DSM Anti Infectives India Ltd., Chandigarh V. DCIT, Chandigarh

ITA 1395/CHANDI/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68411 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 7 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-05-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 09-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI; AJAY SHARMA
• Assessee Lawyers: DIVESH KHANNA MS SHILPI VARMA; KHRENDER MOHANNISHANT SAINI
• Keywords: Related party transaction; Transfer pricing; Business expenditure; International transaction; Rule of consistency; Earning of tax free income; Retrospective amendment; Additional evidence; Wholly owned subsidiary; Commercial expediency
• Section: 143(3); 80HHC; 14A; 133(6); 10B; 92

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.1395/CHD/2010 (ASSESSMENT YEAR : 2005-06) DSM ANTI INFECTIVES INDIA LTD., VS. THE D.C.I.T. , BHAI MOHAN SINGH NAGAR, CIRCLE 1(1), TOANSA, NAWASHAHR, PUNJAB. CHANDIGARH. PAN: AABCM4314K ITA NO.1360/CHD/2010 (ASSESSMENT YEAR : 2005-06) THE D.C.I.T., VS. DSM ANTI INFECTIVES INDIA LTD. , CIRCLE 1(1), BHAI MOHAN SINGH NAGAR, CHANDIGARH. TOANSA, NAWASHAHR, PUNJAB. PAN: AABCM4314K AND ITA NO.1455/CHD/2010 (ASSESSMENT YEAR : 2006-07) DSM ANTI INFECTIVES INDIA LTD., VS. THE ADDL.C.I .T., BHAI MOHAN SINGH NAGAR, RANGE-1, TOANSA, NAWASHAHR, PUNJAB. CHANDIGARH. PAN: AABCM4314K (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI KHRENDER MOHAN,NISHANT SAINI & DIVESH KHANNA, MS.SHILPI VARMA DEPARTMENT BY : SMT.JYOTI KUMARI & SHRI AJAY SHAR MA DATE OF HEARING : 14.05.2013 DATE OF PRONOUNCEMENT : 08.08.2013 O R D E R PER SUSHMA CHOWLA, J.M. : OUT OF THESE THREE APPEALS, THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE ARE AGAINST THE ORDER OF THE COMMISSION ER OF INCOME-TAX 2 (APPEALS), CHANDIGARH DATED 16.07.2010 RELATING TO ASSESSMENT YEAR 2005-06 AGAINST THE ORDER PASSED U/S 143(3) R.W.S.9 2CA(3) OF THE INCOME TAX ACT, 1961(IN SHORT THE ACT). THE APPEAL IN I TA NO.1455/CHD/2010 IS DIRECT APPEAL AGAINST THE ORDER OF ASSESSING OFF ICER PASSED UNDER SECTION 143(3) R.W.S.144C(13) OF THE ACT. 2. ALL THE THREE APPEALS RELATING TO THE SAME ASSES SEE WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLI DATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.1360/CHD/2010 :: REVENUES APPEAL :: ASSTT.Y EAR 2005-06 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE C ASE AND IN LAW THE LD. CIT(A) HAS ERRED IN ALLOWING THE RELIEF WITH REGARD TO DISALLO WING THE INTEREST EXPENDITURE MADE BY THE ASSESSING OFFICER OF RS. 5,64,10,000/- WHICH WA S INCURRED BY THE APPELLANT ON ITS ENTIRE BORROWINGS FOR THE PURPOSES OF ITS BUSINESS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE C ASE AND IN LAW THE LD. CIT(A) HAS ERRED IN ALLOWING THE RELIEF TO THE ENHANCEMENT OF THE RETURNED INCOME DUE TO DETERMINATION OF THE ARM'S LENGTH ADJUSTMENT W ITH REGARD TO THE APPELLANT'S INTERNATIONAL TRANSACTIONS FROM ASSOCIATED ENTERPRI SES. 3. THE APPELLANT CRAVES TO ADD OR AMEND ANY GROUND ANY GROUNDS OF APPEAL BEFORE THE APPEAL IS HEARD OR DISPOSED OFF. 4. IT IS PRAYED THAT THE ORDER OF THE LD. CIT(A) BE CANCELLED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 4. THE ISSUE IN GROUND NO.1 RAISED BY THE REVENUE I S AGAINST THE DISALLOWANCE OF INTEREST EXPENDITURE. 5. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT T HE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED T HAT THE ASSESSEE HAD ADVANCED RS.59,55,74,465/- TO M/S HINDUSTAN MAX G.B . LTD., A JOINT VENTURE COMPANY OF THE ASSESSEE. THE ASSESSEE WAS SHOW CAUSED AS TO WHY ADDITION ON ACCOUNT OF INTEREST DUE ON THE SAID ADVANCES SHOULD NOT BE MADE IN THE HANDS OF THE ASSESSEE. THE EXPLANAT ION OF THE ASSESSEE WAS THAT THE SAID ADVANCES WERE MADE TO M/S HINDUST AN MAX G.B. LTD. 3 FOR SUPPLY OF RAW MATERIAL IN THE EARLIER YEARS, AS PART OF ITS BUSINESS ACTIVITIES. THE SAID LOAN HAD CARRIED INTEREST @ 1 6.5% PER ANNUM. HOWEVER, M/S HINDUSTAN MAX G.B. LTD. MADE AN APPLIC ATION TO THE BOARD FOR INDUSTRIAL & FINANCIAL RECONSTRUCTION (BIFR) AN D NO INTEREST WAS CHARGED ON THE SAID LOAN THEREAFTER. THE ASSESSING OFFICER COMPUTED THE INTEREST @ 16.55% ON THE SAID ADVANCES OF RS.59.55 CRORES AMOUNTING TO RS.9,82,69,787/- BUT THE DISALLOWANCE WAS RESTRICTE D TO RS.5,64,10,000/- AS THE ASSESSEE HAD CLAIMED EXPENDITURE OF INTEREST ON TERM LOAN TO THE SAID EXTENT. THE ADDITION OF RS.5.64 CRORES WAS MA DE TO THE INCOME OF THE ASSESSEE. 6. THE CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSES SEE AS THE BORROWINGS WERE MADE BY THE ASSESSEE COMPANY FROM T HE HOLDING COMPANY ON WHICH IT WAS PAYING INTEREST. THE CIT (APPEALS) FURTHER HELD THAT THE ADVANCES HAD BEEN MADE TO M/S HINDUST AN MAX G.B. LTD. FOR COMMERCIAL CONSIDERATION IN ORDER TO PURCHASE R AW MATERIAL FROM THE SAID COMPANY. IN RESPECT OF THE BORROWINGS MADE BY THE ASSESSEE COMPANY IT WAS OBSERVED BY THE CIT (APPEALS) THAT T HE SAID BORROWINGS WERE MADE IN THE EARLIER YEARS AND INTEREST EXPENSE S HAD BEEN ALLOWED EXCEPT THE FACT THAT DURING THE YEAR INTEREST WAS N OT SHOWN TO BE RECEIVED FROM M/S HINDUSTAN MAX G.B. LTD., DUE TO IT BEING A SICK COMPANY. THE CIT (APPEALS) NOTED THE FACT THAT THE ISSUE HAD BEE N DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE FOR THE ASSESSME NT YEAR 2004-05 AND CONSEQUENTLY THE ADDITION OF RS.5.64 CRORES WAS DEL ETED BY THE CIT (APPEALS). 7. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF TH E CIT (APPEALS). THE LEARNED D.R. FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. 4 8. THE LEARNED A.R. FOR THE ASSESSEE PLACED RELIANC E ON THE ORDER OF THE TRIBUNAL. THE LEARNED A.R. FOR THE ASSESSEE AL SO POINTED OUT THAT THE SAID ADVANCES MADE TO M/S HINDUSTAN MAX G.B. LTD. W ERE MADE IN THE EARLIER YEARS AND NOT DURING THE YEAR UNDER CONSIDE RATION. IT WAS AN OPENING BALANCE IN THE NOTES OF ACCOUNT AND AS PER NOTE-6 THE INTEREST INCOME ON SUCH SICK ADVANCES WAS NOT RECOGNIZED BY THE ASSESSEE. THE LEARNED A.R. FOR THE ASSESSEE STRESSED THAT THE SAI D ADVANCES WERE NOT INTEREST FREE LOAN AND ASSESSEE WAS ALWAYS CHARGING INTEREST ON THE SAID LOAN. DURING THE YEAR UNDER CONSIDERATION, NOTHING WAS ADVANCED TO THE SAID PARTIES AND THUS TOTAL LOAN OF THE EARLIER YEA RS WAS BROUGHT FORWARD. IT WAS STRESSED BY THE LEARNED A.R. FOR THE ASSESSE E THAT NO ADDITION IS WARRANTED DURING THE YEAR BECAUSE OF THE SAME REASO NING AS BEFORE THE TRIBUNAL IN ASSESSMENT YEARS 2003-04 AND 2004-05. THE LEARNED A.R. FOR THE ASSESSEE ALSO CLARIFIED THAT THE SAID COMPANY W AS GOING FOR WINDING UP. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING IN THE APPEAL FILED BY THE REVENUE IS IN RELATION TO THE INTEREST CHARGEABLE ON THE ADVANCES MADE BY THE ASS ESSEE IN THE EARLIER YEARS. DURING THE YEAR UNDER CONSIDERATION A SUM O F RS.59.55 CRORES WAS DUE FROM M/S HINDUSTAN MAX G.B. LTD., WHICH WAS JOI NT VENTURE COMPANY PROMOTED BY THE ASSESSEE COMPANY. THE ASSE SSEE HAD ADVANCED THE SAID AMOUNT TO M/S HINDUSTAN MAX G.B. LTD. AGAI NST SUPPLY OF RAW MATERIAL, AND WAS CARRYING INTEREST @ 16.5% PER ANN UM. HOWEVER, BECAUSE OF THE FINANCIAL CONSTRAINTS, M/S HINDUSTAN MAX G.B. LTD. MOVED AN APPLICATION BEFORE THE BIFR FOR WINDING UP AND THEREAFTER NO INTEREST WAS EARNED ON THE SAID LOAN. THE ASSESSEE WHILE FILING THE RETURN OF INCOME HAD NOT RECOGNIZED THE INTEREST DU E ON THE SAID ADVANCES MADE BY IT IN THE EARLIER YEARS. AS PER N OTE NO.6 I.E. NOTES TO 5 THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT ANNEXED TO THE FINANCIAL STATEMENT PLACED AT PAGES 25 AND 27 OF THE PAPER BO OK, AS PER CLAUSE 7- A, IT WAS REPORTED AS UNDER: BASED ON THE UNAUDITED FINANCIAL STATEMENTS AS AT MARCH 31, 2004, HMGBS NET WORTH HAS BEEN COMPLETELY EROD ED AND IT HAS SUSPENDED ITS PRODUCTION DUE TO SIGNIFIC ANT DECLINE GLOBALLY IN THE REALIZATION OF GOODS MANUFA CTURED BY IT. IN VIEW OF THE ABOVE, THE ABILITY OF HMGB T O CONTINUE AS A GOING CONCERN IS DEPENDENT ON CONTINU ED FUTURE FINANCIAL SUPPORT BY ITS PROMOTER COMPANIES AND ALSO IMPROVEMENT IN THE PRICES OF GOODS MANUFACTURE D BY IT. HOWEVER, IN VIEW OF THE STRATEGIC LONG TERM INVOLVEMENT OF THE COMPANY WITH HMGB, NO PROVISION HAS BEEN CONSIDERED FOR ANY POSSIBLE LOSSES WHICH MAY A RISE ON THE ABOVE ACCOUNT. 10. THE SAID ADVANCES MADE BY THE ASSESSEE WERE BRO UGHT FORWARD FROM THE EARLIER YEARS AND BECAUSE OF THE JOINT VENTURE COMPANY BEING NOT IN GOOD FINANCIAL CONDITIONS, NO INTEREST WAS CHARGED ON THE SAID LOAN. THE ASSESSEE IN THE EARLIER ASSESSMENT YEARS 2003-04 AN D 2004-05 HAD NOT CHARGED ANY INTEREST ON THE SAID LOAN AND THE TRIBU NAL IN ITA NO.366/CHD/2007 RELATING TO ASSESSMENT YEAR 2003-04 AND ITA NO.281/CHD/2008 RELATING TO ASSESSMENT YEAR 2004-05 VIDE ORDER DATED 15.10.2008 HAD ALLOWED THE CLAIM OF THE ASSESSEE OB SERVING THAT THE BORROWINGS MADE BY THE ASSESSEE FROM ITS PARENT COM PANY HAD BEEN UTILIZED FOR THE PURPOSES OF BUSINESS AND THE CLAIM OF INTEREST EXPENDITURE HAD BEEN CONSTANTLY ALLOWED IN THE PREC EDING YEARS. AS THERE WAS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OTHER THAN THAT PART OF THE INTEREST ACCRUED ON THE ADVANCES MADE TO M/S HINDUSTAN MAX G.B. LTD. HAD BEEN WRITTEN OFF IN THE INSTANT YEAR, COUL D NOT BE THE BASIS TO SUGGEST THAT THE BORROWINGS FROM THE PARENT COMPANY HAD NOT BEEN UTILIZED FOR BUSINESS PURPOSES. FURTHER IT WAS HEL D THAT THERE WAS SUFFICIENT MATERIAL TO SHOW THAT THE RELATIONSHIP O F THE ASSESSEE WITH ITS SUBSIDIARY M/S HINDUSTAN MAX G.B. LTD. WAS BASED ON COMMERCIAL EXPEDIENCY AND ADVANCING OF AMOUNT WAS FOR BUSINESS PURPOSES. 6 CONSEQUENTLY, THE INTEREST PAID ON BORROWINGS WAS H ELD TO BE ALLOWABLE DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT IN VI EW OF THE RATIO LAID DOWN BY THE HON'BLE APEX COURT IN S.A.BUILDERS VS. CIT [288 ITR 1(SC)]. 11. WE FIND THAT THE ISSUE IN THE PRESENT APPEAL IS IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEARS 2003-04 AND 2004-05. ADMITTEDLY, THE ASSESSEE HAD PAID INTEREST ON THE BORROWINGS MADE FROM ITS PARENT COMPANY IN THE EARL IER YEARS AND NO FRESH BORROWINGS HAD BEEN MADE DURING THE YEAR UND ER CONSIDERATION. THE INTEREST EXPENDITURE HAD BEEN ALLOWED IN THE HA NDS OF THE ASSESSEE FROM YEAR TO YEAR. FURTHER THE ADVANCES TO M/S HIN DUSTAN MAX G.B. LTD. WERE ALSO MADE IN THE EARLIER YEARS AND THE BALANCE IS BROUGHT FORWARD FROM THE PRECEDING YEAR ON WHICH IN THE EARLIER YEA RS THE ASSESSEE WAS CHARGING INTEREST. HOWEVER, THE INTEREST ON THE SA ID LOAN HAD NOT BEEN RECOGNIZED DURING THE YEAR UNDER CONSIDERATION AS M /S HINDUSTAN MAX G.B. LTD. HAD GONE BEFORE THE BIFR BECAUSE OF FINAN CIAL CONSTRAINT. IN THE ABOVE SAID CIRCUMSTANCES, WE FIND NO MERIT IN T HE ORDER OF THE ASSESSING OFFICER AND UPHOLDING THE ORDER OF THE CI T (APPEALS) WE DISMISS GROUND NO.1 RAISED BY THE REVENUE. 12. THE ISSUE IN GROUND NO.2 RAISED BY THE REVENUE IS IN RELATION TO TRANSFER PRICING ADJUSTMENT WHICH SHALL BE DEALT WI TH ALONGWITH THE ISSUE RAISED BY THE ASSESSEE IN ITS APPEAL ON ACCOU NT OF TRANSFER PRICING. ITA NO.1395/CHD/2010 :: ASSESSEES APPEAL :: ASSTT. YEAR 2005-06 13. THE ASSESSEE IN ITA NO.1395/CHD/2010 HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. THAT THE ORDER PASSED BY THE LD. COMMISSIONER O F INCOME TAX (APPEALS) ('CIT(A)') ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE LD. ASSESSING OFFICER ('AO') TO THE APPELLANT'S INCOME; 7 2. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) HAS INTER-ALIA GROSSLY ERRED: 2.1. IN DISALLOWING EXPENDITURE INCURRED TOWARDS T AX PAID ON SALARY OF EXPATRIATE EMPLOYEE AMOUNTING TO RS.1,374,846 DURING THE YEAR BY TREATI NG THE SAME AS PRIOR PERIOD EXPENSE WITHOUT APPRECIATING THAT THE EVENT OF CRYSTALLIZATION OF S UCH EXPENDITURE AROSE IN THE YEAR UNDER CONSIDERATION. 2.4. IN NOT ALLOWING THE +/- 5% RANGE MENTIONED IN PROVISO TO SECTION 92C(2) OF THE ACT WHILE COMPUTINGTHE ARM'S LENGTH PRICE FOR THE APPELLANT'S INTERNATIONAL TRANSACTIONS WITH AES. THE ASSESSEE CRAVES LEAVE TO ALTER, AMEND OR WITHDR AW ALL OR ANY OF THE GROUNDS OF OBJECTIONS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NEC ESSARY AND TO SUBMIT SUCH STATEMENTS, DOCUMENTS AND PAPERS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 14. THE GROUND NO.1 RAISED BY THE ASSESSEE IS GENER AL IN NATURE AND HENCE THE SAME IS DISMISSED. FURTHER THE ASSESSEE HAS NOT PRESSED GROUND NOS.2.2 AND 2.4 AND BOTH THE GROUNDS ARE DIS MISSED AS NOT PRESSED. 15. THE ISSUE IN GROUND NO.2.1 RAISED BY THE ASSESS EE IS IN RELATION TO DISALLOWANCE OF EXPENDITURE OF RS.13,74,846/- INCUR RED TOWARDS TAX PAID ON SALARY OF EXPATRIATE EMPLOYEE. 16. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD SHOWN SALARIES AMOUNTING TO RS.13,74,846/- AS PRIOR PERIO D EXPENSES AS PER ANNEXURE-XI , CLAUSE 22(B) OF THE PROFIT & LOSS ACC OUNT. THE ASSESSING OFFICER NOTED THAT THE SAID EXPENSES DID NOT PERTAI N TO THE FINANCIAL YEAR 2004-05 AND PERTAINED TO FINANCIAL YEAR 2003-04. A S THE ASSESSEE HAD BOOKED THE EXPENSES IN THE SUCCEEDING YEAR THE SAME WERE HELD TO BE NOT ALLOWABLE EXPENDITURE AND ADDITION OF RS.13,74,846/ - WAS MADE ON THIS ACCOUNT. 17. THE CIT (APPEALS) UPHELD THE ORDER OF THE ASSES SING OFFICER. 18. THE ASSESSEE IS IN APPEAL AGAINST THE SAME. TH E LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THE NATURE OF THE EXP ENDITURE WAS THE TAX ON 2.2. IN NOT APPRECIATING THAT THE EXPENDITURE IN QU ESTION IS GENUINE AND THE APPELLANT HAD SUO- MOTO OFFERED THE PRIOR PERIOD INCOME OF RS. 3,190,5 74/- IN THE YEAR UNDER CONSIDERATION. 2.3. IN DETERMINING THE ARM'S LENGTH PRICE OF THE I NTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. 8 SALARY OF FOREIGN EXPATRIATE WHEREIN THE SALARY WAS PAID UP TO DECEMBER, 2003. HOWEVER, CERTAIN INFORMATION REQUIRED FOR C OMPUTING THE FINAL TAX LIABILITY OF THE SAID FOREIGN EMPLOYEE WAS AVAI LABLE TO THE ASSESSEE IN APRIL 2004 ONLY. HENCE, THE FINAL TAX LIABILITY OF RS.13,74,846/- WAS PAID IN APRIL, 2004. THE LEARNED A.R. FOR THE ASSE SSEE POINTED OUT THAT AS PER NOTE-7 ANNEXED TO THE COMPUTATION OF INCOME FILED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION, THE BREAK DOWN OF PRIOR PERIOD EXPENSES WAS FURNISHED IN WHICH IT WAS REPORTED THA T IN APRIL, 2004 THE FINAL TAX LIABILITY WAS DETERMINED AND PAID IN RESP ECT OF THE FOREIGN EXPATRIATE AND THE SAME DOES ACCRUE IN THE CAPTIONE D ASSESSMENT YEAR. 19. THE LEARNED D.R. FOR THE REVENUE POINTED OUT TH AT THE EXPENDITURE PERTAINED TO THE PRECEDING YEAR, BUT BOOKED DURING THE YEAR UNDER CONSIDERATION. THE LEARNED D.R. FOR THE REVENUE PO INTED OUT THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING AND CONSEQUENTLY THE EXPENDITURE WAS TO BE RECOGNIZED I N THE PRECEDING YEAR AND NOT DURING THE YEAR UNDER CONSIDERATION. 20. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING VIDE PRESENT GROUND NO.2.1 IS IN RELA TION TO THE EXPENDITURE OF RS.13,74,846/- BOOKED AS PRIOR PERIOD EXPENSES. THE SAID EXPENDITURE IS RELATABLE TO THE TAXES PAID ON SALARY OF AN EXPA TRIATE EMPLOYEE WORKING FOR THE ASSESSEE. THE SAID EMPLOYEE WAS WO RKING WITH THE ASSESSEE UP TO DECEMBER, 2003. ADMITTEDLY THE ASSE SSEE HAD TO BEAR THE EXPENDITURE OF TAXES ON THE SALARY OF THE SAID EXPA TRIATE EMPLOYEE. THE ASSESSEE CLAIMED THAT SOME OF THE INFORMATION REQUI RED FOR COMPUTING THE TAX LIABILITY OF THE FOREIGN NATIONAL WAS RECEIVED BY THE ASSESSEE IN APRIL, 2004 AND CONSEQUENTLY THE FINAL TAX LIABILIT Y OF RS.13,74,846/- WAS DETERMINED AND PAID BY THE ASSESSEE IN APRIL, 2 004. THE SAID SUM WAS BOOKED AS PRIOR PERIOD EXPENSES IN THE YEAR IN WHICH THE FINAL TAX 9 LIABILITY GOT CRYSTALLIZED. THE ISSUE ARISING VIDE THE PRESENT GROUND OF APPEAL IS IN RELATION TO THE ALLOWABILITY OF SAID E XPENDITURE. THE CIT (APPEALS) VIDE PARA 18 HAD NOTED THAT SHRI JUAN JUB ANY WAS WORKING WITH THE ASSESSEE AS DIRECTOR, HOWEVER THE PAYMENT FOR SERVICES RENDERED BY HIM WAS DIRECTLY MADE BY THE GROUP ENTITY OF THE ASSESSEE IN NETHERLAND. THE PAYMENT MADE BY NETHERLAND ENTITY WAS IN TURN REIMBURSED BY THE ASSESSEE TO ITS GROUP ENTITY AND WAS CLAIMED AS DEDUCTION. THE TAXES ON INCOME OF SHRI JUAN JUBANY WAS DEDUCTED AND DEPOSITED IN INDIA BASED ON THE INFORMATION OF HIS INCOME GIVEN TO THE ASSESSEE BY ITS GROUP ENTITY IN NETHERLAND. THE CA SE OF THE ASSESSEE WAS THAT SOME OF THE INFORMATION REQUIRED FOR COMPUTING THE FINAL TAX LIABILITY OF SHRI JUAN JUBANY WAS MADE AVAILABLE IN APRIL, 2004 ONLY AND BALANCE TAX LIABILITY OF RS.13,74,846/- WAS DETERMI NED AND PAID IN APRIL, 2004. THE SAID AMOUNT WAS CHARGED TO PROFIT & LOSS ACCOUNT IN THE YEAR UNDER CONSIDERATION. IN VIEW OF THE ABOVE SAID FAC TS AND CIRCUMSTANCES WHERE THE SAID LIABILITY TO PAY BALANCE TAX DUE ON THE SALARY OF THE FOREIGN NATIONAL WAS CRYSTALLIZED AND PAID IN APRIL , 2004, IS TO BE ALLOWED AS AN EXPENDITURE IN THE YEAR UNDER CONSIDE RATION AS THE SAME RELATES TO THE CAPTIONED ASSESSMENT YEAR. THE LIAB ILITY BEING CRYSTALLIZED IN THE YEAR UNDER APPEAL AND HAVING BEEN PAID IN TH E YEAR UNDER APPEAL, IS TO BE ALLOWED AS A DEDUCTION IN THE YEAR UNDER C ONSIDERATION. THUS WE DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.13,74,846/-. THE GROUND NO.2.1 RAISED BY THE ASSESSEE IS THUS AL LOWED. 21. THE ISSUE IN GROUND NO.2.3 RAISED BY THE ASSESS EE AND GROUND NO.2 RAISED BY THE REVENUE ARE IN RELATION TO DETERMINAT ION OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE. 22. THE BRIEF FACTS OF THE CASE RELATING TO THE ISS UE ARE THAT THE DCIT, CIRCLE-I, CHANDIGARH VIDE LETTER DATED 10.9.2007 HA D REFERRED CERTAIN 10 INTERNATIONAL TRANSACTIONS UNDER SECTION 92CA(1) OF THE ACT TO THE JCIT, TRANSFER PRICING, CHANDIGARH. THE LIST OF INTERNAT IONAL TRANSACTIONS SO REFERRED WITH THE ASSOCIATED ENTERPRISES ARE TABULA TED UNDER PARA 2 OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT. THE ASSESSEE WAS ENGAGED IN THE PROCESSING OF THE INTERMEDIARIES AND BULK DRUGS. THE MANUFACTURING UNIT OF THE ASSESSEE WAS LOCATED AT T OANSA VILLAGE, CHANDIGARH. THE BASIC RAW MATERIAL USED BY THE ASS ESSEE IN ITS MANUFACTURING ACTIVITY WAS PENICILLIN G (IN SHORT R EFERRED TO AS PEN G). THE SAID RAW MATERIAL WAS MAINLY IMPORTED FROM DSN ANTI-INVESTIVES B.V., THE NETHERLAND AND ZGB CHINA. PENICILLIN G I S SUITABLE AS A STARTING MATERIAL FOR THE MANUFACTURE OF STERILE PE NICILLIN G SALTS AND THE MANUFACTURE OF BETA-LACTAM INTERMEDIATES SUCH AS 6- AMINO PENICILLAN IN THE CASE OF ACID (6-APA) AND 7 AMINO DECACETOXY CEP HALOSPORANIC ACID (7-ADCA). THE ASSESSEE BEFORE US WAS WHOLLY OWNED SUBSIDIARY OF GB INTERNATIONAL BV, THE NETHERLANDS AND IT WAS OBSERV ED BY THE TPO THAT IT WAS ASSOCIATED ENTERPRISE WITHIN THE MEANING OF SECTION 92CA(2)(A) OF THE ACT. THE ASSESSEE HAD ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) FOR TRANSFER PRICING ANALYSIS WITH OPERATION PROFIT/SALES RATIO AS PROFIT LEVEL INDICATOR. THE SAME METHOD HAD BEE N USED IN THE PRECEDING YEARS BY THE ASSESSEE TO BENCHMARK THE IN TERNATIONAL TRANSACTIONS. THE ASSESSEE HAD SELECTED COMPANIES ENGAGED IN THE MANUFACTURING OF DRUG INTERMEDIARIES AND BULK DRUGS AND CERTAIN FILTERS WERE USED FOR REJECTING THE NON-COMPARABLES. THE A SSESSEE ANALYZED THE OPERATING PROFIT/SALES RATIO OF THESE COMPARABLE CO MPANIES, BASED ON THREE YEARS DATA PERTAINING TO FINANCIAL YEARS 2002 -03, 2003-04 AND 2004-05. THE COMPANIES ANALYZED BY THE ASSESSEE W ERE AS UNDER: 11 SR.NO. NAME OF COMPANY FINANCIAL YEAR OPERATING PROFIT MARGIN (%) 1. AMOL DRUG PHARMA 2002-03 -4.02% 2. AVISNASH DRUGS 2003-04 -550.00% 3. AND-SWIFT LABS 2003-04 10.01% 4. JK PHARMACHEM 2003-04 -43.22% 5. KOPRAN 2004-05 -14.71% 6. TORRENT GUJRAT BIA 2004-05 -33.55% AVERAGE -105.91% THE ARITHMETIC MEAN OF OPERATING PROFIT MARGINS, E ARNED BY THESE COMPARABLE COMPANIES WAS (-)105.91% AND THE ASSESSE E HAD EARNED OPERATING PROFIT MARGIN OF (-)7.3% AND HENCE WAS CL AIMED TO BE AT ARMS LENGTH. 23. THE TPO SHOW CAUSED THE ASSESSEE AS TO WHY DATA OF THE FINANCIAL YEAR 2004-05 SHOULD NOT ONLY BE USED AND ALSO EXPLA NATION WAS ASKED VIS--VIS THE SEGMENTAL PROFIT & LOSS ACCOUNT FOR D OMESTIC SALES, EXPORTS TO ASSOCIATED ENTERPRISES AND EXPORTS TO NO N-ASSOCIATED ENTERPRISES ALONGWITH THE BASIS FOR ALLOCATION OF E XPENSES AMONG DIFFERENT SEGMENTS. THE REPLY OF THE ASSESSEE IS I NCORPORATED UNDER PARA 6.2 AT PAGES 6 TO 11 OF THE TRANSFER PRICING REPORT . THE TPO THEREAFTER SHOW CAUSED THE ASSESSEE BY WAY OF ORDER-SHEET NOTI NG DATED 7.10.2008, AS TO WHY FRESH TRANSFER PRICING ANALYSIS SHOULD NO T BE DONE. A LIST OF COMPARABLES WAS CONFRONTED TO THE ASSESSEE BY THE T PO. THE SAID COMPANIES WERE SELECTED ON THE BASIS OF USAGE OF PE N-G AND THE DATA OF FINANCIAL YEAR 2004-05 WAS CONSIDERED. THE ASSESSE E VIDE LETTER DATED 13.10.2008 EXPLAINED WHY THE COMPANIES SELECTED BY THE TPO SHOULD NOT BE TAKEN AS COMPARABLES. THE REPLY OF THE ASSESSEE IS INCORPORATED UNDER PARA 6.4 AT PAGES 12 AND 13 OF THE TRANSFER PRICING ORDER. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE TPO APPLIED PROVISIONS OF RULE 10B(4) OF THE INCOME TAX RULES, WHICH PRESCRIBE THAT FOR THE PURPOSES OF BENCHMARKING INTERNATIONAL TRANSACTION THE DATA OF COMPARABLES USED WOULD BE THE DATA FOR THE YEAR IN WHICH INTERNATIONAL 12 TRANSACTION TOOK PLACE AND MORE COMMONLY KNOWN AS C ONTEMPORANEOUS DATE . FURTHER RELIANCE WAS PLACED ON THE DECISION OF T HE SPECIAL BENCH OF BANGALORE TRIBUNAL IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. [(2007) 294 ITR (AT) 32] AND THE DELH I BENCH OF INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF MENTOR GRAPHI CS PRIVATE LIMITED [(2007) 109 ITD 101] WHICH STIPULATED THAT THE COMP ARABILITY ANALYSIS IS TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA. IN VIEW THEREOF, THE DATA OF FINANCIAL YEARS 2002-03 AND 2003-04 WAS NOT CONSIDERED BY THE TPO TO BE APPROPRIATE FOR BENCHMARKING INTERNATIONA L TRANSACTION AND IT WAS HELD THAT THE DATA OF THE YEAR 2004-05 WAS ONLY BE USED. IN VIEW THEREOF, FOUR COMPANIES CHOSEN BY THE ASSESSEE WERE REJECTED. THE TPO THEREAFTER ANALYSED THE MANUFACTURING PROCESS OF TH E ASSESSEE UNDER WHICH PEN-G WAS SOUGHT TO BE THE MAIN RAW PRODUCT F OR THE FORMULATIONS MANUFACTURED BY THE ASSESSEE. THE TPO WAS OF THE V IEW THAT THE COMPARABLES WHICH DO NOT MANUFACTURE THEIR PRODUCT OUT OF PEN-G WERE TO BE REJECTED. IN VIEW THEREOF, THE COMPARABLES S ELECTED BY THE ASSESSEE WERE REJECTED BY THE TPO. THE TPO THEREAFTER UNDER TOOK THE SELECTION PROCESS OF THE COMPARABLES ON THE BASIS OF SEARCH C ARRIED OUT IN THE PROWESS DATA BASE AND LIST OF COMPANIES WERE SELECT ED ON THE BASIS OF THE FILTERS APPLIED BY THE TPO. OUT OF FIVE COMPANIES FINALLY SELECTED BY THE TPO, DATA OF THREE COMPANIES WERE USED TO WORK OUT THE AVERAGE RATIO OF OPERATING PROFIT/SALE RATIO, WHICH WAS COM PUTED AT 0.17%. THE OPERATING PROFIT MARGIN IN THE CASE OF THE ASSESSEE WAS (-)7.38%, THE ARMS LENGTH OPERATING PROFIT MARGIN WAS 0.17% AND THE DIFFERENCE OF 7.55% WAS APPLIED TO COMPUTE THE ARMS LENGTH PRICE OF EXPORT MADE TO THE ASSOCIATED ENTERPRISE AT RS.1,09,02,09,789/-. THE BOOK VALUE OF THE REVENUE WAS RS.1,01,36,77,163/-. THE ASSESSING OFF ICER WAS DIRECTED TO ENHANCE THE TOTAL INCOME OF THE ASSESSEE BY RS.7,65,32,626/-. THE 13 ASSESSING OFFICER WAS ALSO DIRECTED THAT IN VIEW OF THE PROVISO TO SECTION 92C(4) OF THE ACT, THE ASSESSEE WOULD NOT B E ENTITLED TO THE DEDUCTION UNDER SECTION 10A, 10AA, 10B OR CHAPTER V I-A OF THE ACT. THE ASSESSING OFFICER APPLIED THE ABOVE SAID DIRECT IONS OF THE TPO AND ENHANCED THE INCOME OF THE ASSESSEE BY RS.7,65,32,6 26/- ON WHICH IT WAS HELD THAT THE ASSESSEE WAS NOT ENTITLED TO THE DEDU CTION UNDER SECTION 10A,10AA, 10B OR UNDER CHAPTER 6-A OF THE ACT. 24. BEFORE THE CIT (APPEALS), THE ASSESSEE MADE ELA BORATE SUBMISSIONS WHICH ARE REPRODUCED UNDER PARA 28 AT PAGES 15 TO 1 9 OF THE APPELLATE ORDER. THE SUBMISSIONS WERE MADE BY THE ASSESSEE A GAINST THE COMPARABLES FILTERS BY THE TPO AND ALSO IN RESPECT OF THE COMPARABLES REJECTED BY THE TPO. THE CIT (APPEALS) AFTER CONSI DERING THE FACTS OF THE CASE AND AFTER ANALYZING THE RELATED PARTIES TR ANSACTIONS, REJECTION OF THE COMPARABLES ON INSIGNIFICANT USE OF PEN-G AND A LSO CONSIDERING THE PROPORTION OF TRADING SALE IN THE CASE OF TWO COMPA RABLES FILTERS CHOSEN BY THE TPO, DETERMINED THE ARMS LENGTH PRICE ON TH E BASIS OF OPERATING PROFITS OVER SALES RATIO AT (-)1.64%. THE GROUND O F APPEAL RAISED BY THE ASSESSEE WAS THUS PARTLY ALLOWED BY THE CIT (APPEAL S). 25. BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE US AGAINST THE SAID DIRECTIONS OF THE CIT (APPEALS) RELATING T O ASSESSMENT YEAR 2005-06. 26. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT FOR DOING THE ANALYSIS OF TRANSFER PRICE PROFIT WITH ASSOCIATED E NTERPRISES, THE TRANSACTIONAL NET MARGIN METHOD WAS USED WITH OPERA TING PROFIT OVER SALES RATIO AS PROFIT LEVEL INDICATOR. IT WAS FAIR LY ADMITTED BY THE LEARNED A.R. FOR THE ASSESSEE THAT THE TPO HAD ALSO APPLIED THE SAID 14 METHOD WHILE DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION. HE FURTHER CONTENDED TH AT THE SIX COMPARABLES SELECTED BY THE ASSESSEE WERE REJECTED BY THE TPO, WHO IN TURN SELECTED FIVE COMPARABLES AND AFTER THE OBJECTION OF THE ASS ESSEE, THE TPO RESTRICTED IT TO THREE COMPANIES. OUR ATTENTION W AS DRAWN TO THE WRITTEN SUBMISSIONS FILED DURING THE COURSE OF HEARING. I T WAS POINTED OUT THAT THE TPO CONDUCTED THE SEARCH APPLYING FILTERS AND O NE OF THE FILTERS WAS ONLY COMPANY USING PENICILLIN-G AS RAW MATERIALS WE RE SELECTED. THE NEXT CONTENTION OF LEARNED A.R. FOR THE ASSESSEE WA S THAT THE ASSESSEE WAS USING PEN-G AND WHILE APPLYING TNMM METHOD IF T HIS WAS ONE OF THE FILTERS CHOSEN, THEN THE ASSESSING OFFICER HAD TO BE CONSTRAINED IN APPLYING THE SAID FILTERS. THREE COMPANIES WHICH W ERE CHOSEN BY THE TPO FOR BENCH MARKING THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE WERE AUROBINDO PHARMA LTD ., KBL BIO TECH. LTD. AND STANDARD PHARMACEUTICALS LTD. IN RESPECT OF AUROBINDO PHARMA LTD. IT WAS POINTED OUT THAT THE SAID CONCERN WAS A RELATED PARTY AND THE ASSESSEE HAD TRANSACTIONS WITH THE SAID CONCERN OF ABOUT 23.19%. THE ASSESSING OFFICER HIMSELF HAD APPLIED THE FILTERS O F RELATED PARTY, TRANSACTION OF MORE THAN 10% TO BE EXCLUDED AS COMP ARABLE COMPANIES. THE NEXT OBJECTION OF THE LEARNED A.R. FOR THE ASSE SSEE WAS THAT THE STANDARD PHARMACEUTICALS LTD. USES 5.23% OF PEN-G W HICH WAS SELECTED AS COMPARABLE BY THE TPO. ON THE OTHER HAND, THE A SSESSEE HAD SELECTED TORRENT GUJRAT BIOTECH, WHICH IN TURN USES PEN-G @ 7.60%, WHICH WAS REJECTED BY TPO. IT WAS FURTHER BROUGHT TO OUR NOT ICE THAT THE CIT (APPEALS) HAD REJECTED THE COMPARABLES OF AUROBINDO PHARMA LTD. AND STANDARD PHARMACEUTICALS LTD. AND RESTRICTED TO NEC TAR LIFE SCIENCES LTD. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT IN VIEW OF THE FILTERS PICKED BY THE TPO, THE COMPARABLES BY WAY O F NUMBER OF COMPANIES WERE VERY LESS AND HENCE TORRENT GUJRAT B IOTECH AND STANDARD 15 PHARMACEUTICALS LTD. SHOULD BE CONSIDERED WHILE COM PUTING THE ARMS LENGTH PRICE AS IGNORING THE SAID COMPARABLES WOULD IMPLY THAT THE RESULTS OF ONLY ONE COMPANY WERE AVAILABLE AS COMPA RABLE. ANOTHER PLEA WAS RAISED BY THE LEARNED A.R. FOR THE ASSESSEE THA T THE CIT (APPEALS) HAD REJECTED TORRENT GUJRAT BIOTECH TO BE CONSIDERE D AS COMPARABLE, SIMILARLY STANDARD PHARMACEUTICALS LTD. HAD ALSO TO BE REJECTED AND THE SAME PROPOSITION SHOULD BE APPLIED IN THE SUCCEEDIN G YEAR TO DETERMINE THE ARMS LENGTH PRICE IN THE CASE OF THE ASSESSEE. 27. THE LEARNED D.R. FOR THE REVENUE IN REPLY FAIRL Y ADMITTED THAT FOR THE TPO ONE OF THE CRITERIA IN FILTERS WAS THE MANU FACTURE OF PEN-G. IT WAS FURTHER POINTED OUT BY THE LEARNED D.R. FOR THE REVENUE THAT THE DATA BASE WAS USED TO SELECT THE COMPARABLES AND THESE A RE JUST TOOLS TO APPLY TO MANY COMPANIES. HOWEVER, FILTERS ARE THEN TO BE APPLIED TO CHOOSE BEST COMPARABLE IN ORDER TO COMPUTE ARMS LENGTH PR ICE FOR INTERNATIONAL TRANSACTION. THE LEARNED D.R. FOR THE REVENUE POIN TED OUT THAT THE ASSESSEE WAS A MANUFACTURING COMPANY. SO THE FIRS T FILTER WAS TO IGNORE THE TRADING COMPANIES. ONE FILTER WHICH WAS USED B OTH BY THE ASSESSEE AND THE TPO WAS THE USE OF PEN-G, WHICH WAS AN ACCE PTED FILTER. OUR ATTENTION WAS DRAWN TO THE REPORT OF THE TPO AT PAG E 95 WHICH TALKS ABOUT THE NATURE OF THE ASSESSEES BUSINESS, UNDER WHICH IT HAD BEEN COMMENTED THAT THE PEN-G WAS THE CRITICAL RAW MATER IAL. THE LEARNED D.R. FOR THE REVENUE FAIRLY ADMITTED THAT PEN-G UTI LIZATION WAS THE FILTER USED BY BOTH THE ASSESSEE AND THE TPO. HOWEVER, N O THRESHOLD LIMIT OF UTILIZATION OF PEN-G WAS DEFINED. IT WAS FURTHER P OINTED OUT BY THE LEARNED D.R. FOR THE REVENUE THAT THE TORRENT AND S TANDARD BOTH SHOULD BE EXCLUDED AS COMPARABLE AND ONE COMPARABLE CAN BE USED TO DETERMINE THE ARMS LENGTH PRICE WHERE SELECTION PROCESS IS S UCH. RELIANCE WAS PLACED IN HAWORTH (INDIA) PVT. LTD., PUNE VS. DCIT, NEW DELHI IN ITA 16 NO.5341/DEL/2010. IN RESPECT OF THE REJECTION OF C OMPANIES WITH RELATED PARTY TRANSACTION, THE LEARNED D.R. FOR THE REVENUE DREW OUR ATTENTION TO THE WRITTEN SUBMISSIONS FILED IN THIS REGARD AND PO INTED OUT THAT FOR EXCLUDING COMPARABLES THE RPT SHOULD BE 25%. 28. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT IDENTICAL ISSUE HAD ARISEN IN ASSESSEES OWN APPEAL RELATING TO ASS ESSMENT YEAR 2006-07 WHEREIN THE DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION BY APPLYING FILTERS WHICH ARE AT VARIANCE TO THE FILTERS APPLIED IN ASSESSMENT YEAR 2005-06. IT WAS THE PLEA OF THE LEARNED A.R. FOR THE ASSESSEE THAT IN ORDER TO DECI DE THE ISSUE THE FILTERS APPLIED BY THE TPO IN ASSESSMENT YEAR 2006-07 NEED TO BE LOOKED INTO AS THE FACTS OF BOTH YEARS WERE IDENTICAL. OUR ATTENT ION WAS DRAWN TO THE REPORT OF THE TPO UNDER SECTION 92CA(3) OF THE ACT RELATING TO ASSESSMENT YEAR 2006-07. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT AS COMPARED TO THE COMPARABLES, PICKED BY THE ASSESSEE FOR DETERMINING ARMS LENGTH PRICE, THE TPO CARRIED OUT FRESH SEARCH FOR IDENTIFICATION OF COMPARABLES USING FRESH FILTERS A ND ONE OF THE FILTERS WAS THE COMPANIES USING PEN-G AS RAW MATERIAL. ANO THER FILTER USED BY THE TPO IN THE SUCCEEDING YEAR WAS THE COMPANY WITH RELATED PARTY TRANSACTION MORE THAN 10% OF SALES TURNOVER REJECTE D. IN VIEW THEREOF, NECTOR LIFE SCIENCES LTD. WITH 39% RPT WAS REJECTED BY THE TPO. THE TPO SELECTED THREE COMPANIES I.E. AUROBINDO PHARMA LTD., STANDARD PHARMACEUTICALS LTD. AND KBL BIO TECH. LTD. IT WA S POINTED OUT BY THE LEARNED A.R. FOR THE ASSESSEE THAT IN RESPECT OF AU ROBINDO PHARMA LTD. RPT WAS 22% AND THE SAID COMPARABLE SHOULD BE IGNOR ED. WITHOUT PREJUDICE AND IN THE ALTERNATIVE IT WAS POINTED OUT THAT A UTILIZATION OF PEN-G BY KBL BIO TECH. LTD. AT 42%, BY STANDARD PHA RMACEUTICALS LTD. WAS 3.58% WAS AS AGAINST THE USAGE BY THE ASSESSEE AT 30%. IN VIEW 17 THEREOF, RESULTS OF STANDARD HAD TO BE IGNORED AS T HESE WERE IGNORED IN THE PRECEDING YEARS. THE LEARNED A.R. FOR THE ASSE SSEE THUS SUBMITTED IN THE CASE OF ADJUSTMENT IN WORK-IN-PROGRESS IS ALLOW ED THEN THE PROFITS DECLARED BY THE ASSESSEE WERE ARMS LENGTH. OUR AT TENTION WAS DRAWN TO THE COMPUTATION AT PAGES 5 TO 9 OF THE PAPER BOOK. OUR ATTENTION WAS ALSO DRAWN TO THE GUIDELINES AND VARIOUS CASE LAWS WHICH SHALL BE REFERRED BY US IN THE PARAS HEREINABOVE. 29. THE LEARNED D.R. FOR THE REVENUE POINTED OUT TH E ASSESSEE HAD NOT APPLIED FILTER OF RPT AND THIS YEAR THE ASSESSING O FFICER APPLIED FILTER OF MORE THAN 10% I.E. COMPANIES WITH RPT OF MORE THAN 10% ON SALES TURNOVER WERE TO BE REJECTED. HOWEVER, AS PER THE LEARNED D.R. FOR THE REVENUE, THE SAID FILTER WAS INCORRECT AND BENCHMAR KING OF 25% RPT FILTER SHOULD BE APPLIED AND CONSEQUENTLY THE RESUL TS OF AUROBINDO PHARMA LTD. SHOULD BE USED. THE LEARNED D.R. FOR T HE REVENUE FAIRLY ADMITTED THAT AFTER STANDARD PHARMACEUTICALS LTD. W ITH LOW UTILIZATION OF PEN-G IS IGNORED LAST YEAR THE SAME SHOULD BE IGNOR ED DURING THIS YEAR ALSO. IT WAS FURTHER CONTENDED BY THE LEARNED D.R. FOR THE REVENUE THAT AUROBINDO PHARMA LTD. WAS ONE OF THE COMPARABLES SE LECTED BY THE ASSESSEE THEN THE SAME SHOULD BE APPLIED. OUR ATTE NTION WAS ALSO DRAWN TO THE WRITTEN SUBMISSIONS ON THE WORKING CAPITAL ADJUSTMENT AND IT WAS POINTED OUT THAT THE CALCULATION HAVE TO BE CHECKED IN THIS REGARD. 30. THE LEARNED A.R. FOR THE ASSESSEE IN THE REJOIN DER POINTED OUT THAT IN CASE FILTER HAD TO BE CHANGED THEN THE SAME FACT S RELATING TO THE FILTER SHOULD BE APPLIED AND IN VIEW THEREOF AUROBINDO PHA RMA LTD. IS TO BE EXCLUDED WHILE DETERMINING ARMS LENGTH PRICE. 31. THE BRIEF FACTS RELATING TO THE TRANSFER PRICIN G ISSUE ARISING IN ASSESSMENT YEAR 2006-07 ARE THAT THE ADDL.CIT, CHAN DIGARH HAD REFERRED 18 CERTAIN INTERNATIONAL TRANSACTIONS OF THE TPO UNDER SECTION 92CA(1) OF THE ACT. THE INTERNATIONAL TRANSACTION WITH THE AS SOCIATED ENTERPRISE ARE ENLISTED AT PAGES 2 AND 3 OF THE ORDER OF THE TRANS FER PRICING OFFICER. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION WA S ALSO ENGAGED IN THE MANUFACTURE OF INTERMEDIARIES AND BULK DRUGS AND BA SIC RAW MATERIAL WAS PEN-G, WHICH IN TURN WAS IMPORTED FROM THE ASSOCIAT ED CONCERN IN THE NETHERLAND AND CHINA AS IN THE EARLIER YEAR. THE A SSESSEE HAD SELECTED SIX COMPARABLES FOLLOWING THE FILTERS FOR REJECTING NON-COMPARABLES AS PER PARAS 6.4 AND 6.5 OF THE ORDER OF THE TPO. THE TPO NOTED THAT THE ASSESSEE HAD SELECTED COMPARABLE COMPANIES WHICH HA D NOT BEEN UTILIZING PEN-G AS RAW MATERIAL THOUGH THE MANUFACT URING PROCESS UNDERTAKEN BY THE ASSESSEE WAS HEAVILY DEPENDENT ON PEN-G. THE ASSESSEE WAS SHOW CAUSED AS TO WHY FRESH TRANSFER P RICING STUDY SHOULD NOT BE CARRIED OUT IN ITS CASE. THE SAID SHOW CAUS E NOTICE IS REPRODUCED AT PAGES 19 AND 20 OF THE ORDER OF THE TPO. IN REP LY THE ASSESSEE MADE ELABORATE SUBMISSIONS WHICH ARE REPRODUCED AT PAGES 21 TO 29 OF THE REPORT OF THE TPO AND IT WAS CLAIMED BY THE ASSESSE E THAT EVEN THE COMPARABLES OF THE TPO WERE ACCEPTED THEN THE STUDY WOULD ARRIVE AT A SET OF FOUR COMPANIES AND PROFIT MARGIN WAS (-)13.2 2% AS AGAINST THE MARGIN SHOWN BY THE ASSESSEE AT (-)23.9% WHICH WAS CLAIMED TO BE AT ARMS LENGTH. THE TPO OBSERVED THAT ONLY THE DATA OF THE FINANCIAL YEAR 2005-06 WAS TO BE CONSIDERED FOR BENCHMARKING OF IN TERNATIONAL TRANSACTION. THE ASSESSING OFFICER ELABORATELY CON SIDERED THE DIFFERENT ASPECTS OF COMPARABLES PICKED UP BY THE ASSESSEE AN D THEREAFTER SELECTED FOUR COMPANIES OUT OF WHICH TWO COMPANIES WERE SELE CTED BY THE ASSESSEE ALSO. IN THE FINAL ANALYSIS THE TPO SELEC TED THREE COMPARABLE COMPANIES WHICH HAD PROFIT MARGIN AT 23.04% WHICH W AS APPLIED TO THE EXPORTS MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTE RPRISES AND THE ARMS LENGTH PRICE WAS DETERMINED AT RS.1,17,94,05,367/-. THE ASSESSEE HAD 19 REFLECTED THE BOOK VALUE OF REVENUE AT RS.1,11,86,6 2,019/-. THE ASSESSING OFFICER WAS THUS DIRECTED TO ENHANCE THE TOTAL INCOME OF THE ASSESSEE BY RS.6,07,43,348/- AGAINST WHICH THE ASSE SSEE WOULD NOT BE ENTITLED TO THE DEDUCTION UNDER SECTION 10A, 10AA, 10B OR UNDER CHAPTER-VI-A OF THE ACT. THE ASSESSEE FILED THE OB JECTION UNDER SECTION 144C OF THE ACT BEFORE THE DISPUTE RESOLUTION PANEL -I, NEW DELHI, WHICH UPHELD THE ORDER OF THE TPO. THE ASSESSING O FFICER IN THE ORDER PASSED UNDER SECTION 144C(13) R.W.S. 143(3) OF THE ACT MADE THE AFORESAID ADDITION AGAINST WHICH THE ASSESSEE HAS F ILED DIRECT APPEAL BEFORE THE TRIBUNAL. 32. ADMITTEDLY THE ISSUE RAISED IN THE ASSESSMENT Y EARS 2005-06 AND 2006-07 AGAINST DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION IS IDENTICAL, SO WE PROCEED TO DECIDE T HE SAID ISSUE BY THIS CONSOLIDATED FINDING AFTER REFERRING TO THE FACTS O F BOTH THE CAPTIONED ASSESSMENT YEARS. 33. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF GB INTERNA TIONAL BV, THE NETHERLANDS. DURING THE YEAR UNDER CONSIDERATION T HE ASSESSEE WAS ENGAGED IN MANUFACTURING/PROCESSING OF INTERMEDIATE S AND BULK DRUGS. THE ASSESSEE WAS USING PEN-G AS BASIC RAW MATERIAL IN ITS MANUFACTURING ACTIVITIES, WHICH IN TURN WAS IMPORTED FROM DSM ANT I-INVESTIVES BV, THE NETHERLAND AND 2GB CHINA. DURING THE YEARS UND ER CONSIDERATION THE ASSESSEE UNDERTOOK VARIOUS INTERNATIONAL TRANSA CTIONS IN ITS ASSOCIATED ENTERPRISES AS ENLISTED UNDER: DURING FY 2004-05, THE APPELLANT UNDERTOOK VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES ('AES') SUCH AS PUR CHASE OF RAW MATERIAL/ FINISHED GOODS; EXPORT OF FINISHED GOODS; PURCHASE OF CAPITA L GOODS; PAYMENT TOWARDS CORPORATE SERVICE CHARGES; INTEREST PAID ON LOAN; R EIMBURSEMENT OF EXPENSES. DURING FY 2005-06, THE APPELLANT UNDERTOOK VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS AES SUCH AS EXPORT OF MATERIALS; PURCHASE OF RAW MA TERIAL, SPARES AND FINISHED GOODS; 20 SERVICES RECEIVED; PURCHASE OF CAPITAL GOODS; INTER EST PAID/PAYABLE; SHARE CONTRIBUTION AND REIMBURSEMENT OF EXPENSES. 34. THE ASSESSEE FOR ESTABLISHING THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTION ADOPTED TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD USING OPERATING PROFITS/SAL ES AS THE PROFIT LEVEL INDICATOR IN ITS TRANSFER PRICING REPORT. THE ASSE SSEE USED THE DATA AVAILABLE FOR THE PRECEDING TWO YEARS AND SELECTED SIX COMPARABLES IN ASSESSMENT YEAR 2005-06 HAVING AN AVERAGE OPERATING MARGIN OF (-) 105.91% AGAINST (-)7.38% OPERATING MARGIN OF THE AS SESSEE. THIS PROVIDED EVIDENCE THAT THE INTERNATIONAL TRANSACTIO NS OF ASSESSEE WERE IN ACCORDANCE WITH ARM'S LENGTH PRINCIPLE UNDER THE TR ANSFER PRICING REGULATIONS. AS PER THE STUDY OF THE ASSESSEE THE INTERNATIONAL TRANSACTIONS OF THE COMPANY WERE FOUND TO BE IN ACC ORDANCE WITH ARMS LENGTH PRINCIPLE UNDER THE INDIAN TRANSFER PRICING REGULATION. THE TPO REJECTED THE SELECTION OF THE COMPARABLES OF THE AS SESSEE IN VIEW OF USING THE DATA FOR THE PRECEDING TWO YEARS AND NOT TAKING INTO CONSIDERATION THE DATA FOR THE RELEVANT YEAR IN QUE STION. THE SUBMISSION OF THE ASSESSEE IN THIS REGARD WAS THAT AT THE TIME OF COMPUTING THE DATA FOR SELECTING THE COMPARABLES, THE FINANCIAL DATA R ELEVANT TO THE YEAR UNDER CONSIDERATION WAS NOT AVAILABLE. HOWEVER, TH E ASSESSEE COMPUTED THE MARGINS EARNED BY THE COMPARABLE COMPANY SELECT ED BY IT DURING THE RELEVANT FINANCIAL YEAR AND FOUND THAT THE TRANSACT ION WAS STILL IN ACCORDANCE WITH ARMS LENGTH PRICE. THE TPO CONDUC TED FRESH SEARCH DURING THE ASSESSMENT YEAR 2005-06 AND FOLLOWING FI LTERS WERE APPLIED FOR REJECTING NON-COMPARABLES: ONLY COMPANIES USING PENICILLIN-G AS RAW MATERIAL W ERE SELECTED. COMPANIES HAVING NO DATA FOR THE FINANCIAL YEAR 200 4-05 WERE REJECTED. COMPANIES PREDOMINANTLY ENGAGED IN TRADING ACTIVITY WERE REJECTED. COMPANIES HAVING NEGATIVE NET WORTH WERE REJECTED. 35. IN ASSESSMENT YEAR 2006-07 THE TPO ALSO CONDUCT ED FRESH SEARCH APPLYING THE FOLLOWING FILTERS: 21 ONLY COMPANIES USING PENICILLIN-G AS RAW MATERIAL S ELECTED COMPANIES HAVING NO DATA FOR THE FINANCIAL YEAR 200 5-06 REJECTED COMPANIES ENGAGED IN TRADING ACTIVITY REJECTED COMPANIES HAVING NEGATIVE NET WORTH REJECTED COMPANIES WITH SALES TURNOVER EXCEEDING RS. 1 CRORE S SELECTED COMPANIES WITH RELATED PARTY TRANSACTIONS ('RPT) > 10% OF SALES TURNOVER REJECTED. 36. AS A RESULT OF THE SEARCH CONDUCTED, THE TPO SE LECTED FOLLOWING COMPARABLE COMPANIES IN ASSESSMENT YEAR 2005-06: A) AUROBINDO PHARMA LIMITED. B) NECTAR LIFE SCIENCES LIMITED. C) STANDARD PHARMACEUTICALS LIMITED. D) VYSALI PHARMACEUTICALS LIMITED. E) WYETH LIMITED. 37. THE TPO SELECTED FOLLOWING TWO ADDITIONAL COMPA NIES AS COMPARABLES IN ASSESSMENT YEAR 2006-07: NECTAR LIFE SCIENCES LTD; STANDARD PHARMACEUTICALS LTD 38. WHILE SELECTING THE ABOVE SAID COMPANIES THE TP O REJECTED ALL THE SIX COMPARABLES SELECTED BY THE ASSESSEE IN ASS ESSMENT YEAR 2005-06 ON ACCOUNT OF FOLLOWING REASONS: NAME OF COMPARABLE COMPANY REASON OF REJECTION AMOL DRUG PHARMA LIMITED CURRENT YEAR DATA NOT AVAILABLE DOES NOT USE PEN-G AS RAW MATERIAL AVINASH DRUGS LIMITED MINISCULE TURNOVER CURRENT YEAR DATA NOT AVAILABLE DOES NOT USE PEN - G AS RAW MATERIAL IND-SWIFT LABORATORIES LIMITED CURRENT YEAR DATA NOT AVAILABLE JK PHARMACHEM LIMITED DOES NOT USE PEN-G AS RAW MATERIAL KOPRAN LIMITED DOES NOT USE PEN-G AS RAW MATERIAL TORRENT GUJARAT BIOTECH LIMITED PROPORTION OF PEN-G AS RAW MATERIAL IS NEGLIIGI BLE 39. SIMILARLY IN ASSESSMENT YEAR 2005-06 THE TPO AC CEPTING TWO COMPANIES SELECTED BY THE ASSESSEE REJECTED THE BAL ANCE FOUR COMPANIES ON THE BASIS OF THE FOLLOWING REASONS: AVINASH DRUGS LTD - MINISCULE TURNOVER BEING INR10 LACS AND DOES NOT USE PEN-G JK PHARMACHEM LTD - DO NOT USE PENICILLIN-G AS RAW MATERIAL BUT MANUF ACTURES PEN-G KOPRAN LTD - PROPORTION OF BULK DRUGS/INTERMEDIATES IN ITS TOT AL TURNOVER < 70% CADILA PHARMACEUTICALS LIMITED- UPDATED MARGIN FOR THE FY 2005-06 NOT AVAILABLE 22 40. IN VIEW OF THE OBJECTION RAISED BY THE ASSESSEE AGAINST THE COMPANIES SELECTED BY THE TPO, THE FOLLOWING COMPAR ABLE COMPANIES WERE FINALLY SELECTED IN ASSESSMENT YEAR 2005-06: S.NO. COMPANY OP/SALES 1 AUROBINDO PHARMA LTD 1.88% 2 NECTAR LIFE SCIENCES LTD. -1.64% 3 STANDARD PHARMACEUTICALS LTD 0.27% MEAN 0.17% 41. WHILE SELECTING THE ABOVE SAID COMPANIES, THE T PO DISREGARDED THE CONTENTION OF THE ASSESSEE ABOUT AUROBINDO PHAR MA LTD., WHICH AS PER THE ASSESSEE HAD SIGNIFICANT RELATED PARTY TRAN SACTION OF APPROXIMATELY 23.19%. 42. THE TPO IN ASSESSMENT YEAR 2006-07 ULTIMATELY S ELECTED THE FOLLOWING COMPARABLES FOR BENCHMARKING ASSESSEES I NTERNATIONAL TRANSACTIONS: S.NO. COMPANY OP/ SALES I AUROBINDO PHARMA LTD 9.46% 2 KDL BIOTECH LTD -6,08% 3 STANDARD PHARMACEUTICALS LTD 5-75% MEAN 3-04% 43. THE TPO WHILE MAKING THE FINAL SELECTION REJECT ED NECTOR LIFE SCIENCES LTD. DUE TO RELATED PARTY TRANSACTION BEIN G GREATER THAN 10% OF SALES. 44. THE CIT (APPEALS) AGAINST THE ORDER PASSED BY T HE ASSESSING OFFICER ADOPTING THE REPORT OF THE TPO IN ASSESSMEN T YEAR 2005-06 REJECTED THE COMPANY STANDARD PHARMACEUTICALS LTD. WHICH WAS USING PEN-G AS ONLY 4.23% OF THE TOTAL RAW MATERIAL. THE SECOND COMPARABLE AUROBINDO PHARMA LTD. WAS ALSO REJECTED AS THE ASSE SSEE HAD SIGNIFICANT RELATED PARTY TRANSACTION WITH THE SAID CONCERN. T HE CIT (APPEALS) APPLIED ONE COMPARABLES TO COMPUTE ARMS LENGTH PRI CE. THE ASSESSEE IS 23 AGGRIEVED BY APPLICATION OF ONLY ONE COMPARABLE TO DETERMINE ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACT ION ENTERED UPON BY THE ASSESSEE. 45. THE SECOND CONTENTION OF THE ASSESSEE BEFORE TH E CIT (APPEALS) WAS THAT STANDARD PHARMACEUTICALS LTD. HAD SIGNIFIC ANT TRADING SALES AND THE SAME SHOULD BE REJECTED IN VIEW OF THE FILTERS SELECTED BY THE TPO. SINCE THE CIT (APPEALS) HAD REJECTED BOTH THE COMPA NIES DUE TO LOW PERCENTAGE OF PEN-G AND RELATED PARTY TRANSACTION, THE SAME WAS NOT CONSIDERED FOR THE PURPOSE OF BENCHMARKING. FURTHE R IT WAS ALSO HELD BY THE CIT (APPEALS) THAT THE APPROACH OF THE ASSESSEE IN APPLYING THE TRADING SALES FILTERS OF 30% SHOULD BE USED IN ORDE R TO ARRIVE AT FUNCTIONALLY SIMILAR COMPANY. AS A RESULT AND REJE CTING THE TWO COMPARABLES THE CIT (APPEALS) USED ONLY SINGLE COMP ARABLE I.E. NECTAR LIFE SCIENCES LTD. WITH HOLDING MARGIN OF 1.64% AS THE BENCHMARK FOR DETERMINING THE ARMS LENGTH PRICE IN ASSESSMENT YE AR 2005-06. 46. IN ASSESSMENT YEAR 2006-07 THE OBJECTION FILED BY THE ASSESSEE BEFORE THE DRP WERE REJECTED AND THE FILTERS APPLIE D BY THE TPO WERE FOUND TO BE CORRECT AND THE ADDITION MADE BY THE TP O WAS UPHELD. 47. ON THE PERUSAL OF THE RECORD THE WRITTEN SUBMIS SIONS FILED BY BOTH THE AUTHORIZED REPRESENTATIVES AND VARIOUS CAS E LAWS ON THE ISSUE, WE FIND THAT THE ASSESSEE IN BOTH THE YEARS UNDER C ONSIDERATION HAD ADOPTED THE TNMM METHOD FOR BENCHMARKING THE INTERN ATIONAL TRANSACTION. EVEN THE TPO IN BOTH THE ASSESSMENT Y EARS HAD APPLIED TNMM METHOD TO COMPUTE THE TRANSFER PRICING REPORT. THE FIRST ISSUE ARISING IN THE PRESENT BUNCH OF APPEALS IS THE DATA OF THE COMPANIES TO BE APPLIED FOR REJECTING THE NON-COMPARABLES. THE ASS ESSEE IN ITS TRANSFER PRICING REPORT HAD APPLIED DATA OF COMPANIES RELATI NG TO THE PRECEDING 24 TWO YEARS AS THE DATE OF THE RELEVANT YEAR WAS NOT AVAILABLE AT THE TIME OF FINALIZING THE REPORT. THE TPO, HOWEVER, USED T HE CURRENT YEAR DATA AND CONDUCTED A FRESH SEARCH DURING THE TRANSFER PR ICING PROCEEDING. THE PROVISIONS OF SECTION 92CA(3) R.W.S.92(C(3) OF THE ACT EMPOWERS THE TPO TO DETERMINE ARMS LENGTH PRICE ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT WHICH IS AVAILABLE TO HIM. IN THE ABOVE SAID CIRCUMSTANCES IN A GIVEN CASE WHERE THE ASSESSEE CO NDUCTS THE SEARCH ON THE DATABASE BEFORE THE CLOSE OF THE FINANCIAL YE AR OR IMMEDIATELY THEREAFTER AND THE DATA IN THE CURRENT YEAR AS REQU IRED UNDER RULE 10B(4) OF THE INCOME TAX RULES WOULD NOT BE AVAILABLE OR T HE NUMBER OF COMPARABLES WOULD BE VERY LIMITED. IN ORDER TO CIR CUMVENT SUCH EXERCISE BECOMING AS NON-FUTILE, THE TPO IS EMPOWER ED TO MAKE USE OF SUCH COMPARABLES AND THEIR DATA WHICH CAN COME INTO PUBLIC DOMAIN SUBSEQUENT TO THE SEARCH CONDUCTED BY THE TAX PAYER S. HOWEVER, THE DATA AVAILABLE AT THE TIME OF COMPARABILITY ANALYSIS SHO ULD BE USED SUBJECT TO THE CONDITION THAT IT PERTAINS TO THE CURRENT YEAR UNDER CONSIDERATION. THE PROVISION OF RULE 10B(4) OF INCOME TAX RULES IT SELF PROVIDE A RIDER THAT WHERE SUCH DATAS ARE NOT AVAILABLE THEN IN SUC H CIRCUMSTANCES THE DATA MOST APPROPRIATE OF THE PRECEDING YEAR SHOULD BE USED. WE FIND THAT SIMILAR ISSUE OF USER OF CURRENT YEAR DATA IN VIEW OF THE PROVISIONS OF RULE 10B(4) OF THE INCOME TAX RULES AROSE BEFORE THE DELHI BENCH OF THE TRIBUNAL IN ACTIS ADVISERS PVT. LTD. VS. DCIT, CIRCLE-1(1), NEW DELHI IN ITA NO.5277/DEL/2011 FOR ASSESSMENT YEAR 2 007-08 ORDER DATED 12.10.2012 AND IT WAS HELD AS UNDER: + A BARE PERUSAL OF THIS RULE [10B(4)]WOULD REVEAL THAT EXPRESSION 'SHALL' HAS BEEN EMPLOYED IN THIS RULE WHICH MAKE IT ABUNDA NTLY CLEAR THAT CURRENT YEAR DATA OF AN UNCONTROLLED TRANSACTION IS TO BE USED FOR THE PURPOSE OF COMPARABILITY, WHILE EXAMINING THE INTER NATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES. THE PROVISO APPENDED TO THE SECTION CARVES OUT AN EXCEPTION THAT THE DATA RELATING TO THE PERIOD O F BEING MORE THAN TWO YEAR PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED , IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMIN ATION OF TRANSFER PRICE 25 IN RELATION TO TRANSACTION OF COMPARISON. THUS THE MAIN SECTION USED THE EXPRESSION 'SHALL' WHICH MAKE IT MANDATORY TO FIRST USE THE CURRENT YEAR DATA. IF CERTAIN OTHER CIRCUMSTANCES REVEALS AN INF LUENCE ON THE DETERMINATION OF TRANSFER PRICING IN RELATION TO TH E TRANSACTION BEING COMPARED THAN OTHER DATAS FOR PERIOD NOT MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY BE USED; + RULE 10D(4) OF THE RULES REQUIRES THAT THE INFORM ATION AND DOCUMENTATION TO BE MAINTAINED UNDER RULE 10D(1) SH OULD BE CONTEMPORANEOUS AS FAR AS POSSIBLE AND SHOULD EXIST LATEST BY THE DUE DATE OF FILING OF THE ITR. THEREFORE, THE PROVISIONS OF THE INCOME-TAX ACT, 1961 AND THE RULES POSTULATE TO THE IMPORTANCE OF THE IN ITIAL DOCUMENTATION REQUIRED TO BE MAINTAINED BY THE ASSESSEE AT THE TI ME OF SETTLING THE PRICE OF THE INTERNATIONAL TRANSACTION. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. AND ITAT, DELHI BENCH IN THE CASE OF MENTORGRAPHIC HAS HELD THAT COMPARABILITY A NALYSIS IS TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA, THEREF ORE, WE WOULD EXAMINE THE ANALYSIS MADE BY THE ASSESSEE, OF ITS ARM'S LEN GTH PRICE IN THE TRANSFER PRICING STUDY REPORT ON THE BASIS OF CURRENT YEAR'S DATA IN THE RESPECTIVE ASSESSMENT YEAR; 48. IN VIEW OF THE ABOVE SAID PRINCIPLE WE HOLD THA T FRESH TRANSFER PRICING STUDY CAN BE CONDUCTED BY THE TPO AND IN VI EW OF THE PROVISIONS OF RULE 10B(4) OF INCOME TAX RULES THE DATA OF THE RELEVANT YEAR IS TO BE CONSIDERED FOR FINDING THE COMPARABLES WHICH IN TUR N STAND THE TEST OF FAR ANALYSIS. HOWEVER, IT IS THE REQUIREMENT OF LA W THAT THE ASSESSEE SHOULD BE CONFRONTED WITH THE SAID DATA IN ORDER TO REBUT THE NEW COMPARABLES SELECTED BY THE TPO AND ALSO TO PIN POI NT AS TO WHY SUCH DATA SHOULD NOT BE USED AGAINST THE ASSESSEE. IN T HE FACTS OF THE PRESENT CASE THE ASSESSEE DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO HAD BEEN PROVIDED WITH MATERIAL GATHERED BY THE TPO BY WAY OF FRESH SEARCH AND REASONABLE OPPORTUNITY HAS BEEN ALLOWED TO THE ASSESSEE TO REBUT THE FINDING OF TPO IN RELATION TO THE COMPARABLES SELEC TED AND ALSO COMPARABLES REJECTED BY THE TPO. THE LEARNED A.R. FOR THE ASSESSEE FAIRLY CONCEDED DURING THE COURSE OF HEARING THAT T HERE WERE NO OBJECTIONS AGAINST THE FRESH STUDY CONDUCTED BY THE TPO. HOWEVER, THE CONTENTION OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT THE SAID FILTERS SHOULD BE UNIFORMLY APPLIED FOR BOTH THE YEARS UNDE R CONSIDERATION IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTION. WE FIND MERIT IN THE 26 SAID STAND OF THE ASSESSEE THAT IN CASE WHERE FACTS ARE IDENTICAL FROM YEAR TO YEAR, SIMILAR FILTERS SHOULD BE USED FOR BENCHMA RKING INTERNATIONAL TRANSACTIONS. 49. IN THE FACTS OF THE PRESENT CASE WE FIND THAT T HE TPO IN ASSESSMENT YEAR 2005-06 HAD APPLIED THE FOLLOWING F ILTERS FOR REJECTING NON-COMPARABLES: ONLY COMPANIES USING PENICILLIN-G AS RAW MATERIAL W ERE SELECTED. COMPANIES HAVING NO DATA FOR THE FINANCIAL YEAR 200 4-05 WERE REJECTED. COMPANIES PREDOMINANTLY ENGAGED IN TRADING ACTIVITY WERE REJECTED. COMPANIES HAVING NEGATIVE NET WORTH WERE REJECTED. 50. THE BASIC FILTER APPLIED BY THE TPO WAS ONLY TH E COMPANIES USING PEN-G AS RAW MATERIAL WERE TO BE SELECTED. T HE SECOND FILTER APPLIED BY THE TPO THAT THE COMPANIES HAVING NO DAT A FOR THE FINANCIAL YEAR 2004-05 WERE TO BE REJECTED. IN ADDITION, THE COMPANIES PREDOMINANTLY ENGAGED IN THE TRADING ACTIVITIES WER E TO BE REJECTED AND ALSO THE COMPANIES HAVING NEGATIVE NETWORTH WERE TO BE REJECTED. 51. THE TPO IN THE FRESH STUDY CONDUCTED IN ASSESSM ENT YEAR 2006- 07 HAD APPLIED FILTERS OF ONLY COMPANIES USING PEN- G AS RAW MATERIAL AS ONE OF THE FILTERS. FURTHER THE COMPANIES HAVING N O DATA FOR THE FINANCIAL YEAR 2005-06 WERE REJECTED AS IN THE EARL IER YEARS. FURTHER THE COMPANIES ENGAGED IN TRADING ACTIVITIES AND ALSO WI TH NEGATIVE NETWORK WERE REJECTED AS IN THE EARLIER YEARS. TWO NEW FIL TERS WERE USED BY THE TPO IN ASSESSMENT YEAR 2006-07 I.E. THE COMPANIES W ITH SALES TURNOVER EXCEEDING RS.1 CRORE WERE SELECTED AND THE COMPANIE S WITH RELATED PARTY TRANSACTION MORE THAN 10% OF SALES TURNOVER WERE RE JECTED. 52. COMING TO THE BENCHMARK USED BY THE TPO IN BOTH THE YEARS I.E. THE COMPANIES USING PEN-G AS RAW MATERIAL WERE SELE CTED AS ONE OF THE 27 FILTERS. THE CONTENTION OF THE LEARNED A.R. FOR TH E ASSESSEE THAT THE USE OF PEN-G AS RAW MATERIAL WAS A FIRST BENCHMARK TO B E APPLIED FOR REJECTING THE NON-COMPARABLES AND ALSO COMPANIES IN DULGED IN TRADING ACTIVITIES SHOULD BE REJECTED AS COMPARABLES. THE NEXT CONTENTION OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT ONE OF THE C OMPARABLES PICKED UP BY THE ASSESSEE WAS TORRENT GUJARAT BIOTECH LIMITED IN ASSESSMENT YEAR 2005-06 WHICH WAS USING PEN-G AS RAW MATERIAL. TH E SAID COMPANY WAS REJECTED BY THE TPO ON THE GROUND THAT THIS COMPANY WAS USING MINISCULE AMOUNT OF PEN-G AS RAW MATERIAL I.E. 7.60 % AS COMPARED TO THE TOTAL SALES. THE LEARNED A.R. FOR THE ASSESSEE FURTHER POINTED OUT THAT IN THE FIRST SEARCH CONDUCTED BY THE TPO, HE H IMSELF HAD SELECTED A COMPARABLE VIZ. STANDARD PHARMACEUTICALS LTD. WHICH WAS USING EVEN LESSER PERCENTAGE OF PEN G TO THE TOTAL RAW MATERIA L I.E. 5.23%. OUR ATTENTION WAS DRAWN TO THE ANNUAL ACCOUNTS OF THE S AID COMPANIES WHICH HIGHLIGHTED RAW MATERIAL CONSUMED BY THE SAID COMPA NIES. BOTH THE SAID COMPANIES WERE REJECTED BY THE CIT (APPEALS) AS COM PARABLES BUT AS PER THE LEARNED A.R. FOR THE ASSESSEE BOTH THE SAID COM PARABLES SHOULD BE ACCEPTED AS COMPARABLES. WHILE APPLYING THE TNMM M ETHOD, AS PER THE LEARNED A.R. FOR THE ASSESSEE, THE COMPARABLES WERE ONLY REQUIRED TO BE FUNCTIONALLY COMPARABLE, IRRESPECTIVE OF USE OF THE PROPORTION OF PEN-G AS PERCENTAGE OF THE TOTAL RAW MATERIAL. WE FIND M ERIT IN THE CONTENTION OF THE ASSESSEE IN THIS REGARD THAT WHERE THE COMPA NIES ARE USING PEN-G AS RAW MATERIAL AND ARE ENGAGED IN THE MANUFACTURE OF DRUGS FALL WITHIN THE AMBIT OF THE FILTER SELECTED AS PART OF TRANSFE R PRICING SEARCH. THE SAID COMPANIES ARE TO USE AS FILTERS IRRESPECTIVE O F PERCENTAGE OF USE OF PEN-G TO THE TOTAL RAW MATERIAL, SINCE THE COMPANIE S SELECTED SHOULD BE FUNCTIONALLY COMPARABLE AND NOT IDENTICAL. IN THE ABOVE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE RESULTS OF TORRENT GUJARAT BIOTECH LIMITED AND STANDARD PHARMACEUTICALS LIMITE D BOTH USING PEN-G 28 AS RAW MATERIAL SHOULD BE SELECTED AS COMPARABLES I N ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASS ESSEE. THE LEARNED A.R. FOR THE ASSESSEE BROUGHT TO OUR KNOWLEDGE THAT DRP IN THE SUCCEEDING YEAR I.E. 2006-07 HAVE ADOPTED STANDARD PHARMACEUTICALS LIMITED AS ONE OF THE FILTERS FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. IN VIEW OF OUR OBSERV ATION IN THE PARAS HEREINABOVE AND ALSO BECAUSE OF THE FACTS THAT THE STANDARD PHARMACEUTICALS LIMITED WAS UTILIZING PEN-G AS RAW MATERIAL AND THE DATA OF SAID COMPANY HAS BEEN USED AS A COMPARABLE IN THE SUCCEEDING YEAR AND THE SAID COMPANY ALONGWITH TORRENT GUJARAT BIOTECH LIMITED, WHICH IN TURN WAS USING PEN-G AS RAW MATERIAL I.E. TO THE EXTENT OF 7.06% TO THE SALES, THE DATA OF THE SAID COMPANIES IS TO BE USED AS COMPARABLE. THE LEARNED A.R. FOR THE ASSESSEE IN V IEW THEREOF, POINTED OUT THAT THE FOLLOWING FINAL COMPANIES SHOULD BE SE LECTED FOR THE PURPOSE OF MAKING A BENCHMARKING ANALYSIS: S.NO. COMPANY NAME MARGIN OF THE COMPARABLE 1 TORRENT GUJARAT BIOTECH LIMITED -33.55% 2 NECTAR LIFE SCIENCES LIMITED -1.64% 3 STANDARD PHARMACEUTICALS LIMITED 0.27% MEAN -11.64% 53. AS PER THE LEARNED A.R. FOR THE ASSESSEE, THE M EAN MARGIN OF THE ABOVE STATED COMPANIES COMES TO -11.64% WHICH IS LE SS THAN THE MARGINS EARNED BY THE ASSESSEE I.E. -7.38%, AND ACCORDINGLY , THE TRANSACTION UNDERTAKEN BY THE ASSESSEE WERE AT ARM'S LENGTH. 54. THE NEXT OBJECTION RAISED BY BOTH THE PARTIES W AS IN RELATION OF RELATED PARTY TRANSACTION. THE SELECTION OF AUROBI NDO PHARMA LTD. AS COMPARABLE BY THE TPO IN ASSESSMENT YEAR 2006-07 WA S OBJECTED BY THE 29 LEARNED A.R. FOR THE ASSESSEE BECAUSE OF THE RELATE D PARTY TRANSACTION BEING SIGNIFICANT. FURTHER THE TPO WHILE DETERMINI NG THE FILTERS TO BE APPLIED REJECTING THE NON-COMPARABLES, APPLIED FILT ER OF RELATED PARTY TRANSACTION OF MORE THAN 10%, TO EXCLUDE COMPARABLE COMPANY AND NECTAR LIFE SCIENCES LIMITED WERE REJECTED. AS PER THE ASSESSEE THE RELATED PARTY TRANSACTION TO THE SALES WITH AUROBIN DO PHARMA LTD. WERE 21.77% AND EXCEEDED THRESHOLD OF RELATED PARTY TRAN SACTION BEING APPLIED BY THE TPO AND THE SAME SHOULD BE REJECTED. THE LE ARNED A.R. FOR THE ASSESSEE STATED THAT THE THRESHOLD SHOULD BE MORE T HAN 15% TO THE SALES. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: SONY INDIA PRIVATE LIMITED [114ITD 448] AVAYA INDIA (P) LTD. (ITA NO.5I50/DEL/20LO, AY 2006 -07, ITAT DELHI) CRM SERVICES INDIA (P) LTD. ITA NO. 4.68(DEL) 2009 SAKATA INX (INDIA) LTD. ITA NO. Q8/JP/201O 55. THE SECOND OBJECTION RAISED BY THE ASSESSEE IN RELATION TO SELECTION OF AUROBINDO PHARMA LTD. WAS THAT THE SAID COMPANY INCURRED SIGNIFICANT RESEARCH AND DEVELOPMENT EXPENSES AS AGAINST EXPENS ES INCURRED BY THE ASSESSEE COMPANY AND IN THIS REGARD RELIANCE WAS PL ACED ON PARA 1.43 OF OECD GUIDELINES. THE LEARNED A.R. FOR THE ASSESSEE ALSO POINTED OUT THAT ON SAME GROUND OF SIGNIFICANT RELATED PARTY TR ANSACTION, THE CIT (APPEALS) HAD REJECTED THE SAID COMPANY AS COMPARAB LE IN THE ASSESSMENT YEAR 2005-06. THE LEARNED A.R. FOR THE ASSESSEE T HUS SUBMITTED THAT IN CASE AUROBINDO PHARMA LTD. IS CONSIDERED AS NON-COM PARABLE THEN ASSESSEES INTERNATIONAL TRANSACTIONS WITH ITS AES WOULD BE CONSISTENT WITH THE ARMS LENGTH STANDARD BASED ON THE PROVISO TO SECTION 92C(2) OF THE ACT AS REFERRED BELOW: 30 NAME OF THE COMPANY PARTICULARS MARGIN KDL BIOTECH LTD - 6.08% STANDARD PHARMACEUTICALS LTD 5.75% ARM'S LENGTH MARGIN (ARITHMETIC MEAN) (A) - 0.17% APPELLANT'S MARGIN (B) - 2.39% 56. THE LEARNED D.R. FOR THE REVENUE HAD ALSO FILED WRITTEN SUBMISSIONS. THE FIRST OBJECTION RAISED BY THE ASS ESSEE WAS AGAINST THE PLEA OF THE ASSESSEE IN REJECTING THE COMPARABLE HA VING RPT TRANSACTION EXCEEDING 15% OF SALES RELYING ON THE RATIO LAID DO WN IN SONY INDIA(SUPRA). THE LEARNED D.R. FOR THE REVENUE POI NTED OUT THAT THE ASSESSEE IN ITS TRANSFER PRICING STUDY HAD NOT USED FILTER OF RPT. HOWEVER, THE REVENUE WAS APPLYING RPT FILTER OF 25% CONSISTENTLY IN THE LATER YEARS AND THE SAME SHOULD BE APPLIED FOR BENCHMARKING THE RELATED PARTY TRANSACTION. THE CONTENTION OF THE L EARNED D.R. FOR THE REVENUE WAS AS UNDER: THE RATIONALE OF 25% THRESHOLD LIMIT IS BASED ON S ECTION 92 A(2) (A). THE ACT DOES NOT PROVIDE DIRECTLY AS T O WHAT % OF RELATED PARTY TRANSACTIONS CAN HAVE MATERIAL EFF ECT ON THE OVERALL MARGINS. HOWEVER GUIDANCE CAN BE TAKEN FROM DEFINITION OF THE ASSOCIATED ENTERPRISE FROM SEC. 9 2A(2)(A) WHERE IT IS PRESCRIBED THAT ONE ENTERPRISE HOLDING 26% SHARES IN THE OTHER ENTERPRISE CAN BE CONSIDERED AS AN ASSOCIATE ENTERPRISE. SIMILARLY IN THE PROVISIONS O F SEC.4OA(2)(B) THE PERSONS HAVING SUBSTANTIAL INTERE ST IS DESCRIBED AS A PERSON CARRYING NOT LESS THAN 20% OF VOTING POWER IN THAT COMPANY. THUS IT IS FOUND THAT 20% OR 26% INTEREST IS CONSIDERED AS SUBSTANTIAL INTEREST. AS THE PROVISIONS OF SEC. G2A(2)(A) ARE FROM CHAPTER X ITS ELF, A LIMIT OF 25% IS APPLIED AS THE THRESHOLD LIMIT FOR THE RELATED PARTY TRANSACTIONS. IF THE LIMIT IS REDUCED FURTHER IT WOULD ONLY RESULT IN ELIMINATING MORE AND MORE COMP ANIES, ON THE OTHER HAND IF THE LIMIT IS RELAXED THEN COMP ANIES WITH PREDOMINANTLY RELATED PARTY TRANSACTIONS WOULD GET INCLUDED WHICH WOULD NOT REPRESENT UNCONTROLLED TRANSACTIONS. THEREFORE ON BALANCE 25% IS A PROPER THRESHOLD LIMIT FOR RELATED PARTY TRANSACTIONS. THE 31 COMPANIES HAVING MORE THAN 25% RELATED PARTY TRANSACTIONS SHOULD THEREFORE BE REJECTED AS COMPAR ABLES. 57. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANC E ON THE FOLLOWING DECISIONS: 1. GLOBAL LOGIC INDIA PVT. LTD. 2011 - TIL- 35- I TAT - DEL - TP - 'SONY INDIA' DISTINGUISHED. RELEVANT PARA 5 2. ADP PVT. LTD. (2011 - TIL - 44 - ITAT - HYD - TP) RELEVANT PARA 15 3. DELOITTE CONSULTING INDIA PVT. LTD. ITA NO. IO 82/HYD/20IO/DATED 22.07.2011RELEVANT PARA 35 4. ACTIS ADVISERS PVT. LTD. (2012- TIL-136 - ITAT - DEL - TP) RELEVANT PARAS 27, 28 & 29 58. THE LEARNED D.R. FOR THE REVENUE ALSO REFERRED TO OECD GUIDELINES AND POINTED OUT THAT THE COMPARABLES PICKED UP FOR BENCHMARKING INTERNATIONAL TRANSACTION SHOULD HAVE NO CONTROLLED TRANSACTION. ELABORATE SUBMISSIONS WERE MADE BY THE LEARNED D.R. FOR THE REVENUE ON THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESS EE AND FRESH SEARCH OF COMPARABLES BY THE TPO. 59. WE FIND THAT THE ISSUE OF EXCLUSION OF RELATED PARTY TRANSACTION AND THE EXENT OF THE SAID TRANSACTION AROSE BEFORE THE DELHI BENCH OF THE TRIBUNAL IN ACTIS ADVISERS PVT. LTD. VS. DCIT (SUPR A). THE TRIBUNAL VIDE PARAS 27 TO 29 HELD AS UNDER: 27. IN THE NEXT FOLD OF SUBMISSIONS, LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DID NOT CONSIDER THE COMPANIES WHICH HAVE MORE THAN 15% OF THE TRANSACTIONS WITH RELATED PARTIES. LEARNED TPO HAS OBSERVED THAT THE COMPANI ES WHO HAVE RELATED PARTIES TRANSACTION IN EXCESS OF 25% OF OPERATING REVENUE WILL ONLY BE EXC LUDED. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FOLLOWING PARTIES HAVE TRANSACTI ONS TO SELL MORE THAN 15% WITH RELATED PARTIES: S.NO. NAME OF THE COMPANIES RPT PERCENTAGE TO SALES -F.Y.2006-07 1. ASIT MEHTA FINANCIAL 2006-07 1. ASIT C.MEHTA FIN ANCIAL SERVICES LTD. 2. INFORMED TECHNOLOGIES INDIA 15.83% 3. APEX KNOWLEDGE SOLUTIONS LTD. 100% 4. HCL COMNET SYSTEM & SERVICES 21.52% (BASED ON RP T% COMPUTED 32 LTD. BY THE LEARNED TPO USING DATA SOURCED BY HIM U/S 133(6) OF THE ACT) REFER PG 124 OF THE MERIT APPEAL PB 28. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF SONY INDIA PVT. LTD. = (2008-TII-08-ITAT-DEL-TP) RENDERED IN ITA NO. 1189/DEL/05 & ORS., ITAT HAS HE LD THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED, IF ITS RELATED PARTY TRANSACTION DO NOT EXIST 10 TO 15% OF THE TOTAL REVENUE. THUS, ACCORDING TO THE LEARNED C OUNSEL FOR THE ASSESSEE, THE COMPARABLES WHO HAVE TRANSACTIONS MORE THAN 15% WITH ITS RELATE D PARTY THEN THEY DESERVE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ON THE OTHER HAND, LE ARNED DR OPPOSED THE CONTENTIONS OF ASSESSEE. HE POINTED OUT THAT IN THE CASE OF S.7. M ICRO ELECTRONICS PVT. LTD. VS. CIT(A) = (2011- TII-63-ITAT-DEL-TP) RENDERED IN ITA NO. 1806 & 1807/DEL/08, THE ITAT HA S UPHELD THE RTP FILTER UP TO 25%. IN THIS CASE, THE ITAT HAS ONLY E XCLUDED THOSE CONCERNS WHO HAVE RELATED PARTY TRANSACTIONS TO SALES MORE THAN 30%. IN REBUT TAL, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF S.T. MICRO ELECTRONIC S, THIS WAS NOT THE DIRECT ISSUE BEFORE THE ITAT. IN THAT CASE, LEARNED TPO SELECTED COMPARABLE S TO THE EXTENT UP 25% FOR RELATED PARTY TRANSACTION. LEARNED FIRST APPELLATE AUTHORITY HAS ELIMINATED ALL THOSE COMPARABLES. ITAT HAS OBSERVED THAT LEARNED DR WAS UNABLE TO POINT OU T SPECIFIC COMPANIES WHICH WERE SELECTED BY THE LEARNED TPO AS COMPARABLES AND WHO HAS TRANS ACTIONS LESS THAN 15% WITH RELATED PARTIES. IN THAT CASE, THE ARITHMETIC MEAN WOULD NO T BE UPGRADED BY INCLUDING THOSE COMPANIES WHICH HAVE BEEN ELIMINATED BY THE LEARNED CIT(APPEALS), THEREFORE, DIRECTLY THERE WAS NO ADJUDICATION AT THE END OF THE ITAT ON THIS ISSUE. 29. WE HAVE HEARD THE RIVAL CONTENTIONS. THE EXPRES SION RELATED PARTY TRANSACTION (RPT) HAS NOT BEEN DEFINED IN THE ACT. THE ITAT IN THE CA SE OF SONY INDIA HAD EXAMINED THE FACTS OF THAT CASE FOR VERIFYING THE ARM'S LENGTH PRICE OF T HE ASSESSEE. THE ITAT HAS NOT INTERPRETED ANY PROVISIONS OF LAW WHICH CAN BE PROPOUNDED AS LAYING DOWN THE RATIO OF LAW. THE ITAT HAS JUST MADE A REFERENCE TO A FIGURE WHICH MAY BE RELEVANT WHILE ADJUDICATING THE ISSUE IN THE FACTS OF THAT CASE. IT MAY BE A GUIDING FACTOR WHILE CONS IDERING THE CASES OF THE ASSESSEE IN OTHER APPEALS. BUT NEITHER IT IS A RATIO OF LAW NOR IT CA N BE GIVEN STATUS OF A STATUTE, WHICH HAS A BINDING EFFECT ON ALL OTHER ADJUDICATING AUTHORITIE S. THE ACT DOES NOT PROVIDE DIRECTLY AS TO WHAT PERCENTAGE OF A RELATED PARTY TRANSACTION HAS TO CONSIDERED FOR EXCLUSION. HOWEVER, IF WE LOOK TO THE SCHEME OF INCOME-TAX ACT, THEN IT WO ULD BE REVEAL THAT EXPRESSION 'ASSOCIATE ENTERPRISES' WHICH IS SOMEWHAT SIMILAR TO THAT OF ' RELATED PARTY', HAS BEEN DEFINED IN SECTION 91A(2)(A) OF THE ACT. ACCORDING TO THIS DEF INITION, IF AN ENTERPRISES HOLDS 26% SHARE IN THE OTHER ENTERPRISES THEN IT CAN BE CONSIDERED AS AN ASSOCIATE ENTERPRISES. SIMILARLY, UNDER SEC. 40A(2)(B) OF THE ACT, INTERESTED PERSONS HAVE BEEN EXPLAINED, IF A PERSON IS HAVING NOT LESS THAN 20% OF VOTING POWER IN A COMPANY THEN SUC H PERSON WOULD BE CONSIDERED AS SUBSTANTIAL INTEREST IN THE COMPANY. THIS SECTION R ELATES TO EXAMINATION OF THE CASES WHERE SOME UNDUE BENEFIT IS BEING EXTENDED BY A COMPANY. THESE TWO PROVISIONS GIVE AN INDICATOR THAT WHENEVER ANY ISSUE REGARDING AN INTE REST CREATED IN ANY COMPANY IS BEING EXAMINED WHICH HAS INFLUENCED OVER THE RESULTS OF T HE COMPANY THEN THESE ASPECTS CAN BE TAKEN AS GUIDANCE. ON THE BASIS OF THE SCHEME, ONE CAN SAFELY SAY THAT AN ENT ITY CAN BE TAKEN AS UNCONTROLLED, IF ITS RELATED PARTY TRANSACTION DO N OT EXCEED 25% OF THE TOTAL REVENUE. THUS, WE DO NOT FIND ANY FAULT IN THE CONCLUSION OF THE LEARNED TPO FOR APPLYING THIS FILTER TO THE EXTENT OF 25% TRANSACTION WITH RELATED PARTY OF THE TOTAL REV ENUE. THE CONTENTIONS RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD ARE REJECTE D. 60. SIMILAR VIEW HAS BEEN LAID DOWN BY OTHER BENCHE S OF THE TRIBUNAL. THE LEARNED A.R. FOR THE ASSESSEE PLACED STRONG REL IANCE ON THE ISSUE LAID DOWN IN SONY INDIA PVT. LTD. AND CRM SERVICES INDIA (P) LTD. (SUPRA) BUT WE FIND NO MERIT IN THE STAND OF THE ASSESSEE. APPLYING THE RATIO LAID 33 DOWN BY DELHI BENCH OF THE TRIBUNAL IN ACTIS ADVISE RS PVT. LTD. VS. DCIT (SUPRA) WE HOLD THAT THE AN ENTITY WITH WHOM R ELATED PARTY TRANSACTION DO NOT EXCEED 25% OF THE TOTAL REVENUE, IS AN UNCONTROLLED ENTITY. APPLYING THE ABOVE SAID FILTER TO THE FACT S OF THE PRESENT CASE WE ARE IN CONFORMITY WITH THE REPORT OF THE TPO IN ASS ESSMENT YEAR 2006-07 IN SELECTING AUTOBINDO PHARMA LTD. AS ONE OF THE CO MPARABLES WHICH ADMITTEDLY HAD RPT OF 21.77% TO THE SALES. THE SAI D RESULTS AS DO NOT EXCEED THRESHOLD OF RELATED PARTY TRANSACTION TO BE APPLIED FOR BENCHMARKING THE COMPARABLES AND HENCE THE RESULTS OF SUCH COMPANIES WERE TO BE APPLIED IN ORDER TO DETERMINE ARMS LENG TH PRICE OF INTERNATIONAL TRANSACTION ENTERED UPON BY THE ASSES SEE. THE SAID COMPANIES SHOULD ALSO BE USED AS FILTER IN THE PREC EDING YEAR IN CASE THE RELATED PARTY TRANSACTIONS WERE NOT MORE THAN 25% O F THE TOTAL REVENUE. 61. ANOTHER ASPECT OF THE ISSUE RAISED BEFORE US IS AGAINST THE PLEA WHETHER THE DATA OF SAME COMPARABLES BE APPLIED FRO M YEAR TO YEAR AND SIMILARLY WHERE ONE COMPARABLE IS REJECTED IN ONE Y EAR IT SHOULD BE SO REJECTED IN THE SUCCEEDING YEAR ALSO. THE CONTENTI ON OF THE LEARNED A.R. FOR THE ASSESSEE IN THIS REGARD IN RELATION TO ASSE SSMENT YEAR 2006-07 WAS THAT STANDARD PHARMACEUTICALS LTD. WAS REJECTED BY THE CIT (APPEALS) IN ASSESSMENT YEAR 2005-06 AND THE SAME S HOULD BE REJECTED DURING THE YEAR UNDER CONSIDERATION ALSO FOLLOWING THE RULE OF CONSISTENCY. IT WAS ALSO POINTED OUT THAT DURING TH E YEAR PEN-G CONSUMPTION BY THE SAID COMPANY WAS 3.58% OF THE TO TAL RAW MATERIAL, WHICH WAS SIGNIFICANTLY LOWER THAN THE RATIO OF PEN -G CONSUMPTION TO TOTAL RAW MATERIAL OF 5.23% FOR ASSESSMENT YEAR 200 5-06. IN CASE THE SAID COMPANY IS REMOVED FROM THE COMPARABLE IN THE RELEVANT ASSESSMENT YEAR, THE INTERNATIONAL TRANSACTIONS OF ASSESSEE IN INDIA WOULD MEET THE ARM'S LENGTH STANDARD AS ENVISAGED BY INDIAN TP REG ULATIONS. WE ARE OF 34 THE VIEW THAT THOUGH THERE IS SOME MERIT IN THE PLE A OF THE LEARNED A.R. FOR THE ASSESSEE BUT THE SAME PROPOSITION CANNOT BE APPLIED AS A UNIVERSAL LAW SPECIALLY IN VIEW OF THE PROVISIONS O F RULE 10B(4) OF THE INCOME TAX RULES, WHICH MANDATES THAT THE DATA OF C URRENT YEAR SHALL BE APPLIED IN ORDER TO BENCHMARK THE INTERNATIONAL TRA NSACTION. IN A CASE WHERE THE DATA OF ONE OF THE COMPARABLES APPLIED IN ONE OF THE YEAR IS AT VARIANCE IN THE SUCCEEDING YEAR BECAUSE OF NON-FULF ILLMENT ANY OF THE FILTERS SELECTED FOR REJECTING THE NON-COMPARABLE, THEN THE DATA OF THE SAID YEAR CANNOT BE SO APPLIED AS A FILTER TO DISRE GARD THE NON- COMPARABLES IN THE SUCCEEDING YEAR. HOWEVER, WE HA VE ALREADY HELD IN THE PARAS HEREINABOVE THAT STANDARD PHARMACEUTICALS LTD. IS TO BE USED AS A COMPARABLE FOR DETERMINING ARMS LENGTH MARGIN TO BE APPLIED TO THE MARGIN DECLARED BY THE ASSESSEE IN ORDER TO COMPUTE WHETHER THE INTERNATIONAL TRANSACTION ENTERED UPON BY THE ASSES SEE ARE AT ARMS LENGTH. IN VIEW THEREOF, WE ALLOW THIS CONTENTION OF THE ASSESSEE TO APPLY THE DATA OF STANDARD PHARMACEUTICALS LTD. IN BOTH THE ASSESSMENT YEARS 2005-06 AND 2006-07. IN THE ABOVE SAID CIRCU MSTANCES, THE FOLLOWING COMPANIES ARE HELD TO BE COMPARABLES IN A SSESSMENT YEAR 2005-06: S.NO. COMPANY NAME 1 TORRENT GUJARAT BIOTECH LIMITED 2 NECTAR LIFE SCIENCES LIMITED 3 STANDARD PHARMACEUTICALS LIMITED 4 AUROBINDO PHARMA LIMITED 62. IN THE ASSESSMENT YEAR 2006-07 THE COMPARABLES WOULD BE AS UNDER: 35 S.NO. COMPANY NAME 1 KDL BIOTECH LTD. 2 STANDARD PHARMACEUTICALS LIMITED 3 AUROBINDO PHARMA LIMITED 63. BOTH THE PARTIES HAVE CITED DECISIONS IN RESPEC T THAT WHETHER SINGLE COMPARABLE CAN BE USED FOR ADJUSTMENT IN OTHERS WHE THER MORE THAN ONE COMPARABLE IS REQUIRED. HOWEVER, WE ARE NOT GOING INTO THIS CONTROVERSY AS WE HAVE ALREADY HELD THAT TORRENT GUJARAT BIOTEC H LIMITED AND STANDARD PHARMACEUTICALS LIMITED IN ASSESSMENT YEAR 2005-06 AND AUROBINDO PHARMA LIMITED AND STANDARD PHARMACEUTICA LS LIMITED IN ASSESSMENT YEAR 2006-07 ARE TO BE USED AS COMPARABL ES. THE ISSUE OF APPLICATION OF DATA OF ONE COMPARABLE BECOMES INFRU CTUOUS. 64. THE SPECIAL BENCH OF DELHI TRIBUNAL IN M/S IHG IT SERVICES (INDIA) PVT. LTD. VS. ITO IN ITA NO.5890/DEL/2010 H AVE LAID DOWN THE PROPOSITION THAT WE ARE OF THE OPINION THAT AFTER THE RETROSPECTIVE AMENDMENT TO THE SECOND PROVISO TO SECTION 92C(2) B Y THE FINANCE ACT, 2012, THERE REMAINS NO AMBIGUITY THAT THE BENEFIT O F TOLERANCE MARGIN IS AVAILABLE ONLY WHEN THE VARIATION BETWEEN THE ARMS LENGTH PRICE IS DETERMINED UNDER SECTION 92C(1) AND THE PRICE AT WH ICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED THE TOLERANCE MARGIN. ONCE IT EXCEEDS THE TOLERANC E MARGIN, NO BENEFIT UNDER THE PROVISO WOULD BE AVAILABLE TO THE ASSESSE E AND THE ARMS LENGTH PRICE AS DETERMINED UNDER SECTION 92C(1) SHA LL BE CONSIDERED . THE LEARNED A.R. FOR THE ASSESSEE HAS NOT STRESSED THE GROUND NO.2.4 RAISED IN THIS REGARD. HOWEVER, SINCE THE ISSUE IS SET ASIDE TO THE FILE OF THE ASSESSING OFFICER FOR LIMITED PURPOSE, THIS ASP ECT OF BENEFIT OF TOLERANCE MARGIN WOULD ALSO BE LOOKED INTO FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION, AS HELD 36 BY THE SPECIAL BENCH OF THE TRIBUNAL, THE BENEFIT O F THE STANDARD DEDUCTION OF 5% IS ALLOWABLE ONLY IF THE DIFFERENCE IS LESS THAN 5% IN THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. 65. IN VIEW THEREOF, THE ASSESSING OFFICER/TPO APPL YING THE DATA OF ABOVE SAID COMPANIES IN ASSESSMENT YEARS 2005-06 AN D 2006-07 RESPECTIVELY SHALL COMPUTE THE ARMS LENGTH PRICE O F INTERNATIONAL TRANSACTIONS IN ACCORDANCE WITH OUR GUIDELINES IN T HE PARAS HEREINABOVE. THE GROUND NO.2 RAISED BY THE REVENUE, GROUND NO.2. 3 RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2005-06 AND GROUND NO.6 RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2006-07 ARE THUS PARTLY ALLOWED. ITA NO.1455/CHD/2010 :: ASSESSEES APPEAL :: ASSTT. YEAR 2006-07 66. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF A PPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE & IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE DRAFT ASSESSMENT ORDER OF THE LD. AO ON THE FOLLOWING ISSUES AND DIRECTING THE LD. AO TO ASSESS INCOME AT RS. NIL AS AGAINST THE R ETURNED LOSS OF RS. 143,509,455: - DISALLOWANCE OF RS.9,458,449 BEING THE DEPB CLAIM S REJECTED AND WRITTEN OFF DURING THE YEAR. - DISALLOWANCE OF RS. 82,530,000 BEING THE INTEREST PAID & FINANCIAL EXPENSES INCURRED DURING THE YEAR. - DISALLOWANCE OF RS. 9,615,144 BEING THE COMMI SSION EXPENSES INCURRED DURING THE YEAR. - DISALLOWANCE OF RS. 1,240,501/- UNDER SECTION 14A OF THE ACT BY ERRONEOUSLY HOLDING THAT THE RULE 8D IS APPLICABLE TO THE FACTS OF THE CASE . - ADDITION ON ACCOUNT OF TRANSFER PRICING (TP 1 ) ADJUSTMENT OF RS. 60,743,348. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKING A DISALLOWANCE OF RS. 9,458,449/- ON ACCOUNT OF DEPB CLAIMS REJECTED OR SHORT RECEIVED A ND WRITTEN OFF DURING THE YEAR IN THE PROFIT & LOSS ACCOUNT. 2.1. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKING THE DISALLOWANCE OF 76,14,696/- OUT OF TOTAL AMOUNT OF RS. 9,458,449/- DEPB CREDIT REJECTE D BY THE KANDLA SPECIAL ECONOMIC ZONE, MINISTRY OF COMMERCE AND INDUSTRY WITHOUT APP RECIATING THAT THE SAME HAVE BEEN SHOWN AS INCOME ON ACCRUAL BASIS AND OFFERED TO TAX IN ASSESSMENT YEAR 2004-05. 2.2. WITHOUT PREJUDICE TO GROUND NO. 2.1, THE LD. AO SHO ULD BE DIRECTED NOT TO TAX THE SAID AMOUNT IN THE ASSESSMENT YEAR 2008-09 WHEN THE CLAI M HAS BEEN OFFERED TO TAX ON ACTUAL 37 RECEIPT UNDER SECTION 41(1) OF THE ACT. 2.3. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKING A DISALLOWANCE OF RS. 1,843,7537- (OUT OF TOTAL AMOUNT OF RS. 9,458,449) OF DEPB CREDIT SH ORT RECEIVED IN THE RELEVANT YEAR AND WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT DURING T HE YEAR UNDER CONSIDERATION WITHOUT APPRECIATING THAT THE SAME HAS BEEN CONSIDERED AND OFFERED TO TAX IN ASSESSMENT YEAR 2004-05. 2.4. THAT THE LD. AO ERRED ON FACTS & IN LAW WHILE MAKIN G THE ABOVE DISALLOWANCES AND ERRED, IN HOLDING THAT EXPORT INCENTIVES WERE NOT TAXABLE IN EARLIER YEARS AND DEDUCTION UND SECTION 80HHC WAS AVAILABLE ON THE DEPB. 3. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKI NG A DISALLOWANCE OF FINANCE EXPENSES OF RS. 82,530,000 BY INADVERTENTLY HOLDING THAT THE AP PELLANT HAD UTILIZED BORROWED FUNDS FOR GIVING INTEREST FREE ADVANCES TO ITS JOINT VENT URE COMPANY I.E. HINDUSTAN MAX-GB LTD. ('HMGB') WITHOUT APPRECIATING THAT THE NO ADVANCES HAVE BEEN MADE BY THE APPELLANT COMPANY TO HMGB DURING THE YEAR UNDER CONSIDERATION NOR IN THE IMMEDIATELY PRECEEDING YEAR. 3.1. THAT THE LD. AO ERRED ON FACTS & IN LAW IN HOLDING THAT THE INTEREST ON LOAN FUNDS BORROWED BY THE APPELLANT COMPANY CANNOT BE ALLOWED AS A BUSINESS EXPENDITURE EITHER UNDER SECTION 36(1)(III) OR SECTION 37 OF THE ACT W ITHOUT APPRECIATING THAT THE INTEREST EXPENSE INCURRED BY THE APPELLANT DURING THE YEAR U NDER CONSIDERATION IS ON LOAN FUNDS BORROWED AND UTILIZED FOR WORKING CAPITAL PURPOSES AND FOR NEW EXPANSION AND THERE IS NO NEXUS OR DIVERSION OF FUNDS TO HMGB DURING TH E YEAR. 3.2. THE LD. AO ERRED ON FACTS AND IN LAW, IN NOT FOLLOW ING THE FAVORABLE TRIBUNAL DECISION IN THE APPELLANT'S OWN CASE FOR THE ASSESSMENT YEAR 2003-04 & 2004-05 ON THE IDENTICAL ISSUE. 4. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKING A DISALLOWANCE OF RS. 9,615,144 ON COMMISSION EXPENSES CHARGED TO THE PRO FIT & LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. 4.1.1 THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKING A DISALLOWANCE OF RS. 5,337,931(OUT OF RS. 9,615,144) ON THE ALLEGED GROUND THAT THE EX PORT SALES WERE INVOICED TO THOSE PARTIES TO WHOM THE COMMISSION WAS PAID, AND HENCE THERE IS NO LIABILITY TO PAY COMMISSION TO THOSE PARTIES WITHOUT APPRECIATING TH AT THE COMMISSION PAID TO THE THOSE PARTIES WERE OUT OF PURELY COMMERCIAL CONSIDERATIONS AND ON ACCOUNT OF BUSINESS EXPEDIENCY. 4.2 THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAK ING A DISALLOWANCE OF RS. 4,277,213 (OUT OF RS.9,615,144) BY ARBITRARILY FIXING AN AVERAGE R ATE OF COMMISSION IN EXCESS OF 3% PAID TO AGENTS AS EXCESSIVE AND UNREASONABLE WITHOU T APPRECIATING THAT NONE OF THE PARTIES IS A RELATED PARTY AND COMMISSION PAID IN E XCESS OF 3% WAS ON ACCOUNT OF BUSINESS EXPEDIENCY. 5. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKI NG A DISALLOWANCE OF EXPENDITURE OF RS.1,240,501/- ON THE ALLEGED GROUND THAT SAID EXPENDITURE IS INCURRED FOR EARNING TAX EXEMPT INCOME ('DIVIDEND') FROM INV ESTMENTS BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 ('THE RULES'). 5.1. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN INVOKIN G RULE 8D OF THE OF RULES WITHOUT APPRECIATING THAT THE SAME WAS INTROD UCED W.E.F MARCH 24,2008 AND IS NOT APPLICABLE FOR ASSESSMENT YEAR 2006-07. 5.2. THAT THE LD. AO ERRED IN NOT APPRECIATING THAT THE APPELLANT HAS NEITHER EARNED ANY INCOME ON INVESTMENTS HELD DURING THE YE AR NOR SUCH INCOME HAS BEEN CLAIMED EXEMPT AND FURTHER THE APPELLANT HAS N OT INCURRED ANY 38 EXPENDITURE IN RELATION TO INVESTMENTS OR EARNING O F EXEMPT INCOME. 6. THAT THE LD. AO ERRED IN FACTS AND IN LAW, IN EN HANCING THE INCOME OF THE APPELLANT BY RS.60,743,348 BY HOLDING THAT THE APPELLANT'S IN TERNATIONAL TRANSACTIONS DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE AS ENVISAGED UND ER THE ACT AND IN DOING SO HAVE GROSSLY ERRED IN: 6.1 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY T HE APPELLANT. 6.2 ON FACTS AND IN LAW IN NOT ALLOWING HE + /- 5% RANGE MENTIONED IN PROVISO TO SECTION 92C(2) OF THE ACT WHILE COMPUTING THE ARMS LENGTH PRICE FOR THE APPELLANTS INTERNATIONAL TRANSACTIONS WITH AES. 6.3 CONSIDERING A COMPANY HAVING SIGNIFICANT RELATED PARTY TRANSACTIONS IN HE FINAL COMPARABLE SET DESPITE HIMSELF HAVING APPLIED A QUA NTITATIVE FILTER REJECTING COMPANIES HAVING RPT MORE THAN 10 PERCENT. 6.4 DISREGARDING MULTIPLE YEAR/PRIOR YEARS D ATA AS USED BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR )I.E. F Y 2005-06) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE OF THE FACT THAT T HE SAME WAS NOT NECESSARILY AVAILABLE AT THE TIME OF THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION. 6.5 DISREGARDING JUDICIAL PRONOUNCEMENTS IN U NDERTAKING THE TP ADJUSTMENT. 7. THAT THE LD. AO ERRED ON FACTS AND IN LAW IN CHARGING INTEREST UNDER SECTIONS 234A, 234B, 234C AND 234D OF THE ACT. 67. THE GROUND NO.1 RAISED BY THE ASSESSEE IS GENER AL IN NATURE AND HENCE THE SAME IS DISMISSED. 68. THE GROUND NO.2 RAISED BY THE ASSESSEE IS AGAIN ST DISALLOWANCE OF RS.94,58,449/- BEING DEPB CLAIM REJECTED AND WRITTE N OFF DURING THE YEAR. 69. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD WRITTEN OFF SUM OF RS. 94.58 LACS UNDER THE HEAD EXPORT INCENTIVE WRITTEN OFF IN THE PROFIT & LOSS ACCOUNT. THE EXPLANATION OF THE ASSESSEE BEFORE THE ASSESSING OF FICER WAS THAT THE EXPORT INCENTIVE WRITTEN OFF DURING THE YEAR UNDER CONSIDERATION WERE OFFERED FOR TAXATION AS INCOME IN THE EARLIER YEARS . HOWEVER, SUM OF RS.76,14,696/- RELATES TO IPCA, DEPB WHICH WAS REJE CTED BY DGFT STATING THAT THESE WERE NOT APPLIED IN TIME. FURTHE R SUM OF RS.18,43,753/- OF DEPB WAS WRITTEN OFF DURING THE Y EAR AS IT WAS RECEIVED SHORT. BEFORE THE ASSESSING OFFICER THE A SSESSEE FURNISHED 39 LETTER DATED 22.2.2006 ADDRESSED TO DGFT WHICH WAS AN APPEAL TO CONSIDER DEPB CLAIM FOR THE BULK DRUGS SUPPLIED TO SEZ UNITS AT KANDLA. ANOTHER LETTER DATED 9.5.2006 TO DEPARTMENT OF COMM ERCE REGARDING THE MEETING OF THE GRIEVANCE REDRESSAL COMMITTEE, UNDER THE CHAIRMANSHIP OF SPECIAL SECRETARY, DEPARTMENT OF COMMERCE WAS AL SO FILED. THE PLEA OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS TH AT THE CLAIM REGARDING DEPB WAS STILL UNDER CONSIDERATION BY THE MINISTRY OF COMMERCE AND INDUSTRY. THE ASSESSING OFFICER WAS OF THE VIEW TH AT AS THE MATTER HAD NOT REACHED FINALITY, DEPB CLAIM COULD NOT BE WRITT EN OFF IN THE BOOKS OF ACCOUNT DURING THE YEAR. IN RESPECT OF SHORT RECEI PT OF DEPB AMOUNTING TO RS.18,43,753/-, THE ASSESSEE FAILED TO FURNISH A NY SUPPORTING DOCUMENT AND HENCE THE CLAIM WAS REJECTED AND ADDIT ION WAS MADE. THE SECOND OBJECTION OF THE ASSESSING OFFICER WAS THAT THE EXPORT INCENTIVES WERE NOT TAXABLE IN THE EARLIER YEARS AND DEDUCTION UNDER SECTION 80HHC OF THE ACT WAS AVAILABLE ON THE DEPB RECEIPTS. THE ASSESSEE HAD RAISED SPECIFIC GROUND BEFORE THE D.R.P. IN DELHI IN THIS REGARD, WHICH WAS REJECTED BY THE D.R.P. THE ASSESSING OFFICER IN V IEW OF THE DIRECTIONS OF D.R.P. IN DELHI AND IN THE ABSENCE OF THE SUPPOR TING DOCUMENTS ADDED BACK SUM OF RS.94,58,449/- AS INCOME OF THE ASSESSE E. 70. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ADDI TION. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE DEPB CREDIT DUE TO THE ASSESSEE WAS CREDITED IN THE EARLIER YEARS BUT THE ASSESSEE HAD NOT RECEIVED TOTAL RECEIPT AND HENCE THE EXCESS WAS WRI TTEN OFF DURING THE YEAR UNDER CONSIDERATION AND CLAIMED AS DEDUCTION. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE HAD MADE A CLAIM BEFORE THE GRIEVANCE CELL, MINISTRY OF COMMERCE BY WAY OF AN A PPEAL TO CONSIDER THE DEPB CLAIM OF BULK DRUGS SUPPLIED TO SEZ UNITS AT KANDLA AND COPY OF THE SAID ANNEXURE IS PLACED AT PAGES 60 AND 61 O F THE ACT THE PAPER 40 BOOK. THE LEARNED A.R. FOR THE ASSESSEE FURTHER RE FERRED TO THE MEETING OF GRIEVANCE REDRESSAL COMMITTEE ON 15.5.2006 UNDER WHICH THE ASSESSEE WAS ALSO ASKED TO ATTEND, COPY OF WHICH IS PLACED AT PAGE 62 OF THE PAPER BOOK-I. FURTHER REFERENCE WAS MADE TO TH E COMMUNICATION OF THE MINISTRY OF COMMERCE PLACED AT PAGE 73 OF THE P APER BOOK. THE LEARNED A.R. FOR THE ASSESSEE STATED THAT THE AMOUN T HAS BEEN RECEIVED BY THE ASSESSEE IN ASSESSMENT YEAR 2008-09 AND HAS BEE N OFFERED TO TAX. IN RESPECT OF SUM OF RS.18,43,753/- THE LEARNED A.R. F OR THE ASSESSEE POINTED OUT THAT THE SAME REPRESENTED SHORT CLAIM R ECEIVED ON DEPB. THE ASSESSEE ON ACCRUAL BASIS HAD ACCOUNTED FOR THE SAME IN THE DEPB ACCOUNT IN EARLIER YEARS BUT THE SAME HAS BEEN RECE IVED IN SHORT AND AS THE RECEIPT WAS FOR THE YEAR UNDER CONSIDERATION TH E AMOUNT WAS BOOKED AS EXPENDITURE DURING THE YEAR UNDER CONSIDERATION. THE LEARNED A.R. FOR THE ASSESSEE PLACED RELIANCE AT PAGE 46 OF THE PAPER BOOK-I. THE LEARNED A.R. FOR THE ASSESSEE FURTHER SUBMITTED THA T THE OBSERVATION OF THE ASSESSING OFFICER THAT NO DETAIL WAS FURNISHED IS MISPLACED AS COMPLETE DETAILS WERE FURNISHED BEFORE THE ASSESSIN G OFFICER. THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT COMPLE TE DOCUMENTS WERE NOT FILED BEFORE THE ASSESSING OFFICER BUT ONLY SAM PLE DOCUMENTS WERE FILED BEFORE THE ASSESSING OFFICER, AGAINST WHICH N O QUERY WAS RAISED. THE LEARNED A.R. FOR THE ASSESSEE FURNISHED COMPLET E EVIDENCE BEFORE US IN RESPECT OF THE CLAIM OF DEDUCTION ON EXPORT INCE NTIVES WRITTEN OFF DURING THE YEAR UNDER CONSIDERATION AT PAGES 695 TO 711 BY WAY OF ADDITIONAL EVIDENCE ALONGWITH AN APPLICATION FOR AD MISSION OF ADDITIONAL EVIDENCE PLACED AT PAGES 692 TO 694 OF THE PAPER BO OK. THE LEARNED A.R. FOR THE ASSESSEE STRESSED THAT IN RESPECT OF F IRST WRITE OFF THERE IS NO LOSS TO THE REVENUE AS THE AMOUNT WAS OFFERED IN AS SESSMENT YEAR 2008- 09. 41 71. THE LEARNED D.R. FOR THE REVENUE POINTED OUT TH AT THE AMOUNT HAD NOT BEEN CRYSTALLIZED DURING THE YEAR AND WRITE OFF OF DEPB CREDIT WAS PREMATURE. RELIANCE WAS PLACED ON THE ORDER OF THE ASSESSING OFFICER IN THIS REGARD. IN RESPECT OF WRITE OFF OF SHORT CLAI M FOR DEPB THE LEARNED D.R. FOR THE REVENUE HAD NO OBJECTION TO THE ADMISS ION OF ADDITIONAL EVIDENCE. IT WAS STRESSED BY THE LEARNED D.R. FOR THE REVENUE THAT THE ASSESSEE HAD FAILED TO FURNISH REQUISITE DOCUMENTS BEFORE THE ASSESSING OFFICER AND THE SAME MAY BE VERIFIED BY THE ASSESSI NG OFFICER. 72. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIST ASPECT OF THE ISSUE RAISED VIDE GROUND NO.2 IS IN R ELATION TO WRITE OFF OF THE DEPB CREDIT OF RS.77,14,696/-, WHICH CLAIM AS PER T HE ASSESSEE WAS REJECTED BY DGFT. THE SECOND ASPECT OF THE CLAIM OF DEDUCTION WAS IN RELATION TO WRITTEN OFF DURING THE YEAR AS THE SAME WAS RECEIVED SHORT TO THE EXTENT OF RS.18,43,753/-. THE ASSESSEE VIDE GROUND NO.2 HAS RAISED THE ISSUE AGAINST THE CUMULATIVE DISALLOWANCE OF RS.94,58,449/-. AS POIN TED OUT IN PARA HEREIN ABOVE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF EXPORT OF THE INTERMEDIARIES AND BULK DRUG MANUFACTURED BY IT. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD DEBITED SUM OF RS.94,58,449/- TO THE P ROFIT & LOSS ACCOUNT UNDER THE HEAD EXPORT INCENTIVE WRITTEN OFF. THE CLAIM OF THE ASSESSEE WAS THAT THE SAID AMOUNT WAS OFFERED FOR TAX IN THE EARLIER YEAR S AND THE SAME HAVE NOT BEEN RECEIVED BY THE ASSESSEE AND HENCE, THE SAID WRITE OFF. IN RESPECT OF SUM OF RS.76,14,696/- RELATING TO IPCA, DEPB., THE SAID CL AIM OF THE ASSESSEE IN RESPECT OF THE DEPB WAS REJECTED BY DGFT AS THE SAM E WAS NOT APPLIED IN TIME. THE CLAIM RELATES TO EXPORTS MADE IN THE EAR LIER YEAR AND THE EXPORT INCENTIVE ACCRUED TO THE ASSESSEE AS INCOME IN FINA NCIAL YEAR 2003-04. HOWEVER, THE APPLICATIONS FOR DEPB CREDIT WERE MADE IN THE FINANCIAL YEAR 2004-05. THE LD. AR FOR THE ASSESSEE REFERRED THE LETTER DATED 10.11.2004 IN RELATION TO THE CLAIM OF DEPB IPCA FOR RS.22,84,475 /- PLACED AT PAGES 47-48 42 OF THE PAPER BOOK. THE SAID CLAIM WAS REJECTED VID E LETTER DATED 07.01.2005. THE SECOND CLAIM WAS MADE VIDE LETTER DATED 27.12.2 004 AMOUNTING TO RS.45,68,777/- COPY OF WHICH IS PLACED AT PAGES 51 & 52 OF THE PAPER BOOK AND THE THIRD CLAIM WAS IN RESPECT OF DEPB IPCA OF RS.7 79,604/- WHICH IS MADE VIDE LETTER DATED 04.01.2005. THE TOTAL DUES IN TH E APPLICATION FOR DEPB CREDIT MADE BEFORE KANDLA SPECIAL ECONOMIC ZONE WERE RS.76 ,32,857/-. THE ASSESSEE HAS PLACED ON RECORD THE COPY OF RETURN OF INCOME ALONGWITH COPY OF COMPUTATION OF INCOME RELATING TO ASSESSMENT YEAR 2 004-05 AT PAGES 1 TO 15 OF THE PAPER BOOK ALONGWITH COPY OF AUDITED FINANCIAL STATEMENTS FOR THE SAID YEAR AT PAGES 16-44 OF THE PAPER BOOK IN WHICH IT I S POINTED OUT THAT THE EXPORT INCENTIVES WERE OFFERED TO TAX AND NO DEDUCTION WAS CLAIMED UNDER SECTION 80HHC OF THE ACT. THE ASSESSEE HAS FURTHER PLACED ON RECORD THE DETAILS OF EXPORT INCENTIVES WRITTEN OFF DURING THE FINANCIAL YEAR 2005-06 AT PAGES 45 TO 62 OF THE PAPER BOOK. THE SAID EXPORT INCENTIVES W ERE WRITTEN OFF BY THE ASSESSEE ON THE BASIS OF THE REJECTION LETTERS RECE IVED BY THE COMPANY FROM THE KANDLA SPECIAL ECONOMIC ZONE AS UNDER : O JANUARY 7, 2005 IN RELATION TO THE APPLICATION OF RS. 22,84,475.26 DATED NOVEMBER 10, 2004 (APPLICATION NUMBER HO:DEPB IPCA 1) (REFER PAGE 57 OF THE PAPERBOOK) O JANUARY 4, 2005 IN RELATION TO THE APPLICATION OF RS. 45,68,777.67 DATED DECEMBER 27, 2004 (APPLICATION NUMBER HO:DEPB IPCA 2) (REFER PAGELS OF THE PAPERBOOK) O JANUARY 17, 2005 IN RELATION TO THE APPLICATION OF RS. 7,79,604. 01 DATED JANUARY 4, 2005 (APPLICATION NUMBER HO:DEPB IPCA 3) (REFER PAGE 59 OF THE PAPERBOOK) 73. THE ASSESSEE VIDE LETTER DATED 22.02.2006 MADE AN APPEAL TO THE MINISTRY OF COMMERCE REQUESTING FOR INTERVENTION AND TO CONS IDER THE CLAIM OF THE COMPANY. IN THE ABSENCE OF ANY COMMUNICATION FROM MINISTRY OF COMMERCE UNTIL MARCH 31, 2006, THE COMPANY ON A PRUDENT BASI S WROTE OFF THE EXPORT INCENTIVE CONSIDERING THE REJECTION LETTERS AND LAC K OF CERTAINTY ON THE POSSIBLE RECOVERY OF THE CLAIM OF EXPORT INCENTIVE. 43 74. THE ISSUE ARISING BEFORE US IS IN RELATION TO T HE ALLOWABILITY OF SUCH WRITE OFF OF EXPORT INCENTIVES TOTALING RS.76,14,696/-. THE SAID AMOUNT ADMITTEDLY HAS BEEN RECEIVED BY THE ASSESSEE IN ASSESSMENT YEA R 2008-09 AND HAS BEEN OFFERED TO TAX. THE CASE OF THE REVENUE IS THAT RE COVERY OF THE SAID AMOUNT HAD NOT CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATIO N AND THE SAID WRITE OFF WAS PRE-MATURE AS THE ISSUE WAS STILL PENDING FOR CONSI DERATION BEFORE THE MINISTRY OF COMMERCE. THE PERUSAL OF THE REJECTION LETTER D ATED 07.01.2005, 04/07.1.2005 AND 17.01.2005 POINTS OUT THAT THE CLA IM OF THE ASSESSEE IN RESPECT OF DEPB ON POST EXPORT BASIS WAS REJECTED B Y THE KANDLA SEZ AS THE SUPPLIES MADE TO SEZ WERE PRIOR TO IMPLEMENTATION O F CHAPTER X-A OF THE CUSTOMS ACT I.E. PRIOR TO 11.05.2004, WHICH WERE NO T ELIGIBLE FOR DEPB BENEFIT. THE ASSESSEE FILED AN APPEAL BEFORE THE D IRECTOR GENERAL OF FOREIGN TRADE GRIEVANCE CELL, MINISTRY OF COMMERCE, NEW DEL HI, TO CONSIDER THE DEPB CLAIM IN THE BULK DRUGS SUPPLIED TO SEZ UNIT A T KANDLA. THE SAID REPRESENTATION WAS MADE ON 22.02.2006 AND THE CLAIM OF THE ASSESSEE WAS THAT THE CLAIM OF DEPB BENEFITS OF THE ASSESSEE WAS REJE CTED BY THE DC OFFICE ON THE BASIS OF CBEC CIRCULAR NO. 11/2004 WHICH IN-TUR N STATED THAT SUPPLIES MADE BY THE DTA UNITS TO SEZ UNITS PRIOR TO IMPLEME NTATION OF CHAPTER X-A OF CUSTOMS ACT WERE NOT ELIGIBLE FOR DEPB BENEFITS. IT WAS FURTHER POINTED OUT BY THE ASSESSEE IN THE SAID APPEAL THAT THE SAID CI RCULAR WAS SUBSEQUENTLY SUPERSEDED BY CBEC CIRCULAR NO. 21/2005 DATED 06.04 .2005, WHICH OVER-RULED THE ABOVE CONDITION. THE RELEVANT CLAUSES OF THE A PPEAL DATED 22.02.2006 MADE TO THE MINISTRY OF COMMERCE READ AS UNDER : WE HAD SUBMITTED OUR APPLICATIONS WITH DC OFFICE KA SEZ AS PER THE PROVISIONS LAID DOWN UNDER FOREIGN TRADE POLICY TO CLAIM DEPB BENEFITS A T DIFFERENT DATES I.E. BETWEEN 14.12.2004 AND 11.1.2005 (DETAIL OF CLAIMS ATTACHED AS ANNEXURE - A), DC OFFICE HAD TURNED DOWN OUR CLAIMS ON 17.1.2005 ON THE BASIS OF CEBC CIRCULAR NO: 11/2004 DT. WHICH STATES THAT SUPPLIES MADE BY DTA UNITS TO SEZ UNITS PRIOR TO IMPLEMENTATION OF 44 CHAPTER X-A OF CUSTOMS ACT I.E. PRIOR TO. 11. 5.200 4 ARE NOT ELIGIBLE FOR DEPB BENEFITS (COPY OF REJECTION LETTERS AND CIRCULAR ATTACHED AS ANNEXURE - B?) YOU WOULD APPRECIATE THAT THE MENTIONED CIRCULAR WA S SUBSEQUENTLY SUPERSEDED BY CBEC ANOTHER CIRCULAR NO: 21/2005 DT. 6 TH APRIL 20P5WHICH OVERRULED THE ABOVE CONDITION AND CLARIFIED THAT THE BENEFIT OF DEPB SCHEME WOULD BE ADMISSIBLE IN RESPECT OF SUPPLY OF GOODS FROM UNITS IN DTA TO UNITS IN SEZ DURING 1.4. 2003 TO 11.5.2004 UNDER DEPB SCHEME TO SEZ (ANNEXURE-C). 75. THE ASSESSEE HAS PLACED THE REJECTION LETTERS O F THE DEVELOPMENT COMMISSIONER, KANDLA SEZ AT PAGES 57 TO 59 OF THE P APER BOOK AND THE COPY OF THE APPEAL MOVED BEFORE THE MINISTRY OF COMMERCE AT PAGES 60 AND 61 OF THE PAPER BOOK. THE ASSESSEE RECEIVED A COMMUNICAT ION FROM THE MINISTRY OF COMMERCE AND INDUSTRIES, GOVERNMENT OF INDIA DATED 09.05.2006, UNDER WHICH IT WAS INFORMED THAT THE NEXT MEETING OF THE GRIEVA NCE REDRESSAL COMMITTEE WOULD BE HELD ON 15.05.2006. A COPY OF THE SAID LET TER IS PLACED AT PAGE 62 OF THE PAPER BOOK. ADMITTEDLY, THE CLAIM OF THE ASSES SEE HAS BEEN ALLOWED BY THE GOVERNMENT OF INDIA VIDE LETTERS DATED 08.08.2007 W HICH ARE PLACED AT PAGES 73 TO 83 UNDER WHICH THE SAID DEPB BENEFIT HAS BEEN ALLOWED TO THE ASSESSEE. IN THE ENTIRETY OF THE ABOVESAID FACTS AND CIRCUMST ANCES, WHERE ADMITTEDLY THE CLAIM OF THE ASSESSEE VIZ-VIZ DEPB CREDIT WAS THOUG H REJECTED IN THE MONTH OF JANUARY,2005 AGAINST WHICH THE APPEAL WAS FILED ON 22.02.2006, WHICH WAS NOT REJECTED BY THE MINISTRY OF COMMERCE AND THE ASSESS EE HAD RECEIVED THE COMMUNICATION DATED 09.05.2006 THAT THE MEETING OF THE GRIEVANCE REDRESSAL COMMITTEE WOULD BE HELD ON 15.05.2006, THE ISSUE IS WHETHER SUCH WRITE OFF IS CORRECT. THE ABOVE FACTS INFER THAT THE SAID CLAIM OF EXPORT INCENTIVES WAS UNDER CONSIDERATION BY THE MINISTRY OF COMMERCE AND INDUSTRIES, GOVERNMENT OF INDIA. THE PLEA OF THE ASSESSEE WAS ALSO THAT T HE REJECSTION OF CLAIM ON THE BASIS OF EARLIER CIRCULAR, WHICH WAS LATER REVERSED , WAS WRONG AND APPEAL WAS PENDING. THE ASSESSEE HAD WRITTEN OFF THE EXPORT I NCENTIVES TOTALING RS.76,14,696/- IN THE FINANCIAL YEAR 2005-06 I.E. E VEN BEFORE THE MEETING OF THE 45 GRIEVANCE REDRESSAL COMMITTEE OF MINISTRY OF COMMER CE. WE ARE OF THE VIEW THAT SUCH WRITE OFF OF THE EXPORT INCENTIVE BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION IS PRE-MATURE IN THE ABOVESAID FACTS AND CIRCUMSTANCES OF THE CASE AND IS NOT AN EXPENSE RELATABLE TO FINANCI AL YEAR 2005-06. FURTHER, ADMITTEDLY THE ASSESSEE HAS RECEIVED THE SAID EXPOR T INCENTIVES IN THE FINANCIAL YEAR 2007-08 ITSELF ESTABLISHES THE CASE OF THE REV ENUE. ACCORDINGLY, WE ARE IN CONFORMITY WITH THE ORDER OF THE DRP AND THE ASSESS ING OFFICER IN THIS REGARD AND WE UPHOLD THE ADDITION OF RS.76,14,696/-. 76. THE SECOND ASPECT OF THE WRITE-OFF OF EXPORT IN CENTIVES IS AMOUNTING TO RS.18,43,753/-. THE ASSESSEE HAS MOVED AN APPLICAT ION FOR ADMISSION OF ADDITIONAL EVIDENCE UNDER RULE 18 OF INCOME TAX (AP PELLATE) TRIBUNAL RULES, UNDER WHICH IT HAS PLACED ON RECORD THE COPIES OF A PPLICATIONS MADE BEFORE THE KANDLA SEZ FOR CREDIT OF RS.35,92,066/- AND RS.85,7 62/- ALONGWITH COPIES OF DEPB LICENCES RECEIVED FROM KANDLA SEZ RESTRICTING THE CLAIM TO RS.28,58,140/- AND RS.52,451/-. THE PLEA OF THE AS SESSEE IN THIS REGARD WAS THAT THE CLAIM OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER VIDE PARA 3.4 OF THE ASSESSMENT ORDER THAT COMPLETE DETAILS W ERE NOT FURNISHED IN THIS REGARD. THE LD. AR FOR THE ASSESSEE POINTED OUT TH AT IT HAD ONLY FILED SAMPLE DOCUMENTS BEFORE THE ASSESSING OFFICER DURING THE A SSESSMENT PROCEEDINGS WHICH ARE PLACED AT PAGES 126 & 127 OF THE PAPER BO OK AND THE ASSESSING OFFICER DID NOT RAISE ANY QUERY IN THIS REGARD. HOW EVER, THE COMPLETE DOCUMENTS RELATING TO THE WRITE-OFF OF RS.18,43,753 /- ARE BEING PLACED BY WAY OF APPLICATION FOR ADDITIONAL EVIDENCE AT PAGES 695 TO 711 OF THE PAPER BOOK AND THE SAME MERITS TO BE ACCEPTED. 77. THE LD. DR FOR THE REVENUE HAD NO OBJECTION TO THE ADMISSION OF THE ADDITIONAL EVIDENCE BUT IT WAS SUGGESTED BY THE LD. DR FOR THE REVENUE THAT THE SAID DOCUMENTS MAY BE FORWARDED TO THE ASSESSING OF FICER AS THE SAME WERE NOT CONSIDERED BY THE ASSESSING OFFICER. IN RESPEC T OF THE CLAIM FOR DEDUCTION 46 OF RS.18,43,753/-, THE LD. AR FOR THE ASSESSEE POIN TED OUT THAT THE EXPORT INCENTIVES WERE ACCOUNTED FOR ON ACCRUAL BASIS IN T HE EARLIER YEAR BUT THE SAME WAS SHORT RECEIVED OUT OF THE TOTAL CLAIM DURING TH E YEAR UNDER CONSIDERATION AND HENCE, WERE WRITTEN OFF AND CLAIMED AS A DEDUCT ION. THE LD. AR FOR THE ASSESSEE PLACED RELIANCE ON THE DETAILS FILED AT PA GE 46 OF THE PAPER BOOK WHICH INCORPORATED THE SHORTFALL IN THE DEPB RECEIV ED DURING THE YEAR UNDER CONSIDERATION. THE LD. DR FOR THE REVENUE PLACED R ELIANCE ON THE ORDER OF THE ASSESSING OFFICER. 78. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING VIDE GROUND NO. 2.3 RAISED BY THE ASSESSEE IS AGAINST THE CLAIM OF DEDUCTION OF RS.18,43,753/- ON ACCOUNT OF WRITE-OFF OF EXPORT INCENTIVE WHICH WAS SHORT RECEIVED BY THE ASSESSEE. AS PER THE DET AILS FILED BY THE ASSESSEE, IT TRANSPIRES THAT THE ASSESSEE HAD ACCOUNTED FOR THE EXPORT INCENTIVES RECEIVABLE IN THE FINANCIAL YEAR 2003-04 AND AS REFERRED TO BY US IN PARAS HEREIN ABOVE, THE ASSESSEE HAD NOT CLAIMED ANY DEDUCTION UNDER SE CTION 80HHC OF THE ACT IN THE ASSESSMENT YEAR 2004-05. AS AGAINST ITS CLAIM OF DEPB, THE AMOUNTS WERE SHORT RECEIVED BY THE ASSESSEE ON 14.03.2006 AND TH E BALANCE WAS CLAIMED AS A DEDUCTION DURING THE YEAR ENDING 31.3.2006. THE DE TAILS IN RESPECT OF THE DEPB DUE, DEPB RECEIVED AND SHORT-FALL IN THE DEPB CREDIT ARE AS UNDER : DEPB NO.3710000460 DATED 14.03.06 APPLIED FOR RS. 2,690,915.80 DECEMBER,2003 RECEIVED RS. 1,614,400.00 SHORTFALL RS. 1,076,515.80 DEPB NO.3710000461 DATED 14.03.2006 APPLIED FOR RS. 3,592,065.94 JANUARY,2004 RECEIVED RS. 2,858,140.00 SHORTFALL RS. 733,925.94 DEPB NO.3710000462 DATED 14.03.2006 APPLIED FOR RS. 85,762.73 47 RECEIVED RS. 52,451.00 FEBRUARY,2004 SHORTFALL RS. 33,311.73 TOTAL DEPB WRITTEN OFF DURING THE YEAR : RS. 9,458, 449.47 79. THE ASSESSEE BY WAY OF APPLICATION FOR ADMISSIO N OF ADDITIONAL EVIDENCE HAS PLACED ON RECORD THE COPIES OF THE APPLICATION MADE BEFORE THE KANDLA SEZ ALONGWITH THE COPIES OF DEPB LICENCE RECEIVED BY TH E ASSESSEE REFLECTING THE CLAIM AT PAGES 695 TO 711 OF THE PAPER BOOK. THE SA ID DOCUMENTS ARE ADMITTED AS ADDITIONAL EVIDENCE IN VIEW OF NO OBJECTION RAIS ED BY THE LD. DR FOR THE REVENUE. IN THE FACTS AND CIRCUMSTANCES OF THE CAS E, WE FIND MERIT IN THE CLAIM OF THE ASSESSEE THAT THE WRITE-OFF OF SUCH EXPORT I NCENTIVES WHICH WERE RECEIVED SHORT BY THE ASSESSEE BY WAY OF COMMUNICATION OF TH E DEDUCTION OF DEPB LICENCE TO THE ASSESSEE UNDER WHICH ITS CLAIM WAS R ESTRICTED, IS TO BE ALLOWED AS A DEDUCTION IN THE YEAR IN WHICH THE SAID COMMUNICA TION HAS BEEN RECEIVED BY THE ASSESSEE. ADMITTEDLY, THE ASSESSEE HAD RECEIVE D THE SAID COMMUNICATION ON 14.03.2006 I.E. FALLING WITHIN THE FINANCIAL YEAR 2 005-06 AND HENCE, THE SAID CLAIM OF THE ASSESSEE IS ALLOWABLE FOR THE CAPTIONE D ASSESSMENT YEAR. HOWEVER, THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE IN RE SPECT OF THE COPIES OF APPLICATION MADE IN RESPECT OF THE DEPB CLAIM AND A LSO THE COPIES OF THE DEPB LICENCE RECEIVED BY THE ASSESSEE UNDER WHICH T HE CLAIM OF DEPB WAS RESTRICTED BY KANDLA SEZ, WERE NOT AVAILABLE BEFORE THE ASSESSING OFFICER. HENCE, THE ISSUE IS RESTORED BACK TO THE FILE OF TH E ASSESSING OFFICER FOR THE LIMITED PURPOSE OF VERIFYING THE QUANTUM OF THE DEP B LICENCE RECEIVED BY THE ASSESSEE UNDER WHICH ITS CLAIM WAS REJECTED. THE P LEA OF THE ASSESSEE IS THAT AS AGAINST THE CLAIM OF DEPB OF RS.35,92,066/- AND RS. 85,762/-, IT HAD ONLY RECEIVED SUM OF RS.28,58,140/- AND RS.52,451/- AS D EPB LICENCE. IN CASE THE CLAIM OF THE ASSESSEE IS FOUND TO BE CORRECT AFTER VERIFICATION OF THE REQUISITE DOCUMENTS, WHICH ARE PLACED AT PAGES 695 TO 711 OF THE PAPER BOOK AS ADDITIONAL EVIDENCE, THE DEDUCTION OF RS.18,43,753/ - IS TO BE ALLOWED IN THE HANDS OF THE ASSESSEE. THE ASSESSING OFFICER SHALL AFFORD REASONABLE 48 OPPORTUNITY OF HEARING TO THE ASSESSEE AND SHALL DE CIDE THE MATTER IN LINE WITH OUR DIRECTIONS. THE GROUND NO. 2.1 AND 2.2 RAISED BY THE ASSESSEE IS, THUS DISMISSED AND GROUND NO. 2.3 RAISED BY THE ASSESSEE IS, THUS ALLOWED FOR STATISTICAL PURPOSES. 80. THE GROUND NO.3 RAISED BY THE ASSESSEE IS IDENT ICAL TO GROUND OF APPEAL NO. 1 RAISED BY THE REVENUE IN ITA NO. 1360/CHD/201 0 AND IN LINE WITH OUR DECISION IN PARAS 10 & 11 HEREIN ABOVE, WE ALLOW TH E CLAIM OF THE ASSESSEE. THE GROUND OF APPEAL 3 IS THUS ALLOWED. 81. THE ISSUE IN GROUND NO. 4 RAISED BY THE ASSESSE E IS AGAINST DISALLOWANCE OF RS.96,15,144/- BOOKED AS COMMISSION EXPENSES. 82. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD DEBITED A SUM OF RS .2.60 CRORES UNDER THE HEAD COMMISSION, WHICH INCLUDED A SUM OF RS.10,563,783 /- ON ACCOUNT OF COMMISSION ON EXPORTS AND SUM OF RS.1,55,27,136/- O N ACCOUNT OF DOMESTIC SALES. THE ASSESSEE WAS SHOW CAUSED TO FURNISH THE COMPLETE DETAILS IN RESPECT OF THE SAID PAYMENTS BY THE ASSESSING OFFICER. THE ASSESSEE FURNISHED DETAILS OF COMMISSION AGENTS AND THE AMOUNT OF SALES EFFECT ED THROUGH THEM INCLUDING THE RATE OF COMMISSION. THE ASSESSING OFFICER, FRO M THE DETAILS NOTED THAT THE RATE OF COMMISSION PAID TO THE MOST OF THE PARTIES WAS APPROXIMATELY 2.9% ON EXPORT SALES AND ON DOMESTIC SALES, IT VARIED BETWE EN 1% TO 4%. THE ASSESSING OFFICER ALSO NOTED THAT IN RESPECT OF TWO OF THE CO MMISSION AGENTS, THE TOTAL COMMISSION WAS PAID ON 31.3.2000 I.E. AT THE CLOSE OF THE YEAR. THE ASSESSEE FAILED TO FILE ANY CONFIRMATION FROM THE COMMISSION AGENTS BEFORE THE ASSESSING OFFICER AND ALSO NO WRITTEN AGREEMENTS RE GARDING THE PAYMENT OF COMMISSION WAS FILED DURING THE ASSESSMENT PROCEEDI NGS. THE ASSESSING OFFICER AFFORDED VARIOUS OPPORTUNITIES TO THE ASSES SEE WHICH WERE NOT COMPLIED WITH. THE ASSESSING OFFICER FURTHER NOTED THAT SOM E OF THE PARTIES TO WHOM 49 SALES HAD BEEN MADE, HAD ALSO BEEN PAID COMMISSION. HOWEVER, NO SUCH COMMISSION WAS PAID TO MANY OF THE PARTIES TO WHOM EXPORTS HAVE BEEN MADE OR TO WHOM DOMESTIC SALES HAVE BEEN MADE. THE ASSE SSING OFFICER, THUS HELD THAT THERE WAS NO MERIT IN THE COMMISSION PAID TO T HE PARTIES TO WHOM SALES HAD BEEN MADE I.E. P.I. MENSANGAN SAKTI AMOUNTING TO RS .40,97,199/-, M/S EDWARD KELLER (PHILS) INC AMOUNTING TO RS.6,95,475/- AND A LSO MALACHITE CHEMICALS AMOUNTING TO RS.545,257/-. THUS, DISALLOWANCE OF R S.53,37,931/- WAS MADE OUT OF THE COMMISSION PAID BY THE ASSESSEE TO THE R ESPECTIVE PARTIES TO WHOM SALES WERE MADE. FURTHER, IN RESPECT OF COMMISSION PAID TO M/S ACE CORPORATION @ 6.6% AS AGAINST NORMAL RATE OF COMMIS SION AT 3% WAS HELD BY THE ASSESSEE TO BE EXCESSIVE. SIMILAR EXCESSIVE CO MMISSION PAID TO OTHER PARTIES, ALL TOTALING RS.42,77,212/- WAS DISALLOWED BY THE ASSESSING OFFICER. THE ASSESSEE IS IN APPEAL AGAINST SAID DISALLOWANCE . 83. THE DRP VIDE ORDER DATED 20.09.2010 HAD UPHELD THE DISALLOWANCE PROPOSED BY THE ASSESSING OFFICER. 84. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT TH E ALLEGATIONS OF THE ASSESSING OFFICER THAT NO DETAILS WERE FILED, ARE I NCORRECT AS THE PERUSAL OF THE ASSESSMENT ORDER WOULD REFLECT THAT ASSESSEE WAS AP PEARING FROM DAY-TODAY AND WAS FURNISHING THE DETAILS REQUISITIONED DURING THE ASSESSMENT PROCEEDINGS. THE LD. AR FOR THE ASSESSEE REFERRED TO THE VARIOUS REPLIES FILED BEFORE THE ASSESSING OFFICER WHICH ARE APPARENT FROM THE PERUS AL OF THE PARA 5 TO 5.6 OF THE ASSESSMENT ORDER. THE GRIEVANCE OF THE LD. AR FOR THE ASSESSEE WAS THAT THE REPLY OF THE ASSESSEE HAS BEEN SUMMARILY REJECTED B Y THE ASSESSING OFFICER VIDE HIS OBSERVATIONS IN PARA 5.8. THE NEXT OBJECT ION OF THE LD. AR FOR THE ASSESSEE WAS THAT THE COMMISSION AMOUNT REFERRED TO BY THE ASSESSING OFFICER IN RESPECT OF EDWARD KELLAR (PHILS) INC WERE CORREC T. HOWEVER, THE COMMISSION AMOUNT OF MALACHITE CHEMICALS WAS INCORR ECT AND THE SALES AMOUNT IN RESPECT OF THE PARTIES WERE WRONG. IT WAS POINT ED OUT BY THE LD. AR FOR THE 50 ASSESSEE THAT CONFIRMATIONS WERE FILED BEFORE THE D RP WHICH ARE PLACED AT PAGE 305 OF THE PAPER BOOK. HE FURTHER SUBMITTED THAT S IMILAR COMMISSION PAID IN THE SUCCEEDING YEAR HAS BEEN ALLOWED. THE CASE OF THE ASSESSEE WAS THAT THE SAID PARTIES WERE TRADERS AND WERE ALSO ACTING AS C OMMISSION AGENTS AND THE BUSINESS OF THE ASSESSEE WAS CONDUCTED THROUGH SUCH AGENTS WHO WERE MAKING PURCHASES ON BEHALF OF OTHER PARTIES. IT HAS BEEN FURTHER POINTED OUT THAT THE OBSERVATION OF THE ASSESSING OFFICER THAT THE ASSES SEE WAS PAYING COMMISSION ON THE PURCHASES MADE BY THE PARTIES IS INCORRECT A S THE SAID COMMISSION WAS BEING PAID TO PERSONS WHO WERE ACTING AS COMMISSION AGENTS. IN RESPECT OF THE DOMESTIC SALES AND THE COMMISSION THEREON, IT WAS P OINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT THE ASSESSING OFFICER HAD DIS ALLOWED THE COMMISSION BEING HIGHER THAN 3%. THE PLEA OF THE ASSESSEE WAS THAT THE COMMISSION HAD BEEN PAID TO UNRELATED PARTIES AND DURING THE ASSES SMENT PROCEEDINGS, NO QUERIES WERE MADE BY THE ASSESSING OFFICER IN THIS REGARD. 85. THE LD. DR FOR THE REVENUE POINTED OUT THAT TH E ASSESSEE HAD FAILED TO FILE THE CONFIRMATION DURING THE ASSESSMENT PROCEED INGS AND THE CONFIRMATION CLAIMED TO BE FILED IS FILED VERY LATE. FURTHER, I N THE ABSENCE OF ANY WRITTEN AGREEMENT, IT CANNOT BE PRESUMED THAT THE ASSESSEE WAS PAYING COMMISSION. FURTHER, THE ASSESSEE HAS FAILED TO FURNISH ANY DET AILS OF THE BUSINESS SERVICES CONDUCTED BY THE SAID COMMISSION AGENT AND AS THE A SSESSEE HAS FAILED TO JUSTIFY THE RENDERING OF SERVICES BY THE SAID COMMI SSION AGENT, THE SAID EXPENDITURE IS NOT ALLOWABLE IN THE HANDS OF THE AS SESSEE. RELIANCE WAS PLACED ON ASSAM PESTICIDES AND AGRO CHEMICALS VS CIT 227 I TR 846. 86. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED VIDE GROUND NO. 4 IS AGAINST THE DISALLOWANC E OF COMMISSION EXPENSES TOTALING RS.96,15,144/-. DURING THE YEAR UNDER CON SIDERATION, THE ASSESSEE HAD CLAIMED TOTAL EXPENDITURE OF RS.2.60 CRORES UNDER T HE HEAD COMMISSION. THE SAID COMMISSION INCLUDED BOTH COMMISSION PAID ON AC COUNT OF EXPORTS AND ALSO 51 THE COMMISSION PAID ON DOMESTIC SALES. THE CASE OF THE REVENUE IS THAT THE ASSESSEE HAD MADE SALES TO CERTAIN PARTIES, TO WHOM COMMISSION WAS ALSO PAID AND THE SAME BEING NOT RELATABLE TO THE BUSINESS OF THE ASSESSEE, WAS NOT TO BE ALLOWED AS AN EXPENDITURE. HOWEVER, THE CASE OF TH E ASSESSEE BEFORE US IS THAT THE SAID COMMISSION HAS BEEN PAID AGAINST THE PURCH ASE ORDERS BOOKED BY THE SAID CONCERN, WHO WERE ENGAGED IN TRADING AND WERE ALSO COMMISSION AGENTS. THE TWO TRANSACTIONS WERE CLAIMED TO BE DIFFERENT A ND WITHOUT ANY CONNECTION TO EACH OTHER. THE ASSESSEE HAS PLACED ON RECORD T HE DETAILS OF COMMISSION PAID AT PAGES 291 & 292 OF THE PAPER BOOK. THE ABO VESAID DETAILS REFLECT COMMISSION ON EXPORT SALES PAID OF RS.105,63,783/- AND DOMESTIC COMMISSION OF RS.155,27,136/-. THE ASSESSEE HAD FURTHER FURNI SHED THE DETAILS OF THE PARTIES ALONGWITH THE RATES OF COMMISSION, SALES MA DE TO THE SAID PARTIES AND THE TOTAL COMMISSION PAID TO THE SAID PARTIES, WHIC H ARE PLACED AT PAGES 293 AND 294 OF THE PAPER BOOK. AS AGAINST THE EXPORT C OMMISSION, THE ASSESSEE HAD PAID A SUM OF RS.695,475/- ON SALES OF RS.2.35 CRORES TO M/S EDWARD KELLER @ 2.950%. FURTHER COMMISSION OF RS.40,97,19 9/- ON SALE VALUE OF RS.13.80 CRORES HAS BEEN PAID TO P.I. MENSANGAN SAK TI. THE NEXT ITEM OF PAYMENT IS TO M/S MALACHITE CHEMICALS, WHICH AS PER THE ASSESSEE IS RS.885,880/- ON SALE VALUE OF RS.2.98 CRORES @ RS.2 .966%. THE ASSESSING OFFICER HAS ADOPTED THE COMMISSION PAID TO M/S MALA CHITE CHEMICALS AT RS.455,257/-. THE CASE OF THE ASSESSEE BEFORE US I S THAT THE COMMISSION AGENTS ARE ALSO TRADERS OF THE DRUGS AND ARE ALSO ACTING A S COMMISSION AGENTS. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF INTERMEDI ARIES AND BULK DRUGS, WHICH IN TURN ARE UTILIZED BY OTHER CONCERNS FOR THE PREP ARATION OF THE FINAL PRODUCTS. THE ASSESSEE, THROUGH THE SAID COMMISSION AGENTS HA D SOLD THE ITEMS MANUFACTURED BY IT TO DIFFERENT CONCERNS. THE ASSE SSEE HAS PLACED ON RECORD THE CONFIRMATION FROM P.I. MENSANGAN SAKTI IN RESPE CT OF RECEIPT OF 52 COMMISSION OF RS.40,97,199/-. THE SAID CERTIFICATE IS PLACED AT PAGES 305 OF THE PAPER BOOK. WE FIND MERIT IN THE CASE OF THE A SSESSEE. HOWEVER, THE NECESSARY DETAILS IN THIS REGARD ARE NOT AVAILABLE, IN PARTICULAR THE PLEA OF THE ASSESSING OFFICER THAT THE ASSESSEE HAD MADE SALES TO THE SAID PARTIES ON WHICH COMMISSION HAD BEEN PAID. WE, THEREFORE, REMIT THI S ISSUE TO THE FILE OF ASSESSING OFFICER TO VERIFY THE CLAIM OF THE ASSESS EE THAT THE COMMISSION PAID TO THE SAID CONCERN HAD NO CONNECTION WITH THE SALE S MADE TO THE SAID CONCERNS AND IF THE CONTENTION OF THE ASSESSEE IS FOUND TO B E CORRECT, THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CLAIM OF EXPENDITU RE BOOKED ON ACCOUNT OF COMMISSION PAID ON EXPORT SALES. REASONABLE OPPORT UNITY OF HEARING SHALL BE AFFORDED TO THE ASSESSEE TO PUT FORWARD ITS CONTENT IONS. IN VIEW THEREOF, THIS ISSUE IS SET ASIDE TO THE FILE OF ASSESSING OFFICER WITH OUR DIRECTIONS. 87. THE SECOND ASPECT OF THE CLAIM OF EXPENDITURE U NDER THE HEAD COMMISSION RELATES TO THE COMMISSION PAID ON DOME STIC SALES. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD PAID COMMISSION AT VARYING RATES STARTING FROM ABOUT 1% TO 5%. THE ASSESSEE HAS FILED ON REC ORD THE DETAILS OF THE ABOVESAID COMMISSION TOTALING RS.155,27,136/-THE AS SESSEE HAS TABULATED THE NAMES OF THE PARTIES ALONGWITH THE DETAILS OF SAME VALUE OF SALES, COMMISSION PAID AND THE RATES AT WHICH PAID. THE PERUSAL OF T HE SAID DETAILS REFLECT THE COMMISSION @ 4.48% BEING PAID TO M/S ACE CORPORATIO N. THE TOTAL AMOUNT PAID TO THE SAID PARTY IS RS.1351,250/-. THE ASSES SING OFFICER, ON THE OTHER HAND, VIDE PARA 5.12 HAS NOTED THAT THE COMMISSION TO THE SAID PARTY HAS BEEN MADE @ 6.6% VIDE PARA 5.12 AT PAGE 32 OF THE ASSES SMENT ORDER. THE ASSESSEE, ON THE OTHER HAND, HAS FURNISHED THE DETA ILS OF COMMISSION AT PAGES 291 AND 292 OF THE PAPER BOOK IN WHICH THE COMMISSI ON TO M/S ACE CORPORATION HAS BEEN SHOWN AT RS.13,51,250/-. WE A RE IN CONFORMITY WITH THE SUBMISSION OF THE ASSESSEE THAT THE RATE OF COMMISS ION PAID FOR THE TRANSACTION 53 CANNOT BE INTERFERED BY THE ASSESSING OFFICER AS IT IS THE UNDERSTANDING BETWEEN THE PARTIES AT THE RELEVANT TIME WHICH DETE RMINES THE RATE OF COMMISSION TO BE PAID ON A PARTICULAR TRANSACTION. IN VIEW THEREOF, WE REVERSE THE ORDER OF ASSESSING OFFICER IN RESTRICTING THE R ATE OF COMMISSION TO 3% . IN ANY CASE, THE SAID RESTRICTION WAS MADE BY THE ASSE SSING OFFICER OBSERVING THAT THE RATE OF COMMISSION PAID BY THE ASSESSEE WAS 6.6 % WHEREAS THE ASSESSEE CLAIMS THAT IT HAD PAID COMMISSION @ 4.48%. THE OT HER TWO PARTIES TO WHOM COMMISSION HAD BEEN PAID BY THE ASSESSEE AND THE SA ME HAS BEEN RESTRICTED BY THE ASSESSING OFFICER ARE M/S INTEGRATED TECHNOLOGY AND M/S AAKAAR ENGINEERING & MANUFACTURING CO. THE COMMISSION TO THE SAID PARTIES, AS ALLEGED BY THE ASSESSING OFFICER ARE PAID @ 6.90% A ND 6.76% RESPECTIVELY. IN LINE WITH OUR OBSERVATIONS HEREIN ABOVE, WE FIND NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER RESTRICTING TO RATE O F COMMISSION TO 3% AS AGAINST THE RATES AGREED UPON BETWEEN THE PARTIES. REVERSING THE ORDER OF THE ASSESSING OFFICER, WE DELETE THE ADDITION OF RS.42, 77,213/-. THE GROUND NO. 4 RAISED BY THE ASSESSEE IS, THUS PARTLY ALLOWED. 88. THE GROUND NO. 5 RAISED BY THE ASSESSEE IS AGAI NST THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE ACT. THE CASE OF THE ASSESSEE WAS THAT THE SAID PROVISIONS WERE NOT APPLICABLE AS THE ASSESSEE HAD MADE ONLY ONE INVESTMENT OF RS.5 CRORES IN 1996 IN M/S HINDUSTAN MAX- GB LTD. ON WHICH THE ASSESSEE WAS RECEIVING INTERES T. HOWEVER, SINCE THE SAID COMPANY HAD GONE INTO LIQUIDATION, NO INTEREST WAS RECEIVED FROM THE SAID PARTIES. IT WAS FURTHER POINTED OUT THAT AT THE TI ME OF INVESTMENT, THE DIVIDEND INCOME WAS TAXABLE AND IN ANY CASE, THE INVESTMENT WAS MADE TO DO BUSINESS OF PURCHASE OF RAW MATERIALS FROM THE SAID CONCERN. A NOTHER CONTENTION OF THE LD. AR WAS THAT THE SAID INVESTMENT WAS MADE OUT OF OWN FUNDS AND HENCE, NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFF ICER. 54 89. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER FROM THE BALANCE-SHEET NOTED THE INVESTMENT OF RS. 5 CRO RES IN SHARES OF M/S HINDUSTAN MAX-GB LTD. THE SAID INVESTMENT WAS MADE IN THE EARLIER YEARS ON WHICH THE ASSESSEE WAS EARNING INTEREST. WHILE DEC IDING GROUND NO.3 OF THE PRESENT APPEAL, WE HAVE DELIBERATED UPON THE ISSUE OF DISALLOWANCE OF INTEREST RELATABLE TO SUCH ADVANCES MADE BY THE ASSESSEE ON WHICH AS PER THE ASSESSING OFFICER, NO INTEREST WAS CHARGED AS AGAINST THE INT EREST EXPENDITURE INCURRED BY THE ASSESSEE. IT IS AN ADMITTED POSITION THAT THE ASSESSEE WAS RECEIVING INTEREST ON THE SAID ADVANCES. THE SAID INVESTMENT WAS MADE FOR BUSINESS PURPOSES I.E. FOR THE PURCHASE OF RAW MATERIAL FROM THE SAID CONC ERN. HOWEVER, AS THE SAID CONCERN WAS IN FINANCIAL CONSTRAINT, THE APPLICATIO N WAS MADE BEFORE THE BIFR BY THE SAID CONCERN AND THEREAFTER, NO INTEREST WAS BEING CHARGED BY THE ASSESSEE ON THE SAID ADVANCES. ADMITTEDLY, THE SAI D INVESTMENT WAS NOT MADE DURING THE YEAR UNDER CONSIDERATION, AS IS APPARENT FROM THE FACT THAT THE ISSUE OF DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III ) OF THE ACT IN RELATION TO THE SAID ADVANCE, AROSE BEFORE THE TRIBUNAL IN ASSESSME NT YEAR 2003-04 AND THEREAFTER. IN THE TOTALITY OF THE ABOVESAID FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT NO DISALLOWANCE IS WARRANTED UNDER SE CTION 14A READ WITH RULE 8D OF IT RULES AS THE SAID INVESTMENT HAD BEEN MADE BY THE ASSESSEE IN A JOINT VENTURE FOR BUSINESS EXPEDIENCY. ACCORDINGLY, WE D IRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.12,40,501/-. GROUND N O.5 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 90. GROUND NO.6 RAISED BY THE ASSESSEE HAS BEEN ADJ UDICATED ALONGWITH GROUND NO.2 RAISED BY THE REVENUE AND GROUND NO. 2. 3 RAISED BY THE ASSESSEE IN THE APPEAL RELATING TO ASSESSMENT YEAR 2005-06. IN LINE WITH OUR DIRECTIONS, THE ASSESSING OFFICER/TPO IS DIRECTED TO RECOMPUTE THE MEAN RATIO OF THE COMPARABLE IN ORDER TO DETERMINE THE ARMS LENGTH PR ICE OF THE INTERNATIONAL 55 TRANSACTION ENTERED UPON BY THE ASSESSEE. THUS, GR OUND NO. 6 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 91. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE AND APPEAL BY THE REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF AUGUST, 2013. SD/- SD/- (T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 8 TH AUGUST , 2013 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH