Dishman Pharmaceuticals & Chemicals Ltd., Ahmedabad V. The ACIT.,Cricle-1, Ahmedabad

ITA 154/AHD/2007

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 2054 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 21-01-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 09-01-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V K GUPTA
• Keywords: Unexplained cash credit; Transfer pricing; International transaction; Proportionate interest; Commercial expediency; Revenue expenditure; Capital expenditure; Set aside
• Section: 271(1)(c); 92C; 80HHC; 14A; 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI D. C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.154 & 587/AHD/2007 & ITA NO.2180 & 3213/AHD/2007 ASSESSMENT YEARS: 2003-04 & 2004-05 DATE OF HEARING:141211 DRAFTED: 15.2.11 DISHMAN PHARMACEUTICALS & CHEMICALS LTD., BHADRARAJ CHAMBERS, SWASTIK CROSS ROADS, AHMEDABAD PAN NO.AAACD4164D DCIT (OSD) RANGE-1, 3 RD FLOOR, JITENDRA CHAMBERS, NR. NEDW RBI LANE, ASHRAM ROAD, AHMEDABAD- 380 014 ACIT (OSD), RANGE-1, AHMEDABAD V/S . V/S . V/S . DCIT,(OSD), RAANGE-1, AHMEDABAD DISHMAN PHARMACEUTICALS & CHEMICALS LTD. AHMEDABAD DISMAN PHARMACEUTICALS & CHEMICALS LTD. AHMEDABAD (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI TUSHAR P HEMANI, AR REVENUE BY:- SHRI V.K. GUPTA, DR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THESE TWO SET OF CROSS-APPEALS ARE ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-V, AHMEDABAD IN APPEAL NOS. CIT(A)-V/DCIT(OSD)1/97& 207/2006-07 BY DIFFERENT DATE 22-11-2006 & 01-05-20 07. THE ASSESSMENTS WERE FRAMED BY DCIT(OSD), RANGE-1, AHMEDABAD U/S143(3) O F THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORD ER DATED 16-03-2006 AND 19-03-2006 FOR ASSESSMENT YEARS 2003-04 AND 2004-05 RESPECTIVE LY. FIRST WE WILL DEAL WITH ASSESSEES APPEAL NO. 154 & 2180/AHD/2007 FOR A.Y. 2003-04 & 2004-05 ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 2 2. THE FIRST COMMON ISSUE IN THESE APPEALS OF THE A SSESSEE IS AGAINST THE ORDER OF CIT(A) CONFIRMING THE ACTION OF THE ASSESSING OF FICER IN NOT GRANTING EXEMPTION OF DIVIDEND INCOME. FOR THIS, THE ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.1 IN ASSESSMENT YEAR 2003-04 AND IDENTICAL GROUND IS RAI SED IN ASSESSMENT YEAR 2004- 05. FOR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE GROUND FOR ASSESSMENT YEAR 2003-04. 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN NOT GRANTING EXEMPTION U/S 10(33) OF THE A CT ON THE DIVIDEND INCOME OF RS.27,918/-. 3. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE FAIRL Y STATED THAT HE HAS INSTRUCTION FROM THE ASSESSEE NOT TO PRESS THIS ISSUE DUE TO SM ALLNESS OF AMOUNT. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED. 4. THE SECOND COMMON ISSUE IN THESE APPEALS OF ASSE SSEE IS AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE EXPENSES BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.2 IN ASSESSMENT YEAR 2003-04 AND IDENTICAL GROUND IS RAISED IN ASSESSMENT YEAR 2004-05. FOR TH E SAKE OF CONVENIENCE, WE ARE REPRODUCING THE GROUND FOR ASSESSMENT YEAR 2003-04:- THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS I N CONFIRMING THE ACTION OF AO IN APPLYING THE PROVISIONS OF SEC.14A OF THE ACT IN DISALLOWING AN AMOUNT OF RS.2,193/-. 5. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE FAIRL Y STATED THAT HE HAS INSTRUCTION FROM THE ASSESSEE NOT TO PRESS THIS ISSUE DUE TO SM ALLNESS OF AMOUNT. ACCORDINGLY, THE SAME IS DISMISSED AS NOT PRESSED. 6. THE NEXT COMMON ISSUE IN THESE APPEALS OF ASSESS EE IS AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF DEDUCTION U/S.80HHC OF THE ACT ON THE SALE PROCEEDS OF DEPB. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING GROUNDS NO. 3 TO 7 IN ASSESSMENT YEAR 2002-03 AND IDENTICAL GROUNDS NO . 4 TO 8 ARE RAISED IN ASSESSMENT YEAR 2004-05. FOR THE SAKE OF CONVENIENC E, WE ARE REPRODUCING THE GROUNDS FOR ASSESSMENT YEAR 2003-04 - 3.THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN REDUCING PROFITS OF THE BUSINESS ON ACCOUNT OF SALE PROCEEDS OF DEPB LICENS E WHILE CALCULATING DEDUCTION U/S 80HHC OF THE ACT WITHOUT APPRECIATING THE CLAIM OF THE ASSESSEE UNDER THE AMENDED PROVISIONS OF S. 80HHC O F THE ACT. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 3 4.ALTERNATIVELY AND WITHOUT PREJUDICE, ONLY 90% OF THE PROFITS AND NOT THE ENTIRE SALE PROCEEDS OF DEPB LICENSE COULD HAVE BEEN REDUC ED FROM THE PROFITS OF THE BUSINESS. 5. ALTERNATIVELY AND WITHOUT PREJUDICE, IF PROFIT O N SALE OF DEPB LICENSES IS NOT FALLING WITHIN THE PURVIEW OF S. 28(IIIA)/(IIIB)/(I IIC) OF THE ACT, THE SAME IS NOT LIABLE TO TAX AT ALL AND THEREFORE THE SAME HAS TO BE REDUCED FROM THE TAXABLE INCOME OF THE APPELLANT. 6. ALTERNATIVELY AND WITHOUT PREJUDICE, EVEN AS PER THE PROVISIONS OF TAXATION LAWS (SECOND AMENDMENT) ACT, 2005, THE SAID DEPB SA LE PROCEED IS ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE ACT. 7.ALTERNATIVELY AND WITHOUT PREJUDICE LD. CIT(A) FA ILED TO APPRECIATE THAT THE SAID SALE PROCEEDS OF THE DEPB LICENSE ARE COVERED BY 28(IV) OF THE ACT AND THEREFORE DEDUCTION U/S 80HHC OF THE ACT OUGHT TO H AVE BEEN ALLOWED FULLY ON THE SAME. 7. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE STAT ED THAT ALL THESE COMMON GROUNDS IN BOTH YEARS RELATES TO ONLY ONE ISSUE OF ALLOWANCE OF CLAIM OF DEPB WHILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT. HE STATED THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 3830/AHD/2003, 2705/AHD/2004, 2339/AHD/2005 FOR A.Y S. 00-01, 01-02 & 02-03 AND ALSO BY THE ORDER OF THIS TRIBUNAL IN THE CASE OF T HE ASSESSES ASSOCIATE CONCERN, I.E. SCHUTZ DISHMAN BIOTECH PVT. LTD. BY ITA NO. 3590/AH D/2007, FOR A.Y. 04-05. IN BOTH THOSE DECISIONS, THE MATTER HAS BEEN SET ASIDE TO T HE FILE OF AO TO RE-EXAMINE AND RE-ADJUDICATE THE CLAIM AS PER LAW. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY THIS TRIBUNAL IN ASSESSEES SISTER CONCERN SCHUTZ DISHMAN BIOTECH PVT. LTD. BY ITA NO. 3590/AHD/2007, FOR A.Y. 04-05, RESPECTFULLY FOLLOWI NG THIS DECISION, WE RESTORE THE ISSUE TO THE FILE OF ASSESSING OFFICER TO DECIDE TH E SAME AS PER THE ABOVE DECISION. ACCORDINGLY, THIS COMMON ISSUE OF BOTH THE APPEAL O F ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 9. THE NEXT COMMON ISSUE IN THIS APPEAL OF ASSESSEE IS AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE LEVY OF INTEREST U/S.234A/ B/C OF THE ACT. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.8 FOR THE ASSESSMENT YEAR 2002-03 AND IDENTICAL GROUND NO.9 IS RAISED IN ASSESSMENT YEAR 2004-05. FOR THE SAKE OF CONVENIENCE, WE ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 4 ARE REPRODUCING THE GROUND FOR ASSESSMENT YEAR 2003-04:- 8. LD. CIT(A) HAS ERRED IN LAW IN CONFIRMING THE L EVY OF INTEREST U/S 234A/B/C OF THE ACT. 10. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THIS COMMON GROUND OF APPEAL IS CONSEQUENTIAL IN NATURE, HENCE, REQUIRES NO ADJUDICATION. ACCORDINGLY, THE SAME IS TREATED AS CONSEQUENTIAL. 11. THE NEXT COMMON ISSUE IN THESE APPEALS OF ASSES SEE IS AGAINST THE ORDER OF CIT(A) IN CONFIRMING THE INITIATION OF PENALTY PROC EEDING U/S 271(1)(C) OF THE ACT. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.9 FOR THE ASSESSMENT YEAR 2002- 03AND IDENTICAL GROUND NO.10 IS RAISED IN ASSESSMENT YEAR 2004-05. FOR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE GROUND FOR ASSESSMENT YEAR 2003-04:- 9.LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF AO IN INITIATING PENALTY UNDER SECTION 271(1)(C) OF TH E ACT WITHOUT RECORDING MANDATORY SATISFACTION AS CONTEMPLATED UNDER THE AC T. 12. AT THE OUTSET IT IS STATED THAT THIS GROUND IS PREMATURE AND REQUIRES NO ADJUDICATION. 13. THE NEXT ISSUE IN ITA NO.2180/AHD/2007 FOR ASSESSMENT YEAR 2004-05 OF ASSESSEES APPEAL IS AS REGARDS TO THE ORDER OF CIT (A) IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN ADDING UNEXPLAINED CASH CREDIT S. FOR THIS, ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.3 :- 3. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN ADDING RS.15,00,000/- AS UNEXPLAINED CASH CREDIT IN THE HANDS OF THE APPELLANT. 14. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE HAS FILED WRITTEN SUBMISSION ADMITTING THE ADDITION ON AGREED BASIS AS UNDER:- IT IS THE CONTENTION OF THE ASSESSING OFFICER THAT THESE ARE BOGUS CASH CREDIT INTRODUCED BY THE ASSESSEE AND THEREFORE HE ADDED R S.15,00,000/- AS UNEXPLAINED CASH CREDIT IN THE HANDS OF THE APPELLA NT. THE APPELLANT MOST RESPECTFULLY SUBMITS THAT THESE ARE NOT ANY CREDITS BUT THE APPELLANT HAS PURCHASED RAW MATERIALS FROM SOME PARTIES AND THE A BOVE STATED PERSONS HAVE PAID ON BEHALF OF THE APPELLANT AND THEREFORE PROVISIONS OF S. 68 SHALL NOT APPLY. IN ANY CASE CONFIRMATION OF THE ABOVE STATED PARTIES ARE ATTACHED HERETO AT PAGE 143-145 OF THE PAPER BOOK. SINCE THE SE CONFIRMATIONS ARE NOT SIGNED, THE CASH CREDIT SHALL HAVE TO BE CONFIRMED. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 5 WE FIND THAT DURING THE YEAR UNDER CONSIDERATION, T HE ASSESSEE MADE PURCHASE OF RAW MATERIALS AMOUNTING TO RS.15 LAKH AND THE FOLLO WING THREE PARTIES MADE PAYMENT TO THE SUPPLIERS ON BEHALF OF THE ASSESSEE:- SR. NO. NAME OF THE PARTY AMOUNT (RS) 1 JANKI SHAH 7,00,000 2 PIYUSH G SHAH 5,50,000 3 PIYUSH G SHAH (HUF) 2,50,000 TOTAL 15,00,000 WE FIND THAT THE ASSESSEE HAS ADMITTED THIS ADDITIO N, ACCORDINGLY SAME IS CONFIRMED. THIS ISSUE OF THE ASSESSEES APPEAL IS DISMISSED. NOW COMING TO REVENUES APPEALS IN ITA NO.587/AHD/2 007 AND 3213/AHD/2007 FOR A.Y. 2003-04 AND 2004-05. SINCE THE ISSUES AND FACTS ARE EXACTLY COMMON EXCEP T AMOUNT, WE WILL TAKE UP THE ISSUE FROM ASSESSMENT YEAR 2003-04 IN ITA NO.587/AHD/2007 AND DECIDE THE ISSUES FOR BOTH THE YEARS. BOTH, THE LD. COUNSEL FOR ASSES SEE AS WELL AS LD. CIT-DR AGREED FOR THE SAME. 15. THE FIRST COMMON ISSUE IN THESE APPEALS OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN RESPECT TO ISO CERTIFICATION EXPENSES. FOR THIS, REVENUE HAS R AISED THE FOLLOWING GROUND NO.1 IN ITA NO.587/AHD/2007:- 1. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG:- I ) TO ALLOW ISO CERTIFICATION EXPENSES OF RS.66,1213 /- AS REVENUE EXPENSES IN ITA NO.3213/AHD/2007 FOLLOWING IS GROUND NO.1 :- 1. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TO ALLOW ISO CERTIFICATIONS EXPENSES AS REVENUE EXPENSES AMOUNTING TO RS.1,09,7 80/-. 16. THE BRIEF FACTS ARE THAT THE CIT(A) DELETED THE DISALLOWANCE OF ISO EXPENSES AMOUNTING TO RS.66,123/- MADE BY AO. AO DISALLOWED EXPENSES OF RS.66,123/- BEING ISO CERTIFICATION EXPENDITURE, TREATING IT AS CAPITAL EXPENDITURE. THE ASSESSING OFFICER HAS OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, ASSESSEE PAID PROFESSIONAL FEES OF RS.66,123/- TOWARDS OBTAINI NG ISO 9002 CERTIFICATION. AS PER THE ASSESSING OFFICER, SAID EXPENDITURE IS CAPITAL IN NATURE AND, THEREFORE, CANNOT BE ALLOWED AS REVENUE EXPENDITURE. THE ASSESSEE BEFORE CIT(A) STATED THAT ISO 9002 CERTIFICATE CERTIFIES THAT THE HOLDER OF THE CERTI FICATE IS CONSISTENT IN DOING ITS ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 6 COMMERCIAL ACTIVITIES AS PER THE STANDARDS SET THE REIN. THIS CERTIFICATE COUPLED WITH THE QUALITY OF PRODUCT OF THE ASSESSEE COMPANY AND OTHER ASPECTS HELP THE ASSESSEE COMPANY CREATE A BETTER REPUTATION AND CREDIBILITY IN THE INTERNATIONAL MARKET. THIS IS NOT A ONE TIME EXPENDITURE AND ONE TIME CERTIFICATE BUT THE PROCESS IS A CONTINUOUS ONE AND IF THE ASSESSEE COMPANY DOES NOT ADHERE TO THE ISO STANDARDS, THE CERTIFICATE MAY BE WITHDRAWN. THUS, THE SAID CERTI FICATE HAS A DIRECT BEARING ON THE PROFIT OF THE ASSESSEE COMPANY. THE ASSESSEE BEFO RE US ALSO STATED THAT THIS GROUND OF APPEAL IS SQUARELY AND DIRECTLY COVERED I N FAVOUR OF THE ASSESSEE BY THE ORDER OF THIS TRIBUNAL IN THE CASE OF THIS VERY ASS ESSEE IN ITA NO. 3830/AHD/2003, 2705/AHD/2004, 2339/AHD/2005 FOR A.YS. 00-01, 01-02 & 02-03. THE EXPENDITURE HAS BEEN HELD TO BE REVENUE IN NATURE. WE FIND THAT THIS ISSUE HAS BEEN ALLOWED BY THE TRIBUNAL IN FAVOUR OF ASSESSEE VIDE PARA-5 & 6 AS UNDER:- 5. THE LD. DR HAS SUPPORTED THE ORDER OF THE ASSES SING OFFICER, WHEREAS THE LD. COUNSEL FOR THE ASSESSEE HAS SUPPORTED THE ORDE R OF THE CIT(APPEALS), AFTER RELYING ON THE DECISION OF JURISDICTIONAL HIG H COURT IN THE CASE OF CIT VS. ARVIND MILLS LTD. (145 TAXMAN 202) HAVING BEEN RELIED UPON BY THE CIT(APPEALS) ALSO] AND SUBSEQUENT DECISION OF ITA A HMEDABAD BENCH D IN THE CASE OF JT. CIT VS. M/S. PLASTICHEMIX INDUSTRIES FOR ASST. YEAR 1997-98 IN ITA NO.1717/AHD/2001, DATED 09/03/2007, WHEREIN THE EXPENDITURE PAID ON ACCOUNT OFISO-9002 CERTIFICATE HAS BEEN ALLOWED AND HE RELEVANT FINDINGS OF THE TRIBUNAL AS CONTAINED IN PARAGRAPH NO.10, READ AS UNDER:- 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD AND ALSO THE DECISION CITED BY THE LEARNED AR OF THE ASSESSE E. IN THE CASE OF ACIT V. UPPER INDIA STEEL MFG. & ENGG. CO. (150 TAXMAN 51), THE EXPENDITURE INCURRED BY THE ASSESSEE-COMPANY FOR IS SUE OF ISO-9002 CERTIFICATE WAS DISALLOWED BY THE ASSESSING OFFICER HOLDING THAT THE AMOUNT WAS IN NATURE OF CAPITAL EXPENDITURE. ON APP EAL, THE COMMISSIONER (APPEALS) DELETED THE IMPUGNED ADDITIO N MADE BY THE ASSESSING OFFICER HOLDING THAT THE AMOUNT HAD BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSES OF FACILITATING ITS BUSIN ESS THEREBY MAKING IT MORE EFFICIENT AND PROFITABLE BECAUSE PROCUREMENT O F SUCH CERTIFICATE NOT ONLY ENSURED CERTIFIED LEVEL OF THE QUALITY OF THE PRODUCT BUT ALSO BOOSTED THE SALES OF THE ASSESSEE. ON APPEAL THE TR IBUNAL UPHELD THE ORDER OF THE CIT(A). FACTS IN THE INSTANT CASE BEIN G SIMILAR, RESPECTFULLY FOLLOWING THE SAID DECISION OF THE ITAT, CHANDIGARH REFERRED TO ABOVE, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE A PPEAL OF THE REVENUE ON THIS GROUND. 6. AFTER CAREFUL CONSIDERATION OF THE RIVAL SUBMISS IONS, FACTS AND CIRCUMSTANCES OF THE CASE, DECISION OF JURISDICTION AL HIGH COURT AS WELL AS THE DECISION (SUPRA) AND THE FACT THAT THE DR HAS NOT BROUGHT ANY DECISION CONTRARY TO THE AFORESAID DECISIONS TO OUR NOTICE, WE ARE OF THE OPINION THAT THE ISSUE INVOLVED IN GROUND NO.1 STANDS COVERED IN FAVOUR OF ASSESSEE AND ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 7 AGAINST THE REVENUE BY THE AFORESAID TWO DECISIONS AND, THEREFORE, RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE ORDE R OF THE CIT(APPEALS) ON THIS POINT. REVENUES GROUND NO.1 IS REJECTED. WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVO UR OF THE ASSESSEE AND AGAINST REVENUE BY THIS TRIBUNALS DECISION IN ASSESSEES O WN CASE FOR ASSESSMENT YEAR 2000-01. RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THE CLAIM OF THE ASSESSEE AND UPHOLD THE ORDER OF CIT(A). THIS COMMON ISSUE IN BO TH THE APPEAL OF REVENUE IS DISMISSED. 17. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE R EVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE OF INTEREST ON INTEREST FREE ADVANCES MADE BY ASSESSING OFFICER. FOR THIS, THE REVENUE IN ITA NO.587/AHD/2007 FOR ASSESSMENT YEAR 2003-04, READS AS UNDER:- 1. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG II) TO ALLOW INTEREST OF RS.47,40,000/- DISALLOWED ON INTEREST-FREE ADVANCES. IN ITA NO.3213/AHD./2007 FOR ASSESSMENT YEAR 2004-0 5, THE GROUND READS AS UNDER:- 2. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TO ALLOW INTEREST OF RS.47,35,200/- DISALLOWED ON INTEREST FREE ADVANCES . 18. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAS DIVERTED THE INTEREST BEARING FUNDS FOR THE PURPOSE OF MAKING INVESTMENT IN GROUP COMPANIES AND THEREFORE HE DISA LLOWED INTEREST @ 12% ON RS.3.95 CRORES FOR THE YEAR WHICH COMES TO RS.47,40 ,000/-. THE ASSESSEE BEFORE THE CIT(A) SUBMITTED THAT THE ENTIRE APPROACH OF THE AS SESSING OFFICER IS ERRONEOUS AND PATENTLY UNTENABLE UNDER THE LAW. THE ASSESSEE MADE INVESTMENTS IN ITS GROUP CONCERNS AND THE SAME WAS SHOWN IN THE HEAD SHARE A PPLICATION MONEY, PENDING THE FINAL ALLOTMENT OF SHARES. IT IS THE NORMAL PRA CTICE OF THE ASSESSEE TO INVEST IN THE SHARES OF GROUP CONCERNS AND AS A MATTER OF FACT BY INVESTING IN THE SHARES OF GROUP CONCERNS AND THUS BY PROMOTING AND NURTURING THESE GROUP COMPANIES, THE ASSESSEE MAKES HUGE PROFIT. AS A MATTER OF FACT, IN THE A.Y. 2000-2001 ONLY, BY SELLING SHARES IN ONE OF THE OTHER GROUP CONCERNS, THE ASSESSEE MA DE CAPITAL GAIN IN THE SUM OF RS.33,20,000/- AND THIS REALLY SHOWS THAT THE INVES TMENT IS A PART OF BUSINESS ACTIVITIES OF THE ASSESSEE. FURTHER THESE GROUP CON CERNS ARE ALSO IN THE SAME LINE OF BUSINESS AND THEREFORE BY MAKING INVESTMENTS IN SHA RE CAPITAL OF THESE COMPANIES, ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 8 THE ASSESSEE ENSURES SMOOTH BUSINESS RELATIONS, TIM ELY SUPPLY OF MATERIALS AND PROPER EXECUTION OF THE JOB WORK AT A GREAT COMFORT LEVEL. THE INVESTMENT IN THE SHARES WAS THEREFORE FOR THE PURPOSE OF THE BUSINES S. ACCORDINGLY, IT WAS SUBMITTED BEFORE THE CIT(A) THAT THE ASSESSEE MUST GET THE IN TEREST EXPENDITURE EITHER UNDER SEC.36(1) (III) OF THE ACT OR UNDER SEC.57(III) OF THE ACT. 19. BEFORE US ALSO IT WAS STATED THAT THE ASSESSING OFFICER HAS FAILED TO ESTABLISH THE NEXUS BETWEEN THE AMOUNT BORROWED AND ALLEGEDLY INVESTED AS SHARE APPLICATION MONEY IN THE GROUP CONCERNS. THERE IS NOT A WHISPER MUCH LESS DISCUSSION IN THE BODY OF THE ASSESSMENT ORDER ON ESTABLISHING NEXUS BETWEEN THE AMOUNT BORROWED AND AMOUNT LENT. NOWHERE IN THE ENTIRE ASSESSME NT ORDER, THE ASSESSING OFFICER HAS MENTIONED THAT THE VERY SAME AMOUNTS WHICH WER E BORROWED DURING THE YEAR, HAVE BEEN LENT TO THESE ENTITIES. LEGALLY, IT IS WELL SETTLED THAT IN ORDER TO DISALLOW THE INTEREST ON THE GROUND OF DIVERSION OF FUNDS BO RROWED, FOR NON-BUSINESS PURPOSES, THE NEXUS HAS TO BE ESTABLISHED BETWEEN T HEM. THE ASSESSEE HAS NOT DIVERTED THE INTEREST BEARING FUNDS FOR THE PURPOSE OF MAKING INVESTMENTS IN THE GROUP CONCERNS. THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT SO AS TO MAKE THESE INVESTMENTS OUT OF THE SAID INTEREST FREE FUNDS. THE ASSESSEE HAS SHARE CAPITAL OF RS.10,30,00,000/- AND RESERVE AND SURPLUS OF RS.38,35,47,746/-. FOR THIS THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 258 OF THE PAPER BOOK. FINALLY IT WAS STATED THAT THIS ISS UE IS SURELY AND DIRECTLY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THIS TRIBUNA L IN THE CASE OF THIS VERY ASSESSEE IN ITA NO. 3830/AHD/2003, 2705/AHD/2004, 2339/AHD/2005 FOR A.YS. 00-01, 01-02 & 02-03. 20. WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY TRIBUNALS DECISION IN ASSESSEES OW N CASE IN ITA NO.3830/AHD/2007 VIDE PARA-22 AS UNDER:- 22. AFTER CAREFUL CONSIDERATION OF THE RIVAL SUBMI SSIONS, FACTS AND CIRCUMSTANCES OF THE CASE AND THE FACT THAT THE REV ENUE HAS NOT DISPUTED THE FACTUAL POSITION AS TO THE FACT THAT THE BORROWINGS IN QUESTION WERE FOR THE PURPOSE OF ASSESSEES BUSINESS, THE ASSESSEE WAS HA VING INTEREST-FREE FUNDS MORE THAN THE INVESTMENTS IN QUESTION, THE ASSESSEE WAS IN THE BUSINESS OF SALE/PURCHASE OF SHARES, WE FOR THE REASONS STATED BY THE CIT(APPEALS) AND THE PROPOSITION OF LAW HELD BY THE TRIBUNAL AS WELL AS APEX COURT IN THE AFORESAID DECISIONS, ARE OF THE OPINION THAT THERE IS NO ILLEGALITY OR INFIRMITY IN ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 9 THE ORDER OF THE CIT(APPEALS) AND, THEREFORE, WE F IND OURSELVES UNABLE TO INTERFERE WITH HIS ORDER ON THIS POINT, WHICH IS CO NFIRMED. GROUND NO.4 OF THE REVENUES APPEAL IS REJECTED. WE FIND FROM THE ABOVE THAT THIS COMMON ISSUE OF RE VENUES APPEALS IS COVERED AGAINST REVENUE AND IN FAVOUR OF ASSESSEE. ACCORDIN GLY, THIS COMMON ISSUE OF REVENUES APPEALS IS DISMISSED. 21. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE R EVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE OF INTEREST EXPENSES ON SECURITY DEPOSIT MADE BY ASSESSING OFFICER. FOR THIS, THE REVENUE IN ITA NO.587/AHD/2007 FOR ASSESSMENT YEAR 2003-04, READS AS UNDER:- 1. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG III) TO ALLOW INTEREST EXPENSES ON SECURITY DEPOSI T OF RS.2,53,310/- IN ITA NO.3213/AHD./2007 FOR ASSESSMENT YEAR 2004-0 5, THE GROUND READS AS UNDER:- 3. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TO ALLOW INTEREST EXPENSES OF RS.2,53,210/-ON SECURITY DEPOSITS. 22. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT ASSESSEE HAS GIVEN SECURITY DEPOSIT OF RS.15,83,932/- TO SMT. ADITI J. VYAS AND RS.5,26,154/- TO SHRI J R VYAS TOWARDS RENTED PREMISES USED AS OFFICE OF THE ASSESSEE. THE ASSESSING OFFICER STATED THAT, SINCE THESE PERSONS ARE DIRECTORS OF T HE ASSESSEE, THERE IS NO NEED TO PLACE SECURITY DEPOSIT AND THEREFORE HE DISALLOWED RS.2,53,210/- OUT OF INTEREST EXPENDITURE ON THE GROUND THAT INTEREST BEARING FUN DS HAVE BEEN DIVERTED FOR NON- BUSINESS PURPOSES. THE ASSESSEE BEFORE THE LD. CIT( A) STATED THAT ADMITTEDLY THE ASSESSEE HAS BEEN USING THE SAID OFFICE PREMISES FO R ITS BUSINESS PURPOSES AND THEREFORE THE SAID AMOUNT HAS BEEN GIVEN AS SECURIT Y DEPOSIT. IF THAT BE SO, IT CANNOT BE SAID THAT MONEYS HAVE BEEN USED FOR NON-BUSINESS PURPOSES. IN ANY CASE THE ASSESSEE HAS NOT DIVERTED THE INTEREST BEARING FUND S FOR THE PURPOSE OF MAKING INVESTMENTS IN THE GROUP CONCERNS. THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT SO AS TO MAKE THESE INVESTM ENTS OUT OF THE SAID INTEREST FREE FUNDS. THE ASSESSEE HAS SHARE CAPITAL OF RS.10,30,0 0,000/- AND RESERVE AND SURPLUS OF RS.38,35,47,746/-. LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 258 OF THE ASSESSEES PAPER BOOK AND FOR THE ABOVE CONTENTION, RELIANCE WAS PLACED ON FOLLOWING: ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 10 MUNJAL SALES CORPORATION VS. CIT 298 ITR 298 (SC) CIT VS. RELIANCE UTILITIES & POWER LTD. 313 ITR 34 0 (BOM.) FURTHER, THE ASSESSEE STATED THAT THE ADVANCES TO S ISTER CONCERN WERE FOR BUSINESS PURPOSES OUT OF COMMERCIAL EXPEDIENCY AND THEREFORE ALSO DISALLOWANCE MADE BY THE LD. AO CANNOT BE SUSTAINED. HE ALSO PLACED RELI ANCE ON S. A. BUILDERS (288 ITR 1) (SC). 23. WE FIND THAT THIS ISSUE IS VERY CLEAR THAT THE ASSESSEE HAS NOT USED THE INTEREST BEARING FUNDS FOR THE PURPOSE OF ADVANCING THE SAME AND EVEN OTHERWISE THE ASSESSEES SHARE CAPITAL OF RS.10.30 CRORES AND RS. 38.35 CRORES OF SURPLUS AND RESERVE WAS AVAILABLE. ACCORDINGLY, FOLLOWING MUNJAL SALES CORPORATION (SUPRA), WE ALLOW THE CLAIM OF THE ASSESSEE AND UPHOLD THE ORDE R OF CIT(A). THIS COMMON ISSUE OF REVENUES APPEALS IS DISMISSED. 24. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE R EVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION MADE BY ASSESSI NG OFFICER ON ACCOUNT OF DIFFERENCE IN STOCK AS PER BOOKS OF ACCOUNT AND AS PER BANK STATEMENT. FOR THIS, THE REVENUE IN ITA NO.587/AHD/2007 FOR ASSESSMENT YEAR 2003-04, READS AS UNDER:- 1. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG IV) TO DELETE THE DIFFERENCE OF RS.941,43,486/- BEI NG STOCK AS PER BOOKS AND AS PER BANK STATEMENTS ADDED TO TOTAL INCOME. IN ITA NO.3213/AHD./2007 FOR ASSESSMENT YEAR 2004-0 5, THE GROUND READS AS UNDER:- 5. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TO DELETE THE DIFFERENCE BETWEEN STOCK AS PER BOOKS AND AS PER BANK STATEMEN TS AMOUNTING TO RS.3,288,63,913/-. 25. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER ISSUED NOTICES TO THE BANKS AND OBTAINED INVENTORY STATEMENTS FROM THE RESPECTIVE B ANKS. THE ASSESSING OFFICER THEREAFTER COMPARED THE SAID STOCK STATEMENTS WITH THE STOCK AS APPEARING IN THE BOOKS OF ACCOUNTS AND REACHED TO A CONCLUSION THAT THERE WAS A DIFFERENCE OF STOCK BOTH IN TERMS OF QUANTITY AS WELL AS VALUATION RUNN ING INTO RS.9,41,43,486/- AND THEREFORE HE ADDED THE SAME AS UNEXPLAINED INVESTME NTS IN THE HANDS OF THE ASSESSEE. THE ASSESSEE BEFORE THE CIT(A) STATED THA T THERE IS NO DIFFERENCE IN THE STOCK AS APPEARING IN THE BOOKS OF ACCOUNTS AND AS SUBMITTED TO THE BANKS FOR ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 11 OBTAINING VARIOUS CREDIT FACILITIES AS ALLEGED BY A SSESSING OFFICER OR FOR THE REASONS AS ALLEGED ARE NOT AT ALL. AS A MATTER OF FACT ON A N OVERALL BASIS THE POSITION OF STOCK AS ON 25/03/2003 WAS AS FOLLOWS:- STOCK IN RS. IN QUANTITY STOCK AS PER BANK ACCOUNT 38,39,52,610 1590.69 M.T . STOCK AS PER BOOKS OF ACCOUNTS 40,34,08,263 1595.93 M.T. THUS ON OVERALL BASIS BOOKS OF ACCOUNTS SHOW MORE S TOCK BOTH IN TERMS OF VALUE AS WELL AS QUANTITY. EVEN THIS DIFFERENCE IS MAINLY ON ACCOUNT OF DIFFERENT METHODS OF VALUATION BEING FOLLOWED FOR THE PURPOSE OF FURNISH ING THE STATEMENT TO THE BANK AND FOR THE PURPOSE OF RECORDING THE INVENTORIES IN THE BOOKS OF ACCOUNTS. A DETAILED STATEMENT AS ON 25/03/2003 EXPLAINING THE SAID DIFF ERENCE BOTH IN TERMS OF QUANTITY AS WELL AS VALUATION WAS ALSO SUBMITTED TO THE CIT( A) WHICH IS PLACED IN ASSESSEES PAPER BOOK PAGE NOS. 408 TO 410. 26 THE ASSESSEE STATED THAT ASSESSING OFFICER HAS C OMMITTED ONE FUNDAMENTAL MISTAKE IN COMPARING STOCK FIGURES OF BANK AS ON 25 /03/2003 VIS--VIS STOCK FIGURES OF BOOKS OF ACCOUNTS AS ON 31/03/2003. THE DATES OF COMPARISON WERE COMPLETELY DIFFERENT AND THEREFORE THERE WAS BOUND TO BE SOME DIFFERENCE IN THE SAID TWO FIGURES OF STOCKS. HAD THE ASSESSING OFFICER TAKEN THE FIGU RES OF STOCK AS ON 25/03/2003 IN THE BOOKS OF ACCOUNTS, THERE WOULD HAVE BEEN NO DIF FERENCE IN THE SAID TWO FIGURES IN SO FAR AS QUANTITY IS CONCERNED. IN SO FAR AS VALUA TION DIFFERENCE IS CONCERNED, THE SAME IS EXPLAINED IN THE FOREGOING PARAGRAPH HEREIN AFTER. THE ASSESSEE HEREBY PLACES ON RECORD COMPARATIVE CHART OF THE SAID TWO FIGURES OF STOCKS AS ON 25/03/2003 ALONG WITH THE RECONCILIATION STATEMENTS WHICH IS PLACED ON PAPER BOOK PAGE NOS.408 TO 410. THE ASSESSEE CONTENDED BEFORE US THAT DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OB TAINED THE STOCK STATEMENTS FROM CORPORATION BANK AND STATE BANK OF INDIA CONTA INING THE DETAILS OF CLOSING STOCK AS ON 25.3.2003. THE SAID STOCK STATEMENTS ARE AT P AGE NOS. 120 TO 149 OF THE PAPER BOOK. THE ASSESSING OFFICER THEREAFTER COMPARED THI S STOCK WITH THE STOCK AS APPEARING IN THE BOOKS OF ACCOUNTS OF THE ASSESSEES GENERALLY AND SCHEDULE G TO THE BALANCE SHEET AS ON 31.3.2003 PARTICULARLY. (CO PIES ARE AT PAGE 242-282 @ 265 OF THE PAPER BOOK). WE FIND THAT THOUGH THERE IS DI FFERENCE IN THE PRESENTATION OF THE ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 12 STOCK IN BOTH THESE STATEMENTS, ONE IMPORTANT ASPEC T HAS BEEN OVERLOOKED BY THE ASSESSING OFFICER IS THAT THE STOCK OF WORK IN PROG RESS HAS COMPLETELY BEEN IGNORED, WHILE DETERMINING THE DIFFERENCE BETWEEN THESE TWO STOCK FIGURES. THE STOCK OF WORK IN PROGRESS AS GIVEN TO THE BANK WAS IN THE SUM OF RS.11,16,38,678/- WHEREAS THE SAME WAS RS.19,98,39,218/- AS PER THE BOOKS OF ACCO UNTS. MEANING THEREBY THE STOCK OF WIP WAS MORE IN THE BOOKS OF ACCOUNTS BY A N AMOUNT OF RS.8,82,00,540/-. HOWEVER THE ASSESSING OFFICER IGNORED THIS FIGURE I N ORDER TO MAKE ADDITION ON ACCOUNT OF ALLEGED DIFFERENCE IN THE STOCK FIGURE. HAD THIS AMOUNT BEEN CONSIDERED AND TAKEN INTO ACCOUNT, STOCK AS PER BOOKS OF ACCOU NTS WOULD HAVE BEEN HIGHER BY RS.1,94,55,653/-. A DETAIL STATEMENT SHOWING THIS O VER ALL POSITION HAS ALREADY BEEN PLACED ON RECORD AS ANNEXURE I OF THE SUBMISSIONS P LACED BY ASSESSEE, WHEREIN IT CAN BE SEEN THAT ON AN OVERALL BASIS THE FIGURE OF STOCK BOTH IN TERMS OF QUANTITY AS WELL AS VALUE, IS HIGHER IN THE BOOKS OF ACCOUNTS A S COMPARED TO THE STATEMENT GIVEN TO THE BANK. EVEN OTHERWISE, WE FIND THAT ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE IN ITA NO.3830/AHD/2003 FOR ASSESSMENT YEAR 2000-01 IN ASSESSEES OWN CASE BY THIS TRIBUNAL VID E PARA-35 TO 37 AS UNDER:- 35. AFTER CAREFUL CONSIDERATION OF THE RIVAL SUBMI SSIONS, FACTS AND CIRCUMSTANCES OF THE CASE AND THE REASONS STATED BY THE ASSESSEE AND THE CIT(APPEALS) , WE ARE OF THE OPINION THAT SO FAR AS ASSESSING OFFICERS ALLEGATION OF DIFFERENCE IN STOCK (QUANTITY-WISE) S HOWN TO THE BANK AND AS PER BOOKS OF ACCOUNT IS CONCERNED, DO NOT SURVIVE BECAU SE ADMITTEDLY, HE FAILED TO TAKE NOTE OF CLOSING STOCK OF WORK-IN-PROGRESS W HICH WAS DULY RECORDED IN THE BOOKS OF ACCOUNT AND APPEARS IN BALANCE-SHEET A ND THE SCHEDULE-G TO IT. 35.1 FURTHER, THE LD. DR HAS ALSO NOT POINTED OUT A NY INFIRMITY IN THE FINDINGS OF THE CIT(APPEALS) SHOULD HAVE ALLOWED OPPORTUNITY T O THE ASSESSING OFFICER, IN OUR OPINION, IS NOTHING BUT PLEA FOR THE SAKE OF LI NGERING ON THE LITIGATION FOR NO FAULT OF THE ASSESSEE. ADMITTEDLY, IT WAS MISTAKE O N THE PART OF THE ASSESSING OFFICER TO TAKE NOTE OF THE STOCK AS PER ANNEXURE W ITHOUT GETTING CLARIFICATION FROM ASSESSEE. WHEN IT IS PATENTLY CLEAR FROM THE A SSESSMENT (PARAGRAPH NO.15.2) THAT THE ASSESSING OFFICER HAD DULY NOTED THE AVAILABILITY OF WORK-IN- PROGRESS TO THE TUNE OF RS.12,01,48,923- AS PER SCH EDULE-G OF BALANCE-SHEET, WHY HE FAILED TO CONSIDER THE SAME WHILE COMPARING THE QUANTITY-WISE STOCK AS PER BOOKS WITH THE QUANTITY-WISE STOCK AS PER ST ATEMENT FURNISHED TO BANK. HAVING NOTICED THE DETAILS OF CLOSING STOCK AS PER ANEXURE-20 TO THE TAX AUDIT REPORT, IT WAS OBLIGATORY FOR THE ASSESSING OFFICER TO GET THE POSITION CLARIFIED FROM THE ASSESSEE ALLOWING THE ASSESSEE AN OPPORTUN ITY TO EXPLAIN AS TO WHY THE WORK-IN-PROGRESS HAS NOT BEEN SHOWN IN ANNEXURE -20 TO THE AUDITED BALANCE-SHEET. THE PLEA OF THE LD. DR IN OUR OPINIO N, IS, THEREFORE, NOT MAINTAINABLE AND IS REJECTED. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 13 36. COMING TO THE DIFFERENCE OF RS.42,07,617/- WHIC H, ADMITTEDLY, WAS DUE TO ADOPTION OF DIFFERENT METHODS OF VALUATION BY THE A SSESSEE FOR VALUING THE CLOSING STOCK IN THE BOOKS OF ACCOUNT AND CLOSING S TOCK SHOWN IN THE BANK STATEMENT AND THIS FACT HAVING NOT DISPUTED BY THE LD. DR THE ORDER OF THE CIT(APPEALS) APPRECIATING THE ASSESSEES PLEA ON T HIS POINT HAS TO BE UPHELD. EVEN OTHERWISE, IT IS NOW SETTLED LAW THAT IF THERE IS DIFFERENCE IN VALUE OF STOCK AND NOT IN QUANTITY SHOWN IN THE BANK STATEMENT AND THE VALUE OF STOCK SHOWN IN THE BOOKS OF ACCOUNT, THERE CANNOT BE ANY ADDITI ON AND FOR THIS PURPOSE HE REFERRED FOLLOWING DECISIONS:- (I) CIT VS. N.SWAMY (241 ITR 363) [MAD] (II) RAMNIKLAL & ROS. VS. ITO (81 TAXMAN 26)[AHD MA G.] (III) GUJARAT PROCESSING WORKS VS. IT0 (58 TTJ 168) [AHD] (IV) ACIT VS. LAKSHMI PRINTING CO. (47 TTJ 177) [CH D] (V) EASTERN LEATHER PRODUCTS PVT. LTD. 58 ITD 358 ( DEL) (VI) P.P.ZAVERI V/S. ITO ITA NO.1521/MUM/2001 (VII) JM SONI VS. ITO 105 TAXMAN, 197 (AHD) (VIII) CIT V/S. PARRY AGRO INDUSTRIES LTD 257 ITR 4 5 AND (IX) CIT V/S RATHORE BROTHERS 254 ITR 656 (MAD) 37. IN VIEW OF ABOVE DISCUSSION AND THE DECISIONS R ELIED UPON BY THE ASSESSEE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(APPEALS) ON THIS POINT ALSO AND, THEREFORE, THE SAME IS CONFIRMED AN D REVENUES GROUND NO.7 IS REJECTED. IN VIEW OF THE ABOVE FACTS AND THE DECISION OF THIS TRIBUNAL IN ASSESSEE OWN CASE, THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSE SSEE AND AGAINST THE REVENUE. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) AND THIS COMMON ISSUE OF REVENUES APPEALS IS DISMISSED. 27. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE R EVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE MADE U/S 14A OF THE ACT BY ASSESSING OFFICER. FOR THIS, THE REVENUE IN ITA NO.587/AHD/2007 FOR ASSESSMENT YEAR 2003-04, READS AS UNDER:- 5. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG V) TO DELETE THE DISALLOWANCE MADE U/S.14A OF RS.1 0,34,489/- IN ITA NO.3213/AHD./2007 FOR ASSESSMENT YEAR 2004-0 5, THE GROUND READS AS UNDER:- 4. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TO DELETE THE DISALLOWANCE MADE U/S.14A AMOUNTING TO RS.18,36,545/-. 28. THE BRIEF FACTS LEADING TO THE ABOVE COMMON ISS UE IN THE ASSESSING OFFICER APPLIED THE PROVISIONS OF SEC.14A OF THE ACT IN DISALLOWING AN AMOUNT OF 10,36,682/- ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 14 AS AGAINST THE EXEMPTED DIVIDEND INCOME U/S10(33) O F THE ACT AMOUNTING TO RS.94,199/-. THE ASSESSEE DURING THE YEAR UNDER CON SIDERATION EARNED DIVIDEND INCOME OF RS.1,22,117/- WHICH WAS CLAIMED AS EXEMPT U/S 10(33) OF THE ACT. THE ASSESSING OFFICER RESTRICTED SUCH CLAIM FOR EXEMPTI ON TO RS.94,199/- UNDER SEC.10(33) OF THE ACT. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS MADE INVESTMENTS OUT OF THE BORROWED FUNDS AND THEREFORE PART OF THE INTEREST ON THE BORROWED FUNDS FOR EARNING THE EXEMPT DIVIDEND INCO ME IS REQUIRED TO BE DISALLOWED. IT WAS FURTHER CONTENDED BY THE ASSESSING OFFICER T HAT EVEN A PORTION OF ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO THE SAID DI VIDEND INCOME IS ALSO REQUIRED TO BE DISALLOWED. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS IT WAS STATED BY THE ASSESSEE THAT IT WAS HAVING SUBSTANTIAL INTEREST FR OM FUNDS AT ITS DISPOSAL AND THEREFORE IN ABSENCE OF NEXUS BETWEEN THE BORROWING S AND THE INVESTMENTS, NO PART- DISALLOWANCE OF INTEREST IS CALLED FOR AND FURTHER STATED THAT THE ASSESSEE HAS NOT INCURRED ANY ADMINISTRATIVE EXPENSES IN ORDER TO EA RN DIVIDEND INCOME AS THE SAME REQUIRES NO EFFORTS ON THE PART OF THE ASSESSEE. HO WEVER THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST EXPENSES AND PROP ORTIONATE ADMINISTRATIVE EXPENSES TOTALING TO RS.10,36,682/- WITHOUT APPRECI ATING THAT THE TOTAL DIVIDEND CLAIMED EXEMPT WAS ONLY RS.94,199/-. 29. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF T HIS TRIBUNAL IN THE VERY CASE OF THE ASSESSEE BY ITA NO. 2339/AHD/2005 FOR A.Y. 02-03 AN D ALSO STATED THAT UNDER IDENTICAL CIRCUMSTANCES, THIS TRIBUNAL IN THE CASE OF ACIT VS. AQUAGEL CHEMICALS PVT. LIMITED ITA NO. 3533/AHD/2008 , DATED 03/09/2010, HAS TAKEN A VIEW THAT NO DISALLOWANCE OF DIRECT EXPENDITURE VIZ. INTEREST CA N BE DISALLOWED IF NO NEXUS IS PROVED AND NO SUCH ALLEGATION IS MADE BY THE AO IN HIS ORDER. WE FIND THAT THE TRIBUNAL IN ASSESSEES OWN CASE IN PARA-59 HELD AS UNDER:- 59. AFTER CAREFUL CONSIDERATION OF THE RIVAL SUBMI SSIONS, FACTS AND CIRCUMSTANCES OF THE CASE AND DECISIONS RELIED UPON BY THE LD. AR, THE LD. DR DID NOT BRING ANY MATERIAL TO OUR NOTICE, WHICH COU LD LEAD THE FACTUAL FINDINGS OF THE CIT(APPEALS) THAT THERE IS NO DIVERSION OF INTEREST-BEARING FUNDS AS THE ENTIRE AMOUNT HAS COME OUT OF THE ASSESSEES OWN FU NDS, THE CIT(APPEALS) WAS QUITE JUSTIFIED IN HOLDING THAT THE PROVISIONS OF SECTION 14A OF THE ACT WERE NOT APPLICABLE, SO FAR AS INTEREST EXPENDITURE OF R S.1,626/- WAS CONCERNED, WE, THEREFORE, DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE CIT(APPEALS) , WHICH ARE CONFIRMED. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 15 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE AR E OF THE VIEW THAT IN THE PRESENT CASE THAT THE ASSESSING OFFICER IS UNABLE TO PROVE THE NEXUS AND THE CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE. AS THE ISSUE IS S QUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY THE TRIBUNALS DECISION IN ASSESSEES OWN CASE, RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THE CLAIM OF ASSESSEE AND UPHOLD THE ORDER OF CIT(A). THIS COMMON ISSUE OF REVENUES APP EALS IS DISMISSED. 30. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE R EVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION MADE BY ASSESSIN G OFFICER IN RESPECT OF DIFFERENCE IN ARMS LENGTH PRICE CHARGED ON INTERNATIONAL TRAN SACTIONS. FOR THIS, THE REVENUE IN ITA NO.587/AHD/2007 FOR ASSESSMENT YEAR 2003-04, READS AS UNDER:- 1. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG IV) TO DELETE THE ADDITION OF RS.3,06,48,478/- MADE AS PER TPOS ORDER IN RESPECT OF DIFFERENCE IN ARMS LENGTH PRICE CHARGED ON INTERNATIONAL TRANSACTIONS. IN ITA NO.3213/AHD./2007 FOR ASSESSMENT YEAR 2004-0 5, THE GROUND READS AS UNDER:- 6. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TO DELETE THE ADDITION OF RS.1,41,08,711/- MADE AS PER TPOS ORDER IN RESPECT OF DIFFERENCE IN ARMS LENGTH PRICE CHARGED INTERNATIONAL TRANSACTIONS. 31. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT THE ASSESSEE HAS ONE SUBSIDIARY BASED IN U.K. VIZ. DISHMAN EUROPE LTD. ( DEL FOR SHORT).THE TRANSACTIONS WITH THE DEL HAS BEEN ADJUSTED BY THE TPO AT ARM'S LENGTH PRICE AS ACCORDING TO HIM, THE SALES TRANSACTIONS WITH THE SAID DEL HAS B EEN UNDER STATED TO THE TUNE OF RS.3,06,48,478/-. BEFORE GOING INTO THE MERITS OF T HE MATTER IT IS NECESSARY TO UNDERSTAND THE METHOD ADOPTED BY THE ASSESSEE FOR T HE PURPOSE OF CALCULATING THE ARM'S LENGTH PRICE AND THE REASONS BEHIND SUCH ADOP TION. THE ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM FOR S HORT) AS THE ASSESSEE WAS HAVING SALES OF LARGE NUMBER OF PRODUCTS TO DEL DUR ING THE YEAR UNDER CONSIDERATION. APART FROM DEL, THE ASSESSEE ALSO SO LD DIVERSIFIED PRODUCTS TO UNRELATED ENTERPRISES. THEREFORE CONSIDERING THE CO MPLEXITY OF THE TRANSACTIONS, PRODUCT DIVERSITY AND MULTIPLICITY OF TRANSACTIONS, THE SAID TNMM METHOD WAS THE ONLY PRACTICABLE METHOD TO DETERMINE THE MARGINS EA RNED BY THE ASSESSEE AS A WHOLE WHICH WOULD DULY REFLECT THE MARGINS EARNED I N THE INTERNATIONAL TRANSACTIONS, BOTH WITH AES AS WELL AS UNRELATED ENTERPRISES. UND ER THE SAID METHOD, THE ASSESSEE ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 16 FOUND OUT THE PROFIT BEFORE INTEREST AND TAXATION, (PBIT) AS A PERCENTAGE OF NET SALES AND THE SAME WAS COMPARED WITH PBIT OF OTHER INDUST RIES DEALING IN IDENTICAL PRODUCTS AND HAVING COMPARABLE TURNOVERS. THE ASSES SEE IN ITS REPORTS SUBMITTED AS PER RULE-10D OF THE INCOME-TAX RULES, WHICH ARE REF ERRED ON PAGES- 332 TO 359 @ 345 OF THE PAPER BOOK-III, GAVE THE COMPARISON OF P BIT OF THE ASSESSEE WITH VARIOUS OTHER CONCERNS AND IT WAS DEMONSTRATED THAT THE PBI T OF THE ASSESSEE AT 21.28% WAS HIGHER THAN THE AVERAGE COMPARABLE PBIT OF OTHE R SIMILAR CASES AT 14.74%. 32. HOWEVER THE ASSESSING OFFICER REJECTED THE METH OD FOLLOWED BY THE ASSESSEE ON THE GROUNDS WHICH ARE REPRODUCED HEREIN BELOW TO GETHER WITH THE EXPLANATION OF THE ASSESSEE: ACCORDING TO TPO, THIS METHOD IS NOT APPROPRIATE A S IN THE SAID METHOD CONTROLLED TRANSACTIONS ARE BEING COMPARED WITH UNC ONTROLLED TRANSACTIONS WHEREIN THE DEGREE OF COMPARABILITY WITH UNCONTROLL ED TRANSACTIONS IS VERY HIGH. THE ASSESSEE MOST RESPECTFULLY SUBMITS THAT T HIS IS A GENERAL REASON AS IN CASE OF THE APPELLANT, IT HAS BEEN CATEGORICA LLY DEMONSTRATED THAT ITS PBIT OF 21.28% IS VERY MUCH COMPARABLE WITH OTHER S IMILARLY PLACED ASSESSEES. ONCE OVERALL PBIT IS COMPARABLE, THE QUE STION OF COMPARING EACH INDIVIDUAL TRANSACTION DOES NOT ARISE. TPO CONTENDED THAT THIS METHOD IS MOST APPROPRIATE ONLY WHEN THE ASSESSEE PROVIDES THE INFORMATION REGARDING GROSS P ROFIT MARK UP TO COSTS WITH REGARD TO EXPORTS TO RELATED AND UNRELATED ENT ITIES. THE ASSESSEE MOST RESPECTFULLY SUBMITS THAT IT HAS PROVIDED THE INFORMATION REGARDING GROSS MARK UP OF THE ASSESSEE AS A WHOLE WHICH INCL UDES THE EXPORT AS WELL AS DOMESTIC SALES BOTH TO RELATED AND UNRELATE D ENTITIES. IF THE TOTAL PBIT OF THE ASSESSEE AS A WHOLE IS COMPARABLE WITH PBIT OF SIMILARLY PLACED ASSESSEES, THERE IS NO REASON AND/OR GROUND TO TAKE A VIEW THAT THE ASSESSEE HAS PASSED ON OR PARTED WITH SOME PROFIT I N FAVOUR OF ITS AE I.E. DEL. IN ANY CASE, THE ASSESSEE MOST RESPECTFULLY SU BMITS THAT IT HAS THE DETAILS OF GROSS PROFIT MARK UP WITH RESPECT TO EXP ORTS AND DOMESTIC SALES WITH RESPECT TO RELATED AND UNRELATED ENTITIES. A D ETAILED CHART SHOWING THE COMPARISON OF PBIT OF DEL & OTHERS FOR THE YEAR UND ER CONSIDERATION HAS BEEN PLACED ON RECORD BEFORE THE LOWER AUTHORITY. F ROM THE PERUSAL OF THE SAID ANNEXURE IT CAN BE SEEN THAT THE PBT WITH DEL IS AS HIGH AS 21.32% WHEREAS OVERALL PBIT OF THE ASSESSEE WAS 21.28%. IN OTHER WORDS THE TRANSACTIONS WITH DEL RESULTED INTO MORE PBIT FOR T HE ASSESSEE THAN OTHER TRANSACTIONS AND THEREFORE THERE IS NO REASON FOR T HE LEARNED TPO TO DISTURB THE ARM'S LENGTH PRICE DETERMINED BY THE AS SESSEE. TPO CONTENDED THAT THE OTHER COMPARABLE CASES ARE OF THE COMPANIES DEALING IN THE ORGANIC CHEMICALS AND NOT IN BULK DR UG ACTIVITIES AND INTERMEDIATES. THIS IS FACTUALLY INACCURATE. OTHER COMPARABLE CASES VIZ. ARATI INDUSTRIES, AEGIS LOGISTICS LTD. AND HIKAL LT D. ARE ALL OPERATING INTO ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 17 BULK DRUG ACTIVITIES AND INTERMEDIATES. THE ASSESSE E MOST RESPECTFULLY SUBMITS THAT ALL THESE COMPANIES HAVE BEEN CLASSIFI ED UNDER THE HEAD 'ORGANIC CHEMICALS' IN THE DATABASE 'PROWESS' PUBLI SHED BY CENTRE FOR MONITORING INDIAN ECONOMY, AN INDEPENDENT RESEARCH BODY. IF AN INDEPENDENT RESEARCH BODY HAS CLASSIFIED ALL THESE COMPANIES UNDER ONE INDUSTRY, THERE IS NO REASON ON THE PART OF THE LEA RNED TPO TO SUSPECT THE SAME AND NOT TO ACCEPT THE COMPARISON AS PROVIDED B Y THE ASSESSEE. ACCORDING TO TPO, SINCE THE ASSESSEE DID NOT SUBMI T THE BREAK UP OF PBIT IN RESPECT OF SALES TO AES AND OTHERS, IT MIGHT BE POSSIBLE THAT ASSESSEE WAS INCURRING LOSS IN INTERNATIONAL TRANSACTIONS AN D THE SAME WAS GETTING SET OFF AGAINST OTHER PROFITS SO AS TO SHOW AN OVER ALL PBIT OF 21.28%. THEREFORE THE TPO CONTENDED THAT PRICES MAY FAIL TH E TEST OF ARM'S LENGTH PRICE WITH THE ASSOCIATED CONCERNS. THE ASSESSEE MO ST RESPECTFULLY SUBMITS THAT THE ENTIRE APPREHENSION ON THE PART OF TPO IS PURELY BASED ON CONJECTURES AND SURMISES WITHOUT THERE BEING ANY FA CTUAL FOUNDATION FOR THE SAME. AS HAS BEEN STATED ABOVE, THE ASSESSEE IS IN A POSITION TO IDENTIFY ITS PBIT WITH DEL VIS-A-VIS OTHERS AND FRO M THE SAID ANNEXURE-A IT CAN BE SEEN THAT THE PBIT WITH DEL WAS 21.32% AS CO MPARED TO AN OVERALL PBIT OF 21.28%. IF THAT BE THE SCENARIO, TH E CONTENTION ON THE PART OF TPO IS WITHOUT ANY BASIS AND INCORRECT ASSUMPTIO N OF THE FACTS. THE ASSESSEE THEREFORE MOST RESPECTFULLY SUBMITS T HAT THE ONLY REASON WHY HAS REJECTED ITS TNMM METHOD WAS ON THE GROUND THAT THE GROSS PROFIT MARK UP WITH RESPECT TO EXPORTS TO DEL AND OTHERS I S NOT AVAILABLE. NOW SINCE THE INFORMATION IS AVAILABLE, THIS GROUND FOR REJECTING THE TNMM GOES AWAY AND THEREFORE THE METHOD ADOPTED BY THE ASSESS EE MAY KINDLY BE ACCEPTED. 33. THE ASSESSEE STATED THAT THE OECD GUIDELINES SO UGHT TO BE RELIED UPON BY TPO IN FACT HELPS THE CASE OF THE ASSESSEE INASMUCH AS THAT IT HAS BEEN VERY SPECIFICALLY STATED IN THE SAID GUIDELINES THAT IF THE NET MARGINS FROM UNCONTROLLED TRANSACTIONS VIS-A-VIS CONTROLLED TRANSACTIONS CAN BE COMPARED, THEN TNMM IS THE BEST METHOD TO FIND OUT THE ARM'S LENGTH PRICE. AS STATED EARLIER THE SAME INFORMATION IS VERY MUCH AVAILABLE AND PLACED ON RE CORD. IF THAT BE SO, THERE IS NO REASON TO REJECT THE TNMM METHOD FOLLOWED BY THE AP PELLANT AND SUBSTITUTE THE SAME WITH COMPARABLE UNCONTROLLED PRICE METHOD (CUP METHOD). IN ANY CASE THE ASSESSEE STATED THAT THE SAID CUP METHOD IS NOT AT ALL SUITABLE FOR THE PURPOSE OF FINDING OUT ARM'S LENGTH PRICE IN THE HANDS OF THE ASSESSEE. AS STATED EARLIER FOR THE PURPOSE OF REJECTING THE METHOD ADOPTED BY THE ASSE SSEE AND TO SUBSTITUTE THE SAME WITH ANOTHER METHOD, IT HAS TO BE CONCLUSIVELY ESTA BLISHED BY TPO THAT THE METHOD ADOPTED BY THE ASSESSEE IS PATENTLY ERRONEOUS AND T HE SAME CAN NEVER TRULY AND FAIRLY STATE THE ARM'S LENGTH PRICE. IN ANY CASE WH ILE ADOPTING ANOTHER METHOD IT IS ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 18 ALSO NECESSARY ON THE PART OF TPO TO ESTABLISH THAT WHY THE METHOD SELECTED BY HIM IS SUPERIOR TO THE METHOD FOLLOWED BY THE ASSESSEE. IN THIS RESPECT, CIRCULAR NO.14 OF 2001 ISSUED BY THE CBDT EXPLAINING NOTES OF PROFITS IN THE FINANCE ACT, 2001 DATED 22.11.2001 AND ALSO RULE 10C ARE RELIED UPON. FROM THE PERUSAL OF THE RULES IT IS VERY APPARENT THAT FOR THE PURPOSE OF SEC.92C(1), M OST APPROPRIATE METHOD SHALL BE THE ONE WHICH IS BEST SUITED TO THE FACTS AND CIRCU MSTANCES EACH PARTICULAR INTERNATIONAL TRANSACTIONS AND EACH PROFITS THE MOS T RELIABLE MEASURE OF ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS . THE ASSESSEE FURTHER STATED THAT THE PERUSAL TO THE PROVISIONS OF TRANSFER PRICING M AKES IT ABUNDANTLY CLEAR THAT NO METHOD IS GIVEN PREFERENCE OVER ANOTHER METHOD. IN FACT THE SCHEME NOWHERE PROVIDES THAT CUP METHOD IS THE MOST DIRECT METHOD TO DETERMINE THE ARM'S LENGTH PRICE AND SHOULD BE PREFERRED OVER ALL OTHER METHOD S. IN FACT RULES PROVIDES DIFFERENT CRITERIA FROM CLAUSES-(A) TO CLAUSES-(F) AND BASED ON THE SAME, MOST APPROPRIATE METHOD SHALL HAVE TO BE DETERMINED BY THE ASSESSEE FIRST AND APPROVED BY THE TPO LATER. THE ASSESSEE FURTHER STATED THAT THE CUP MET HOD IS NOT AT ALL APPROPRIATE IN THE FACTS OF THE PRESENT CASE AS BY ADOPTING THE SA ME THE LEARNED TPO HAS DISTURBED THE GROSS PROFITS / NET PROFITS SHOWN BY THE APPELLANT. THE MECHANISM FOR CALCULATING ARMS LENGTH PRICE UNDER THE CUP METHOD IS AS FOLLOWS: (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH: - (I) THE PRICE CHARGED OR PAID FOR PROPERTY T RANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACT ION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMP ARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTER PRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AF FECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-C LAUSE (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRA NSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; 34. THE ASSESSEE FURTHER STATED THAT THE SAID METH OD CAN ONLY BE APPLIED AFTER TAKING INTO CONSIDERATION VARIOUS FACTORS AND MATER IAL DIFFERENCES ARISING ON ACCOUNT OF RISK, FINANCIAL SUPPORT, MARKETING SUPPORT, TECH NICAL SUPPORT, GEOGRAPHICAL PRESENCE, READY SET UP, RECOGNITION, ASSETS EMPLOYE D AND CURRENCY FLUCTUATIONS. THE ASSESSEE FURTHER STATED THAT AS PRESCRIBED UNDER TH E SAID CUP METHOD, ADJUSTMENTS ON ACCOUNT OF DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND COMPARABLE ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 19 UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE PRICES IN THE OPE N MARKET IS VERY DIFFICULT TO QUANTIFY. IN FACT, TPO HAS NOT MADE AN ATTEMPT TO MAKE ANY AD JUSTMENT ON ACCOUNT OF THE FACTORS VIZ. FINANCIAL SUPPORT, MARKETING EFFORTS, STORAGE OF GOODS FOR READY DELIVERY AND ALL OTHER RELEVANT AND MATERIAL FACTORS. IN FAC T, IT IS VERY DIFFICULT TO ACTUALLY QUANTIFY THESE FACTORS IN THE PRICE ADJUSTMENTS AND THEREFORE THE CUP METHOD AS ADOPTED BY TPO IS NOT APPROPRIATE METHOD FOR THE PU RPOSE OF FINDING OUT ARM'S LENGTH PRICE. IT WAS STATED THAT THE ACTION OF REJE CTION OF TNMM METHOD OF ALP AND ADOPTION OF CUP METHOD OF ALP ITSELF IS ILLEGAL AND WITHOUT JURISDICTION AS HELD BY ITAT IN THE CASE OF THE ASSOCIATE CONCERN VIZ. SCHU TZ DISHMAN BIOTECH PVT. LTD., A.Y. 02-03 IN ITA NO. 554/AHD/2006 AND ALSO IN ITA NO. 3590/AHD/2007, FOR A.Y. 04- 05. IT IS FURTHER STATED THAT PBIT OF 21.28% IS VER Y MUCH COMPARABLE AND BETTER THAN THE INDUSTRY AVERAGE OF 14.74%. EVEN MARGINS WITH A E AT 21.32% ARE BETTER THAN OVERALL PBIT. IN ANY CASE AS TABULATED ON PAGES 25- 26 OF CIT(A) ORDER QUANTITY SOLD TO VARIOUS NON-AE COMPARED TO AE IS NOT AT ALL COMP ARABLE AS THERE IS A VAST DIFFERENCE BETWEEN THE SAME. SALES TO NON AE AND AE ARE NOT AT ALL COMPARABLE INASMUCH AS THE NON-AE ENTITIES DO NOT UNDERTAKE AN Y MARKETING EXERCISES, NO AFTER SALES SUPPORT IS PROVIDED AND EVEN TECHNICAL SUPPOR T IS ALSO NOT PROVIDED. AS AGAINST THIS, AES PROVIDE ALL THESE SERVICES AND THEREFORE THE PRICES ARE NOT COMPARABLE. IN ANY CASE HAS IGNORED ONE VERY VITAL AND IMPORTANT F ACTOR OF DEMAND AND SUPPLY SITUATION. IN AN OPEN MARKET, THE PRICES ARE DETERM INED BASED ON DEMAND AND SUPPLY AND THEREFORE THE COMPARISONS WITHOUT ACCOUN TING SUCH FACTORS ARE NO COMPARISON AT ALL. EVAN GEOGRAPHICAL, ECONOMICAL AN D POLITICAL RISK AND FAR FACTORS ARE NOT AT ALL CONSIDERED. 35. THE LD. CIT DR ARGUED AND FILED WRITTEN SUBMISS IONS, WHICH ARE REPRODUCED AS IT IS, AS UNDER:- (A) ENTITY LEVEL COMPARISON THE ASSESSEE HAS CARRIED OUT COMPARABILITY AT ENTIT Y LEVEL AND NOT AT TRANSACTION LEVEL WHILE APPLYING TNM METHOD. THE AS SESSEE HAS USED TNM METHOD ON ENTITY BASIS FOR COMPUTATION OF ARMS LENG TH PRICE FOR ITS SALES TO ITS SUBSIDIARIES. THE NET PROFIT MARGIN OF ENTERPRISE A S A WHOLE HAS BEEN COMPAR4D WITH THE NET MARGINS EARNED BY ORGANIC CHE MICALS MANUFACTURING COMPANIES. THE ASSESSEE HAS AGGREGATED ALL THE TRAN SACTIONS AND HAS NOT GIVEN ANY REASON FOR SUCH AGGREGATION AND COMPUTED NET MARGIN ON ITS ENTIRE SALE. TNM METHOD REQUIRES COMPUTATION OF NET MARGIN ON EACH TRANSACTION OR AGGREGATION OF SIMILAR TRANSACTIONS. SELECTION FOR THIS METHOD AND COMPUTING ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 20 NET PROFIT ON ENTIRE SALES OF THE COMPANY BECOMES M ORE IRRELEVANT WHEN INTERNAL CUP DATA SHOWS THAT FOR CERTAIN FINE CHEMI CALS/PHARMACEUTICALS, THE ASSESSEE HAS CHARGED CONSIDERABLY HIGHER PRICE IN D OMESTIC MARKET AS COMPARED TO EXPORT PRICE TO ITS AE. HIGHER MARGINS ON DOMESTIC SALES CANNOT JUSTIFY ARMS LENGTH TANS OF ITS SALE TO THE AE, AS HIGHER DOMESTIC RATES MEANS, NET PROFIT IS MORE DUE TO HIGHER DOMESTIC MARGINS. IN CERTAIN CASES, SALE PRICE OF EXPORT TO NON AES ARE HIGHER THAN SALES PRICE TO THE AES AND IN CERTAIN CASES SALES PRICE CHARGED TO ONE AE IS SUBSTANTIALL Y HIGHER THAN SALES PRICE CHARGED TO OTHER AE. UNDER THE CIRCUMSTANCES, LOWER SALES PRICE CHARGED ARE AT ARMS LENGTH DOES NOT COME OUT FROM THE METHOD E MPLOYED BY THE ASSESSEE FOR COMPARISON OF THESE INTERNATIONAL TRAN SACTIONS. THE ASSESSEE HAS ITSELF STATED THAT FOR CERTAIN TRANSACTIONS INT ERNAL UNRELATED PRICE ARE AVAILABLE. HOWEVER, FOR REASONS BEST KNOWN TO IT, T HEY HAVE NOT CARRIED OUT ANY COMPARISON USING INTERNAL DATA FOR COMPARISON P URPOSE. SIMILARLY, NO EFFORTS WERE MADE BY THE ASSESSEE FOR OBTAINING EXT ERNAL DATA WHICH ARE AVAILABLE IN PUBLIC DOMAIN LIKE; EXIM KEY DATA, IBI S DATA ETC. WHERE UNIT EXPORT PRICE FOR EXPORT OF THESE CHEMICALS/PHARMACEUTICALS TO VARIOUS COUNTRIES IN THE WORLD FROM INDIAN PORT ARE AVAILABLE RELATED TO IND IAN MANUFACTURERS/BUSINESS. IT IS CLEAR FROM THE ABOVE THAT THE ASSESSEE HAS NO T CHOSEN CORRECT METHOD FOR COMPARISON OF ITS TRANSACTIONS. THE ITAT MUMBAI L BENCH IN THE CASE OF UCB INDIA PVT. LD. V ACIT 121 ITD 131 (MUM) [2009-T11-02ZTADT-MUM-TP] HAS HELD THAT S ECTION 92C READ WITH RULE 10B(1)(E) DEALS WITH TRANSACTIONAL NET MA RGIN METHOD (TNMM) AND IT REFERS TO ONLY NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLAUSE OF SUCH TRANS ACTION, BUT NOT OPERATIONAL MARGINS OF ENTERPRISE AS WHOLE. SIMILAR VIEW WAS AL SO TAKEN BY THE ITAT MUBAI IN THE CASE OF DCIT V. M/S. STARLITE, SERDIA PHARMACEUTICALS INDIA PVT. LTD. V. ACIT AND IN THE CASE OF ACIT 16(3) MUMBAI V. TEJ DIAM TO THE EFFECT THAT TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTIONS AND N OT COMPARISON OF OPERATING MARGINS OF ENTERPRISES. THE TRIBUNAL OBSERVED TNMM REFERS TO ONLY NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIO NAL TRANSACTION OR A CLASS OF SUCH TRANSACTIONS, BUT NO OPERATIONAL MARGINS OF TH E ENTERPRISE AS A WHOLE. AS EXPLAINED BY THE COURT, THE CLASS OF TRANSACTION OF AN ENTERPRISE MAY BE EVALUATED ON ACCOUNT OF AGGREGATED BASIS IN CASES WHEN ONLY SIMILAR TRANSACTIONS ARE UNDERTAKEN I.E. ALL THE TRANSACT IONS ARE OF THE SAME TYPE; SAME CLASS AND OF SIMILAR VARIETY AND THE ENTERPRIS E DOES NOT HAVE ANY OTHER TRANSACTION THAT IS NOT SIMILAR. THE TRIBUNAL DID N OT ACCEPT THE ASSESSEES ARGUMENT THAT IT WAS NOT PRACTICALLY POSSIBLE TO LO OK AT TRANSACTION LEVEL MARGINS. IT HELD THAT IF A ASSESSEE WANTS TO ADOPT A PARTICULAR METHOD AS THE MOST APPROPRIATE METHOD, THEN IT IS THE ASSESSEES DUTY TO MAINTAIN AND FURNISH THE REQUIRED DATA. (B) WRONG FUNCTIONS CONSIDERED FOR TRANSFER PRICING ANALYSIS: I) THE ASSESSEE IN PARA 7 OF THE TRANSFER PRICING R EPORT HAS PERFORMED THE ANALYSIS FOR EVALUATING THE COMPARABILITY OF THE UN CONTROLLED TRANSACTIONS WITH CONTROLLED TRANSACTIONS. IT HAS STATED THAT WHOLLY OWNED SUBSIDIARIES PROVIDE VALUE ADDED SERVICE, ACTS AS LOCAL STOCK POINTS. IT FURTHER STATED THAT FUNCTIONAL ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 21 PROFILE AS WELL AS OPERATING PARAMET4ERS OF THE SUB SIDIARIES IS SIGNIFICANTLY DIFFERENT VIS--VIS THE SAME APPLICABLE TO OTHER PA RALLEL UNCONTROLLED INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE. ALL THESE FACTORS STATED ABOVE AFFECTS SECONDARY SALE BY THE AES OR N ON-AES IN THEIR JURISDICTION AND DOES NOT AFFECT SALES MADE BY THE ASSESSEE TO THE AES AND NON-AES. FUNCTIONS CARRIED OUT BY THE AES WILL GIVE BETTER MARGINS TO THEM ON THEIR SECONDARY SALE BUT WILL NOT BE HAVING ANY EFF ECT ON PURCHASE PRICE OF THESE AES. II) THE ASSESSEE HIMSELF STATED THAT LIMITED INTERN AL CUPS ARE AVAILABLE BUT STATED THAT THEY ARE NOT STRICTLY COMPARABLE EVEN A FTER MAKING PERMISSIBLE ADJUSTMENT\.HW, HE HAS NOT EXPLAINED THE SAME ANY F URTHER AND HAS NOT GIVEN ANY REASONS WHY THEY ARE NOT COMPARABLE. III) THE ASSESSEE HAS FAILED TO SUBMIT DETAILS EVEN FOR THE APPLICATION OF TNM METHOD WHEN AO ASKED HIM TO PROVIDE PRODUCT-WISE MA RGIN WHERE HE STATED THAT WE ARE NOT WORKING OUT PRODUCT-WISE COST OF PRODUC TION. UNDER THE CIRCUMSTANCES, WE REGRET THAT GROSS PROFIT MARK UP ON SALE SEPARATELY FOR EXPORTS TO DISHMAN EUROPE(UK), DISHMAN (USA) & THE EXPORTS TO UNRELATED PARTIES, AS REQUIRED CANNOT BE FURNISHED (PAGE 5 FIRST LINE OF TPO ORDER ANNEXED ANNEXURE-A) ABOVE ASSERTION OF THE ASSESSEE CLEARLY GOES AGAINS T AS FOR THE SELECTION OF MOST APPROPRIATE METHOD IT HAS BEEN PROVIDED DIN RU LE 10C(2)(E) THAT AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECE SSARY FOR APPLICATION OF METHOD IS ONE OF THE FOREMOST REQUIREMENT./ THE ASS ESSEE HAS FAILED TO PROVIDE ANY DATA IN THIS REGARD TO APPLY TNM METHOD . NON-COMPARABLE DATA SET ASSESSEE HAS USED ONLY ONE QUALITATIVE FILTER WHILE CARRYING OUT SEARCH ON PROERS DATA BASE AS IT HAS TAKEN ALL ORGANIC CHEMIC AL COMPANIES AS COMPARABLE COMPANIES. THE ASSESSEE HAS FAILED TO CO MPARE FUNCTIONS PERFORMED BY THESE COMPANIES, ASSET UTILIZED AND RI SK UNDERTAKEN IN CARRYING OUT THEIR BUSINESS. THERE ARE FOLLOWING DEFECTS IN THE DATA SET; (I) THE ASSESSEE HAS NOT MADE ANY ADJUSTMENT FOR TH ESE DIFFERENCES TO ANY OF THE COMPARABLES. (II) NO SEGMENTAL ACCOUNTS OF COMPARABLE COMPANIES CARRYING OUT SIMILAR ACTIVITIES HAVE BEEN TAKEN FOR THE PURPOSE OF COMPA RISON AND ENTITY LEVEL ACCOUNTS HAVE BEEN TAKEN. (III) THE ASSESSEE HAS SELECTED TEN COMPANIES FOR T HE PURPOSE OF COMPARISON WITH IT. HOWEVER, MAJORITY OF SALE TO THESE COMPANI ES ARE COMING FROM DIFFERENT PRODUCTS WHICH ARE NOT BEING MANUFACTURED BY THE ASSESSEE- COMPANY. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 22 (IV) THE ASSESSEE HAS NOT CARRIED OUT ANY ANALYSIS OF THESE COMPANIES FOR COMPARABILITY PURPOSE AND HAS MERELY PICKED UP THES E COMPANIES FROM PROESS DATA BASE WHICH WERE ENGAGED IN ORGANIC CHEM ICAL BUSINESS COMPLETELY DISREGARDING THE FACT THE WHETHER THEY A RE EXPORTING SIMILAR PRODUCTS/MANUFACTURING SIMILAR PRODUCTS ET. THIS AN ALYSIS HAS GONE SO ABSURD THAT ASSESSEE HAS SELECTED M/S AEGIS LOGISTICS LTD. AS COMPARABLE COMPANY WHICH S ENGAGED IN TRANSPORTATION/STORAGE OF ORGANI C CHEMICALS I.E. IN LOGISTICS BUSINESS. SIMILARLY, OTHER COMPANIES SELECTED BY TH E ASSESSEE ARE HAVING VERY LOW DEGREE OF COMPARABILITY VIS--VIS THE ASSE SSEE REGARDING ITS INTERNATIONAL TRANSACTIONS. THE PRODUCT PROFILE DET AILS OF FIRST FOUR COMPANIES OUT OF TEN COMPANIES SELECTED BY THE ASSESSEE-COMPA NY ARE ANNEXED WHICH CLEARLY SHOWS THAT THESE COMPANIES ARE HAVING HARDL Y ANY SIMILARITY IN MANUFACTURING PROCESS OR IN PRODUCT PROFILE (ANNEXU RE-B) M/S. ARTI INDUSTRIES LTD. IS ENGAGED IN BENZENE RELATED COMPOUNDS, POLYM ER ADDITIVES, PLASTICIZER ETC. WHEREAS M/S. ALKYL AMINES CHEMICALS LTD. IS EN GAGED IN MANUFACTURING AMINES AND M/S DEEPAK NITRITE LTD IS ENGAGED IN MAN UFACTURING AGRO CHEMICALS, SODIUM NITRITE ETC. (D) WRONG AND IRRELEVANT REASONS GIVEN FOR NON-APPL ICATION OF CUP. THE ASSESSEE HAS GIVEN FOLLOWING REASONS DUE TO WHI CH INTERNAL;/EXTERNAL CUP AS PER IT CANNOT BE APPLIED: A) OUR COST OF MANUFACTURING AND GROSS AND NET MARG IN EARNED BY US; B) LARGE QUANTITY OF GOODS SOLD TO SINGLE PARTY I.E . TO WOS (WHOLLY OWNED SUBSIDIARIES) VS. SMALL QUANTITY OF GOODS SOLD TO V ARIOUS PARTIES, AS IN FORMER CASE ONE IS HAVING CERTAINTY OF BUSINESS WHE REBY THE COST OF MANUFACTURE OF PRODUCTS CAN BE LESS. ALSO COST OF P ACKAGING AND TRANSPORTATION ALSO NEEDS TO BE CONSIDERED. C) FOR SALES IN DOMESTIC MARKET IMPORT DUTY COMPONE NT IF IMPORTED BY THE PURCHASER. D) IN OUR CASE AE IS SOUR WOS AND AS PER THE ARRANG EMENT EES SCOPE OF SERVICES AS TO MARKETING, PAYMENT AND ALSO THE OVER ALL RISK ASSUMED BY AE IS ALSO REQUI9RED TO BE TAKEN INTO CONSIDERAT ION WHILE COMPARING THE PRICE AT WHICH THE PRODUCT IS SUPPLIED TO AE WI TH THAT OF PRICE OF THE PRODUCT SUPPLIED TO OTHERS AS WELL AS THE PRICE AT WHICH THE THIRD PARTY SALES ITS PRODUCT TO OTHERS. E) OVER AND ABOVE THE FACTORS SUCH AS AVERAGE PREVA ILING INTERNATIONAL MARKET PRICE, THE SCOPE OF SERVICES RENDERED BY WO S, THE VOLUME OF BUSINESS OF A PARTICULAR PRODUCT THE QUALITY OF PRO DUCT REQUIRED BY THE END CUSTOMER, THE AREA OF THE MARKET CAPTURE AND TO BE DEVELOPED BY THE WOS COUPLED WITH THE SIZE OF THE MARKET. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 23 F) VARIOUS FUNCTIONAL DIFFERENCES ARISING ON ACCOUN T OF ASSUMING RISK, FINANCIAL SUPPORT, MARKETING SUPPORT, TECHNICAL SUP PORT, MARKETING SUPPORT, TECHNICAL SUPPORT, GEOGRAPHICAL PRESENCE, READY SET UP, RECOGNITION ASSET EMPLOYED AND CURRENT FLUCTUATIONS , ARE ALSO REQUIRED TO BE CONSIDERED WHILE COMPARING THE PRICE. THE ABOVE DIFFERENCES AND REASONS WILL ALSO AFFECT COMPARISON FOR TRANSACTIONAL NET MARGIN METHOD AS WELL A ASSESSEE HAS NOT CARRIED OUT ANY ADJUSTMENT FOR THESE DIFFERENCES FOR APPLYING TNM M ETHOD, IT IS CLEAR THAT ASSESSEE HAS NOT CHOSEN MOST APPROPRIATE METHOD IN THIS CASE. THE ITAT AHMEDABAD BENCH HAS STATED THAT IN ITA NO.846/AHD/2006 AND ITA NO.253/AHD/2008 IN THE CASE OF M/S. ATUL LTD. THAT ONUS LIES ON ASS ESSEE TO PROVIDE DETAILS FOR CUP ANALYSIS AS THAT TAXPAYER AS A PARTY TO THE TRANSACTION HAS FULL KNOWLEDGE OF TRANSACTION CARRI ED OUT AND AS A PERSONAL ASSOCIATE WITH THAT PARTICULAR LINE OF BUSINESS, TH E ASSESSEE REASONABLY ACCEPTED TO BE NOT ONLY AWARE ABOUT NUANCES OF THAT BUSINESS AND BUT ALSO ECONOMIC CONDITIONS AND PECULIAR SITUATION OF THAT BUSINESS. THE BENCH FURTHER HELD THAT THE ASSESSEE KNEW EVEN ABOUT THE COMPARABLE UNCONTROLLED TRANSACTION, AND THEREFORE IT IS REASONABLE TO CALL UPON THE TAXPAYER TO FURNISH CONTROLLED/UNCONTROLLED TRANSACTIONS WHICH ARE WITH IN TAXPAYERS SPECIAL KNOWLEDGE RELYING UPON DECISION OF SPECIAL BENCH OF ITAT, BAN GALORE I.E. AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. V. ACIT C UIRL.1 (I) (2007) 107 ITO 141 (BANG) (SB) IN VIEW OF ABOVE THE TPO HAS GIVEN ELABORATE FINDIN G IN THIS REGARD ABOUT NON- APPLICABILITY OF TNM METHOD AS MOST APPROPRIATE MET HOD ON PAGE11 TO 13 OF THE ORDER. THE AO HAS ALSO ACCEPTED AND CONSIDERED DIFFERENCE IN PRICES ON ACCOUNT OF VOLUME, FOB/CIF AND ISSUE OF ECONOMIC DE VELOPMENT OF PARTICULAR MARKET WHILE COMPUTING CUP FOR VARIOUS PRODUCTS. (E) DEFECTS IN CIT(A)S ORDER I) CIT(A) IN HIS ORDER IN PARA 16.3 ON PAGE 24 HAS STATED THAT ASSESSEE HAS RIGHT TO CHOOSE THE BEST APPLICABLE METHOD FOR THE PURPOSE OF CALCULATION OF ARMS LENGTH PRICE. HOWEVER, IN ITA NO.2469/MUM/200 6 IN THE CASE OF SERDIA PHARMACEUTICAL INDIA PVT. LTD. V ACIT IT HAS BEEN HELD AT PARA NO.51 THAT SELECTION OF METHOD OF DETERMINING THE ARMS LENGTH PRICE IS NOT ON THE UNFETTERED DISCRETION OF THE TAX PAYER (ANNEXURE-C) II) CIT(A) ERRED IN ADMITTING FRESH EVIDENCE RE4GAR DING CONSOLIDATED PBIT WITH RESPECT TO TRANSACTION WITH AES DURING APPELLATE PR OCEEDINGS AS SAME WERE NOT PRODUCED BEFORE THE TPO BY THE ASSESSEE. HOWEVE R, THESE CONSOLIDATED PBIT ARE NOT RELEVANT FOR THE PURP0SE\OSE OF DETERM INING NET PROFIT MARGIN UNDER TNMM AS NET PROFIT MARGIN IS TO BE COMPUTED O N AN INTERNATIONAL TRANSACTION OR AGGREGATED SIMILAR TRANSACTIONS. THE ASSESSEE HAS NOT SUBMITTED NET PROFIT MARGIN ON EACH INTERNATIONAL T RANSACTION OR ON EACH PRODUCT WHICH ARE PART OF INTERNATIONAL TRANSACTION AND IT WAS STATED BY THE ASSESSEE CATEGORICALLY THAT ASSESSEE IS NOT MAINTAI NING SUCH DATA. THE ITAT MUMBAI L BENCH IN THE CASE OF UCB INDIA PVT. LTD. V. ACIT 121 ITD 131 ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 24 (MUM) [2009-T11-02-ITAT-MUM-TP] HAS HELD THAT SECTI ON 92C READ WITH RULE 10B(1)(E) DEALS WITH TRANSACTIONAL NET METHOD (TNMM ) AND IT REFERS TO ONLY NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLAUSE OF SUCH TRANSACTION, BUT NOT OPERATIONAL A MARGINS OF ENTERPRISE AS WHOLE. SIMILAR VIEW WAS ALSO TAKEN BY THE ITAT MUMB AI BENCH IN THE CASE OF DCIT V. M/S. STARLITE,SERDIA PHARMACEUTICALS INDIA PVT. LTD. V. ACIT AND IN THE CASE OF ACIT 16(3), MUMBAI V. TEJ DIAM TO THE E FFECT THAT TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REALIZED BY AN ENT ERPRISE FROM AN INTERNATIONAL A TRANSACTIONS AND NOT COMPARISON OF OPERATING MARGINS OF ENTERPRISES. THE TRIBUNAL OBSERVED TNMM REFERS TO O NLY NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRA NSACTION OR A CLASS OF SUCH TRANSACTIONS, BUT NO OPERATIONAL MARGINS OF THE ENT ERPRISE AS A WHOLE. III) CIT(A) HAS NOT GIVEN ANY REASONS FOR REJECTING EACH POINT MENTIONED BY THE TPO IN HIS ORDER ON PAGE 11 TO 13 AND HAS MERELY ST ATED THAT THERE WAS NO REASONABLE GROUND FOR CHANGING THE METHOD. IV) CONSIDERING THE FACTS OF THE CASE, AVAILABILITY OF INTERNAL COMPARABLES AND ALSO THE DISCUSSION IN THE OECD REPORT ON THE SUITA BILITY OF TNMM AS THE METHOD IT WAS HELD BY THE TPO THAT THE TNMM IS NOT THE MOST APPROPRIATE METHOD FOR COMPUTING THE ARMS LENGTH PRICE. COMPAR ABLE UNCONTROLLED PRICE METHOD USE DIN THE ECONOMIC ANALYSIS FOR THE TRANSA CTIONS IS THE MOST APPROPRIATE METHOD. THIS IS FURTHER SUPPORTED BY OE CD COMMENTARY IN PARA 3.49 AND 3.50 WHICH ARE REPRODUCED AS UNDER:- TRADITIONAL TRANSACTION METHODS ARE TO BE PREFERRE D OVER TRANSACTIONAL PROFIT METHODS AS A MEANS OF ESTABLISHING WHETHER A TRANSFER PRICE IS AT ARMS LENGTH I.E. WHETHER THERE IS A SPECIAL CONDIT ION AFFECTING THE LEVEL OF PROFITS BETWEEN ASSOCIATED ENTERPRISES. TO DATE, PRACTICAL EXPERIENCE HAS SHOWN THAT IN THE MAJORITY OF CASES, IT IS POSS IBLE TO APPLY TRADITIONAL TRANSACTION METHODS (PARA 3.49 OF THE O ECD REPORT) THERE ASSESSEE HOWEVER CASES WHERE TRADITIONAL TRAN SACTION METHODS CANNOT BE RELIABLY APPLIED ALONE OR EXCEPTIONALLY CANNOT B E APPLIED AT ALL. THESE WOULD BE CONSIDERED CASES OF LAST RESORT. SUCH CASE S ARISE ONLY WHERE THERE IS SUFFICIENT DATA ON UNCONTROLLED TRANSACTIONS (PO SSIBLY BECAUSE OF UNCOOPERATIVE BEHAVIOR ON THE PART OF THE TAXPAYER RELATIVE TO THSE4 GUIDELINES), OR WHERE SUCH DATA ARE CONSIDERED UNRE LIABLE, OR DUE TO THE NATURE OF THE BUSINESS SITUATION. IN SUCH CASES OF LAST RESORT, PRACTICAL CONSIDERATION, MAY SUGGEST APPLICATION OF A TRANSAC TIONAL PROFIT METHOD EITHER IN CONJUNCTION WITH TRADITIONAL TRANSACTION METHODS OR ON IT OWN. HOWEVER, EVEN IN A CASE OF LAST RESORT, IT WOULD BE INAPPROP RIATE TO AUTOMATICALLY APPLY A TRANSACTIONAL PROFIT METHOD WITHOUT FIRST CONSIDERI NG THE RELIABILITY F THAT METHOD (PARA 3.50 OF THE OECD REPORT.) EVEN THE LATEST GUIDELINES OF OECD OF 2010 STATES I N PARA 2.3 THAT: TRADITIONAL TRANSACTION METHODS ARE REGARDED AS TH E MOST DIRECT MEANS OF ESTABLISHING WHETHER CONDITIONS IN THE COMMERCIAL A ND FINANCIAL RELATIONS ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 25 BETWEEN ASSOCIATED ENTERPRISES ARE AT ARMS LENGTH. THIS IS BECAUSE ANY DIFFERENCE IN THE PRICE OF A CONTROLLED TRANSACTION FROM THE PRICE OF A COMPARABLE UNCONTROLLED TRANSACTION CAN NORMALLY BE TRACED DIRECTLY TO THE COMMERCIAL AND FINANCIAL RELATIONS MADE OR IMPOSED BETWEEN THE ASSOCIATED ENTERPRISES, AND THE ARMS LENGTH CONDITIONS CAN BE ESTABLISHED BY DIRECTLY SUBSTITUTING THE PRICE IN A COMPARABLE UNCONTROLLED TRANSACTION FOR THE PRICE OF THE CONTROLLED TRANSACTION. AS A RESULT, WHERE TAKI NG INTO ACCOUNT THE CRITERIA ESTABLISHED IN PARAGRAPH 23.2 A TRADITIONAL TRANSAC TION METHOD AND A TRADITION PROFIT METHOD CAN BE APPLIED IN A EQUALLY RELIABLE MANNER, THE TRADITIONAL TRANSACTION METHOD IS TO BE PREFERRED OVER TRADITIO NAL PROFIT METHOD. MOREOVER, WHERE TAKING INTO ACCOUNT THE CRITERIA ES TABLISHED IN PARAGRAPH 2.2 HE COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AND A NOTHER TRANSFER PRICING METHOD CAN BE APPLIED IN A EQUALLY RELIABLE MANNER, THE CUP METHOD IS TO BE PREFERRED IN VIEW OF ABOVE AND CONSIDERING DATA AVAILABLE IN THIS CASE FOR TRANSFER PRICING ANALYSIS, IT CAN BE SAID THAT ORDER OF THE CIT(A) IS NOT CORRECT AND DOES NOT GIVE COGENT REASONS FOR ACCEPTING TNMM AS MOST APPROPRIATE METHOD. EARLIER ORDER AND SIMILAR ORDERS OF TRIBUNAL OR CIT (A) CANNOT BE APPLIED TO THE PRESENT FACT MATRIX AS TRANSFER PRICING ANALYSIS IS AN EXERCISE BASED ON PECULIAR FACTS AND DATA OF EACH CASE FOR EACH INDIV IDUAL YEAR. IN FACT TPO HAS ALSO WRITTEN THAT THIS DECISION IS IN RESPONSE TO S PECIFIC REFERENCE U/S92CA(1) AND WILL APPLY TO THE CASE OF ASSESSEE FOR ASSESSME NT YEAR 20903-04 ONLY. IN VIEW OF ABOVE IT IS REQUESTED THAT ORDER SHOULD BE PASSED ON THE BASIS OF FACTS AND CIRCUMSTANCES OF EACH YEAR AND NOT ON THE BASIS OF ORDERS IN EARLIER YEAR. 36. LD. COUNSEL FOR THE ASSESSEE IN REPLY TO CIT-DR S SUBMISSIONS STATED THAT AS UNDER:- (A) ENTITY LEVEL COMPARISON THE ASSESSEE HAS CARRIED OUT COMPARABILITY AT ENTIT Y LEVEL AND NOT AT TRANSACTION LEVEL WHILE: APPLYING TNM METHOD. THE A SSESSEE HAS USED TNM METHOD ON ENTITY BASIS FOR COMPUTATION OF ARMS LENGTH PRICE FOR ITS SALES TO ITS SUBSIDIARIES. THE NET PROFIT MARGIN OF ENTERPRISE AS A WHOLE HAS BEEN COMPARED WITH THE NET MARGINS EARNED BY ORGANI C CHEMICALS MANUFACTURING COMPANIES. THE ASSESSEE HAS AGGREGATE D ALL THE TRANSACTIONS AND HAS NOT GIVEN ANY REASON FOR SUCH AGGREGATION AND COMPUTED NET MARGIN ON ITS ENTIRE SALE. TNM METHOD REQUIRES COMPUTATION OF NET MARGIN ON EACH TRANSACTION OR AGGREGATION OF SIMILAR TRANSACTIONS. SELECTION OF THIS METHOD AND COMPUTING NET PROFIT O N ENTIRE SALES OF THE COMPANY BECOMES MORE IRRELEVANT WHEN INTERNAL CUP D ATA SHOWS THAT FOR , CERTAIN FINE CHEMICALS/PHARMACEUTICALS, THE ASSESSE E HAS CHARGED CONSIDERABLY HIGHER PRICE IN DOMESTIC MARKET AS COM PARED TO EXPORT PRICE TO ITS AE. HIGHER MARGINS ON DOMESTIC SALES CANNOT JUSTIFY ARMS LENGTH TRANSACTIONS OF ITS SALE TO THE AE, AS HIGHER DOMES TIC RATES MEANS, NET PROFIT IS MORE DUE TO HIGHER DOMESTIC MARGINS. IN CERTAIN CASES, SALE PRICE OF EXPORT TO NON AES ARE HIGHER THAN SALES PRICE TO TH E AES AND IN CERTAIN CASES SALES PRICE CHARGED TO ONE AE ITS SUBSTANTIALLY HIG HER THAN SALES PRICE CHARGED TO OTHER AE. UNDER THE CIRCUMSTANCES, LOWER SALES PRICE CHARGED ARE ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 26 AT ARM'S LENGTH DOES NOT COME OUT FROM THE METHOD E MPLOYED BY THE ASSESSEE FOR COMPARISON OF THESE INTERNATIONAL TRAN SACTIONS. THE ASSESSEE HAS ITSELF STATED THAT FOR CERTAIN TRANSACTIONS INT ERNAL UNRELATED PRICE ARE AVAILABLE. HOWEVER, FOR REASONS BEST KNOWN TO IT, T HEY HAVE NOT CARRIED OUT ANY COMPARISON USING INTERNAL DATA FOR COMPARIS ON PURPOSE. SIMILARLY, NO EFFORTS WERE MADE BY THE ASSESSEE FOR OBTAINING EXTERNAL DATA WHICH ARE AVAILABLE IN PUBLIC DOMAIN LIKE; EXIM KEY DATA, IBI S DATA ETC. WHERE UNIT EXPORT PRICE FOR EXPORT OF THESE CHEMICALS / PHARMACEUTICA LS TO VARIOUS COUNTRIES IN THE WORLD FROM INDIAN PORT ARE AVAILABLE RELATED TO INDIAN MANUFACTURERS / BUSINESSES. IT IS CLEAR FROM THE ABOVE THAT THE ASS ESSEE HAS NOT CHOSEN CORRECT METHOD FOR COMPARISON OF ITS TRANSACTIONS. THE HON. ITAT MUFFIBAI 'L' BENCH IN THE CASE OF UCB INDIA PVT. LTD. V. ALIT 121 ITD 131 (MUMBAI) [2009-T11-02-ZTAT-MUM-TP] HAS HELD THAT SECTION 92C READ WITH RULE 10B(L)(E) DEALS WITH TRANSACTION AL NET MARGIN METHOD (TNMM) AND IT REFERS TO ONLY NET PROFIT MARGIN REAL IZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLAUSE OF SUCH TR ANSACTION, BUT NOT OPERATIONAL MARGINS OF ENTERPRISE AS WHOLE. SIMILAR VIEW WAS ALSO TAKEN BY THE HON. ITAT MUMBAI IN THE CASES OF DCIT V. M/S . STARLITE , SERDIA PHARMACEUTICALS INDIA PRIVATE LIMITED VS ACIT, AND IN ADDL. CIT 16(3), MUMBAI VS TEJ DIAM TO THE EFFECT THAT TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REALISED BY AN ENTERPRISE FROM AN IN TERNATIONAL TRANSACTION(S) AND NOT COMPARISON OF OPERATING MARGINS OF ENTERPRI SES. THE TRIBUNAL OBSERVED TNMM REFERS TO ONLY NET PROFIT MARGIN REAL IZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUC H TRANSACTIONS, BUT NO OPERATIONAL MARGINS OF THE ENTERPRISE AS A WHOLE. A S EXPLAINED BY THE COURT, THE CLASS OF TRANSACTION OF AN ENTERPRISE MAY BE EV ALUATED ON AN AGGREGATED BASIS IN CASES WHEN ONLY SIMILAR TRANSACTIONS ARE U NDERTAKEN I.E., ALL THE TRANSACTIONS ARE OF THE SAME TYPE; SAME CLASS AND O F SIMILAR VARIETY AND THE ENTERPRISE DOES NOT HAVE ANY OTHER TRANSACTION THAT IS NOT SIMILAR. THE TRIBUNAL DID NOT ACCEPT THE TAXPAYER'S ARGUMENT THA T IT WAS NOT PRACTICALLY POSSIBLE TO LOOK AT TRANSACTION LEVEL MARGINS. IT F IELD THAT IF A TAX PAYER WANTS TO ADOPT A PARTICULAR METHOD AS THE MOST APPROPRIATE M ETHOD, THEN IT IS THE TAX PAYER'S DUTY TO MAINTAIN AND FURNISH THE REQUIRED D ATA. IT IS SUBMITTED THAT THIS ISSUE IS NO MORE REST INT EGRA IN AS MUCH AS IN THE CASE OF M/S SCHUTZ DISHMAN BIOTECH (ITA NO.554/A/2006). THE SAI D ISSUE WAS RAISED AND ANSWERED AGAINST THE DEPARTMENT BY THE HONBLE TRIB UNAL (REF. PG. 24, PARA (D)). THE SAID VIEW HAS FURTHER BEEN REITERATED IN ITA NO .3590 AND 3751/AHD/2007. IT IS FURTHER SUBMITTED THAT WHEN UNDER IDENTICAL FACTS A ND CIRCUMSTANCES THIS TRIBUNAL HAS TAKEN A PARTICULAR VIEW, THAT TOO IN THE CASE OF TH E ASSOCIATED CONCERN OF THE ASSESSEE, THE SAME MAY KINDLY BE FOLLOWED COMPARED TO OTHER DECISIONS OF OTHER TRIBUNAL. IN ANY CASE, ALL THE CASES CITED ARE DIFF ERENT ON FACTS AND HAVE NO APPLICATION WHATSOEVER. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 27 (B) WRONG FUNCTIONS CONSIDERED FOR TRANSFER PRICIN G ANALYSIS : (I) THE ASSESSEE IN PARA. 7 OF THE TRANSFER PRICING REPORT HAS PERFORMED THE ANALYSIS FOR EVALUATING THE COMPARABI LITY OF THE UNCONTROLLED TRANSACTIONS WITH CONTROLLED TRANSACTIONS. IT HAS S TATED THAT WHOLLY OWNED SUBSIDIARIES PROVIDE VALUE ADDED SERVICES, ACTS AS, LOCAL STOCK POINTS. IT FURTHER STATED THAT FUNCTIONAL PROFILE AS WELL AS O PERATING PARAMETERS OF THE SUBSIDIARIES IS SIGNIFICANTLY DIFFERENT VIS-A-V IS THE SAME APPLICABLE TO OTHER PARALLEL UNCONTROLLED INTERNATIONAL TRANSACTI ONS ENTERED INTO BY THE ASSESSEE. ALL THESE FACTORS STATED ABOVE AFFECTS SE CONDARY SALE BY THE AES OR NON-AES IN THEIR JURISDICTION AND DOES NOT AFFEC T SALES MADE BY THE ASSESSEE TO THE AES AND NON-AES. FUNCTIONS CARRIED OUT BY THE AES WILL GIVE BETTER MARGINS TO THEM ON THEIR SECONDARY SALE BUT WILL NOT BE HAVING ANY EFFECT ON PURCHASE PRICE OF THESE AES. (II) THE ASSESSEE HIMSELF STATED THAT LIMITED INTER NAL CUPS ARE AVAILABLE BUT STATED THAT THEY ARE NOT STRICTLY COMPARABLE EV EN AFTER MAKING PERMISSIBLE ADJUSTMENT. HOWEVER, HE HAS NOT EXPLAIN ED THE SAME ANY FURTHER AND HAS NOT GIVEN ANY REASON WHY THEY ARE R IOT COMPARABLE. THE ASSESSEE HAS FAILED TO SUBMIT DETAILS EVEN FOR THE APPLICATION OF TNM METHOD WHEN AO ASKED HIM TO PROVIDE PRODUCT-WISE MA RGIN WHERE HE STATED THAT 'WE ARE NOT WORKING OUT PRODUCT-WISE COST OF P RODUCTION. UNDER THE CIRCUMSTANCES, WE REGRET THAT GROSS PROFIT MARK UP ON SALES SEPARATELY FOR EXPORTS TO DISHMAN EUROPE (UK), DISHMAN (USA) & THE EXPORTS TO UNRELATED PARTIES, AS REQUIRED CANNOT: FURNISHED.' (PAGE 5 FI RST LINE OF TPO ORDER ANNEXED AS ANNEXURE A). ABOVE ASSERTION OF THE ASSESSEE CLEARLY GOES AGAINS T AS FOR THE SELECTION OF MOST APPROPRIATE METHOD. IT HAS BEEN PROVIDED IN RULE 1OC(2)(C) THAT AVAILABILITY, COVERAGE AND RELIABILITY OF DATA, NEC ESSARY FOR APPLICATION OF METHOD IS ONE OF THE FOREMOST REQUIREMENT. THE ASSE SSEE HAS FAILED TO PROVIDE ANY DATA IN THIS REGARD TO APPLY TNM METHOD . IT IS SUBMITTED THAT THIS ISSUE IS NO MORE REST INT EGRA IN AS MUCH AS IN THE CASE OF M/S SCHUTZ DISHMAN BIOTECH (ITA NO.554/A/2006). THE SAI D ISSUE WAS RAISED AND ANSWERED AGAINST THE DEPARTMENT BY THE HONBLE TRIB UNAL (REF. PGA. 22 TO 24, PARAS (IV)(A/B/C/E). THE SAID VIEW HAS FURTHER BEEN REITE RATED IN ITA NO.3590 AND 3751/AHD/2007. (C) NON-COMPARABLE DATA SET ASSESSEE HAS USED ONLY ONE QUALITATIVE FILTER WHILE CARRYING OUT SEARCH ON PROWESS DATABASE AS IT HAS TAKEN ALL ORGANIC CHEMIC AL COMPANIES AS COMPARABLE COMPANIES. THE ASSESSEE HAS FAILED TO CO MPARE FUNCTIONS PERFORMED BY THESE COMPANIES, ASSET UTILIZED AND RI SK UNDERTAKEN IN CARRYING OUT THEIR BUSINESS. THERE ARE FOLLOWING DEFECTS IN THE DATA SET : ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 28 (I) THE ASSESSEE HAS NOT MADE ANY ADJUSTMENT FOR TH ESE DIFFERENCES TO ANY OF THE, COMPARABLES. (II) NO SEGMENTAL ACCOUNTS OF COMPARABLE COMPANIES CARRYING OUT SIMILAR ACTIVITIES HAVE, BEEN TAKEN FOR THE PURPOSE OF COMPARISON AND ENTITY LEVEL ACCOUNTS HAVE BEEN TAKEN. (III) THE ASSESSEE HAS SELECTED TEN COMPANIES FOR T HE PURPOSE OF COMPARISON WITH IT. HOWEVER, MAJORITY OF SALE TO TH ESE COMPANIES ARE COMING FROM DIFFERENT PRODUCTS WHICH ARE NOT BEING MANUFAC TURED BY THE ASSESSEE COMPANY. THE ASSESSEE HAS NOT CARRIED OUT ANY ANALYSIS OF TH ESE COMPANIES FOR COMPARABILITY PURPOSE AND HAS MERELY PICKED UP THES E COMPANIES FROM PROWESS DATABASE WHICH WERE ENGAGED IN ORGANIC CHEM ICAL BUSINESS COMPLETELY DISREGARDING THE FACT THAT WHETHER THEY ARE EXPORTING SIMILAR PRODUCTS/MANUFACTURING SIMILAR PRODUCTS, ETC. THIS ANALYSIS HAS GONE SO ABSURD THAT ASSESSEE HAS SELECTED M/S. AEGIS LOGIST ICS LIMITED AS COMPARABLE COMPANY WHICH IS ENGAGED IN TRANSPORTATI ON/STORAGE OF ORGANIC CHEMICALS I.E. IN LOGISTICS BUSINESS. SIMIL ARLY, OTHER COMPANIES SELECTED BY THE ASSESSEE ARE HAVING VERY LOW DEGREE OF COMPARABILITY VIS-A- VIS THE ASSESSEE REGARDING ITS INTERNATIONAL TRANSA CTIONS. THE PRODUCT PROFILE DETAILS OF FIRST FOUR COMPANIES OUT OF TEN COMPANIES SELECTED BY THE ASSESSEE COMPANY ARE ANNEXED WHICH CLEARLY SHOWS TH AT THESE C8MPANIES ARE HAVING HARDLY ANY SIMILARITY IN MANUFACTURING P ROCESS OR IN PRODUCT PROFILE. (ANNEXURE-B). M/S. ARTI INDUSTRIES LIMITED IS ENGAGED IN BENZENE RELATED COMPOUNDS, POLYMER ADDITIVES, PLASTICIZER, ETC. WHE REAS M/S. ALKYL AMINES CHEMICALS LIMITED IS ENGAGED IN MANUFACTURING AMINE S AND M/S. DEEPAK. NITRITE LIMITED IS ENGAGED IN MANUFACTURING AGRO CHEMICALS, SODIUM NITRITE, ETC. IT IS SUBMITTED THAT THIS ISSUE IS NO MORE REST INT EGRA IN AS MUCH AS IN THE CASE OF M/S SCHUTZ DISHMAN BIOTECH (ITA NO.554/A/2006). THE SAI D ISSUE WAS RAISED AND ANSWERED AGAINST THE DEPARTMENT BY THE HONBLE TRIB UNAL (REF. PGS. 24 TO 29). THE SAID VIEW HAS FURTHER BEEN REITERATED IN ITA NO.359 0 AND 3751/AHD/2007. (D) WRONG AND IRRELEVANT REASONS GIVEN FOR NON-APP LICATION OF CUP. THE ASSESSEE HAS GIVEN FOLLOWING REASONS DUE TO WHI CH INTERNAL/EXTERNAL CUP AS PER IT CANNOT BE APPLIED : (A) OUR COST OF MANUFACTURING AND GROSS AND NET MAR GIN EARNED BY US. (B) LARGE QUANTITY OF GOODS SOLD TO SINGLE PARTY I. E. TO WOS (WHOLLY OWNED SUBSIDIARIES) VS. SMALL QUANTITY OF GOODS SOLD TO V ARIOUS PARTIES, AS IN FORMER CASE ONE IS HAVING CERTAINTY OF BUSINESS WHE REBY THE COST OF MANUFACTURE OF PRODUCTS CAN BE LESS. ALSO COST OF P ACKAGING AND TRANSPORTATION ALSO NEEDS TO BE CONSIDERED. (C) FOR SALES IN DOMESTIC MARKET IMPORT DUTY COMPO9 NENT IF IMPORTED BY THE PURCHASER. ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 29 (D) IN OUR CASE AE IS OUR WOS AND AS PER THE ARRANG EMENT AE'S SCOPE IS SUPPLIED TO AE WITH THAT OF PRICE OF THE PRODUCT SUPPLIED TO OTHERS AS WELL AS THE PRICE AT WHICH THE THIRD PARTY SALES ITS OF SERVICES AS TO MARKETING, PAYMENT AND ALSO THE OVERALL RISK ASSUMED BY AE IS ALSO REQUIRED TO BE TAKEN INTO CONSIDERATION WHILE COMPARING THE PRICE AT WHICH THE PRODUCT TO OTHERS. (E) OVER AND ABOVE THE FACTORS SUCH AS AVERAGE PREV AILING INTERNATIONAL MARKET PRICE, THE SCOPE OF SERVICES RENDERED BY WOS, THE VOLUME OF BU SINESS OF A PARTICULAR PRODUCT THE QUALITY OF PRODUCT REQUIRED BY THE END CUSTOMER , THE AREA OF THE MARKET CAPTURE AND TO BE DEVELOPED BY THE WOS COUPLED WITH THE SIZ E OF THE MARKET. (F) VARIOUS FUNCTIONAL DIFFERENCES ARISING ON ACCOU NT OF ASSUMING RISK, FINANCIAL SUPPORT, MARKETING SUPPORT, TECHNICAL SUP PORT, GEOGRAPHICAL PRESENCE, READY SET UP, RECOGNITION ASSETS EMPLOYED AND CURRENCY FLUCTUATIONS, ARE ALSO REQUIRED T O BE CONSIDERED WHILE COMPARING THE PRICE. THE ABOVE DIFFERENCES AND REASONS WILL ALSO AFFECT COMPARISON FOR TRANSACTIONAL NET MARGIN METHOD AS WELL AS ASSESSEE HAS NOT CARRIED OUT ANY ADJUSTMENT FOR THESE DIFFERENCES FOR APPLYING TNM M ETHOD, IT IS CLEAR THAT ASSESSEE HAS NOT CHOSEN MOST APPROPRIATE METHOD IN THIS CASE. THE HON'BLE I.T.A.T. , AHMEDABAD HAS STATED THAT IN ITA NO. 846 /A/2006 AND ITA NO. 253/AHD/2008 IN THE CASE OF M/S. ATUL LTD. THAT , ONUS LIES ON ASSESSEE TO PROVIDE DETAILS FOR CUP ANALYSIS AS 'THAT TAX PAYER AS A PARTY TO THE TRANSACTION HAS FULL KNOWLEDGE OF TRANSACTION CARRIED' OUT AND AS A PERS ONAL ASSOCIATE WITH THAT PARTICULAR LINE OF BUSINESS, THE ASSESSEE REAS ONABLY ACCEPTED TO BE NOT ONLY AWARE ABOUT NUANCES OF THAT BUSINESS AND BUT ALSO E CONOMIC CONDITIONS AND PECULIAR SITUATION OF THAT BUSINESS. THE BENCH FURT HER HELD THAT THE ASSESSEE KNEW EVEN ABOUT THE COMPARABLE UNCONTROLLE D TRANSACTION, AND THEREFORE IT IS REASONABLE TO CALL UPON THE TAXPAYE R TO FURNISH CONTROLLED / UNCONTROLLED TRANSACTIONS WHICH ARE WITHIN TAXPAYER 'S SPECIAL KNOWLEDGE' RELYING UPON DECISION OF SPECIAL BENCH OF ITAT, BANGALORE I .E. AZTEC SOFTWARE &; TECHNOLOGY SERVICES LTD. VS. ACIT CIR. I (I) (2007) 107 ITO 141 (BANG) (SB) IN VIEW OF ABOVE THE TPO HAS GIVEN ELABORATE FINDIN G IN THIS REGARD ABOUT NON- APPLICABILITY OF TNM METHOD AS MOST APPROPRIATE MET HOD ON PAGE 11, 12 AND 13 OF THE ORDER. THE A. 0. HAS ALSO ACCEPTED AND CONSI DERED DIFFERENCE IN PRICES ON ACCOUNT OF VOLUME, FOB/CIF AND ISSUE OF ECONOMIC DEVELOPMENT OF PARTICULAR MARKET WHILE COMPUTING CUP FOR VARIOUS P RODUCTS. IT IS SUBMITTED THAT THIS ISSUE IS NO MORE REST INT EGRA IN AS MUCH AS IN THE CASE OF M/S SCHUTZ DISHMAN BIOTECH (ITA NO.554/A/2006). THE SAI D ISSUE WAS RAISED AND ANSWERED AGAINST THE DEPARTMENT BY THE HONBLE TRIB UNAL (REF. PGS. 24 TO 34). THE SAID VIEW HAS FURTHER BEEN REITERATED IN ITA NO.359 0 AND 3751/AHD/2007. IN ANY CASE, EVEN IN CASE OF ASSOCIATE CONCERN VIZ. SCHUTZ DISHMAN ( SUPRA) THIS TRIBUNAL ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 30 HAS UPHELD THE VERY SAME REASON GIVEN BY THE ASSESS EE FOR NON-APPLICATION OF CUP METHOD OF ALP. IT IS SUBMITTED THAT IF THE SAME REA SONS HAVE WEIGHT WITH THE TRIBUNAL WHILE DECIDING THE APPEAL IN THE CASE OF SCHUTZ DIS HMAN (SUPRA), IT IS SUBMITTED THAT THE SAME CONSIDERATION MAY KINDLY BE APPLIED AND TH E CONTENTION OF THE ASSESSEE MAY KINDLY BE UPHELD. (E) DEFECTS IN CIT(A)'S ORDER (I) CIT(A) IN HIS ORDER IN PARA 16.3 ON PAGE 24 HAS STA TED THAT ASSESSEE HAS RIGHT TO CHOOSE THE BEST APPLICABLE METHOD FOR THE PURPOSE OF CALCULATION OF ARM'S LENGTH PRICE,, HOWEVER, IN ITA NO. 2469/MU MBAI/06 IN THE CA S E SERDIA PHARMACEUTICAL INDIA PVT. LTD. V. ACIT, IT HAS BEEN FIELD AT PARA NO. 51 THAT SELECTION OF METHOD OF DETERMINING THE ARM'S LENGTH PRICE IS NOT ON THE UNFETTERED DISCRETION OF THE TAX PAYER (ANNEXURE -C ). CIT(A) ERRED IN ADMITTING FRESH EVIDENCE REGARDING CONSOLIDATED PBIT WITH RESPECT TO TRANSACTION WITH AES DURING APPELLATE PR OCEEDINGS AS SAME WERE NOT PRODUCED BEFORE THE TPO BY THE ASSESSEE. HOWEVE R, THESE CONSOLIDATED PBIT ARE NOT RELEVANT FOR THE PURPOSE OF DETERMININ G NET PROFIT MARGIN UNDER TNMM AS NET PROFIT MARGIN IS TO BE COMPUTED ON AN I NTERNATIONAL TRANSACTION OR AGGREGATED SIMILAR TRANSACTIONS. 'THE ASSESSEE H AS NOT SUBMITTED NET PROFIT MARGIN ON EACH INTERNATIONAL TRANSACTION OR ON EACH PRODUCT WHICH. ARE PART OF INTERNATIONAL TRANSACTION AND IT WAS STATED BY THE ASSESSEE CATEGORICALLY THAT ASSESSEE IS NOT MAINTAINING SUCH DATA. THE HON. ITAT MUMBAI 'L' BENCH IN THE CASE OF UCB INDIA PVT. LTD. V. ACIT 121 ITD 131 (MUMBAI) [.2009-T11-02-ZTAT-MUM-TP] HAS HELD THAT S ECTION 92C READ WITH RULE 10B(L)(E) DEALS WITH TRANSACTIONAL NET MARGIN METHOD (TNMM) AND IT REFERS TO ONLY NET PROFIT MARGIN REALIZED BY AN ENT ERPRISE FROM AN INTERNATIONAL TRANSACTION OR CLAUSE OF SUCH TRANSACTION, BUT NOT OPERATIONAL MARGINS OF ENTERPRISE AS WHOLE. SIMILAR VIEW WAS ALSO TAKEN BY THE HON. ITAT MUMBAI IN THE CASES OF DCIT V. M/S. STARLITE , SERD IA PHARMACEUTICALS INDIA PRIVATE LIMITED VS ACTT, AND IN ADDL. CIT 16(3), MU MBAI VS TEJ DIAM TO THE EFFECT THAT TNMM REQUIRES COMPARISON OF NET PRO FIT MARGINS REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION(S) AND NOT COMPARISON OF OPERATING MARGINS OF ENTERPRISES. THE TRIBUNAL OBSE RVED TNMM REFERS. TO ONLY NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSACTIONS, BUT NO OPERATIONAL MARG INS OF THE ENTERPRISE AS A WHOLE. (III ) CIT(A) HAS NOT GIVEN ANY REASON FOR REJECTIN G EACH POINT MENTIONED BY THE TPO IN HIS ORDER ON PAGE 11,12, & 113 AND HA S MERELY STATED THAT THERE WAS NO REASONABLE GROUND FOR CHANGING THE MET HOD. (IV ) CONSIDERING THE FACTS OF THE CASE, AVAILABILI TY OF INTERNAL COMPARABLES AND ALSO THE DISCUSSION IN THE OECD REP ORT ON THE SUITABILITY OF TNMM AS THE METHOD IT WAS HELD BY TH E TPO THAT THE TRANSACTIONAL NET MARGIN METHOD IS NOT THE MOST APP ROPRIATE METHOD ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 31 FOR COMPUTING THE ARM'S LENGTH PRICE. COMPARABLE UN CONTROLLED PRICE METHOD, USED IN THE ECONOMIC ANALYSIS FOR THE TRANS ACTIONS IS THE MOST APPROPRIATE METHOD. THIS IS FURTHER SUPPORTED BY OE CD COMMENTARY IN PARA 3.49 AND 3.50 WHICH ARE REPRODUCED AS UNDER : 'TRADITIONAL TRANSACTION METHODS ARE TO BE PREFERRE D OVER TRANSACTIONAL PROFIT METHODS AS A MEANS OF ESTABLISHING WHETHER A TRANSFER PRICE IS A T ARM'S LENGTH L E. WHETHER THERE IS A SPECIAL CONDITION AF FECTING THE LEVEL OF PROFITS BETWEEN ASSOCIATED ENTERPRISES. TO DATE, PRACTICAL EXPERIENCE HAS SHOWN THAT IN THE MAJORITY OF CASES, IT IS POSSIBLE TO AP PLY TRADITIONAL TRANSACTION METHODS (PARA 3.49 OF THE OECD REPORT). THERE ARE, HOWEVER CASES WHERE TRADITIONAL TRANSACT ION METHODS CANNOT BE RELIABLY APPLIED ALONE OR EXCEPTIONALLY CANNOT B E APPLIED AT ALL. THESE WOULD BE CONSIDERED CASES OF LAST RESORT~ SUCH CASE S ARISE ONLY WHERE THERE IS SUFFICIENT DATA ON UNCONTROLLED TRANSACTIO NS (POSSIBLY BECAUSE OF UNCOOPERATIVE BEHAVIOR ON THE PART OF THE TAXPAYER RELATIVE TO THESE GUIDELINES), OR WHERE SUCH DATA AREA CONSIDERED ARE CONSIDERED UNRELIABLE, OR DUE TO THE NATURE OF 'THE BUSINESS SITUATION. IN SU CH CASES OF LAST RESORT, PRACTICAL CONSIDERATION, MAY SUGGEST APPLICATION OF A TRANSACTIONAL PROFIT METHOD EITHER IN CONJUNCTION WITH TRADITIONAL TRANS ACTION METHODS OR ON FT OWN. HOWEVER, EVEN IN A CASE OF LAST RESORT, IT WOU LD BE INAPPROPRIATE TO AUTOMATICALLY APPLY A TRANSACTIONAL PROFIT METHOD W ITHOUT FIRST CONSIDERING THE RELIABILITY OF THAT METHOD (PARA 3.50 OF THE OECD REPORT). ' EVEN THE LATEST GUIDELINES OF OECD OF 2010 STATES I N PARA 2.3 THAT : 'TRADITIONAL TRANSACTION METHODS ARE REGARDED CIS T HE MOST DIRECT MEANS OF ESTABLISHING WHETHER CONDITIONS IN THE COMMERCIAL AND FINANCIAL RELATIONS BETWEEN ASSOCIATED ENTERPRISES ARE AT ARM 'S LENGTH. THIS , IS BECAUSE ANY DIFFERENCE IN THE PRICE OF A CONTROLLED TRANSACTION FROM THE PRICE OF A COMPARABLE UNCONTROLLED TRANSACTION CAN NORMALLY BE TRACED DIRECTLY TO THE COMMERCIAL AND FINANCIAL RELATIONS MADE OR IMPOSED BETWEEN THE ASSOCIATED ENTERPRISES, AND THE ARM'S L ENGTH CONDITIONS CAN BE ESTABLISHED BY DIRECTLY SUBSTITUTING THE PRICE I N COMPARABLE UNCONTROLLED TRANSACTION FOR THE PRICE O)'* THE CON TROLLED TRANSACTION. AS A RESULT, WHERE, TAKING INTO ACCOUNT THE CRITERIA EST ABLISHED IN PARAGRAPH 2.2, A TRADITIONAL TRANSACTION METHOD AND A TRADITI ON PRO METHOD CAN BE APPLIED IN O EQUALLY RELIABLE MANNER, THE TRADITION AL TRANSACTION METHOD IS TO BE PREFERRED OVER TRADITIONAL PROFIT METHOD. MOR EOVER, WHERE, TAKING INTO ACCOUNT THE CRITERIA ESTABLISHED IN PARAGRAPH 2.2, THE COMPARABLE UNCONTROLLED F PRICE METHOD (CUP) AND ANOTHER TRANSFER PRICING MET HOD CAN BE APPLIED IN A EQUALLY RELIABLE MANNER, THE CU P METHOD IS TO BE PREFERRED.... ' IN VIEW OF ABOVE AND CONSIDERING DATA AVAILABLE IN THIS CASE FOR TRANSFER PRICING ANALYSIS, IT CAN BE SAID THAT: OF THE CIT(A ) IS NOT. CORRECT AND ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 32 DOES NOT GIVE COGENT REASONS FOR ACCEPTING TNMM AS MOST APPROPRIATE METHOD. EARLIER ORDER AND SIMILAR ORDERS OF ITAT OR CIT(A) CANNOT BE APPLIED TO THE PRESENT FACT MATRUX AS TRANSFER PRICING ANALYSIS IS AN EXERCISE BASED ON PECULIAR FACTS AND DATA OF EACH CASE FOR EACH INDIV IDUAL YEAR. IN FACT TPO HAS ALSO WRITTEN THAT THIS DECISION IS IN RESPONSE TO SPECIFIC REFERENCE UNDER SECTION 92CA(L) AND WILL APPLY TO THE CASE OF ASSESSEE FOR A.Y. 2003- 04 ONLY. IN VIEW OF ABOVE FT IS REQUESTED THAT ORDE R SHOULD BE PASSED ON THE BASIS OF FACTS AND CIRCUMSTANCES OF EACH YEA R AND NOT ON THE BASIS OF ORDERS IN EARLIER YEAR. IT IS SUBMITTED THAT THERE ARE NO DEFECTS IN THE OR DER OF CIT(A) AS ALLEGED OR FOR THE REASONS FOR AS ALLEGED. IN FACT, UNDER IDENTICAL FA CTS AND CIRCUMSTANCES AND IN SOME WHAT IDENTICAL WORDED CIT(A) ORDER IN THE CASE OF S CHUTZ DISHMAN (SUPRA), THIS TRIBUNAL IN A SERIES OF ORDERS HAVE UPHELD THE REAS ONING AND LOGIC OF CIT(A). IF THAT BE SO, IT IS SUBMITTED THAT THE ORDER MAY KINDLY BE UPHELD IN THIS APPEAL ALSO. IN SO FAR AS OECD GUIDELINES ARE CONCERENED, IT IS SUBMITTED THAT THERE IS PARADIGM SHIFT BY OECD WHEN IT COMES TO SELECTION OF THE MAM IN ITS L ATEST GUIDELINES ISSUED IN JULY, 2010 WHICH IS REPRODUCED HEREIN BELOW FOR READY REF ERENCE : OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS 22 JULY 2010 CHAPTER II : TRANSFER PRICING METHODS PART I: SELECTION OF THE TRANSFER PRICING METHOD: A. SELECTION OF THE MOST APPROPRIATE TRANSFER PRICING METHOD TO THE CIRCUMSTANCES OF THE CASE 2.1 PARTS II AND III OF THIS CHAPTER RESPECTIVELY D ESCRIBE TRADITIONAL TRANSACTION METHODS AND TRANSACTIONAL PROFIT METHODS THAT CA N BE USED TO ESTABLISH WHETHER THE CONDITIONS IMPOSED IN THE COMMERCIAL OR FINANCIAL RELATIONS BETWEEN ASSOCIATED ENTERPRISES ARE CONSISTENT WITH THE ARM'S LENGTH PRINCIPLE. TRADITIONAL TRANSACTION METHODS ARE THE COMPARABLE UNCONTROLLED PRICE METHOD OR CUP METHOD, THE RESALE PRICE METHOD, AND THE COST PLUS METHOD. TRANSACTIONAL PROFIT METHODS ARE THE TRANSACTIONAL NET MARGIN METHOD AND THE TRANSACTIONAL PROFIT SPLIT METHOD. XXX ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 33 2.4 THERE ARE SITUATIONS WHERE TRANSACTIONAL PROFIT METHODS ARE FOUND TO BE MORE APPROPRIATE THAN TRADITIONAL TRANSACTION ME THODS. FOR EXAMPLE, CASES WHERE EACH OF THE PARTIES MAKES VALUABLE AND UNIQUE CONTRIBUTIONS IN RELATION TO THE CONTROLLED TRANSAC TION, OR WHERE THE PARTIES ENGAGE IN HIGHLY INTEGRATED ACTIVITIES, MAY MAKE A TRANSACTIONAL PROFIT SPLIT MORE APPROPRIATE THAN A ONE-SIDED METH OD. AS ANOTHER EXAMPLE, WHERE THERE IS NO OR LIMITED PUBLICLY AVAI LABLE RELIABLE GROSS MARGIN INFORMATION ON THIRD PARTIES, TRADITIONAL TR ANSACTION METHODS MIGHT BE DIFFICULT TO APPLY IN CASES OTHER THAN THO SE WHERE THERE ARE INTERNAL COMPARABLES, AND A TRANSACTIONAL PROFIT ME THOD MIGHT BE THE MOST APPROPRIATE METHOD IN VIEW OF THE AVAILABILITY OF INFORMATION. IT CAN BE SEEN THAT NOW EVEN OECD STATES THAT TNMM IS NOT A METHOD OF LAST RESORT. UNDER THE CIRCUMSTANCES, THE TNMM METHOD OF ALP AS ADOPTED BY THE ASSESSEE MAY BE ACCEPTED. IN ANY CASE, EVEN IF THE CUP METHOD OF ALP IS APPLI ED, THE COMPARISON IS 1COMPLETE AND PATENTLY INAPPROPRIATE AND INCORRECT AS CAN BE SEEN FROM THE FOLLOWING TABLE: SR. NO. ARM'S LENGTH PRICE ADJUSTMENT REMARKS 1. CETYL PRYIDINIUM C RS.20,28,563/- SALES MADE TO SCHUTZ & CO., GERMANY ARE NOT AT ALL COMPARABLE INASMUCH AS THIS ENTITY DOES NOT UNDERTAKE ANY MARKETING EXERCISES, NO AFTER SALES SUPPORT IS PROVIDED AND EVEN TECHNICAL SUPPORT IS ALSO NOT PROVIDED. AS AGAINST THIS DEL PROVIDES ALL THESE SERVICES AND THEREFORE THE PRICES ARE NOT COMPARABLE. FURTHER AS AGAINST THE TOTAL QUANTITY OF 17,450 KGS, SOLD TO DEL, THE APPELLANT HAS SOLD ONLY 2000 KGS TO THIS SCHUTZ & CO.. IT IS ALSO SEEN THAT RATE APPLIED BY TPO IS RS.603 PER KG, WHICH IS MUCH MORE THAN THE RATE OF RS.527 PER KG, THE RATE AT WHICH THE SAME GOODS WEIGHING 20000 KGS HAS BEEN SOLD TO USA AE AND WHICH HAS BEEN ACCEPTED BY THE TPO WITHOUT ADJUSTMENT. THUS, THIS ADJUSTMENT IS PATENTLY WRONG. 2 ETHYL TRIPHENYL PH RS.1,72,93,050/- THERE IS NO COMPARABLE INSTANCE. AO HA COMPARED DOMESTIC SALES OF 55 KGS AS AGAINST 23,150 KGS TO DEL IN THE INTERNATIONAL MARKET. THE COMPARABLE SALES ARE MADE DOMESTICALLY AND THEREFORE THE SAME CANNOT BE COMPARED WITH AS HELD BY THE TPO IN ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 34 THE CASE OF BENZYL TRIETHYL AM, WHERE4E NO COMPARATIVE INTERNATIONAL RATES WERE AVAILABLE AND NO ADJUSTMENT WAS MADE BY HIM. THUS, THIS ADJUSTMENT IS ALSO INCORRECT. 3 CETRAMID B.P. RS.45,000/- DIFFERENCE IN PRICE IS LESS THAN 5% AND THEREFORE THE SAME IN ANY CASE HAS TO BE IGNORED. 4 GILBENCLAMIDE BP RS.5,076/- DIFFERENCE IS NEGLIGIBLE AND HAS TO BE IGNORED. 5. TETRA BUTYL AMM BR RS.35,93,565/- THE QUANTITY SOLD TO DEL WAS 1,40,10 0 KGS AS AGAINST 6000 KGS SOLD TO DIFFERENT NON-AE PARTIES. THE MARGINAL DIFFERENCE IN RATES APPEARS REASONABLE CONSIDERING THE LARGE VOLUME INVOLVED. 6 TETRA BUTYL AMM HY RS.21,62,724/- THE QUANTITY SOLD TO DEL WAS 58,452 KGS AS AGAINST 10,060 KGS SOLD TO DIFFERENT NON-AE PARTIES. APART FROM THAT ASSESSING OFFICER HAS HIMSELF ACCEPTED A RATE OF RS.550-/- PER KG IN RESPECT OF DISHMAN USA AND THUS WHEN THE SAME ITEM WAS SOLD TO EUROPE AT A HIGHER RATE OF RS.557/- PER KG. THERE WAS NO QUESTION OF ANY ADJUSTMENT. THIS ADJUSTMENT IS PATENTLY INCORRECT. 7 TETRA ETHYL AMMK BR RSS.55,20,500/- THE QUANTITY SOLD TO DEL WAS 90,500 KGS AS AGAINST 5,875 KGS SOLD TO DIFFERENT NON-AE PARTIES. THE PRICE ADOPTED BY THE ASSESSING OFFICER IS OF RS.272/- PER KG, BUT IN CASES OF USA, THE RATE OF RS.243/- HAS BEEN ACCEPTED BY HIM. THE BALANCE MINOR VARIATION IS ON ACCOUNT OF LARGE VOLUME OF GOODS AND HENCE RATES SHOULD HAVE BEEN ACCEPTED. IT CAN BE SEEN THAT APPARENTLY INCOMPARABLE HAVE BE EN COMPARED WHILE APPLYING THE CUP METHOD. EITHER THE QUANTITY TRANSA CTED IS TOO SMALL OR INSIGNIFICANT OR DOMESTIC TRANSACTIONS HAVE BEEN CO MPARED WITH INTERNATIONAL TRANSACTIONS OR PRICES OF VASTLY DIFFERENT GEOGRAPH ICAL LOCATIONS HAVING INCOMPARABLE ECONOMIC AND POLITICAL RISKS HAVE BEEN COMPARED, WHICH IS NOT PERMISSIBLE UNDER THE SCHEME OF THE ACT. THIS VIEW IS SUPPORTED BY THE DECISION OF THE MUMBAI BENCH IN THE CASE OF ACIT V. DUFON LABORATORIES (2010) 39 SOT 59 (MUM), WHEREIN IT HAS BEEN HELD TH AT: XXX.. 28. FROM THE ABOVE FACTS AND CIRCUMSTANCES WE FIND THAT THE FOLLOWING FACTORS HAVE BEEN RIGHTLY CONSIDERED BY LD. CIT(A). ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 35 (1) TURNOVER OR QUANTITY DIFFERENCE: THE SALE TO NO N-AE IS OF 1150 KGS. ONLY, WHEREAS THERE IS A SALE TO THE MAGNITUDE OF 6 2,000 KGS. TO THE AE WHICH WILL HAVE A BEARING ON THE PRICES. VOLUME SOL D IS A SIGNIFICANT FACTOR IN FIXING THE PRICE. (2) GEOGRAPHICAL DIFFERENCE: IN THE CASE OF RANBAXY LABORATORIES LTD. V. ASSTT. CIT (2008) 110 ITD 428 (DEL) IT HAS BEEN HELD THAT IT COULD HAVE BEEN APPRECIATED IF A PARTICULAR ENTITY IN A P ARTICULAR COUNTRY WAS SOUGHT TO BE COMPARED WITH SOME SIMILAR ENTITY IN T HAT VERY COUNTRY AS GEOGRAPHICAL SITUATIONS IN SEVERAL WAYS INFLUENCE T HE TRANSFER PRICING. (3) PROFILE OF CUSTOMER: THE TRANSACTIONS WITH HIGH PROFILE CLIENTS SUCH AS AKZO NOBEL OR ISOLA IS DIFFERENT WHEN COMPARED T O SMALL SALES TO SMALL PLAYERS IN SOUTH EAST ASIAN BUSINESS. (4) SURVIVAL OF THE APPELLANT: IN ORDER TO CAPTURE AND MAXIMIZE ITS PROFITS OF THE BIG AND FLOURISHING MARKET OF USA AN D EUROPE IT HAS TO DEPEND ON ITS AE ONLY. (5) LASTLY ON A SIMPLE AVERAGE IT IS 8.21 FROM IT T O ITS AE WHEREAS IT IS 8.87 FROM ITS AE TO CUSTOMERS. AT THE WEIGHTED AVER AGE RATE IT IS 8.20 FROM IT TO ITS AE WHILE IT IS 8.75 FROM ITS AE TO C USTOMERS. IF THE OVERHEADS AS IDENTIFIED IN THE SUBMISSIONS TO RUN T HE AE IS REDUCED THEN THERE WOULD BE HARDLY ANY PROFIT. 37. AFTER GOING THROUGH THE FACTS IN ENTIRETY, WE A RE OF THE VIEW THAT THE FACTS IN THE PRESENT APPEALS ARE EXACTLY IDENTICAL TO THE CASE O F M/S. SCHUTZ DISHMAN BIOTECH IN ITA NO.554/AHD/2006 AND THIS ISSUE WAS ANSWERED AGAINST THE REVENUE BY THIS TRIBUNAL. IN ANY CASE, EVEN IN THE CASE OF ASSOCIA TE COCERN VIZ. SCHUTZ DISHMAN (SUPRA) THIS TRIBUNAL HAS UPHELD THE VERY SAME REAS ONS GIVEN B THE ASSESSEE FOR NON-APPLICATION OF CUP METHOD OF AMP AND ACCORDINGL Y, FOLLOWING THE TRIBUNALS DECISION, WE ALLOW THE CLAIM OF THE ASSESSEE, UPHOL DING THE ORDER OF CIT(A) ON THIS COMMON ISSUE OF THE REVENUES APPEALS. THIS COMMON ISSUE OF REVENUES APPEALS IS DISMISSED. 38. THE NEXT COMMON ISSUE IN THESE APPEALS OF REVEN UE IS AGAINST THE ORDER OF CIT(A) IN DIRECTING TO EXCLUDE SALES TAX AND EXCISE DUTY AND ALSO TURNOVER OF DISHMAN BUSINESS CENTRE AND ADIMAN TRAVELS FROM TOT AL TURNOVER OF THE BUSINESS FOR WORKING OUT DEDUCTION U/S.80HHC OF THE ACT. FOR THI S, REVENUE IN ITA NO.587/AHD/2007 FOLLOWING GROUND NO.1(VII) :- 1) THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 36 VII) TO EXCLUDE SALES TAX, EXCISE DUTY AND ALSO THE TURNOVER OF ADIMAN TRAVELS AND DISHMAN BUSINESS CENTRE, FROM THE TOTAL TURNOVER OF THE BUSINESS, FOR WORKING OUT THE DEDUCTION U/S.80HHC O F THE I.T. ACT. IN ITA NO.32`13/AHD./2007 FOR THE ASSESSMENT YEAR 3204-05 THE FOLLOWING GROUND NO.7 :- 7. THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG TO EXCLUDE TURNOVER OF ADIMAN TRAVELS OF RS.32,97,698/- AND DISHMAN CENTER OF RS.24,25,511/- FROM THE TOTAL TURNOVER OF THE BUSINESS FOR WORKING OUT DEDUCTION U/S.80HHC. 39. WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS. LAKSHMI MACHINE WORKS (2007) 290 ITR 667 (SC), WHEREIN THE HONBLE APEX COURT HAS HELD AS UNDER:- 6. THE LEARNED CIT(APPEALS)-V, AHMEDABAD ERRED IN CONFIRMING THAT EXCISE DUTY IS PART OF TOTAL TURNOVER FOR THE PURPOSE OF C ALCULATION OF DEDUCTION U/S.80HHC OF THE ACT. IN FACT, IN CIVIL APPEAL NO.4409 OF 2005, THE ABOV E PROPOSITION HAS BEEN ACCEPTED BY THE ASSESSING OFFICER [SEE : PAGE NO.24 OF THE PAPER BOOK] , IF SO, THEN EXCISE DUTY AND SALES TAX ALSO CANNOT FORM PAR T OF THE TOTAL TURNOVER UNDER SECTION 80HHC(3), OTHERWISE THE FORMULA BECOM ES UNWORKABLE. IN OUR VIEW, SALES TAX AND EXCISE DUTY ALSO DO NOT HAVE AN Y ELEMENT OF TURNOVER WHICH IS THE POSITION EVEN IN THE CASE OF RENT, COM MISSION, INTEREST ETC., IT IS IMPORTANT TO BEAR IN MIND THAT EXCISE DUTY AND SALE S TAX ARE INDIRECT TAXES. THEY ARE RECOVERED BY THE ASSESSEE ON BEHALF OF THE GOVERNMENT. THEREFORE, IF THEY ARE MADE RELATABLE TO EXPORTS, THE FORMULA UNDER SECTION 80HHC WOULD BECOME UNWORKABLE. THE VIEW WHICH WE HAVE TAKEN IS IN THE LIGHT OF THE AMENDMENTS MADE TO SECTION 80HHC FROM TIME TO TIME. AS THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE A SSESSEE, WE DISMISS THIS ISSUE OF THE REVENUES APPEAL. ACCORDINGLY, THIS ISSUE OF TH E REVENUES APPEAL IS DISMISSED. 40. AS REGARDS TO THE ISSUE OF EXCLUSION OF TURNOVE R OF DISHMAN BUSINESS CENTRE AND ADIMAN TRAVELS FROM THE TOTAL TURNOVER FOR THE COMPUTATION OF DEDUCTION U/S.80HHC OF THE ACT, THE RELEVANT FACTS ARE NOT AV AILABLE ON RECORDS, HENCE, THE SAME IS SET ASIDE TO THE FILE OF THE ASSESSING OFFI CER FOR VERIFICATION AND DECISION. 41. THE NEXT COMMON ISSUE IN THESE APPEALS OF REVEN UE IS AGAINST THE ORDER OF CIT(A) IN DIRECTING NOT TO EXCLUDE MISCELLANEOUS IN COME FROM THE TOTAL OF BUSINESS WHILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT. FOR THIS, REVENUE IN ITA NO.587/AHD/2007 FOLLOWING GROUND NO.1(VIII) :- ITA NO.154 & 547/AHD/2007 & 2180 & 3213/AHD/07 A.YS. 03-04 & 04- 05 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. V. DCIT (OSD) RNG -1 ABD PAGE 37 1) THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTI NG VIII) NOT TO EXCLUDE THE MISC. INCOME OF RS.4,29,36 5/- FROM THE PROFIT TO WORK OUT THE ADJUSTED PROFIT OF BUSINESS WHILE WORKING O UT THE ADMISSIBLE DEDUCTION U/S.80HHC OF THE I.T. ACT. IN ITA NO.3213/AHD./2007 FOR THE ASSESSMENT YEAR 2004-05 THE FOLLOWING GROUND NO.8 :- THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTING TO EXCLUDE MISC. INCOME OF RS.4,29,365/- FROM THE PROFIT TO WORK OUT THE ADJUS TED PROFIT OF BUSINESS WHILE WORKING OUT THE ADMISSIBLE DEDUCTION U/S. 80HHC. 42. WE FIND THAT MISCELLANEOUS INCOME REPRESENTS TR ADE DISCOUNTS RECEIVED AS WELL AS PREVIOUS YEAR BUT IT IS NOT CLEAR WHETHER T HIS MISCELLANEOUS INCOME HAS ANY NEXUS WITH THE EXPORT TURNOVER. ACCORDINGLY, THIS C OMMON ISSUE SET ASIDE TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION. ACCORDINGLY, THIS COMMON ISSUE OF REVENUES APPEALS IS ALLOWED FOR STATISTICAL PURPOSES. 43. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THAT OF THE ASSESSEE ARE A LSO PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 18/02/2011 SD/- SD/- (D.C.AGRAWAL) (MAHAVI R SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 18/02/2011 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-V, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD