Organon (India) Limited, Mumbai V. Addl. CIT, Circle - 12, Kolkata, Kolkata

ITA 1335/KOL/2010

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5307 (ITAT-KOLKATA)
• Duration Of Justice: 8 year(s) 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2005-2006
• Appeal Filed On: 28-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P K SRIHARI
• Assessee Lawyers: SHASANK KAJAT; PUSKAR GUPTA
• Keywords: Related party transaction; Depreciation; Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Non-deduction of tax; Tax effect; Revised return
• Section: 143(3); 10B; 195

Judgement Text

ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 1 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA C BENCH, KOLKATA BEFORE SHRI P.M. JAGTAP, VICE-PRESIDENT (KZ) AND SHRI A.T. VARKEY, JUDICIAL MEMBER I.T.A. NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED,........................... .................................APPELLANT PLATINA, 7 TH FLOOR, PLOT NO. C-59, G BLOCK, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI-400 098, MAHARASHTRA (PAN: AAACI 6949 R) -VS.- ADDITIONAL COMMISSIONER OF INCOME TAX,............. .....................RESPONDENT CIRCLE-12, KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 APPEARANCES BY: SHRI PUSKAR GUPTA, C.A. AND SHRI SHASANK KAJAT, C.A , FOR THE APPELLANT SHRI P.K. SRIHARI, CIT, D.R. , FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : MARCH 15, 2019 DATE OF PRONOUNCING THE ORDER : MAY 15, 2019 O R D E R PER SHRI P.M. JAGTAP, VICE-PRESIDENT (KZ):- THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS)-12, KOLKATA DA TED 29.03.2010. 2. GROUNDS NO. 1 TO 5 OF THIS APPEAL INVOLVE A COMM ON ISSUE RELATING TO DISALLOWANCE OF RS.41,20,200/- MADE BY THE ASSESSIN G OFFICER UNDER SECTION 40(A)(I) OF THE ACT AND CONFIRMED BY THE LD . CIT(APPEALS) FOR THE ALLEGED NON-DEDUCTION OF TAX AT SOURCE FROM THE PAY MENT MADE FOR MICROSOFT LICENCE FEES. 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY, W HICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING AND SALE OF PHARMACEUTICAL PRODUCTS AS WELL AS MANUFACTURING OF READY-TO-EAT F OODS PRODUCTS ON ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 2 CONTRACT BASIS FOR GOVERNMENT. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 31.10.2005 DECLARI NG TOTAL INCOME OF RS.24,50,77,530/-. AS NOTED BY THE ASSESSING OFFICE R DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD PAID AN AM OUNT OF RS.41,20,200/- TO ITS ASSOCIATED ENTERPRISE AT NETH ERLAND NAMELY M/S. ORGANON NV AND THE SAME WAS CLAIMED TO BE TOWARDS R EIMBURSEMENT OF EXPENSES. IT WAS CLAIMED ON BEHALF OF THE ASSESSEE- COMPANY IN THIS REGARD THAT ITS NETHERLANDS BASED ASSOCIATED ENTERPRISE HA D PURCHASED SOFTWARE ON LICENCE FROM MICROSOFT FOR USE BY ALL ITS GROUP ENTITIES AND THE LICENCE FEES PAID BY M/S. ORGANON NV FOR THE SOFTWARE TO MI CROSOFT WAS APPORTIONED AT ACTUALS TO ALL THE GROUP ENTITIES ON THE BASIS OF NUMBER OF EMPLOYEES. IT WAS SUBMITTED THAT THE SHARE OF THE A SSESSEE WORKED OUT TO RS.41,20,200/-, WHICH WAS REIMBURSED TO M/S. ORGANO N NV ON THE BASIS OF ACTUALS. IT WAS CONTENDED THAT THE SAID AMOUNT THUS REPRESENTED PURELY REIMBURSEMENT OF EXPENSES TO M/S. ORGANON NV AND SI NCE IT DID NOT INCLUDE ANY INCOME ELEMENT, THE ASSESSEE WAS NOT LI ABLE TO DEDUCT TAX AT SOURCE FROM THE PAYMENT OF THE SAME. THE ASSESSING OFFICER DID NOT FIND MERIT IN THIS CONTENTION RAISED ON BEHALF OF THE AS SESSEE. ACCORDING TO HIM, THE AMOUNT IN QUESTION WAS PAID BY THE ASSESSE E FOR THE USE OF SOFTWARE AND SINCE IT WAS TAXABLE AS ROYALTY AS PER THE PROVISIONS OF THE ACT AS WELL AS THE DTAA BETWEEN INDIA AND USA, THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT FROM THE PAYMENT MADE TO M/S. ORGANON NV . AS THE ASSESSEE HAD FAILED TO COMPLY WITH THE SAID REQUIREMENT, THE ASSESSING OFFICER IN VOKED SECTION 40(A)(I) AND DISALLOWED THE SUM OF RS.41,20,200/-. 4. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U NDER SECTION 40(A)(I) WAS DISPUTED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(APPEALS). DURING THE COURSE OF APPELLATE PROCEE DINGS BEFORE THE LD. CIT(APPEALS), THE MAIN CONTENTION RAISED ON BEHALF OF THE ASSESSEE- COMPANY IN SUPPORT OF ITS CASE ON THIS ISSUE WAS TH AT THE AMOUNT IN QUESTION REPRESENTED MERE REIMBURSEMENT OF EXPENDIT URE BEING A PART OF ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 3 LICENCE FEES APPORTIONED BY M/S. ORGANON NV AS A SH ARE OF THE ASSESSEE- COMPANY AND SINCE THE SAME HAD NOT GIVEN RISE TO AN Y INCOME IN THE HANDS OF M/S. ORGANON NV, THE PROVISIONS OF SECTION 195 WERE NOT ATTRACTED AND THE ASSESSEE-COMPANY WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE FROM THE PAYMENT MADE TO M/S. ORGANON NV. TH E LD. CIT(APPEALS) DID NOT ACCEPT THIS STAND OF THE ASSESSEE-COMPANY. HE AGREED WITH THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE AMOUNT IN QUESTION HAVING BEEN PAID BY THE ASSESSEE INDIRECTLY TO MICROSOFT T HROUGH ITS NETHERLANDS BASED ASSOCIATED ENTERPRISE FOR USE OF SOFTWARE WAS IN THE NATURE OF ROYALTY AND SINCE THE SAME WAS CHARGEABLE TO TAX IN INDIA IN THE HANDS OF MICROSOFT, THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE UNDER SECTION 195. HE ACCORDINGLY HELD THAT THE FAILURE OF THE AS SESSEE TO DEDUCT TAX AT SOURCE FROM THE SAID AMOUNT ATTRACTED THE PROVISION S OF SECTION 40(A)(I) AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY INVOKING THE SAID PROVISION WAS CONFIRMED BY THE LD. CIT(APPEALS). HE ALSO TOOK NOTE OF THE FACT THAT A SIMILAR ISSUE WAS INVOLVED IN ASSESSEE S OWN CASE FOR A.YS. 2003-04 AND 2004-05 AND THE SAME WAS DECIDED BY THE FIRST APPELLATE AUTHORITY. 5. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT A SIMILAR ISSUE WAS INVOLVED IN ASSESSEES OWN CASE FOR EARLIER YEARS I .E. A.YS. 2003-04 AND 2004-05 AND THE SAME HAS ALREADY BEEN DECIDED BY TH E TRIBUNAL IN FAVOUR OF THE ASSESESE VIDE ITS COMMON ORDER DATED SEPTEMB ER 20, 2017 PASSED IN ITA NOS. 863/KOL/2008 AND 978/KOL/2009. HE ALSO INVITED OUR ATTENTION TO THE RELEVANT PORTION OF THE ORDER OF T HE TRIBUNAL AS CONTAINED IN PARAGRAPH NO. 14 TO 18 AND SUBMITTED THAT A SIMI LAR AMOUNT PAID BY THE ASSESSEE-COMPANY TO ITS NETHERLANDS BASED ASSOCIATE D ENTERPRISE FOR ITS SHARE OF THE EXPENDITURE INCURRED ON PURCHASE OF SO FTWARE ON LICENCE FROM MICROSOFT USA WAS HELD TO BE NOT LIABLE FOR DE DUCTION OF TAX AT SOURCE BY THE TRIBUNAL AND THE DISALLOWANCE MADE UN DER SECTION 40(A)(I) WAS DELETED. ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 4 6. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT EVEN THOUGH THE TRIBUNAL HAS DECIDED A SIMILAR ISSUE IN FAVOUR OF T HE ASSESSEE FOR A.YS 2003-04 AND 2004-05 VIDE ITS ORDER DATED SEPTEMBER 20, 2017 (SUPRA), THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS.- ANDAMAN SEA FOOD PVT. LIMITED (ITAT NO. 19 OF 2013 DATED 23.07.2014) SUPPORTS THE STAND OF THE REVENUE TAKEN ON THIS ISS UE. 7. IN THE REJOINDER, THE LD. COUNSEL FOR THE ASSESS EE SUBMITTED THAT THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS.- ANDAMAN SEA FOOD PVT. LIMITED (SUPRA) CITED BY THE LD. D.R. IS DISTINGUISHABLE ON FACTS. HE SUBMITTED THAT THE TRA NSACTIONS INVOLVED IN THE SAID CASE WERE NOT COVERED BY DTAA WHILE THE TR ANSACTIONS INVOLVED IN THE PRESENT CASE ARE NOT ONLY COVERED BY DTAA BU T THE PROVISIONS OF DTAA ARE IN FAVOUR OF THE ASSESSEE AS FOUND BY THE TRIBUNAL IN A.YS. 2003-04 AND 2004-05. HE ALSO SUBMITTED THAT EVEN OT HERWISE THE NON- DISCRIMINATION CLAUSE IS APPLICABLE IN THE CASE OF THE ASSESSEE AND THE ASSESSEE IS ENTITLED FOR RELIEF AS PER THE SAID CLA USE AS HELD BY THE TRIBUNAL IN A.YS. 2003-04 AND 2004-05. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT A SIMILAR ISSUE INVOLVING IDENTICAL FACTS AND CIRCUMSTANCES WAS CON SIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.YS. 2003-04 A ND 2004-05 VIDE ITS COMMON ORDER DATED SEPTEMBER 20, 2017 AND AFTER CON SIDERING ALL THE RELEVANT ASPECTS INCLUDING THE PROVISIONS OF DTAA, THE CASE LAWS ON THE POINTS ETC. IT WAS HELD BY THE TRIBUNAL THAT THE AM OUNT IN QUESTION PAID BY THE ASSESSEE WAS NOT IN THE NATURE OF ROYALTY. I T WAS HELD THAT SINCE THE SAID AMOUNT WAS PAID TOWARDS PURCHASE OF SOFTWARE, IT WOULD HAVE BEEN ASSESSABLE AS BUSINESS PROFITS IN THE HANDS OF NETH ERLAND BASED ASSOCIATED ENTERPRISE AND SINCE THE SAID ASSOCIATED ENTERPRISE DID NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA, THE BUSINE SS PROFITS COULD NOT BE TAXED IN INDIA UNDER ARTICLE 7 OF THE INDO NETHE RLAND DTAA. IT WAS HELD ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 5 BY THE TRIBUNAL THAT THERE WAS NO ELEMENT OF PROFIT INVOLVED IN THE TRANSACTIONS REPRESENTING REMITTANCE MADE TOWARDS P URCHASE OF LICENCE SOFTWARE FOR USE BY THE ASSESSEE, WHICH WAS TAXABLE IN INDIA IN THE HANDS OF THE ASSOCIATED ENTERPRISE AND THE ASSESSEE, THER EFORE, WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE FROM THE SAID PAYM ENT UNDER SECTION 195. IT WAS FURTHER HELD BY THE TRIBUNAL THAT THE A SSESSEE WAS ENTITLED FOR RELIEF ON THIS ISSUE EVEN ON THE BASIS OF NON-DISCR IMINATION CLAUSE CONTAINED IN ARTICLE 24(4) OF THE INDO-NETHERLAND D TAA. THE TRIBUNAL ACCORDINGLY DELETED THE DISALLOWANCE MADE BY THE AS SESSING OFFICER UNDER SECTION 40(A)(I) OF THE ACT AND CONFIRMED BY THE LD . CIT(APPEALS) IN BOTH THE YEARS I.E. A.YS. 2003-04 AND 2004-05. 9. AT THE TIME OF HEARING BEFORE US, THE LD. D.R. H AS NOT DISPUTED THE FACT THAT THIS ISSUE STANDS SQUARELY COVERED IN FAV OUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL RENDERED IN ASSESSEES OWN CASE FOR A.YS. 2003-04 AND 2004-05. HE, HOWEVER, HAS RELIED ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. - ANDAMAN SEA FOOD PVT. LIMITED (ITAT NO. 19 OF 2013 DATED 23.07.2014) WHICH, ACCORDING TO HIM, SUPPORTS THE REVENUES STAND ON THIS ISSUE. HO WEVER, AS RIGHTLY CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE, THE SAID CASE DECIDED BY THE HONBLE CALCUTTA HIGH COURT IS DISTINGUISHABLE ON FACTS, INASMUCH AS, THE TRANSACTIONS UNDER CONSIDERATION IN THE SAID CA SE WERE NOT COVERED BY THE RELEVANT DTAA, WHEREAS THE AMOUNT IN QUESTION P AID BY THE ASSESSEE IN THE PRESENT CASE TO ITS NETHERLAND BASED ASSOCIA TED ENTERPRISE IS NOT TAXABLE IN THE HANDS OF THE ASSOCIATED ENTERPRISE I N INDIA AS PER THE RELEVANT CLAUSE OF THE DTAA AS FOUND BY THE TRIBUNA L IN THE ASSESSEES OWN CASE FOR A.YS. 2003-04 AND 2004-05. MOREOVER, A S HELD BY THE TRIBUNAL IN ITS ORDER FOR A.YS 2003-04 AND 2004-05, THE ASSESSEE WAS ENTITLED FOR RELIEF ON THIS ISSUE EVEN AS PER THE B ENEFIT CONFERRED UNDER NON-DISCRIMINATION CLAUSE OF THE DTAA. WE, THEREFOR E, RESPECTFULLY FOLLOW THE DECISION OF THE TRIBUNAL RENDERED IN ASSESSEES OWN CASE FOR A.YS. 2003-04 AND 2004-05 VIDE ITS ORDER DATED SEPTEMBER 20, 2017 (SUPRA) ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 6 AND DELETE THE DISALLOWANCE MADE BY THE ASSESSING O FFICER UNDER SECTION 40(A)(I) AND CONFIRMED BY THE LD. CIT(APPEALS). GRO UNDS NO. 1 TO 5 OF THE ASSESSEES APPEAL ARE ACCORDINGLY ALLOWED. 10. GROUNDS NO. 6 TO 8 INVOLVE A COMMON ISSUE RELAT ING TO DISALLOWANCE OF CONVERSION CHARGES OF RS.35,87,454/- AS MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF PRIOR PERIOD EXPENSES. 11. THE ASSESSEE-COMPANY DURING THE RELEVANT PERIOD HAD ENTERED INTO AN AGREEMENT WITH A THIRD PARTY MANUFACTURER, WHO W AS REQUIRED TO MANUFACTURE GOODS ON BEHALF OF AND UNDER THE LICENS E OF THE ASSESSEE- COMPANY. THE ASSESSEE-COMPANY WAS LIABLE TO PAY CON VERSION CHARGES TO THE SAID PARTY AND AS PER THE TERMS OF THE AGREEMEN T, THE ASSESSEE- COMPANY WAS COMMITTED TO PAY MINIMUM AMOUNT OF CONV ERSION CHARGES EVERY CALENDAR YEAR TO THE SAID PARTY I.E. JANUARY TO DECEMBER CALLED AS MINIMUM CONVERSION CHARGES. ACCORDINGLY IF THE AC TUAL CONVERSION CHARGES PAID ON THE BASIS OF ACTUAL PRODUCTION DURI NG THE YEAR WAS SHORT OF A MINIMUM CONVERSION CHARGES, THEN THE ASSESSEE- COMPANY WAS REQUIRED TO MAKE THE SHORT-FALL GOOD. THERE WAS SUC H A SHORT-FALL TO THE EXTENT OF RS.35,87,454/- PERTAINING TO FINANCIAL YE AR 2004-05 AND RS.4,51,83,246/- PERTAINING TO FINANCIAL YEAR 2005- 06. AFTER SETTLING AND FINALIZING THESE AMOUNTS IN THE F.Y. 2006-07, A TOT AL AMOUNT OF RS.4,87,70,700/- WAS DEBITED BY THE ASSESSEE TO THE PROFIT & LOSS ACCOUNT OF F.Y. 2006-07 ON ACCOUNT OF PRIOR PERIOD EXPENSES . SINCE THE ASSESSEE- COMPANY WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCO UNTING, IT SUO MOTO OFFERED THE ENTIRE AMOUNT OF RS.4,87,70,700/- IN TH E COMPUTATION OF INCOME FOR F.Y. 2006-07 RELEVANT TO A.Y. 2007-08 BE ING THE EXPENDITURE OF PRIOR PERIOD. DURING THE COURSE OF ASSESSMENT PROCE EDINGS FOR THE YEAR UNDER CONSIDERATION, I.E. A.Y. 2005-06, THE ASSESSE E CLAIMED A DEDUCTION OF RS.35,87,454/- BEING THE EXPENDITURE INCURRED ON CONVERSION CHARGES PERTAINING TO A.Y. 2005-06. SINCE THE SAID DEDUCTIO N WAS NOT CLAIMED BY ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 7 THE ASSESSEE EITHER IN THE ORIGINAL RETURN OR EVEN IN THE FORM OF REVISED RETURN, THE ASSESSING OFFICER DID NOT ENTERTAIN THE CLAIM OF THE ASSESSEE FOR THE SAID DEDUCTION BY RELYING ON THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF GOETZE INDIA LIMITED [284 ITR 323]. ON APPEAL, THE LD. CIT(APPEALS) UPHELD THE ACTION OF THE ASSESSING OFF ICER ON THIS ISSUE BY OBSERVING THAT THE ASSESSEE WAS NOT ENTITLED TO MAK E ANY FRESH CLAIM, WHICH WAS NOT MADE EITHER IN THE RETURN OF INCOME O RIGINALLY FILED OR BY WAY OF FILING A REVISED RETURN. 12. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS LIABLE TO MAKE GOOD ANY SHORT-FALL IN THE MINIMUM C ONVERSION CHARGES PAYABLE AS PER THE AGREEMENT ENTERED INTO WITH A CO NTRACT MANUFACTURER. HE SUBMITTED THAT SUCH SHORT-FALL PERTAINING TO THE YEAR UNDER CONSIDERATION I.E. A.Y. 2005-06 AS WELL AS FOR A.Y. 2006-07 WAS SETTLED AND FINALIZED IN THE PREVIOUS YEAR RELEVANT TO A.Y. 200 7-08. HE SUBMITTED THAT THE AMOUNT OF SUCH SHORT FALL ACCORDINGLY WAS DEBIT ED BY THE ASSESSEE TO THE PROFIT & LOSS ACCOUNT FOR A.Y. 2007-08 AND IN T HE COMPUTATION OF TOTAL INCOME FOR A.Y. 2007-08, THE AMOUNT SO DEBITED WAS OFFERED TO TAX BEING PRIOR PERIOD EXPENSES. HE INVITED OUR ATTENTION TO THE AUDIT NOTE GIVEN ON THIS ISSUE PLACED AT PAGE NO. 380 OF THE PAPER BOOK AND POINTED OUT THAT THE AMOUNT TO THE EXTENT OF RS.35,87,451/- BEING PE RTAINING TO THE YEAR UNDER CONSIDERATION, I.E. A.Y. 2005-06 WAS CLAIMED BY THE ASSESSEE AS DEDUCTION DURING THE COURSE OF ASSESSMENT PROCEEDIN GS HE CONTENDED THAT SINCE THE SAID AMOUNT UNDISPUTEDLY PERTAINED T O THE YEAR UNDER CONSIDERATION AND EVEN THE DEBIT NOTES FOR THE SAME WERE RAISED BY THE CONCERNED PARTY DURING THE YEAR UNDER CONSIDERATION , THE ASSESSEE WAS ENTITLED FOR DEDUCTION OF THE SAME AND THE AUTHORIT IES BELOW WERE NOT JUSTIFIED IN DISALLOWING THE DEDUCTION CLAIMED BY T HE ASSESSEE MERELY ON THE GROUND THAT THE SAME WAS NOT CLAIMED EITHER IN THE RETURN OF INCOME ORIGINALLY FILED OR BY WAY OF REVISED RETURN. HE CO NTENDED THAT SINCE THE AMOUNT IN QUESTION WAS SETTLED AND FINALIZED SUBSEQ UENTLY, IT WAS NOT ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 8 POSSIBLE FOR THE ASSESSEE TO CLAIM THE SAME EITHER IN THE ORIGINAL RETURN OR BY WAY OF REVISED RETURN. 13. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT NEITHER THE ASSESSING OFFICER NOR THE LD. CIT(APPEALS) HAS DECI DED THIS ISSUE ON MERIT AND THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE AMOUNT UNDER CONSIDERATION WAS DISALLOWED BY THEM ON THE GROUND THAT THE SAME WAS NOT CLAIMED EITHER IN THE RETURN OF INCOME ORIGINAL LY FILED OR BY WAY OF REVISED RETURN. HE CONTENDED THAT THE ASSESSEE, HOW EVER, IS NOT ENTITLED FOR THIS DEDUCTION ON MERIT BECAUSE EVEN THOUGH THE DEBIT NOTES WERE RAISED BY THE CONCERNED PARTY IN THE YEAR UNDER CON SIDERATION, THERE WAS A DISPUTE ABOUT THIS CONTRACTUAL LIABILITY PAYABLE BY THE ASSESSEE WHICH WAS FINALLY SETTLED IN THE SUBSEQUENT YEAR RELEVANT TO A.Y. 2007-08. BY RELYING ON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS.- SESHASAYEE BROS. (TRAVANCORE) [82 ITR 442], H E CONTENDED THAT THE DEDUCTION ON ACCOUNT OF CONTRACTUAL LIABILITY CAN B E CLAIMED BY THE ASSESSEE ONLY IN THE YEAR IN WHICH IT IS FINALLY SE TTLED AND CRYSTALLIZED. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD INCLUDING THE AUDIT NOTE ON THE ISSUE UNDER CONSIDERATION AS GIVEN AT PAGE NO. 380 OF THE PAPER BOOK. IT IS OBSERVED THAT THERE WAS A DIFFERENCE BETWEEN THE AC TUAL CONVERSION CHARGES AND MINIMUM CONVERSION CHARGES FOR THE YEAR UNDER CONSIDERATION AS PAYABLE BY THE ASSESSEE TO M/S. AS G BIO CHEM LIMITED IN TERMS OF THE LOAN LICENSING AGREEMENT DATED 1 ST JANUARY, 2005. IT IS ALSO OBSERVED THAT DEBIT NOTES FOR SUCH DIFFERENCE WERE RAISED BY M/S. ASG BIO CHEM LIMITED DURING THE YEAR UNDER CONSIDERATIO N ON 15.02.2005 AND 15.03.2005. HOWEVER, THE AMOUNT RAISED IN THE SAID DEBIT NOTES WAS NOT ACCEPTED BY THE ASSESSEE AND THE SAME WAS IN DISPUT E. THE SAID DISPUTE WAS FINALLY SETTLED IN THE FINANCIAL YEAR 2006-07 R ELEVANT TO ASSESSMENT YEAR 2007-08 AND ACCORDINGLY THE AMOUNT OF DIFFEREN CE PAYABLE BY THE ASSESSEE TO M/S. ASG BIO CHEM LIMITED WAS DEBITED T O THE PROFIT & LOSS ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 9 ACCOUNT FOR THE F.Y. 2006-07. IT IS THUS CLEAR THAT THE AMOUNT IN QUESTION PAYABLE BY THE ASSESSEE ON ACCOUNT OF DIFFERENCE BE TWEEN THE ACTUAL CONVERSION CHARGES AND MINIMUM CONVERSION CHARGES F OR THE YEAR UNDER CONSIDERATION REPRESENTING CONTRACTUAL LIABILITY WA S IN DISPUTE AND THE SAME WAS SETTLED AND CRYSTALLIZED ONLY IN THE F.Y. 2006-07 RELEVANT TO A.Y. 2007-08. AS RIGHTLY CONTENDED BY THE LD. D.R., THE ASSESSEE, THEREFORE, WAS NOT ENTITLED FOR DEDUCTION ON ACCOUNT OF THIS CONTR ACTUAL LIABILITY PERTAINING TO THE YEAR UNDER CONSIDERATION AS THE S AME REPRESENTED DISPUTED LIABILITY AND SINCE THIS DISPUTE WAS SETTL ED AND THE LIABILITY WAS CRYSTALLIZED ONLY IN THE F.Y. 2006-07, THE ASSESSEE WAS ENTITLED FOR THE DEDUCTION OF THE SAME ONLY IN A.Y. 2007-08. WE, THE REFORE, FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(APPE ALS) CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE AND UPHOLDING THE SAME, WE DISMISS GROUNDS NO. 6 TO 8 OF THE ASSE SSEES APPEAL. 15. THE COMMON ISSUE RAISED IN GROUNDS NO. 9 TO 13 RELATES TO THE ADDITION OF RS.1,54,04,816/- MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF TRANSFER PRIC ING ADJUSTMENT. 16. DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE-COMPANY HAD ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WIT H ITS ASSOCIATED ENTERPRISES INVOLVING, INTER ALIA, PURCHASE OF RAW MATERIALS FROM RELATED PARTIES AND SALE OF GOODS MANUFACTURED FROM THE SAI D RAW MATERIALS TO UNRELATED PARTIES IN THE DOMESTIC MARKET AND TO THE ASSOCIATED ENTERPRISES IN THE OVERSEAS MARKET. THERE WERE THUS TWO SEGMENTS, ONE INVOLVING PURCHASE OF RAW MATERIAL FROM RELATED PAR TIES AND SALE OF THE MANUFACTURED PRODUCTS TO UNRELATED PARTIES AND SECO ND INVOLVING PURCHASE OF RAW MATERIALS FROM RELATED PARTIES AND SALE OF MANUFACTURED PRODUCTS TO THE ASSOCIATED ENTERPRISES. IN ORDER TO DETERMINE THE ARMS LENGTH PRICE OF THE SECOND SEGMENT INVOLVING TRANSA CTIONS WITH ASSOCIATED ENTERPRISES, A REFERENCE WAS MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 10 1961. DURING THE COURSE OF PROCEEDINGS BEFORE THE T RANSFER PRICING OFFICER, SEGMENTAL PROFIT & LOSS ACCOUNT OF THESE T WO SEGMENTS WAS PREPARED AND FURNISHED BY THE ASSESSEE SHOWING THE FOLLOWING RESULTS:- PARTICULARS PURCHASE OF RM FROM RELATED, EXPORT OF MFG GOODS TO RELATED (RS. PURCHASE OF RM FROM RELATED, EXPORT OF MFG GOODS TO UNRELATED SALES/COMMISSIONER INCOME 7,50,96,654 5331094 MATERIAL CONSUMED 51401792 1425626 ADJUSTMENT FOR DIFFERENCE -18275397 -200396 MATERIAL CONSUMED 33126395 1225230 PURCHASE FOR TRADING NIL NIL EXCISE DUTY NIL NIL ADJUSTMENT FOR DIFFERENCE NIL NIL PURCHASES FOR TRADING NIL NIL GROSS MARGIN 23694862 3905468 VALUE ADDING EXPENSES(VAE) MANUFACTURING COST 14198328 563338 TRADE DISCOUNT NIL NIL APPORTIONED EXPENSES ADVERTISEMENT AND PRODUCT PROMOTION NIL NIL ADMINISTRATIVE, OTHER ALLOCABLE EXPENSES NIL 1451892 DEPRECIATION 961848 68281 COMMISSION NIL 142239 DISCOUNT NIL NIL TOTAL VAE 15160176 2225750 TOTAL COST 66561968 3658376 RM/TOTAL COST 77% 39% OPERATING MARGIN 8534686 1679718 NON-OPERATING INCOMES NIL NIL NON-OPERATING EXPENSES NIL NIL PROFIT BEFORE TAX(AS PER ACCOUNTS) NIL NIL GROSS MARGIN TO SALES(0%) NIL NIL OPERATING MARGIN TO SALES (0%) 11.36% 31.51% GROSS MARGIN TO VAE (0%) NIL NIL GP/OICOP NIL NIL ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 11 17. FROM THE ABOVE SEGMENTAL PROFIT & LOSS ACCOUNT, THE TRANSFER PRICING OFFICER FOUND THAT ADMINISTRATIVE AND OTHER ALLOCABLE EXPENSES HAD NOT BEEN ALLOCATED BY THE ASSESSEE TO THE SEGME NT, WHEREIN SALES WERE MADE TO THE ASSOCIATED ENTERPRISES AND THE SAM E WERE ENTIRELY ALLOCATED TO THE SEGMENTS WHERE SALES WERE MADE TO THE UNRELATED PARTIES. HE ALSO FOUND THAT OPERATING MARGIN TO SAL ES IN CASE OF SALE MADE TO UNRELATED PARTIES WAS 31.51% AS COMPARED TO 11.3 6% IN CASE OF SALES MADE TO ASSOCIATED ENTERPRISES. AS NOTED BY THE TRA NSFER PRICING OFFICER, IF THE ADMINISTRATIVE AND OTHER EXPENSES HAD BEEN A LLOCATED TO THE SEGMENT INVOLVING SALES MADE TO THE ASSOCIATED ENTE RPRISE, PROFIT OF THE SAID SEGMENT WOULD HAVE FURTHER GONE DOWN. HE ACCOR DINGLY REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE TRANSACTIONS OF T HE SEGMENT INVOLVING SALES MADE TO ASSOCIATED ENTERPRISE SHOULD NOT BE C ONSIDERED AS NOT BEING ENTERED INTO AT ARMS LENGTH SINCE BOTH THE P URCHASES AND SALES WERE CONTROLLED TRANSACTIONS ENTERED INTO WITH THE RELATED PARTIES. IN REPLY, THE FOLLOWING EXPLANATION WAS OFFERED BY THE ASSESSEE:- ON AND FROM FINANCIAL YEAR 2003-04, ORGANON INDIA LIMITED (OIL), APART FROM HAVING ITS OWN MANUFACTUR ING FACILITIES, ALSO STARTED SUB-CONTRACTING MANUFACTUR ING OPERATIONS TO SUBCONTRACTORS, KNOW AS LOAN MANUFACTURERS. ALL THE NECESSARY RAW MATERIALS AND TECHNOLOGIES ARE SUPPLIED BY OIL TO THE CONTRACT MANUFACTURER WHO DOES ALL THE NECESSARY PROCESSING OPERATIONS. OIL IN TURN PAYS CONVERSION CHARGES TO THE LOAN MANUFACTURERS FOR THE PROCESSING WORK CARRIED ON BY THEM. IN THIS REGARD, THE TWO EXISTING MANUFACTURING FACI LITIES WERE DISPOSED OFF BY OIL WITH EFFECT FROM FINANCIAL YEAR4 2004-05 AND HENCE ALL ITS MANUFACTURING ACTIVITIES ARE BEING CARRIED OUT THROUGH THE ABOVE MENTIONED LOAN MANUFACTURERS. SINCE, OIL SUBCONTRACT ITS MANUFACTU RING OPERATIONS TO SUB-CONTRACTORS, ALLOCATION OF ADMINI STRATIVE OVERHEAD WOULD NOT REFLECT THE TRUE AND CORRECT PROFITABILITY OF THE SAID SEGMENT. ALLOCATION OF ADMINISTRATIVE OVERHEAD WOULD DISTORT THE PROFITABI LITY O THE ABOVE SEGMENT. BASED ON THE ABOVE RATIONALE, ADMINISTRATIVE OVERHE AD HAS NOT BEEN ALLOCATED IN SEGMENT 2- CONTRACT MANUFACTU RING SEGMENT. IN THIS REGARD, REFERENCE CAN ALSO BE MADE TO PAGE NO. 10 AND 11 OF THE TRANSFER PRICING STUDY FOR FIN ANCIAL ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 12 YEAR 2004-05 FILED AS APPENDIX-5 THROUGH OUR SUBMIS SION DATED 31 ST JUNE, 2008. THE MANUFACTURING FACILITIES WHICH WERE DISPOSED O FF ON AS IS WHERE IS BASIS TO THE LOAN MANUFACTURERS WI TH EFFECT FROM FINANCIAL YEAR 2004-05, WERE ENGAGED IN FULL F LEDGED MANUFACTURING. IN THE SAID UNITS, VARIOUS OTHER PRO DUCTS ALONG WITH THOSE REFERRED TO IN SEGMENT 2 WERE ALSO BEING MANUFACTURED. HOWEVER, IN RESPECT TO SEGMENT 2, THE FUNCTIONAL PROFILE OF THE ASSESSEE IS DIFFERENT FRO M THAT IN RESPECT OF OTHER MANUFACTURING SEGMENTS. WITH RESPE CT TO SEGMENT 2, THAT IS THE CONTRACT MANUFACTURING SEGME NT. ORGANON INDIA LTD. (OIL) ENTERS INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS:- -IMPORT OF RAW MATERIALS - EXPORT OF MANUFACTURED FINISHED GOODS THOUGH THE NATURE OF TRANSACTION FOR SEGMENT 2 AND THE OTHER MANUFACTURING SEGMENTS, I.E. SEGMENTS 1, 3 & 4 ARE SIMILAR, YET THERE ARE SIGNIFICANT FUNCTIONAL DIFFE RENCES, BETWEEN THESE SEGMENTS AS STATED IN PARAGRAPH 4.2.2 1 (PAGE 25) OF THE TRANSFER PRICING STUDY FOR FY 2004 -05 ALREADY SUBMITTED BEFORE YOUR GOODSELF. SUCH FUNCTI ONAL DIFFERENCE EXPLAIN THE REASON FOR NOT ALLOCATING ADMINISTRATIVE EXPENSES TO SEGMENT 2. TO ELABORATE ON SUCH DIFFERENCES, THE FUNCTIONS PERFORMED BY OIL WITH RE SPECT TO THE ABOVE MENTIONED INTERNATIONAL TRANSACTIONS HAS BEEN SUMMARISED AS UNDER:- OIL IMPORTS RAW MATERIALS FROM GROUP COMPANIES AS WELL AS NON GROUP COMPANIES, WHICH ARE USED IN THE MANUFACTURING OF THE FINAL PRODUCTS, THE NATURE OF THE PHARMACEUTICAL INDUSTRY IS SUCH THAT THE QUALITY OF INPUTS (SPECIALLY THE ACTIVE INGREDIENTS) IS OF PARAMOUNT IMPORTANCE IN DETERMINING THE QUALITY OF THE END PRODUCT. BEFORE A RAW MATERIAL CAN BE USED IN THE PRODUCTION PROCESS, THE QUALITY PARAMETERS NEED TO BE SET. ONCE THE RAW MATERIALS PASS THE QUALITY CONTROL PROCEDURE, THEY CAN BE USED FOR THE PRODUCTION PROCESS. IN THE CASE OF OIL, SUCH QUALITY TESTING I S GENERALLY DONE BY THE ASSOCIATE ENTERPRISE FROM WHOM THE RAW MATERIALS ARE PURCHASED. IN THE CASE OF IMPORTS FROM NON GROUP ENTITIES (I.E. THIRD PARTIES) QUALITY TESTING IS DONE BY OIL. THE OTHER GENERAL FUNCTIONS PERFORMED IN THE COURSE OF PURCHASE OF RAW MATERIALS ARE RECEIVING AN INDENT, OBTAINING QUOTATIONS, PLACING OF ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 13 PURCHASE ORDERS, MAKING TIMELY SHIPMENTS AND PAYMENT TO THE SUPPLIERS. IN RELATION TO SEGMENT 2, OIL DOES NOT PERFORM ANY QUALITY CONTROL FUNCTIONS AND ALSO DOES NOT PERFORM ANY FUNCTIONS IN RELATION TO SOURCING OF RAW MATERIALS (SUCH AS RECEIVING AN INDENT, OBTAINING QUOTATIONS, PLACING OF PURCHASE ORDERS, MAKING TIMELY SHIPMENTS) BECAUSE THE ACTIVE INGREDIENTS ARE SUPPLIED BY THE ASSOCIATED ENTERPRISE (AFTER NECESSARY QUALITY CONTROL) FOR CONTRACT MANUFACTURING PURPOSES. THUS, FOR THIS SEGMENT OIL DOES NOT INCUR ANY SIGNIFICANT ADMINISTRATIVE EXPENSES IN RELATING TO IMPORT OF RAW MATERIALS. IN ADDITION TO THE ABOVE EXPLANATION, IT WAS ALSO S UBMITTED BY THE ASSESSEE THAT THE TWO SEGMENTS ARE NOT FUNCTIONALLY SIMILAR SINCE IN THE SEGMENT UNDER QUESTION GOODS HAD NOT BEEN MANUFACTU RED BY THE ASSESSEE ITSELF BUT WERE MANUFACTURED BY A LOAN MAN UFACTURER I.E. A SUB- CONTRACTOR AND IN THE SEGMENT WHICH IS BEING COMPAR ED TO, THE MANUFACTURING PROCESS WAS DONE BY THE ASSESSEE-COMP ANY ITSELF. 18. THE TRANSFER PRICING OFFICER FOUND THE EXPLANAT ION OFFERED BY THE ASSESSEE TO BE UN-ACCEPTABLE. ACCORDING TO HIM, THE RE WAS HARDLY ANY DIFFERENCE BETWEEN THE OWN MANUFACTURING ACTIVITY O F THE ASSESSEE- COMPANY AND THE CONTRACT MANUFACTURING DONE FOR THE ASSOCIATED ENTERPRISES. HE HELD THAT THE ASSESSEE-COMPANY WAS REQUIRED TO ENSURE THE QUALITY OF FINISHED GOODS MANUFACTURED BY THE C ONTRACT MANUFACTURING AS PER THE SPECIFIC REQUIREMENTS OF THE ASSOCIATED ENTERPRISE AND SINCE IT WAS THE LIABILITY OF THE ASSESSEE-COMPANY, ADMINIST RATIVE AND OTHER EXPENSES OUGHT TO HAVE BEEN ALLOCATED TO THE SAID A CTIVITY. HE HELD THAT BOTH THESE SEGMENTS WERE FUNCTIONALLY COMPARABLE AN D THE ONLY DIFFERENCE WAS THAT IN ONE CASE, THE EXPORT WAS TO ASSOCIATED ENTERPRISE AND IN OTHER CASE, THE EXPORT WAS TO UNRELATED PART Y. HE OBSERVED THAT EVEN THOUGH IN ONE SEGMENT, MANUFACTURING HAD BEEN DONE BY A SUB- CONTRACTOR BUT THE COST OF THE MANUFACTURE OF THESE GOODS WAS DEBITED BY ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 14 THE ASSESSEE IN ITS BOOKS OF ACCOUNT AS MANUFACTURI NG EXPENSES. HE HELD THAT THE SAID ACTIVITY THUS WAS DEEMED TO BE THE MA NUFACTURING ACTIVITY OF THE ASSESSEE-COMPANY FOR ALL PRACTICAL PURPOSES AND THERE WAS HARDLY ANY DIFFERENCE WHETHER THE MANUFACTURING WAS DONE BY TH E ASSESSEE-COMPANY BY USING ITS OWN FACILITY OR SOMEBODY ELSES FACILI TIES. HE ALSO HELD THAT THERE WAS NOTHING TO SHOW THAT ANY RISK INVOLVED IN THE TRANSACTIONS WAS TRANSFERRED BY THE ASSESSEE-COMPANY TO THE SUB-CONT RACTORS/LOAN MANUFACTURERS. HE ACCORDINGLY REJECTED THE ASSESSEE S CONTENTION THAT TWO SEGMENTS COULD NOT BE FUNCTIONALLY COMPARED AND APPLYING THE OPERATING PROFIT MARGIN TO SALES OF 31.51% OF THE S EGMENT INVOLVING EXPORT OF GOODS TO UNRELATED PARTIES AFTER ALLOWING THE ADJUSTMENT OF 1.51% ON ACCOUNT OF COMMISSION/CHARGES PAID TO THE LOAN MANUFACTURER IN LIEU OF THE SERVICES, HE DETERMINED THE ARMS LE NGTH OPERATING MARGIN OF THE ASSESSEE-COMPANY OF THE SEGMENT INVOLVING EX PORT TO ASSOCIATED ENTERPRISE AT RS.2,25,38,783/- AS AGAINST THE OPERA TING MARGIN OF RS.85,34,686/- SHOWN BY THE ASSESSEE. ACCORDINGLY T RANSFER PRICING ADJUSTMENT OF RS.1,40,04,097/- (RS.2,25,38,783/- MI NUS 85,34,686/-), WAS WORKED OUT BY THE TRANSFER PRICING OFFICER IN R ESPECT OF THESE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE-COMPANY WITH ITS ASSOCIATED ENTERPRISE AND IN THE ASSESSMENT COMPLETED UNDER SE CTION 143(3) VIDE AN ORDER DATED 22.12.2008, AN ADDITION TO THAT EXTENT WAS MADE BY THE ASSESSING OFFICER TO THE TOTAL INCOME OF THE ASSESS EE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 19. THE ADDITION OF RS.1,40,04,097/- MADE BY THE AS SESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT WAS CHALLENG ED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(APPEALS) AND TH E FOLLOWING SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE BEF ORE THE LD. CIT(APPEALS) IN SUPPORT OF ITS CASE THAT THE ADDITI ON ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT MADE BY THE ASSESSING O FFICER WAS NOT SUSTAINABLE:- ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 15 TPO / AO FAILED TO COMMUNICATE TO THE APPELLANT TH E RELEVANT CLAUSE UNDER SECTION 92C(3) OF THE ACT, WH ICH TRIGGERS THE APPLICATION OF PROVISIONS OF THE TRANS FER PRICING. B. REASONS WHY SEGMENT 2 (CONTRACT MANUFACTURING SEGMENT) CANNOT BE COMPARED TO SEGMENT 3. - FUNCTIONAL PROFILE OF SEGMENT 2 AND 3 NOT CORRECT LY APPRECIATED BY THE TPO - BOTH SEGMENT 2 AND 3 CANNOT BE COMPARED SINCE BOT H THE SEGMENT HAVE RELATED PARTY TRANSACTIONS. - THE TWO SEGMENTS CANNOT BE COMPARED SINCE THE VOL UME OF TRANSACTIONS FOR SEGMENT 2 IS ALMOST 15 TIMES MORE THAN SEGMENT 3. - THE TRANSFER PRICING OFFICER AND ACCORDINGLY THE ASSESSING OFFICER HAS ERRONEOUSLY TOOK AN ADHOC VIEW WHILE CO MPUTING THE COMMISSION CHARGES AT 1.51 % AND THUS COMPUTING THE TOTAL ADJUSTMENT FOR 'SEGMENT 2' AT 30% (OP/ SALES) WITHOUT ANY BASIS IN LOW NOR ANY SCIENTIFIC BASIS OF CALCUL ATION. C. INTERPRETATION OF INTERNAL AUDIT SERVICES AS SHA REHOLDER SERVICE THE APPELLANT, HUMBLY SUBMITS THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT IN RESPECT OF AY 2004-05, WHEREIN THE CIT(APPEALS) HELD THAT' ..... THE FACT THAT THE EXPENDITURE HAS BEEN ACTUALLY EXPENDED IS NOT DISPU TED AND THE ASSESSEE HAS CLAIMED THAT IT HAS IMMENSELY BENE FITED BY SUCH AUDIT BY WAY OF BETTER CONTROL, BETTER ADMINIS TRATION AND BETTER FUNCTIONING OF THE COMPANY. CONSIDERING THE FACT THAT THE CIT(APPEALS), IN THE ASSESSEE'S OWN CASE FOR AY 2003-04 HAS HELD THAT SUCH EXPENDITURE AS ALLOWABLE, THE TP O'S OBSERVATION THAT NO TANGIBLE BENEFIT HAS ACCRUED TO THE ASSESSEE COMPANY DIRECTLY OR INDIRECTLY BY THIS INT ERNAL AUDIT IS HELD TO BE NOT CORRECT. THEREFORE, HE SHOULD HAV E COMPUTED THE ARM'S LENGTH PRICE FOR THE SAID TRANSACTION. TH OUGH, IN THE PRECEDING YEAR THE DISALLOWANCE WAS MADE UNDER THE NORMAL PROVISIONS OF THE ACT AND IN THE PRESENT YEAR THE S AME WAS DONE UNDER THE PROVISIONS RELATING TO TRANSFER PRIC ING, BUT IN BOTH THE YEARS THE DISALLOWANCE WAS MODE FOLLOWING THE SAME PRINCIPLE THAT THERE WAS NO APPARENT PURPOSE OR UTI LITY OF SUCH AUDIT TO THE ASSESSEE. THEREFORE, I FIND NO ME RIT IN THE DECISIONS OF THE TPO IN THIS RESPECT AND HENCE, THE AO. IS DIRECTED TO ALLOW THE CLAIM .... ' BASED ON THE JUDGMENT OF THE CIT (APPEALS), THE APP ELLANT HUMBLY SUBMITS BEFORE YOUR GOODSELF, THAT, THE ADJU STMENT OF RS. 1,400,719 MADE BY THE TPO AND AS ACCEPTED BY AO IS ERRONEOUS AND BAD IN LAW SINCE THE SAME IS IN CONTR ADICTION OF ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 16 THE PROVISIONS OF THE ACT AND AGAINST THE DECISION OF VARIOUS TRIBUNAL.' D. VARIANCE OF 5% FROM THE ARITHMETICAL MEAN AS PRO VIDED UNDER THE ACT HAS NOT BEEN ALLOWED BY THE TPO AND T HE ASSESSING OFFICER. FURTHER, THE LD. A.R. MADE SUBMISSIONS VIDE HIS LET TER DT. 24- 09-2009 AS UNDER: 'ADHOC ALLOWANCE BY THE TRANSFER PRICING OFFICER (' TPO') AND THE ASSESSING OFFICER ('AO') OF 1.51 % AS COMMI SSION CHARGES PAYABLE TO THE LOAN MANUFACTURER 1.0 THE APPELLANT WOULD LIKE TO REITERATE FROM THE SUBMISSION DATED 5TH JUNE DATED 2009 (COPY OF THE S AME IS ATTACHED AS APPENDIX 1) THAT THE TPO HAS WRONGLY COMPARED 'SEGMENT 2' WITH 'SEGMENT 3' (WHERE PURCHA SES ARE MADE FROM RELATED ENTITIES AND FINISHED GOODS A RE EXPORTED BACK TO UNRELATED PARTIES). THE TPO AT PAG E 9 PARA 3 OF HIS ORDER HAS CONTENDED THAT 'THIS PARTIC ULAR SET OF TRANSACTIONS HAVE BEEN TAKEN AS THE BENCHMARK, A S FUNCTIONALLY THIS SECTOR RESEMBLES THE MOST WITH TH E ACTIVITY THAT HAS TO BE ADJUSTED. IN BOTH THE CASES , THE RAW MATERIALS HAVE BEEN PURCHASES FROM RELATED ENTERPRI SES, AND GOODS HAVE BEEN MANUFACTURED AND THE MANUFACTUR ED GOODS HAVE BEEN EXPORTED. THUS FUNCTIONALLY BOTH TH E SET OF TRANSACTIONS ARE COMPARABLE.' (COPY OF THE TPO O RDER IS ATTACHED AS APPENDIX 2) 1.1 IN THIS REGARD, THE APPELLANT HUMBLY SUBMITS TH AT THE TPO GROSSLY ERRED IN COMPARING 'SEGMENT 2' WITH SEG MENT 3. THE TPO WHILE COMPARING THE TWO SEGMENTS HAS SPECIALLY COMMENTED THAT IN BOTH THE SEGMENTS, THE RAW MATERIALS HAVE BEEN PURCHASED FROM RELATED ENTERPRI SES AND MANUFACTURED GOODS ARE EXPORTED BACK. THE CONTENTION OF THE TPO IS AGAINST THE PRINCIPLES OF TRANSFER PRICING. THE ACT AND THE INCOME-TAX RULES, 1962 (HEREINAFTER REFERRED TO AS 'RULES') SPECIFICALLY P ROVIDES THAT FOR COMPARABILITY PURPOSES ON INTERNATIONAL TRANSACTION NEEDS TO BE COMPARED OR ADJUSTED TO AN UNCONTROLLED TRANSACTIONS. IN THIS CASE BOTH THE SE GMENTS HAVE RELATED PARTY TRANSACTIONS AND HENCE CANNOT BE COMPARED. 2.0 BASED ON THE ABOVE SUBMISSION, THE APPELLANT WO ULD ALSO LIKE TO SUBMIT BEFORE YOUR GOODSELF THAT THE R ULES ALSO LAYS DOWN CERTAIN SPECIFIC PARAMETER, WHICH IF SATI SFIED,' THEN ONLY COMPARISON CAN BE POSSIBLE. REFERENCE CAN BE DRAWN FROM RULES 10B(2) OF THE RULES; ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 17 10B. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMP ARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLE D TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE F OLLOWING, NAMELY:- (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT AS SETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERM S ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE RESPECTIVE PARTIES O THE TRANSACTIONS OPERATE, INCL UDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE O R RETAIL. THE TPO' AND ACCORDINGLY THE AO WHILE COMPARING THE TWO SEGMENTS AND ALSO COMPUTING THE ADJUSTMENT DID NOT TAKE COGNIZANCE TO THE PARAMETERS LAID DOWN IN RULE 10B OF THE RULES. 2.1 FURTHER, THE RULES ALSO PROVIDES THAT AN UNCONT ROLLED TRANSACTION WOULD BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF 1. NONE OF THE DIFFERENCES BETWEEN T HE TRANSACTIONS BEING COMPARED OR BETWEEN THE ENTERPRI SES ENTERING INTO SUCH TRANSACTIONS MATERIALLY AFFECT T HE PRICE OF THE INTERNATIONAL TRANSACTION, OR 2. A. REASONABLE ADJUSTMENT COULD BE MADE TO ELIMIN ATE THE EFFECTS OF SUCH DIFFERENCES. IN THIS REGARD, REFERENCE, CAN BE DRAWN FROM RULES 10B (3) OF THE RULES, 10B (3) AN UNCONTROLLED TRANSACTION SHAL L BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF - I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRA NSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY OR MATERIALLY AFFECT THE PR ICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR . ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 18 II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 2.2. THE PRODUCTS MANUFACTURED UNDER THE TWO SEGMEN TS ARE SIGNIFICANTLY DIFFERENT IN NATURE, NAMELY UNDER SEG MENT 2, THE PRODUCTS MANUFACTURED ARE NORDION AND ALLYLESTRENOL , WHILE UNDER SEGMENT 3, THE PRODUCTS MANUFACTURED ARE PAVU LON 2ML- L'S PVMS, DECA DURABOLIN 25 MG OLD, DECA DURAB OLIN 25 MG, DURABOLIN 25 MG ARID SUSTANON 250. SINCE THE PR ODUCTS MANUFACTURED ARE DIFFERENT IN NATURE, THE APPELLANT HUMBLY SUBMITS THAT THERE CANNOT BE ANY COMPARISON. 2.3. BASED, ON THE ABOVE, WE HUMBLY SUBMIT BEFORE Y OUR GOODSELF THAT AS PER THE PROVISIONS RULES 10B(3)(II ) NO REASONABLE ACCURATE ADJUSTMENTS CAN BE MADE TO SEGM ENT TO ELIMINATE THE MATERIALS DIFFERENCE AND HENCE ACCORD INGLY, THE TWO SEGMENTS CANNOT BE COMPARED. (B) COPY OF THE KOLKATA TRIBUNAL JUDGMENT IN THE CA SE OF DEVELOPMENT CONSULTANTS PVT. LTD. V. DCIT (2008) 11 5 TTJ 577 (ITAT-KOLKATA) IS ATTACHED AS APPENDIX 3. 20. THE SUBMISSIONS MADE BY THE ASSESSEE DID NOT FI ND MERIT WITH THE LD. CIT(APPEALS), WHO PROCEEDED TO CONFIRM THE TRAN SFER PRICING ADJUSTMENT OF RS.1,40,04,097/- MADE BY THE ASSESSIN G OFFICER FOR THE FOLLOWING REASONS GIVEN IN HIS IMPUGNED ORDER:- I HAVE CAREFULLY PERUSED THE IMPUGNED ASSESSMENT O RDERS, SUBMISSIONS MADE BY THE A.R OF THE APPELLANT AND AL SO THE JUDICIAL DECISIONS RELIED UPON BY THE A.O AND THE A .R. THE APPELLANT FURNISHED FORM NO. 3CEB BEING CHARTERED ACCOUNTANTS REPORT IN RESPECT OF INTERNATIONAL TRAN SACTIONS WHICH CONTAINED COMPARISON OF PROFIT MARGIN OF DIFF ERENT SEGMENTS OF INTERNATIONAL TRANSACTIONS WITH MOST AP PROPRIATE METHOD IN EACH CASE AND FOUND THAT PRICE OF INTERNA TIONAL TRANSACTIONS ARE AT ARM'S LENGTH PRICE. THE TPO, HO WEVER DISREGARDED THE REPORT IN FORM 3CEB AND PROCEEDED T O MAKE TWO ADJUSTMENTS TO THE VALUE OF INTERNATIONAL TRANS ACTIONS. THE APPELLANT VEHEMENTLY OPPOSED THE ADJUSTMENTS MADE B Y TPO. 5.3.1. THE APPELLANT'S FIRST CHALLENGE TO A.O'S ACT ION IS ON THE GROUND THAT THE TPO/AO FAILED TO COMMUNICATE TO THE APPELLANT THE RELEVANT CLAUSE U/S 92C(3) OF THE ACT WHICH TRI GGERED THE APPLICATION OF PROVISIONS OF THE TRANSFER PRICING. BUT THIS OBJECTION OF THE APPELLANT HAS NO SUBSTANCE AT ALL AS THE REFERENCE TO TPO WAS MADE BY A.O U/S 92CA(1) AND NO T U/S 92C(3). HENCE APPELLANT'S OBJECTION RAISED VIDE GRO UND NO. 5 IS REJECTED. ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 19 5.3.2. THE APPELLANT'S OTHER OBJECTIONS TO ADJUSTME NT ARE ON THE GROUND OF NON-COMPARABILITY OF BOTH SEGMENTS ON ACC OUNT OF FAR DIFFERENCES, INVOLVEMENT OF RELATED PARTY TRANS ACTIONS IN BOTH SEGMENTS ETC. IN THIS CONNECTION MY OBSERVATIO NS ARE AS UNDER: (I) THE APPELLANT HAS IMPORTED RAW MATERIALS FROM ITS AE AND IN TURN EXPORTED GOODS AFTER MANUFACTURING TO ITS AE'S AND NON AE'S BOTH. THE GOODS EXPORTED TO AE'S HAVE BEEN MANUFACTURED BY- THE APPELLANT THROUGH THE LOAN LICENSEE (CONTRACT MANUFACTURER) AND THIS SEGMENT IS HEREINAFTER CALLED 'SEGMENT 2' AND THE GOODS EXPORTED TO NON AE'S HAVE BEEN MANUFACTURED BY THE APPELLANT ITSELF AND THIS SEGMENT IS HEREINAFTE R CALLED 'SEGMENT 3'. THE A/O HAS COMPARED THESE TWO SEGMENTS AND HAS OBSERVED THAT THE APPELLANT HAS DERIVED OPERATING MARGIN TO SALE OF 11.36% FROM 'SEGMENT 2' AND 31.51 % FROM 'SEGMENT 3'. IT HAS ALSO BEEN OBSERVED THAT PROPORTIONATE ADMINISTRATIVE EXPENSES OF RS.1,91,42,072/- HAS NOT BEEN ALLOCATED TO 'SEGMENT 2'. IN 'SEGMENT 2' THE APPELLANT SOLD GOODS TO AE'S WHICH WERE RESOLD BY THE AE'S IN THE INTERNATIONAL MARKET AND IN 'SEGMENT 3' THE APPELLANT DIRECTLY SOLD GOODS IN THE INTERNATIONAL MARKET. THE GROSS MARGIN OF 'SEGMENT 2' IS VERY LOW AS COMPARED TO GROSS MARGIN OF 'SEGMENT 3' WHICH SHOWS THAT THE APPELLANT SELL GOODS TO ITS AE AT PRICES LOWER THAN THE MARKET PRICE COMPARED TO ITS SALE TO NON-AE, SO THAT ON RESALE MOST OF THE PROFITS WOULD BE REPORTED IN AE'S JURISDICTION. THEREBY THE APPELLANT AVOIDED THE EXPOSURE OF ITS REAL PROFITS TO TAXATION IN INDIA. (II) IT IS BEYOND DOUBT THAT THE APPELLANT HAS PERFORMED LESS FUNCTION IN RELATION TO 'SEGMENT 2' AS COMPARED TO 'SEGMENT 3', BUT IT DOES NOT MEAN THAT BOTH SEGMENTS ARE FUNCTIONALLY DIFFERENT. IN BOTH THE SEGMENTS THE APPELLANT IMPORTED RAW MATERIALS AND AFTER MANUFACTURING FINISHED GOODS EXPORTED THEM ON OUTRIGHT BASIS TO ITS AE'S AND NON AE'S BOTH. THE ONLY DIFFERENCE IS THE OUTSOURCING OF MANUFACTURING PROCESS IN 'SEGMENT 2' AND IN 'SEGMENT 3' THE MANUFACTURING PROCESS HAS BEEN CONDUCTED BY THE APPELLANT COMPANY ITSELF. IN THE FIELD OF MANUFACTURING OF PHARMACEUTICAL BUSINESS, THE OUTSOURCING OF MANUFACTURING PROCESS IS IN VOGUE AND IT IS COST EFFECTIVE ALSO. ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 20 (III) THE APPELLANT ITSELF SUBMITTED THAT 'THOUGH T HE APPARENT NATURE OF ACTIVITIES FOR 'SEGMENT 2' AND T HE OTHER MANUFACTURING SEGMENTS I.E. 'SEGMENTS 1, 3, & 4' ARE SIMILAR, 'YET THERE ARE SIGNIFICANT FUNCTIONAL DIFFERENCES BETWEEN THESE SEGMENTS AS STATED IN PARAGRAPH 4.2.21 (PAGE 25) OF THE TRANSFER PRICING STUDY FOR FY 2004-2005. SUCH FUNCTIONAL DIFFERENCE EXPLAI NS THE REASONS FOR NOT ALLOCATING ADMINISTRATIVE EXPENSES TO 'SEGMENT 2' WHILE THE SAME HAS BEEN ALLOCATED TO TH E OTHER SEGMENTS. THEREFORE, IT IS CLEAR THAT THE APP ELLANT HAS ALREADY CONDUCTED FAR ANALYSIS AT THE TIME OF T P STUDY AND ADJUSTMENTS HAVE ALREADY BEEN MODE TO MITIGATE THE FAR DIFFERENCES BETWEEN 'SEGMENT 2' AN D 'SEGMENT 3'. THIS IMPLIES THAT AFTER MAKING SUCH ADJUSTMENTS 'SEGMENT 3' HAD BECOME COMPARABLE TO 'SEGMENT 2'. (IV) MOREOVER, THE MANUFACTURING COST IN CASE OF 'SEGMENT 2' REPRESENTS COST OF JOB CHARGES PAID TO LOAN LICENSEE. IT IS OBSERVED THAT THE RATIOS OF MANUFAC TURING COSTS TO RAW MATERIALS CONSUMED ARE 42.86% IN CASE OF SEGMENT 2 BEING CONTRACT MANUFACTURING AND 45.98% I N CASE OF SEGMENT 3 BEING OWN MANUFACTURING, IT MEANS THE OUTSOURCING OF MANUFACTURING FACILITY IS BENEFICIAL IN THE CASE OF THE APPELLANT ALSO. BUT THE RATIOS OF GROSS MARGIN TO SALES ARE 31.55% IN CASE OF 'SEGMENT 2' AND 73.2 6% IN CASE OF 'SEGMENT 3' WHICH SHOWS THAT IN SPITE OF TH E FACT THAT THE CONTRACT MANUFACTURING IS BENEFICIAL THE G ROSS MARGIN TO SALES IN CASE OF 'SEGMENT 2' IS VERY LOW AS COMPARED TO 'SEGMENT 3'. THIS PROVES THAT THE APPEL LANT SELL GOODS TO ITS AE'S AT PRICES LOWER THAN THE MAR KET PRICE, SO THAT ON RESALE MOST OF THE PROFITS WOULD BE REPORTED IN AE'S JURISDICTION. (V) RELIANCE IS PLACED ON RANBAXY LABORATORIES LTD. VS. ACIT (2008) 110 ITD 428 (DELHI) WHEREIN THE HON'BLE TRIBUNAL HAS DISMISSED THE ASSESSEE'S CONTENTION TH AT INTERNAL UNCONTROLLED TRANSACTIONS CARRIED OUT BY T HE TAXPAYER WERE NOT COMPARABLE WITH TRANSACTIONS WITH THE AE'S ON ACCOUNT OF THE RISK DIFFERENTIAL BETWEE N THEM BECAUSE IT DID NOT UNDERTAKE RISK OF SUCCESS OR FAI LURE OF PRODUCT WHICH WERE UNDERTAKEN IN TRANSACTIONS WITH ITS AE'S. THE HON'BLE TRIBUNAL HELD THAT IF IT'S DONE A S PER NORMAL BUSINESS PRACTICE, NO ADJUSTMENT IS NEEDED. BUT IF IT IS ABNORMAL FAVOUR TO AN ASSOCIATED ENTERPRISE, THIS CRUCIAL ASPECT WAS REQUIRED TO BE EXAMINED AND EVALUATED AS ENTIRE TRANSFER PRICING REGULATIONS AR E CONCERNED WITH ADJUSTMENTS OF FAVOURABLE TREATMENT METED TO RELATED (ASSOCIATED) CONCERNS. THE HON'BLE TRIBUNAL HELD THAT THE CONTRACTUAL TERMS FOR BOTH CATEGORIES OF TRANSACTIONS SHOULD HAVE BEEN ANALYSE D AND ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 21 THE POSSIBILITY OF SUITABLE ADJUSTMENTS EVALUATED I N LIGHT OF THE SAME. (VI) FURTHER, AS PER PROVISIONS OF THE ACT, THE NET MARGIN OF TRANSACTION IS CALCULATED WITH REFERENCE TO AN APPROPRIATE BASE SAY COSTS, SALES, OR ASSETS. THERE FORE, THE NET MARGIN FROM THE UNCONTROLLED TRANSACTION IS ESTABLISHED BY REFERENCE TO NET MARGIN EARNED BY TH E TAX PAYER FROM COMPARABLE UNCONTROLLED TRANSACTIONS OR FROM NET MARGIN THAT WOULD BE EARNED IN COMPARABLE TRANSACTIONS MADE BY INDEPENDENT ENTERPRISES. IN TH E INSTANT CASE THE NET MARGIN EARNED BY THE APPELLANT FROM COMPARABLE UNCONTROLLED SALES HAS BEEN TAKEN AS BENCHMARK FOR COMPARING NET MARGIN EARNED BY THE APPELLANT FROM CONTROLLED SALES. THEREFORE, COMPARI SON OF THE ABOVE MENTIONED SEGMENTS MADE BY THE AO IS A S PER PROVISIONS OF THE ACT AND THE PLEA OF THE APPEL LANT THAT THE RAW MATERIALS IN BOTH SEGMENTS HAVE BEEN PURCHASED FROM RELATED PARTY CANNOT DEBAR THE AO/TP O FROM SUCH COMPARISON SINCE THE NET MARGIN HAS BEEN CALCULATED WITH REFERENCE TO SALE AND NOT PURCHASES . (VII) COMING TO THE CASE LAWS CITED BY THE APPELLAN T, IT IS TO BE MENTIONED THAT THE FACTS OF THE APPELLANT CAS E ARE DIFFERENT FROM THAT OF THE CASE CITED. (VIII) DECISION:- THEREFORE, BASED ON THE ABOVE DISCUSSION THE UPWARD ADJUSTMENT OF RS.1,40,04,097/- MADE BY AO AS PER RE PORT OF TPO IN RESPECT OF INTERNATIONAL TRANSACTIONS OF GOODS SOLD TO AE'S IS PROPER. THE GROUND NO. 6 IS NOT ALL OWED. 21. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TWO SEGMENTS COMPARED BY THE TRANSFER PRICING OFFICER WERE FUNCT IONALLY DIFFERENT. HE SUBMITTED THAT EVEN THOUGH THE RAW MATERIAL CONSUME D IN BOTH THESE SEGMENTS WAS PURCHASED BY THE ASSESSEE-COMPANY FROM THE RELATED PARTIES, THE PRODUCTS MANUFACTURED FROM ONE SEGMENT AND SOLD BY THE ASSESSEE TO ASSOCIATED ENTERPRISES WAS CLASSIFIED A S ACTIVE PHARMACEUTICAL INGREDIENTS OR BULK DRUGS WHILE THE PRODUCTS OF THE OTHER SEGMENT MANUFACTURED AND SOLD TO UNRELATED PARTIES WERE FORMULATIONS. HE ALSO INVITED OUR ATTENTION TO THE LIST OF SUCH P RODUCTS MANUFACTURED IN BOTH THE SEGMENTS AND SUBMITTED THAT THE ACTIVE PHA RMACEUTICAL INGREDIENTS/BULK DRUGS PRODUCED BY THE ASSESSEE IN ONE SEGMENT WERE IN THE NATURE OF INTERMEDIATES WHICH WERE REQUIRED TO BE FURTHER PROCESSED ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 22 BY THE ASSOCIATED ENTERPRISES TO PRODUCE THE FINAL PRODUCTS FOR SALE TO THEIR CUSTOMERS. HE SUBMITTED THAT THE FORMULATIONS PRODUCED IN THE OTHER SEGMENT BY THE ASSESSEE-COMPANY AND SUPPLIED TO THE UNRELATED PARTIES, ON THE OTHER HAND, WERE FINAL PRODUCTS. BY RELYING ON THE DECISION OF AHMEDABAD BENCH OF ITAT IN THE CASE OF INDUCOTHE R (INDIA) PVT. LIMITED VS.- DCIT, HE CONTENDED THAT THESE TWO SEG MENTS, THEREFORE, WERE NOT COMPARABLE AND THE TRANSFER PRICING OFFICE R AS WELL AS THE LD. CIT(APPEALS) FAILED TO APPRECIATE AND UNDERSTAND TH E DIFFERENCE IN THE FUNCTIONAL PROFILE POINTED OUT BY THE ASSESSEE IN T HESE TWO SEGMENTS. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE PRODUCTS OF THE ONE SEGMENT SUPPLIED BY THE ASSESSEE-COMPANY TO ITS ASSOCIATED ENTERPRISES WERE NOT MANUFACTURED BY THE ASSESSEE-C OMPANY IN ITS OWN FACILITY AND THE SAME WERE GOT MANUFACTURED FROM TH E CONTRACT MANUFACTURERS. HE CONTENDED THAT THE RISK UNDERTAKE N BY THE ASSESSEE- COMPANY IN RESPECT OF THIS SEGMENT, THEREFORE, WAS LIMITED AS COMPARED TO THE RISK UNDERTAKEN BY IT IN CASE OF THE OTHER S EGMENT WHERE PRODUCTS WERE MANUFACTURED ON ITS OWN BY THE ASSESSEE-COMPAN Y AND SUPPLIED TO THE UNRELATED PARTIES UNDER ITS OWN BRAND NAME. HE INVITED OUR ATTENTION TO THE DETAILS FURNISHED BY THE ASSESSEE IN THIS RE GARD BEFORE THE AUTHORITIES BELOW ENUMERATING THE DIFFERENT RISKS U NDERTAKEN IN RESPECT OF THESE TWO SEGMENTS. HE ALSO INVITED OUR ATTENTIO N TO THE RELEVANT PORTION OF THE TRANSFER PRICING STUDY REPORT SUBMIT TED BY THE ASSESSEE AT PAGE NO. 64 OF THE PAPER BOOK TO POINT OUT THAT THE ADDITIONAL FUNCTIONS PERFORMED BY THE ASSESSEE IN RESPECT OF SEGMENT WHE RE GOODS WERE MANUFACTURED AND SOLD BY THE ASSESSEE-COMPANY TO UN RELATED PARTIES AS FINAL PRODUCTS UNDER ITS OWN BRAND NAME THAN THE OT HER SEGMENT WHERE THE INTERMEDIATE GOODS SUPPLIED TO THE ASSOCIATED E NTERPRISES WERE GOT MANUFACTURED FROM THE CONTRACT MANUFACTURER AS PER THE SPECIFIC REQUIREMENT OF THE ASSOCIATED ENTERPRISE. HE CONTEN DED THAT EVEN THERE WAS A HUGE DIFFERENCE IN THE VOLUME OF BOTH THESE S EGMENTS MAKING THEM UN-COMPARABLE ON THIS GROUND ALSO. HE CONTENDED THA T ALL THESE DIFFERENCES POINTED OUT BY THE ASSESSEE IN THE TWO SEGMENTS HAVE BEEN ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 23 PROPERLY APPRECIATED BY THE TRANSFER PRICING OFFICE R IN A.Y. 2007-08 AND THE TWO SEGMENTS WERE NOT COMPARED BY HIM IN THAT Y EAR FOR MAKING ANY TRANSFER PRICING ADJUSTMENT AS DONE IN THE YEAR UND ER CONSIDERATION. 22. THE LD. D.R., ON THE OTHER HAND, SUBMITTED THAT THERE WAS NO DIFFERENCE BETWEEN TWO SEGMENTS COMPARED BY THE TRA NSFER PRICING OFFICER, INASMUCH AS, IN BOTH THESE SEGMENTS, SIMIL AR PRODUCTS WERE MANUFACTURED FROM THE RAW MATERIALS PURCHASED BY TH E ASSESSEE FROM THE ASSOCIATED ENTERPRISES AND THE SAME WERE SOLD IN ON E SEGMENT TO UNRELATED PARTIES AND IN THE OTHER SEGMENT TO THE A SSOCIATED ENTERPRISES. HE CONTENDED THAT THERE WAS THUS NO FUNCTIONAL DIFF ERENCE IN THESE TWO SEGMENTS AND EVEN IF THERE WAS SOME DIFFERENCE IN T HE NATURE OF PRODUCTS MANUFACTURED AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE, THE SAME IS NOT RELEVANT WHEN THE METHOD ADOPTED IS TNMM. AS REGARDS THE DIFFERENCE IN RISK UNDERTAKEN IN TWO SEGMENTS AS PO INTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE, HE CONTENDED THAT SUCH DI FFERENCE IS ONLY MARGINAL AND NOT SUBSTANTIAL. HE CONTENDED THAT WHE N THESE TWO SEGMENTS ARE FOUND TO BE THE FUNCTIONALLY COMPARABL E, SOME ADJUSTMENTS CAN BE MADE FOR THE MARGINAL DIFFERENCE IN RISK UND ERTAKEN WHILE DETERMINING THE TRANSFER PRICING ADJUSTMENT. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT THE SEGMENT IN WHICH SALES WERE MADE BY THE ASSESSEE TO ITS ASSOCI ATED ENTERPRISES, THE PRODUCTS WERE IN THE NATURE OF ACTIVE PHARMACEUTICA L INGREDIENTS/BULK DRUGS, WHICH WERE INTERMEDIATES AND THE SAID INTERM EDIATES WERE REQUIRED TO BE FURTHER PROCESSED BY THE ASSOCIATED ENTERPRISES FOR PRODUCING THE FINAL PRODUCTS FOR SALE OF ITS CUSTOM ERS. IN THE OTHER SEGMENT WHERE SALES MADE BY THE ASSESSEE WERE TO TH E UNRELATED PARTIES, PRODUCTS MANUFACTURED WERE IN THE NATURE OF FORMULA TION WHICH CONSTITUTED FINAL PRODUCTS MANUFACTURED AND SOLD BY THE ASSESSEE- COMPANY UNDER ITS OWN NAME. IT IS THUS CLEAR THAT T HE PRODUCTS SOLD BY ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 24 THE ASSESSEE-COMPANY TO ITS ASSOCIATED ENTERPRISES WERE BEING USED BY THE ASSOCIATED ENTERPRISES AS THEIR INPUTS FOR FURT HER MANUFACTURING WHILE THE PRODUCTS SOLD BY THE ASSESSEE-COMPANY IN OTHER SEGMENT TO UNRELATED PARTIES WERE FINAL PRODUCTS WHICH WERE ME ANT FOR THEIR CONSUMPTION. IN THE CASE OF INDUCOTHERM (INDIA) PVT . LTD. (SUPRA) CITED BY THE LD. COUNSEL FOR THE ASSESSEE, IT WAS HELD THAT A SALE TO DEALER OF THE SAME PRODUCT, MUCH LESS TO A MANUFACTURER OF RELATE D END PRODUCT, INHERENTLY CANNOT BE EQUATED WITH THE SALE TO THE E ND-CONSUMER. IT WAS HELD THAT THE COMPARABILITY OF AN INTERNATIONAL TRA NSACTION WITH AN UNCONTROLLED TRANSACTION UNDER RULE 10B(2)(D) IS TO BE JUDGED WITH REFERENCE TO, INTER ALIA, THE CONDITIONS PREVAILING IN THE MARKET IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE AND THE CASE OF SALE TO THE END CONSUMER IS NOT THE SAME THING AS SALE TO T HE MANUFACTURER OR DEALER WHO USES THE SAME AS INPUT RAW MATERIAL. IT WAS HELD THAT THIS DISTINCTION IS SO FUNDAMENTAL THAT THE COMPARISON I S MEANINGLESS. 24. IT IS OBSERVED THAT BESIDES THE DIFFERENCE IN T HE NATURE OF PRODUCTS MANUFACTURED IN TWO SEGMENTS COMPARED BY THE TRANSF ER PRICING OFFICER, EVEN THE RISK UNDERTAKEN BY THE ASSESSEE-COMPANY IN THESE TWO SEGMENTS WAS DIFFERENT. AS POINTED OUT BY THE ASSESSEE IN TH IS REGARD BEFORE THE AUTHORITIES BELOW AS WELL AS BEFORE US, A LIMITED R ISK WAS UNDERTAKEN BY IT IN THE SEGMENT WHERE THE PRODUCTS WERE GOT MANUFACT URED FROM THE THIRD PARTY AS PER THE SPECIFIC REQUIREMENT OF THE ASSOCI ATED ENTERPRISES WHEREAS HIGHER RISK WAS TAKEN IN THE OTHER SEGMENT WHERE PRODUCTS WERE NOT ONLY MANUFACTURED MAINLY IN THE OWN MANUFACTURI NG FACILITY OF THE ASSESSEE-COMPANY BUT THE SAME WERE SOLD AS A FINAL PRODUCT TO THE ULTIMATE CONSUMER UNDER ITS OWN BRAND. THE RISK UND ERTAKEN IN ONE SEGMENT INVOLVING SALE OF ASSOCIATED ENTERPRISE THU S WAS LIMITED WHILE A FULL-FLEDGED RISK WAS TAKEN BY THE ASSESSEE IN THE OTHER SEGMENT INVOLVING SALE TO UNRELATED PARTIES AND THE EXTENT OF SUCH DI FFERENT RISK UNDERTAKEN IN THESE TWO SEGMENTS WAS BROUGHT TO THE NOTICE OF THE AUTHORITIES BELOW ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 25 WITH REFERENCE TO EACH AND EVERY RISK INVOLVED IN T HE RELEVANT TRANSACTIONS. 25. IT IS PERTINENT TO NOTE HERE THAT THE TWO SEGME NTS COMPARED IN THE PROCESS OF TRANSFER PRICING ANALYSIS DONE IN THE YE AR UNDER CONSIDERATION WERE ALSO SOUGHT TO BE TAKEN AS COMPARABLES BY THE TRANSFER PRICING OFFICER IN A.Y. 2007-08 AND WHEN SPECIFIC QUERY WAS RAISED BY HIM, THE DIFFERENCE IN BUSINESS PROFILE OF BOTH THESE SEGMEN TS WAS EXPLAINED BY THE ASSESSEE BY POINTING OUT THAT THE FINAL PRODUCT S EXPORTED TO ASSOCIATED ENTERPRISES WERE ACTIVE PHARMACEUTICAL I NGREDIENTS, WHICH WERE ACTIVE CHEMICALS WITH MEDICINAL PROPERTIES USE D IN THE FURTHER MANUFACTURING OF DRUGS (FORMULATIONS), WHEREAS THE GOODS EXPORTED TO UNRELATED PARTIES WERE FORMULATIONS BEING THE FINIS HED PRODUCTS (DRUGS). IT WAS ALSO POINTED OUT BY THE ASSESSEE THAT THE NA TURE OF RISK BORNE BY THE ASSESSEE IN THESE TWO SEGMENTS WAS DIFFERENT, I NASMUCH AS, THE RISK UNDERTAKEN IN THE MANUFACTURING AND EXPORT OF GOODS TO ASSOCIATED ENTERPRISES WAS LOW WHILE THE RISK UNDERTAKEN IN MA NUFACTURING AND EXPORT OF FINAL PRODUCTS TO UNRELATED PARTIES WAS H IGH. AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE FROM THE TRANSFER PRICING OFFICERS ORDER DATED 28.10.2010 PASSED FOR A.Y. 2007-08, THIS DIST INCTION OR DISSIMILARITY BROUGHT TO HIS NOTICE BY THE ASSESSEE WAS ACCEPTED BY THE TRANSFER PRICING OFFICER AND THESE TWO SEGMENTS WER E NOT TAKEN BY HIM AS COMPARABLES INSPITE OF THE FACT THAT THE PLI (OP/TC ) OF THE SEGMENT INVOLVING EXPORT OF GOODS TO UNRELATED PARTIES WAS SUBSTANTIALLY HIGHER THAN THE PLI OF OTHER SEGMENT INVOLVING EXPORT OF G OODS TO ASSOCIATED ENTERPRISE. 26. KEEPING IN VIEW THE ABOVE DISCUSSION, WE FIND T HAT NOT ONLY THE NATURE OF PRODUCTS MANUFACTURED IN BOTH THESE SEGME NTS COMPARED BY THE TRANSFER PRICING OFFICER AS WELL AS THE RISK UNDERT AKEN BY THE ASSESSEE IN THESE TWO SEGMENTS WAS DIFFERENT, EVEN THE BUSINESS MODEL OR BUSINESS PROCESS ADOPTED BY THE ASSESSEE IN THESE TWO SEGMEN TS WAS DIFFERENT AND ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 26 THE SAME CANNOT BE TAKEN AS COMPARABLES FOR THE PUR POSE OF TRANSFER PRICING ANALYSIS IN ORDER TO DETERMINE THE ARMS LE NGTH PRICE. WE, THEREFORE, DELETE THE ADDITION MADE BY THE ASSESSIN G OFFICER AND CONFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF TRA NSFER PRICING ADJUSTMENT AND ALLOW GROUNDS NO. 9 TO 13 OF THE ASS ESSEES APPEAL. 27. IN GROUND NO. 14, THE ASSESSEE HAS CHALLENGED T HE ADDITION OF RS.14,00,719/- MADE BY THE ASSESSING OFFICER AND CO NFIRMED BY THE LD. CIT(APPEALS) ON ACCOUNT OF TRANSFER PRICING ADJUSTM ENT MADE IN RESPECT OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE-COMPA NY WITH ITS ASSOCIATED ENTERPRISE INVOLVING PAYMENT OF AUDIT FEES. 28. DURING THE YEAR UNDER CONSIDERATION, A SUM OF R S.14,00,719/- WAS CLAIMED TO BE PAID BY THE ASSESSEE FOR INTERNAL AUD IT SERVICES RECEIVED FROM ITS ASSOCIATED ENTERPRISE NAMELY AKZO NOBEL SO UTH EAST PTE. LTD., SINGAPORE. ALTHOUGH THE ASSESSEE-COMPANY DURING THE COURSE OF PROCEEDINGS BEFORE THE TRANSFER PRICING OFFICER FUR NISHED THE RELEVANT DETAILS INCLUDING THE COPY OF INTERNAL AUDIT REPORT , WHICH CONTAINED THE FINDINGS AND RECOMMENDATIONS OF THE INTERNAL AUDITO RS AND THE COMMENTS TO THE MANAGEMENT OF THE ASSESSEE-COMPANY ON SUCH F INDINGS AND RECOMMENDATIONS, THE TRANSFER PRICING OFFICER WAS O F THE VIEW THAT NO TANGIBLE BENEFIT HAD ACCRUED TO THE ASSESSEE-COMPAN Y DIRECTLY OR INDIRECTLY BY SUCH INTERNAL AUDIT. HE ACCORDINGLY D ETERMINED THE ARMS LENGTH PRICE OF THE INTERNAL AUDIT SERVICES RECEIVE D BY THE ASSESSEE- COMPANY FROM ITS ASSOCIATED ENTERPRISE AT NIL AND PROPOSED A TRANSFER PRICING ADJUSTMENT OF RS.14,00,719/-. WHEN THE ADDI TION WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF THIS TRANSFER PRICI NG ADJUSTMENT, THE ASSESSEE CHALLENGED THE SAME IN THE APPEAL FILED BE FORE THE LD. CIT(APPEALS). DURING THE COURSE OF APPELLATE PROCEE DINGS BEFORE THE LD. CIT(APPEALS), IT WAS SUBMITTED ON BEHALF OF THE ASS ESSEE-COMPANY THAT IT DID NOT HAVE ANY INTERNAL AUDIT DEPARTMENT IN ITS O RGANISATION AND HENCE INTERNAL AUDIT SERVICES WERE AVAILED FROM EXTERNAL AGENCIES IN ORDER TO ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 27 HAVE AN INTERNAL AUDIT SYSTEM COMMENSURATE WITH ITS SIZE AND NATURE OF BUSINESS. THE BENEFITS RECEIVED FROM SUCH INTERNAL AUDIT SERVICES WERE ALSO EXPLAINED BY THE ASSESSEE BEFORE THE LD. CIT(A PPEALS). THE LD. CIT(APPEALS), HOWEVER, DID NOT FIND MERIT IN THE CA SE OF THE ASSESSEE ON THIS ISSUE AND CONFIRMED THE ADDITION MADE BY THE A SSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT FOR THE SAME REASONS AS GIVEN BY THE ASSESSING OFFICER. 29. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THIS ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON REC ORD. ALTHOUGH THE LD. D.R. HAS STRONGLY RELIED ON THE ORDERS OF THE AUTHO RITIES BELOW IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE, IT IS OBSERVED THAT A SIMILAR ISSUE WAS INVOLVED IN THE ASSESSEES OWN CASE FOR THE IMMEDIA TELY PRECEDING YEAR I.E. A.Y. 2004-05 AND THE SIMILAR ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT MADE IN R ESPECT OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE-COMPANY ENTERED INTO WITH ITS ASSOCIATED ENTERPRISE AVAILING OF INTERNAL AUDIT SE RVICES WAS DELETED BY THE LD. CIT(APPEALS) AFTER REJECTING THE TPOS CASE THAT NO TANGIBLE BENEFITS HAD ACCRUED TO THE ASSESSEE DIRECTLY OR IN DIRECTLY BY THE INTERNAL AUDIT. THE RELEVANT PORTION OF THE LD. CIT(APPEALS) S ORDER GIVING HIS CONCLUSION ON THIS ISSUE FOR A.Y. 2004-05 IS REPROD UCED HEREUNDER:- IN THE INSTANT CASE THE FACT THAT THE EXPENDITURE HAS BEEN ACTUALLY EXPENDED IS NOT DISPUTED AND THE ASSESSEE HAS CLAIMED THAT IT HAS IMMENSELY BENEFITED BY SUCH AUD IT BY WAY OF BETTER CONTROL, BETTER ADMINISTRATION AND BETTER FUNCTIONING OF THE COMPANY. CONSIDERING THE FACT TH AT THE CIT(APPEALS) IN ASSESSEE'S OWN CASE FOR AY 2003-04 HAS HELD SUCH EXPENDITURE AS ALLOWABLE, THE TPO'S OBSERVATIO N THAT NO INTANGIBLE BENEFIT HAS ACCRUED TO THE ASSESSEE COMP ANY DIRECTLY OR INDIRECTLY BY THIS INTERNAL AUDIT IS HE LD NOT TO BE CORRECT. THEREFORE, HE SHOULD HAVE COMPUTED THE ARM 'S LENGTH PRICE FOR THE SAID TRANSACTION. THOUGH, IN THE PREC EDING YEAR THE DISALLOWANCE WAS MADE UNDER THE NORMAL PROVISIO NS OF THE ACT AND IN THE PRESENT YEAR THE SAME WAS DONE UNDER THE PROVISIONS RELATING TO TRANSFER PRICING, BUT IN BOT H THE YEARS THE DISALLOWANCE WAS MADE FOLLOWING THE SAME PRINCI PLE THAT THERE WAS NO APPARENT PURPOSE OR UTILITY OF SUCH AU DIT TO THE ASSESSEE. THEREFORE, I FIND NO MERIT IN THE DECISIO N OF THE TPO ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 28 IN THIS RESPECT AND HENCE, THE AO IS DIRECTED TO AL LOW THE CLAIM OF RS.13,61,864/- OF THE ASSESSEE. 30. AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSE E, THE DECISION OF THE LD. CIT(APPEALS) GIVING RELIEF TO THE ASSESSEE ON T HIS ISSUE IN A.Y. 2004-05 WAS CHALLENGED BY THE REVENUE BY FILING AN APPEAL B EFORE THE TRIBUNAL BUT THE SAID APPEAL INVOLVING LOW TAX EFFECT WAS DISMIS SED BY THE TRIBUNAL AS NOT MAINTAINABLE WITHOUT GOING INTO MERIT OF THE IS SUE. IT APPEARS THAT THE DECISION RENDERED BY HIS PREDECESSOR ON A SIMILAR I SSUE IN THE IMMEDIATELY PRECEDING YEAR I.E. 2004-05 IN ASSESSEE S OWN CASE WAS NOT TAKEN INTO CONSIDERATION BY THE LD. CIT(APPEALS) WH ILE DECIDING THIS ISSUE VIDE HIS IMPUGNED ORDER PASSED FOR THE YEAR UNDER C ONSIDERATION. AS FOUND BY THE LD. CIT(APPEALS) IN A.Y. 2004-05, THE ASSESSEE-COMPANY WAS BENEFITED BY THE INTERNAL AUDIT BY WAY OF BETTER CO NTROL, BETTER ADMINISTRATION AND BETTER FUNCTIONING AND KEEPING I N VIEW THE SAME, THE TRANSFER PRICING OFFICERS CONCLUSIONS THAT NO TANG IBLE BENEFIT HAD ACCRUED TO THE ASSESSEE-COMPANY DIRECTLY OR INDIREC TLY BY SUCH INTERNAL AUDIT WAS HELD TO BE INCORRECT BY THE LD. CIT(APPEA LS) IN A.Y. 2004-05. EVEN IN HIS IMPUGNED ORDER PASSED FOR THE YEAR UNDE R CONSIDERATION, THE LD. CIT(APPEALS) ACCEPTED THE FACT THAT THE INTERNA L AUDIT CONDUCTED BY THE PARENT COMPANY WAS TO ENSURE THAT THE AFFAIRS O F THE ASSESSEE- COMPANY ARE CARRIED OUT AS PER THE GLOBAL PRACTICES OF THE GROUP. HE, HOWEVER, HELD THAT THE PARENT COMPANY WAS NOT WILLI NGLY APPOINTED BY THE ASSESESE-COMPANY TO CONDUCT THE AUDIT AND, THER EFORE, THERE WAS NO ADDITIONAL BENEFIT THAT HAD ACCRUED TO THE ASSESSEE DIRECTLY OR INDIRECTLY FROM SUCH AUDIT. KEEPING IN VIEW ALL THE FACTS OF T HE CASE AS WELL AS THE DECISION OF THE LD. CIT(APPEALS) IN ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING YEAR I.E. A.Y. 2004-05, WE AR E UNABLE TO SUBSCRIBE TO THE VIEW TAKEN BY THE LD. CIT(APPEALS) IN THE YE AR UNDER CONSIDERATION. 31. AS ALREADY NOTED, THE RELEVANT DETAILS OF THE I NTERNAL AUDIT SERVICES RENDERED FROM ITS ASSOCIATED ENTERPRISE WERE FURNIS HED BY THE ASSESSEE INCLUDING THE INTERNAL AUDIT REPORT WHICH CONTAINED FINDINGS AND RECOMMENDATIONS OF THE INTERNAL AUDITORS AND THE CO MMENTS TO THE ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 29 MANAGEMENT OF THE ASSESSEE-COMPANY ON SUCH FINDINGS AND RECOMMENDATIONS. IT WAS SPECIFICALLY POINTED OUT ON BEHALF OF THE ASSESSEE-COMPANY THAT IT DID NOT HAVE ANY INTERNAL AUDIT DEPARTMENT AND HENCE THE INTERNAL AUDIT SERVICES WERE REQUIRED TO BE AVAILED IN ORDER TO HAVE AN INTERNAL AUDIT SYSTEM COMMENSURATE WITH ITS SIZE AND NATURE OF BUSINESS. EVEN THE BENEFITS RECEIVED FROM SUCH INTE RNAL AUDIT SERVICES WERE EXPLAINED BY THE ASSESSEE BY POINTING OUT THAT THE FOCUS OF THE SAID AUDIT WAS ON BUSINESS RISK ASPECT AND IT PROVIDED C ERTAIN ASSURANCE/COMFORT TO THE MANAGEMENT THAT THE OPERAT IONS OF THE ASSESSEE-COMPANY WERE WELL MANAGED AND EFFICIENT. A S POINTED OUT ON BEHALF OF THE ASSESSEE-COMPANY, KEY FINDINGS AND RE COMMENDATIONS UNDER VARIOUS FINANCIAL AND OPERATIONAL AREAS OF THE ASSE SSEE-COMPANY WERE MADE IN THE INTERNAL AUDIT REPORT AND IMPLEMENTATIO N OF SUCH RECOMMENDATIONS BY THE MANAGEMENT HAD RESULTED IN B ETTER CONTROL AND FUNCTIONING OF THE BUSINESS OF THE ASSESSEE-COMPANY . HAVING REGARD TO ALL THESE FACTS OF THE CASE, WE ARE OF THE VIEW THAT CE RTAIN SPECIFIC BENEFITS WERE DERIVED BY THE ASSESSEE-COMPANY FROM THE INTER NAL AUDIT SERVICES RENDERED BY ITS ASSOCIATED ENTERPRISE AND THE AUTHO RITIES BELOW WERE NOT JUSTIFIED IN MAKING THE IMPUGNED ADDITION ON ACCOUN T OF TRANSFER PRICING ADJUSTMENT BY TAKING THE ARMS LENGTH PRICE OF THE INTERNAL AUDIT SERVICES RENDERED BY ITS ASSOCIATED ENTERPRISE TO THE ASSESS EE AT NIL ON THE GROUND THAT NO BENEFIT, DIRECTLY OR INDIRECTLY, WAS RECEIVED BY THE ASSESSEE BY AVAILING THE SAID SERVICES. IN THAT VIE W OF THE MATTER, WE DELETE THE ADDITION MADE BY THE ASSESSING OFFICER A ND CONFIRMED BY THE LD. CIT(APPEALS) BY WAY OF TRANSFER PRICING ADJUSTM ENT ON THIS ISSUE AND ALLOW GROUND NO. 14 OF THE ASSESSEES APPEAL. 32. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON MAY 15, 20 19. SD/- SD/- (A.T. VARKEY) (P.M. JAGTAP) JUDICIAL MEMBER VICE-PRESIDENT (KZ) KOLKATA, THE 15 TH DAY OF MAY, 2019 ITA NO. 1335/KOL/2010 ASSESSMENT YEAR: 2005-2006 ORGANON (INDIA) LIMITED 30 COPIES TO : (1) ORGANON (INDIA) LIMITED, PLATINA, 7 TH FLOOR, PLOT NO. C-59, G BLOCK, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI-400 098, MAHARASHTRA (2) ADDITIONAL COMMISSIONER OF INCOME TAX, CIRCLE-12, KOLKATA, AAYAKAR BHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 (3) COMMISSIONER OF INCOME TAX (APPEALS)-12, KOLKAT A, (4) COMMISSIONER OF INCOME TAX- , (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.