Appeal details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 89589 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 11 month(s) 9 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
05-06-2015
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
C
Next Hearing Date
07-05-2015
Assessment Year
2005-2006
Appeal Filed On
26-06-2009
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD , BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER. ITA. NO. 2060/AHD/2009 (ASSESSMENT YEAR:2005-06) DCIT(OSD), CIRCLE-8, AHMEDABAD APPELLANT VS. SCHUTZ DISHMAN BIO-TECH PVT. LTD. 2 ND FLOOR, BHADRARAJ CHEMBERS, SWASTIK CROSS ROAD, NAVRANGPURA, AHMEDABAD RESPONDENT & ITA. NO. 3141/AHD/2011 (ASSESSMENT YEAR:2006-07) A.C.I.T.(OSD), CIRCLE-8, AHMEDABAD APPELLANT VS. I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 2 SCHUTZ DISHMAN BIO-TECH PVT. LTD. 2 ND FLOOR, BHADRARAJ CHAMBERS, NR. SWASTIK CROSS ROADS, NAVRANGPURA, AHMEDABAD-380009 RESPONDENT & ITA. NO. 2888/AHD/2011 (ASSESSMENT YEAR:2006-07) SCHUTZ DISHMAN BIO-TECH PVT. LTD. 2 ND FLOOR, BHADRARAJ CHAMBERS, NR. SWASTIK CROSS ROADS, NAVRANGPURA, AHMEDABAD-380009 APPELLANT VS. THE DCIT(OSD), CIRCLE-8, AHMEDABAD RESPONDENT & ITA. NOS. 3224 & 3225/AHD/2010 (ASSESSMENT YEARS: 2004-05 & 2005-06) INCOME-TAX OFFICER, TDS-1, AHMEDABAD APPELLANT VS. M/S. SCHUTZ DISHMAN BIOTECH LTD. NR. BHADRARAJ CHAMBERS, NR. SWASTIK CROSS ROADS, NAVRANGPURA, AHMEDABAD RESPONDENT PAN: AACCS0988C I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 3 / BY REVENUE :SHRI NIMESH YADAV, SR. D.R. / BY ASSESSEE : SHRI TUSHAR HEMANI, A.R. /DATE OF HEARING :13.05.2015 /DATE OF PRONOUNCEMENT : 05.06.2015 ORDER PER BENCH ALL THESE APPEALS PERTAIN TO SAME ASSESSE, SO, THEY ARE BEING DISPOSED OF BY WAY OF THIS COMMON ORDER FOR T HE SAKE OF CONVENIENCE. 2. IN ITA NO. 2060/AHD/2009 FOR A.Y. 2005-06, REVEN UE HAS FILED THE APPEAL ON THE FOLLOWING GROUNDS: 1. THE LD.CIT(A)XIV, AHMEDABAD ERRED IN LAW AND ON FACTS IN DIRECTING TO DELETE ADJUSTMENTS OF RS.1,59,51,605/- MADE IN THE ASSESSMENT ORDER IN RESPECT OF ARMS LENGTH PRICE. 2. THE LD.CIT(A)XIV, AHMEDABAD ERRED IN LAW AND ON FACTS IN DIRECTING TO DELETE ADDITIONS OF RS.2,52,05,652/- ON ACCOUNT OF DEFICIT/EXCESS CONSUMPTION OF RAW MATERIALS. 3. THE LD.CIT(A)XIV, AHMEDABAD ERRED IN LAW AND ON FACTS IN ALLOWING RS.54,13,383/- ON ACCOUNT OF INTE REST EXPENDITURE. I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 4 3. FIRST ISSUE IN REVENUES APPEAL FOR A.Y. 2005-06 IS WITH REGARDS TO ADDITION OF RS.1,59,51,605/- ON ACCOUNT OF ADJUSTMENTS IN RESPECT OF ARMS LENGTH PRICE MADE U/ S.92CA(6) OF THE ACT. ASSESSEE IS ENGAGED IN BUSINESS OF MAN UFACTURING AND TRADING CHEMICALS AND OTHER MATERIALS. DURING YEAR UNDER CONSIDERATION, ASSESSING OFFICER NOTICED THAT ASSES SE HAD SOLD VARIOUS PRODUCTS TO TWO ASSOCIATE ENTERPRISES VIZ. AMATI PACKAGING MANUFACTURES GMBH, GERMANY AND SCHUTZ & C O. (GMBH), GERMANY AND THE TOTAL VALUE OF SUCH TRANSAC TIONS WAS OF RS.17,89,86,080/-. ASSESSEE FILED REPORT IN FOR M 3CEB UNDER RULE 10E ALONGWITH THE RETURN OF INCOME. ASS ESSING OFFICER MADE A REFERENCE TO TRANSFER PRICING OFFICE R (TPO), ADDL. CIT (TPO-1), AHMEDABAD. THE TPO PASSED ORDER U/S.9 2CA(2) OF THE ACT WHEREIN HE MADE TOTAL ADJUSTMENT OF RS.1,59,51,605/-. 3.1 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F ASSESSE AS DETAILED IN PARA 2.1 AND HAVING CONSIDERED THE S AME, CIT(A) GRANTED RELIEF TO ASSESSEE. SAME HAS BEEN OPPOSED BEFORE US ON BEHALF OF REVENUE INTER ALIA SUBMITTING THAT CIT (A) ERRED IN DIRECTING TO DELETE ADJUSTMENT OF RS.1,59,51,605/- MADE IN ASSESSMENT ORDER IN RESPECT OF ARMS LENGTH PRICE AN D REQUESTED THAT THE ORDER OF CIT(A) ON ISSUE BE SET ASIDE AND THAT OF ASSESSING OFFICER BE RESTORED. ON OTHER HA ND, LEARNED AUTHORIZED REPRESENTATIVE SUPPORTED THE ORDER OF CI T(A) ON ISSUE AND SUBMITTED THIS ISSUE IS COVERED BY THE OR DER OF ITAT I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 5 IN ASSESSEES OWN CASE AND OTHER DECISIONS OF TRIBU NAL ON THE ISSUE. SO, ORDER OF CIT(A) BE UPHELD. 3.2 AFTER GOING THROUGH RIVAL SUBMISSIONS AND MATER IAL ON RECORD, WE FIND THAT CIT(A) UNDER IDENTICAL CIRCUMS TANCES, FOR A.Y. 2002-03, METHOD OF DETERMINING THE ARMS LENGTH PRICING ADOPTED BY ASSESSE VIZ. TRANSACTIONAL NET MARGIN ME THOD (TNMM) WAS REJECTED BY THE TPO AND IN ITS PLACE, CO MPARABLE UNCONTROLLED PRICE (CUP) METHOD WAS ADOPTED. ASSES SEE CARRIED THE MATTER TO ITAT, WHEREIN VIDE ORDER DATE D 15 TH FEBRUARY, 2008 IN ITA NO. 554/AHD/2006 VIDE PARA 39 HAD DECIDED SIMILAR ISSUE IN FAVOUR OF ASSESSEE BY OBSE RVING AS UNDER: 39. IN VIEW OF THESE FACTS AND CIRCUMS TANCES, AND AS REFERRED BY BOTH THE SIDES TO OECD GUIDELINES FO R TRANSFER PRICING IN MULTINATIONAL ENTERPRISES AND T AX ADMINISTRATIONS FOR THE PURPOSE OF COMPUTATION OF A LP IS VERY IMPORTANT AND WITH REGARD TO THE FACTS OF THIS CASE, WE HAVE TO DISCUSS THE RELEVANT OECD GUIDELINES O N TRANSFER PRICING. FIRST OF ALL, IT IS SEEN THAT THE ASSESSEE HAS ADOPTED TNM METHOD FOR COMPUTATION OF ALP WITH REGARD TO INTERNATIONAL TRANSACTIONS. IT IS SEEN THAT OECD GU IDELINES ARTICLE 9 AND RELEVANT PARA 3.26 REFERS TO THE TNM METHOD AND WHY IT SHOULD BE ADOPTED. THE RELEVANT PARA 3.2 6 READS AS UNDER: '3.26 THE TRANSACTIONAL NET MARGIN METHOD EXAMINES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BA SE (E.G. COSTS, SALES, ASSETS) THAT A TAXPAYER REALIZE S FROM A CONTROLLED TRANSACTION (FOR TRANSACTIONS THAT ARE APPROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF CHAPTER I). THUS, A TRANSACTIONAL NET MARGIN METHOD OPERATES IN A MANNER SIMILAR TO THE COST PLUS AND RESALE PRICE METHODS. THIS SIMILARITY MEANS THAT IN I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 6 ORDER TO BE APPLIED RELIABLY, THE TRANSACTIONAL NET MARGIN METHOD MUST BE APPLIED IN A MANNER CONSISTENT WITH THE MANNER IN WHICH THE RESALE PRIC E OR COST PLUS METHOD IS APPLIED THIS MEANS IN PARTICULA R THAT THE NET MARGIN OF THE TAXPAYER FROM THE CONTRO LLED TRANSACTION (OR TRANSACTIONS THAT ARE APPROPRIATE T O AGGREGATE UNDER THE PRINCIPLES OF CHAPTER I) SHOULD IDEALLY BE ESTABLISHED BY REFERENCE TO THE NET MARG IN THAT THE SAME TAXPAYER EARNS IN COMPARABLE UNCONTROLLED TRANSACTIONS.' WHERE THIS IS NOT POSSI BLE, THE NET MARGIN THAT WOULD HAVE BEEN EARNED IN COMPARABLE TRANSACTIONS BY AN INDEPENDENT ENTERPRIS E MAY SERVE AS A GUIDE, A FUNCTIONAL ANALYSIS OF THE ASSOCIATED ENTERPRISE AND, IN THE LATTER CASE, THE INDEPENDENT ENTERPRISE IS REQUIRED TO DETERMINE WHETHER THE TRANSACTIONS ARE COMPARABLE AND WHAT ADJUSTMENTS MAY BE NECESSARY TO OBTAIN RELIABLE RESULTS. FURTHER, THE OTHER REQUIREMENTS FOR COMPARABILITY, AND IN PARTICULAR THOSE OF PARAGRAPH S 3.34-3.40 MUST BE APPLIED. IN VIEW OF THE ABOVE GUIDELINES OF OECD, IT IS CLEA R THAT, IN THE PRESENT CASE, WHILE ADOPTING THE CUP METHOD THE TPO HAS COMPARED THE PRICES OF THOSE COMPANIES WHO PROD UCES AND SELLS IN SMALL QUANTITIES AND NOT AS PRODUCED B Y THE ASSESSEE-COMPANY. SALES TO THE NON-AE AS COMPARED B Y THE TPO ARE NOT AT ALL COMPARABLE INASMUCH AS THESE NON -AE ENTITIES DO NOT UNDERTAKE ANY MARKETING EXERCISES, NO AFTER- SALE SUPPORT AND TECHNICAL SUPPORT. EVEN OTHERWISE, THE QUANTITY IS UN-COMPARABLE WITH THAT OF THE ASSESSEE COMPANY. THE QUANTITY SOLD BY VIPOR CHEMICALS AND C ADILA PHARMA IS TOO SMALL TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSES OF DECIDING THE TRANSFER PRICING OF THE IN TERNATIONAL TRANSACTIONS OF THE ASSESSEE-COMPANY, FOR ADOPTING CUP METHOD AS ADOPTED BY THE TPO. EVEN OTHERWISE THE P BIT IN REGARD TO EXPORT WHICH IS AS HIGH AS 23.02%, AS AGA INST THE OVERALL PBIT OF THE ASSESSEE-COMPANY WAS TO THE EXT ENT OF 20.04% AND THE TRANSACTIONS OF EXPORT WERE MORE THA N 92% OF THE- EXPORTS HAVING BEEN MADE TO AE RESULTED INT O MORE PBIT FOR THE ASSESSEE-COMPANY THAN THE OTHER TRANSA CTIONS. FURTHER, A REFERENCE IS TO BE MADE TO PARA 3.34 AND 3.40, I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 7 WHERE THE STRENGTH OF TNM METHOD IS DESCRIBED AND T HE GUIDANCE FOR APPLICATION OF SAME IS PROVIDED. THE R ELEVANT PARA 3.24 AND 3.40 OF OECD GUIDELINES READ AS UNDER : '3.34 PRICES ARE LIKELY TO BE AFFECTED BY DIFFERENC ES IN PRODUCTS, AND GROSS MARGINS ARE LIKELY TO BE AFFECT ED BY DIFFERENCES IN FUNCTIONS, BUT OPERATING PROFITS ARE LESS ADVERSELY AFFECTED BY SUCH DIFFERENCES. AS WITH THE RESALE PRICE AND COST PLUS METHODS THAT THE TRANSACTIONAL NET MARGIN METHOD RESEMBLES, THIS, HOWEVER, DOES NOT MEAN THAT A MERE SIMILARITY OF FUNCTIONS BETWEEN TWO ENTERPRISES WILL NECESSARILY LEAD TO RELIABLE COMPARISONS. ASSUMING SIMILAR FUNCTIONS CAN BE ISOLATED FROM AMONG THE WIDE RANGE OF FUNCTI ONS THAT ENTERPRISES MAY EXERCISE, IN ORDER TO APPLY TH E METHOD, THE PROFIT MARGINS RELATED TO SUCH FUNCTION S MAY STILL NOT BE AUTOMATICALLY COMPARABLE WHERE, FO R INSTANCE, THE ENTERPRISES CONCERNED CARRY ON THOSE FUNCTIONS IN DIFFERENT ECONOMIC SECTORS OR MARKETS WITH DIFFERENT LEVELS OF PROFITABILITY. WHEN THE COMPARA BLE UNCONTROLLED TRANSACTIONS BEING USED ARE THOSE OF A N INDEPENDENT ENTERPRISE, A HIGH DEGREE OF SIMILARITY IS REQUIRED IN A MANNER OF ASPECTS OF THE ASSOCIATED ENTERPRISE AND THE INDEPENDENT ENTERPRISE INVOLVED IN THE TRANSACTIONS IN ORDER FOR THE CONTROLLED TRANSACTIONS TO BE COMPARABLE; THERE ARE VARIOUS FACTORS OTHER THAN PRODUCTS AND FUNCTIONS THAT CAN SIGNIFICANTLY INFLUENCE NET MARGINS. 3.40 ANOTHER IMPORTANT ASPECT OF COMPARABILITY IS MEASUREMENT CONSISTENCY. THE NET MARGINS MUST BE MEASURED CONSISTENTLY BETWEEN THE ASSOCIATED ENTERPRISE AND THE INDEPENDENT ENTERPRISE. IN ADDIT ION, THERE MAY BE DIFFERENCES IN THE TREATMENT ACROSS ENTERPRISES OF OPERATING EXPENSES AND NON-OPERATING EXPENSES AFFECTING THE NET MARGINS SUCH AS DEPRECIATION AND RESERVES OR PROVISIONS THAT WOULD NEED TO BE ACCOUNTED FOR IN ORDER TO ACHIEVE RELIAB LE COMPARABILITY. I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 8 IN VIEW OF THE ABOVE GUIDELINES AND THE FACTS OF TH E PRESENT CASE, IT IS CLEAR THAT THE TRANSACTIONAL NET MARGI N METHOD(TNM METHOD) AS UNDERSTOOD BY US AND AS PER RULE 10B(1)E OF IT RULES, THE APPLICATION OF CORRECT TNM METHOD FOR COMPUTING NET MARGINS OF THE ASSESSE, THE SIMIL AR TRANSACTIONS RELATING TO THE PRODUCT OF THE ASSESSE -COMPANY WERE TO BE TAKEN INTO CONSIDERATION AND BENCHMARK O F NET MARGIN DETERMINED FROM COMPARABLE UNCONTROLLED TRANSACTIONS OR NET MARGIN FOUND BY ANOTHER UNRELAT ED ENTERPRISES FROM A COMPARABLE UNCONTROLLED TRANSACT ION SHOULD BE CONSIDERED. IN THE PRESENT CASE, THE ASSE SSEE WHILE ADOPTING THE TNM METHOD HAS GIVEN THE COMPLET E DETAILS REGARDING TRANSFER PRICING DOCUMENTATION, C OMPLETE OWNERSHIP STRUCTURE, PROFILE OF THE ASSESSE-COMPANY , BUSINESS DESCRIPTION AND THE FINANCIAL CAPACITY / A SSET BASE AND THAT ALSO OF ASSOCIATED ENTERPRISE WERE PR OVIDED TO THE TPO. THE ASSESSEE-COMPANY HAS DEMONSTRATED THE AVERAGE OF PBIT OF VARIOUS GROUP COMPANIES IN THE O RGANIC CHEMICAL BUSINESS DURING THE RELEVANT YEAR AND THE PROFIT EARNED DURING THE SAME YEAR, ARE ALMOST IDENTICAL A ND COMPARABLE THE ARGUMENT OF THE LEARNED DR, ON FACTU AL ASPECTS THAT THE DATA SUBMITTED BY THE ASSESSEE AS REGARDS TO OVERALL PBIT OF THE ASSESSEE AND THE COMPARATIVE STATEMENT OF PBIT OF VARIOUS COMPANIES ADOPTING TNM METHOD IS NOT COMPARABLE WITH THE ASSESSEE, IS NOT CORRECT. WE FEEL THAT THE GENERAL REMARKS WITH R EGARD TO FACTUAL ASPECTS MADE BY THE LEARNED DR AS DISCUSSED ABOVE IS OUT OF FACTS. THE FACTS CLEARLY SPEAK OUT ITSE LF AND THE SAME ARE DISCUSSED IN DETAIL IN ABOVE PARAGRAPHS. W E FIND NO FAULT WITH THE TNM METHOD ADOPTED BY THE ASSESSE E ON THE ABOVE FACTS OF THE CASE. EVEN THE HON'BLE APEX COURT IN THE CASE OF MORGAN STANLEY AND CO. INC. (SUPRA) HAS CLEARLY UPHELD THE ADOPTION OF TNM METHOD AS MOST APPR OPRIATE METHOD AND THE RELEVANT 'PARTICULAR LINE FROM THE JUDGMENT READS AS UNDER: AS REGARDS INCOME ATTRIBUTABLE TO THE P.E. (MSAS), WE HOLD THAT THE TRANSACTIONAL NET MARGIN METHOD WAS T HE APPROPRIATE METHOD FOR DETERMINATION OF THE ARM'S LENGTH PRICE IN RESPECT OF TRANSACTION BETWEEN MSCO AND MSAS.' I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 9 EVEN THE HON'BLE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. (SUPRA ) HAS HELD THAT THE COMPUTATION OF ARM'S LENGTH PRICE IS A FACTUAL EXERCISE. EACH CASE DEPENDS ON ITS OWN FACTS AND CIRCUMSTANCES. IN MANY CASES WHERE IDENTICAL OR ALM OST SIMILAR UNCONTROLLED TRANSACTION IS AVAILABLE FOR C OMPARISON; DETERMINATION OF ARM'S LENGTH PRICE IS AN EASY TASK . BUT IT IS NOT SO IN MOST OF TRANSACTIONS AND RARELY ONE IS ABLE TO LOCATE AN IDENTICAL TRANSACTION. IN SUCH CASES ARM' S LENGTH PRICE IS DETERMINED BY TAKING RESULTS OF A COMPARAB LE TRANSACTION IN COMPARABLE CIRCUMSTANCES AND MAKE SU ITABLE ADJUSTMENTS FOR THE DIFFERENCES. SIMILARLY, IN THE PRESENT CASE ALSO, THE PBIT OF THE ASSESSEE-COMPANY IS EXAC TLY SIMILAR OR NEARBY WITH THAT OF THE OTHER UNCONTROLL ED TRANSACTIONS OF UNCONNECTED ENTERPRISES. THE PBIT O F EXPORTS IS AS HIGH AS 23.02% AS AGAINST THE OVERALL PBIT OF THE ASSESSEE-COMPANY WAS AT 20.04% AND THE TRANSACT IONS OF THE EXPORT OF THE ASSESSEE-COMPANY WAS MORE THAN 92% OF THE EXPORTS HAVING BEEN MADE TO THE AE RESULTED INTO MORE PBIT FOR THE ASSESSEE THAN 'OTHER TRANSACTIONS . EVEN THE ASSESSEE HAS COMPARED THE PBIT OF OTHER INDEPEN DENT ENTITIES WITH THAT OF THE ASSESSEE AND DEMONSTRATED THE APPLICATION OF TNM METHOD CORRECTLY. ACCORDINGLY, W E UPHOLD THE TNM METHOD ADOPTED BY THE ASSESSEE AND REVERSE THE CUP METHOD ADOPTED BY THE REVENUE. ACCORDINGLY, THIS ISSUE OF THE ASSESSEE'S APPEAL IS ALLOWED. NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE ON BE HALF OF REVENUE AND WE FIND THAT IN ASSESSEES OWN CASE IN ITA NO.3590 & 3751/AHD/2007 FOR A.Y.04-05, SIMILAR ISSU E HAS BEEN DECIDED BY ITAT IN FAVOUR OF ASSESSEE FOLLOWIN G CASE OF ASSOCIATE CONCERN VIZ. M/S DISHMAN PHARMACEUTICALS & CHEMICALS LTD. IN VIEW OF ABOVE, CIT(A) WAS JUSTIF IED TO DIRECT THE ASSESSING OFFICER TO DELETE THE ADJUSTMENT OF RS.1,59,51,605/- MADE IN ASSESSMENT ORDER IN RESPEC T OF ARMS I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 10 LENGTH PRICE BECAUSE PBIT OF 17.13% IS VERY MUCH CO MPARABLE AND BETTER THAN THE INDUSTRY AVERAGE OF 12.87%. EV EN MARGINS WITH AE AT 16.66% ARE BETTER THAN OVERALL PBIT. TP O WAS NOT JUSTIFIED IN APPLYING COMPARABLE UNCONTROLLED PRICE METHOD AND COMPARE THE PURCHASE OF 72,000KGS. WORTH RS.5,25,69,297/- MADE FROM GERMANY WITH MEAGER QUAN TITY OF 2,000 KGS. WORTH OF RS.10,40,000/- MADE FROM INDIA N PARTY. DOMESTIC AND INTERNATIONAL RATES CANNOT BE COMPARED . FUNDAMENTAL REQUIREMENT, IN ANY OF THE METHOD SELEC TED, IS SELECTION OF COMPARABLES FOR BENCHMARKING INTERNATI ONAL TRANSACTION. WHATEVER METHODOLOGY IS CHOSEN FOR TH E PURPOSE OF DETERMINATION OF ALP U/S.92C, THE CRITERIA, AS S PECIFIED IN THE ACT AND THE RULES, HAVE TO FORM A BASIS OF JUDG ING THE COMPARABILITY. THERE SHOULD BE PROPER ANALYSIS OF S UCH TRANSACTION WITH RESPECT TO FUNCTIONAL PERFORMED, A SSETS EMPLOYED AND RISK ASSUMED BY RESPECTIVE PARTIES WIT H REFERENCE TO TRANSACTION IN QUESTION. THIS CAN BE T ERMED AS FUNCTIONAL, ASSET, RISK ANALYSIS I.E. FAR ANALYSIS. THE PROVISION ALSO PROVIDES SCOPE FOR CARRYING OUT ADJUSTMENTS IN CASES WHERE THERE ARE SOME DIFFERENCES OR VARIATIONS TO M AKE TWO TRANSACTIONS COMMERCIALLY COMPARABLE, FOR THE PURPO SE OF BENCHMARKING. THE UNDERLYING PRINCIPAL BEING THAT ONLY LIKES CAN BE COMPARED WITH LIKES. RAW MATERIAL PURCHASED FROM INDIAN SUPPLIER WERE NOT QUALITATIVE COMPARED TO RA W MATERIAL PURCHASED FROM AMARI PACKAGING, GERMANY. ASSESSEE IS RESPONSIBLE FOR QUALITATIVE PRODUCT AND IT ASSUMES RISK THEREOF. I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 11 SO, IT WAS DECIDED TO CONTINUE WITH QUALITATIVE RAW MATERIAL BEING PURCHASED FROM AMARI PACKAGIN. ASSESSING OFF ICER OUGHT TO HAVE TAKEN INTO CONSIDERATION FAR ANALYSIS AND S HOULD ALSO TAKE INTO ACCOUNT VARIOUS FACTORS SUCH AS, QUALITY, QUANTITY, PRICING FACTORS, GOVERNMENT POLICY AND TRANSPORTATI ON COST BEFORE COMPARING CONTROLLED TRANSACTION WITH UNCONT ROLLED TRANSACTION. ASSESSING OFFICER OUGHT TO HAVE EVAL UATED ALL THE METHODS OF TRANSFER PRICING, HOWEVER, HE SELECTED D IRECTLY CUP METHOD BEING EASY IN APPLY. ASSESSING OFFICER HAS TAKEN PRICE FROM DATABASE WITHOUT POINTING OUT ANY COMPARABLE C ASES. THE INDUSTRY AVERAGE IS NOT A COMPARABLE INSTANCE A S HELD BY THE SPECIAL BENCH IN CASE OF AZTEC SOFTWARE & TECHN OLOGY SERVICES LTD. VS. ACIT (2007) (107 ITD 141) (BANG) (SB), WHEREIN IT WAS HELD THAT ASSESSING OFFICER (A) RIGHT TO SELECT MOST APPROPRIATE METHOD IS THAT OF ASSESSE. (B) IT HAS TO BE DULY SUBSTANTIATED (C) INDUSTRY AVERAGE CANNOT BE APPLIED (D) NO SPECIFIC PREFERENCE TO ANY METHOD COMPARED T O OTHER METHODS BE GIVEN. IN VIEW OF ABOVE DECISION, ORDER OF CIT(A) ON THE I SSUE IS UPHELD. 4. NEXT ISSUE IN REVENUES APPEAL IS WITH REGARDS T O ADDITION OF RS.2,52,05,652/- MADE ON ACCOUNT OF DEFICIT/EXCE SS CONSUMPTION OF RAW MATERIALS. THIS AMOUNT INCLUDE ADDITION OF RS.73,43,999/- ON ACCOUNT OF INFLATION OF PURCHA SE OF RAW MATERIAL AND ADDITION OF RS.1,77,61,653/- ON ACCOUN T OF I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 12 UNEXPLAINED INVESTMENT IN PURCHASE OF RAW MATERIALS . AS BOTH THE GROUNDS RELATE TO COMMON ISSUE, THE SAME WERE C ONSIDERED TOGETHER. ASSESSING OFFICER OBSERVED THAT ASSESSE WAS ENGAGED IN THE MANUFACTURE OF BULK DRUGS AND THAT IN ASSESS MENT OF A.Y. 2004-05 ADDITION WAS MADE ON ACCOUNT OF DIFFER ENCE IN ACTUAL CONSUMPTION OF RAW MATERIAL AND STANDARD CON SUMPTION PRESCRIBED UNDER EXIM INPUT AND OUTPUT NORMS. ASSE SSING OFFICER ASKED TO FURNISH DETAILS OF VARIATION BETWE EN ACTUAL CONSUMPTION AND THE STANDARD CONSUMPTION. AS PER T HE DETAILS GIVEN IN ANNEXURE-II TO THE ASSESSMENT ORDE R, ASSESSING OFFICER NOTICED THAT THERE WAS SHORT CONSUMPTION OF RAW MATERIAL OF RS.L,77,61,653/- AND EXCESS CONSUMPTION OF RAW MATERIALS OF RS.74,43,999/-. ASSESSING OFFICER REFE RRED TO ASSESSMENT ORDER OF A.Y. 2002-03 AND THE STATEMENT OF SRI R.S. SHARMA, THE THEN GENERAL MANAGER (WORKS) AND ADDITI ON MADE FOR THAT YEAR OF RS.89,L0,724/-. AFTER RELYING ON THE ASSESSMENT ORDERS OF EARLIER YEARS, ASSESSING OFFICER MADE DIS ALLOWANCE OF RS.2,52,05,652/-. 4.1 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY WHEREIN CIT(A) GONE THROUGH THE ORDER OF ITAT FOR A .Y. 2002- 03, WHEREIN ISSUE HAS BEEN DECIDED IN FAVOUR OF ASS ESSE, WHEREBY HE DELETED THE ADDITION OF RS.2,52,05,652/- . THE SAID ORDER OF ITAT IN ITA NO. 554/AHD/2006 FOR A.Y. 2002 -03 HAS BEEN ANNEXED BEFORE US, WHEREIN VIDE PARA 41 &42 HA S DECIDED SIMILAR ISSUE IN FAVOUR OF ASSESSEE BY OBSERVING AS UNDER: I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 13 41 FIRST OF ALL, WE HAVE GONE THROUGH THE FACTS NA RRATED BY THE CIT(A) IN PARA 2.2 WHICH READS AS UNDER: 2.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT, REMAND REPORT OF THE AO AND FACTS OF THE CASE CAREFULLY. FROM THE FACTS ON RECORD, IT IS CL EAR THAT THE APPELLANT IS MANUFACTURING MEDICINES WHICH ARE BEING EXPORTED. THE QUALITY CONTROL OF THESE DRUGS IS OF HIGH STANDARDS AND THE COMPOSITION OF THE DRU GS WILL HAVE TO BE MAINTAINED AS PER THE PRESCRIBED NO RMS AND OF INTERNATIONALLY QUALITY. FOR A PARTICULAR MEDICINE WHICH IS TO BE EXPORTED THE GOVERNMENT OF INDIA HAS PRESCRIBED THE; INPUT RATIO OF VARIOUS RA W MATERIAL WHICH HAVE BEEN PRINTED ON THE VARIOUS SAL E INVOICES WHICH HAVE BEEN MENTIONED BY THE APPELLANT . AS THERE WAS NOT OF VARIATION IN THE RATIO, TO KNOW THE EXACT CONSUMPTION OF THE RAW MATERIAL THE STATEMENT OF THE GENERAL MANAGER (WORKS) NAMELY SHRI R S SHARMA WHO IS THE IN-CHARGE OF PRODUCTION WAS RECORDED. AS HE WAS THE IN-CHARGE OF PRODUCTION HIS STATEMENT WOULD DETERMINE THE ACTUAL CONSUMPTION OF VARIOUS RAW MATERIAL FOR THE PRODUCTION OF PARTICUL AR MEDICINE. THE STATEMENT HAS BEEN REPRODUCED IN THE ASSESSMENT ORDER ON PAGE 10 & 11. HE HAS CATEGORICALLY STATED IN REPLY TO VARIOUS QUESTIONS WHICH HAVE BEEN PUT-UP BY THE AO THAT THE CONSUMPTION OF RAW MATERIALS IS EXACTLY IN ACCORDANCE TO THE INPUT OUTPUT RATIO PRESCRIBED BY THE GOVERNMENT AND PRINT ED IN THE SALE INVOICES, IN REPLY TO QUESTION NO.5, 6, AND 8 HE HAS CATEGORICALLY MENTIONED THAT THE PRODUCTION OF EXPORT ITEMS IS AS PER THE STANDARD NORMS AND THESE INPUTS ARE ALSO MENTIONED AT THE BOTTOM OF EXPORT S ALES INVOICE, IN REPLY TO QUESTION NO.8 HE HAS AGAIN CONFIRMED THAT PRODUCTION OF THE ITEM IS AS PER THE STANDARD NORMS AND THE INPUTS ARE USED AS PER THE STANDARD USAGE MENTIONED AT THE BOTTOM OF SALES BIL LS. IF THERE WOULD HAVE BEEN ANY VARIATION IN THE CONSUMPTION OF RAW MATERIAL HE WOULD HAVE MENTIONED THE SAME BEFORE THE AO. EVEN OTHERWISE FOR THE FORMULATION OF MEDICINE THE STANDARD INPUT OUTPUT RATIO WILL HAVE TO BE ADHERED TO. HE HAS NOT MENTIO NED I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 14 IN ANY OF THE REPLY TO THE QUESTION THAT THERE WAS ANY VARIATION BETWEEN THE STANDARD INPUT AND OUTPUT RAT IO IN THE CONSUMPTION OF THE RAW MATERIALS. THEREFORE, HIS STATEMENT WHO CONTROLS THE PRODUCTION CERTIFIES THA T THE CONSUMPTION OF RAW MATERIAL HAS BEEN IN ACCORDANCE WITH THE STANDARD INPUT OUTPUT RATIO. TH E APPELLANT'S SUBMISSION THAT THE CONSUMPTION DEPENDS ON VARIOUS FACTORS LIKE EFFICIENCY OF THE PLANT AND PROCESS INVOLVED IS ONLY AN AFTERTHOUGHT BECAUSE TH E PRODUCTION MANAGER WHO IS THE IN-CHARGE OF PRODUCTI ON HAS NOWHERE MENTIONED THAT THERE IS EVEN SLIGHT VARIATION IN CONSUMPTION FROM THE STANDARD INPUT OUTPUT RATIO. THE APPELLANT HAS ALSO NOT PROVED WIT H ANY OTHER EVIDENCE THAT THE CONSUMPTION HAS BEEN DIFFERENT BECAUSE OF FACTORS MENTIONED BY IT. THERE FORE, THE CONSUMPTION OF RAW MATERIAL WILL HAVE TO BE COMPARED VIS A VIS THE STANDARD INPUT OUTPUT RATIO AND THERE IS NO JUSTIFICATION OF GIVING MARGIN OF 10% CONSIDERING THE STATEMENT OF GENERAL MANAGER. AFTER COMPARING THE STANDARD INPUT AND OUTPUT RATIO AND ACTUAL CONSUMPTION, IT WAS FOUND THAT THERE WAS A DEFICIENCY OF CERTAIN RAW MATERIAL OF RS.63,04,605/ - AND THERE WAS EXCESS CONSUMPTION SHOWN BY THE APPELLANT OF OTHER RAW MATERIALS AS RS. 1,32,57,449 /-. AS THE DEFICIT AND EXCESS IS OF DIFFERENT RAW MATER IALS, THERE CANNOT BE OFFSET AGAINST EACH OTHER AS HAS BE EN DONE BY AO IN THE ASSESSMENT ORDER. THE APPELLANT'S ANOTHER ARGUMENT THAT RECORD ARE BEING EXAMINED BY THE EXCISE DEPARTMENT AND SALES TAX DEPARTMENT IS O F NO RELEVANCE BECAUSE THE EXCISE DEPARTMENT IS ONLY CONCERNED WITH THE ACTUAL PRODUCTION AND LEVY OF EXCISE DUTY RATHER THAN TO EXAMINE THE EXCESS OR DEFICIENCY OF THE RAW MATERIAL WHICH HAS BEEN WORKE D OUT ONLY ON THE BASIS OF STANDARD INPUT OUTPUT RATI O. APPELLANT'S ANOTHER ARGUMENT THAT IT DID NOT HAVE A NY MOTIVE IN SUPPRESSING THE INCOME BECAUSE MOST OF TH E INCOME IS EXEMPT U/S 80HHC OF THE I.T. ACT IS ALSO OF NO RELEVANCE BECAUSE THE INCOME WILL HAVE TO BE COMPUTED ON THE BASIS OF ACCOUNTS AND RECORDS MAINTAINED BY THE APPELLANT AND NOT ON THE BASIS OF MOTIVE OF THE APPELLANT AND BENEFIT OF SECTION 80HH C I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 15 WILL BE GIVEN AS PER PROVISIONS OF THE ACT. THE APP ELLANT HAS ALSO NOT PROVED WITH ANY OTHER EVIDENCE THAT TH E CONSUMPTION HAS BEEN DIFFERENT BECAUSE OF FACTORS MENTIONED BY IT. THE FACT REMAINS THAT THE APPELLAN T HAS NOT BEEN IN A POSITION TO EXPLAIN THE DEFICIENC Y AND THE ALLEGED EXTRA CONSUMPTION OF RAW MATERIAL VIS-A -VIS THE STANDARD INPUT OUTPUT RATIO IN VIEW OF THE STATEMENT OF THE PRODUCTION MANAGER WHO HAS STRICTL Y CONFIRMED THAT THE RAW MATERIAL HAS BEEN CONSUMED A S PER STANDARD INPUT OUTPUT RATIO,' ON THESE FACTS, THE CIT(A) FINALLY ENHANCED THE ADD ITION VIDE PARA 2.2.3, BY OBSERVING AS UNDER: 2.2.3 FROM THE FACTS ON RECORD AND THE ABOVE DISCUSSION, IT IS CLEAR THAT THE APPELLANT HAD SHOW N LESS CONSUMPTION OF CERTAIN INPUT RAW MATERIAL OF RS.63,04,605/- AND THE ONLY INFERENCE IS THE SAME HAVE BEEN PURCHASED FROM OUTSIDE THE BOOKS OF ACCOUNT AND THE SAME IS LIABLE TO BE ADDED AS THE INVESTMENT FROM UNDISCLOSED SOURCES AND THE APPELLANT HAS SHOWN MORE CONSUMPTION OF CERTAIN ITEMS TO THE EXTENT OF RS.1,32,57,449/- WHICH HAS N OT BEEN CONSUMED AND THEREFORE, THE PURCHASED TO THIS EXTENT HAVE BEEN INFLATED TO REDUCE THE PROFIT OF T HE COMPANY. THUS THE TOTAL ADDITION WHICH IS LIABLE TO BE MADE IS RS.1,95,62,054/-. AFTER CONSIDERING THE ADDITION OF RS.89,10,074/-, THE INCOME WHICH IS TO BE FURTHER ENHANCED IS RS.1,06,51,333/-. THEREFORE, TH E AO IS DIRECTED TO ENHANCE THE INCOME BY RS.1,06,51,980/- ACCORDINGLY THIS GROUND IS DISMISS ED WITH DIRECTION TO ENHANCE THE INCOME BY RS.1,06,51,980/-.' THE LEARNED COUNSEL OF THE ASSESSEE REFERRED THE TR IBUNAL'S DECISION, WHEREIN THE TRIBUNAL IN THE CASE OF M/S G UJARAT WOOLEN FELT MILLS (SUPRA) HAS HELD VIDE PARA 5 AS U NDER: '5 WE HAVE HEARD THE PARTIES AND CONSIDERED THE RIV AL SUBMISSIONS. IT IS TRUE THAT NO RECORDS HAVE BEEN MAINTAINED BY THE ASSESSEE AFTER CARDING STAGE THAT BY I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 16 ITSELF IS NOT A GROUND FOR MAKING ADDITION AND TREA TING THE PRODUCTION AT THE CARDING STAGE AS FINAL. THE DIFFERENCE OF 11,506 KG IS DUE TO WASTAGE IN THE PRODUCTION APPROXIMATELY 13% OF THE PRODUCTION AND LOOKING TO THE STANDARD FIXED BY THE HANDBOOK OF TH E PROCEDURES, THE PERCENTAGE OF WASTAGE CANNOT BE SAI D TO BE EXCESSIVE. IN THESE CIRCUMSTANCES, PARTICULAR LY IN THE ABSENCE OF ANY SPECIFIC MATERIAL TO SHOW THAT T HE ASSESSES HAS MADE A FALSE CLAIM OF WASTAGE, WHICH I N ANY CASE IS WITHIN THE PARAMETERS LAID DOWN UNDER T HE EXCISE DUTY EXEMPTION SCHEME, NO ADDITION CAN BE MADE TO THE INCOME OF THE ASSESSEE. THE CONCLUSION OF THE ASSESSING OFFICER, AS OBSERVED BY THE CIT(A) IS BASED ON THE PRODUCTION REGISTER UP TO THE CARDING STAGE IS INCOMPLETE OR PARTIAL STAGE OF THE MATERIA L AND, THE ADDITION MADE ON THE BASIS OF SUCH INCOMPLETE A ND PARTIAL EFFECT CANNOT BE JUSTIFIED. THE CIT(A), IN OUR OPINION, WAS RIGHT IN ALLOWING THE CLAIM OF THE ASSESSEE.' | 42. IT IS SEEN FROM THE ABOVE FACTS AS NARRATED IN THE ORDER OF THE CIT(A), WHICH ARE UNDISPUTED, AS WELL AS THE CASE LAW RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE ARE OF THE VIEW THAT THE CIT(A) HAS ADOPTED THE NORMS PRES CRIBED UNDER THE STANDARD INPUT AND OUTPUT RATIO OF CONSUMPTION BUT THE ASSESSEE-COMPANY HAS CLEARLY DEMONSTRATED T HAT IT WOULD BE BETTER OF HAD IT IMPORTED THE RAW MATERIAL AS PER THE INPUT OUTPUT NORMS. THE ASSESSEE-COMPANY HAS CL AIMED THAT IT HAS CONSUMED LESS THAN WHAT I S PRESCRIBED UNDER THE INPUT OUTPUT NORMS. THE CIT(A) HAS WRONGL Y RELIED ON THE INPUT OUTPUT CONSUMPTION RATIO AND TH E FACTS IN THE PRESENT CASE ARE EXACTLY IDENTICAL WHAT WAS BEFORE THE TRIBUNAL IN THE CASE OF M/S GUJARAT WOOLEN FELT MIL LS (SUPRA), RESPECTFULLY FOLLOWING THE SAID DECISION O F THE TRIBUNAL, WE DELETE THE ADDITION AND ALLOW THIS ISS UE OF THE ASSESSEE'S APPEAL. SIMILAR VIEW HAS BEEN TAKEN IN ITAT IN ASSESSEES O WN CASE FOR A.Y. 03-04 & 04-05. NOTHING CONTRARY WAS BROUGHT T O OUR I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 17 KNOWLEDGE, FACTS BEING SIMILAR, SO FOLLOWING THE SA ME REASONING, WE ARE NOT INCLINED TO INTERFERE IN THE FINDING OF CIT(A) WHO HAS RIGHTLY DELETED THE ADDITION OF RS.2 ,52,05,652/- MADE ON ACCOUNT OF DEFICIT/EXCESS CONSUMPTION OF R AW MATERIALS. 5. NEXT ISSUE IS WITH REGARDS TO DISALLOWANCE OF IN TEREST EXPENDITURE OF RS.54,13,383/- U/S. 36(I)(III) OF TH E ACT. ASSESSING OFFICER OBSERVED THAT ASSESSE HAS GIVEN A N INTEREST FREE DEPOSIT OF RS.3,04,37,540/- TO ITS PARENT COMP ANY M/S. DISHMAN PHARMACEUTICAL & CHEMICALS LTD. ASSESSING O FFICER DISALLOWED THE WHOLE OF INTEREST EXPENDITURE AMOUNT ING TO RS.54,13,383/- RELYING ON THE DECISION OF ABHISHEK INDUSTRIES LTD. 156 TAXMAN 257(P&H) FOR DIVERSION OF BORROWED FUNDS. 5.1 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY, WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F ASSESSE AND HAVING CONSIDERED THE SAME CIT(A) GRANTED RELIE F TO ASSESSEE BY OBSERVING THAT ISSUE IS DIRECTLY COVERE D BY THE DECISION OF HONBLE SUPREME COURT IN CASE OF S. A. BUILDERS 288 ITR 1 (SC), WHEREIN IT HAS BEEN HELD THAT MONEY ADVANCE TO SISTER CONCERN CAN BE CONSIDERED AS OUT OF COMME RCIAL EXPEDIENCY. IN PRESENT CASE, MONEY HAS BEEN ADVANC ED TO SISTER CONCERN OUT OF COMMERCIAL EXPEDIENCY AND THE REFORE, FOLLOWING THE DECISION OF S. A. BUILDERS (SUPRA), N O DISALLOWANCE IS CALLED FOR. IN ANY CASE, ASSESSE HAS SUBSTANTIA L INTEREST FREE FUNDS AT ITS DISPOSAL SO AS TO JUSTIFY THE ADVANCE TO ASSOCIATE I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 18 CONCERN AS PER ACCOUNTS, OBTAINING BALANCE OF M/S. DISHMAN PHARMACEUTICAL & CHEMICALS LTD. WAS OUTSTANDING AT RS.4 CRORE AGAINST WHICH PAID UP CAPITAL AND SURPLUS OF ASSESSE WAS AT RS.1,50,00,000/- AND RS.6,98,59,670/- RESPECTIVE LY. FURTHER DURING YEAR UNDER CONSIDERATION, ASSESSE HA S GIVEN SUM OF RS.2,70,00,000/- TO M/S. DISHMAN PHARMACEUTI CAL & CHEMICALS LTD. AGAINST WHICH THEY HAVE RETURNED AMO UNT OF RS.3,85,90,000/- AND THEREFORE, ON CONTRARY, AMOUNT HAS BEEN REPAID DURING YEAR UNDER CONSIDERATION. IN VIEW OF THIS, DISALLOWANCE WAS DELETED. LEARNED AUTHORIZED REPRE SENTATIVE POINTED OUT THAT THIS ISSUE IS COVERED BY THE ORDER OF ITAT FOR A.Y. 04-05 IN ITA NO. 3590 & 3751/AHD/2007, DATED 10.12.2010 HAS DECIDED SIMILAR ISSUE IN FAVOUR OF A SSESSE BY OBSERVING AS UNDER: 18. WE FIND THAT THESE LOANS ARE OLD LOANS AN D NO DISALLOWANCE WAS MADE IN EARLIER YEARS AND MOREOVER THESE ARE BUSINESS ADVANCES FOR THE PURPOSE OF BUSINESS EXPEDIENCY AS HELD BY HON'BLE APEX COURT IN THE CAS E OF S.A. BUILDERS (SUPRA). EVEN OTHERWISE, WE FIND THAT THE ASSESSEE- COMPANY HAVING INTEREST FREE FUNDS IN THE SUM OF RS.7,34,00,922/- (SHARE CAPITAL RS.1.50 CRORE + RES ERVES AND SURPLUS RS.5,84,00,922/-). ACCORDINGLY, THIS IS SUE IS ALSO COVERED BY THE DECISION OF HON'BLE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION (SUPRA), WHEREIN T HE HEAD- NOTE IS EXTRACTED HEREIN:- 'UNDER THE INCOME-TAX ACT, 1961, AFTER AMENDMENT OF THE ACT BY THE FINANCE ACT, 1992, IN ORDER THAT INT EREST PAID ON BORROWINGS CAN BE ALLOWED AS A DEDUCTION IN COMPUTING THE BUSINESS PROFITS, EVERY ASSESSEE, INCLUDING A FIRM, HAS TO ESTABLISH, IN THE FIRST IN STANCE, THAT IT WAS ALLOWABLE UNDER SECTION 36(1)(III); AND , IN I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 19 THE CASE OF A FIRM, FURTHER THAT THE AMOUNT DOES NO T EXCEED THE LIMIT FIXED BY SECTION 40(B)(IV). HELD, HOWEVER, ON THE FACTS, IN THIS CASE, THAT SIN CE THE ASSESSEE HAD BORROWED THE MONEYS FROM ITS PARTNERS AS EARLY AS 1991, AND THE APPELLATE TRIBUNAL HAD HE LD THAT THE LOANS WERE GIVEN BY THE PARTNERS FOR BUSIN ESS PURPOSES AND THE INTEREST DID NOT EXCEED 13 PER CEN T, PER ANNUM SIMPLE INTEREST, THE ASSESSEE-FIRM WAS ENTITLED TO DEDUCTION OF INTEREST ON THE BORROWINGS FOR THE ASSESSMENT YEARS 1993-94 TO 1997-98. HELD ALSO, THAT SINCE THE OPENING BALANCE OF THE PR OFITS OF THE ASSESSEE-FIRM AS ON APRIL 1, 1994, WAS RS.1. 91 CRORES, AND THE PROFITS WERE SUFFICIENT TO COVER TH E LOAN GIVEN TO A SISTER CONCERN OF RS.5 LAKHS ONLY, THE APPELLATE TRIBUNAL OUGHT TO HAVE HELD THAT THE LOAN GIVEN WAS FROM THE ASSESSEE'S OWN FUNDS,' ACCORDINGLY, WE CONFIRM THE ORDER OF CIT(A) DELETIN G THE ADDITION AND THIS ISSUE OF THE REVENUE'S APPEAL IS DISMISSED. NOTHING CONTRARY WAS BROUGHT TO OUR KNOWLEDGE, FAC TS BEING SIMILAR, SO FOLLOWING THE SAME REASONING, WE ARE NO T INCLINED TO INTERFERE IN THE FINDING OF CIT(A) WHO HAS DELETED THE DISALLOWANCE OF INTEREST EXPENDITURE OF RS.54,13,38 3/- U/S. 36(I)(III) OF THE ACT, BY FOLLOWING RATIO OF S.A. B UILDERS (SUPRA). SAME IS UPHELD. 6. AS A RESULT, REVENUES APPEAL FOR A.Y. 05-06 IS DISMISSED. 7. IN ITA NO. 3141/AHD/2011 FOR A.Y. 2006-07, REVEN UE HAS FILED THE APPEAL ON THE FOLLOWING GROUNDS: I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 20 1. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XI V, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.1,58,88,008/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ADJUSTMENTS OF THE ARMS LENGTH PRICE. 2. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XI V, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.2,49,98,986/- & RS.84,61,907/- U/S.69 OF THE I.T. ACT ON ACCOUNT OF UNEXPLAINED INVESTMENT IN PURCHASE OF RAW MATERIALS. 3. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV , AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF INTEREST AMOUNTING TO RS.29,11,419/ - MADE BY THE ASSESSING OFFICER U/S.36(I)(III) OF THE I.T. ACT. 8. FIRST ISSUE IS WITH REGARDS TO ADDITION OF RS.1, 58,88,008/- MADE BY ASSESSING OFFICER ON ACCOUNT OF ADJUSTMENT OF ARMS LENGTH PRICE. SIMILAR ISSUE AROSE IN ITA NO. 2060/A HD/2009 FOR A.Y. 2005-06, WHEREIN VIDE PARA 3 OF THIS ORDER, WE HAVE DECIDED THE SIMILAR ISSUE IN FAVOUR OF ASSESSEE. F ACTS BEING SIMILAR, SO FOLLOWING SAME REASONING, WE ARE NOT IN CLINED TO INTERFERE IN THE FINDING OF CIT(A) WHO HAS RIGHTLY DELETED THE ADDITION OF RS.1,58,88,008/- MADE ON ACCOUNT OF ADJ USTMENT OF ARMS LENGTH PRICE. SAME IS UPHELD. 9. NEXT ISSUE IS WITH REGARDS TO ADDITION OF RS.2,4 9,98,986/- & RS.84,61,907/- U/S.69 OF THE I.T. ACT ON ACCOUNT OF UNEXPLAINED INVESTMENT IN PURCHASE OF RAW MATERIALS . WE FIND THAT SIMILAR ISSUE AROSE IN ITA NO. 2060/AHD/2009 F OR A.Y. 2005-06, WHEREIN VIDE PARA 4 OF THIS ORDER, WE HAVE DECIDED I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 21 THE SIMILAR ISSUE IN FAVOUR OF ASSESSEE. FACTS BEI NG SIMILAR, SO FOLLOWING SAME REASONING, WE ARE NOT INCLINED TO IN TERFERE IN THE FINDING OF CIT(A) WHO HAS RIGHTLY DELETED THE ADDIT ION OF RS.2,49,98,986/- & RS.84,61,907/- U/S.69 OF THE I.T . ACT ON ACCOUNT OF UNEXPLAINED INVESTMENT IN PURCHASE OF RA W MATERIALS. SAME IS UPHELD. 10. NEXT ISSUE IS WITH REGARDS TO ADDITION OF INTER EST AMOUNTING TO RS.29,11,419/- MADE BY THE ASSESSING O FFICER U/S.36(I)(III) OF THE I.T. ACT. SIMILAR ISSUE AROSE IN ITA NO. 2060/AHD/2009 FOR A.Y. 2005-06, WHEREIN VIDE PARA 5 OF THIS ORDER, WE HAVE DECIDED THE SIMILAR ISSUE IN FAVOUR OF ASSESSEE. FACTS BEING SIMILAR, SO FOLLOWING SAME REASONING, W E ARE NOT INCLINED TO INTERFERE IN THE FINDING OF CIT(A) WHO HAS RIGHTLY DELETED THE THE ADDITION OF INTEREST AMOUNTING TO RS.29,11,419/ - MADE BY THE ASSESSING OFFICER U/S.36(I)(III) OF THE I.T. ACT. SAME IS UPHELD. 11. AS A RESULT, REVENUES APPEAL FOR A.Y. 2006-07 IS ALSO DISMISSED. 12. IN ITA NO. 2888/AHD/2011 FOR A.Y. 2006-07, ASSE SSEE HAS FILED THE APPEAL ON THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S OF THE CASE IN NOT ACCEPTING THE ARMS LENGTH PRICING ADOP TED BY THE ASSESSE. 1.1 THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S OF THE CASE IN HOLDING THAT OPERATING PROFIT @8.94% SHOULD BE I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 22 ADOPTED FOR MAKING TRANSFER PRICING ADJUSTMENT WHIL E DETERMINING ARMS LENGTH PRICING AS AGAINST OPERATI NG PROFITS @7.37% DECLARED BY THE ASSESSEE. 1.2 THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S OF THE CASE IN FURTHER ERRED IN ADOPTING AN ERRONEOUS METH OD OF COMPARING OPERATING PROFITS. HE FURTHER ERRED I N EXCLUDING ONE OF THE PARTIES SELECTED BY THE APPELL ANT FOR THE COMPARISON OF OPERATING PROFIT WITHOUT GIVI NG ANY COGENT REASON. 1.3 THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S OF THE CASE IN CONFIRMING THE ACTION OF LD. AO IN INVOKING THE PROVISIONS OF CHAPTER X WITHOUT PRIMA FACIE DEMONSTRATING THAT THERE WAS SOME TAX AVOIDANCE. 2. BOTH THE LOWER AUTHORITIES HAVE PASSED THE ORDER S WITHOUT PROPERLY APPRECIATING THE FACT AND THAT THE Y FURTHER ERRED IN GROSSLY IGNORING VARIOUS SUBMISSIO NS, EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEE N CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD.AO IN CHARGING INTEREST U/S 234B/C/D OF THE ACT. 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD.AO IN INITIATING PENALT Y PROCEEDINGS U/S 271(1)(C) OF THE ACT. 13. AT THE OUTSET OF HEARING LEARNED AUTHORIZED REP RESENTATIVE WITHOUT PREJUDICE TO THE MERIT OF THE CASE AND DUE TO SMALLNESS OF AMOUNT DID NOT PRESS THIS APPEAL. SO, SAME IS D ISMISSED AS NOT PRESSED FOR ABOVE SAID REASON. 14. AS A RESULT, THIS APPEAL IN ITA NO. 2888/AHD/20 11 FOR A.Y. 2006-07 IS DISMISSED. I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 23 15. IN ITA NO. 3224/AHD/2010 FOR A.Y. 2004-05, REVE NUE HAS FILED THE APPEAL ON THE FOLLOWING GROUND: 1. THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS FACT S OF THE CASE IN DELETING THE ORDER PASSED U/S.201(1) & INTE REST CHARGED U/S. 201(1A) OF THE IT ACT OF RS.45,38,515/ - AND RS.31,76,960/- FOR A.Y. 2004-05 BY THE A.O. EVE N THOUGH THE ASSESSE HAD ADVANCED FUND TO M/S. DISHMAN PHARMACEUTICALS & CHEMICALS LTD. AND THE AMOUNTS ADVANCED WERE IN THE NATURE OF DEEMED DIVIDEND AS PER PROVISIONS OF SECTION 2(22)(E) OF T HE IT ACT AND SAME IS SUBJECT TO SEC.194 OF I.T. ACT. 16. IN ITA NO. 3225/AHD/2010 FOR A.Y. 2005-06, REVE NUE HAS FILED THE APPEAL ON THE FOLLOWING GROUND: 1. THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS FACT S OF THE CASE IN DELETING THE ORDER PASSED U/S.201(1) & INTE REST CHARGED U/S. 201(1A) OF THE IT ACT OF RS.57,92,070/ - AND RS.33,59,400/- FOR A.Y. 2005-06 BY THE A.O. EVE N THOUGH THE ASSESSE HAD ADVANCED FUND TO M/S. DISHMAN PHARMACEUTICALS & CHEMICALS LTD. AND THE AMOUNTS ADVANCED WERE IN THE NATURE OF DEEMED DIVIDEND AS PER PROVISIONS OF SECTION 2(22)(E) OF T HE IT ACT AND SAME IS SUBJECT TO SEC.194 OF I.T. ACT. ITA NOS. 3224 & 3225/AHD/2010, BOTH REVENUES APPEA LS ARE FILED ON SIMILAR ISSUE, SO BOTH ARE BEING DISPOSED OF BY COMMON ORDER. 17. AS STATED ABOVE, ASSESSEE IS ENGAGED IN BUSINES S OF MANUFACTURING BULK DRUGS AND CHEMICALS. DURING BOT H YEARS UNDER CONSIDERATION, ASSESSE HAS MAINTAINED CURRENT ACCOMMODATION ADJUSTMENT ACCOUNT WITH ITS SISTER CO NCERN, I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 24 M/S. DISHMAN PHARMACEUTICALS & CHEMICALS LTD. DURIN G COURSE OF ASSESSMENT PROCEEDINGS, ASSESSING OFFICER CONTENDED THAT IN MAKING SUCH DEPOSITS, PROVISIONS OF SECTION 2(22)(E) OF THE INCOME TAX ACT, 1961 WOULD BE MADE APPLICABLE A ND RESULTANTLY, ASSESSE WAS REQUIRED TO DEDUCTED TAX A T SOUCE. HOWEVER, ASSESSE HAS NOT DEDUCTED TAX AT SOURCE ON SUCH DEEMED DIVIDEND U/S.194 OF THE ACT AND THEREFORE AS SESSEE HAS MADE DEFAULT U/S.201(1) OF THE ACT. ASSESSING OFFI CER HAS ALSO LEVIED INTEREST U/S.201(1A) OF THE ACT FOR BOTH THE YEARS. 17.1 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY IN BOTH YEARS, WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF OF ASSESSEE AND HAVING CONSIDERED THE SAME, CIT(A) HAS GRANTED RELIEF TO ASSESSE BY CONSOLIDATED ORDER BY OBSERVING THAT PROVISIONS OF SECTION 2(22)(E) OF THE ACT ARE NOT APPLICABLE AT ALL AND THEREFORE, QUESTION OF DEDUCTION OF TAX AT SOURCE DOES NOT ARISE AND THEREFORE LIABILITY U/S.201(1) AND 20 1(1A) OF THE ACT ALSO DOES NOT ARISE. BOTH YEARS UNDER CONSIDER ATION, CIT(A) PERUSED THE COPIES OF LEDGER ACCOUNTS PLACED ON REC ORD AND FOUND THAT THERE ARE LARGE NUMBER OF DEBIT AND CRED IT TRANSACTIONS. MEANING THEREBY, ASSESSE HAS GIVEN A ND RECEIVED FUNDS AS AND WHEN REQUIRED TO AND FROM ITS ASSOCIAT E CONCERN. IT IS NOT AN ACCOUNT WHEREBY LOANS AND ADVANCES HAV E BEEN GIVEN TO ASSOCIATE CONCERN. IT IS AN ACCOUNT WHICH IS IN NATURE OF CURRENT ADJUSTMENT ACCOMMODATION ACCOUNT WHEREIN THERE IS A MOVEMENT OF FUNDS BOTH WAYS, ON NEED BASIS. U NLIKE TRANSACTIONS OF LOANS AND ADVANCES, IN THIS KIND OF CURRENT I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 25 ADJUSTMENT ACCOMMODATION ACCOUNT, THE MOVEMENT OF F UNDS IS BOTH WAYS AND THE SAME IS MORE IN NATURE OF CURRENT ACCOUNT RATHER THAN A LOAN ACCOUNT. TRANSACTIONS IN NATURE OF LOANS AND ADVANCES ARE USUALLY VERY FEW AND FOR A LONGER DURATION. IN PRESENT CASE, NATURE OF TRANSACTION IS IN THE FO RM OF CURRENT ACCOMMODATION ADJUSTMENT ACCOUNT AND THEREFORE, SAM E IS NOT A TRANSACTION IN THE NATURE OF LOANS AND ADVANCES. IN ABSENCE OF ANY LOANS AND ADVANCES, THE PROVISIONS OF SECTIO N 2(22)(E) OF THE ACT IN RESPECT OF DEEMED DIVIDEND ARE NOT ATTRA CTED AND THEREFORE, QUESTION OF DEDUCTION OF TAX AT SOURCE W OULD NOT ARISE. ACCORDINGLY, CIT(A) GRANTED RELIEF TO ASSES SEE. 17.2 SAME HAS BEEN OPPOSED BEFORE US ON BEHALF OF R EVENUE INTER ALIA SUBMITTING THAT CIT(A) ERRED IN LAW AND ON FACTS IN DELETING ORDERS PASSED U/S.201(1) & INTEREST CHARGE D U/S. 201(1A) OF THE ACT IN BOTH YEARS AS DISCUSSED ABOVE . ON OTHER HAND, LEARNED AUTHORIZED REPRESENTATIVE SUPPORTED T HE ORDER OF CIT(A). 17.3 AFTER GOING THROUGH RIVAL SUBMISSIONS AND MATE RIAL ON RECORD, WE FIND THAT ASSESSEE AND M/S DISHMAN PHARMACEUTICALS & CHEMICALS LTD, BOTH ARE ENGAGED I N BUSINESS OF MANUFACTURING BULK DRUGS AND CHEMICALS. ONE OF THE CONDITION FOR INVOKING PROVISIONS OF SECTION 2( 22)(E) OF THE ACT IS THAT MONEY SHOULD BE PAID EITHER BY WAY OF L OANS OR ADVANCES. CIT(A) HAS RIGHTLY OBSERVED THAT THESE A MOUNTS ARE IN NATURE OF INTER CORPORATE DEPOSITS (ICD), WHICH HAS BEEN I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 26 GIVEN ONE CORPORATE TO ANOTHER CORPORATE AND THEREF ORE, NO LOAN OR ADVANCE AS CONTEMPLATED U/S.2(22)(E) OF THE ACT. CIT(A) FROM THE LEDGER ACCOUNTS OBSERVED THAT SUCH ACCOUNT S ARE IN NATURE OF DEPOSITS. ASSESSING OFFICER FAILED TO AP PRECIATE THAT TERM DEPOSIT CANNOT MEANS LOAN OR ADVANCE. A CCORDINGLY, CIT(A) WAS JUSTIFIED IN OBSERVING THAT INTER CORPOR ATE DEPOSITS (ICD) BEING DIFFERENT FROM LOANS OR ADVANCES, WILL NOT COME UNDER THE PURVIEW OF DEEMED DIVIDEND U/S.2(22)(E). THIS VIEW IS FORTIFIED BY DECISION OF ITAT A BENCH, MUMBIA IN CASE OF BOMBAY OIL INDUSTRIES LTD. VS. DCIT 28 SOT 383 (MUM ). IN VIEW OF ABOVE DISCUSSION, ORDER OF CIT(A) FOR BOTH YEARS ARE UPHELD, WHEREBY HE DELETED THE ORDER PASSED U/S.201 (1) AND 201(1A) OF THE ACT. SAME ARE UPHELD. 18. IN RESULT, REVENUES APPEALS FOR BOTH YEARS ARE DISMISSED. 19. AS A RESULT, REVENUES APPEALS FOR ALL YEARS AS WELL ASSESSEES APPEAL IN ONE YEAR ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 5 TH DAY OF JUNE, 2015. SD/- SD/- (ANIL CHATURVEDI) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMB ER AHMEDABAD: DATED 05/06/2015 S.K.SINHA / COPY OF ORDER FORWARDED TO:- I.T.A. NOS. 2060/A/09, 2888/A/11, 3141/A/11, 3224 & 3225/A/10 (DCIT/ACIT/ITO VS. M/S. SCHUTZ DISHMAN BIOTECH LTD.) PAGE 27 / REVENUE / ASSESSEE ! / CONCERNED CIT ' !#$%&' / CIT (A) ()*+& ,--. $%&' $.$/0 / DR, ITAT, AHMEDABAD 1+2345' / GUARD FILE. BY ORDER / 6. 7%8/ %& $%&' $.$/0 9 STRENGTHEN PREPARATION & DELIVERY OF ORDERS IN THE ITAT 1) DATE OF TAKING DICTATION 13.05.2015 2) DIRECT DICTATION BY MEMBER STRAIGHT ON COMPUTER/LAPTOP/DRAGON DICTATE XXX 3) DATE OF TYPING & DRAFT ORDER PLACE BEFORE MEMBER 15/05/2015 4) DATE OF CORRECTION ,, ,, 5) DATE OF FURTHER CORRECTION 6) DATE OF INITIAL SIGN BY MEMBERS 7) ORDER UPLOADED ON 8) ORIGINAL DICTATION PAD HAS BEEN ENCLOSED IN THIS FILE 9) FINAL ORDER AND 2 ND COPY SEND TO BENCH CLERK ON
