Dr. Reddy Laboratories Limited, Hyderabad V. Addl.Commissioner of IT, Hyderabad

ITA 1605/HYD/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69740 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 04-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 16-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: SAMPATH RAGHUNATHAN
• Keywords: Gift; Recovery proceedings; Business income; Depreciation; Transfer pricing; Business expenditure; Double taxation relief; International transaction; Earning of tax free income; Cost of acquisition; Wholly owned subsidiary; Bad and doubtful debts; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 80IB; 37(1); 139(5); 10B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1605/HYD./10 ASSESSMENT YEAR : 2006-07 DR. REDDYS LABORATORIES LIMITED 7-1-27, AMEERPET HYDERABAD-500 016. PAN NO.AAACD 7999 Q VS. ADDL. CIT CIRCLE-1(2), 4 TH FLOOR AAYAKAR BHAVAN HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SAMPATH RAGHUNATHAN REVENUE BY : SHRI D. SUDHAKAR RAO DATE OF HEARING : 21 / 05 / 2013 DATE OF PRONOUNCEMENT : 08 / 08/2013 O R D E R PER B. RAMAKOTAIAH, AM: THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDERS OF THE AO UNDER SECTION 143(3) R.W.S. 144C(5) AND 144C(13) OF THE I NCOME TAX ACT, 1961 (THE ACT). THE ASSESSEE FILED RETURN OF INCOME ON 2 9.11.2006 DECLARING TOTAL INCOME AT NIL AFTER CLAIMING DEDUCTION UNDER CHAPTER-VI-A UNDER NORMAL PROVISIONS AND RS.204,62,90,909 AS BOOK PROF IT UNDER SECTION 115JB. SUBSEQUENTLY, ASSESSEE FILED REVISED RETURN ON 29.10.2007 DECLARING TOTAL INCOME AT NIL AND BOOK PROFIT AT RS .197,74,95,284. THE RETURN WAS SELECTED FOR SCRUTINY AND ASSESSING OFFI CER PROPOSED A DRAFT ORDER UNDER SECTION 144C DATED 23.12.2009. THE ASSE SSEE FILED ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 2 OBJECTIONS UNDER SECTION 144C(2) BEFORE DRP ON 29.0 1.2010. THE DRP HYDERABAD PASSED ORDER UNDER SECTION 144C(5) ON 30. 09.2010 AND AO FINALIZED THE ASSESSMENT ORDER ON 01.11.2010. THIS ORDER IS THE SUBJECT MATTER OF PRESENT APPEAL. 2. THE ASSESSEE RAISED 20 GROUNDS IN ITS APPEAL. GR OUND NOS. 1, 18, 19 & 20 ARE GENERAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. IN THE COURSE OF APPELLATE PROCEEDINGS THE ASSESSEE HA S NOT PRESSED GROUND NO.4 WHICH IS ON CLAIM OF WEIGHTED DEDUCTION UNDER SECTION 35(2AB)OF THE ACT. 2.1 WE HAVE HEARD THE LD. COUNSEL AND THE LD. DR IN DETAIL AND ALSO PERUSED THE CHART PLACED ON RECORD WITH REFERENCE T O THE GROUNDS AND SUBMISSIONS INCLUDING THE PAPER BOOK RELEVANT FOR C ONSIDERING THE ISSUES UNDER APPEAL. LD. DR RELIED ON THE FACTS AS STATED IN ORDERS AND THE FINDINGS OF AO/DRP. VARIOUS GROUNDS ARE DECIDED AS UNDER :- 3. GROUND NO.2 AND 17 : THESE TWO GROUNDS ARE AS UNDER :- GROUND NO.2 AOS ORDER GIVING EFFECT TO ASSESS ING OFFICER AND LD. DRP ORDER WITHOUT CONSIDERING THE REVISED RETURN FI LED BY THE ASSESSEE INCORPORATING THE MERGER OF PERLECAN PHAR MA PVT. LTD. WITH DR. REDDYS LABORATORIES LIMITED AS PER THE ORDER O F HONBLE HIGH COURT OF ANDHRA PRADESH IS BAD IN LAW AND LACKS MER ITS. GROUND NO.17. AO AND LD. DRP HAS ERRED IN OMITT ING TO CONSIDER THE REVISED RETURN OF INCOME FILED FOR THE ASSESSME NT YEAR 2006-07 DURING THE COURSE OF ASSESSMENT PROCEEDINGS CONSEQU ENT TO THE MERGER OF ITS SUBSIDIARY M/S. PERLECAN PHARMA PRIVA TE LIMITED WITH THE ASSESSEE AS PER HIGH COURT ORDER. 3.1 THE ASSESSEE HAVING FILED ORIGINAL RETURN ON 29 .11.2006 AND REVISED RETURN ON 29.10.2007, FILED A SECOND REVISE D RETURN ON 24.12.2009. THE REASON FOR FILING SECOND REVISED RE TURN WAS TO GIVE EFFECT TO THE MERGER ORDER OF THE ANDHRA PRADESH HIGH COUR T. SINCE THE DRAFT ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 3 ASSESSMENT WAS SERVED ON THE ASSESSEE ON 31.12.2009 AND ASSESSMENT PROCEEDINGS HAVE NOT BEEN CONCLUDED, THE ASSESSEE F ILED OBJECTIONS BEFORE THE DRP FOR CONSIDERING THE SECOND REVISED RETURN. VIDE OBJECTION NO.15 ON PAGE-47 (WRONGLY STATED AS PAGE-51 BY THE ASSESS EE IN THE CHART), THE DRP DID NOT AGREE WITH THE ASSESSEES CONTENTION ST ATING THAT THE AO HAS PASSED ORDER UNDER SECTION 143(3) ON 23.12.2009. 3.2 BEFORE US REFERRING TO THE OBJECTIONS FILED BY THE ASSESSEE AND THE ORDER OF THE DRP, THE LD. COUNSEL SUBMITTED THAT TH E REASONING GIVEN BY THE DRP WAS NOT CORRECT AS A DRAFT ASSESSMENT ORDER IS NOT FINAL ASSESSMENT ORDER AND RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF ALPINE ELECTRONICS ASIA PTE. LTD. VS DIRECTOR GENER AL OF INCOME-TAX (DEL) (341 ITR 247)(DEL.). IT WAS FURTHER SUBMITTED THAT REVISED RETURN HAD BEEN FILED ON 24.12.2009 AND RELYING ON THE PRINCIPLE LAID DOWN IN THE JUDGMENT GIVEN BY THE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF DHAMPUR SUGAR MILLS LTD. VS CIT (90 ITR 236)(ALL.) , IT WAS SUBMITTED THAT ONCE A REVISED RETURN HAS BEEN FILED THE ORIGINAL RETURN HAS TO BE TAKEN AS WITHDRAWN. IT WAS SUBMITTED THAT PROCEEDINGS WITHOUT CONSIDERING THE REVISED RETURN ARE BAD IN LAW. 3.3 AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE UNABLE TO AGREE WITH THE CONTENTIONS RAISED BY THE ASSESSEE FOR CON SIDERING THE SECOND REVISED RETURN FILED ON 24.12.2009. WHILE ADMITTING THAT THE ORDER OF THE DRP IN REJECTING THE ASSESSEES CONTENTION IS NOT C ORRECT, IN THE SENSE THAT DRAFT ASSESSMENT ORDER CANNOT BE TAKEN AS FINA L ASSESSMENT ORDER, THE ASSESSEES CONTENTION THAT SECOND REVISED RETUR N SHOULD BE CONSIDERED AS A VALID REVISED RETURN CANNOT BE ACCE PTED. EVENTHOUGH, THE REASON FOR FILING THE SECOND REVISED RETURN IS DUE TO MERGER OF PERLECAN PHARMA PVT. LTD. WITH THE ASSESSEE COMPANY EFFECTIV E FROM 1 ST JANUARY 2006 VIDE ORDER OF HON'BLE HIGH COURT OF ANDHRA PRA DESH DATED ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 4 07.07.2009 AND A SECOND REVISED RETURN WAS PREPAR ED AND FILED GIVING EFFECT TO THE SAID ORDER, THE PROVISIONS OF INCOME TAX ACT DOES NOT PERMIT THE SECOND REVISED RETURN FILED BEYOND THE TIME LIM IT PROVIDED TO BE TREATED AS A VALID RETURN OF INCOME. PROVISIONS OF SECTION 139(5) ARE AS UNDER :- [(5) IF ANY PERSON, HAVING FURNISHED A RETURN UNDER SUB-SECTION (1), OR IN PURSUANCE OF A NOTICE ISSUED UNDER SUB-SECTION ( 1) OF SECTION 142 , DISCOVERS ANY OMISSION OR ANY WRONG STATEMENT THERE IN, HE MAY FURNISH A REVISED RETURN AT ANY TIME BEFORE THE EXP IRY OF ONE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YEAR O R BEFORE THE COMPLETION OF THE ASSESSMENT, WHICHEVER IS EARL IER : PROVIDED THAT WHERE THE RETURN RELATES TO THE PREVI OUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1988, OR ANY EARLIER ASSESSMENT YEAR, THE REFERENCE TO ONE Y EAR AFORESAID SHALL BE CONSTRUED AS A REFERENCE TO TWO YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR.] ( EMPHASIS SUPPLIED) 3.4 AS CAN BE SEEN FROM THE ABOVE PROVISION OF THE ACT, ASSESSEE HAS AN OPTION TO FURNISH THE REVISED RETURN AT ANY TIME BEFORE THE EXPIRY OF ONE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YE AR OR BEFORE COMPLETION OF THE ASSESSMENT, WHICHEVER IS EARLIER. ASSESSEES CONTENTION THAT THE SECOND REVISED RETURN WAS FILED BEFORE COM PLETION OF THE ASSESSMENT MAY BE TECHNICALLY CORRECT, BUT THAT HAS TO BE FILED BEFORE EXPIRY OF ONE YEAR FROM THE END OF THE RELEVANT ASS ESSMENT YEAR. IN THIS CASE, AS ALREADY STATED EARLIER, ASSESSEE HAD FILED ORIGINAL RETURN OF INCOME ON 29.11.2006 AND ANOTHER REVISED RETURN ON 29.10.2007. IN CASE, THE ASSESSEE HAS TO FILE ANOTHER REVISED RETU RN THE SAME COULD HAVE BEEN FILED ON OR BEFORE 31.03.2008, AS PER THE PROV ISIONS OF SECTION 139(5). THE WORDS WHICH EVER IS EARLIER PUTS LIMITATION ON FILING OF REVISED RETURN BEYOND ONE YEAR FROM THE END OF ASSE SSMENT YEAR. THUS, ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 5 THE SECOND REVISED RETURN FILED ON 24.12.2009 WAS B EYOND THE TIME LIMIT PRESCRIBED UNDER THE ACT. THEREFORE, SINCE THERE IS A LIMITATION PROVIDED UNDER SECTION 139(5) WHICH CANNOT BE IGNORED, WE HA VE TO HOLD THAT THE SECOND REVISED RETURN FILED WAS BEYOND THE TIME LIM IT PRESCRIBED. WE CANNOT DIRECT THE AO OR DRP TO CONSIDER THE SAME, W HEN THE LAW ITSELF DOES NOT PERMIT THE SAME. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE REJECTED. 4. GROUND NO.3 IS AS FOLLOWS :- 3. AO AND THE LD. DRP HAS ERRED IN CONSIDERING CAP ITAL GAIN ON THE SALE OF GOA UNIT OF THE ASSESSEE AS SHORT TERM CAPITAL GAIN INSTEAD OF LONG TERM CAPITAL GAIN. 4.1 THIS GROUND PERTAINS TO THE ISSUE WHETHER CAPIT AL GAIN ARISING ON SALE OF GOA UNIT OF THE ASSESSEE RESULTS IN SHORT T ERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN. 4.2 BRIEFLY STATED, THE ASSESSEE WAS HAVING A MANUF ACTURING UNIT AT GOA. DURING THE YEAR, THE UNIT WAS SOLD TO M/S WATS ON INDIA LTD. FOR A CONSIDERATION OF RS.75.62 CRORES. THE ASSESSEE FILE D THE COMPUTATION OF CAPITAL GAINS IN THE ORIGINAL RETURN AS UNDER :- CAPITAL GAINS IN THE ORIGINAL RETURN OF INCOME: A) SALE OF LEASE HOLD RIGHTS-AT GOA -SALE CONSIDERATION RS.7,50,22,200 -LESS: COST OF ACQUISITION RS.1,60,60,688 5,89,6 1,512 B) SALE OF BUSINESS AND COMMERCIAL RIGHT-AT GOA - SALE CONSIDERATION RS.10,42,82,630 -LESS COST OF ACQUISITION --- 10,42,82,630 ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 6 4.3 SUBSEQUENTLY, THE ASSESSEE FILED THE CAPITAL GA INS IN THE REVISED RETURN OF INCOME AS UNDER :- CAPITAL GAINS IN THE REVISED RETURN OF INCOME: GROSS SALE CONSIDERATION RECEIVED RS.75,61,88,546 LESS: NET WORTH OF THE UNIT LAND RS.1,60,60,688 WDV OF BLOCK OF ASSETS + ADDITIONS MADE DURING THE YEAR RS.24,49,49,785 RS.26,10,10,563 LONG TERN CAPITAL GAINS RS.49,51,77,983 4.3.1 THE DATE OF SALE TO M/S. WATSON INDIA LTD. WAS RS.29.10.2005 ON WHICH THERE IS NO DISPUTE. THERE I S ALSO NO DISPUTE WITH REFERENCE TO CONSIDERATION RECEIVED UNDER CAPI TAL GAIN WORKING. THE ONLY DISPUTE WAS WITH REFERENCE TO DATE OF SETTING UP OF THE UNIT. ACCORDING TO THE ASSESSEE, AS ASSESSEE APPLIED TO G OA INDUSTRIAL DEVELOPMENT CORPORATION (GIDC) VIDE LETTER DATED 28 .10.2002 FOR ALLOTMENT OF PLOT, IT CONTENDS THAT THE CAPITAL GAI N IS LONG TERM CAPITAL GAIN, AS IT SOLD AFTER THREE YEARS. HOWEVER, THE AO WAS OF THE OPINION THAT IT WAS ONLY AN APPLICATION MADE TO GIDC FOR GRANTIN G LEASE OF PLOT OF LAND AND EVENTHOUGH A SECURITY DEPOSIT OF RS.2,05,660/- WAS PAID ON THAT DATE, THE ACTUAL TRANSACTION RESULTED ON 11.03.2003 ON WHICH DATE PREMIUM OF RS.1,76,28,000/- WAS PAID AND THE ASSESS EE WAS GIVEN POSSESSION OF LAND, ON LEASE, FROM 10.04.2003 AND F URTHER LEASE DEED WAS REGISTERED ON 31.07.2003. EVENTHOUGH, THE FACTORY W AS ESTABLISHED SUBSEQUENTLY, THE AO CONSIDERED THAT, EVEN GIVING B ENEFIT OF DOUBT TO THE ASSESSEE, THE EARLIEST DATE OF ACQUISITION CAN ONLY BE ON 10.04.2003. ACCORDINGLY, INVOKING PROVISO TO SECTION 50B, THE A O TREATED THE SAME AS SHORT TERM CAPITAL GAIN AS THE DATE OF SALE TRANSAC TION WAS WITHIN 36 MONTHS OF SETTING UP OF THE UNIT. THE ASSESSEE REIT ERATED THE SAME ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 7 SUBMISSIONS BEFORE THE DRP AND RELIED ON THE DECISI ON OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. HUGHES ESCORTS COMMUNICATION LTD. (311 ITR 253)(DEL.), WHEREIN THE HONBLE COURT HELD THAT THE SETTING UP OF BUSINESS OF THE ASSESSEE COMPANY SHOULD BE CO NSIDERED AS THE DATE WHEN THE ASSESSEE TOOK THE FIRST STEP IN THE SAID B USINESS I.E. PLACED ORDERS FOR PURCHASE OF VSAT EQUIPMENTS. RELYING ON THE ABOVE PRINCIPLE IT WAS THE CONTENTION THAT THE UNIT WAS SET UP WHEN THE ASSESSEE MADE APPLICATION FOR THE LAND TO GIDC WHICH IS RELEVANT. IF CALCULATED FROM THAT PERIOD THE CAPITAL GAINS BECOMES LONG TERM CAP ITAL GAIN. THE DRP HOWEVER RELIED ON THE DATE OF MANUFACTURING OF COMM ERCIAL PRODUCTION WHICH JOINTLY IS AFTER THE DATE OF REGISTERING THE BARREN LAND TO THE TAX PAYER. THEREFORE, IT DID NOT AGREE WITH THE CONTENT ION THAT DATE OF APPLICATION HAS TO BE CONSIDERED AS DATE OF SETTING UP OF UNIT. 4.4 BEFORE US, THE LD. COUNSEL, IN ADDITION TO RELY ING ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. HUGHES ESCORTS COMMUNICATION LTD. (311 ITR 253)(DEL.) ALSO RELIED ON THE CO-ORDINATE BENCH DECISION IN THE CASE OF DHOOMKETU BUILDERS & DEVELOPMENT (P.) LTD. VS. ADDL. CIT ITAT, DELHI 2011(11)TMI 193 AND IN THE CASE OF JITENDRA MOHAN VS. INCOME TAX OFFICER (2007) (11 SOT 594)(DE L.). HE ALSO REFERRED TO THE PRINCIPLES RENDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF RUSTOM CAVASJEE COOPER VS. UOI (1970 AIR 564). THE LD. DR RELIED ON THE ORDERS OF DRP. 4.5 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE RELEVANT FACTS AND CASE LAW. IN THIS CASE, THE ASSESSEE MADE THE APPLI CATION TO GIDC ON 28.10.2002 FOR ALLOTMENT OF PLOT IN THE INDUSTRIAL AREA BEING DEVELOPED BY GIDC. THERE IS NO DISPUTE W.R.T. DATE OF LEASE REGI STRATION BEING 31 ST DAY OF JULY, 2003. THE RECITALS OF THE AGREEMENT ARE AL READY EXTRACTED IN THE ASSESSMENT ORDER BUT SUFFICE TO SAY THAT THE ASSESS EE PAID AN AMOUNT OF ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 8 RS.2,05,660/- AS SECURITY DEPOSIT AT THE TIME OF AP PLICATION AND IN PURSUANCE, THE ASSESSEE PAID PREMIUM OF RS.1.76 CRO RES ON 11.03.2003 AND POSSESSION WAS HANDED OVER ON 10.04.2003. THE PERIOD OF 30 YEARS LEASE STARTS FROM 10.04.2003, WHICH CAN BE EXTENDED TO 95 YEARS. THIS INDICATES THAT EVENTHOUGH ASSESSEE MADE AN OFFER FO R ESTABLISHING A UNIT IN GIDC, THE OFFER WAS COMPLETE ONLY WHEN THE SAME WAS ACCEPTED AND THIS SEEMS TO HAVE HAPPENED ON 11.03.2003, WHEN THE ASSESSEE PAID FURTHER AMOUNT OF RS.1.76 CRORES AND POSSESSION WAS HANDED OVER ON 10.04.2003. EVENTHOUGH LEASE DEED WAS ENTERED INTO ON 31.07.2003, POSSESSION OF VACANT LAND WAS GIVEN ON 10.04.2003 A ND PERIOD OF 30 YEARS OF LEASE PERIOD STARTS FROM THAT DAY. ONLY AF TER GETTING THE POSSESSION, THE ASSESSEE WOULD HAVE BEEN IN A POSIT ION TO ESTABLISH A FACTORY THERE AND START MANUFACTURING ACTIVITY. THU S, IT CAN BE CONSIDERED THAT A UNIT HAD BEEN SET UP AND READY TO COMMENCE B USINESS ONLY FROM THE TIME GIDC ALLOTS THE PLOT. IN THE CASE RELIED U PON BY THE ASSESSEE CIT VS. HUGHES ESCORTS COMMUNICATIONS LTD.(311 ITR 253)(DEL.), THE DATE OF PLACING OF PURCHASE ORDER FOR VSAT EQUIPMENT WAS CO NSIDERED TO BE THE DATE OF SET UP OF THE COMPANY. IN THIS CASE, IT IS NOT EVEN THE ORDER FOR PURCHASE OF MACHINERY OR RAW MATERIAL BUT AN APPLIC ATION MADE TO GIDC WHICH, WHEN GETS ACCEPTED ONLY CAN BE CONSIDERED AS A VALID ONE. IN THE CASE OF JITENDRA MOHAN VS. INCOME TAX OFFICER (2007) (11 SO T 594)(DEL.) THE ISSUE WAS WITH REFERENCE TO PERIOD OF HOLDING U /S. 2(14). THERE THE STARTING DATE FOR THE COUNTING THE PERIOD OF HOLDIN G WAS CONSIDERED AS DATE OF ALLOTMENT I.E. 08.07.1994 AND NOT BEFORE, T HEREFORE, THIS CASE LAW DOES NOT HELP ASSESSEE. EVEN IN THE CASE OF DHOOMKETU BUILDERS & DEVELOPMENT (P.) LTD. VS. ADDL. CIT ITAT, DELHI(SUP RA) THE ISSUE WAS WITH REFERENCE TO COMMENCEMENT OF BUSINESS AND ASSESSEE S PARTICIPATION IN THE TENDER WAS CONSIDERED AS STARTING OF ONE ACTIVI TY WHICH ENABLE THE ASSESSEE TO ACQUIRE THE LAND FOR DEVELOPMENT. IN TH AT CASE, THE ASSESSEE WAS IN THE REAL ESTATE BUSINESS AND PARTICIPATION I N THE TENDER FOR ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 9 ACQUIRING LAND WAS CONSIDERED AS COMMENCEMENT OF BU SINESS. VIDE PARA- 7 OF THE ORDER THE HONBLE BENCH HAS CONSIDERED THE ISSUE AS UNDER :- 7. SECTION 2(13) PROVIDES THE DEFINITION OF EXPRE SSION BUSINESS ACCORDING TO WHICH BUSINESS INCLUDES ANY TRADE, COMMERCE, MANUFACTURE OR ANY ADVENTURE OR CONCERN I N THE NATURE OF TRADE, COMMERCE OR MANUFACTURE. THE LEARNED COUNSEL FOR THE ASSESSEE HAS REFERRED A LARGE NUMBER OF DECISIONS N OTICED ABOVE. SIMILARLY, THE ASSESSING OFFICER HAS MADE A REFEREN CE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN A LKALI CHEMICALS & FERTILIZERS LTD.S CASE (SUPRA). IN VARIOUS AUTHORI TATIVE PRONOUNCEMENT OF HONBLE SUPREME COURT AND HONBLE HIGH COURT, MEANING AND SCOPE OF EXPRESSION, BUSINESS HAS BEEN PROPOUNDED. IT IS NOT NECESSARY TO RECITE AND RECAPITULATE OF THOS E DECISIONS BUT ON THE STRENGTH OF THEM IT WOULD BE SUFFICE TO SAY THA T WORD BUSINESS HAD A WIDE IMPORT AND IT MEANS AN ACTIVITY CARRIED ON CONTINUOUSLY AND SYSTEMATICALLY BY A PERSON BY THE APPLICATION O F HIS LABOUR AND SKILL WITH A VIEW TO EARN AN INCOME. SECTION 3 OF T HE INCOME-TAX ACT, 1961 DEFINES PREVIOUS YEAR. PREVIOUS MEANS THE FI NANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR. THE PROV ISO APPENDED TO THIS SECTION FURTHER CONTEMPLATES THAT IN CASE O F A BUSINESS NEWLY SET UP IN THE SAID FINANCIAL YEAR, THE PREVIOUS YEA R SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SET UP OF THE BUS INESS. THE EXPRESSION SET UP HAS NOT BEEN DEFINED ANYWHERE I N THE ACT BUT IT IS UNDERSTOOD IN THE COMMON PARLANCE AND HAS BEEN EXPLAINED IN A LARGE NUMBER OF DECISIONS. ACCORDING TO THE MEANING EXPOUNDED IN THE AUTHORITATIVE PRONOUNCEMEN T, IF AN ASSESSEE IS IN A POSITION TO DELIVER THE GOODS M EANS THAT THE BUSINESS IS SET UP. ACTUAL DELIVERY IS IMMATERI AL. FOR EXAMPLE, IF A PERSON WANTS TO CARRY ON THE BUSINESS OF TRANSPORTATION, THE MOMENT HE PURCHASED THE VEHICLE FOR TRANSPORTING THE GOODS AND ARRANGED THE SPACE THEN IT WOULD INDICATE THAT BUSINESS HAS BEEN SET UP, IT IS IMMAT ERIAL WHETHER HE WAS ABLE TO ACTUALLY TRANSPORTED THE GOO DS OR NOT. IN THE CASE OF HUGHES ESCORTS COMMUNICATIONS LTD.S CASE (SUPRA), HONBLE DELHI HIGH COURT HAS CONSIDERED THIS EXPRES SION AND AFTER REFERRING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. V. CIT [1954] 26 ITR 151 HAS OBSERVED THAT HONBLE BOMBAY HIGH COURT HAS DRAWN A DISTINCTION BETWEEN THE CONCEPT OF COMMENCEMENT AND SETTING UP OF A BUSINESS. HONBLE DELHI HIGH COURT HAS REPRODUCED THE OBSERVA TIONS OF THE HONBLE MUMBAI HIGH COURT WHICH READ AS UNDER: ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 10 THE BOMBAY HIGH COURT, WHICH WAS IN THIS CASE DEAL ING WITH THE CORRESPONDING PROVISION OF THE INDIAN INCOME-TAX AC T, 1922 THEN EXPLAINED THE DISTINCTION BETWEEN THE CONCEPTS OF C OMMENCEMENT AND SETTING UP OF A BUSINESS (PAGES 158 AND 159): IT SEEMS TO US, THAT THE EXPRESSION SETTING UP M EANS, AS IS DEFINED IN THE OXFORD ENGLISH DICTIONARY, TO PLACE ON FOOT OR TO ESTABLISH, AND IN CONTRADICTION TO COMMERCE. THE DISTINCTION IS THIS THAT WHEN A BUSINESS IS ESTABLISHED AND IS READY TO COMM ENCE BUSINESS THEN IT CAN BE SAID OF THAT BUSINESS THAT IT IS SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSINESS IT IS N OT SET UP. BUT THERE MAY BE AN INTERREGNUM, THERE MAY BE AN IN TERVAL BETWEEN A BUSINESS WHICH IS SET UP AND A BUSINESS WHICH IS COMMENCED AND ALL EXPENSES INCURRED AFTER THE SETTING UP OF THE B USINESS AND BEFORE THE COMMENCEMENT OF THE BUSINESS, ALL EXPENSES DURI NG THE INTERREGNUM, WOULD BE PERMISSIBLE DEDUCTIONS UNDER SEC. 10(2). (EMPHASIS SUPPLIED) 4.6 ADVERTING TO THE PRESENT FACTS OF THE CASE, WE FIND THAT ASSESSEE CAN BE CONSIDERED AS SETTING UP THE BUSINESS ONLY F ROM THE TIME IT GOT ALLOTMENT OF THE LAND, IF NOT READY TO COMMENCE MAN UFACTURING ACTIVITY, AND NOT BEFORE. IN THIS CASE, EVENTHOUGH ACTUAL MAN UFACTURING ACTIVITY STARTED MUCH LATER, THE SETTING UP OF THE BUSINESS CAN BE CONSIDERED ONLY WHEN THE ASSESSEE IS IN POSITION TO OCCUPY LAND TO START THE UNIT IN GOA, GIDC, AS CONSIDERED BY AUTHORITIES. THE PRINCIPLES DISCUSSED ABOVE INFACT CONSIDER THE SETTING UP MUCH LATER. BUT THE AUTHORITIES EVEN GAVE A BENEFIT IN CONSIDERING THE DATE OF TAKING POSSESSIO N OF LAND WHILE DECIDING THE DATE OF SETUP. THEREFORE, WE ARE OF TH E CONSIDERED OPINION THAT DATE OF SETTING UP OF THE BUSINESS ACTIVITY, A S ACCEPTED BY ASSESSING OFFICER AND DRP AS ON 10.04.2003, DOES NOT REQUIRE ANY MODIFICATION, EVENTHOUGH LEASE DEED WAS ENTERED INTO SUBSEQUENTLY AND UNIT WAS SET UP MUCH LATER. IN VIEW OF THIS, THE GAIN CAN ONLY B E CONSIDERED AS SHORT TERM CAPITAL GAIN, AS DECIDED BY AUTHORITIES. THE G ROUND IS ACCORDINGLY REJECTED. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 11 5. GROUND NO.4 IS REGARDING WEIGHTED DEDUCTION AVAILABLE TO THE ASSESSEE U/S. 35(2AB) WHICH WAS WITHDRAWN. 6. GROUND NO.5 READS AS UNDER :- 5. AO AND THE LD. DRP HAS ERRED IN DISALLOWING THE EXPENDITURE INCURRED TOWARDS PAYMENT OF INTEREST TO DEPARTMENT OF CHEMICALS AND PETROCHEMICALS (DCP). 6.1 GROUND NO.5 PERTAINS TO THE ISSUE OF DISALLOWAN CE OF EXPENDITURE INCURRED TOWARDS PAYMENT OF INTEREST TO DEPARTMENT OF CHEMICALS AND PETROCHEMICALS (DCP). BRIEFLY STATED, ASSESSEE HAS CLAIMED A SUM OF RS.28,49,85,605 AS REVENUE EXPENDITURE BEING THE AM OUNT PAID TO DCP. THIS AMOUNT WAS DIRECTLY DEDUCTED IN THE COMPUTATIO N OF INCOME. ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF THIS E XPENDITURE. IT IS SEEN FORM THE DETAILS THAT THIS AMOUNT WAS PAID IN PURSU ANCE OF ORDERS OF NATIONAL PHARMACEUTICALS PRICING AUTHORITY (NPPA) W HICH IS A GOVERNMENT AGENCY. IT FIXES THE SELLING PRICE OF SO ME DRUGS BASED ON THE DPCO (DRUG PRICE CONTROL ORDER) 1995 WHICH IS BINDI NG ON ALL MANUFACTURERS OF THOSE CONTROLLED DRUGS. NO MANUFAC TURER SHOULD SELL AT A PRICE HIGHER THAN WHAT WAS FIXED BY NPPA. FROM TH E ORDER, IT IS SEEN THAT THE AMOUNT CONSISTS OF TWO PARTS. (A) THE FIRST PART RELATES TO THE AMOUNT OVER CHAR GED ON SALE OF NORFLOXACIN FORMULATION. ASSESSEE MANUFACTURES NORF LOXACIN FORMULATION WHOSE PRICE OF THE DRUG WAS FIXED BY NPPA. NPPA HAS PASSED ORDER ON 14/7/2005 WITH A FINDING THAT ASSESSEE HAS OVERCHAR GED THE PRICE IN THE SALE OF NORFLOXACIN. THE ORDER HAS COMPUTED THE EXC ESS AMOUNT CHARGED BY THE ASSESSEE AT RS.15,42,97,070 WITH A DIRECTION THAT SUCH EXCESS THE AMOUNT BE PAID TO THE GOVERNMENT. (B) NPPA HAS PASSED ANOTHER ORDER DATED 14/07/2005, WHEREBY IT HAS CHARGED INTEREST OF RS.13,06,87,515 FOR VIOLATI ON OF NORMS NOTIFIED BY ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 12 GOVERNMENT OF INDIA IN DPCO (DRUG PRICE CONTROL PRI CE) 1995 BY OVERCHARGING THE SALE PRICE FOR NORFLOXACIN FORMULA TION. 6.2 ASSESSEE HAS PAID BOTH THE AMOUNTS AND CLAIMED BOTH OF THEM AS EXPENDITURE. 6.3 INVOKING THE EXPLANATION TO SECTION 37, THE AO CONSIDERED THE CLAIM OF INTEREST AS PENAL IN NATURE AND ACCORDINGL Y DISALLOWED THE AMOUNT, WHOLLY ALLOWING OVERCHARGED AMOUNT PAID TO THE DPCO. IT WAS THE CONTENTION OF THE ASSESSEE THAT NPPA VIDE ITS O RDER DATED 14.07.2005 ASKED TO PAY AN AMOUNT OF RS.28,49,85,605/- TOWARDS RECOVERING OF EXCESS PRICE ON SALE OF THE PRODUCT ALONG WITH INTE REST. THEREFORE, BOTH THE AMOUNTS ARE ALLOWABLE AS DEDUCTION. THE ASSESSE E RELIED ON THE DECISION OF THE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF KAMLAPAT MOTILAL VS CIT (104 ITR 783)(ALL.) ON THE PROPOSITION THAT IF THE PRINCIPAL IS A PERMISSIBLE DEDUCTION, INTEREST PAYABLE THEREO N WOULD ALSO BE A PERMISSIBLE DEDUCTION. HOWEVER, THE DRP DID NOT AG REE ON THE REASON THAT INTEREST WAS CHARGED FOR VIOLATING THE PROVISI ONS OF CENTRAL ACT AND THEREFORE PENAL IN NATURE. THE ASSESSEE RELIED ON T HE SUBMISSIONS BEFORE THE DRP AND ALSO THE DECISION OF THE CO-ORDINATE BE NCH OF THE TRIBUNAL IN THE CASE OF A.P. PAPER MILLS LTD. VS. ACIT IN ITA N O.872/HYD./2006 FOR ASSESSMENT YEAR 2002-03. 6.4 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE F ACTS. THERE IS NO DISPUTE TO THE FACT THAT AO ALLOWED THE PRINCIPAL A MOUNT WHICH WAS ALSO DETERMINED VIDE DRUG PRICING CONTROL ORDER (DPCO). ASSESSEE WAS DIRECTED TO DEPOSIT TOTAL OF RS.28.49 CRORES. WE AR E UNABLE TO UNDERSTAND THE ACTION OF AO IN ALLOWING THE PRINCIPAL AMOUNT U /S. 37(1) BUT DISALLOWING THE INTEREST THERE ON AS PENAL IN NATU RE. AS SEEN FROM THE RECORD, THE ASSESSEE HAS COLLECTED MORE AMOUNT TOWA RDS SALE OF NORFLOXACIN FORMULATION AND ORDER WAS PASSED TO PAY THE AMOUNT ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 13 COLLECTED IN EXCESS OF THE REGULATIONS. THESE TRANS ACTIONS ARE CONTRACTUAL IN NATURE AND CAN NOT BE CONSIDERED AS PENAL IN NAT URE. EVENTHOUGH THE ASSESSEE RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF A.P. PAPER MILLS LTD. VS. ACIT(SUPRA),THE ISSUE DEALT THEREIN IS NOT U/S.37(1) BUT U/S. 43B, THEREFORE, THE SAME IS NOT APPLICABLE. T HIS ISSUE HOWEVER WAS DECIDED BY THE CO-ORDINATE BENCH( WHEREIN THE AM IS A PARTY) IN THE CASE OF GLAXO SMITHKLINE PHARMACEUTICALS LTD. IN ITA NO. 6158/MUM/2003 IN ASSESSMENT YEAR: 1998-99 AND ITA NO.7125 & 7206/MUM /2003 IN ASSESSMENT YEAR: 1998-99 DATED 12.06.2013, THE ISSU E HAS BEEN DISCUSSED AS UNDER : ASSESSEE HAS RAISED THE FOLLOWING ADDITIONAL GROUND S WHICH ARE NUMBERED AS 9 AND 10, WHICH ARE ALLOWED: GROUND NO.9 BETNELAN INTEREST DEMAND. THE APPELLANTS SUBMIT THAT IN VIEW OF THE DEMAND OF INTEREST RAISED BY THE DEPARTMENT OF CHEMICALS AND PETROCHEMICALS P URSUANT TO THE LETTER/ORDER DATED 10 TH JUNE, 1997 A SUM OF RS..18,06,887 WHICH REPRESENTS THE INTEREST PAYABLE FOR THE PERIOD 1.4. 1997 TO 31.3.1998 BE ALLOWED AS A DEDUCTION. GROUND NO.10. BETNELAN DEMAND. THE APPELLANTS SUBMIT WITHOUT PREJUDICE TO THEIR CO NTENTIONS THAT THEY BE ALLOWED DEDUCTION FOR THE DEMAND IN EACH OF THE AYS TO WHICH THEY PERTAIN I.E. 1995-96 AND 1996-97, THE EN TIRE AMOUNT OF RS.1,20,42,318 BE ALLOWED IN AY 1998-99 AS THE DEMA ND WAS RAISED VIDE LETTER/ORDER DATED 10.6.1997 OF THE DEPARTMENT OF CHEMICALS AND PETROCHEMICALS. 10.1 GROUND NO.9 & 10 ARE THE ADDITIONAL GROUNDS RA ISED IN THE COURSE OF PRESENT APPELLATE PROCEEDINGS VIDE LETTER DATED 9.8.2007. THE FACTS LEADING TO THE PRESENT ISSUE ARE THAT DUR ING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 1998-99, ASSESSEE RECEIVED A DEMAND DATED 10 TH JUNE, 1997 FROM THE DEPARTMENT OF CHEMICALS & PETROCHEMICALS (DCP) AMOUNTING TO RS.1,90-,43,347/- TOWARDS OVERCHARGING OF PRICE IN RESPECT OF THE APPELLANTS PRODUCT BETNELAN TABS SOLD DURING THE PERIOD JANUARY 1995 TO JULY 19 95. THE DEMAND WAS REVISED TO RS. 1,20,42,312/-. INTEREST O F RS. 84,29,619/- UPTO 31.12.1999 WAS CHARGED ON THE DEMA ND AT THE RATE OF 15% PER ANNUM. AGGRIEVED BY THE DCPS ORDER , ASSESSEE FILED A WRIT PETITION BEARING NO. 1266 OF 1999 BEFORE THE DIVISION BENCH OF ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 14 THE HONBLE HIGH COURT OF BOMBAY. THE DIVISION BENC H, VIDE ORDER DATED 16.2.2004 UPHELD THE STAND OF THE DCP. THE DC P, SUBSEQUENTLY BY AN ORDER DATED 17/18.5.2004, REVISE D UPWARDS THE INTEREST DEMAND TO RS. 1,63,70,915/- (TOTAL DEMAND: RS.2,84, 13,228/-). ASSESSEE HAS FILED A SPECIAL LEAVE PETI TION (CIVIL) NO. 6518 OF 2004 IN THE SUPREME COURT WITH PRAYER FOR I NTERIM RELIEF CHALLENGING THE ORDER OF THE DIVISION BENCH OF THE BOMBAY HIGH COURT. THE SAME IS PENDING BEFORE THE HONBLE SUPRE ME COURT FOR DISPOSAL. 10.2 ASSESSEE IS OF THE VIEW THAT THE LIABILITY PER TAINING TO THE ABOVE DEMAND WAS ALLOWABLE IN EACH OF THE YEARS TO WHICH THE DEMAND PERTAINS. THE YEAR-WISE BREAK-UP OF THE TOTAL DEMAN D OF RS.2,84,13,228/- (INCLUSIVE OF INTEREST) IS GIVEN B ELOW: ASSESSMENT YEAR DEMAND PRODUCT BETNELAN ( ) INTEREST DEMAND ( .) 1995-96 14,59,674 47,891 1996-97 1,05,82,638 18,06,887 1997-98 - 18,06,887 1998-99 - 18,06,887 1999-2000 18,06,887 2000-01 18,06,887 2001-02 18,06,887 2002-03 18,06,887 2003-04 18,06,887 2004-05 18,06,887 2005-06 65,901 TOTAL 1,20,42,312 1,63,70,915 ASSESSEE HAS NOT DEBITED THE AFORESAID DEMAND (INCL UDING INTEREST) TO THE PROFIT & LOSS ACCOUNT. ASSESSEE HAS ALSO NOT PAID THE DEMAND. 10.3 ON THIS ISSUE, IT WAS FAIRLY ADMITTED THAT THE ISSUE IS RESTORED TO THE FILE OF AO FOR FRESH ADJUDICATION IN VIEW OF THE DIRECTIONS GIVEN IN ASSESSMENT YEAR 1995-96 ORDER DATED 30.11.2011 W HEREIN THE TRIBUNAL VIDE PARA 3 & 4 RESTORED THE ISSUE TO THE FILE OF AO FOR DE NOVO ADJUDICATION IN ACCORDANCE WITH THE LAW. CONSI STENT WITH THE VIEW TAKEN THEREIN, WE DIRECT AO TO ADJUDICATE THE ISSUE AND CONSIDER THE ALLOWANCE OF THE ABOVE AMOUNT IN ACCOR DANCE WITH THE LAW AND FACTS. THE GROUNDS ARE CONSIDERED ALLOWED F OR STATISTICAL PURPOSES. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 15 CONSIDERING THE ORDERS OF THE CO-ORDINATE BENCH ON THE ISSUE AND THE FACT THAT AO ALLOWED PRINCIPAL AMOUNT AS DEDUCTION U/S. 37(1), WE SEE NO REASON TO DISALLOW THE INTEREST AS PENAL IN NATURE. THIS INTEREST ARISES NOT AS PENALTY BUT AS COMPENSATORY AMOUNT. THEREFOR E, WE HOLD THAT INTEREST IS ALLOWABLE. GROUND NO.5 IS ALLOWED. 7. GROUND NO.6 IS AS FOLLOWS : AO AND THE LD. DRP HAS ERRED IN DISALLOWING THE EX PENDITURE INCURRED BY THE ASSESSEE TOWARDS HONOURING OF BANK GUARANTEE IN RESPECT OF BANK LOAN TAKEN BY PATHNET. 7.1 THIS GROUND PERTAINS TO DISALLOWANCE OF AMOUNT PAID ON DISCHARGE OF BANK GUARANTEE ISSUED FOR SUBSIDIARIES. THE FACT S OF THE CASE ARE THAT ASSESSEE FURNISHED A GUARANTEE IN CONNECTION WITH T HE BORROWING BY PATHNET FROM ICICI BANK. THE ASSESSEE HELD 49% STAK E IN THE PATHNET. THE ASSESSEE DURING THE YEAR HAD SOLD ITS STAKE IN PATHNET AND SETTLED THE GUARANTEE OF RS.2,08,02,460/- ISSUED FOR LOAN T AKEN BY THE JV WITH THE BANK. THE ASSESSEE WROTE OFF THE SAID AMOUNT IN THE BOOKS BY DEBITING TO THE PROFIT AND LOSS ACCOUNT AS THE SAME WAS NOT RECOVERABLE FROM PATHNET. 7.2 ASSESSEE CONTENDED THAT PATHNET WAS IN THE BUS INESS OF SETTING UP OF MEDICAL PATHOLOGICAL LABORATORIES. ASSESSEE HAS GIVEN THE CORPORATE GUARANTEE AGAINST THE LOAN TAKEN BY THE JV. THE ASS ESSEE HAS COMMERCIAL INTEREST IN THE JV AND THE LOAN AMOUNT P AID BY THE ASSESSEE IS IN THE COMMERCIAL EXPEDIENCY OF THE BUSINESS OF ASSESSEE. 7.3 REGARDING BAD DEBTS WRITTEN OFF THE LD. ASSESSI NG OFFICER IN HIS ORDER HELD AS UNDER : ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 16 AS PER THE PROVISIONS OF SECTION.36(2) OF THE ACT, FOR THE PURPOSE OF CLAIMING BAD DEBT SUCH AS DEDUCTION SUCH DEBT SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOM E OF THE ASSESSEE IN THE CURRENT PREVIOUS OR IN AN EARLIER P REVIOUS YEAR OR SHOULD REPRESENT MONEY LENT IN THE ORDINARY COURSE OF THE BUSINESS OF BANKING OR MONEY LENDING WHICH IS CARRIED ON BY ASSESSEE. IN THE INSTANT CASE, THE SUM BEING CLAIMED AS BAD DEBT NEVER FORMED PART OF THE RECEIPTS OF ASSESSEES BUSINESS EITHER IN THE PREVIOUS YEAR UNDER CONSIDERATION OR IN AN EARLIER YEAR. THE ASSESSEE IS NEITHER A BANK NOT IS ENGAGED IN THE BU SINESS OF LENDING MONEY. THE AMOUNT WAS PAID TO ICICI BANK TO SETTLE THE GUARANTEE GIVEN TO THE LOAN AVAILED BY A RELATED COMPANY. THE AMOUNT REPRESENTS CAPITAL LOSS AND CANNOT BE SET OF AGAIN ST BUSINESS INCOME. GIVEN THESE FACTS, THIS CLAIM OF RS.2,08,02 ,460/- AS BAD DEBT IS NOT ALLOWABLE. THE SAME IS THEREFORE, DISAL LOWED AND ADDED BACK TO ASSESSEES INCOME. THE FACTS OF THE PRESENT CASE ARE DIFFERENT FROM THE FACTS IN THE CASE LAW CITED BY A SSESSEE. A SOMEWHAT IDENTICAL ISSUE WAS FOR CONSIDERATION I N THE AY 2003-04 WHERE THE ASSESSEE WROTE-OFF LOAN GIVEN TO COMPACT ELECTRIC LTD., 100% SUBSIDIARY OF THE ASSESSEE COMPANY DURIN G THE COURSE OF THE BUSINESS TO MEET THE REQUIREMENTS. THE SAME WAS DISALLOWED BY AO WHICH WAS UPHELD BY CIT(A). THIS STRENGTHENS THE FINDING THAT THE ABOVE AMOUNT IS NOT ALLOWABLE AS BAD DEBT. 8. DRP CONFIRMED THE SAME STATING THAT THE SAME WAS IN CAPITAL FIELD. 8.1 IT WAS SUBMITTED THAT PATHNET (AN EQUITY INVEST EE) SECURED A CREDIT FACILITY OF RS.250 MILLION FROM ICICI BANK LTD. TO ENHANCE THE CREDIT STANDING OF PATHNET, ON DECEMBER14, 2001 THE ASSESS EE ISSUED A CORPORATE GUARANTEE AMOUNTING TO RS.122.5 MILLION I N FAVOUR OF ICICI BANK. IN JULY, 2005, THE COMPANY WAS RELEASED BY IC ICI BANK FROM THIS GUARANTEE OBLIGATION WHEN ITS SHARE OF THE OUTSTAND ING LOAN AMOUNT, RS.21.0 MILLION (RS.2.1 CRORES), WAS REPAID. DURING THE YEAR ENDED MARCH 31, 2006 THE COMPANY SOLD ITS STAKE IN PATHNET AND SETTLED THE GUARANTEE ISSUED TO ICICI BANK BY PAYING ITS SHARE OF THE INVOKED GUARANTEE BY ICICI. THE AMOUNT WAS PAID AND WRITTEN OFF BY THE ASSESSEE TO PROTECT ITS CREDIBILITY IN BUSINESS AND CLAIMED AS ALLOWABLE EXPENDITURE ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 17 UNDER SECTION 37(1) OF THE ACT. THE CLAIM WAS BASED ON THE FOLLOWING JUDGMENTS: A) ACIT VS. M/S. W.S. INDUSTRIES (INDIA) LTD.(2009-TI OL-783-ITAT- MAD) WHERE THE ITAT HAS HELD THAT AMOUNT PAID ON DISCHA RGE OF CORPORATE GUARANTEE GIVEN TO THE SUBSIDIARY COMPANY IS AN ALLOWABLE EXPENDITURE ON THE GROUNDS OF COMMERCIAL EXPEDIENCY. B) SA BUILDERS VS. CIT (288 ITR 1)(SC) HAS OBSERVED TH E FOLLOWING ON THE PRINCIPLE OF COMMERCIAL EXPEDIENCY: THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPR ESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT B USINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NO T HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IT WAS INCURRED ON GROUNDS OF COMMERCIA L EXPEDIENCY. C) PFIZER PHARMACEUTICALS (INDIA)(P.) LTD. VS. DY. C IT 2010(12) TMI 242 (ITAT MUMBAI). 8.2 WE HAVE CONSIDERED THE RIVAL CONTENTIONS. W E ARE UNABLE TO DECIDE THE ISSUE AS FACTS ARE NOT COMPLETELY BROUGHT ON RE CORD. THE LOSS ON SALE OF INVESTMENT IN PATHNET WAS CONTESTED IN GROUND NO 14. BUT WHAT WAS NOT ON RECORD WAS WHETHER THE BANK GUARANTEE WAS GI VEN AT THE TIME OF INVESTMENT IN PATHNET OR SUBSEQUENTLY IN THE COURSE OF BUSINESS BY THAT CONCERN. THIS FACT HAS A BEARING ON THE DECISION. I N CASE ASSESSEE EXTENDED THE GUARANTEE AT THE TIME OF INVESTMENT IT SELF THE SAME CAN BE CONSIDERED AS CAPITAL IN NATURE AS PART OF INVESTME NT DECISION, THE LOSS THERE ON WILL BE CAPITAL LOSS TO BE CONSIDERED UNDE R THE HEAD CAPITAL GAINS. IN CASE, THE GUARANTEE WAS EXTENDED LATER AF TER THE INVESTMENT AS PART OF BUSINESS UNDER TAKEN BY SUBSIDIARY, THE PRI NCIPLES OF COMMERCIAL EXPEDIENCY ARE TO BE CONSIDERED. AO RELIED ON THE D ECISION IN AY 2003-04 BY CIT(A) WHICH WAS CONFIRMED BY ITAT IN THAT YEAR. BUT THE FACTS IN THAT CASE WERE THAT ASSESSEE ADVANCED A LOAN DIRECTLY TO THE SUBSIDIARY WHERE AS IN THIS CASE IT WAS NOT A DIRECT LOAN BUT A GUAR ANTEE GIVEN TO BANK. SO THE FACTS ARE DIFFERENT. HOWEVER, IN THE INTEREST O F JUSTICE, WE RESTORE THE ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 18 MATTER TO THE FILE OF AO TO EXAMINE THE ABOVE ASPEC T AND DECIDE AFRESH, KEEPING IN MIND THE PRINCIPLE LAID DOWN IN THE ABOV E CASES RELIED ON BY ASSESSEE AND ORDER OF ITAT IN AY 2003-04. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY TO SUPPORT ITS CONTENTIONS AND PLACE ON RECORD COMPLETE DETAILS. GROUND IS ALLOWED FOR STATISTICAL PURPOSES . 9. GROUND NO.7 IS AS FOLLOWS: 7. THE AO AND LD. DRP HAS ERRED IN DISALLOWING THE CLAIM OF RS.13,30,73,097/- MADE BY THE ASSESSEE IN RESPECT O F THE ESOP ALLOTMENT. 9.1 DURING THE FY 2005-06, ASSESSEE HAS CHARGED A N AMOUNT OF RS.13,30,73,097/- TOWARDS EXPENDITURE ON THE ISSUE OF SHARES UNDER THE EMPLOYEES STOCK OPTION PLAN. IN ACCORDANCE WITH THE SECURITIES AND EXCHANGE BOARD OF INDIA GUIDELINES, THE EXCESS OF T HE MARKET PRICE OF SHARES, AT THE DATE OF GRANT OF OPTIONS UNDER THE EMPLOYEE STOCK OPTION SCHEMES, OVER THE EXERCISE PRICE IS TREATED AS EMPL OYEE COMPENSATION AND AMORTISED OVER THE VESTING PERIOD. ASSESSEE CLA IMED THE SAID EXPENDITURE AS ALLOWABLE EXPENDITURE. THE AO HAS DI SALLOWED THE SAME CONTENDING THAT THE EXPENDITURE IS NOTIONAL IN NATU RE. 9.2 IT WAS SUBMITTED THAT THE EXPENDITURE WAS INCUR RED TOWARDS RETAINING THE EMPLOYEES AND HENCE IS AN ALLOWABLE R EVENUE EXPENDITURE. THE SAME HAS BEEN ALLOWED IN ASSESSEES OWN CASE BY CIT APPEALS FOR THE ASSESSMENT YEAR 2004-05. THE JUDGMENT OF HON'BLE HI GH COURT OF MADRAS IN THE CASE OF M/S. PVP INDUSTRIES (TC(A).NO .1023 OF 2005) WAS RELIED ALONG WITH OTHER ITAT BENCH ORDERS WHERE IT HAS BEEN DECIDED THAT THE ESOP CHARGE MADE IN BOOKS FOLLOWING SEBI DIRECT IONS IS AN ALLOWABLE EXPENDITURE. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 19 9.3 AFTER THE HEARING THE CASE, THE SPECIAL BENCH OF TH E ITATBANGALORE IN THE CASE OF BOICON LTD VS DCIT HELD THAT ESOP DI SCOUNT (DIFFERENCE BETWEEN MARKET PRICE AND ISSUE PRICE) IS A DEDUCTIB LE EXPENDITURE AT THE TIME OF VESTING OF THE OPTION. AN ADJUSTMENT HAS TO BE MADE IF THE MARKET PRICE IS DIFFERENT AT THE TIME OF EXERCISE OF THE O PTION. IN THAT CASE ALSO ASSESSEE FRAMED AN EMPLOYEE STOCK OPTION PLAN (ESOP ) PURSUANT TO WHICH IT GRANTED OPTIONS TO ITS EMPLOYEES TO SUBSCR IBE FOR SHARES AT THE FACE VALUE OF RS. 10. AS THE MARKET PRICE OF EACH S HARE WAS RS. 919, THE ASSESSEE CLAIMED THAT IT HAD GIVEN A DISCOUNT OF RS . 909 WHICH WAS ALLOWABLE AS A DEDUCTION AS 'EMPLOYEE COMPENSATION. THOUGH THE OPTIONS VESTED EQUALLY OVER FOUR YEARS, THE ASSESSEE CLAIME D A LARGER AMOUNT IN THE FIRST YEAR THAN WAS AVAILABLE UNDER THE SEBI GU IDELINES. THE AO & CIT(A) REJECTED THE CLAIM ON THE GROUND THAT THERE WAS NO 'EXPENDITURE'. ON APPEAL TO THE TRIBUNAL, THE ISSUE WAS REFERRED T O THE SPECIAL BENCH. HELD BY THE SPECIAL BENCH: (I) THE DIFFERENCE (DISCOUNT) BETWEEN THE MARKET PR ICE OF THE SHARES AND THEIR ISSUE PRICE IS 'EXPENDITURE' IN THE HANDS OF THE ASSESSEE BECAUSE IT IS A SUBSTITUTE TO GIVING DIRECT INCENTIVE IN CASH FOR AVAILING THE SERVICES OF THE EMPLOYEES. THERE IS NO DIFFERENCE BETWEEN A CASE WH ERE THE COMPANY ISSUES SHARES TO THE PUBLIC AT MARKET PRICE AND PAY S A PART OF THE PREMIUM TO THE EMPLOYEES FOR THEIR SERVICES AND ANOTHER WHE RE THE SHARES ARE DIRECTLY ISSUED TO EMPLOYEES AT A REDUCED RATE. IN BOTH SITUATIONS, THE EMPLOYEES STAND COMPENSATED FOR THEIR EFFORT. BY UN DERTAKING TO ISSUE SHARES AT A DISCOUNT, THE COMPANY DOES NOT PAY ANYT HING TO ITS EMPLOYEES BUT INCURS THE OBLIGATION OF ISSUING SHARES AT A DI SCOUNTED PRICE AT A FUTURE DATE. THIS IS NOTHING BUT 'EXPENDITURE' U/S 37(1); (II) THE LIABILITY CANNOT BE REGARDED AS BEING 'CON TINGENT' IN NATURE BECAUSE THE RENDERING OF SERVICE FOR ONE YEAR IS SINE QUA N ON FOR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE SCHEME. ONCE THE SER VICE IS RENDERED FOR ONE YEAR, IT BECOMES OBLIGATORY ON THE PART OF THE COMP ANY TO HONOR ITS ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 20 COMMITMENT OF ALLOWING THE VESTING OF 25% OF THE OP TION. THE LIABILITY IS INCURRED AT THE END OF THE FIRST YEAR THOUGH IT IS DISCHARGED AT THE END OF THE FOURTH YEAR WHEN THE OPTIONS ARE EXERCISED BY T HE EMPLOYEES. THE FACT THAT SOME OPTIONS MAY LAPSE DUE TO NON-EXERCISE/ RE SIGNATION ETC DOES NOT MAKE THE ENTIRE LIABILITY CONTINGENT; (III) HOWEVER, THE OBLIGATION TO ISSUE SHARES AT A DISCOUNTED PREMIUM DOES NOT ARISE AT THE STAGE THE OPTIONS ARE GRANTED. IT ARISES AT THE STAGE THAT THE OPTIONS ARE VESTED IN THE EMPLOYEES. THE AMOUNT DEDUCTIBLE HAS TO BE DETERMINED BASED ON THE PERIOD AND PERCENTAGE OF VE STING UNDER THE ESOP SCHEME; (IV) THERE IS LIKELY TO BE A DIFFERENCE IN THE QUAN TUM OF DISCOUNT AT THE STAGE OF VESTING OF THE STOCK OPTIONS (WHEN THE DEDUCTION IS ALLOWABLE) AND AT THE STAGE OF EXERCISE OF THE OPTIONS. THE DIFFERENCE HA S TO BE ADJUSTED BY MAKING SUITABLE NORTHWARDS OR SOUTHWARDS ADJUSTMENT AT THE TIME OF EXERCISE OF THE OPTION DEPENDING ON THE MARKET PRIC E OF THE SHARES THEN PREVAILING. THE FACT THAT THE SEBI GUIDELINES DO NO T PROVIDE FOR THE ADJUSTMENT OF DISCOUNT AT THE TIME OF EXERCISE OF O PTIONS IS IRRELEVANT BECAUSE ACCOUNTING PRINCIPLES CANNOT AFFECT THE POS ITION UNDER THE INCOME- TAX ACT. (V) ON FACTS, THE ASSESSEE'S METHOD OF CLAIMING A L ARGER DEDUCTION IN THE FIRST YEAR DEFIES LOGIC. AS THE OPTIONS VEST EQUALL Y OVER A PERIOD OF FOUR YEARS, THE DEDUCTION OUGHT TO BE CLAIMED IN FOUR EQ UAL INSTALLMENTS ON A STRAIGHT LINE BASIS. THE DECISION IN THE CASE OF RANBAXY LABORATORIES 124 TTJ 771 (DELHI) WAS REVERSED AND S.S.I. LTD. V. DCIT 85 TTJ 1049 (CHENNAI) APPROVED, PVP VENTURES 211 TAXMAN 554 REFERRED. THE DECISION OF SPRAY ENGINEERING DEVICES LTD 53 SOT 70 (CHD) WAS ALSO AP PROVED. THE ABOVE DECISIONS REFERRED BY SPECIAL BENCH WAS RELIED UPON BY ASSESSEE, THEREFORE THERE IS NO NEED TO REFER THEM AGAIN. AO IS DIRECTED TO WORK OUT THE DEDUCTION KEEPING MIND THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 21 IN THE ABOVE REFERRED CASE, AFTER GIVING AN OPPORTU NITY TO ASSESSEE. GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 10. GROUND NO.8 IS AS FOLLOWS: 8. AO AND LD. DRP HAS ERRED IN DISALLOWING PAYMENT OF SALES COMMISSION AND LEGAL AND PROFESSIONAL CHARGES MADE TO THE NON- RESIDENT U/S.40(A)(IA) ON THE GROUND THAT THE ASSES SEE HAS FAILED TO MAKE AN APPLICATION BEFORE AO UNDER SECTION 195(2) OF THE ACT. 10.1 DURING THE CURRENT FINANCIAL YEAR, THE ASSES SEE MADE PAYMENT TO NON-RESIDENTS TOWARDS SALES COMMISSION AND LEGAL A ND PROFESSIONAL CHARGES ON WHICH THE ASSESSEE DID NOT WITHHOLD TAXE S ON THE REASON THAT THE SAME WERE NOT SUBJECT TO THE TAX IN INDIA. AO HAS DISALLOWED THE EXPENDITURE STATING THAT, THE ASSESSEE HAS TO COMPU LSORILY APPROACH THE AO UNDER SECTION 195(2) OF THE ACT TO OBTAIN A NIL WITHHOLDING TAX ORDER IF THE ASSESSEE WISHES TO MAKE THE PAYMENT TO NON-R ESIDENT WITHOUT WITHHOLDING TAXES. IT WAS SUBMITTED THAT THE ADDIT ION MADE BY THE AO/DRP IS ERRONEOUS AND THE CLAIM SHOULD BE ALLOWAB LE BASED ON THE FOLLOWING RULINGS: A) IN ASSESSEES OWN CASE IN RESPECT OF ASSESSMEN T YEAR 1997-98, THE HONBLE ITAT WHILE DEALING WITH THE SIMILAR ISSUE, AFTER CONSIDERING THE DECISION OF TRANSMISSION CORPORATION OF AP LTD. (1999) (239 ITR 587)(SC) HELD THAT THE SALES COMMISSION PAID TO FOR EIGN AGENTS IS NOT LIABLE TO TAX IN INDIA, THE QUESTION OF WITHHOLDING TAXES ON THE SAME DOES NOT ARISE AT ALL. THE ITAT ALSO HELD THAT IN T HE ASSESSMENT PROCEEDINGS THE AO HAS TO NECESSARILY COME TO A CON CLUSION AS TO WHETHER PAYMENTS MADE TO NON-RESIDENTS ARE LIABLE T O TAX IN INDIA BEFORE MAKING ANY DISALLOWANCE UNDER SECTION 40(A)( I). THE SAID ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 22 DECISION WAS AGAIN FOLLOWED BY THE ITAT IN ASSESSEE S OWN CASE IN RESPECT OF ASSESSMENT YEAR 2000-01. 10.2 IT WAS FURTHER SUBMITTED THAT IN RESPECT OF T HE LEGAL AND PROFESSIONAL CHARGES PAID TO NON-RESIDENTS, THE SAM E BEING SERVICES PERFORMED OUTSIDE INDIA AND PAYMENTS RECEIVED OUTSI DE INDIA, THE SAME WERE NOT LIABLE TO TAX AS PER THE PROVISIONS OF THE ACT AND THE RELEVANT DTAA. THE AO, HOWEVER, WITHOUT ARRIVING AT A DEFINI TE FINDING AS TO WHETHER THE PAYMENTS MADE TO NON-RESIDENTS WAS IN F ACT CHARGEABLE TO TAX IN INDIA AND SIMPLY BASED ON THE GROUND THAT TH E ASSESSEE HAS NOT MADE AN APPLICATION UNDER SECTION 195(2) OF THE ACT HAS JUMPED TO THE CONCLUSION THAT THE SAID PAYMENTS ARE LIABLE TO BE DISALLOWED UNDER SECTION 40(A)(I). THIS IS CONTRARY TO THE DECISION OF THE ITAT IN RESPECT OF ASSESSEES OWN CASE AS STATED ABOVE. 10.3 IN RESPECT OF MEXICAN ENTITY, IT WAS SUBMITTED THAT THE EXPENDITURE WAS INCURRED TOWARDS CONVERSION CHARGES AMOUNTING T O RS.25,33,858/- FOR CONVERSION OF DL ACID INTO NAPROXIN. NO PROVISI ON TO WITH HOLD TAXES WITH REFERENCE TO BUSINESS INCOME PERTAINING TO CONVERSION/MANUFACTURING ACTIVITIES AS THAT ENTITY DOES NOT HAVE ANY PE IN INDIA. 10.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE ORDERS OF THE AUTHORITIES. AS SUBMITTED BY THE ASSESSEE TH IS ISSUE WAS CONSIDERED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1997-98 IN ITA NO.693/H/2000 WHEREI N IT WAS HELD AS UNDER :- 8. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD. U/S 195 OF THE ACT, AN ASSESSEE IS LIABL E TO DEDUCT TAX AT SOURCE FROM THE PAYMENTS MADE TO NON RESIDENTS, IF SUCH PAYMENTS ARE CHARGEABLE TO TAX IN INDIA IN THE HANDS OF THE NON RESIDENTS. IN THE INSTANT CASE, THE REVENUE HAS HEAVILY RELIED ON TWO DECISIONS ONE ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 23 OF THE TRIBUNAL IN THE CASE OF CHEMINOR DRUGS AND T HE OTHER OF THE SUPREME COURT IN THE CASE OF TRANSMISSION CORPORATI ON. IN THE CASE OF CHEMINOR DRUGS, THE ASSESSEE HAD NOT DEDUCTED TA X U/S 195 UNDER SIMILAR CIRCUMSTANCES AND HENCE AN ORDER U/S 201 WAS PASSED RAISING DEMAND AGAINST ASSESSEE AT THE SAID TAX AMOUNT. IT WAS, IN THE BACKDROP OF S.201 PROCEEDINGS, THE TRIB UNAL HELD THAT THE PROVISIONS CONTAINED IN S. 195 ARE URGENT PROVI SIONS AGAINST FOR COLLECTING TAX DURING THE FINANCIAL YEAR ITSELF. TH EREFORE, THE NATURE OF ENQUIRY AND THE NATURE OF ADJUDICATION U/S 195(1.) IS NECESSARILY SUMMARY AND GENERALLY PEREMPTORY IN NATURE. THE PRO CEEDINGS U/S 201, THEREFORE, PROVIDES AN OPPORTUNITY TO THE ASSE SSEE TO SHOW, THAT HE IS NOT LIABLE TO DEDUCT TAX AND THE ONLY WAY TO SHOW IT IS EITHER U/S 195(2), OR BY PRODUCING A CERTIFICATE U/S 195(3 ), ONLY TO ABSOLVE THE ASSESSEE OF HIS LIABILITY. HOWEVER, IN THE PRES ENT CASE, WE ARE DEALING WITH THE REGULAR ASSESSMENT OF THE ASSESSEE ITSELF IN WHICH WE ARE CONCERNED WITH THE DEDUCTIBILITY OF THE EXPE NDITURE U/S 40(A)(IA) OF THE ACT. UNDER THESE PROCEEDINGS, THE ASSESSING OFFICER HAS TO COME TO A DEFINITE FINDING WHETHER COMMISSIO N PAID TO FOREIGN AGENTS WAS IN FACT CHARGEABLE TO TAX IN INDIA OR NO T BECAUSE OF THAT FINDING DEPENDS THE DETERMINATION OF THE TOTAL INCO ME OF THE ASSESSEE. ACCORDINGLY IN THESE PROCEEDINGS THE REVE NUE CANNOT BE HEARD SAYING THAT SINCE THE ASSESSEE HAS NOT DEDUCT ED TAX U/S 195(1), IT WILL MAKE THE DISALLOWANCE U/S 40(A)(IA) OF THE ACT. TO REPEAT, IT HAS TO COME TO A DEFINITE CONCLUSION THA T THE INCOME WAS CHARGEABLE TO TAX IN INDIA. 9. OF COURSE, THE ASSESSING OFFICER HAS HELD THAT T HE INCOME WAS CHARGEABLE TO TAX IN INDIA BECAUSE THE PAYMENT WAS RECEIVED IN INDIA. IT IS ON RECORD THAT THE ASSESSEE HAD PURCHA SED DEMAND DRAFT FAVOURING THE FOREIGN AGENTS AND THE SAME WERE SENT BY POST. THE DRAFTS WERE SENT BY POST BY THE ASSESSEE ITSELF AND NOT AT THE INSTANCE OF THE AGENTS NOR WAS THERE SUCH STIPULATI ON IN THE AGREEMENTS WITH THE AGENTS. SAME SET OF CIRCUMSTANC ES WERE THERE IN ASSESSMENT YEAR 1994-95 IN WHICH THE TRIBUNAL HE LD THAT THE POSTAL AUTHORITIES CANNOT BE TREATED AS THE AGENT O F THE FOREIGN PAYEES. THUS, THE PAYMENT IS DEEMED TO HAVE BEEN MA DE DIRECTLY TO THE AGENTS ABROAD. IF THAT BE THE CASE THEN THE FOR EIGN AGENTS ARE NOT LIABLE TO TAX IN INDIA IN THE LIGHT OF THE CIRCULAR S OF THE BOARD. 10. IN THE CASE OF TRANSMISSION CORPORATION, THE FA CTS WERE THAT THE ASSESSEE HAD ENTERED INTO CERTAIN AGREEMENTS WITH C ERTAIN FOREIGN PARTIES FOR SUPPLY OF EQUIPMENTS. ANOTHER SET OF CO NTRACTS ENTERED INTO WERE FOR ASSEMBLING, ERECTION, TESTING AND COM MISSIONING OF THE EQUIPMENT. PURSUANT TO THESE CONTRACTS, PAYMENTS WE RE MADE BY THE ASSESSEE TO THE FOREIGN PARTIES WITHOUT DEDUCTING T AX U/S 195 OF THE ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 24 ACT. THE CONTENTION OF THE ASSESSEE WAS THAT S. 195 WOULD BE APPLICABLE ONLY WHERE THE PAYMENT TO THE NON RESIDE NT IS WHOLLY INCOME CHARGEABLE TO TAX AS IT PROVIDES THAT ANY PE RSON RESPONSIBLE FOR PAYING TO A NON RESIDENT ANY SUM CHARGEABLE UND ER THE PROVISIONS OF THIS ACT, SHALL, AT THE TIME OF PAYME NT, DEDUCT INCOME TAX THEREON AT THE RATES IN FORCE. IN THE TIME OF P AYMENT, DEDUCT INCOME TAX THEREON AT THE RATES IN FORCE. IN OTHER WORDS, THE CONTENTION WAS THAT WHEN THE PAYMENTS MADE TO THE N ON RESIDENT WERE NOT ENTIRELY INCOME, BUT A TRADING RECEIPT, TH ERE IS NO QUESTION OF DEDUCTION OF INCOME TAX AT THE SOURCE AS THE SEC TION DOES NOT PROVIDE FOR IT. TO THIS CONTENTION, THE HONBLE SUP REME COURT ANSWERED THAT THE ASSESSEE WHO MADE THE PAYMENTS TO THE NON RESIDENTS WAS UNDER AN OBLIGATION TO DEDUCT TAX AT SOURCE U/S 195 OF THE ACT IN RESPECT OF THE SUMS PAID TO THEM UNDE R THE CONTRACTS ENTERED INTO. IT FURTHER HELD THAT THE OBLIGATION O F THE ASSESSEE TO DEDUCT TAX U/S 195 IS LIMITED ONLY TO THE APPROPRIA TE PROPORTION OF INCOME CHARGEABLE UNDER THE ACT. THUS, IT CAN, BE S EEN THAT THE SAID JUDGEMENT IN FACT HELPS THE ASSESSEE. THE SECOND QU ESTION ANSWERED BY THE HONBLE SUPREME COURT CAN BE UNDERS TOOD TO MEAN THAT THE OBLIGATION OF THE ASSESSEE TO DEDUCT TAX U /S 195 IS NOT THERE WHEN THE PAYMENT MADE TO THE NON RESIDENT DOES NOT CONTAIN ANY PROPORTION OF INCOME THEREIN. IN OUR VIEW, RIGHT FR OM THE BEGINNING, NOT ONLY ON THE BASIS OF THE CIRCULARS OF THE BOARD , BUT ALSO ON THE BASIS OF THE DECISION OF THE TRIBUNAL IN ITS OWN CA SE, THE ASSESSEE FIRMLY BELIEVED THAT NO PART OF THE INCOME PAID TO THE FOREIGN AGENT WAS TAXABLE IN INDIA. THEREFORE, THERE WAS NO QUEST ION OF DEDUCTING ANY TAX AT SOURCE ON ANY EXEMPTION OF THE PAYMENT M ADE TO THE NON RESIDENTS. THUS, THE JUDGEMENT IN THE CASE OF TRANS MISSION CORPORATION DOES NOT ADVANCE THE CASE OF THE DEPART MENT IN THE PRESENT APPEAL. FINALLY, IT MAY BE PERTINENT TO NOT E THAT CIRCULAR NO.786 IS DATED 7.2.2000., I.E. THE SAME HAS BEEN I SSUED AFTER THE JUDGEMENT WAS RENDERED IN THE CASE OF TRANSMISSION CORPORATION I.E. 17.8.1999. THE FACTS IN THE ASSESSEES CASE RE MAIN GOVERNED BY THE BOARD CIRCULAR AND HENCE, IN THE FINAL ANALYSIS , RESPECTFULLY FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE, WE UPHOLD THE ORDER OF THE CIT(A) DELETING TH E DISALLOWANCE. 10.5 THE SAME WAS RELIED UPON BEFORE ITAT IN ITA NO .739/HYD/07. WHILE AGREEING WITH THE PRINCIPLES, THE MATTER WAS RESTORED TO AO AS REVENUE HAD RAISED ADDITIONAL GROUNDS WITH REFERENC E TO PAYMENTS BEING ILLEGAL PAYMENTS UNDER FOOD FOR OIL PROGRAMME (VOLK ER COMMITTEE REPORT) IN ASSESSMENT YEAR 2003-04. IN THIS YEAR, THERE ARE NO SUCH PAYMENTS MADE UNDER FOOD FOR OIL PROGRAMME, THEREFORE, THE O RDER OF ITAT IN ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 25 ASSESSMENT YEAR 2003-04 IN SETTING ASIDE THE ISSUE FOR FRESH CONSIDERATION DOES NOT APPLY TO THE FACTS THIS YEAR . THEREFORE, THE ORDER FOR ASSESSMENT YEAR 1997-98 APPLIES TO THE FACTS SQ UARELY. AO HAS NOT ESTABLISHED THAT THE AMOUNTS PAID ARE TAXABLE UNDER INDIAN INCOME TAX ACT 1961. PRIMA FACIE, THE PAYMENTS WERE MADE FOR S ERVICES RENDERED ABROAD AND AS SEEN FROM AOS ORDER THE ASSESSEE HAS DEDUCTED TAX ON THE PAYMENTS MADE IN INDIA/FOR SERVICES RENDERED IN INDIA. FURTHER, AS SUBMITTED THE CONVERSION CHARGES PAID TO A MEXICAN ENTITY ALSO CAN NOT BE TAXED IN INDIA AS THAT AMOUNT WAS A BUSINESS INC OME AND THAT ENTITY DOES NOT HAVE ANY PE IN INDIA. MOREOVER, THERE SEEM S TO BE NO PROCEEDINGS INITIATED U/S.201 FOR RECOVERY OF TAXES , EVENTHOUGH ASSESSEE APPLIED FOR A CERTIFICATE U/S. 195. CONSIDERING THE ABOVE FACTS AND ORDER OF THE CO-ORDINATE BENCH EXTRACTED ABOVE, WE HOLD T HAT THE AMOUNT CAN NOT BE DISALLOWED IN 40(A)(I) AS WAS DONE BY AO WIT HOUT ESTABLISHING THAT THE AMOUNTS ARE TAXABLE IN INDIA. AO IS DIRECTED TO ALLOW THE AMOUNTS. THE GROUND IS ALLOWED. 11. GROUND NO.9 READS AS UNDER : 9. AO AND THE LD. DRP HAS ERRED IN DISALLOWING VAR IOUS PAYMENTS AS FOLLOWS: I) BUSINESS PROMOTION EXPENDITURE RS.8,25,910/- II) GIFTS & COMPLIMENTS RS.68,62,136/- III) LOCAL DOCTORS MEET EXPENSES RS.1,03,29,388/- IV) INDIVIDUAL DOCTOR SERVICE RS.8,84,41,258/- THE ABOVE EXPENDITURE HAVE BEEN DISALLOWED ERRONEOU SLY BY ASSESSING OFFICER ON THE GROUND THAT THE SAME IS NO T INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS. 11.1 THIS GROUND PERTAINS TO DISALLOWANCE OF VARIOU S PAYMENTS TOWARDS: I) BUSINESS PROMOTION EXPENDITURE: RS. 8,25,9 10 II) GIFTS & COMPLIMENTS: RS. 68,62,136 III) LOCAL DOCTORS MEET EXPENSES: RS. 1,03,29, 388 ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 26 IV) INDIVIDUAL DOCTOR SERVICES: RS. 8,84, 41,258 DURING THE YEAR THE ASSESSEE HAS INCURRED EXPENDITU RE TOWARDS SALES PROMOTION WHICH COMPRISE OF BUSINESS PROMOTION EXPE NDITURE, GIFTS AND COMPLIMENTS, LOCAL DOCTORS MEET EXPENSES, INDIVIDUA L DOCTOR SERVICE. IT WAS SUBMITTED THAT THE EXPENDITURE WERE INCURRED IN THE COURSE OF BUSINESS AND WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE AO/DRP DISALLOWED THE EXPENDITURE STATING THAT THE EXPENDITURE IS NOT INCURRED IN THE COURSE OF THE BUSINESS OF THE ASSES SEE. 11.2 THIS ISSUE WAS A RECURRING ONE HAVING BEEN CON SIDERED BY ITAT IN ASSESSMENT YEAR 2003-04 IN ITA NO.655/HYD/07 DATED 29/10/2010 IN AY 2003-04. BUSINESS PROMOTION EXPENDITURE WAS STA TED TO BE PAYMENTS TO THE DOCTORS, HOSPITALS IN CASH AMOUNT AND ALSO L IKE GIFTS. THE CONTENTION OF THE ASSESSEE WAS THAT THIS EXPENDITUR E WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, WHEREA S AO/DRP WAS OF THE OPINION THAT THE ASSESSEE CAN NOT EXPLAIN SAID PAYM ENTS AS RELATED TO BUSINESS. SIMILAR ISSUE WAS EXAMINED BY ASSESSING OFFICER AND CIT(A) IN ASSESSMENT YEAR 2003-04 IN THE ABOVE ORDER (SUPRA). ITAT ALSO UPHELD THE DISALLOWANCE OF THESE ITEMS VIDE PARA-39 OF THE ORDER. ACCORDINGLY, THE ADDITION ON THIS ACCOUNT STANDS CONFIRMED. LIKE WISE THE EXPENDITURE OF GIFTS AND COMPLIMENTS AND OTHER EXPENDITURE OF S IMILAR NATURE WAS ALSO NOT ALLOWED IN THE ORDER OF ITAT (SUPRA). RESP ECTFULLY FOLLOWING, WE UPHOLD THE ORDER OF AO/DRP ON VARIOUS EXPENDITURES . 11.2 WITH REGARD TO LOCAL DOCTOR MEET EXPENDITURE IT WAS SUBMITTED THAT EXPENDITURE WAS INCURRED ON DOCTORS FOR PROVISION OF VARIOUS GIFTS IN INDIVIDUAL CAPACITY INCLUDING GIFT S, TICKETS, SPONSORSHIP ETC. IT WAS CONTENDED THAT THIS WAS FOR BUSINESS PR OMOTIONAL EXPENSES WHICH ARE TO BE ALLOWED AS REVENUE EXPENDITURE. IN ASSESSMENT YEAR ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 27 2003-04, THIS ISSUE WAS SET ASIDE TO THE FILE OF A SSESSING OFFICER FOR FRESH CONSIDERATION WITH THE DIRECTION TO ASSESSEE TO SUBSTANTIATE THE BUSINESS EXPEDIENCY TO INCUR THIS EXPENDITURE. RESP ECTFULLY FOLLOWING THE ABOVE, IN THIS YEAR ALSO, WE MODIFY THE ORDER O F AO/DRP TO THAT EFFECT AND DIRECT ASSESSING OFFICER TO EXAMINE THE NATURE OF EXPENDITURE AND WHETHER THE SAME CAN BE ALLOWED AS INCURRED FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, ISSUE WAS SET ASIDE TO THE FILE OF ASSESSING OFFICER TO EXAMINE AND DECIDE AFRESH. TO THAT EXTEN T, ASSESSEES GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 11.3 INDIVIDUAL DOCTORS SERVICES: ON THE REASON TH AT ASSESSEE INCURRED THESE EXPENSES TOWARDS INDIVIDUAL DOCTORS AND PAYMENT WERE MADE IN CASH OR KIND BOTH TRAVEL EXPENSES, SPONSORS HIP ETC. THE ASSESSEE WAS ASKED TO JUSTIFY THE EXPENDITURE. THE AO WAS OF THE VIEW THAT DOCTOR WOULD NOT ADMIT THE BENEFIT AS A RECEIPT AND MOST O F THE EXPENDITURE WAS SELF VOUCHED AND ARE UNVERIFIABLE IN NATURE AND DIS ALLOWANCE MADE WAS TO THE EXTENT OF RS.8,84,41,258/-. THIS ISSUE WAS C ONSIDERED BY ITAT IN THE ORDER SUPRA AS UNDER : 42 THE NEXT IS WITH REGARD TO DISALLOWANCE OF INDI VIDUAL DOCTORS MEET EXPENSES AT RS.3,20,97,763/-. THIS EXPENDITURE INCLUDES SPONSORSHIP OF DOCTORS TRAVEL FROM STATES TO ATTEN D THE CONFERENCE ORGANIZED BY THE 3 RD PARTY TO VARIOUS PARTS OF THE COUNTRY FOR WHICH NO DETAILS HAVE BEEN GIVEN. IT ALSO INCLUDES EXPEND ITURE LIKE SPONSORING VACATIONS DOCTORS AND HIS FAMILY AND GIF TS INCLUDING HOSPITAL EQUIPMENTS LIKE LASER MACHINES ETC. SINCE NO SATISFACTORY EXPLANATION WAS GIVEN BY THE ASSESSEE DURING THE AS SESSMENT PROCEEDINGS, ASSESSING OFFICER DISALLOWED THE SAME. THE CIT(A) SET ASIDE THE ISSUE TO THE FILE OF ASSESSING OFFICER W ITH A DIRECTION TO ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 28 VERIFY THE NATURE OF EXPENDITURE AND DISALLOW ONLY THAT EXPENDITURE WHICH ARE NOT INCURRED FOR THE PURPOSE OF BUSINESS. WE DO NOT FIND ANY INFIRMITY IN THE DIRECTION OF THE CIT(A) AND TH E ASSESSEE IS DIRECTED TO SUBSTANTIATE ITS CLAIM BEFORE ASSESSING OFFICER. ACCORDINGLY THIS GROUND OF THE ASSESSEE IS DISMISSE D. SINCE THE ISSUE WAS SET ASIDE BY CIT(A) TO THE FILE OF THE ASSESSING OFFICER TO VERIFY THE NATURE OF EXPENDITURE AND DISALLOW ON LY THAT EXPENDITURE WHICH IS NOT INCURRED FOR THE PURPOSE OF BUSINESS, WE ALSO MODIFY THE ORDER OF AO/DRP AND DIRECT THE ASSESSING OFFICER TO EXAMINE THE NATURE OF EXPENDITURE AND CONSIDER DISALLOWANCE OF EXPENDI TURE WHICH IS NOT INCURRED FOR THE PURPOSE OF BUSINESS. THE ISSUE IS RESTORED TO THE FILE OF ASSESSING OFFICER. 11.4 THE CIRCULAR ISSUED BY THE BOARD IN 5/2012 AND CODE OF ETHICS REGULATIONS 2002 ISSUED BY MEDICAL COUNCIL OF INDIA WAS APPLICABLE FROM 2003-04 AND FOR THE RELEVANT ASSESSMENT YEAR, THE C ODE OF ETHICS IS APPLICABLE AND SO EXPENDITURE INCURRED ON THE DOCTO RS CAN BE CONSIDERED AS UNETHICAL. THE ASSESSING OFFICER IS ALSO DIRECTE D TO EXAMINE THIS ASPECT ALSO IN ADDITION TO THE DIRECTIONS GIVEN BY THE ITA NO.655/HYD./07 DATED 29.10.2010. WITH THESE DIRECTI ONS THE GROUND IS CONSIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. 12. GROUND 10 & 11 IS AS FOLLOWS : 10. THE AO AND THE LD. DRP HAS ERRED IN ALLOCATING A PART OF THE HEAD OFFICE EXPENDITURE AGAINST THE PROFITS OF THE UNITS ELIGIBLE FOR DEDUCTION U/S. 10B THEREBY REDUCING THE DEDUCTION A VAILABLE TO ASSESSEE. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 29 11. THE AO AND THE LD. DRP HAS ERRED IN ALLOCATING A PART OF THE HEAD OFFICE EXPENDITURE AGAINST THE PROFITS OF THE UNITS ELIGIBLE FOR DEDUCTION U/S. 80B THEREBY REDUCING THE DEDUCTION A VAILABLE TO ASSESSEE. 12.1 REGARDING ALLOCATION OF CORPORATE OVERHEADS I) ON 10B-GENERICS 100% EOU UNITS II) ON 10B BULK DRUGS 100% EOU UNIT III) ON 80IB YANAM UNIT IV) ON 80IB GOA UNIT WHILE COMPUTING THE TOTAL INCOME, THE ASSESSEE HAD COMPUTED DEDUCTION UNDER SECTION 10B, 80IB AND 80IC WITHOUT ALLOCATING OVERHEAD COST OF CORPORATE UNIT. IT WAS THE CONTENTION THAT THE COMP UTATION OF DEDUCTION IS BASED ON THE PROVISIONS LAID DOWN IN THE RESPECT IVE SECTIONS OF 10B, 80IB AND AS PER THE ACT IT IS THE PROFIT WHICH IS DERIVED BY AN UNDERTAKING IS ELIGIBLE FOR DEDUCTION. THE ASSESSEE CONSIDERED THE DERIVED PROFIT AS NET OF INCOME DERIVED AND EXPENDITURE DERIVED OUT OF THE UNDERTAKING CONCERNED. IN OTHER WORDS IT SHOULD BE INCOME DERIVED NET- OF EXPENDITURE DERIVED BUT NOT INCOME DERI VED NET-OF EXPENDITURE ATTRIBUTABLE TO. 12.2 IT WAS REITERATED THAT, AS HELD BY THE APEX C OURT IN CASES LIKE STERLITE INDUSTRIES, THE TERM USED IN THE CONTEXT O F PROFITS AND GAINS IS DERIVED AND IT IS VERY NARROW IN APPLICATION THAN ATTRIBUTABLE. THE PROFITS THAT ARE DIRECT IN NEXUS TO THE INDUSTRIAL UNDERTAKING ONLY NEED TO BE CONSIDERED. IN THE PRESENT CASE THE EXPENDITURE THAT IS ALLOCATED IS THE EXPENDITURE IN CORPORATE OFFICE WHICH CANNOT BE REL ATED TO ANY BUSINESS. IT HAS ITS OWN INCOME LIKE DIVIDED, INTEREST ETC AN D OPERATIONS. THE STAFF THEREIN DO NOT PROVIDE ANY DIRECT SERVICE TO ANY OF THE UNITS ELIGIBLE FOR DEDUCTIONS U/S LOB, 8OLB ETC. IN VIEW OF THE FORGOI NG EXPLANATION THE SERVICES THAT MAY REMOTELY AND INDIRECTLY AND, AT T HE MOST, POSSIBLY, GIVE SOME BENEFIT TO THE UNITS AND THE EXPENDITURE THERE IN NEED NOT BE ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 30 ALLOCATED AND DEDUCTED. THE SIMILAR OBSERVATION WAS MADE IN THE AAR RULING IN THE CASE OF M/S NATIONAL FERTILIZERS LIMI TED (A.A.R NO.532 & 533 OF 2001) INTERPRETING THE MEANING OF DERIVED F ROM BY HONBLE SUPREME COURT IN THE CASE OF CIT VS STERLING FOODS [237 ITR 579]. FURTHER IN A RULING BY HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS M/S S T MICRO ELECTRONICS PVT. LTD [ITA NO. 928/201 01 IT IS OBSERVED THAT WHAT WAS REQUIRED TO BE APPORTIONED WAS THE CO MMON EXPENDITURE OF THE UNITS AND NOT THE TOTAL EXPENSES. 12.3 WITHOUT PREJUDICE TO THE ABOVE DERIVED PRINC IPLE , THE PRINCIPLE OF NEXUS IS ALSO REQUIRED TO BE SEEN. IT MAY BE NOT ED THAT IN THE CONTEXT OF SEC.14A, THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. WIMCO SEEDLINGS LTD. HAS PRONOUNCED, THAT.. THE ONLY EXP ENDITURE WHICH HAS BEEN PROVED TO HAVE BEEN INCURRED IN RELATION TO TH E EARNING OF TAX FREE INCOME, CAN BE DISALLOWED WHILE APPLYING THE SECTIO N THERE IS NO AUTHORITY CONFERRED UPON THE ASSESSING OFFICER TO D EEM OR ASSUME EXPENDITURE TO HAVE BEEN INCURRED IN RELATION TO TH E TAX FREE INCOME. COMMON EXPENDITURE INCURRED AT THE HEAD OFFICE CANN OT BE BROKEN UP ARTIFICIALLY TO ATTRIBUTE OR APPORTION A PART THERE OF TO THE EARNING OF THE TAX FREE INCOME ON THE ASSUMPTION THAT SUCH PART OF THE COMMON EXPENDITURE WAS INCURRED IN RELATION TO THE TAX FRE E INCOME. IT IS SUBMITTED THAT THIS PRINCIPLE SHOULD SQUARELY BE AP PLICABLE IN OUR CASE TOO. CONSIDERING THE PRINCIPLES LAID IN THE ABOVE J UDGMENTS, IT WAS SUBMITTED THAT THERE CANNOT BE ANY PRESUMED ALLOCAT ION OF OVER HEADS TO THE UNITS WHOSE INCOME IS TAX FREE 12.4 WITHOUT PREJUDICE TO THE ABOVE, IT WAS FURTHER CONTENDED THAT, THE A.O WHILE COMPUTING THE CORPORATE OVERHEAD, HAS CON SIDERED CORPORATE EXPENDITURE INCLUDING FINANCE CHARGES, BUT HAS FAIL ED TO CONSIDER INTEREST INCOME AND GAIN ON FOREIGN EXCHANGE FLUCTUATIONS WH ICH ARE ALSO ATTRIBUTABLE TO CORPORATE ACTIVITIES ONLY. HENCE WH ILE COMPUTING CORPORATE ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 31 OVERHEAD ALLOCABLE TO THE SAID UNITS, HE HAS TO NEC ESSARILY NET-OFF THE CORPORATE INCOME FROM THE CORPORATE EXPENDITURE AND NET ONLY SHOULD BE CONSIDERED AS CORPORATE OVERHEAD ALLOCABLE. 12.5 WE HAVE CONSIDERED THE ISSUE. THIS ISSUE W AS DISCUSSED BY ITAT IN ASSESSMENT YEAR 2003-04 IN ASSESSEES OWN CASE F ROM PARA 14 TO PARA 18 ONWARDS. THE ISSUE WAS SET ASIDE TO THE ASSESS ING OFFICER OBSERVING AS UNDER: 18. WE HAVE CAREFULLY GONE THROUGH THE ORDER OF TH E TRIBUNAL IN THE CASE OF WIPRO GE MEDICAL SYSTEM LTD. CITED SUPRA AN D WHEREIN IT WAS HELD THAT THE ASSESSEE IS RIGHTLY HAVING ALLOCA TED INDIRECT EXPENSES TO THE TWO UNITS ACCORDING TO THE WAGES AN D OTHER EXPENSES ON THE BASIS OF SALES FOR ARRIVING RESPECT IVE PROFITS OF ITS TWO UNITS. THE ASSESSING OFFICER IS DIRECTED TO ACC EPT ASSESSEES WORKING IN RELATION TO DEDUCTION U/S.80IA. IN VIEW OF THE ABOVE JUDGMENT, IN OUR OPINION, IN THE ABSENCE OF IDENTIF YING THE EXPENDITURE OF THE EXPORT DIVISION, THERE IS NO BAS IS OTHER THAN ALLOCATING THE TOTAL INDIRECT COST ON THE BASIS OF TURNOVER. ACCORDINGLY, WE DIRECT ASSESSING OFFICER TO APPORT ION THE EXPENDITURE ON THE BASIS OF TURNOVER OF VARIOUS UNI TS. THE ISSUE IS SET ASIDE TO THE FILE OF ASSESSING OFFICER FOR FRES H CONSIDERATION. 12.6 RESPECTFULLY FOLLOWING THE ABOVE, IN THIS YEAR ALSO THE MATTER IS SET ASIDE TO AO TO RE-EXAMINE THE CLAIM ON SIMIL AR LINES. ACCORDINGLY, GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NO.12 IS AS FOLLOWS: 12. AO AND THE LD. DRP ERRED IN CONSIDERING THE PA YMENT MADE TO GET THE EXISTING CUSTOMERS CONTRACTS OF FALCON ASSI GNED IN FAVOUR OF THE ASSESSEE AS CAPITAL EXPENDITURE INSTEAD OF REVE NUE EXPENDITURE AS CLAIMED BY ASSESSEE. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 32 13.1 THIS GROUND IS REGARDING EXPENDITURE INCURRED TOWARDS CUSTOMER CONTRACTS. DURING THE FY 2005-06 THE ASSESSEE ACQU IRED 100% SHARE CAPITAL OF INDUTRIAS QUIMICAS FALCON DE MEXICO (HER EINAFTER AND BEFORE REFERRED TO AS FALCON) FROM ROCHE INTERNATIONAL LI MITED FOR A CONSIDERATION OF RS. 232.02 CRORES. IN ADDITION TO THE PURCHASE CONSIDERATION, THE ASSESSEE HAS PAID A FURTHER SUM OF RS.28.49,85,605 TO ROCHE, WHOSE AFFILIATE WAS ABOVE REFERRED COMPANY, TO GET THE EXISTING CUSTOMER CONTRACTS OF FALCON ASSIGNED IN FAVOUR OF THE ASSESSEE AND CLAIMED THE ENTIRE AMOUNT AS ALLOWABLE EXPENDITUR E, EVENTHOUGH THE SAME WAS CAPITALIZED AS INTANGIBLE ASSET IN THE BOO KS OF ACCOUNT. 13.2 THE AO AND THE DRP DISALLOWED THE CLAIM ALLOWI NG DEPRECIATION ON THE SAME STATING THAT THE ASSESSEE GOT GUARANTEED S ALES NOT ONLY FOR THE YEAR UNDER CONSIDERATION BUT ALSO FOR FUTURE YEARS ALSO AND HENCE CAPITAL IN NATURE. 13.3 IT WAS SUBMITTED THAT THE A.O / DRP ERRED IN T REATING THE EXPENDITURE AS CAPITAL AND DISALLOWING THE ASSESSEE CLAIM BASED ON THE FOLLOWING: I) THE FACTS AS MODIFIED BY THE AO ARE NOT CORRECT. THE AGREEMENT NO WHERE STATES THAT BY VIRTUE OF ENTERING INTO AGREEM ENT WITH ROCHE THE ASSESSEE WOULD BE ENSURED GUARANTEED SALES. II) IT IS RESPECTFULLY SUBMITTED THAT THE AO HAS TO TALLY MISUNDERSTOOD THE ARRANGEMENT. BY VIRTUE OF THE ARRANGEMENT, THE ASSESSEE ONLY GOT AN ASSIGNMENT OF THE EXISTING CUSTOMER CONTRACTS. III) THE CUSTOMERS BEING INDEPENDENT PARTIES AND NO T PRIVY TO THIS AGREEMENT WERE NOT BOUND TO CONTINUE PURCHASING FRO M DRL ROCHE DID NOT GUARANTEE THAT THE CUSTOMER WOULD CONTINUE TO P URCHASE FROM DRL ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 33 BY INFERRING THAT THE ASSESSEE HAS GOT GUARANTEED S ALES FROM THE CUSTOMERS. 13.4. ASSESSEE RELIED ON THE CASE OF HONDA SIEL P OWER PRODUCTS LTD. V CIT (2006) 167 TAXMAN 76 (ITAT DELHI) WHEREIN IT WA S HELD THAT IF ADVANTAGE CONSISTS OF MERELY FACILITATING TRADING O PERATIONS OF ASSESSEE OR ENABLES MANAGEMENT TO CONDUCT BUSINESS MORE PROFITA BLY OR EFFICIENTLY, EXPENDITURE WOULD BE ON REVENUE ACCOUNT THOUGH THE ADVANTAGE MAY ENSURE FOR AN INDEFINITE PERIOD. 13.5 DRP DISCUSSED THE TERMS OF AGREEMENT AND DISTI NGUISHED THE CASES RELIED ON BY ASSESSEE. WE DO NOT INTEND TO EXTRACT THE AGREEMENT HERE AGAIN. SUFFICE TO SAY THAT THE AGREEMENT IS FOR PUR CHASE AND SALE OF A BUSINESS. PREAMBLE STATES THE M/S ROACH MANAGES THE BUSINESS OF FALCON AND THIS BUSINESS CONSIST OF NUMBER OF THIRD PARTY AGREEMENTS FOR SUPPLY OF NAPROXEN AND STEROIDS MANUFACTURED UN DER THE FALCON BUSINESS, TERMED AS TRANSFERRED BUSINESS IN THE AGREEMENT AND ASSESSEE ACQUIRED THE TRANSFERRED BUSINESS. CLAUSE 2.1 CLEARLY STATES THAT THE AGREEMENT WAS FOR PURCHASE AND SALE OF ASSETS W HICH ARE LISTED IN (A) TO (C). TERMS ALSO INCLUDE THAT SELLER HAS TO RENE GOTIATE CONTRACTS WITH THIRD PARTIES TO THE EXTENT OF TRANSFERRED BUSINESS . ASSESSEE ALSO TREATED THE SAME AS PURCHASE OF INTANGIBLE ASSETS IN THE BO OKS. ALL THESE INDICATE THAT WHAT ASSESSEE PURCHASED ARE INTANGIBLE ASSETS OF TRANSFERRED BUSINESS AND AO AND DRP WERE CORRECT IN TREATING IT AS CAPITAL EXPENDITURE AND ALLOWING DEPRECIATION U/S 32 OF THE ACT. WE AGREE WITH THE FINDINGS OF AUTHORITIES. GROUND IS REJECTED. GROUND NO.13 IS AS FOLLOWS: 13. AO AND THE LD. DRP HAS ERRED IN NOT ALLOWING T HE AMOUNT PAID AS CONTRIBUTION TOWARDS THE PROJECTS OF ILS AS REVE NUE EXPENDITURE U/S. 37(1) OF THE ACT. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 34 13.1 THIS GROUND PERTAINS TO DISALLOWANCE OF CONTRI BUTION PAID TO ILS. ILS IS A RESEARCH INSTITUTION, ENGAGED IN RESEARCH ACTIVITIES IN THE FIELD OF PHARMACEUTICALS AND IS AFFILIATED TO OSMANIA UNIVER SITY, HYDERABAD. SINCE THE ASSESSEE IS ALSO ENGAGED IN THE BUSINESS OF MANUFACTURING, RESEARCH AND DEVELOPMENT OF PHARMACEUTICALS, THE AS SESSEE IN ITS OWN BUSINESS INTEREST CONTRIBUTED A SUM OF RS.3,41,18,5 38 TO ILS AND CLAIMED DEDUCTION U/S 35AC AND ALTERNATELY U/S 37. THE AO DISALLOWED THE CONTRIBUTION AS THE ASSESSEE WAS NOT ABLE TO PR ODUCE THE CERTIFICATE REQUIRED UNDER THE PROVISIONS OF SECTION 35AC OF TH E ACT. 13.2 IT WAS SUBMITTED THAT THOUGH IT IS NOT ALLOWA BLE U/S 35AC, THE SAID PAYMENT IS ALLOWABLE U/S 37 AS THE PAYMENT WAS MADE TO AN ORGANIZATION WHICH IS IN SIMILAR LINE WITH ASSESSEE . SIMILAR EXPENDITURE WAS ALLOWED BY CIT(A)-III AND FURTHER CONFIRMED BY ITAT IN OUR OWN CASE FOR THE AY 2003-04.IT FURTHER RELIED ON THE DECISIO N GIVEN IN THE CASE OF RANBAXY LABORATORIES LTD VS. DCII (2009-TIOL-32-ITA T-DEL) (DELHI ITAT). 13.3 AS SEEN FROM THE RECORD, THE AO AND DRP CON SIDERED THE CLAIM ONLY U/S 35AC. SINCE THE SAME WAS NOT ADMISSIBLE, T O THAT EXTENT ORDER OF AO AND DRP IS SUSTAINED. THE ALTERNATE CLAIM U/S 37(1) WAS NOT MADE BEFORE REVENUE AUTHORITIES. THEREFORE IN THE INTERE ST OF JUSTICE WE RESTORE THE CLAIM U/S 37(1) TO THE FILE OF AO TO EXAMINE TH E SAME AFRESH, KEEPING IN MIND THE ORDER OF ITAT IN AY 2003-04 AND OTHER C ASES RELIED ON BY ASSESSEE. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY T O SUBSTANTIATE THE CLAIM. THE GROUND IS CONSIDERED ALLOWED FOR STATIST ICAL PURPOSES. GROUND NO.14 IS AS FOLLOWS: 14. THE AO AND THE LD. DRP HAS ERRED IN DISALLOWING THE LOSS INCURRED ON TRANSFER OF INVESTMENT IN PATHNET, JV B Y TREATING THE SAME AS CAPITAL LOSS. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 35 14.1 IT PERTAINS TO DISALLOWANCE OF LOSS INCURRED O N TRANSFER OF INVESTMENT IN PATHNET INDIA (PVT.) LTD. (A JV ENTIT Y). PATHNET IS IN THE BUSINESS OF SETTING UP OF MEDICAL PATHOLOGICAL LABO RATORIES. THE ASSESSEE HAD 49% STAKE IN PATHNET. 14.2 DURING THE YEAR UNDER CONSIDERATION THE ASSESS EE TRANSFERRED ITS TOTAL STAKE IN PATHNET. THE ASSESSEE INCURRED LOSS OF RS. 4,90,00,000 ON SUCH TRANSFER AND DEBITED THE SAME TO THE PROFIT AN D LOSS ACCOUNT OF THE YEAR AND CLAIMED AS ALLOWABLE EXPENDITURE. THE AO/D RP HAS CONSIDERED THE LOSS ARISING ON TRANSFER OF SHARES AS CAPITAL I N NATURE AND HAS DISALLOWED THE LOSS CLAIMED AS EXPENDITURE NOT ALLO WABLE U/S 37. 14.3 IT WAS SUBMITTED THAT THE INVESTMENT BY THE AS SESSEE IN THE PATHNET WAS A BUSINESS INVESTMENT. THE ASSESSEE HAS TREATED PATHNET AS A SPECIAL PURPOSE VEHICLE FOR ENTERING INTO THE BUS INESS OF PATHOLOGICAL LABORATORIES. 14.4 WITHOUT PREJUDICE TO ABOVE, ASSESSEE CONTENDS THAT AS THE LOSS HAS ARISEN DUE TO TRANSFER OF ASSESSEES INVESTMENT IN PATHNET AND AS THE SHARES IN PATHNET WAS HELD BY THE ASSESSEE PRIOR TO ITS TRANSFER, THE SAME SHOULD BE AS ALLOWED AS LONG TERM CAPITAL LOSS UNDE R THE HEAD CAPITAL GAINS ASSESSEE RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF CLAIM: 1.CIT VS AMALGAMATION PVT LTD 226 ITR 188 (SC) 2. ACIT VS M/S WS INDUSTRIES INDIA LTD [2009-TIOL 783-ITAT- MAD] 14.4 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT THE AUTHORITIES ARE JUSTIFIED IN DISALLOWING THE SA ME AS CAPITAL LOSS AND NOT AS REVENUE LOSS TO BE SET OFF UNDER THE HEAD B USINESS. HOWEVER, THEY ARE NOT CORRECT IN DISALLOWING THE SAME WITHOUT CON SIDERING THE SAME UNDER THE HEAD CAPITAL GAINS OR LOSS. ASSESSEE NO DOUBT TREATED THE ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 36 SAME AS INVESTMENTS AND SALE OF INVESTMENTS RESULTE D IN LOSS. THIS SHOULD BE CONSIDERED AS LONG TERM/ SHORT TERM CAPIT AL LOSS AS THE CASE MAY BE AND ALLOWED SET OFF OR CARRIED FORWARD TO BE SET OFF LATER AS PER PROVISIONS OF ACT. THIS WAS NOT DONE BY AUTHORITIES . THEREFORE, WE ALLOW THE ALTERNATE CLAIM OF ASSESSEE AND DIRECT THE AO T O COMPUTE THE SAME AND ALLOW BENEFIT OF SET OFF AS PER THE PROVISIONS OF ACT. GROUND CONSIDERED ALLOWED TO THAT EXTENT. GROUND NO.15 IS AS FOLLOWS: 15. THE AO AND THE DRP HAS ERRED IN DISALLOWING TH E LOSS OF RS.8,50,98,956/- INCURRED IN WRITE OFF OF INVESTMEN T IN AURANTIS CONSIDERING THE SAME AS CAPITAL LOSS AND NOT ALLOWA BLE U/S. 37 OF THE ACT OR NOT CONSIDERING THE SAME FOR SET OFF OR CARRY FORWARD. 15.1 IT PERTAINS TO DISALLOWING THE LOSS INCURRED I N WRITE OFF OF INVESTMENTS IN AURANTIS FARMACEUTICA LTD. BRAZIL CO NSIDERING THE SAME AS CAPITAL LOSS. THE ASSESSEE MADE INVESTMENT IN AU RANTIS FOR THE PURPOSE OF EXPLORING THE PHARMACEUTICAL BUSINESS OP PORTUNITIES IN BRAZIL. DURING THE YEAR AURANTIS WENT INTO LIQUIDAT ION AND ASSESSEE COULD NOT RECOVER ANY AMOUNT AGAINST ITS INVESTMENTS IN A URANTIS. THE LOSS CHARGED TO P&L A/C WAS CLAIMED AS ALLOWABLE EXPENDI TURE U/S 37 CONSIDERING IT TO BE A BUSINESS INVESTMENT AND ACCO RDINGLY LOSS AS BUSINESS LOSS. A.O / DRP DISALLOWED THE SAME CONSI DERING IT TO BE CAPITAL IN NATURE. 15.2 IT WAS SUBMITTED THAT THE INVESTMENT BY THE AS SESSEE IN THE AURANTIS WAS A BUSINESS INVESTMENT. THE ASSESSEE HA S TREATED AURANTIS AS A SPECIAL PURPOSE VEHICLE FOR ENTERING INTO THE BUSINESS OF PATHOLOGICAL LABORATORIES. WITHOUT PREJUDICE TO ABOVE THE ASSESS EE CONTENDS THAT AS THE LOSS HAS ARISEN DUE TO TRANSFER OF ASSESSEES I NVESTMENT IN PATHNET AND AS THE SHARES IN PATHNET WAS HELD BY THE ASSESS EE PRIOR TO ITS ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 37 TRANSFER, THE SAME SHOULD BE AS ALLOWED AS LONG TER M CAPITAL LOSS UNDER THE HEAD CAPITAL GAINS. 15.3 THIS CLAIM IS SIMILAR TO THE CLAIM MADE WITH REFERENCE TO INVESTMENT IN PATHNET DISCUSSED IN GROUND NO 14 ABOVE. FOR THE REASONS STATED ABOVE, THIS SHOULD BE CONSIDERED AS LONG TERM/ SHOR T TERM CAPITAL LOSS AS THE CASE MAY BE AND ALLOWED SET OFF OR CARRIED FORW ARD TO BE SET OFF LATER AS PER PROVISIONS OF ACT. THIS WAS NOT DONE BY AUTH ORITIES. THEREFORE, WE ALLOW THE ALTERNATE CLAIM OF ASSESSEE AND DIRECT TH E AO TO COMPUTE THE SAME AND ALLOW BENEFIT OF SET OFF AS PER THE PROVIS IONS OF ACT. GROUND CONSIDERED ALLOWED TO THAT EXTENT. GROUND NO.16 IS AS FOLLOWS : 16. THE ASSESSEE RESPECTFULLY OBJECTS TO THE ADJUS TMENT OF RS.8,19,20,766/- PROPOSED TO BE MADE BY AO AND LD. DRP BY RELYING ON THE TPOS ORDER DATED 30 OCTOBER 2009 IN THIS REGARD THE ASSESSEE WISHES TO SUBMIT ITS GR OUNDS OF OBJECTION WHICH ARE AS FOLLOWS: I) AO AND THE LD. DRP/TPO MADE THE ADJUSTMENT IGNOR ING THE NATURE OF TRANSACTION. II) AO AND THE LD. DRP/TPO ERRED IN IGNORING LIBOR AS A BENCHMARK FOR DETERMINING ARMS LENGTH INTEREST RATE IN INTER NATIONAL TRANSACTION. III)WITHOUT PREJUDICE TO THE ABOVE THE AO AND THE LD. DRP/TPO ERRED IN IGNORING PRINCIPLES OF CONSISTENCY BY IGNORING T HE RATE OF INTEREST LAID DOWN BY THE CIT(A) IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05, WHERE IN THE HONBLE CIT(A)HELD THAT THE BENCHMARK RATE FOR DETERMINING THE INTEREST RATE RECEIVABLE S HOULD BE THE INTEREST RATE OF RISK FREE BANK DEPOSIT. 16.1 IT PERTAINS TO TRANSFER PRICING ADJUSTMENT. D URING THE FY 2005-06, ASSESSEE COMPANY HAS CHARGED INTEREST ON ADVANCES P ROVIDED TO ITS ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 38 SUBSIDIARIES. IT HAS BEEN CHARGING INTEREST AT A RA TE DETERMINED BASED ON THE LIBOR, PREVALENT IN THE MARKET FROM TIME TO TIM E, IN SOME CASES AND BASED ON THE MUTUALLY AGREED RATE IN SOME OTHER CAS ES. THE INTEREST SO CHARGED BY THE ASSESSEE WAS RS.3,62,12, 739/- 16.2 THE LEARNED AO / TPO HAS TAKEN A VIEW THAT THE INTEREST SHOULD HAVE BEEN CHARGED AT A RATE DETERMINED BASED ON THE RATE FOR CORPORATE BONDS AS APPLICABLE TO UNRATED COMPANIES WHICH WAS CLAIMED TO BE AROUND 14% AND ACCORDINGLY CONSIDERED THE ARMS LENG TH INTEREST AS RS.11,81,33,505/-, THERE BY ADDING THE DIFFERENTIAL AMOUNT OF RS. 8,19,20,766/- AS ADJUSTMENT U/S 92CA OF INCOME TAX ACT. 16.3 IN THIS RESPECT IT WAS SUBMITTED THAT THE ENTI TIES TO WHICH THE ADVANCES ARE GIVEN ARE WHOLLY OWNED SUBSIDIARIES AN D ARE PROVIDED TO SUPPORT THEIR WORKING CAPITAL REQUIREMENTS. THE COM PANY HAS BEEN CHARGING INTEREST AT A RATE DETERMINED BASED ON THE LIBOR, PREVALENT IN THE MARKET FROM TIME TO TIME, IN SOME CASES AND BAS ED ON THE MUTUALLY AGREED RATE IN SOME OTHER CASES. SINCE THEY ARE OUR GROUP ENTITIES, THE LOANS GIVEN BY THE ASSESSEE COMPANY WERE RISK FREE AS THESE COULD HAVE BEEN REPAID AFTER A STIPULATED PERIOD. HENCE, THE U NRATED LOAN UNDER BBB GRADE (WHICH ARE WITH RISK ADJUSTMENT) ADOPTED BY TPO/A.O IS FACTUALLY NOT TENABLE. IT WAS FURTHER SUBMITTED THA T THE COMMISSIONER OF IT (APPEALS) III, IN ASSESSEES OWN CASE FOR THE AY 2004-05, HAS HELD THE RATE EARNED BY COMPANY ON THE INVESTMENTS, IN T HE FORM OF BANK DEPOSITS, SHOULD ONLY BE COMPARED AND ALLOWED APPEA L PARTLY FOR THAT YEAR. IT WAS FURTHER SUBMITTED THAT THE ITAT CHENNA I BENCH IN THE CASE OF M/S. SIVA INDUSTRIES & HOLDINGS LTD VS ACIT (L.T .A NO.2148/MDS/2010) DECIDED THAT ONCE THE TRANSACTIO N BETWEEN THE ASSESSEE AND THE A.E IS IN FOREIGN CURRENCY AND THE TRANSACTION IS AN INTERNATIONAL TRANSACTION, THEN THE TRANSACTION WOU LD HAVE TO BE LOOKED UPON BY APPLYING THE COMMERCIAL PRINCIPLES IN REGAR D TO THE INTERNATIONAL ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 39 TRANSACTION. IF THIS IS SO, THEN THE DOMESTIC PLR W OULD HAVE NO APPLICABILITY AND THE INTERNATIONAL RATE FIXED BEIN G LIBOR WOULD COME INTO PLAY. SIMILAR OBSERVATION IS ALSO MADE IN THE CASE OF M/S FOUR SOFT LIMITED VS DCIT BY HYDERABAD BENCH OF ITAT WIDE ITA NO. 14951HVD/2010. 16.4 THIS ISSUE WAS CONTESTED BY REVENUE IN ITA NO.836/H/09 IN ASSESSMENT YEAR 2004-05. IN THAT YEAR, THE FACTS OF THE ISSUE WERE THAT THE ASSESSEE EXTENDED A LOAN OF USD 3MILLION TO M/S . DR. REDDYS LABORATORIES INC. (DRI), A 100% SUBSIDIARY OF THE A SSESSEE AT USA. DRI PAID INTEREST ON THIS LOAN TO THE ASSESSEE @ LIBOR + 70 BASIS POINTS ON HALF YEARLY BASIS, WHICH WORKS OUT TO APPROX. 2.7%. THE AMOUNT OF INTEREST RECEIVED DURING ASSESSMENT YEAR 2004-05 AM OUNTED TO RS.27,61,021/-. SINCE THE AFORESAID INTERNATIONAL T RANSACTION WITH ASSOCIATED ENTERPRISE WAS MORE THAN RS.5 CRORES, TH E MATTER WAS REFERRED TO THE TPO TO DETERMINE THE ARMS LENGTH PRICE. THE TPO VIDE ITS ORDER DATED 21.12.2006 HELD THAT SINCE THERE WAS NO COMPA RABLE AVAILABLE FOR SUCH TRANSACTIONS, THE ISSUE HAS TO BE DECIDED CONS IDERING THE PURPOSE OF THE LOAN, DEBT MARKET CONDITIONS, THIRD PARTY IN TEREST RATE & THE PREVAILING LENDING RATE. THE ARMS LENGTH RATE IS T HE RATE OF INTEREST CHARGED OR WOULD HAVE BEEN CHARGED IN TRANSACTION W ITH OR BETWEEN UNRELATED PARTIES UNDER SIMILAR CIRCUMSTANCES. IT W AS HELD THAT NO INDEPENDENT PARTIES WOULD HAVE GIVEN LOANS AT SUCH A LOW INTEREST AS WAS DONE BY THE TAXPAYER TO ITS ASSOCIATED ENTERPRISE. IT WAS OBSERVED BY THE TPO THAT ALL THE LENDING PUBLIC SECTOR INSTITUTIONS IN INDIA WERE REQUIRED TO FOLLOW THE PRIME LENDING RATE (PLR) WHILE FIXING THE RATE OF INTEREST ON THE LENDING IN INDIAN CONDITIONS. THE PREVAILING PL R OF 10.75% WAS ACCORDINGLY ADOPTED AS THE ARMS LENGTH PRICE OF TH E INTEREST RECEIVABLE FROM THE ASSOCIATED ENTERPRISE. THE INTEREST RECEIV ABLE AT PLR OF 10.75% WAS COMPUTED AT RS.1,43,54,690/- AND ACCORDINGLY TH E DIFFERENCE OF RS.1,15,93,669/- WAS ADJUSTED U/S. 92 CA OF THE ACT . BEFORE THE LD. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 40 CIT(A) THE ASSESSEE SUBMITTED THAT AS PER INTEREST NORMS LIBOR IS CONSIDERED TO BE BENCH MARK FOR THE CHARGING OF I NTEREST . ACCORDINGLY PLR IS NOT A CORRECT TOOL FOR CALCULATING INTEREST IN THE TRANSACTION WITH DRI,USA. ON CONSIDERING OF THE SUBMISSION, THE LD. CIT(A) RE-WORKED OUT THE INTEREST ON THE BASIS OF DEPOSIT @ 7% BY STATIN G AS UNDER :- 10. 3 ON DUE CONSIDERATION, I AGREE WITH THE CONTENTI ON OF THE LD. AR THAT PLR CANNOT BE ADOPTED FOR DETERMINING T HE ARMS LENGTH PRICE OF THE INTEREST RECEIVABLE FROM THE AS SOCIATED ENTERPRISE. PLR IS THE RATE AT WHICH A BANK CHARGES INTEREST TO ITS BORROWERS. THE APPELLANT IS NOT A BANK OR A LEN DING INSTITUTION. IT IS NOT IN THE BUSINESS OF REGULAR L ENDING, SO AS TO CONSIDER & COMPARE WITH A RATE USED BY A LENDING IN STITUTION. HENCE, THE COMPARISON CANNOT BE SAID TO BE BETWEEN TWO IDENTICAL OR NEARLY IDENTICAL PROPERTIES. IN FACT, PLR IS THE RATE AT WHICH THE APPELLANT COULD HAVE BORROWED THE MONE Y. A BASIS FOR AN INCOME CANNOT BE COMPARED WITH A BASIS FOR EXPENDITURE. THE RATE CHARGED BY THE APPELLANT CAN BE COMPARED TO AN INTEREST THAT IT COULD HAVE EARNED O N AN INVESTMENT, SAY A BANK DEPOSIT, WHICH IS ALSO RISK FREE. DURING THE APPEAL PROCEEDINGS, LD. AR WAS ASKED TO FURNISH THE AVERAGE RATE OF INTEREST OF BANK DEPOSITS. THE APPE LLANTS LETTER DATED 15.04.2009 FURNISHED THE REQUIRED DETA ILS SHOWING THAT IT HAD RECEIVED INTEREST ON DEPOSIT MA DE WITH BANKS & PUBLIC COMPANIES AT THE RATE VARYING FROM 5 .95% TO 7.43%, AVERAGE COMING TO 7%. 10.4 AT THE SAME TIME AND ON THE SAME LOGIC, I AGRE E WITH THE CONTENTION OF TPO THAT LIBOR CANT BE ADOPTED AS TH E BASIS TO DETERMINE THE ALP OF INTEREST CHARGED BY APPELLANT FROM ITS AE. THE LONDON INTERBANK OFFERED RATE (LIBOR) IS A DAILY ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 41 REFERENCE RATE BASED ON THE INTEREST RATES AT WHICH BANKS BORROW UNSECURED FUNDS FROM OTHER BANKS IN THE LOND ON WHOLESALE MONEY MARKET (OR INTERBANK MARKET). I ALS O AGREE WITH THE CONTENTION OF THE TPO THAT WHILE DETERMINI NG THE ARMS LENGTH PRICE, IT IS RELEVANT TO CONSIDER WHET HER ANY INDEPENDENT PARTY WOULD HAVE GIVEN LOANS TO AN UNRE LATED PARTY AT THE RATE ON WHICH THE LOAN WAS ADVANCED BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISE. IT IS A FAC T THAT THE APPELLANT COMPANY WOULD NOT HAVE GIVEN A LOAN TO AN UNRELATED PARTY @ 2.7%. IN FACT, THE APPELLANT ITSE LF HAD CHARGED INTEREST @ 6% -6.5% FROM ITS OTHER SUBSIDIA RIES LOCATED IN CHINA, BRAZIL & SOUTH AFRICA IN SUBSEQUE NT YEAR I.E. AY 05-06. 16.3 IT WAS HELD BY ITAT IN THAT YEAR AS UNDER: AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). WE AGREE WITH THE FINDING OF THE LD. CIT(A) THAT PLR CAN NOT BE CONSIDERED AS A BASIS FOR ARRIVING AT RATE AT WHICH ASSESSEE SHOULD HAVE ADVANCED THE FUNDS AS INTERNATIONAL FINANCIAL MARKET WORKS IN A DIFFERENT WAY THAN THE INDIAN MARKET. THERE IS ALSO A BASIS OF ARRIVING AT 7% BY THE CIT(A) BASED ON THE INTEREST RECEIVED ON DEPOSITS MADE WIT H BANKS AND PUBLIC COMPANIES. THEREFORE, CONSIDERING THE FACTS OF THE CASE, WE DO NOT SEE ANY REASON TO ALLOW THE REVENUE CONTENTIONS . ASSESSEE ALSO ACCEPTED THE RATE AT 7% AS IT HAS NOT COME IN CROSS APPEAL ON THE SAME ISSUE. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT (A). THE GROUND IS REJECTED. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 42 16.5 SINCE FACTS ARE SAME, FOLLOWING THE FINDING S IN AY 2004-05 IN ASSESSEES OWN CASE, WE DIRECT THE AO TO MODIFY THE ALP ADJUSTMENT ON THE BASIS OF RATE OF INTEREST RECEIVED ON DEPOSITS MADE WITH BANKS AND PUBLIC COMPANIES, FOR WHICH ASSESSEE ALSO HAS NO OB JECTION. THUS THE GROUND IS ALLOWED PARTLY. 17. IN THE RESULT, ASSESSEE APPEAL IS ALLOWED PAR TLY. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH AUG., 2013. SD/- SD/- (SAKTIJIT DEY ) JUDICIAL MEMBER (B. RAMAKOTAIAH ) ACCOUNTANT MEMBER MUMBAI, DATED: 08/08/2013. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI. ITA NO.1605/H/10 A.Y.06-07 DR. REDDYS LA BORATORIES LTD. 43 S.NO . DETAILS DATE INITIAL S DESIGNATIO N 1 DRAFT DICTATED ON 10/07/,11/7,19/7/1 3 JM/AM 2 DRAFT PLACED BEFORE AUTHOR 10/7, 11/7/, 19/7/13 JM/AM 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVE D BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER 10. DRAFT DICTATION ENCLOSED IN FILE YES