Cadila Pharmaceuticals Ltd., Ahmedabad V. The Dy.CIT.,Range-1, Ahmedabad

ITA 1117/AHD/2012

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8613 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 24-01-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 22-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P SHARMA
• Keywords: Gift; Business income; Depreciation; Transfer pricing; Business expenditure; International transaction; Earning of tax free income; Retrospective amendment; Question of law; Speculation loss; Corroborative evidences; Onus to prove; Revenue expenditure; Capital expenditure
• Section: 80HHC; 80IB; 37(1); 80G; 43(5); 37; 28; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH AHMEDABAD BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER, AND SHRI S. S. GODARA, JUDICIAL MEMBER. ITA NOS. 1117/AHD/2012 & 848/AHD/2016 (ASSESSMENT YEARS : 2004-05 & 2011-12) M/S. CADILA PHARMACEUTICALS LTD. 708, CADILA CORPORATE CAMPUS, SARKHEJ-DHOLKA ROAD, BHAT, AHMEDABAD-382210 APPELLA NT VS. DCIT, RANGE-1/CIRCLE-1(1)(2), AHMEDABAD RESPONDENT & ITA NO. 918/AHD/2016 (ASSESSMENT YEAR : 2011-12) DCIT, CIRCLE-1(1)(2), AHMEDABAD APPELLANT VS. M/S. CADILA PHARMACEUTICALS LTD. CADILA CORPORATE CAMPUS, SARKHEJ DHOLKA ROAD, BHAT, AHMEDABAD-382210 RESPONDE NT PAN: AAACC6251E ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 2 - /BY ASSESSEE : SHRI S. N. SOPARKAR WITH BANDISH SOPARKAR & PARIN SHAH, A.R. /BY REVENUE : SHRI O. P. SHARMA, CIT. DR. /DATE OF HEARING : 15.06.2017 /DATE OF PRONOUNCEMENT : 11.09.2017 ORDER PER S. S. GODARA, JUDICIAL MEMBER THIS BATCH OF THREE APPEALS PERTAINS TO ASSESSMENT YEARS 2004-05 & 2011-12. FORMER ASSESSMENT YEAR 2004-05 INVOLVES A SSESSEES APPEAL ITA NO. 1117/AHD/2012 PREFERRED AGAINST THE CIT(A)-6, A HMADABADS ORDER DATED 02.03.2012 IN CASE NO. CIT(A)-VI/DCIT.CIR.1/9 1/07-08, IN PROCEEDINGS U/S.143(3) OF THE INCOME TAX ACT, 1961, IN SHORT THE ACT. LATTER ASSESSMENT YEAR 2011-12 CONTAINS ASSESSEES AND REVENUES CROSS APPEALS ITA NOS. 848 & 918/AHD/2016 ARISING FROM TH E DCIT, CIRCLE- 1(1)(2), AHMEDABADS ASSESSMENT ORDER DATED 16.02.2 016 INVOLVING PROCEEDINGS U/S.143(3) R.W.S. 144C(13) OF THE ACT. WE PROCEED ASSESSMENT YEAR-WISE FOR THE SAKE OF CO NVENIENCE AND BREVITY. ASSESSMENT YEAR 2004-05 (ASSESSEES APPEAL ITA NO. 117/AHD/2012) 2. THE ASSESSEES FIRST SUBSTANTIVE GROUND PLEADS T HAT BOTH THE LOWER AUTHORITIES HAVE ERRED IN LAW AS WELL AS ON FACTS I N DISALLOWING ITS SECTION 80HHC DEDUCTION CLAIM OF RS.18,85,093/-. THERE IS NO DISPUTE THAT THE ASSESSING OFFICER AS WELL AS THE CIT(A) REJECT THE ABOVE DEDUCTION CLAIM BY PLACING RELIANCE UPON LEGISLATIVE AMENDMENT IN S ECTION 80HHC BY THE ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 3 - TAXATION LAWS (AMENDMENT) ACT, 2005 WITH RETROSPECT IVE EFFECT FROM 01.04.1998 INSERTING SECOND TO FOURTH PROVISO FOLLO WED BY FIFTH PROVISO THERETO WITH RETROSPECTIVE EFFECT FROM 01.04.1992 F OR RE-WORKING OF THE ABOVE DEDUCTION ALONGWITH SIMILAR CORRESPONDING AME NDMENTS IN SECTION 28 OF THE ACT BY WAY OF CLAUSES (IIID) AND (IIIE) T HEREIN. THE ASSESSING OFFICERS ASSESSMENT ORDER DATED 22.12.2006 MADE TH E IMPUGNED DISALLOWANCE FOR THE REASON THAT ASSESSEES PROFITS IN QUESTION STATED A NEGATIVE FIGURE. 3. THE CIT(A) AFFIRMS ASSESSING OFFICERS ACTION AS UNDER: 3.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSES SMENT ORDER AND APPELLANTS SUBMISSION. ASSESSING OFFICER DISALLOWED APPELLANT S CLAIM OF DEDUCTION UNDER SECTION 80HHC ON THE GROUND THAT AFTER REDUCING DEP B INCOME, THE EXPORT PROFITS WERE NEGATIVE AND HENCE NO DEDUCTION WAS AL LOWABLE. IT IS NOT IN DISPUTE THAT APPELLANT HAD NEGATIVE PROFIT OF BUSINESS IF D EPB INCOME ETC IS REDUCED . ON DEPB INCOME, AS PER THE AMENDED PROVISIONS OF SE CTION 80 HHC, THE DEDUCTION IS ALLOWABLE ONLY IF THE EXPORT TURNOVER IS LESS THAN RS 10 CRORES. IF THE TURNOVER EXCEEDS RS 10 CRORES THEN TWO CONDITIO NS AS MENTIONED IN THE 4TH PROVISO TO SECTION 80 HHC (3) ARE TO BE FULFILLED. IN THE CASE OF APPELLANT, THESE CONDITIONS ARE NOT FULFILLED AND THEREFORE APPELLAN T IS NOT ENTITLED TO CLAIM DEDUCTION UNDER SECTION 80 HHC ON DEPB AND RELATED INCOME. SINCE AMENDMENT TO SECTION 80 HHC WAS MADE WITH A RETROSP ECTIVE EFFECT, THE SAID AMENDMENT IS APPLICABLE TO THIS ASSESSMENT YEAR ALS O. CONSIDERING THIS, ASSESSING OFFICER IS JUSTIFIED IN NOT ALLOWING DEDU CTION UNDER SECTION 80 HHC ON DEPB AND OTHER INCOME. THIS GROUND IS DISMISSED. 4. HEARD BOTH SIDES. RELEVANT FINDING PERUSED. IT EMERGES FIRST OF ALL FROM THE CIT(A) ABOVE EXTRACTED FINDINGS THAT HE HA S CONSIDERED ASSESSEES DEPB INCOME IN COMPUTING SECTION 80HHC DEDUCTION WI THOUT TAKING INTO ACCOUNT NET PROFIT ELEMENT THEREIN. HIS CONCLUSION THEREFORE GOES CONTRARY TO HONBLE APEX COURTS DECISION IN TOPMAN EXPORTS CASE (2012) 342 ITR 49 (SC) HOLDING THE FIELD TILL DATE THAT ONLY THE N ET PROFIT COMPONENT IS TO BE TAKEN AS INCOME. IT FURTHER EMERGES THAT HONBLE J URISDICTIONAL HIGH COURTS JUDGMENT IN AVANI EXPORTS VS. CIT (2012) 348 ITR 31 9 (GUJARAT) HAS ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 4 - QUASHED RETROSPECTIVE OPERATION OF THE ABOVE SECTIO N 80HHC AMENDMENTS (SUPRA) INSERTING TWO CLAUSES AS UNCONSTITUTIONAL. WE ARE INFORMED THAT HONBLE APEX COURT HAS UPHELD THE SAME IN CIVIL APP EAL NO. 9273/2013. WE THEREFORE DIRECT THE ASSESSING OFFICER TO FINALI ZE ASSESSEES DEDUCTION CLAIM U/S.80HHC AFRESH THEREBY COMPUTING THE SAME A S PER LAW AFTER AFFORDING IT ADEQUATE OPPORTUNITY OF HEARING. THIS FIRST SUBSTANTIVE GROUND IS ACCEPTED FOR STATISTICAL PURPOSES. 5. WE MOVE ON TO ASSESSEES SECOND SUBSTANTIVE GROU ND NOW SEEKING TO DELETE PRIOR PERIOD EXPENDITURE DISALLOWANCE OF RS. 10,83,885/- AS UPHELD IN LOWER APPELLATE PROCEEDINGS. THE SAID AMOUNT COMPRI SES OF VARIOUS HEADS OF ADVERTISEMENT, PROCESSING FEES, SAMPLE FEES, MEM BERSHIP SUBSCRIPTION, MAINTENANCE, FINISHED GOODS PURCHASES, TRAVELLING C HARGES, RESEARCH AND OTHER EXPENSES. THE ASSESSEE PLEADED TO HAVE DEBIT ED THE SAME IN THE RELEVANT PREVIOUS YEAR ONLY AFTER SETTLING ALL DISP UTED ISSUES PERTAINING THERETO. CASE FILE ALSO INDICATES THE VERY FACTUAL POSITION. THE ASSESSING OFFICERS VIEW WAS THAT THE ASSESSEES MERCANTILE S YSTEM OF ACCOUNTING WOULD NOT PERMIT SUCH A COURSE OF ACTION. HE THERE FORE INVOKED THE IMPUGNED DISALLOWANCE. 6. THE CIT(A) UPHOLDS ASSESSING OFFICERS ACTION AS UNDER: 5.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSES SMENT ORDER AND APPELLANTS SUBMISSION. PRIOR PERIOD EXPENSES ARE ALLOWABLE IN THE YEAR IN WHICH THE SAME ARE CRYSTALLIZED. ASSESSING OFFICER ALLOWED OPPORT UNITIES TO THE APPELLANT TO GIVE DETAILS OF PRIOR PERIOD EXPENSES AND TO PROVE AS TO HOW THESE EXPENSES WERE CRYSTALIZED DURING THE YEAR. APPELLANT HAS NOT GIVE N DETAILS TO THE AO. NO SUCH DETAILS WERE FILED IN THE APPEAL HEARING ALSO. ONLY MENTION OF CERTAIN ITEMS OF EXPENSES IS THERE. IN ABSENCE OF DETAILS AND VOUCHE RS ETC, ONE CANNOT REACH TO THE CONCLUSION THAT THESE EXPENSES WERE CRYSTALLISE D DURING THE YEAR. IT IS NOT AT ALL IN DISPUTE THAT ONLY THOSE EXPENSES WHICH WERE CRYSTALLISED DURING THE CURRENT YEAR ARE ALLOWABLE BUT ONUS TO PROVE THAT P RIOR PERIOD EXPENSES WERE CRYSTALLISED DURING THE YEAR IS ON THE APPELLANT BE CAUSE APPELLANT HAS THE DETAILS AND NOT THE DEPARTMENT. IN THE ABSENCE OF DETAILS OF PRIOR PERIOD ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 5 - EXPENSES, SIMPLE MENTION OF THE NATURE OF THESE EXP ENSES WILL NOT SERVE THE PURPOSE. THE DECISIONS RELIED UPON BY THE APPELLANT CLEARLY INDICATE THAT ONLY THOSE EXPENSES WHICH ARE CRYSTALLIZED DURING THE YE AR ARE TO BE ALLOWED. THEREFORE THERE IS NO DISPUTE OVER THIS. IN THE ABS ENCE OF ANY EVIDENCE TO PROVE THAT THESE EXPENSES WERE CRYSTALLIZED DURING THE YE AR, I FIND NO REASON TO INTERFERE WITH THE AO'S ORDER. APPELLANT'S ARGUMENT OF REDUCING PRIOR PERIOD INCOM E FROM THESE EXPENSES IS NOT CORRECT BECAUSE THE NATURE OF INCOM E AND EXPENSES ARE DIFFERENT AND THE SAME CANNOT BE NETTED. WHEREAS ONLY CURRENT YEAR'S EXPENSE ARE ALLOWED UNDER SECTION 37 (1) OF IT ACT, PRIOR PERIOD EXPENS ES NOT CRYSTALLIZED DURING THE YEAR ARE NOT ALLOWABLE. AS REGARDS PRIOR PERIOD INC OME, IF APPELLANT WANTED THE SAME TO BE EXCLUDED FROM THIS YEAR'S INCOME, IT SHO ULD HAVE GIVEN DETAILS IN THIS REGARD. IN ABSENCE OF NECESSARY DETAILS AND EVIDENC ES, THE PRIOR PERIOD EXPENSES ARE NOT ALLOWABLE AND SIMILARLY THESE CANNOT BE SET OFF AGAINST PRIOR PERIOD INCOME. THIS GROUND IS THEREFORE REJECTED. 7. WE HAVE HEARD RIVAL SUBMISSIONS. BOTH THE LOWER AUTHORITIES ARE FAIR ENOUGH IN NOT DISPUTING ASSESSEES BASIC PLEA THAT IT HAD RECEIVED THE IMPUGNED BILLS ONLY IN THE RELEVANT PREVIOUS YEAR. THE ASSESSEES CASE THEREFORE IS THAT ALL THE SAID EXPENSES HAVE CRYSTA LLIZED IN THE IMPUGNED ASSESSMENT YEAR. THE ASSESSING OFFICER HOLDS THAT THERE IS NO SUCH EVIDENCE OF CRYSTALLIZATION OF THE EXPENSES IN QUE STION. WE OBSERVE IN THESE PECULIAR FACTS THAT THE ASSESSEE COULD NOT HA VE PAID OR CLAIMED THE IMPUGNED BILLS WITHOUT RECEIVING THE SAME FROM ITS PAYEES. NON RECEIPT OF THE CORRESPONDING EARLIER ASSESSMENT YEARS FORMS A SUFFICIENT REASON ON ASSESSEES PART IN NOT RAISING ITS CLAIM IN EARLIER YEARS. BOTH THE LOWER AUTHORITIES ADMITTEDLY DO NOT DOUBT GENUINENESS OF THE ABOVE EXPENSES. THERE IS FURTHER NO DENIAL OF THE FACT THAT THE ASS ESSEE HAS ALL ALONG BEEN TAXED AT UNIFORM RATE IN SAID EARLIER AS WELL AS IN THE IMPUGNED ASSESSMENT YEAR. HONBLE JURISDICTIONAL HIGH COURTS DECISION IN TAX APPEAL NO. 566/2016 PCIT VS. ADANI ENTERPRISES HOLDS THAT SUCH PRIOR PERIOD EXPENSES OUGHT NOT TO BE DISALLOWED IF AN ASSESSEE IS ASSESS ED AT THE SAME RATE IN THE TWO SETS OF ASSESSMENT YEARS. WE ADOPT THE SAME AN ALOGY HEREIN AS WELL TO ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 6 - DELETE THE IMPUGNED DISALLOWANCE. THIS SECOND SUBS TANTIVE GROUND IS THEREFORE ACCEPTED. 8. THE ASSESSEES THIRD SUBSTANTIVE GROUND SEEKS TO DELETE TRANSFER PRICING ADJUSTMENT ADDITION OF RS.38,14,000/- AS PR OPOSED IN THE TRANSFER PRICING OFFICER TPOS ORDER DATED 31.05.2006 AND M ADE IN AN ASSESSMENT ORDER DATED 22.12.2006 AS AFFIRMED IN LOWER APPELLA TE PROCEEDINGS. THE ASSESSEE HAD ADMITTEDLY SOLD FORMULATIONS AND HOSPI TAL PRODUCT TO ITS KENYA BASED ASSOCIATE ENTERPRISE. THE AUTHORITIES BELOW NOTICED IT TO HAVE CHARGED AVERAGE PROFIT MARK UP OF 16.57% IN SAID KE NYAN SALES THAN @ 37.53% IN CASE OF UNRELATED PARTY SALES IN UGANDA A ND CONGO. THE ASSESSEE HAD APPLIED THE TRANSACTIONAL NET MARGIN M ETHOD TNMM IN COMPUTING ITS PLI . THE TPO HOWEVER REJECTED THE S AME. HE APPLIED COST PLUS METHOD. HE THEN ADOPTED AVERAGE PLI @37.53% T O ARRIVE AT THE IMPUGNED ARMS LENGTH ADJUSTMENT OF RS.38.14LACS AS AFFIRMED RIGHT UPTO LOWER APPELLATE PROCEEDINGS. 9. THE ASSESSEES ONLY PLEA BEFORE US IS THAT THIS TRIBUNALS ORDER IN PRECEDING TWO ASSESSMENT YEARS 2002-03 & 2003-04 HA S REMITTED THE VERY ISSUE BACK TO THE CIT(A) FOR A REASONED ADJUDICATIO N AS PER LAW. THE REVENUE FAILS TO INDICATE ANY DISTINCTION IN THE IM PUGNED ASSESSMENT YEAR. THIS IS FURTHER NOT ITS CASE THAT THE ABOVE ISSUE R EMITTED BACK TO THE CIT(A) DOES NOT INVOLVE ISSUE OF ASSESSEES ALP IN ITS KEN YAN SALES. LEARNED DEPARTMENTAL REPRESENTATIVES SOLE PLEA IS THAT THE LOWER AUTHORITIES ADMITTEDLY PASSED THEIR RESPECTIVE SPEAKING ORDER T HAN NON SPEAKING ONE IN SAID EARLIER ASSESSMENT YEAR. WE FIND THAT MUCH WA TER HAS FLOWN DOWN THE STREAM AS THE INSTANT ISSUE DOES CARRY ALL RAMIFICA TIONS ARISING OUT OF THE CORRESPONDING ADJUDICATION IN SAID EARLIER ASSESSME NT YEARS. WE THUS ADOPT THE VERY COURSE OF ACTION HEREIN AS WELL TO RESTORE THE INSTANT ISSUE BACK TO ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 7 - THE ASSESSING OFFICER FOR AFRESH DECISION AS FINALI ZED IN PRECEDING TWO ASSESSMENT YEARS. WE ARE WELL CONSCIOUS OF THE FAC T THAT OUR EARLIER REMAND ORDER HAD RESTORED THE IMPUGNED ALP ISSUE TO THE CI T(A). WE HOWEVER FEEL THAT THE ASSESSING OFFICER NEEDS TO RE-ADJUDIC ATE THE ISSUE INSTEAD OF THE CIT(A) TO AVOID MULTIPLICITY OF PROCEEDINGS BEF ORE THE ASSESSING AUTHORITY AND THE CIT(A) SINCE WE HAVE ALREADY REST ORED FIRST SUBSTANTIVE GROUND HEREINABOVE TO FORMER AUTHORITY ONLY. TH IS SUBSTANTIVE GROUND IS THEREFORE TAKEN AS ACCEPTED FOR STATISTICAL PURPOSE S. 10. MR. SOPARKAR INVITES OUR ATTENTION TO ASSESSEE S FOURTH SUBSTANTIVE GROUND CHALLENGING CORRECTNESS OF NET OF DEPRECIATI ON IN RESPECT OF FOREIGN EXCHANGE LAWS OF RS.42,66,137/-. HE IS VERY FAIR I N INFORMING US THAT THE ABOVE CO-ORDINATE BENCH DECISION IN ITA NO.1440/AHD /2006 DECIDED ON 27.04.2012 FOR ASSESSMENT YEAR 2002-03(SUPRA) HAS A LREADY UPHELD THE CIT(A)S ACTION AFFIRMING AN IDENTICAL DISALLOWANCE . WE THEREFORE ADOPT JUDICIAL CONSISTENCY TO REJECT ASSESSEES INSTANT S UBSTANTIVE GROUND. 11. THE ASSESSEES FIFTH SUBSTANTIVE GROUND AVERS T HAT THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING ASSESSING O FFICERS ACTION DISALLOWING SECTION 35(2AB) DEDUCTION CLAIM OF RS.5 ,34,000/-. WE NOTICE IN FORM NO. 35 THAT THE ASSESSEE HAD RAISED ITS COR RESPONDING GROUND NO.8 TO THIS EFFECT IN LOWER APPELLATE PROCEEDINGS. THE CI T(A) OBSERVES IN PARA 9 PAGE 24 THAT IT DID NOT PRESS FOR ITS ABOVE CORRESP ONDING SUBSTANTIVE GROUND. THE ASSESSEES PLEADINGS IN THE INSTANT APPEAL NOWH ERE REBUT THIS FACTUAL POSITION. WE THEREFORE FIND NO REASON TO ADJUDICAT E THE INSTANT ISSUE AS THE ASSESSEE HAD ITSELF CONCEDED ITS GRIEVANCE IN COURS E OF LOWER APPELLATE PROCEEDINGS. THIS SUBSTANTIVE GROUND IS THEREFORE REJECTED. ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 8 - 12. THE ASSESSEES LAST SUBSTANTIVE GROUND SEEKS TO ALLOW SECTION 80G DEDUCTION CLAIM OF RS.3,50,000/- IN BOTH THE LOWER PROCEEDINGS ON THE GROUND THAT IT DID NOT FILE THE RELEVANT RECEIPTS O F DONATIONS AS WELL AS THEIR NEXUS WITH ITS BUSINESS AS STIPULATED U/S.31OF THE ACT. THE VERY FACTUAL POSITION CONTINUES HEREIN AS WELL. WE THEREFORE RE JECT ASSESSEES INSTANT LAST SUBSTANTIVE GROUND. ITS APPEAL ITA NO.1117/AH D/2012 IS PARTLY ACCEPTED. ASSESSMENT YEAR 2011-12 (ASSESSEES AND REVENUES C ROSS APPEALS ITA NOS. 848 & 918/AHD/2016 13. WE COME TO ASSESSEES APPEAL. ITS FIRST GRIEVA NCE THEREIN CHALLENGES UPWARD TRANSFER PRICING ADJUSTMENT OF RS.60,83,440/ - PERTAINING TO CORPORATE GUARANTEE FEE; AS MADE BY THE TPO AND AFF IRMED IN DISPUTE RESOLUTION PENAL; DRPS DIRECTIONS. THE SAID LOWE R AUTHORITIES HOLD THAT THE ASSESSEE OUGHT TO HAVE CHARGED @1.24% ON CORPOR ATE GUARANTEE AMOUNT OF RS.49,06,00,000/-. THE ASSESSEE ADMITTEDLY HAD PROVIDED THE CORPORATE GUARANTEE IN QUESTION TO ITS ASSOCIATE ENTERPRISE I N EARLIER ASSESSMENT YEARS. THERE IS NO QUARREL THAT RELEVANT FACTUAL BACKDROP REMAINS THE SAME IN THE IMPUGNED ASSESSMENT YEAR AS IT WAS IN PRECEDING ASS ESSMENT YEAR 2010-11. BOTH THE LOWER AUTHORITIES MAKE THE IMPUGNED ADJUST MENT BY DRAWING SUPPORT FROM THEIR RESPECTIVE ORDERS IN SAID EARLIE R ASSESSMENT YEAR. CASE FILE INDICATES THAT A CO-ORDINATE BENCH IN ASSESSEE S APPEAL ITSELF ITA NO.694/AHD/2015 FOR ASSESSMENT YEAR 2010-11 DECIDED ON 03.03.2017 HAS ALREADY DELETED THE SAID CORPORATE GUARANTEE ADJUST MENT AFTER CONCLUDING THAT THE SAME IS NOT AN INTERNATIONAL TRANSACTION U /S.92B OF THE ACT. LEARNED DEPARTMENTAL REPRESENTATIVE FAILS TO INDICA TE ANY DISTINCTION ON FACTS OR LAW IN THE IMPUGNED ASSESSMENT YEAR. WE T HEREFORE ADOPT THE VERY ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 9 - REASONING HEREIN AS WELL TO DELETE THE IMPUGNED COR PORATE GUARANTEE ADJUSTMENT OF RS.60,83,440/-. 14. THE ASSESSEES SECOND SUBSTANTIVE GROUND CHALLE NGES SECTION 36(1)(III) INTEREST DISALLOWANCE OF RS.1,68,88,558/ - AS MADE BY BOTH THE LOWER AUTHORITIES. THE ASSESSEES BALANCE SHEET SC HEDULE 10 REVEALED IT TO HAVE ADVANCED A GROSS AMOUNT OF RS.5,40,74,507/- TO ITS NINE DOMESTIC AND OVERSEAS SISTER CONCERNS NAMELY M/S. CASIL HEALTH P RODUCTS LTD., CPL INFRASTRUCTURE LTD., APOLLO HOSPITALS INTERNATIONAL LTD., KADERA YAKUHIN LTD., IRM ENTERPRISE PVT. LTD., SOHL (UK), CADILA PHARMACEUTICALS (ETHOPIA) PLC, CPL HOLDINGS PVT. LTD. AND CPL AGRO PRODUCTS LTD. THE ASSESSING OFFICER OBSERVED IN ASSESSMENT ORDER THAT IT MAY BE TRUE THAT THE NATURE OF ADVANCES ARE STRATEGIC INVESTMENTS FOR TH E PURPOSE OF JOB WORK OR ANY OTHER PURPOSES; NONETHELESS, IT IS ALSO TRUE TH AT CERTAIN AMOUNT HAS REMAINED OUTSTANDING DURING THE YEAR. IN ESSENCE, THE ACCOUNTS OF ALL THESE ASSOCIATE COMPANIES IN THE BOOKS OF THE ASSESSEE IS A COMBINED ACCOUNT OF LOANS AND ADVANCES. THE ASSESSING OFFICER FURTHER TOOK NOTE OF THE FACT THAT ASSESSEES INTEREST EXPENDITURE IN RELEVANT PR EVIOUS YEAR READS A FIGURE OF RS.40,10,60,348/-. WE NOTICE IN THIS FACTUAL BA CKDROP THAT A CO-ORDINATE BENCH HAS FOLLOWED VARIOUS JUDICIAL PRECEDENTS CIT VS. RAGHUVIR SYNTHETICS (2013) 354 ITR 222 (GUJ), CIT VS. DALMIA CEMENTS PVT. LTD. (2002) 254 ITR 377 (DELHI), S A BUILDERS LTD. VS. C IT (2007) 288 ITR 1(SC) TO DELETE IDENTICAL DISALLOWANCE(S) IN ASSESS MENT YEARS 2006-07 & 2007-08. HONBLE JURISDICTIONAL HIGH COURT HAS UPH ELD THE SAME IN TAX APPEAL NO. 39/2015 DECIDED ON 23.01.2015. THE REVE NUE FAILS TO DISPUTE ALL THE ABOVE FACTS AS WELL AS LEGAL DEVELOPMENTS. WE THEREFORE CONCLUDE THAT BOTH THE LOWER AUTHORITIES HAVE ERRED IN INVOK ING THE IMPUGNED DISALLOWANCE OF INTEREST IN ASSESSEES STRATEGIC IN TEREST FREE ADVANCES MADE ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 10 - TO ITS SISTER CONCERNS. THIS SECOND SUBSTANTIVE GR OUND IS ACCORDINGLY ACCEPTED. 15. THE ASSESSEES THIRD SUBSTANTIVE GROUND SEEKS T O DELETE SECTION 35(2AB) DEDUCTION DISALLOWANCE. THE ASSESSING OFFI CER HAD DISALLOWED AN AMOUNT OF RS.6,53,96,880/- IN DRAFT ASSESSMENT O RDER. THE DRP RESTRICTS THE SAME TO RS.4,59,11,880/-. THE REVENUES CORRES PONDING SECOND SUBSTANTIVE GROUND IN ITS CROSS APPEAL ITA NO.918/A HD/2016 SEEKS TO REVIVE THE REMAINING DISALLOWANCE AS WELL TO THE TU NE OF RS.1,94,85,000/- PERTAINING TO CLINICAL TRIAL EXPENDITURE INCURRED O UTSIDE THE INHOUSE FACILITY IN QUESTION. WE FIND THAT THE REVENUES INSTANT GR IEVANCE HAS NO MERIT AS THE ASSESSEE HAS ALREADY SUCCEEDED ON THE VERY ISSU E BEFORE HONBLE JURISDICTIONAL HIGH COURT IN ITS OWN CASE TAX APPEA L NO. 39/2015 UPHOLDING TRIBUNALS ORDER DELETING IDENTICAL DISALLOWANCE IN ITA NO.1146/AHD/2011 FOR ASSESSMENT YEAR 2006-07. REVENUES SECOND SUBS TANTIVE GROUND IS THEREFORE REJECTED. 16. WE NOW ADVERT TO ASSESSEES GRIEVANCE. IT HAD CLAIMED TOTAL WEIGHTED DEDUCTION OF RS.25,47,35,880/-. THE ASSES SING OFFICER RESTRICTED THE SAID CLAIM TO THAT APPROVED BY THE DSIR TO TH E EXTENT OF RS.18,93,39,000/- ONLY. ALL THIS RESULTED IN DISAL LOWANCE OF RS.6,53,96,880/- BEING MADE IN ASSESSMENT ORDER. 17. CASE FILE INDICATES THAT THE DRP PARTLY ACCEPTS ASSESSEES ARGUMENTS AS FOLLOWS: 7.1 ASSESSEE'S SUBMISSION: 7.1.1 THE ASSESSEE HAS NOT ADVANCED ANY SPECIFIC AR GUMENTS ON THIS ISSUE. IT REITERATED SUBMISSIONS DATED 15.02.2015 VIDE POINT NO 18 AND POINT NO 21 AND ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 11 - DATED 16.02.2015 VIDE POINT NO 21, BEFORE THE AO AN D FURNISHED THE REVISED RECONCILIATION IN THIS REGARD AS UNDER: ANNEXURE NO PARTICULAR AMOUNT. RS COMMENT 1 WEIGHTED DEDUCTION FOR CAPITAL EXPENDITURE AS PER A UDITOR'S CERTIFICATE IN APPENDIX II TO ANNEXURE IV AS PER DSIR GUIDELINES 79,30,754 2 WEIGHTED DEDUCTION FOR CAPITAL EXPENDITURE APPROVED AS PER FORM 3CL 77,11,000 3=(L-2) DIFFERENCE NOT APPROVED IN FORM 3CLBY DSIR 2,19,764 4 WEIGHTED DEDUCTION FOR REVENUE EXPENDITURE AS PER A UDITOR'S CERTIFICATE IN APPENDIX II TO ANNEXURE IV AS PER DSIR GUIDELINES (CAPITAL E XP + REVENUE EXP) 25,12,87,843 5 WEIGHTED DEDUCTION FOR REVENUE EXPENDITURE APPROVED AS PER FORM 3CL 18,93,38,930 6 CLINICAL TRIAL EXPENDITURE APPROVED AS PER FORM 3CL 1,94,85,000 'CLAIMED WITHOUT PREJUDICE' CLINICAL TRIAL CONDUCTED OUTSIDE INDIA IS ELIGIBLE FOR DEDUCTION U/S 35(2AB)AS PER ASSESSEE'S OWN CASE (CADILA PHARMA VS ACIT (2012) 147 TTJ 49(AHD) 7=(4-5-6) DIFFERENCE NOT APPROVED IN FORM 3CL BY DSIR 4,24,63,913 8=( 2+5+6) WEIGHTED DEDUCTION FOR CAPITAL & REVENUE EXPENDITUR E APPROVED U/S 35{2AB) AS PER FORM 3CL INCLUDING EXPENDITURE INCURRED IN CLINICAL TRIAL SHOWN SEPARATELY IN FORM 3CL 20,88,23,930 9 WEIGHTED DEDUCTION FOR REVENUE & CAPITAL EXPENDITUR E CLAIMED U/S 35(2AB) IN INCOME TAX RETURN OF FY 2010-11 (NET CLAIMED AFTER REDUCING INCOME FROM CRO) 26,26,66,644 10=(9--8) DIFFERENCE 5,38,42,714 11 LESS:DEPRECIATION CLAIMED ON PLANT & MACHINERY FOR WHICH THE ASSESSEE COMPANY HAS OFFERED TO TAX AN AMOUNT OF RS.10,53,64,250/- I N AY 2009-10. THESE ASSETS CONTINUE TO BE USED IN THE NORMAL COURSE OF BUSINES S HENCE ARE ELIGIBLE TO DEPREDATION U/S 32. THE ASSESSEE COMPANY IS ELIGIBLE TO DEPRECI ATION ON WRITTEN DOWN VALUE OF RS.7,02,42,834/- BEING THE VALUE ON THE DATE OF CHA NGE OF USE. 1,05,36,425 THE ASSESSEE COMPANY HEREBY ATTACHES THE COPY OF 3CL ISSUED BY THE DSIR REDUCING THE WEIGHTED CLAIM IN AY 2009- 10 FOR THE AMOUNT OF RS. 10,53,64,250/-SUBMITTED VIDE ANNEXURE 27 IN REPLY DATED 15.02.2015 12 PLUS: DEPRECIATION OFFERED TO TAX BEING INCORRECT A MOUNT CLAIMED IN RETURN 34,48,037 13=(10-11+12) DIFFERENCE TO BE DISALLOWED IN THE ASSESSMENT (AS P ER FORM 3CL ISSUED BY THE DSIR) 4,67,54,326 7.1.2 ASSESSEE'S SUBMISSIONS ARE ON THE FOLLOWI NG LINES: (I) THE ASSESSEE HAS NOT WORKED OUT ANY DISALLOWANC E OF RS. 4,67,54,326/-. IT ONLY SOUGHT TO PROVIDE RECONCILIA TION TABLE BETWEEN THE CLAIM AS PER THE RETURN OF INCOME AND T HE AMOUNT AS APPROVED BY THE DSIR AUTHORITY. (II) THE ISSUE RELATING TO THE AMOUNT SPENT ON THE CLINICAL TRIAL EXPENSES WAS DECIDED IN FAVOUR OF THE ASSESSEE BY T HE HON'BLE ITAT, AHMEDABAD IN ASSESSEE'S OWN CASE FOR A.Y. 200 6-07. THE ASSESSEE FURTHER MENTIONED THAT THE DEPARTMENTAL AP PEAL IN THAT CASE WAS ALSO DISMISSED BY THE HIGH COURT VIDE ORDE R DATED 23.01.2015. 7.2 DISCUSSION AND DIRECTIONS OF DRP: 7.2.1 THE DRP HAS CONSIDERED THE SUBMISSIONS OF THE ASSESSEE. THE ASSESSEE IN THIS REVISED RECONCILIATION TABLE ITSELF WORKED OUT THE 'DIFFERENCE TO BE DISALLOWED IN THE ASSESSMENT ( AS PER FORM 3CL ISSU ED BY DSIR)' RS. 4,67,54,326/-. THEREFORE THE ADDITION PROPOSED BY A O IS CONFIRMED TO THIS EXTENT. ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 12 - 7.2.2 THE ISSUE ON ACCOUNT OF AMOUNT INCURRED ON TH E CLINICAL TRIAL EXPENDITURE HAS BEEN DECIDED BY THE HON'BLE ITAT, AHMEDABAD IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE. FURTHER APPEAL BEFORE HON'BLE GUJARAT HIGH COURT HAS ALSO BEEN DECIDED IN FAVOUR OF ASSESSEE. THE RELEVANT PART IS REPRODUCED BELOW: 'THE QUESTION OF LAW INVOLVED WAS (A) WHETHER THE APPELLATE TRIBUNAL HAS SUBSTANTIALL Y ERRED IN LAW IN HOLDING THAT THE EXPENSES INCURRED OUTSIDE THE APPR OVED R &D FACILITY ARE ALSO ELIGIBLE FOR WEIGHTED DEDUCTION IN CONTRAV ENTION OF THE PROVISIONS OF SECTION 35(2AB) WHEREBY ONLY THE EXPE NDITURE ON IN-HOUSE RESEARCH AT APPROVED R&D FACILITY QUALIFIES FOR WEI GHTED DEDUCTION? 7.2.3 THE HON'BLE GUJARAT HIGH COURT DEALT WITH THE ISSUE AS UNDER: 'ON QUESTION (A), DISCUSSION BY THE 'TRIBUNAL IS FR OM PARAGRAPHS 10, 11 AND 11.1, WHICH IS REPRODUCED HEREIN BELOW:- 10. GROUND NO. 5 IS AGAINST THE DISALLOWANCE OF THE EXPENSES FOR SCIENTIFIC RESEARCH U/S 35(2AB) OF THE ACT AMOUNTIN G TO RS. 3,59,500/-. THE LD. COUNSEL FOR THE ASSESSEE SUBMIT TED THAT THE AO DISALLOWED THE EXPENDITURE ON THE BASIS THAT THE CLINICAL TRIAL EXPENSES WAS NOT WITHIN THE IN-HOUSE RESEARCH AND D EVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY. T HE LD. CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO ON THE BA SIS THAT THE CONDITION ALLOWING OF WEIGHTED EXPENDITURE IS THAT THE IN-HOUSE RESEARCH SHOULD HAVE BEEN MADE. THE ID, COUNSEL FOR THE ASSESSES RELIED ON THE JUDGEMENT OF HON'BLE GUJARAT HIGH COURT RENDERED IN THE CASE OF CIT VS. CADILA HEALTHCARE L TD. REPORTED AT (2013) 31 TAXMANN.COM 300 (GUJ). THE ID. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS SQUARELY COVER ED BY THE JUDGMENT OF HON'BLE HIGH COURT OF GUJARAT IN THE CA SE OF CIT VS. CADILA HEALTHCARE LTD. (SUPRA). 11. WE HAVE HEARD THE RIVAL SUBMISSION, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE HON 'BLE HIGH COURT OF GUJAR AT IN THE CASE OF CIT VS. CADILA HEALTHCARE LTD. (SUPRA) HAS HELD AS UNDER:- '11. REVENUE HAS ALSO SUGGESTED FOLLOWING QUESTION: 'D. WHETHER THE APPELLATE TRIBUNAL HAS SUBSTANTIALL Y ERRED IN HOLDING THAT THE EXPENSES INCURRED OUTSIDE THE APPROVED R&D FACILITY WOULD ALSO GET WEIGHTED DEDUC TION BASED ON THE WORK UNDER 'ON IN HOUSE' INTERPRETING CONTRADICTORY TO THE FINDING OF COORDINATE BENCH IN CONCEPT PHARMACEUTICALS LTD V. ACIT (ITAT, MUM) REPORTED AT 43 SOT 423?' 12. WE MAY RECORD THAT QUESTION ' IN THE APPEAL MEMO IS AN ADDITIONAL QUESTION WHICH HAS AN ELEMENT OF ABOVE NOTED QUESTION. WE HAVE, THEREFORE, NOT SEPAR ATELY ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 13 - REPRODUCED THE SAME IN THIS ORDER. THE ISSUE IS WHE THER THE ASSESSEE WHO HAS INCURRED EXPENDITURE FOR SCIEN TIFIC RESEARCH, WHICH WAS NOT IN THE IN-HOME FACILITY, CO ULD BE COVERED FOR DEDUCTION UNDER SECTION 35(2AB) OF THE INCOME TAX ACT, 1961. ' 11.1 THE HON'BLE HIGH COURT- OF GUJARAT AFTER EXAMI NING THE ENTIRE ISSUE, CAME TO THE CONCLUSION THAT THE TRIBU NAL COMMITTED NO ERROR. RESPECTFULLY FOLLOWING THE JUDGEMENT OF J URISDICTIONAL HIGH COURT IN THE- CASE OF CIT VS. CADILA HEALTHCAR E LTD. (SUPRA), WE HEREBY DIRECT THE AO TO FOLLOW THE CLAI M OF THE ASSESSEE. THUS, THIS GROUND OF ASSESSEE'S APPEAL IS ALLOWED. 4. THE AFORESAID SHOWS THAT THE TRIBUNAL FOR ALLOWI NG THIS PARTICULAR GROUND/ QUESTION IN FAVOUR OF THE ASSESSEE, HAS REL IED UPON THE DECISION OF THIS COURT IN THE CASE OF CIT VS. CADILA HEALTHC ARE LIMITED, REPORTED IN (2013) 31 TAXMANN.COM 300 (GUJARAT). WE FIND THA T AS THE QUESTION IS ALREADY COVERED BY THE SAID DECISION OF THIS COURT, SUCH QUESTION 'A' WOULD NOT ARISE BEING SUBSTANTIAL QUESTION OF LAW T O BE CONSIDERED IN THE PRESENT APPEAL, AS CANVASSED.' 7.2.4 IN VIEW OF THE ABOVE, THE AO IS DIRECTED TO D ELETE THE PROPOSED DISALLOWANCE OF RS. 1,94,85,000/-. 18. HEARD BOTH THE LEARNED REPRESENTATIVES. RELEVA NT FINDINGS PERUSED. IT IS EVIDENT THAT THE DRP HAS WORKED OUT THE IMPUG NED DISALLOWANCE MERELY BECAUSE THE ASSESSEE HAS MENTIONED IN ITS RE CONCILIATION AN AMOUNT OF RS.4,67,54,326/- IS TO BE DISALLOWED AS PER DSIR S FORM 3CL. THERE IS THEREFORE NO INDEPENDENT ADJUDICATION. IT EMERGES THAT THE ASSESSEES ENDEAVOR BEFORE THE DRP WAS TO APPRAISE IT ABOUT DS IRS FORM 3CL INSTEAD OF SUO MOTTU MAKING THE IMPUGNED DISALLOWAN CE. WE NOTICE IN THIS FACTUAL BACKDROP THAT A CO-ORDINATE BENCH IN ASSESS EES CASE ITSELF ITA NO.383/AHD/012 DECIDED ON 04.01.2017 FOLLOWS TRIBUN ALS DECISION IN ITA NO.3569/AHD/2004 ACIT VS. TORRENT PHARMACEUTICALS I N HOLDING THAT ONCE AN ASSESSING AUTHORITY ACCEPTS REVENUE EXPENDITURE CLAIM REGARDING AN AMOUNT SPENT ON CLINICAL TRIAL/RESEARCH & DEVELOPME NT, THE VERY SUM IS ELIGIBLE FOR THE IMPUGNED WEIGHTED DEDUCTION AS WEL L SINCE THERE IS NO STIPULATION INCORPORATED IN THE ACT THAT THE SAME W OULD BE ALLOWABLE ONLY TO THE EXTENT OF RELEVANT FIGURES STATED IN FORM NO . 3CL . THIS IS ADMITTEDLY ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 14 - NOT THE REVENUES CASE THAT THE ASSESSEE HAS NOT IN CURRED THE IMPUGNED EXPENDITURE FOR THE ABOVE SPECIFIED PURPOSE U/S.35( 2AB) OF THE ACT. WE THEREFORE DRAW SUPPORT FROM THE ABOVE CO-ORDINATE B ENCH FINDING IN ASSESSEES APPEAL FOR ASSESSMENT YEAR 2007-08 FOR D IRECTING THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE. THIS SUBSTANTIVE GROUND IS ACCORDINGLY ACCEPTED. 19. THE ASSESSEES FOURTH SUBSTANTIVE GROUND CHALLE NGES BOTH THE LOWER AUTHORITIES ACTION DISALLOWING A SUM OF RS.55,64,4 91/- U/S.14A IN RELATION TO EXEMPT INCOME OF RS.5,808/- FROM DIVIDENDS. IT FURTHER SEEKS TO RAISE AN ADDITIONAL GROUND TO WITHDRAW EVEN SUO MOTTU DISALL OWANCE OF RS.2,82,07,492/- SINCE HAVING SUFFICIENT INTEREST F REE FUNDS. THE SAME IS ADMITTED AS IT DOES NOT REQUIRE ANY ADDITIONAL EVID ENCE. RELEVANT FACTS ARE ALREADY ON RECORD. WE THEREFORE REJECT REVENUES O BJECTIONS TO ADMISSION OF ABOVE ADDITIONAL GROUND. 20. BOTH THE LEARNED REPRESENTATIVES INFORM US VERY FAIRLY THAT A CO- ORDINATE BENCH IN ASSESSMENT YEAR 2007-08 HAS ALREA DY RESTRICTED AN IDENTICAL DISALLOWANCE TO THE EXTENT OF EXEMPT INCO ME AMOUNT. WE THEREFORE FOLLOW THE VERY COURSE OF ACTION HEREIN A S WELL TO RESTRICT THE IMPUGNED DISALLOWANCE TO RS.5,808/- ONLY. THE ASSE SSEES ADDITIONAL SUBSTANTIVE GROUND AS WELL AS MAIN GROUND PLEADED H EREIN PARTLY SUCCEED. 21. THE ASSESSEES FIFTH SUBSTANTIVE GROUND CHALLEN GES SECTION 80IB DEDUCTION DISALLOWANCE OF RS.16,34,58,692/- OUT OF TOTAL CLAIM OF RS.53,25,79,553/-; AS MADE BY THE LOWER AUTHORITIES . THE ABOVE DISALLOWANCE FIGURE INVOLVES EXCISE DUTY REFUND AMO UNT OF RS.8,12,71,702/-. THE DRP QUOTED HONBLE APEX COUR TS DECISION IN LIBERTY INDIA VS. CIT (2009) 317 ITR 218 IN CONCLU DING THE ABOVE EXCISE ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 15 - REFUND TO BE NOT AN INCOME DERIVED FROM THE ELIGIBL E INDUSTRIAL UNDERTAKING. WE FIND THAT EARLIER CO-ORDINATE BENCH IN ASSESSMEN T YEAR 2007-08(SUPRA) HAD FOLLOWED HONBLE APEX COURTS RECENT DECISION I N CIT VS. MEGHALAYA STEELS LTD. CIVIL APPEAL NO 7622/2014 IN HOLDING TH AT SUCH A REFUND BY WAY OF AN INCENTIVE SUBSIDY RESULTS IN REIMBURSEMENT OF COST OF PRODUCTION AS COVERED U/S.28 OF THE ACT. THE REVENUE FAILS TO RE BUT THIS FACTUAL AND LEGAL POSITION. WE THEREFORE TREAT ASSESSEES ABOVE EXCI SE REFUND COMPONENT TO BE AN INCOME ELIGIBLE FOR SECTION 80IB DEDUCTION. 22. NEXT COMES LATTER COMPONENT OF ALLOCATION OF RE SEARCH AND DEVELOPMENT EXPENSES BY BOTH THE LOWER AUTHORITIES IN PROPORTION TO TURN OVER IN JAMMU UNIT AMOUNTING TO RS.8,21,86,990/-. THE ASSESSEES TOTAL RESEARCH AND DEVELOPMENT EXPENDITURE READS A FIGURE OF RS.32,27,73,501/- AS INCURRED ON INHOUSE R&D RELATING TO VARIOUS PROD UCTS LIKE BULK DRUGS, FORMULATIONS AND AGRICULTURE RELATED RESEARCH. THE ASSESSING OFFICER OBSERVED THAT RESULTS OF ITS RESEARCH WERE VERY WEL L AVAILABLE AS A WHOLE WHILE INCLUDING ITS JAMMU UNIT SINCE THE ASSESSEE H AD CLARIFIED THE ABOVE EXPENDITURE TO BE NOT PERTAINING ANY PARTICULAR UNI T. THE ASSESSING OFFICER THEREAFTER ADOPTED TURNOVER FORMULA TO ALLOCATE THE IMPUGNED EXPENDITURE . 23. THE DRP AFFIRMS THE ABOVE ALLOCATION AS UNDER; 11.2.3 REGARDING THE ALLOCATION OF R&D EXPENDITURE OF RS 8,21,86,990 ON TURNOVER BASIS, THE ASSESSEE HAS MERELY MADE AN ASS ERTIONS THAT COMMON EXPENSES HAVE BEEN ALLOCATED BASED ON THE CONSUMPTI ON OF MATERIAL/SERVICES FOR OPERATIONS OF THE JAMMU PLANT AND THE SAME HAVE BEE N DULY SCRUTINIZED AND VERIFIED BY THE AUDITORS AND FOUND TO BE CORRECT AN D IN COMPLIANCE WITH THE ACCOUNTING PRINCIPLES, WHEREAS THE ASSESSEE IS BOUN D TO FURNISH NECESSARY EVIDENCE AND DOCUMENTS BEFORE THE ASSESSING OFFICER TO SHOW THAT COMMON EXPENSES HAVE BEEN ALLOCATED PROPORTIONATELY FOR TH E PURPOSE OF CLAIMING DEDUCTION U/S 80IB. THE ONUS WAS ON ASSESSEE. HOWEV ER THE ASSESSEE HAS NOT DISCHARGED ITS ONUS. THE ASSESSEE HAS ALLOCATED THE ENTIRE EXPENDITURE ON R&D OF RS 32.27 CRORE TO UNITS OTHER THAN J&K UNIT THOU GH AS POINTED OUT BY THE AO ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 16 - THE RESULTS OF THE RESEARCH ARE AVAILABLE TO J&K UN IT ALSO. IN CASE OF NITCO TILES 30 SOT 47 HON'BLE ITAT MUMBAI OBSERVED AS UNDER: PROVISIONS OF S. 80-IA(5) ARE DISTINCT, DEEMED AND OVERRIDING PROVISIONS AND THEY, M THE COMBINATION OF S. 80-IB(1), ADVOCAT E FOR SPECIAL COMPUTATION OF 'PROFITS AND GAINS OF THE ELIGIBLE B USINESS' IN GENERAL AND FOR CONSIDERING ALL THE EXPENSES, BOTH DIRECT AND I NDIRECT, AMONG ALL THE ONGOING PROJECTS, IF NOT EXCLUSIVE AGAINST THE PROF ITS AND GAINS OF THE ELIGIBLE BUSINESS, THE ONLY SOURCE OF INCOME OF THE ASSESSEE. FURTHER, THE PROVISIONS OF S. 80-IA/80-IB DO NOT ENCOURAGE THE D ISCLOSURE OF THE PROFITS OF THE ELIGIBLE BUSINESS MORE THAN THE ORDI NARY PROFITS. THE PROVISIONS OF S. 80-IB(1) READ WITH THE DEEMED PROV ISIONS OF SUB-S. (5) (ERSTWHILE SUB-S. (7) OF S. 80-IA WITH ITS OVERRIDI NG APPLICATION, PRESCRIBE FOR THE SPECIAL MODEL MANNER OF COMPUTATION OF THE PROFITS AND GAINS OF THE ELIGIBLE BUSINESS, WHICH MUST BE COMPUTED AS IF IT THE ONLY SOURCE OF INCOME. WHEN SUCH COMPUTATION IS UNDERTAKEN AS PER THE SAME, ALL THE EXPENSES OF THE BUSINESS INCLUDING THE INDIRECT OR COMMON OR HEAD OFFICE EXPENSES HAVE TO BE BOOKED TO ALL THE ONGOING PROJE CTS, IF NOT TO THE S. 80 - IB PROJECTS EXCLUSIVELY. 11.2.4 IN VIEW OF THIS, THE DRP IS OF THE CONSIDE RED OPINION THAT NO INTERFERENCE SHOULD BE MADE ON THE ADDITION PROPOSED BY THE AO/T PO ON THIS GROUND. THE OBJECTION RAISED BY THE ASSESSEE IS REJECTED. 24. WE HAVE HEARD BOTH THE PARTIES AT LENGTH. THE ASSESSEE ADMITTEDLY HAS THREE PRODUCTION DIVISIONS AT JAMMU, ANKLESHWAR AND DHOLKA; RESPECTIVELY. CASE RECORDS AT PAGE 396 INDICATE TH E SAME TO BE OPERATING EXCLUSIVELY FOR FORMULATION (DOMESTIC SALES), BULK DRUGS (DOMESTIC AND EXPORT SALES) AND FORMULATIONS (DOMESTIC AND INTERN ATIONAL SALES); RESPECTIVELY. THE ASSESSEE PLEADED BEFORE THE DRP AT PAGE 409 THAT IT HAD NOT DONE ANY RESEARCH AND DEVELOPMENT FOR ANY OF TH E FORMULATION PRODUCT MANUFACTURED IN JAMMU UNIT IN RELEVANT PREVIOUS YEA R. THE SAME HAS NEITHER BEEN SPECIFICALLY REBUTTED NOR ACCEPTED IN DRPS DIRECTIONS. NOR IS THERE ANY SPECIFIC MATERIAL QUOTED TO DISTURB ASSES SEES ACCOUNTS SEPARATELY MAINTAINING EACH AND EVERY MINUTE DETAIL PERTAINING TO THESE THREE UNITS IN QUESTION. IT THUS EMERGES THAT THE AUTHORITIES BEL OW HAVE ADOPTED ADHOCISM IN APPLYING THE ABOVE TURNOVER FORMULA FOR ALLOCATI NG THE IMPUGNED EXPENDITURE. HONBLE BOMBAY HIGH COURTS DECISION IN ZHANDU PHARMACEUTICAL WORKS LTD. VS. CIT (2013) 350 ITR 3 66 (BOM.) DELETES ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 17 - SIMILAR DISALLOWANCE IN ABSENCE OF NON ESTABLISHMEN T OF ANY NEXUS BETWEEN R&D FACILITIES AND OTHER UNITS. WE FIND THAT THE A UTHORITIES BELOW HAVE NOWHERE ARRIVED AT SUCH A NEXUS IN INSTANT CASE AS WELL. WE THEREFORE DELETE THE IMPUGNED ALLOCATION BY ADOPTING THE ABOV E DISCUSSED REASONING. THE ASSESSEE SUCCEEDS IN ITS SUBSTANTIVE GROUND. 25. THE ASSESSEES NEXT SUBSTANTIVE GROUND SEEKS TO DELETE FOREIGN CURRENCY LOSS OF RS.25,39,60,000/- AS DISALLOWED BY THE LOWER AUTHORITIES TO BE IN THE NATURE OF SPECULATION LOSS. THE ASSESSIN G OFFICER AS WELL AS THE DRP INVOKE SECTION 43(5) OF THE ACT TO CONCLUDE THA T THE ABOVE LOSS IS SPECULATIVE INSTEAD OF BUSINESS LOSS SINCE NOT INVO LVING ANY ACTUAL DELIVERY THEREIN. WE NOTICE THAT THE DRPS ELABORATELY DISC USSES THE INSTANT ISSUE AS UNDER: 12 GROUND NO. 8: THE LEARNED. ASSESSING OFFICER ERRED IN DISALLOWING FOREIGN CURRENCY LOSS OF RS.25,39,60,000/- TREATING THE SAME AS SPEC ULATION LOSS. 12.1 AO/TPO'S FINDINGS 12.1.1 THE ASSESSEE HAD ENTERED INTO TWO PUT CALL C ONTRACTS WITH SBI WHERE UNDERLYING EXPOSURE FOR EXPORT TURNOVER WAS 2 MILLI ON USD IN CASE THE DOLLAR RATE IS MORE THAN RS/$ . AO HAS FOUND THAT IF THE A SSESSEE FULFILLS THE CONDITIONS MENTIONED IN THE CONTRACT, IT GETS BENEFIT IN MULTI PLE OF 1 MILLION USD. WHEN IT FAILS TO FULFILL THE CONDITIONS, IT SUFFERS LOSSES IN MULTIPLE OF 2 MILLION USD HENCE HE HELD THAT SUCH AN ACTIVITY, CAN NEVER BE CALLED AS HEDGING AND IS PURELY SPECULATIVE IN NATURE. 12.1.2 THE AO FURTHER FOUND THAT AS PER THE COPIES OF EXPORT BILL PAYMENT ADVICE OBTAINED FROM THE 2 BANKS CORPORATION BANK AND BANK OF BARODA, WHERE THE ASSESSEE HAD SUBMITTED THESE BILLS, THE ASSESSEE HA S BOOKED EACH AND EVERY EXPORT BILL AT THE FORWARD RATE OF EXCHANGE FOR THE MATURITY/DUE DATE OF EXPORT DOCUMENTS THUS THAT THE BANK HAD REMITTED THE AMOUN T WHICH INCLUDES PREMIUM/GAIN AS ON THE DATE OF REMITTANCE I.E. ALON G WITH THE FOREIGN CURRENCY GAIN/LOSS. 12.1.3 THE AO THUS CONCLUDED THAT THE LOSS INCURRED BY THE ASSESSEE IS IN 'CURRENCY SWAP LOSS' WHICH IS A DERIVATIVE LOSS AND THIS LOSS HAS BEEN INCURRED ON ACCOUNT OF HEDGING OF US DOLLARS LOAN, WHEREIN D OLLAR LOAN IS THE UNDERLYING ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 18 - ASSET. HE FURTHER OBSERVED THAT THE CURRENCY SWAP M ADE BY THE ASSESSEE WAS BY WAY OF 'OVER THE COUNTER' CONTRACTS ENTERED INTO WI TH THE BANKS AND SETTLED ON MATURITY BY ISSUE OF DEBIT/CREDIT ADVICE BY THE BAN KS. THEREFORE AS PER EXPLANATION TO CLAUSE (D) OF SECTION 4 3(5) OF THE ACT, WAS NOT AN ELIGIBLE TRANSACTION, AND HENCE SPECULATIVE LOSS NOT ALLOWABLE AS BUSINE SS EXPENDITURE 'THE ASSESSING OFFICER THUS DISALLOWED FOREIGN CURR ENCY LOSS OF RS 25,39,60,000/- TREATING THE SAME AS SPECULATION LOS S'. 12.2 ASSESSEE'S SUBMISSION: 12.2.1 THE ASSESSEE HAS SUBMITTED THAT IT HAS EARNE D A FOREIGN EXCHANGE GAIN OF RS.1,49,17,753/-ON REALIZATION OF EXPORT SALES AND THE SAME HAS BEEN OFFERED TO TAX DURING THE YEAR UNDER ASSESSMENT AND APART FROM THE AFORESAID FOREIGN EXCHANGE GAIN, THE ASSESSEE COMPANY ENTERED INTO A FOREX CONTRACT WITH THE STATE BANK OF INDIA BASED ON ITS TOTAL FOREIGN CURR ENCY EXPOSURE IN THE IMPORT AND EXPORT TRANSACTIONS. THE ASSESSEE HAS CLAIMED T HAT THE SAID CONTRACT HAS BEEN ENTERED INTO IN COMPLIANCE WITH THE RBI GUIDEL INES AND IT IS IN NATURE OF HEDGING TO GUARD AGAINST THE LOSS ON ACCOUNT OF FOR EIGN CURRENCY RATE FLUCTUATION. THE CLAIM OF THE ASSESSEE IS THAT THE ASSESSEE HAS DEVISED A RISK MANAGEMENT POLICY FOR MITIGATING THE RISK ARISING O UT OF FLUCTUATION IN FOREIGN CURRENCY TRANSACTIONS WHICH IS DULY APPROVED BY ITS BOARD OF DIRECTORS AND IT WAS THE REQUIREMENT OF THE RESERVE BANK OF INDIA AS WELL AS CORPORATE GUIDELINES WHEREIN IT WAS MADE MANDATORY FOR ALL CO MPANIES TO HAVE FOREIGN EXCHANGE RISK MANAGEMENT POLICY IN PLACE. THE ASSES SEE HAS SUBMITTED THE FOLLOWING DETAILS IN THIS REGARD: SUMMARY EXPLAINING EXPORTS AND FOREIGN CURRENCY FLUC TUATION EXPOSURE COVERAGE NO PARTICULARS AMOUNT ANNEXURES A FORMULATION EXPORT (FSBU) 1,17,64,19,250 STATEMENT ATTACHED VIDE ANNEXURE 6 A B BULK DRUG EXPORT (CSBU) 1,08,11,08,935 STATEMENT ATTACHED VIDE ANNEXURE 6 B (A+B) TOTAL 2,25,75,28,185 A LODGMENT OF BULK DRUG EXPORT DOCUMENTS (CSBU)- BANK OF BARODA 1,23,71,57,417 LODGMENT CERTIFICATE ATTACHED VIDE ANNEXURE 6 C B LODGMENT OF FORMULATION EXPORT DOCUMENTS (FSBU)-CORPORATION BANK 97,90,51,235 LODGMENT CERTIFICATE ATTACHED VIDE ANNEXURE 6 D (A+B) TOTAL LODGMENT VALUE DURING THE YEARJAS PER THE CERTIFICATES FROM RESPECTIVE BANK) ALL LODGMENTS HAVE TAKEN PLACE WITH ABOVE BANKS AS WHEN EXPORT HAVE TAKEN PLACE I.E THROUGHOUT THE MONTHS OVER TWELVE MONTHS 2,21,62,08,652 EXPORT EXPOSURE SBI PER YEAR (4 MILLION USD PER MONTH'12 MONTH ),THIS EXPOSURES HAVE TAKEN PLACE AT THE END OF EACH MONTH THUS HEDGING OVER THE ABOVE OPERATIONS OF THE ASSESSEE COMPANY. 1,96,80,00,000 COPY OF THE BANK STATEMENT OF SBI WHEREIN RESPECTIVE DEBITS HAS BEEN MADE VIDE ANNEXURE 5 12.2.2 THE ASSESSEE SUBMITTED THAT ITS FOREIGN CURR ENCY FLUCTUATION EXPOSURE ON ACCOUNT OF FOREX CONTRACT IS IN LINE WITH ITS EXPOR TS TURNOVER AND EXPORT REALIZATION AND CLAIMED THAT IT HAS NOT ENGAGED IN ANY KIND OF SPECULATIVE TRANSACTION AND THE FLUCTUATION LOSS HAS INCURRED D URING THE COURSE OF BUSINESS WHICH IS ALLOWABLE AS DEDUCTIBLE EXPENDITURE UNDER SECTION 37 OF THE INCOME TAX ACT. ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 19 - 12.2.3 THE ASSESSEE FURTHER CLAIMED THAT FLUCTU ATION LOSS OR GAIN INCURRED BY IT FALLS UNDER THE PROVISIONS OF CLAUSE (A) OF SECTION 43(5) WHICH READS AS UNDER: 'SECTION 43 (5) 24 'SPECULATIVE TRANSACTION' 25 MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY CO MMODITY 25 , INCLUDING STOCKS AND SHARES 25 , IS PERIODICALLY OR ULTIMATELY 25 SETTLED 25 OTHERWISE THAN BY THE ACTUAL DELIVERY 25 OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCH ANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERC HANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATION S IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR . . SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION .' 12.2.4 THE ASSESSEE THUS SUBMITTED THAT THE FLUCTUA TION LOSS OR GAIN ARISING OUT OF FOREIGN CURRENCY TRANSACTIONS HAVE ARISEN DURING THE COURSE OF EXPORTS BUSINESS FOR WHICH LODGMENTS TO THE TUNE OF RS.221. 62 CRORES AS AGAINST THE TOTAL EXPORTS OF RS.225.75 CRORES (WITH FOB VALUE OF RS.2 10.80 CRORES) HAVE BEEN PLACED WITH THE BANK OF BARODA AND CORPORATION BANK AS STATED ABOVE IN THE STATEMENT SHARED ABOVE, WHICH SHOWS THAT LOSS ON FO REIGN CURRENCY FLUCTUATION HAS BEEN INCURRED DURING THE COURSE OF BUSINESS AS PRESCRIBED UNDER THE PROVISIONS OF CLAUSE (A) TO SECTION 43(5), HENCE IT SHOULD BE GRANTED AS BUSINESS EXPENDITURE. 12.3 DISCUSSION AND DIRECTIONS OF DRP: 12.3.1 THE DRP HAS CONSIDERED THE SUBMISSIONS OF TH E ASSESSEE COMPANY ON THIS ISSUE AND THE LEGAL POSITION UNDER THE I.T. ACT 196 1. THE PROVISIONS OF CLAUSE (A) OF SECTION 43(5) READS AS UNDER: 'SECTION 43 (5) 24 'SPECULATIVE TRANSACTION' 25 MEANS A TRANSACTION IN WHICH A CONTRACT 25 FOR THE PURCHASE OR SALE OF ANY COMMODITY 25 , INCLUDING STOCKS AND SHARES 25 , IS PERIODICALLY OR ULTIMATELY 25 SETTLE 25 OTHERWISE THAN BY THE ACTUAL DELIVERY 25 OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCH ANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERC HANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATION S IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM: OR 12.3.2 IT IS APPARENT FROM THE PLAIN READING OF THE ABOVE CLAUSE THAT WHERE A CONTRACT 25 FOR THE PURCHASE OR SALE OF ANY COMMODITY 25 IS SETTLED 25 OTHERWISE THAN BY THE ACTUAL DELIVERY 25 OR TRANSFER OF THE COMMODITY, IT SHALL BE TREATED AS SPECULATIVE TRANSACTION. THE AO HAS CLEARLY BROUGHT ON RECORD THAT THE COPIES OF ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 20 - EXPORT BILL PAYMENT ADVICE OBTAINED FROM THE 2 BANK S CORPORATION BANK AND BANK OF BARODA, WHERE THE ASSESSEE HAD SUBMITTED TH ESE BILLS, SHOWS THAT THE ASSESSEE HAS BOOKED EACH AND EVERY EXPORT BILL AT T HE FORWARD RATE OF EXCHANGE FOR THE MATURITY/DUE DATE OF EXPORT DOCUMENTS AND T HAT THE BANK HAD REMITTED THE AMOUNT WHICH INCLUDES PREMIUM/GAIN AS ON THE DATE O F REMITTANCE I.E. ALONG WITH THE FOREIGN CURRENCY GAIN/LOSS. HE HAS CLEARLY BROUGHT ON RECORD THE FACT THAT THE LOSS HAS OCCURRED ON ACCOUNT OF AN INDEPEN DENT PUT CALL CONTRACTS WITH SBI WHERE UNDERLYING EXPOSURE FOR EXPORT TURNOVER W AS 2 MILLION USD WHICH WAS NOT DEPENDENT ON ACTUAL DELIVERY 25 OR TRANSFER OF THE COMMODITY. THEREFORE THE PLEA OF THE ASSESSEE THAT FOREIGN CURRENCY FLUC TUATION HAS BEN INCURRED DURING THE COURSE OF BUSINESS AS PRESCRIBED UNDER T HE PROVISIONS OF CLAUSE (A) TO SECTION 43(5), HENCE IT SHOULD BE GRANTED AS BUSINE SS EXPENDITURE, CAN NOT BE ACCEPTED. 12.3.3 THE OBJECTION RAISED BY THE ASSESSEE IS THUS REJECTED. 26. WE HAVE HEARD RIVAL SUBMISSIONS. THE ASSESSEE S CASE THROUGHOUT HAS BEEN THAT IT HAD ENTERED INTO A FOREX CONTRACT WITH THE STATE BANK OF INDIA ON THE BASIS OF ITS FOREIGN CURRENCY EXPOSUR E IN IMPORT/EXPORT TRANSACTIONS WITH PUBLIC SECTOR BANKS TO COVER FLUC TUATION RISK UPTO RS.200CRORES. ONE OF THE BANK NAMELY BANK OF BAROD A IS STATED TO HAVE ISSUED A CERTIFICATE DATED 12.02.2015 CLAIMING REAL IZATION OF RS.123,71,57,417/- WHICH COULD BE REALIZED TO THE T UNE OF RS.111,72,18,092/- AS ON 31.03.2011. ITS SBI CONTR ACT ENABLED IT TO BOOK LOSSES AGAINST THE ABOVE UNREALIZED BILLS. LOWER A UTHORITIES AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE DO NOT REBUT TH IS FACTUAL POSITION. THE ASSESSEE CLAIMS TO HAVE BEEN INTER ALIA RECORDING I TS SALES TO OVERSEAS CLIENTS ON THE DAY OF TRANSACTION IN ITS BOOKS IN INDIAN CU RRENCY AT THE RATE PREVAILING ON THE VERY DAY, IT WOULD LODGE CONVERSI ON CLAIM UPON PAYMENT OF ITS CONSIDERATION MONEY BY SAID CUSTOMERS, THIS CURRENCY SETTLEMENT TOOK TIME AFTER LODGMENT TO BE REALIZED RESULTING IN FLU CTUATION LOSS AS IS THE CASE HEREIN. WE NOTICE IN THIS BACKDROP THAT HONBLE JU RISDICTIONAL HIGH COURTS DECISION IN CIT VS. FRIENDS & FRIENDS SHIPPING PVT. LTD. (2013) 35 TAXMANN.COM 553 (GUJ) HOLDS LOSSES ARISING FROM SIM ILAR FOREIGN EXCHANGE CONTRACTS TO BE BUSINESS LOSSES THAN SPECULATIVE ON ES. THEIR LORDSHIPS ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 21 - CONCLUDE THAT SUCH EXCHANGE TRANSACTIONS ARE HEDGIN G TRANSACTIONS INSTEAD OF BEING SPECULATIVE TRANSACTIONS IN NATURE. NEXT COMES HONBLE BOMBAY HIGH COURTS DECISION IN CIT VS. D. CHETAN & CO. (2 016) 75 TAXMANN.COM 300 (BOM.) HOLDING THAT FORWARD CONTRACTS IN THE NA TURE OF HEDGING TRANSACTIONS IN COURSE OF NORMAL IMPORT EXPORT ACTI VITIES TO COVER UP LOSSES ON ACCOUNT OF FOREIGN EXCHANGE VALUATION DIFFERENCE RESULTS IN BUSINESS LOSSES AND NOT SPECULATIVE ONE. WE FIND THAT HONB LE JURISDICTIONAL HIGH COURTS DECISION IN PANKAJ OIL MILLS VS. CIT (1978) 115 ITR 824 (GUJ) (FULL BENCH) ALSO HOLDS INTER ALIA THAT HEDGING CON TRACTS; IN ORDER TO BE OUT OF SPECULATIVE TRANSACTIONS, MUST BE IN RESPECT OF RAW MATERIALS ONLY IN MANUFACTURERS CASES THOUGH THEY COULD BE BOTH WITH REGARD TO SALES AND PURCHASES, SUCH HEDGING CONTRACTS NEED NOT SUCCEED THE CONTRACT FOR SALE AND ACTUAL DELIVERY OF GOODS MANUFACTURED, BUT THE LATTER COULD BE SUBSEQUENTLY ENTERED INTO WITHIN REASONABLE TIME NO T EXCEEDING THE RELEVANT ASSESSMENT YEAR IN NORMAL CIRCUMSTANCES AND SUCH TR ANSACTIONS SHOULD NOT EXCEED THE TOTAL STOCK OF THE RAW MATERIAL OR MERCH ANDISE ON HAND INCLUDING EXISTING STOCKS AS WELL AS THAT ACQUIRED UNDER THE FIRMS CONTRACT OF PURCHASES IN ORDER TO BE GENUINE AND VALID HEDGING CONTRACT OF SALES; RESPECTIVELY. LEARNED DEPARTMENTAL REPRESENTATIVE FAILS TO INDICATE ANY DISTINCTION THEREIN VIS--VIS THOSE INVOLVED IN THE INSTANT ADJUDICATION. WE THEREFORE DIRECT THE ASSESSING OFFICER TO DELETE TH E IMPUGNED DISALLOWANCE. 27. THE ASSESSEES LAST SUBSTANTIVE GROUND SEEKS TO REVERSE THE ASSESSING OFFICER AS WELL AS DRPS ACTION DISALLOWING ITS SAL ES PROMOTION EXPENDITURE OF RS.10,89,29,928/- U/S. 37(1) OF THE ACT. WE DEE M IT APPROPRIATE AT THIS STAGE TO REPRODUCE LEARNED DRPS DISCUSSION AS UNDE R: 13.2.1 THE DRP HAS CONSIDERED THE SUBMISSIONS OF T HE ASSESSEE COMPANY ON THIS ISSUE, THE LEGAL POSITION UNDER THE I.T. ACT 1961. ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 22 - 13.2.2 IN THIS REGARD, REFERENCE MAY BE MADE TO THE CBDT'S CIRCULAR NO. 5/2012 DATED 1 AUG 2012, WHICH CLEARLY STATES THAT FREEBIES IN THE NATURE OF GIFT, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRAN T RECEIVED BY MEDICAL PRACTITIONERS AND THEIR PROFESSIONAL ASSOCIATIONS F ROM THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR ARE TO BE DISALLOWED UNDER THE EXPLANATION TO SECTION 37(1) OF THE I.T. ACT 1961. THE CONTENT OF THE BOARD'S CI RCULAR BEING CLEARLY APPLICABLE IS REPRODUCED BELOW: - 'CIRCULAR NO. 5/2012, DT. 1ST A UGUST, 2012 INADTNISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SE CTOR INDUSTRY 01/08/2012 BUSINESS EXPENDITURE SECTION 37(1), IT HAS BEEN BROUGHT TO THE NOTICE OF THE 'BOARD THA T SOME PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES ARE PROVIDING F REEBEES (FREEBIES) TO MEDICAL PRACTITIONERS AND THEIR PROFESSIONAL ASSOCI ATIONS IN VIOLATION OF THE REGULATIONS ISSUED BY MEDICAL COUNCIL OF INDIA (THE 'COUNCIL') WHICH IS A REGULATORY BODY CONSTITUTED UNDER THE MEDICAL COUNCIL ACT, 1956. 2. THE COUNCIL IN EXERCISE OF ITS STATUTORY POWERS AMENDED THE INDIAN MEDICAL COUNCIL (PROFESSIONAL ETIQUETTE AND ETHICS) REGULATIONS, 2002 (THE REGULATIONS) ON 10-12-2009 IMPOSING A PROHIBIT ION ON THE MEDICAL PRACTITIONER AND THEIR PROFESSIONAL ASSOCIATIONS FR OM TAKING ANY GIFT, 'TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRA NT FROM THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES. 3. SECTION 37(1) OF INCOME TAX ACT PROVIDES FOR DED UCTION OF ANY REVENUE EXPENDITURE (OTHER THAN THOSE FAILING UNDER SECTION S 30 TO 36) FROM THE BUSINESS INCOME IF SUCH EXPENSE IS LAID OUT/ EXPEND ED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSI ON. HOWEVER, THE EXPLANATION APPENDED TO THIS SUB-SECTION DENIES CLA IM OF AIRY SUCH EXPENSE, IF THE SAME HAS BEEN INCURRED FOR A PURPOS E WHICH IS EITHER AN OFFENCE OR PROHIBITED BY LAW. THUS, THE CLAIM OF ANY EXPENSE INCURRED IN PROVIDIN G ABOVE MENTIONED OR SIMILAR FREEBEES IN VIOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULA TIONS, 2002 SHALL BE INADMISSIBLE UNDER SECTION 37(1) OF THE INCOME TAX ACT BEING AN EXPENSE PROHIBITED BY THE LAW. THIS DISALLOWANCE SHALL HE M ADE IN THE HANDS OF SUCH PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDUSTR IES OR OTHER ASSESSEE WHICH IS PROVIDED AFORESAID FREEBEES AND CLAIMED IT AS A DEDUCTIBLE EXPENSE IN ITS ACCOUNTS AGAINST 4. IF IT ALSO CLARIFIED THAT THE SUM EQUIVALENT TO VALUE OF FREEBEES ENJOYED BY THE AFORESAID MEDICAL PRACTITIONER OR PROFESSION AL ASSOCIATIONS IS ALSO TAXABLE AS BUSINESS INCOME OR INCOME FROM OTHER SOU RCES AS THE CASE MAY BE DEPENDING ON THE FACTS OF EACH CASE. THE ASS ESSING OFFICERS OF SUCH MEDICAL PRACTITIONER OR PROFESSIONAL ASSOCIATI ONS SHOULD EXAMINE THE SAME AND TAKE AN APPROPRIATE ACTION. ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 23 - THIS MAY BE BROUGHT TO THE NOTICE OF ALL THE OFFICE RS OF THE CHARGE FOR NECESSARY ACTION. 13.2.3 THE ASSESSEE HAS SUBMITTED THAT A CIRCULAR B ENEFICIAL TO THE ASSESSEE WILL BE APPLICABLE RETROSPECTIVELY, WHILE AN OPPRESSIVE CIRCULAR WILL BE MADE OPERATIONAL PROSPECTIVELY AND IN ABSENCE OF ANY SPE CIFIC MENTION OF ITS EFFECTIVE DATE OF APPLICATION, THE CIRCULAR IS EFFECTIVE FROM ITS DATE OF ISSUE I.E. FROM THE FINANCIAL YEAR 2012-13 RELEVANT TO THE A.Y.2013-14. THE ARGUMENT OF THE ASSESSEE IS NOT ACCEPTABLE AS INDIAN MEDICAL COUNCI L (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 (THE REGULA TIONS) ON 10-12-2009 WHICH FORMS THE BASIS OF THE DISALLOWANCE BY THE AO WAS V ERY MUCH IN EXISTENCE DURING THE YEAR. THE CLAIM OF DEDUCTION BY THE ASSESSEE IS DETERMINED ON THE BASIS OF PROVISIONS OF THE INCOME TAX ACT AND NOT ON THE BAS IS OF THE CIRCULAR ISSUED BY THE BOARD. THE CIRCULAR IS MERELY CLARIFICATORY IN NATURE. 13.2.4 AS REGARDS THE CLAIM OF DEDUCTION BY THE ASS ESSEE THE PANEL FINDS THAT THE ASSESSEE WAS ASKED TO SUBMIT SUPPORTING EVIDENCE BY THE ASSESSEE VIDE ORDER SHEET ENTRY, AND IT MADE A DETAILED SUBMISSION BEFO RE THE AO TO JUSTIFY THE CLAIM OF EXPENDITURE AND FURTHER FURNISHED THE FOLLOWING DETAILS: PARTICULARS TOTAL AMOUNT RS. NATURE OF EXPENSE EXPENDITURE RELATED TO BUSINESS CONFERENCE 10,19,12,419 EXPENDITURE INCURRED ON EMPLOYEES, SPEAKERS & FACULTIES FOR ATTENDING BUSINESS RELATED CONFERENCES AND SEMINARS. THIS ALSO INCLUDES EXPENSES INCURRED FOR CONFERENCES FOR SKILL UP- GRADATION WORKSHOPS HENCE THE SAME IS BEYOND THE SCOPE OF CIRCULAR 5/2012 DATED 1 ST AUGUST 2012. CONSIDERING LARGE VOLUME OF THE TRANSACTIONS WE HAVE FURNISHED THE SAMPLE EVIDENCES VIDE SUBMISSION DATED 16.03.2015 IN ANNEXURE -A-I THEREOF. HONORARIUM TO DOCTORS 70,17,509 EXPENSES HAVE BEEN INCURRED TOWARDS HONORARIUMS FOR POST MARKET, SURVEILLANCE, WHICH IS NOT SUBJECT TO ANY VIOLATION UNDER CLAUSE 6.8.1 (G) OF THE MEDICAL COUNCIL OF INDIA REGULATIONS 2009 13.2.5 THE DETAILS FURNISHED AS ABOVE SHOWS THAT T HE EXPENDITURE HAS BEEN INCURRED ON EMPLOYEES, SPEAKERS & FACULTIES FOR ATT ENDING BUSINESS RELATED CONFERENCES AND SEMINARS, WHICH ALSO INCLUDES EXPEN SES FOR SKILL UPGRADATION WORKSHOP, AND FURTHER FOR POST MARKET SURVEILLANCE. HOWEVER THE FACTS THAT CLEARLY EMERGE FROM THE ASSESSMENT ORDER ARE THAT T HE ASSESSEE FAILED TO SUBMIT SUPPORTING EVIDENCE TO SUPPORT THE CLAIM BEFORE THE AO INSPITE OF REPEATED ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 24 - OPPORTUNITY. IT IS OBSERVED AGAIN THAT THE ASSESSEE HAS NOT PROVIDED THE DETAILS OF THESE SPEAKERS, THE THERAPEUTIC FIELD THEY ARE WORK ING IN, THEIR RESEARCH AND PUBLICATION. THEREFORE THE CLAIM OF THE ASSESSEE TH AT THEY WERE PAID HONORARIUM FOR POST MARKET RESEARCH DOES NOT EMERGE FROM THE E VIDENCE PRODUCED BY THE ASSESSEE. FURTHER, THEY ARE PROHIBITED TO ATTEND IN TERNATIONAL CONFERENCES ON BEHALF OF THE APPLICANT BY VIRTUE OF CLAUSE PER 6.8 .1 (G) OF THE IMC GUIDELINES WHICH STATES AS UNDER: (B) TRAVEL FACILITIES: A MEDICAL PRACTITIONER SHALL NOT ACCEPT ANY TRAVEL FACILITY INSIDE THE COUNTRY OR OUTSIDE, INCLUDING R AIL, AIR, SHIP, CRUISE TICKETS, PAID VACATIONS ETC. FROM ANY PHARMACEUTICA L OR ALLIED HEALTHCARE INDUSTRY OR THEIR REPRESENTATIVES FOR SELF AND FAMI LY MEMBERS FOR VACATION OR FOR ATTENDING CONFERENCES, SEMINARS, WO RKSHOPS, CME PROGRAMME ETC AS A DELEGATE. 13.2.6 HERE, THE CLAUSE 6.8.1(G) OF THE IMC GUIDE LINES ALSO BECOMES RELEVANT AGAIN WHICH STATES AS UNDER: (G) AFFILIATION: A MEDICAL PRACTITIONER MAY WORK FO R PHARMACEUTICAL AND ALLIED HEALTHCARE INDUSTRIES IN ADVISORY CAPACI TIES, AS CONSULTANTS, AS RESEARCHERS, AS TREATING DOCTORS OR IN ANY OTHER PR OFESSIONAL CAPACITY. , 13.2.7 THE ASSESSEE IS ENGAGED IN MANUFACTURING AND TRADING OF DRUGS AND PHARMACEUTICALS. THE ASSESSEE COULD HAVE ENGAGED TH E DOCTORS AS CONSULTANTS, AS RESEARCHERS, AS TREATING DOCTORS OR IN ANY OTHER PROFESSIONAL CAPACITY FOR ITS BUSINESS. THE DOCTORS HAVE NOT BEEN ENGAGED FOR ANY OF THE PURPOSE SPECIFIED. THEREFORE THE CLAIM OF THE ASSESSEE IS NOT BONAFIDE AND HENCE REJECTED. 13.2.8 THE HON'BLE HIGH COURT OF KARNATAKA IN THE C ASE OF J.K.PANTHAKI & CO. VS. ITO REPORTED IN(2012) 246 CTR 0059 : (2011) 64 DTR 0283 : (2012) 344 ITR 0329 HAS HELD THAT IF THE ASSESSEE COMMITS AN O FFENCE UNDER ANY LAW IN THE COURSE OF HIS BUSINESS AND INCURS EXPENDITURE FOR A NY PURPOSE IN CONNECTION WITH THE SAID OFFENCE, THE SAID AMOUNT IS NOT DEDUC TIBLE UNDER SECTION 37 OF THE I.T. ACT 1961. THE RELEVANT EXCERPTS OF THE JUDGMEN T ARE REPRODUCED HERE UNDER:- THE COMMISSION SAID TO HAVE BEEN PAID IS NOT COMPE NSATION TO THE DIRECTORS OF THE COMPANY FOR ANY SERVICE RENDERED T O THE ASSESSEE. FROM THE UNDISPUTED FACTS IT IS CLEAR THAT A HIGHER AMOU NT WAS AGREED TO BE PAID FOR PERFORMING THE CONTRACT. SUBSEQUENTLY, THE CONSIDERATION FOR THE CONTRACT WAS REDUCED. HOWEVER, BEFORE THE SAID REED UCATION IN COST, THE ASSESSEE HAD BEEN PAID THE ENTIRE COST OF THE CONTR ACT. IF THE CONSTRUCTION COST WAS REDUCED THE EXCESS AMOUNT RECEIVED HAD TO BE RETURNED. THE ASSESSEE SHOULD HAVE RETURNED THE SAID MONEY TO THE PERSON WHO PAID IT I.E., THE COMPANY. THEREFORE, PAYMENT BY THE ASSESS EE IS OF AN AMOUNT LEGALLY LIABLE TO BE RETURNED TO THE COMPANY. INSTE AD OF RETURNING TO THE COMPANY, SAME MAY BE TAKEN AS RETURNED TO DIRECTORS FOR/ON BEHALF OF THE COMPANY. THEREFORE, IN LAW, THE ASSESSEE WAS LEGALL Y BOUND TO RESTORE THE DIFFERENCE IN PRICE TO THE PERSON WHO PAID THE SAID AMOUNT. THEREFORE WHAT IS REPAID BY THE ASSESSEE CANNOT BE CONSTRUED AS COMMISSION AT ALL, ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 25 - AS CONTENDED BY HIM. IT IS A CASE OF RETURN OF THE ADVANTAGE WHICH HE OBTAINED UNDER THE CONTRACT, TO THE PERSON WHO IS L AWFULLY ENTITLED TO THE SAME. INSTEAD OF RESTORING THE ADVANTAGE TO THE COM PANY WHICH PAID HIM THE AMOUNT, HE HAS REPAID THE SAID AMOUNT TO THE DI RECTORS OF THE COMPANY. THE SAID PAYMENT IS NOT MADE FOR ANY SERVI CES RENDERED BY THEM. THEREFORE, THE SAID AMOUNT CANNOT BE CONSTRUE D AS COMMISSION OR EXPENDITURE INCURRED UNDER S. 37 SO AS TO BE ELIGIB LE FOR BEING DEDUCTED IN ARRIVING AT INCOME OF THE ASSESSEE UNDER THE BEA D 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', BECAUSE IT IS NOT AN EXPEN DITURE LAID DOWN OR EXPENDED FULLY AND EXCLUSIVELY FOR THE PURPOSE OF B USINESS. (PARA 18) YET ANOTHER WAY OF LOOKING AT THINGS IS, THERE IS A CLEAR CASE OF COLLUSION BETWEEN THE DIRECTORS OF THE COMPANY AND THE ASSESS EE. IN THE TENDER WHICH IS FLOATED, THEY HAVE SUBMITTED PRICES WHICH ARE HIGHER THAN THE NORMAL PRICE. ACCORDINGLY PAYMENT IS MADE. AFTER AW ARDING THE CONTRACT, THEY HAVE REDUCED THE PRICE AND AGREED TO RECEIVE THE DIFFERENCE OF PRICE IN THEIR NAME. THE ASSESSEE HAS OBLIGED THEM. IT IS OBVIOUS THAT IT IS A KICK BACK OR BRIBE. IT IS AN I LLEGAL GRATIFICATION. IT IS A SCHEME ADOPTED TO SIPHON OUT THE MONEY BELONGING TO THE COMPANY. THEY WANT TO LEND RESPECTABILITY TO IT BY CALLING IT AS A 'COMMISSION'. THEREFORE, SEEN FROM ANY ANGLE, IT CANNOT BE CONSTR UED AS AN EXPENDITURE AT ALL, LET ALONE COMMISSION. (PARA 19) THE EXPLANATION TO S. 37 DECLARES THAT ANY EXPENDIT URE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHI CH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR T HE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANC E SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. THE WORD OFFENCE HAS N OT BEEN DEFINED UNDER THE ACT, HOWEVER, CHAPTER XXII DEALS WITH OFFENCES AND PROSECUTIONS. IT REFERS TO VARIOUS SECTIONS UNDER T HE ACT AND NON- COMPLIANCE WITH THOSE PROVISIONS ARE PUNISHABLE WIT H PUNISHMENT 'AS PRESCRIBED THEREIN. WILLFUL ATTEMPT TO EVADE TAX IS AN OFFENCE UNDER THE ACT. THE WORD 'OFFENCE' HAS TO BE UNDERSTOOD IN THE CONTEXT OF AN OFFENCE GENERALLY UNDER ANY ACT. IT FOLLOWS THAT IF THE ASS ESSEE COMMITS AN OFFENCE UNDER ANY LAW IN THE COURSE OF HIS BUSINESS AND INCURS EXPENDITURE FOR ANY PURPOSE IN CONNECTION WITH THE SAID OFFENCE, THE SAID AMOUNT IS NOT DEDUCTIBLE UNDER S. 37. NO EXPENSE WH ICH IS PAID BY WAY OF PENALTY FOR A BREACH OF THE LAW CAN BE SAID TO BE A N AMOUNT WHOLLY AND EXCLUSIVELY LAID FOR THE PURPOSE OF THE BUSINESS. A NYTHING DONE WHICH IS AN INFRACTION OF THE LAW AND IS VISITED WITH A PENA LTY CANNOT ON GROUNDS OF PUBLIC POLICY BE SAID TO BE A COMMERCIAL EXPENSE FOR THE PURPOSE OF A BUSINESS OR A DISBURSEMENT MADE FOR THE PURPOSES OF EARNING THE PROFITS OF SUCH BUSINESS. PENALTIES WHICH ARE INCURRED FOR INFRACTION OF THE LAW ARE NOT A NORMAL INCIDENT OF BUSINESS AND THEY FALL ON THE ASSESSEE IN SOME CHARACTER OTHER THAN THAT OF A TRADER. A. PENA LTY CANNOT BE REGARDED AS AN EXPENDITURE WHOLLY AND EXCLUSIVELY L AID FOR THE PURPOSE OF THE BUSINESS. (PARAS 35 & 36) INFRACTION OF THE LAW IS NOT A NORMAL INCIDENT OF B USINESS. ONLY SUCH DISBURSEMENTS CAN BE DEDUCTED AS ARE REALLY INCIDEN TAL TO THE BUSINESS ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 26 - ITSELF. THEY CANNOT BE DEDUCTED IF THEY FALL ON THE ASSESSEE IN SOME CHARACTER OTHER THAN THAT OF A TRADER. IT IS WELL S ETTLED THAT CONTRACTS WHICH ARE PROHIBITED BY STATUTE, THE PROHIBITION BE ING EITHER EXPRESS OR IMPLIED, WOULD BE ILLEGAL AND UNENFORCEABLE IF THEY ARE ENTERED INTO IN CONTRAVENTION OF THE STATUTE. WHEN A CONTRACT IS EX PRESSLY OR BY IMPLICATION FORBIDDEN BY STATUTE, NO COURT WILL LEN D ITS ASSISTANCE TO GIVE EFFECT TO SUCH CONTRACT. A DISTINCTION IS SOMETIMES MADE BETWEEN CONTRACTS ENTERED INTO WITH THE OBJECT OF COMMITTIN G AN ILLEGAL ACT AND CONTRACTS EXPRESSLY OR IMPLIEDLY PROHIBITED BY STAT UTE. THE DISTINCTION IS THAT IN THE FORMER CLASS ONE HAS ONLY TO LOOK AND S EE WHAT ACTS THE STATUTE PROHIBITS; IT DOES NOT MATTER WHETHER OR NOT IT PRO HIBITS A CONTRACT. IN THE LATTER CLASS, ONE HAS TO CONSIDER NOT WHAT ACT THE STATUTE PROHIBITS, BUT WHAT CONTRACTS IT PROHIBITS. ANY AGREEMENT WHICH TE NDS TO BE INJURIOUS TO THE PUBLIC OR AGAINST THE PUBLIC GOOD IS INVALIDATE D ON THE GROUND OF PUBLIC POLICY. THE QUESTION WHETHER A PARTICULAR AG REEMENT IS CONTRARY TO PUBLIC POLICY IS A QUESTION OF LAW, TO BE DETERM INED LIKE ANY OTHER QUESTION OF LAW BY THE PROPER APPLICATION OF LEGAL PRINCIPLES AND PRIOR DECISIONS. CONTENTION THAT IF WHAT IS PAID BY WAY O F COMMISSION IS HELD TO BE BRIBE, IT IS ONLY RECEIPT OF BRIBE OR PAYMENT OF BRIBE TO A PUBLIC SERVANT WHICH IS AN OFFENCE AND IT IS NOT AN OFFENC E IF PAID OR RECEIVED BY A PERSON OTHER THAN PUBLIC SERVANT, AND THEREFORE I T DOES NOT FALL WITHIN THE MISCHIEF OF THE EXPLANATION TO S. 37 IS NOT SUS TAINABLE. THE CONSIDERATION OR OBJECT OF AN AGREEMENT IS LAWFUL U NLESS THE COURT REGARDS IT AS IMMORAL OR OPPOSED TO PUBLIC POLICY. IF THE CONSIDERATION OR OBJECT OF AN AGREEMENT IS UNLAWFUL, THEN THE SAID A GREEMENT IS VOID. THEN THE SAID AGREEMENT IS NOT ENFORCEABLE BY LAW. ILLUS TRATION (J) TO S. 23 OF THE CONTRACT ACT, BRINGS HOME THE POINT EXPLICITLY, THEREFORE, UNDER THE INDIAN LAW AN AGREEMENT TO PAY ILLEGAL GRATIFICATIO N IS EXPRESSLY DECLARED AS IMMORAL AND CONSEQUENTLY SUCH AN AGREEM ENT IS VOID AND NOT ENFORCEABLE. IT IS NOT THE JUDGE OR THE COURT W HICH IS DECLARING SUCH ACT AS IMMORAL. THE LAW DECLARES IT AS IMMORAL. THO UGH LAW IS DIFFERENT FROM MORALITY, IN THE CASE OF ILLEGAL GRATIFICATION PAYABLE UNDER AN AGREEMENT THERE IS CONVERGENCE OF VIEWS. THERE ARE LAWS IN THE COUNTRY EXPRESSLY DECLARING PAYMENT OF BRIBE AND RECEIPT OF BRIBE BY PUBLIC SERVANTS AS AN OFFENCE AND PUNISHABLE UNDER THE CRI MINAL LAW OF THE COUNTRY. THE CIVIL LAW HAS WIDER APPLICATION AND IT DECLARES THAT SUCH PAYMENT OF BRIBE IS IMMORAL AND THE AGREEMENT IS VO ID AB INITIO. IN THIS CONTEXT THE PHRASE 'PROHIBITED BY LAW' USED IN THE EXPLANATION TO S. 37, HAS WIDER CONNOTATION. IT INCLUDES EXPENDITURE INCU RRED BY WAY OF PAYMENT OF BRIBE, ALTHOUGH IT IS LAID OUT OR EXPEND ED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. AS THE IND IAN LAWS DECLARE SUCH AGREEMENTS AS VOID, IT IS UNENFORCEABLE. THE DOCTRI NE OR RULE OF PAN DELICTO IS THE EMBODIMENT OF THE PRINCIPLE THAT THE COURTS WILL REFUSE TO ENFORCE AN ILLEGAL AGREEMENT AT THE INSTANCE OF A P ERSON WHO IS HIMSELF A PARTY TO AN ILLEGALITY OR FRAUD. IT IS A MAXIM OF L AW, ESTABLISHED, NOT FOR THE BENEFIT OF EITHER OF THE PARTIES TO THE LITIGAT ION, BUT IS FOUNDED ON THE PRINCIPLES OF PUBLIC POLICY, WHICH WILL NOT ASSIST A PARTY WHO HAS PAID OVER MONEY, OR HANDED OVER PROPERTY, IN PURSUANCE O F AN ILLEGAL OR IMMORAL CONTRACT, TO RECOVER IT BACK; FOR 'THE COUR TS WILL NOT ASSIST AN ILLEGAL TRANSACTION IN ANY RESPECT'. THE MAXIM IS T HEREFORE, INTIMATELY ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 27 - CONNECTED WITH THE MORE COMPREHENSIVE RULE OF LAW, EX TURPI CAUSA NON ORITUR ACTIO, ON ACCOUNT OF WHICH NO COURT WILL ALL OW ITSELF TO BE MADE THE INSTRUMENT OF ENFORCING OBLIGATIONS ALLEGED TO ARISE OUT OF A CONTRACT OR TRANSACTION WHICH IS ILLEGAL, AND THE MAXIM MAY BE SAID TO BE A BRANCH OF THAT COMPREHENSIVE RULE. IF HE REQUIRES A ID FROM THE ILLEGAL TRANSACTION TO ESTABLISH HIS CASE, THE COURT WILL N OT ENTERTAIN HIS CLAIM. (PARAS 38, 39 & 41 TO 43) IN THE PRESENT DAY CONTEXT, THE MALADY OF CORRUPTIO N IS ENTERING INTO ALL THE VITAL ORGANS OF THE SOCIETY AND SITUATION HAS R EACHED WHERE THESE ILLEGAL ACTS HAVE BEEN ACCEPTED AS A NORMAL PRACTIC E AND THE ATTEMPT TO PREVENT, LET ALONE ERADICATE CORRUPTION, IS BEYOND REACH. IF THE COURTS WERE TO ACCORD THEIR APPROVAL TO SUCH TRANSACTIONS, THAT WOULD BE THE END OF THE RULE OJ LAW AND AMOUNTS TO UPHOLDING IMMORAL ACTIONS BY LAW COURTS. SUCH AN ACTION GETS CREDIBILITY AND RESPECT AND IT WILL BE PERPETUATED WITH THE SUPPORT OF THE COURT ORDERS. W HEN RECEIPT OF BRIBE AND PAYMENT OF BRIBE BY PUBLIC SERVANTS IS HELD TO BE AN OFFENCE AND THE PARLIAMENT HAS PASSED LEGISLATION FOR PREVENTING TH E SAME, MERELY BECAUSE THOSE LAWS ARE NOT APPLICABLE TO PRIVATE PE RSONS, IT CANNOT BE SAID THAT IT IS MORAL, DECEIVING OR PAYING BRIBE IS A CRIME. PERSONS INDULGING IN THE SAME CANNOT BE PROTECTED BY LAW CO URTS. THE COURTS CANNOT EXTEND THEIR AID TO UPHOLD SUCH TRANSACTIONS . IN THAT VIEW OF THE MATTER, EVEN IF IT IS NOT AN OFFENCE AS CONTENDED C ERTAINLY, IT IS IMMORAL AND IT CAUSES INJURY TO PUBLIC AND THEREFORE THE EX PENDITURE INCURRED IN SUCH IMMORAL ACTS CANNOT BE CONSTRUED AS EXPENDITUR E INCURRED FOR THE PURPOSE OF PROFITS AND GAINS OF BUSINESS OR PROFESS ION AND THE BENEFIT OF DEDUCTION OR ALLOWANCE UNDER THE PARLIAMENTARY LEGI SLATION CANNOT BE EXTENDED TO SUCH PERSONS OR TO SUCH EXPENDITURE. SU CH A QUESTION WOULD FALL WITHIN THE EXPLANATION-OF S. 37 AND IS NOT DED UCTIBLE UNDER S. 37. J.K PANTHAKI & CO. VS. ITO (2011) 57 DTR (BANG) (TR IB) 233 : (2011) 139 TTJ (BANG) 337 AFFIRMED.' (PARA 45) 13.2.9 IN VIEW OF THE DISCUSSION AS ABOVE, THE OB JECTION RAISED BY THE ASSESSEE IS REJECTED. 28. WE HAVE HEARD BOTH THE PARTIES. MR. SOPARKAR I S VERY FAIR IN POINTING OUT AT THE OUTSET THAT THIS TRIBUNALS DECISION IN ACIT VS. LIVA HEALTHCARE LTD. 161 ITD 63 (MUM) UPHOLDING SUCH A DISALLOWANCE IN CASE OF PHARMACEUTICAL COMPANIES OFFERING FREE SAMPLES TO D OCTOR POST INTRODUCTION OF THE RELEVANT PRODUCT IN MARKET AFTER ESTABLISHIN G END USE; IS HIT BY SECTION 37(1) EXPLANATION. HE HOWEVER REFERS TO AN OTHER CO-ORDINATE BENCH DECISION IN MACLEODS PHARMACEUTICALS LTD. VS. ACIT (2016) 161 ITD 291 (MUM) HOLDING THAT THE ABOVE BOARDS CIRCULAR DATED 01.08.2012 WOULD NOT HAVE ANY RETROSPECTIVE EFFECT SINCE NOT OPERATING I N ASSESSMENT YEARS 2010- ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 28 - 11. HE FURTHER QUOTES ANOTHER CO-ORDINATE BENCH DE CISION IN DCIT VS. PHL PHARMA PVT. LTD. (2017) 184 TTJ 1(MUM) DISTINGUISHI NG THE ABOVE CASE LAW IN REVENUES FAVOUR WHILST DELETING AN IDENTICA L DISALLOWANCE ON THE GROUND THAT SUCH BUSINESS PROMOTION EXPENSES ARE AL LOWABLE AS BUSINESS EXPENDITURE NOT HIT U/S. 37(1) EXPLANATION. WE AFF ORDED AMPLE REBUTTAL OPPORTUNITY TO THE REVENUE. LEARNED DEPARTMENTAL R EPRESENTATIVE FAILS TO INDICATE ANY DISTINGUISHING FEATURES THEREIN. WE F IND THAT THE ABOVE LATTER CO-ORDINATE BENCH HAS ELABORATELY DISCUSSED ALL CAS E LAWS, IMC REGULATIONS AS WELL AS BOARDS CIRCULAR IN DECIDING THE ISSUE. WE THEREFORE ADOPT THE VERY REASONING HEREIN AS WELL TO DELETE THE IMPUGNE D DISALLOWANCE. THE ASSESSEE SUCCEEDS IN ITS INSTANT SUBSTANTIVE GROUND . ITS APPEAL ITA NO.848/AHD/2016 IS PARTLY ACCEPTED. 29. THIS LEAVES US WITH REVENUES CROSS APPEAL ITA NO.918/AHD/2016. ITS FIRST SUBSTANTIVE GROUND PLEADS THAT THE DRP HA S ERRED IN HOLDING THAT THE ASSESSEE IS ENTITLED FOR ADJUSTMENT UNDER TRANSFER PRICING PROVISION AGAINST SECTION 36(1)(III) DISALLOWANCE QUA INTEREST TOWARD S SOHL (SUPRA). ITS CASE IS THAT THE ASSESSING OFFICER HAD NOT MADE ANY SUCH DISALLOWANCE. MR. SOPARKAR TAKES US TO CASE RECORDS PRIMA FACIE INDIC ATING NO SUCH RELIEF. WE FURTHER ARE OF THE VIEW THAT THE INSTANT ISSUE IS R ENDERED ACADEMIC SINCE WE HAVE DELETED SECTION 36(1)(III) DISALLOWANCE ITSELF IN ASSESSEES APPEAL IN PRECEDING PARAGRAPHS. WE THEREFORE REJECT REVENUE S FIRST SUBSTANTIVE GROUND TO BE DEVOID OF MERIT. 30. THE REVENUES SECOND SUBSTANTIVE GROUND SEEKING TO REVIVE DISALLOWANCE OF RS.1,94,85,000/- PERTAINING TO CLIN ICAL TRIAL EXPENDITURE OUTSIDE IN-HOUSE FACILITY ALREADY STANDS DECLINED A LONGWITH ASSESSEES CORRESPONDING SUBSTANTIVE GROUND IN PRECEDING PARAG RAPHS. ITA NOS. 1117/AHD/12, 848 & 918/AHD/2016 (M/S. CA DILA PHARMACEUTICALS LTD.) A.YS. 2004-05 & 2011-12 - 29 - 31. THE REVENUES THIRD SUBSTANTIVE GROUND SEEKS TO REVIVE PRODUCT REGISTRATION EXPENDITURE DISALLOWANCE OF RS.3,65,93 ,107/- TREATED AS CAPITAL IN NATURE IN ASSESSMENT AND REVENUE EXPENDITURE IN DRPS DIRECTIONS. THE ASSESSEE POINTS OUT THAT A CO-ORDINATE BENCH IN ITS APPEAL ITA NO.1518/AHD/2011 HAS ALREADY DECIDED THE ISSUE AGAI NST THE REVENUE IN ASSESSMENT YEAR 2006-07 AS APPROVED IN HONBLE JURI SDICTIONAL HIGH COURT DECISION IN TAX APPEAL NO.40 OF 2015. THIS CLINCHI NG PLEA GOES UNREBUTTED FROM REVENUE SIDE. WE THEREFORE AFFIRM DRPS DIRE CTIONS UNDER CHALLENGE PERTAINING TO THE INSTANT SUBSTANTIVE GRO UND. THE REVENUES APPEAL ITA NO.918/AHD/2016 FAILS. 32. THE ASSESSEES TWO APPEALS ITA NOS. 1117/AHD/20 12 & 848/AHD/2016 ARE PARTLY ALLOWED. THE REVENUES APP EAL ITA NO.918/AHD/2016 IS DISMISSED. [PRONOUNCED IN THE OPEN COURT ON THIS THE 11 TH DAY OF SEPTEMBER, 2017.] SD/- SD/- (PRAMOD KUMAR) (S. S. GODARA) ACCOUNTANT MEMBER JUDIC IAL MEMBER AHMEDABAD: DATED 11/09/2017 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT 4 !- / CIT (A) ( )* + ,--. . /0 / DR, ITAT, AHMEDABAD 1 + 23 4 5 / GUARD FILE. BY ORDER / . // . /0