The ACIT, Circle-2(1)(2), Ahmedabad V. Lambda Therapeutic Research Ltd., Ahmedabad

ITA 2114/AHD/2017

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 6841 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 08-04-2020
• Assessment Year: 2013-2014
• Appeal Filed On: 22-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Transfer pricing; Business expenditure; Double taxation relief; Principle of natural justice; International transaction; Earning of tax free income; Retrospective amendment; Permanent establishment; Deemed dividend; Arm length price; Notional interest; Commercial expediency; Revised return; TDS; Rule 8D; Set aside; CHAPTER IV; FORM 26AS
• Section: 92C; 143(3); 92B; 133A; 153A; 2(22)(e); 14A; 115JB; 40(a)(ia); 80IB; 37(1); 10B; 195; 250; 251; 64; 43; 48; 40a(ia); 194 I; 13; 22; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL, DBENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER SR. NO. ITANO. ASSTT. YEAR NAME OF APPELLANT NAME OF RESPONDENT 1. 3492/AHD/2015 2010-11 LAMBDA THERAPEUTIC RESEARCH LTD. LAMBDA HOUSE. OPP. GUJARAT HIGH COURT, S.G. HIGHWAY, GOTA, AHMEDABAD- 380061. PAN : AAACL4089R J.C.I.T, RANGE-4, AHMEDABAD 2. 3470/AHD/2015 2010-11 D.C.I.T, CIRCLE-2(1)(2), AHMEDABAD LAMBDA THERAPEUTIC RESEARCH LTD. LAMBDA HOUSE. OPP. GUJARAT HIGH COURT, S.G. HIGHWAY, GOTA, AHMEDABAD- 380061. PAN : AAACL4089R 3. 2276/AHD/2016 2011-12 LAMBDA THERAPEUTIC RESEARCH LTD. LAMBDA HOUSE. OPP. GUJARAT HIGH COURT, S.G. HIGHWAY, GOTA, AHMEDABAD- 380061. PAN : AAACL4089R D.C.I.T, CIRCLE-2(1)(2), AHMEDABAD 4. 2293/AHD/2016 2011-12 D.C.I.T, CIRCLE-2(1)(2), AHMEDABAD LAMBDA THERAPEUTIC RESEARCH LTD. LAMBDA HOUSE. OPP. GUJARAT HIGH COURT, S.G. HIGHWAY, GOTA, AHMEDABAD- 380061. PAN : AAACL4089R 5. 2114/AHD/2017 2013-14 A.C.I.T, CIRCLE-2(1)(2), AHMEDABAD LAMBDA THERAPEUTIC RESEARCH LTD. LAMBDA HOUSE. OPP. GUJARAT HIGH COURT, S.G. HIGHWAY, GOTA, AHMEDABAD- 380061. PAN : AAACL4089R 6. 1751/AHD/2017 2013-14 LAMBDA THERAPEUTIC RESEARCH LTD. LAMBDA HOUSE. OPP. GUJARAT HIGH COURT, D.C.I.T, CIRCLE-2(1)(2), AHMEDABAD ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 2 S.G. HIGHWAY, GOTA, AHMEDABAD- 380061. PAN : AAACL4089R ( APPLICANT ) ( RESPONENT ) ASSESSEE BY : SHRI TUSHAR P. HEMANI SR. ADVOCATE WITHSHRIPARIMALSINHPARMAR, A.R REVENUE BY : SHRI MOHD USMAN, CIT. D.R WITH SHRI LALIT P. JAIN. SR. D.R / DATE OF HEARING : 02/02/2021 / DATE OF PRONOUNCEMENT: 12/04/2021 %&/ O R D E R PER WASEEM AHMED ACCOUNTANT MEMBER: THE ABOVE APPEALS HAVE BEEN FILED BY THE ASSESSEE A ND THE REVENUE AGAINST THE ORDERS OF LD.COMMISSIONER OF INCOME-TAX (APPEALS) INVOLVING RESPECTIVE ASSESSMENT YEARS. SINCE THE ISSUES RAISE D BY THE ASSESSEE AND THE REVENUE IN ALL THESE APPEALS ARE COMMON, WE ARE IN CLINED TO PASS A CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. FIRST WE TAKE ITA 3492/AHD/2015, AN APPEAL BY THE A SSESSEE FOR A.Y. 2010-11 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE ACTION OF ID. AO IN TREATING THE TRANSACTION OF GRANTING QUASI CAPITAL INTEREST FREE CONTRIBUTION TO LAMBDA THERAPEUTIC LTD., UK AND LAMBDA THERAPEUTIC RESEARCH INC, USA A S 'INTERNATIONAL TRANSACTION' FALLING WITHIN THE PURVIEW OF CHAPTER X OF THE ACT. 2. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE ACTION OF ID. AO IN MAKING ADDITION OF RS.27,36,080/- AS PROPOSED BY TPO BEING INTEREST FREE LOAN ADVANCES TO LAMBDA THERAPEUTIC LTD., UK AND LAMBDA THERAPEUTIC RESEARCH INC, USA. 3. THE ID. CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT ADJUDICATING UPON THE GROUND WITH RESPECT TO ADDITION OF 14A DISALLOWANCE TO THE AMOU NT OF BOOK PROFITS U/S 115JB OF THE ACT BY HOLDING IT TO BE INFRACTUOUS. LD. CIT(A) OUGHT T O HAVE INDEPENDENTLY DECIDED THE SAID GROUND ON MERITS. 4. BOTH THE POWER AUTHORITIES HAVE PASSED THE ORDERS W ITHOUT PROPERLY APPRECIATING THE FACTS AND THAT THEY FURTHER ERRED IN GROSSLY IGNORING VAR IOUS SUBMISSION, EXPLANATIONS AND ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 3 INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEEN CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. THE A CTION OF THE LOWER AUTHORITIES IS CLEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JUSTICE AND THEREFORE DESERVES TO BE QUASHED. 5. THE LD.CIT(A) HAS ERRED IN LAW AND IN FACTS OF THE CASE IN CONFIRMING ACTION OF LD.AO IN LEVYING INTEREST U/S 234A/B/C/D OF THE ACT. 6. THE LD.CIT(A) HAS ERRED IN LAW AND ON THE FACTS IN CONFIRMING THE ACTION OF LD.AO IN INTIMATING PENALTY U/S.271(1)(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, ED IT, DELETE, MODIFY OR CHANGE ALL OR ANY OF THE GROUNDS OF APPEAL AT THE TIME OF OR BEFORE THE HEARING OF THE HEARING. 3. THE 1 ST ISSUE RAISED BY THE ASSESSEE IS THAT IS THAT THE L D. CIT-A ERRED IN CONFIRMING THE ADDITION AMOUNTING TO < 27,36,080/- MADE BY THE AO AS PROPOSED BY THE TPO CONSIDERING THE INTEREST FREE LOAN AND A DVANCES TO ITS ASSOCIATED ENTERPRISES. 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IN THE PRESENT CASE IS A LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF FACILITATING THE CLINICAL RESEARCH SERVICES TO THE PHARMACEUTICALS INDUSTRY. THE ASSESSEE IN TH E YEAR UNDER CONSIDERATION HAS PROVIDED INTEREST-FREE LOANS AND ADVANCES TO ITS AS SOCIATED ENTERPRISES AS DETAILED UNDER: S.NO. TRANSACTION ASSOCIATED ENTERPRISES AMOUNT ( < ) 1. LOAN GIVEN TO MEET MARKETING AND BUSINESS DEVELOPMENT EXPENDITURE LAMBDA THERAPEUTIC LIMITED, UK 2,11,61,450 2. LOAN GIVEN TO MEET MARKETING AND BUSINESS DEVELOPMENT EXPENDITURE JINA PHARMAINC, USA 4,62,00,000 3. LOAN GIVEN TO MEET MARKETING AND BUSINESS DEVELOPMENT EXPENDITURE LAMBDA THERAPEUTICERESEACH Z.O.O. POLAND 2,56,94,504 4. LOAN GIVEN TO MEET MARKETING AND BUSINESS DEVELOPMENT EXPENDITURE LAMBDA THERAPEUTIC, USA 23,69,453 4.1 THE ASSESSEE HAS NOT CHARGED ANY INTEREST FROM THESE ASSOCIATED ENTERPRISES ON THE AMOUNT OF LOANS AND ADVANCES PRO VIDED TO THEM ON THE REASONING THAT: I. IT HAS NOT CHARGED ANY INTEREST FROM SUCH ASSOCIATE D ENTERPRISES IN THE EARLIER YEARS. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 4 II. IT HAS PROVIDED LOANS TO THE ASSOCIATED ENTERPRISES AS A MEASURE OF COMMERCIAL EXPEDIENCY TO SET UP THE BUSINESS, TO ME ET THE NEED OF WORKING CAPITAL REQUIREMENT AND FOR THE REPAIRS AND RENOVATIONS. AS A RESULT, THE ASSESSEE HAS GOT THE BENEFIT FROM SUC H ASSOCIATED ENTERPRISES BY GETTING THE BUSINESS FROM THE FOREIG N MARKETS BESIDES GETTING THE HIGHER VALUATION OF THE AE. III. IN MANY CASES THESE INTEREST FREE LOANS WERE PROVID ED IN THE NATURE OF QUASI CAPITAL. 4.2 IN VIEW OF THE ABOVE, THE ASSESSEE BEFORE THE A O/TPO CONTENDED THAT THERE CANNOT BE ANY ADJUSTMENT OF THE NOTIONAL INTE REST UNDER THE PROVISIONS OF SECTION 92C READ WITH RULE 10B OF THE INCOME TAX RU LES. 4.3 HOWEVER, THE AO/TPO DISAGREED WITH THE CONTENTI ONS OF THE ASSESSEE BY OBSERVING THAT THE TRANSACTION OF ADVANCING THE INT EREST-FREE LOANS TO THE ASSOCIATED ENTERPRISES IS AN INTERNATIONAL TRANSACT ION WHICH REQUIRES TO BE DETERMINED AT THE ARM LENGTH PRICE IN PURSUANCE TO THE PROVISIONS OF SECTION 92C OF THE ACT. THE AO ACCORDINGLY HAS WORKED OUT THE A MOUNT OF INTEREST WITH RESPECT TO THE AES BASED IN USA AT LIBOR PLUS 412 BPS AND WITH RESPECT TO THE AE BASED IN EUROPE EURIBOR PLUS 281 BPS AND MADE THE UPWARD ADJUSTMENT AGGREGATING TO < 1,78,63,433/- TO THE TOTAL INCOME OF THE ASSES SEE. 5. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE LD . CIT-A. THE ASSESSEE BEFORE THE LD. CIT-A SUBMITTED THAT INTEREST FREE L OANS AND ADVANCES GIVEN TO THE ASSOCIATED ENTERPRISES BASED IN FOREIGN COUNTRIES W ERE IN THE NATURE OF QUASI CAPITAL WHICH IS AKIN TO SHAREHOLDERS FUND. WHILE M AKING EQUITY INVESTMENTS IN THE FOREIGN SUBSIDIARIES, THERE WAS THE NEED OF TAKING PRIOR APPROVAL FROM THE RBI BUT NO SUCH APPROVAL WAS REQUIRED FOR GIVING LOANS AND ADVANCES TO FOREIGN SUBSIDIARY. 5.1 FURTHERMORE, THERE WAS NO COST INCURRED BY THE ASSESSEE ON SUCH LOANS AND ADVANCES GIVEN TO THE FOREIGN SUBSIDIARIES AS THERE WAS SURPLUS FUND AVAILABLE WITH IT. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 5 5.2 THE ASSESSEE ALSO SUBMITTED THAT IT WAS ABLE TO ACHIEVELOT OF BUSINESS FROM THE COUNTRIES OUTSIDE INDIA AS A RESULT OF ESTABLIS HMENT OF THE FOREIGN SUBSIDIARIES. THEREFORE, THE TRANSACTION FOR ADVANCING THE LOAN T O THE FOREIGN SUBSIDIARIES SHOULD NOT BE SEEN IN ISOLATION RATHER THE OTHER BE NEFITS RECEIVED BY THE ASSESSEE FROM THESE FOREIGN COUNTRIES SHOULD ALSO BE TAKEN I NTO CONSIDERATION. AS SUCH, THE INTEREST-FREE LOANS AND ADVANCES HAVE BEEN GIVEN AS A MEASURE OF COMMERCIAL EXPEDIENCY. IN OTHER WORDS, THE BUSINESS TRANSACTIO NS CARRIED OUT BY THE ASSESSEE WITH THESE FOREIGN SUBSIDIARIES HAVE RESULTED THE B ENEFIT EXCEEDING THE NOTIONAL COST OF INTEREST AS WORKED OUT BY THE AO/TPO. HAD T HESE FOREIGN SUBSIDIARIES NOT BEEN FORMED, THEN THE ASSESSEE WAS SUPPOSED TO TAKE THE SERVICES FROM OTHER COMPANIES WHICH WOULD HAVE RESULTED INCREASE IN COS T AND SHARING OF SECRET BUSINESS INFORMATION. AS SUCH THE ASSESSEE WAS ABLE TO CUT DOWN ITS COST AS WELL AS TO MAINTAIN THE CONFIDENTIALITY OF CRITICAL BUSI NESS INFORMATION. 5.3 THE ASSESSEE ALSO CONTENDED THAT THE AO HIMSELF IN HIS ORDER HAS ADMITTED THE FACT THAT THESE SUBSIDIARIES WERE ALSO ENGAGED IN THE BUSINESS OF CLINICAL RESEARCH SERVICES TO THE PHARMACEUTICAL INDUSTRIES AS THESE COMPANIES ARE SPECIAL- PURPOSE VEHICLE TO CARRY OUT BUSINESS ACTIVITIES OF THE ASSESSEE. 6. THE LEARNED CIT (A) AFTER CONSIDERING THE SUBMIS SION OF THE ASSESSEE AND THE ASSESSMENT ORDER, OBSERVED THAT THE ASSOCIATED ENTERPRISES WERE SET UP FOR THE DEVELOPMENT OF THE BUSINESS AND REDUCING ITS CO ST ON THE TECHNICAL CLINICAL RESEARCH WORK WHICH RESULTED THE BENEFIT TO THE ASS ESSEE. FURTHER THE PURPOSE OF ADVANCING LOAN TO SUCH AES WAS TO HOLD AND CONTROL OF EQUITY AND GAINING BUSINESSES FROM THEM. ACCORDINGLY THE LEARNED CIT-A WAS PLEASED TO DELETE THE ADDITION MADE BY THE AO ON ACCOUNT OF ADJUSTMENT FO R THE INTEREST ON THE ADVANCES GIVEN TO THE AES NAMELY JINA PHARMACEUTIC ALS, INC USA AND LAMBDA THERAPEUTIC RESEARCH, SP Z.O.O POLAND BY OBSERVING THAT THE ASSESSEE WAS ABLE TO GENERATE THE BUSINESS AND INCOME FROM SUCH AES W HICH IS MORE THAN THE NOTIONAL INTEREST COST ON ADVANCES. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 6 6.1 THE LEARNED CIT (A) ALSO FOUND THAT THE ADVANCE S GIVEN TO THE AE NAMELY LAMBDA THERAPEUTIC RESEARCH, SP. Z.O.O. POLLAND W ERE EVENTUALLY PARTLY CONVERTED INTO SHARE CAPITAL. THUS IT CAN BE INFERR ED THAT THE ADVANCES WERE MADE BY THE ASSESSEE FOR ACQUIRING THE EQUITY IN THE ASS OCIATED ENTERPRISE. THEREFORE, NO FURTHER ADJUSTMENT ON ACCOUNT OF INTEREST IS REQ UIRED TO BE MADE. 6.2 HOWEVER, THE LEARNED CIT(A), WITH RESPECT TO TH E ADVANCE GIVEN TO THE ASSOCIATED ENTERPRISES NAMELY LAMBDA THERAPEUTIC L TD, UK AND LAMBDA THERAPEUTIC RESEARCH INC, USA FOUND THAT THERE WAS NO BENEFIT ACCRUED TO THE ASSESSEE FROM SUCH AES. ACCORDINGLY, THE LEARNED CI T (A) CONFIRMED THE UPWARD ADJUSTMENT MADE BY THE AO/TPO FOR THE INTEREST AMOU NT TO< 26,19,740/- AND < 1,16,340/- RESPECTIVELY ON ACCOUNT OF INTEREST FREE ADVANCES MADE TO THESE AES. HENCE THE LEARNED CIT (A) ALLOWED THE GROUNDS OF AP PEAL OF THE ASSESSEE IN PART. 7. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT-A BO TH THE ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE CONFIRMATION OF THE ADDITION MADE BY THE AO FOR THE AMOUNT OF INTEREST OF < 26,19,740/- AND < 1,16,340/- WITH RESPECT TO THE IN TEREST FREE LOANS AND ADVANCES GIVEN TO ITS UK AE AND USA AE RESPECTIVELY WHEREAS THE REVENUE IS IN APPEAL AGAINST THE DELETION OF THE ADDITION MADE BY THE AO FOR THE AMOUNT OF INTEREST OF < 36,40,120/-AND < 1,14,87,233/- WITH RESPECT TO TH E INTEREST FREE LOANS AND ADVANCES GIVEN TO M/S LAMBDA POLAND AND M/S JINA PH ARMA USA RESPECTIVELY. THE GROUND OF APPEAL OF THE REVENUE IN ITA NO. 3470/AHD /2015 STANDS AS UNDER: 2. WHETHER THE LD.CIT(A) ERRED IN FACTS AND LAW WHILE HOLDING THAT NO INTEREST WAS REQUIRED TO BE CHARGED ON THE LOAN EXTENDED TO THE AES-M/S. LAMBDA THERAPEUTIC RESEARCH SP. Z.O.O AND M/S. JINA PHARMACEUTICALS IN C ON ACCOUNT OF BUSINESS CONNECTION BETWEEN THE AES AND THE ASSESSEE COMPANY . 3. WHETHER THE LD.CIT(A) ERRED IN FACTS AND LAW WHILE HOLDING THAT NO INTEREST WAS REQUIRED TO BE CHARGED ON THE LOAN EXTENDED TO THE AE-M/S. LAMBDA THERAPEUTIC RESEARCH SP. Z.O.O AS THE SAME WAS CONVERTED INTO T HE EQUITY. 8. THE LD. AR BEFORE US FILED A PAPER BOOK RUNNING FROM PAGES 1 TO 111 AND SUBMITTED THAT THE INTEREST FREE LOANS AND ADVANCES WERE GIVEN FOR COMMERCIAL EXPEDIENCY. SIMILARLY, THE ASSESSEE WAS ABLE TO GEN ERATE THE REVENUE FROM THESE FOREIGN SUBSIDIARIES. THE ASSESSEE WAS ABLE TO CUT DOWN ITS COST AS WELL AS ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 7 MAINTAIN THE CONFIDENTIALITY OF ITS BUSINESS PROCES S. IT WAS ALSO CONTENDED BY THE LEARNED AR THAT THE LOANS AND ADVANCES GIVEN TO THE FOREIGN SUBSIDIARIES WERE IN THE NATURE OF QUASI CAPITAL. IN VIEW OF THE ABOVE, THE LEARNED AR CONTENDED THAT THERE CANNOT BE ANY ADJUSTMENT MADE ON ACCOUNT OF N OTIONAL INTEREST ON THE AMOUNT OF INTEREST FREE LOANS AND ADVANCES GIVEN TO THE FOREIGN SUBSIDIARIES. 9. ON THE OTHER HAND, THE LD. DR CONTENDED THAT THE TRANSACTION OF ADVANCING INTEREST-FREE LOANS TO THE ASSOCIATED ENTERPRISES S HOULD BE SEEN AS SEPARATE AND INDEPENDENT TRANSACTION AND THE SAME SHOULD NOT BE SEEN IN THE CONTEXT OF THE REVENUE GENERATED BY THE ASSESSEE THROUGH THE ASSOC IATED ENTERPRISES. IT IS BECAUSE EACH TRANSACTION ENTERED BETWEEN THE ASSESS EE AND THE ASSOCIATED ENTERPRISES HAS TO BE EVALUATED TO DETERMINE THE AL P INDEPENDENTLY AND SEPARATELY. 9.1 BOTH THE LD. DR AND AR BEFORE US VEHEMENTLY SUP PORTED THE ORDER OF THE AUTHORITIES BELOW TO THE EXTENT FAVORABLE TO THEM. 10. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE DISPUTE IN THE C ASE ON HAND BEFORE US REVOLVES WHETHER THE AMOUNT OF INTEREST FREE LOANS AND ADVAN CES PROVIDED TO THE ASSOCIATED ENTERPRISES SHOULD BE SUBJECT TO THE ADJ USTMENT ON ACCOUNT OF NOTIONAL INTEREST UNDER THE TRANSFER PRICING PROVISIONS AS P ROVIDED UNDER SECTION 92C OF THE ACT. THE ASSESSEE IN THE CASE ON HAND HAS PROVIDED INTEREST-FREE ADVANCES TO ITS FOUR ASSOCIATED ENTERPRISES AS DISCUSSED ABOVE. 10.1 FROM THE PRECEDING DISCUSSION, WE FIND THAT TH E ASSESSEE ALONG WITH ITS ASSOCIATED ENTERPRISES HAS BEEN CARRYING OUT CLINIC AL RESEARCH ACTIVITIES AS A WHOLE. THESE ACTIVITIES ARE INTERCONNECTED WITH EACH OTHER . THESE ACTIVITIES OF CLINICAL RESEARCH CAN BE UNDERSTOOD BETTER IN THE MANNER AS DETAILED BELOW: PHASE PRIMARY GOAL UNDERTAKEN AT PRECLINICAL TESTING OF DRUG IN NON-HUMAN SUBJECTS, TO GATHER EFFICACY, TOXICITY AND PHARMACOKINETIC INFORMATION INDIA, CANADA, SINCE INCEPTION ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 8 PHASE O PHARMACODYNAMICS AND PHARMACOKINETICS PARTICULARLY ORAL BIOAVAILABILITY AND HALF- TIME OF THE DRUG INDIA, CANADA, AND POLAND SINCE INCEPTION PHASE I TESTING OF DRUG ON HEALTHY VOLUNTEERS FOR DOSE-RANGING INDIA, CANADA AND POLAND SINCE INCEPTION PHASE II TESTING OF DRUG ON PATIENTS TO ASSESS EFFICACY AND SAFETY INDIA, CANADA AND POLAND SINCE INCEPTION PHASE III TESTING OF DRUG ON PATIENTS TO ASSESS EFFICACY, EFFECTIVENESS AND SAFETY INDIA, CANADA AND POLAND SINCE INCEPTION PHASE IV POSTMARKETING SURVEILLANCE- WATCHING DRUG USE IN PUBLIC. UK AND INDIA SINCE INCEPTION. 10.2 ON PERUSAL OF THE ACTIVITIES OF THE ASSESSEE A LONG WITH ITS GROUP ASSOCIATED ENTERPRISES, IT IS REVEALED THAT THERE ARE DIFFEREN T ACTIVITIES WHICH ARE CARRIED OUT BY THE DIFFERENT ASSOCIATED ENTERPRISES. FOR EXAMPL E, THE PRECLINICAL PHASE ACTIVITY IS CARRIED OUT IN INDIA AND CANADA. SIMILARLY, THE PHASE-0 ACTIVITIES CARRIED OUT IN INDIA, CANADA AND POLAND SO ON AND SO FORTH. IN OTH ER WORDS, THE PROJECT OF THE RESEARCH ACTIVITY CAN BE ENDED UPON THE COMPLETION OF PROCESS OF THE DIFFERENT PHASES AS DISCUSSED ABOVE. 10.3 ONCE THE ACTIVITIES OF THE ASSESSEE AND ITS AS SOCIATED ENTERPRISES ARE SO INTERRELATED AND INTERCONNECTED THEN THE TRANSACTIO NS SHOULD BE SEEN IN AGGREGATION FOR WORKING OUT THE ALP. IN THIS REGARD WE FIND PARA 3.9 OF OECD TRANSFER PRICING GUIDELINES WHICH REITERATES T HAT THOUGH IDEALLY THE ARM'S LENGTH PRINCIPLES SHOULD BE APPLIED ON A TRANSACTIO N BY TRANSACTION BASIS, THERE ARE OFTEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. OECD GUIDELINES PROVIDE A NUMBER OF ILLUSTRATIONS TO SUB STANTIATE 'CLOSELY LINKED OR CONTINUOUS' TEST WHICH ARE AS DETAILED UNDER; 1. ONGOING BUSINESS RELATIONS SUCH AS A LONG-TERM SUPP LY CONTRACT. 2. RIGHT TO USE INTANGIBLE PROPERTY COUPLED WITH SUPPL Y OF COMPONENTS. 3. TRANSACTIONS IN A RANGE OF CLOSELY- LINKED PRODUCTS: THIS INCLUDES BUSINESS STRATEGY TO HAVE A PORTFOLIO APPROACH I.E. GOODS WITH LOW AND HIGH MARGINS MAY BE TRANSACTED TOGETHER IN ORDER TO OFFER A FULL RANGE OF PRODUCTS TO CUSTOMERS (CARS AND SPARE PARTS, PRINTE RS AND CARTRIDGES ETC.). ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 9 4. ROUTING OF A TRANSACTION THROUGH ANOTHER ASSOCIATED ENTERPRISE (AE) . OECD GUIDELINES SUGGESTS THAT IT MAY BE MORE APPROPRIATE TO CONSIDER THE TRANSACTION (OF WHICH THE ROUTING IS A PART) IN ITS ENTIRETY, RATHER THAN CONSIDERING THE INDIVIDUAL PARTS OF TRA NSACTION ON A SEPARATE BASIS. 10.4 WE FURTHER FIND THAT THE US TREASURY REGULATIO NS ALSO PROVIDE THE SIMILAR VIEW AS UNDER; US TREASURY REGULATIONS EVEN PROVIDE FOR AGGREGATI NG TRANSACTION BETWEEN DIFFERENT LEGAL ENTITIES FOR BENCHMARKING. WHERE A US PARENT HAS TH REE OVERSEAS SUBSIDIARIES ENGAGED IN ADMINISTRATION, MARKETING AND DISTRIBUTION RELATING TO A SINGLE PRODUCT OF US PARENT, THEN TO ENSURE THAT ECONOMIES OF INTEGRATION ARE WELL CAPTU RED IN COMPARABILITY ANALYSIS, THE REGULATIONS PROVIDE THAT THE COMBINED EFFECT OF ALL CONTROLLED TRANSACTIONS BETWEEN THESE COMPANIES SHOULD BE CONSIDERED. 10.5 WE FURTHER FIND THAT THE PARA 3.13 OF OECD COM MENTARY ALSO DEALS WITH THE TOPIC OF INTENTIONAL SET OFFS WHERE IT WAS MENTIONE D THAT THE INTENTIONAL SET-OFFS GENERALLY OCCUR BETWEEN AES IN RESPECT OF CONTROLLE D TRANSACTIONS WHEREIN WHEN ONE ENTERPRISE PROVIDES BENEFIT TO ANOTHER ENTERPRI SE WITHIN THE GROUP THAT IS BALANCED TO SOME DEGREE BY DIFFERENT BENEFITS RECEI VED FROM THAT ENTERPRISE IN RETURN. 10.6 THIS VIEW IS ALSO CONSIDERED IN THE JUDGMENT O F HONBLE HIGH COURT OF DELHI IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P.) LTD.VS. CIT REPORTED IN [2015] 55 TAXMANN.COM 240 (DELHI) AS UN DER; BUNDLED/INTER-CONNECTED TRANSACTIONS CLUBBING OF CLOSELY LINKED TRANSACTIONS, WHICH WOUL D INCLUDE CONTINUOUS TRANSACTIONS, MAY BE PERMISSIBLE AND NOT EXCLUDED. AGGREGATION OF CLOSEL Y LINKED TRANSACTIONS OR SEGREGATION BY THE ASSESSEE SHOULD BE TESTED BY THE ASSESSING OFFICER/ TPO ON THE BENCHMARK AND THE E XEMPLAR; WHETHER SUCH AGGREGATION/SEGREGATION BY THE ASSESSEE SHOULD BE I NTERFERED IN TERMS OF THE FOUR CLAUSES STIPULATED IN SECTION 92C(3), READ WITH THE RULES. IT WOULD, AMONG OTHER ASPECTS, REFER TO THE METHOD ADOPTED AND WHETHER RELIABILITY AND AUTHEN TICITY OF THE ARM'S LENGTH DETERMINATION IS AFFECTED OR CORRUPTED.[PARA 82] 10.6 NOW PROCEEDINGS FURTHER, WE FIND THAT THE ASSO CIATED ENTERPRISE BASED IN UK HAS GOT THE BUSINESS FROM THE USA FOR WHICH THE CLINICAL STUDY WAS CONDUCTED ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 10 IN INDIA. THE ASSESSEE FOR SUCH ACTIVITY RECEIVED I TS SERVICE CHARGES FROM THE USA COMPANY. THE DETAILS OF THE SAME STAND AS UNDER: 10.7 INDEED, THE ASSESSEE HAS ADVANCED INTEREST-FRE E LOAN TO ITS ASSOCIATED ENTERPRISES BASED IN THE UK. NOW THE QUESTION ARISE S WHETHER ANY ADJUSTMENT IS REQUIRED UNDER THE TRANSFER PRICING PROVISION ON AC COUNT OF SUCH INTEREST EROSION ADVANCES. THE ANSWER STANDS IN NEGATIVE FOR THE REA SON THAT THE ASSESSEE GOT SUCH HUGE BUSINESS FROM ITS ASSOCIATED ENTERPRISES BASED IN THE USA. IN THE ABSENCE AE IN UK THE ASSESSEE WOULD HAVE TAKEN SERV ICES FROM THIRD PARTY WHICH WOULD HAVE LED TO MORE COST THAN THE NOTIONAL INTER EST INCOME. IN OTHER WORDS, THE TRANSACTION FOR ADVANCING THE INTEREST-FREE LOA NS TO THE ASSOCIATED ENTERPRISES HAS TO BE SEEN IN THE CONTEXT OF THE BENEFIT RECEIV ED BY IT FROM SUCH ASSOCIATED ENTERPRISES. AS SUCH THE TRANSACTION OF INTEREST FR EE LOANS/ ADVANCES VIZ A VIZ THE BENEFIT RECEIVED BY THE ASSESSEE ARE INTRINSICALLY LINKED WHICH HAS TO BE EVALUATED AFTER AGGREGATING BOTH THE TRANSACTIONS. THE TRANSA CTION OF INTEREST FREE ADVANCES CANNOT BE VIEWED WITHOUT CONSIDERING THE BENEFIT DE RIVED BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISES. ON ANALYZING THE NOTION AL INTEREST ADDED BY THE TPO UNDER THE TRANSFER PRICING ADJUSTMENT WITH THE BENE FIT DERIVED BY THE ASSESSEE, THE INTEREST COST APPEARS TO BE NEGLIGIBLE. THE AMO UNT OF INTEREST COST STANDS AT < 26,19,740/- WHEREAS THE AMOUNT OF GROSS RECEIPT GEN ERATED BY THE ASSESSEE S.N. NAME OF SPONSOR STUDY HELD ON DRUG NAME COUNTRY OF ORIGIN COUNTRY OF SPONSOR NO. OF PATIENT ENROLLE D CURRENC Y QUOTE VALUE 1. STASON PHARMA INDIA DICLOFENAC EPOLAMINE PATCH UK USA Q80 USD USD 377,700 2. PAR PHARMAC EUTICALS, INC INDIA MESALAMINE TABLETS 1.2G COMPARISION WITH PLACEBO AND LIALDA 1.2 UK USA 250 INR USD 1,178,530 ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 11 STANDS AT USD 1,556,230 WHICH IS FAR MORE THAN THE INTEREST EXPENSES AFTER CONVERTING IN INDIA RUPEES. 10.8 LIKEWISE, WE ALSO NOTE THAT THE ASSESSEE HAS D ERIVED THE BENEFIT FROM ITS ASSOCIATED ENTERPRISES NAMELY JINA PHARMACEUTICALS LOCATED AT USA FOR < 3.56 CRORES IN THE YEAR UNDER CONSIDERATION AGAINST THE INTEREST EXPENSES OF < 1,14,87,233/-. THE DETAILS STAND AS UNDER: REVENUE DETAILS YEAR WISE YEAR WISE 2008 - 09 2009 - 10 2010 - 11 2011 - 12 2012 - 13 2013 - 14 2014 - 15 2015 - 16 PROJECT NUMBER 2007 - 08 2008 - 09 2009 - 10 2010 - 11 2011 - 12 2012 - 13 2013 - 14 2014 - 15 GRAND TOTAL 010 - 12 5,016,650 4,212,650 9,229,300 022 - 10 21,488,475 7,439,597 28,928,072 033 - 12 8,985,249 8,985.249 039 - 11 506,850 506,850 053 - 11 442,500 442,500 056 - 09 2,650,400 2,196,800 4,847,200 063 - 12 891,800 891,800 1,783,600 069 - 1 1 603,200 603,200 072 - 10 8,336,100 8,336,100 073 - 10 10,306,570 10,306,570 081 - 11 16,471,482 16,471,482 085 - 08 3,452,600 3,366,200 6,818,800 089 - 06 2,041,500 2,041,500 089 - 09 1,296,885 091 - 10 350,672 350,672 05 - 1 1 331,875 110,625 442.500 118 - 11 9,292,500 9,292,500 139 - 07 4,089,000 425,000 4,514,000 140 - 07 4,680,400 4,680,400 159 - 1 1 8,681,900 8,681,900 162 - 11 11,228,300 - 11,228,300 179 - 12 200,000 200,000 196 - 08 673,050 221,950 895,000 ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 12 238 - 08 18,223,340 (8,923,447) 9,299,893 250 - 13 3,019,285 3,019,285 277 - 09 902,565 902,565 294 - 07 1,487,860 1,487,860 296 - 12 200,000 200,000 305 - 12 736,800 736,800 326 - 07 3,182,700 1,118,500 4,301,200 Z 5,284,200 525,000 5,809,200 347 - 13 2,000,000 2,000,000 357 - 08 12,742,758 - 12,742,758 413 - 10 4,637,525 1,655,175 6,292,700 518 - 11 1,953,900 1,953,900 630 - 13 9,165,249 9,165,249 635 - 13 6,759,563 2,440,187 9,199,749 667 - 14 272,700 272,700 GRAND TOTAL 24,218,26 0 7,808,150 35,584,298 37,920,270 63,851,979 6,241,250 15,744,81 2 16,897,42 1 208,266,439 10.9 HOWEVER, WE FIND THAT THE ASSESSEE HAS NOT DEM ONSTRATED ANY BENEFIT DERIVED FROM ITS ASSOCIATED ENTERPRISES NAMELY LAMB DA USA WHEREAS IT HAS ADVANCED INTEREST FREE LOAN OF EURO 49,999/-. THUS, THE QUESTION ARISES WHETHER THERE IS A NEED TO MAKE ANY ADJUSTMENT ON ACCOUNT O F NOTIONAL INTEREST UNDER THE PROVISIONS OF SECTION 92C OF THE ACT. IN THIS REGAR D WE NOTE THAT ADMITTEDLY THERE WAS NO BENEFIT ACCRUED TO THE ASSESSEE IN THE YEAR UNDER CONSIDERATION BUT CONSIDERING THE INTERRELATED ACTIVITIES CARRIED OUT BY THE ASSESSEE ALONG WITH ASSOCIATE ENTERPRISES, IN OUR CONSIDERED VIEW IT IS NOT NECESSARY THAT THE BENEFIT WILL ARISE IN THE YEAR IN WHICH SUCH LOANS AND ADVA NCES WERE PROVIDED WITHOUT INTEREST. A DRUG NORMALLY TAKES 8 TO 10 YEARS TIME FOR ITS DEVELOPMENT. FURTHERMORE, THIS ASSOCIATED ENTERPRISE WAS SET UP FOR THE ACTIVITIES WHICH ARE DIRECTLY CONNECTED WITH THE ASSESSEE AS DISCUSSED/E LABORATED IN THE PRECEDING PARAGRAPH. IN OUR VIEW, THE GENERATION OF THE BENEF IT IN TERMS OF MONEY IN THE YEAR UNDER CONSIDERATION ONLY CANNOT BE A CRITERIA FOR MAKING ANY ADJUSTMENT ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 13 UNDER THE TRANSFER PRICING PROVISIONS IN THE GIVEN FACTS AND CIRCUMSTANCES. SUCH INCOME MAY ARISE IN SUBSEQUENT YEARS. 10.10 IT IS ALSO IMPORTANT TO NOTE THAT THE ASSESSE E HAS GIVEN ADVANCES TO LAMBDA THERAPEUTIC RESEARCH Z.O.O. POLAND WHICH HAV E BEEN CONVERTED INTO EQUITY. THUS, WHAT IS INFERRED IS THIS THAT THE LOA NS AND ADVANCES WERE GIVEN PRIMARILY AS THE INVESTMENT IN EQUITY. IN SUCH CASE S THERE CANNOT BE ANY ADJUSTMENT ON ACCOUNT OF INTEREST FREE LOANS/ADVANC ES. IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FROM THE ORDER OF THIS HONBLE TRIBUNAL IN THE CASE OF MICRO INKS LTD. VS. ACIT REPORTED IN [2013] 144 ITD 610 W HERE IT WAS HELD AS UNDER; IN THE PRESENT CASE, THERE ARE TWO IMPORTANT FACTO RS PERTAINING TO THIS INTEREST FREE LOAN, AND BOTH THESE ASPECTS DESERVE TO BE EXAMINED IN DE TAIL. THE FIRST IMPORTANT ASPECT OF THIS INTEREST FREE ADVANCE IS THAT THE LOAN WAS SAID TO BE IN THE NATURE OF QUASI-CAPITAL, AND IT WAS SO GIVEN OUT OF EEFC (EXCHANGE EARNERS FOREIGN CURRENCY) ACCOUNT, BECAUSE WHILE THE ASSESSEE COULD HAVE GIVEN LOAN UP TO US $ 50 MILLIO N, IT WAS NOT OPEN TO THE ASSESSEE TO SUBSCRIBE TO THE EQUITY CAPITAL WITHOUT THE PERMISS ION OF THE RESERVE BANK OF INDIA. THERE WAS, THUS, INDEED A TECHNICAL PROBLEM IN SUBSCRIBIN G TO THE CAPITAL DIRECTLY. IT IS ALSO IMPORTANT TO NOTE THAT IMMEDIATELY UPON OBTAINING T HE PERMISSION OF THE RESERVE BANK OF INDIA, WHICH ASSESSEE DID OBTAIN AT LATER STAGES, T HE ADVANCES WERE CONVERTED INTO SHARES. EXCEPT FOR AN AMOUNT OF US $10,000, ENTIRE ADVANCES RECEIVED BY THE STEP DOWN SUBSIDIARY WERE CONVERTED INTO SHARES. IT IS ALSO N OT IN DISPUTE THAT WHEN RBI PERMISSION TO CONVERT LOAN INTO EQUITY WAS SOUGHT, IT WAS SOUGHT EFFECTIVE FROM THE DATE ON WHICH REMITTANCE WAS MADE. THE SECOND VERY IMPORTANT ASPE CT OF THIS INTEREST FREE LOAN IS THAT THE ENTITY RECEIVING THE INTEREST FREE ADVANCES 'M' USA, EXISTED ONLY TO FACILITATE THE MARKETING OF ASSESSEE'S PRODUCTS IN US MARKETS. THE RELATIONSHIP ON ACCOUNT OF LENDING OF MONEY CANNOT, THUS, BE CONSIDERED IN ISOLATION WITH OUT THESE CRUCIAL BUSINESS CONSIDERATIONS. [PARA 15] IT IS ONLY ELEMENTARY LEGAL POSITION THAT WHAT COUL D NOT HAVE BEEN DONE DIRECTLY COULD NOT HAVE DONE INDIRECTLY ALSO. THERE IS, THUS, NOT MUCH OF A MERIT IN THE STAND OF THE REVENUE AUTHORITIES THAT IN THE ABSENCE OF A SPECIFIC MENTI ON ABOUT CONVERSION OF LOAN INTO EQUITY, IT CANNOT BE PRESUMED THAT THE INTEREST FREE LOANS COU LD NOT HAVE BEEN IN THE NATURE OF QUASI-CAPITAL. [PARA 16] 10.11 IT IS ALSO SIGNIFICANT TO NOTE THAT THE LD. C IT-A IN HIS ORDER HAS GIVEN A FINDING THAT THERE WAS NO BENEFIT DERIVED BY THE AS SESSEE WITH RESPECT TO THE AMOUNT OF INTEREST FREE LOANS AND ADVANCES GIVEN TO UK AE. HOWEVER, ON PERUSAL OF THE DETAILS SUBMITTED BY THE ASSESSEE, WE NOTE T HAT THERE WAS THE BENEFIT DERIVED BY THE ASSESSEE FROM SUCH ASSOCIATED ENTERP RISES WHICH HAS BEEN ELABORATED SOMEWHERE IN THE PRECEDING PARAGRAPH. TH US, SUCH FINDING OF THE LD. CIT-A IS FACTUALLY INCORRECT. AT THE TIME OF HEARIN G THE LD. DR HAS ALSO NOT CONTROVERTED THE FACT OF BENEFIT DERIVED BY THE ASS ESSEE. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 14 10.12 IN VIEW OF THE ABOVE AND AFTER CONSIDERING TH E FACTS IN TOTALITY, WE HOLD THAT NO ADJUSTMENT UNDER THE TRANSFER PRICING PROVISIONS IS REQUIRED TO BE MADE WITH RESPECT TO THE INTEREST FREE LOANS AND ADVANCES BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES IN THE GIVEN FACTS AND CIRCUMSTANCES. H ENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 11. THE NEXT ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 3 IS THAT THE LEARNED CIT (A) ERRED IN NOT ADJUDICATING THE ISSUE ON MERI T RAISED BEFORE HIM FOR THE DISALLOWANCE MADE BY THE AO UNDER SECTION 115JB OF THE ACT ON ACCOUNT OF EXEMPTED INCOME. 12. THE AO IN THE YEAR UNDER CONSIDERATION FOUND TH AT THE ASSESSEE HAS MADE INVESTMENTS IN ITS SUBSIDIARY COMPANIES AMOUNTING T O < 25,27,78,010/- ONLY. AT THE SAME TIME THE ASSESSEE HAS INCURRED INTEREST EX PENSES ON THE BORROWED FUND AMOUNTING TO < 6,76,84,807/- IN THE YEAR UNDER CONS IDERATION. ACCORDINGLY THE AO WAS OF THE VIEW THAT THE ASSESSEE MUST HAVE UTILIZE D THE BORROWED FUND IN THE IMPUGNED INVESTMENTS WHICH WILL GENERATE TAX FREE I NCOME. ACCORDINGLY, THE AO INVOKED THE PROVISIONS OF SECTION 14A READ WITH RUL E 8D OF INCOME TAX RULE AND MADE THE DISALLOWANCE OF <69,48,903/- WHICH WAS ADD ED TO THE TOTAL INCOME OF THE ASSESSEE. 12.1 THE AO AT THE SAME TIME ALSO MADE THE DISALLOW ANCE OF THE SAME AMOUNT WHILE DETERMINING THE BOOKS PROFIT UNDER THE PROVIS IONS OF SECTION 115JB OF THE ACT. 12.2 AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE LEARNED CIT (A) WHO DELETED THE ADDITION MADE BY THE AO UNDER SECTION 14A READ WITH RULE 8D WHILE DETERMINING THE INCOME UNDER NORMAL COMPUTATION OF INCOME. HOWEVER THE LEARNED CIT (A) REGARDING THE ADDITION MADE WHILE W ORKING OUT THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT HELD THAT THIS ISSUE DOES NOT REQUIRE ANY SEPARATE ADJUDICATION IN VIEW OF THE FACT THAT DISALLOWANCE MADE UNDER SECTION 14A READ WITH RULE 8D UNDER NORMAL COMPUTATION OF INCOME HAS BEEN DELETED. AS SUCH THE ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 15 DISALLOWANCE UNDER SECTION 115JB OF THE ACT WAS BAS ED ON THE DISALLOWANCE MADE UNDER SECTION 14A READ WITH RULE 8D FOR THE NORMAL COMPUTATION OF INCOME. AS THE ADDITION UNDER NORMAL COMPUTATION OF INCOME HAS BEE N DELETED, ACCORDINGLY THE QUESTION OF MAKING THE DISALLOWANCE UNDER SECTION 1 15JB OF THE ACT DOES NOT ARISE. CONSEQUENTLY, THE LEARNED CIT (A) HELD THAT THE ISSUE RAISED BY THE ASSESSEE FOR THE ADDITION MADE UNDER SECTION 115JB OF THE AC T BECOMES INFRUCTUOUS. 13. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE ASSESSEE IS IN APPEAL BEFORE US. 14. THE LEARNED AR BEFORE US CONTENDED THAT THE LEA RNED CIT (A) INSTEAD OF HOLDING THE ISSUE RAISED BY THE ASSESSEE FOR THE DI SALLOWANCE MADE UNDER SECTION 15JB OF THE ACT AS INFRUCTUOUS, HE SHOULD HAVE ADJU DICATED THE SAME ON MERIT IN THE LIGHT OF THE ORDER OF THE HONBLE SPECIAL BENCH OF ITAT IN THE CASE OF ACIT VS VIREET INVESTMENTS PRIVATE LTD REPORTED IN 165 ITD 27. 15. ON THE OTHER HAND THE LEARNED DR VEHEMENTLY SUP PORTED THE ORDER OF THE AUTHORITIES BELOW. 16. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THERE ARE CERTAIN SP ECIFIED ADJUSTMENTS WHICH NEEDS TO BE MADE TO WORK OUT THE BOOK PROFIT AS PROVIDED IN THE EXPLANATION (1) TO SECTION 115 JB OF THE ACT. CLAUSE (F) OF EXPLANATIO N (1) OF SECTION 115 JB OF THE ACT DEALS WITH THE ISSUE ON HAND WHICH READS AS UNDER: EXPLANATION 1.FOR THE PURPOSES OF THIS SECTION, 'B OOK PROFIT' MEANS THE PROFIT AS SHOWN IN THE STATEMENT OF PROFIT AND LOSS FOR THE RELEVAN T PREVIOUS YEAR PREPARED UNDER SUB- SECTION (2), AS INCREASED BY ************** (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH SECTION 10 (OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (38 ) THEREOF) OR SECTION 11 OR SECTION 12 APPLY; OR 16.1 AS PER THE ABOVE CLAUSE THE BOOK PROFIT SHALL INCREASE BY THE AMOUNT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME TO WHICH THE PROVISIONS OF SECTION 10 APPLIES. INDEED THE INCOME BY WAY OF DIVIDEND IS EXEMPT UNDER SUBSECTION (34) OF SECTION 10 OF THE ACT. ACC ORDINGLY, SUBSECTION (34) OF ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 16 SECTION 10 OF THE ACT APPLIES TO THE DIVIDEND INCOM E AND CONSEQUENTLY THE AMOUNT OF EXPENSES RELATABLE TO THE EXEMPTED INCOME NEEDS TO BE ADDED WHILE DETERMINING THE BOOK PROFIT. HOWEVER, IN THE CASE O N HAND WE NOTE THAT THERE WAS NO DIVIDEND INCOME EARNED BY THE ASSESSEE IN THE YE AR UNDER CONSIDERATION. ACCORDINGLY IN OUR CONSIDERED VIEW THE PROVISIONS A S SPECIFIED IN CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT CANNOT BE APPLIED IN THE CASE ON HAND. ACCORDINGLY THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 16.2 THE ISSUES RAISED BY THE ASSESSEE IN GROUND NO . 4 TO 6 ARE EITHER GENERAL AND CONSEQUENTIAL IN NATURE OR PREMATURE TO DECIDE. ACCORDINGLY WE DISMISS THE SAME AS INFRUCTUOUS. 16.3 IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS PARTLY ALLOWED. COMING TO THE ITA NO. 3470/AHD/2015, AN APPEAL BY T HE REVENUE FOR A.Y. 2010-11 17. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 4. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELE TING THE ADDITION MADE ON ACCOUNT OF DEDUCTION U/S.80IB OF THE ACT AMOUNTING TO RS.9, 82,226/-, WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD. 5. WHETHER THE LD.CIT(A) ERRED IN FACTS AND LAW WHILE HOLDING THAT NO INTEREST WAS REQUIRED TO BE CHARGED ON THE LOAN EXTENDED TO THE AES-M/S. LAMBDA THERAPEUTIC RESEARCH SP. Z.O.O AND M/S. JINA PHARMACEUTICALS IN C ON ACCOUNT OF BUSINESS CONNECTION BETWEEN THE AES AND THE ASSESSEE COMPANY . 6. WHETHER THE LD.CIT(A) ERRED IN FACTS AND LAW WHILE HOLDING THAT NO INTEREST WAS REQUIRED TO BE CHARGED ON THE LOAN EXTENDED TO THE AE-M/S. LAMBDA THERAPEUTIC RESEARCH SP. Z.O.O AS THE SAME WAS CONVERTED INTO T HE EQUITY. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 8. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE LD. CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED TO THE ABOVE EXTENT.THE 1 ST ISSUE RAISED BY THE REVENUE IS THAT THE LEARNED CIT (A) ERRED IN INCLUD ING THE INCOME ON ACCOUNT OF NOTICE PAY AND MISCELLANEOUS INCOME WHILE WORKING OUT THE DEDUCTION UNDER SECTION 80IB(8) OF THE ACT. 9. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD A NEW GROUND, WHICH MAY BE NECESSARY. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 17 THE FIRST ISSUE RAISED BY THE REVENUE IS THAT THE L D. CIT-A ERRED IN DELETING THE ADDITION MADE BY THE AO FOR <9,82,226/-ON ACCOUNT O F DEDUCTION U/S.80IB OF THE ACT. 18. THE AO DURING THE ASSESSMENT PROCEEDINGS FOUND THAT THE INCOME FROM THE NOTICE PAY AND MISCELLANEOUS INCOME AMOUNTING TO < 9,62,549 AND < 18,677/- RESPECTIVELY ARE NOT ARISING FROM THE ELIGIBLE BUSI NESS ACTIVITIES AND THEREFORE SUCH INCOME IS NOT SUBJECT FOR DEDUCTION UNDER SECTION 8 0IB (8) OF THE ACT. ACCORDINGLY THE AO ADDED THE SAME TO THE TOTAL INCOME OF THE AS SESSEE. 19. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A) WHO ALLOWED THE GROUND OF APPEAL OF THE ASSESSEE BY OBSERVING T HAT BOTH THE INCOME ARE RELATED TO THE BUSINESS ACTIVITIES OF THE ASSESSEE. THE INCOME SHOWN UNDER THE HEAD NOTICE PAY GOES TO REDUCE THE SALARY EXPENSES INCURRED BY THE ASSESSEE AND THEREFORE THE SAME IS ELIGIBLE FOR DEDUCTION. 20. LIKEWISE THE MISCELLANEOUS INCOME SHOWN BY THE ASSESSEE RELATES TO THE DAY TO DAY ACTIVITIES OF THE ASSESSEE SUCH AS SETTL EMENT OF TRAVELLING ADVANCES GIVEN TO THE EMPLOYEES WHICH ARE NORMAL BUSINESS TR ANSACTION. 21. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 22. THE LEARNED DR BEFORE US CONTENDED THAT THE INC OME SHOWN BY THE ASSESSEE UNDER THE HEAD NOTICE PAY AND MISCELLANEOU S INCOME DO NOT ARISE FROM THE ELIGIBLE BUSINESS ACTIVITIES. THEREFORE THE SAM E CANNOT BE ALLOWED AS DEDUCTION UNDER SECTION 80IB OF THE ACT. 23. THE LEARNED AR BEFORE US SUBMITTED THAT THE INC OME SHOWN UNDER THE HEAD NOTICE PAY AND MISCELLANEOUS INCOME IS ARISING FROM THE BUSINESS ACTIVITIES OF THE ASSESSEE. THEREFORE THE SAME IS ELIGIBLE FOR DEDUCT ION UNDER SECTION 80 IB(8) OF THE ACT. 24. BOTH THE LEARNED DR AND AR BEFORE US VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW AS FAVOURABLE TO THEM. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 18 25. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. FROM THE PRECEDING D ISCUSSION WE NOTE THAT INCOME ARISING TO THE ASSESSEE ON ACCOUNT OF NOTICE PAY RE PRESENTS THE INCOME OF THE EARLIER CESSATION OF THE JOB OF THE EMPLOYEES. IT I S A NORMAL BUSINESS PRACTICE IN THE INDUSTRY WHERE THE EMPLOYEE WANTS TO LEAVE ORGA NIZATION, THE EMPLOYEE IS REQUIRED TO GIVE THE NOTICE IN ADVANCE AND IF HE DO ESNT DO SO THE EMPLOYER RECOVERS CERTAIN AMOUNT FROM THE EMPLOYEE TO COMPEN SATE THE LOSS WHICH OTHERWISE ARISES IN HIRING THE NEW STAFF IN PLACE O F PREVIOUS EMPLOYEE. IN OTHER WORDS, THE ASSESSEE WOULD HAVE ADJUSTED THE AMOUNT OF NOTICE PAY RECOVERED FROM THE EMPLOYEE AGAINST THE SALARY EXPENSES BUT T HE ASSESSEE HAS NOT DONE SO AND SHOWN NOTICE PAY AS A SEPARATE ITEM OF INCOME. IT DOESNT MEAN THAT THE ASSESSEE IS NOT ENTITLED FOR THE DEDUCTION WITH RES PECT TO THE NOTICE PAY. IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FROM THE OR DER OF ITAT DELHIBENCH IN THE CASE OF BIRLASOFT (INDIA) LTD. VS. DY. CIT REPO RTED IN 20 TAXMANN.COM 43 WHEREIN IT WAS HELD THAT NOTICE PAY RECEIVED/RECEIV ABLE FROM THE EMPLOYEE IS AN INCOME DERIVED FROM ELIGIBLE UNDERTAKING FOR THE PU RPOSE OF THE SECTION 10A OF THE ACT. 25.1 SIMILARLY, WE ALSO NOTE THAT MISCELLANEOUS INC OME REPRESENTS THE SETTLEMENT OF THE ADVANCES GIVEN BY THE ASSESSEE TO ITS EMPLOY EES. IN OTHER WORDS SUCH INCOME ALSO REPRESENTS FROM THE DAY TO DAY ACTIVITI ES OF THE ASSESSEE. ACCORDINGLY WE HOLD THAT SUCH INCOME IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB OF THE ACT. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF THE LEARNED CIT (A). HENCE THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 26. THE NEXT ISSUE RAISED BY THE REVENUE IN GROUND NO. 2 AND 3 IS THAT THE LEARNED CIT (A) ERRED IN DELETING THE ADDITION MADE BY THE AO TO THE EXTENT OF < 1,51,27,353/- ON ACCOUNT OF UPWARD ADJUSTMENT ON TH E INTEREST-FREE ADVANCES GIVEN TO THE ASSOCIATED ENTERPRISES. 27. AT THE OUTSET WE NOTE THAT THE ISSUE RAISED BY THE REVENUE HAS ALREADY BEEN DECIDED ALONG WITH THE APPEAL FILED BY THE ASS ESSEE BEARING ITA NO. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 19 3492/AHD/2015 IN FAVOUR OF THE ASSESSEE VIDE PARAGR APH NUMBER 10 OF THIS ORDER. FOR THE DETAILED DISCUSSION, PLEASE REFER THE RELEV ANT PARAGRAPH. ACCORDINGLY, WE DISMISS THE GROUND OF APPEAL RAISED BY THE REVENUE. 28. THE ISSUES RAISED BY THE REVENUE IN GROUND NO. 4 TO 6 ARE GENERAL IN NATURE AND NO SEPARATE ADJUDICATION IS REQUIRED. ACCORDING LY WE DISMISS THE SAME AS INFRUCTUOUS. 28.1 IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. COMING TO THE ITA NO. 2276/AHD/2016 AN APPEAL BY TH E ASSESSEE FOR A.Y. 2011-12. 29. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS O F APPEAL: 1. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING THE ACTION OF AO INDISALLOWING ADMINISTRATIVE AND O THER EXPENSES OF RS.37,514/- U/S.14A R.W.R.8D. 2. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING RS.37,514/- U/S .14A WHILE CALCULATING BOOK PROFIT U/S. 115JB. 3. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING THE ACTION OF THE AO OF MAKING ANADDITION OF RS.5,4 8,9277- AS PROPOSED BY TPO ON ACCOUNT OF INTEREST FREE LOANS AND ADVANCES TOLAMDA THERAPEUTIC LTD., UK. 4. BOTH THE LOWER AUTHORITIES HAVE PASSED THE ORDERS W ITHOUT PROPERLY APPRECIATING THE FACTS AND THEY FURTHER ERRED IN GROSSLY IGNORING VA RIOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEEN CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. THIS ACTION OF THE LOWER AUTHORITIES IS IN CLEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JU STICE AND THEREFORE DESERVES TO BE QUASHED. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING ACTION OF THE ID. AO IN LEVYING INTEREST U/S.234A/B/C OF THE ACT. AT THE OUTSET THE LEARNED AR BEFORE US SUBMITTED THAT HE HAS BEEN INSTRUCTED BY THE ASSESSEE NOT TO PRESS GROUND NO. 1 AND 2 ON ACCOUNT OF SMALLNESS OF AMOUNT. ACCO RDINGLY WE DISMISS THE SAME AS NOT PRESSED. 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING ACTION OF THE LD.AO IN INTIMATING PENALTY U/S.271(1)(C) OF TH E ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, ED IT, DELETE, MODIFY OR CHANGE ALL OR ANY OF THE GROUNDS OF APPEAL AT THE TIME OF OR BEFORE THE HEARING OF THE APPEAL. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 20 THE FIRST ISSUE RAISED BY THE ASSESSEE IN GROUND N OS. 1 & 2 IS THAT THE LD. CIT-A ERRED IN CONFIRMING THE ADDITION MADE BY THE AO FOR < 37,514/- UNDER SECTION 14A OF THE ACT UNDER NORMAL AND MAT COMPUTA TION OF INCOME. AT THE OUTSET, THE LEARNED AR FOR THE ASSESSEE BEF ORE US SUBMITTED THAT AMOUNT INVOLVED IN THE DISPUTE RAISED BY THE ASSESS EE IN ITS GROUND OF APPEAL IS NOT BEING PRESSED ON ACCOUNT OF SMALLNESS OF THE AM OUNT INVOLVED THEREIN. ACCORDINGLY, WE DISMISS THE SAME AS NOT PRESSED. 30. THE SECOND ISSUE RAISED BY THE ASSESSEE IN GROU ND NO. 3 IS THAT THE LEARNED CIT (A) ERRED IN CONFIRMING THE UPWARD ADJUSTMENT W ITH RESPECT TO INTEREST ON ACCOUNT OF INTEREST FREE LOANS AND ADVANCES PROVIDE D TO THE AE. 31. AT THE OUTSET WE NOTE THAT THE IDENTICAL ISSUE HAS BEEN RAISED BY THE ASSESSEE IN ITA NO. 3492/AHD/2015 WHICH HAS BEEN DE CIDED IN THE FAVOUR OF THE ASSESSEE VIDE PARAGRAPH NUMBER 10 OF THIS ORDER. FO R THE DETAILED DISCUSSION, PLEASE REFER THE RELEVANT PARAGRAPH. ACCORDINGLY, W E ALLOW THE GROUND OF APPEAL RAISED BY THE ASSESSEE. 32. THE ISSUE RAISED BY THE ASSESSEE IN GROUND 4, 5 AND 6 IN ITS APPEAL ARE GENERAL, CONSEQUENTIAL AND PREMATURE TO ADJUDICATE. ACCORDING WE DISMISS THE SAME BEING GENERAL, CONSEQUENTIAL AND PREMATURE TO ADJUDICATE AS INFRUCTUOUS. 32.1 IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED COMING TO ITA NO. 2293/AHD/2016, AN APPEAL BY THE R EVENUE FOR A.Y 2011-12 . 33. AT THE OUTSET WE FIND THAT IN THIS APPEAL OF RE VENUE, THE TAX IN DISPUTE IS LOWER THAN THE AMOUNT SPECIFIED BY THE CBDT VIDE CI RCULAR NO 17 OF 2019 DATED 08-08-20019. THUS THE APPEAL FILED BY THE REVENUE I S NOT MAINTAINABLE. ACCORDINGLY WE DISMISS THE SAME ON ACCOUNT OF LOW T AX EFFECT. COMING TO ITA NO. 2114/AHD/2014 AN APPEAL BY THE RE VENUE FOR A.Y. 2013-14 ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 21 34. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN A LLOWING THE DEDUCTION U/S 80IB (8A) OF THE IT ACT ( PAGE 80 OF THE APPELLATE ORDER ). 1.1 THE LD CIT(A) FAILED TO APPRECIATE THAT THE INI TIAL ASSESSMENT YEAR AS A.Y. 2003- 04 HAS BEEN TAKEN HY THE ASSESSES ON HIS OWN ACCORD , I.E. AS PER THE RETURN FILED ALONGWITH THE AUDIT FORM 10CCB FOR THE A.Y.2003-04 AND THEREB Y 10 CONSECUTIVEYEARS EXPIRED IN A.Y.2012 13 1.2 THE LD CIT(A) FAILED TO APPRECIATE THAT THE 'INITIAL ASSESSMENT YEAR OF DEDUCTION' 1 AS MENTIONED IN FORM 10CCB ALL THROUGH THE \0 YEARS (F ROM A.Y. 03-04 TO THE A.Y112-13) WAS A.Y. 2003-04 ONLY AND THEREFORE, THE PRINCIPLE OF C ONSISTENCY PREVENTED THE ASSESSEE FROM DEVIATING FROM THIS SETTLED POSITION. 1.3 THE LD CIT(A) FAILED TO APPRECIATE THAT TH E ASSESSEE ITSELF HAD CLAIMED BENEFIT U/S 80IB OF THE IT ACT FOR THE A.Y.2003-04 AS THE INITI AL ASSESSMENT YEAR AND NOW IT SAYS IT WAS NOT LEGALLY ALLOWED IN THAT ASSESSMENT YEAR. 1.4 THE LDCIT(A) HAS GROSSLY ERRED IN LAW HY A DMITTING NEW /FRESH EVIDENCES IN THE FORM OF ALLEGED LETTER BY APAJI AMIN & CO. IIP ( W HICH HAS BEEN REPRODUCED ; AT PAGE 77 OF THE APPELLATE ORDER) WHICH ID IN VIOLATION OF RULE 46A OF THE IT RULES, AND THE IMPUGNED ORDER IS LIABLE TO BE SET ASIDE ON THIS GR OUND ALONE. 1.5 THE LD CIT(A) FAILED TO APPRECIATE THAT VI OLATION OF NATURAL JUSTICE ,IF ANY, CANNOT RENDER THE ORDER A NULLITY, BUT CAN AT BEST BE A GR OUND TO SET ASIDE THE IMPUGNED ORDER TO BE DONE DE-NOVO. 2. THE LDCIT(A) HAS FAILED TO APPRECIATE THA T THE APPROVAL FROM THE PRESCRIBED AUTHORITY IS ONLY A CONDITION PRECEDENT FOR ALLOWIN G DEDUCTION U/S 80IB(8A) AND THAT APPROVAL COULD NOT RESTRAIN THE AO FROM EXAMINING A S TO WHETHER ALL THE ACTIVITIES CARRIED OUT BY THE R&D WERE ELIGIBLE FOR BENEFITS UNDER SEC TION 80IB (8A) OF THE H ACT ( PAGE 42 OF THE APPELLATE ORDER). 2.1 THE LDCIT(A) HAS FAILED TO APPRECIATE T HAT ONE OF THE ACTIVITIES CARRIED OUT BY THE ASSESSEE DURING THE YEAR WAS CLINICAL TRIAL WHERE T HERE WAS NO R&D WORK BUT THE WORK ASSIGNED TO THE ASSESSEE WAS ONLY TO VERIFY IF THE DRUG BEING ADMINISTERED (UNDER TESTING) WAS EQUIVALENT TO OTHER DRUGS IN THE MARKET AND ON SUCH RECEIPTS (INCOME), PROVISIONS OF SECTION 80!B(8A) WOULD NOT BE APPLICABLE. 2.2 THE LDCIT(A) HAS FAILED TO APPRECIATE TH AT THE WORK OF THE COLLATION/COLLECTION OF DATA UNDERTAKEN BY THE ASSESSEE DURING THE YEAR WER E RELATED TO REGULATORY COMPLIANCE BY ITS CUSTOMERS AND IT HAD NOTHING TO DO WITH THE ANY SORT OF R& D WORK; THUS SUCH RECEIPTS/ INCOME WERE NOT RELATABLE TO PROVISIONS OF SECTION 80IB(8A) WERE NOT ELIGIBLE FOR DEDUCTION U/S 80IB. 2.3 THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT IN CLINICAL. TRAILS AS UNDERTAKEN BY THEASSESSEE COMPANY THERE WOULD BE INPUT ON ACCOUNT OF RESEARCH BUT THERE WAS NO DEVELOPMENT WORK CARRIED OUT BY THE ASSESSEE AND TH EREFORE THE ASSESSEE WAS NOT CARRYING OUT RESEARCH AND DEVELOPMENT. 2.4 THE ORDER OF THE LDCIT(A), IN ANY CASE SUFFE RS, FROM NON -APPLICATION OF MIND AND IS .THEREFORE, LIABLE TO BE SET ASIDE ON THIS GROUND A LONE. 3. THE LDCIT(A) HAS ERRED IN LAW AND ON FACTS BY DELETING THE ADJUSTMENT MADE BY THE AO/TPO ON ACCOUNT OF INTEREST IN THE CASE OF LOANS AND ADVANCES MADE TO JINA ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 22 PHARMACEUTICALS, USA & LAMBDA THERAPEUTICS, CANADA. (PAGE 112 TO 125 OF THE APPELLATE ORDER) . 3.1 THE LDCIT(A) HAS ERRED IN LAW AND ON FACTS BY DELETING THE AFORESAID ADJUSTMENTS BY WRONGLY HOLDING THAT SUCH ADJUSTMENTS WERE, NOT NEEDED AS THERE WAS PROXIMITY TO BUSINESS CONNECTION. 3.2 THE LDCIT(A) HAS ERRED IN LAW BY NOT APPREC IATING THAT AS PER THE I.T. LAW, ALL INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE WITH AES, HAD TO BE BENCHMARKED FOR BEING @ALP. 4. THE LD CIT(A) HAS ERRED IN LAW AND ON FACTS BY DELETING THE ADJUSTMENT OF RS 23,52,607/- MADE ON ACCOUNT OF GUARANTEE COMMISSION PAID WHILE AGREEING THAT THE SAME HAD BEEN CORRECTLY CALCULATED BY THE AO. 4.1 THE LDCIT(A) HAS FAILED TO APPRECIATE THAT AD DING BACK THE AMOUNT OF RS 23,52,607/- PAID BY THE ASSESSEE COMPANY TO THE AXIS BANK TO IT S TOTAL INCOME FOR GUARANTEE COMMISSION DOES NOT SERVE THE REQUIREMENT OF ALP; T HE ENTIRE AMOUNT OF RS 29,19,536/- HAD TO BE ADDED AS SEPARATE INCOME AND SUCH INCOME WOULD NOT BE ELIGIBLE FOR THE BENEFIT LI / S 801B (8A) OF THE ACT. 5. THE LD CIT(A) HAS ERRED IN DELETING THE ADDITI ON OF RS 2,33,374/- AS RENT ADVANCE NOT RETURNED BACK WITHOUT APPRECIATING THE FACT THAT TH E ASSESSEE HAD FAILED TO DEDUCT TDS ON SUCH, RENT ADVANCES IN TERMS OF SECTION 194 I OF TH E ACT AND THEREFORE, THE SAID AMOUNT WAS DISALLOWABLE U/S 40A(IA) OF THE IT ACT. ( PAGE 132 OF THE APPELLATE 1; ORDER). 6. THE LD CIT(A) HAS ERRED IN LAW AND ON FACT S IN ACCEPTING IN PRINCIPLE THE SUBMISSION OF THE ASSESSEE REGARDING NON -RECONC ILIATION OF RECEIPTS IN P& L ACCOUNT WITH THAT IN FORM 26AS WITHOUT CONSIDERING THE FACT THAT THE ASSESSEE OUGHT TO HAVE SHOWN THESE RECEIPTS IN VIEW OF MERCANTILE BASIS OF ACCOUNTING ADOPTED BY THE ASSESSEE. (PAGE 142 OF THE APPELLATE ORDER). 7. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE U/S 14A OF THE IT ACT. 7.1 THE LDCIT(A) HAS FAILED TO APPRECIATE THAT F OR MAKING DISALLOWANCE U/S 14A, ACTUAL EARNING OF EXEMPT INCOME DURING THE YEAR IS NOT REQ UIRED. (PAGE 159 OF THE APPELLATE ORDER). 8. THE LD CIT(A) HAS ERRED IN DELETING THE ADDITION MADE U/S 40A(IA) R.W.S 195 OF THE IT ACT ON ACCOUNT OF NON-DEDUCTION OF TDS ON PAYMEN T ,OF RS 19,86,207/- MADE ON ACCOUNT OF CONSULTANCY FEES TO TAX RESIDENTS OF USA & CANADA WITHOUT APPRECIATING THAT SUCH INCOMES WERE TAXABLE IN INDIA IN TERMS OF SECT ION 9(1)(VII) OF THE IT ACT AND ALSO AS PER THE PROVISIONS OF RESPECTIVE DTAA'S. ( PAGE166 OF THE APPELLATE ORDER). 8.1 IN ANY CASE, THE LDCIT(A) SHOULD HAVE ASKED F OR A REMAND REPORT FROM THE AO SO AS TO ASCERTAIN THE EXACT NATURE OF CONSULTANCY RENDER ED BY THESE NON-RESIDENTS. 9. THE LDCIT(A) HAS ERRED IN DELETING THE ADDITIO N MADE U/S 40(A)(IA) R.W.S 195 ACT FOR NON DEDUCTION OF IDS ON PAYMENT MADE FOR SU BSCRIPTION OF SOFTWARE FROM PORTUGAL WITHOUT APPRECIATING THAT SUCH PAYMENTS WOULD CONST ITUTE ROYALTY PAYMENT IN TERMS OF SECTION 9(1 )(VI) OF THE IT ACT AND ALSO THE RELEVA NT PROVISIONS OF DTAA. 10. THELDCIT(A) HAD ERRED IN LAW AND ON FACTS IN DE LETING THE ADDITION2(22)(E) WITHOUT CONSIDERING THE FACT THAT THE THEREWERE SHARE HOLDE RS WHICH WERE COMMON IN BOTH THESE ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 23 ENTITIES AND HAD SUBSTANTIAL VOTING POWER IN BOTH T HEIRCOMPANIES AS PER THE REQUIREMENT OF SECTION 2(22)(E) OF THE IT ACT. (PAGE 175 OF THE APPELLATE ORDER). 10.1 WHETHER THE LDCIT(A) HAS FAILED TO APPRECIATE THE LAW THAT FOR THE PURPOSES OF DEEMED DIVIDEND, AS ENSHRINED IN SECTION 2(22 )(E) OF THE IT ACT, IT IS NOT NECESSARY THAT THE RECEIVING COMPANY SHOULD BE A SHARE HO LDER OF THE GIVER COMPANY. 10.2 THE LDCIT(A) HAS ERRED IN LAW AND ON FACT THAT THERE WOULD BE CHARGE OF DEEMED DIVIDEND EVEN INCASES WHERE THERE ATE COMMON SHARE HOLDERS HOLDING STIPULATED VOTING RIGHTS BETWEEN THE GIVER AND RECEIVER COMPANIES. 11 THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND, WHICH MAY BE NECESSARY. 35. THE 1 ST ISSUE RAISED BY THE REVENUE IS THAT THE LEARNED CI T (A) ERRED IN ALLOWING THE DEDUCTION TO THE ASSESSEE UNDER SECTIO N 80 IB(8) OF THE ACT AMOUNTING TO < 28,57,75,943/- ONLY THOUGH THE CONDI TIONS AS SPECIFIED THEREIN WERE NOT SATISFIED AS ALLEGED BY THE AO. 36. THE AO DURING THE ASSESSMENT PROCEEDINGS FOUND THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB(8) OF THE ACT FOR THE REASONS AS DETAILED BELOW: I. THE DEDUCTION UNDER SECTION 80IB(8) OF THE ACT IS A VAILABLE TO AN ASSESSEE ENGAGED IN THE ACTIVITY OF SCIENTIFIC RESE ARCH AND DEVELOPMENT WHICH IS APPROVED BY THE PRESCRIBED AUTHORITY I.E. DSIR. HOWEVER, THE ASSESSEE IS ENGAGED IN PROVIDING CLINICAL ANALYSIS SERVICES TO THE PHARMACEUTICAL COMPANIES. THIS FACT WAS ALSO ESTABL ISHED DURING SURVEY PROCEEDINGS CONDUCTED UNDER SECTION 133A OF THE ACT WHERE THE STATEMENTS OF VARIOUS PERSONS REPRESENTING THE ASSE SSEE WERE RECORDED TO THAT EFFECT. BESIDES, THE COPY OF THE REVISED RE TURN FOR THE YEAR UNDER CONSIDERATION WAS ALSO DISCOVERED DURING THE SURVEY PROCEEDINGS WHEREIN THE ASSESSEE HAS SHOWN INCOME CHARGEABLE TO TAX AMOUNTING TO < 28,66,44,640/- IN WHICH NO DEDUCTION UNDER SECTIO N 80-IB(8) OF THE ACT WAS CLAIMED. II. IN ADDITION TO THE ABOVE, IT WAS ALSO POINTED OUT T HAT THE DEDUCTION UNDER SECTION 80-IB (8) OF THE ACT IS AVAILABLE TO THE ASSESSEE FOR CONSECUTIVE 10 YEARS BEGINNING FROM THE INITIAL ASS ESSMENT YEAR. THE INITIAL ASSESSMENT YEAR IS AY 2003-04. THIS FACT CA N BE VERIFIED FROM THE ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 24 REPORT SUBMITTED BY THE ASSESSEE IN FORM 10 CCB AS WELL AS FROM THE ASSESSMENT ORDER FRAMED UNDER SECTION 153A READ WIT H SECTION 143(3) OF THE ACT FOR THE ASSESSMENT YEAR 2003-04. THUS IT IS IMPLIED THAT 10 CONSECUTIVE ASSESSMENT YEARS CAME TO AN END IN THE ASSESSMENT YEAR 2012-13. HENCE THE ASSESSEE WAS NOT ELIGIBLE FOR CL AIMING THE DEDUCTION UNDER SECTION 80 IB(8) OF THE ACT FOR THE YEAR UNDE R CONSIDERATION BEING THE 11 TH YEAR OF ITS DEDUCTION. 36.1 IN VIEW OF THE ABOVE, THE AO DISALLOWED THE CL AIM MADE BY THE ASSESSEE FOR THE DEDUCTION CLAIMED UNDER SECTION 80 IB (8) OF TH E ACT AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 37. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A). 38. THE ASSESSEE BEFORE THE LEARNED CIT (A) SUBMITT ED THAT IT IS ACTING AS A PARTNER TO PHARMACEUTICAL AND BIOTECH COMPANIES IN THE DRUG DEVELOPMENT PROGRAM. IT PROVIDES VARIOUS SERVICES SUCH AS CLINI CAL RESEARCH, CLINICAL LABORATORY, DATA MANAGEMENT, BIOSTATISTICS, MEDICAL AND SCIENTI FIC AFFAIRS, QUALITY ASSURANCE, REGULATORY AFFAIRS, AND BIO-EQUIVALENCE / BIOAVAILA BILITY STUDIES. ALL THE SERVICES HAVE BEEN ACCEPTED BY THE REVENUE AS SCIENTIFIC AND INDUSTRIAL RESEARCH AND DEVELOPMENT FOR THE PURPOSE OF DEDUCTION UNDER SECT ION 80 IB(8) OF THE ACT IN THE EARLIER ASSESSMENT YEARS. THERE BEING NO CHANGE IN THE AFORESAID SERVICES IN THE YEAR UNDER CONSIDERATION VIZ A VIZ THE ACCEPTANCE O F DSIR, THE DEDUCTION UNDER SECTION 80IB(8) OF THE ACT CANNOT BE DENIED MERELY ON THE REASONING THAT THE ASSESSEE DOES NOT RENDER THE SPECIFIED SERVICES. ON CE THE SERVICES OF THE ASSESSEE HAVE BEEN ACCEPTED BY THE DSIR, THE SAME CANNOT BE DENIED BASED ON THE STATEMENTS RECORDED DURING THE SURVEY PROCEEDINGS U NDER SECTION 133A OF THE ACT. FURTHERMORE, THE SURVEY STATEMENTS WERE NOT PROVIDE D TO THE ASSESSEE FOR THE CROSS EXAMINATION. ACCORDINGLY NO RELIANCE CAN BE P LACED ON SUCH STATEMENTS. 38.1 THE ASSESSEE ALSO CONTENDED THAT DSIR HAS EXTE NDED THE APPROVAL TO IT VIDE LETTER DATED 20 TH FEBRUARY 2012 AS A COMMERCIAL RESEARCH AND DEVELOP MENT COMPANY FOR THE ASSESSMENT YEAR 2013-14. FURTHERMOR E, THE ASSESSEE WAS ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 25 GRANTED THE APPROVAL BY THE DSIR BEGINNING FROM ASS ESSMENT YEAR 2004-05 FOR 10 CONSECUTIVE ASSESSMENT YEARS WHICH ENDS IN THE ASSE SSMENT YEAR 2013-14. ACCORDINGLY THE AO HAVE NO JURISDICTION TO HOLD THA T THE ASSESSEE IS NOT ENTITLED FOR THE DEDUCTION UNDER SECTION 80 IB(8) OF THE ACT. 39. THE LEARNED CIT (A) AFTER CONSIDERING THE SUBMI SSION OF THE ASSESSEE OBSERVED THAT THE APPROVAL BY THE DSIR WAS GRANTED IN TRANCHES. FIRST APPROVAL VIDE LETTER NO. TU/IV/COMM.R & D/43/2003 DATED 22 ND OCTOBER 2003 WAS GRANTED FOR THE ASSESSMENT YEARS BEGINNING FROM 2004-05, 20 05-06 AND 2006-07 WHICH WAS FURTHER EXTENDED FOR 3 CONSECUTIVE ASSESSMENT Y EARS I.E. 2007-08 TO 2009-10 VIDE LETTER DATED 29 TH JUNE 2006. LIKEWISE THE APPROVAL BY THE DSIR WAS F URTHER EXTENDED FOR 3 YEARS VIDE LETTER DATED 6 TH APRIL 2009 I.E. AYS 2010-11 TO 2012-13. FURTHER, 10 TH YEAR APPROVAL I.E. A.Y. 2013-14 WAS GRANTED DATED 24 TH FEBRUARY 2012. ACCORDINGLY THE LEARNED CIT (A) CONCLUDED THA T THE YEAR UNDER CONSIDERATION WAS THE 10 TH YEAR FOR CLAIMING THE DEDUCTION UNDER SECTION 80IB (8) OF THE ACT. 39.1 REGARDING THE DEDUCTION CLAIMED BY THE ASSESSE E FOR THE ASSESSMENT YEAR 2003-04, THE LEARNED CIT (A) OBSERVED THAT THE DEDU CTION WAS CLAIMED BY THE ASSESSEE ON THE BASIS OF THE APPLICATION MOVED FOR THE APPROVAL FROM THE DSIR. BUT THE SAME WAS NOT GRANTED BY THE DSIR IN THAT YE AR. HOWEVER THE ASSESSEE CLAIMED THE DEDUCTION UNDER THE BELIEF THAT IT WILL GET THE APPROVAL FROM THE DSIR. BUT, THE ASSESSEE WAS NOT ELIGIBLE FOR SUCH DEDUCTI ON IN THE ABSENCE OF THE APPROVAL FROM THE DSIR. HOWEVER THE REVENUE HAS ALL OWED THE DEDUCTION WHICH WAS NOT AS PER THE PROVISIONS OF THE ACT. IN FACT T HE ASSESSEE FOR THE YEAR UNDER CONSIDERATION FULFILS ALL THE CONDITIONS FOR CLAIMI NG THE DEDUCTION UNDER SECTION 80IB(8) OF THE ACT. 39.2 REGARDING THE STATEMENT OBTAINED DURING SURVEY PROCEEDINGS UNDER SECTION 133-A OF THE ACT FROM SHRI NARESHKHEMANI, AGM FINAN CE AND PURCHASE, THE LEARNED CIT (A) OBSERVED THAT HE DID NOT ADMIT THAT THE ASSESSEE IS NOT ENGAGED IN THE RESEARCH AND DEVELOPMENT ACTIVITIES. HE MENT IONED THAT THE ASSESSEE CARRIES OUT THE ACTIVITY ON BIOAVAILABILITY- BIOEQU IVALENCE BASED ON WHICH THE DSIR ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 26 HAS GRANTED THE APPROVAL TO THE ASSESSEE. FURTHERMO RE, SHRI NARESHKHEMANI, AGM FINANCE AND PURCHASE IS NOT A TECHNICAL PERSON WITH RESPECT TO THE SCIENTIFIC RESEARCH AND DEVELOPMENT ACTIVITIES AS HE WAS LOOKI NG AFTER THE FINANCE AND THE PURCHASES. 39.3 LIKEWISE, LEARNED CIT (A) ALSO FOUND THAT THE STATEMENT OBTAINED OF SHRI JITESH PATEL IN THE SURVEY PROCEEDINGS UNDER SECTIO N 133A OF THE ACT IS NOT RELEVANT AS HE IS NOT CONNECTED WITH THE ASSESSEE. RATHER, THE STATEMENT OF SHRI JITESH PATEL SUPPORTS THE CASE OF THE ASSESSEE AS H E ADMITTED THAT HE HAS COME ON BEHALF OF THE CLIENT COMPANY TO VERIFY THE CLINICAL TRIALS CARRIED OUT BY THE ASSESSEE. 39.4 SIMILARLY, THE LEARNED CIT (A) HELD THAT THE S TATEMENT OF SHRI TAUSIF MONIF, PRESIDENT GLOBAL OPERATIONS CANNOT BE RELIED FOR T HE REASON THAT HE HAS JOINED THE COMPANY IN THE YEAR 2016 WHEREAS THE CASE OF TH E ASSESSEE RELATES FOR THE ASSESSMENT YEAR 2013-14. HOWEVER, HE HAS PROVIDED I N THE STATEMENT THAT THE ASSESSEE UNDERTAKES CLINICAL TRIALS OF PHARMACEUTIC AL PRODUCTS AND THE ASSESSEE IS REGISTERED WITH THE DSIR FOR SUCH ACTIVITIES AS SCI ENTIFIC RESEARCH AND DEVELOPMENT ACTIVITIES. 39.5 THERE WERE VARIOUS CLIENTS OF THE ASSESSEE BUT NO ENQUIRY WAS CONDUCTED BY THE AO TO ARRIVE AT THE CONCLUSION THAT THE ASSE SSEE IS NOT CARRYING OUT ANY SCIENTIFIC AND RESEARCH DEVELOPMENT ACTIVITIES. 39.6 FURTHERMORE, THE LEARNED CIT (A) ALSO HELD THA T THERE WAS NO OPPORTUNITY PROVIDED TO THE ASSESSEE FOR THE CROSS-EXAMINATION OF THE STATEMENT RECORDED DURING THE SURVEY PROCEEDINGS WHICH IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. 39.7 SIMILARLY, THE LEARNED CIT (A) FURTHER OBSERVE D THAT THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 80 IB OF THE ACT CANN OT BE DENIED MERELY ON THE BASIS THAT A COPY REVISED RETURN WAS FOUND DURING T HE SURVEY PROCEEDINGS WHEREIN SUCH CLAIM WAS NOT MADE. THOUGH THE SAME WAS NOT FI LED WITH THE DEPARTMENT IN THIS SCENARIO THAT COPY OF RETURN HAS NO BASE FOR D ISALLOWING THE DEDUCTION IN VIEW OF THE FACT THAT ALL OTHER CONDITIONS SPECIFIED UND ER THE PROVISIONS OF SECTION 80 ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 27 IB(8) OF THE ACT HAVE BEEN DULY COMPLIED WITH BY TH E ASSESSEE. THERE WAS NO ADVERSE REPORT BROUGHT ON RECORD BY THE AO EVIDENCI NG THAT THE ASSESSEE FAILED TO COMPLY THE PROVISIONS OF SECTION 80 IB(8) OF THE AC T. ACCORDINGLY THE LEARNED CIT (A) ALLOWED THE GROUND OF APPEAL RAISED BY THE ASSE SSEE. 40. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 41. THE LEARNED DR BEFORE US CONTENDED THAT THE ASS ESSEE CLAIMED DEDUCTION UNDER SECTION 80 IB(8) OF THE ACT FIRST TIME IN THE ASSESSMENT YEAR 2003-04 AND ITS PERIOD OF 10 YEARS HAS EXPIRED IN THE ASSESSMENT YE AR 2012-13. THEREFORE THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTIO N 80 IB(8) OF THE ACT FOR THE YEAR UNDER CONSIDERATION. THE LEARNED DR VEHEMENTLY SUPP ORTED THE ORDER OF THE AO. 42. ON THE OTHER HAND THE LEARNED AR BEFORE US FILE D A PAPER BOOK RUNNING FROM PAGES 1 TO 553 AND SUBMITTED THAT THE ASSESSEE WAS APPROVED FOR THE DEDUCTION UNDER SECTION 80 IB(8) OF THE ACT FOR THE YEAR UNDER CONSIDERATION BY THE ORDER OF THE DSIR. THEREFORE, THE AO HAD NO JUR ISDICTION ON QUESTIONING ON THE DEDUCTION CLAIMED BY THE ASSESSEE. 42.1 THE LEARNED AR ALSO CONTENDED THAT THE REVENUE HAS ALLOWED THE DEDUCTION TO THE ASSESSEE ON ITS ACTIVITIES CARRIED OUT IN TH E EARLIER YEARS. FURTHERMORE, THERE WAS NO CHANGE IN THE ACTIVITIES OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION VIZ A VIZ THE EARLIER ASSESSMENT YEARS. THE LEARNED AR VEHEMENTLY SUPPORTED THE ORDER OF THE LEARNED CIT (A). 43. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. FOR CLAIMING THE DED UCTION UNDER SECTION 80 IB(8) OF THE ACT, THE ASSESSEE HAS TO COMPLY WITH THE CONDIT IONS AS DETAILED UNDER: I. CARRYING SCIENTIFIC RESEARCH AND DEVELOPMENT ACTIVI TY II. COMPANY REGISTERED IN INDIA III. HAVING MAIN OBJECT OF SCIENTIFIC AND INDUSTRIAL RES EARCH AND DEVELOPMENT IV. APPROVED BY THE PRESCRIBED AUTHORITY I.E. DSIR ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 28 43.1 THE AO IN HIS ORDER FRAMED UNDER SECTION 143(3 ) OF THE ACT HAS NOWHERE ALLEGED THAT THE ASSESSEE HAS VIOLATED ANY OF THE P ROVISIONS OF SECTION 80 IB(8) OF THE ACT. AS SUCH THE CLAIM OF THE ASSESSEE WAS REJE CTED BY THE AO ON THE REASONING THAT THE ASSESSEE IS NOT ENGAGED IN THE A CTIVITY OF RESEARCH AND DEVELOPMENT ACTIVITIES AS CONTEMPLATED UNDER THE PR OVISIONS OF SECTION 80 IB (8) OF THE ACT. IN THIS REGARD WE NOTE THAT THE GOVERNM ENT AUTHORITY I.E. DSIR HAS APPROVED THE ACTIVITIES OF THE ASSESSEE AS RESEARCH AND DEVELOPMENT ACTIVITY WHICH ARE ELIGIBLE FOR THE DEDUCTION UNDER SECTION 80 IB(8) OF THE ACT. THUS THE QUESTION ARISES WHETHER THE AO CAN GO ON TO HOLD TH AT THE ACTIVITIES OF THE ASSESSEE ARE NOT IN THE NATURE OF RESEARCH AND DEVE LOPMENT ACTIVITIES WHICH IS AGAINST THE APPROVAL GRANTED BY THE DSIR. TO OUR MI ND, THE AO BEING A NON- TECHNICAL PERSON IN RELATION TO THE RESEARCH AND DE VELOPMENT ACTIVITIES CARRIED ON BY THE ASSESSEE HAS EXCEEDED HIS JURISDICTION IN HO LDING THAT THE ASSESSEE IS NOT ENGAGED IN THE RESEARCH AND DEVELOPMENT ACTIVITIES, KNOWING FULLY WELL THAT THE ASSESSEE HAS BEEN APPROVED BY THE DSIR AND ITS CLAI M HAS BEEN ALLOWED BY THE REVENUE IN THE EARLIER ASSESSMENT YEARS. IN OTHER W ORDS, THE AO CANNOT DISALLOW THE DEDUCTION OF THE ASSESSEE ONCE THE APPROVAL HAS BEEN GRANTED BY THE PRESCRIBED AUTHORITY FOR THE RESEARCH AND DEVELOPME NT ACTIVITIES AS HELD BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF PR. CIT V S. BA RESEARCH INDIA LTD IN TAX APPEAL NO. 233 AND 234 OF 2016 REPORTED IN [2016] 7 0 TAXMANN.COM 268 [GUJ] WHEREIN IT WAS HELD AS UNDER: UNDER THE CIRCUMSTANCES, ONCE SUCH AUTHORITY GRANTS APPROVAL AND SUCH APPROVAL HOLDS THE FIELD, IT WOULD NOT BE OPEN FOR THE ASSESSING OFFIC ER OR ANY OTHER REVENUE AUTHORITY TO GO BEHIND SUCH APPROVAL CERTIFICATE AND RE-EXAMINE FOR HIMSELF, THE FULFILMENT OF THE CONDITIONS CONTAINED IN RULE 18DA(1). THESE CONDITI ONS ARE PRESCRIBED IN TERMS OF CLAUSE (IV) OF SECTION 80-IB(8A). THE COMMISSIONER WAS, TH EREFORE, COMPLETELY IN ERROR IN OBSERVING THAT EVEN THOUGH THE ASSESSEE HAD VALID A PPROVAL ISSUED BY THE PRESCRIBED AUTHORITY, THE ASSESSING OFFICER STILL HAD TO EXAMI NE WHETHER SUCH COMPANY HAD FULFILLED THE CONDITIONS REFERRED TO IN CLAUSE (IV), AS SUCH OTHER CONDITIONS AS MAY BE PRESCRIBED, REFERENCE TO WHICH WE FIND IN RULE 18DA. ANY OTHER VIEW WOULD CREATE CONFLICT OF DECISION- MAKING PROCESS. EVEN REVENUE COULD NOT DISPUTE THAT MANY OF THESE REQUIREMENTS PRESCRIBED UNDER RULE 18DA ARE TO BE EXAMINED BY TH E PRESCRIBED AUTHORITY. IF ONCE THE PRESCRIBED AUTHORITY EXAMINES SUCH CONDITIONS AND U PON BEING SATISFIED THAT THE CONDITIONS ARE FULFILLED, GRANTS APPROVAL, CAN THE ASSESSING O FFICER TAKE A DIFFERENT VIEW? THE ANSWER OBVIOUSLY HAS TO BE IN THE NEGATIVE. FIRST AND FORE MOST, THE PRESCRIBED AUTHORITY IS A SPECIALISED BODY HAVING EXPERTISE IN THE FIELD OF S CIENTIFIC RESEARCH AND DEVELOPMENT. THE REQUIREMENTS ARE EXTREMELY COMPLEX SCIENTIFIC REQUI REMENTS AND HAVE THEREFORE, BEEN RIGHTLY PLACED IN THE HANDS OF AN EXPERT BODY TO JU DGE. SECONDLY, THERE IS NO REASON WHY ONCE AN AUTHORITY WHICH IS PRESCRIBED UNDER THE RUL ES FOR A SPECIFIC PURPOSE HAS BEEN ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 29 INVESTED WITH STATUTORY FUNCTIONS, THE ASSESSING OF FICER SHOULD BE ALLOWED TO OVERRULE THE DECISION OF THE SAID BODY. THIRDLY, THERE ARE MULTI PLE INDICATIONS WITHIN THE RULES THEMSELVES. UNDER RULE 18D(2), EXTENSION OF APPROVA L ONCE GRANTED IS SUBJECT TO SATISFACTORY PERFORMANCE OF THE COMPANY, TO BE JUDG ED ON PERIODIC REVIEW. FURTHER, RULE 18DA(3) GIVES WIDE POWERS TO THE PRESCRIBED AUTHORI TY TO WITHDRAW THE APPROVAL IF IT IS FOUND THAT THE SAME WAS TO AVOID PAYMENT OF TAXES B Y ITS GROUP COMPANIES OR COMPANIES RELATED TO ITS DIRECTORS OR MAJORITY OF ITS SHAREHO LDERS OR THAT ANY PROVISIONS OR THE RULES HAVE BEEN VIOLATED. THUS ONCE AGAIN THE TASK OF JUD GING WHETHER THE PROVISIONS OR THE RULES HAVE BEEN VIOLATED OR NOT, HAS ENTRUSTED TO T HE PRESCRIBED AUTHORITY WITH MATCHING POWERS FOR WITHDRAWAL OF THE APPROVAL, IF THE AUTHO RITY IS SATISFIED ABOUT SUCH BREACH. [PARA 18] 43.2 IT IS ALSO SIGNIFICANT TO NOTE THAT THERE BEIN G NO CHANGE IN THE FACTS AND UNDER THE PROVISIONS OF LAW, THE PRINCIPLES OF CONS ISTENCY NEEDS TO BE APPLIED AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CI T VS. EXCEL INDUSTRIES LTD REPORTED IN [2013] 358 ITR 295 (SC) WHERE THE HONB LE COURT OBSERVED AS UNDER: SECONDLY, AS NOTED BY THE TRIBUNAL, A CONSISTENT VI EW HAS BEEN TAKEN IN FAVOUR OF THE ASSESSEE ON THE QUESTIONS RAISED, STARTING WITH THE ASSESSMENT YEAR 1992-93, THAT THE BENEFITS UNDER THE ADVANCE LICENCES OR UNDER THE DU TY ENTITLEMENT PASS BOOK DO NOT REPRESENT THE REAL INCOME OF THE ASSESSEE. CONSEQUE NTLY, THERE IS NO REASON TO TAKE A DIFFERENT VIEW UNLESS THERE ARE VERY CONVINCING REA SONS, NONE OF WHICH HAVE BEEN POINTED OUT BY THE REVENUE. [PARA 28] IT APPEARS FROM THE RECORD THAT IN SEVERAL ASSESSME NT YEARS, THE REVENUE ACCEPTED THE ORDER OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE AND DID NOT PURSUE THE MATTER ANY FURTHER BUT IN RESPECT OF SOME ASSESSMENT YEARS THE MATTER WAS TAKEN UP IN APPEAL BEFORE THE HIGH COURT BUT WITHOUT ANY SUCCESS. THAT BEING SO, THE REVENUE CANNOT BE ALLOWED TO FLIP- FLOP ON THE ISSUE AND IT OUGHT LET THE MATTER REST RATHER THAN SPEND THE TAXPAYERS' MONEY IN PURSUING LITIGATION FOR THE SAKE OF IT. [PARA 31 ] 43.3 WE ALSO FIND THAT DURING THE SURVEY PROCEEDING S STATEMENTS OF VARIOUS PERSONS WERE RECORDED WHICH WERE USED BY THE AO TO HOLD THAT THE ASSESSEE IS NOT ENGAGED IN THE RESEARCH AND DEVELOPMENT ACTIVIT IES AS ENVISAGED UNDER THE PROVISIONS OF SECTION 80 IB(8) OF THE ACT. FIRST OF ALL, WE NOTE THAT NO RELIANCE CAN PLACED ON THESE STATEMENTS IN VIEW OF THE FACT THAT THE OPPORTUNITY OF CROSS- EXAMINATION WAS NOT AFFORDED TO THE ASSESSEE WHICH WAS MANDATORY IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF AN DAMAN TIMBER INDUSTRIES VS. COMMISSIONER OF CENTRAL EXCISE KOLKATA-II REPORTED IN [2015] 62 TAXMANN.COM 3 (SC) WHERE THE HONBLE APEX COURT HELD AS UNDER: 6. ACCORDING TO US, NOT ALLOWING THE ASSESSEE TO CROS S-EXAMINE THE WITNESSES BY THE ADJUDICATING AUTHORITY THOUGH THE STATEMENTS OF THO SE WITNESSES WERE MADE THE BASIS OF THE IMPUGNED ORDER IS A SERIOUS FLAW WHICH MAKES TH E ORDER NULLITY INASMUCH AS IT AMOUNTED TO VIOLATION OF PRINCIPLES OF NATURAL JUST ICE BECAUSE OF WHICH THE ASSESSEE WAS ADVERSELY AFFECTED. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 30 43.4 FURTHERMORE, THESE STATEMENTS WERE SUFFERING F ROM CERTAIN INFIRMITIES. SUCH AS, THE STATEMENT OF SHRI NARESH KHEMANI AGM FINANC E AND PURCHASE CANNOT BE RELIED UPON FOR THE SIMPLE REASON THAT HE DOESNT H AVE ANY TECHNICAL KNOWLEDGE ABOUT THE SCIENTIFIC RESEARCH AND DEVELOPMENT ACTIV ITIES OF THE ASSESSEE. LIKEWISE, THE STATEMENT OF SHRI JITESH PATEL BEING A PERSON O F THE 3 RD PARTY CANNOT BE REFERRED TO DRAW AN INFERENCE THAT THE ASSESSEE WAS NOT CARRYING OUT ANY RESEARCH AND DEVELOPMENT ACTIVITIES. MOVING FURTHER, SHRI TA USIF PATEL HAS JOINED THE ASSESSEE COMPANY IN THE YEAR 2016 ONLY WHEREAS THE YEAR UNDER CONSIDERATION IS 2013-14. THEREFORE, SUCH PERSON WAS NOT CONNECTED W ITH THE AFFAIRS OF THE BUSINESS OF THE ASSESSEE DURING THE RELEVANT TIME. 43.5 WE HAVE ALSO SEEN THE APPROVALS GRANTED BY THE DSIR, AS RECORDED IN THE ORDER OF THE LEARNED CIT (A), WE FIND THAT INITIAL ASSESSMENT YEAR FOR THE DEDUCTION UNDER SECTION 80 IB(8) OF THE ACT WAS FOR THE ASSES SMENT YEAR 2004-05. THE APPROVAL FROM THE PRESCRIBED AUTHORITY IS MANDATORY FOR CLAIMING THE DEDUCTION. ADMITTEDLY, THE ASSESSEE HAS CLAIMED DEDUCTION FOR THE ASSESSMENT YEAR 2003-04 UNDER SECTION 80 IB(8) OF THE ACT WHICH WAS ALSO AL LOWED BY THE REVENUE. THUS IT APPEARS THAT THE ASSESSEE HAS WRONGFULLY CLAIMED TH E DEDUCTION UNDER SECTION 80 IB(8) OF THE ACT FOR THE ASSESSMENT YEAR 2003-04 UN DER THE BONA FIDES BELIEVE THAT IT WILL GET THE APPROVAL IN THAT PARTICULAR YE AR. BUT THE REVENUE FAILED TO TAKE A NOTE OF SUCH WRONG DEDUCTION CLAIMED BY THE ASSES SEE. THUS THE QUESTION ARISES, WHETHER THE AO CAN DISTURB THE DEDUCTION CL AIMED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION BY HOLDING THAT IT IS THE 11 TH YEAR IN THE GIVEN FACTS AND CIRCUMSTANCES. IN THIS REGARD, WE ARE OF THE VIEW T HAT THE INACTION ON THE PART OF THE REVENUE CANNOT DISENTITLE THE ASSESSEE FOR ITS RIGHTFUL CLAIM. ONCE THE REVENUE HAS MISSED THE BUS FOR DISALLOWING THE DEDUCTION FO R THE ASSESSMENT YEAR 2003- 04, IT CANNOT CHALLENGE THE DEDUCTION ON THIS REASO NING IN THE YEAR UNDER CONSIDERATION UNTIL AND UNLESS THERE WAS SOME VIOLA TION OF THE PROVISIONS OF LAW UNDER SECTION 80 IB(8) OF THE ACT R.W. RELEVANT RUL ES I.E. RULE 18D AND 18DA OF INCOME TAX RULE. AS WE HAVE ALREADY HELD THAT THERE WAS NO VIOLATION OF THE PROVISIONS OF SECTION 80 IB(8) OF THE ACT FOR THE Y EAR UNDER CONSIDERATION, THE ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 31 ASSESSEE CANNOT BE DENIED FOR ITS RIGHTFUL CLAIM. I N VIEW OF THE ABOVE AND AFTER CONSIDERING THE FACTS IN TOTALITY, WE DO NOT FIND A NY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A). ACCORDINGLY WE UPHOLD THE SAME. TH US THE AO IS DIRECTED TO ALLOW THE DEDUCTION TO THE ASSESSEE UNDER THE PROVISIONS OF SECTION 80IB OF THE ACT. HENCE THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 44. THE SECOND ISSUE RAISED BY THE REVENUE IS THAT THE LEARNED CIT (A) ERRED IN DELETING THE ADJUSTMENTS MADE BY THE TPO/AO WITH RE SPECT TO THE INTEREST FREE ADVANCES TO THE AES. 45. AT THE OUTSET, WE NOTE THAT THE IDENTICAL ISSUE HAS BEEN RAISED BY THE REVENUE IN ITA NO. 3470/AHD/2015 WHICH HAS BEEN DEC IDED IN FAVOUR OF THE ASSESSEE VIDE PARAGRAPH NUMBER 10 OF THIS ORDER. FO R THE DETAILED DISCUSSION, PLEASE REFER THE RELEVANT PARAGRAPH. ACCORDINGLY, W E DISMISS THE GROUND OF APPEAL RAISED BY THE REVENUE. 46. THE NEXT ISSUE RAISED BY THE REVENUE IS THAT TH E LEARNED CIT (A) ERRED IN DELETING THE ADJUSTMENTS MADE BY THE TPO/AO WITH RE SPECT TO CORPORATE GUARANTEE PROVIDED BY THE ASSESSEE. 47. DURING THE YEAR UNDER CONSIDERATION, AXIS BANK OF INDIA HAS ISSUED A STANDBY LETTER OF CREDIT FOR < 32.75 CRORE IN FAVOU R OF ASSESSEES AE NAMELY M/S LAMBDA THERAPEUTIC RESEARCH INC (CANADA) ON ITS REQ UEST. FOR WHICH THE AXIS BANK HAS CHARGED A COMMISSION OF < 23,52,607/- FROM THE ASSESSEE. SUBSEQUENTLY THE ASSESSEE GOT REIMBURSEDTHE COMMISSION CHARGES P AID BY IT FROM M/S LAMBDA THERAPEUTIC RESEARCH INC (CANADA). THE ASSESSEE CLA IMED THAT THE CORPORATE GUARANTEE PROVIDED TO AE IS IN THE NATURE OF SHAREH OLDER ACTIVITY AND AN INTRAGROUP ACTIVITY CARRIED OUT BECAUSE OF OWNERSHI P INTEREST. THEREFORE THE PROVISION OF TRANSFER PRICING WILL NOT APPLY IN THE CASE ON HAND. 47.1 HOWEVER THE TPO OBSERVED THAT DUE THE STANDBY LETTER CREDIT ISSUED TO THE AE M/S LAMBDA THERAPEUTIC RESEARCH INC (CANADA) GOT DIRECT BENEFIT AND INCURRED LOW INTEREST CHARGES ON LOANS TAKEN FROM CANADIAN I MPERIAL BANK OF COMMERCE. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 32 THUS IT IS IN THE NATURE OF FINANCIAL SERVICES PROV IDED BY THE ASSESSEE TO ITS AE FOR WHICH IT INCURRED COST IN FORM OF COMMISSION PAID T O AXIS BANK INDIA, THEREFORE THE SAME NEEDS TO BE DETERMINED AT ARM LENGTH FOR THE P URPOSE OF TRANSFER PRICING. ACCORDINGLY, THE TPO WORKED MARGIN OF 24.1% ON COST I.E. < 23,52,607/- BY EMPLOYING CPM AS MOST APPROPRIATE METHOD AND MADE U PWARD ADJUSTMENT OF < 29,19,586/- ( 23,52,607 + 24.1%) TO THE TOTAL INCOM E OF THE ASSESSEE. 48. AGGRIEVED ASSESSEE PREFERRED TO APPEAL TO THE L EARNED CIT (A), WHO PARTLY DELETED THE UPWARD ADJUSTMENT MADE BY THE AO BY OBS ERVING AS UNDER: 3.11. THE APPELLANT'S CONTENTION THAT AS PER THE PR OVISIONS OF SECTION 92(1), IT IS CLEAR THAT THE INCOME WHICH IS ACTUALLY ARISING FROM AN INTERN ATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS' LENGTH PRICE AND IT WAS NOT THE INTENTION OF THE LEGISLATURE TO DRAG INTO NOTIONAL INCOME UNDER THE TRANSFER PRICIN G SCHEME BUT TO ACTUAL INCOME WHICH IS ARISING FROM AN INTERNATIONAL TRANSACTION SUBJECTED TO THE REGIME OF TRANSFER PRICING PROVISIONS ARE FOUND CONVINCING TO A LITTLE EXTENT. THE APPELLANT'S CONTENTION THAT ON THE FACTS OF THE CASE, MERELY PROVIDING GUARANTEE ADMIT TEDLY DOES NOT INVOLVE ANY PROFIT ELEMENT, THE VERY PROVISION OF SECTION 92 CANNOT BE INVOKED HAVE SOME SUBSTANCE IN VIEW OF THE CIRCULAR NO. 14 OF 2001 DATED 22/11/2001 I.E . EXPLANATORY NOTES ON PROVISIONS RELATING TO DIRECT TAXES IN FINANCE ACT, 2001 AND A LSO TO THE MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL, 2002, PROVISIONS RE LATING TO DIRECT TAXES DATED 28/02/2002 AND ALSO THE CIRCULAR NO. 8 OF 2002 DATED 27/08/200 2 I.E. EXPLANATORY NOTES ON PROVISIONS RELATING TO DIRECT TAXES IN FINANCE ACT, 2002. IT H AS BEEN NOTICED THAT BY PROVIDING THE CORPORATE GUARANTEE TO THE AXIS BANK FOR THE AE, TH ERE WAS PAYMENT OF GUARANTEE CHARGES BY THE APPELLANT TO THE BANK. SINCE AFTER ] AMENDME NT IN THE DEFINITION OF INTERNATIONAL TRANSACTION UNDER THE PROVISIONS-OF SECTION 92B OF THE I. T. ACT, IT HAS BEEN NOTICED THAT PROVIDING THE GUARANTEE HAS TO BE SEEN AS PER ALP. IN THIS REGARD, VARIOUS JUDGMENTS HAVE BEEN CITED BY THE APPELLANT WHEREBY SIMILAR NATURE OF GUARANTEES HAVE BEEN ADJUSTED AT THE ARMS' LENGTH PRICE. 3.12. IN VIEW OF THE AFORESAID DISCUSSION, IT IS NO TICED THAT THE APPELLANT HIMSELF HAS MADE THE DISALLOWANCE OF BANK GUARANTEE CHARGES PAID OF RS.23,52,607/- IN THE COMPUTATION OF INCOME OF THE APPELLANT COMPANY AND THEREFORE, THE SAME CANNOT BE ONCE AGAIN CONSIDERED FOR UPWARD ADJUSTMENT, OTHERWISE IT WOUL D TANTAMOUNT TO DOUBLE TAXATION OF THE SAME AMOUNT. FURTHER WITH REGARD TO MARK UP ON THE GUARANTEE CHARGES WORKED OUT BY THE AO @ 24.1% WHICH AMOUNTED TO RS.5,66,979/- I S FOUND CORRECT AND HENCE, THE SAME IS CONFIRMED IN VIEW OF THE DISCUSSION MADE IN THE TPOS ORDER, AS IT IS CLEAR THAT THE PROVISION OF GUARANTEE SERVICE IS AN INTERNATIONAL TRANSACTION WHICH IS REQUIRED TO BE BENCHMARKED BY ADOPTING THE CPS METHOD. THUS, THE U PWARD ADJUSTMENT TO THE EXTENT OF RS.5,66,979/- IS CONFIRMED AND RELIEF IS GRANTED FO R THE BALANCE AMOUNT. 49. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) BOTH THE REVENUE AND THE ASSESSEE ARE IN APPEAL BEFORE US. THE REVENUE I S IN APPEAL AGAINST THE RELIEF PROVIDED FOR < 23,52,607/- WHEREAS THE ASSESSE IS I N APPEAL FOR ADDITION SUSTAINED OF < 5,66,979/- ONLY BY THE LD. CIT-A. THE RELEVANT GROUND OF THE ASSESSEES APPEAL IN ITA NO 1751/AHD/2017 READS AS UNDER: ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 33 3. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW A ND ON THE FACTS OF THE CASE IN HOLDING THAT CORPORATE GUARANTEE GIVEN TO ASSOCIATE ENTERPR ISE IS AN 'INTERNATIONAL TRANSACTION' FALLING WITHIN THE PURVIEW OF TRANSFER PRICING PROV ISIONS. 4. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW A ND ON THE FACTS OF THE CASE IN HOLDING THAT DIRECT AND BINDING DECISION OF JURISDICTIONAL TRIBUNAL WHICH HAS CONSIDERED ALL THE EARLIER JUDGMENTS ON THE ISSUES IN THE CASE OF MICR O INK LIMITED VS ACIT (2015)(63 TAXMANN.COM 353) IS NOT TO BE FOLLOWED, DESPITE THE SAME BEING APPLICABLE ON THE FACTS OF THE CASE. 5. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW A ND ON THE FACTS OF THE CASE IN CONFIRMING THE UPWARD ADJUSTMENT TO THE EXTENT OF RS.5,66,979/ -@ 24.1% MARKUP ON ACCOUNT OF CORPORATE GUARANTEE GIVEN TO ASSOCIATE ENTERPRISE W HILE DETERMINING ARM'S LENGTH PRICE UNDER THE PROVISIONS OF TRANSFER PRICING. 6. BOTH THE LOWER AUTHORITIES HAVE PASSED THE ORDERS WITHOUT PROPERLY APPRECIATING THE FACTS AND THEY FURTHER ERRED IN GROSSLY IGNORINGVAR IOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEENCONSIDERED BEFORE PASSING THE IMPUGNED ORDER. T HIS ACTION OF THE LOWER AUTHORITIES IS IN CLEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JU STICE AND THEREFORE DESERVES TO BE QUASHED. 50. THE LEARNED DR BEFORE US SUBMITTED THAT THE ASS ESSEE FOR FURNISHING THE BANK GUARANTEE TO THE AE HAS INCURRED THE COST. LIK EWISE, THE AE HAS GOT THE BENEFIT OF LOW INTEREST ON THE LOAN OBTAINED BY IT AFTER OBTAINING THE BANK GUARANTEE FROM THE ASSESSEE. ACCORDINGLY, THE LEARN ED AR CONTENDED THAT IMPUGNED TRANSACTION FOR FURNISHING THE BANK GUARAN TEE IS AN INTERNATIONAL TRANSACTION WHICH NEEDS TO BE BENCHMARKED UNDER THE PROVISIONS OF THE ACT. THE LEARNED DR ALSO CONTENDED THAT THE FACTS OF THE CAS E MICRO INK LTD. VS. ACIT ARE DISTINGUISHABLE FROM THE FACTS OF THE CASE ON HAND. AS PER THE LEARNED DR THERE WAS NO BANK GUARANTEE INVOLVED IN THE CASE OF MICRO INK LTD. WHEREAS IN THE CASE ON HAND THE ASSESSEE HAS FURNISHED THE BANK GUARANT EE AFTER INCURRING THE COST. 51. ON THE OTHER HAND, THE LEARNED AR BEFORE US SUB MITTED THAT THE CORPORATE GUARANTEE FURNISHED BY THE ASSESSEE ON BEHALF OF IT S SUBSIDIARY IS IN THE NATURE OF QUASI CAPITAL/SHAREHOLDER ACTIVITY. THEREFORE THE S AME NEEDS TO BE EXCLUDED FROM THE SCOPE OF INTERNATIONAL TRANSACTION. 52. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS ON RECORD. AT THE OUTSET WE NOTE THAT THE FACT OF ISSUE ON HAN D HAS BEEN ELABORATED IN ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 34 PREVIOUS PARAGRAPH, THEREFORE WE ARE NOT INCLINED T O REPEAT THE SAME FOR THE SAKE OF BREVITY. HENCE WE PROCEED TO ADJUDICATE THE SAME ACCORDINGLY. 52.1 THE PROVISIONS OF SECTION 92B OF THE ACT DEFIN ES THE PARAMETERS OF WHAT CONSTITUTES AN INTERNATIONAL TRANSACTION. ALTHOUGH THE AMBIT OF INTERNATIONAL TRANSACTION WAS WIDE ENOUGH, YET DUE TO JUDICIAL IN TERPRETATION, CERTAIN CLASSES OF TRANSACTIONS WERE BEING LEFT OUT OF THE TRANSFER PR ICING NET. TO TACKLE THE SAME, BY THE FINANCE ACT OF 2012AN EXPLANATION TO SECTION 92 B[2] OF THE ACT WAS BROUGHT ON THE STATUTE WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL 2002. THE EXPLANATION IS CLARIFICATORY IN NATURE AND ADDEDCERTAIN CATEGORIES OF TRANSACTIONS, INTER ALIA, THE TRANSACTION AS SPECIFIED UNDER CLAUSE (C) OF EXPLAN ATION (I) TO SECTION 92BOF THE ACT WITHIN THE AMBIT OF INTERNATIONAL TRANSACTIONS WHI CH IS REPRODUCED AS UNDER: [ EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED THAT ( I ) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHALL INCLUDE ( A ) *********** ( B ) ************* ( C ) CAPITAL FINANCING, INCLUDING ANY TYPE OF LONG-TE RM OR SHORT-TERM BORROWING, LENDING OR GUARANTEE, PURCHASE OR SALE OF MARKETABLE SECURI TIES OR ANY TYPE OF ADVANCE, PAYMENTS OR DEFERRED PAYMENT OR RECEIVABLE OR ANY O THER DEBT ARISING DURING THE COURSE OF BUSINESS; 52.2 IT CAN BE SEEN THAT THE GUARANTEE WAS INCLUDED WITHIN THE AMBIT OF INTERNATIONAL TRANSACTION VIDE THE FINANCE ACT 2012 WITH RETROSPECTIVE EFFECT. THUS THERE REMAINS NO AMBIGUITY TO THE FACT THAT CORPORA TE GUARANTEE EXTENDED BY THE ASSESSEE TO ITS AE IS AN INTERNATIONAL TRANSACTION AND THEREFORE THE SAME HAS TO BE BENCHMARKED AT THE ARM LENGTH PRICE. HOWEVER, WE NO TE THAT THE DIFFERENT BENCHES OF THE ITAT HAVE TAKEN DIFFERENT VIEW. SOME OF THEM HELD THAT THE TRANSACTION OF CORPORATE GUARANTEE IS AN INTERNATIO NAL TRANSACTION WHEREAS SOME OF THEM HELD THAT THE TRANSACTION OF CORPORATE GUARANT EE IS OUTSIDE THE PURVIEW OF THE INTERNATIONAL TRANSACTION INCLUDING THE AHMEDAB AD TRIBUNAL IN THE CASE OF MICRO INK LTD. VS. ADDL. CIT REPORTED IN [2015] TAXMANN.C OM 353, WHEREIN IT WAS HELD THAT THE CORPORATE GUARANTEE IS NOT INTERNATIONAL T RANSACTION. AT THE TIME OF HEARING, THE LEARNED AR HEAVY RELIED ON THIS ORDER OF THE TRIBUNAL. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 35 52.3 HOWEVER, WE FIND THAT THE FACTS OF THE ORDER O F THIS TRIBUNAL IN THE CASE OF MICRO INK LTD. (SUPRA) ARE DISTINGUISHABLE FROM THE FACTS OF THE CASE ON HAND. IN THAT CASE, THERE WAS NO COST INCURRED BY THE ASSESS EE (MICRO INK LTD.) IN PROVIDING THE CORPORATE GUARANTEE TO THE AE. FURTHERMORE THE ASSESSEE (MICRO INK LTD.) PROVIDED GUARANTEE TO ITS AES WITHOUT INVOLVING AN Y BANK. CONVERSELY, IN THE CASE ON HAND, THE ASSESSEE HAS EXTENDED THE GUARANTEE BY INVOLVING THE AXIS BANK OF INDIA AFTER INCURRING THE COST. INDEED, SUCH COST W AS REIMBURSED BY THE AE OF THE ASSESSEE ON ACTUAL BASIS AND THE SAME WAS ADDED BY THE ASSESSEE IN THE COMPUTATION OF INCOME. THUS, WHAT IS INFERRED IS TH IS THAT THE ASSESSEE HAS GIVEN CORPORATE GUARANTEE TO ITS AE AFTER AVAILING THE SE RVICES FROM THE BANK VIZ A VIZ INCURRING THE COST THERE ON WHICH WAS GIVEN IN THE COURSE OF THE BUSINESS. ACCORDINGLY, WE HOLD THAT THE CORPORATE GUARANTEE G IVEN IN THE CASE ON HAND IS THE INTERNATIONAL TRANSACTION WHICH REQUIRES TO BE BENCHMARKED AT THE ARM LENGTH PRICE. IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE F ROM THE ORDER OF HYDERABAD TRIBUNAL THE CASE OF INFOTECH ENTERPRISES LTD. VS. ADDL. CIT REPORTED IN 41 TAXMANN.COM 364 WHEREIN IT WAS HELD AS UNDER: 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MAT ERIAL AVAILABLE ON RECORD. IN THE PRESENT CASE THOUGH THE IMMEDIATE TRANSACTION IS TH AT OF THE ASSESSEE AND CITI BANK INDIA THE BENEFIT OF THE GUARANTEE IS FOR THE US SUBSIDIA RY AND HENCE THE ASSESSEE HAS RENDERED A SERVICE TO ITS US SUBSIDIARY FOR WHICH IT MUST CH ARGE FEES AT AN ARM'S-LENGTH. THIS SAME LOGIC WAS APPLIED IN ASSTT. CIT V. NIMBUS COMMUNICA TIONS [2013] 34 TAXMANN.COM 298 (MUM.) . WE ALSO NOTE THE INTRODUCTION OF RETROSPECTIVE AM ENDMENT IN SECTION 92B EXPLANATION (I)(C) WHICH SPECIFICALLY COVERS SUCH G UARANTEE PAYMENTS. FURTHERMORE THE DECISION OF SWARNADHARA IJMIT INTEGRATED TOWNSHIP D EVELOPMENT CO. (SUPRA) (TAX SUTRA) WAS IN AN ALTOGETHER DIFFERENT FACTUAL MATRIX CONCE RNING THE ASSESSEE (AN INDIAN JOINT VENTURE) REIMBURSING CORPORATE GUARANTEE FEES PAID BY ITS MALAYSIAN AE. WE DRAW SUPPORT FROM THE ORDER OF MUMBAI TRIBUNAL IN GLENMARK PHARM ACEUTICALS V. ASSTT. CIT [ITA NO.5031/MUM/2012 DATED 13-11-2013) WHICH HAS ANALYZ ED THIS ISSUE IN DETAIL AND HELD THAT 0.53% CORPORATE GUARANTEE RATE IN THAT CASE WA S APPROPRIATE. WE THEREFORE SET ASIDE THE ISSUE TO THE TPO TO DECIDE THE QUANTUM OF CORPO RATE GUARANTEE RATES IN THE INSTANT CASE FOLLOWING THE METHOD ADOPTED IN GLENMARK PHARM ACEUTICALS (SUPRA). 52.4 IN THIS REGARD WE ALSO FIND SUPPORT AND GUIDAN CE FROM THE ORDER OF THE BANGALORE ITAT IN CASE OF ADVANTA INDIA LTD. VS. AC IT REPORTED IN 64 TAXMANN.COM 251 WHERE IT WAS HELD AS UNDER: 29. IN THE CASE OF BHARTI AIRTEL LTD. (SUPRA), IT WAS AN UNDISPUTED POSITION THAT THE ISSUANCE OF THE GUARANTEE DID NOT COST THE ASSESSEE ANYTHING AND IT WAS FOR THIS REASON THAT THE COORDINATE BENCH CONCLUDED THAT THE ISSUAN CE OF GUARANTEE DID NOT HAVE ANY 'BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS O R SUCH ENTERPRISE' THUS TAKING IT OUT OF ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 36 THE AMBIT OF INTERNATIONAL TRANSACTION WHICH COULD BE SUBJECTED TO ARM'S LENGTH PRICE ADJUSTMENT. THAT WAS A CASE IN WHICH THE ASSESSEE H AD ISSUED A COMFORT LETTER TO THE BANKER AND IT WAS THE CONSIDERATION FOR ISSUANCE OF THIS COMFORT LETTER WHICH WAS SOUGHT TO BE SUBJECTED TO THE ALP ADJUSTMENTS. 30. HOWEVER, MATERIAL FACTS OF THE CASE IN THE PRESENT CASE ARE DIFFERENT INASMUCH AS IT IS AN ADMITTED POSITION THAT THE ASSESSEE DID INCUR CO STS ON ISSUANCE OF THIS GUARANTEE (I.E. PAYMENT OF RS 4,39.005 TO THE ICICI BANK IN THIS RE SPECT), AND, FOR THAT REASON, THE ISSUANCE OF GUARANTEE INDEED HAD A BEARING ON THE P ROFITS AND INCOME OF SUCH ENTERPRISE. IT CANNOT, THEREFORE, BE SAID THAT THE ISSUANCE OF GUARANTEES, ON THE FACTS AND IN THE CIRCUMSTANCES OF THIS CASE, DID NOT CONSTITUTE AN ' INTERNATIONAL TRANSACTION'. 52.5 THE NEXT ASPECTS ARISES FOR THE DETERMINATION OF THE BENCHMARK IN ORDER TO WORKING OUT THE ALP OF THE IMPUGNED INTERNATIONAL T RANSACTION. THE AO IN THE CASE ON HAND HAS ADOPTED CPM METHOD FOR WORKING OUT THE ALP USING THE DATA OF BANKS OBTAINED FROM THE MONEY CONTROL.COM. THE RELE VANT FINDING OF THE TPO/AO READS AS UNDER: 6.4 SINCE SUCH SERVICES IN THE NATURE OF GUARANTEE FEE ETC FALLS IN THE DOMAIN OF FINANCIAL SERVICES, THE FUNCTIONAL PROFILE OF THE ASSESSEE CO MPANY AND THE RISK ASSUMED BY THE ASSESSEE COMPANY IN THE PRESENT FACTS OF THE CASE I S THUS SIMILAR TO THE ENTITIES ENGAGED IN THE BUSINESS OF PROVIDING FINANCIAL SERV ICES. IN THE ARM'S LENGTH SCENARIO, WHEN THE ASSESSEE COMPANY HAD INCURRED THE COST TO THE TUNE OF 0.71% OF THE CREDIT EXTENDED, IT WOULD BE EXPECTING RETURN EQUAL TO WHA T IS EARNED BY SUCH ENTITIES ENGAGED IN PROVIDING FINANCIAL SERVICES. FOR THE PU RPOSE OF IDENTIFYING THE VALID COMPARABLES, THE GOOGLE DATABASE WAS QUERIED TO IDE NTIFY TOP 10 PRIVATE SECTOR ENTITIES ENGAGED IN EXTENDING BANKING AND OTHER FIN ANCIAL SERVICES. SUCH ENTITIES WERE IDENTIFIED FROM INFORMATION AVAILABLE AT WWW.MONEYC ONTROL.COM. THE AVERAGE MARGIN (OP/OC) OF SUCH ENTITIES WAS COMPUTED AT 24.1 % USI NG DATA AVAILABLE ON CAPITALINE DATABASE AS UNDER: SRNO. COMPANY NAME TOTAL INCOME [201303] PROFIT BEFORE TAX|201303] TOTAL COST MARGIN 1 KOTAKMAH. BANK 9203.15 1972.03 7231.12 27.3% 2 KARURVYSYA BANK 4694.99 72F.44 3969.55 18.3% 3 FEDERAL BANK 6832.01 1193.76 5638.25 21.2% 4 HDFC BANK 41917.49 9750.62 32166.8 7 30.3% 5 ICIC1 BANK 48421.3 11389.69 37031.6 1 30.8% 6 INDUSLND BANK 8346.19 1575.87 6770.32 23.3% 7 AXIS BANK 33733.68 7552.7 26180.9 28.8% ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 37 8 9 SOUTH IND. BANK 4769.22 655.85 4113.37 15.9% 10 CITY UNION BANK 2462.39 403.02 2059.37 19,6% 12 YES BANK 9551.43 1925.73 7625.7 25.3% 24.1% 6.5 APPLYING THE MARK-UP OF 24.1% ON THE AMOUNT OF RS 2 352607/- PAID TO THE AXIS BANK, THE ALP OF INTERNATIONAL TRANSACTION OF CORPORATE GUARA NTEE EXTENDED TO THE AE WAS DETERMINED AT RS 29,19,586/- AND ACCORDINGLY, THE ASSESSEE COMPAN Y WAS ISSUED WITH THE SHOW-CAUSE NOTICE AS MENTIONED IN PARA 3 OF THE ORDER. 52.6 FROM THE ABOVE, IT IS REVEALED THAT THE TPO/AO HAS TREATED THE ASSESSEE AS IF IT WAS ENGAGED IN THE BUSINESS OF FINANCIAL SERV ICES AND ACCORDINGLY THE ALP WAS DETERMINED BY COMPARING WITH THE AVERAGE MARGIN EAR NED BY THE BANKS ON COST. ADMITTEDLY, THE ASSESSEE IS NOT CARRYING OUT ANY FI NANCIAL ACTIVITY AND THEREFORE WE ARE NOT CONVINCED WITH THE BASIS ADOPTED BY THE AUT HORITIES BELOW. 52.7 MOVING AHEAD, WE NOTE THAT THERE IS NO DIFFERE NCE BETWEEN THE BANKS OR A CORPORATE ENTITY AS FAR AS CORPORATE GUARANTEE IS C ONCERNED. BOTH HAVE TO CONSIDER THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED. IN CASE OF DEFAULT BY THE BORROWER, THE CORPORATE GUARANTOR IS EXPOSED TO THE SAME RISK OF A BANK. IN CASE OF AN AE THE RISK WOULD NOT BE AS HIGH AS I N CASE OF AN OUTSIDER. THEREFORE, THE RATE CHARGED BY THE BANK FOR PROVIDI NG THE CORPORATE GUARANTEE SHOULD BE A BENCHMARKED FOR WORKING OUT THE ALP FOR THE CORPORATE GUARANTEE EXTENDED BY THE ASSESSEE TO ITS AE. IN THE CASE ON HAND, THE BANK HAS CHARGED .79% OF THE AMOUNT OF THE CORPORATE GUARANTEE AS FE ES FROM THE ASSESSEE WHICH HAS BEEN REIMBURSED TO THE ASSESSEE BY THE AE. THIS FEES IN ABSOLUTE AMOUNT WORKS OUT AT <23,52,607/- ONLY. HOWEVER, THE ASSESS EE HAS NOT ADDED ANY MARKUP ON THIS INTERNATIONAL TRANSACTION WITH ITS AE. IN T HE INTEREST OF JUSTICE AND FAIR PLAY, WE ARE OF THE VIEW THAT A SUM OF < 1,17,630/- BEING 5% OF THE FEES PAID TO THE BANK FOR THE CORPORATE GUARANTEE OF < 23,52,607/- W ILL BE SUFFICIENT TO ADD AS MARGIN OF THE ASSESSEE. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 38 52.8 REGARDING THE REVENUE APPEAL, WE NOTE THAT THE ASSESSEE HAS ALREADY MADE THE DISALLOWANCE OF <23,52,607/- IN ITS COMPUTATION OF INCOME AND FURTHER ADDITION OF THE SAME AMOUNT TO THE TOTAL INCOME OF THE ASSES SEE WILL LEAD TO THE DOUBLE ADDITION WHICH IS UNWANTED UNDER THE PROVISIONS OF LAW. ACCORDINGLY, WE ARE OF THE VIEW THAT THE DECISION OF THE LEARNED CIT (A) FOR D ELETING THE ADDITION OF <23,52,607/-DOES NOT REQUIRE ANY INTERFERENCE. HENC E, THE GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED WHEREAS THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 53. THE NEXT ISSUE RAISED BY THE REVENUE IS THAT TH E LEARNED CIT (A) ERRED IN DELETING THE ADDITION MADE BY THE AO FOR AN AMOUNT OF < 2,33,374/- REPRESENTING THE ADVANCES WITH RESPECT TO THE PREMISES TAKEN ON RENT. 53.1 THE ASSESSEE HAS WRITTEN OFF THE ADVANCES GIVE N AS RENT DEPOSITS WHICH WERE NOT RECOVERED. AS PER THE ASSESSEE SUCH LOSS H AS BEEN INCURRED IN THE COURSE OF THE BUSINESS AND THEREFORE THE SAME SHOULD BE AL LOWED AS BUSINESS LOSS. HOWEVER THE AO DISALLOWED THE SAME ON THE REASONING THAT SUCH RENT DEPOSITS REPRESENTS THE CAPITAL ADVANCE AND THEREFORE THE SA ME CANNOT BE ALLOWED AS DEDUCTION. 54. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A) WHO DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER: 4.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, ASSESSMENT ORDER AND SUBMISSION OF THE APPELLANT. THE APPELLANT HAS CLAIMED THE DED UCTION OF RS.2,33,374/- AS ADVANCE FOR RENT NOT RECEIVED BACK BY THE APPELLANT. THE AO DID NOT GRANT THE DEDUCTION FOR THE REASON THAT IT WAS A CAPITAL ADVANCE WHICH WAS NOT RECOVER ABLE AND NOT A BUSINESS EXPENDITURE. I 4.4. ON THE OTHER SIDE, THE APPELLANT HAS CLAIMED T HAT IT WAS BUSINESS EXPENDITURE FOR THE REASON THAT THE APPELLANT COMPANY HAS TAKEN A P REMISES ON RENT FOR BUSINESS PURPOSE AND SUBSEQUENTLY THIS PREMISE WAS VACATED BY THE AP PELLANT AND PAID ALL THE RENT DUES. HOWEVER, THE RENT DEPOSIT COULD NOT BE RECOVERED. 4.5. HAVING CONSIDERED THE FACTS AND SUBMISSIONS, I T IS NOTICED THAT THE APPELLANT HAD GIVEN THE ADVANCE FOR THE PURPOSE OF BUSINESS AND S UCH ADVANCE COULD NOT BE RECOVERED IS NOTHING BUT A BUSINESS LOSS WHICH IS ALLOWABLE U/S. 37(1) OF THE I. T. ACT, 1961. THE SAME CANNOT BE SAID LO BE CAPITAL LOSS AS IT WAS NOT A C LAIM PERTAINING TO SOME CAPITAL ASSET OR EXPENDITURE HAVING INCURRED FOR SOME ENDURING BENEF ITS. THUS, THE DISALLOWANCE MADE BY THE AO IS FOUND NOT CORRECT AND JUSTIFIED AND HENCE , THE SAME IS DELETED. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 39 55. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 56. THE LEARNED DR BEFORE US VEHEMENTLY SUPPORTED T HE ORDER OF THE AO. 57. ON THE OTHER HAND, THE LEARNED AR BEFORE US CON TENDED THAT THE ADVANCES WERE GIVEN BY THE ASSESSEE IN ITS NORMAL BUSINESS A CTIVITIES. FURTHERMORE, THERE HAS NOT COME ANY FIXED ASSETS INTO EXISTENCE OUT OF SUCH EXPENSES. ACCORDINGLY, THE LEARNED AR PRAYED THAT IMPUGNED EXPENSES NEED T O BE ALLOWED AS DEDUCTION. THE LEARNED AR VEHEMENTLY SUPPORTED THE ORDER OF TH E LEARNED CIT (A). 58. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THERE IS NO DISPUTE TO THE FACT THAT THE PR EMISES WERE TAKEN BY THE ASSESSEE FOR ITS BUSINESS PURPOSES. IT IS A PREVAIL ING PRACTICE THAT THE TENANTS IS TO MAKE THE RENT DEPOSITS WITH THE LANDLORD. GENERALLY THESE RENT DEPOSITS ARE RETURNED BACK TO THE TENANTS ON THE EXPIRY OF RENT AGREEMENT OR IT IS ADJUSTED AGAINST THE RENT DUE. THE ASSESSEE AGAINST SUCH ADV ANCE RENT DEPOSIT HAS NEITHER GENERATED ANY CAPITAL ASSETS NOR GETTING ANY BENEFI T OF ENDURING NATURE. THEREFORE THE SAME CANNOT BE TREATED AS CAPITAL ADVANCE AS HE LD BY THE AO. ANY EXPENSE INCURRED BY THE ASSESSEE FOR THE PURPOSE OF THE BUS INESS IS ALLOWABLE EXPENSES UNDER SECTION 37(1) OF THE ACT, IF IT IS NOT CAPITA L IN NATURE VIZ A VIZ PERSONAL IN NATURE. IN THE CASE ON HAND, SUCH ADVANCE WAS NEITH ER CAPITAL IN NATURE NOR PERSONAL IN NATURE. IN OTHER WORDS, THE PREMISES WE RE TAKEN FOR THE PURPOSE OF THE BUSINESS AND THEREFORE ANY RENT DEPOSITS WITH R ESPECT TO SUCH RENTED PREMISES ARE ALLOWABLE AS DEDUCTION AS BUSINESS LOSS. ACCORD INGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A). HENC E, THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 59. THE NEXT ISSUE RAISED BY THE REVENUE IN GROUND NO. 6 IS THAT THE LEARNED CIT (A) ERRED IN DELETING THE AMOUNT REFLECTING IN FORM 26AS WHICH WAS NOT SHOWN AS INCOME OF THE ASSESSEE. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 40 60. THE AO DURING THE ASSESSMENT PROCEEDINGS FOUND THAT THERE IS A MISMATCH IN THE AMOUNT OF INCOME SHOWN BY THE ASSESSEE IN TH E BOOKS OF ACCOUNTS VIZ A VIZ THE AMOUNT RECORDED IN FORM 26AS. AS SUCH THE ASSES SEE HAS SHOWN LESS AMOUNT IN THE BOOKS OF ACCOUNTS BY < 4,00,89,104/- THAN TH E AMOUNT RECORDED IN FORM 26AS. ACCORDINGLY, THE AO SOUGHT CLARIFICATION FROM THE ASSESSEE. 60.1 THE ASSESSEE VIDE LETTER DATED 5 TH DECEMBER 2016 SUBMITTED THAT THE INVOICES ARE RAISED AS AGREED IN THE TERMS OF THE C ONTRACT BUT THE REVENUE IS BOOKED BASED ON THE LEVEL OF THE WORK COMPLETED. IN OTHER WORDS THE PAYER DEDUCT THE TDS ON THE BASIS OF THE INVOICE ISSUED B Y THE ASSESSEE WHEREAS THE REVENUE IS RECOGNIZED IN THE BOOKS OF ACCOUNTS BASE D ON THE WORK COMPLETED. THUS THE DIFFERENCES ARE ARISING BETWEEN THE INCOME SHOWN BY THE ASSESSEE IN THE BOOKS OF ACCOUNTS VIZ A VIZ INCOME SHOWN IN THE FOR M 26AS. 60.2 THE ASSESSEE ALSO SUBMITTED THAT ALL THE TRANS ACTIONS HAVE BEEN DULY RECORDED IN THE BOOKS OF ACCOUNTS EITHER AS REVENUE OR ADVANCE FOR THE PROJECT WHICH WILL BE CREDITED TO THE INCOME ON THE COMPLET ION OF THE WORK WHICH MAY BE NEXT ACCOUNTING YEAR. THE ASSESSEE IN SUPPORT OF HI S CONTENTION FILED THE LEDGER COPIES OF THE PARTIES ALONG WITH THE TDS RECONCILIA TION. 60.3 HOWEVER, THE AO FOUND THAT THE ASSESSEE FAILED TO FURNISH THE DOCUMENTARY EVIDENCE, REFLECTING THE DIFFERENCE IN THE INCOME A S DISCUSSED ABOVE, TO JUSTIFY THAT IT HAS SHOWN SUCH DIFFERENCE AS INCOME IN THE BOOKS OF ACCOUNTS IN THE SUBSEQUENT YEAR/S. 60.4 THE AO ALSO FOUND THAT THE PAYER HAVE RECEIVED SERVICES FROM THE ASSESSEE AND THEREFORE THEY HAVE CREDITED THE ACCOUNT OF THE ASSESSEE IN THE BOOKS OF ACCOUNTS. ACCORDINGLY, THE ASSESSEE WAS TO ACCOUNT FOR SUCH INCOME IN ITS BOOKS OF ACCOUNTS BASED ON MERCANTILE SYSTEM OF ACCOUNTING. IN CASE, THE ASSESSEE DOES NOT ACCOUNT FOR THE FULL INCOME IN RESPECT OF SERVI CES PROVIDED THEN THE SAME SHOULD HAVE BEEN SHOWN UNDER THE HEAD WORK IN PROGR ESS BUT IT HAS NOT BEEN DONE SO BY THE ASSESSEE. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 41 60.5 IN VIEW OF THE ABOVE THE AO CONCLUDED THAT THE ASSESSEE HAS SUPPRESSED ITS INCOME BY NOT SHOWING THE AMOUNT OF < 4,00,89,1 04/- AS EVIDENT FROM THE DIFFERENCE IN THE INCOME SHOWN IN THE BOOKS OF ACCO UNTS VIZ A VIZ AMOUNT SHOWN IN FORM 26AS. ACCORDINGLY THE AO ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 60.6 THE ASSESSEE BEFORE THE LEARNED CIT (A) SUBMIT TED THAT IT IS FOLLOWING THE PRACTICE OF TAKING 50% ADVANCE OF THE CONTRACT VALU E AT THE TIME OF SIGNING OF THE CONTRACT AND THE BALANCE AMOUNT IS RECEIVED IN PHAS ED MANNER DEPENDING UPON THE COMPLETION OF THE WORK. HOWEVER, THE ASSESSEE R AISES INVOICE TO THE PARTY FOR THE 50% OF THE CONTRACT VALUE AT THE TIME OF SIGNIN G THE CONTRACT WHICH IS SHOWN AS AN ADVANCE IN THE BOOKS OF ACCOUNTS. SUCH ADVANC E WILL BE RECOGNIZED AS REVENUE DEPENDING UPON THE COMPLETION OF THE WORK. HOWEVER, THE OTHER PARTY I.E. PAYER SHOWS SUCH PAYMENT TO THE ASSESSEE IS AN EXPENSE AFTER DEDUCTING THE TDS IN ITS BOOKS OF ACCOUNTS. IN EFFECT, THE ENTIRE AMOUNT OF THE PROJECT IS OFFERED TO TAX BY SHOWING IT IS INCOME OVER A PERIOD OF TIM E. THE ASSESSEE IN SUPPORT OF ITS CONTENTION ALSO FILED THE COPY OF THE LEDGER OF THE PARTIES. 60.7 THE LEARNED CIT (A) AFTER CONSIDERING THE SUBM ISSION OF THE ASSESSEE OBSERVED THAT THE PROJECT OF THE ASSESSEE SPILLS OV ER IN VARIOUS YEAR/S AND THE INCOME IS RECOGNIZED IN EACH YEAR DEPENDING UPON TH E COMPLETION OF THE PROJECT. IT IS NOT THE CASE THAT THE ASSESSEE HAS NOT SHOWN THE INCOME IN THE BOOKS OF ACCOUNTS RATHER THE INCOME OF THE ASSESSEE SPREADS IN VARIOUS YEARS. FURTHERMORE, THE INCOME OF THE ASSESSEE REMAINS IN THE SAME BRAC KET OF TAXES AND THEREFORE IT WAS TAX NEUTRAL. 60.8 THE LEARNED CIT (A) ALSO OBSERVED THAT THE AMO UNT RECEIVED BY THE ASSESSEE FROM THE PARTY HAS EITHER BEEN SHOWN AS IN COME OR AS LIABILITY IN THE BOOKS OF ACCOUNTS. THE LIABILITY WAS SUBSEQUENTLY A CCOUNTED FOR AS INCOME OF THE ASSESSEE UPON THE LEVEL OF WORK COMPLETED. THIS MET HOD OF ACCOUNTING OF THE ASSESSEE IS IN FORCE SINCE INCEPTION AS PER THE ACC OUNTING STANDARD. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 42 60.9 THE LEARNED CIT (A) ALSO FOUND THAT THERE WERE INSTANCES WHERE THE ASSESSEE HAS SHOWN MORE INCOME THAN THE AMOUNT SHOW N IN THE FORM 26AS. BUT THE AO HAS ONLY SELECTED THOSE ITEMS WHERE THE INCO ME WAS SHOWN LESS IN THE PROFIT AND LOSS ACCOUNT THAN THE AMOUNT SHOWN IN FO RM 26AS WHICH IS NOT CORRECT METHOD. IF THIS FACTOR IS CONSIDERED THEN THE EFFEC TIVE DIFFERENCE WORKS OUT AT < 85,43,113/- IN PLACE OF < 4,00,89,104/- AS OBSERVED BY THE AO IN HIS ORDER. 60.10 THE LEARNED CIT (A) ALSO FOUND THAT THE ASSES SEE HAS FILED THE RECONCILIATION STATEMENT BETWEEN THE INCOME SHOWN IN THE BOOKS OF ACCOUNTS VIZ A VIZ THE AMOUNT OF INCOME REFLECTED IN FORM 26AS. ACCORDINGL Y IT WAS FOUND THAT THE INCOME OF THE ASSESSEE HAS BEEN SPREAD OVER IN VARI OUS YEARS AND NO DIFFERENCE WAS FOUND OUT. CONSEQUENTLY, THE LEARNED CIT (A) DI RECTED THE AO TO ALLOW THE CLAIM OF THE ASSESSEE SUBJECT TO THE VERIFICATION O F THE RECONCILIATION STATEMENT. 61. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 62. BOTH THE LEARNED DR AND THE AR BEFORE US VEHEME NTLY SUPPORTED THE ORDER OF THE LEARNED CIT (A) AS FAVOURABLE TO THEM. 63. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. FROM THE PRECEDING D ISCUSSION WE NOTE THAT THE ASSESSEE HAS BEEN FOLLOWING ITS POLICY FOR ITS REVE NUE RECOGNITION CONSISTENTLY. AS PER THE POLICY, THE ASSESSEE RECEIVES THE ADVANCES AT THE TIME OF SIGNING THE CONTRACT WHICH IS SHOWN AS LIABILITY IN THE BOOKS O F ACCOUNTS AND THE SAME IS ADJUSTED BY RECOGNIZING THE REVENUE IN THE PROFIT A ND LOSS ACCOUNT PROGRESSIVELY DEPENDING UPON THE LEVEL OF WORK COMPLETED. ON THE CONTRARY, THE PAYER CLAIMS THE EXPENSES IN ITS BOOKS OF ACCOUNTS UPON MAKING T HE ADVANCE PAYMENT TO THE ASSESSEE AFTER DEDUCTING THE TDS. ADMITTEDLY, THE P AYER IS CLAIMING AN EXPENSE BUT THE ASSESSEE IS NOT SHOWING CORRESPONDING INCOM E IN ITS BOOKS OF ACCOUNTS AS THE WORK WAS NOT COMPLETED UP TO THE CERTAIN STAGE. IN FACT THE ASSESSEE ACCOUNTS FOR THE INCOME UPON THE COMPLETION OF LEVEL OF WORK , THEREFORE THE ADVANCES FROM THE CUSTOMER ARE SHOWN AS LIABILITY IN THE BOOKS OF ACCOUNTS. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 43 63.1 THE PRINCIPLES OF ACCOUNTING STANDARD REQUIRES THAT THE INCOME SHOULD BE BOOKED BY THE ASSESSEE WHEN IT IS CERTAIN TO ACCRUE WHEREAS THE EXPENDITURES ARE REQUIRED TO BE RECORDED WHERE THERE IS A POSSIBILIT Y OF INCURRING THE SAME. SIMILARLY, THE ASSESSEE ALSO REQUIRE TO APPLY THE M ATCHING CONCEPT. ONCE THE ASSESSEE HAS RECEIVED THE ADVANCE BUT HAS NOT INCUR RED ANY EXPENSE AGAINST SUCH ADVANCES RECEIVED FOR RENDERING ANY SERVICE. THEN S UCH ADVANCE CANNOT BE ACCOUNTED AS INCOME. IN OTHER WORDS WHEN THE EXPENS ES ARE INCURRED BY THE ASSESSEE AGAINST SUCH ADVANCES THEN BOTH THE INCOME AND THE ADVANCE SHOULD BE ACCOUNTED FOR IN THE SAME PROPORTION. 63.2 IN THE CASE ON HAND, THERE IS NO DISPUTE TO TH E FACT THAT THE AO HAS SELECTED ONLY THOSE INSTANCES WHERE THE ASSESSEE HA S SHOWN LESS INCOME THAN THE AMOUNT SHOWN IN FORM 26AS IGNORING THE CASES WHERE THE ASSESSEE HAS SHOWN MORE INCOME IN THE BOOKS OF ACCOUNTS THEN THE AMOUN T REFLECTED IN THE FORM 26AS. IN FACT THE AO HAS USED THE METHOD FAVOURING THE REVENUE WHICH IS NOT CORRECT AS A MATTER OF PRINCIPLE. AS SUCH THE AO, S HOULD HAVE TAKEN ONLY IN THE DIFFERENCE AMOUNTING TO <85,43,113/- FOR WORKING OU T THE SUPPRESSED INCOME. HOWEVER, EVEN THE DIFFERENCE IS NOT TO BE TAKEN AS INCOME FOR THE REASON THAT THIS HAS ALREADY BEEN OFFERED TO TAX BY THE ASSESSEE IN DIFFERENT YEARS. FOR THIS PURPOSE, THE RECONCILIATION STATEMENT WAS FILED BY THE ASSESSEE BEFORE THE LEARNED CIT (A). ACCORDINGLY THE LEARNED CIT (A) ALLOWED TH E GROUND OF APPEAL OF THE ASSESSEE SUBJECT TO VERIFICATION OF RECONCILIATION STATEMENT. IN FACT, THERE IS NO AMBIGUITY IN THE DIRECTION OF THE LD. CIT-A FOR THE REASON THAT, IF THE DIFFERENCE AS HIGHLIGHTED BY THE AO, HAS BEEN ACCOUNTED FOR AS IN COME BY THE ASSESSEE ANY OTHER YEAR WHICH WILL PROVE THAT THE INCOME OF THE ASSESSEE HAS SUFFERED THE TAX OTHERWISE THE AO WILL MAKE THE ADDITION TO THE TOTA L INCOME OF THE ASSESSEE. THE DIRECTION OF THE LEARNED CIT (A) IS VERY CLEAR ON T HE ISSUE AND THEREFORE NO INTERFERENCE IS REQUIRED. HENCE THE GROUND OF APPEA L OF THE REVENUE IS DISMISSED. 64. THE ISSUE RAISED BY THE REVENUE IN GROUND NO. 7 IS THAT THE LEARNED CIT (A) ERRED IN DELETING THE ADDITION MADE BY THE AO UNDER THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF INCOME TAX RULE. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 44 65. THE AO DURING THE ASSESSMENT PROCEEDINGS FOUND THAT THE ASSESSEE HAS MADE HUGE INVESTMENTS AMOUNTING TO <59,11,96,725/- WHICH WILL GENERATE THE EXEMPTED INCOME. ACCORDINGLY, THE AO WAS OF THE VIE W THAT THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS REQUIRED TO BE MADE. ACCORDINGLY THE AO MADE THE DISALLOWANCE OF <1,17,27,579/- UNDER THE P ROVISIONS OF SECTION 14A READ WITH RULE 8D AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 66. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A), WHO DELETED THE ADDITION MADE BY THE AO BY OBSERVING TH AT THERE WAS NO INCOME EARNED BY THE ASSESSEE BY WAY OF DIVIDEND. THEREFOR E, NO DISALLOWANCE IS WARRANTED. 67. BEING AGGRIEVED BY THE ORDER OF LEARNED CIT (A) THE REVENUE IS IN APPEAL BEFORE US. 68. THE LEARNED DR AND THE AR BEFORE US VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW AS FAVOURABLE TO THEM. 69. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. UNDISPUTEDLY, THERE WAS NO INCOME EARNED BY THE ASSESSEE BEING EXEMPTED FROM TAX AND THEREFORE NO D ISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS REQUIRED TO BE MADE IN TER MS OF THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY PRIVATE LTD REPORTED IN 372 ITR 97 WHEREIN IT WAS HELD AS UNDER: SECTION 14A(1) PROVIDES THAT FOR THE PURPOSE OF COM PUTING TOTAL INCOME UNDER CHAPTER IV, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDI TURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THE ACT. IN THE INSTANT CASE, THE TRIBUNAL HAS RECORDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT THE TRIBUNAL HELD THAT DISALLOWANCE UNDER SECTION 14A COULD NOT BE MA DE. IN THE PROCESS TRIBUNAL RELIED ON THE DECISION OF DIVISION BENCH OF PUNJAB AND HARYAN A HIGH COURT IN CASE OF CIT V. WINSOME TEXTILE INDUSTRIES LTD. [2009] 319 ITR 204 IN WHICH ALSO THE COURT HAD OBSERVED THAT WHERE THE ASSESSEE DID NOT MAKE ANY C LAIM FOR EXEMPTION, SECTION 14A COULD HAVE NO APPLICATION. 69.1 AS THERE IS NO INCOME TO THE ASSESSEE BY WAY O F DIVIDEND IN THE YEAR UNDER CONSIDERATION, THERE CANNOT BE ANY DISALLOWANCE OF EXPENSES UNDER SECTION 14A ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 45 READ WITH RULE 8D AS HELD BY THE HONBLE GUJARAT HI GH COURT IN THE ABOVE STATED CASE. ACCORDINGLY WE DO NOT FIND ANY REASON TO INTE RFERE IN THE FINDING OF THE LEARNED CIT (A). HENCE THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 70. THE NEXT ISSUE RAISED BY THE REVENUE IN GROUND NO. 8 & 9 IS THAT THE LEARNED CIT (A) ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF NON- DEDUCTION OF TDS UNDER SECTION 40(A)(I) READ WITH S ECTION 195 OF THE ACT AMOUNTING TO <19,86,207/-. 71. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATIO N MADE PAYMENT WITH RESPECT TO CONSULTANCY EXPENSES IN FOREIGN CURRENCY TO HOLTER CLINICAL OUTSOURCING CORPORATION (USA) AND GRIGORIA MAVROGEORGIS (CANADA ) FOR < 19,86,202/- WITHOUT DEDUCTING THE WITHHOLDING TAX UNDER SECTION 195 OF THE ACT. THE ASSESSEE CLAIMED THAT CONSULTANCY SERVICES PROVIDED BY THE IMPUGNED PARTIES DID NOT FALL UNDER THE ARTICLE 12 OF DTAA BETWEEN GOVT. OF INDIA AND GOVT. OF USA AND CANADA. AS IMPUGNED PARTIES DID NOT PROVIDE ANY TECHNICAL OR C ONSULTANCY SERVICES WHICH IS ANCILLARY TO THE USE OF ANY RIGHT, INFORMATION OR P ROPERTY, NEITHER MADE AVAILABLE ANY TECHNICAL KNOWLEDGE, KNOW HOW, EXPERIENCE ETC.A CCORDINGLY THE PAYMENT FALLS UNDER THE ARTICLE 7 OF DTAA WHICH IS TO BE CONSIDER ED AS BUSINESS INCOME IN THE HAND OF THE IMPUGNED PARTIES. THEREFORE DEDUCTION O F WITHHOLDING TAX IS NOT REQUIRED BEING THE IMPUGNED PARTIES DO NOT HAVE PE IN INDIA. 71.1 HOWEVER THE AO HELD THAT THE ASSESSEE WAS LIAB LE TO DEDUCT TAXES ON PAYMENT OF CONSULTANCY BUT THE ASSESSEE FAILED TO D O SO. ACCORDINGLY THE AO DISALLOWED THE EXPENSES UNDER SECTION 40(A)(I) OF T HE ACT AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 72. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE LEARNED CIT (A) WHO DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER: IT HAS BEEN NOTICED THAT THE AO HAS NOT CONTROVERTE D THE SUBMISSION GIVEN BY THE APPELLANT IN THE ASSESSMENT PROCEEDINGS SHOWING THA T THOSE RECIPIENT ENTITIES DID NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA AND THE TDS WA S NOT LIABLE TO BE MADE AS PER THE DTAA BETWEEN INDIA AND THE RESPECTIVE COUNTRIES. EV EN THE AO HAS NOT BROUGHT OUT THE CASE THAT THOSE RECIPIENT PARTIES HAVE ANY BUSINESS CONNECTION/NEXUS IN INDIA SO AS TO SHOW THAT THE INCOME IN THEIR HANDS HAVE ARISEN IN INDIA AND NOT OUTSIDE INDIA. IN ABSENCE ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 46 OF ANY DETAILS AND EVIDENCES, THE INCOME AROSE IN T HE HANDS OF THE RECIPIENT PARTY IS FOUND TO ACCRUE OUTSIDE INDIA ON WHICH NO TDS WAS LIABLE TO MADE IN INDIA. THUS, THE DISALLOWANCE MADE BY THE AO IS FOUND UNTENABLE AND HENCE, THE SAME IS DELETED. 72. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A) THE REVENUE IS IN APPEAL BEFORE US. THE LEARNED DR AND THE AR BEFORE US VEHEMENTLY SUPP ORTED THE ORDER OF THE AUTHORITIES BELOW AS FAVOURABLE TO THEM. 73. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE PART IES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE CASE ON HAND, THE AO MADE THE DISALLOWANCE ON THE CONSULTANCY EXPENSES PAID BY THE ASSESSEE TO A NON-RESIDENT ON THE REASONING THAT THE ASSESSEE FAILED TO DEDUCT TDS UN DER SECTION 195 OF THE ACT. ACCORDINGLY THE AO MADE THE DISALLOWANCE BY INVOKIN G THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. HOWEVER, THE LEARNED CIT (A) D ELETED THE ADDITION MADE BY THE AO BY OBSERVING THAT THE PAYMENT MADE BY THE AS SESSEE TO THE NON-RESIDENTS BASED IN USA AND CANADA ARE NOT CHARGEABLE TO TAX I N INDIA IN TERMS OF THE ARTICLE 12 OF THE DTAA WITH BOTH THE COUNTRIES. AS PER THE LEARNED CIT (A), THE PAYMENT MADE BY THE ASSESSEE WAS THE CONSULTANCY CHARGES FA LLS UNDER CLAUSE 7 OF THE DTAA WHICH REQUIRES THAT THE PAYEE SHOULD HAVE PERM ANENT ESTABLISHMENT AND BUSINESS CONNECTION IN INDIA FOR HOLDING THAT THE I NCOME IS ACCRUING OR ARISING IN INDIA. IN OTHER WORDS, IF THE PAYEE BEING A NON-RES IDENT DOES NOT HAVE ANY PERMANENT ESTABLISHMENT OR BUSINESS CONNECTION IN I NDIA, THEN IT IS CONSTRUED THAT INCOME IS NOT ARISING OR ACCRUING IN INDIA AND THER EFORE THE SAME IS NOT CHARGEABLE TO TAX IN INDIA. THUS, ONCE AN INCOME IS NOT CHARGE ABLE TO TAX IN INDIA THEN THE QUESTION FOR DEDUCTING THE TDS DOES NOT ARISE. 73.1 AT THE TIME OF HEARING, THE LEARNED DR HAS NOT BROUGHT ANY INFIRMITY IN THE FINDING OF THE LEARNED CIT (A). ON THE CONTRARY, TH E LEARNED AR BEFORE US HAS CONTENDED THAT THE PAYMENT MADE BY THE ASSESSEE TO THE NON-RESIDENTS AS DISCUSSED ABOVE IS NOT CHARGEABLE TO TAX IN INDIA I N TERMS OF THE PROVISIONS OF DTAA. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFI RMITY IN THE ORDER OF THE LEARNED CIT (A). HENCE THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 47 74. THE NEXT ISSUE RAISED BY THE REVENUE IS THAT TH E LEARNED CIT (A) ERRED IN DELETING THE ADDITION MADE BY THE AO FOR < 26,00,00 0/- UNDER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. 75. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HA S RECEIVED UNSECURED LOAN OF <26 LAKHS FROM M/S EPSILION MARKETING AND CONS P VT. LTD. THERE WERE 2 SHAREHOLDERS NAMELY MR. BINISH H. CHUDGAR AND MS. B INDI B. CHUDGAR WHO WERE COMMON IN BOTH THE COMPANIES I.E. ASSESSEE COMPANY AND EPSILION MARKETING AND CONS PVT. LTD. HOLDING MORE THAN 10% VOTING RIGHTS AS WELL AS SUBSTANTIAL INTEREST. ACCORDINGLY THE AO WAS OF THE VIEW THAT SUCH AMOUNT OF LOAN IS DEEMED DIVIDEND IN THE HANDS OF THE ASSESSEE. 75.1 HOWEVER, THE ASSESSEE ON QUESTION BY THE AO, C ONTENDED THAT IT IS PRECONDITION TO INVOKE THE PROVISIONS OF SECTION 2( 22)(E) OF THE ACT THAT THE RECIPIENT SHOULD BE A SHAREHOLDER IN THE COMPANY WH ICH HAS PROVIDED THE LOAN. BUT THE ASSESSEE IN THE CASE ON HAND IS NOT A SHARE HOLDER AND THEREFORE THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT CANNOT BE APPLIED TO SUCH TRANSACTION. 75.2 HOWEVER THE AO DISREGARDED THE CONTENTION OF T HE ASSESSEE AND HELD THAT THERE ARE COMMON SHAREHOLDERS IN BOTH THE COMPANIES WHICH SATISFIES THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT. ACCORDIN GLY, THE AO MADE THE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE. 76. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE L EARNED CIT (A) WHO DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER: 8.4. IT IS WORTH HERE TO MENTION THAT IDENTICAL IS SUE HAS BEEN DECIDED IN APPELLANT'S OWN CASE IN A. Y. 2011-12, VIDE THIS OFFICE APPELLATE O RDER NO.CII(A)-2/L/L/DC. CIR. 2(1)(2)/2015-16 DATED 28/06/2016 WHEREBY IHE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT-. THE RELEVANT EXTRACT OF THE DECISION IS REPRODUCED HERE UNDER:- '5.3. DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSION OF THE APPELLANT. THE AO HAS MADE THE AD DITION OF RS.27,00,000/- IN RESPECT OF LOANS TAKEN FROM M/S. EPSILLION MARKETING AND CONS PVT. LTD. TO THE EXTENT OF ACCUMULATED PROFITS IN THE HANDS OF THE AFORESAID COMPANY. IT I S WORTH HERE TO MENTION THAT SHRI BINISH H. CHUDGAR AND MS. BINDI B. CHUDGAR WERE HOLDING 21% A ND 47% SHARES RESPECTIVELY IN THE APPELLANT COMPANY. THEY WERE ALSO HOLDING THE SHARE S OF 75% AND 25% RESPECTIVELY IN THE LENDER COMPANY NAMELY; M/S. EPSILLIONMARKETING AND CONS PVT. LTD. THUS, AO HOLD THAT THE ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 48 LOANS TAKEN BY THE APPELLANT COMPANY FROM M/S. EPSI LLION MARKETING AND CONS PVT. LTD. WAS THE DEEMED DIVIDEND IN THE HANDS OF THE APPELLANT UNDER 2(22) (E) OF THE I. T. ACT AND ACCORDINGLY IT MADE THE ADDITION IN THE HANDS OF THE APPELLANT COMPANY. 5.4. ON THE OTHER SIDE, THE APPELLANT HAS CLAIMED T HAT IT WAS NOT THE SHARE HOLDER OF M/S. EPSILLION MARKETING AND CONS PVT. LTD. I.E. THE LEN DER COMPANY AND DID NOT HOLD ANY SHARES HENCE THE PROVISIONS OF SECTION 2(22) (E) OF THE I. T. ACT ARE NOT ATTRACTED IN ITS CASE. THE PROVISION OF SECTION 2(22) (E) ARE ATTRACTED ONLY I N THE HANDS OF THE SHARE HOLDERS OF THE LENDERS COMPANY AND NOT IN CASE OF ANY OTHER PERSON S. MERELY SHRI BINISH H. CHUDGAR AND MS. BINDI B. CHUDGAR HAVING SUBSTANTIAL INTEREST IN APP ELLANT AND IN THE LENDER COMPANY WOULD NOT BE ENOUGH TO HOLD THE APPLICATION OF PROVISIONS OF SECTION 2(22) (E) OF THE I. T. ACT IN THE HANDS OF APPELLANT. IN OTHER WORDS, MERELY BECAUSE THE SHARE HOLDERS WERE COMMON BETWEEN THE APPELLANT AND LENDER COMPANY, THE LOAN RECEIVED ARE NO I LUXABLE AS DIVIDEND AS THE APPELLANT COMPANY DID NOT HAVE THE REQUISITE SHAREH OLDING. THE A.R HAS RELIED UPON VARIOUS DECISIONS OF THEAUTHORITIES IN SUPPORT OF THIS PROP OSITION WHICH ARE BRIEFLY NOTED IN THE WRITTEN SUBMISSION FILED WHICH IS REPRODUCED IN THE PRECEDI NG PARAS OF THIS ORDER. 5.5. THE HON'BLE MUMBAI ITAT SPECIAL BENCH IN THE C ASE OF ACIT VS. BHAUMIKCOLOUR (P) LTD. 313 ITR 146 (AT) OF WHICH DECISION WAS ALSO SUBSEQUENTLY AFFIRMED BY THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICARE (P) LTD. 324 ITR 263. IN BOTH THE JUDGMENTS, IT WAS OBSERVED THAT THE INT ENTION OF THE VARIOUS LEGISLATURE IS TO TAX DIVIDEND ONLY IN THE HANDS OF THE SHARE HOLDER AND NOT IN THE HANDS OF THE CONCERN AND THEREFORE NO DIVIDEND CAN BE TAXED IN THE HANDS OF THE APPELLANT BEING NOT A SHARE HOLDER IN ANY OF THE THREE LENDER COMPANIES. IN THE WRITTEN S UBMISSION VARIOUS JUDGMENTS HAVE BEEN CITED. 5.6. HAVING CONSIDERED THE FACTS AND THE WRITTEN SU BMISSION, IT IS OBSERVED THAT THE PLEA OF THE APPELLANT IS FOUND CORRECT FOR THE REASON I HA I DE EMED DIVIDEND CAN BE TAXED IN THE HANDS OF THE SHARE HOLDERS ONLY AND NOT IN THE HANDS OF ANY OTHER PERSON .AS HELD BY THE HON'BLE ITAT MUMBAI SPECIAL BENCH IN THE CASE OF ACIT VS. BHAUMIKCOLOUR (P) LTD. 313 ITR 146. FOR THE REFERENCE, THE HEAD NOTES OF THE DECISION ARE R EPRODUCED AS UNDER:- 'SECTION 2(22) OF THE INCOME-TAX ACT, 1961 - DEEMED DIVIDEND -ASSESSMENT YEAR 1997-98 - WHETHER DEEMED DIVIDEND CAN BE ASSESSED O NLY IN HANDS OF A PERSON WHO IS A SHAREHOLDER OF LENDER COMPANY AND NOT IN H ANDS OF A PERSON OTHER THAN A SHAREHOLDER - HELD, YES, - WHETHER EXPRESSION 'SHAR EHOLDER' REFERRED TO IN SECTION 2(22)(E) REFERS TO BOTH A REGISTERED SHAREHOLDER AN D BENEFICIAL SHAREHOLDER AND, THUS, IF A PERSON IS A REGISTERED SHAREHOLDER BUT N OT BENEFICIAL SHAREHOLDER THEN PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY AND SIMILARLY IF A PERSON IS A BENEFICIAL SHAREHOLDER BUT NOT A REGISTERED SHAREHO LDER THEN ALSO PROVISIONS OF SECTION 2(22)(E) WOULD NOT APPLY - HELD, YES - WHET HER DEEMING PROVISION OF SECTION 2(22)(E) AS IT APPLIES TO CASE OF LOANS OR ADVANCES BY A COMPANY TO A CONCERN IN WHICH ITS SHAREHOLDER HAS SUBSTANTIAL IN TEREST, IS BASED ON PRESUMPTION THAT LOAN OR ADVANCES WOULD ULTIMATELY BE MADE AVAI LABLE TO SHAREHOLDERS OF COMPANY GIVING LOAN OR ADVANCE, AND, THEREFORE, INT ENTION OF LEGISLATURE IS TO TAX DIVIDEND ONLY IN HANDS OF SHAREHOLDER AND NOT IN HA NDS OF CONCERN.' 5.7. JUDGMENT OF HON'BLE HIGH COURT OF GUJARAT IN THE CA SE OF COMMISSIONER OF INCOME-TAX V. DAISY PACKERS (P.) LTD. [ 2013 ] 40 T AXMANN.COM 480 (GUJARAT) IS ALSO RELEVANT ON THIS ISSUE, WHEREBY THE HON'BLE COURT H AS HELD THE SIMILAR VIEW. THE HEAD NOTES ARE AS UNDER:- SECTION 2(22) OF THE INCOME-TAX ACT, 1961 - DEEMED DIVIDEND [LOANS AND ADVANCES] - WHETHER WHERE ASSESSEE HAD RECEIVED A D EPOSIT FROM A COMPANY BUT IT DID OWN ANY SHARE OF SAID COMPANY, SAID DEPOSIT WAS AN INTER-CORPORATE DEPOSIT ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 49 AND COULD NOT BE TREATED AS DEEMED DIVIDEND - HELD, YES [PARA 2] [IN FAVOUR OF ASSESSEE] 5.8. FURTHER THE HON'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. UN IVERSAL MEDICARE (P) LTD. IN 324 ITR 363 HAS ALSO CONFIRMED THE PROPOSITION OF THE SPECIAL B ENCH DECISION REFERRED ABOVE. THE HEAD NOTES OF THIS JUDGMENT ARE REPRODUCED AS UNDER:- 'SECTION 2(22J OF THE INCOME-TAX ACT, 1961 - DEEMED DIVIDEND -ASSESSMENT YEAR 2003-04 - CERTAIN AMOUNT WAS TRANSFERRED FROM BANK ACCOUNT OF COMPANY 'CSPL' TO BANK ACCOUNT OF ASSESSEE-COMPANY - ONE 'V, WHO WAS DIRECTOR OF CSPL , HELD OVER 10 PER CENT OF EQUITY CAPITAL OF CSPL AND OVER 20 PER CENT OF EQUITY CAPITAL OF A SSESSEE - ASSESSING OFFICER, RELYING UPON PROVISIONS OF SECTION 2(22}(E), TREATED AFORESAID A MOUNT AS DEEMED DIVIDEND IN HANDS OF ASSESSEE AND WHILE DOING SO, HE REJECTED ASSESSEE'S CONTENTION THAT AMOUNT IN QUESTION WAS NEITHER AN ADVANCE NOR A LOAN TO ASSESSEE BUT REPRE SENTED MISAPPROPRIATION OF FUNDS BY VICE- PRESIDENT (FINANCE) - ON APPEAL. TRIBUNAL FOUND THA T AS A MATTER OF FACT NO LOAN OR ADVANCE WAS GRANTED TO ASSESSEE, SINCE AMOUNT IN QUESTION H AD ACTUALLY BEEN DEFALCATED AND WAS NOT REFLECTED IN BOOKS OF ACCOUNT OF ASSESSEE AND, THER EFORE, FIRST REQUIREMENT OF SECTION 2(22)(E) OF THERE BEING AN ADVANCE OR LOAN WAS NO FULFILLED AND THAT EVEN ASSUMING THAT IT WAS A DIVIDEND, IF WOULD HAVE TO BE TAXED NOT IN HANDS OF ASSESSEE BUT IN HANDS OF SHAREHOLDER - WHETHER, ON FACTS. TRIBUNAL WAS JUSTIFIED IN ALLOWI NG ASSESSEE'S APPEAL-HELD - YES.' 5.9. FURTHER THE HON'BLE RAJASTHAN HIGH COURT IN TH E CASE OF CIT, UDAIPUR VS. HOTEL HILLTOP 313 ITR 116 HAS ALSO PROPOUNDED THE SAID PROPOSITION AS HELD BY THE MUMBAI SPECIAL BENCH. THE HEAD NOTES OF THE JUDGMENT ARE REPRODUCED AS UNDER: - 'IT : WHERE ASSESSEE-FIRM HAD RECEIVED AN ADVANCES FROM A COMPANY AND IT WAS ASSESSEE'S PARTNERS WHO WERE SHAREHOLDERS IN SAID C OMPANY AND NOT ASSESSEE-FIRM, SUCH AN ADVANCE COULD NOT BE TAXED AS DEEMED DIVIDEND IN HA NDS OF ASSESSEE-F/RM. SECTION 2(22) OF THE INCOME-TAX ACT, 1961 - DEEMED DIVIDEND -ASSESSEE- FIRM HAD RECEIVED CERTAIN AMOUNT AS AN ADVANCE FROM A COMPANY UNDER AN AGREEMENT TO HAND OVER MANAGEMENT OF FIRM'S HOTEL T O SAID COMPANY - PARNTERS OF ASSESSE- FIRM WERE ALSO SHAREHOLDERS IN SAID COMPAN Y - ASSESSING OFFICER TREATED SAID AMOUNT RECEIVED BY ASSESSEE-FIRM AS DEEMED DIV IDEND UNDER SECTION 2(22)(E) IN HANDS OFASSESSEE AND ASSESSED SAME TO TAX - WHET HER IT WAS NOT ASSESSEE-FIRM WHICH WAS SHOWN TO BE SHAREHOLDER OF COMPANY BUT IN FACT IT WAS ITS PARTNERS WHO WERE HOLDING MORE THAN REQUISITE AMOUNT OF SHAREHOL DING IN COMPANY AND WERE HAVING REQUISITE INTEREST IN FIRM - HELD, YES - WHE THER, THEREFORE, AFORESAID AMOUNT RECEIVED BY ASSESSEE WOULD NOT BE DEEMED DIVIDEND I N HANDS OF ASSESSEE-FIRM, RATHER IT WOULD OBVIOUSLY BE DEEMED DIVIDEND IN HAN DS OF INDIVIDUALS (PARTNERS), ON WHOSE BEHALF, OR ON WHOSE INDIVIDUAL BENEFIT, BEING SUCH SHAREHOLDERS, AMOUNT WAS PAID BY COMPANY TO CONCERN- HELD, YES' 5.10. THE HON'BLE IT AT, AHMEDABAD BENCH 'A' IN THE CASE OF K RUPESH N. PATEL VS. DCIT, CENTRAL CIRCLE-1, VADODARA HAS ALSO TAKEN THE SIMILAR VIEW. THE HEAD NOTES ARE REPRODUCED AS UNDER: 'IT : LOANS AND ADVANCES SHAREHOLDER, CONNOTATION O F - LEGAL FICTION CREATED UNDER SECTION 2(22)(E) DOES NOT EXTEND FURTHER FOR BROADENING CONCEPT OF SHAREHOLDER SO AS TO TAX LOANS OR ADVANCES AS 'DEEM ED DIVIDEND' IN HANDS OF 'DEEMING SHAREHOLDER' 5.11 FURTHER, HON'BLE ITAT MUMBAI IN THE CASE OF SAJJANKUMARDOKAN IA, MUMBAI VS. DEPARTMENT OF INCOME TAX IN ITA NO.7149/ MUM/2011 VIDE ORDER DTD. 5.10.2012 HAS ALSO OF THE SAME VIEW. FINDING IS BRIEFLY REPRO DUCED AS UNDER:- ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 50 'IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BROUG HT ON RECORD BY THE REVENUE, WE RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL (SUPRA) AND KEEPING IN VIEW THAT THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF BHAUMIKCOLOUR (P) LTD. (SUPRA) HAS BEEN APPROVED BY THE HON'BLE BOMBAY HIGH COURT IN UNIVER SAL MEDICARE (P.) LTD. (SUPRA) WHICH IS BINDING ON US, WE ARE OF THE VIEW THAT THE ID. CIT( A) WAS FULLY JUSTIFIED IN DELETING THE ADDITION MADE BY THE A.O. THE GROUNDS TAKEN BY THE REVENUE A RE, THEREFORE, REJECTED' 5.13. FURTHER, ITAT MUMBAI IN THE CASE OF BIJIS HOTELS (I) P. LTD. MUMBAI VS. 1 DEPARTMENT OF INCOME TAX IN ITA NP.3444/MUM/2011 DT D. 29.2.2012 HAS ALSO TAKEN THE SIMILAR VIEW. FINDING IS BRIEFLY REP RODUCED AS UNDER:- '9. THUS RESPECTFULLY FOLLOWING THE PRINCIPLE AND RATIO LAID DOWN I BY FHEHON'BLE SPECIAL BENCH IN THE CASE OF ACIT VS. BHAUMIKCOLOUR (P) TL' D. (SUPRA) AND HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. UNIVERSAL MEDICARE PVT . LTD. (SUPRA), THE ORDER OF THE LEARNED CIT(APPEALS) DELETING THE ADDITION OF RS. 1,58,14,0 61/- ON ACCOUNT OF DEEMED DIVIDENDS IS THUS UPHELD AND ACCORDINGLY THE DEPARTMENTAL APPEAL IS DISMISSED.' 5.14. FURTHER, HON'BLE SUPREME COURT IN THE CASE OF CIT VS. C.P. SARATHYMUDALIAR IN CIVIL APPEAL NOS.2242 AND 2243 OF 1968 DTD. 12.10.1971 HA S ALSO TAKEN THE SIMILAR VIEW. THE HEAD NOTES ARE REPRODUCED A SUNDER:- 'SECTION 2(22} OF THE INCOME-TAX ACT, 1961 (CORRESP ONDING TO SECTION 2(6A)(E) OF THE INDIAN INCOME-TAX ACT, 1922) - DEEMED DIVIDEND -ASS ESSMENT YEARS 1955-56 AND 1956-57 - MEMBERS OF ASSESSEE-HUF WERE SHAREHOLDERS OF A COMP ANY - THOSE SHARES WERE ACQUIRED FROM OUT OF FAMILY FUNDS - IN RELEVANT ACCOUNTING YEARS COMPANY ADVANCED LOANS TO ASSESSEE-HUF - TRIBUNAL FOUND AS FACT THAT LOAN IN QUESTION HAD BE EN GRANTED TO ASSESSEE-HUF AND NOT TO SHAREHOLDERS WHO WERE MEMBERS OF HUF - WHETHER HUF CANNOT BE CONSIDERED AS A SHAREHOLDER UNDER SECTION 2(6A)(E) OF 1922 ACT AND HENCE, A LOAN GIVEN TO HUF CANNOT BE CONSIDERED AS A LOAN ADVANCED TO A 'SHAREHOLDER' OF A COMPANY - HELD, YES - WHETHER SINCE NO LOANS HAD BEEN ADVANCED TO A SHAREHOLDERS, THEY DID NOT GET ANY INCOME AND HENCE, SECTION 2(6A)(E) BECAME INAPPLICABLE - HELD, YES' 5.15. FURTHER THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. NAVINBHAI N. PATEL [2013] 35 TAXMANN.COM 312 (GUJARAT) AS ALSO TAKEN T HE SIMILAR VIEW. THE HEAD NOTES OF THE JUDGMENT ARE REPRODUCED AS UNDER:- 'SECTION 2(22) OF THE INCOME-TAX ACT, 1961 - DEEMED DIVIDEND '[LOANS OR ADVANCES TO SHAREHOLDER] - ASSESSMENT YEAR 2006-07 - WHETHER RE QUIREMENT OF SECTION 2(22) IS THAT LOAN OR ADVANCE MUST BE MADE BY A COMPANY TO ITS SHAREHOLDE R HOLDING SHARE REPRESENTING 10 PER CENT VOTING POWER AND HE MUST BE BENEFICIAL OWNER O F SAID SHARES - HELD, YES -WHETHER WHERE ASSESSEE SHAREHOLDER HAD ALREADY DIVESTED HIS INTER EST IN SHARES OF A COMPANY IN FAVOUR OF A TRUST, ASSESSEE COULD NO MORE BE SAID TO BE BENEFIC IAL OWNER OF THOSE SHARES AND, THUS, ANY SUM ADVANCED BY COMPANY TO ASSESSEE SUBSEQUENTLY CO ULD NOT BE TREATED AS DEEMED DIVIDEND - HELD, YES [PARA 2] [IN FAVOUR OF ASSESSEE]' 5.16 FURTHER THE HON'BLE ITAT HYDERABAD BENCH 'A' I N THE CASE OF MTAR TECHNOLOGIES (P.) LTD. VS. ASSTT. COMMISSIONER OF INCOME-TAX, CI RCLE 14(2), (TDS), HYDERABAD [2010] 39 SOT 465 (HYD.) HAS ALSO TAKEN THE SIMILAR VIEW. THE HEAD NOTES OF THE JUDGEMENT ARE REPRODUCED AS UNDER:- 'SECTION 2(22) OF THE INCOME-TAX ACT, 1961 - DEEMED DIVIDEND - ASSESSMENT YEARS 2003-04 TO 2005-06 - WHETHER UNDER SECTION 2(22)(E) ONLY PAYMENT MADE BY A COMPANY BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER ALONE IS TO BE CONSIDERED FOR PURPOSE OF DEEMED DIVIDEND -HELD, YES - WHETHER, THEREFORE, DEEMED DI VIDEND UNDER SECTION 2(22)(E) CAN ONLY BE ASSESSED IN HANDS OF PERSON, WHO IS SHAREHOLDER OF LENDER COMPANY AND NOT IN HANDS OF A PERSON OTHER THAN SHAREHOLDER - HELD, YES'. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 51 5.17. IN VIEW OF THE ABOVE DISCUSSION, CONSIDERING THE FACTS OF THE CASE, WRITTEN SUBMISSIONS AND VARIOUS JUDGMENTS, IT IS OBSERVED T HAT APPELLANT WAS NOT THE SHARE HOLDER IN THE AFORESAID LENDER COMPANY FROM WHOM LOANS HAVE BEEN TAKEN AND THEREFORE IT DOES NOT ATTRACT THE DEEMING PROVISIONS OF SECTION 2(22) (E) OF THE I.T. ACT. IT IS WORTH TO MENTION THAT THE PROVISIONS OF SECTION 2(22) (E) ARE DEEMING FOR THE DIVIDEND BUT THE SAME ARE NOT DEEMING FOR THE SHAREHOLDERS. MERELY SHRI BINISH H. CHUDGAR AND MS. BINDI 6. CHUDGAR, WERE COMMON SHARE HOLDERS IN APPELLANT COMPANY AND LENDER COMPA NY WOULD NOT BROUGHT THE APPELLANT COMPANY INTO THE DEEMING FICTION OF DIVIDEND U/S.2( 22)(E). MOREOVER, FOR ATTRACTING THE PROVISIONS CONDITIONS PRECEDENT ARE THAT THE SHAREH OLDERS SHALL NOT ONLY BE REGISTERED SHAREHOLDERS BUT THEY SHOULD BE BENEFICIAL SHAREHOL DERS. IN THE PRESENT CASE, THE APPELLANT IS NOT EVEN THE SHAREHOLDER OF THE LENDER COMPANY, HEN CE THE QUESTION OF APPLICATION OF OTHER CONDITIONS DO NOT COME INTO PLAY. HENCE, THE PROVIS IONS OF SECTION 2(22) (E) ARE NOT APPLICABLE ON THE SAME. 5.18. IN VIEW OF THE ABOVE DISCUSSION, THE ADDITION MADE BY THE A.O. IS NOT WARRANTED AND SAME IS DELETED. THE GROUNDS OF APPEAL ARE ALLO WED.' 8.5. IN VIEW OF THE ABOVE DISCUSSION, AND THE FACT THAT THE IDENTICAL ISSUE ON SIMILAR FACTS HAS BEEN DECIDED BY THIS OFFICE IN A. Y. 2011-12, FOLLO WING I THE SAME, THE ADDITION MADE BY THE A.O. IN THE YEAR UNDER CONSIDERATION | IS ALSO NOT FOUND CORRECT AND JUSTIFIED AND HENCE THE SAME IS DELETED. 77. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 78. BOTH THE LEARNED DR AND THE AR BEFORE US VEHEME NTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW AS FAVOURABLE TO THEM. 79. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. ADMITTEDLY, THE SHAR EHOLDER OF THE ASSESSEE NAMELY SHRI BINISH H. CHUDGAR AND SMT. BINDI B. CHUDGARAR E HOLDING 21 % AND 47% SHARE IN ASSESSEE COMPANY AND ALSO HOLDING 75% AND 25% SHARE IN M/S EPSILLION MARKETING AND CONS PVT LTD. FROM WHERE ASSESSEE HAS RECEIVED UNSECURED LOAN OF < 26 LAKH. ACCORDINGLY THE AO IN THE CASE ON HAND H AS TREATED THE AMOUNT OF < 26 LAKH AS DEEMED DIVIDEND IN THE HANDS OF THE ASSESS EE ON THE REASONING THAT THE TRANSACTIONS OF ADVANCING LOAN TO THE COMPANIES AS DISCUSSED ABOVE FALLS WITHIN THE PURVIEW OF THE PROVISIONS OF SECTION (2)(22)(E) OF THE ACT. HOWEVER, THE LEARNED CIT (A) WAS PLEASED TO DELETE THE ADDITION MADE BY THE AO FOR THE REASONS AS DISCUSSED IN THE AFORESAID PARAGRAPHS. ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 52 79.1 THE 1 ST QUESTION BEFORE US ARISES WHETHER THE ASSESSEE COM PANY, WHICH IS NOT A REGISTERED SHAREHOLDER OBTAINS ANY LOAN FROM OTHER COMPANY IN WHICH ITS SHAREHOLDER ALSO HOLDING SUBSTANTIAL SHARE IN SUCH OTHER COMPANY MAY BE BROUGHT UNDER THE SCANNER OF DEEMED DIVIDEND. IN THIS REGAR D WE FIND PERTINENT TO REFER THE PROVISIONS OF SECTION 2(22)(E) OF THE ACT WHICH READS AS UNDER: (22) 'DIVIDEND' INCLUDES (E) ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY I N WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A P ART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER THE 31ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER, BEING A PERSON WHO IS THE BENEFICIAL O WNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH O R WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING PO WER, OR TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH H E HAS A SUBSTANTIAL INTEREST (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE SAID CONCERN) OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT, OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH THE COMPANY IN EITHER CASE POSSESSES ACCUMULATED PROFIT S ; 79.2 ON PERUSAL OF ABOVE PROVISION WHAT INFERRED IS THAT THE PROVISION OF SECTION 2(22)(E) OF THE ACT CAN ONLY BE INVOKED IN CASE OF SHAREHOLDER WHO IS HOLDING SUBSTANTIAL INTEREST. THE PROVISION OF SECTION 2(22 )(E) OF THE ACT NOWHERE TALKS ABOUT TAXING AN ENTITY/COMPANY WHO IS NOT A SHAREHO LDER HOLDER IN LENDER COMPANY BUT SHAREHOLDER OF SUCH COMPANY HOLDING SUB STANTIAL SHARE IN LENDER COMPANY. IN THIS REGARD WE FIND SUPPORT AND GUIDANC E FROM THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN TAX APPEAL NO- 891 OF 2016 IN CASE OF PCIT VS. MAHAVIR INDUCTOMELT PV.T LTD WHERE IN SIMILAR FACTS THE HONBLE COURT HELD AS UNDER: '50. IDENTICAL QUESTION CAME TO BE CONSIDERED BY TH E DIVISION BENCH OF THIS COURT IN TAX APPEAL NO. 253 OF 2015. AFTER CONSIDERING THE DECIS ION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. IMPACT CONTAINERS PRIVATE LIMITED &ORS RENDERED IN I TA NO. 114 OF 2012 AND THE DECISION OF THE DELHI HIGH COURT IN THECASE OF CIT VS. ANKITECHPVT LT D REPORTED IN 340 ITR 14 (DEL) AND ON INTERPRETING SECTION 2(22)(E) , IN PARA 4 HAS OBSERVED AND HELD AS UNDER: '4.SHRI BHATT, LEARNED COUNSEL APPEARING ON BEHALF OF THE REVENUE HAS AS SUCH TRIED TO JUSTIFY THE DECISION OF THE DELHI COURT IN THE CASE OF ANKITECH PVT. LTD. (SUPRA) AND HAS VEHEMENTLY SUBMITTED THAT THE DELHI HIGH COURT HAS NOT CONSIDERED THE THIRD CATEGORY I.E. SHAREHOLDER IN THE ASSESSEE COMPANY HOLDING NOT LES S THAN 10% OF THE VOTING POWER IN THE COMPANY FROM WHOM THE LOAN OR ADVANCE IS TAKEN. HOWEVER, ON CONSIDERING SECTION 2(22)(E) OF THE ACT, WE ARE NOT AT ALL IMPRESSED WITH THE A FORESAID. IF THE CONTENTION ON BEHALF OF THE REVENUE IS ACCEPTED, IN THAT CASE, IT WILL BE CREATING THE THIRD CATEGORY / CLASS, WHICH IS NOT PERMISSIBLE. WHAT IS PROVIDED UNDER SECTION 2(22) (E) OF THE ACT SEEMS TO BE THAT THE ASSESSEE COMPANY MUST BE A SHAREHOLDER IN THE COMPANY FROM WHOM THE LOAN OR ADVANCE HAS BEEN TAKEN AND SHOULD BE HOLDING NOT LE SS THAN 10% OF THE VOTING POWER. IT DOES NOT PROVIDE THAT ANY SHAREHOLDER IN THE ASSESS EE- COMPANY WHO HAD TAKEN ANY LOAN ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 53 OR ADVANCE FROM ANOTHER COMPANY IN WHICH SUCH SHARE HOLDER IS ALSO A SHAREHOLDER HAVING SUBSTANTIAL INTEREST, SECTION 2(22)(E) OF THE ACT MAY BE APPLICABLE. 5.1. CONSIDERING THE AFORESAID DECISION OF THE DIVI SION BENCH OF THIS COURT AND THE FACTS NARRATED HEREIN ABOVE, MORE PARTICULARLY,CONSIDERIN G THE FACT THAT THE ASSESSEE WAS NOT SHAREHOLDER OF MAHAVIR ROLLING MILLS PVT LTD TO WHO M LOAN WAS GIVEN, IT CANNOT BE SAID THAT THE LEARNED TRIBUNAL HAS COMMITTED ANY ERR OR IN DE LETING THE ADDITION MADE BY THE ASSESSING OFFICER ON DEEMED DIVIDEND.' 79.3 COMING TO THE CASE ON HAND ADMITTEDLY THE ASSE SSEE COMPANY IN NOT HOLDING ANY SHARES OR RIGHTS OF M/S. EPSILLION MARK ETING AND CONS PVT. LTD. THUS CONSIDERING THE ABOVE DISCUSSION AND JUDGMENT OF HO NBLE COURT IN CASE OF MAHAVIR INDUCTOMELT (SUPRA) THE AO WAS NOT JUSTIFIED IN INVOKING THE PROVISION OF SECTION 2(22)(E) OF THE ACT IN THE PRESENT CASE. THE LEARNED CIT(A) RIGHTLY DELETED THE ADDITION MADE BY THE AO. 79.4 IN THE RESULT APPEAL OF THE REVENUE IS DISMISSED. COMING TO ITA NO. 1751/AHD/2017 AN APPEAL OF THE AS SESSEE FOR A.Y. 2013-14: 80. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN HOLDING THAT GIVING LOAN WHICH IS IN NATURE OF QUASI CAPIT AL, IS AN INTERNATIONAL TRANSACTION FALLING WITHIN THE PURVIEW OF TRANSFER PRICING PROVISIONS. 2. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW AND ON THE FACTS OF THE CASE IN CONFIRMING THE ACTION OF THE AO OF MAKING AN ADDITI ON OF RS.49,88,829/- AS PROPOSED BY TPO ON ACCOUNT OF INTEREST FREE LOANS AND ADVANCES TO LAMDA THERAPEUTIC LTD., U.K. 3. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW A ND ON THE FACTS OF THE CASE IN HOLDING THAT CORPORATE GUARANTEE GIVEN TO ASSOCIATE ENTERPR ISE IS AN 'INTERNATIONAL TRANSACTION' FALLING WITHIN THE PURVIEW OF TRANSFER PRICING PROV ISIONS. 4. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW A ND ON THE FACTS OF THE CASE IN HOLDING THAT DIRECT AND BINDING DECISION OF JURISDICTIONAL TRIBUNAL WHICH HAS CONSIDERED ALL THE EARLIER JUDGMENTS ON THE ISSUES IN THE CASE OF MICR O INK LIMITED VS ACIT (2015)(63 TAXMANN.COM 353) IS NOT TO BE FOLLOWED, DESPITE THE SAME BEING APPLICABLE ON THE FACTS OF THE CASE. 5. THE LEARNED CIT(A) HAS ERRED BOTH IN LAW A ND ON THE FACTS OF THE CASE IN CONFIRMING THE UPWARD ADJUSTMENT TO THE EXTENT OF RS.5,66,979/ -@ 24.1% MARKUP ON ACCOUNT OF CORPORATE GUARANTEE GIVEN TO ASSOCIATE ENTERPRISE W HILE DETERMINING ARM'S LENGTH PRICE UNDER THE PROVISIONS OF TRANSFER PRICING. 6. BOTH THE LOWER AUTHORITIES HAVE PASSED THE ORDERS WITHOUT PROPERLY APPRECIATING THE FACTS AND THEY FURTHER ERRED IN GROSSLY IGNORING VARIOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION S UBMITTED BY THE I APPELLANT FROM TIME TO TIME WHICH OUG HT TO HAVE BEEN ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 54 CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. THIS ACTION OF THE LOWER AUTHORITIES IS IN CLEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JUSTI CE AND THEREFORE DESERVES TO BE QUASHED. 7. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING ACTION OF THE ID. AO IN LEVYING INTEREST U/S.234A/B/C OF T HE ACT. 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING ACTION OF THE ID. AO IN INITIATING PENALTY U/S.271(L)(C) OF T HE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, ED IT, DELETE, MODIFY OR CHANGE ALL OR ANY OF THE GROUNDS OF APPEAL AT THE TIME OF OR BEFORE T HE HEARING OF THE APPEAL. 81. THE FIRST ISSUE RAISED BY THE ASSESSEE VIDE GRO UND NUMBER 1 AND 2 OF ITS APPEAL IS THAT THE LEARNED CIT (A) ERRED IN SUSTAIN ING THE UPWARD ADJUSTMENT OF < 49,88,829/- ON ACCOUNT OF INTEREST FREE LOAN PROVID ED TO AE. 82. AT THE OUTSET WE NOTE ISSUE ON HAND HAS ALREADY BEEN DECIDED ALONG WITH GROUND NUMBER 3 OF REVENUES APPEAL BEARING ITA NO. 2114/AHD/2017 VIDE PARAGRAPH NUMBER 45 OF THIS ORDER IN FAVOR OF THE A SSESSEE. ACCORDINGLY, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 83. THE SECOND ISSUE RAISED BY THE ASSESSEE VIDE GR OUND NOS. 3 TO 6 IS THAT THE LEARNED CIT (A) ERRED IN HOLDING CORPORATE GUARANTE E AS INTERNATIONAL TRANSACTION IN PURSUANCE TO THE PROVISION OF SECTION 92B OF THE ACT. 84. AT THE OUTSET WE NOTE ISSUE ON HAND HAS ALREADY BEEN DECIDED ALONG WITH GROUND OF APPEAL BEARING NUMBER 4 IN REVENUES APPE AL ITA NO. 2114/AHD/2017 VIDE PARAGRAPH NUMBER 52OF THIS ORDER. THUS THE SAM E IS NOT REQUIRED TO BE ADJUDICATEDAGAIN. AS SUCH, THE FINDING GIVEN IN ABO VE MENTIONED PARAGRAPH SHALL ALSO APPLY HERE IN THIS CASE ALSO. 85. THE ISSUE RAISED BY THE ASSESSEE VIDE GROUND NO 7 AND 8 OF ITS APPEAL ARE EITHER PREMATURE OR CONSEQUENTIAL. THEREFORE WE ARE NOT INCLINED TO ADJUDICATE THE SAME. AS SUCH WE DISMISS THEM BEING CONSEQUENTIAL A ND PREMATURE AS INFRUCTUOUS. 85.1 IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED . ITA NO.3492/AHD/2015 AND 5 OTHERS A.Y. 2010-11 55 86. IN THE COMBINED RESULTS, ALL THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED WHEREAS APPEALS OF THE REVENUE ARE DISMISSED . ORDER PRONOUNCED IN THE COURT ON 12/04/2021AT AHMED ABAD. SD/- SD/- ( RAJPAL YADAV ) VICE PRESIDENT ( WASEEM AHMED ) ACCOUNTANT MEMBER AHMEDABAD; DATED 12/04/2021 MANISH/TANMAY TRUE COPY %& ' ()*+, -%,.* / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ! / CONCERNED CIT 4. ! ( ) / THE CIT(A) 5. $%& '' , / DR, ITAT, 6. &)* + / GUARD FILE. %&/ 0 1 / BY ORDER, 2/1 34 ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION : 25-03-2021 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S. - 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT .. 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. : 12-04-2021 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE