Wockhardt Limited, Aurangabad V. Assistamt Commissioner of Income Tax, Circle -3, Aurangabad

CO 43/PUN/2019

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4396 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 4 month(s) 20 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 09-05-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 19-12-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Rule of consistency; Earning of tax free income; Set aside
• Section: 143(3); 92B; 14A; 37(1); 250; 80IC; 80IC; 48

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपीऱ सं. / ITA No.775/PUN/2019 निर्धारण वषा / Assessment Year : 2013-14 ACIT, Circle-3, Aurangabad .......अऩीऱाथी / Appellant बिधम / V/s. Wockhardt Ltd., R&D Centre, D-4, MIDC, Chikalthana, Aurangabad. PAN: AAACW2472M ......प्रत्यथी / Respondent आयकर अपीऱ सं. / ITA No.758/PUN/2019 निर्धारण वषा / Assessment Year : 2013-14 Wockhardt Ltd., R&D Centre, D-4, MIDC, Chikalthana, Aurangabad. PAN: AAACW2472M .......अऩीऱाथी / Appellant बिधम / V/s. ACIT, Circle-3, Aurangabad ......प्रत्यथी / Respondent CO No.43/PUN/2019 निर्धारण वषा / Assessment Year : 2013-14 Wockhardt Ltd., R&D Centre, D-4, MIDC, Chikalthana, Aurangabad. PAN: AAACW2472M .......Cross Objector बिधम / V/s. ACIT, Circle-3, Aurangabad ......प्रत्यथी / Respondent 2 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 Assessee by : Shri Rajan Vora Revenue by : Shri Anurag Shivastava स ु नवाई की तारीख / Date of Hearing : 09-05-2022 घोषणा की तारीख / Date of Pronouncement : 10-05-2022 आदेश / ORDER PER INTURI RAMA RAO, AM: The cross appeals are filed by the Revenue and assessee directed against order of the Commissioner of Income Tax (Appeals)-2, Aurangabad, dated 15.03.2019 for the assessment year 2013-14. The assessee also filed Cross Objection against the appeal of Revenue. Cross Appeals 2. Briefly, the facts of the case are that the assessee namely Wockhardt Ltd. is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of undertaking Research & Development in pharmaceutical. The return of income for the assessment year 2013-14 was filed on 29.11.2013 declaring total income of Rs.742,20,29,380/-. Against the said return of income, assessment was completed by the Assessing Officer (AO) vide order dated 25.01.2017 passed u/s 143(3) r.w.s. 92CA(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). While doing so, the AO made TP adjustment as suggested by the Transfer Pricing Officer (TPO) of Rs.109,81,22,628/-, disallowance of excess claim of deduction u/s 80IC of Rs.9,61,86,526/-, disallowance under provisions of section 35(2AB) of Rs.65,55,77,068/-, disallowance of Freebies to Doctors of Rs.1,19,82,100/-, disallowance u/s 3 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 14A of Rs.78,87,413/- and disallowance of Provision for BDDR of Rs.1,56,33,232/-. Being aggrieved, an appeal was filed before the CIT(A), who vide impugned order held that a transaction of sale of FDFS to Associated Enterprise (AE) is at Arm's length price which is not under challenge before us by the Revenue. As regards to the addition on account of Corporate guarantee given for loan availed by Associated enterprise of Rs.9,10,70,177/-, the ld. CIT(A) held that the transaction of providing guarantee to various banks on behalf of Associated enterprise was not an international transaction u/s 92B of the Act. Accordingly directed the AO to delete the addition of Rs.9,10,70,177/- made by the AO. As regards to the addition with regard to interest received on loans advanced to Associated enterprises, the ld. CIT(A) held that the appellant company had charged interest on loans advanced to Associated enterprise at the rate that was significantly higher than the US LIBOR and other international benchmarking rates, therefore, held that the transaction is at Arm's length price and accordingly, directed the AO to delete the addition of Rs.1,60,16,145/-. The reasons following the decision of Hon’ble Bombay High Court in the case of Zandu Pharmaceutical Works Ltd. vs. CIT (31 taxmann.com 191) and Hindustan Unilever Ltd. in ITA No.1873 of 2013 held that while computing profits of eligible undertakings u/s 80IC, R&D expenditure should not be allocated. Accordingly, directed the AO to delete the addition of Rs.9,61,86,526/-. As regards to the disallowance u/s 35(2AB), the ld. CIT(A) observed that the expenses incurred outside R&D unit of Rs.23 crores are held to be allowable as deduction. As regards to 4 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 the balance amount of Rs.62,60,64,990/- being the expenditure incurred at Wockhardt plant other than R&D Centre for test production batches of Rs.36,69,69,768/- and the difference between the amounts claimed by the assessee company and certified by DSIR of Rs.25,90,95,222/- was held not allowable as deduction. As regards to the disallowance u/s 14A, the ld. CIT(A) directed the AO not to make any addition in the absence of any exempt income following the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Limited (366 ITR 505). As regards to the Freebies to Doctors, the ld. CIT(A) confirmed the addition on account of Freebies to Doctors of Rs.1,19,82,100/-. Being aggrieved by the decision of ld. CIT(A) disallowing the part of expenditure incurred on R&D u/s 35(2AB) and distribution of freebies to Doctors, the assessee is in appeal vide ITA No.758/PUN/2019 and being aggrieved with that part of order of ld. CIT(A) which is against Revenue, the Revenue is in appeal vide ITA No.775/PUN/2019. 3. Now, we shall take up assessee’s appeal. The appellant has raised the following grounds of appeal: On the facts and in the circumstances of the case and in law, Id.CIT(A): Disallowance of expenditure under section 35(2AB) of the Act 1. erred in confirming the disallowance of weighted deduction under section 35(2AB) of the Act made by the ld AO amounting to Rs 62,60,65,990 without appreciating the fact that the Department of Scientific and Industrial Research ('DSIR' - the approving authority), prior to 1 July 2016, was only required to approve the in-house R&D facility and not quantify the amounts eligible for deduction under section 35(2AB) of the Act; 5 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 2. erred in confirming the disallowance of weighted deduction under section 35(2AB) of the Act amounting to Rs 36,69,69,768, being expenses incurred for test production batches, on the ground that these expenses are not intrinsically linked to R&D activities conducted by the Appellant; 3. erred in confirming the disallowance of weighted deduction under section 35(2AB) of the Act amounting to Rs 25,90,96,222, being difference in the amounts claimed by the Appellant (as certified by the Statutory Auditors) and allowed by the DSIR, on the ground that no nexus of such expenditure was established with the R&D activity by the Appellant Disallowance of sales promotion expenses 4. erred in confirming the disallowance of expenses amounting to Rs 1,19,82,100 incurred by the Appellant on account of sales promotion expenses incurred towards medical practitioners by holding that the same is prohibited under the Medical Council of India ('MCI') Regulations without appreciating the fact that the MCI Regulations apply to medical practitioners and not to the pharmaceutical companies; Without prejudice to the above 5. erred in confirming the disallowance made by the ld AO by relying on the CBDT Circular No.5/2012 without appreciating the fact that the said Circular came into effect from 1 August 2012 and hence expenses incurred upto 31 July 2012 amounting to Rs 76,12,222 should be allowed under section 37(1) of the Act; Interest under section 234C of the Act 6. erred in considering the levy of interest under section 234C of the Act amounting to Rs 2,26,15,476 as consequential in nature without appreciating the fact that the interest under section 234C ought to be levied on the returned income and not on assessed income. 4. The grounds of appeal No.1 to 3 challenges the decision of ld. CIT(A) disallowing weighted deduction u/s 35(2AB) amounting to Rs.62,60,65,990/-. The factual background of the disallowance is as under: During the previous year relevant to the assessment under consideration, the assessee company incurred revenue expenditure on R&D of Rs.1,89,08,37,068/-, capital expenditure on R&D of Rs.15,16,18,128/-. During the assessment proceedings, the AO found 6 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 that out of expenditure, a sum of Rs.60,26,68,846/- was incurred outside the R&D facilities as set out in para 7.2 of assessment order. The AO was of the opinion that the expenditure incurred outside the R&D facilities were on account of clinical trial and Bio-studies got conducted by third parties and payments made to these outside parties does not qualify for weighted deduction @ 200% of such expenditure. Further, the AO also disallowed the difference between the amounts certified by DSIR in Form No.3CL and the actual expenditure incurred by the assessee of Rs.65,55,77,068/-. On appeal before the ld. CIT(A), the ld. CIT(A) allowed an amount of Rs.23,57,00,078/- incurred outside the R&D facility in respect of following: a. Foreign patent filing expenses :Rs. 2,68,46,556 b. Clinical trial expenses for activities carried Outside the approved facilities :Rs. 3,26,46,140 c. Bio-studies expenses and Pivotal Bio-studies Expenses for activities carried outside the approved facilities :Rs. 2,96,94,617 d. Foreign consultancy (legal and professional expenses) :Rs.13,63,58,344 e. Building maintenance, municipal taxes and rental charges :Rs. 1,00,85,756 f. Director travelling charges :Rs. 68,665 5. However, the balance expenditure incurred outside R&D Centre of Rs.36,69,69,768/- and the difference between the amount certified by DSIR and the amount claimed of Rs.25,90,95,222/- was disallowed on the ground that the amount not certified by the DSIR cannot be allowed as deduction. Being aggrieved by the decision of ld. CIT(A), the appellant is in appeal before us. 7 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 6. It is contended before us that the expenditure is closely linked with R&D activity, though incurred outside the approved R&D Centre are eligible for weighted deduction u/s 35(2AB). Reliance in this regard is placed on the decision of Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd. (31 taxmann.com 300). Thus, it is prayed that the expenditure incurred of Rs.36,69,69,762/- should held to be eligible for weighted deduction. It is further submitted that no disallowance u/s 35(2AB) can be made for the reason that the expenditure was not certified by DSIR. It is submitted that it is only with effect from 01.07.2016, DSIR was vested with the power to certify the expenditure, the expenditure should be allowed as deduction once the DSIR had approved R&D facility. Thus, it is prayed that no disallowance u/s 35(2AB) can be made for the reason that the expenditure was not certified by DSIR. Reliance in this regard was placed on the decisions of Pune Bench in the cases of Cummins India Limited (2018) (ITA No.308/PUN/2014) and ACIT vs. Cooper Corporation Pvt. Ltd. (ITA No.621 & 652/PUN/2015). It is further submitted that in the earlier year, this Tribunal had remanded the matter to the file of AO to examine the allowability of claim based on the ratio of judgment of Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd. (supra). 7. On the other hand, the ld. CIT-DR placing reliance on the orders of lower authorities submits that expenditure incurred outside R&D facility is not eligible for weighted deduction u/s 35(2AB). Similarly, it is submitted that the expenditure which is not certified by DSIR is also not eligible for weighted deduction. 8 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 8. We have heard the rival contentions and perused the record. The issue in the present grounds of appeal relate to the allowability of weighted deduction u/s 35(2AB) on the revenue expenditure incurred on R&D of Rs.1,89,08,37,068/-. The AO disallowed the weighted deduction u/s 35(2AB) in respect of expenditure incurred on outside the approved R&D facilities and the expenditure which is not approved by DSIR in Form No.3CL. On appeal before the ld. CIT(A), the expenses incurred in respect of Foreign patent filing expenses, Clinical trial expenses for activities carried outside the approved facilities, Bio-studies expenses and Pivotal Bio-studies expenses for activities carried outside the approved facilities, Foreign consultancy (Legal and professional expenses), Building maintenance, municipal taxes and rental charges, Director travelling charges and expenditure incurred at Wockhardt plant other than R&D center for test production batches totaling Rs.23,57,00,078/- was allowed and the balance addition was confirmed. We find from the material on record that in the earlier years in A.Ys. 2006-07, 2007-08, 2008-09 and 2010-11, the issue relating to the eligibility of expenditure incurred outside the approved R&D center by way of outsourcing or otherwise, is restored to the file of AO for fresh adjudication in the light of decision rendered by the Hon’ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd. (supra). Therefore, on the principle of consistency, we restore this issue to the file of AO for de novo adjudication in accordance with law after giving an opportunity of being heard to the assessee. On the similar line as indicated in the Tribunal order for assessment year 2010-11, ITA No.438/PUN/2018, dated 13.12.2021. Thus, the grounds of appeal No.1 to 3 stands partly allowed for statistical purposes. 9 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 9. The grounds of appeal No.4 and 5 challenges the finding of ld. CIT(A) confirming the disallowance of distribution of freebies to Doctors. This issue is now stands covered against the assessee by the decision of Hon'ble Supreme Court in the case of Apex Laboratories vs. DCIT [442 ITR 1 (SC)]. Accordingly, the grounds of appeal No.4 and 5 stands dismissed. 10. In the result, appeal filed by the assessee is partly allowed for statistical purposes. 11. Now, we shall take up the Revenue’s appeal in ITA No.775/PUN/2019. The Revenue has raised the following grounds of appeal: 1. The Ld. CIT(A) erred in both on facts 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. 9.10 crore on account of Guarantee Fee income by holding that corporate guarantee is not an international transaction ignoring the fact that the assessee itself had considered guarantee as international transaction and offered Rs. 10.40 crore as a suo-moto transfer pricing adjustment on account of Guarantee Fee? 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. 9.10 crore on account of Guarantee Fee income by holding that corporate guarantee is not an international transaction ignoring the decisions in case of Prolifics Corporation Ltd. vs. DCIT (TS-I-ITAT-2015 (HYD)-TP] and Commissioner of Income Tax vs. M/s. Everest Kento Cylinders Ltd (ITA No. 542/Mum/2012- A.Y. 2007-08) in which corporate guarantee has been held as an international transaction. 4. 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. 9.10 crore relying on the Hon. Mumbai Bench of ITAT in assessee's own case for AY 2007-08 which in turn relied on the decision of Commissioner of Income Tax vs. M/s. Everest Kento Cylinders Ltd (ITA No. 542/Mum/2012^A.Y. 2007-08) ignoring the fact that TPO in para 7.9 of its own order for AY 2013-14 had considered the decision in M/s. Everest Kento Cylinders (Supra) and had worked out the rate of 1.5 as corporate guarantee rate accordingly in para 7.9 of his order. 5. 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. 1.60 crore on account of interest to be charged from AEs by accepting benchmarking 10 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 carried out by the assessee on the basis of rates given in SBI quote and by Swiss National Bank without appreciating that there were substantial differences between the terms and comparable conditions of these quotes and that of loans advanced by assessee 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 addition on account of interest to be charged from AEs by accepting benchmarking carried out by the assessee on the basis of rates given in SBI quote without appreciating that the SBI was seeking security in form of shares of the Morton Grove Pharmaceutical Inc. and arrangement fees @ 2.75% on the facility amount whereas no such condition or fees existed in the transaction between assessee and AE? 7. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition on account of interest to be charged from AEs by accepting benchmarking carried out by the assessee on the basis of Swiss National Bank (SNB) rates without appreciating that these are not rates on which the banks in Switzerland are charging from the corporate but the rates charged by SNB from other banks. 8. The Ld. CIT(A) erred in deleting the addition of Rs. 9,61,86,526/- being excess claim of' deduction under section 80IB/80IC disallowed by the AO/ on the ground that the relief on this issue is given to the assessee in earlier year i.e. A.Y. 2007-08, A.Y. 2005-06, without appreciating 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. 9. The Ld. CIT(A) erred in allowing deduction under section 35(2AB) in respect of foreign patent filing expenses/ clinical trial expenses/ bio-studies expenses and pivotal bio-studies expenses, foreign consultancy charges for patent registration, building maintenance/ municipal taxes and rental charges and directors travelling charges totaling to Rs.23,5699,078/- without appreciating the fact that all the clinical trials and bio-studies have been conducted through third parties and deduction under section 35(2AB) of the Income-tax Act,1961 is available only on in house expenditure incurred on R&D as approved by DSIR. The department has contested the issue in further appeal for the A.Y. 2009-10 and A.Y. 2010-11. 10. The Ld. CIT(A) erred in allowing the deduction of Rs.60,26,68,846/- out of the claim of excess deduction under section 35(2AB) of the Income-tax Act,1961 without appreciating the fact that the assessee company has claimed excess deduction on revenue expenditure over and above the expenses approved by DSIR. 11. On the facts and in the circumstance of the case and in law, the Ld.CIT(A) erred in deleting addition of disallowances under section 14A amounting to Rs.78,87,413/-, by holding that the assessee did not have any exempt income during the year. 12. On the facts and in the circumstance of the case and in law, the Ld.CIT(A) erred in deleting addition of disallowances under section 14A amounting to Rs.78,87,413/- by holding that the investment in shares was made out of non interest bearing funds. 13. The order of the CIT(A) be vacated and the order of the AO be restored. 11 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 12. The ground of appeal No.1 is general in nature, requires no adjudication. 13. The grounds of appeal No.2 to 4 challenges the decision of ld. CIT(A) holding that the transaction of guarantee is not an international transaction, placing reliance on the decision of Prolifics Corporation Ltd. vs. DCIT (TS-I-ITAT-2015 (HYD)-TP) and CIT vs. M/s. Everest Kento Cylinders Ltd. (ITA No.542/Mum/2012, A.Y. 2007-08). 14. The factual background of the case is that the assessee company had provided Corporate guarantee for loans availed by its Associated enterprise Wockhardt Bio AG, Switzerland. The assessee company did not charge any guarantee fees or commission for providing such corporate guarantee during the previous year relevant to the assessment under consideration. However, the appellant had suo motu offered to tax guarantee commission @ 0.8%. However, the TPO determined the Arm's length price of guarantee commission @ 1.5% p.a. On appeal before the ld. CIT(A), the ld. CIT(A) held that the transaction of corporate guarantee is not an international transaction. This finding of ld. CIT(A) cannot be sustained in the eyes of law as it is plainly contrary to the provisions of section 92B which defines the international transaction to include the transaction of lending or guarantee under Explanation to sub-clause (c) of clause (i) to sub-section (2) of section 92B. However, the approach adopted by TPO for the purpose of determining Arm's length price of guarantee commission is also not sustainable for the reason that the TPO adopted 12 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 Arm's length price of guarantee commission by adopting average on the bankers rate notified by SBI. The Hon’ble jurisdictional High Court in the case of CIT vs. M/s. Everest Kento Cylinders Ltd. (378 ITR 57) held that a comparison cannot be made between a bank guarantee and corporate guarantee as is not between the like transaction. Hence, no transfer pricing adjustment could be made in respect of guarantee commission on the basis of bank rate and this ratio was followed by the Hon’ble jurisdictional High Court in the case of CIT vs. Glenmark Pharmaceuticals Ltd. (398 ITR 439) and CIT Vs. Glenmark Pharmaceuticals Ltd. (417 ITR 479). In the present case, though the assessee has not charged any fee from its AE for providing bank guarantee for loan availed by its AEs, the assessee company had voluntarily offered to tax guarantee commission @ 0.8% p.a. In the preceding year i.e. A.Y. 2010-11, the Coordinate Bench of this Tribunal held that the Arm's length price of guarantee fees can be at 0.5%. In the light of decision of Coordinate Bench of Tribunal in assessee’s own case, we hold that no adjustment towards bank guarantee commission is required to be made. Thus, the grounds of appeal No.2 to 4 are dismissed. 15. The grounds of appeal No.5 to 7 challenges the decision of ld. CIT(A) deleting the addition towards transfer pricing adjustment on account of interest received on loans given to AEs. During the previous year relevant to the assessment under consideration, the assessee company received interest on loans advanced to AEs. In the TP study report the assessee company sought to benchmark the international transactions by using CUP method as follows: 13 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 AE Interest charged (INR) Interest charged (%) ALP (%) CUP used Wockhardt Holdings, USA (‘Wockhardt Holdings’) 2,77,40,799 LIBOR + 3.75% (effective 4.43%) LIBOR + 2% (effective 2.68%) SBI Bank quote Wockhardt Bio AG, Switzerland (‘Wockhardt Bio’) 70,51,821 LIBOR + 2.5% (effective 3.24%) 0.75% Swiss National Bank report 16. However, the TPO proceeded to benchmark the above international transactions by applying fixed rate of 6.41% for Wockhardt Holdings and 4.902% or Wockhardt Bio and made an adjustment of Rs.1.6 crore. On appeal before the ld. CIT(A), the ld. CIT(A) held that interest charged by the assessee company is more than LIBOR + 2% in the case of Wockhardt Holdings, USA and LIBOR + 0.75% in the case of Wockhardt Bio AG, Switzerland. The Coordinate Bench of Tribunal in the case of DCIT vs. iGate Global Solutions Ltd. (2019) 109 taxmann.com 48 (Pune-Trib.) held as follows: “9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. Therefore, LIBOR, as such, can also not be construed as a comparable uncontrolled transaction. The Hon’ble Bombay High Court in CIT Vs. Aurionpro Solutions Ltd. (2017) 99 CCH 0070 MUM-HC approved the action of the Tribunal in considering LIBOR +2% as the arm’s length rate as against the TPO applying LIBOR plus 3%. Drawing an analogy from this position, we hold that EURIBOR+2% should be considered as arm’s length rate of interest for determining the ALP of the international transaction of interest received by the assessee from Mascot Systems GmbH, Germany.” 14 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 17. Applying the above legal position to the facts of the present case and admittedly, in the present case, the appellant has charged interest higher than the LIBOR + 2%, therefore, we hold that the transaction of receipt of interest from its AEs is at Arm's length price, no adjustment is required to be made. Thus, we do not find any illegality in the order of ld. CIT(A). Accordingly, grounds of appeal No.5 to 7 stands dismissed. 18. The ground of appeal No.8 challenges the decision of ld. CIT(A) granting relief in respect of disallowance of excess claim of deduction u/s 80IC. The AO made disallowance of excess claim for deduction u/s 80IC of Rs.9,61,86,526/- on the ground that the appellant while computing profits for the purpose of allowance u/s 80IC had not allocated R&D expenditure. While allocating this common expenditure, the AO also taken into consideration the statement of Vice President of the company recorded u/s 131 on 11.11.2000 wherein it is stated that the R&D work is also used by the production unit, thus, R&D expenditure is incurred only in connection with the business purposes. The ld. CIT(A) relying on the decision of Zandu Pharmaceuticals Works Ltd. vs. CIT (350 ITR 366) and CIT vs. Glenmark Pharmaceuticals Ltd. (supra) allowed exemption u/s 80IC without allocation of R&D expenditure. 19. We have carefully gone through the decisions rendered by the Hon’ble Bombay High Court in the cases of Zandu Pharmaceuticals Works Ltd. vs. CIT (supra) and CIT vs. Glenmark Pharmaceuticals Ltd. (supra). The decision of Hon’ble Bombay High Court is based on the finding of fact that R&D expenditure have no direct nexus with the unit, profits of which 15 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 are exempt u/s 80IC. In the present case, the AO had categorically referred to the statement given by the Vice President of the company u/s 131 saying that the activities of R&D unit have direct nexus with the production units and therefore, allowed the exemption u/s 80IC on the income computed after allocation of R&D expenditure. Therefore, the ratio laid down by the Hon’ble Bombay High Court in the cases of Zandu Pharmaceuticals Works Ltd. vs. CIT (supra) and CIT vs. Glenmark Pharmaceuticals Ltd. (supra) cannot be applied directly without establishing that there was no nexus of R&D activities with the production unit, in respect of which the deduction u/s 80IC was claimed. Thus, the ld. CIT(A) had clearly fell in error in allowing the relief to the assessee without meeting the case made out by the AO. In the circumstances, the findings of ld. CIT(A) on this issue are set aside, we restore this ground of appeal to the file of ld. CIT(A) to examine the nexus of R&D activity with the production unit, the profits of which are claimed exempt u/s 80IC, in case, if it is found on verification that there was no nexus between R&D activity and production unit to allow the exemption u/s 80IC on the profits computed without allocation of R&D expenditure. Thus, this ground of appeal stands partly allowed. 20. The grounds of appeal No.9 and 10 relate to R&D expenditure. In the assessee’s appeal, we restored this issue to the file of AO on the lines indicated in the earlier paras on principle of consistency. Accordingly, these grounds 9 and 10 are also restored to the file of AO. 16 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 21. The grounds 11 and 12 challenging the decision of ld. CIT(A), no addition u/s 14A is warranted. We find that admittedly, in the present case, there is no exempt income during the previous year relevant to the assessment under consideration, the appellant had not earned any exempt income. Now, it is a settled position of law that in the absence of any exempt income, resort to provision of section 14A cannot be made, in view of the decision of following Hon’ble High Courts: (i) Redington (India) Ltd. vs. Addl. CIT, 392 ITR 633 (Mad); (ii) CIT vs. Celebrity Fashion Ltd., 428 ITR 470 (Mad); (iii) CIT vs. Chettinad Logistics Pvt. Ltd., 80 taxmann.com 221 (Mad) (Against which the SLP filed by the Department was dismissed by the Hon’ble Supreme Court in the case of CIT vs. Chettinad Logistics P. Ltd., 95 taxmann.com 250 (SC); (iv) CIT vs. Continuum Wind Energy (India) Pvt. Ltd., 430 ITR 52 (Mad); (v) PCIT vs. Kohinoor Project Pvt. Ltd., 425 ITR 700 (Bom.); (vi) Cheminvest Ltd. vs. CIT, 378 ITR 33 (Delhi); (vi) MAN Infraprojects Ltd. (ITA No.259 of 2017 dated 09.04.2019) (Bom.) 22. In the light of above legal position, we do not find any illegality in the finding of ld. CIT(A) in holding that provisions of section 14A have no application in the absence of any exempt income. Accordingly, this ground stands dismissed. CO No.43/PUN/2019 23. At the outset, the ld. AR submitted that he wishes to withdraw the Cross Objection filed by the assessee. Accordingly, we dismiss the Cross Objection filed by assessee as withdrawn. 17 ITA No.758/PUN/2019 ITA No.775/PUN/2019 CO No.43/PUN/2019 24. In the result, the appeal filed by Revenue is partly allowed, the appeal filed by assessee is partly allowed and the CO filed by assessee is dismissed as withdrawn. Order pronounced in the open court on 10 th May, 2022. Sd/- Sd/- S.S.VISWANETHRA RAVI INTURI RAMA RAO JUDICIAL MEMBER ACCOUNTANT MEMBER ऩ ु णे / Pune; ददनाांक / Dated : 10 th May, 2022 GCVSR आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order is forwarded to : 1. अऩीऱाथी / The Appellant; 2. प्रत्यथी / The Respondent; 3. आयकर आय ु क्त(अऩीऱ) / The CIT(A)-2, Aurangabad; 4. The Pr.CIT-2, Aurangabad 5. ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩ ु णे “C” / DR ‘C’, ITAT, Pune; 6. गार्ड पाईऱ / Guard file. आदेशान ु सार / BY ORDER, //सत्यावऩत प्रतत// True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण, ऩ ु णे / ITAT, Pune