SI GROUP INDIA LTD, NAVI MUMBAI V. ASST CIT LTU, MUMBAI

ITA 1745/MUM/2014

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 2083 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2009-2010
• Appeal Filed On: 13-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Question of law; Wholly owned subsidiary; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 92C; 14A; 115JB; 37(1); 10B; 10; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J , BENCH MUMBAI BEFORE SHRI SAKTIJIT DEY, JM & SHRI M.BALAGANESH, AM ITA NO. 1745 / MUM/20 1 4 ( ASSESSMENT YEAR : 2009 - 10 ) M/S. SI GROUP INDIA LIMITED PLOT NO.D - 2/1, TTC INDUSTRIAL AREA, THANE - BELAPUR ROAD OPP. JUINAGAR RAILWAY STATION NAVI MUMBAI 400 705 VS. ASST. COMMISSIONER OF INCOME TAX, LTU, MUMBAI PAN/GIR NO. AAACH7323L ( APPELLANT ) .. ( RESPONDENT ) ITA NO.1307/MUM/2014 ( ASSESSMENT YEAR :2009 - 10 ) ASST. COMMISSIONER OF INCOME TAX, CENTRE - 1, 29 TH FLOOR WO RLD TRADE CENTRE CUFFE PARADE, MUMBAI - 400 005 VS. M/S. SI GROUP INDIA LIMITED PLOT NO.D - 2/1, TTC INDUSTRIAL AREA, THANE - BELAPUR ROAD OPP. JUINAGAR RAILWAY STATION NAVI MUMBAI 400 705 PAN/GIR NO.AAACH7323L (APPELLANT ) .. (RESPONDENT ) ASSESSEE BY SHRI AJIT KUMAR JAIN & SHRI SIDDHESH CHAUGULE REVENUE BY SHRI MANOJ KUMAR SINGH DATE OF HEARING 17 / 05/ 201 9 DATE OF PRONOUNCEMENT 19 / 06 /201 9 / O R D E R PER M. BALAGANESH (A.M) : THESE CROSS APPEAL S IN ITA NO. 1745/MUM/2014 & 1307/MUM/2014 FOR A.Y. 2009 - 10 ARISE OUT OF THE ORDER BY THE LD. DISPUTE RESOLUTION PANEL - ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 2 II, MUMBAI IN OBJECTION NO. 50 DATED 29/11/2013 (LD. DRP IN SHORT) AGAINST TH E ORDER OF ASSESSMENT PASSED U/S.143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 DATED 07/01/2014 BY THE ASST. (HEREINAFTER REFERRED TO AS LD. AO). 2. THE BRIEF FACTS OF THIS APPEAL ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURE AND SALE OF ORGANIC CHEMICALS AND PHENOLIC RESINS HAVING A WIDE RANGE OF INDUSTRIAL APPLICATIONS. THE ASSESSEE IS A SUBSIDIARY OF SCHENECTADY (INDIA) HOLDINGS PVT. LTD. WHICH IN TURN IS A WHOLLY OWNED SUBSIDIARY OF SI INC., USA. THE LIST OF INTERNATIONAL TRANSACTIONS CARRIE D OUT BY THE ASSESSEE AND THE MOST APPROPRIATE METHOD (MAM) FOLLOWED THEREON ARE AS UNDER: - SUMMARY OF INTERNATIONAL TRANSACTIONS AS REPORTED IN FORM NO. 3CEB SR. NO. NATURE OF TRANSACTION AMOUNT (RS.) METHOD 1 IMPORT OF MATERIALS 77,28,43,438 TNMM MFG . 2 EXPORT OF GOODS 20,76,21,540 3 PAYMENT OF ROYALTY 2,83,03,595 4 RECEIPT OF INDENTING COMMISSION 1,02,39,075 5 PAYMENT OF EXPORT COMMISSION 4,67,343 6 REIMBURSEMENT OF EXPENSES 1,29,37,145 7 RECEIPT OF FEE FROM RESEARCH SERVICES 2,37,95,236 T NMM - R&D 8 RECOVERY OF EXPENSES 8,72,529 AT COST 2.1. THE ASSESSEE HAD ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM IN SHORT) AND SUBMITTED TWO SEPARATE BENCHMARKING IN THE TRANSFER PRICING STUDY REPORT AS BELOW: - ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 3 SEARCH LIST OF INTERNATIONAL TRANSACTI ONS ASSESSEES MARGIN COMPARABLES MARGIN NO. OF COMPARABLES ORDER OF LD TPO MANUFACTURING (OP/OI) SL. NO. 1 TO 6 ON PAGE 1 OF ORDER OF LD TPO 3.00% (AFTER ADJUSTMENTS FOR EXTRA - ORDINARY/ NON - RECURRING EXPENSES) 4.75% (3 YEARS WEIGHTED AVERAGE) 32 PAGES 3 & 4 R&D (OP/OC) SL. NO. 7 ON PAGE 1 OF ORDER OF LD TPO 15.46% 8.39% (SINGLE YEAR DATA) 8 PAGES 4 & 5 2.2. THE MARGINS OF THE ASSESSEE IN MANUFACTURING FUNCTION ARE WORKED OUT AS UNDER: - PARTICULARS AMOUNT (RS. IN LACS) AMOUNT (RS. IN LACS) TOTA L INCOME 59,637 TOTAL EXPENDITURE 61,217 NET PROFIT BEFORE INTEREST AND TAX (1,580) ADD: EXTRAORDINARY/ NON RECURRING EXPENSES ADJUSTMENTS STOCK WRITE DOWN COSTS 1209 CAPACITY UNDERUTILIZATION RASAI PLANT 935 SHUT DOWN COST RASAI PLANT 5 3 ABNORMAL FOREIGN EXCHANGE LOSS 829 PREMIUM AMORTISED ON FORWARD CONTRACTS 76 PROFESSIONAL CHARGES FOR SEARCH FOR NEW MANAGING DIRECTOR 58 COSTS RELATING TO R&D SEGMENT BENCHMARKED SEPARATELY 206 ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 4 PARTICULARS AMOUNT (RS. IN LACS) AMOUNT (RS. IN LACS) ADJUSTED OPERATING PROFIT 1786 ADJUSTED NET PRO FIT MARGIN (%) 3.00 2.3. THE MARGINS OF THE ASSESSEE IN RESEARCH & DEVELOPMENT (R&D) SERVICES ARE WORKED OUT AS UNDER: - PARTICULARS AMOUNT (RS. IN LACS) SERVICE INCOME 237.95 EXPENDITURE 206.09 OPERATING PROFIT 31.86 NCP% (OP/OE) 15.46 2.4. HOWEV ER, THE LD TPO REJECTED SEPARATED BENCHMARKING OF R&D AND PROCEEDED TO BENCHMARK THE INTERNATIONAL TRANSACTION OF RESEARCH FEES IN AGGREGATION TO OTHER INTERNATIONAL TRANSACTIONS IN MANUFACTURING SEARCH. 2.5. THE ASSESSEE SUBMITTED SEGMENTAL PROFITABILITY FOR AE AND NON - AE FOR ALL THE UNITS DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS. HOWEVER, THE LD. TPO REJECTED THE SEGMENTAL (INTERNAL TNMM) ON THE GROUND THAT IT WAS NOT AUDITED AND THAT THE SAME WERE SUBMITTED BY THE ASSESSEE ONLY AFTER THE ISSUANCE OF SHOW CAUSE NOTICE BY THE LD TPO. THE LD TPO ALSO OBSERVED THAT SEGMENT RESULTS ARE NOTHING BUT AN AFTERTHOUGHT RESORTED TO AFTER THE RECEIPT OF THE SHOW CAUSE NOTICE. ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 5 2.6. THE LD. TPO PROCEEDED WITH ENTITY LEVEL BENCHMARKING AND FINALIZED A LIST OF 68 COMPARABLES WITH OP/OI MARGIN OF 6.69%. THE LD TPO GRANTED ECONOMIC ADJUSTMENTS TO THE ASSESSEE FOR WORKING OUT THE ADJUSTED OPERATING PROFIT AS UNDER: - SL.NO. ECONOMIC ADJUSTMENT CLAIMED BY ALLOWED BY LD TPO ASSESSEE (RS IN LACS) (RS IN LACS) 1 STOCK WRITE DOWN 1209 363 2 CAPACITY UNDERUTILIZATION (RASAI PLANT) 935 0 3 SHUTDOWN COST (RASAI PLANT) 53 0 4 ABNORMAL FOREX LOSS 829 829 5 PREMIUM AMORTISED ON FORWARD CONTRACT 76 0 6 PROFESSIO NAL CHARGES FOR SEARCH OF NEW MD 58 0 2.7. THE LD. TPO RECOMPUTED THE MARGIN OF ASSESSEE AS - 0.56% AFTER GRANTING PARTIAL ECONOMIC ADJUSTMENTS AND AFTER AGGREGATING R&D INCOME WITH MANUFACTURING INCOME AS UNDER: - TOTAL INCOME 63120 TOTAL EXPE NDITURE 64668 NET PROFIT BEFORE INTEREST AND TAX - 1548 ADD: ECONOMIC / FUNCTIONAL ADJUSTMENTS STOCK WRITE DOWN 363 ABNORMAL FOREX LOSS 829 ------ 1192 ADJUSTED OPERAT ING PROFIT - 356 ADJUSTED NET PROFIT MARGIN (OP / OI) % - 0.56% ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 6 2.8. THE LD TPO MADE AN ADJUSTMENT TO ALP OF RS 4578.73 LACS ON AN OVERALL BASIS INSTEAD OF RESTRICTING THE ADJUSTMENT ONLY TO INTERNATIONAL TRANSACTIONS OF ASSESSEE AS UNDER: - PARTICULARS AMOUNT IN LACS OPERATING INCOME 63120 ADJUSTED PBIT - 356 OP / OI (%) - 0.56% ARMS LENGTH OP / OI % 6.69% ARMS LENGTH OP 4222.73 VARIATION 4578.73 TRANSFER PRICE (COST SIDE TRANSACTIONS) 8016.14 5 % OF TP 400.81 ADJUSTMENT 4578.73 CONCLUSION : VARIATION > 5% OF TP, HENCE NO BENEFIT U/S 92C(2) OF THE ACT. 3. THE LD DRP OBSERVED THAT THE ASSESSEE HAD UNDERTAKEN AN ENTITY LEVEL BENCHMARKING OF THE INTERNATIONAL TRANSACTIONS AND HAD ASKED FOR VARI OUS ADJUSTMENTS ON ACCOUNT OF STOCK WRITE DOWN, CAPACITY UNDERUTILIZATION, ABNORMAL COSTS, EXCHANGE FLUCTUATION ETC. THE LD DRP OBSERVED THAT THE ASSESSEE HAD WORKED OUT AN ADJUSTED NET PROFIT MARGIN OF 3% BY CONVERTING LOSS OF RS 1580 LACS INTO AN INCOME OF RS 1786 LACS AFTER MAKING THESE ADJUSTMENTS. THE ASSESSEE CHOSE 32 COMPARABLES WHOSE AVERAGE PROFIT MARGIN WAS 4.75% AND ACCORDINGLY THE ASSESSEE CONCLUDED THAT ITS ADJUSTED PROFITS OF 3% FALLS WITHIN THE RANGE OF +/ - 5% FROM THE INTERNATIONAL TRANSAC TION AND HENCE ITS TRANSACTIONS WERE AT ARMS LENGTH. APART FROM MANUFACTURING SEGMENT, THE ASSESSEE ALSO CONSIDERED R&D SEGMENT IN RESPECT OF R&D FEES RECEIVED BY IT FROM AE OF RS 2.378 CRORES. ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 7 THE ASSESSEE BENCHMARKED THE SAID R&D SEGMENT BY DETERMININ G A MARGIN OF 15.46% AND CHOSE 8 COMPARABLES WHOSE MARGIN WAS 17.01% FOR 3 YEARS PERIOD. THE ASSESSEE ACCORDINGLY CONTENDED THAT ITS INTERNATIONAL TRANSACTION IN RESPECT OF R&D SEGMENT FALLS WITHIN THE SAFE HARBOUR LIMITS OF +/ - 5%. THE LD TPO HELD THA T THERE IS NO SEPARATE SEGMENT PERTAINING TO R&D AND HENCE PROCEEDED WITH AN ENTITY LEVEL TNMM ANALYSIS. AFTER IDENTIFYING 68 COMPARABLES, WHOSE AVERAGE MARGIN WAS DETERMINED AT 6.69%, THE LD TPO MADE AN ADJUSTMENT ON THE ENTITY LEVEL COSTS OF THE ASSESSE E AT RS 45.78 CRORES. THE LD DRP OBSERVED THAT BEFORE THE LD TPO, THE ASSESSEE RELIED ON INTERNAL SEGMENTAL PROFITABILITY BY BIFURCATING ITS PROFITS IN RESPECT OF ITS 3 UNITS LOCATED AT RASAI, NAVI MUMBAI AND LOTE. SINCE THE SAME WAS NOT AUDITED, THE LD TPO REJECTED THE SAME. 3.1. DURING THE COURSE OF PROCEEDINGS BEFORE THE LD DRP, THE ASSESSEE REITERATED ITS CLAIM FOR INTERNAL TNMM ANALYSIS AND SUBMITTED AUDITED SEGMENTAL ACCOUNTS AND SEPARATE PROFITABILITY IN RESPECT OF 3 UNITS HAVE BEEN WORKED OUT BY THE ASSESSEE. THE SAID SEGMENTAL ACCOUNTS WERE REMANDED BY THE LD DRP TO THE LD TPO FOR HIS COMMENTS. THE LD DRP OBSERVED IN PARA 5.5 OF THEIR ORDER THAT THE LD TPO FAILED TO AVAIL THE OPPORTUNITY AND DID NOT COMMENT ON THE MERITS OF THE SEGMENTAL ACCOU NTS. THE LD DRP OBSERVED THAT IT WAS FOUND THAT ASSESSEE WAS MAINTAINING SEPARATE ACCOUNT OF TRANSACTIONS OF 3 DIFFERENT UNITS, THE SEGMENTAL PROFITABILITY AFTER AUDITING CAN PRESENT A RELIABLE PICTURE OF THE ASSESSEES PROFIT. THE LD DRP ALSO OBSERVED T HAT THE ASSESSEES TOTAL TURNOVER WAS RS 625 CRORES , WHEREAS THE INTERNATIONAL TRANSACTIONS ARE ONLY TO THE EXTENT OF RS 77 CRORES OF IMPORT AND RS 20 CRORES OF EXPORT. THE LD DRP CATEGORICALLY OBSERVED THAT UNDER THE TP PROVISION, IT IS THE PROFIT FROM THE INTERNATIONAL TRANSACTION THAT HAS TO BE CONSIDERED FOR ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 8 DETERMINING THE ALP AND NOT THE ENTITY LEVEL PROFITS. THE LD DRP OBSERVED THAT FOR THIS REASON ALSO, THE SEGMENTAL AUDITED PROFITABILITY OF THE ASSESSEE DESERVES TO BE CONSIDERED. 3.2. THE LD D RP AFTER DUE ANALYSIS OF SEGMENT STATEMENT THEN PROCEEDED TO ACCEPT THE AUDITED SEGMENTAL ACCOUNTS OF ASSESSEE BY ADOPTING INTERNAL TNMM. THE LD DRP ACCORDINGLY GAVE THE DIRECTIONS TO THE LD TPO TO BENCHMARK THE AE SEGMENT OF EACH UNIT WITH THE NON - AE SEG MENT. HOWEVER, AN EXCEPTION WAS MADE FOR RASAI UNIT SINCE ITS NON - AE SEGMENT OPERATIONS WAS CONSIDERED AS CONTRACT MANUFACTURING BY LD DRP. THE SUMMARY OF THE SAID DIRECTIONS ARE AS BELOW: - UNIT AE MARGIN NON - AE MARGIN TOTAL MARGIN (AE+NON - AE) LD DRP DIRE CTIONS RASAI (10.18) % (20.72)% (9.56)% NON - AE SEGMENT REJECTED BY LD DRP AND PROCEEDED TO BENCHMARK IMPORT TRANSACTION OF RS. 65 CRORES WITH TOTAL MARGIN (AE+ NON - AE) OF NAVI MUMBAI AND LOTE NAVI MUMBAI 6.08% (0.27)% 0.30% INTERNATIONAL TRANSACTIONS AC CEPTED AT ARMS LENGTH LOTE 19.08% 1.74% 7.95% INTERNATIONAL TRANSACTIONS ACCEPTED AT ARMS LENGTH 3.2.1. THE LD DRP DIRECTIONS ALSO STATED THAT THE ASSESSEE WITHDREW HIS CLAIM FOR ECONOMIC ADJUSTMENTS IF INTERNAL TNMM WAS ACCEPTED. HOWEVER, THE ASSESS EE HAD NEVER WITHDREW ITS CLAIM FOR ECONOMIC ADJUSTMENTS EITHER IN WRITING OR IN HEARINGS DURING THE COURSE OF DRP PROCEEDINGS. 3.3. PURSUANT TO THE DIRECTIONS OF LD DRP, AN ADJUSTMENT OF RS. 10.97 CRORES WAS COMPUTED BY THE LD. TPO. THE LD. TPO CONSIDERE D THE ENTIRE ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 9 TOTAL OPERATING EXPENDITURE (AND NOT RESTRICTING ONLY THE IMPORT TRANSACTION OF RS. 65 CRORES) OF THE AE SEGMENT OF RASAI UNIT WHILE COMPUTING THE ADJUSTMENT. HOWEVER, THE LD. TPO NOTED THAT LD DRPS DIRECTION OF COMPARISON OF AE SEGMENT MARGI N OF RASAI UNIT WITH TOTAL MARGIN OF OTHER 2 UNITS IS CONCEPTUALLY INCORRECT. 4. AGGRIEVED, BOTH THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS NO T IN DISPUTE THAT THE INTERNAL TNMM SHOULD BE ADOPTED AS THE MAM IN THE INSTANT CASE. WE FIND THAT THE DIRECTIONS OF LD DRP WERE IN EFFECT COMPARING CONTROLLED TRANSACTION IN RASAI UNIT WITH CONTROLLED TRANSACTION IN OTHER UNITS. BUT, THE COMPARISON OF AE SEGMENT OF RASAI UNIT SHOULD BE MADE WITH NON - AE SEGMENT OF NAVI MUMBAI AND LOTE UNITS. THE NON - AE MARGIN OF NAVI MUMBAI IS - 0.27% AND NON - AE MARGIN OF LOTE IS 1.74%. WE FIND THAT THE LD TPO ALSO DISAGREED WITH THE DIRECTION OF LD DRP IN RESPECT OF CONS IDERING THE USE OF ENTIRE UNIT TRANSACTIONS FOR NAVI MUMBAI AND LOTE UNIT FOR COMPUTING ADJUSTMENT IN RASAI UNIT, AS IS EVIDENT FROM HIS GIVING EFFECT ORDER ENCLOSED IN PAGE 295 OF THE PAPER BOOK. IT IS NOT IN DISPUTE THAT THE SEGMENTAL PROFITABILITY STAT EMENT WAS REJECTED BY THE LD TPO ON THE GROUND THAT THE SAME WAS NOT AUDITED. HOWEVER, THE SAME WAS DULY AUDITED AND SUBMITTED BEFORE THE LD DRP , WHICH HAS BEEN TAKEN ON RECORD AND CONSIDERED BY THE LD DRP. THE REVENUE APPEAL BEFORE US IS ONLY ON THE PO INT THAT AUDITED SEGMENTAL PROFITABILITY STATEMENT SUBMITTED BY THE ASSESSEE BEFORE THE LD DRP OUGHT NOT TO HAVE BEEN CONSIDERED BY THE LD DRP. MOREOVER, WE FIND THAT THE INDIAN TRANSFER PRICING REGULATIONS DO NOT REQUIRE THE NEED FOR AUDITED SEGMENTALS. WE FIND THAT THE RELIANCE IN THIS REGARD HAS BEEN RIGHTLY PLACED ON THE CO - ORDINATE BENCH DECISION OF CHENNAI TRIBUNAL IN THE CAES OF 3I INFOTECH LIMITED REPORTED IN 35 TAXMANN.COM 582 (CHENNAI ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 10 TRIB.) WHEREIN IT WAS HELD THAT THERE IS NO LEGAL REQUIREMENT THAT SEGMENT WISE WORKING OF ALP SUBMITTED BEFORE THE LD TPO SHOULD BE AUDITED BY CHARTERED ACCOUNTANT OF ASSESSEE. HENCE WE HOLD THAT THE SEGMENTAL PROFITABILITY STATEMENT SUBMITTED BY THE ASSESSEE DULY AUDITED, NEEDS TO BE CONSIDERED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE. WE FIND THAT THE RELIANCE HAS BEEN RIGHTLY PLACED ON THE DECISION OF THIRD MEMBER OF MUMBAI TRIBUNAL IN THE CASE OF TECHNIMONT ICB INDIA (P.) LTD REPORTED IN [2012] 138 ITD 23 (MUMBAI) (TM) WHERE IN IT WAS HELD THAT THE INTERNAL COMPARABILITY SHOULD BE GIVEN PREFERENCE OVER EXTERNAL COMPARABILITY. WE FIND THAT THE LD DRP ERRED IN GIVING DIRECTIONS BY COMPARING THE TOTAL MARGIN (AE+ NON - AE) OF NAVI MUMBAI AND LOTE WITH THE AE SEGMENT MARGIN OF RASA I. IT IS A VERY CLEAR PROPOSITION IN TRANSFER PRICING REGULATIONS THAT A CONTROLLED TRANSACTION CANNOT BE COMPARED WITH ANOTHER CONTROLLED TRANSACTION. THE THIRD MEMBER DECISION IN THE CASE OF ADDL CIT V. TECHNIMONT ICB INDIA (P.) LTD [2012] 138 ITD 23 (MU MBAI) (TM) IS DIRECTLY ON THIS ISSUE. THE QUESTION RAISED BEFORE THE HONBLE THIRD MEMBER IN THAT CASE WAS AS UNDER: - WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE NET MARGIN REALIZED FROM A TRANSACTION WITH AN ASSOCIATED ENTERPRISE (AE) FOUND A ND ACCEPTED AT ARMS LENGTH PRICE (ALP) CAN BE TAKEN AS A COMPARABLE BEING AN INTERNAL COMPARABLE FOR COMPUTATION OF ALP OF AN INTERNATIONAL TRANSACTION WITH ANOTHER AE ? IT WAS HELD AS UNDER BY THE HONBLE THIRD MEMBER : - 11. REVERTING TO THE QUESTION OF MAKING COMPARISON OF NET PROFIT MARGIN OF INTERNALLY OR EXTERNALLY COMPARABLE CASE FROM UNCONTROLLED TRANSACTIONM IT CAN BE SEEN THAT CLAUSE (II) OF RULE 10B(E) UNEQUIVOCALLY MANDATES FOR MAKING AN COMPARISON WITH UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS. THE WORD COMPARABLE USED IN THE PROVISION TO DESCRIBE INTERNAL OR EXTERNAL COMPARABLE, IS SUCCEEDED BY THE WORDS UNCONTROLLED TRANSACTION. WHEN CLAUSE (III) OF RULE 10B(E) IS EXAMINED, IT BECOMES LUCID THAT THERE IS REFERENCE TO THE NET PROFIT MARGIN ARISING AGAIN IN COMPARABLE UNCONTROLLED TRANSACTION. IT PROVIDES THAT THE NET PROFIT MARGIN ARISING IN COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED TO ACCOUNT FOR DIFFERENCE, IF ANY, BETWEEN THE ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 11 INTERNATIONAL TRANSACTION AND T HE COMPARABLE UNCONTROLLED TRANSACTION. WHEN THE NET PROFIT MARGIN FROM A COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED IN THE LIGHT OF CLAUSE (III) OF RULE 10B(E) , THE RESULTING FIGURE CONSTITUTES BENCHMARK, WHICH IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ALP IN RELATION TO THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS AES. THUS IT IS EVIDENT THAT RULE 10B(E) VIVIDLY REFERS TO MAKING A COMPARISON OF NET PROFIT MARGIN WITH SOME COMPARABLE UNCONTROLLED TRANSACTION. THERE IS NO REFERENCE TO MAKING A COMPARISON OF AN ASSESSEES INTERNATIONAL TRANSATION WITH A COMPARABLE CONTROLLED TRANSACTION. COMPARABLE MAY BE INTERNAL OR EXTERNAL, BUT IN ANY CASE SUCH COMPARABLE MUST BE THAT OF UNCONTROLLED TRANSACTION OR NUMBER OF SUCH UNCONT ROLLED TRANSACTIONS. 12. IN FACT, THE ENTIRE SCHEME OF DETERMINING ALP OF AN INTERNATIONAL TRANSACTION IS BASED ON MAKING COMPARISON WITH CERTAIN COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS MORE GLARING FROM THE COMMAND OF RULE 10B GIVEN IN ALL THE METHO DS WHICH HAVE BEEN PRESCRIBED U/S 92C(1) FOR DETERMINING ALP. THE FIRST METHOD IS 'COMPARABLE UNCONTROLLED PRICE METHOD'. PROCEDURE FOR DETERMINING ALP UNDER THIS METHOD IS GIVEN IN RULE 10B(A). AS THE VERY NAME OF THE METHOD ITSELF SUGGESTS THAT THE PRICE CHARGED OR PAID FOR THE PROPERTY 'IN A COMPARABLE UNCONTROLLED TRANSACTION' IS IDENTIFIED. SUCH PRICE IN A COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED ON ACCOUNT OF DIFFERENCES, IF ANY. THE CONSEQUENTIAL PRICE IS TAKEN AS BENCHMARK FOR CONSIDERING THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH ITS AES. THE SECOND METHOD IS 'RESALE PRICE METHOD'. THE PROCEDURE FOR DETERMINING PRICE UNDER THIS METHOD IS GIVEN IN RULE 10B(B). UNDER THIS METHOD, THE PRICE AT WHICH PROPERTY PURCHASED OR SERVICES OBTAINED BY THE ENTERPRISE FROM AN AE IS RESOLD OR ARE PROVIDED TO 'AN UNRELATED ENTERPRISE' IS IDENTIFIED. THIS METHOD ALSO COMPARES THE GROSS PROFIT MARGIN IN A CONTROLLED TRANSACTION WITH THE GROSS PROFIT MARGIN IN AN UNCONTROLLED TRANSACTION BASED ON SPECIFIC FUN CTIONS PERFORMED. NEXT IS 'COST PLUS METHOD'. THE MODUS OPERANDI FOR DETERMINING OF ALP UNDER THIS METHOD IS PROVIDED IN SECTION 10B(C) WHICH AGAIN REFERS TO MAKING COMPARISON WITH 'UNCONTROLLED TRANSACTION'. 13. A BRIEF OVERVIEW OF VARIOUS METHODS PRESCR IBED FOR DETERMINING ALP CLEARLY DIVULGES THAT THE COMPARISON IS ALWAYS SOUGHT TO BE MADE OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH COMPARABLE 'UNCONTROLLED TRANSACTIONS'. ONE COMMON FACTOR PERMEATING THROUGH VARIOUS METHODS FOR DETERMINING ALP IS COMPARISON OF THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH THOSE OF THIRD PARTIES SIMILARLY SITUATED. THE ESSENCE IS THAT THE COMPARISON IS SOUGHT WITH 'UNCONTROLLED TRANSACTION'. THE TRANSACTIONAL NET MARGIN METHOD IS NO EXCEPTION IN THIS REGARD. IT ALS O CONTEMPLATES COMPARISON OF NET PROFIT REALIZED BY AN ENTERPRISE WITH THE NET PROFIT REALIZED FROM A COMPARABLE UNCONTROLLED TRANSACTION. 14. WHAT IS AN 'UNCONTROLLED TRANSACTION' HAS BEEN CLEARLY DEFINED UNDER RULE 10A(A) TO MEAN 'A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRISES WHETHER RESIDENT OR NON - RESIDENT'. A PLAIN READING OF THE MEANING GIVEN TO THE EXPRESSION 'UNCONTROLLED TRANSACTION' LEAVES NO ROOM FOR ANY DOUBT THAT IT IS A TRANSACTION BETWEEN TWO NON - ASSOCIATED ENTERPRISES. IF THE TRANSACTION ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 12 IS BETWEEN TWO ASSOCIATED ENTERPRISES, IT GOES OUT OF THE AMBIT OF 'UNCONTROLLED TRANSACTION' UNDER RULE 10A. WHEN SECTION 92C IS READ ALONG WITH RULES 10B(E), AND 10A, IT BECOMES ABUNDANTLY CLEAR THAT IN COMPUTING ALP UNDER THE TRANSAC TIONAL NET MARGIN METHOD, A COMPARISON OF THE ASSESSEE'S NET PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH ITS AES HAS NECESSARILY TO BE MADE WITH THAT OF THE NET PROFIT MARGIN REALIZED BY THE SAME ENTERPRISE OR AN UNRELATED ENTERPRISE FROM A COMPARAB LE BUT DEFINITELY UNCONTROLLED TRANSACTION I.E., A TRANSACTION BETWEEN NON - ASSOCIATED ENTERPRISES. THERE IS NO STATUTORY SANCTION FOR ROPING IN A COMPARABLE CONTROLLED TRANSACTION FOR THE PURPOSES OF BENCHMARKING. WHEN IT HAS BEEN CLEARLY MANDATED IN ALL T HE RELEVANT METHODS FOR DETERMINING ALP THAT THE COMPARISON HAS TO BE MADE BY THE ENTERPRISE'S INTERNATIONAL TRANSACTION WITH COMPARABLE UNCONTROLLED TRANSACTION, BY NO SHEER LOGIC A COMPARABLE CONTROLLED TRANSACTION CAN BE EMPLOYED FOR THE PURPOSES OF MAK ING COMPARISON. THERE IS NO WARRANT FOR DILUTING THE PRESCRIPTION GIVEN BY THE STATUTE OR RULES WHEN SUCH PRESCRIPTION ITSELF SERVES THE ENDS OF JUSTICE PROPERLY AND IS INFALLIBLE. IF THE VIEW OF THE REVENUE THAT A CONTROLLED TRANSACTION SHOULD NOT BE SHUN TED OUT FOR THE PURPOSES OF BENCHMARKING, IS ACCEPTED, THEN ALL THE RELEVANT PROVISIONS CONTAINED IN CHAPTER X IN THIS REGARD, WILL BECOME OTIOSE. IF SUCH A CONTENTION OF MAKING COMPARISON WITH A COMPARABLE CONTROLLED TRANSACTION IS TAKEN TO ITS LOGICAL CO NCLUSION, THEN THERE WILL NEVER ARISE ANY NEED TO TAKE UP ANY CASE FOR TRANSFER PRICING SCRUTINY. THE REASON IS OBVIOUS. ALP IS DETERMINED FOR APPLICATION IN RESPECT OF TRANSACTIONS BETWEEN TWO AES SO THAT THE PROFIT LIKELY TO ARISE FROM SUCH TRANSACTIONS IS NOT UNDER - REPORTED VIS - A - VIS FROM SIMILAR TRANSACTIONS WITH THIRD PARTIES. IF THE COMPARISON IS MADE AGAIN WITH NET PROFIT MARGIN REALIZED FROM TRANSACTIONS BETWEEN TWO AES, INSTEAD OF THIRD PARTIES, IT MAY DEMONSTRATE THE SAME COOKED RESULTS IN BOTH TH E SITUATIONS, THEREBY LEAVING NO SCOPE FOR ANY ADJUSTMENT. IN THIS EVENTUALITY, THE VERY OBJECT OF SUCH PROVISIONS WILL BE FRUSTRATED. THUS IT FOLLOWS THAT THE ALP CAN BE DETERMINED ONLY BY MAKING COMPARISON WITH A COMPARABLE UNCONTROLLED TRANSACTION AND N OT A COMPARABLE CONTROLLED TRANSACTION. 15. THERE IS ONE MORE DIMENSION OF THIS CASE. THE TRANSACTIONS BETWEEN ICB AND JTS ARE NOT ONLY CONTROLLED, BUT THE PROFIT MARGIN OF ICB ALSO PASSED THROUGH THE EXAMINATION BY THE TPO, WHO DECLARED IT AT ARM'S LENGTH . THE LD. DR CONTENDED THAT ONCE CONTROLLED TRANSACTIONS ARE VERIFIED BY THE TPO AND FOUND AT ALP, THEN THE DIFFERENCE BETWEEN CONTROLLED AND CONTROLLED TRANSACTIONS IS OBLITERATED. CANVASSING THIS POINT FURTHER, HE ACCENTUATED THAT EVEN THOUGH THE TRANSAC TIONS BETWEEN ICB AND JTS WERE CONTROLLED, STILL THEY CONSTITUTED A GOOD BASIS FOR COMPARISON AS THE TPO FOUND THEM AT ARM'S LENGTH. 16. THIS CONTENTION OF THE ID. DR ALBEIT SOUNDS ATTRACTIVE AT THE FIRST BLUSH, BUT ON CLOSER EXAMINATION, FAILS TO ENDURE. THE BASIC PURPOSE BEHIND THE TRANSFER PRICING PROVISIONS IS TO ENSURE THAT THE MULTINATIONAL COMPANIES DO NOT ARRANGE THEIR INTRA GROUP CROSS BORDER TRANSACTIONS IN SUCH A WAY AS TO REDUCE THE INCIDENCE OF TAX IN INDIA. A MULTINATIONAL COMPANY, HAVING CONC ERNS ACROSS THE WORLD, MAY RESORT TO PRICING THE INTRA GROUP TRANSACTIONS IN SUCH A MANNER THAT LOWER INCOME GETS OFFERED IN COUNTRIES WITH HIGH TAX RATES AND HIGHER INCOME GETS REFLECTED IN COUNTRIES WITH LOWER TAX RATES, SO THAT ITS OVERALL TAX LIABILITY IS SHRINKED. IF THE TAX RATES IN INDIA ARE RELATIVELY HIGHER VIS - A - VIS THE OTHER COUNTRY, SAY A, AND THE INTERNATIONAL TRANSACTION IS BETWEEN THE CONCERNS IN INDIA AND COUNTRY A, THERE MAY BE AN ATTEMPT ON THE PART OF MULTINATIONAL ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 13 COMPANY TO VALUE THE TR ANSACTION IN SUCH A WAY THAT THE INCOME TO BE OFFERED IN INDIA GETS SLICED AWAY AND CORRESPONDING INCOME IS INCREASED IN THE HANDS OF THE COMPANY SITUATED IN COUNTRY A. THERE MAY A CONVERSE SITUATION AS WELL. IT MAY ALSO HAPPEN THAT THE TAX RATES IN INDIA ARE LOWER THAN THE OTHER COUNTRY, SAY B, AND THE INTERNATIONAL TRANSACTION IS BETWEEN THE CONCERNS IN INDIA AND COUNTRY B. IN SUCH A SITUATION, THE MULTINATIONAL COMPANY MAY ATTEMPT TO VALUE THE TRANSACTION IN SUCH A MANNER THAT THE INCOME TO BE OFFERED IN INDIA IS SWELLED, THEREBY REDUCING THE CORRESPONDING INCOME IN THE HANDS OF THE COMPANY SITUATED IN COUNTRY B. IT IS PALPABLE THAT IN BOTH SUCH SITUATIONS, THE VALUE OF TRANSACTION BETWEEN THE ASSOCIATED ENTERPRISES IS TAILOR - MADE TO SUIT THE OVERALL INTE REST OF THE MULTINATIONAL COMPANY. IT DOES NOT REPRESENT THE TRANSACTION AT ITS TRUE VALUE. IN THE FIRST SITUATION, THE RECEIPT FROM THE TRANSACTION RECORDED IN INDIA WILL BE LOWER AND ITS ALP WILL BE HIGHER. IN THE SECOND SITUATION, THE RECEIPT FROM THE T RANSACTION RECORDED IN INDIA WILL BE HIGHER BUT THE BENCHMARK PRICE WILL BE LOWER. WHEREAS THE FIRST SITUATION WILL NECESSITATE THE MAKING OF AN ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN THE HANDS OF INDIAN COMPANY, THE SECOND SITUATION WILL NO T PERMIT ANY DEDUCTION IN THE DECLARED INCOME OF THE SUCH INDIAN CONCERN TO THAT EXTENT. IT IS SO BECAUSE IF THE ALP IS HIGHER THAN THE VALUE OF THE TRANSACTION RECORDED IN THE BOOKS OF ACCOUNT, IT REQUIRES MAKING ADDITION ON ACCOUNT OF TRANSFER PRICING AD JUSTMENT. HOWEVER, IN THE OPPOSITE SITUATION, THERE IS NO MANDATE FOR REDUCING THE INCOME. IN SUCH A SECOND SITUATION, THE RECEIPT FROM THE TRANSACTION RECORDED SHALL BE CONSIDERED AT ALP, NOTWITHSTANDING THE FACT THAT IT IS AT EXAGGERATED FIGURE WHEN COMP ARED WITH A COMPARABLE UNCONTROLLED TRANSACTION. THIS IS WHAT HAS BEEN LAID DOWN IN SUB - SECTION (3) OF SECTION 92. WHEREAS SUB - SECTION (1) OF SECTION 92 PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO T HE ARM'S LENGTH PRICE, SUB - SECTION (3) PROVIDES THAT : 'THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB - SECTION (1) OR THE DETERMINATION OF THE ALLOWANCE FOR ANY EXPENSE OR INTEREST UNDER THAT SUB - SECTION, OR THE DETERMINATION OF ANY COST OR EXPENSE ALLOCATED OR APPORTIONED, OR, AS THE CASE MAY BE, CONTRIBUTED UNDER SUB - SECTION (2), HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED ON THE BASIS OF E NTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ENTERED INTO.' FROM THE ABOVE DISCUSSION IT IS VIVID THAT WHEREAS IN THE FIRST SITUATION, THE ALP REPRESENTS THE TRUE VALUE OF TRANSACTION OR, PR OFITABILITY AS WILL BE THERE IN THE ORDINARY COURSE WITHOUT HAVING ANY REGARD TO THE RELATIONSHIP BETWEEN THE CONCERNS, IT IS NOT SO IN THE SECOND SITUATION. IN THE LATER CASE, EVEN THOUGH THE VALUE OF TRANSACTION OR PROFITABILITY WILL BE AT MORE THAN HIGH ER LEVEL, STILL IT WILL BE DESCRIBED AS THE ALP. IN SUCH LATER CASE, THE ALP OF THE TRANSACTION OR THE ARM'S LENGTH PROFIT CANNOT BE CONSIDERED AS BENCHMARK FOR THE PURPOSES OF MAKING COMPARISON IN OTHER CASES. THAT APPEARS TO BE THE PROBABLE REASON FOR WH ICH THE LEGISLATURE HAS IGNORED THE CONTROLLED TRANSACTIONS, EVEN THOUGH AT ALP, AND RESTRICTED THE AMBIT ONLY TO UNCONTROLLED TRANSACTIONS FOR COMPUTING ALP IN RESPECT OF INTERNATIONAL TRANSACTIONS BETWEEN TWO AES. 17. I, THEREFORE, ANSWER THE QUESTION RE FERRED TO ME U/S 255(4) IN NEGATIVE BY HOLDING THAT THE NET PROFIT MARGIN REALIZED FROM A TRANSACTION WITH AN AE CANNOT BE TAKEN AS A COMPARABLE BEING INTERNAL COMPARABLE FOR COMPUTATION OF ALP OF AN INTERNATIONAL TRANSACTION WITH ANOTHER AE EVEN THOUGH TH E NET MARGIN FROM A TRANSACTION WITH AE IS FOUND AND ACCEPTED AT ALP. ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 14 18. BEFORE PARTING WITH THIS MATTER, I CONSIDER IT MY DUTY TO RECORD THAT THE LD. AR RELIED ON CERTAIN DECISIONS INCLUDING UCB INDIA (P.) LTD. V.. ASSTT. CIT [2009] 121 ITD 131 / 30 SOT 95 (MUM), BAYER. MATERIAL SCIENCE (P.) LTD. V. ADDL. CIT [2012] 134 ITD 582 /18 TAXMAN.COM 60 (MUM.) AND DY. CIT V. BP INDIA SERVICES (P.)LTD. [2011] 133 ITD 255 / 48 SOT 253 / 15 TAXMANN.COM 125 (MUM) IN WHICH IT HAS BEEN HELD THAT CONTROL LED TRANSACTIONS CANNOT BE CONSIDERED FOR DETERMINING ALP IN OTHER TRANSACTIONS. PER CONTRA , THE LD. DR HAS RELIED ON A SOLITARY DECISION RENDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN NGC NETWORK (INDIA) (P.) LTD. ( SUPRA ) TO BUTTRESS HIS CONTENTION THAT A CONTROLLED TRANSACTION CAN ALSO BE CONSIDERED FOR BENCHMARKING. I DO NOT PROPOSE TO EMBARK UPON THESE CASES SEPARATELY FOR DISCUSSION, I CLARIFY THAT MY DECISION IN THE FOREGOING PARAS IS FOUNDED ON THE INTERPRETATION OF THE RELEVANT BARE PROVISIONS OF T HE ACT AND RULES, WITHOUT TAKING ANY ASSISTANCE FROM DECISIONS CITED BY THE RIVAL PARTIES ON THE POINT, WHICH DIFFER IN THEIR CONCLUSION AS STATED BY THE LD. REPRESENTATIVES BEFORE ME. 19. FOR THE FOREGOING REASONS I AGREE WITH THE VIEW EXPRESSED BY THE LE ARNED AM. THE REGISTRY OF THE TRIBUNAL IS DIRECTED TO PLACE THIS MATTER BEFORE THE DIVISION BENCH FOR PASSING AN ORDER IN ACCORDANCE WITH MAJORITY VIEW. 5.1. WE FIND THAT THE LD AR BEFORE US ALSO PLACED RELIANCE ON THE DECISION OF CO - ORDINATE BENCH OF TH IS TRIBUNAL IN THE CASE OF M/S SNC LAVALIN ENGINEERING INDIA PVT LTD VS ACIT IN ITA NO. 287/MUM/2014 (ASSESSMENT YEAR 2008 - 09) DATED 15.3.2018, WHEREIN IT WAS HELD AS UNDER: - 6. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICED T HAT THE ASSESSEE HAS NOT PREPARED SEGMENTAL ACCOUNTS INITIALLY AND HENCE IT COULD FURNISH ONLY UNAUDITED SEGMENTAL ACCOUNTS BEFORE TPO. HENCE THE TPO HAS REJECTED THE SAME DOUBTING ABOUT ITS RELIABILITY. SUBSEQUENTLY, THE ASSESSEE HAS PREPARED PROPER SEG MENTAL ACCOUNTS AND GOT IT AUDITED AND FRUNSIHED THE SAME BEFORE THE LEARNED CIT(A). WE NOTICE THAT THE LD CIT(A) HAS REFUSED TO ADMIT THE SAME FOR TECHNICAL REASONS. AS HELD BY THE CO - ORDINATE BENCH IN THE CASE OF SMT AVAN GIDWANI (SUPRA) , THE ADDITIONA L EVIDENCES FURNISHED BY THE ASSESSEE IN THE FORM OF AUDITED SEGMENTAL ACCOUNTS MAY BE VITAL DOCUMENTS THAT MAY BE REQUIRED TO ADJUDICATE THE ISSUE IN JUDICIOUS MATTER, PARTICULARLY IN VIEW OF THE FACT THAT THE TPO HAS CHANGED THE METHODOLOGY ALTOGETHER TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTIONS. ACCORDINGLY, WE ADMIT THE ADDITIONAL EVIDENCES . SINCE, THE ISSUE IS REQUIRED TO BE EXAMINE AFRESH, AS PER THE PLEA OF LEARNED DR, WE RESTORE THE ISSUE RELATING TO DETERMINATION OF ARMS LENGTH PRICE TO TH E FILE OF ASSESSING OFFICER / TPO FOR EXAMINING IT AFRESH BY DULY CONSIDERING THE ADDITIONAL EVIDENCES FURNISHED BY THE ASSESSEE. AFTER HEARING THE ASSESSEE, THEY MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 15 5.2. MOREOVER, WE FIND THAT THE PROPORTIONATE ADJUSTMENT IS TO BE MADE ONLY ON THE VALUE OF INTERNATIONAL TRANSACTIONS AND NOT FOR THE ENTIRE TRANSACTIONS AT ENTITY LEVEL. THE TOTAL VALUE OF INTERNATIONAL TRANSACTIONS OF RASAI UNIT IN RESPECT OF IMPORT OF RAW MATERIALS WAS ONLY RS 65 CR ORES. THE LD. TPO CONSIDERED THE ENTIRE TOTAL OPERATING EXPENDITURE (AND NOT RESTRICTING ONLY THE IMPORT TRANSACTION OF RS. 65 CRORES) OF THE AE SEGMENT OF RASAL UNIT WHILE COMPUTING THE ADJUSTMENT. THIS IS NOW WELL SETTLED BY THE DECISION OF HONBLE BOMB AY HIGH COURT IN THE CASE OF PCIT VS SANDVIK ASIA PVT. LTD IN INCOME TAX APPEAL NO. 1088 OF 2015 DATED 26.4.2018 STATES THE ADJUSTMENT SHOULD BE RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS NOT ALL THE OTHER THIRD PARTY TRANSACTIONS. IN THIS REGARD, O NE OF THE QUESTIONS RAISED BEFORE THE HONBLE BOMBAY HIGH COURT WAS AS UNDER: - (A) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, THE TRIBUNAL HAS ERRED IN DIRECTING THE AO TO COMPUTE THE TP ADJUSTMENT PROPORTIONATE TO AE TURNOVER, WH EREAS THE ASSESSEE HAS APPLIED TNMM AT ENTITY LEVEL AND THEREFORE, ADJUSTMENT WOULD HAVE TO BE COMPUTED AT ENTITY LEVEL. THE LAW DOES NOT PROVIDE FOR A PRO - RATA ADJUSTMENT WHEN TNMM IS APPLIED AT ENTITY LEVEL ? IT WAS HELD BY HONBLE BOMBAY HIGH COURT AS UNDER: - 3. RE. QUESTION (A): - (I) IT IS AN AGREED POSITION BETWEEN THE PARTIES THAT THE ISSUE RAISED HEREIN STANDS CONCLUDED AGAINST THE REVENUE BY THE FOLLOWING DECISIONS OF THIS COURT: - (I) CIT V/S M/S RAITLAL BECHARLAL & SONS (INCOME TAX APPEAL NO. 19 06 OF 2013) RENDERED ON 24 TH NOVEMBER, 2015; (II) CIT V/S GOLDSTAR JEWELLERY DESIGN (P) LTD., (INCOME TAX APPEAL NO. 2237 OF 2013) RENDERED ON 4 TH FEBRUARY, 2016 ; (III) CIT V/S ALSTOM PROJECTS INDIA LTD., (INCOME TAX APPEAL NO. 362 OF 2014) RENDERED ON 1 4 TH SEPTEMBER, 2016 ; AND (IV) CIT V/S M/S. BHANSALI & CO., (INCOME TAX APPEAL NO. 1066 OF 2014) RENDERED ON 9 TH DECEMBER, 2016. ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 16 (II) BESIDES THE AFORESAID DECISIONS OF THIS COURT, THE ISSUE ALSO STANDS COVERED BY THE DECISION OF THE DELHI HIGH COURT IN CIT V/S. KEIHIN PANALFA LTD., (INCOME TAX APPEAL NO. 11 OF 2015) RENDERED ON 9 TH SEPTEMBER, 2015. (III) IN ALL THE AFORESAID DECISIONS, IT HAS BEEN HELD THAT THE TRANSFER PRICING ADJUSTMENT IS NOT TO BE DONE AT THE ENTITY LEVEL BUT ONLY IN RESPECT OF INTE RNATIONAL TRANSACTIONS OF THE RESPONDENT WITH ITS ASSOCIATED ENTERPRISE (AE). THIS, ON THE APPLICATION OF PROPORTIONATE METHOD. (IV) IN THE ABOVE VIEW, QUESTION AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS, NOT ENTERTAINED. 5.3. WITH REGARD TO THE CLAIM OF ECONOMIC ADJUSTMENTS IN RESPECT OF CERTAIN ITEMS, WE FIND THAT THE LD AR ARGUED THAT THE ASSESSEE HAD NEVER WITHDRAWN ITS CLAIM FOR ECONOMIC ADJUSTMENTS EITHER IN WRITING OR IN HEARINGS DURING THE COURSE OF THE PROCEEDINGS BEFORE THE LD DRP. THE SAID STATEMENT MENTIONED IN DRP DIRECTIONS WAS FACTUALLY INCORRECT. IN THIS REGARD, THE LD AR ARGUED THAT CONCESSION OF LAW MADE BY AN ASSESSEE OR HIS AUTHORIZED REPRESENTATIVE DURING THE COURSE OF ANY PROCEEDINGS IS NOT BINDING. H E PLACED RELIANCE ON THE FOLLOWING DECISIONS IN THIS REGARD: - RANI ANAND KUNWAR VS CIT (1940) 8 ITR 126 (OUDH) CIT VS ARCHANA R. DHANWATAY (1982) 136 ITR 355 (BOM) (HC) GOURI SAHAI GHISA RAM VS CIT (1979) 120 ITR 338 (ALL.) (HC) NARSEPALLI OIL MILLS VS STA TE OF MYSORE (1973) 32 STC 599 (MAD.) CENTRAL COUNCIL FOR RESEARCH IN AYURVEDA & SIDDHA VS DR. K. SHANKARA KUMARI (2001) 5 SSC 60 CIT VS MAHALAXMI SUGAR MIILS CO. LTD (1986) 160 ITR 920 (SC) AT (928) 5.3.1. WE ARE INCLINED TO ACCEPT THIS ARGUMENT OF THE L D AR AND PROCEED TO ADJUDICATE THE ELIGIBILITY OF CLAIM OF ECONOMIC ADJUSTMENTS SOUGHT BY THE ASSESSEE ON MERITS AS UNDER: - 5.3.1.1. STOCK WRITE DOWN OF RS. 846 LACS: ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 17 THE LD. TPO HAS ALLOWED STOCK WRITE DOWN TOWARDS NON - AE OF RS 363 LACS BUT DID NOT ALLOW THE SAME AS AN ECONOMIC ADJUSTMENT TOWARDS AE SEGMENT. IT WAS EXPLAINED THAT THE STOCK WRITE DOWN WAS ON ACCOUNT OF STEEP INCREASE IN THE COST OF RAW MATERIALS AND VOLATILE CONDITION OF THE INDUSTRY. THIS VOLATILITY IN MARKET CONDITIONS AND STEEP INCREASE IN THE COST OF RAW MATERIALS WERE DULY ACCEPTED AND ALLOWED BY THE LD TPO FOR NON - AE SEGMENT BUT DENIED FOR AE SEGMENT. IT IS ELEMENTARY THAT FOR THE PURPOSE OF COMPARISON, BOTH THE TESTED PARTY AND THE COMPARABLE IS TO BE EVALUATED UNDER SAME CONDITIONS. WE HOLD THAT THE LD TPO HAVING ALLOWED THE SAME IN NON - AE SEGMENT TO THE TUNE OF RS 363 LACS, OUGHT NOT TO HAVE TAKEN A DIVERGENT STAND IN RESPECT OF AE SEGMENT IN THE SUM OF RS 846 LACS. ACCORDINGLY, WE DIRECT THE LD TPO TO ALLOW THE SAME AS AN ECONOMIC ADJUSTMENT WHILE COMPUTING THE MARGINS OF THE AE SEGMENT FOR THE PURPOSE OF COMPARABILITY. 5.3.1.2. CAPACITY UNDERUTILIZATION (RASAI PLANT) OF RS. 935 LACS AND SHUTDOWN COST (RASAI PLANT) OF RS. 53 LACS: IT IS NOT IN DISPUTE THAT THE RASAI PLANT WAS CLOS ED DOWN FOR A PERIOD OF 4 MONTHS FROM NOVEMBER 2008 TO FEBRUARY 2009 DUE TO LACK OF DEMAND AND PILE UP OF EXCESS INVENTORIES. THIS FACT IS EVIDENT FROM THE EXCISE REGISTER PLACED ON RECORD. THIS IS EVIDENT FROM THE MANUFACTURING DETAILS PROVIDED BY THE ASS ESSEE FOR THE FINANCIAL YEARS 2007 - 08 AND 2008 - 09 ENCLOSED IN PAGE 253 OF THE PAPER BOOK. THIS RESULTED IN UNDERUTILIZATION OF CAPACITY IN RASAI PLANT TO 42% DURING THE YEAR AND CONSEQUENT SHUTDOWN COST. THIS IS PART OF OPERATIONAL COST AND HENCE ALLOWANCE SHOULD BE GRANTED TO THE ASSESSEE AS AN ECONOMIC ADJUSTMENT. WE DIRECT THE LD TPO ACCORDINGLY. 5.3.1.3. PROFESSIONAL CHARGES FOR SEARCH OF NEW MD OF RS. 58 LACS: THIS IS A NON - RECURRING ITEM AND EXTRA - ORDINARY IN NATURE. IT IS NOT THAT A NEW MD IS APP OINTED IN NORMAL COURSE OF BUSINESS EVERY YEAR. DURING THE ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 18 YEAR, THE ASSESSEE COMPANY HAD PAID THIS FEES TO RECRUITMENT AGENCY IN SEARCH OF MD AND CLAIMED THE SAME AS AN EXTRAORDINARY ECONOMIC ADJUSTMENT. ACCORDINGLY, WE DIRECT THE LD TPO TO CONSIDER THE A MOUNT SPENT ON PROFESSIONAL CHARGES FOR SEARCH OF NEW MD TO BE ALLOWED AS AN ECONOMIC ADJUSTMENT WHILE COMPUTING THE MARGINS OF AE SEGMENT FOR THE PURPOSE OF COMPARABILITY. 5.4. THE TRANSFER PRICING GROUNDS RAISED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE DISPOSED OFF AS ABOVE. 6. WE FIND THAT THE ASSESSEE HAD RAISED AN ADDITIONAL GROUND NO. 1.1. AND 1.2. CLAIMING DEPRECIATION ON GOODWILL ARISING ON ACCOUNT OF AMALGAMATION. 6.1. THE BRIEF FACTS OF THIS ISSUE ARE THAT DURING THE FINANCIAL YEAR 2002 - 03 RELEVANT TO ASST YEAR 2003 - 04, THE ASSESSEE ACQUIRED AN UNDERTAKING OF SCHENECTADY SPECIALTIES ASIA P. LTD. (SSAPL OR AMALGAMATING COMPANY) UNDER A SCHEME OF AMALGAMATION APPROVED BY THE HONBLE BOMBAY HIGH COURT. PURSUANT TO THE SCHEME OF AMALGAMA TION, ALL THE ASSETS, LIABILITIES, AND RESERVES OF SSAPL WERE TRANSFERRED TO AND VESTED IN THE COMPANY AT BOOK VALUES. AS PER THE SCHEME, THE ASSESSEE RECORDED RS. 8,86,57,302 AS GOODWILL IN ITS BOOKS TOWARDS THE EXCESS LIABILITY/OUTFLOW OF OVER AND AB OVE THE VALUE OF THE UNDERTAKING. 6.2. THE A SSESSEE HAD NOT CLAIMED DEPRECIATION ON SUCH GOODWILL IN ITS RETURN OF INCOME. BASED ON SUBSEQUENT DEVELOPMENT IN TERMS OF THE LAW / PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN CIT V . SMIFS SECURITIES L TD. 348 ITR 302 (SC), THE ASSESSEE FOR THE FIRST TIME MADE ITS CLAIM BEFORE THIS TRIBUNAL FOR ASST YEAR 2003 - 04 AND SUBSEQUENTLY, FOR ASST YEARS 2006 - 07 AND 2007 - 08. THIS TRIBUNAL IN ASSESSEES OWN CASE ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 19 FOR ASST YEAR 2003 - 04 IN ITA NO. 4384/MUM/2010 DATED 16.1.2015 HAD REMANDED THE MATTER BACK TO THE FILE OF THE LD AO FOR FRESH ADJUDICATION. THIS TRIBUNAL PASSED SIMILAR ORDER DATED 8.3.2017 FOR THE ASST YEARS 2006 - 07 AND 2007 - 08 IN ITA NOS. 9197/MUM/2013 AND ITA NO. 1009/MUM/2013 AGAINST THE ADDITIONAL GR OUNDS RAISED THEREON. WE DEEM IT FIT AND APPROPRIATE TO GIVE SIMILAR DIRECTIONS TO THE LD AO FOR THE YEAR UNDER CONSIDERATION ALSO FOR FRESH ADJUDICATION. NEEDLESS TO MENTION THAT THE ASSESEE BE GIVEN REASONABLE OPPORTUNITY OF BEING HEARD. ACCORDINGLY, THE ADDITIONAL GROUNDS 1.1. AND 1.2. RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 7. WE FIND THAT THE ASSESSEE HAD ALSO RAISED FURTHER ADDITIONAL GROUNDS VIDE ADDITIONAL GROUNDS 2.1. TO 2.3. WITH REGARD TO DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT WHILE COMPUTING THE BOOK PROFITS U/S 115JB OF THE ACT. DURING THE COURSE OF HEARING BEFORE US, THE LD AR SUBMITTED THAT DUE TO SMALLNESS OF THE AMOUNT INVOLVED IN THIS ISSUE, THE SAME IS NOT PRESSED. THE SAME IS RECKONED AS A STATEMENT FR OM THE BAR. ACCORDINGLY, THESE ADDITIONAL GROUNDS ARE DISMISSED AS NOT PRESSED. 8. THE ADDITIONAL GROUND NO. 3.1. IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 9. WE ARE NOW LEFT WITH GROUND NO. 2 IN REVENUES APPEAL IN ITA NO. 13 07/MUM/2014 , WHEREIN THE REVENUE HAD CHALLENGED THE ACTION OF THE LD DRP IN DELETING THE ADDITION OF RS 30,22,002/ - MADE ON ACCOUNT OF CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH CENTRE. 9.1. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSESSEE HAD IN - HOUS E R&D UNIT RECOGNIZED / APPROVED BY DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH (DSIR). THE SAID APPROVAL WAS VALID UNTIL 31 MARCH 2007. ON 18.12.2006, THE ASSESSEE HAD MADE AN APPLICATION TO DSIR FOR RENEWAL OF ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 20 THE APPROVAL BEYOND 31.3.2007. HOWEVE R, THE APPROVAL HAD NOT BEEN RECEIVED UNTIL THE COMPLETION OF THE ASSESSMENT PROCEEDINGS. DURING THE YEAR UNDER APPEAL, THE ASSESSEE HAD INCURRED CAPITAL EXPENDITURE OF RS. 30.22 LACS ON SCIENTIFIC RESEARCH WHICH WAS CLAIMED AS A DEDUCTION UNDER SECTION 35 (1)(IV) OF THE ACT (DEDUCTION OF 100% OF EXPENDITURE AND NOT WEIGHTED DEDUCTION). THE LD AO IN THE DRAFT ASSESSMENT ORDER PROPOSED TO DISALLOW THE SAID EXPENDITURE IN THE ABSENCE OF DSIR APPROVAL FOR THE YEAR UNDER APPEAL. BEFORE THE LD DRP, THE ASSESSEE SUBMITTED THAT DEDUCTION OF EXPENDITURE TOWARDS SCIENTIFIC RESEARCH CANNOT BE DENIED ONCE THE REQUIREMENTS ARE FULFILLED. IT WAS ARGUED THAT SINCE THE ASSESSEE HAS FILED THE RENEWAL APPLICATION AND ONLY PROCEDURAL REQUIREMENT IS PENDING, THE DEDUCTION SHO ULD BE ALLOWED. THE ASSESSEE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SANDAN VIKAS (INDIA) LTD REPORTED IN 22 TAXMANN.COM 19 (DELHI) IN SUPPORT OF ITS CONTENTIONS. THE LD DRP ALLOWED THE ASSESSEES CLAIM AND DIRECTED THE LD AO TO DELETE THE PROPOSED DISALLOWANCE. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 9.2. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE ONLY GRIEVANCE OF THE REVENUE IS THAT SINCE THE ASSESSEE HAD NOT OBTAINED RENEWED ITS APPROVAL FROM DSIR, THE A SSESSEE IS NOT ENTITLED FOR DEDUCTION. WE FIND LOT OF FORCE IN THE ALTERNATIVE CLAIM OF THE LD AR BEFORE US THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION OF SUCH CAPITAL EXPENDITURE IN ENTIRETY IN VIEW OF SPECIFIC PROVISIONS CONTAINED IN SECTION 35(1)(IV) OF THE ACT , WHEREIN THERE IS NO CONDITION FOR HAVING DSIR APPROVAL FOR DEDUCTION UNDER THIS SECTION. WE FIND THAT THE LD AR PLACED RELIANCE ON THE FOLLOWING DECISIONS WHEREIN IT HAS BEEN HELD THAT APPROVAL OF DSIR IS NOT A PRE - REQUISITE FOR CLAIMING DEDUCT ION UNDER SECTION 35(1)(IV) OF THE ACT: - ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 21 TUBE INVESTMENTS OF INDIA LTD. V. CIT [2002] 125 TAXMAN 421 (MADRAS HC) SHREE PACETRONICS LTD. ACIT [2011] 10 TAMANN.COM 118 (INDORE TRIB.) COROMANDEL INTERNATIONAL LTD. V. ACIT (ITA NO. 101/HYD/2012) AYUSHAKTI AYU RVED P. LTD. V. ACIT [2010] 37 SOT 313 (MUMBAI TRIB.) 9.3. WE FIND THAT THE CO - ORDINATE BENCH DECISION OF HYDERABAD TRIBUNAL IN THE CASE OF COROMANDEL INTERNATIONAL LTD VS ADDL CIT IN ITA NO. 101/HYD/2012 DATED 28.8.2014 IS DIRECTLY ON THIS IMPUGNED ISSUE WHEREIN IT WAS HELD THAT : - 7. WE HAVE CONSIDERED THE ARGUMENTS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF THE REVENUE AUTHORITIES. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECISIONS RELIED UPON BY THE PARTIES. IT IS A FACT ON RECORD THAT OUT OF THE TOTAL DEDUCTION OF RS. 4,73,31,953/ - CLAIMED BY THE ASSESSEE TOWARDS R&D EXPENDITURE ON CAPITAL FIELD, DSIR IN ITS APPROVAL IN FORM NO. 3CL ALLOWED THE CLAIM TO THE EXTENT OF RS. 4,71,08,743 AND IN THE PROCESS DISALLOWIN G THE AMOUNT OF RS. 2,23,215/ - . WHEREAS THE ENTIRE REVENUE EXPENDITURE OF RS. 1,31,87,576/ - WAS NOT APPROVED BY DSIR. IT IS THE CONTENTION OF THE LEARNED AR THAT APPROVAL OF DSIR AS ENVISAGED U/S 35(2AB) IS ONLY CONFINED TO DEDUCTION CLAIMED UNDER THAT SEC TION. SUCH APPROVAL IS NEITHER NECESSARY TO DECIDE WHETHER EXPENDITURE IS IN THE NATURE OF REVENUE OR CAPITAL NOR IT IS RELEVANT FOR CONSIDERING ASSESSEE'S CLAIM UNDER ANY OTHER PROVISIONS OF THE ACT. WE FIND FORCE IN THE CONTENTION OF THE LEARNED AR. ON A READING OF THE PROVISION CONTAINED U/S 35 AS A WHOLE AND SECTION 35(2AB) IN PARTICULAR AND ON PERUSAL OF FORM NO. 3CL, WE ARE OF THE VIEW THAT APPROVAL OF DSIR AS CONTEMPLATED IS ONLY IN RESPECT OF WEI GHTED DEDUCTION TO BE CLAIMED U/S 35(2AB) OF THE ACT. IT HAS NO RELEVANCE FOR DETERMINING WHETHER THE EXPENDITURE CLAIMED IS ALLOWABLE UNDER ANY OTHER PROVISIONS OF THE ACT. THE ONLY CONDITION PRESCRIBED U/S 35(2AB) IS, IF THE CLAIM OF THE ASSESSEE IS ALLO WED U/S 35(2AB) IT WILL NOT BE ALLOWABLE UNDER ANY ANOTHER PROVISION. IN THE PRESENT CASE, NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE DEPARTMENT TO CONTROVERT ASSESSEE'S CLAIM THAT IT HAS INCURRED TOWARDS SALARY AND WAGES OF EMPLOYEES ENGAGED IN REVENUE EXPENDITURE OF RS. 1,31,87,576/ - , R&D AND CAPITAL EXPENDITURE OF RS. 4,73,31,953/ - ON R&D ACTIVITIES. THAT BEING THE CASE UNAPPROVED REVENUE EXPENDITURE OF RS. 1,31,87,576/ - IF NOT ALLOWABLE U/S 35(2AB) OF THE ACT, IN ABSENCE OF APPROVAL FROM DSIR, CERTAI NLY CAN BE ALLOWED AS DEDUCTION U/S 35(1)(I) AND 37(1) OF THE ACT AS THE CASE MAY BE. ITAT, DELHI BENCH IN CASE OF ACIT PARABOLIC DRUGS LTD. (SUPRA) WHILE CONSIDERING THE ISSUE HELD AS FOLLOWS: ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 22 '28. SEC. 35(1)(I) FALLS UNDER CHAPTER IV UNDER THE HEAD 'COMP UTATION OF BUSINESS INCOME'. IT DESCRIBES THE ALLOWABILITY OF THE EXPENDITURE IN CASE WHERE BUSINESS INCOME IS COMPUTED. IT DEALS WITH THE EXPENDITURE INCURRED BY THE ASSESSEE ON SCIENTIFIC RESEARCH. IT HAS BEEN PRESCRIBED THEREIN THAT IN RESPECT OF EXPEND ITURE ON SCIENTIFIC RESEARCH THE SAME WILL BE ALLOWED IF THE SAID EXPENDITURE HAS BEEN LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS. IT IS NOT THE CASE OF ANYBODY THAT EXPLANATION TO S. 35(1)(I) IS APPLICABLE TO THE FACTS OF THE CASE. THEREFORE, THE CASE OF THE ASSESSEE HAS TO BE SEEN IN THE LIGHT OF PROVISIONS CONTAINED IN S. 35(1)(I) WITHOUT APPLICATION OF EXPLANATION. THE BUS INESS OF THE ASSESSEE IS OF MANUFACTURING OF BULK DRUGS AND FINE CHEMICALS ETC. IN THE PROCESS OF ITS MANUFACTURING OF DRUGS IT HAS TO MAKE R&D SO TO MAKE THE DRUG MORE EFFECTIVE AND ALSO TO BRING DOWN THE COST. NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SU GGEST THAT BY INCURRING THESE EXPENDITURE THE ASSESSEE HAS ENTERED INTO ANY NEW ACTIVITY OF MANUFACTURING OR NEW ACTIVITY OF TRADE. IN THE BUSINESS OF MANUFACTURING OF DRUG, PROCESS OF R&D IS CONTINUOUS PROCESS WHICH AUGMENTS THE BUSINESS OF THE ASSESSEE. THESE EXPENSES ARE NOT IN THE NATURE OF ANY PERSONAL EXPENDITURE AS NO SUCH ALLEGATION HAS BEEN MADE. THEREFORE, THE REMAINING CRITERIA TO CONSIDER THE ALLOWABILITY IS ONLY THE THING TO BE SEEN IS THAT WHETHER THE EXPENDITURE IS INCURRED BY THE ASSESSEE IS CAPITAL IN NATURE. SO AS IT RELATES TO CAPITAL EXPENDITURE OF RS. 44.41 LAKHS, THE ASSESSEE ITSELF HAS CLAIMED THE SAID EXPENDITURE AS BEING CAPITAL IN NATURE. THEREFORE, THERE IS NO DISPUTE WITH REGARD TO THAT. SO AS IT RELATES TO EXPENSES OF RS. 19.57 L AKHS ON SALARY AND WAGES THE SAME CANNOT BE CONSIDERED TO BE EXPENDITURE OF BEING CAPITAL IN NATURE AS THE SAID SALARY AND WAGES ARE PAID TO THE MANPOWER DEPLOYED FOR CARRYING OUT THE R&D ACTIVITY WHICH IS PART AND PARCEL OF THE BUSINESS OF THE ASSESSEE. 29. NOW COMING TO THE EXPENSES OF RS. 611.78 LAKHS RELATING TO MATERIALS/CONSUMABLES/SPARES, IT IS NOT THE CASE OF THE AO THAT THE SAID MATERIAL WAS NOT CONSUMED IN THE R&D PROCESS AND SOME PART THEREOF WAS REMAINING IN THE CLOSING STOCK. THEREFORE, THESE EXPENDITURE INCURRED ON MATERIAL USED FOR LAB TRIALS CANNOT IN ANY MANNER BE CONSIDERED AS EXPENDITURE BEING IN THE NATURE OF CAPITAL. THE NEXT ITEM IS 'OTHER EXPENDITURE DIRECTLY RELATED TO R&D'. WITH REGARD TO THESE EXPENDITURE THE FINDING OF FACT HAS BE EN RECORDED BY CIT(A) THAT THESE HAVE BEEN INCURRED BY THE ASSESSEE FOR REGISTRATION OF PRODUCTS IN OTHER COUNTRIES OR TOWARDS OBTAINING TECHNICAL KNOW - HOW FEE FOR PRODUCING NEW DRUGS ETC. HE HAS RECORDED IN HIS ORDER THAT HE HAS CALLED FOR AND PERUSED THE AGREEMENTS BETWEEN THE ASSESSEE COMPANY AND IS LTD. (WHICH IS THE MAJOR SUM OF RS. 1 CRORE COMPRISING OF TWO ITEMS OF RS. 50 LAKHS EACH) FOR TRANSFER OF TECHNICAL KNOW - HOW. HE HAS ALSO OBSERVED THAT AO HAS NOT GIVEN ANY ADVERSE COMMENT IN HIS REPORT REGAR DING THIS AGREEMENT AND SUCH TYPES OF AGREEMENTS FOR TRANSFER OF TECHNICAL KNOW - HOW ARE QUITE COMMON IN PHARMACEUTICAL INDUSTRY DUE TO COMMERCIAL ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 23 EXIGENCY. THESE FINDINGS OF FACT HAVE NOT BEEN CONTROVERTED BY THE REVENUE BY BRINING ANY MATERIAL ON RECORD T O SUGGEST THAT SUCH FINDINGS OF CIT(A) ARE CONTRARY TO THE FACTS EXISTING ON RECORD. IF IT IS SO, THEN WE FIND NO INFIRMITY IN THE FINDINGS RECORDED BY LEARNED CIT(A), WHEREBY FOLLOWING THE DECISIONS OF DELHI TRIBUNAL IN THE CASES OF JT. CIT VS. MODI OLIVE TTI LTD. (SUPRA) AND ASST. CIT VS. MEDICAMEN BLOTECH LTD. (SUPRA), HE HAS ALLOWED THE RELIEF TO THE ASSESSEE. 30. IN VIEW OF THE ABOVE DISCUSSION, IT HAS TO BE HELD THAT ALL OF THESE EXPENDITURE WERE INCURRED BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS AND NONE OF THE EXPENDITURE CAN BE CLASSIFIED AS EXPENDITURE IN THE NATURE OF CAPITAL. THEREFORE, NO INFIRMITY IS FOUND IN THE ORDER OF CIT(A) VIDE WHICH THE ASSESSEE HAS BEEN HELD ELIGIBLE FOR DEDUCTION OF THESE EXPENDITURE UNDER BOTH THE SECTIONS EITHER UNDER S. 35(1)(I) OR UNDER S. 37(1) . WE DECLINE TO INTERFERE IN SUCH DELETION AND THIS GROUND OF REVENUE IS DISMISSED. 8. IN THE PRESENT CASE, THE DE PARTMENT HAS NOT DISPUTED THE FACT THAT EXPENDITURE INCURRED WAS TOWARDS SALARY AND WAGES. THAT BEING THE CASE, THE EXPENDITURE IS ALLOWABLE U/S 35(1)(I) OR U/S 37(1) AS HELD BY ITAT DELHI BENCH (SUPRA). SO FAR AS DISALLOWANCE OF CAPITAL EXPENDITURE OF RS. 2,23,215 IS CONCERNED, UNDISPUTEDLY, NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE DEPARTMENT TO CONTROVERT ASSESSEE'S CLAIM THAT SUCH EXPENDITURE INCURRED WAS TOWARDS SCIENTIFIC RESEARCH. DISALLOWANCE WAS ONLY FOR THE REASON THAT IT IS NOT APPROVED BY DS IR. HOWEVER, EVEN IN ABSENCE OF APPROVAL FROM DSIR THOUGH ASSESSEE MAY NOT BE ELIGIBLE FOR DEDUCTION U/S 35(2AB), STILL ASSESSEE CAN CLAIM THE DEDUCTION U/S 35(1)(IV). IN THIS CONTEXT WE REFER TO THE DECISION OF HON'BLE MADRAS HIGH COURT IN CASE OF TUBE IN VESTMENTS OF INDIA LTD. VS. CIT (SUPRA) WHEREIN IT IS HELD A UNDER: 'SEC. 35 OF THE ACT DEALS WITH EXPENDITURE ON SCIENTIFIC RESEARCH. SECTION 35(1)(IV) REFERS TO EXPENDITURE OF A CAPITAL NATURE ON SCIE NTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. SEC. 35(2B) REFERS TO EXPENDITURE, OTHER THAN CAPITAL EXPENDITURE INCURRED ON THE ACQUISITION OF ANY LAND OR BUILDING OR CONSTRUCTION OF ANY BUILDING, ON SCIENTIFIC RESEARCH UNDERTAKEN UND ER A PROGRAMME APPROVED IN THAT BEHALF BY THE PRESCRIBED AUTHORITY, HAVING REGARD TO THE SOCIAL, ECONOMIC AND INDUSTRIAL NEED OF INDIA. IT IS ONLY SUCH EXPENDITURE AS IS INCURRED ON A PROGRAMME WHICH HAS BEEN APPROVED BY THE AUTHORITY PRESCRIBED UNDER S. 35(2B) , WHICH CAN BE CLAIMED AS DEDUCTION UNDER THAT PROVISION. THE CAPITAL EXPENDITURE ON THE ACQUISITION OF LAND OR BUILDING WHETHER ACQUIRED OR CONSTRUCTED CANNOT BE CLAIMED UNDER S. 35(2B) . THE BENEFIT OF S. 35 (1)(IV) CAN BE AVAILED BY THE ASSESSEE IN RESPECT OF EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RESEARCH IF THAT RESEARCH IS RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. THE APPROVAL OF THE ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 24 AUTHORITY PRESCRIBED UNDER S. 35(2B) IS NOT AN ESSENTIAL PREREQUISITE FOR CLAIMING THE ALLOWANCE UNDER S. 35(1)(IV) IF IT IS FOUND THAT A PART OF THE CLAIM FALLS WITHIN THE AMBIT OF S. 35(1)(IV) . THE MERE FACT OF A CLAIM NOT HAVING BEEN FOUND ADMISSIBLE UNDER S. 35(2B) WILL NOT CONSTITUTE A BAR TO ALLOWING AN EXPENDITURE UNDER S. 35(1)(IV) IF THAT EXPENDITURE IS CAPITAL EXPENDITURE AND FALLS SQUARELY WITHIN THE AMBIT OF S. 35(1)(IV) . CAPITAL EXPENDITURE INCURRED ON THE ACQUISITION OF LAND OR CONSTRUCTION OF BUILDING WHICH IS EXCLUDED BY THE VERY TERMS OF S. 35(2B) CAN BE CLAIMED UND ER S. 35(1)(IV) . 9. FOLLOWING THE RATIO LAID DOWN AS ABOVE, WE HOLD THAT ASSESSEE IS ELIGIBLE FOR DEDUCTION IN RESPECT OF REVENUE EXPENDITURE OF RS. 1,31,87,576 AND CAPITAL EXPENDITURE OF RS. 2,23,215/ - . THUS, GROUND NOS. 2 & 3 ARE ALLOWED. 9.4. RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S 35(1)(IV) OF THE ACT. ACCORDINGLY, THE GROUND NO. 2 RAISED BY THE REVENUE IS DISMISSED. 10. THE GROUND NOS. 3 & 4 RAISED BY THE REVENUE ARE GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 11. TO SUM UP, THE APPEAL OF THE ASSESSEE IN ITA NO. 1745/MUM/2014 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF THE REVENUE IN ITA NO. 1307/MUM/2014 IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 19 / 06 /201 9 SD/ - ( SAKTIJIT DEY ) SD/ - (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED 19 / 06 /201 9 KARUNA SR. PS ITA NO S . 1745/MUM/2014 & 1307/MUM/2014 M/S. SI GROUP INDIA LTD., 25 COPY OF THE ORD ER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//