Torrent Pharmaceutical Ltd., Ahmedabad V. DCIT, Circle-4(1)(2), Ahmedabad

ITA 164/AHD/2018

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5106 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 16-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SU RENDRA KUMAR
• Keywords: Gift; Revision of order; Transfer pricing; Business expenditure; Opportunity of being heard; Competent authority; Assessment record; Capital expenditure
• Section: 263; 63; 143(3); 92D; 37(1); 80G

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR ./ I.T.A. NO. 164/AHD/2018 ( ASSESSMENT YEAR : 2014-15) TORRENT PHARMACEUTICALS LTD., TORRENT HOUSE, OFF. ASHRAM ROAD, AHMEDABAD 380009 / VS. DCIT, CIRCLE-4(1)(2), AHMEDABAD ./ ./ PAN/GIR NO. : AAACT5456A ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI VARTIK CHOKSI, A.R. / RESPONDENT BY : SHRI SURENDRA KUMAR, CIT D.R. DATE OF HEARING 04/06/2018 !'# / DATE OF PRONOUNCEMENT 08/08/2018 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE PRINCIPAL COMMISS IONER OF INCOME-TAX-4, AHMEDABAD (PR.CIT IN SHORT), DATED 15.11.2017 WHEREIN ORDER PASSED BY THE ASSESSING OFFICER (AO) UNDER S. ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 2 - 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) DATED 26.12.2016 CONCERNING ASSESSMENT YEAR 2014-15 WAS HELD TO BE E RRONEOUS IN SO FAR AS THE PREJUDICIAL TO THE INTEREST OF THE RE VENUE WITHIN THE MEANING OF SECTION 263 OF THE ACT AND THUS SET ASID E. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE RE ADS AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE ORDER PASSED BY THE LEARNED PR.C.I.T. U/S. 263 OF THE I.T. ACT IS AB IN ITIO VOID BEING BAD IN LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED PR.C.I.T. ERRED IN SETTING ASIDE THE ASSESSMENT ORDER DATED 26 TH DECEMBER, 2016 AND DIRECTING THE ASSESSING OFFICER TO PASS A FRESH ASSESSMENT ORDER. 3. THE ASSESSEE, AS PER GROUNDS OF APPEAL, ESSENTIA LLY CHALLENGES THE FOUNDATION OF JURISDICTION ASSUMED B Y THE PR.CIT UNDER S.263 OF THE ACT AND CONTENDS THAT THE SUBJEC T ASSESSMENT ORDER FRAMED UNDER S. 143(3) OF THE ACT PASSED BY T HE AO CANNOT BE TERMED AS ERRONEOUS AND PREJUDICIAL TO THE INTER EST OF THE REVENUE WHICH IS A CONDITION PRECEDENT FOR USURPTIO N OF REVISIONAL JURISDICTION. 4. THE RELEVANT FACTS IN BRIEF ARE THAT THE RETURN OF THE ASSESSEE WAS SUBJECTED TO SCRUTINY ASSESSMENT FOR AY 2014-15 AND THE ASSESSMENT WAS COMPLETED BY THE AO UNDER S. 143(3) OF THE ACT VIDE ORDER DATED 26.12.2016 WHEREBY THE TOTAL INCOM E OF THE ASSESSEE WAS ASSESSED AT RS.715.01 CRORES AS AGAINS T THE RETURNED INCOME OF RS.584.13 CRORES. THEREAFTER, THE PR.CIT IN EXERCISE OF HIS REVISIONARY POWER, ISSUED SHOW CAUSE NOTICE DAT ED 18.08.2017 UNDER S.263 OF THE ACT REQUIRING THE ASSESSEE TO SH OW CAUSE AS TO ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 3 - WHY ASSESSMENT SO FRAMED U/S.143(3) IS NOT LIABLE T O BE SET ASIDE OR MODIFIED. IT WAS ALLEGED BY THE PR.CIT THAT THE EXAMINATION OF RECORDS REVEALED THAT THE ASSESSMENT ORDER SO PASSE D IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF T HE REVENUE FOR THE REASONS THAT THE AO HAS FAILED TO MAKE ADEQUATE INQ UIRIES IN RESPECT OF VARIOUS ISSUES DISCUSSED IN THE SHOW CAU SE NOTICE AND THE ASSESSMENT ORDER WAS ALLEGEDLY PASSED WITHOUT D UE APPLICATION OF MIND. THE SHOW CAUSE NOTICE ISSUED BY THE PR.CI T UNDER S.263(SUPRA) IS REPRODUCED HEREUNDER FOR THE SAKE O F READY REFERENCE: YOU HAVE DEBITED A TOTAL AMOUNT OF RS.55.14 CR. ON ACCOUNT OF BUSINESS ADVANCEMENT EXPENSES, WHICH HAVE BEEN ALLE GEDLY INCURRED ON GIFTS ITEMS DISTRIBUTED TO VARIOUS PERSONS. OUT OF THIS RS.55.14 CR., YOU HAVE INCURRED AN EXPENDITURE OF RS.24.32 CR. ON GIF T ITEMS EXCEEDING RS.1000/- EACH. ON PERUSAL OF THE RECORDS, IT IS SE EN THAT THE A.O. HAS NOT MADE ANY ENQUIRY AS REGARDS TO WHOM SUCH GIFT I TEMS WERE DISTRIBUTED AND WHAT WAS THE RECORD MAINTAINED. THE A.O. HAS ALSO NOT ENQUIRED AS TO THE PROOF/EVIDENCE OF SUCH DISTRIBUT ION MADE TO VARIOUS STAKE HOLDERS. NON ENQUIRY IN THE MATTER HAS RENDER ED THE IMPUGNED ORDER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. II) YOU HAVE SHOWN A TURNOVER OF RS.52,126.83 LAKH FROM YOUR BADDI UNIT AND SHOWN A PROFIT OF RS.12,296.55 LAKH. THE A .O. HAS FAILED TO APPLY HIS MIND TO THE ISSUE AND HAS ALSO FAILED TO MAKE ANY MEANINGFUL ENQUIRY AS TO WHAT KIND OF MEDICINES WERE BEING MAN UFACTURED THERE; WHETHER IT WAS API OR WHETHER IT WAS FORMULATION; F ROM WHERE DID THIS PLANT GET THE CHEMISTRY OF MOLECULES IF API HAS BEE N MANUFACTURED? IF THE SAID UNIT WAS FDA/OTHER REGULATORY AUTHORITIES APPROVED? AND, IF YES, WHO INCURRED EXPENSES FOR SUCH APPROVALS? WHET HER BADDI UNIT WAS MANUFACTURING GENERIC MEDICINES OR BRANDED GENE RICS? IF BRANDED, WHETHER THESE WERE OLD BRANDS BELONGING TO THE COMP ANY? WHAT KIND OF EXPENSES HAD BEEN INCURRED ON ACCOUNT OF BUSINESS A DVANCEMENT (IN INDIA & ABROAD) AND OTHER RELATED EXPENSES. WHAT AM OUNT OF EXPENDITURE WAS DEBITED TO BADDI UNIT ON ACCOUNT OF SALARY/REMUNERATION PAID TO THE HIGHER MANAGEMENT A ND OTHER ADMINISTRATIVE EXPENSES? IF THE MEDICINES WERE EXPO RTED, WHAT KIND AND HOW MUCH OF EXPENDITURE WAS INCURRED AND DEBITED TO THE BOOKS OF BADDI UNIT ON ACCOUNT OF EXPORT OF SUCH FORMULATION S. SIMILAR IS THE CASE WITH YOUR SIKKIM UNIT. NON APPLICATION OF MIND IN THIS MATTER BY THE A.O. HAS RENDERED THE IMPUGNED ORDER AS ERRONEO US AND PREJUDICIAL TO THE INTEREST OF REVENUE ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 4 - III) YOU HAVE DEBITED A TOTAL EXPENSES OF RS. 137,4 1 CRORES ON ACCOUNT OF R & D EXPENSES ON WHICH A WEIGHTED DEDUC TION HAS BEEN CLAIMED. THE A.O. HAS NOT ENQUIRED AS TO WHETHER SE PARATE EXPENSES HAVE BEEN INCURRED BY YOU ON ACCOUNT OF QUALITY CON TROL & REGULATORY APPROVALS OR WHETHER THEY HAVE BEEN GROUPED INTO R & D EXPENSES. NON APPLICATION OF MIND IN THIS MATTER BY THE A.O. HAS RENDERED THE IMPUGNED ORDER AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. YOU HAVE CLAIMED AN EXPENDITURE OF RS475,32 LAKHS O N ACCOUNT OF PATENT EXPENSES/PATENT RELATED EXPENSES OUTSIDE IND IA AS ELIGIBLE FOR WEIGHTED TAX U/S.35 (2AB) OF THE I.T. ACT, THE EXPL ANATION INSERTED UNDER CLAUSE 1D TO SEC.35(2AB) STATED THAT; EXPLANATION - FOR THE PURPOSED OF THIS CLAUSE, 'EXP ENDITURE ON SCIENTIFIC RESEARCH', IN RELATION TO DRUGS AND PHAR MACEUTICALS, SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL , OBTAINING APPROVAL FROM ANY REGULATORY AUTHORITY UNDER ANY CENTRAL, ST ATE OR PROVINCIAL ACT AND FILING AN APPLICATION FOR A PATENT UNDER TH E PATENTS ACT, 1970 (39 OF 1970). THUS, THE EXPENDITURE INCURRED IN RELATION TO PATEN TS NOT RELATING TO THE PATENT ACT, 1970 WOULD NOT BE ELIGIBLE FOR SUCH DED UCTION, A/ON APPLICATION OF MIND IN THIS MATTER BY THE A.O. HAS RENDERED THE IMPUGNED ORDER AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. IV) YOU HAVE CLAIMED AN EXPENDITURE OF RS. 1214.01 LAKHS ON CLINICAL RESEARCH. THE A.O. HAS FAILED TO APPLY HIS MIND AND NOT MADE ANY ENQUIRIES IN THIS REGARD AS TO THE NATURE AND D ETAILS OF THE EXPENSES INCURRED - AS TO WHOM PAID AND FOR WHAT PURPOSES? H E HAS ALSO NOT ENQUIRED IF SUCH CLINICAL TRIALS WERE MADE FOR THE PURPOSE OF REGULATORY APPROVALS OR FOR R & D WORK, WHICH WOULD HAVE AFFEC TED THE DEDUCTION AVAILABLE U/S.35 (2AB) OF THE I.T. ACT. A/ON APPLIC ATION OF MIND AND NON ENQUIRY IN THIS REGARD HAS RENDERED THE IMPUGNED AS SESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E. V) YOU HAVE ALSO CLAIMED VARIOUS EXPENSES ON ACCOUN T OF LABOUR AND JOB WORK CHARGES, PROFESSIONAL FEES, LEGAL EXPENSES AND OTHER SALARY EXPENSES AS PART OF R&D EXPENSES. THE A.O. HAS NOT MADE ANY MEANINGFUL ENQUIRY WITH RESPECT TO THESE EXPENSES A S TO DETERMINE WHETHER ALL SUCH EXPENSES WERE RELATED TO R&D BECAU SE OF WHICH THE IMPUGNED ORDER HAS BEEN RENDERED ERRONEOUS AND PREJ UDICIAL TO THE INTEREST OF REVENUE. VI) YOU HAVE CLAIMED EXPENSES ON ACADEMIC/SCIENTIFI C GET TOGETHER OF RS.9.44 CR., SALES PROMOTION EXPENSES OF RS.19,57 C RORES, BUSINESS ADVANCEMENT EXPENSES OF RS.1.48 CR. (OTHER THAN ON DOMESTIC). THE A.O. HAS NOT MADE ANY ENQUIRY AS REGARDS THE INCURR ING OF SUCH EXPENSES NOR HAS HE APPLIED HIS MIND AS TO WHETHER SUCH OR PART OF SUCH EXPENSES FELL FOUL OF LOCAL REGULATIONS PREVAILING IN THOSE COUNTRIES REGARDING GIFTING/OTHER PAYMENTS/EXPENSES INCURRED ON DOCTORS AND MEDICAL PRACTITIONERS. FURTHER, THE A.O, HAS ALSO N OT EXAMINED IF SUCH ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 5 - EXPENSES INCURRED WERE RIGHTFULLY BELONGING TO THE ASSESSEE COMPANY AND NOT ITS FOREIGN SUBSIDIARIES WHICH WERE ALSO EN GAGED IN MARKETING OF FORMULATIONS IN OTHER COUNTRIES. NON APPLICATION OF MIND AND NON ENQUIRY IN THIS REGARD HAS RENDERED THE IMPUGNED AS SESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE.' 4.1 THE CONTROVERSY EMERGING FROM THE SHOW CAUSE NO TICE IS BROADLY SUMMARIZED AS UNDER: (I) THE ASSESSEE DEBITED A SUM OF RS.55.14 CRORES ON ACCOUNT OF BUSINESS ADVANCEMENT EXPENSES ALLEGEDLY INCURRED ON GIFT ARTICLES DISTRIBUTED TO VARIOUS PERSONS. THE ASSESS EE WAS INTIMATED THAT THE AFORESAID AMOUNT INCLUDED RS.24. 32 CRORES ON GIFT ITEMS EXCEEDING RS.1000 EACH. THE LEARNED PR. CIT ALLEGED THAT THE ASSESSING OFFICER DID NOT MAKE INQUIRY REG ARDING THE PERSONS TO WHOM GIFTS WERE GIVEN AND THE RECORD MAI NTAINED FOR THE SAME. (II) THE ASSESSEE HAS SHOWN TURNOVER OF RS.52126.83 LACS FROM BADDI UNIT YIELDING PROFIT OF RS.12296.55 LACS AND THE AS SESSING OFFICER FAILED TO APPLY HIS MIND TO THIS ISSUE AND TO MAKE MEANINGFUL INQUIRY REGARDING THE MANUFACTURING PROCESS, AND GO ODS BEING MANUFACTURED. THE LEARNED PR. CIT HAS ALLEGED THAT SIMILAR IS THE POSITION WITH REGARD TO SIKKIM UNIT. (IV) THE ASSESSEE HAS DEBITED EXPENDITURE OF RS. 13 7.41 CRORES FOR R & D EXPENSES ON WHICH WEIGHTED DEDUCTION HAS BEEN C LAIMED. HE HAS OBSERVED THAT THE ASSESSING OFFICER HAS NOT INQ UIRED AS TO WHETHER SEPARATE EXPENSES HAVE BEEN INCURRED ON ACC OUNT OF QUALITY CONTROL AND REGULATORY APPROVALS OR WHETHER THESE EXPENSES ARE GROUPED UNDER R & D EXPENSES. THE LEAR NED PR. CIT ASSUMED THAT THERE WAS NON-APPLICATION OF MIND ON THE PART OF THE ASSESSING OFFICER ON THIS ISSUE. (IV) THE ASSESSEE HAS CLAIMED CLINICAL RESEARCH EXP ENDITURE OF RS. 1214.01 LACS AND THE ASSESSING OFFICER DID NOT APPL Y HIS MIND AND DID NOT MAKE INQUIRY REGARDING THE NATURE AND D ETAILS OF THE EXPENSES AND THE PURPOSE OF THE EXPENDITURE VIS-A-V IS DEDUCTION AVAILABLE U/S.35(2AB) OF THE ACT. (V) THE ASSESSEE HAS CLAIMED VARIOUS EXPENSES FOR LABOUR, JOB-WORK, PROFESSIONAL FEES, LEGAL EXPENSES AND SALARY EXPENS ES AS PART OF R & D EXPENSES AND THE ASSESSING OFFICER DID NOT MA KE ANY MEANINGFUL INQUIRY WITH REGARD TO THESE EXPENSES. (VI) THE ASSESSEE CLAIMED EXPENSES OF RS.9.44 CRORE S ON ACADEMIC / SCIENTIFIC GET-TOGETHER, SALES PROMOTION EXPENSES O F RS. 19.57 CRORES AND BUSINESS ADVANCEMENT EXPENSES OF RS.1.48 CRORES (OTHER THAN DOMESTIC EXPENSES). THE LEARNED PR. CIT ASSUMED THAT THE ASSESSING OFFICER DID NOT MAKE INQUIRY REG ARDING INCURRING OF SUCH EXPENSES AND THERE WAS NO APPLICA TION OF MIND ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 6 - AS TO WHETHER ANY PART OF SUCH EXPENDITURE VIOLATED THE REGULATIONS PREVAILING IN THOSE COUNTRIES WHERE EXP ENSES WERE INCURRED. 4.2 IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE FILED A DETAILED REPLY DATED 21.09.2017 TO DEMONSTRATE THAT THE ALLEGATIONS MADE IN THE SHOW CAUSE NOTICE HAS, IN F ACT, BEEN DEALT WITH AFTER MAKING PROPER INQUIRIES DURING THE COURS E OF ASSESSMENT PROCEEDINGS AND A VERY LENGTHY ASSESSMEN T ORDER RUNNING INTO 102 PAGES WAS PASSED BY THE AO IN THIS REGARD. IT WAS ALSO POINTED OUT THAT THE RETURNED INCOME WAS A CCOMPANIED BY THE AUDITED FINANCIAL STATEMENTS TOGETHER WITH ALL STATUTORY ANNEXURES AND NOTES. THE BOOKS OF ACCOUNTS WERE AL SO PRODUCED BEFORE THE AO IN THE COURSE OF THE ASSESSMENT PROCE EDINGS. IT WAS FURTHER POINTED OUT THAT THE AO MADE VARIOUS ADDITIONS/DISALLOWANCES OF SUBSTANTIAL NATURE WHILE ACCEPTING THE REMAINING PART AFTER THOROUGH SCRUTINY AND APPLICAT ION OF MIND. 4.3 FOR BETTER APPRECIATION OF THE VERSION OF THE A SSESSEE BEFORE THE REVISIONAL COMMISSIONER, THE RELEVANT PART OF T HE WRITTEN REPLY DEALING WITH SHOW CAUSE NOTICE IS REPRODUCED HEREUNDER: '5.1 REGARDING BUSINESS ADVANCEMENT EXPENSES: I. VIDE PARA NO. (I) OF THE ABOVE REFERRED NOTICE, YOUR HONOR HAS STATED THAT NON INQUIRY BY THE ASSESSING OFFICER IN THE MATTER OF BUSINESS ADVANCEMENT EXPENSES HAS RENDERED THE IMPU GNED ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE R EVENUE. RELEVANT PARA OF THE SAID NOTICE IS REPRODUCED AS U NDER: 'I). YOU HAVE DEBITED A TOTAL AMOUNT OF RS, 55,14 C R. ON ACCOUNT OF BUSINESS ADVANCEMENT EXPENSES, WHICH HAV E BEEN ALLEGEDLY INCURRED ON GIFTS ITEMS DISTRIBUTED TO VA RIOUS PERSONS. OUT OF THIS RS. 55.14 CR., YOU HAVE INCURRED ON EXP ENDITURE OF RS. 24.32 CR. ON GIFT ITEMS EXCEEDING RS. 1,000/- E ACH. ON PERUSAL OF THE RECORDS, IT IS SEEN THAT THE A.O. HA S NOT MADE ANY INQUIRY AS REGARDS TO WHOM SUCH GIFT ITEMS WERE DIS TRIBUTED AND ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 7 - WHAT WAS THE RECORD MAINTAINED. THE A.O. HAS ALSO N OT ENQUIRED AS TO THE PROOF/EVIDENCE OF SUCH DISTRIBUTION MADE TO VARIOUS STAKE-HOLDERS. NON INQUIRY IN THE MATTER HAS RENDER ED THE IMPUGNED ORDER ERRONEOUS AND PREJUDICIAL TO THE INT EREST OF REVENUE.' II. IN THIS CONNECTION, THE ASSESSEE COMPANY SUBMIT S FOLLOWING DETAILS IN RESPECT OF RECORDS AVAILABLE WITH THE AS SESSING OFFICER, INQUIRIES MADE BY HIM AND REPLIES /DETAILS SUBMITTE D BY THE ASSESSEE COMPANY. (A). VIDE SUBMISSION DATED 17.06.2016 THE ASSESSEE COMPANY SUBMITTED COPY OF AUDIT REPORT. BASED ON THE VERIFI CATION OF THE FINANCIAL STATEMENTS, THE ASSESSING OFFICER ASKED T O PROVIDE BREAK-UP OF SELLING, PUBLICITY AND MEDICAL LITERATU RE EXPENSES AMOUNTING TO RS. 279.20 CRORES AS APPEARING IN NOTE NO. 21 'OTHER EXPENSES' OF PROFIT & LOSS ACCOUNT ALONG WIT H EXPLANATION FOR NATURE OF EXPENSES. IN RESPONSE TO THAT THE ASSESSEE COMPANY SUBMITTED THE DETAILED BREAKUP OF SELLING AND PUBLICITY EXPENSES INCURRED FOR DOMESTIC MARKET AND OTHER THAN DOMESTIC MARKET, DETAILED EXP LANATION FOR NATURE OF SUCH EXPENDITURE ALONG WITH BREAK-UP OF B USINESS ADVANCEMENT EXPENSES INTO ITEMS COSTING MORE THAN R S. 1000/- AND THOSE LESS THAN RS. 1,000/- VIDE SUBMISSION DAT ED 10.12.2016. COPY OF THE SAID REPLY IS ANNEXED HEREW ITH VIDE ANNEXURE-1(A). (B). ON THE BASIS OF VERIFICATION AND EXAMINATION O F DETAILS SUBMITTED VIDE ABOVE MENTIONED SUBMITTED DATED 10.12.2016. TH E ASSESSEE COMPANY WAS ASKED TO SHOW CAUSE AS TO WHY EXPENSES ACCOUNTED UNDER THE HEAD OF BUSINESS ADVANCEMENT EXPENSES AND DOCTORS' SPONSORSHIP, WHICH ARE GROUPED UNDER SELLING AND DI STRIBUTION EXPENSES, SHOULD NOT BE DISALLOWED IN VIEW OF THE C BDT CIRCULAR NO. 5/2012 DATED 01-08-2012 WHICH PROVIDES FOR DISA LLOWANCE OF DEDUCTION PERTAINING TO FREEBIES GIVEN TO MEDICAL P RACTITIONERS. IN RESPONSE TO THAT THE ASSESSEE COMPA NY SUBMITTED FOLLOWING DETAILS VIDE SUBMISSION DATED / 15.12.2016, COPY OF WHICH IS ANNEXED HEREWITH VIDE ANNEXURE-1(B). (I). NOTE ON THE NATURE OF SUCH EXPENSES - PARA 1.1 ON PAGE 1 AND 1.2 ON PAGE 4 (II). TYPES OF GIFT ITEMS GIVEN - PARA 1.1 (B) ON PAGE 2 (III). CATEGORY OF VARIOUS PERSONS TO WHOM SUCH GIF T ITEMS ARE DISTRIBUTED - PARA 1.1(C) ON PAGE 2 (IV). HOW SUCH GIFT ITEMS ARE DISTRIBUTED TO VARIOU S STAKEHOLDERS BY THE ASSESSEE COMPANY - PARA 1.1 (D) ON PAGE 3 ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 8 - (V). EXPLANATION REGARDING MAINTAINING RECORDS IN R ESPECT OF SUCH EXPENSES - PARA 1.1(D) ON PAGE 3; AND (VI). JUSTIFICATION FOR ALLOWABILITY OF THE SAID EXPENSES VIZ-A-VIZ CIRCULAR NO. 5/2012 - PARA 2 ON PAGE 4 . III. THE HEARINGS ON THE ABOVE MATTER WERE TAKEN UP BY THE ASSESSING OFFICER ON A NUMBER OF OCCASIONS. OVER AND ABOVE TH E VERIFICATION LEDGER ACCOUNTS, THE ASSESSING OFFICER HAS ALSO VIEWED CERTAIN INVOICES AND/BILLS, WHICH WERE MADE AVAILABLE DURING THE COURSE OF THE PROCEEDINGS. BASED ON SUCH SCRUTINY OF THE AFORESAID BILLS AND R ECORDS OF THE ASSESSE COMPANY AND AFTER DETAILED VERIFICATION OF THE BILLS AND INVOICES ON RANDOM CHECK BASIS, THE ASSESSING OFFIC ER HAS MADE DISALLOWANCE OF 10% OF THE THE ENTIRE EXPENSES OF R S. 55.14 CRORES, AFTER SATISFYING HIMSELF OF THE FACT THAT T HE EXPENSES ARE INCURRED ALSO FOR THE PERSONS OTHER THAN DOCTORS AN D MEDICAL PROFESSIONALS SUCH AS ASSOCIATES, BUSINESS ASSOCIAT ES, SUPPLIERS AND SUCH OTHER PROFESSIONALS, ETC. AS ALREADY DISCU SSED IN THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER. IV. IN THIS CONNECTION, IT IS ALSO IMPORTANT TO NO TE THAT SMALL ITEMS COSTING BELOW RS.1000/- IN EACH CASE ARE ALSO OF SU BSTANTIAL AMOUNT AND THE BALANCE OF THE TOTAL EXPENDITURE COM ES TO RS.24.32 CRORES. FURTHER, IT IS SUBMITTED THAT THE SMALL ITEMS COSTING BELOW RS. 1000/- IN EACH CASE, GIVEN AS A M EMENTO, WOULD NOT BE HIT BY THE CBDT CIRCULAR NO. 5/2012. E VEN IF THEY ARE GIVEN TO MEDICAL PRACTITIONERS (AS PER MCI REGU LATION AMENDED BY NOTIFICATION DATED 01-02-2016). THEREFOR E, IT CAN BE SAID THAT THE ASSESSING OFFICER HAS MADE DISALLOWAN CE OF RS. 5,51,37,427 OUT OF EXPENDITURE OF RS. 24.32 CRORES, BEING EXPENDITURE ON ITEMS EXCEEDING RS. 1000/- IN EACH C ASE. APART FROM ABOVE , THE ASSESSING OFFICER HAS ALSO MADE DISALLOWANCE OF ENTIRE EXPENDITURE OF RS. 25,99,87, 036, BEING EXPENSES ON ACADEMIC/ SCIENTIFIC GRANTS TO DOCTORS ETC. V. THEREFORE, THE OBSERVATION OF YOUR HONOR THAT THE A SSESSING OFFICER HAS NOT MADE ANY ENQUIRY AS REGARDS TO WHOM SUCH GIFTS ITEMS WERE DISTRIBUTED AND WHAT WAS THE RECORD MAIN TAINED, OR AS TO THE PROOF / EVIDENCE OF SUCH DISTRIBUTION MADE T O VARIOUS STAKEHOLDERS, IS, APPARENTLY, ON INCORRECT UNDERSTA NDING OF THE FACTS. THE ASSESSEE COMPANY ALSO SUBMITTED LIST OF THE ITE MS DISTRIBUTED ALONG WITH THE BREAK-UP OF ITEMS COSTING MORE THAN RS. 1000 AND LESS THAN THAT. THIS INDICATES THAT ADEQUATE RECORD S HAVE BEEN MAINTAINED BY THE ASSESSEE COMPANY, AS TO THE EXPEN DITURE INCURRED BY IT FOR THE SAID EXPENSE AND ON PRODUCTS DISTRIBUTED BY IT. ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 9 - IT WAS ALSO EXPLAINED THAT THESE ITEMS ARE NOT DIST RIBUTED ON ONE TO ONE BASIS BY THE ASSESSEE COMPANY ITSELF, RATHER THESE ITEMS ARE GENERALLY HANDED OVER TO THE MARKETING STAFF AN D OTHER EMPLOYEES OF THE COMPANY, WHO IN-TURA DISTRIBUTE TH EM TO THE RESPECTIVE PERSONS WHOM THEY HAVE BEEN DIRECTLY INT ERACTING / DEALING WITH. THESE ITEMS ARE DISTRIBUTED TO THE FO LLOWING PERSONS: * DISTRIBUTORS, * WHOLESALERS, * RETAILERS, * COMMISSION AGENTS, * STOCKIEST, * PHARMACIES, * EMPLOYEES, * PROFESSIONAL CONSULTANTS, * BANKERS, * OTHER FINANCERS, * LAWYERS * PERMANENT SUPPLIERS, * HOSPITALS, DOCTORS, OTHERS PEOPLE CONNECTED WITH MEDICAL FIELD, * INDEPENDENT SCIENTISTS AND * SCIENTIFIC AND RESEARCH ASSOCIATIONS ETC. IT IS SUBMITTED THAT THE ASSESSEE COMPANY MAINTAINS THE RECORDS PERTAINING TO SUCH EXPENSES, HOWEVER, IT IS NOT POS SIBLE TO MAINTAIN THE LIST OF THE PERSONS TO WHOM THESE ITEM S HAVE BEEN DISTRIBUTED BY THE MARKETING STAFF AND OTHER EMPLOY EES OF THE COMPANY, ESPECIALLY CONSIDERING THE NATURE, VALUE A ND VOLUME OF SUCH PRODUCTS. VI. ON THE BASIS OF ABOVE, IT CAN BE SAID THAT IT IS NOT A CASE THAT THERE IS NON-ENQUIRY ON THE PART OF THE ASSESSING O FFICER IN THIS MATTER AS OBSERVED BY YOUR HONOR, BUT THE ASSESSING OFFICER HAS MADE IN-DEPTH INQUIRIES REGARDING THE BUSINESS ADVA NCEMENT EXPENSES, WHICH WAS DULY REPLIED BY THE ASSESSEE CO MPANY DURING THE COURSE OF ASSESSMENT PROCEEDINGS . THE ASSESSING OFFICER HAS ALSO MADE CERTAIN DISALLOWANCE AS MENTI ONED IN PARA 5.1(III) (SUPRA) FOR THIS MATTER IN HIS ASSESSMENT ORDER AT PARA 6 ON PAGE NO. 20-21 . FURTHER, AS STATED ABOVE, THE ASSESSING OFFICER HAS ALSO MADE DISALLOWANCE OF ENTIRE EXPENDITURE OF RS. 25.99.87. 036/-. BEING EXPENSES ON ACADEMIC / SCIENTIFIC GRANTS TO DOCTORS ETC. 5.2 REGARDING BUSINESS OF BADDI AND SIKKIM UNITS : I. VIDE PARA NO. (II) OF THE ABOVE REFERRED NOTICE, YOUR HONOR HAS OBSERVED THAT THE ASSESSMENT ORDER PASSED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E BY STATING THAT AO HAS FAILED TO MAKE MEANINGFUL INQUIRY AS TO : ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 10 - - WHAT KIND OF MEDICINES BEING MANUFACTURED THERE ( WHETHER API OR FORMULATIONS) - SOURCE OF GETTING CHEMISTRY OF MOLECULES, IF API IS MANUFACTURED - SOURCE OF FORMULA / COMPOSITION, IF F ORMULATION IS MANUFACTURED - WHETHER THE SAID UNITS REQUIRED APPROVAL FROM PDA / OTHER REGULATORY AUTHORITIES AND IF YES, WHO INCURRED EXP ENSES FOR SUCH APPROVALS? - WHETHER UNIT IS MANUFACTURING GENERIC OR BRANDED MEDICINES? IF BRANDED, WHETHER THESE OLD BRANDS BEL ONG TO COMPANY? - EXPENSES INCURRED FOR BUSINESS ADVANCEMENT (IN IN DIA AND ABROAD) - EXPENDITURE DEBITED TO BADDI AND SIKKIM UNIT FOR SALARY / REMUNERATION TO HIGHER MANAGEMENT AND ADMINISTRATIV E EXPENSES - IF MEDICINES WERE EXPORTED, EXPENDITURE INCURRED AND DEBITED TO THE BOOKS OF BADDI AND SIKKIM UNIT FOR E XPORT OF SUCH FORMULATIONS. II. IN THIS CONNECTION, THE ASSESSEE COMPANY SUBMIT S THE FOLLOWING DETAILS ABOUT THE RECORDS AVAILABLE WITH ASSESSING OFFICER, INQUIRIES MADE BY HIM AND REPLIES AND DETAILS SUBMI TTED BY THE ASSESSEE COMPANY: (A) AS PER THE PROVISIONS OF SECTION 80IC (7) AND 80IE(6) READ WITH SECTION 80IA (7), EVERY UNDERTAKING CLAIMING DEDUCTION UNDER THE SAID PROVISIONS IS REQUIRED TO GET ITS ACCOUNTS AUDITED BY A CHARTERED ACCOUNTANT AND FURN ISH THE REPORT OF SUCH AUDIT IN FORM NO. 10CCB ALONG WI TH THE RETURN OF INCOME. THE ASSESSEE COMPANY HAD MAINTAINED SEPA RATE BOOKS OF ACCOUNTS OF ITS BADDI UNIT AND SIKKIM UNIT AND THE SAID BOOKS OF ACCOUNT ARE AUDITED BY A CHARTERE D ACCOUNTANT AS REQUIRED UNDER THE ABOVE PROVISIONS. THE COPY OF SUCH REPORTS ALONG WITH THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF BADDI UNIT AND SIKKIM UNIT WERE ALSO AVAILABLE WITH THE ASSESSING OFFICER. (B) FURTHER, VIDE SUBMISSION DATED 17.06.2016, THE ASSESSEE COMPANY SUBMITTED COPY OF ACKNOWLEDGEMENT OF RETURN OF INCOME ALONG WITH THE STATEMENT OF TOTAL INCOME, WH EREIN THE CLAIM MADE BY THE ASSESSEE COMPANY U/S. 80IC AN D 80IE WAS VERIFIABLE. ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 11 - (C) BASIS OF ALLOCATION OF EXPENSES: I. ON THE BASIS OF VERIFICATION OF ABOVE DOCUMENTS / DETAILS AS MENTIONED IN PARA 5.2 (II) (A) & (B) AND EXPLANATIONS PROVIDED DURING THE COURSE OF HEARING, THE ASSESSING OFFICER ASKED THE ASSESSEE COMPANY TO PROVIDE THE DETAILS REGARDING EXPENDITURE DEBITED T O P&L ACCOUNT AND THE BASIS OF ALLOCATION OF EXPENSES TO BADDI AND SIKKIM UNIT. IN THIS CONNECTION, THE ASSESSEE COMPANY EXPLAINED THAT ALL MANUFACTURING & OTHER DIRECT EXPENSES INCURRED FOR THE BADDI AND SIKKIM UNITS HAVE BEEN ACCOUNTED DIRECTLY IN BADDI AND SIKKIM UNIT'S BOOKS OF ACCOUNT RESPECTIVELY AND EXPENSES WHICH ARE INCURRED IN COMMON FOR BADDI, SIKKIM & OTHER UNITS OF COMPANY ARE ALLOCATED ON THE SYSTEMATIC BASIS AS EXPLAINED IN THE SAID SUBMISSION DATED 10.12.2016 , COPY OF WHICH IS ANNEXED HEREWITH VIDE ANNEXURE-2(A) II. ON THE BASIS OF VERIFICATION OF THE ABOVE SUBMISSIONS, ASSESSING OFFICER FURTHER ASKED THE ASSESSEE COMPANY TO EXPLAIN THAT: > WHY THE ADMINISTRATIVE EXPENSES SHOULD NOT BE ALLOCATED ON THE BASIS OF TURNOVER RATIO OF BADDI & SIKKIM UNIT, INSTEAD OF ALLOCATION OF SUCH EXPENSES MADE BY THE ASSESSEE COMPANY ON THE BASIS OF NUMBER OF EMPLOYEES; > WHY THE DONATION SHOULD NOT BE ALLOCATED TO BADD I & SIKKIM UNIT; > TO JUSTIFY THE BASIS OF ALLOCATION OF R & D EXPENSE S (DEVELOPMENT COST) TO BADDI & SIKKIM UNIT; AND > EXPLAIN AS TO WHY THE DISCOVERY COST OF R & D AN D CAPITAL EXPENDITURE ON R & D ARE NOT ALLOCATED TO BADDI AND SIKKIM UNITS IN RESPONSE TO THIS, THE ASSESSEE COMPANY SUBMITTED ITS DETAILED EXPLANATION VIDE THREE REPLIES FILED ON 13 .12.2016 ON EACH OF THE QUESTION RAISED BY THE ASSESSING OFF ICER. COPIES OF THOSE REPLIES ARE ANNEXED HEREWITH VIDE ANNEXURE-2(B)(I), 2(B)(II) AND 2(B)(III). (D) CLAIM FOR DEDUCTION U/S. 80IC AND 80IE OF TH E ACT: FROM THE COPY OF FORM 10CCB SUBMITTED BY THE ASSESS EE COMPANY, THE ASSESSING OFFICER VERIFIED THE BASIC D ETAILS, ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 12 - REGARDING ELIGIBILITY OF CLAIM U/S. 80IC AND 80IE O F THE ACT VIZ. A. LOCATION OF THE UNDERTAKING, B. COMMENCEMENT OF COMMERCIAL PRODUCTION, C. ARTICLES MANUFACTURED OR PRODUCED I.E. PHARMACEUTICAL PRODUCTS (SCHEDULE XIV, PART C, SR. NO. 12) ETC. THEREAFTER, THE AO ASKED THE ASSESSEE COMPANY TO PR OVIDE THE DETAILS OF OTHER OPERATING INCOME OF BADDI & SI KKIM UNIT AND TO EXPLAIN ITS ELIGIBILITY FOR CLAIM U/S. 80IC AND 80IE OF THE ACT RESPECTIVELY. IN RESPONSE TO THE SAME THE ASSESSEE COMPANY SUBMIT TED EXPLANATION FOR ELIGIBILITY OF CLAIM ON ACCOUNT OF OTHER OPERATING INCOME U/S. 80IC AND 80IE OF THE ACT. COP Y OF THE SAID SUBMISSIONS DATED 14.12.2016 AND 15.12.201 6 IS ATTACHED HEREWITH VIDE ANNEXURE-2(C) & 2(D) RESPECTIVELY. III. AFTER CONSIDERING THE VARIOUS SUBMISSIONS MADE BY THE ASSESSEE COMPANY AND ON THE BASIS OF VARIOUS POINTS DISCUSSED DURING THE COURSE OF ASSESSMENT PROCEEDIN GS, THE ASSESSING OFFICER HAS IN HIS ASSESSMENT ORDER MADE FOLLOWING ADJUSTMENTS: - REALLOCATED THE EXPENDITURE IN THE NATURE OF ADMINISTRATIVE EXPENSES AND THERE BY REDUCED THE AMOUNT ELIGIBLE FOR THE CLAIM OF DEDUCTION U/S. 80I E OF THE ACT BY AN AMOUNT OF RS. 27,74,99,662/-, (SINCE, THE ALLOCATION MADE BY THE ASSESSEE COMPANY TO BADDI UNIT WAS HIGHER THAN THE AMOUNT WORKED OUT BY ASSESSING OFFICER, NO ADJUSTMENT WAS MADE TO INCREASE THE AMOUNT ELIGIBLE FOR CLAIM OF DEDUCTION U/S. 80IC OF THE ACT) - PARA NO. 19 AT PAGE NO. 77-79 OF THE ASSESSMENT ORDER ; - REJECTED THE ALLOCATION MADE BY THE ASSESSEE COMPANY IN RESPECT OF DEVELOPMENT COST RELATED TO R&D CENTER AND REALLOCATED THE SAME ON THE BASIS OF TOTAL TURNOVER RATIO, THEREBY REDUCED THE AMOUNT ELIGIBLE FOR CLAIM OF DEDUCTION U/S. 80IC AND U/S. 80IE OF THE ACT BY AN AMOUNT OF RS. 1,01,69,860/- AND RS. 18,95,26,218/- FOR BADDI & SIKKIM UNIT RESPECTIVELY - PARA NO. 15&16 AT PAGE NO. 54-59 OF THE ASSESSMENT ORDER : - ALLOCATED THE CAPITAL EXPENDITURE AND DISCOVERY COST OF R&D CENTRE TO BADDI & SIKKIM UNIT, REJECTING THE CONTENTION OF THE ASSESSEE COMPANY THAT NO SUCH ALLOCATION SHOULD BE MADE, THEREBY ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 13 - REDUCED THE AMOUNT ELIGIBLE FOR CLAIM OF DEDUCTION U/S. 80IC AND U/S. 80IE OF THE ACT BY AN AMOUNT OF RS. 17,83,57,712/- AND RS. 21,86,59,796/- FOR BADDI & SIKKIM UNIT RESPECTIVELY - PARA NO. 15&16 AT PAGE NO. 54-59 OF THE ASSESSMENT ORDER : - REDUCED THE AMOUNT ELIGIBLE FOR DEDUCTION ON ACCOUNT OF OTHER OPERATING INCOME CLAIMED BY THE ASSESSEE COMPANY U/S. 80IC AND 80IE OF THE ACT BY AMOUNT OF RS.6,97,68,075/- AND RS. 30,81,029/- RESPECTIVELY - PARA NO. 9&22-23 AT PAGE NO. 28-38 & 85-99 OF THE ASSESSMENT ORDER: - REDUCED THE CLAIM OF DEDUCTION U/S. 80G OF THE AC T BY RS. 1,73,65,884/- AND 80GGB OF THE ACT BY RS. 1,90,25,206/- BY ALLOCATING THE SAID DONATIONS TO BADDI & SIKKIM UNIT - PARA NO. 18 AT PAGE NO. 73-77 OF THE ASSESSMENT ORDER. THE AMOUNT OF EXPENSES / DONATION ALLOCATED BY THE ASSESSEE COMPANY AND ADJUSTMENT MADE BY THE ASSESSI NG OFFICER TO EXPENSE AND THE OTHER INCOME CLAIMED BY THE ASSESSEE COMPANY U/S 80IC / 80IE AND THE AMOUNT ALL OWED BY THE ASSESSING OFFICER ARE SUMMARIZED AS UNDER. PARTICULARS DISALLOWANC ES MADE IN RELATION TO BADDI UNIT DISALLOWANCE S MADE IN RELATION TO SIKKIM UNIT REALLOCATION OF ADMINISTRATIVE EXPENSES 27,74,99,662 REALLOCATION OF DEVELOPMENT COST OF R&D 1,01,69,860 18,95,26,218 ALLOCATION OF DISCOVERY COST OF R&D 13,48,79,464 16,53,57,112 ALLOCATION OF CAPITAL EXP. OF R&D 4,34,78,248 5,33,02,684 EXCLUSION OF OTHER INCOME FROM ELIGIBLE PROFIT 6,97,68,075 30,81,029 DEDUCTION CLAIMED U/S. 80G OUT OF DONATION ALLOCATED TO ELIGIBLE UNIT 78,30,043 95,35,841 DEDUCTION CLAIMED U/S. 80GGB OUT OF 85,78,209 1,04,46,997 ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 14 - DONATION ALLOCATED TO ELIGIBLE UNIT TOTAL 27,47,03,899 70,87,49,543 ON THE BASIS OF ABOVE TABLE, IT CAN BE SEEN THAT TH E ASSESSING OFFICER HAS, AFTER THOROUGH EXAMINATION O F ALL THE RECORDS / DETAILS / INFORMATION AND AFTER IN-DE PTH VERIFICATION OF INCOME AND EXPENSES, MADE DISALLOWA NCES OF RS. 27,47,03,899/- IN RELATION TO BADDI UNIT, WH ICH ELIGIBLE FOR DEDUCTION U/S. 80IC AND RS. 70,87,49,5 43/-, IN RELATION TO SIKKIM UNIT, WHICH ELIGIBLE FOR DEDUCTI ON U/S. 80IE. IV. ON THE BASIS OF ABOVE, IT CAN BE SAID THAT IT IS NOT A CASE THAT THERE IS NON-APPLICATION OF MIND ON THE PART O F THE ASSESSING OFFICER IN THIS MATTER AS OBSERVED BY YOU R HONOR. ON THE OTHER HAND, THERE IS ACTIVE APPLICATI ON OF MIND AND DETAILED DISALLOWANCES. (A) IN THIS CONNECTION, THE ASSESSEE COMPANY SUBMIT S THE ASSESSING OFFICER HAD VERIFIED THE DETAILS OF NATUR E OF BUSINESS ACTIVITIES CARRIED OUT BY BADDI AND SIKKIM UNITS OF THE ASSESSEE COMPANY FROM THE DETAILS DISCUSSED AND VARIOUS DOCUMENTS SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIZ. ANNUAL AUDIT REPORT OF THE COMPANY, AUDITED FINANCIALS OF RESPECTIVE UNITS, FORM 10CCB AND TRANSFER PRICING DOCUMENTATION ETC. (B) FURTHER, IN CONNECTION WITH THE ISSUES RAISED BY YOUR HONOR THAT THE ASSESSING OFFICER HAS NOT INQUIRED AS TO WHAT KIND OF MEDICINES ARE BEING MANUFACTURED AT RESPECTIVE UNITS, SOURCE OF GETTING CHEMISTRY OF MOLECULES IF API IS MANUFACTURED, SOURCE OF FORMULA / COMPOSITION IF FORMULA IS MANUFACTURED, IT IS SUBMITTED THAT THESE DETAILS WE RE DISCUSSED DURING THE COURSE OF ASSESSMENT PROCEEDING SINCE YEARS. MOREOVER, DETAILS OF PRODUCTS MANUFACTURED WERE ALSO AVAILABLE IN VARIOUS AUDIT REPORTS. MERELY BECAUSE THE ASSESSING OFFICER HAS NOT DISCUSSED ABOUT THE SAME IN HIS ASSESSMENT ORDER, WILL NOT MAKE THE SAID ORDER ERRONEOUS. THE ASSESSEE COMPANY FAILS TO UNDERSTAND THAT WHEN THE ASSESSING OFFICER HAS EXAMINED ALL THE INCOME AND EXPENDITURE AS DISCUSSED IN PARA 5.2(11), THEN WHAT WOULD BE THE IMPACT WHICH MAKES THE ASSESSMENT ORDER PREJUDICIAL TO THE INTEREST OF THE REVENUE ON THE BASIS OF ANSWERS TO ABOVE QUESTIONS AS RAISED BY YOUR HONOR IN THE SHOW CAUSE NOTICE, WHICH ARE THOUGH ALREADY DISCUSSED DURING THE COURSE OF ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 15 - HEARING BUT MERELY NOT MENTION IN THE ASSESSMENT ORDER. (C) FURTHER, THE ASSESSING OFFICER HAS MADE IN-DEPTH INQUIRIES REGARDING THE AMOUNT OF EXPENDITURE DEBITED TO P&L ACCOUNT OF BADDI & SIKKIM UNIT OF THE ASSESSEE COMPANY, THE BASIS OF ALLOCATION OF VARIOUS EXPENSES AND AMOUNT CLAIMED AS DEDUCTION U/S. 80IC AND 80IE OF THE ACT . THEREAFTER, NOT BEING SATISFIED BY THE REPLIES OF THE ASSESSEE COMPANY, T HE ASSESSING OFFICER HAS PROCEEDED TO MODIFY THE CLAIM OF DEDUCTION U/S. 80IC & 80IE OF THE ACT ON ACCOUNT OF OTHER OPERATING INCOMES AND REJECTED THE BASIS O F ALLOCATION OF EXPENSES OF THE ASSESSEE COMPANY TO BOTH THE ELIGIBLE UNITS AND ALLOCATED THE EXPENDITU RE AS PER HIS CALCULATIONS AND MADE CERTAIN DISALLOWANCE IN THIS MATTER IN HIS ASSESSMENT ORDER AT VARIOUS PARA MENTIONED IN POINT 5.2(111) SUPRA. ON THE BASIS OF THE ABOVE, THE ASSESSEE COMPANY SUB MITS THAT THE NOTICE U/S 263 OF THE ACT ISSUED BY YOUR H ONOR ON THIS ISSUE IS DEVOID OF ANY MERITS AS THE ORDER PAS SED BY ASSESSING OFFICER IS NOT PREJUDICIAL TO THE INTERES T OF REVENUE. 5.3 REGARDING DETAILS OF EXPENSES ON ACCOUNT OF QUALITY CONTROL & REGULATORY APPROVALS. CLAIM U/S. 35(2AB) FOR R&D EXPENSES ON ACCOUNT OF PATENT OR RELATED EXPENS ES OUTSIDE INDIA. CLINICAL RESEARCH EXPENSES AND OTHER EXPENSES (BEING LABOUR, JOB WORK CHARGES, PROFESSIO NAL FEES, LEGAL EXPENSES AND OTHER SALARY EXPENSES) I. VIDE PARA NO. (III), (IV) AND (V) OF THE ABOVE R EFERRED NOTICE, YOUR HONOR HAS CONSIDERED THE ASSESSMENT OR DER PASSED BY THE AO AS ERRONEOUS AND PREJUDICIAL TO TH E INTEREST OF REVENUE STATING AS UNDER: '(III) YOU HAVE DEBITED A TOTAL EXPENSES OF RS. 137.41 CRORES ON ACCOUNT OF R&D EXPENSES ON WHICH A WEIGHTED DEDUCTION HAS BEEN CLAIMED, THE A.O. HAS NOT ENQUIRED AS TO WHETHER SEPARATE EXPENSES HAVE BEEN INCURRED BY YOU ON ACCOUNT OF QUALITY CONTROL & REGULATORY APPROVALS OR WHETHER THEY HAVE BEEN GROUPED INTO R&D EXPENSES. NON APPLICATION OF MIND IN THIS MATTER BY THE A.O. HAS RENDERED THE IMPUGNED ORDER AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. YOU HAVE CLAIMED AN EXPENDITURE OF RS. 475.32 LAKHS ON ACCOUNT OF PATENT EXPENSES/PATENT RELATED EXPENSES OUTSIDE INDIA AS ELIGIBLE FOR WEIGHTED TAX ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 16 - U/S 35(2AB) OF IT. ACT. THE EXPLANATION INSERTED UNDER CLAUSE ID TO SECTION 35(2AB) STATED THAT: EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, 'EXPENDITURE ON SCIENTIFIC RESEARCH', IN RELATION T O DRUGS AND PHARMACEUTICALS, SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL, OBTAINING APPROVAL FROM ANY REGULATORY AUTHORITY UNDER ANY CENTRAL STATE OR PROVINCIAL ACT AND FILIN G AN APPLICATION FOR A PATENT UNDER THE PATENTS ACT, 1970 (39 OF 1970). THUS THE EXPENDITURE INCURRED IN RELATION TO PATENT S NOT RELATING TO THE PATENT ACT, 1970 WOULD NOT BE ELIGIBLE FOR SUCH DEDUCTION. NON APPLICATION OF MIN D IN THIS MATTER BY THE A.O. HAS RENDERED THE IMPUGNED ORDER AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. (IV) YOU HAVE CLAIMED AN EXPENDITURE OF RS. 1214.01 LAKHS ON CLINICAL RESEARCH. THE A.O. HAS FAILED TO APPLY HIS MIND AND NOT MADE ANY ENQUIRIES IN THIS REGARD AS TO NATURE AND DETAILS OF EXPENSES INCURRED - AS TO WHOM PAID AND FOR WHAT PURPOSE? HE HAS ALSO NOT ENQUIRED IF SUCH CLINICAL TRIAL WER E MADE FOR THE PURPOSE OF REGULATORY APPROVALS OR FOR R&D WORK WHICH WOULD HAVE BEEN AFFECTED THE DEDUCTION AVAILABLE U/S 35(2AB) OF THE IT. ACT. NON APPLICATION OF MIND AND NON INQUIRY IN THIS REGARD HAS RENDERED THE IMPUGNED ORDER AS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. (V) YOU HAVE ALSO CLAIMED VARIOUS EXPENSES ON ACCOUNT OF LABOUR AND JOB WORK CHARGES, PROFESSIONAL FEES, LEGAL EXPENSES AND OTHER SALARY EXPENSES AS PART OF R&D EXPENSES. THE A.O. HAS NOT MADE ANY MEANINGFUL INQUIRY WITH RESPECT TO THESE EXPENSES AS TO DETERMINE WHETHER ALL SUCH EXPENSES WERE RELATED TO R&D BECAUSE OF WHICH THE IMPUGNED ORDER HAS BEEN RENDERED ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE.' II. IN THIS CONNECTION, THE ASSESSEE COMPANY SUBMIT S FOLLOWING DETAILS OF RECORDS AVAILABLE WITH ASSESSING OFFICER , INQUIRIES MADE BY HIM AND REPLIES AND DETAILS SUBMI TTED BY THE ASSESSEE COMPANY: (A) AS PER THE PROVISIONS OF SECTION 35(2AB)(3) OF THE ACT READ WITH RULE 6(7A) OF THE INCOME TAX RULES, I N ORDER TO CLAIM THE DEDUCTION U/S. 35(2AB) OF THE AC T, THE ASSESSEE COMPANY NEEDS TO MAINTAIN SEPARATE BOOKS OF ACCOUNT FOR ITS APPROVED R&D FACILITY AND ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 17 - THE SAME IS REQUIRED TO BE AUDITED ANNUALLY BY A CHARTERED ACCOUNTANT AND A REPORT FOR THE SAME IS REQUIRED TO BE SUBMITTED TO THE PRESCRIBED AUTHORIT Y I.E. DSIR FOR EACH YEAR. IT IS ALSO PROVIDED THAT T HE DSIR SHALL ISSUE ITS REPORT IN RELATION TO THE APPROVAL OF IN-HOUSE R&D FACILITY IN FORM NO. 3CL. HENCE, THE ASSESSEE COMPANY HAD CLAIMED THE DEDUCTION U/S. 35(2AB) AFTER COMPLYING WITH ALL THE STATUTORY REQUIREMENTS AND THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY ON R&D ACTIVITIES HAVE ALSO BEEN VERIFIED AND CERTIFIED BY DSIR. (B) VIDE SUBMISSION DATED 17.06.2016, THE ASSESSEE COMPANY SUBMITTED COPY OF ACKNOWLEDGEMENT OF RETURN OF INCOME ALONG WITH THE STATEMENT OF TOTAL INCOME, WHEREIN THE CLAIM MADE BY THE ASSESSEE COMPANY U/S. 35(2AB) OF THE ACT WAS VERIFIABLE. FURTHER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS COPY OF FORM 3CM ISSUED BY DSIR FOR APPROVAL OF THE TORRENT RESEARCH CENTRE AS AN IN- HOUSE RESEARCH CENTRE AND FORM 3CL ISSUED BY DSIR WERE ALSO SUBMITTED . IN ORDER TO VERIFY THE ALLOWABILITY OF CLAIM MADE B Y THE ASSESSEE COMPANY, THE ASSESSING OFFICER HAD ASKED THE ASSESSEE COMPANY TO SUBMIT THE NECESSARY DETAILS AND AN EXPLANATION AS TO WHY THE WEIGHTED DEDUCTION CLAIMED BY THE ASSESSEE COMPANY IN PURSUANCE OF SECTION 35(2AB) SHOULD NOT BE RESTRICTED TO THE WEIGHTED AMOUNT OF QUANTUM OF DEDUCTION CERTIFIED BY DSIR IN FORM NO. 3CL. (C) IN RESPONSE TO THE SAME, THE ASSESSEE COMPANY SUBMITTED A DETAILED EXPLANATION AS REGARDS FOLLOWING: I. TORRENT RESEARCH CENTRE (TRC) HAS BEEN APPROVED AS AN IN-HOUSE RESEARCH CENTRE BY THE PRESCRIBED AUTHORITY I.E. DSIR; II. THAT THE ASSESSEE COMPANY HAS COMPLIED WITH ALL THE CONDITIONS AS PRESCRIBED U/S 35(2AB) AND HENCE, IT IS RIGHTLY ENTITLED TO CLAIM THE DEDUCTION FOR EXPENDITURE INCURRED IN RESPECT OF ITS APPROVED R&D ACTIVITIES; III. THOUGH THE FORM 3CL DOES NOT REQUIRE OR SEEK INFORMATION OF ALLOWABLE OR DISALLOWABLE EXPENDITURE U/S. 35(2AB) OF THE ACT, THE ASSESSEE COMPANY SUBMITTED, AS REQUIRED BY ASSESSING OFFICER, A RECONCILIATION OF THE EXPENSES THAT MIGH T HAVE BEEN EXCLUDED BY DSIR IN ISSUING FORM 3CL ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 18 - BASED ON THE BASIS OF DISALLOWANCE MADE IN PRECEDING YEARS; IV. DETAILED EXPLANATION IN RESPECT OF NATURE OF EXPENSES WHICH HAVE BEEN EXCLUDED BY DSIR IN FORM NO. 3CL AND WHY THE SAME SHOULD NOT BE DISALLOWED WHILE DETERMINING THE AMOUNT ELIGIBLE FOR CLAIM OF WEIGHTED DEDUCTION U/S. 35(2AB) OF THE ACT. A COPY OF THE ABOVE SUBMISSION DATED 12.12.2016 IS ATTACHED HEREWITH VIDE ANNEXURE-3 FOR READY REFERENCE OF YOUR HONOR. III. THE SUBMISSION OF THE ASSESSEE COMPANY THAT TH E AMOUNT ELIGIBLE FOR DEDUCTION U/S. 35(2AB) SHOULD NOT BE RESTRICTED TO THE AMOUNT CERTIFIED BY DSIR IN FORM 3CL WAS REJECTED BY THE ASSESSING OFFICER AND FOLLOWING ADJUSTMENTS WERE MADE BY HIM. (A) THE FOLLOWING DISALLOWANCES WERE MADE BY THE ASSESSING OFFICER ON THE GROUND THAT ONLY THE EXPENDITURE APPROVED BY DSIR IS ALLOWABLE U/S. 35(2AB) OF THE ACT: PARTICULARS RS. (IN LACS) AMOUNT CERTIFIED BY DSIR AS EXPENSES INCURRED OUTSIDE APPROVED R&D FACILITY CLINICAL RESEARCH EXPENSES 1,214.01 PATENT EXPENSES (OFFICIAL FEES) OUTSIDE INDIA 57.32 PATENT EXPENSES (CONSULTANCY FEES] OUTSIDE INDIA 4,09.41 INTEREST ON LOAN 44.72 LABOUR CHARGES / CONTRACT MANPOWER / CONSULTANCY CHARGES / RETAINER SHIP LABOUR & JOB WORK CHARGES 1,76.32 PROFESSIONAL FEES IN AND OUTSIDE INDIA (RS. 81.89 LACS SPENT IN INDIA AND RS. 8.59 SPENT OUTSIDE INDIA) 90.48 FEES AND LEGAL EXPENSES 14.73 OTHER STUDIES EXPENSES 2,01.32 (A) 2,208.31 OTHER EXPENDITURE NOT APPROVED BY DSIR BUILDING RELATED RECURRING EXPENSES 104.88 MUNICIPAL TAXES 12.84 SALARY TO DR. C. DUTT 274.19 ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 19 - EMPLOYEES NOT HAVING DEGREE IN SCIENCE 338.55 (B) 730.46 TOTAL [C= (A+B)] 2,938.77 200% OF CAPITAL EXPENDITURE (OTHER THAN BUILDING OF RS. 137.50 LACS) (D) 275.00 TOTAL AMOUNT OF DISALLOWANCE U/S. 35(2AB) - (C+D) 3,213.77 (B) THE ABOVE TABLE SHOWS THAT THE ISSUES RAISED BY YOUR HONOR IN THE SHOW CAUSE U/S 263 OF THE ACT WERE ALREADY INQUIRED BY ASSESSING OFFICER AND AFTER REJECTING THE SUBMISSIONS OF THE ASSESSEE COMPANY THE SAID EXPENSES WERE ALREADY DISALLOWED . IN THIS CONNECTION, THE ASSESSEE COMPANY FURTHER SUBMITS THAT THE EXPENDITURE ON PATENTS AMOUNTS TO RS. 4.67 CRORES AND NOT RS. 4.75 CRORES AS MENTIONED IN THE ABOVE REFERRED SHOW CAUSE NOTICE U/S. 263 OF THE ACT. HOWEVER, THE ASSESSEE COMPANY SUBMITS THAT AN AMOUNT OF RS. 4.75 CRORES IS ALREADY DISALLOWED BY THE ASSESSING OFFICER AND THE SAME IS WORKED OUT AS UNDER AND THE SAME IS VERIFIABLE FROM THE ABOVE TABLE IN PARA III (A): PARTICULARS AMOUNT SPENT IN INDIA AMOUNT SPENT OUTSIDE INDIA TOTAL PATENT EXPENSE (OFFICIAL FEES) 6.78 57.32 64.10 PATENT EXPENSE (CONSULTING FEES] 13.44 409.41 422.85 PROFESSIONAL FEES 81.89 8.59 90.48 TOTAL 102.11 475.32 577.43 FURTHER, IT IS ALSO SUBMITTED THAT AMOUNT OF RS. 12.14 CRORES IN RESPECT OF CLINICAL TRIAL EXPENSES AND RS. 281.53 LACS RELATING TO LABOUR CHARGES / CONTRACT MANPOWER / CONSULTANCY CHARGES / RETAINER SHIP HAS ALSO BEEN DISALLOWED BY THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER. THESE DETAILS OF THE DISALLOWANCES MADE BY ASSESSING OFFICER ARE VERIFIABLE FROM THE PARA 17.4 ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 20 - ON PAGE NO. 71 TO 73 OF THE ASSESSMENT ORDER. ON PERUSAL OF THE SAME, IT CAN BE OBSERVED THAT THE ASSESSING OFFICER HAS ALREADY MADE DISALLOWANCE ON ACCOUNT FOLLOWING R & D EXPENSES REFERRED IN YOUR NOTICE IN THE VARIOUS PARAGRAPHS OF THE NOTICE. PARTICULARS PARA NO. OF NOTICE U/S. 263-DATED 18-08-2017 AMOUNT 1 DISALLOWED BY THE ASSESSING OFFICER PATENT EXPENSES - INCURRED OUTSIDE INDIA PARA (III) 466.75 LACS EXPENDITURE ON CLINICAL RESEARCH PARA (IV) 1214.01 LACS LABOUR AND JOB-WORK CHARGES PARA-(V) 176.32 LACS PROFESSIONAL FEES (RS. 81.89 LACS SPENT IN INDIA AND RS. 8.59 SPENT OUTSIDE INDIA) PARA-(V) 90.48 LACS LEGAL EXPENSES PARA-(V) 14.73 LACS SALARY EXPENSES : PARA-(V) SALARY TO DR. C. DUTT 274.19 LACS SALARY TO EMPLOYEES NOT HAVING DEGREE IN SCIENCE 338.55 LACS FROM THE ABOVE, IT IS CLEAR THAT THE EXPENSES REFER RED IN PARA- (HI), (IV) AND (V) ARE ALREADY DISALLOWED BY THE AS SESSING OFFICER IN THE ORDER PASSED U/S. 143(3) OF THE ACT THEREFOR E, THE SAID ORDER IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE I NTEREST OF THE REVENUE. IV. FURTHER, REGARDING YOUR HONOR'S OBSERVATION THA T THE ASSESSING OFFICER HAS NOT MADE INQUIRY AS TO WHETHER SEPARATE EXPENSES HAVE BEEN INCURRED ON QUALITY CONTROL & REGULATORY APPROVALS AND WHETHER THESE EXPENSES HAVE BEEN GROUPED INTO R &D EXPENSES, THE ASSESSEE COMPANY SUBMITS AS UNDER: (A) AS STATED IN PARA 5.2(II)(C)(I) SUPRA, THE ASSE SSEE COMPANY HAS VIDE SUBMISSION DATED 10.12.2016, EXPLAINED THA T ALL MANUFACTURING & OTHER DIRECT EXPENSES INCURRED FOR EACH UNIT HAVE BEEN ACCOUNTED DIRECTLY IN THE RESPECTIVE UNIT'S BOOKS OF ACCOUNTS. IN THIS CONTEXT, IT MAY ALSO BE NOTED THAT THE R&D CENTER OF THE ASSESSEE COMPANY IS SITUATED AT VILLAGE BHAT , DIST. GANDHINAGAR IN GUJARAT, WHEREAS THE MANUFACTURING FACILITIES OF THE ASSESSEE COMPANY ARE SITUATED AT THE FOLLOWING LOCATIONS: ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 21 - - VILLAGE INDRAD, TALUKA KADI, DIST. MEHSAN A, GUJARAT; - VILLAGE BHUD, NALAGARH, BADDI, DIST. SOLAN, HIMACHAL PRADESH; - - 32 NO. MIDDLE CAMP, NH-31A, EAST DISTRICT, GANGTOK (SIKKIM). THE ABOVE INFORMATION WAS PROVIDED TO THE ASSESSING OFFICER WHEN SPECIFIC QUERY WAS RAISED BY HIM ON TH E SAME. (B) IN THIS BACKGROUND, YOUR HONOR WOULD APPRECIATE THAT IT IS NOT POSSIBLE TO SEND THE GOODS MANUFACTURED IN DIFF ERENT UNITS AND AT DIFFERENT LOCATIONS TO R&D FACILITY FO R QUALITY CONTROL AND TESTING PURPOSE. HENCE, THERE DOES NOT ARISE A QUESTION THAT EXPENDITURE RELATING TO QUALITY CONTR OL & REGULATORY APPROVALS ARE GROUPED INTO R&D EXPENSE. FURTHER, THE EXPENDITURE ON QUALITY CONTROL IS PART OF PRODUCTION COST, AS IT IS INCURRED AT THE STAGE OF PRODUCTION ONLY AND THEREFORE, IT IS DEBITED IN THE BOOKS OF ACCOUNT OF THE RESPECTIVE UNITS. AS THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND PRODUCTI ON OF PHARMACEUTICAL PRODUCTS, THE QUALITY TESTING AND APPROVAL PROCESS ARE REQUIRED TO BE CARRIED OUT BEFORE THE F INISHED PRODUCT IS PACKED BEFORE ITS REMOVAL FROM MANUFACTU RING PLANT . ACCORDINGLY, IT IS CLEAR THAT THE QUALITY CONTROL AND TESTING ACTIVITIES CAN BE CARRIED OUT AT MANUFACTUR ING PLANT ONLY. (C) AT THIS POINT, THE ASSESSEE COMPANY ALSO REITER ATES THAT THE EXPENDITURE INCURRED ON R&D FACILITY IS ALSO VERIFI ED BY DSIR AND AFTER VERIFICATION THE DSIR HAS EXCLUDED THE EXPENDITURE AMOUNTING TO RS. 29.39 CRORES FROM THE AMOUNT ELIGIBLE FOR DEDUCTION U/S. 35(2AB) OF THE A CT WHICH HAS BEEN DULY CONSIDERED BY ASSESSING OFFICER AS EXPLAINED IN PARA 5.3(11) SUPRA. ON THE BASIS OF ABOVE, THE ASSESSEE COMPANY SUBMITS THAT IT IS NOT A CASE THAT THERE IS NON-APPLICATION OF M IND ON THE PART OF THE ASSESSING OFFICER IN THIS MATTER AS OBSERVED BY YOUR HONOR, BUT THE ASSESSING OFFICER H AS MADE IN-DEPTH INQUIRIES REGARDING THE AMOUNT OF EXPENDITURE DEBITED TO P&L, RECONCILIATION AND JUSTIFICATION FOR THE AMOUNT NOT APPROVED BY DSIR A ND ON THAT BASIS , NOT BEING SATISFIED BY THE REPLIES OF THE ASSESSEE COMPANY, THE ASSESSING OFFICER HAS PROCEED ED TO MAKE CERTAIN DISALLOWANCE AS MENTIONED IN PARA III SUPRA OF THIS POINT. THEREFORE, THE ASSESSEE COMPANY SUBM ITS THAT THE NOTICE U/S 263 OF THE ACT ISSUED BY YOUR HONOR ON THIS ISSUE IS DEVOID OF ANY MERITS, AS THE ORDER PASSED BY ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 22 - ASSESSING OFFICER IS NEITHER ERRONEOUS NOR PREJUDIC IAL TO THE INTERESTS OF THE REVENUE. 5.4 REGARDING SELLING & PUBLICITY EXPENSES (OTHER THAN DOMESTIC) II. VIDE PARA NO. (VI) OF THE ABOVE REFERRED NOTICE, YO UR HONOR HAS OBSERVED THAT THE ASSESSMENT ORDER PASSED BY THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E BY STATING AS UNDER: VI) YOU HAVE CLAIMED EXPENSES ON ACADEMIC/SCIENTIF IC GET TOGETHER OF RS9.44 CR., SALES PROMOTION EXPENSE S OF RS.1.48 CR., BUSINESS ADVANCEMENT EXPENSES OF RS.1. 48 CR. (OTHER THAN ON DOMESTIC). THE A.O. HAS NOT MADE ANY ENQUIRY AS REGARDS THE INCURRING OF SUCH EXPENSES N OR HAS HE APPLIED HIS MIND AS TO WHETHER SUCH OR PART OF S UCH EXPENSES FELL FOUL OF LOCAL REGULATIONS PREVAILING IN THOSE COUNTRIES REGARDING GIFTING/OTHER PAYMENTS/ EXPENSE S INCURRED ON DOCTORS AND MEDICAL PRACTITIONERS. FURT HER, THE A.O. HAS ALSO NOT EXAMINED IF SUCH EXPENSES INC URRED WERE RIGHTFULLY BELONGING TO THE ASSESSEE COMPANY A ND NOT ITS FOREIGN SUBSIDIARIES WHICH WERE ALSO ENGAGED IN MARKETING OF FORMULATIONS IN OTHER COUNTRIES. NON APPLICATION OF MIND AND NON INQUIRY IN THIS REGARD HAS RENDERED THE IMPUGNED ORDER AS ERRONEOUS AND PREJUD ICIAL TO THE INTEREST OF REVENUE. II. IN THIS CONNECTION, THE ASSESSEE COMPANY SUBMIT S FOLLOWING DETAILS OF RECORDS AVAILABLE WITH ASSESSING OFFICER , INQUIRIES MADE BY ASSESSING OFFICER AND REPLIES AND DETAILS S UBMITTED BY THE ASSESSEE COMPANY: (A) DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER ASKED TO PROVIDE BREAK-UP OF SELL ING, PUBLICITY AND MEDICAL LITERATURE EXPENSES AMOUNTING TO RS. 279.20 CRORES AS APPEARING IN NOTE NO. 21 OTHER EXPENSES' OF PROFIT & LOSS ACCOUNT ALONG WITH EXPLANATION FOR NATURE OF EXPENSES. IN RESPONSE TO THE SAME, THE ASSESSEE COMPANY SUBMI TTED THE DETAILED BREAKUP OF SELLING AND PUBLICITY EXPEN SES INCURRED FOR DOMESTIC MARKET AND OTHER THAN DOMESTI C MARKET, DETAILED EXPLANATION FOR NATURE OF SUCH EXPENDITURE, ALONG WITH BREAK-UP OF BUSINESS ADVANC EMENT EXPENSES GIVING DETAILS OF ITEMS COSTING MORE THAN RS. 1000/-AND THOSE LESS THAN RS. 1,000/-, VIDE SUBMISS ION DATED 10.12.2016. COPY OF THE SAID REPLY IS ANNEXED HEREWITH VIDE ANNEXURE-1(A) SUPRA. (B) ON THE BASIS OF VERIFICATION AND EXAMINATION OF DETAILS SUBMITTED VIDE ABOVE MENTIONED SUBMITTED DATED 10.12.2016, THE ASSESSEE COMPANY WAS ASKED TO SHOW CAUSE AS TO WHY EXPENSES ACCOUNTED UNDER HEAD OF BUSINESS ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 23 - ADVANCEMENT EXPENSES AND DOCTORS' SPONSORSHIP, WHIC H ARE GROUPED UNDER SELLING AND DISTRIBUTION EXPENSES SHOULD NOT BE DISALLOWED, IN VIEW OF THE CBDT CIRCU LAR NO. 5/2012 DATED 01-08-2012, WHICH PROVIDES FOR DISALLOWANCE OF DEDUCTION PERTAINING TO FREEBIES GI VEN TO MEDICAL PRACTITIONERS. IN RESPONSE TO THAT THE ASSESSEE COMPANY SUBMITTED DETAILS VIDE SUBMISSION DATED 15.12.2016, AS MENTIONED IN PARA 5 .1(II)(B) SUPRA, A COPY OF WHICH IS ANNEXED HEREWITH VIDE ANNEXURE-1(B) SUPRA. III. REGARDING YOUR HONOR'S ABOVE REFERRED OBSERVAT IONS, THE ASSESSEE COMPANY SUBMITS AS UNDER: (A) YOUR HONOR HAS OBSERVED THAT THE ASSESSING OFFI CER HAS NEITHER MADE ANY ENQUIRY AS REGARDS THE INCURRING O F SUCH EXPENSES NOR HAS HE APPLIED HIS MIND AS TO WHETHER SUCH OR PART OF SUCH EXPENSES FELL FOUL OF LOCAL REGULATION S PREVAILING IN THOSE COUNTRIES REGARDING GIFTING / OTHER PAYMEN T / EXPENSES INCURRED ON DOCTORS AND MEDICAL PRACTITION ERS. IN THIS REGARDS, THE ASSESSEE COMPANY SUBMITS THAT AS PER CIRCULAR NO. 5/2012 IT HAS BEEN PROVIDED THAT THE C LAIM OF ANY EXPENDITURE INCURRED IN PROVIDING FREEBIES IN V IOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFES SIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002, S HALL BE INADMISSIBLE UNDER SECTION 37(1) OF THE ACT, BEING EXPENSES PROHIBITED BY LAW. THIS DISALLOWANCE SHALL BE MADE IN THE HANDS OF SUCH PHARMACEUTICALS OR ALLIED HEALTH SECT OR INDUSTRIES OR OTHER ASSESSEE WHICH HAS PROVIDED SUC H FREEBIES AND CLAIMED IT AS A DEDUCTIBLE EXPENSE IN ITS ACCOUNTS AGAINST INCOME. IN THIS CONTEXT, THE ASSESSEE COMPANY SUBMITS THAT THE SAID REGULATIONS OF INDIAN MEDICAL COUNCIL (MCI) HAS BEE N ISSUED AS PER THE POWERS CONFERRED U/S 20A R.W.S 33(M) OF THE INDIAN MEDICAL COUNCIL ACT, 1956 AND THE SAID ACT I S APPLICABLE TO WHOLE OF INDIA, AS PROVIDED IN SECTIO N \ OF THE SAID ACT. ACCORDINGLY, IT CAN BE SAID THAT THE AFOR EMENTIONED REGULATION OF 2002 ARE NOT APPLICABLE AND BINDING T O MEDICAL PRACTITIONERS OUTSIDE INDIA. THEREFORE, THERE ARE N O PROVISIONS WHICH DENIES THE DEDUCTION OF BUSINESS EXPENDITURE RELATING TO BUSINESS ADVANCEMENTS, WHIC H IS ALLOWABLE U/S. 37(1) OF THE ACT. HENCE, THERE IS NO NON- APPLICATION OF MIND OR NON-ENQUIRY ON THE PART OF T HE ASSESSING OFFICER ON THIS ISSUE. (B) FURTHER, YOUR HONOR HAS OBSERVED THAT THE ASSES SING OFFICER HAS NOT EXAMINED IF SUCH EXPENSES INCURRED WERE RIGHTFULLY BELONGING TO THE ASSESSEE COMPANY AND NO T ITS ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 24 - SUBSIDIARIES WHICH WERE ALSO ENGAGED IN MARKET ING OR FORMULATIONS IN OTHER COUNTRIES. * IN THIS REGARDS, THE ASSESSEE COMPANY SUBMITS T HAT THE ACCOUNT OF THE ASSESSEE COMPANY HAS BEEN AUDITED UNDER THE COMPANIES ACT AS WELL AS THE SAME ARE SUBJECT TO TAX AUDIT UNDER THE PROVISIONS OF IN COME TAX ACT. ALL THE EXPENDITURE DEBITED IN ITS P&L ACC OUNT HAVE BEEN VERIFIED BY THE AUDITOR AS RIGHTFULLY INC URRED BY THE ASSESSEE COMPANY FOR ITS BUSINESS. * VIDE SUBMISSION DATED 17.06.2016, THE ASSESSEE COMPANY SUBMITTED COPY OF FORM NO. 3CEB, FROM WHICH THE ASSESSING OFFICER VERIFIED THE DETAILS OF TRANSACTION ENTERED INTO WITH ASSOCIATED ENTERPRI SES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY ALSO SUBMITTED THE DOCUMENTATION RELATING TO TRANSFER PRICING , WHICH PROVIDE THE BASIS OF ALL THE TRANSACTIONS WITH ASSOCIATED ENTERPR ISES AND GIVES ALL THE DETAILS WHICH ARE SELF-EXPLANATOR Y. THEREFORE, NO FURTHER QUESTIONS WERE REQUIRED TO BE RAISED. * IN THIS CONTEXT, THE ASSESSEE COMPANY SUBMITS THA T FOR PROVIDING OF MARKET INFORMATION AND REGULATORY SUPPORT SERVICES IN ORDER TO PROMOTE THE COMPANY' S BUSINESS IN THE RESPECTIVE TERRITORY AND TO ACT AS A LEGAL AGENT FOR THE COMPANY ON ALL THE MATTERS RELA TED TO REGULATORY MATTERS IN THOSE TERRITORIES THE ASSESSEE COMPANY HAS ENTERED INTO LIAISON SUP PORT AGREEMENTS WITH CERTAIN ASSOCIATED ENTITIES. DETAILS OF THESE TRANSACTIONS ARE REPORTED IN THE TRANS FER PRICING REPORT U/S 92D OF THE ACT IN FORM 3CEB AND TRANSFER PRICING DOCUMENTATION, WHICH HAS BEEN SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. * SUCH EXPENSES ON LIAISON SUPPORT SERVICES ARE DUL Y INCURRED BY THE ASSESSEE COMPANY AND PAYABLE BY IT IN CONNECTION WITH PROMOTING ITS BUSINESS IN FOREIG N TERRITORIES. HOWEVER, THE ASSESSING OFFICER HAS ALLOWED THE SAME AFTER TROUGH VERIFICATION OF TRANS FER PRICING DOCUMENTATION. IV. ON THE BASIS OF ABOVE, THE ASSESSEE COMPANY SUB MITS THAT THE ORDER PASSED BY ASSESSING OFFICER CANNOT BE TERMED AS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE BEC AUSE THE ASSESSING OFFICER HAS VERIFIED THE TRANSFER PRICING REPORT IN FORM NO. 3CEB AND THE TRANSFER PRICING DOCUMENTATIO N.' ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 25 - 4.4 IT WAS THUS CONTENDED BEFORE THE PR.CIT THAT TH ERE WAS NO FAILURE ON THE PART OF THE AO IN MAKING PROPER INQU IRIES AS REQUIRED IN THE CONTEXT OF THE STATE OF AFFAIRS OF ASSESSEE AND NO FURTHER INQUIRY WAS PLAUSIBLE AND CALLED FOR. IT W AS ALSO STATED THAT IT COULD NOT BE SAID THAT INQUIRY WAS INADEQUA TE AS COMPLETE DETAILS WERE PROVIDED TO AO AND THE ACCOUNTS OF THE ASSESSEE (A LISTED COMPANY) WERE DULY AUDITED AND DETAILED DISC LOSURES OF VARIOUS ASPECTS OF THE FINANCIAL STATEMENTS WERE MA DE AND ANNEXED TO THE AUDITED STATEMENT. IT WAS THUS CONTENDED BY THE ASSESSEE THAT PROPOSED ACTION OF THE PR.CIT IS NOT PERMISSIB LE UNDER S.263 OF THE ACT. 4.5 THE PR.CIT, HOWEVER, DID NOT ACCEPT THE DEFENCE RAISED BY THE ASSESSEE ON ISSUES RAISED IN THE SHOW CAUSE NOT ICE. THE PR.CIT, IN ESSENCE, OBSERVED THAT THE ASSESSMENT WA S COMPLETED BY THE AO IN HASTE WITHOUT PROPER INQUIRIES AND VER IFICATION WHICH WERE NECESSARY FOR THE PURPOSE OF MAKING ASSESSMENT . CONSEQUENTLY, THE REVISIONAL COMMISSIONER SET ASIDE THE ASSESSMENT FRAMED UNDER S.143(3) OF THE ACT WITH DI RECTIONS TO RE- FRAME THE ASSESSMENT AFTER CONDUCTING REQUISITE INQ UIRIES ON THE ISSUES INVOLVED AS NOTICED BY HIM. 5. AGGRIEVED BY THE AFORESAID REVISIONARY ORDER OF THE PR.CIT UNDER S. 263 WHICH SOUGHT TO CANCEL THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED THE APPEAL BEFORE THE TRIBUNAL. 6. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE AFOREMENTIONED PLEAS EARLIER RAISED BEFORE THE PR.C IT AND VOCIFEROUSLY EXHORTED THAT THE ASSESSEE IS A LISTED COMPANY AND IS RUN ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 26 - BY A PROFESSIONAL BOARD. THE ACCOUNTS ARE EXHAUSTI VELY AUDITED AND IS SUBJECTED TO COMPREHENSIVE INTERNAL AUDIT AS WELL AS STATUTORY AUDIT. THE ASSESSEE COMPANY IS ENGAGED I N MANUFACTURE AND PRODUCTION OF PHARMACEUTICAL PRODUCTS AND IS ON E OF THE LEADING AND RENOWNED COMPANY IN THE SECTOR. THE CO MPANY HAS REPORTED GENERATION OF REVENUE FROM PHARMACEUTICAL OPERATIONS IN THE VICINITY OF RS.4000 CRORES ON AVERAGE IN LAST T WO YEARS. THE INCOME RETURNED BY THE ASSESSEE IS ALSO TO THE TUNE OF RS.584.13 CRORES. THE LEARNED AR CONTENDED THAT IN THIS BACK DROP, THE ACTION OF THE AO REQUIRES TO BE EVALUATED. 6.1 THE LEARNED AR THEREAFTER ADVERTED TO THE SPECI FIC ALLEGATIONS RAISED ON VARIOUS ISSUES AND SUBMITTED THAT THE DETAILED REPLY BEFORE THE PR.CIT IS SELF EXPLANATOR Y. 6.2 REBUTTING THE ALLEGED INADEQUACY IN INQUIRY ON EXPENDITURE OF RS.24.32 CRORES ON GIFT ITEM, THE LEARNED AR REF ERRED TO THE SUBMISSIONS MADE BEFORE THE PR.CIT AND SUBMITTED TH AT THE EXPENDITURE INCURRED TOWARDS GIFT IS MINISCULE HAVI NG REGARD TO THE SCALE OF OPERATIONS. THE LEARNED AR REFERRED T O PAGE NO.46 OF THE PAPER BOOK SHOWING BREAK UP OF BUSINESS ADVANCE MENT EXPENSES AND SUBMITTED THAT MOST OF THE ITEMS INVOL VED ARE OF VERY SMALL VALUE ITEMS COSTING BELOW RS.1000/- IN E ACH CASE AND ONLY ITEMS AGGREGATING TO RS.24.3 CRORES COST ABOVE RS.1000/- PER ITEM. THE REQUISITE DETAILS WERE PROVIDED TO THE A O VIDE SUBMISSION DATED 17.06.2016 AND 15.12.2016 TO EXPLA IN ITS POSITION. DESPITE THE STRONG BASIS AVAILABLE FOR A DMISSION OF THE ENTIRE EXPENSES, THE AO STILL INDULGED IN DISALLOWA NCE OF 10% OF THE ENTIRE EXPENSES OF RS.55.14 CRORES (INCLUDING R S.24.3 CRORE) ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 27 - TO COVER UP THE POSSIBLE EXPENSES INCURRED FOR NON BUSINESS PURPOSES AND FOR POSSIBLE BREACH OF CBDT CIRCULAR N O.5/2012. THE AO HAD ALSO MADE DISALLOWANCE OF ENTIRE EXPENDI TURE OF NEARLY RS.26 CRORES BEING EXPENSES INCURRED ON ACAD EMIC / SCIENTIFIC GRANTS TO THE DOCTORS IN THE NATURE OF S PONSORSHIP EXPENSES. IT WAS THUS CONTENDED THAT THE AO HAS DE CIDED THE ISSUE AFTER REQUISITE APPLICATION OF MIND AND THE REVENUE RISKS HAVE BEEN ADDRESSED FAR MORE THAN WHAT WAS POSSIBLY CALL ED FOR IN THE CIRCUMSTANCES. TO EXPAND FURTHER, THE LEARNED AR CO NTENDED THAT IT IS NOT THE OBJECTIVE OF SECTION 263 OF THE ACT T O INTERFERE WITH THE ORDER OF THE AO IN EACH AND EVERY TYPE OF SITUA TION WHERE THE INQUIRY WAS NOT MADE IN THE MANNER EXPECTED BY THE REVISIONAL OFFICER FROM A PERFECTIONIST POINT OF VIEW. IT WAS CONTENDED THAT THE QUASI-JUDICIAL ACTION OF THE AO CANNOT BE LIGHT LY STRUCK DOWN WITHOUT SHOWING IT TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE AO HAS CONCLUDED THE ISSUE HAV ING REGARD TO THE TOTALITY OF THE FACTS AND THUS CANNOT BE BRANDE D AS ERRONEOUS IN THE NAME OF ALLEGED INADEQUACY OF INQUIRY. 6.3 THE LEARNED AR THEREAFTER REFERRED TO THE NEXT ISSUE NAMELY INQUIRY REGARDING MANUFACTURING PROCESS. THE LEARN ED AR IN THIS REGARD SUBMITTED THAT A BARE READING OF SHOW-CAUSE IN THIS REGARD POINTS OUT TO THE FACT THAT THE INQUIRY EXPECTED IT SELF IS OBSCURE. THE LEARNED AR SUBMITTED THAT WHAT KIND OF INQUIRY REGARDING MANUFACTURING PROCESS AND GOODS BEING MANUFACTURED WAS NEEDED, WHICH ALLEGEDLY LEAD TO EROSION OF TAXES, HAS NOT B EEN SPELT AT ALL. 6.4 ADVERTING TO ITEM NO.3 OF THE SHOW CAUSE NOTICE , THE LEARNED AR FOR THE ASSESSEE SUBMITTED THAT REQUISITE DETAIL S OF EXPENSES ON ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 28 - ACCOUNT OF QUALITY CONTROL AND REGULATORY APPROVALS WERE PLACED ON THE RECORDS OF THE AO AND NECESSARY INQUIRIES WE RE MADE BY THE AO AS NOTED IN THE DETAILED SUBMISSION BEFORE T HE PR.CIT. THE LEARNED AR THEREAFTER SUBMITTED THAT TORRENT RE SEARCH CENTRE (TRC) WAS APPROVED AS AN IN-HOUSE RESEARCH CENTRE B Y THE PRESCRIBED AUTHORITY I.E. DSIR. THE ASSESSEE HAS F ILED REQUISITE STATUTORY FORMS TO SUPPORT THE COMPLIANCE OF CONDIT IONS PRESCRIBED UNDER S.35(2AB) OF THE ACT. THE AO HOWEVER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE IN TOTO AND SUBSTANTIAL DISALLOWANCE AGGREGATING TO RS.3213.77 LAKHS WAS MADE AS DETAILE D IN THE SUBMISSIONS AND THE ASSESSMENT ORDER. THE ADVANTAG E OF WEIGHTED DEDUCTION IN RESPECT OF EXPENSES TOWARDS QUALITY CO NTROL ETC. HAS NOT BEEN TAKEN. THE LEARNED AR SUBMITTED THAT IN TH ESE CIRCUMSTANCES, WHERE THE SUBMISSIONS OF THE ASSESSE E WERE PARTLY REJECTED AFTER MAKING ENQUIRY, THE ALLEGATION TOWAR DS INADEQUACY IN ENQUIRY IS TOTALLY UNSUSTAINABLE. AS SUBMITTED, THE ISSUE TOWARDS SEPARATE EXPENSES ON QUALITY CONTROL AND RE GULATORY APPROVALS WAS ALSO ADDRESSED TO THE AO AS POINTED O UT IN THE WRITTEN SUBMISSIONS. THUS, NON-APPLICATION OF MIND OF AO TO THE UNDERLYING FACTS IS NOT DISCERNIBLE. 6.5 ADVERTING TO THE CLINICAL RESEARCH EXPENDITURE OF RS.1214.01 LAKHS, THE LEARNED AR SUBMITTED THAT CLINICAL RESEA RCH EXPENSES FORMED PART OF AMOUNT ELIGIBLE FOR DEDUCTION UNDER S.35(2AB) OF THE ACT AND WAS INCURRED YEAR AFTER YEAR HAVING REG ARD TO THE NATURE OF PHARMACEUTICAL SECTOR. THE AO INDULGED I N RE-WORKING OF ELIGIBLE AMOUNT OF DEDUCTION AFTER TAKING INTO A CCOUNT THE EXPENDITURE APPROVED BY DSIR AND AFTER REJECTING TH E SUBMISSIONS OF THE ASSESSEE COMPANY ON MANY ASPECTS. THE LEARN ED AR ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 29 - REFERRED TO THE DETAILED SUBMISSIONS MADE BEFORE TH E REVISIONAL COMMISSIONER ON WHAT TRANSPIRED BEFORE THE AO. THE LEARNED AR MADE PARA-WISE REFERENCE TO THE SHOW CAUSE NOTICE A ND SUBMITTED THAT THE EXPENDITURE ON CLINICAL RESEARCH AMOUNTING TO RS.1214.01 LAKHS WAS INTER ALIA DISALLOWED BY THE AO. SIMILARLY, EXPENSES INCURRED TOWARDS LABOUR, JOB WORK, PROFESSIONAL FEE S, LEGAL EXPENSES AND SALARY EXPENSES AS PART OF R&D EXPENSE S ETC. WERE VERIFIED. THE LEARNED AR SUBMITTED THAT ALL SUCH E XPENSES WERE SUBJECTED TO OBJECTIVE SCRUTINY AND A PART OF SUCH EXPENDITURE WAS DISALLOWED BY THE AO. FOR INSTANCE, RS.176.32 LAKH S WAS DISALLOWED OUT OF LABOUR AND JOB WORK, RS.90.48 LAK HS OUT OF PROFESSIONAL FEES AND RS.14.73 LAKHS WAS REJECTED O UT OF LEGAL EXPENSES. THEREFORE, THE ALLEGATION THAT THE AO AC TED PERFUNCTORILY ON THE ISSUE IS WITHOUT ANY BASIS. 6.6 WITH REFERENCE TO EXPENSES CLAIMED ON ACADEMIC/ SCIENTIFIC GET-TOGETHER OF RS.9.44 CRORES AS WELL AS SALES PRO MOTION EXPENSES OF RS.19.57CRORES AND BUSINESS ADVANCEMENT EXPENSES OF RS.1.48 CRORES, THE LEARNED AR RESPONDED TO BY S TATING THAT RELEVANT DETAILS AND RECORDS MADE AVAILABLE TO THE AO WAS POINTED OUT TO THE PR.CIT IN ITS WRITTEN REPLY. IT WAS POI NTED OUT TO THE PR.CIT THAT THE BREAKUP OF SUCH EXPENSES WAS DULY P ROVIDED. BREAKUP OF BUSINESS ADVANCEMENT EXPENSES WAS PROVID ED GIVING DETAILS OF ITEMS COSTING MORE THAN RS.1000/- AND TH OSE LESS THAN RS.1000/- ALSO VIDE SUBMISSIONS DATED 10.12.2016. THE ASSESSEE WAS ALSO SHOW CAUSED BY THE AO IN THE MATTER WITH R EFERENCE TO CBDT CIRCULAR NO. 5/2012. IT IS AFTER TAKING INTO ACCOUNT THE REPLY OF THE ASSESSEE DATED 15.12.2016 AND AFTER TA KING NOTE OF ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 30 - DOCUMENTATIONS RELATING TO TRANSFER PRICING, THE AO CONCLUDED ON THE EXPENSES INCURRED. THIS BELIES THE ALLEGATION OF PR.CIT. 6.7 THE LEARNED AR AFTER ADDRESSING US ON THE FACTU AL ASPECTS AS NOTED ABOVE, EXHORTED THAT THE REVISIONAL COMMISSIO NER HAS TOTALLY MIS-DIRECTED HIMSELF IN LAW AND HAS WRONGLY APPRECIATED THE FACTUAL ASPECTS. THE LEARNED AR SUBMITTED THAT EACH AND EVERY ISSUE RAISED BY THE PR.CIT IN ITS SHOW CAUSE NOTICE WERE THOROUGHLY EXAMINED BY THE AO AS DEMONSTRATED IN TH E WRITTEN SUBMISSION BEFORE THE PR.CIT. THERE WAS FULL APPLI CATION OF MIND ON THE PART OF THE AO ON ALL THE ISSUES. THE LEARN ED AR VEHEMENTLY SUBMITTED THAT HUGE ADJUSTMENTS TO THE R ETURNED INCOME AS A COROLLARY TO THESE FACTUAL APPRECIATION IPSO FACTO VINDICATES THE FACT OF PROPER ENQUIRY AND APPLICATI ON OF MIND. THE ASSESSMENT FRAMED RESULTED IN OVER ALL ADDITION S /DISALLOWANCES OF APPROXIMATELY RS.131 CRORES. A N UMBER OF WRITTEN SUBMISSIONS FILED BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS WERE ALSO ANNEXED TO THE DET AILED RESPONSE TO THE SHOW CAUSE NOTICE ISSUED UNDER S.26 3 OF THE ACT TO SHUN THE SUSPICION ON ISSUES FROWNED UPON. IT WAS THUS CONTENDED ON BEHALF OF THE ASSESSEE THAT IT WAS ONLY AFTER RE QUISITE INQUIRY AND EXAMINATION OF FACTS AND AFTER OBJECTIVE ANALYS IS THEREOF ON EACH AND EVERY ISSUE RAISED IN THE SHOW CAUSE NOTIC E, THE AO HAD ADOPTED A VIEW FOR OR AGAINST THE ASSESSEE. IT WAS THEREAFTER VEHEMENTLY SUBMITTED THAT SUCH ISSUES WERE ALREADY SUBJECT MATTER OF EXAMINATION IN THE SCRUTINY ASSESSMENTS YEAR-AFT ER-YEAR IN THE PAST, ADDITIONS/DISALLOWANCES FLOWING FROM THE ACTI ON OF THE AO WERE SUBJECTED TO JUDICIAL SCRUTINY BEFORE THE APPE LLATE AUTHORITIES. THE LEARNED AR THUS SUBMITTED THAT IN THE LIGHT OF ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 31 - FACTUAL POSITION EXPLAINED TOWARDS EACH ITEM, THE O RDER OF THE AO CANNOT BE FAULTED ON THE TOUCHSTONE OF SECTION 263 OF THE ACT. 6.8 EXPANDING THE DELIBERATIONS FURTHER, THE LEARNE D AR THEREAFTER ALLEGED THAT THE REVISIONAL COMMISSIONER HAS ATTEMPTED TO WRONGFULLY TAKE SHELTER OF EXPLANATION 2 TO SECT ION 263(1) FOR HIS ACTIONS DE HORSE THE MATERIAL FACTS AND LONG STANDING BACKGROUND OF THE ASSESSEE. ADVERTING TO EXPLANATI ON 2 TO SECTION 263(1) RELIED UPON BY THE REVISIONAL AUTHOR ITY, THE LEARNED AR OBSERVED THAT AS PER THE EXPLANATORY NOT E PROVIDED TO IN THE RELEVANT FINANCE BILL, 2015 FOR SUCH INSERTI ON, THE PURPOSE OF THE INSERTION OF AFORESAID EXPLANATION WAS TO PR OVIDE CLARITY ON THE INTERPRETATION OF EXPRESSION ERRONEOUS IN SO F AR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. IT WA S THUS CONTENDED THAT THE AFORESAID EXPLANATION IS ONLY CLARIFICATOR Y AND DOES NOT IN ANY WAY DILUTE THE SUBSTANTIVE REQUIREMENTS OF SECT ION 263(1) OF THE ACT. THE LEARNED AR RELIED UPON THE DECISION O F THE CO- ORDINATE BENCH IN THE CASE OF NARAYAN TATU RANE VS. ITO [2016] 70 TAXMANN.COM 227 (MUM) TO THROW LIGHT ON THE SCOP E AND AMBIT OF EXPLANATION 2 AS UNDERSTOOD JUDICIALLY. THE LEA RNED AR SUBMITTED THAT IN VIEW OF THE DECISION OF THE CO-OR DINATE BENCH (SUPRA) EXPLANATION 2 SHALL APPLY ONLY IF THE ASSES SMENT ORDER HAS BEEN PASSED WITHOUT MAKING INQUIRY OR VERIFICATION WHICH A REASONABLE AND PRUDENT OFFICER WOULD HAVE CARRIED O UT IN SUCH CASES. LAW DOES NOT PROVIDE TO STRETCH THE INQUIRI ES AND VERIFICATION TO AN EXTENT WHICH MAY TANTAMOUNT TO O PPRESSION AND HARASSMENT OF A TAX PAYER. THE AO, IN THE INSTANT CASE, HAS ARRIVED AT CONCLUSION AFTER MAKING SEVERAL ROUNDS O F INQUIRIES AND ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 32 - THEREFORE THE ACTION OF THE AO CANNOT BE IMPUGNED U NDER S.263 OF THE ACT. 6.9 THE LEARNED AR NEXT RELIED UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. ARVIND JW ELLERS 259 ITR 502 (GUJ) TO PADDLE A PLEA THAT PROVISIONS OF S ECTION 263 OF THE ACT CANNOT BE INVOKED TO CORRECT EACH AND EVERY TYPE OF MISTAKE OR ERROR COMMITTED BY THE AO. IT WAS CLAIM ED THAT THE REVISIONAL AUTHORITY HAS NEITHER DEMONSTRATED INCOR RECT ASSUMPTION OF FACTS NOR ALLEGED THE INCORRECT APPLI CATION OF LAW SUCCESSFULLY. THE LEARNED AR NEXT REFERRED TO THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. R . K. CONSTRUCTION CO. (2009) 313 ITR 65 (GUJ) FOR THE PR OPOSITION THAT WHERE THE AO HAS TAKEN A PARTICULAR VIEW ON THE BAS IS OF EVIDENCES PRODUCED BEFORE HIM, IT IS NOT OPEN FOR T HE COMMISSIONER, IN THE REVISIONAL PROCEEDINGS UNDER S .263 OF THE ACT, TO TAKE A DIFFERENT VIEW ON THE SAME MATERIAL. THE AO IN THE INSTANT CASE HAS SPECIFICALLY EXAMINED ALL THE ISSU ES RAISED BY PR.CIT ALBEIT NOT PROBABLY IN THE MANNER IN WHICH T HE PR.CIT WOULD HAVE LIKED BUT THIS CANNOT BE THE GROUND FOR ASSUMPTION OF JURISDICTION UNDER S.263 OF THE ACT. THE LEARNED A R THUS SUBMITTED IN CONCLUSION THAT THE ASSESSMENT ORDER U NDER REVIEW CANNOT BE LABELLED AS ERRONEOUS IN SO FAR AS PREJUD ICIAL TO THE INTEREST OF THE REVENUE WITHIN THE TERMS OF SECTION 263 OF THE ACT IN THE CIRCUMSTANCES SO NARRATED. 7. THE LEARNED DR, ON THE OTHER HAND, VEHEMENTLY SU PPORTED THE ACTION OF THE REVISIONAL AUTHORITY AND RELIED U PON THE ORDER SO PASSED UNDER S.263 OF THE ACT. AS REGARDS, BUSINES S ADVANCEMENT ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 33 - EXPENDITURE, THE LEARNED DR SUBMITTED THAT THE AO H AS NOT MADE ANY INQUIRY AS REGARDS TO WHOM THE GIFTS WERE DISTR IBUTED AND UNDERLYING RECORDS THEREON. SIMILARLY, MCI REGULAT IONS AND CBDT CIRCULAR DOES NOT PERMIT DISTRIBUTION OF GIFTS TO MEDICAL PRACTITIONERS. THIS ASPECT HAS NOT BEEN EXAMINED A T ALL. SIMILARLY, THE LEARNED DR REFERRED TO THE ALLOCATIO N OF COMMON EXPENSES ATTRIBUTABLE TO BADDI & SIKKIM UNITS AND S UBMITTED THAT THE PR.CIT HAS RIGHTLY OBSERVED THAT BASIS OF ALLOC ATION OF EXPENSES FOR DETERMINING THE TRUE PROFITS ELIGIBLE FOR DEDUCTION UNDER CHAPTER VIA WAS NOT INQUIRED INTO. THE LEARN ED DR OBJECTED TO THE ACTION OF THE AO TOWARDS EXPENSES I NCURRED ON R&D EXPENSES AND SIMILAR EXPENSES AND RELIED UPON T HE ORDER OF THE PR.CIT. OTHER ISSUES RAISED IN THE SHOW CAUSE NOTICE WERE ALSO SUPPORTED IN THE LIGHT OF THE ORDER OF THE PR. CIT. THE LEARNED DR ACCORDINGLY SUBMITTED THAT THE REVISIONAL COMMIS SIONER HAS ACTED WITHIN THE FOUR CORNERS OF THE PROVISIONS OF THE ACT AND AS PER THE SANCTION OF THE LAW AND CONSEQUENTLY, THE R EVISIONAL ACTION REQUIRES TO BE UPHELD. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE REVISIONAL ORDER PASSED BY THE PR.CIT U NDER S.263 OF THE ACT AS WELL AS OTHER MATERIALS REFERRED TO AND RELIED UPON BY THE RESPECTIVE PARTIES AND CASE LAWS CITED. 8.1 SUPERVISORY JURISDICTION VESTED UNDER SECTION 2 63 OF THE ACT ENABLES THE CONCERNED PR.CIT/CIT TO REVIEW THE RECO RDS OF ANY PROCEEDINGS AND ORDER PASSED THEREIN BY THE AO. IT EMPOWERS THE REVISIONAL COMMISSIONER CONCERNED TO CALL FOR AND E XAMINE THE RECORDS OF ANOTHER PROCEEDING UNDER THE ACT AND IF HE CONSIDERS ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 34 - THAT ANY ORDER PASSED THEREIN BY THE AO IS ERRONEOU S IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE REVENUE, THEN HE MAY (AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD A ND AFTER MAKING OR CAUSING TO BE MADE SUCH INQUIRY AS HE DEE MS NECESSARY), PASS SUCH ORDER THEREON AS THE CIRCUMST ANCES OF THE CASE JUSTIFY, INCLUDING THE ORDER ENHANCING OR MODI FYING THE ASSESSMENT OR CANCELLING THE ASSESSMENT AND DIRECTI NG AFRESH ASSESSMENT. THUS, THE REVISIONAL POWERS CONFERRED ON THE PR.CIT/CIT UNDER S.263 OF THE ACT ARE OF VERY WIDE AMPLITUDE WITH A VIEW TO ADDRESS THE REVENUE RISKS WHICH ARE OBJECTIVELY JUSTIFIABLE. 8.2 IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE SUBSTANTIVE ISSUE THAT EMERGES FOR ADJUDICATION IS WHETHER THE PR.CIT UNDER THE UMBRELLA OF REVISONARY POWERS IS ENTITLED TO UP SET THE FINALITY OF ASSESSMENT PROCEEDINGS BEFORE THE AO WHERE THE A O HAS ALLEGEDLY COMMITTED ERROR IN PASSING ASSESSMENT ORD ER WITHOUT PROPER VERIFICATION OF EXPENSES AND DEDUCTIONS CLAI MED. IMPLICIT IN THE QUESTION IS THE SCOPE OF POWERS OF REVISIONA L COMMISSIONER IN THE EVENT OF ALLEGED INADEQUACY OF ENQUIRY INTO VARIOUS ASPECTS OF AN ISSUE. 8.3 ON PERUSAL OF THE SHOW CAUSE NOTICE (SCN) DATED 18.08.2017 ISSUED BY THE REVISIONAL COMMISSIONER PROPOSING TO SET ASIDE THE ASSESSMENT ORDER DATED 26.12.2016 PASSED BY AO UNDE R S.143(3) OF THE ACT, WE NOTICE THAT THE PR.CIT IS ESSENTIALL Y DISSATISFIED WITH THE DEGREE OF INQUIRY MADE IN RESPECT OF ISSUE S RAISED THEREIN. FIRSTLY, AS PER PARA (I) OF SCN, THE PR.C IT ALLEGED THAT INQUIRY WAS NOT MADE ON DISTRIBUTION OF GIFT ITEMS TO VARIOUS ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 35 - INDIVIDUALS WHICH INCLUDE EXPENDITURE INCURRED OF R S.24.32 CRORES ON GIFT ITEMS EXCEEDING RS.1000/- EACH. SUCH NON-I NQUIRY WAS ALLEGED TO BE ERRONEOUS AND PREJUDICIAL TO THE INTE REST OF THE REVENUE. AS NOTED ABOVE, THE ASSESSEE RESPONDED BY STATING THAT THE DETAILED BREAKUP OF BUSINESS ADVANCEMENT EXPENS ES AMOUNTING TO RS.55.14 CRORES INCURRED WAS PROVIDED TO THE AO IN PURSUANCE OF SPECIFIC QUERY IN THIS REGARD. THIS AMOUNT INCL UDED THE IMPUGNED EXPENSES TOWARDS GIFT ITEMS. THE APPLICAB ILITY OF CBDT CIRCULAR NO. 5/2012 IN THIS REGARD WAS ALSO AD DRESSED WHEREBY IT WAS SUBMITTED SUBMIT THAT THIS CIRCULAR IS APPLICABLE ONLY WHERE FREEBIES ABOVE RS.1000/- PER ITEM WERE G IVEN TO THE MEDICAL PRACTITIONERS. DESPITE PRODUCTION OF BILLS AND RECORDS OF THE COMPANY, THE AO EMBARKED UPON ESTIMATED DISALLO WANCE OF 10% OF ENTIRE EXPENSES OF RS.55.14 CRORES WHICH WOR KS OUT TO 5.51 CRORES OUT OF EXPENDITURE OF RS.24.32 CRORES O N ITEMS EXCEEDING RS.1000/- PER ITEM. THIS APART, AS STATED , THE AO HAD ALSO MADE DISALLOWANCE OF ENTIRE EXPENDITURE OF RS. 25.99 CRORES BEING EXPENSES ON ACADEMIC / SCIENTIFIC GRANTS TO D OCTORS. IN SUCH SCENARIO, THE ALLEGATION OF THE PR.CIT TOWARDS ABSENCE OF INQUIRY ON THE POINT APPEARS QUITE SHALLOW. IT MAY BE PERTINENT HERE TO OBSERVE THAT IN ORDER TO WEIGH THE CREDENCE IN THE ALLEGATION OF THE REVISIONAL COMMISSIONER, ONE REQU IRES TO KEEP IN MIND THE VOLUME AND MAGNITUDE OF TRANSACTIONS IN VOLVED IN A GIVEN CASE. AS OBSERVED, THE REVENUE FROM OPERATIO NS IN THE INSTANT CASE IS EXCEEDING RS.4000 CRORES. LIKEWISE , THE QUANTUM OF EXPENDITURE INCURRED IS PEGGED IN EXCESS OF RS.3 200/- CRORE. THE PROFIT BEFORE TAX IS IN THE VICINITY OF RS.850 CRORES. THEREFORE, EXPECTING AN AO TO EXAMINE EACH AND EVER Y ITEM OF INCOME AND EXPENDITURE AND OTHER TRANSACTIONS TO TH E HILT IS ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 36 - FRAUGHT WITH SERIOUS CONSTRAINTS AND DOES NOT APPEA R FEASIBLE. NOTICEABLY, THE ASSESSEE IS A LISTED COMPANY AND AC COUNTS ARE SUBJECTED TO MULTIPLE AUDITS BY EXPERT PROFESSIONAL S. THE ASSESSMENT IS ALSO CARRIED OUT ON YEAR-TO-YEAR BASI S. IN SUCH A SCENARIO, WHERE THE AO HAS REJECTED SUBSTANTIAL AMO UNT FROM THE CLAIM OF EXPENDITURE AFTER REASONABLY VERIFYING BIL LS AND VOUCHERS, THE ALLEGATION OF THE PR.CIT APPEARS MISC ONCEIVED. ORDINARILY, IT IS ONLY IN A VERY GROSS CASE OF INAD EQUACY IN INQUIRY AND LACK OF APPLICATION OF MIND THAT THE ORDER OF A O IS OPEN TO ATTACK AS ERRONEOUS. IN THE CONTEXT OF A TURNOVER AND SCALE OF OPERATION OF THIS MAGNITUDE, THE EXPENDITURE INCURR ED ON BUSINESS ADVANCEMENT OF SUCH AMOUNT DO NOT INDICATE ANY VISI BLE ABNORMALITY. THIS APART, THE AO DID TAKE COGNIZANC E OF THE ISSUE AND MADE SUBSTANTIAL DISALLOWANCE. THUS, IT CANNOT BE OUTRIGHTLY ALLEGED THAT THE AO HAS OMITTED TO APPLY ITS MIND T O THE ISSUE. THE ALLEGATION THUS APPEARS UNINTELLIGIBLE. THE AO , IN OUR VIEW, HAS NOT COMMITTED ANY ERROR IN NOT CHASING WILL O THE WISP IN THE ABSENCE OF ANY BRAZEN CIRCUMSTANCES. THE ACTION OF THE PR.CIT ON THIS ISSUE OF BUSINESS ADVANCEMENT EXPENSES APPEARS TO BE GUIDED BY THE CONSIDERATIONS OF REVENUE ALONE AND THUS CAN NOT BE VIEWED WITH FAVOUR. 8.4 THE SECOND ISSUE FLAGGED AS PER PARA (II) OF TH E SHOW CAUSE NOTICE CONCERNS EXAMINATION OF CERTAIN POINTS IN RE LATION TO BADDI UNIT AND SIKKIM UNIT. AS AN ADJUNCT TO THIS ALLEGA TION, THE PR.CIT ALSO ASSERTED THAT THE AO HAS FAILED TO APPLY AS TO WHAT KIND OF MEDICINES ARE BEING MANUFACTURED AND WHETHER THE UN ITS WERE API OR IT WAS FORMULATION ETC. WE HAVE PERUSED THE ALL EGATION AS REPRODUCED IN PARA 4 OF THIS ORDER. THE PR.CIT ESS ENTIALLY OPINED ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 37 - THAT THE AO FAILED TO MAKE INQUIRY REGARDING THE MA NUFACTURING PROCESS AND NATURE OF MEDICINES BEING MANUFACTURED AND THUS ALLEGED THAT ASSESSMENT ORDER IS VITIATED FOR THIS REASON. IN THIS CONNECTION, WE TAKE NOTE OF THE REPLY DATED 10 TH DECEMBER, 2016 PLACED BY ASSESSEE BEFORE THE AO TOUCHING THE AFORE SAID ISSUE. AS POINTED OUT ON BEHALF OF THE ASSESSEE, THE BOOKS OF ACCOUNTS OF BADDI UNIT AND SIKKIM UNITS ARE MAINTAINED SEPARATE LY AND THE ALLOCATION OF COMMON EXPENDITURE IS MADE ON RATIONA L BASIS CONSISTENTLY FOLLOWED YEAR AFTER YEAR. THE AO HAS EXAMINED THE ISSUE REASONABLY AND HAD ALSO POSED SEVERAL QUERIES TO THE ASSESSEE IN THE COURSE OF THE ASSESSMENT PROCEEDING S TOWARDS BASIS OF ALLOCATION OF COMMON EXPENSES AND R&D EXPE NSES AND ALSO DISCOVERY COSTS OF R&D EXPENSES AND CAPITAL EX PENDITURE ON R&D ETC. THE ELIGIBILITY FOR CLAIM OF DEDUCTION UN DER S.80IC OF THE ACT (BADDI UNIT) AND 80IE OF THE ACT (SIKKIM UN IT) WAS ALSO VERIFIED. THUS, THE AO WAS CLEARLY LIVE TO THE ISS UE AND THERE WAS ACTIVE APPLICATION OF MIND IN AS MUCH AS THE AO IND ULGED IN RE- ALLOCATION OF EXPENSES AND RE-DETERMINATION OF AMOU NT ELIGIBLE OF DEDUCTION UNDER S.80IC AND 80IE OF THE ACT. SIGNIF ICANTLY, THE AO MADE DISALLOWANCE OF RS.27.47 CRORES IN RELATION TO BADDI UNIT AND RS.70.87 CRORES IN RELATION TO SIKKIM UNIT . TO DWELL FURTHER, IT IS ALSO THE CASE OF THE ASSESSEE THAT B ADDI UNIT CAME IN EXISTENCE WAY BACK IN AY 2006-07 AND HAS BEEN SUBJE CTED TO SCRUTINY YEAR AFTER YEAR. THUS, THERE APPEARS NO P ERCEPTIBLE OCCASION FOR THE AO TO REVISIT THE FACTS CONCERNING MANUFACTURING PROCESS ETC. THREADBARE AS RAISED. THE SIKKIM UNIT IS ALSO IN OPERATION SINCE AY 2012-13 AND THUS, THIS IS NOT TH E FIRST YEAR OF OPERATION. WE ALSO NOTE THAT THE ASSESSMENT MADE O N SIMILAR BASIS WAS ACCEPTED IN THE EARLIER YEAR AS WELL AS IN SUBS EQUENT ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 38 - ASSESSMENT YEARS. IN SUCH A SCENARIO, IT IS EQUALL Y PLAUSIBLE THAT RACKING UP ALREADY SETTLED ASPECTS YEAR AFTER YEAR MAY NOT HAVE BEEN FOUND NECESSARY TO THE WISDOM OF AO. ALTHOUGH , DESIRABLE FROM THE IDEALISTIC POINT OF VIEW OF REVISIONAL COM MISSIONER, THE RECORDS SUGGEST THAT THE AO CANNOT BE BLAMED TO HAV E ACTED IN A PERFUNCTORY MANNER. WHERE THE AO HAS EXAMINED THE EXPENDITURE CONCERNING THESE UNITS AND RESTRICTED THE DEDUCTION S CLAIMED THEREON, ONE CANNOT POSSIBLY SAY THAT THE AO HAS SL EEPWALKED ON THE ISSUE. OWING TO CONTINUITY OF OPERATIONS AND IN THE ABSENCE OF ANY STRONG CIRCUMSTANCE WHICH MAY PROVOKE INQUIRY A S DESIRED BY PR.CIT, CONCLUSION DRAWN BY THE AO SHOULD NOT BE OR DINARILY DISTURBED. NEEDLESS TO SAY, THE PR.CIT OUGHT TO HA VE MAKE INQUIRY ON THE ISSUE HIMSELF IF SO CONSIDERED EXPEDIENT TO AT LEAST PRIMA FACIE DEMONSTRATE IN ACTION OF THE AO WHICH RENDERE D THE ORDER ERRONEOUS WHICH ALSO CAUSED PREJUDICE TO THE REVENU E. MERELY BECAUSE THE EXPECTATIONS OF THE REVISIONAL COMMISSI ONER ARE PURPORTEDLY NOT MET, IT SHOULD NOT NECESSARILY TRIG GER REVISIONAL ACTION UNDER S.263 OF THE ACT IN EVERY CASE. THE D ISCRETION GIVEN TO THE SUPERVISORY AUTHORITY IS EXPECTED TO EXERCIS E IN A JUDICIAL MANNER HAVING REGARD TO THE TOTALITY OF FACTS. 8.5 WE SHALL NOW TURN TO THE NEXT ISSUE NAMELY NON INQUIRY TOWARDS QUALITY CONTROL AND REGULATORY APPROVAL IN RELATION TO R&D EXPENSES ON WHICH THE ASSESSEE HAS CLAIMED WEIG HTED DEDUCTION. IN THIS REGARD, WE REFER TO THE REPLY O F THE ASSESSEE BEFORE THE PR.CIT CLARIFYING THE ISSUE. THE PR.CIT HAS NOT REBUTTED THE EXPLANATION OF THE ASSESSEE ANYWHERE. IT WAS POINTED OUT BY THE ASSESSEE BEFORE THE PR.CIT THAT IT HAD A LREADY INFORMED THE AO VIDE SUBMISSIONS DATED 10.12.2016 FILED IN T HE COURSE OF ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 39 - ASSESSMENT PROCEEDINGS THAT ALL MANUFACTURING AND D IRECT EXPENSES INCURRED FOR EACH UNIT HAVE BEEN ACCOUNTED DIRECTLY IN THE RESPECTIVE BOOKS OF ACCOUNTS OF GIVEN UNIT. IT WAS CLARIFIED THAT EXPENDITURE RELATING TO QUALITY CONTROL AND REGULAT ORY APPROVALS WERE NOT GROUPED INTO R&D EXPENSES. THE QUALITY CO NTROL HAS BEEN CLAIMED AS AN ORDINARY EXPENDITURE IN THE RESP ECTIVE BOOKS OF VARIOUS UNITS AS IT IS A PART OF THE PRODUCTION COSTS. THE ASSESSEE FURTHER CLARIFIED THAT AFTER VERIFICATION, THE APPROVING AUTHORITY NAMELY DSIR EXCLUDED THE EXPENDITURE AMOU NTING TO RS.29.39 CRORES FROM THE AMOUNT ELIGIBLE FOR WEIGHT ED DEDUCTION UNDER S. 35(2AB) OF THE ACT. THIS ASPECT WAS ALSO DULY TAKEN NOTE OF BY AO WHILE FRAMING THE ASSESSMENT. IN VIE W OF THE UNEQUIVOCAL STAND TAKEN BY THE ASSESSEE BEFORE THE AO AS WELL AS BEFORE THE PR.CIT, WHICH HAS NOT BEEN DISLODGED AT ANY STAGE, THE ALLEGATION TOWARDS NON-APPLICATION OF MIND ON THE I SSUES OF R&D EXPENSES FADES INTO INSIGNIFICANCE AND DOES NOT SUR VIVE AGAINST THE ASSESSEE. WE THUS FIND THAT THE IMPUGNED ALLEG ATION PERTAINING TO R&D EXPENSES ALSO DOES NOT HOLD ANY W ATER. 8.6 IN RESPONSE TO THE CONCERN OF THE PR.CIT TOWARD S PATENT RELATED EXPENDITURE OUTSIDE INDIA AMOUNTING TO RS.4 75.32LAKHS AS NOT ELIGIBLE FOR WEIGHTED DEDUCTION UNDER S.35(2AB) OF THE ACT, WE OBSERVE FROM THE REPLY OF THE ASSESSEE BEFORE TH E AUTHORITIES BELOW THAT THE AFORESAID AMOUNT WAS ALREADY DISALLO WED BY THE AO AND THEREFORE THE CONCERN OF THE PR.CIT IS MISPL ACED. IT IS ALSO NOTICED THAT APART FROM DISALLOWANCE OF PATENT RELATED EXPENSES, SUBSTANTIAL AMOUNT OUT OF EXPENDITURE ON CLINICAL RESEARCH (RS.12.41 CRORE), LABOUR AND JOB WORK CHAR GES (RS.1.76 CRORE), PROFESSIONAL FEE (RS.90.48 LAKHS), LEGAL CH ARGES (RS.14.73 ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 40 - LAKHS) AND SALARY TO DR. C. DUTT (RS.2.72 CRORES) A S WELL AS SALARY TO EMPLOYEES NOT HAVING DEGREE IN SCIENCE (RS. 3.38 CORES) WAS DISALLOWED BY THE AO OUT OF R&D EXPENSES. THEREFOR E, THE CONCERN RAISED BY THE PR.CIT AS PER PARA (IV) & (V) ALSO WAS ADDRESSED BY THE AO AND ALLEGATION OF THE PR.CIT ON MECHANICAL ACCEPTANCE OF SUCH ASPECTS BY AO IS ON TENUOUS GROU NDS. 8.7 VIDE PARA (VI) OF THE SHOW CAUSE NOTICE, THE PR .CIT ALSO ALLEGED DEFICIENCY IN EXAMINATION OF ACADEMIC / SCI ENTIFIC GET TOGETHER EXPENSES OF RS.9.44 CRORES, SALES PROMOTIO N EXPENSES OF RS.19.57 CRORES AND BUSINESS ADVANCEMENT EXPENSES O F RS.1.48 CRORE (OTHER THAN AN DOMESTIC). IN THIS REGARD, AS NOTICED, IT IS THE CASE OF THE ASSESSEE THAT QUERIES WERE DULY RAISED IN THIS CONNECTION AND RESPONDED TO BY THE ASSESSEE VIDE IT S SUBMISSION DATED 10.12.2016 BEFORE THE AO. THE ELIGIBILITY OF EXPENSES WERE EXAMINED ON THE TOUCHSTONE OF CBDT CIRCULAR 5/2012 DATED 01.08.2012 WHICH PROVIDES FOR DISALLOWANCE OF DEDUC TION PERTAINING TO FREEBIES GIVEN TO MEDICAL PRACTITIONE RS. FURTHER, REPLY DATED 15.12.2016 WAS ALSO FILED IN RELATION T O THE ISSUE. THIS APART, VIDE SUBMISSION DATED 17.062016, THE AS SESSEE COMPANY ALSO SUBMITTED COPY OF FORM NO. 3CEB TOWARD S DETAILS OF TRANSACTION ENTERED INTO WITH ASSOCIATED ENTERPR ISES. THE TRANSACTIONS ARE ALSO REPORTED IN THE TRANSFER PRIC ING REPORT UNDER S.92D AS WELL AS IN TRANSFER PRICING DOCUMENTATION DURING THE COURSE OF ASSESSMENT PROCEEDINGS. IT IS THE CASE O F THE ASSESSEE THAT THE EXPENSES INCURRED TOWARDS PROMOTING ITS BU SINESS IN FOREIGN TERRITORY WERE ALLOWED AFTER THOROUGH VERIF ICATION OF TRANSFER PRICING DOCUMENTATION. THE APPLICABILITY OF CBDT CIRCULAR NO. 5/2012 (SUPRA) ON ACCOUNT OF ITEMS COS TING LESS THAN ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 41 - RS.1000/- GIVEN AS A FREEBIES TO MEDICAL PRACTITION ERS IS, AT BEST, A DEBATABLE ISSUE IN VIEW OF THE LANGUAGE EMPLOYED TH E CIRCULAR. THE AO HAS EXAMINED ALL THE ASPECTS AND HAS RECORDE D A CONSCIOUS FINDING ON EACH ISSUE. THE ACTION OF THE REVISIONA L COMMISSIONER IS NOT TENABLE ON THIS SCORE EITHER. 8.8 ON A BROADER RECKONING, WE NOTE THAT IT IS THE CASE OF THE ASSESSEE THAT THE AO HAS RECORDED A CONSCIOUS FINDI NG AFTER CONSIDERING THE FACTUAL MATRIX IN THE GIVEN CONTEXT AND IN THE LIGHT OF PREVAILING LEGAL POSITION AND HAVING REGARD TO T HE PAST HISTORY OF THE CASE ON EACH AND EVERY ISSUE RAISED BY PR.CI T. WE NOTICE THAT THE ASSESSMENT SO FRAMED HAS RUN INTO MORE THA N 100 PAGES AND HAS RESULTED IN APPROXIMATE ADDITIONS/DISALLOWA NCES OF WHOPPING RS.131 CRORE. ALL THE ISSUES RAISED BY TH E PR.CIT HAS BEEN DULY TOUCHED AND CERTAIN ADJUSTMENTS HAVE BEEN ALREADY CARRIED OUT BY THE AO. BESIDES, THE ASSESSEE IS A PUBLIC LIMITED COMPANY LISTED ON THE STOCK EXCHANGES AND IS RECKON ED TO BE A VALUABLE COMPANY IN THE PHARMACEUTICAL SECTOR STATE D TO BE RUN BY A DEDICATED TEAM OF PROFESSIONAL MANAGEMENT. THE A SSESSMENT OF THE ASSESSEE IS CARRIED OUT ON A YEAR TO YEAR BASIS . HAVING REGARD TO THE STAGGERING TURNOVER AND SCALE OF OPERATION, IT IS VIRTUALLY IMPOSSIBLE FOR ANY ADJUDICATING AUTHORITY TO EXAMIN E AND RE- EXAMINE ALL THE POINTS IN A GIVEN ASSESSMENT YEAR T O THE HILT AS PERCEIVED BY THE PR.CIT. THE ASSESSEE HAS FILED IT S DETAILED COUNTER BEFORE THE PR.CIT TO ADDRESS THE ISSUES RAI SED IN THE SHOW CAUSE NOTICE. THE PR.CIT HAS NOT GIVEN ANY COGENT REBUTTAL IN ITS ORDER AS TO HOW THE SO CALLED INADEQUACIES IN THE E NQUIRIES MADE HAS DENTED THE ULTIMATE OUTCOME IN ASSESSMENT ORDER . THE ACTION OF THE REVISIONAL COMMISSIONER REQUIRES TO BE OBJEC TIVELY ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 42 - JUSTIFIABLE AND CANNOT BE A MERE IPSE DIXIT. THE PR.CIT OUGHT TO HAVE MADE SOME ELEMENTARY INQUIRY HIMSELF TO UNEART H ALLEGED ERROR IN THE ORDER OF THE AO WHICH CAUSED PREJUDICE TO THE REVENUE. INSTEAD, THE PR.CIT HAS MERELY ALLEGED AB SENCE OF FULLER INQUIRY AND NON-APPLICATION OF MIND WITHOUT SHOWING ANY SYSTEMATIC EFFORTS ON HIS PART TO SUPPORT THE ALLEG ATIONS. WE ARE OF THE FIRM VIEW THAT THE PR.CIT WAS EXPECTED TO DO MORE IN THE TOTALITY OF THE FACTS AND CONTEXT. THUS, IT IS DIF FICULT TO AGREE WITH THE ALLEGATION OF THE PR.CIT ON ANY OF THE ISSUES R AISED IN THE SHOW CAUSE NOTICE AND THE REVISIONAL ORDER. 9. THE PR.CIT HAS DRAWN SUPPORT FROM NEWLY INSERTED EXPLANATION 2 BELOW SECTION 263(1) OF THE ACT INTRO DUCED BY FINANCE ACT, 2015 W.E.F. 01.06.2015 FOR HIS ACTION. THE EXPLANATION 2 INTER ALIA PROVIDES THAT THE ORDER PASSED WITHOUT MAKING INQUIRIES OR VERIFICATION WHICH SHOULD HAVE BEEN MADE WILL BE DEEMED TO BE ERRONEOUS IN SO FAR AS IT IS P REJUDICIAL TO THE INTEREST OF THE REVENUE. IT IS ON THIS BASIS, THE ASSESSMENT ORDER PASSED BY THE AO UNDER S.143(3) OF THE ACT HAS BEEN SET ASIDE WITH A DIRECTION TO THE AO TO PASS A FRESH ASSESSME NT ORDER. IT WILL BE THEREFORE IMPERATIVE TO DWELL UPON THE IMPA CT OF EXPLANATION 2 FOR THE PURPOSES OF SECTION 263 OF TH E ACT. 9.1 THE AIM AND OBJECT OF INTRODUCTION OF AFORESAID EXPLANATION BY FINANCE ACT, 2015 WAS EXPLAINED IN CBDT CIRCULAR NO. 19/2015 [F.NO.142/14/2015-TPL], DATED 27-11-2015 WH ICH IS REPRODUCED HEREUNDER: 53. REVISION OF ORDER THAT IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF REVENUE. ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 43 - 53.1 THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 263 OF THE INCOME-TAX ACT, BEFORE AMENDMENT BY THE ACT, PROVID ED THAT IF THE PRINCIPAL COMMISSIONER OR COMMISSIONER CONSIDERS TH AT ANY ORDER PASSED BY THE ASSESSING OFFICER IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE, HE MAY , AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND AFTER MA KING AN ENQUIRY PASS AN ORDER MODIFYING THE ASSESSMENT MADE BY THE ASSESSING OFFICER OR CANCELLING THE ASSESSMENT AND DIRECTING FRESH AS SESSMENT. 53.2 THE INTERPRETATION OF EXPRESSION 'ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE' HAS BE EN A CONTENTIOUS ONE. IN ORDER TO PROVIDE CLARITY ON THE ISSUE, SECTION 2 63 OF THE INCOME-TAX ACT HAS BEEN AMENDED TO PROVIDE THAT AN ORDER PASSE D BY THE ASSESSING OFFICER SHALL BE DEEMED TO BE ERRONEOUS IN SO FAR A S IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE, IF, IN THE OPINION OF THE PRINCIPAL COMMISSIONER OR COMMISSIONER. (A) THE ORDER IS PAS SED WITHOUT MAKING INQUIRIES OR VERIFICATION WHICH, SHOULD HAVE BEEN MADE; (B) THE ORDER IS PASSED ALLOWING ANY RELIEF WITHOUT INQUIRI NG INTO THE CLAIM; (C) THE ORDER HAS NOT BEEN MADE IN ACCORDANCE WITH ANY ORDER, DIRECTION OR INSTRUCTION ISSUED BY THE BOARD UNDER SECTION 119; OR (D) THE ORDER HAS NOT BEEN PASSED IN ACCORDANCE WITH ANY DECISION, PR EJUDICIAL TO THE ASSESSEE, RENDERED BY THE JURISDICTIONAL HIGH COURT OR SUPREME COURT IN THE CASE OF THE ASSESSEE OR ANY OTHER PERSON. 53.3 APPLICABILITY: THIS AMENDMENT HAS TAKEN EFFECT FROM 1ST DAY OF JUNE, 2015. 9.2 A BARE READING OF THE CIRCULAR GIVES A SOMEWHAT IMPRESSION THAT THE EXPLANATION 2 WAS INSERTED FOR THE PURPOSE OF PROVIDING CLARITY ON THE EXPRESSION ERRONEOUS IN SO FAR AS I T IS PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE EXPLANATION BEIN G CLARIFICATORY WOULD NOT LEAD TO DILUTION OF THE BASIC REQUIREMENT S OF SECTION 263(1) OF THE ACT. THE PROVISIONS OF SECTION 263 AL THOUGH APPEARS TO BE OF A VERY WIDE AMPLITUDE AND MORE PARTICULARL Y AFTER INSERTION OF EXPLANATION 2 BUT CANNOT POSSIBLY MEAN THAT RECOURSE TO SECTION 263 OF THE ACT WOULD BE AVAILABLE TO THE REVISIONAL AUTHORITY ON EACH AND EVERY INADEQUACY IN THE MATTE R OF INQUIRIES AND VERIFICATION AS PERCEIVED BY THE REVISIONAL AUT HORITY. THE REVISIONAL ACTION PERCEIVED ON THE PRETEXT OF INADE QUACY OF ENQUIRY IN A PLANNERY AND BLANKET MANNER MUST BE DE SISTED FROM. ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 44 - THE OBJECT OF SUCH EXPLANATION IS PROBABLY TO DISSU ADE THE AO FROM PASSING ORDERS IN A ROUTINE AND PERFUNCTORY MA NNER AND WHERE HE FAILED TO CARRY OUT THE RELEVANT AND NECES SARY INQUIRIES OR WHERE THE AO HAS NOT APPLIED MIND ON IMPORTANT A SPECTS. HOWEVER, IN THE SAME VAIN WHERE THE PREPONDERANCE O F EVIDENCE INDICATES ABSENCE OF CULPABILITY, AN ONEROUS BURDEN CANNOT OBVIOUSLY BE FASTENED UPON THE AO WHILE MAKING ASSE SSMENT IN THE NAME OF INADEQUACY IN INQUIRIES OR VERIFICATION AS PERCEIVED IN THE OPINION OF THE REVISIONAL AUTHORITY. IT GOES W ITHOUT SAYING THAT THE EXERCISE OF STATUTORY POWERS IS DEPENDENT ON EXISTENCE OF OBJECTIVE FACTS. THE POWERS OUTLINED UNDER S.263 O F THE ACT ARE EXTRAORDINARY AND DRASTIC IN NATURE AND THUS CANNOT BE READ TO HOLD THAT AN UNCONTROLLED, UNGUIDED AND UNCANALISED POWE RS ARE VESTED WITH THE COMPETENT AUTHORITY. THE POWERS UNDER S.2 63 OF THE ACT HOWSOEVER SWEEPING ARE NOT BLANKET NEVERTHELESS. T HE AO CANNOT BE EXPECTED TO GO TO THE LAST MILE IN AN ENQUIRY ON THE ISSUE OR INDULGE IN FLEETING INQUIRIES. THE ACTION OF THE R EVISIONAL COMMISSIONER BASED ON SUCH EXPECTATION REQUIRES TO BE STRUCK DOWN. 9.3 THE USE OF EXPRESSION WHICH SHOULD HAVE BEEN M ADE IN CLAUSE (A) TO EXPLANATION 2 TO SECTION 263 OF THE A CT IS SIGNIFICANT. THIS IMPLIEDLY TESTS THE ACTION OF AO ON THE TOUCHSTONE OF REASONABLENESS AND RATIONALITY IN APP ROACH. IT CLEARLY SUGGESTS THAT CONTEXT ALSO HOLDS THE KEY IN THE MATTER OF ENQUIRY. THE ACTION OF THE AO REQUIRES TO BE EVALU ATED CONTEXTUALLY. IF THE AFORESAID EXPLANATION IS READ IN A ABSTRACT MANNER DE HORSE THE TEST OF REASONABLENESS AND CONTEXT, THE POWERS OF REVISIONAL CIT WOULD BE RENDERED INVINCIB LE AND ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 45 - ALMOST EVERY ASSESSMENT ORDER CAN BE POSSIBLY FRUST RATED. A NUANCED UNDERSTANDING OF EXPLANATION SUGGESTS THAT INADEQUACY IN INQUIRY OUGHT TO BE OF CARDINAL NATURE TO IGNITE TH E POTENT POWERS OF REVIEW. 9.4 AS NOTED, THE ASSESSEE IS A VERY BIG PLAYER IN THE PHARMA SECTOR AND ENORMITY OF OPERATION IS TO BE KEPT IN M IND. THUS WHAT IS RELEVANT IS TO WEIGH AS TO WHAT COUNTERVAILING C IRCUMSTANCES WERE PREVAILING WHICH OUGHT TO HAVE PROVOKED SUCH E NQUIRY BY A REASONABLE PERSON INSTRUCTED IN LAW. IN THE INSTAN T CASE, APART FROM NOTICING THAT EACH AND EVERY ISSUE RAISED IN T HE NOTICE WERE SUBJECT MATTER TO ENQUIRY IN ONE WAY OR THE OTHER, WE ALSO CANNOT REMAIN OBLIVIOUS OF THE FACTS THAT THE FINANCIAL AC COUNTS OF THE ASSESSEE ARE SUBJECTED TO VARIOUS KINDS OF AUDITS U NDER DIFFERENT ACTS AND THE ASSESSEE BEING A LISTED COMPANY IS PRE SUMED TO FUNCTION IN A DISCIPLINED AND REGULATORY ENVIRONMEN T. IN THE CONTEXT OF THE MAMMOTH SCALE OF OPERATION COUPLED W ITH REGULARITY OF THE SCRUTINY ASSESSMENT YEAR AFTER YEAR, WE FIND APPARENT PLAUSIBILITY AND SUFFICIENT STRENGTH IN THE CONTENT IONS RAISED ON BEHALF OF THE ASSESSEE IN ITS DEFENSE. HAVING REGA RD TO COLOSSAL VOLUME, THE SERIOUS TIME AND CAPACITY CONSTRAINTS S ADDLED UPON AO WHILE RAISING PITCH FOR DEEPER EXAMINATION MUST BE BORNE IN MIND. 9.5 WE THUS FIND MERIT IN THE PLEA OF THE ASSESSEE THAT THE REVISIONAL COMMISSIONER IS EXPECTED SHOW THAT THE V IEW TAKEN BY THE AO IS WHOLLY UNSUSTAINABLE IN LAW BEFORE EMBARK ING UPON EXERCISE OF REVISIONARY POWERS. THE REVISIONAL POW ERS CANNOT BE EXERCISED FOR DIRECTING A FULLER INQUIRY TO MERELY FIND OUT IF THE ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 46 - EARLIER VIEW TAKEN IS ERRONEOUS PARTICULARLY WHEN A VIEW WAS ALREADY TAKEN AFTER INQUIRY. IF SUCH COURSE OF ACT ION AS INTERPRETED BY THE REVISIONAL COMMISSIONER IN THE LIGHT OF THE EXPLANATION 2 IS PERMITTED, REVISIONAL COMMISSIONER CAN POSSIBLY FIND FAULT WITH EACH AND EVERY ASSESSMENT ORDER WITHOUT HIMSEL F MAKING ANY INQUIRY OR VERIFICATION AND WITHOUT ESTABLISHING TH AT ASSESSMENT ORDER IS NOT SUSTAINABLE IN LAW. THIS WOULD INEVIT ABLY MEAN THAT EVERY ORDER OF THE LOWER AUTHORITY WOULD THUS BECOM E SUSCEPTIBLE TO SECTION 263 OF THE ACT AND, IN TURN, WILL CAUSE SERIOUS UNINTENDED HARDSHIP TO THE TAX PAYER CONCERNED FOR NO FAULT ON HIS PART. APPARENTLY, THIS IS NOT INTENDED BY THE EXPLA NATION. HOWSOEVER WIDE THE SCOPE OF EXPLANATION 2(A) MAY BE , ITS LIMITS ARE IMPLICIT IN IT. IT IS ONLY IN A VERY GROSS CAS E OF INADEQUACY IN INQUIRY OR WHERE INQUIRY IS PER SE MANDATED ON THE BASIS OF RECORD AVAILABLE BEFORE THE AO AND SUCH INQUIRY WAS NOT CO NDUCTED, THE REVISIONAL POWER SO CONFERRED CAN BE EXERCISED TO I NVALIDATE THE ACTION OF AO. THE AO IN THE PRESENT CASE HAS NOT A CCEPTED THE SUBMISSIONS OF THE ASSESSEE ON VARIOUS ISSUES SUMMA RILY BUT HAS SHOWN APPETITE FOR INQUIRY AND VERIFICATIONS. THE AO HAS PASSED THE ORDER IN GREAT DETAIL AFTER MAKING SEVERAL ALLO WANCES AND DISALLOWANCES ON THE ISSUES INVOLVED IMPLIEDLY AFTE R DUE APPLICATION OF MIND. THEREFORE, THE EXPLANATION 2 TO SECTION 263 OF THE ACT DO NOT, IN OUR VIEW, THWART THE ASSESSME NT PROCESS IN THE FACTS AND THE CONTEXT OF THE CASE. CONSEQUENTL Y, WE FIND THAT THE FOUNDATION FOR EXERCISE OF REVISIONAL JURISDICT ION IS SORELY MISSING IN THE PRESENT CASE. ITA NO.164/AHD/18 [TORRENT PHARMACEUTICALS LTD. VS. DCIT] A.Y. 2014-15 - 47 - 10. RESULTANTLY, THE ORDER OF THE PR.CIT PASSED UND ER S.263 OF THE ACT IS SET ASIDE AND CANCELLED AND THE ORDER OF THE AO UNDER S.143(3) IS RESTORED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. SD/- SD/- (MAHAVIR PRASAD) (PRADIP KUMA R KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 08/08/2018 TRUE COPY S. K. SINHA !'#' / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ , / CONCERNED CIT 4. ,- / CIT (A) /. 012 33*+4 *+#4 56) / DR, ITAT, AHMEDABAD 7. 289 : / GUARD FILE. BY ORDER / 4 /5 *+#4 56) THIS ORDER PRONOUNCED IN OPEN COURT ON 08/08/201 8