribunal in ITO Vs Sterling Oil Resources (P) Ltd [2016] (67 taxmann.com 2 Mum Trib), Aditya Birla Minacs Worldwide Ltd Vs JCIT (2016) 75 taxmann.com 79 (Mumbai Trib) and Sun Pharmaceutical Industries Ltd Vs ACIT (2017) 84 taxmann.com 217 (Ahmedabad Trib). In other alternative submissions the ld. AR for the assessee submits that there was delay in allotment of shares, if the share application money is classified as 'loan' the notional interest could not exceed LIBOR. In support of his submissions he relied on decision of Bombay High Court in CIT Vs Tata Autocomp System (supra), Delhi High Court in CIT Vs Cotton Naturals India Pvt Ltd (supra). 12. On the other hand the ld. DR for the revenue supported the order of TPO. 13. We have considered the submissions of the parties and perused the order of the tax authorities below. During the relevant period under assessment year the assessee paid share application money to its AE's. The assessee not included this transaction in its TPSR. The TPO after giving show cause notice to the assessee treated the said share application money as loan to its subsidiary and charged interest @ 12.5% and worked out the adjustment of Rs.17,82,00,000/-. Before, ld CIT(A) the assessee placed detailed submissions including the submissions that there is no international transaction on subscribing the share of AEs. The assessee also placed various alternative submissions which have been recorded by ld. CIT(A) in para 6 of his order. The ld CIT(A) after considering the submissions of concluded that the delay in receipt of share is short and as per Circular of Reserve Bank of India, the interest would be LIBOR plus 150 and directed the TPO/AO to charge interest for 6 month at LIBOR plus 150 basis point for the period between the date of remittance and by adding 15 days and the date of allotment of shares. 14. The coordinate bench of this Tribunal in ITO Vs Sterling Oil Resources (P) ltd (supra) (authored by the same combination) held that adjustment on account of notional interest on share application money, which had been recharacterised as loan, merely because there was delay in allotment of share, was not sustainable in law. Further, this Tribunal in Aditya Birla Minacs Worldwide Ltd (supra) also took the same view that share application money cannot be treated as loan amount; merely there is delay in issuance of shares by subsidiary. Considering the consistent view of the Tribunal, we are of the view that share application money cannot be treated as loan amount only because of delay in issuance of shares by its subsidiary. 15. In the result the grounds No. II& III of the assessee's appeal are allowed and resultantly the ground of appeal by revenue is dismissed. Since, we have accepted the second contention of the ld. AR for the assessee; hence, discussions on other submissions of the assessee have become academic.” 17 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Respectfully, following the aforesaid decisions, Grounds No.1 & additional Ground Nos. 4 to 5 read with Ground Nos. 7 to 9 of Department‟s Appeal are decided accordingly. Ground No.2 & Additional Ground Nos.6 to 7 read with Ground Nos. 7 to 9 of the Department‟s Appeal 11. These grounds pertain to re-characterization of share application money to loan due to delay in allotment of fresh issue of share during the year and imputation of interest thereon. 12. The TPO has discussed this issue vide Para 9, Page 10 of his order which reads as follows: “9. Investment in equity shares of Wockhardt EO Operations (Swiss) AG During the year the assessee has invested Rs.13,04,30,000/- equivalent to 3.10 mn CHF. The assessee has invested into 3100 shares of its AE at the face value of 1000CHF. The assessee has filed valuers report vide submission dated 07.01.2014 to justify the ALP of the investment. The valuer has computed book value of shares at CHF 2338 and CHF 2446 on 31.12.2007 and 31.12.2008 respectively. The book value filed by the assessee has been checked by the undersigned and was found correct. Accordingly, the international transaction is considered to at ALP. Delay in allotment of shares: It was seen from the financials that share application money was paid on 4 th November, 2008 in FY 2008-09. But the shares were allotted in FY 2009-10 on 4 th September, 2009. Accordingly, interest is charged for the period of 4 months i.e. after 6 months of payment of share application money and until receipt of shares @11.34% as under: Sr. No. Particulars Amount (Rs.) 1 Investment made into equity shares of Wockhardt EU operations (Swiss) AG 13,04,28,466 2 Rate of interest chargeable for full year 11.34% 3 Interest chargeable for the period of 4 months 49,30,196 18 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 13. Before the Ld. CIT(Appeals), the assessee has made following submissions: “Appellant’s submission for Ground No. 6 & 7 : The Appellant would like to state that addition on account of re- characterization shows that the addition is made in a pre-conceived manner without any base and even without a whisper as to how an investment in capital can be re-characterized as 'loan'. Further the Appellant would also like to submit that there exists an inherent distinction between a "loan" and "capital contribution" by way of equity. In this regard, the Assessee relied upon the decision of the Hon'ble Punjab & Haryana High Court in the case of Pepsu Road Transport Co v. CIT (130 ITR 18) (Refer Page No. 298 to 300 of LPB), wherein it was held as under: "Though an element of refund or repayment is inherent in the concept of borrowing, in the instant case, the RTCA not only provided nothing for the repayment of the impugned loan, but it also made distinction between the "capital provided" and the "capital borrowed" and the ass~ssee's case-fell under the former head. The word "borrow" has not been defined in the statute and, therefore, its dictionary meaning has to be looked up. The meaning of the word "borrow" as given in the Shorter Oxford Dictionary (3rd edn.), is "to take (a thing) on or an equivalent". Reference in this respect may also be made to CEPT v. Bhartia Electric Steel Co. Ltd. [1954] 25 ITR 192 (Cal). In this also, the question was whether it was "money had and received"; or "borrowed money". It was held that there has to be a positive act of lending coupled with acceptance by the other side of the money, as a loan. Thus, it is clear that an element of refund or repayment is inherent in the concept of borrowing." (Emphasis Supplied) Further for the year under consideration, in the absence of thin capitalization rules and specific anti-abuse provisions, there is no scope I jurisdiction to reclassify the investment as loan. In this regard, reliance is placed on the decision of the Hon'ble Jurisdictional Tribunal in the case of Be six Kier Dabhol SA (134 ITJ 513) wherein it has been held as under: "it is thus not even necessary to examine whether or not the finance structure in question constituted colourable device or sort of subterfuge. As long as finance structure adopted by the assessee was not specifically prohibited by the applicable tax treaty provisions, and as long as there was no specific anti abuse provision to deal with the same in the tax treaty itself, the effect of the finance structure could not be ignored." Further, the Appellant would like to state that the aforesaid decision has been affirmed by the Hon'ble Bombay High Court in the case of DIT v. Besix Kier Dabhol SA(26 taxmann.com 169). 19 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Further the Appellant would also like to rely upon the following judicial pronouncements: The Hon'ble Jurisdictional Tribunal has in the case of Aegis Limited v. Addl. CIT (ITA No. 1213/Mum/2014) wherein similar issue was involved by following the decision of Jurisdictional High Court in the case of Besix (supra) has held as under: "The TPO cannot question the commercial expediency of the transaction entered into by the assessee unless there are evidence and circumstances to doubt. Here it is a case of investment in shares and it cannot be given different colour so as to expand the scope of transfer pricing adjustments by re-characterizing it as interest free loan. Now, whether in a third party scenario, if an independent enterprise subscribes to a share, can it be characterize as loan. If not, then this transaction also cannot be inferred as loan. The contention of the Ld. Counsel is also supported by the Hon'ble jurisdictional High Court in the case of Dexiskier Dhboal SA, ITA No. 776 of 20 II order dated 30th August, 2012 and by various other decisions, as cited by him. The Co-ordinate Benches of the Tribunal have been consistently holding that subscription of shares cannot be characterizes as loan and therefore no interest should be imputed by treating it as a loan. Accordingly, on this ground alone, we delete the adjustment of interest made by the Assessing Officer.” The Hon‟ble Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Addl. CIT ( 368 ITR 1) held as under: "The transaction on capital account or on account of restructuring would become taxable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP price. It is not a tax on the capital receipts. This aspect appears to have been completely lost sight of in the impugned order." (Emphasis Supplied) Following the decision of the Jurisdictional High Court in the case of Vodafone India Services Pvt. Ltd. (supra) the Hon'ble Jurisdictional Tribunal has in the case of PMP Auto Components Pvt. Ltd. v. DCIT (7724IMum/2014, AY 201O-ll)(Refer Page No. 301 to 318 of LPB) held that: "17. The aforesaid principles and ratio will equally apply to out bound investment also, because it is investment on shares, which is purely on capital field and there is no income which needs to be benchmarked in this year for making any kind of transfer pricing adjustment. Thus, respectfully following the decision of Hon'ble Jurisdictional High Court, we hold that transfer pricing adjustment made cannot be sustained ... " The abovementioned decision of the Hon'ble Jurisdictional Tribunal has been followed in the case of PMP Auto Components Pvt. Ltd. v. DCIT (1484/Mum/2014, A Y 2009-10, MA recalled order)(Refer Page No. 649 to 657 of LPB). Further, the Hon'ble Jurisdictional Tribunal has in the case of M/s. All Cargo Global Losgistics Ltd. v. ACIT (150 ITD 651)(Refer Page No. 336 to 341 of LPB)held that transactions involving 20 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 payment of share application money could not be treated as international transactions of loan given by assessee company to its AE merely because there was delay in allotment of shares. The Appellant would further like to submit that similar view has been taken in the following judicial pronouncements:  Parle Biscuits Pvt. Ltd. Vs. DCIT ( 46 Taxmann.com 11) ( Mum.. Trib)  M/s. Hill Country Properties Ltd. Vs. ACIT ( ITA No.1404/Hyd/2013) (Hyd)  Bharati Airtel Ltd. Vs. Addl. CIT ( 161 TTJ 428) ( Del. Trib.) The Appellant would also like to submit that with respect to the issue of reclassification of investment as loan for initial investment of Rs.142,58,00,000/- has been decided in favour of appellant by Ld. CIT(A) in A Y 2008-09(Refer Page No. 196 to 275 of the LPB) and 2009-10 (Refer Page No. 675 to 7470fthe LPB). Further, during AY 2012-13, department suo-moto dropped this adjustment. The Appellant therefore prays that the addition of Rs.16,66,30, 196/- u/s.92(C) of the Act be deleted. Without Prejudice to the above the Appellant submits as under: The Appellant had invested Rs.1,42,58,00,000/- in the equity shares of Wockhardt EUO (which is a 100% subsidiary of the Appellant company) in AY 2008-09.The Appellant made a further investment of Rs. 13,04,28,466/- in the equity shares of Wockhardt EUO on November 4, 2008. The equity shares were allocated to the Appellant on September 4, 2009 i.e. in AY 2010-11. The Appellant submits that in case the action of Ld. AO/Ld. TPO of treating investment in subsidiary/ share application money allotted after delay, is treated as loan then the interest rate applicable on such loan should be LIBOR rate as the loan was given in foreign currency. For this reliance is placed on the following judicial pronouncements:  CIT v. Tata Autocomp Systems Ltd. (374 ITR 516) (Bom.) (Refer Page No. 276 to 279 of the LPB)  CIT v. Cotton Naturals (1.) Pvt. Limited (231 Taxman 401) (Del HC) (Refer Page No. 280 to 297 of the LPB)  CIT vs. Aurinpro Solutions Ltd. (ITA No. 1869/2014 dated June 9, 2017) (Born.)  Hinduja Global Solutions v. ACIT (145 ITD 361) (Mum.)  Marico Ltd. v. ACIT (70 taxmann.com 214) (Mum.)  Shrenuj& Co. Ltd. v. ACIT (57 taxmann.com 274) (Mum.)  Videocon Industries Ltd. v. ACIT (55 taxmann.com 263) (Mum.)  DCIT v Geodesic Ltd. (62 taxmann.com 383) (Mum.)  Everest Kanto Cylinder Ltd. v. ACIT (167 ITJ 204) (Mum.)  VVF Ltd. v. DCIT (ITA No. 6731M12006) (Mum.)  DCIT v. Tech Mahindra Ltd. (46 SOT 141) (Mum.)  PMP Auto Components Pvt Ltd v. DCIT (ITA No. 14841Mum/2014) 21 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 (Mum.)(Refer Page No. 319 to 335 of LPB)  PMP Auto Components Pvt Ltd v. DCIT (ITA No. 7724IMum/2014) (Mum.)(Refer Page No. 301 to 318 of LPB) In view of the foregoing the Appellant submits that the interest rate to be charged, if any should be the Euro/LIB OR rate.” 14. The Ld. CIT(Appeals) after considering the submissions of the assessee and assessment order has held as follows: “DECISION FOR GROUND NO. 6 & 7 : I have gone through the submissions of appellant and order of the TPO. I agree with the TPO order treating investment in subsidiary/share applications money allotted after delay is treated as loan. I also agree with appellant‟s submission that the interest rate should be applicable in such loan at LIBOR rate at the loan is given or foreign currency. The appeal is partly allowed.” 15. The Ld. Counsel for the assessee that the issue has been decided in the same decision of the Mumbai Bench of the Tribunal in assessee‟s own case as afore-stated and has been decided therein. 16. The Ld. DR fairly conceded that this issue is decided in favour of the assessee by the Mumbai Bench of the Tribunal in assessee‟s own case (supra.) 17. Having heard the parties herein, respectfully following the decision in assessee‟s own case, Ground No.2 & Additional Ground Nos.6 to 7 read with Ground Nos. 7 to 9 of the Department‟s Appeal are decided accordingly. Additional Ground No.8 to 9 read with CO‟s Ground Nos. 1 & 2 and Ground Nos. 2 to 4 of the Department‟s Appeal 22 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 18. These grounds pertain to adjustment on account of Corporate guarantee provided by Wockhardt to AEs. This is with regard to Guarantee Transaction 1-for the corporate guarantee extended to CP Pharma, WL charged a guarantee commission at 0.75% as per the quote obtained from HSBC Bank, Mumbai. 19. The TPO on this issue vide Para 4.1 of his order has held and observed as follows: “4.1. Guarantee fee income received in relation to guarantee provided on loans It is seen from details mentioned in Form 3CEB and also submitted by the assessee that it has given guarantees on behalf of its AEs during the FY 2009-10 as under. CP Pharma, UK had availed loans of GBP 14 million from HSBC Bank PIc, UK in relation to which, the assessee had guaranteed payments to HSBC Bank on an agreed guarantee fee charge of 0.75 % of the loan amount to its AE. The assessee company has undertaken to guarantee the loan availed by its AE from HSBC bank, UK in exchange for a consideration of 0,75% of the loan amount as guarantee fee. Wockhardt would have to compensate HSBC Bank, UK for defaults in repayment of loan, if any, by its AE. The assessee was asked to justify charging of corporate guarantee fee at the rate of 0.75% to its AE. The assessee could not give any justification. The rate of 0.75% charge to the AE is on ad hoc basis. Naturally, it cannot meet the arm's length standards. In AY 2009-10, the TPO has levied guarantee fee on the assessee at the rate of 2.50% using average guarantee fees charged by banks in India. The learned CIT(A) has deleted the adjustment made by the TPO and upheld assessee's rate of corporate guarantee fee (0.75 %) as the arm's length rate. In A Y 2009-10, the TPO has levied guarantee fee on the assessee at the rate of 2.874 % using the yield method and splitting the benefit in 60%:40%. The same is pending before CIT(A). TI1e assessee has protested against multiple assumptions in the yield rate approach. Therefore, the same is dropped and Guarantee fee in UK is applied. A search was done to find out market rate of guarantee fees in UK. It was found that HSBC bank was giving guarantee to its customers at the rate of 2.20% p.a. plus miscellaneous charges. This rate is available on the website of HSBC UK and the copy of the same is attached as Annexure 1. Similarly, SBI UK is charging guarantee fee of 2% and the copy of the same is attached as Annexure 2. The average guarantee fee charged by two banks works out to 2.1 %. Further, the yield approach has many variables and assumptions, and therefore serve more as a guidance in computation of guarantee fee rather than providi.ng actual market rate of guarantee. In view of the 23 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 above facts, arm's length guarantee rate is adopted as 2.10% plus 0.4% markup = 2.50%. Computation of Arm’s Length Price: Based on the above, the arm‟s length price of the international transactions entered into by the assesse (providing financial facility in the form of corporate guarantee to its associated enterprises) is computed as under: Guarantee Fee charged by the assessee 1,95,650 Guarantee Commission rate considered by the assessee 0.75% p.a Arm‟s length guarantee Commission/fee 6,52,167 Arm‟s length guarantee fee @2.50% p.a. on the outstanding corporate guarantee 4,56,517 Price received vis-à-vis the Arm‟s Length Price : The guarantee fee charged by the assessee to the AE is Rs.1,95,650/-. Hence the different between ALP of guarantee commission and commission actually charged is to be adjusted as compared below: Arm‟s Length Guarantee Fee Rs.6,52,167/- Guarantee Fee Received Rs.1,95,650/- Shortfall being adjustment U/s.92CA Rs.4,56,517/- The above amount of Rs.4,56,517/- is treated as a transfer pricing adjustment u/s.92CA in respect of guarantee fee chargeable on the financial guarantee extended by the assessee to banks on behalf of its AE, CP Pharmaceuticals Ltd., UK for the FY 2009-10.” 20. The Ld. CIT(Appeals) after considering the submissions of the assessee and assessment order has held as follows: “Wockhardt EUO: With respect to corporate guarantee given for loan availed by Wockhardt EUO, during AY 2014-15 the Appellant has suo moto charged and offered to tax corporate guarantee fees @0.8% including current AY on the basis of comparable quote obtained from credit Sussie bank. In view of the foregoing legal position, the assessee prays that since the assessee has charged during subsequent AY 0.80% towards fees on corporate guarantee given for loans availed by Wockhardt EUO as applicable to current AY, no further adjustment be made towards the same. 24 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 CP Pharma : Further, the Appellant would like to submit that with regards to corporate guarantee given for loans availed by CP Pharma had also arisen in Appellant's own case for A.Y. 2006-07(Refer Page No. 149 to 157 of the LPB), 2007-08(Refer Page No. 158 to 195 of the LPB), 2008-09 (Refer Page No. 196 to 275 of the LPB) and 2009-10 (Refer Page No. 675 to 7470f the LPB) wherein the Hon'ble CIT(A) decided the issue in favour of the Appellant on the basis that the certificate obtained from the bank serves as an external CUP and as this rate was adopted by the Appellant, no addition was required to be made by the TPO. In view of the foregoing legal position, the Assessee prays that since the Assessee has already charged 0.75% towards commission on corporate/ performance guarantee given for loans availed by CP Pharma and 0.8% with respect to corporate/performance guarantee given for loans availed by Wockhardt EUO no further adjustments be made. Decision for Ground No. 1 to 4 Ground no 1 to 4 are regarding treating corporate guarantee as an international transaction u/s section 92 of the IT Act and making additions on account of Arm's Length adjustment to income from guarantee Commission. The TPO in his order has observed that the assessee has given guarantee on behalf of its AE during the FY 2009-10 as under: CK Pharma UK had availed loans of GBP 14 millions from HSBC Bank PLC, UK and the assessee had guaranteed payments to HSBC Bank as on agreed guaranteed fee charge of 0.75 of loan amount to its AE. The TPO further contended that in A Y 2008-09 the TPO has levied guarantee fee in the assessee at the rate of 2.50 using average guarantee fees charged by banks in India. But CIT(A) had deleted the adjustment made by TPO and upheld assessee's rate of corporate guarantee fee (0.75) as the arm's Length. In A Y 2009-10 the TPO levied the rate of guarantee fee at 2.8744 using the yield method and splitting the benefit in 60:40. The assessee objected the yield rate approach therefore the same is dropped and guarantee fee in UK is applied and so the TPO applied guarantee rate at 2.10% plus 0.4% markup = 2.50%. The appellant relied on various case laws which is produced extensively in above Para's that providing corporate guarantee does not fall within the definition of international transaction the appellant would like to submit that providing such corporate guarantee by a Parent Company to its wholly owned subsidiary is for the overall benefit of the business of the entire Wockhardt group and would not be considered at Arm's Length. I have gone through the submission of the appellant. It is seen that to Wockhardt EUO the appellant has charged 0.8% guarantee this is accepted. To CP Pharma the appellant has charged 0.75% towards commission on corporate / performance and this was accepted by CIT(A) in A Y 2008-09 and 2009-10 the same may be accepted. Hence, I agree with the rate applied by the appellant towards commission in corporate/ performance guarantee given for loans availed 25 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 by CP Pharma @.0.75% and to Wockhardt EUP @ 0.8% and no further adjustment is needed.. This ground of appeal is allowed.” 21. The Ld. Counsel for the assessee submitted that this issue has been dealt with by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.4866/Mum/2013 & ITA No.5378/Mum 2013 for the assessment year 2008-09 dated 09.03.2020 wherein the Tribunal on the issue has held and observed as follows: “4. Ground No. 1 relates to deleting the upward adjustment on account of corporate guarantee commission. The ld. DR for the revenue supported the order of TPO/AO. 5. On the other hand the ld. AR for the assessee submits that the assessee benchmarked the transaction at .75% and this ground of appeal is covered in favour of the assessee in assessee's own case for AY 2006-07 and there are no variations in the facts for the year under consideration. 6. We have considered the submissions of the parties and perused the order of the lower authorities. We have seen that the assessee in its transfer pricing study report (TPSR) reported that they have charged guarantee commissions @.75%. The Transfer Pricing officer (TPO) worked out at 2.15% and suggested upward adjustment of Rs. 1,71,04,416/-. On appeal the ld CIT(A), the order of TPO in suggesting the upward adjustment was deleted by following his own order for AY 2006-07 and 2007-08. We have seen that on similar grounds of on similar set of facts in assessee's own case for AY 2006-07 in ITA No. 1875/Mum/2011 dated 12.06.2019, the Tribunal while following its order for AY 2007-08 passed the following order; "13. We have considered rival submissions and perused the material on record. Undisputedly, the assessee itself has charged guarantee commission on the corporate guarantee provided to the AE @ 0.75%. The guarantee fee charged has been benchmarked by the assessee by obtaining a quotation from HSBC India which has been used as an external CUP. In our view, the method adopted by the assessee to benchmark the guarantee commission cannot be faulted with. It is necessary to observe, while deciding the appeal of the Revenue in assessee's own case in assessment year 2007-08, vide ITA no. 5557/Mum./2012, dated 5th January 2018, the Co-ordinate Bench has held that guarantee fee charged @ 0.75% is at arm's length. It is relevant to observe, in various other cases involving similar nature of dispute not only the Tribunal but the Hon'ble Jurisdictional High Court has held that arm's length price of guarantee fee can reasonably be fixed @ 0.5%. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals). This ground is dismissed." 7. Considering the decision of Tribunal in assessee's own case for AY 2006-07 and when no variations in the facts is brought in our notice for 26 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 the year under consideration, thus we uphold the order of ld CIT(A). in the result this ground of appeal is dismissed.” Having heard the parties herein, respectfully following the decision in assessee‟s own case, this part of additional Ground No.8 to 9 read with CO‟s Ground Nos. 1 & 2 and Ground Nos. 2 to 4 of the Department‟s Appeal are decided accordingly. 22. There is another Guarantee Transaction No.2- for the corporate guarantee extended to Wockhardt Swiss, WL did not charge any guarantee commission, being for the purpose of an acquisition and thus, shareholder activity. However, based on a quote obtained from credit Suisse Bank at 0.8%, WL has retrospectively charged guarantee commission to its AE and offered to tax in AY 2014-15 for all the years including AY 2010-11 on a conservative basis. 23. The TPO has dealt with this issue at Para 4.2 onwards of his order which reads as follows: “4.2 Corporate Guarantee provided to Wockhardt EU Operations (Swiss) AG of USD 250 mn This transaction was found in the contingent liability schedule of the assessee financials for AY 2010-11. It was found that the assessee had neither reported this transaction in its related party schedule nor in the Form No. 3CEB filed. This is an international transaction and liable to be tested for ALP. The amount of loan of USD 250 mn has been guaranteed by the assessee taking a substantial risk. The same is secured by a first pari- passu charge on the Baddi and Daman units of the company and second pari-passu charge on the current assets of the company. Thus, based on the function, asset and risk involvement, the assessee should have charged a commensurate guarantee commission. The assessee had failed to do so and even failed to provide a proper disclosure in the accountants report filed with the department. Accordingly, based on the above proposition, an arm‟s length guarantee commission needs to be charged on the outstanding loan of 27 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 USD 250 mn. As discussed in Para 5.1, an arm‟s length guarantee rate of 2.50% is considered as an appropriate compensation for guarantee to USD 250 mn loan to the AE. Hence, an arm‟s length charge is derived below: Loan amount USD 250 mn ALP Guarantee Rate 2.50% ALP Guarantee Commission USD 6.25mn ALP Guarantee Commission in INR (1 USD= INR 44.97) Rs.28,10,62,500 Accordingly, an adjustment of Rs.28,10,62,500/- is made on account of guarantee commission to be received.” 24. The Ld. CIT(Appeals) after considering the submissions of the assessee and assessment order has held as follows: “I have gone through the submission of the appellant. It is seen that to Wockhardt EUO the appellant has charged 0.8% guarantee this is accepted. To CP Pharma the appellant has charged 0.75% towards commission on corporate / performance and this was accepted by CIT(A) in A Y 2008-09 and 2009-10 the same may be accepted. Hence, I agree with the rate applied by the appellant towards commission in corporate/ performance guarantee given for loans availed by CP Pharma @.0.75% and to Wockhardt EUP @ 0.8% and no further adjustment is needed.. This ground of appeal is allowed.” 25. We have gone through the judgment in detail and the observations of the Sub-ordinate Authorities on this issue. We have also considered the ratio laid down by the Mumbai Bench of the Tribunal in assessee‟s own case with respect to guarantee transaction No. 1 and after going through the findings of the Ld. CIT(Appeals) with respect to guarantee transaction No.2, we do not find any infirmity on the issue with his findings, considering totality of facts and circumstances. Thus, this part of Additional Ground No.8 to 9 read with CO‟s Ground Nos. 1 & 2 and Ground Nos. 2 to 4 of the Department‟s Appeal are decided accordingly. Additional Ground No.10 to 13 by assessee read with Ground Nos. 5 to 6 of Department‟s Appeal : interest received on loans advanced to AEs 28 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 26. The TPO has dealt with this issue at Page 4, Para 5 onwards of his order which reads as follows: “5.1 The assessee has reported interest income earned from the following AEs: Name of AE Amount of Loan Interest amount Rs. Interest rate charged CUP used to Benchmark ESPharma, Germany Euro 3019144 34,95,654 3.00 European Central Bank-2.93% Wockhardt EU, Switzerland $7167184 1,32,19,179 4.09 Swiss National bank 0.51% Wockhardt Holding, USA $11500000 2,60,51,232 Libor +3.75% (4.83) Libor +2% 5.2 In the course of TP proceedings, the ARs of the assessee were requested to explain as to why the assessee has charged interest at such nominal/low rates from their AEs. The assessee was also asked to explain as to why it has used Libor/EURIBOR as the basis for charging interest from AEs instead of working out the interest on the basis of prevalent prime lending rates as the assesse is an India entity operating in India. 5.3 The assessee has stated that all the above AEs are 100% subsidiaries of Wockhardt and loans were given to them to fulfill their capital requirements. The loan is granted to these AEs out of own funds in evidence of which the assessee has stated that it had own funds. Being the holding company, the assessee has 100% shareholdings of these subsidiaries, and can always recover the money, therefore, the loan has always been treated as a risk free. The assessee has further argued that the loans were given to the subsidiaries at the prevailing international lending rates, using LIBOR/EURIBOR as base rate as banks/financial institutions follow the same practice in line with RBI guidelines. Assessee also further stated that the SBI had also agreed to grant foreign currency loan to its subsidiary in USA on which the interest was made to be charged @ Libor + 2% margin (a copy of the sanction letter submitted by assessee). Keeping the aforesaid in view and also citing certain judicial decisions, the assessee has argued that the interest charged by it at the international rates may be accepted as at Arm‟s length. 5.4 The assessee‟s contention and submissions are carefully considered. However, they are not found to be tenable. The assessee has referred to RBI Guidelines and practice followed by banks as a guiding point for charging interest at LIBOR/EURIBOR rates. It may be stated here that Libor is often used as reference for pound sterling & other foreign currencies and is a reference benchmark for inter bank transactions but 29 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 not necessarily is to be accepted as a tradable rate i.e., the actual rate at which a bank or a lending party in an uncontrolled situation would like to lend to a borrower. It may also be noted that LIBOR is not the rate of consideration for loans where a currency is to be bought and cannot be applied to a loan where the currency of the origin country of loan is not the currency in which the loan is finally extended. Therefore, in the Indian scenario, loans issued by the assessee for which the requisite Dollar/Pound Sterlings/ Euro etc., need to be purchased, such loans cannot be governed by LIBOR rates. Moreover, even if the assessee refers to LIBOR rates, for its own guidance in determining the rate of interest, it should take into account the cost of capital incurred by it and make further adjustments towards currency risks, country risks and forex market fluctuations in to account before fixing the rate of loan chargeable to AEs. 5.5 Extending an unsecured loan is a decision based on various complex factors that go into business prudence. The very fact that the AE has approached the holding company in India for loan instead of availing it from the nearby lending bank in the country of residence suggests that the AE has considered obtaining loan from holding company in India cheaper and at more liberal terms than obtaining the loan from an unrelated lending institution in the country of residence. In this case, the assessee being the holding company, has advanced unsecured loan to the subsidiary companies. Although it is owning the shares of the subsidiary companies, those shares will not act as a guarantee for liquidation of the funds invested in the subsidiaries, if the subsidiaries default on any account. 5.6 Thus, risk of lending to a foreign subsidiary will always continue to be there in as much as the same risk lies in advancing a loan to any unrelated borrowing concern. The assessee‟s claim that it has lend from its investible surplus funds will not help as far as determination of Arm's Length Price of the transactions are involved. Moreover, the assessee has not produced the relevant documentary evidence from its accounts to establish that the amounts have been advanced as loans to the AEs from its surplus money deposited in any account. Therefore, in the absence of exact documentary evidence, the possibility of advancing loans to the AEs out of borrowed funds cannot be ruled out. In the circumstances, it is not the fund transfer from assessee to the AE is in question, but the question is whether or not, the rate of interest at which the money is lent, is on pm with the market rate of interest prevalent in the domestic territory of India. This poses a question on the opportunity cost sacrificed by the holding company for the sake of its AEs and thereby sacrificing the interest which otherwise in an uncontrolled scenario would have been accrued to it, had the funds been deployed remuneratively with unrelated third parties. The market rate of Fixed Deposit above 5 years during the period was 6.5% to 7.50% as per RBI (Annexure 3). Thus, the appropriate opportunity cost on this lending to the assessee was 6.50% to 7.50%. Under market rate situation, any person would have lent to a third person at a rate higher than this rate. 5.7. The RBI has prescribed the prime lending rates on year to year basis and the BPLR for the FY 2009-10 was ranging between 11.00 to 12.00% (Annexure 4). Moreover, in an uncontrolled scenario, when an Indian entity is advancing long term unsecured loans to any overseas party, it has to take into account the currency risks, entity risk and sovereign risk involved in giving such loans. The assessee has not produced before me any such document or due diligence note to satisfy that proper 30 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 risk adjustments have been made prior to fixing the rate of interest to be charged to the AEs. The profile of the AEs, the risk environment in which they are functioning, the exposure to foreign exchange fluctuation of their functions etc., have not been laid down before me for a detailed analysis. Therefore, taking into account the risks involved in advancing to overseas parties, it is held that at least 1 % of additional markup should be charged by the assessee to its AEs, so as to keep the interest on par with the ALP rates, which would be charged by a lender to a borrower in an uncontrolled situation. Keeping the aforesaid 111 view, it can be safely concluded that by under-charging interest to its AEs the assessee has foregone substantial amount of interest which would have otherwise been earned by it from ordinary business of lending to any third party. 5.8 Average cost of debt/ borrowed funds to the assessee as seen from its audited financials is 9.34%. Naturally any lending has to be at a rate higher than this rate. 5.9 In A Y 2008-09, the TPO has considered PLR of 12.50% as the arm's length interest rate for these loans advanced by the assessee. The learned CIT(A) deleted the adjustment made by the TPO and upheld the LIBOR+markup approach of the assessee. However, this approach suffers from a vital flaw. LIBOR+markup is the rate which is charged by banks in India for giving foreign currency loans out of their foreign currency reserves. In this case, the assessee has given foreign currency loans to its AEs by converting Indian currency into hard currency. Thus, the loan is been given from weak currency economic environment. The lender is exposed to ERD fluctuations, inflation and various other risks. Had the assessee given loan to its AE out of its EEFC account, LIBOR plus markup would have been an appropriate benchmark. But not in this case, when loan is been given out of INR funds. The Revenue has not accepted the view of CIT(A) for charging interest at LIBOR+markup. In AY 2009-10, the TPO has considered PLR of 12.50% as arm's length interest rate for these loans advanced by the assessee. The appeal of assessee against the order of TPO is pending before CIT(A). 5.10 There is lot of dispute on PLR rate as banks often give loan at sub- PLR rate too. Further, it doesn't take into account the cost of debts to the taxpayer. Hence, average cost of debt approach is taken. In the view of the above discussion, ALP rate of interest is determined at average cost of debt / borrowed funds to the assessee plus a markup of 2% to remunerate the assessee for various risks and administrative costs. Thus, the ALP rate of interest is 11.34%. Name of AE Amount of Loan Interest Amount Rs. ALP Amount @11.34% Adjustment ES Pharma, Germany Euro3019144 34,95,654 1,45,65,225 1,10,69,571 Wockhardt EU, Switzerland $7167184 1,32,19,179 4,04,00,914 2,71,81,735 Wockhardt Holding USA $11500000 2,60,51,232 6,74,20,373 4,13,69,141 Total 7,96,20,447 31 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 27. That referring to this issue, the Ld. Counsel for the assessee submitted that the assessee has charged sufficiently high rate of interest. That before the Ld. CIT(Appeals), the assessee has filed detailed written submissions and relied on various case laws which reads as follows: “The appellant most humbly submit that interest rate charged by the Appellant is at a mark up above the foreign benchmarking rates rate and therefore, should be considered as at arm‟s length price. Further, the Appellant would like to submit that the interest on the loan charged should be on the basis of the rates prevailing in the country in which the loan is received and not in the country from which loan is given. For this proposition, the Appellant would like to place reliance on the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Tata Autocomp Systems Ltd. (374 ITR 516)(Refer Page No. 276 to 279 of the LPB)wherein it is held that: "With regard to quantum of addition on account of interest by ALP the impugned order held that as the amounts were advanced to Associated Enterprises in Germany, the rate of interest is to be determined on EURIBOR rate of interest i.e. rates prevailing in Europe. Thus partly allowed the assessee's appeal by applying the decision of the Tribunal in the case of "VVF Ltd. v. DCIT [ITA No.673IMum/06)" and "Dy. CIT v. Tech Mahindra Ltd. [2011] 46 SOT 141(Mum.)" by holding that the loan advanced to an Associate Enterprise situated abroad, the rate of interest to be applied is the rate prevailing in the country where the loan has been consumed." The Appellant would also like to place reliance on the decision of Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (1.) Pvt. Limited (231 Taxman 401)(Refer Page No. 280 to 297 of the LP8) wherein it is held that: "The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, must be answered by adopting and applying a commonsensical and pragmatic reasoning. The interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal 32 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest." The Appellant would also like to place reliance on the following judicial pronouncements in which a similar view has been taken:  CIT vs. Aurinpro Solutions Ltd. (ITA No. 1869/2014 dated June 9, 2017) (Bom.)  Hinduja Global Solutions v. ACIT (145 ITD 361) (Mum.)  Marico Ltd. v. ACIT (70 taxmann.com 214) (Mum.)  Shrenuj & Co. Ltd. v. ACIT (57 taxmann.com 274) (Mum.)  Videocon Industries Ltd. v. ACIT (55 taxmann.com 263) (Mum.)  DCIT v Geodesic Ltd. (62 taxmann.com 383) (Mum.)  Everest Kanto Cylinder Ltd. v. ACIT (167 ITJ 204) (Mum.)  VVF Ltd. v. DCIT (ITA No. 6731M/2006) (Mum.)  DCIT v. Tech Mahindra Ltd. (46 SOT 141) (Mum.)  PMP Auto Components Pvt. Ltd v. DCIT (ITA No. 1484/Mum/2014) (Mum.)(Refer Page No. 319 to 335 of LPB)  PMP Auto Components Pvt. Ltd v. DCIT (ITA No. 7724IMurnl2014) (Mum.)(Refer Page No. 301 to 318 of LPB) Therefore, in view of the above, the Appellant submits that the addition made by the TPO and confirmed by the AO be deleted. The Appellant would like to submit that the Appellant had requested the State Bank of India ("SB1") to give an indicative offer for the Foreign Currency Term to its subsidiary. The SBl had after detailed consideration of the facts, worked out an interest rate of LIB OR + 200 basis points (i.e. LIBOR + 2%). The Appellant therefore submits that even reputed banks use the international benchmarking rates as the basis for the granting of loans. Further, the interest rates charged by the Appellant are equal to or more than the rate so indicated by SBI. Accordingly, it is submitted that the rates charged by the Appellant are as per the external CUP and therefore, are at arm's length. Further, the Appellant would like to submit that the issue of interest on loans advanced to AEs had also arisen in Appellant's own case for A Y 2008-09 (Refer Page No. 196 to 275 of the LPB) and 2009-10 (Refer Page No. 675 to 7470f the LPB) wherein the Hon'ble CIT(A) has upheld the interest rate of LIB OR + markup approach. Therefore, the Appellant humbly submits that levying interest at the rate of 11.34% cannot be held to be at Arm's Length. 33 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 On the basis of the above submissions, the appellant prays that the addition of notional interest of Rs.7,96,20,447/- be deleted.” 28. The Ld. CIT(Appeals) after considering the submissions of the assessee and assessment order has held as follows: “Decision for Ground No.5 I have gone through the AO‟s order and appellant‟s submission. I have also perused the CIT(A)‟s order for AY 2008-09 wherein my predecessor has upheld the interest rate of LIBOR + Mark up approach. Following the order of CIT(A) in 2008-09 and 2009-10, I direct the AO to accept the appellant‟s interest rate of LIBOR + Mark up approach. The appeal is allowed.” 29. The Ld. Counsel for the assessee submitted that this issue has been dealt with by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.4866/Mum/2013 & ITA No.5378/Mum 2013 for the assessment year 2008-09 dated 09.03.2020 wherein the Tribunal on the issue has held and observed as follows: “9. We have considered the rival submissions of the ld. representatives of the parties and perused the order of the lower authorities. During the relevant period for the assessment year under consideration the assessee in its TPSR reported receipt of interest of Rs.6,25,23,143/- received against loan given to its overseas subsidiaries. The assessee charged interest @ LIBOR + margin rates. The TPO worked out interest income @ 12.5% and works out interest of Rs10,56,96,252/- and accordingly suggested upward adjustment of Rs. 4,31,73,109/- ( Rs. 10,56,96,252/- minus Rs. 6,25,23,143/-) . On appeal before ld CIT (A), it was directed that if the loan period is three years and up to five years then the rated of interest be adopted as 6 month LIBOR plus 150 basis points and in case of average period of loan is more than five years, the rate is 6 month LIBOR plus 250 basis points may be adopted. The Hon'ble jurisdictional High Court in CIT Vs Tata Autocomp (supra) held that where the assessee advances loans to its associated enterprises (AE's) situated in Germany, rate of interest was to be determined on the basis of rate prevailing in Germany where loan has been consumed. 10.Considering the decision of jurisdictional High Court the AO/TPO is directed to recompute the interest on the basis of rate prevalent in the countries where 8 loan was received. In the result the ground of appeal raised by the assessee is allowed and resultantly the ground of appeal raised by the revenue has become infructuous.” 34 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Respectfully, following the aforesaid decision for this year also in the case of the assessee, the Assessing Officer/TPO is directed to re-compute the interest on the basis of rate prevalent in the countries where loan was received. Thus, additional Ground No.10 to 13 by assessee read with Ground Nos. 5 to 6 of Department‟s appeal are decided accordingly. Ground No.3 and Additional Ground Nos. 14 to 16 of the assessee read with CO‟s ground Nos. 9 to 10 of assessee 30. These grounds pertain to disallowance u/s.14A read with Rule 8D of the Income Tax Rules, 1962. 31. The Assessing Officer has discussed this issue vide Para 7 of his order which reads as follows: “7. Disallowance u/s.14A read with Rule 8D 7.1 During the AY under consideration, the assessee has submitted that it has not earned dividend income and hence no exemption has claimed under section 10(35) of the Act. However, the assessee has not disallowed any expenditure in respect of investments invested for earning exempt income. The AR of the assessee has argued that there is no any direct expenditure as there is no any separate department/division for the purpose of making the aforesaid investments. Further, the investments made of out of own funds, which has no costs to the company. The company has not borrowed any funds for making any investments.” 32. The Ld. CIT(Appeals) has adjudicated the issue as per following paragraphs of her order: “DECISION FOR GROUND NO.11: This ground is regarding disallowance u/s.14A of the Act amounting to Rs.72,64,463/-. The AO has applied section 14A r.w. Rule 8D and held that the assessee has submitted that it has not earned dividend income and hence no exemption has been claimed us 10(38) of the Act. However assessee has not disallowed any expenditure in respect of investment invested for earning exempt income. The investment have been made out of own funds which have no costs to the company and the company has not borrowed any funds for making any investments. During the course of appellate proceedings the appellant gave decisions of various case laws and held that no disallowance can be 35 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 made when no exempt income has been received. The AO has not given any justifiable reasons for not being satisfied with the claim of the appellant that no expenditure has been incurred for earning tax free income. I have perused the appellant‟s submission and assessing officers working. I find no infirmity in Assessing Officer‟s contentions. The appellant has not given any working before me which could prove his submission. Hence, I confirm the additions made by the Assessing Officers. This Ground of appeal is dismissed.” 33. The Ld. Counsel for the assessee submitted that this issue has been dealt with by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.4866/Mum/2013 & ITA No.5378/Mum 2013 for the assessment year 2008-09 dated 09.03.2020 wherein the Tribunal on the issue has held and observed as follows: “38. Ground No. V relates to disallowance under section 14A. the ld AR for the assessee submits that during the year under consideration the assessee earned exempt income of Rs. 80,000/-. The assessing officer invoked the provisions of Rule 8D and disallowed Rs. 15,86,540/- under Rule 8D(2)(ii) and Rs. 6,95,100/- under Rule 8D(2)(iii), thus total of Rs. 22,81,641/-. The ld. AR for the assessee made alternative submission, however, ultimately confined to the submissions that the disallowance under section 14A should not exceed exempt income. In support of his submissions relied on decision of Bombay High Court in Nirvad Trader Pvt Ltd Vs DCIT [ ITA No. 149 of 2017] and PCIT Vs HSBC Invest Direct (India) [ITA 1672 of 2016 Bombay] 21 39. On the other hand the ld. DR for the revenue supported the order of the tax authority below. 40. We have considered the submissions of the parties and perused the order of the tax authorities below. The assessing officer noted that the assessee has shown exempt income of Rs. 80,000/-. The assessee has not disallowed any expenditure in relation to earning of exempt income. On show cause notice the assessee submitted that no direct expenditure was incurred as there is no separate department for making such investment and that they have sufficient own funds. The contention of the assessee was not accepted by assessing officer invoked the provisions of Rule 8D and disallowed Rs. 15,86,540/- under Rule 8D(2)(ii) and Rs.6,95,100/- under Rule 8D(2)(iii), thus total of Rs. 22,81,641/-. The ld CIT(A) upheld the action of the assessing officer by taking view that as per the decision of Bombay High Court in Godjej & Boycee Mfg Co Ltd (ITA No. 626 of 2010 ) the assessing officer is duty bound to work out disallowance under section14A. 41. The Hon'ble Bombay High Court in Nirved Traders Pvt Ltd (supra) held that the disallowance under section 14A be restrict to the exempt 36 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 income. Thus, respectfully following the order of the Jurisdictional High Court referred above, we direct the assessing officer to restrict the disallowance to 22 the extent of exempt income earned by the assessee. In the result this ground of appeal is partly allowed.” Respectfully following the aforesaid decision and the direction of the Hon‟ble Jurisdictional High Court referred therein, Ground No.3 and Additional Ground Nos. 14 to 16 of the assessee read with CO‟s ground Nos. 9 to 10 of assessee are decided accordingly. Ground No.14 of Revenue‟s appeal read with CO‟s Ground Nos. 6 to 8 of the assessee 34. These grounds pertain to disallowance u/s.14A while calculating book profits u/s.115JB of the Act. 35. The Ld. Counsel for the assessee submitted that this issue has been dealt with by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.4866/Mum/2013 & ITA No.5378/Mum 2013 for the assessment year 2008-09 dated 09.03.2020 wherein the Tribunal on the issue has held and observed as follows: “35.We have considered the submissions of the parties and perused the order of the tax authorities below. The assessing officer while computing book profit added back the disallowance of section 14A without discussion or issuing show cause notice to the assessee. During the first appellate stage the assessee filed its detail submissions and relied on various decisions including in Apollo Tyres (supra) and Goetze India Ltd Vs CIT(32 SOT 101). The ld CIT(A) after considering the submissions of the assessee observed the provision of section 14A cannot be imported to clause (f) of Explanation 1 to section 115JA. The Special bench of Delhi Tribunal recently in ACIT vs. 20 Vireet Investment (P) Ltd (supra) held the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D. Thus, considering the recent decision of the Special Bench of Tribunal we uphold the order of the ld CIT(A). In the result this ground of appeal is dismissed. 36. In the result the appeal of the revenue is partly allowed. ITA No. 4866/Mum/2013 by assessee.” 37 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Respectfully following the aforesaid decision, ground No.14 of Revenue‟s appeal read with CO‟s Ground Nos. 6 to 8 of the assessee are decided accordingly. Additional Ground No.17 of the assessee : Education Cess 36. The Ld. Counsel for the assessee submitted that this ground is taken first time before us and has placed strong reliance on the decision of the Hon‟ble Bombay High Court in the case of Sesa Goa Limited Vs. Joint Commissioner of Income Tax, (2020) 107 CCH 0376 MumHC, Tax Appeal No.17 of 2013/18 of 2013 wherein the question raised before the Hon‟ble High Court was “whether Education Cess and Higher and Secondary Education Cess collectively referred to as “cess” is allowable as a deduction in year of its payment. It was held and observed by the Hon‟ble High Court that “legislature in section 40(a)(ii) has provided that „any rate or tax levied‟ on profits and gains of business or profession shall not be deducted in computing income chargeable under head „profits and gains of business or profession‟. There is no reference to any „cess‟. Obviously, therefore, there is no scope to accept that „cess‟ being in nature of a tax is equally not deductable in computing income chargeable under head „profits and gains of business or profession‟. If legislature intended to prohibit deduction of amounts paid by a assessee towards „education cess‟ or any other „cess‟ then legislature could have easily included reference to „cess‟ in clause (ii) of Section 40(a) of the Act. The fact that legislature has not done so means that legislature did not intend to prevent deduction of amounts paid by the assessee towards „cess‟ when it comes to computing income chargeable under head „profits and gains of business or profession‟. Though the claim for deduction was not raised in original return or by filing revised return, assessee had indeed addressed a 38 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 letter claiming such deduction before assessment could be completed. However, even if Court proceed on basis that there was no obligation on Assessing Officer to consider claim for deduction in such letter, the Commissioner (Appeals) or ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. This substantial question of law was answered in favour of the assessee stating that the amount paid by the assessee towards education cess has to be allowed as deduction. Similar view was also taken by the Hon‟ble Rajasthan High Court in the case of Pr. Commissioner of Income Tax, Kota Vs. M/s. Chambal Fertilizers and Chemicals Ltd., Income Tax Appeal No.52/2018 ( Raj HC). 37. After hearing both the parties herein and respectfully following the aforesaid judicial precedents, this additional ground in respect of „Education Cess‟ is allowed. Thus, additional ground No.17 raised in appeal by the assessee is allowed. 38. Ground Nos. 1 to 9 raised in Revenue‟s appeal has already been adjudicated while deciding the corresponding grounds of assessee‟s appeal and hence, the grounds decided accordingly. 39. Ground No.10 of the Revenue‟s appeal read with CO‟s Ground No. 3 to 5 and additional Ground No. 14 to 17 pertains to imputation of notional interest on outstanding receivables from AEs. 40. The TPO has dealt with this issue vide Para 10, Page 11 to 13 of his order which reads as follows: 39 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 “10. Outstanding receivables From the perusal of the related party schedule of the company, it was found that there are following amounts which are outstanding: AE Amount Outstanding Esparma GmbH Rs.0.65 mn Wockhardt USA LLC Rs.2595.87 mn Wockhardt EU Operations (Swiss) AG Rs.615.73 mn ( Rs.726.21 Less Loan of Rs.110.48 mn on which interest is already considered) Pinewood Laboratories Limited Rs.10.92 mn Wockhardt Holding (France) S.A.S Rs.16.30 mn Wockhardt Holding Corp Rs.9.54 ( Rs. 526.43mn Less loan of Rs.516.89 mn on which interest is already considered) Total Rs.3240.01mn The assessee was asked as to why ALP interest rate should not be charged on the above. The assessee submitted that the outstanding payables, advances received should be netted of against outstanding receivables. The net outstanding receivables from AEs as on 31 st March 2010 is only Rs.299.4 crore as below: AE Amount Outstanding Esparma GmbH Rs.6,45,534 Wockhardt USA LLC Rs.259,58,73,621 Wockhardt EU Operations (Swiss) AG Rs.61,60,27,938 Pinewood Laboratories Limited Rs.1,09,19,665 Wockhardt Holding (France) S.A.S Rs.1,63,01,749 Wockhardt Holding Corp Rs.95,36,490 CP Pharma Rs.-8,99,40,956 Wockhardt Uk Ltd. Rs.-1,05,16,429 Morton Grove Pharmaceuticals Inc. Rs.-55, 21,069 Atlantis USA Inc Rs.-15,92,433 Negma Laboratories Rs.-14,72,10,813 Girex Laboratories Rs.-2,42,935 Total Rs.299,42,79,363 Where as net outstanding receivables form AEs as on 1 st April 2009 were 236.6 Crores as below : AE Amount Outstanding 40 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Esparma GmbH Rs.62,12,64, 612 Wockhardt USA LLC Rs.251,93,53,277 Wockhardt EU Operations (Swiss) AG Rs.-43,42,34,741 Pinewood Laboratories Limited Rs.-1,67,88,861 Wockhardt Holding (France) S.A.S Rs.1,85,19,040 Wockhardt Holding Corp Rs.-25,46,616 CP Pharma Rs.-5,18,34315 Wockhardt Uk Ltd. Rs.-2,05,30,263 Morton Grove Pharmaceuticals Inc. Rs.71,99,750 Atlantis USA Inc Rs-26,97,786 Negma Laboratories Rs.-27,10,28,467 Girex Laboratories Rs.-2,70,758 Total Rs.236,64,04,872 Assessee submitted that the interest shall be charged only on the excess credit period granted to AEs on average outstanding during the FY 2009- 10 of Rs.268 crores (236.6 +299.4/2). The assessee submitted that average credit period for the AE is 7.5 months (268 [Avg. debtors as above]/428 [total net sales and service income from AEs]*12) and whereas for the company as a whole the same is 4 months (510[Avg. debtors as per financial statements for FY 2009-10]/ 1532 ( Sales for FY 2009-10]*12). Accordingly, there is excess credit period granted to AEs of 3.5 months. Thus, an amount of Rs.10.74 cr. ( Rs.324.9 crores*11.34%*3.5/12) should have been charged to AEs for the outstanding receivables. The assessee had not charged them at all. Hence, an adjustment of Rs.10,74,00,000/- is made on account of interest chargeable on delayed/ outstanding receivables for AY 2010-11.” 41. The Ld. CIT(Appeals) after considering the submissions of the assessee and assessment order has held and observed as follows: “APPLLANT’s SUBMISSION FOR GROUND NO.8 The appellant would first like to draw your Honours attention to the language of section 92 of the Act which reads as under: “Any income arising from an international transaction shall be computed having regard to the arm length price. From the plain reading it is clear that arm's length adjustments can only be made in respect of any income which arises from international transaction. 41 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 The expression 'international transaction' is defined under section 92B of the Act as a transaction between two or more AE, either or both of them are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing of money, or any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises' as also transaction in the nature of cost or expenses sharing arrangement. From the overview of the above definition it is clear that a continuing debit balance with AE doesn't constitute a transaction within the meaning of the term "international transaction". Further we would like to state that a continuing debit balance is not a transaction per se, but is a result of international transaction. It is not necessary that the payment is to be made as soon as it becomes due. Many factors such as normal business practice, relation with customers etc. which influence the fact of payments. Unlike loan it cannot be viewed as standalone transaction. For this proposition the Appellant would like to rely on the decision of the Hon'ble Mumbai Tribunal in case of Nimbus Communication Ltd. vs. ACIT (43 SOT 695), wherein the Appellant was engaged in the business of marketing of airtime available on television programs, cricket and other sports events, as also in business of producing television serial During the year under consideration Appellant's AE had to make certain overdue payment to the Appellant for which the Appellant had not charged any interest. It was held that a continuing debit balance does not constitute an international transaction under section 92B of the Act in respect of which Arm Length Price (ALP) adjustment can be done but it is just an outcome of international transaction. Reliance is also placed on the decision of the Hon'ble Pune Tribunal in the case of Patni Computer Systems Ltd. vs. DCIT (ITA No. 426 & 1131/PN/06), wherein the Appellant 'as engaged in the business of providing software services for various entities abroad and such services were provided off-shore as well as on-site. The Assessing Officer noted international transactions with AE and the TPO while determining the ALP, made certain adjustment; one of them on account of interest chargeable on excess period of credit allowed by the Appellant to the AE. The Hon'ble Pune Tribunal held that that non-charging of interest on balances outstanding for services provided cannot constitute an international transaction and in this regard reliance was placed on the decision of the Hon'ble Mumbai Tribunal in the case of Nimbus Communications Ltd. vs. ACIT (ITA No. 6597/Mum/09). Further, it also held that element of interest comes in only with respect to an indebtedness created out of a loan transaction and in the instant case the indebtedness in question has arisen against provision of sales and services. Hence, on the basis of facts and circumstances of the Appellant's case and in law the addition of Rs.10,74,00,000/- on account of transfer pricing adjustment on debit balance with AE was unjustified and unwarranted. Further, the Appellant submits that in the case of AEs as well as Non-AEs, where there was a delay exceeding the normal credit period in realizing the receivables by the Assessee, generally as a normal business strategy, no interest had been charged on the delay in receipt of payments from Non-AEs as well (Refer FPB Page No.522, 532 42 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 to 534). The Hon'ble Bombay High Court in the decision of CIT v. Indo American Jewellery Ltd (223 Taxman 8)(Refer Page No. 342 to 343 of LPB)has held that as there is complete uniformity in the act of the assessee in not charging interest from both Associated Enterprises and Non Associated Enterprises, the notional interest on outstanding amount of export proceeds realized belatedly could be deleted. Further, a similar view has been endorsed by the Hon‟ble Jurisdictional Tribunal in the following cases:  ACIT v. Nimbus Communications Limited (145 ITD 582);  Dinurje Jewellery (P.) Ltd. v. ITA (2014) (51 taxrnann.com 41);  V.I.P. Industries Ltd. v. ACIT (2015) (54 taxmann.com 51)  Livingstones v. DCIT (41 taxmann.corn 499) A similar view has been endorsed by the Hon 'ble Delhi Tribunal in case of Bausch & Lomb Eyecare (India) (P.) Ltd. v. ACIT (2015) (60 taxmann.com 141), wherein it was held that where there was uniformity in assessee's act in not charging interest both from AE and non AE in case of delay in realization of outstanding amount, adjustment in relation to notional interest on outstanding receivables from AEs could not be made while determining ann's length price. Without prejudice to the above, assuming without accepting, the computation of notional interest on outstanding receivables done by the Ld. TPO is correct, even after reducing the said notional interest of Rs.10,74,OO,OOO/- from the net operating profit of the Appellant Company, the reduced margin of Appellant was still more than average margin of selected comparables and hence no further adjustment was required to be made. Hence, on the basis of facts and circumstances of the Appellant's case and in law the addition of Rs.10,74,00,000/- on account of transfer pricing adjustment on long debit balance with AE should be deleted. In case Your Honours do not agree with the Appellant on the above proposition, the Appellant craves leave to further substantiate this ground with further propositions in due course. DECISION FOR GROUND NO.8 I have gone through the TPO's order and also appellant's submission. The appellant has not charged interest with AE as well as non AE and following the order of Hon'ble Bombay High Court in the decision of CIT vs Indo American Jewellery Ltd (223 Taxman 8) where the court held that as there is complete uniformity in the act of the assessee in not charging interest from both Associated Enterprises and Non Associated Enterprises, the notional interest on outstanding amount of export proceeds realized belatedly could be deleted. Hence following the above additions made by TPO is deleted. Ground of Appeal is Allowed.” 43 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 42. On this issue before us, the Ld. Counsel for the assessee has filed detailed written submissions which read as follows: “15.3.9 Given the above, the Appellant wishes to submit that even after reducing the notional interest determined by the Learned TPO from the Appellant's operating revenue, its margin is still higher than the average operating margins earned by similarly placed comparable companies considered for benchmarking the principal transaction of export. A summary of the same is provided below: Operating margin of Wockhardt after reducing notional interest from operating revenue Operating margin of comparable companies Considering Wockhardt margins as per TP study Considering Wockhardt margins as computed by learned TPO Three year weighted average margin as per TP study Single year updated margin submitted during TP assessment ( Accepted by Learned TPO) OP/OC-25.94% ( Refer Annexure- 2 at page 2961 for working) OP/OC-23.68% ( Refer Annexure 2 at Page 1961 for working) OP/OC-17.55% ( Refer Page 178 of Paper book) OP/OC-21.78% ( Refer Annexure 3 at Page 1962 for working OP/OR-16.68% ( Refer Page 2041 of paper book) 15.3.10 The above approach of analysing outstanding receivables has been advocated by the Hon'ble Mumbai ITAT in the following decisions:  Agilisys IT Services India (Private) Limited ([2016]76 taxmann.com 134) (Refer Page 2585 to 2588 of Legal Paperbook)  Agilisys IT Services India (Private) Limited ([2017]77 taxmann.com 16) (Refer Page 2589 to 2591 of Legal Paperbook) Without prejudice to the above contentions, no separate addition for interest on receivables is required after allowing working capital adjustment. 15.3.11 In this connection, the Appellant humbly submits that working capital adjusted margins factor the impact of outstanding receivables and therefore, no separate adjustment on account of outstanding receivables is required once working capital adjustment is allowed. The working capital adjusted margins of the comparable companies considered for benchmarking the principal transaction of export vis-a-vis the margins earned by the Appellant, are tabulated below: Operating margin of Appellant Operating margin of 44 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 comparable companies As per TP study (OP/OC) As per Learned TPO(OP/OC) Single year working adjusted margins (OP/OC) 26.83% ( Refer Page 246 of paper book) 24.55% (Refer Page 8 to 9 of TP order) 24.98% (Refer Annexure 3 at Page 1962 for working) 15.3.12 From the above table, it is evident that the Appellant's margins as per its TP study are higher than the working capital adjusted margins of comparable companies. Further, even on considering the Appellant's margins as computed by the Learned TPO, the margins are within the tolerance band of +!- 5% provided under Section 92C of the Act (as applicable for AY 2010-11). Therefore, it is submitted that no separate adjustment on account of outstanding receivables is required. 15.3.13 In this regard, reliance is placed on the following ruling which have been held that working capital adjusted margins account for the impact of outstanding receivables and therefore, no separate addition for the same is required to be made.  Hon'ble Delhi ITAT in case of Kusum Health Care Private Limited ([2015] 62 taxmann.com 79) [Refer Page 2592 to 2600 of Legal Paperbook], affirmed by Hon'ble Delhi High Court ([2017] 398 ITR 66) [Refer Page 2601 to 2603 of Legal Paperbook]  Hon'ble Delhi ITAT in case of Kusum Health Care Private Limited (ITA No. 3717/Oell2017 dated 1 September 2020) [Refer Page 2604 to 2620 of Legal Paperbook]  Hon'ble Hyderabad ITAT in case of Hexagon Capability Center India Private Limited ITA 2032/Hyd/2017 dated 16 November 2020) [Refer Page 2621 to 2628 of Legal Paperbook] Amendment to Section 92B of the Act to be considered prospective (ie, effective from AY 2013-14) 15.3.14 The Appellant respectfully submits that the retrospective amendment to Section 92B of the Act vide Finance Act, 2012, which has included "receivable or any other debt arising during the course of business" under the definition of "international transaction" by way of an Explanation, is to be treated as effective from 1 April 2012 (i.e, AY 2013-14). Accordingly, for the AYs prior to AY 2013-14, outstanding receivables from AEs cannot be considered as an international transaction. 15.3.15 In this regard, reliance is placed on the following decisions which have held that the amendment to Section 92B of the Act, qua outstanding receivables from AEs, is to be considered effective from AY 2013-14 and therefore, the same does not constitute an international transaction for prior AYs:  Hon'ble Mumbai ITAT in case of Hiraco Jewellery (India) Private Limited [ITA 7297/Mum/2014 dated 31 March 2016) for AY 2009-10 45 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11  Hon'ble Mumbai ITAT in case of Rusabh Diamonds ([2016] 68 taxmann.com 141) for AY 2009-10 (Refer Page 2519 to 2535 of Legal Paperbook)  Hon'ble Mumbai ITAT in case of Firestone Diamond Private Limited (ITA 139/Mum/2014 dated 31 March 2016) for AY 2008-09 Without prejudice to the above contentions, adjustment (if made) should be based on L1BOR 15.3.16 Without prejudice to the above contentions, the Appellant wishes to submit that since the outstanding receivables is a result of export transactions, any adjustment (if made) should be calculated by adopting a LlBOR based rate. In support of this contention, the Appellant relies on the following decisions:  Hon'ble Supreme Court of India dismissed the SLP in case of Vaibhav Gems Limited [(Civil) Diary No(s) 30849/2018 dated 1 October 2018], arising out decision of Hon'ble Rajasthan High Court (DB ITA No. 14/2015 dated 13 October 2017)  Bombay High Court in case ofTata Autocomp System Limited (374 ITR 516 [Bom]) dated 3 February 2015 (Refer Page 2448 to 2451 of Legal Paperbook)  Pune ITAT in case of Capgemini Technology Services India Limited ([2018] 90 taxmann.com 191) dated 25 January 2018 Pune ITAT in case of iGate Global Solutions Limited (IT(TP)A No.286/Bang/2013 dated 5 August 2019] (Refer Page 2452 to 2464 of Legal paper book) Reference is also drawn to the additional decision cided in Para 11.3.10 above. Without prejudice to the above contentions, adjustment (if any) should be computed at value of outstanding receivables net of payables. 15.3.17. In this connection, it is submitted that if an adjustment on account of outstanding receivables is required to be made, the same should be made on the amount of outstanding receivables net of payables/advances from AEs. In support of its contention, the Appellant wishes to place reliance on the following rulings:  Hon‟ble Mumbai ITAT in case of Tecnimont ICB House (2015) 60 taxmann.com 143 ) (Refer Page 2629 to 2635 of legal paper book)  Hon‟ble Delhi ITAT in case of Contitech India (Private) Limited (2016) 75 taxmann.com191]” 46 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 43. We find the Hon‟ble Delhii High Court in the case of Avenue Asia Advisors Pvt. Ltd. Vs. DCIT (2017) 398 ITR 120 ( Del.) following the earlier decision in the case of Pr. CIT Vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 ( Del.) held that “there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health care Pvt. Ltd. (supra.), the Hon‟ble Delhi High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions.” This decision was considered by the Delhi Bench of the Tribunal in the case of BT (India) Pvt. Ltd. Vs. ACIT, ITA No.442/Del/2016 & ITA No.302/Del/2017 for the assessment year 2011-12 and 2012-13 dated 19.07.2018 wherein on the identical facts and circumstances following the decision of the Hon‟ble Delhi High Court in the case of Avenue Asia Advisors Pvt. Ltd. Vs. DCIT (supra), it was held as follows: “16. We have perused the submissions advanced by both the sides in the light of the records placed before us. On perusal of service agreement between assessee and AE placed at page 337-353 of paper book it is observed that there is no specific period mentioned for the payments to be received from its AE. Ld.TPO, therefore estimated a period of 30 days as allowable for payment receivables and any delay beyond 30 days has been bench marked as international transaction by imputing interest at the rate of 9.60% LIBOR +300 basis points. Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a ITA 302/Del/17 A.Y. 2012-13 & ITA 442/Del/16 A.Y. 2011-12 BT (India) Pvt.Ltd. vs. ACIT period of time to discern a pattern which would indicate that vis-à- vis the receivables 47 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." 16.1. In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.” Respectfully following the aforesaid decision and on same parity of reasoning, Ground No.10 of the Revenue‟s appeal read with CO‟s Ground No. 3 to 5 and additional Ground No. 14 to 17 are decided accordingly. Ground No.11 of the Revenue‟s appeal : Deduction u/s.80IB & 80IC of the Act : 44. The Assessing Officer vide Para 5.1 onwards on this issue has held as follows: “ 5.1. The company has claimed deduction u/s.80IB in respect of Daman Kadaiya and deduction u/s.80IC in respect of Baddi-Himachal Pradesh. The assessee has been claiming R & D expenses and has been claiming 150% deduction on it u/s.35(2AB) of the Income Tax Act, 1961. It has however not apportioned any R & D expense, on the basis of turnover to the 80-IB and 80-IC eligible units. By doing the profits of the units on which deduction u/s.80IB and 80 IC is claimed is getting inflated. The same issue was there from AY 2001-02 till AY 2008-09 and also in the block assessment. Hence, during the course of assessment proceedings, the assessee was asked to show cause why the R & D expenses claimed u/s.35(2AB) should not be allocated between the various 80-IB and 80- IC units on the basis of turnover. 5.2 The assessee has submitted its reply dated 28.02.2014 which has been perused. It is also stated by the assessee company that Hon‟ble Mumbai Tribunal has decided this issue in favour of the assessee by Hon‟ble ITAT for AY 01-02 till AY 05-06 and Hon‟ble CIT(A) for AY 2002- 03 till AY 2008-09. 48 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 5.3. The main argument of the assessee against allotment of R & D expenses to the industrial undertaking on which deduction u/s.80IB and 80IC has been claimed is that the impugned expenditure has not contributed to the earning of income in respect of which deduction is claimed. Such expenditure should therefore, not be taken into account for computing the deduction. 5.4 The assessee is claiming deduction on its R & D expenses u/s. 35{2AB). Now, deduction u/s.(2AB) is only available to the assessee only if its R&D expenses are related to its business. The fact that its R&D expenses have been approved by the Dept. of Science & Technology, on the assessee‟s request, 3S being eligible for deduction u/s. 35(2AB) means that they relate to the business of manufacturing pharmaceutical drugs. In fact during the course of search and seizure operations conducted on the assessee, the statement of its Vice President, Bulk Drug units at Ankleshwar, who is also looking after its chemical H&D at Aurangabad was recorded u/s. 131 on 11- 11-2000 as discussed in AY 2001-02 wherein he said that R&D work at the R&D centre is also used by the production units. Besides, it is inherent in the provisions of section 35(2AB) that such R&D expenses are for assessee's business purposes and it is also inherent in such activity that only a small fraction of research and development activity may result into commercial production. The R&D expenses of the assessee cannot be dissociated from its business and delinked from its production units. 5.5 In reference to the assessee‟s submission about the decisions for earlier years as mentioned above, it mentioned here that there decisions have not been accepted by the Department and the appeals u/s.260A and appeal to ITAT has been filed for respective years. 5.6 Considering the discussion as above, the R.& D expenses on which the assessee has claimed deduction u/s.35(2AB) needs to be allocated to the various units and in absence of details of allocation from the assessee, it considered that the expenses be allocated in the ratio of turnover of the units. 5.7 It is seen that the assessee has allocated interest costs to units on the basis of turnover. The entire interest is for the purpose of acquisition of assets and for business requirements related to the units. Hence, the interest cost has being allocated accordingly. 5.8 The calculation of deduction u/s.80 IB and 80 IC is as per Annexure 1 enclosed. 5.9 Thus, in the result, out of the claim of deduction u/s.80IB amounting to rs.42,618,935/-, a deduction of Rs.4,06,70,420/- is allowed and with respect to the deduction claimed u/s.80 IC amounting to Rs.1,211,792,362/-, a deduction of Rs.1,20,96,11,735/- is being allowed. Hence, excess claim of deduction u/s.80IB to the tune of Rs.19,48,515/- and of 80IC to the tune of Rs.4,28,51,047/- is disallowed.” 45. The Ld. CIT(Appeals) after considering the submissions of the assessee and assessment order has held and observed as follows: 49 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 “APPELLANT‟s SUBMISSION : The expenditure on R&D could not have been charged to any qualifying industrial undertaking while computing admissible deduction under section 80IB and 80lC in as much as no part of the expenditure had any connection - much less any direct or proximate connection with the working of any undertaking during the year. The Appellant would like to submit that the R&D expenditure incurred were futuristic in nature and accordingly, not related to the manufacturing activities carried out by the eligible undertakings. The Hon'ble Jurisdictional Tribunal has in Appellant's own case in AY 2001-02 bearing ITA No. 3991/Mum/2005(Refer Pg. No. 344 to 3680fLPB), has decided the issue in favour of the Appellant and held that the CIT(A) was not justified in confirming the action of the AO in regard to allocation of expenses on account of R&D and interest for purpose of computing deduction u/s. 80IB of the Act. "16. The ratio of both of these decisions of the Tribunal are squarely applicable on the facts of the present case. Therefore, in view of the ratio of these decisions and in view of the facts and circumstances discussed by us above, we hold that the CIT(A) was not justified in confirming the action of the Assessing Officer in regard to allocation of expenses on account of R&D and interest for the purpose of computing deduction u/s. 80m. Accordingly, we set aside the order of lower authorities on this issue and the Assessing Officer if directed tore- compute the deduction accordingly." (Emphasis Supplied) Furthermore, in the subsequent years i.e., from A.Y. 2002-03 to A.Y. 2009-10, the Hon'ble CIT(A), in Appellant's own case has decided the issue in favour of the Appellant and aggrieved by the decision of the Hon'ble CIT(A), the department preferred an appeal before the Hon'ble Tribunal for A.Y 2002-03 to A.Y 2005-06, wherein the Hon'ble Tribunal respectfully following the decision of A.Y 2001-02 in Appellant's own case, dismissed the Department's appeal and decided the issue in favour of the Appellant, the Income Tax Appeal No. for the respective A.Y's is as under: ITA No.71/Mum/2007 ( AY 2002-03) ( Refer Pg No.369 to 393 of LPB)  ITA No.3556/Mum/2007 ( AY 2003-04) ( Refer Pg No. 394 to 403 of LPB) ITA N0. 2524/Mum/2009 (AY 2004-05) ( Refer Pg No. 404 to 418 of LPB)  ITA No.7383/Mum/2010 ( AY 2005-06) ( Refer Pg No.419 to 427 of LPB) In view of the above submissions, the appellant prays that no allocation of R & D expense to be made to Section 80IB & 80 IC eligible units. DECISION FOR GROUND NO.9 As the above issue is covered in favour of appellant by the Hon‟ble ITAT in AY 2002-03 to 2005-06 and CIT(A) in AY 2002-03 to 2009- 50 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 10. Following the order of Hon‟ble Tribunal and CIT(A) I delete the addition. This ground of appeal is allowed.” 46. The Ld. Counsel for the assessee submitted that this issue has been dealt with by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.4866/Mum/2013 & ITA No.5378/Mum 2013 for the assessment year 2008-09 dated 09.03.2020 wherein the Tribunal on the issue has held and observed as follows: “18. We have considered the submissions of the parties and perused the order of the tax authorities below. During the relevant period under assessment year the assessee the assessee claimed deduction under section 80IB of Rs.23,36,103/ and under section 80IC of Rs. 141,65,46,365/- respectively. On show cause notice on the issue, the assessee contended that similar deduction is allowed in the earlier years by Tribunal and furnished the copy of the orders for earlier years. The assessing officer took his view that R&D expenditure to the industrial undertaking on which deductions under section 80IB & 80IC are claimed, on which the expenditure is not contributed to the earning of the income for which deduction is claimed. The assessing officer allocated interest cost to the units on turnover basis. The ld CIT(A) granted relief to the assessee by following the order of the Tribunal for various earlier years. We have noted that on similar ground of appeal the Tribunal in assessee's own case for AY 2007-07 passed the following order; "17. We have considered rival submissions and perused the material on record. The learned Counsels appearing for the parties have agreed that the issue has been decided in favour of the assessee by the Tribunal in the preceding assessment years. It is noticed, identical dispute arose in assessee's own case for the assessment years 2001- 02, 2002-03, 2003-04, 2004-05 and 2005-06. In the latest order passed for the assessment year 2007- 08, in ITA no.5557/ Mum./2012, dated 5th January 2018, the Tribunal, following its own decision for the earlier assessment years, has upheld the decision of learned Commissioner (Appeals) by dismissing the ground raised by the Revenue. Facts being identical, respectfully following the consistent view of the Tribunal in the preceding assessment years in assessee's own case, we uphold the decision of learned Commissioner (Appeals) by dismissing the ground." 19. Considering the consistent view of the Tribunal on identical set of facts and respectfully following the view of the Tribunal in the preceding assessment years in assessee's own case, we uphold the decision of ld. CIT(A).In the result the Ground of appeal is dismissed.” 51 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Respectfully, following the aforesaid decision, Ground No.11 of the Revenue‟s appeal is decided accordingly. 47. The Ld. Counsel for the assessee has not pressed Ground No.13 of the Cross objection. In view of the submissions of the Ld. Counsel, Ground No.13 is dismissed as not pressed. 48. Ground No.12 of the Revenue‟s appeal pertains to disallowance of weighted deduction u/s.35(2AB) of the Act. 49. The Assessing Officer has dealt with this issue vide Para 6.1 onwards which reads as follows: “6. Deduction u/s.35(2AB)- in-house R & D Unit 6.1 During the year under consideration the assesse company has claimed weighted deduction @150% on capital expenditure of Rs.16.32 crores and revenue expenditure of Rs.74.50 crores at in house R & D unit. In order to examine the correctness of the claim, necessary details have been obtained, in respect of expenses claimed to have been made by the assessee company for in house scientific research. 6.2 On examination of the details filed by the assessee company, it is found that huge payments have been made to outside parties in connection with the consultancy charges and expenses related to clinical trials under the heads analysis charges, clinical trial expenses, Sio studies and pilot bio study expenses relating to Chikalthana Unit and Bhandup unit. As per the details filed by the assessee these expenses inter-alia, includes the following: Particulars Amounts (Rs.) Patent filing charges 14,881,724 Repair & Maintenance-CWIP 1307,684 Add. Expenses on clinical trials Bio studies 16,075,454 Clinical trial expenses 11,552,570 Pivotal bio study 33,762,708 Total expenses 77,580,139 52 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 6.3 Since, the weighted deduction u/s.35(2AB) was brought in by the Finance Act,1997 w.e.f.01.04.1998 and was to promote only those assesses who are engaged in the business of bio technology or in the business of manufacture or production of any drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipment, chemicals or things notified by the Board and who incurs any expenditure on scientific research on in house research and development facility proved by the prescribed authority break-up of the expenditure incurred by the assessee company on such scientific research and development at its own units and expenditure relatable to research/analysis got conducted through outside parties has been obtained. The assessee company was also requested to justify its claim in relation to the clinical research and analysis and pilot bio study conducted by outside parties. The assessee's reply has been received vide its letter dated 28.02.2014 and 07.03.2014 which is considered and taken on record. 6.4 The submissions made on behalf of the assessee company have been given a very careful thought. As a matter of fact, neither the assessee has carried out any clinical trials/ bio studies at their units nor has it created any infrastructure/facility for such clinical trials and bio studies. All these clinical trials and bio studies have been got conducted by the assessee company through third parties and therefore, the payments made to outside parties would not qualify for weighted deduction @150% of such expenditure. 6.5 It may, also, be pointed out here that the deduction U/s 35 was already available to the assessee's in respect of expenditure on scientific research and the deduction u/s 35(2AB) was brought in with a very specific purpose i.e. to promote in house research and development and also to give rise to creation of infrastructure/ research facilities in the country. If the deduction @ 150% is allowed on expenditure incurred outside the assessee‟s units also then the whole purpose of giving this extra incentive will be defeated. 6.6. The assessee has claimed Rs.3,87,90,070/- due to weighted deduction @150% on such expenses of Rs.7,75,80,139/-. In view of the above discussion, the assessee‟s claim u/s.35(2AB) on the said expenditure is rejected in respect of the excess allowance due to weighted deduction on the above detailed expenditure on the above expenditure amounting to Rs.7,75,80,139/-.” 50. The Ld. CIT(Appeals) on this issue after considering the submissions of the assessee and the assessment order has held and observed as follows: “APPELLANT‟S SUBMISSIONS : The Appellant would like to state that the language used in section 35(2AB) of the Act says that, "incurs any expenditure on in-house scientific research and development facility". The significance is that the 53 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Statute has used the terminology "on in-house". As per the dictionary, meaning of the word "on" means (i) in contact with and supported by a surface, (ii) to a position in contact with such a surface of. (iii) in a condition or process of, (iv) towards or to, (v) directed towards, (vi) in the direction of, (vii) applied to, (viii) close to, beside, (ix) exactly or very nearly at (x) at the time date or occasion of, (xi) engaged in and (xii) with respect to. Thus, expenditure "on" scientific research would mean expenditure "with respect to" in-house research and development. It connotes any expenditure on scientific research directed towards in- house research and development facility. Therefore, the language of tills section does not suggest that expenditure on scientific research should be incurred within the in-house research and development. The language does not suggest that the research is to be conducted within four walls of an undertaking. The Appellant thus submits that the intention of the legislature is that weighted deduction with respect to R&D expenditure which is for the purpose of in-house research and development facility should be allowed, whether such expenditure is incurred within the four walls of the organization or outside. The Appellant further submits that the idea behind introduction of Explanation to section 35(2AB) which was introduced by the Finance Act 2001 with effect from 1.4.2002, is to provide encouragement to in-house scientific research. The assessee would further like to state that scientific research is important for the business of the assessee and merely because a part of the expenditure was incurred outside the four walls of the organization, the weighted deduction cannot be denied to the assessee. The Hon‟b le Income Tax Appellate Tribunal (“Tribunal), Mumbai in Assessee‟s own case for AY 2002-03, 2003-04, 2004-05 and 2005-06 has decided the issue against the assessee by relaying on the decision of the Hon‟ble Mumbai Tribunal in the case of Concept Pharmaceuticals Ltd. Vs. ACIT ( 43 SOT 423). However, the assessee would like to humbly submit that the above mentioned Tribunal orders in Assesse‟s own case were dated 27, 2010 for AY 2002-03, July 09 2010 for AY 2003-04, November 30, 2011 for AY 2004-05 and April 13, 2012 for AY 2005-06. However, thereafter the Hon‟ble Ahamedabad Tribunal in the case of Cadila Healthcare Vs. ACIT ( 21 taxmann.co, 483) has vide order dated May 25, 2012 decided the very same issue in favour of the assessee granting weighted deduction on clinical trials and bio equivalent studies and held as follows: "We are of the view that clinical trial is one of the various steps involved in a scientific research especially for the development in a new drug. For the purpose of clinical trial a pharmaceutical company is required to set up an in-house research facility. To conduct the research the qualified team of scientists may have to collect datas from several resources, both, within the premises or outside the premises. But the datas so collected by them is to be brought into the in-house research facility and on the basis of those collected datas or clinical trials carried out the team of experts thereafter arrived at a result. Therefore, for the purpose of conducting scientific research the requirement is that in-house research and development facility is to be created or established by an organization." 54 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Against the abovementioned order of the Hon'ble Ahmedabad Tribunal, the Department had preferred an appeal to. the Hon'ble Gujrat High Court. The Hon'ble Gujarat High Court vide order dated March 20, 2013 in the case of ClT v. Cadila Healthcare Ltd. (214 Taxman 672)(Refer Page No. 428 to 433 ofLPB), dismissed the following question of law as under: "D. Whether the Appellate Tribunal has substantially erred in holding that the expenses incurred outside the approved R&D facility would also get weighted deduction based on the word under "on in house" interpreting contradictorily to the finding of coordinate bench in Concept Pharmaceuticals Ltd. v. AClT (lTAT, Mum) reported at 43 SOT 423 ... ..... .. 18. We are, therefore, of the opinion that the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises." Further, the assessee would like to humbly submit that the Hon'ble Ahmedabad Tribunal has in the case of Cadila Healthcare Ltd. vs. ACIT (56 SOT 89)(Refer Page No.434 to 456 of LPB)vide order dated January 24, 2013 after considering Concept Pharmaceuticals Ltd. v. ACIT (Mum. Tribunal) (43 SOT 423) stated that: "We have seen that in the said Tribunal order rendered in the case of Concept Pharmaceuticals Ltd. (supra), the other two expenses included in the relevant explanation to Section 35(2AB)(l) were not examined at all by the Tribunal to find out whether those expenses can be incurred inside the in-house research and development facility or not and hence, this aspect was not discussed and decided specifically as to whether the explanation also requires that the expenditure included in the explanation are also to be incurred inside the in-house research and development facility or not. We have seen that all the three expenses included in the explanation are not capable of being incurred inside the in house research and development facility and, therefore, in our considered opinion, for all the expenditures included in the explanation including the expenditure on clinical drug trial, it is not required that the same has to be incurred inside the in-house research and development facility and if the same are incurred in relation to drug developed in an in-house research and development facility, the same becomes eligible for deduction uJs 35(2AB)(1). Hence, we are of the considered opinion that the Tribunal order rendered in the case of Concept Pharmaceuticals Ltd. (supra) does not lay down a binding precedent and, therefore, we decide this issue in favour of the assessee by respectfully following the Tribunal decision in assessee's own case for assessment year 2006-07. This ground is also allowed." 55 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Thus, the Hon'ble Gujrat High Court vide order dated March 20,2013, and Hon'ble Ahmedabad Tribunal vide order dated January 24, 20l3, has considered the decision of the Hon'ble Mumbai Tribunal in the case of Concept Pharmaceuticals Ltd. v. ACIT (43 SOT 423) and held that it cannot be considered as a valid precedence. In view of the above submissions, the Appellant prays that weighted deduction u/s. 35(2AB) of the Act should be allowed towards the R&D expenses as mentioned above. DECISION FOR GROUND NO.10 Ground No 9 is regarding disallowance of weighted deduction of Rs.3,87,90,070/- u/s. 35(2AB) by the AO. The Assessing Officer observed that assessee neither carried out any clinical trials/bio studies at their units nor has it created any infrastructure 1 facility for such clinical trials and bio studies and has got conducted all these through third parties and therefore payments made to outside parties would not qualify for weighted deduction @ 150% of such expenditure. The AO further pointed out that the deduction u/s 35 was already available to assessee in respect of expenditure on scientific Research and the deduction u/s 35(2AB) was brought by the Finance Act 1997 for a very specific purpose and that was to promote in house research and development and also to give rise to creations of infrastructure 1 research facilities in the country. The AO disallowed the expenditure of Rs.3,87,90,070/-due to weighted deduction @ 150% on such expenses of Rs.7,75,80,139/-. The appellant during the course of appellate proceedings submitted that he language of the section does not suggest that the research is to conducted within four walls of an undertaking. The appellant further submitted that Mumbai ITAT in his own case for A Y 2002-03 to 2005-06 has decided the issue against the appellant by relying on the decision of Hon'ble Mumbai Tribunal in the case of concept Pharmaceuticals Ltd us ACIT ( 43 SOT 423). But these orders were passed by the Hon'ble Tribunal in the case of appellant in 2010 and 2011. However thereafter the Hon'ble Ahemdabad Tribunal in the case of Cadila Healthcare Ltd vs ACIT (taxman.com 483) vide order dated May 25, 2012 decided the very same issue in favour of the above assessee granting weighted deduction on clinical trials and bio equivalent studies, further the Hon'ble Gujrat High Court vide order dated March 20, 2013 in the case of CIT v Cadila Healthcare Ltd( 214 Taxman 672) dismissed the following questions of law as under. The Hon‟ble Court further held that “ Hence we are of the considered opinion that the Tribunal order rendered in the case of concept Pharmaceuticals Ltd. (supra.) does not lay down a binding precedent and therefore, we decide this issue in favour of the assessee by respectfully following the Tribunal decision in assessee‟s own case for AY 2006-07. This Ground is allowed. Hence, relying on the Hon‟ble Ahemadabad High Court order in the case of Cadila Health Care Ltd, I allow the expenses claimed by the Appellant on weighted deduction of Rs.3,87,90,070/- under section 35(2AB). This Ground is allowed.” 56 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 51. The Ld. Counsel for the assessee submitted that this issue has been dealt with by the Mumbai Bench of the Tribunal in assessee‟s own case in ITA No.4866/Mum/2013 & ITA No.5378/Mum 2013 for the assessment year 2008-09 dated 09.03.2020 wherein the Tribunal on the issue has held and observed as follows: “22. We have considered the submissions of the parties and perused the order of the tax authorities below. During the relevant period under assessment year 13 the assessee the assessee claimed weighted deduction under section 35(2AB). The assessing officer after issuing show cause and receiving reply concluded that all the clinical trial are got conducted by assessee through third parties and the payment made to third parties are not qualified for weighted deduction. The ld CIT(A) followed the order of Tribunal in AY 2004-05 and dismissed the appeal of the assessee. However, we have noted that in AY 2006-07, the Tribunal by following the order for AY 2007-08 restore the issue to the file of assessing officer by passing the following order; "6. We have considered rival submissions and perused the material on record. On a perusal of the impugned order of learned Commissioner (Appeals) and, more particularly, his finding in Para-8 to 8.4 of the impugned order, it is very much clear that he has fully allowed the claim of the assessee under section 35(2AB) of the Act. Therefore, we fail to understand how the assessee can be aggrieved with the decision of learned Commissioner (Appeals). Be that as it may, the Revenue has also challenged the decision of learned Commissioner (Appeals) on the issue of deduction claimed under section 35(2AB) of the Act. Undisputedly, the research and development activity in respect of which the assessee has claimed deduction under section 35(2AB) of the Act were not carried out in assessee's own in- house research and development facility. Therefore, the issue which arises for consideration is, whether the expenditure incurred for carrying out research and development activity outside by way of out sourcing or otherwise can be eligible for deduction under section 35(2AB) of the Act? As per the provision contained 14 under section 35(2AB) of the Act, weighted deduction can be allowed in respect of expenditure on scientific research carried out in the in- house research and development activity as approved by the prescribed authority. Therefore, going by the plain meaning of the words used in section 35(2AB) of the Act, only those expenditures which are incurred in the in-house research and development facility are eligible for deduction. In fact, while dealing with identical issue in assessee's own case in the assessment years 2002-03 to 2004-05 in ITA no.2522 to 2524/Mum./ 2009, dated 13th April 2012, the Tribunal decided the issue against the assessee. However, while deciding the same issue in assessee's own case in assessment year 2007-08, in ITA no.5557/Mum./ 2012, dated 5th January 2018, the Tribunal has restored the issue to the Assessing Officer for fresh adjudication keeping in view various decisions cited by the assessee including the decision of the Hon'ble Gujarat High Court in Cadila 57 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Healthcare Ltd. (supra). Therefore, following the decision of the Tribunal in assessment year 2007-08, we are inclined to restore the issue to the Assessing Officer for de novo adjudication keeping in view the ratio laid down in the decisions to be cited by the assessee including the decision of the Hon'ble Gujarat High Court in Cadila Healthcare Ltd. (supra). While doing so, the Assessing Officer is also directed to examine the ratio laid down by the Hon'ble Supreme Court in Commissioner of Customs v/s Dilip Kumar & Co. & Ors., vide judgment dated 30th July 2018, in Civil Appeal no.3327 of 2007. Needless to mention, the Assessing Officer must afford reasonable opportunity of being heard to the assessee before deciding the issue. These grounds are allowed for statistical purposes." 23. Considering the decision of the Tribunal in assessment year 2006- 07, we respectfully following the same we are inclined to restore the issue to the Assessing Officer for adjudication afresh as per the direction date 12.06.2019 in ITA No. 1967/Mum/2011. In the result the ground of appeal raised by both the parties are allowed for statistical purpose.” Respectfully following the aforesaid decision, on the same parity of reasoning, the matter is restored to the file of the Assessing Officer/TPO for re-adjudication as per directions dated 12.06.2019 in ITA No. 1967/Mum/2011. Thus, Ground No.12 of the Revenue‟s appeal decided accordingly. Ground No.13 of the Revenue‟s appeal read with grounds No. 11 & 12 of the assessee‟s CO: 52. These grounds pertains to disallowance of Freebies u/s.37(1) of the Act amounting to Rs.1,15,52,790/-. 53. The Ld. CIT(Appeals) has discussed this issue at Page 42 & 43 of his order which reads as follows: “Decision For Ground No.12 This ground is regarding disallowance of Freebies u/s.37(1) amounting to Rs.1,15,52,790/-. The Assessing Officer did not agree with the contention of the assessee that IMC Notification is applicable only to Doctors and their professional association and not to assessee. Further, CBDT Circular was issued on 1st August 2012 and hence will be applicable from AY 2013-14 onwards. The AO has contended that 58 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 pursuant to the Notification issue by Medical Council of India, (CBDT) Central Board of Direct Taxes has issued circular No.5/2012 (F. No. 225/142/2012-ITA IIL dated 1st August 2012 stating that the expenses incurred by Pharmaceuticals or allied health sector Industries in providing the Freebies in violation of the Provision of the Indian Medical Council( Professional Conduct, Etiquette and Ethics) Regulation 2002, shall be inadmissible u/s 37(1) of the Act, being an expense prohibited by law. The appellant submitted that Hon'ble Jurisdictional Tribunal respectfully following the decision of Sycom Formulations (1) Ltd vs DCIT (ITA No. 6429/Mum/2012) in the case of UCB India Ltd Pvt Ltd vs ITO( ITA No 6681/ Mum/2013 dated May 18,2016) deleted the ad-hoc disallowance made by the AO in respect of gift articles. In the case of Sycom Formulations (1) Ltd vs DCIT the Hon‟ble Tribunal held that circular was not applicable because it was introduced w.e.f 01-08-2012 i.e A Y 2013-14. Further Hon'ble Mumbai Tribunal in the case of Macleods Pharmaceuticals ltd v ACIT (161 ITD 291) held that CBDT Circular No 5/2012 issued on August 1, 2012 was effective from AY 2013-14. Hence following the Jurisdictional Tribunal disallowance made by the AO u/s 37(1) is hereby deleted. This ground of appeal is Allowed.” 54. At the time of hearing before us, the Ld. Counsel submitted that on this issue the matter is actually sub-judice before the Hon‟ble Apex Court wherein the decision on the issue of Freebies has been reserved and the parties have been directed to file their written submissions in the case of M/s. Apex Laboratories P. Ltd. Vs. The Deputy Commissioner of Income Tax, Special Leave to Appeal (C) No.23207/2019 dated 20.09.2021. In view thereof, it was prayed that the matter may be restored to the file of the Assessing Officer/TPO to re-adjudicate as per decision of the Hon‟ble Apex Court as and when it would be pronounced. 55. The Ld. DR fairly conceded to the submissions put forth by the Ld. Counsel for the assessee. 59 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 56. Having heard the parties herein, in view of the facts and circumstances of the case, this issue is restored to the file of Assessing Officer/TPO for re- adjudication as per law complying with the principles of natural justice. Thus, Revenue‟s ground of appeal No.13 and CO‟s ground Nos. 11 & 12 of the assessee are decided accordingly. 57. In the combined result, cross-appeal filed by the assessee and Revenue and corresponding Cross objection filed by the assessee are decided as indicated hereinabove. Order pronounced on 13 th day of December, 2021. Sd/- Sd/- R.S.SYAL PARTHA SARATHI CHAUDHURY VICE PRESIDENT JUDICIAL MEMBER पुणे / Pune; ददनांक / Dated : 13 th December, 2021. SB आदेश की प्रधतधलधप अग्रेधषत / Copy of the Order forwarded to : 1. अपीलाथी / The Appellant. 2. प्रत्यथी / The Respondent. 3. The CIT(Appeals)-55, Mumbai 4. The Pr. CIT-5, Pune. 5. धवभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, “सी” बेंच, पुणे / DR, ITAT, “C” Bench, Pune. 6. गार्ा फ़ाइल / Guard File. आदेशानुसार / BY ORDER, // True Copy // धनजी सधचव / Private Secretary आयकर अपीलीय अधधकरण, पुणे / ITAT, Pune. 60 ITA No.438/PUN/2018 ITA No.453/PUN/2018 CO No.16/PUN/2019 A.Y.2010-11 Date 1 Draft dictated on 07.12.2021 Sr.PS/PS 2 Draft placed before author 13.12.2021 Sr.PS/PS 3 Draft proposed and placed before the second Member JM/AM 4 Draft discussed/approved by second Member AM/JM 5 Approved draft comes to the Sr. PS/PS Sr.PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order