M/s Granules India Limited, Hyderabad V. Dy.CIT, Circle-2(3), Hyderabad

ITA 1793/HYD/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69849 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 12-12-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: J J VARUN
• Keywords: Business income; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 92C; 43B; 143(3); 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1793/HYD/2012 ASSESSMENT YEAR 2008-09 M/S. GRANULES INDIA LIMITED, HYDERABAD PAN AAACG-7369-K VS. DCIT, CIRCLE 2(3) HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE MR. J.J. VARUN FOR REVENUE MR. D. SUDHAKAR RAO DATE OF HEARING 21.04.2014 DATE OF PRONOUNCEMENT 18.06.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE A.O. PASSED UNDER SECTION 143(3) READ WITH SECTION 144C(1) CONSEQUENT TO THE DIRECTIONS OF THE DRP UNDER SECTION 144C(5) OF THE I.T. ACT, 1961. 2. BRIEFLY STATED, ASSESSEE M/S. GRANULES INDIA LIMITED IS ENGAGED IN THE BUSINESS OF MANUFACTURE O F BULK DRUG (API) FORMULATIONS/GRANULES (PFI) AND TABLETS. ASSESSEE IS HAVING A WHOLLY OWNED SUBSIDIARY IN USA NAMED GR ANULES USA (INC.) TO MARKET THE PRODUCTS MANUFACTURED BY A SSESSEE. FOR THE A.Y. 2008-09, ASSESSEE FILED ITS RETURN OF INCOME ON 22.09.2008 DECLARING TOTAL INCOME OF RS.3,66,83,590 /- AFTER CLAIMING DEDUCTION UNDER SECTION 10B OF THE I.T. AC T, 1961. 2 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD 3. A.O. ULTIMATELY DETERMINED THE TOTAL INCOME AT RS.29,56,20,000/- VIDE DRAFT ORDER DATED 30.12.2011 BY MAKING THE FOLLOWING ADJUSTMENTS : I) TRANSFER PRICING ADJUSTMENT U/S.92CA RS. 24,56,90,761 II) BELATED PAYMENT OF PROVIDENT FUND RS. 18,47,797 III) BELATED PAYMENT OF EMPLOYEES STATE INSURANCE RS. 41,014 IV) LOSS ON INSURANCE CLAIM RS. 2,45,196 V) DISALLOWANCE OF DONATIONS RS. 6,22,272 VI) DISALLOWANCE OF GDR EXPENSES U/S.35D RS. 8,70,912 VII) DISALLOWANCE OF DEDUCTION U/S.10B RS. 96,18,462 4. ASSESSEE RAISED VARIOUS OBJECTIONS BEFORE THE D RP AND THE DRP CONSIDERED THE OBJECTIONS AND REJECTED MOST OF THE CONTENTIONS OF ASSESSEE WHILE ACCEPTING THAT TH E TP ADJUSTMENT SHOULD BE MADE ONLY TO THE EXTENT OF INT ERNATIONAL TRANSACTIONS UNDERTAKEN BY ASSESSEE AND NOT TO THE ENTIRE TRANSACTIONS WHICH INCLUDED NON-AE OR DOMESTIC TRAN SACTIONS. CONSEQUENTLY, ASSESSEE GOT RELIEF UNDER T.P. ADJUST MENTS. IT ALSO GAVE DIRECTIONS WITH REFERENCE TO OTHER NON-T. P. GROUNDS RAISED BY ASSESSEE. ACCORDINGLY, ASSESSEE IS AGGRIE VED ON THE ADJUSTMENTS SO CONFIRMED BY THE DRP. THE DETAILS OF VARIOUS ISSUES WILL BE DISCUSSED IN DUE COURSE WHILE CONSID ERING THE GROUNDS AT THE APPROPRIATE LEVEL. 5. ASSESSEE HAS RAISED 14 GROUNDS IN ITS APPEAL. GROUND NOS. 1 TO 9 PERTAINS TO T.P. ADJUSTMENTS MAD E UNDER SECTION 92C WHEREAS, GROUND NOS. 10 TO 14 PERTAIN T O OTHER ADDITIONS/DISALLOWANCES MADE BY THE A.O. IN THE COU RSE OF ARGUMENTS, LD. COUNSEL DID NOT PRESS GROUND NO.9 WI TH REFERENCE TO LIMITING THE ADJUSTMENT TO A VARIATION OF 5% ARMS LENGTH PRICE UNDER PROVISO TO SECTION 92C(2). GROUN D NO.1 IS ALSO GENERAL ONE WITH REFERENCE TO ADJUSTMENT MADE AT RS.6.62 3 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD CRORES REJECTING THE ECONOMIC ANALYSIS UNDERTAKEN B Y ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. THIS DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION AS THE OTHER GROU NDS TAKEN BY ASSESSEE WILL ALSO HAVE A BEARING ON THIS CONTENTIO N. 6. TRANSFER PRICING ADJUSTMENTS (GROUND NO.2) : GROUND NO.2 IS WITH REFERENCE TO ISSUE OF S ELECTION OF TESTED PARTY IN DETERMINATION OF ARMS LENGTH PRICE . BRIEFLY STATED, DURING THE FINANCIAL YEAR ASSESSEE ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS AE FOR A TOTAL SUM OF RS.59,38,96,711/- AS UNDER : S. NO CLASS OF TRANSACTION PAID/ RECEIVED A.E. AMOUNT INVOLVED (RS.) METHO D APPLIE D 1. EXPORT OF FINISHED GOODS RECEIVED GRANULES USA INC. 53,38,53,829 RPM 2. PURCHASE OF RAW MATERIALS PAID HUBEI GRANULES BROCAUSE PHARMACEUTI CALS CO. LTD., CHINA 5,11,89,888 CUP 3. CONSULTANCY PAID GRANULES USA INC. 14,40,260 CUP 4. INTEREST RECEIVED ON LOAN RECEIVED GRANULES USA INC. 74,12,734 CUP TOTAL 59,38,96,711 6.1. IN THE T.P. STUDY ASSESSEE HAD FURNISHED PROFITABILITY ANALYSIS IN RESPECT OF DOMESTIC SALES AND SALES TO AE AND NON-AE UNDER EXPORT SEGMENT FOR FINANCIAL YE AR 2007- 08. ASSESSEE HAS ALLOCATED DIRECT AND INDIRECT EXPE NSES TO THESE SEGMENTS IN PROPORTION TO THEIR SALES AND NOT OF THEIR ACTUAL BASIS. IN THE T.P. STUDY OF ASSESSEE, THE TE STED PARTY WAS THE AE IN USA. ASSESSEE EXPORTED FINISHED GOODS TO AE IN USA 4 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD FOR A SUM OF RS.53.38 CRORES AND ASSESSEE SUBMITTED BEFORE THE A.O. THAT THE AE HAS LEAST COMPLEX TRANSACTIONS AND THE ALP CAN BE DETERMINED ACTUALLY BY ADOPTING RE-SALE PRICE METHOD (IN SHORT RPM). ASSESSEE SOURCED THE DATA FROM THE WEBSITE WWW.SESC.GOV AND THE INTERNATIONAL TRANSAC TIONS WITH THE AE WERE COMPARED BY SEARCHING THE DATA BASED IN THE WEBSITE AND SIX COMPARABLES WERE PICKED FROM THE BU SINESS OF MARKETING AND DISTRIBUTION USING THE MULTIPLE YEAR DATA. ASSESSEE ARRIVED AT WEIGHTED AVERAGE GROSS PROFIT M ARGIN OF THESE COMPANIES COMPUTED AT RANGES FROM 2.9% TO 29. 5%. THE GROSS PROFIT MARGIN OF AE WAS WORKED OUT TO 4.42% A ND CONCLUDED THAT INTERNATIONAL TRANSACTION WITH THE A E WERE AT ARMS LENGTH. 6.2. THE TPO HELD THAT TRANSFER PRICING STUDY OF ASSESSEE BY MAKING THE AE AS TESTED PARTY WAS DEFEC TIVE AND REJECTED THE SAME BY GIVING THE FOLLOWING REASONS : I) THE FAR ANALYSIS OF THE COMPARABLES WAS NOT CARR IED OUT II) THE SEARCH PROCESS ADOPTED BY THE TESTED PARTY AND SEARCH MATRIX WAS NOT PROVIDED TO THE TPO. III) THE FILTERS APPLIED FOR SELECTION OF COMPARABLES WA S NOT REVEALED TO THE TPO. IV) THE TESTED PARTY HAD APPLIED MULTIPLE YEAR DATA V) THE COMPARABLES SELECTED IN USA WERE CHERRY PICK ED AND FOUND TO BE FUNCTIONALLY DISSIMILAR AND THE ACTIVIT IES IN WHICH THEY WERE ENGAGED WERE DIFFERENT FROM THAT OF THE AE. VI) THE TPO ALSO REJECTED THE RESALE PRICE METHOD ADOPT ED BY ASSESSEE FOR THE PURPOSE OF DETERMINATION OF ALP AN D CHOSE TNMM AS THE MOST APPROPRIATE METHOD. 6.3. BEFORE THE DRP, IT WAS CONTENDED THAT AE SHO ULD BE THE TESTED PARTY AND WITHOUT ANY JUSTIFICATION, TPO REJECTED THE RPM ADOPTED BY ASSESSEE. THEY ALSO SUBMITTED TH AT THE TPO DID NOT CONDUCT ANY STUDY BY MAKING AE AS THE T ESTED 5 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD PARTY. THE PANEL DIRECTED THE TPO TO EXAMINE THE SU BMISSIONS OF ASSESSEE AS THE ISSUE GOES TO THE ROOT OF THE MA TTER. THE TPO WAS DIRECTED TO OFFER HIS VIEWS ON THE APPLICABILIT Y OF THE RPM AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO ASSES SEE. IN RESPONSE, THE TPO SUBMITTED A REPORT ON 18.07.2012 AND A COPY OF THE REPORT WAS ALSO GIVEN TO ASSESSEE AND I N RESPONSE, THE COMPANY FURNISHED ITS OBJECTIONS. THE TPOS REPO RT AND ASSESSEE'S OBJECTIONS THEREON WERE CONSIDERED. 6.4. ASSESSEE SUBMITTED THAT IT HAD COMPLIED WITH ITS STATUTORY OBLIGATION TO MAINTAIN THE TRANSACTIONS DOCUMENTATION AS PRESCRIBED IN THE STATUTE. ASSESSE E SELECTED RPM AS THE MOST APPROPRIATE METHOD AND ALSO DETERMI NED TNMM AS AN ALTERNATIVE METHOD FOR DETERMINING THE A LP. ASSESSEE'S ANALYSIS AND ITS TP STUDY WAS BASED ON A CCEPTED SOUND PRINCIPLES, IN THE ABSENCE OF ANY INFORMATION TO THE CONTRARY, IT IS NOT JUSTIFIED IN REJECTING THE TP S TUDY OF ASSESSEE. IN THIS CONTEXT, ASSESSEE RELIED ON THE D ECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SONY INDIA PVT LTD 288 ITR 5 (DELHI). THE COMPARABLES SELECTED BY IT WERE ALSO IN THE SIMILAR BUSINESS. THE AE INCURRED LOSSES SINCE ITS INCEPTION AND IS CONSOLIDATING ITS POSITION IN THE US MARKET. THE AE EXCLUSIVELY SELLS THE PRODUCTS OF ASSESSEE AND DOES NOT MANUFACTURE OR SELL ANY OTHER PRODUCT. ASSESSEE DID NOT SHIFT ANY PROFIT TO USA WITH AN INTENTION TO EVADE TAXES. 7. THE DRP AFTER GIVING DUE OPPORTUNITY TO ASSESSE E REJECTED ASSESSEES CONTENTIONS STATING THAT ASSESS EE DID NOT ESTABLISH THAT THE COMPARABLE SELECTED BY MAKING A. E. AS A TESTED PARTY WERE UNBIASED AND THE SAMPLE WAS FAIR SAMPLE. IT WAS OF THE OPINION THAT ASSESSEE DID NOT BRING ANY EVIDENCE TO REBUT THE FINDINGS OF THE TPO THAT THE COMPARABLES SELECTED 6 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD WERE CHERRY PICKED. IT FELT THAT COMPARABILITY ANAL YSIS AND SEARCH PROCESS FOR SELECTION OF THE COMPARABLES SHO ULD BE FAIR AND UNBIASED. DRP ALSO NOTED THAT ASSESSEE COULD SE LECT ONLY SIX COMPARABLES ENGAGED IN MARKETING AND DISTRIBUTI ON OF BULK DRUGS AND FORMULATIONS. FURTHER, IT ASKED FOR A REP ORT FROM THE TPO AND THE FINDINGS OF THE TPO AND DRP OBSERVATION S ARE AS UNDER : 5.6.2 THE TPO IN HIS REPORT DATED 18.07.2012 SUBM ITTED THAT THE FOLLOWING SIX COMPANIES WERE SELECTED AS COMPARABLES AND EXCEPT ONE, NONE OF THEM WAS COMPAR ABLE TO ASSESSEE. (AE HAS 5 EMPLOYEES AND 7 MILLION USD ASSETS) TOTAL ASSETS IN USD (MILLION) NUMBER OF EMPLOYEES I) ACETO CORPORATION 311.70 238 II) AMERI SOURCE BERGEN CORP. 14,982.70 10,300 III) AMEX DRUG CORP. 1.60 6 IV) OWENS & MINER INC. 1946.80 4,800 V) PSS WORLD MEDICAL INC. 1156.00 4,100 VI) HENRY SCHEIN INC. 4740.10 15,000 5.6.3 THE TPO IN HIS REPORT FURNISHED THE BUSINESS PROFILE OF THE SIX COMPARABLES SELECTED BY THE TAXPAYER. THE B USINESS PROFILE OF THESE COMPANIES REVEAL THAT A PART OF TH E BUSINESS OF THESE COMPANIES IS COMPARABLE TO THE TAXPAYER BU T NOT ALL THE OPERATIONS UNDERTAKEN BY THESE SIX COMPANIES. F OR EG. AMERI SOURCE BERGEN CORPORATION HAS 10300 EMPLOYEES AND IT IS ALSO ENGAGED IN PHARMACEUTICALS SERVICES AND DISTRIBUTES AN OFFERING OF BRAND NAME AND GENERIC PHARMACEUTICALS, OVER THE COUNTER HEALTH CARE PRODU CTS, HOME HEALTH CARE SUPPLIES AND EQUIPMENT AND RELATED SERVICES TO A VARIETY OF HEALTH CARE PROVIDERS PRIM ARILY LOCATED IN THE USA AND CANADA. THE FIVE COMPARABLES SELECTED BY THE TAXPAYER IN USA WERE GIANTS AND ONL Y ONE COMPANY WAS COMPARABLE TO THE TAXPAYER IN SIZE. NAM ELY. AMEXDRUG CORPORATION. THE PANEL AGREES WITH THE VIE WS OF THE TPO THAT ALL THE COM PARABLES SELECTED BY THE T AXPAYER HAD TRANSACTIONS IN MEDICAL~QUIPM~NT. HEALTH CARE A ND DIAGNOSTIC EQUIPMENT, HEALTH CARE INFORMATION TECHN OLOGY 7 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD AND OPERATIONS IN COSMOCEUTICALS. THE PANEL DOES NO T WISH TO REPEAT THE REASONS RECORDED BY THE TPO IN HIS OR DER AND ALSO IN HIS REMAND REPORT DATED 18.07.2012. 5.6.4 THE TPO ALSO BROUGHT TO THE PANEL'S NOTICE TH AT IN ONE OF THE PRODUCTS SOLD BY THE TAXPAYER, NAMELY, ACETOMINOPHEN, THE PRICE CHARGED TO NON-AE WAS MUCH HIGHER THAN THE PRICE AT WHICH THE PRODUCT WAS SOLD TO AE. THE TRTL GAVE A DOZEN TRANSACTIONS AS A SAMPLE. 5.6.5. FOR THE PURPOSE OF COMPARABILITY, ASSESSEE A ND THE TPO MUST USE THE CURRENT YEAR DATA FOR DETERMINATIO N OF THE ARM'S LENGTH PRICE. ASSESSEE HAD USED THREE FINANCI AL YEARS DATA AND NOT THE CURRENT FINANCIAL YEAR DATA WHICH AMOUNTS TO VIOLATION OF RULE-L0B(4) OF THE I.T. RULES. NO D OUBT, ASSESSEE IS ENTITLED TO MAKE THE AE AS THE TESTED P ARTY BUT IT DID NOT USE THE CURRENT YEAR DATA AS REQUIRED UNDER THE INDIAN TRANSFER PRICING REGULATIONS. MOREOVER, THE COMPARABLES SELECTED BY ASSESSEE WERE NOT COMPARABL E FUNCTIONALLY AND ASSESSEE DID NOT BRING ANY MATERIA L ON RECORD TO ESTABLISH THAT COMPARABLES SELECTED BY IT WERE FUNCTIONALLY SIMILAR TO THE TESTED PARTY. THERE WAS ENORMOUS DIFFERENCE IN THE SCALE OF OPERATIONS UNDERTAKEN BY THE TESTED PARTY AND THE COMPARABLES SELECTED BY IT. TH E ASSETS EMPLOYED BY THE COMPARABLE COMPANIES FOR CARRYING O N THE BUSINESS OPERATIONS WERE NOT COMPARABLE TO THE ASSE TS EMPLOYED BY THE TESTED PARTY EXCEPT IN ONE COMPARAB LE. THE NUMBER OF EMPLOYEES WHO WORKED FOR THE COMPARABLES CANNOT BE COMPARED WITH THE NUMBER OF EMPLOYEES OF ASSESSEE. ASSESSEE SUBMITTED BEFORE THE TPO THAT TH ERE SHOULD BE AN UPPER LIMIT ON THE TURNOVER WHILE SELE CTING THE COMPARABLES AND THIS LOGIC WAS NOT APPLIED WHILE CH OOSING THE COMPARABLES IN USA. THE FINANCIAL DATA OF THE COMPARABLES WAS FOR THE YEAR ENDED ON 30TH JUNE. 20 05, 30TH JUNE, 2006 AND 30TH JUNE, 2007. ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ITS AE TILL 31ST MA RCH, 2008. THUS, THE DATA USED FOR COMPARABILITY PURPOSE WAS N OT THE DATA RELATING TO THE FINANCIAL YEAR 2007-08. 5.6.6 BEFORE THE TPO, ASSESSEE DID NOT REVEAL THE FILTERS IT HAD APPLIED FOR SELECTION OF COMPARABLES . THE PANEL DOES NOT FIND ANY MERIT IN THE SUBMISSIONS OF ASSES SEE AND AGREES WITH THE TPO THAT THE TP STUDY OF ASSESSEE A ND COMPARABLES SELECTED WERE CHERRY PICKED AND NOT UNB IASED. THE PANEL HAS CONSIDERED THE DECISIONS RELIED UPON BY ASSESSEE AND IN THE VIEW OF THE PANEL, THE FACTS OF ASSESSEE 8 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD ARE TOTALLY DIFFERENT. TO REPEAT ASSESSEE SELECTION OF COMPARABLES WAS NOT UNBIASED. 7.1. CONTESTING THE ABOVE ISSUE, IT WAS SUBMITTED THAT THE 'TESTED PARTY' SHOULD BE THE LEAST COMPLEX OF T HE TRANSACTING ENTITIES, I.E., THE SIMPLER ENTITY IN T ERMS OF INTENSITY OF FUNCTIONS PERFORMED AND RISKS ASSUMED AND WOULD NOT OWN VALUABLE OR NON-ROUTINE INTANGIBLES. IT WAS SUBMITT ED THAT ASSESSEE IS NOT TO BE CONSIDERED AS 'TESTED PARTY' AND ACCORDINGLY BENCHMARKED, SINCE, BY VIRTUE OF THEIR COMPLEX FUNCTIONAL AND RISK PROFILES, THEIR MARGINS FLUCTUA TE HEAVILY WITH THE VAGARIES OF THE ECONOMY, THUS MAKING COMPA RABILITY ANALYSIS EXTREMELY DIFFICULT AND UNRELIABLE. FURTHE R, THE FINANCIAL RESULTS OF ASSESSEE OFTEN DEPEND ON EXTER NAL ECONOMIC FACTORS IN THE MARKET; AND NOT ON THE INTERNAL PRIC ING POLICIES OF THE COMPANY'S MANAGEMENT. IT WAS FURTHER CONTEN DED THAT AVAILABILITY OF OVERSEAS COMPARABLES IS NEVER A CHA LLENGE, GIVEN THE VARIETY OF PAID GLOBAL DATABASES (E.G. ORBIS, A MADEUS, STANDARD & POOR, OSIRIS, COMPUSTAT, ETC) THAT EXIST IN PUBLIC DOMAIN, WHICH HOUSE SUCH COMPARABLES ACROSS THE VAR IOUS REGIONS IN THE WORLD. IT WAS SUBMITTED THAT ASSESSEE SHOULD BE GIVEN ANOTHER OPPORTUNITY TO JUSTIFY THE TP ANALYSI S ON THE BASIS OF AE BEING TESTED PARTY. LD COUNSEL RELIED O N THE FOLLOWING CASE LAW AND GUIDELINES IN SUPPORT: 1. 2008-TIOL-150-ITAT-KOL-DEVELOPMENT CONSULTANTS PVT LTD VS DCLT 2. OECD TP GUIDELINES [PARAS 3~18 &.-1.G] 3. DRAFT UN TP GUIDELINES PARA 5.3..3.1 OF CHAPTER 5; AND PARAS 6.2.20.3, 6.3.3.2 & 6.3:B.4 OF CHAPTER 6. 9 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD 8 . LD DR HOWEVER RELIED ON DETAILED ORDERS OF TPO/ DRP. 9. WE HAVE CONSIDERED THE DETAILED SUBMISSIONS ON THE ISSUE. IT IS ACKNOWLEDGED GENERALLY THAT THE 'TESTED PARTY' SHOULD BE THE LEAST COMPLEX OF THE TRANSACTING ENTI TIES, I.E., THE SIMPLER ENTITY IN TERMS OF INTENSITY OF FUNCTIONS P ERFORMED AND RISKS ASSUMED; AND WOULD ALSO NOT OWN VALUABLE OR N ON- ROUTINE INTANGIBLES. CONCEPT OF 'TESTED PARTY' IS F UNDAMENTAL TO TP; AND HAS BEEN EXPLAINED IN DETAIL IN THE OECD TP GUIDELINES AND ALSO THE DRAFT UN TP GUIDELINES AND ALSO ACCEPTED BY THE ITAT IN THE CASE OF DEVELOPMENT CON SULTANTS PVT LTD (SUPRA) WAY BACK IN THE YEAR 2008. AS A MA TTER OF FACT, THE TRIBUNAL DID NOT EVEN HAVE THE ADVANTAGES OF TH E OECD & UN GUIDELINES TO THE AFORESAID EFFECT, WHICH GOT RE LEASED IN 2010 & THEREAFTER. BY VIRTUE OF THEIR COMPLEX FUNCT IONAL AND RISK PROFILES, ASSESSEE MARGINS FLUCTUATE HEAVILY W ITH THE VAGARIES OF THE ECONOMY, THUS MAKING COMPARABILITY ANALYSIS DIFFICULT. 9.1. THE INDIAN TP REGULATIONS DO NOT PROVIDE A NY GUIDANCE ON WHO SHOULD BE THE 'TESTED PARTY'. FURTH ER, THE REVENUE HAS ALSO NOT ISSUED ANY OFFICIAL GUIDELINES IN THE FORM OF CIRCULARS ON APPROACHES AROUND THE FUNDAMENTALS OF TP. THUS, UNDER THE CIRCUMSTANCES, REFERENCE NEED TO BE MADE TO THE GUIDANCE AVAILABLE GLOBALLY ON FUNDAMENTALS OF TP, NAMELY OECD AND UN GUIDELINES; TP REGULATIONS OF US; RULIN GS OF UK AND AUSTRALIAN REVENUE AUTHORITIES, ETC, TO THE EXT ENT THE SAME DO NOT INFRINGE WITH THE BASIC FRAMEWORK OF TH E TP REGULATIONS OF INDIA. INCIDENTALLY, THE INDIAN TP REGULATIONS EXPRESSLY DEVIATE FROM THE OECD AND DRAFT UN TP GUI DELINES ONLY ON TWO ISSUES, NAMELY THE USE OF (I) 'ARITHMET IC MEAN' AS A 10 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD MEASURE OF CENTRAL TENDENCY FOR THE PURPOSES OF COM PUTING THE ARM'S LENGTH PRICE, AS OPPOSED TO THE CONCEPT OF 'I NTER QUARTILE RANGE' AND 'MEDIAN'; AND (II) 'SINGLE YEAR DATA', A S OPPOSED TO 'MULTIPLE YEAR DATA', FOR THE PURPOSES OF COMPARABI LITY ANALYSIS. THE TERM 'ENTERPRISE', USED WHILE DEFININ G THE VARIOUS TP METHODS IN RULE 10B OF THE INCOME TAX RULES, DOE S NOT REFER TO ONLY THE INDIAN TAXPAYER FOR BEING SUBJECT TO BE NCHMARKING ANALYSIS BY ALWAYS SELECTING THE SAME AS THE 'TESTE D PARTY'. THE TERM 'ENTERPRISE' IN RULE 10B REFERS TO EITHER OF THE TWO AES INVOLVED IN THE 'INTERNATIONAL TRANSACTION'. NO W, WHICH OF THE TWO AES SHOULD BE SELECTED AS THE 'TESTED PARTY ', FOR THE PURPOSES OF ECONOMIC OR BENCH MARKING ANALYSIS, IS AN ISSUE, ON WHICH THE INDIAN TP REGULATIONS ARE ABSOLUTELY S ILENT. THAT IS WHERE REFERENCE IS TO BE MADE TO OECD & DRAFT UN TP GUIDELINES. IT NEEDS TO BE BORNE IN MIND THAT CARR YING OUT OF ECONOMIC OR BENCHMARKING ANALYSIS ON THE WRONG ENTI TY WOULD RESULT INTO A MERE MATHEMATICAL FALLACY, NOT LEADIN G TO ANY RESOLUTION IN TP WHATSOEVER. THAT WOULD DEFEAT THE WHOLE PURPOSE OF TP; AND THE SAME IS NOT; AND ALSO COULD NEVER HAVE BEEN, INTENDED OR ENVISAGED BY THE INDIAN TP REGULA TIONS. 9.2. WE AGREE WITH THE BASIC PROPOSITIONS RAISED B Y THE LD. COUNSEL. THE OBJECTION BY TPO/DRP WAS THAT THER E IS INSUFFICIENT DATA TO CONSIDER THE AE AS TESTED PART Y. IN THE ABSENCE OF RELIABLE DATA AO REJECTED THE ASSESSEE C ONTENTIONS. HE DID NOT VERIFY WHETHER ANY DATA IS AVAILABLE. LD . COUNSEL BEFORE US UNDERTOOK TO FURNISH THE REVISED DATA SO THAT COMPARABILITY STUDY CAN BE UNDERTAKEN BY MAKING A.E . AS A TESTED PARTY. SINCE THE ASSESSEE COMPANY IS HAVING VARIOUS ACTIVITIES AND ONLY ACTIVITY A.E. HAS UNDERTAKEN IN USA IS TO DISTRIBUTE THE PRODUCTS OF THE ASSESSEE IN USA MARK ET, WE ARE 11 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD OF THE OPINION THAT A.E. CAN BE TAKEN AS TESTED PA RTY IN ORDER TO EXAMINE THE TRANSACTIONS BEING ARMS LENGTH OR NO T. AS THE LD. COUNSEL PLEADED FOR RESTORING THE MATTER TO THE FILE OF THE A.O. FOR UNDERTAKING THE FRESH EXERCISE, WE ARE OF THE OPINION THAT TPO SHOULD EXAMINE AFRESH WITH THE DATA AVAILA BLE IN PUBLIC DOMAIN KEEPING IN MIND A.E. AS THE TESTED PA RTY AND TO DO THE NEEDFUL. WE MAKE IT CLEAR THAT IN CASE ASSES SEE IS NOT ABLE TO FURNISH DATA OR THE DATA AVAILABLE IN PUBLI C DOMAIN IS NOT APPROPRIATE, THEN, A.O. IS FREE TO DETERMINE CO MPARABILITY STUDY TAKING ASSESSEE AS A TESTED PARTY. HOWEVER, T HIS WILL COME ONLY WHEN A.E. AS TESTED PARTY IS REJECTED AFT ER EXAMINING THE DATA AVAILABILITY AND ITS SUITABILITY. IN ORDER TO REEXAMINE THE ISSUE, ASSESSEES GROUNDS ARE CONSIDERED AS ALL OWED FOR STATISTICAL PURPOSES AND THE ISSUE IS RESTORED TO T HE FILE OF A.O. TO CONSIDER THE A.E. AS TESTED PARTY. 10. GROUND NO.3 PERTAINS TO REJECTION OF RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIATE METHOD. IT IS ONE OF THE CONTENTIONS THAT SINCE ASSESSEES AE IS ACTING AS M ARKETING AND DISTRIBUTION AGENCY, RPM METHOD IS THE MOST APP ROPRIATE METHOD FOR T.P. ADJUSTMENTS. THIS CONTENTION WAS RE JECTED BY THE TPO AND ALSO BY THE DRP. THE DRP OBSERVED AS UN DER : 6. THE NEXT ISSUE THAT ARISES FOR CONSIDERATION IS THE REJECTION OF THE RESALE PRICE METHOD. ONCE THE TP S TUDY OF ASSESSEE IS REJECTED BY ASSIGNING VALID REASONS, TH E REJECTION OF RPM IS INCIDENTAL THERETO. RPM IS SUIT ABLE WHEN THE AE IS MADE AS THE TESTED PARTY. AS THE PAN EL REJECTED THE SUBMISSIONS OF THE TAXPAYER IN RESPECT OF THE TESTED PARTY. SO ALSO REJECTS THE RPM. CONTESTING THE ABOVE, IT WAS SUBMITTED THAT GRANULE S USA INC., IS ACTING AS REDISTRIBUTION AGENT FOR US REGI ON. IT DOES NOT SELL PRODUCTS DIRECTLY TO CUSTOMERS IN US REGION AN D DOES NOT MANUFACTURE ANY PRODUCTS ON ITS OWN. IT IS RESPONSI BLE FOR 12 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD RECEIVABLES, ASSUMING DEL CREDRE RISK. TIME GAP BET WEEN THE PURCHASE AND RESALE IS LESS (1-3 MONTHS). RESALE PR ICE MARGIN IS EASIEST TO DETERMINE WHERE THE RESELLER DOES NOT ADD SUBSTANTIALLY TO THE VALUE OF THE PRODUCT. GRANULES USA IS NOT MAKING ANY VALUE ADDITION TO THE PRODUCT BEING REDI STRIBUTED. IT WAS SUBMITTED THAT ONCE IT HAS BEEN PROVED THAT THE RPM IS THE MOST APPROPRIATE METHOD, NON SUBMISSION / SUBMI SSION OF DATA / INFORMATION MUST NOT LEAD TO CHANGE IN THE M ETHOD OF DETERMINATION OF ALP. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND EXAMINED THE ISSUE. SINCE WE HAVE ALREADY CONSIDERE D ABOVE THAT A.E. SHOULD BE SELECTED AS TESTED PARTY, IT IS NOTHING BUT NATURAL THAT THE T.P. STUDY SHOULD BE UNDERTAKEN BY RESALE PRICE METHOD ONLY, AS A.E. IS ONLY UNDERTAKING THE DISTRIBUTION OF ASSESSEES PRODUCTS IN THE LOCAL MARKET. PROFITA BILITY OF THE SELECTED COMPARABLE COMPANIES IN DOMESTIC MARKET MA Y VARY WITH THE PROFIT MARGINS AVAILABLE ABROAD, PARTICULA RLY IN THE USA MARKET. DRP ALSO REJECTED THE METHOD SOLELY ON THE REASON THAT AE WAS NOT SELECTED AS TESTED PARTY. TH EREFORE, KEEPING IN MIND THE SUBMISSIONS MADE BY THE LD. COU NSEL, THE ISSUE OF SELECTION OF METHOD OF RESALE PRICE METHOD OR OF TNMM OR ANY OTHER METHOD SUITABLE TO THE INTERNATIONAL T RANSACTIONS IS ALSO RESTORED TO THE FILE OF A.O. TO EXAMINE THE SUITABILITY OF VARIOUS METHODS AND CONSIDER ACCORDINGLY. 12. GROUND NOS. 4 TO 8 ARE AS UNDER : 4. REJECTING THE ALTERNATIVE ANALYSIS OF THE APPEL LANT UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM) AND COMPARABLE UNCONTROLLED PRICE METHOD (CUP) TO DETERMINE THE ALP; 13 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD 5. APPLYING FOLLOWING FILTERS FOR SELECTING COMPARA BLE COMPANIES TO DETERMINE ALP UNDER TNMM : I) TURNOVER RANGE OF RS.148 CRORES TO RS.246 CRORES; AND II) EXPORT REVENUES MORE THAN 10% OF TOTAL REVENUE; 6. NOT APPLYING APPROPRIATE AND RELIABLE PRODUCT COMPARABILITY CRITERIA IN SELECTION OF COMPARABLES; 7. NOT UNDERTAKING AN OBJECTIVE ANALYSIS AND IN INT ER ALIA SELECTING FOLLOWING COMPANIES AS COMPARABLES; I. ANUS LABORATORIES LTD., II. HIKAL LIMITED (SEGMENT); III. NATCO PHARMA LTD., IV. PARAS PHARMACEUTICALS LTD., (SEG.) V. SMS PHARMACEUTICALS LTD., VI. VENUS REMEDIES LTD., VII. VIVIMED LABS LTD.,; AND VIII. VINATI ORGANICS LTD., 8. REJECTING THE USE OF FOLLOWING COMPANY AS COMPARABLE TO THE APPELLANT, THOUGH IT SATISFIES AL L THE FILTERS APPLIED BY THE LD.TPO ; I. FRES KABI ONCOLOGY LTD., (FORMERLY KNOWN AS DABU R PHARMA LTD.,). 12.1 CONTESTING THE ABOVE, IT WAS SUBMITTED T HAT THE INTENT AND PURPOSE OF TRANSFER PRICING PROVISIONS IS TO MA KE CERTAIN THAT THE TRANSACTIONS BETWEEN THE ASSOCIATED ENTERP RISES SHOULD NOT BE ARRANGED IN SUCH A WAY THAT THE ULTIM ATE TAX PAYABLE IN INDIA IS ARTIFICIALLY REDUCED. WHAT IS M ATERIAL IS THAT THE RIGHTFUL TAX PAYABLE IN INDIA SHOULD NOT SUFFER DUE TO THE ADJUSTMENT OF PRICE FOR GOODS OR SERVICES BETWEEN T HE RELATED ENTERPRISES. WITH REFERENCE TO SELECTION OF COMPARA BLES ASSESSEE ADOPTED THE TURNOVER RANGE OF RS 125 CROR ES TO 275 CRORES TO SELECT THE COMPARABLES. THE INTENT WAS TO GET 14 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD COMPARABLES OF THE SAME SIZE OF OPERATIONS. THE TPO DID NOT ACCEPT THE SEARCH CRITERIA OF ASSESSEE BUT DID NOT PROVIDE ANY RATIONAL IN REVISING THE TURNOVER. IN FACT, WHILE THE LEARNED TPO HAD ISSUED THE FOLLOWING SHOW CAUSE NOTICES, (1 ) F.NO.76/TPO/2008-09/789 DATED 06.06.2011 AND (2) F.NO.76/TPO/2008-09/1061 DATED 07.10.2011, HE HAD ADOPTED TURNOVER RANGE OF RS. 170 CR TO RS.370 CR F OR SELECTING COMPARABLES. IN THE SUBSEQUENT SCN THE LE ARNED TPO REVISED THE TURNOVER RANGE FROM RS.148 TO RS 246 CR WITHOUT GIVING PROPER REASONS FOR THE CHANGE OF TURNOVER. T HIS IS AGAINST THE PRINCIPLE OF NATURAL JUSTICE, AS WAS RI GHTLY HELD IN THE CASE OF FIRST ADVANTAGE OFFSHORE SERVICES (PVT) LTD VS DCLT, WHEREIN IT WAS HELD THAT THE TPO HAS TO GIVE REASON S IF HE WANTS TO DEVIATE FROM A SET OF FILTERS ADOPTED. SEC ONDLY, ASSESSEE SELECTED THE COMPARABLES WITH FOREX REVENU E MORE THAN 60%OF ITS TOTAL SALES. THE EXPORT TURNOVER OF ASSESSEE IS RS.143.25CR. THE RATIO OF EXPORT TURNOVER TO SALES IS 74%. IT WOULD BE INAPPROPRIATE TO SELECT ALL THE COMPANIES EARNINGS FOREX REVENUE MORE. THIRDLY, THE COMPARATIVES CHOSE N BY THE TPO ARE FUNCTIONALLY DIFFERENT. ASSESSEE INVITED A TTENTION TO PAGES 12 TO 15 OF THE DRP'S DIRECTIONS, WHEREIN IT HAS SYSTEMATICALLY GIVEN REASONS FOR NON-ACCEPTANCE OF THE COMPARABLES. 12.2. THE DRP VIDE PARA 14 OF ITS DIRECTIONS HAS S IMPLY STATED THE FOLLOWING, AS AGAINST INVESTIGATING AS T O WHY & IF THE FILTERS WERE CORRECTLY APPLIED: 'CONSIDERING THE QUANTUM OF INTERNATIONAL TRANSACTI ONS, THE PANEL AGREES WITH THE VIEWS OF THE TPO THAT EXPORT FILTER SHOULD BE 10% OF THE TOTAL SALES OF THE COMPARABLE COMPANY .... ' 15 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD 13. THESE GROUNDS AND CONTENTIONS AS STATED ABOVE ARE MATERIAL ONLY IN THE CASE WHERE ASSESSEE IS SEL ECTED AS TESTED PARTY AND TNMM IS TAKEN AS THE MOST APPROPRI ATE METHOD. SINCE WE HAVE ALREADY DIRECTED THE TPO TO E XAMINE AFRESH WHETHER A.E. CAN BE SELECTED AS TESTED PARTY AND RESALE PRICE METHOD CAN BE SELECTED AS MOST APPROPRIATE ME THOD, THERE IS NO NEED TO ADJUDICATE THE ISSUE ABOUT FILT ERS/ COMPARABLES RAISED IN THESE GROUNDS. ASSESSEE IS FR EE TO RAISE ANY CONTENTIONS AS AND WHEN NEED ARISES. THEREFORE, THESE GROUNDS ARE CONSIDERED AS ALLOWED FOR STATISTICAL P URPOSES, TO BE ADJUDICATED IF REQUIRED, IN CASE A.O.S/TPOS OR DER REJECTS THE ABOVE ISSUES AND SELECTS ASSESSEE AS TESTED PAR TY AND TNMM AS THE MOST APPROPRIATE METHOD. GROUNDS 4 TO 8 ARE ACCORDINGLY CONSIDERED AS ALLOWED FOR STATISTICAL P URPOSES. 14. OTHER ADDITIONS/DISALLOWANCES : GROUND - 10: DISALLOWING EMPLOYEES CONTRIBUTION TOWARDS PROVIDENT FUND PAYMENTS OF RS. 18,47,797/- & GROUND - 11: DISALLOWING EMPLOYEES CONTRIBUTION TOWARDS ESI PAYMENTS OF RS.41,014/- 14.1. THESE GROUNDS RELATE TO DISALLOWANCE OF PF A ND ESI PAYMENTS. ASSESSEE PAID AN AMOUNT OF RS.18,47,7 97/- FOR THE MONTHS OF APRIL, JULY, AUGUST AND DECEMBER, 200 7 BELATEDLY BUT WITHIN THE YEAR. FURTHER, ESI CONTRIB UTION RELATING TO AUGUST 2007 AMOUNTING TO RS.91,014/- WA S ALSO PAID LITTLE BELATEDLY. A.O. WAS OF THE OPINION THAT AS THE SUMS WERE PAID BEYOND THE DUE DATES UNDER THE RELEVANT S TATUTE, ALLOWANCE CANNOT BE MADE OF THE ABOVE AMOUNTS. IT W AS SUBMITTED BEFORE THE DRP THAT THE AMOUNTS WERE PAID BEFORE THE FILING OF THE RETURN OF INCOME AND THEREFORE, F OLLOWING THE PRINCIPLES LAID DOWN BY HONBLE SUPREME COURT IN TH E CASE OF 16 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD VINAY CEMENTS LTD., AND ALSO BY HONBLE DELHI HIGH COURT IN THE CASE OF SPL INDUSTRIES LTD., AMOUNTS REQUIRE TO BE ALLOWED AS DEDUCTION. THE DRP, HOWEVER, REJECTED THE CONTEN TIONS STATING THAT PROVISIONS OF SECTION 36(1)(VA) READ W ITH SECTION 43B DOES NOT ALLOW THE EMPLOYEES CONTRIBUTION TO BE ALLOWED AS DEDUCTION. IT UPHELD THE DISALLOWANCE SO MADE. 14.2. CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT ASSESSEE CLAIMS ARE TO BE ALLOWED. HON BLE HIMACHAL PRADESH HIGH COURT IN THE CASE OF CIT VS. NIPSO POLY FABRICS HAS CONSIDERED THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF AIMIL LTD., AND CONCLUDED AS U NDER : IT IS CLEAR THAT THE LAW WAS ENACTED TO ENSURE THA T THE PAYMENT OF THE CONTRIBUTIONS TOWARDS THE PROVIDENT FUNDS, THE ESI FUNDS OR OTHER SUCH WELFARE SCHEMES LTJUST BE MADE BEFORE FURNISHING THE RETURN OF INCOME U/S 139(1). WHEN WE READ SECTION 36 (1) (VA) AND SECTION 438 TOGETHER, IT IS OBVIOUS THAT EARLIER SECTION 438 MADE REFERENCE TO THE DUE DATE AS PRESCRIBED UNDER SECTION 36 (1) (VA). THERE WAS A CONFLICT BETWEEN THE FIRST AND THE SECOND PROVISO A ND THE SECOND PROVISO WAS DELETED. THE SC HELD THAT THIS AMENDMENT BEING CURATIVE IN NATURE WAS RETROSPECTIV E. ACCORDING TO US, THE BENEFIT OF THIS AMENDMENT MUST BE EXTENDED TO THE EMPLOYEES' CONTRIBUTION ALSO; ONCE THE CONTRIBUTION IS THERE, WHETHER BY THE EMPL OYEE OR BY THE EMPLOYER, IT IS A CONTRIBUTION TO A WELFARE FUND HELD IN TRUST BY THE EMPLOYER, WHO IS BOUND TO DEPOSIT THE SAME. WHEN THE EMPLOYER DOES NOT DEPOSIT THE SAME WITHIN THE TIME PRESCRIBED UNDER THE WELFARE ACTS, SUCH AS THE PROVIDENT FUND ACT, ESI ACT ETC., HE MAY FACE CRIMI NAL PROSECUTION UNDER THE SAID ACT. HE MAY ALSO BECOME LIABLE TO PAY INTEREST OR PENALTY. HOWEVER, THAT IS NO REASON TO DENY HIM THE BENEFIT OF SECTION 438, WHICH STARTS WITH A NON OBSTANTE CLAUSE AND WHICH CLEARLY LAYS DOWN THAT AS SESSEE CAN TAKE BENEFIT OF DEDUCTION OF SUCH CONTRIBUTIONS , IF THE SAME ARE PAID BEFORE FURNISHING OF THE RETURN. 17 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD 14.3. CONSIDERING ABOVE AND ALSO THE FACT THAT THI S ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE BY JUDGMENTS OF H ONBLE KERALA, MADRAS AND DELHI HIGH COURTS, WE DIRECT THE A.O. TO ALLOW THE AMOUNTS WHICH ARE PAID BEFORE THE DUE DAT E OF FILING OF THE RETURN OF INCOME. GROUND NOS. 10 AND 11 ARE CONSIDERED AS ALLOWED. 15. GROUND NO.12 RELATES TO DISALLOWANCE OF LOSS O F INSURANCE AS BUSINESS EXPENDITURE FOR A SUM OF RS.2 ,45,196/-. IT WAS SUBMITTED BEFORE THE A.O. THAT IT SUSTAINED LOSS OF SETTLEMENT OF INSURANCE CLAIM. A.O. DISALLOWED THE SAME ON THE REASON THAT ASSESSEE DID NOT PRODUCE THE RELEVANT D ETAILS. BEFORE THE DRP, ASSESSEE SUBMITTED THAT AN AMOUNT O F RS.4067/- PERTAINS TO EXPENDITURE INCURRED ON DAMAG ED VEHICLE REPAIR TO AN EXTENT OF RS.9567/- WHICH WAS SETTLED BY INSURANCE COMPANY FOR AN AMOUNT OF RS.5500/-. AN AM OUNT OF RS.2,41,129/- PERTAINS TO NON-RECOVERY OF AMOUNT FROM THE CUSTOMER ON EXPORT OF GOODS THROUGH ECGC AS AN AMOU NT OF RS.2,76,741/- EXPORTED TO HAZUR GETA PHARMA WAS CL AIMED AND THE AMOUNT WAS SETTLED ONLY AT RS.35,612/-. THE SE DETAILS WERE FURNISHED BEFORE THE DRP. THEREFORE, DRP DIREC TED THE A.O. TO VERIFY THE SETTLEMENT ORDER PASSED FOR ECGC AND ALSO CORRESPONDENCE WITH NEW INDIA ASSURANCE CO. IN RESP ECT OF DAMAGE FOR VEHICLE. 15.1. IT WAS THE CONTENTION OF ASSESSEE THAT SINCE THE AMOUNTS WERE CLAIMED IN THE BOOKS OF ACCOUNTS THE A .O. SHOULD ALLOW THE AMOUNT UNDER THE PROVISIONS OF SEC TION 36(1)(VII) AND RELIED ON THE DECISION OF THE JURISD ICTIONAL HIGH COURT IN THE CASE OF CIT VS. SIRPUR PAPER MILLS LTD ., 15 TAXMANN.COM 373 (A.P.). 18 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD 15.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT WE NEED NOT INTERFERE WITH THE DIR ECTIONS OF THE DRP. IT IS TRUE THAT ASSESSEE HAS CLAIMED AMOUNTS I N THE BOOKS OF ACCOUNTS. THE PROVISIONS OF SECTION 36(1)(VII) W ILL APPLY ONLY TO THE BAD DEBTS WHICH ARE NOT RECOVERABLE IN THE C OURSE OF BUSINESS. IF THE EXPORT PROCEEDS OF RS.2,76,741/- W ERE NOT RECEIVED IT COULD HAVE BECOME A BAD DEBT BUT ASSES SEE CHOOSE TO PREFER AN INSURANCE CLAIM WITH ECGC. THEREFORE, NON- RECOVERY OF THE ABOVE AMOUNT IS CERTAINLY A LOSS. L IKE WISE, EVEN FOR REPAIRS ALSO, HAD ASSESSEE CHARGED AMOUNT DIRECTLY TO THE P & L ACCOUNT WHEN REPAIRS WERE OCCURRED, PROBA BLY THE RECEIPT OF RS.5500/- AS AMOUNT OF SETTLEMENT OF CLA IM COULD HAVE BEEN SHOWN AS INCOME AND THERE WILL BE NO ISSU E OF SEPARATE CLAIM OF LOSS. HOWEVER, SINCE ASSESSEE CHO OSE TO MAKE THE CLAIM ON INSURANCE COMPANY, NON-RECOVERY OF THE AMOUNT IS CERTAINLY A LOSS, BUT NOT A BAD DEBT. THE CONTEN TION THAT AMOUNT SHOULD BE ALLOWED AS BAD DEBT ON WRITE OFF C ANNOT BE ACCEPTED. THE CASE LAW RELIED ALSO DO NOT PERTAIN T O LOSS CLAIM, BUT TO BAD DEBT CLAIMS. THE LOSS CLAIMED HAS TO BE JUSTIFIED AND DRP HAS CORRECTLY DIRECTED THE A.O. TO VERIFY THE S ETTLEMENT ORDER PASSED BY THE ECGC AND ALSO THE CLAIM WITH NE W INDIA ASSURANCE CO. LTD., IN RESPECT OF DAMAGE OF VEHICLE . THEREFORE, THE DIRECTIONS GIVEN BY THE DRP ARE JUSTIFIED. A.O. HOWEVER, IS DIRECTED TO IMPLEMENT THE DIRECTIONS OF THE DRP, IF NOT ALREADY DONE. GROUND NO.12 IS ACCORDINGLY REJECTED. 16. GROUND NO.13 IS DISALLOWANCE OF GDR EXPENSES O F RS.8,70,912/- CLAIMED UNDER SECTION 35D OF THE ACT. A.O. DIRECTED ASSESSEE TO PRODUCE PROOF IN RESPECT OF GD R EXPENSES. IT SEEMS ASSESSEE COULD PRODUCE ONLY TWO BILLS FOR EXPENSES AND DID NOT PRODUCE BILLS FOR THE BALANCE AMOUNT. I T WAS 19 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD SUBMITTED BY ASSESSEE THAT EXPENDITURE IS COVERED U NDER SECTION 35D AND THE DRP HOWEVER, DID NOT ADJUDICATE FULLY BUT REJECTED THE CONTENTION THAT ASSESSEE DID NOT PROVE THE FACT OF INCURRING EXPENSES AND WHETHER SUCH EXPENDITURE WAS ADMISSIBLE AS DEDUCTION UNDER SECTION 35D OR NOT AN D THE DRP DIRECTED THE A.O. TO VERIFY THE BILLS IN RESPECT OF GDR EXPENSES AND THEN ALLOW OR DISALLOW THE EXPENSES. 16.1. IT WAS SUBMITTED BEFORE US BY THE LD. COUNSE L THAT TOTAL AMOUNT OF RS.1,51,8,652/- WAS SPENT AS GDR EX PENSES IN THE YEAR 2004-05 AND THESE AMOUNTS ARE PAID THROUGH THE ACCOUNT PAYEE CHEQUES AND BANK TRANSFERS. IT WAS FU RTHER SUBMITTED THAT THIS EXPENDITURE IS ONLY 4% OF THE T OTAL GDR PROCEEDS AND ALL THE DETAILS WERE SUBMITTED TO THE A.O IN THAT YEAR. IT WAS ALSO SUBMITTED THAT PROPORTIONATE EXPE NSES OF 1/5 TH HAVE BEEN ALLOWED IN THE PREVIOUS YEAR 2005-06 UND ER SECTION 35D. 16.2. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE MODIFY THE DIRECTIONS OF THE DRP AND DIRECT THE A.O. TO EX AMINE WHETHER THIS CLAIM WAS ALREADY ALLOWED IN EARLIER Y EAR AND IF SO, ALLOW THE PROPORTIONATE AMOUNT IN THIS YEAR BEI NG A CONSEQUENTIAL AMOUNT. IN CASE, THE EXPENDITURE WAS DISALLOWED OR NOT ALLOWED IN EARLIER YEARS IN THE YEAR IN WHIC H THIS AMOUNT WAS INCURRED, A.O. IS FREE TO RESTRICT THE DISALLOW ANCE AMOUNT IN THIS YEAR CONSEQUENT TO THE ORDERS IN EARLIER YE AR. THERE IS NO NEED TO SEPARATELY VERIFY THE EXPENSES IN THIS Y EAR AS THE EXPENDITURE WAS NOT STATED TO BE INCURRED IN THIS Y EAR. THEREFORE, THE CONSEQUENTIAL CLAIM CAN BE ALLOWED O N THE BASIS OF THE RECORD OF THE EARLIER YEAR. GROUND NO.13 IS CONSIDERED AS ALLOWED FOR STATISTICAL PURPOSES. 20 ITA.NO.1793/HYD/2012 M/S. GRANULES INDIA LTD., HYDERABAD 17. GROUND NO.14 IS WITH REFERENCE TO LEVY OF INTE REST UNDER SECTION 234B ON THE TRANSFER PRICING ADJUSTME NTS. IT WAS THE CONTENTION THAT ASSESSEE COULD NOT ANTICIPATE T HE T.P. ADJUSTMENTS AND THEREFORE, LEVY OF INTEREST UNDER S ECTION 234B CANNOT BE MADE ON THE ADJUSTMENTS MADE ON ACCOUNT O F T.P. PROVISIONS IF ANY. CONSIDERING THE ABOVE SUBMISSION S AND ALSO KEEPING IN MIND THE PRINCIPLES LAID DOWN BY THE HON BLE UTTARANCHAL HIGH COURT IN THE CASE OF CIT VS. SEDCO FOREX INTERNATIONAL DRILLING CO. LTD., (2003) 264 ITR 320 (UTTARANCHAL (HC) A.O. IS DIRECTED TO RECONSIDER LE VY OF INTEREST AS THE ISSUE OF ADDITION OF T.P. ITSELF IS RESTORED TO THE FILE OF THE A.O. FOR FRESH CONSIDERATION. ACCORDINGLY, GROUND N O.14 IS ALSO RESTORED TO THE FILE OF THE A.O. FOR FRESH CONSIDER ATION AND TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 18. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED F OR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18.06.2014. SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATE 18 TH JUNE, 2014 VBP/- COPY TO 1. M/S. GRANULES INDIA LTD., 2 ND FLOOR, 3 RD BLOCK, MY HOME HUB, HITECH CITY, MADHAPUR, HYDERABAD 500 081 , A.P. 2. DCIT, CIRCLE 2(3) HYDERABAD. 3. DISPUTES RESOLUTION PANEL, 2 ND FLOOR, I.T. TOWERS, 10-2-3, AC GUARDS, HYDERABAD 500 004. 4. CIT(A)-1, HYDERABAD 5. D.R. B BENCH, ITAT, HYDERABAD.