ASST CIT (LTU) 2, MUMBAI V. GLENMARK PHARMACEUTICALS LTD, MUMBAI

ITA 1654/MUM/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5802 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 22-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHI RAJESH DUMOR
• Keywords: Business income; Transfer pricing; International transaction; Earning of tax free income; Wholly owned subsidiary; Revised return
• Section: 92C; 14A; 115JB; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ' K ' BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA , ACCOUNTANT MEMBER AND SHRI RAVISH SOOD , JUDICIAL MEMBER ITA NO. 1654 /MUM/ 2016 (ASSESSMENT YEAR: 2010 - 11 ) ACIT ( LTU ) - 2 WORLD TRADE CENTRE CENTRE - 1, 29TH FLOR CUFF PARADE MUMBAI 400005 VS. M/S. GLENMARK PHARMACEUTICALS LTD. GLENMARK HUSE, HDO CORPORATE BLDG., WING A, B.D. SAWANT MARG CHAKALA, OPP. WESTERN EXPRESS HIGH WAY, ANDHERI (E) , MUMBAI PAN AAACG2207L APPELLANT RESPONDENT APPELLANT BY: SHI RAJESH DUMOR RESPONDENT BY: SHRI VIJAY MEHTA & SHRI AN UJ KI SNADWALA DATE OF HEARING: 05 . 11 .2019 DATE OF PRONOUNCEMENT: 01.02 . 2019 O R D E R PER SHAMIM YAHYA , A M THIS APPEAL FILED BY REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A) - 56 , MUMBAI DATED 31 . 12 .201 5 AND IT RELATES TO A.Y. 2010 - 11 . 2. THE GROUNDS OF APPEAL READS AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE L D. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 5,64,498/ - MADE BY THE ASSESSING OFFICER U/S 41(1) OF THE INCOME TAX ACT, 1961 ON ACCOUNT OF CESSATION OF LIABILITY TOWARDS PAYMENT OF SUNDRY CREDITORS . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE L D. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE U/S 14A R.W. RULE 8D AT RS. 26.11 LAKHS INSTEAD OF RS.7,23,91,578/ - AS COMPUTED BY THE AO CONSEQUENTIAL EFFECT U/S 115JB IS ALSO PRAYED. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CI T(A) HAS ERRED IN DELETING THE TP ADJUSTMENT OF RS. 17,10,92,000/ - MADE BY TPO TO THE EXTENT OF 3% OF THE AMOUNT OF GUARANTEE GIVEN BY THE ASSESSEE ON BEHALF OF AE'S? ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 2 4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE TP ADJUSTMENT OF RS.1,17,11,449/ - MADE BY THE TPO BY APPLYING CUP METHOD INSTEAD OF TNMM USED BY ASSESSEE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE L D. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 10,04,36556/ - BEING R & D EXPENSES ALLOCATED TO BADDI & SOLAN UNIT OF THE ASSESSEE. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 11,88,53,122/ - , BEING INTEREST EXPENDITURE ALLOCATED TO BADDI & SOLAN UNITS ON THE BASIS OF SALES TURNOVER RATIO, WHILE COMPUTING DEDUCT ION U/S 80IC. 7. THE APPELLANT PRAYS THAT THE ORDER OF THE L D. CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 3. APROPOS GROUND RELATING TO DISALLOWANCE US 41(1) OF INCOME TAX ACT, 1961 (HEREINAFTER 'THE ACT') OF RS. 5,64,498/ - . ON THIS ISSUE THE AO MADE DISALLOWANCE ON THE GROUND THAT SOME OF THE CREDITORS WERE OUTSTANDING FOR MORE THAN THREE YEARS AND THERE WAS NO MOVEMENT IN THEIR ACCOUNTS, HENCE THE AO WAS OF THE OPINION THAT THERE WAS NOT MUCH CHANCE FOR THE ASSES SEE TO MAKE PAYMENT IN THIS REGARD. THEREFORE ADDITION OF RS. 5,64,498/ - IN RESPECT OF 30 CREDITORS INVOLVED WAS MADE. 4. UPON THE ASSESSEES APPEAL, THE LEARNED CIT(A) DELETED THE SAME AS SIMILAR DISALLOWANCES MADE IN EARLIER YEARS HAVE BEEN DELETED BY THE I TAT IN ASSESSEES OWN CASE. AGAINST THIS ORDER REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. WE FIND THAT THE ADDITION UNDER SECTION 41(1) OF THE ACT HAS BEEN MADE BY THE AO WITHOUT ANY COGENT REASON. NO CASE HAS BEEN MADE OUT THAT THE AO HAS MADE ANY ENQUIRY AND FOUND THAT THESE CREDITORS ARE NOT PAYABLE . J UST BECAUSE THE CREDITORS ARE OUTSTANDING FOR MORE THAN THREE YEARS , T HERE IS NO UNIVERSAL RULE THAT THE BALANCE HAS TO DATE BACK UNDER SECTION 41(1) OF THE ACT . WE FURTHER NOTE THAT SIMILAR ADDITION IN EARLIER WAS DELETED BY THE ITAT. ACCORDINGLY WE D O NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). 6. APROPOS GROUND NO. 2 RELATING TO DISALLOWANCE UNDER SECTION 14A OF THE ACT. ON THIS ISSUE THE AO NOTED THAT THE ASSESSEE HAS MADE HUGE INVESTMENT ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 3 BUT HAS MADE MEAGRE DISALLOWANCE OF RS. 75,022/ - UNDER SECTION 14 A OF THE ACT. THE AO PROCEEDED TO REJECT ASSESSEES CONTENTION THAT INVESTMENTS WERE OF STRATEGIC IN NATURE AND THAT THE ASSESSEES OWN FUNDS WERE MORE THAN THE INVESTMENT MADE. HE COMPUTED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT R.W. RULE 8D OF IT RULES AND MADE AN ADDITION UNDER SECTION 14A OF THE ACT OF RS. 7,23,91,578/ - . THE AO, REFERRING TO CLAUSE (F) OF EXPLANATION TO SECTION 115JB OF THE ACT ALSO A DDED THE SAME TO THE BOOK PROFITS UNDER SECTION 115JB OF THE ACT. AGAINST THIS ORDER THE ASSESSEE APPEALED BEFORE THE LEARNED CIT(A). THE LD. CIT(A) REPRODUCED THE ASSESSEES SUBMISSIONS AND THEREAFTER CONCLUDED AS UNDER: THE FACTS OF THE CASE HAVE BEEN CONSIDERED TOGETHER WITH THE SUBMISSIONS OF THE APPELLANT VIS - A - VIS THE OBSERVATIONS/ FINDINGS OF THE AO, IN HIS ORDER. I DO NOT AGREE WITH THE SUBMISSION OF THE APPELLANT THAT NO DISALLOWANCE CAN BE MADE FOR THE INCOME WHIC H IS SUBJECT TO TAX U/S 115JB. HOWEVER, I AGREE WITH THE CONTENTION OF THE APPELLANT THAT DECISION OF ITAT MUMBAI IN THE GARWARE WALL ROPES LIMITED & JM FINANCIAL UNITED ARE APPLICABLE TO THE FACTS OF THE PRESENT CASE AS INVESTMENT IN SUBSIDIARY COMPANIES IS NOT FOR EARNING THE EXEMPT INCOME (DIVIDEND) BUT FOR THE PURPOSES OF HAVING CONTROL OF ME SUBSIDIARY AND MIS INVESTMENT IS PURELY FOR 'BUSINESS PURPOSE'. FURTHER, THE AO HAS NOT BROUGHT ANYTHING ON RECORD TO SHOW THAT THE ASSESSEE HAS INCURRED THIS EXPENDITURE ON INVESTMENT IN SUBSIDIARY COMPANIES FOR PURPOSES OTHER THAN 'BUSINESS PURPOSE' OR TO EARN EXEMPT INCOME. NO DISALLOWANCE OUT OF INTEREST PAID IS CALLED FOR IN RESPECT OF THIS INVESTMENT IN SUBSIDIARY COMPANIES U/S 14A R.W. RULE 8D, I ALSO FIND THAT APPELLANT HAS NOT BEEN ABLE TO SHOW THAT NO BORROWED FUNDS HAVE BEEN USED TO EARN EXEMPT INCOME. I, THEREFORE HOLD THAT REMAINING INVESTMENT OF KS. 26.11 LACS CANNOT BE CONSIDERED TO HAVE BEEN MADE FOR PURPOSES OF BUSINESS AS THIS INVESTMENT HAS BEEN MADE TO EARN EXEMPT INCOME & CONSEQUENTLY WOULD ATTRACT DISALLOWANCE U/S 14A. KEEPING IN MIND THE FACTS OF THE CASE AND FOLLOWING PRINCIPLES LAID DOWN IN THE ABOVE - MENTION ED JUDGEMENTS AND FOLLOWING PRINCIPLE OF JUDICIAL DISCIPLINE THIS GROUND OF APPEAL OF THE APPELLANT IS PARTLY ALLOWED. 7. AGAINST THIS ORDER REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORD. THE LEARNED COUNSEL OF THE ASSE SSEE AGREED THAT IN VIEW OF HON'BLE APEX COURTS DECISION IN THE CASE OF MAX OPP INVESTMENT LTD. VS. CIT [2018] 402 ITR 640 (SC) THE PLANK THAT INVESTMENT MADE WAS STRATEGIC IN NATURE CANNOT BE MADE FOR DELETING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT . HOWEVER, T HE LEARNED COUNSEL FOR THE ASSESSEE UNDER RULE 27 OF THE ITAT RULES PLEADED AS UNDER: ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 4 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT ADDITIONS MADE U/S 14A OF THE INCOME TAX ACT, 1961 (''THE ACT') SHOULD BE RESTRICTED TO TEN PERCENT OF EXEMPT INCOME AS UPHELD BY THE HON'BLE MUMBAI TRIBUNAL IN ASSESSEE'S OWN CASE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT NO INTEREST DISALLOWANCE CAN B E MADE U/S 14A OF THE ACT SINCE ASSESSEE'S OWN FUNDS ARE SUFFICIENT TO COVER UP THE VALUE OF INVESTMENTS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW . , THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT DISALLOWANCE U/ S 14A OF THE ACT IS TO BE RESTR ICTED TO THE AMOUNT OF EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE YEAR. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW . , THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT FOR THE PURPOSE OF DISALLOWANCE U/S.14A OF THE ACT ONLY THOSE INVESTMENTS ARE TO BE CONSIDERED FROM WHICH EXEMPT INCOME HAS BEEN RECEIVED DURING THE YEAR. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW . , THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT DISALLOWANCE UNDER SECTION 14A WHILE COMPUTING INCOME U/S.115JB OF THE ACT I S CONSEQUENTIAL, HENCE, DISALLOWANCE MADE UNDER NORMAL PROVISIONS SHOULD BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE WHILE COMPUTING INCOME U/S.115JB OF THE ACT. 8. THE LD. COUNSEL OF THE ASSESSEE HAS STATED THAT IN A.YS. 2007 - 08 TO 2009 - 10, TH E ASSESSEE H AS SUO MOTO DISALLOWED 10% WHICH HAS BEEN ACCEPTED UPTO THE LEVEL OF ITAT. FURTHERMORE, THE LD. COUNSEL OF THE A SSESSEE HAS STATED THAT SINCE T H E ASSESSEE HAS SUFFICIENT OWN FUNDS, NO INTEREST DISALLOWANCE CAN BE MADE U/S.14A. FOR THIS, THE ASSESSEE HAS PLACED RELIANCE UPON THE FOLLOWING CASE LAWS: CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) CIT VS. HDFC BANK LTD ( 2014) 366 ITR 505 (BOM.)(HC). FURTHERMORE, THE LD. CIT(A) HAS PLEADED THAT THE LD. CIT(A) OUGHT TO HAVE HLED THAT THE DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO THE AMOUNT OF EXEMPT INCOME EARNED. FOR THIS, THE LD. COUNSEL OF THE ASSESSEE HAS PLACED RELIANCE UPO N THE FOLLOWING CASE LAWS: JOINT INVESTMENTS VS. CIT [372 ITR 694] (DEL); PR. CIT VS. STATE BANK OF PATIALA [393 ITR 476] (P&H) M/S. DELUX POLYMERS PVT. LTD. VS. ASST. CIT (ITA NO.4138/MUM/2016) DATED 07.09.2017 FURTHER, THE LD. CIT(A) PLEADED THAT FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE U/S.14A, ONLY THOSE INVESTMENTS SHOULD HAVE BEEN CONSIDERED FROM WHICH EXEMPT INCOME HAS BEEN EARNED. FOR THIS, THE LD.COUNSEL OF THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF THE ITAT SPECIAL BENCH DECISION IN THE CASE OF ACIT V. VIREET INVESTMENTS PRIVATE LIMITED [165 ITD 27]. LASTLY, ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 5 THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE LD. CIT(A) OUGHT TO HAVE HELD THAT DISALL OWANCE U/S. 14A WHILE COMPUTING THE INCOME U/S.115JB IS CONSEQUENTIAL. HENCE, THE DISALLOWANCE MADE UNDER NORMAL PROVISIONS SHOULD BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE WHILE COMPUTING THE INCOME U/S.115JB OF THE ACT . 9. UPON H EARING BOTH THE COUNSEL AND PERUSING THE RECORDS WE FIND THAT THE LEARNED CIT(A) HAS DELETED THE ADDITION BY HOLDING THAT SINCE THE INVESTMENTS ARE OF STRATEGIC IN NATURE, NO DISALLOWANCE SHOULD BE MADE UNDER SECTION 14A OF THE ACT . THIS IS NOW NOT SUSTAINABLE IN VIEW OF HONBLE APEX COURT IN THE CASE OF MAXOPP INVESTMENT LTD (SUPRA). 10. AS REGARDS THE FIRST PLEA OF THE LD. COUNSEL OF THE ASS ESSEE THAT IN PRIOR YEARS, DISALLOWANCE WAS RESTRICTED TO 10%, HENCE, THE SAME CAN BE ACCEPTED. WE NOTE THAT THIS PLEA IS NOT SUSTAINABLE. IN VIEW OF THE APPLICABILITY OF RULE 8D, THE APPLICABILITY OF WHICH FOR THE CURRENT ASSESSMENT YEAR IS UPHELD BY THE HONBLE APEX COURT IN THE CASE OF GODREJ & BOYCE VS. CIT 328 ITR 81. 11. AS REGARDS THE LD. COUNSEL OF THE ASSESSEE THAT NO DISALLOWANCE SHOULD B E MADE FOR INTEREST , AS THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS, WE NOTE THAT THE SUBMISSION OF THE ASSESSEE HAS CONSIDERABLE COGENCY IN VIEW OF THE HONBLE JURISDICTIONAL HIGH COURT DECISION RELIED UPON. HENCE, WE REMIT THIS ISSUE TO THE FILE OF T HE A.O. TO EXAMINE THE VERACITY OF THE SUBMISSION AND THEREAFTER DECIDE AS PER THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT AS ABOVE. 12. AS REGARDS THE SUBMISSION OF THE LD. COUNSEL OF THE ASSESSEE THAT DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO THE AMOUNT OF THE EXEMPT INCOME DURING THE YEAR , IS ALSO ACCEPTABLE IN VIEW OF THE CASE LAWS RELIED HEREIN ABOVE. THE A.O. IS DIRECTED TO FOLLOW THE PROPOSITION AS ABOVE. AS REGARDS THE OTHER CONTENTION OF THE LD. COUNSEL OF THE ASSESSEE THAT FOR THE PURPO SE OF DISALLOWANCE U/S.14A, FOR THE PURPOSE OF COMPUTING THE AVERAGE VALUE OF INVESTMENT, ONLY THOSE INVESTMENT SHOULD BE COMPUTED ON WHICH EXEMPT INCOME IS EARNED, IS SUSTAINABLE IN VIEW OF THE SPECIAL BENCH DECISION IN THE ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 6 CASE OF ACIT V. VIREET INVESTMENTS PRIVATE LIMITED (SUPRA) AS ABOVE. THE A.O. IS DIRECTED TO FOLLOW THE SAME. 13. AS REGARDS THE DISALLOWANCE FOR EARNING EXEMPT INCOME U/S.115JB, WE NOTE THAT THE SPECIAL BENCH OF THE ITAT IN THE ABOVE CASE LAW HAS EXPOUNDED THAT THE DISALLOWANCE CANNOT BE MADE U/S. 14A. THE DISALLOWANCE SHOULD BE MADE BY THE A.O. IN ACCORDANCE WITH THE PROVISION OF CLAUSE (F) OF SECTION 115JB OF THE ACT. THE A.O. IS DIRECTED ACCORDINGLY. 14. APROPOS GROUND RELATING TO TP ADJUSTM ENT OF RS. 17,10,92,000/ - MADE BY THE BY THE TOP TO THE EXTENT OF 3% OF THE AMOUNT OF GUARANTEE GIVEN BY THE ASSESSEE ON BEHALF OF ASSOCIATED ENTERPRISES (AE). ON THIS ISSUE THE T P O NOTED THAT THE ASSESSEE HAS GIVEN THE FOLLOWING CORPORATE GUARANTEES: - S. NO. DETAILS GUARANTEE GIVEN ( RS. ) 1 CORPORATE GUARANTEES GIVEN TO CITI BANK ON BEHALF OF GLENMARK HOLDING SA, SWITZERLAND (FULL YEAR) 451,40,00,000 2 CORPORATE GUARANTEES GIVEN TO ICICI BANK ON BEHALF OF GLENMARK HOLDING SA, SWITZERLAND (FULL YEAR) 64,55,02,000 3 CORPORATE GUARANTEES GIVEN TO CITI BANK ON BEHALF OF GLENMARK HOLDING SRL , ROMANIA (FULL YEAR) 52,04,000 4 CORPORATE GUARANTEES GIVEN TO ALD AUTOMATIVE ON BEHALF OF GLENMARK IMPEX LLC RUSSIA (FULL YEAR) 9,80,26,000 5 CORPORATE GUARANTEES GIVEN TO CITI BANK ON BEHALF OF GLENMARK PHARMACEUTICALS LTD. BRAZIL 9,02,80,000 6 CORPORATE GUARANTEES GIVEN TO PAUL ROYALTY HOLDING FUND ON BEHALF OF GLENMARK GENERICS INC. USA (FULL YEAR) (USD 27 MILLION) 121,87,80,000 15. THE TPO NOTED THAT THE ASSESSEE HAS CHARGED GUARANTEE COMMISSION OF 0.53% FROM THE AES AT SL. NO. 1 AND 2 AND NO GUARANTEE COMMISSION HAS BEEN CHARGED BY THE ASSESSEE ON THE AES LISTED AT 3, 4, 5 & 6. THE AO PROCEEDED TO HOLD THAT CORPORATE GUARANTEE BEING CHARGEABLE AT 3% IN THE SAID INTERNATIONAL TRANSACTION. UPON ASSESSEES APPEAL IN THIS REGARD THE CIT(A) CONCLUDED THAT ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 7 CHARGING GUARANTEE COMMISSION @0.53% WITH REGARD TO ITEM 1 AND 2 IS FAIR AND REASONABLE. IN THIS REGARD HE PLACED RELIANCE ON ITAT DECI SION IN ASSESSEES OWN CASE. HE CONCLUDED AS UNDER: - I HOLD THAT CHARGING GUARANTEE COMMISSION BY THE ASSESSEE AT 0.53% IS FAIR AND REASONABLE AND NEED TO BE ACCEPTED WITHOUT ANY ADJUSTMENT. MOREOVER, HON'BLE ITAT IN THE CASE OF THE ASSESSEE FOR A.Y. 2008 - 09 IN RESPECT OF THE SAME LOAN AND GUARANTEE IN RESP ECT OF THE SAME LOAN, HAS UPHELD CHARGING OF GUARANTEE COMMISSION ADOPTED BY THE ASSESSEE @0.53%. THE ITAT IN APPEAL IN RESPECT OF THESE 2 YEARS HAS REJECTED THE ADJUSTMENT OF 3% MADE BY THE TPO. FOLLOWING THE DECISION OF THE HON'BLE ITAT IN ASSESSEES OWN CASE I HOLD THAT NO ADJUSTMENT IN RESPECT OF IMPUGNED GUARANTEE COMMISSION IS REQUIRED AS ASSESSEE HAS CHARGED GUARANTEE COMMISSION FAIRLY AND REASONABLY @0.53% (THIS IS MORE THAN THE AVERAGE GUARANTEE COMMISSION ACCEPTED BY THE ITAT IN THE CASE OF RELIAN CE INDUSTRIES, ASIAN PAINTS LTD., EVEREST KENTO CYLINDER AND NIMBUS COMMUNICATION). THUS THIS GROUND OF APPEAL OF THE APPELLANT ON THIS COUNT IS ALLOWED. 16. A S REGARDS NOT CHA R GING OF COMMISSION WITH RESPECT TO ITEM NO. 3 TO 6, THE LD. CIT(A) HELD AS UNDER: I FIND MERIT IN THE SUBMISSIONS OF THE APPELLANT THAT GUARANTEE PROVIDED BY GPL TO LESSOR OF AE AND/OR PERFORMANCE GUARANTEE OF AE FOR THE CONTRACT ENTERED BY AE. THESE ARE IN THE NATURE OF COMFORT GUARANTEE AND THEY DO NOT HAVE ANY BEARING ON THE PROFIT OF THE ASSESSEE. THESE COMFORT GUARANTEES ARE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE & IT IS A NORMAL PRACTICE FOR A PARENT COMPANY TO EXTEND SUCH GUARANTEES ON BEHALF OF THE SUBSIDIARY COMPANIES. NO BENEFIT DIRECT OR INDIRECT ACCRUED TO THE AES ON ACC OUNT OF THESE COMFORT GUARANTEES. THESE GUARANTEES INVOLVE NO COST. THERE IS HARDLY ANY RISK TO THE GUARANTOR AND AT BEST RISK IS ONLY CONTINGENT IN NATURE. RELYING UPON THE RATIO OF DECISION OF BHARTI AIRTEL, REDINGTON (INDIA) LTD., MICRO INK LTD., AND DE CISION OF JURISDICTIONAL TRIBUNAL IN THE CASE OF VIDEOCON INDUSTRIES & COX & KINGS, I AM OF THE VIEW THAT NO ADJUSTMENT IS REQUIRED IN RESPECT OF COMFORT GUARANTEES GIVE N BY THE ASSESSEE TO ITS 4 AES I E. GLENMARK IMPEX LLC RUSSIA, GLEN M ARK PHAR MACEUTICALS S.R.L ROMANIA, GLENMARK GENERICS INC. USA AND GLENMARK FARMACEUTICA LTD., BRAZIL. THE ADJUSTMENT MADE BY THE TPO IN RESPECT OF THESE COMFORT GUARANTEES ON BEHALF OF 4 AES IS NOT CALLED FOR AND THUS THIS GROUND OF APPEAL OF THE APPELLANT ON THIS COUNT IS AL LOWED . 17. A GAINST THE SAID ORDER REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE COUNSELS AND PERUSED THE RECORD. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ITAT DECISION IN ASSES SEE'S OWN CASE IN EARLIER YEARS WHEREIN THE 0.53% ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 8 WAS HELD TO BE CHARGEABLE FOR THE GUARANTEE COMMISSION. IN THIS REGARD THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT AGAINST THE ORDER ITAT FOR A.Y. 2008 - 09 REVENUE HAS FILED APPEAL BEFORE THE HO N'BLE JURISDICTIONAL HIGH COURT AND THE HON'BLE JURISDICTIONAL HIGH COURT HAS UPHELD THE SAME VIDE ORDER DATED 02.02.2017. FURTHERMORE THE ITAT FOR A.Y. 2009 - 10 VIDE ORDER DATED 07.02.2018 HAS SIMILARLY HELD THAT 0.53% WAS CHARGEABLE. HENCE, HE PRAYED THAT GUARANTEE COMMISSION OF 0. 53% MAY BE C HA R GED ON THE ENTIRE GUARANTEE GIVEN. 18. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS WE HOLD THAT DISALLOWANCE OF 0.53% FOR GUARANTEE COMMISSION ON ALL THE GUARANTEE GIVEN SERVES THE PURPOSE. WE DIRECT ACCORDINGLY. 19. APROPOS GROUND RELATING TO TRANSFER PRICING ADJUSTMENT OF RS. 1,17,11,449/ - MADE BY TPO BY APPLYING CUP METHOD INSTEAD OF TNMM USED BY THE ASSESSEE. ON THIS ISSUE THE TRANSFER PRICING OFFICER NOTED THAT THE THE ASSESSEE MANUFACTURERS AND EXPORTS PHARMACEU TICAL PRODUCTS TO ITS VARIOUS AES. THE ASSESSEE WAS ASKED TO PROVIDE CUP DETAILS IN RESPECT OF EXPORTS TO RUSSIA. IN REPLY TO THE SAME, THE ASSESSEE FURNISHED THE CUP DETAILS FOR AL PRODUCTS EXPORTED TO RUSSIA VIDE LETTER DATED 17.01.2014. OUT OF THE TOTA L 26 PRODUCTS, DETAILS OF TWO PRODUCT WERE ASSESSEES EXPORT PRICE TO RUSSIA IS LOWER AS COMPARED TO EXPORT MADE TO NON - AES WERE NOTED AS UNDER. EXPORT TO RUSSIA EXPORT TO OTHER ENTITIES CONVE RSION RATE DIFFERENCE IN INR DESCRIPTION QUANTITY RATE TOTAL IN USD RATE DIFFER - ENCE ASCORIL EXPECTORANT - RUSSIA RU 200 ML 748560 1.29 965,642 1.55 194,626 45.14 8,785,400 RELCER TABLETS RU 1X1 0'S 122305 0.97 118,636 1.50 64,822 45.14 2,926,049 TOTAL 870,865 1,084,278 259,447 11,711,449 THE ASSESSES VIDE NOTE SHEET ENTRY DATED 17.012014 WAS ASKED TO SHOW CAUSE AS TO WHY THIS TRANSACTION SHOULD NOT BE BENCHMARKED USING CUP AS THE MOST ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 9 APPROPRIATE METHOD AND CONSEQUENTLY ADJUSTMENT SHOULD NOT BE MADE IN RESPECT OF THESE TWO PRODUCTS. 20. THE ASSESSEE SUBMITTED ITS REPLY. THE CONTENTIONS RAISED BY THE ASSESS EE AND THE ANALYSIS OF THE TPO ARE SUMMARISED AS UNDER: (I) THE ASSESSEE HAS BENCHMARK ED ITS TRANSACTIONS USING TNMM AS THE MOST APPROPRIATE METHOD AND TAKING THE AE AS THE TESTED PARTY. THIS ACTION OF THE ASSESSEE CANNOT BE ACCEPTED AS THE ASSESSEE IS A MANUFACTURER OF PHARMACEUTICAL FORMULATIONS AND IT IS EXPORTING THE SAME PRODUCT TO VARIOUS GEOGRAPHIES INCLUDING THE LOCAL MARKET. HENCE THE BENCHMARKING DONE BY THE ASSESSE E USING AE AS THE TESTED PARTY IS REJECTED. (II) ASSESSEE WAS ASKED WHY CUP METHOD SHOULD NOT BE PREFERRED OVER TNMM METHOD. THE ASSESSEE HAS SUBMITTED THAT INTERNAL CUP CANNOT BE APPLIED AS NONE OF THE AES PROCURE PHARMACEUTICAL PRODUCTS FROM ANY OTHER THIRD PARTY FROM INDIA. IT ONLY PROCURES PHARMACEUTICAL PRODUCTS FROM GPL AND GPL DOES NOT SELL THE SAME PRODUCT TO ANY OTHER THIRD PARTY IN THE COUNTRIES IN WHICH AE'S ARE SITUATED. THIS CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. THE FACT REMAINS THAT THE ASSESSEE IS MANUFACTURING THE FORMULATIONS AND SELLING IT TO VARIOUS GEOGRAPHIES AS WELL AS TO LOCAL MARKET. HENCE THE CUP CAN BE USED TO COMPARE THE PRICES AND LOCAL MARKET WITH THOSE IN THE EXPORT MARKET, ALTHOUGH ON FOB BASIS. THUS THE CONTENTION O F THE ASSESSEE ON THIS POINT CANNOT BE ACCEPTED. (III) AS REGARDS EXTERNAL CUP ASSESSEE SUBMITTED THAT: 'THE SAME CANNOT BE USED TO DETERMINE A RELIABLE ARM'S LENGTH BENCHMARK BECAUSE NEITHER DOES IT HAVE ANY SUCH COMPARABLE DATA NOR HAVE WE BEEN GIVEN CO MPARABLE DATA BY TPO. EVEN IF SUCH DATA WERE TO BE MADE AVAILABLE TO US THERE WOULD BE DIFFERENCES IN RESPECT OF WHICH ADJUSTMENTS ARE DIFFICULT OR IMPOSSIBLE TO MAKE. TYPICALLY, THESE DIFFERENCES CANNOT BE VALUED AND, AS A CONSEQUENCE, A REASONABLY ACCURA TE QUANTIFICATION FOR VARIATION IN PRICES CANNOT BE MADE. THESE INCLUDE: DIFFERENCES IN THE AMOUNT AND TYPE OF THE INTANGIBLE PROPERTY INVOLVED IN THE SALE (THE PHARMACEUTICAL PRODUCTS EXPORTED TO AES ARE BRANDED); DIFFERENCES WITH RESPECT TO THE ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 10 QUALITY; DIFFERENCES IN THE GEOGRAPHIC MARKETS; DIFFERENCES IN THE LEVEL OF MARKET; INABILITY TO DIFFERENTIATE A CONTROLLED TRANSACTION FROM AN UNCONTROLLED TRANSACTION. THIS CONTENTION OF THE ASSESSEE IS ACADEMIC AS THE TPO PROPOSES TO APPLY INTERNAL CUP AND SO TH ERE IS NO QUESTION OF APPLYING EXTERNAL CUP. (IV) ACCORDING TO THE ASSESSEE, THE IDENTIFICATION OF THE ABOVE DIFFERENCES ITSELF IS A DIFFICULT TASK BASED ON THE LEVEL OF INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. FURTHER, THESE DIFFERENCES CANNOT BE QUAN TIFIED WITH REASONABLE ACCURACY (AS REQUIRED UNDER RULE 10B(2) AND RULE 10B(3) OF THE RULES), AND ACCORDINGLY CUP METHOD CANNOT BE APPLIED IN CASE OF EXPORT OF PHARMACEUTICAL PRODUCTS TO THE ASSOCIATED ENTERPRISE. THE CONTENTION, AS DISCUSSED IN THE ABOVE PARAGRAPH, CANNOT BE ACCEPTED. THE ONLY QUESTION THAT REMAINS IS, MAKING SUITABLE ADJUSTMENT TO THIS INTERNATIONAL TRANSACTION SO AS TO ESTABLISH BETT ER COMPARABILITY. THE ASSESSEE HA S NOT SUBMITTED ANY WORKINGS REGARDING ADJUSTMENTS TO BE MADE IN RESPECT OF THE APPLICATION OF CUP. (V) BESIDES, IT HAS NOW BEEN FAIRLY SETTLED BY A SERIES OF DECISIONS OF THE ITAT INCLUDING THAT IN THE CASE OF SERDIA PHARMACEUTICALS LTD, THAT CUP IS A BETTER METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS IN COMPARISON WITH TNMM. HENCE THE CONTENTION OF THE ASSESSEE ON THIS POINT IS REJECTED. (VI) FURTHER, THE CONTENTION OF THE ASSESSEE THAT THE ADJUSTMENT FALLS WITHIN THE PRESCRIBED 5% LIMITS SET UNDER THE INCOME TAX ACT, ALSO CANNOT BE ACCEPTED. THE LIMITS OF 5% WILL HAVE TO APPLY, WITH RESPECT TO THE PART OF INTERNATIONAL TRANSACTION THAT IS SUBJECT MATTER OF THE ADJUSTMENT UNDER CUP. THE PRESCRIBED SAFE HARBOUR LIMITS CANNOT APPLY IN RESPECT OF THE ENTIRE INTERNATIONAL TRANSACTION OF EXPORT. HENCE THE CONTENTION OF THE ASSESSEE ON THIS POINT CANNOT BE ACCEPTED. HAVING REGARD TO THE ELABORATE DISCUSSION ABOVE, THE CONTENTIONS OF THE ASSESSEE ARE REJECTED AND THE ADJUSTMENT IS DONE BY TAKING CUP AS THE MOST APPROPRIATE METHOD IN RESPECT OF THESE TWO TRANSACTIONS. T HE ADJUSTMENT RESULTING IS RS. 1,1711,449/ - . ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 11 21. AGAINST THE ABOVE ORDER THE ASSESSEE APPEALED BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A) REPRODUCED THE SUBMISSION OF THE ASSESSEE AND THEREAFTER DELETED THE ADDITION AND HE LD AS UNDER: 2.8 I FIND THAT NO ADJUSTMENT IS REQUIRED IN RESPECT OF EXPORT TO RUSSIA. THE TPO BASED ON 2 PRODUCTS SOLD TO NON - AES LOCATED IN MAURITIUS AND WEST INDIES HAS MADE ADJUSTMENT WITHOUT TAKING IN TO ACCOUNT THE CRUCIAL DIFFERENCE OF THE GEOGRAPHY INVOLVED AND THE QUANTITY INVOL VED. I AGREE WITH THE ARGUMENT OF THE ASSESSEE THAT QUANTITY OF THE PRODUCT SOLD HAS A MAJOR BEARING ON THE PRICE CHARGED. WITHOUT CONSIDERING THE ASPECTS ADJUSTMENT MADE BY THE TPO IS NOT WARRANTED IN THE FACTS OF THE CASE. I AM OF THE VIEW THAT CUP METHO D CANNOT BE APPLIED ON THESE 2 PRODUCTS AND TNMM METHOD ADOPTED BY THE ASSESSEE IS CORRECT IN THE FACTS AND CIRCUMSTANCES OF THE CASE. NO ADJUSTMENT IS THEREFORE, REQUIRED IN RESPECT OF EXPORT TO RUSSIA, THUS THIS GROUND OF APPEAL OF THE APPELLANT ON THIS COUNT IS ALLOWED. 22. AGAINST THE ABOVE ORDER , THE REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECOR D. THE LD. DR RELIED UPON THE ORDER OF THE TPO. 23. PER CONTRA, THE LD. AR SUPPORTED THE ORDER OF THE LD. CIT(A) . THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS CONSISTENTLY ADOPTING THE TNMM METHOD FOR THE COMPUTATION OF THE ARMS LENGTH PRICE IN THIS REGARD , AS MOST APPROPRIATE METHOD (MAM) . THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT WITHOUT ANY COGENT R EASON, THE TPO HAS REJECTED THE TNMM METHOD AND ADOPTED THE CUP METHOD. IN THIS REGARD, THE LD. COUNSEL OF THE ASSESSEE HAS PLACED RELIANCE UPON THE ITAT DECISION IN THE CASE OF OMNI ACTIVE HEALTH TECHNOLOGIES LTD. VS. DY. CIT (IN ITA NOS. 638 & 4643/MUM/2 017 VIDE ORDER DATED 06.03.2018) FOR THE PROPOSITION THAT CONSISTENTLY THE APPLIED METHOD LIKE TNMM CANNOT BE REJECTED WITHOUT ANY CHANGE IN THE FACTS AND LAW OF THE CASE. HENCE, THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT WITHOUT ANY COGENT REASON, THE TPO SHOULD NOT HAVE REJECTED THE TNMM METHOD AS MAM AND ADOPT ED THE CUP METHOD INSTEAD. THE LD. COUNSEL OF THE ASSESSEE MADE FURTHER FOLLOWING SUBMISSIONS: 4.1 DURING THE YEAR UNDER CONSIDERATION, GPL MANUFACTURED AND EXPORTED PHARMACEUTICAL PRODUCTS TO ITS 100% SUBSIDIARY GLENMARK IMPEX LLC, RUSSIA ('GIL RUSSIA') FOR DISTRIBUTION IN THE RUSSIAN MARKET. THE ASSESSEE EXPORTED PHARMACEUTICAL PRODUCTS OF RS 481,562,389 TO GIL RUSSIA, THE INTELLECTUAL PROPERTY IN THE PHARMACEUTICAL PRODUCTS WAS OW NED BY ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 12 ASSESSEE. GIL RUSSIA DID NOT OWN AN INTEREST IN ANY VALUABLE KNOW - HOW, PATENTS, BRAND NAMES AND TRADEMARKS OWNED BY GPL. THE COSTS INCURRED, AND THE OPERATING ASSETS OWNED BY GIL RUSSIA WERE SEGREGATED AND IDENTIFIED. 4.2 THE ASSESSEE SELECTED TNMM AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH NATURE OF THE INTERNATIONAL TRANSACTION AND A PREFERRED METHOD OVER THE CUP METHOD DUE TO THE FOLLOWING REASONS: (I) INTERNAL CUP: INTERNAL CUP IN THIS CASE WOULD MEAN THAT THE AE PROCURED T HE SAME PRODUCT FROM OTHER UNRELATED PARTIES, OR GPL EXPORTS THE SAME PRODUCT TO OTHER PARTIES IN THE GEOGRAPHY IN WHICH THE ABOVEMENTIONED AES ARE SITUATED. HOWEVER, NONE OF THE AES PROCURED PHARMACEUTICAL PRODUCTS FROM ANY OTHER THIRD PARTY FROM INDIA. I T ONLY PROCURED PHARMACEUTICAL PRODUCTS FROM GPL. FURTHER, GPL DID NOT SELL THE SAME PRODUCT TO ANY OTHER THIRD PARTY IN THE COUNTRIES IN WHICH AE'S WAS SITUATED. (II)EXTERNAL CUP: EXTERNAL CUP IN THIS CASE WOULD MEAN THE PRICE AT WHICH AN UNRELATED ENTITY SITUATED IN INDIA IS EXPORTING SIMILAR PRODUCTS TO ENTITIES LOCATED THE SIMILAR GEOGRAPHIES AS GLENMARK RUSSIA. AS REGARDS EXTERNAL CUPS, THE SAME COULD NOT BE USED TO DETERMINE A RELIABLE ARM'S LENGTH BENCHMARK BECAUSE NEITHER DID THE ASSESSEE HAVE ANY S UCH COMPARABLE DATA NOR ASSESSEE HAD BEEN GIVEN SUCH COMPARABLE DATA BY THE TPO. EVEN IF SUCH DATA WERE TO BE MADE AVAILABLE, THERE WOULD BE DIFFERENCES IN RESPECT OF WHICH ADJUSTMENTS WOULD BE DIFFICULT OR IMPOSSIBLE TO MAKE. TYPICALLY, THESE DIFFERENCES COULD NOT BE VALUED AND, AS A CONSEQUENCE, A REASONABLY ACCURATE QUANTIFICATION FOR VARIATION IN PRICES COULD NOT BE MADE. THESE INCLUDE: A. DIFFERENCES IN THE AMOUNT AND TYPE OF THE INTANGIBLE PROPERTY INVOLVED IN THE SALE (THE PHARMACEUTICAL PRODUCTS EXPORT ED TO AES ARE BRANDED); B. DIFFERENCES WITH RESPECT TO THE QUALITY; C. DIFFERENCES IN THE GEOGRAPHIC MARKETS; D. DIFFERENCES IN THE LEVEL OF MARKET; E. INABILITY TO DIFFERENTIATE A CONTROLLED TRANSACTION FROM AN UNCONTROLLED TRANSACTION. THE IDENTIFICATION OF THE ABOVE DIFFERENCES ITSELF WAS A DIFFICULT TASK BASED ON THE LEVEL OF INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. FURTHER, THESE DIFFERENCES COULD NOT BE QUANTIFIED WITH REASONABLE A CCURACY AS REQUIRED UNDER RULE 10 B (2) AND RULE 10 B (3) OF THE RULES. IN THE VIEW OF ABOVE, CUP METHOD WAS NOT APPLIED AS THE DIFFERENCE IN PRICE COULD NOT BE CORRECTLY CALCULATED/ MEASURED. 4.3 SINCE THE CUP METHOD COULD NOT BE APPLIED, THE ASSESSE HAD IN ORDER TO CALCULATE THE ARM'S LENGTH PRICE FOLLOWED THE TRANSACTIONAL NET MARGIN METHOD TAKING THE AES AS THE TESTED PARTY AS SPECIFIED U/S 92C OF THE ACT READ WITH RULE 1 OB & 1 OC OF THE INCOME TAX RULES. ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 13 4.4 DURING THE COURSE OF TRANSFER PRICING PROCEEDING, THE ASSESSEE WAS ASLED T O PROVIDE THE CUP DETAILS IN RESPECT OF EXPORTS TO RUSSIA. IN REPLY TO THE SAME, THE ASSESSEE PROVIDED ALL THE PRODUCTS EXPORTED TO RUSSIA AND TO OTHER UNCONTROLLABLE ENTITIES (NON AES) GIVING DESCRIPTION, QUANTITY, RATE PER UNIT AND TOTAL VALUE OF SALES I N RESPECT OF EXPORT MADE TO RUSSIA AND OTHER ENTITIES. OUT OF THE TOTAL 26 PRODUCTS, EXPORTS OF 24 PRODUCTS WERE MADE TO RUSSIA AT HIGHER PRICE THAN THE EXPORT MADE TO OTHER UNCONTROLLABLE ENTITIES. THE TOTAL SALE VALUE OF SUCH 24 PRODUCTS AMOUNTS TO RS. 4 3.07 CRORES AS AGAINST THE TOTAL EXPORT OF RS 48.15 CRORES. 4.5 FURTHER IN RESPECT OF THE 2 PRODUCTS WHERE THE EXPORT PRICE TO RUSSIA WAS AT LOWER PRICE AS COMPARED TO EXPORT MADE TO COMPARABLE UNCONTROLLED ENTITIES (I.E - . EXPORTS TO MAURITIUS AND WEST IN DIES), THE ASSESSEE SUBMITTED THAT THE DIFFERENCE IN PRICE WAS BECAUSE OF QUALITY, PACKING AND COMPOSITION OF CHEMICAL, RAW MATERIAL AND A!SO DIFFERENT GEOGRAPHICAL LOCATIONS OF THE MARKETS. TABLE SHOWING THE 2 PRODUCTS IS AS UNDER - EXPORTS TO GIL RUSSIA EXPORTS TO NON AES S. NO. DESCRIPTION QTY RATE (IN USD) SALES (IN USD) DATE NAME OF THE PARTY COUNTRY QTY RATE (IN USD) SALES (IN USD) 1 ASCORIL EXPECTORANT RUSSIA RU 200 ML 748,560 1.29 965,642 30.3.2010 COPHARMA LTD. (SCOTT HEALTH LTD.) MAURITIUS 9,200 1.55 14,260 2 RELCER TABLETS RU 1 X 10S 122,305 0.97 118,636 30.9.2009 T. GEDDE S - GRANT LTD. WEST INDIES 1,520 1.50 2,280 TOTAL 10,84,278 TOTAL 16.540 4.6 HOWEVER, THE TPO IN HIS ORDER BENCHMARKED THE SAID T RANSACTION USING CUP METHOD AS THE MOST APPROPRIATE METHOD AND BASED ON THE 2 PRODUCTS SOLD TO NON - AE'S LOCATED IN MAURITIUS AND WEST INDIES MADE AN ADJUSTMENT OFLNR 1,17,11,449/ - THE SAME IS TABULATED AS UNDER : EXPORTS TO GIL RUSSIA EXPORTS TO NON - AES CONVERSION RATE DIFFERENCE IN INR DESCRIPTION QTY RATE TOTAL IN USD RATE DIFFERENCE ASCORIL EXPECTORANT - RUSSIA RU 200 ML 784,560 1.29 965,642 1.55 194,626 45.14 8,785,400 RELCER TABLETS RU 1X10S 122,305 0.97 118,636 1.50 64,822 45.14 2,926,049 TOTAL 870,865 1,084,278 259,447 11,711,449 4.7 THE LEARNED CIT(A), DELETED THE SAID ADDITION AND HELD THAT NO ADJUSTMENT WAS REQUIRED IN RESPECT OF EXPORT TO RUSSIA AS TPO FAILED TO CONSIDER THE CRUCIAL DIFFERENCE OF THE GEOGRAPHY AND QUANTITY INVOLVED. ACCORDINGLY, HE HELD THAT CUP METHOD CANNOT BE APPLIED AND TNMM METHOD ADOPTED BY THE ASSESSEE WAS CORRECT. AGAINST THIS GROUND, THE REVENUE HAS FILED AN APPEAL BEFORE THE HON'BLE TRIBUNAL. ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 14 IN THIS REGARD, IT IS HUMBLY SUBMITTED THAT 4.8 TNMM METHOD IS MORE APPROPRIATE THAN CUP METHOD IT IS SUBMITTED THAT GIL RUSSIA IS A LOW RISK DISTRIBUTOR FOR GPL FOR THE SALE OF PHARMACEUTICAL PRODUCTS. THE ASSESSEE HAS BENCHMARKED THE INTERNATIONAL TRANSACTION BY APPLYING TNMM METHOD. ONE OF STRENGTHS OF THE TNMM IS THAT NET MARGINS (E.G. RETURNS ON ASSETS, OPERATING INCOME TO SALES, AND POSSIBLY OTHER MEASURES OF NET PROFIT) ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IS THE CASE WITH PRICE, AS USED IN THE CUP METHOD. THE NET MARGINS ALSO MAY BE MORE TOLERANT TO SOME FUNCTIONAL DIFFERENCES B ETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS. DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPENSES. CONSEQUENTLY, ENTERPRISES MAY HAVE A WIDE RANGE OF GRO SS PROFIT MARGINS BUT STILL EARN BROADLY SIMIFTR LEVELS OF NET PROFITS. 4.9 IN THE VIEW OF ABOVE TNMM METHOD APPLIED BY THE ASSESSEE TO DETERMINE THE ARMS LENGTH PRICE IS MORE APPROPRIATE THAN CUP METHOD. 4.10 GPL, INDIA SHOULD BE TAKEN AS THE TESTED PARTY, AS HAS BEEN DONE IN RESPECT OF THE EXPORT OF FORMULATION PRODUCTS TO BRAZIL, NIGERIA & SOUTH AFRICA. YOUR HONOUR WILL OBSERVE THAT NOT A SINGLE ENTITY OPERATES FROM THE COUNTRY WHERE GIL, RUSSIA IS OPERA TING. THEREFORE, GEOGRAPHICALLY, POLITICALLY AND ECONOMICALLY THE ENTITIES CANNOT BE COMPARED WITH THE OPERATION OF GIL, RUSSIA. DUE TO THE ABSENCE OF FINANCIAL DATA, THE ACCOUNTING POLICIES & ACCOUNTING STANDARDS FCLLOWED CANNOT BE ANALYSED IN COMPARISON TO GIL, RUSSIA. 4.11 GPL INDIA BEING THE INDIAN PARTY, THE FUNCTIONAL AND RISK ANALYSIS CAN BE COMPARED WITH OTHER ENTITIES OF WHICH FINANCIAL DATA ARE AVAILABLE IN PUBIC DOMAIN. THE OPERATING MARGIN OF COMPARABLE ENTITIES HAS BEEN ARRIVED AT 9.22%. THEREF ORE, THE OPERATING MARGIN OF 9.22% OR MORE EARNED BY GPL INDIA WOULD BE SUFFICIENT COMPLIANCE OF THE ARM'S LENGTH REQUIREMENT. A. APPLICATION OF TNMM AT ENTITY LEVEL GPL HAS EARNED AN OPERATING MARGIN (TAKING INTO ACCOUNT ALL BUSINESS ACTIVITIES TOGETHER) 15. 99% OF TOTAL OPERATING COST AS AGAINST 9.22% OF COMPARABLE ENTITIES. THE ASSESSEE'S OPERATING MARGIN IS MUCH HIGHER THAN THE MEAN OPERATING MARGIN (IE. 9.22%) EARNED BY THE COMPARABLE ENTITIES. THEREFORE, GPL INDIA HAS COMPLIED WITH THE ARM'S LENGTH PRICIN G REQUIREMENT IN RESPECT OF THIS TRANSACTION. B. APPLICATION OF TNMM AT SEGMENTAL LEVEL OPERATING MARGIN WITH RESPECT TO EXPORTS TO GIL, RUSSIA COMES TO 64.02% AS AGAINST 35.60% OF GIL RUSSIA. AS OPERATING MARGIN EARNED BY GPL INDIA IS MUCH HIGHER THAN GIL RU SSIA, HENCE THE TRANSACTION IS AT ARM'S LENGTH PRICE AS PER THE INDIAN TP REGULATIONS. C. APPLICATION OF INTERNAL TNMM IN CASE OF INTERNAL TNMM THE OM WITH RESPECT TO NON AES EXPORT IS 22.37% AS AGAINST 64.02% OF GPL INDIA IN RESPECT 12 ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 15 TO EXPORT TO GIL, RUS SIA. THEREFORE, IN ALL THE THREE SITUATIONS THE OM OF ASSESSEE COMPANY WITH RESPECT TO EXPORT TO GIL, RUSSIA IS VERY HIGH. AND THEREFORE THE ASSESSE HAS COMPLIED WITH ALP REGULATION IN RESPECT OF THIS TRANSACTION. 4.12 EXPORT TO ALL A.E'S ARE AT A HIGHER PRICE INCLUDING RUSSIA GPL MANUFACTURES AND EXPORTS PHARMACEUTICALS PRODUCTS TO WHOLLY OWNED SUBSIDIARIES, FOR DISTRIBUTION IN DIFFERENT GEOGRAPHIES LIKE PHILIPPINES, BRAZIL, NIGERIA, RUSSIA, SOUTH AFRICA, VENEZULA AND ARGENTINA. DURING THE YEAR UNDER REFE RENCE, GPL EXPORTED PHARMACEUTICAL PRODUCTS TO ALL ITS AES FOR AN AGGREGATE AMOUNT OF RS. 65.05 CRORES, OUT OF TOTAL SALES OF RS. 1029.68 CRORES. THIS COMES TO ONLY 6.31% OF TOTAL SALES, WHICH IS VERY INSIGNIFICANT CONSIDERING THE TOTAL SALES OF THE ASSESS EE. OPERATING MARGIN IN CASE OF PORTS TO ALL AE'S COMES TO 144.69% AS AGAINST AVERAGE MARGIN OF 15.99% AT ENTITY LEVEL. SIMILARL PERATING MARGIN IN CASE OF EXPORTS MADE TO OTHER UNCONTROLLABLE PARTIES COMES TO 28.82% ONLY AS AGAINST 144.9% IN RESPECT OFA.E 'S. THUS, EXPORT MADE TO A.E.'S ARE AT ALP. WITHOUT PREJUDICE TO THE ABOVE, AS REQUIRED BY THE TPO, THE ASSESSEE IDENTIFIED AND PROVIDED ALL THE PRODUCTS EXPORTED TO RUSSIA AND TO OTHER UNCONTROLLABLE ENTITIES (NON AES) GIVING DESCRIPTION, QUANTITY, RATE PER UNIT AND TOTAL VALUE OF SALES IN RESPECT OF EXPORT MADE TO RUSSIA AND OTHER ENTITIES. OUT OF THE TOTAL 26 PRODUCTS, EXPORTS OF 24 PRODUCTS WERE MADE TO RUSSIA AT HIGHER PRICE THAN THE EXPORT MADE TO OTHER UNCONTROLLABLE ENTITIES. THE TOTAL SALE VALUE OF SUCH 24 PRODUCTS AMOUNTS TO RS. 43.07 CRORES AS AGAINST THE TOTAL EXPORT OF RS 48.15 CRORES. EXPORTS TO GIL RUSSIA EXPORTS TO NON AES S. NO. DESCRIPTION QTY RATE (IN USD) SALES (IN USD) DATE NAME OF THE PARTY COUNTRY QTY RATE (IN USD) SALES (IN USD) 1 ASCORIL EXPECTORANT RUSSIA RU 200 ML 748,560 1.29 965,642 30.3.2010 COPHARMA LTD. (SCOTT HEALTH LTD.) MAURITIUS 9,200 1.55 14,260 2 RELCER TABLETS RU 1 X 10S 122,305 0.97 118,636 30.9.2009 T. GEDDE S - GRANT LTD. WEST INDIES 1,520 1.50 2,280 TOTAL 10,84,278 TOTAL 16.540 AS SEEN IN THE TABLE, THE QUANTITY OF THE PRODUCTS SOLD TO THE AE IS SI G NIFICANT HIGHER (APPROX 80 TIMES HIGHER) THAN THE QUANTITY SOLD TO NON AES. THE PRICING OF THE PRODUCT ALSO DEPENDS ON THE QUANTITY OF THE PRODUCT THAT IS BEING SOLD. SMALL QUANTITIES ARE SOLD USUALLY AT A HIGHER PRICE DUE TO HIGHER OVERHEAD COST INVOLVED AND VICE VERSA. THEREFORE, CUP METHOD CANNOT BE APPLIED IN CASE OF THESE 2 PRODUCTS. 4.13 IN VIEW OF THE ABOVE, THERE IS NO PROPER REASON TO APPLY CUP M ETHOD AND HENCE THE TPO HAS ERRED IN MAKING AN ADDITION OF RS 117,11,449 IN RESPECT OF THE TWO PHARMACEUTICAL PRODUCTS EXPORTED TO GIL RUSSIA. ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 16 24. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE (LD. DR FOR SHORT) RELIED UPON THE ORDERS OF THE TPO . 25. UPON CAREFUL CONSIDERATION, WE NOTE THAT THE FIRST OBJECTION OF THE LD. COUNSEL OF THE ASSESSEE IS THAT THE TPO HAS CHANGED THE CONSISTENTLY APPLIED MAM OF TNMM FOR BENCH MARKING THE INTERNATIONAL TRANSACTION WITHOUT ANY COGENT REASON. IN THIS REGARD, WE F IND THAT WITHOUT NOTING ANY CHANGE IN THE FACTS AND LAW, THE TPO HAS PROCEEDED TO HO LD THAT CUP IS BETTER METHOD THA N TNMM. WE FIND THAT THIS REASONING OF THE TPO, IS TOTALLY FALLACIOUS AND NOT AT ALL SUSTAINABLE. IN THIS REGARD, WE NOTE THAT THIS ITAT IN THE CASE OF OMNI ACTIVE HEALTH TECHNOLOGIES LTD. (SUPRA) HAD AN OCCASION TO EXAMINE THE SIMILAR ISSUE. THE TRIBUNAL HAD HELD AS UNDER: 27. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND ALL THE RELEVANT RECORDS HAVE BEEN PERUSED. WE FIND THAT THE FIRST O BJECTION OF THE LD. COUNSEL OF THE ASSESSEE IS THAT IN THE PRECEDING YEARS, FOR THREE YEARS TRANSACTIONAL NET MARGIN METHOD WAS USED TO BENCH MARK THE INTERNATIONAL TRANSACTION. IN THE PRESENT ASSESSMENT YEAR, THE TRANSFER PRICING OFFICER NOTED THAT THE AS SESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD FOR DETERMINING THE ARMS LENGTH PRICE FOR EXPORT OF FINALISED GOODS TO THE ASSOCIATE ENTERPRISES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE TRANSFER PRICING OFFICER PROCEEDED WITH THE SAME AND ALSO ASKED THE ASSESSEE TO PROVIDE AN UPDATED MARGIN OF THE COMPARABLE SELECTED. THE UPDATED MARGIN WAS GIVEN TO THE TRANSFER PRICING OFFICER. FROM THE COMPUTATION OF UPDATED MARGIN ALSO, THE PLI OF THE ASSESSEE COME TO 15.21% WHICH WAS HIGHER THAN THE PLI OF T HE TWO COMPARABLE COMPANIES. HENCE, FROM THIS ANALYSIS OF UPDATED COMPARABLES ALSO, THE TRANSACTION WAS FOUND TO BE AT ARMS LENGTH. AT THIS JUNCTURE, THE TRANSFER PRICING OFFICER CHANGED HIS TRACKS. HE OBSERVED THAT NO VERIFIABLE DATA HAS BEEN PROVIDED TO SUBSTANTIATE THE METHOD USED. HE FURTHER HELD THAT CUP WOULD BE A MORE APPROPRIATE METHOD TO BENCH MARK THE SALE TRANSACTION. THE ASSESSEE OBJECTED TO THE SAME. IN THE OBJECTIONS, THE ASSESSEE ALSO RELIED UPON THE OECD GUIDELINES AND THE ITAT DECISION IN THE CASE OF WELSPUN ZUCCHI TEXTILES LTD. VS ACIT. HOWEVER, THE TRANSFER PRICING OFFICER SUMMARILY REJECTED AND HELD THAT THE APPLICATION OF TNMM IS THE METHOD OF LAST RESORT WHEN THE COMPARABLE PRICE METHOD CANNOT BE APPLIED. HOWEVER, HE NOTED THAT IN THE ASSESSEES CASE SINCE THE COMPARABLE PRICE FOR THE SAME OR SIMILAR PRODUCTS TO THE THIRD PARTIES HAS BEEN PROVIDED BY THE ASSESSEE, THE SAME HAS TO BE CONSIDERED FOR BENCH - MARKING THIS TRANSACTION. ACCORDINGLY, TRANSFER PRICING OFFICER PROCEEDED TO APPLY THE CUP METHOD FOR BENCH MARKING. THE ASSESSEES OBJECTION IN THIS REGARD WAS ALSO DISMISSED BY THE DRP WHEN IT HELD THAT IT WAS OF THE OPINION THAT WHEN INTERNAL CUP IS EASILY AVAILABLE, THE TNMM I S TO BE TREATED AS METHOD OF LAST RESORT. 28. FROM THE ABOVE DISCUSSION, WE FIND THAT THE TRANSFER PRICING OFFICER HAS REJECTED THE CONSISTENTLY APPLIED TNMM METHOD WITHOUT BRINGING ON RECORD ANY COGENT REASON. IT IS THE SETTLED LAW THAT THE CONSISTENT M ETHOD FOLLOWED CAN BE CHANGED ONLY IF THERE IS A CHANGE OF FACTS OR LAW. THERE ARE VARIOUS DECISIONS OF HON'BLE APEX COURT IN THIS REGARD INCLUDING THAT FROM RADHASOAMI SATSANG (SUPRA). IN THE PRESENT CASE, THERE IS NO CASE THAT THERE IS A CHANGE OF LAW OR THERE IS A ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 17 CHANGE IN FACT. IT IS ALSO NOT THE CASE THAT TNMM METHOD WHICH HAS BEEN CONSISTENTLY APPLIED IN PAST WAS TOTALLY WRONG METHOD. IN THIS REGARD, WE MAY GAINFULLY REFER TO THE RELEVANT PROVISIONS CONTENDED BY THE TRANSFER PRICING OFFICER AS UNDER: I. 92C COMPUTATION OF ARMS LENGTH PRICE 2) THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. 3) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB - SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIB ED; PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES. II. RULE 10C OF THE INCOME - TAX RULES, 1962 (RULES) STATES THAT: (1) FOR THE PURPOSES OF SUB - SECTION (1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION PROVIDES THE MOST RELIABLE MEASURE OF AN ARM'S LENGTH PRICE IN RELA TION TO THE INTERNATIONAL TRANSACTION. (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN SUB - RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: ( A ) THE NATURE AND CLASS OF THE INTERNATIONAL TRANSACTION; ( B ) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; ( C ) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD; ( D ) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; ( E ) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; ( F ) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. III. RULE 10B OF THE INCOME - TAX RULES, 1962 (RULES) STATES THAT: (1) FOR THE PURPOSES OF SUB - SECTION (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 18 ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATE RIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB - CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION 29. THUS FROM THE ABOVE, IT IS EVIDENT THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION IS TO BE DETERMINED BY ONE OF THE PRESCRIBED METHODS WHICH IS MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION, CLASS OF TRANSACTION, CLASS OF ASSOCIATED PERSONS, FUNCTIONS TO FORM BY SUCH PERSON, OR SUCH OTHER RELEVANT FACTORS. SECTION 92C(2) PROVIDES THAT IT IS ONLY THE APPROPRIATE METHOD AS REFERRED TO IN SECTION 92C(1) WHICH CAN BE APPLIED FOR DETERMINING ARMS LENGTH PRICE IN THE PRESCRIBED MANNER. THE CHOICE OF METHOD ON THE BASIS OF WHICH ARMS LENGTH PRICE IS DETERMINED HAS TO BE EXERCISED ON THE TOUCH STONE OF PRINCIPLES GOVERNING SELECTION OF MOST APPROPRIATE METHOD SET OUT IN SECTION 92C(1). THE LEGISLATURE DOES NOT PROVIDE FOR AN ORDER OF PREFERENCE OF METHOD OF DETERMINING OF ARMS LENGTH PRICE. NOW ONCE AN APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE HAS BEEN CHOSEN AND ACCEPTED BY THE REVENUE CONSISTENTLY OVER A NUMBER OF YEARS, THERE HAS TO BE SOME COGENT REASON TO MAKE IT DEPARTURE FROM THE CONSISTENT METHOD. WE DO NOT FIND THAT ANY CASE HAS BEEN MADE OUT BY THE TRANSFER PRICING OFFICER OR THE DRP THAT THERE WAS AN ERROR COMMITTED EARLIER WHEN THE TNMM METHOD WAS CHOSEN AND APPROVED. THE TRANSFER PRICING OFFICER WHILE JUSTIFYING THE CHANGE STATED THAT IN T.P. REPORT ASSESSEE HAS BENCH MARKED THE TRANSACTION UNDER TNMM, NO VERIFIABLE DATA HAS BEEN PROVIDED TO SUBSTANTIATE THE METHOD USED. HENCE, FROM THE ABOVE DISCUSSION, WE FIND THAT NO COGENT REASON HAS BEEN POINTED OUT BY THE AUTHORITIES BELOW THAT THE TNMM METHOD APPLIED EARLIER WAS NOT IN ACCORDANCE WITH THE M ANDATE OF LAW AS ABOVE. IT IS SETTLED LAW THAT RESJUDICATA DOES NOT APPLY TO TAXATION PROCEEDINGS BUT IT HAS FAIRLY OFTEN BEEN HELD BY THE HIGHER COURTS INCLUDING BY THE HON'BLE APEX COURT THAT THE CONSISTENCY SHOULD BE MAINTAINED IN THE ASSESSMENT PROCEEDINGS. A CONSISTENTLY APP LIED METHOD CAN BE CHANGED ONLY IF THERE IS A CHANGE IN FACTS AND LAW. IN THE PRESENT CASE, WE FIND THAT THERE IS NO SUCH CASE HAS BEEN MADE OUT. RATHER THE TRANSFER PRICING OFFICER HAS PROCEEDED TO EXAMINE THE ISSUE ON THE BASIS OF TNMM METHOD. HE HAS ORD ERED FOR UPDATED DATA OF COMPARABLE. THEREAFTER, WHEN EVEN ON THE BASIS OF UPDATED DATA, THE INTERNATIONAL TRANSACTION WAS FOUND TO BE AT ARMS LENGTH, HE LACONICALLY HELD THAT CUP METHOD WOULD BE PREFERRED. THE DRP HAD SUMMARILY UPHELD THE CHANGE FROM TNM M TO CUP METHOD WITHOUT ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 19 ASSIGNING ANY COGENT REASON WHATSOEVER. BY NO MEANS IT IS JUSTIFIED TO KEEP ON FINDING A METHOD FOR ADDITION BY TRIAL AND ERROR METHOD. ACCORDINGLY, ON THE ANVIL OF AFORESAID HON'BLE APEX COURTS DECISION AS DISCUSSED HEREINABOVE, W E HOLD THAT THERE WAS NO JUSTIFICATION IN REJECTING THE TNMM METHOD APPLIED BY THE ASSESSEE AS IN THE PRECEDING YEAR. SINCE AS PER THE SAME COMPUTATION THE ASSESSEES MARGIN WAS FOUND TO BE AT ARMS LENGTH, WE SET ASIDE THE ORDER OF AUTHORITIES BELOW AND D ECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. SINCE WE HAVE ALREADY ALLOWED THE ASSESSEES APPEAL ON THIS ISSUE, FOR LACK OF JUSTIFICATION IN CHANGING THE METHOD OF BENCH MARKING WE ARE NOT DEALING WITH THE ARGUMENTS ON OTHER ASPECTS OF MERITS OF APPLICATION OF CUP METHOD COMPUTATION OF ARMS LENGTH PRICE BY THE TRANSFER PRICING OFFICER IN THIS CASE. THE CASE LAW REFERRED BY THE LD. DEPARTMENTAL REPRESENTATIVE ARE DISTINGUISHABLE ON THE FACTS OF THIS CASE. 27. WE FIND THAT THE ABOVE CASE LAW IS FULLY APPLICABLE O N THE FACTS OF THE PRESENT CASE. HERE ALSO, THE TPO HAS CHANGED OVER TO CUP METHOD AS MAM BY REJECTING THE TNMM METHOD CONSISTENTLY BEING APPLIED BY THE ASSESSEE WITHOUT ANY CHANGE IN FACTS AND LAW. WE NOTE THAT THE TRIBUNAL AFTER ELABORATELY DELIBERATING UPON THE PROVISION OF THE LAW HAS EXPOUNDED THAT IN ABSENCE OF ANY JUSTIFICATION FOR CHAN GE IN FACTS OR LAW , THE TPO IS NOT JUSTIFIED IN REJECTING THE CONSISTENTLY APPLIED TNMM METHOD AND APPLYING THE CUP METHOD AS MAM . THE ABOVE PROPOSITION IS FULLY APPLICABLE HERE. HENCE, T HE ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE SET ASIDE. 28. FURTHERMORE , WE NOTE THAT ON MERIT ALSO, THE LD. COUNSEL OF THE ASSESSEE HAS MADE A GOOD CASE THAT THE CUP METHOD ADOPTED BY THE TPO IS NOT CORRECT. OUT OF 26 PRODUCTS, 24 PRODUCTS E XPORTED TO RUSSIA WERE AT HIGHER PRICE. THE T.P.O. HAS ONLY PICKED UP 2 PRODUCTS W H ER E PRICES ARE LOWER AND HAS COMPARED THE RATE ADOPTED FOR MAURITIUS AND WEST INDIES TO THAT OF RUSSIA. HERE, THE PLEA OF THE ASSESSEE IS COGENT THAT THE S E ARE CRUCIAL DIFFERENCE OF THE GEOGRAPHY AS WELL AS QUANTITY INVOLVED . T HE QUANTITY EXPORTED TO RUSSIA IS HUGE (APPROXIMATELY 80 TIME S ) AS COMPARED TO THAT EXPORTED TO MAURITIUS AND WEST INDIES. WHEN ENTITIES ARE OPERATING IN DIFFERENT GEOGRAPHICAL , POLITICAL AND ECONOMICAL EN VIRONM ENT, THE SAME HAS TO BE TAKEN INTO ACCOUNT. F URTHERMORE, THE LD. COUNSEL OF THE ASSESSEE IS CORRECT IN PLACING RELIANCE UPON THE HONBLE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF PR. CIT VS. AMPHENOL INTERCONNECT INDIA P. LTD . (IN ITA NO.1131 OF 2015 VIDE ORDER DATED 07.03.2018) THAT GEOGRAPH ICAL DIFFERENCE , VOLUME DIFFERENCE ARE ALSO TO BE CONSIDERED IN MAKING THE COMPARISON IN SIMILAR CASES. THE TPO IS TOTALLY WRONG IN HOLDING ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 20 THAT THESE MATTERS ARE OF ACADEMIC INTEREST ONLY. HENCE, WITHOUT FACTORING IN THE DIFFERENCE IN FAR, THE COMPARISON DONE BY THE TPO IS NOT SUSTAINABLE. IN THE BACKGROUND OF THE AFORESAID DISCUSSION AND PRECEDENT, WE UPHOLD THE ORDER OF THE LD. CIT(A) THAT THERE IS NO PROPER REASON TO APPLY CUP METHOD , INSTEAD OF THAT CONSISTENTLY APPLIED EARLIER METHOD OF TNMM , AS THE MOST APPROPRIATE METHOD (MAM) . 29. APROPOS ROUND RELATING TO ADDITION OF RS. 10,04,36,556/ - BEING R&D EXPENSES ALLOCATED TO BADDI & SOLAN UNIT. THE BRIEF FACTS ARE THAT I N ITS ORIGINAL RETURN OF INCOME, THE ASSESSEE ALLOCATED R&D EXPENSES TO ITS BADDI & SOLAN U NITS IN THE RATIO OF SALES TURNOVER AS FOLLOWS: BADDI UNIT SOLAN UNIT TOTAL 35(2AB) R&D EXPENSES 4,91,47,000 1,78,10,704 6,69,57,704 10,04,36,556 HOWEVER, IN ITS REVISED RETURN OF INCOME, THE ASSESSEE DID NOT ALLOCATE ANY R&D EXPENSES TO IT BADDI & SOLAN UNITS AS FOLLOWS: BADDI UNIT SOLAN UNIT TOTAL 35(2AB) R&D AS PER REVISED RETURN NIL NIL NIL NIL VIDE QUESTIONNAIRE DATED 11.06.2013, THE ASSESSEE WAS ASKED TO FURNISH DETAILS OF R&D EXPENSES CLAIMED IN BADDI & SOLAN UNITS AND EXPLAIN WHY THEIR WEIGHTED DEDUCTION SHOULD NOT BE ADJUSTED AGAINST PROFIT OF THESE UNITS. THE ASSESSEE VIDE LETTER DATED 29.01.2014 SUBMITTED AS FOLLOWS: 'A NOTE ON ALLOCATION OF RESEARCH & DEVELOPMENT EXPENDITURE THE ASSESSEE HAS 2 UNITS ELIGIBLE TO CLAIM DEDUCTION OF PR OFIT U/S 80IC OF THE ACT I.E. I)BADDI AND II) SOLAN IN THE ORIGINAL RETURN, THE ASSESSEE CLAIMED DEDUCTION OF RS. 1,381,861,388/ - U/S 80IC OF THE ACT IN RESPECT OF BOTH THE UNITS I.E. IN CASE OF BADDI UNIT RS.1,057,498,180/ - AND SOLAN UNIT RS.324,363,208/ - BUT RESTRICTED THE DEDUCTION TO THE EXTENT OF GROSS TOTAL INCOME RS. 1,298,123,164/ - . REVISED ROI WAS FILED ON 29.03.2012 TO REVISE THE CLAIM FOR DEDUCTION OF PROFIT U/S 80IC OF THE ACT BY WITHDRAWING ALLOCATION OF R&D EXPENSES, IN RESPECT OF 80IC UNIT I.E. AT BADDI AND SOLAN AND ALSO SOME OTHER CHANGES. AS PER REVISED RETURN, THE CLAIM FOR DEDUCTION OF PROFIT U/S 80IC OF THE ACT HAS BEEN REVISED TO RS. 1,567,672,213 OF BOTH THE UNITS, BUT DEDUCTION IS RESTRICTED TO THE EXTENT OF GROSS TOTA L INCOME OF RS. 1,247,957,350/ - . ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 21 UNDER THE PROVISION OF INCOME TAX ACT, RESEARCH AND DEVELOPMENT EXPENSES ARE NOT ALLOCABLE TO 80IC UNITS. THESE R&D EXPENSES ARE DIRECTLY OR INDIRECTLY NOT CONNECTED WITH THE MANUFACTURING OPERATION CARRIED OUT AT THE ABOVE UNITS. THE RESEARCH AND DEVELOPMENT EXPENSES INCURRED HAD NO CONNECTION WITH THE BUSINESS OF THE ABOVE 2 UNITS NOR ANY BENEFIT IS RECEIVED BY THEM FROM THE SAID RESEARCH. ALL THE RESEARCH AND DEVELOPMENT EXPENSES WERE INCURRED AT APPROVED R&D CENTRES SITUATED AT MAH P E AND SINNA R AND NOT AT 80IC UNITS. THE RESEARCH AND DEVELOPMENT EXPENSES INCURRED AT THE ABOVE APPROVED CENTRES HAD NOTHING TO DO ANYTHING WITH THE ABOVE 2 UNITS. THE RESEARCH AND DEVELOPMENT ACTIVITIES BY R & D CENTRES WERE I N RELATION TO NEW DRUGS AND NOT WITH THE DRUGS MANUFACTURED B Y THESE 2 UNITS. THERE IS NO CORRELATION EITHER DIRECT OR INDIRECT OF R & D EXPENSES WITH THE SALES OF COMPANY WHETHER IT IS SALE OF BADDI UNIT - I , BADDI UNIT - II OR ANY OTHER UNIT. THE ENTIRE DEVELOPMENT PROCESS (R &D) REQUIRED A LONG GESTATION PERIOD OF 4 TO 7 YEARS WITH VERY HIGH PROBABILITY OF FAILURE. MOREOVER, IT IS NOT CERTAIN THAT THE FINAL PRODUCT WILL BE MANUFACTURED AT THE BADDI UNIT - I OR BADDI UNIT - II O NLY. THEREFORE, THE EXPENSES INCURRED AT SEPARATE R&D FACILITY ARE NOTHING TO DO WITH THE MANUFAC TURING OPERATION AT BADDI UNIT - I & BADDI UNIT - II AND HENCE THESE EXPENSES DOES NOT REQUIRES TO BE ALLOCATED TO ANY MANUFACTURING UNIT. THUS IT IS NOT FEASIBLE TO ALLOCATE RESEARCH & DEVELOPMENT EXPENSES TO THE BADDI & SOLAN UNIT ON THE FOLLOWING GROUNDS: > ALL THE EXPENSES ARE NOT NECESSARILY RELATED TO FORMULATION DEVELOPMENT. ALL PRODUCTS PLANNED TO BE DEVELOPED, MAY NOT BE SUCCESSFUL. > ALL PRODUCTS WHICH HAVE BEEN DEVELOPED SUCCESSFULLY MAY NOT BE TRANSFERRED FOR COMMERCIAL PRODUCTION AT BADDI PLANT &S OLAN PLANT. > DECISION OF COMMERCIAL PRODUCTION DEPENDS ON VARIOUS MARKET FACTORS. IF THE PRODUCT IS NOT FEASIBLE FOR COMMERCIAL PRODUCTION, IT MA Y NOT BE PRODUCED BY THE ASSESSE AT ANY OF ITS UNITS . > TIME GAP FROM INITIATION OF PROJECT TILL APPROVAL AND COMMERCIALIZATION OF PRODUCT IS APPROX. 4 - 7 YEARS AND THUS IT'S NOT CORRECT TO DO ALLOCATION ON SALES OR ANY OTHER BASIS CONSIDERING THE REVENUE - EXPENSES MATCHING PRINCIPLE. > RESEARCH EXPENSES WAS ON FUTURISTIC RESEARCH; RESULTS OF RESEARCH ARE ALWAYS UNCERTAIN; NONE OF THE ITEMS OF RESEARCH WAS FORMING PART OF QUALIFYING UNDERTAKINGS; NONE OF QUALIFYING UNDERTAKINGS HAS BENEFITED FRO M THE RESEARCH SINCE THE RESEARCH AND DEVELOPMENT EXPENSES RELATES TO NEW DRUGS, THE SAME CANNOT BE APPORTIONED / ALLOCATED TO THE ABOVE UNITS. THIS VIEW HAS BEE N ACCEPTED BY THE HON'BLE MUMBAI HIGH COURT IN CASE ZANDU PHARMACEUTICALS WORKS LTD V. CIT ( 20 12) 80 DTR 322 (BOM). IN THIS CASE JURISDICTIONAL HIGH COURT ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 22 HELD THAT RESEARCH AND DEVELOPMENT EXPENSES WHICH HAVE NO RELEVANCE TO THE INDUSTRIAL UNDERTAKING CANNOT BE ALLOCATED TO SUCH UNITS. (COPY OF ORDER ATTACHED). IN VIEW OF THE ABOVE FACTS, THE RETU RN OF INCOME WAS REVISED AND ALLOCATION OF RESEARCH AND DEVELOPMENT EXPENSES WERE WITHDRAWN TO THE ABOVE UNITS.' 30. HOWEVER, THE AO WAS NOT SATISFIED. HE REJECTED ASSESSEES CONTENTION AND COMPUTED THE DISALLOWANCE AS UNDER: - BADDI UNIT SOLAN UNIT TOTAL INTEREST AS PER REVISED RETURN NIL NIL NIL NIL INTEREST DISALLOWED 4,91,47,000 1,78,10,704 6,69,57,704 10.04,36,556 AGAINST THE ABOVE ORDER ASSESSEE APPEALED BEFORE THE LEARNED CIT(A). 31. THE LEARNED CIT(A) NOTED THAT THE ITAT IN ASSESSEES OWN CASE IN A.Y. 2009 - 10 DIRECTED AO TO GIVE THE FINDINGS ON THE BASIS OF THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA S E OF ZANDU PHARMACEUTICAL WORKS LTD. VS. CIT 350 ITR 366 . FROM THIS HE INFERRED THAT THE ITAT HAS NOT UPHELD THE SAND OF THE REVENUE. THE LEARNED CIT(A) PROCEEDED TO REFER TO THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. BRAKES 161 TAXMAN 47 AND THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE ZANDU PHARMACEUTICAL WORKS LTD. (SUPRA) AND HE DELETED THE ADDITION BY CONCLUDING AS UNDER: - IT CAN BE SEEN THAT AO IN THE PRESENT CASE WENT BY ASSUMPTIONS THAT RESEARCH CARRIED OUT AT MAHAPE AND SINNAR WAS UTILIZED BY THE OTHER UNITS OF BADDI & SOLAN BU T NOT A SHRED OF EVIDENCE IN SUPPORT OF THIS ASSUMPTION HAS BEEN BROUGHT ON RECORD. I ALSO FIND THAT APPROVED R&D FACILITY HAS TO RENDER ACCOUNTS OF EXPENDITURE INCURRED ON RESEARCH CARRIED OUT TO DSIR. THE RESEARCH, IF SUCCESSFUL, MAY NOT BE COMMERCIALLY EXPLOITED BY THE COMPANY, IT MAY BE ASSIGNED TO THE THIRD PARTY. THERE IS NO COMMITMENT THAT IF RESEARCH YIELDS ANY FRUIT, NEW DRUG WOULD BE MANUFACTURED AT BADDI & SOLAN UNITS. IN VIEW OF THE ABOVE EXPLANATION GIVEN BY THE ASSESSEE AND FOLLOWING THE RATIO OF JUDICIAL DECISIONS IN THE CASE OF ZANDU PHARMACEUTICALS WORKS & BUSH BRAKES INDIA LIMITED, I AM OF THE CONSIDERED VIEW THAT THE R & D EXPENSES INCURRED AT MAHAPE AND SINNAR SHOULD NOT BE ALLOCATED TO BADDI AND SOLAN UNITS AS AO HAS FAILED TO PROVE THAT RESULTANT BENEFIT OF RESEARCH CARRIED OUT AT MAHAPE AND SINNAR APPROVED R &D CENTRES HAS BEEN UTILIZED AT BADDI AND SOLAN UNITS OR THERE IS ANY DIRECT OR INDIRECT NEXUS BETWEEN THE EXPENDITURE ON R & D ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 23 ACTIVITIES CARRIED OUT AT MAHAPE AND SINNAR UNITS ON ONE HAND & MANUFACTURING OPERATION AT BADDI UNIT & SOLAN UNIT. I, THEREFORE, HOLD THAT REDUCTION IN AMOUNT OF DEDUCTION U/S 80 - IC MADE BY THE AO CONSEQUENT TO APPORTION OF R & D EXPENSES INCURRED AT MAHAPE AND SINNAR TOWARDS BADDI AND SOLAN IS NOT PROPER. THUS THIS GROUND OF APPEAL OF THE APPELLANT ON THIS COUNT IS ALLOWED. 32. WE HAVE HEARD THE CONTENTIONS OF BOTH PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE ITAT IN ASSESSEE'S OWN CASE FOR A.Y. 2009 - 20 HAS RESTORED IDENTICAL ISSUE TO THE FILE OF THE AO TO GIVE FINDING AS TO THE UTILIZATION OF R & D EXPENDITURE WITH RESPECT TO THESE UNITS. IN THIS VIEW OF THE MATTER , IN OUR CONSIDERED OPINION , THE DOCTRINE OF S T ARE DEC I SIS MANDATES THAT WE FOLLOW T HE ITATS ORDER OF EARLIER YEAR. ACCORDINGLY, FO LLOWING THE SAME FINDING OF THE ITAT IN THE EARLIER YEAR WE REMIT THE ISSUE TO THE FILE OF THE AO WITH DIRECTION TO THE AO TO DECIDE THE ISSUE AFTER GRANTING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 33. APROPOS GROUND RELATING TO ADDITION OF RS. 11,88,53,122/ - BEING INTEREST EXPENDITURE ALLOCATED TO BADDI & SOLAN UNITS ON THE BASIS OF SALES TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 80IC. BRIEF FACTS OF THE CASE ARE THAT IN ITS ORIGINAL INCOME, THE ASSESSEE ALLOCATED INTEREST EXPENSES TO ITS BADDI & SOLAN UNITS IN THE RATIO OF SALES TURNOVER AS FOLLOWS: - BADDI UNIT SOLAN UNIT TOTAL INTEREST EXPENSES 9,88,78,321 3,58,33,164 13,47,11,485 HOWEVER, IN ITS REVISED RETURN OF INCOME, THE ASSESSEE REDUCED ALLOCATION OF INTEREST EXPENSES TO ITS BADDI & SOLAN UNITS AS FOLLOWS: - BADDI UNIT SOLAN UNIT TOTAL INTEREST AS PER REVISED RETURN NIL 1,58,58,363 1,58,58,363 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO JUSTIFY THE REDUCTION IN ALLOCATION OF INTEREST EXPENSES TO ITS BADDI & SOLAN UNITS. ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 24 34. THE ASSESSEE RESPONDED AS UNDER: THE ASSESSEE HAS TWO UNITS WHICH ARE ELIGIBLE FOR 80IC DEDUCTION, I.E. BADDI AND SOLAN. I) BADDI UNIT (A) THIS UNIT IS IN EXISTENCE SINCE THE YEAR 2006 - 07 WHICH HAS HUGE ACCUMULATED PROFITS OF TH E UNIT AND SUCH OPERATIONAL CASH FLOW IS BEING USED BY HO. AS PER THE BALANCE SHEET, BADDI UNIT HAS ACCUMULATED PROFITS OF THE UNIT USED BY HO AT RS. 261.83 CRORES. THERE IS NO BORROWING WHETHER SECURED OR UNSECURED AT BADDI UNIT. (B) NO MONEY IS BORROWED FOR BADDI UNIT WHICH IS EVIDENT FROM AUDITED BALANCE SHEET OF BADDI UNIT AS OF 31.03.2010. NO LOAN APPEARS IN BALANCE SHEET OF BADDI UNIT. FROM THE ABOVE, IT IS CLEAR THAT BADDI UNIT HAS NEITHER BORROWED FUNDS NOR USED FUNDS OF HO, HENCE NO INTEREST IS ALLOCABLE TO BADDI UNIT. COPY OF AUDITED B/S AS OF 31.03.2010 OF BADDI UNIT IS ALREADY FILED. II) SOLAN UNIT: THE ASSESSED COMPANY ACQUIRED I NDUSTRIAL UNIT SITUATED AT SOLAN AS GOING CONCERN FROM 'M/S ACME FORMULATION PRIVATE LIMITED' VIDE BUSIN ESS TRANSFER AGREEMENT DATED 23. 03 . 2009 WITH EFFECT FROM 01.04. 2009. THE ASSESSEE HAS ALLOCATED INTEREST EXPENSES OF RS. 1,58,58,363/ - TO THIS UNIT. ALLOCATION WAS DONE ON THE BASIS OF THE AVERAGE INTEREST COST FOR THE YEAR MULTIPLIED BY THE AVERAGE FUND INVESTED ON THE SET - UP AND OPERATION OF THE UNIT. (WORKING ATTACHED. REFER ALLOCATION RATIO) THE ASSESSEE HAS PROPERLY ALLOCATED THE INTEREST EXPENSE TO THIS UNIT. COPIES OF AUDITEDB/S OF SOLAN UNIT IS ALREADY FILED. CONCLUSION IN VIEW OF THE ABOVE FACTS, THE ALLOCATION OF INTEREST TO ABOVE TWO UNITS IS PROPER AND DOES NOT REQUIRE TO BE DISTURBED. 35. HOWEVER, THE AO WAS NOT SATISFIED. HE OBSERVED THAT THE ASSESSEE HAS A POOL OF FUNDS WHICH IS BEING UTILISED BY ALL UNITS OF THE ASSESSEE COMPANY. HENCE HE HELD THAT ALLOCATION OF INTEREST ON THE BASIS OF SALES TURNOVER WAS PERFECTLY JUSTIFIED AS THE ASSESSEE HAS A G ENERAL POOL OF FUND . HE FOU ND THAT REJECT ION OF ALLOCATION OF RS. 1,58,58,363/ - IS AN AFTERTHOUGHT AND IS NOT SUSTAINABLE. HE CONCLUDED AS UNDER: - 7.6 ACCORDINGLY, THE ASSESSEES CONTENTION IS REJECTED AND TOTAL DISALLOWANCE IS COMPUTED AS FOLLOWS: - ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 25 BADDI UNIT SOLAN UNIT TOTAL INTEREST AS PER REVISED RETURN NIL 1,58,58,363 1,58,58,363 INTEREST DISALLOWED 9,88,78,321 1,99,74,801 11,88,53,122 THUS, DEDUCTION U/S 80IC OF RS.11,88,53,122/ - IS HEREBY DISALLOWED AND ADDED BACK TO TOTAL INCOME OF THE ASSESSEE. 36. AGAINST THIS ORDER ASSESSEE APPEALED BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A) ACCEPTED ASSESSEES CONTENTION THAT ONE SHOULD LOOK FOR DIRECT NEXUS BETWEEN THE EXPENDITURE INCURRED AND SOURCE OF INCOME FOR ALLOWING OR DISALLOWING EXPENDITURE. IN THIS REGARD THE LEARNED CIT(A) NOTED THE FOLLOWING SUBMISSIONS: - THIS UNIT IS IN EXISTENCE SINCE THE YEAR 2006 - 07 WHICH HAS HUGE ACCUMULATED PROFITS OF THE UNIT AND SUCH OPERATIONAL CASH FLOW IS BEING USED BY HO. AS PER THE BALANCE SHEET, BADDI UNIT HAS ACCUMULATED PROFITS OF THE UNIT USED BY HO AT RS. 261.83 CRORES. THE RE IS NO BORROWING WHETHER SECURED TO UNSECURED AT BADDI UNIT. - NO MONEY IS BORROWED FOR BADDI UNIT WHICH IS EVIDENT FROM AUDITED BALANCE SHEET OF BADDI UNIT AS OF 31.03.2010 . NO LOAN APPEARS IN BALANCE SHEET OF BADDI UNIT. - FROM THE ABOVE, IT IS CLEAR THA T BADDI UNIT HAS NEITHER BORROWED FUNDS NOR USED FUNDS OF HO, HENCE NO INTEREST IS ALLOCABLE TO BADDI UNIT. - THE ASSESSEE COMPANY ACQUIRED INDUSTRIAL UNIT SITUATED AT SOLAN AS GOING CONCERN FROM M/S. ACME FORMULATION PRIVATE LTD. VIDE BUSINESS TRANSFER AG REEMENT DATED 23.03.2009 WITH EFFECT FROM 01.04.2009. - THE ASSESSEE HAS ALLOCATED INTEREST EXPENSES OF RS. 1,58,58,363/ - TO THIS UNIT. ALLOCATION WAS DONE ON THE BASIS OF THE AVERAGE INTEREST COST FOR THE YEAR MULTIPLIED BY THE AVERAGE FUND INVESTED ON THE SETUP AND OPERATION OF THE UNIT (WORKING ATTACHED. REFER ALLOCATION RATIO) THE ASSESSEE HAS PROPERLY ALLOCATED THE INTEREST EXPENSE TO THIS UNIT. CONSIDERING THE SUBMISSION T HE LEARNED CIT(A) HELD AS UNDER: - SECTION 80 - IC USED THE EXPRESSION DERIVED FR OM WHICH IS QUITE NARROWER THAN THE EXPRESSION ATTRIBUTABLE TO. THE LEGISLATURE HAS USED THE ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 26 EXPRESSION DERIVED FROM' INTENTIONALLY & THEREFORE, THIS ASPECT NEED TO BE CONSIDERED IN THIS PERSPECTIVE. THE APEX COURT IN THE CASE OF CAMBAY ELECTRIC SUPPLY CO. V. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC) HAS HELD THAT THE EXPRESSION 'DERIVED FROM' HAS BEEN USED BY THE LEGISLATURE IN RESTRICTED SENSE AS THE WORDS 'ATTRIBUTABLE TO' ARE MUCH WIDER IN MEANING THAN THE WORDS 'DERIVED FROM'. FURTHER, THE SUPR EME COURT IN THE CASE OF CIT V. STERLING FOODS (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC) HAS HELD THAT FOR APPLICATION OF THE WORDS 'DERIVED FROM', THERE MUST BE A DIRECT NEXUS BETWEEN THE PROFITS AND THE ACTIVIT Y OF THE INDUSTRIAL UNDERTAKING , WHI CH MEANS THAT REMOTE OR INDIRECT NEXUS WOULD NOT BE SUFFICIENT FOR BRINGING THE TRANSACTION WITHIN PURVIEW OF THE WORDS 'DERIVED FROM'. I, AM OF THE VIEW THAT PROFITS OF ANY INDUSTRIAL UNDERTAKING HAVE TO BE COMPUTED AFTER TAKING INTO ACCOUNT ALL THE RECE IPTS AND EXPENDITURE INCURRED BY IT & WHAT IS TRUE TO THE RECEIPTS IS ALSO EQUALLY APPLICABLE TO THE EXPENDITURE. AS A NATURAL COROLLARY ONLY THOSE EXPENDITURES SHOULD BE TAKEN INTO CONSIDERATIONS WHICH HAVE A DIRECT NEXUS FOR CARRYING ON THE ACTIVITY OF S UCH UNDERTAKING. IN THIS CONTEXT INTEREST EXPENDITURE MAY HAVE INDIRECT OR REMOTE NEXUS WITH THE MANUFACTURING ACTIVITY AT BADDI ON WHICH DEDUCTION U/S 80 - IC HAS BEEN CLAIMED AND THIS INTEREST EXPENDITURE NEED NOT BE APPORTIONED TOWARDS THIS UNIT IN ABSEN CE OF ANY DIRECT NEXUS, AS LAID DOWN BY THE APEX COURT WHILE INTERPRETING THE EXPRESSION 'DERIVED FROM'. I FIND THAT IN THE PRESENT CASE AO HAS FAILED TO BRING ON RECORD ANYTHING TO SUGGEST THAT PART OF THE BORROWED FUNDS HAVE BEEN U SED FOR BADDI UNIT, NO INTEREST S HOULD BE APPORTIONED TOWARDS BADDI UNIT. THE ASSESSEE HAS RIGHTLY FOLLOWED THIS RATIONALE & HAS APPORTIONED INTEREST EXPENSE TOWARDS SOLAN UNIT WHERE BORROWED FUNDS HAVE BEEN UTILIZED. I FIND THAT RATIO OF DECISION OF CATVISION P RODUCTS IS SQ UARELY APPLICABLE TO THE FACTS O F THE PRESENT CASE. I, THEREFORE, HOLD THAT REDUCTION MADE BY THE AO IN CLAIM OF 80 - IC BY APPORTIONING INT EREST EXPENDITURE T OWARDS BADDI UNIT IS NOT CALLED FOR. THUS THIS GROUND OF APPEAL OF THE APPELLANT ON THIS COUNT IS ALLOWED. 37. AGAINST THE ABOVE ORDER, THE REVENUE IS IN APPEAL BEFORE US. 38. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. UPON CAREFUL CONSIDERATION, WE FIND THAT THE FACTUAL DETAILS SUBMITTED CORROBORATE THAT THE B ADDI UNIT HA D HUGE ACCUMULATED PROFIT. IN FACT, ITS OPERATIONAL CASH FLOW IS BEING USED BY THE HEAD OFFICE. IN THE BALANCE SHEET, THE DEBIT BALANCE OF HEAD OFFICE ACCOUNT IS RS.2,470,281,148/ - AS ON 31.03.2010. THERE IS NO BORROWING SECURED OR UNSECURED FOR THIS UNIT. IN FACT, THE BALANCE SHEET SHOWS THAT THE UNIT HAS HUGE RESERVE AND SURPLUS AMOUNTING TO RS.3,920,730,627/ - COVERING THE ENTIRE ASSETS OF THE UNIT. ITA NO. 1654 /MUM/ 2016 M/S. GLENMARK PHARMACEUTICALS LTD. 27 39. IN THE SE CIRCUMSTANCES, WHEN NO LOAN IS THERE FOR B A DDI UNIT AND THE UNIT IS GENERATING HUGE PROFITS, THE C ASE LAW RELIED BY THE LD. COUNSEL OF THE ASSESSEE DULY SUPPORT THE PROPOSITION THAT ONLY THE INTEREST EXPENSES WHICH HAVE DIRECT NEXUS IN EARNING THE INCOME OF THE TAX EXEMPT UNIT SHOULD BE CONSIDERED. SINCE THE DOCUMENTARY EVIDENCE DULY SUPPORT THE PLEA T HAT THERE IS NO DIRECT NEXUS BETWEEN THE EXPENSES ALLOCATED BY THE A.O. TO THE UNIT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN THIS REGARD. 40. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSE . ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST FEBRUARY, 2019 . SD/ - SD/ - ( RAVISH SOOD ) ( SHAMIM YAHYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 01.02 . 2019 COPY TO: THE APPELLANT 1. THE RESPONDENT 2. THE CIT(A) - 56 , MUMBAI 3. THECIT - CONCERNED , MUMBAI 4. THE DR, K BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.