Mylan Laboratories Limited, (Formerly Matrix Laboratories Limited), Hyderabad V. ACIT, Circle 16(2), Hyderabad

ITA 2123/HYD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98474 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 01-07-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 23-12-2011
• Court: TRIBUNAL
• Department Lawyers: T VENKATA REDDY
• Keywords: Sale consideration of property below Jantri Value; Business income; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Wholly owned subsidiary; Revenue expenditure; Reassessment proceedings; Capital expenditure
• Section: 143(3); 50C; 92A; 80HHC; 14A; 115JB; 37(1); 10B; 37; 263; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER I.T.A. NO. 2123/HYD/2011 ASSESSMENT YEAR: 2007-08 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) HYDERABAD [PAN: AADCM3491M] VS ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI RAGHUNATHAN SAMPATH, AR FOR REVENUE : SHRI T. VENKATA REDDY, CIT-DR DATE OF HEARING : 01-07-2015 DATE OF PRONOUNCEMENT : 26-08-2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS APPEAL BY ASSESSEE IS AGAINST THE ORDERS OF A SSESSING OFFICER (AO) U/S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT [ACT] CONSEQUENT TO THE DIRECTIONS ISSUED BY DISPUTE RESOLUTION PANEL [ DRP], HYDERABAD DATED 26-09-2011. 2. ASSESSEE IS IN THE BUSINESS OF MANUFACTURE OF PHARMACEUTICAL PRODUCTS, MAINLY ACTIVE PHARMA INGRE DIENTS (IN SHORT API). DURING THE YEAR, ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 2 -: LOSS OF RS. 40,04,39,585/- UNDER THE NORMAL PROVISI ONS OF THE IT ACT AND BOOK PROFIT/LOSS OF RS. (-) 5,17,28,098/- U/S. 115J B OF THE ACT. THIS RETURN WAS ACCEPTED U/S. 143(1) AND A NOTICE U/S. 1 43(2) WAS ISSUED. DURING THE COURSE OF PROCEEDINGS, ASSESSEE HAS REVI SED CERTAIN CLAIMS. SINCE ASSESSEE TRANSACTED WITH ITS ASSOCIATED ENTER PRISE [AE] AS DEFINED IN SECTION 92A OF THE ACT, THE MATTER WAS REFERRED TO TRANSFER PRICING OFFICER [TPO], WHO ISSUED AN ORDER U/S. 92CA OF THE ACT DT. 31-03-2010. THE AO FRAMED DRAFT ASSESSMENT ORDER DT. 31-12-2010 TAKING INTO ACCOUNT THE TP ORDER. THE TOTAL INCOME IN THE DRAF T ORDER WAS DETERMINED AT RS. 1,07,98,53,286/- UNDER NORMAL COM PUTATION. AO DID NOT COMPUTE BOOK PROFITS IN THE DRAFT ORDER. ASSES SEE OBJECTED TO THE DRAFT ORDER VIDE ITS OBJECTIONS FILED BEFORE DRP, H YDERABAD ON 03-02- 2011. THE DRP DISPOSED OFF THE OBJECTIONS VIDE ITS ORDER DT. 26-09-2011 U/S. 144C OF THE ACT. PURSUANT TO THE SAID DIRECTI ONS, AO PASSED THE FINAL ORDER U/S. 143(3) DETERMINED THE TOTAL INCOME AT RS. 1,07,93,35,036/- VIDE ORDER DT. 20-10-2011. 3. AGGRIEVED ON THE ABOVE ACTION OF AO, ASSESSEE H AS RAISED AS MANY AS 20 GROUNDS. OUT OF WHICH, GROUND NO. 1 AN D 20 ARE GENERAL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. 4. WE HAVE HEARD THE LD. COUNSEL MR. RAGHUNATHAN S AMPATH, LD. AR AND MR. T. VENKATA REDDY, LD. CIT-DR AND PER USED THE PAPER BOOKS PLACED ON RECORD IN THREE VOLUMES CONTAINING PAGES 1 TO 2242 AND VARIOUS CASE LAW AND CHARTS SUBMITTED IN THIS REGAR D. THE RIVAL CONTENTIONS ARE INCORPORATED AS AND WHEN NECESSARY. THE GROUNDS ARE DISPOSED OFF AS UNDER: GROUND NO. 2 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ORDER OF THE TRANSFER PRICING OFFICER UNDER SEC. 9 2CA OF THE ACT, FOR ADJUSTMENT OF RS. 6,57,51,298/- AS INTEREST ON SHO RT TERM FACILITY I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 3 -: EXTENDED TO MATRIX LABORATORIES NV, BELGIUM (ASSOC IATED ENTERPRISE) ADOPTING INTEREST RATE OF 14% PER INDIAN MONEY MAR KETS. 5. THE FACTS LEADING TO THE ABOVE GROUND ARE THAT ASSESSEE ADVANCED A SUM OF EURO 14.61 MIO DURING DECEMBER, 2 005, EURO 2.25 MIO DURING APRIL, 2006 AND FURTHER SUM OF EURO 61.5 0 MIO DURING MAY, 2006 TO MATRIX LABORATORIES NV, BELGIUM I.E., AE. THE AMOUNTS WERE REPAID BY MATRIX LABORATORIES NV ON 19-10-2007, OUT OF EQUITY CONTRIBUTION MADE BY MATRIX BV WHICH FUNDS WERE REC EIVED BY IT IN THE FORM OF EQUITY CONTRIBUTION FROM MATRIX INDIA I.E., ASSESSEE. IT WAS THE SUBMISSION THAT THE AMOUNTS ADVANCED TO MATRIX LABO RATORIES NV, BELGIUM PARTAKE THE CHARACTER OF EQUITY AND NO INTE REST IS CHARGEABLE THEREON. TPO ADOPTED 14% AS THE APPROPRIATE BENCH MARK PRICE UNDER THE CUP METHOD BASED ON BBB RATED INDIAN CORPORATE BOND YIELDS. BEFORE THE DRP, IT WAS SUBMITTED THAT ASSESSEE HAS ADVANCED THE MONEY WITH A VIEW TO ACQUIRE CONTROLLING INTEREST IN BELG IUM COMPANY AND SINCE IT IS FOR THE PURPOSE OF BUSINESS, NO INTEREST COUL D BE CHARGED. RELYING ON THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF VVF LTD., VS. DCIT ALTERNATIVELY, IT CONTENDED THAT ABN AMRO BANK PROVIDED LOANS WITH AN INTEREST RATE OF EURIBOR + 60-125BPS FOR TRANCHE A AND EURIBOR + 129BPS FOR TRANCHE B. THEREFORE, THE RELEVANT PERIOD INTEREST WOULD BE 3.35% AND THE SAME CAN BE RESTRICTED TO THE ABOVE. ON THE REASON THAT EARLIER YEARS ISSUES ARE PENDING BEFORE THE ITAT, THE DRP DID NOT INTERFERE. 5.1 LD. COUNSEL FAIRLY ADMITTED THAT ITAT HAS HELD ADJUSTMENTS AT LIBOR + 2% / EURIBOR + 2% IN THE LATER YEAR. IT WAS SUBMITTED THAT ASSESSEE HAS NO OBJECTION IF THE SAME RATE IS ADOPT ED. IT WAS FURTHER SUBMITTED THAT DRP ACCEPTED IN AY. 2006-07 AT EURIB OR + 2%. CONSIDERING THE ORDERS OF THE DRP IN AY. 2006-07 AN D ALSO ORDER OF ITAT IN AY. 2008-09 IN ITA NO. 665/HYD/2013 IN ASSESSEE' S OWN CASE ON THE I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 4 -: ISSUE OF ADJUSTMENT TOWARDS INTEREST AND ADVANCE PR OVIDED TO AES, WE DIRECT THE AO/TPO TO ADOPT EURIBOR + 2% RATE OF INTEREST FOR MAKING THE ADJUSTMENT UNDER THE PROVISIONS. THE GROUND IS ACCORDINGLY CONSIDERED ALLOWED. GROUND NO. 3 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE TRANSFER PRICING OFFICER'S ORDER UNDER SEC. 92CA O F THE ACT, FOR MAKING AN ADJUSTMENT OF RS. 8,04,750/- AS INTEREST IN RESPECT OF SHARE APPLICATION MONEY OF RS. 4,60,00,000/- DEPOS ITED WITH MATRIX LABORATORIES BV, NETHERLANDS (ASSOCIATED ENTERPRIS E) WHICH WAS CONVERTED AS EQUITY SHARE CAPITAL SUBSCRIPTION IN THE SUBSEQUENT PERIOD. 6. THE FACTS LEADING THE ABOVE GROUND ARE THAT ASS ESSEE AS PART OF BUSINESS EXPANSION PLANS INCORPORATED 100% SUBSI DIARY MATRIX LABORATORIES BV, NETHERLANDS AND SUBSCRIBED TO FURT HER EQUITY TO THE TUNE OF RS. 4.60 CRORES I.E., EURO 8 LAKHS. THE MO NEYS WERE REMITTED ON 13-02-2006 AND ALLOTMENT WAS MADE ON 12-06-2006. THE TPO, HOWEVER, TREATED THE SHARE APPLICATION MONEY PENDIN G ALLOTMENT AS LOAN ADVANCED AND INTEREST TO BE CHARGED THEREON. HE AD OPTED THE RATE OF 14% INTEREST FOR THE PERIOD OF APPLICATION TO ALLOT MENT. ASSESSEE OBJECTED TO THE CALCULATION OF INTEREST STATING THA T DUE TO REGULATORY APPROVALS, THERE WAS DELAY IN ALLOTMENT, BUT BASICA LLY THE AMOUNT WAS TOWARDS SHARE CAPITAL AND TPO IS NOT CORRECT IN CHA RACTERIZING THE AMOUNT AS LOAN. IT IS FURTHER CONTENDED THAT FROM THE DATE OF REMITTANCE TO THE YEAR ENDING, THERE IS ONLY PERIOD OF 1.5 MON THS INSTEAD OF TWO MONTHS CALCULATED BY THE TPO. WHILE NOT AGREEING W ITH THE PRINCIPLE OF INTEREST COMPUTATION, THE DRP, HOWEVER, ACCEPTED TH E SECOND CONTENTION AND RESTRICTED THE AMOUNT TO BE CHARGED FROM RS. 10 ,73,000/- TO AN AMOUNT OF RS. 8,04,750/- ON RS. 4.60 CRORES AMOUNT INVESTED. ASSESSEE IS OBJECTING. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 5 -: 6.1 LD. COUNSEL FOR ASSESSEE SUBMITTED THAT AMOUNT WAS REMITTED AS SHARE APPLICATION MONEY AND SUBSEQUENTL Y, SHARES WERE ALLOTTED. THEREFORE, THE SAME CANNOT BE TREATED AS LOAN. HE RELIED ON THE DECISION OF PRITHVI INFORMATION SOLUTIONS LTD., VS. ACIT [34 ITR (TRIB) 429 (ITAT, HYD)]. LD. DR RELIED ON THE ORDERS OF THE DRP. 6.2 THE CO-ORDINATE BENCH IN THE CASE OF PRITHVI I NFORMATION SOLUTIONS LTD., VS. ACIT [34 ITR (TRIB) 429 (ITAT, HYD)] (SUPRA), HAS CONSIDERED SIMILAR ISSUE WHEREIN ASSESSEE ALSO MADE INVESTMENTS TOWARDS EQUITY AND SHARES HAVE BEEN ALLOTTED. THE FACTS ARE SIMILAR TO ASSESSEE'S CASE VIDE PARA 12, THE CO-ORDINATE BENCH CONSIDERING VARIOUS ORDERS PASSED BY THE CO-ORDINATE BENCHES REFERRED T O IN THE ORDER HELD THAT THE INVESTMENTS ARE IN THE NATURE OF EQUITY TH EN, THEY CANNOT BE TREATED AS 'LOANS AND ADVANCES'. SINCE IN THIS CAS E, THE INVESTMENTS ARE IN THE NATURE OF EQUITY AND SHARES HAVE BEEN ALLOTT ED AFTER A PERIOD OF FOUR MONTHS, WE ARE OF THE OPINION THAT TPO CANNOT RECLSSIFY THE AMOUNT AS 'LOANS AND ADVANCES'. MOREOVER, WE HAVE CONSIDE RED THE APPEAL IN AY. 2008-09 VIDE ORDERS DT. 10-01-2014, WHEREIN IT IS N OTICED THAT TPO HAS NOT MADE ANY ADJUSTMENT FROM 1 ST APRIL 2007 TO THE PERIOD OF ALLOTMENT. THEREFORE, KEEPING THAT FACTOR ALSO IN MIND, WE ARE OF THE OPINION THAT ADJUSTMENT PROPOSED BY THE TPO AS CONFIRMED BY THE DRP IS NOT WARRANTED. WE DIRECT THE SAME TO BE DELETED. GROU ND IS ALLOWED. GROUND NO. 4 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE TRANSFER PRICING OFFICER'S ORDER UNDER SEC. 92CA O F THE ACT, FOR MAKING AN ADJUSTMENT OF RS. 19,11,68,600/- IN RESP ECT OF CORPORATE GUARANTEE EXTENDED TO MATRIX LABORATORIES NV, BEL GIUM A WHOLLY OWNED SUBSIDIARY OF THE TAX-PAYER. GROUND NO. 5: THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING T HE TRANSFER PRICING OFFICER'S ORDER UNDER SEC. 92CA O F THE ACT, FOR MAKING AN ADJUSTMENT OF RS. 60,81,800/- IN RESPECT OF CORPORATE GUARANTEE EXTENDED TO MCHEM PHARMA GROUP LTD., CHI NA A SUBSIDIARY COMPANY OF THE TAX-PAYER. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 6 -: 7. BRIEFLY STATED, IN ORDER TO ACQUIRE ENTRY INTO EUROPEAN MARKETS, ASSESSEE FLOATED 100% OWNED COMPANY IN NET HERLANDS FOR WHICH IT INCORPORATED A SPECIAL PURPOSE VEHICLE MAT RIX LABORATORIES NV. MATRIX INDIA INFUSED EQUITY CAPITAL OF 30 MILLIONS AND ALSO GAVE CORPORATE GUARANTEE TO ABN AMRO BANK, NETHERLANDS BASED ON WH ICH THE BANK GAVE A LOAN OF EURO 165 MILLION (EQUIVALENT TO INR 955.84 CRORES). IN ADDITION, ASSESSEE ALSO PROVIDED CORPORATE GUARANTE E TO ABN AMRO BANK, SINGAPORE AND RABO BANK, SINGAPORE IN RESPECT OF LO AN TO MCHEM PHARMA GROUP LTD., FOR AN AMOUNT OF RS. 30.40 CRORE S. TPO CONSIDERED THE CORPORATE GUARANTEE AND ADOPTED A GUARANTEE COM MISSION @ 2% ON AMOUNT EXTENDED BY ASSESSEE, AS AGAINST ASSESSEE'S CONTENTION OF TREATING THE GUARANTEE AS A NON-FUND BASED QUASI EQ UITY TRANSACTION. ASSESSEE OBJECTED TO THE ADJUSTMENT MADE BEFORE THE DRP. HOWEVER, DRP AGREED WITH TPO AND OBJECTIONS WERE REJECTED. 7.1 IT WAS SUBMITTED BY LD. COUNSEL THAT AT PRESEN T PROVIDING CORPORATE GUARANTEE IS CONSIDERED FOR THE PURPOSE O F TRANSFER PRICING ADJUSTMENT, BUT THE RATE AT WHICH GUARANTEE COMMISS ION WAS CONSIDERED IS NOT AT 2% BUT SHOULD BE RESTRICTED TO 0.53% AS C ONSIDERED BY THE CO- ORDINATE BENCH IN THE CASE OF PROLIFICS CORPORATION LIMITED (PREVIOUSLY KNOWN AS SEMANTIC SPACE TECHNOLOGIES LTD) IN ITA NO . 237/HYD/2014 DT. 31-12-2014. HE ALSO RELIED ON VARIOUS OTHER CO -ORDINATE BENCH DECISIONS. 7.2 AFTER CONSIDERING THE RIVAL CONTENTIONS, WE AR E OF THE OPINION THAT THERE IS A SERVICE RENDERED TO AE BY PROVIDING GUARANTEES AND THEREFORE INVOKING PROVISIONS OF TP DOES ARISE ON T HE FACTS OF THE CASE. THE CO-ORDINATE BENCH OF HYDERABAD IN THE CASE OF M /S. FOUR SOFT LTD., IN ITA NO. 1495/HYD/2010 [44 TAXMAN.COM 479] HAS CONSIDERED IN DETAIL THE CASE LAW ON THE ISSUE AND UPHELD THE TP ADJUSTMENTS ON I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 7 -: CORPORATE GUARANTEE PROVIDED. CONSIDERING THE CO-O RDINATE BENCH DECISION, WE UPHOLD THE ADJUSTMENT MADE ON THE GUAR ANTEE COMMISSION ON THE CORPORATE GUARANTEES PROVIDED BY ASSESSEE TO ITS AES. HOWEVER, AS FAR AS THE RATE AT WHICH THE GUARANTEE COMMISSIO N IS TO BE CONSIDERED, THE ADOPTION OF 2% WAS NOT APPROVED IN VARIOUS CO-ORDINATE BENCH DECISIONS. IN CO-ORDINATE BENCH DECISIONS LI KE THAT OF GLENMARK PHARMACEUTICALS VS. ACIT IN ITA NO. 5031/MUM/2012 D T. 13-11-2013, THE MUMBAI BENCH OF TRIBUNAL AFTER ANALYZING FACTS ON THAT CASE HAS HELD THAT 0.53% CORPORATE GUARANTEE RATE WAS APPROP RIATE. BASED ON THAT, CO-ORDINATE BENCH IN THE CASE OF PROLIFICS CO RPORATION LIMITED (PREVIOUSLY KNOWN AS SEMANTIC SPACE TECHNOLOGIES LT D) IN ITA NO. 237/HYD/2014 DT. 31-12-2014 DIRECTED THE TPO TO ADO PT THE RATE OF 0.53%, WHICH IS CONSIDERED AS ARM'S LENGTH IN OTHER CASES ALSO. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE TPO TO ADOPT 0.53% AS THE GUARANTEE COMMISSION RATE INSTEAD OF 2% ADOPTED BY HIM. THEREFORE, THESE GROUNDS ARE PARTLY ALLOWED ACCORDINGLY. GROUND NO. 6 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE TRANSFER PRICING OFFICER'S ORDER UNDER SEC. 92CA O F THE ACT, FOR REDUCING THE OPERATING PROFITS OF THE TAX-PAYER CO MPANY BY RS. 36,40,74,254/- ON ACCOUNT OF (I) INCOME FROM SETTL EMENT OF PATENT INFRINGEMENT SUIT CREDITED TO PROFIT & LOSS ACCOUN T OF RS. 26,83,94,695/- AND (II) FOREIGN EXCHANGE FLUCTUATI ONS (CREDIT) OF RS. 9,56,79,559/- 8. AS SEEN FROM THE ABOVE GROUND, THERE ARE TWO IS SUES TO BE CONSIDERED. GROUND NO. 6(I) IS ON THE ISSUE OF INC OME FROM SETTLEMENT OF PATENT INFRINGEMENT SUIT CREDITED TO P&L A/C OF RS. 26,83,94,695/-. THIS ISSUE WAS CONSIDERED BY THE CO-ORDINATE BENCH IN THE LATER YEAR IN ASSESSEE'S OWN CASE FOR AY. 2008-09 AND LD. COUNSEL FAIRLY ADMITTED THE ISSUE WAS HELD AGAINST ASSESSEE. IN THAT ABOVE REF ERRED CASE, THE CO- ORDINATE BENCH HAS HELD AS UNDER: I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 8 -: 15. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS ON RECORD AND THE CASE LAW RELIED UPON BY THE ASSES SEE. AS PER THE NOTE GIVEN AS PART OF REPORT OF TRANSFER PRICING RE PORT FOR ASSESSMENT YEAR 2007-2008, IT CAN BE OBSERVED THAT RECEIPTS ARE IN THE NATURE OF ONE TIME SETTLEMENT IN CONSIDERATION FOR COSTS AND LIABILITIES INCURRED BY MATRIX AS A CONSEQUENCE OF CEASING ITS PROGRAMME TO DEVELOP AND MANUFACTURE 'PERINDOPRIL' MADE USING THE PROCESS. THE ENTIRE AMOUNT OF RS.97.87 CRORES WAS O FFERED AS INCOME IN ASSESSMENT YEAR 2005-2006 BASED ON RECEIP T BASIS. AS CAN BE SEEN THE AMOUNT OF RS.26.91 CRORES CREDITED TO THE P & L ACCOUNT THIS YEAR IS ONLY A NOTIONAL DEFERRED INCOM E WHEREAS THE ACTUAL INCOME WAS RECEIVED MUCH EARLIER. AS CAN BE SEEN FROM THE FACTS ON RECORD, THE CORRESPONDING EXPENDITURE PERT AINING TO DEVELOPMENT OF 'PERINDOPRIL' WAS SPENT MUCH EARLIER I.E., MUCH PRIOR TO ASSESSMENT YEAR 2005-2006. THEREFORE, THERE IS N O CORRESPONDING EXPENDITURE IN THE RELEVANT ASSESSMENT YEAR. EVEN I F THERE ARE COSTS/ LIABILITIES FOR DEVELOPING THE PRODUCT ON WH ICH THE ASSESSEE RECEIVED PATENT INFRINGEMENT COMPENSATION, THE COST S AND LIABILITIES DOES NOT PERTAIN TO THE YEAR UNDER CONSIDERATION. 16. ASSESSEE RELIED ON THE DECISION OF HON'BLE DELH I HIGH COURT IN THE CASE OF CIT VS. DESICCANT ROTORS S INT ERNATIONAL PVT. LTD. (2012) 347 ITR 32 (DEL.) (H.C.) WHEREIN THE ISSUE W AS WITH REFERENCE TO THE CLAIM OF EXPENDITURE UNDER SECTION 37(1). IN THAT CONTEXT, THE HON'BLE DELHI HIGH COURT HAS ANALYZED THE PRINCIPLE S RELATING TO PATENT INFRINGEMENT RIGHTS AND HELD THAT THEY ARE P URELY COMPENSATORY IN NATURE AND CONFIRMED THE LIABILITY OF AMOUNT UNDER SECTION 37(1) OF THE ACT AND THE ITAT ORDER WAS ACC ORDINGLY CONFIRMED BY THE HON'BLE DELHI HIGH ITA.NO.66/HYD/2 013 MYLAN LABORATORIES LTD. (FORMERLY MATRIX LABORATORIES LTD .) COURT. BUT AS SEEN FROM THE JUDGMENT, THE ISSUE IS NOT WITH REFER ENCE TO THE TRANSFER PRICING ADJUSTMENTS BUT WITH REFERENCE TO THE CLAIM OF AMOUNT PAID TOWARDS PATENT INFRINGEMENT AS REVENUE EXPENDITURE, WHERE THE REVENUE TREATED IT AS CAPITAL EXPENDITURE . IN THAT CONTEXT, THE DECISION WAS GIVEN WHICH ALLOWED THE AMOUNT AS REVENUE IN NATURE. THE DISPUTE BEFORE US IS NOT WITH REFERENCE TO THE CLAIM OR RECEIPT OF THE AMOUNT. THERE IS NO DISPUTE AS THE A MOUNT WAS OFFERED AS REVENUE INCOME. THERE IS ALSO NO DISPUTE THAT THE AMOUNT OFFERED IN THE P & L ACCOUNT WAS ADJUSTED IN THE CO MPUTATION OF INCOME FOR THE YEAR AS THE SAME IS ALREADY TAXED IN THE EARLIER YEAR. WE ARE NOT CONSIDERING EITHER TAXABILITY OF THE AMO UNT OR THE ALLOWABILITY OF THE AMOUNT AS A DEDUCTION/ EXPENDIT URE. THE ISSUE PERTAINS TO THE TRANSFER PRICING ADJUSTMENTS WHICH OPERATE UNDER DIFFERENT MECHANISM. WHILE ARRIVING AT THE PROFITS OF AN ORGANIZATION, THE OPERATING PROFITS OVER THE OPERATING COST IS CO NSIDERED AS A BASIC I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 9 -: PRINCIPLE TO ARRIVE AT OPERATING PROFITS IN AN ASSE SSEE'S CASE. AS DISCUSSED IN THE LATER PART OF THE ORDER, THERE ARE TWO SEGMENTS OF INCOME AND DIFFERENT SEGMENTS OF PROFIT SOURCE AND DIFFERENT COMPARISONS ARE REQUIRED. WHILE ARRIVING AT SEGMENT AL PROFITS, ONLY THOSE INCOMES PERTAINS TO THAT SEGMENT AND COST PER TAIN TO THAT SEGMENT ARE ALLOCATED SO AS TO ARRIVE AT THE OPERAT IONAL PROFITS FOR COMPARISON PURPOSES. THIS EXERCISE HAS NOTHING TO D O WITH THE PRINCIPLES LAID DOWN UNDER SECTION 37(1) OR THE PRI NCIPLES ON PATENT INFRINGEMENT COMPENSATION. THE SIMPLE ISSUE TO BE E XAMINED IS, WHETHER THE INCOME ACCOUNTED BY THE ASSESSEE WILL B ECOME OPERATIONAL INCOME FOR THE PURPOSE OF ARRIVING AT T HE OPERATIONAL PROFIT. THE ASSESSING OFFICER HAS EXCLUDED THE SAME STATING THAT THE SAME IS NOTHING BUT NOTIONAL ITA.NO.66/HYD/2013 MYL AN LABORATORIES LTD. (FORMERLY MATRIX LABORATORIES LTD .) REVENUE. WE AGREE WITH THE FINDING OF THE ASSESSING OFFICER AS HELD BY THE DRP THAT THE INCOME FROM SETTLEMENT OF PATENT INFRINGEM ENT CANNOT BECOME PART OF OPERATING REVENUES EITHER ON BULK DR UG MANUFACTURING (API) SEGMENT OR ON PRODUCT DEVELOPME NT SERVICE (PDS) SEGMENT WHICH ARE TWO DIFFERENT SEGMENTS IN W HICH ASSESSEE IS OPERATING AND ACCORDINGLY WE AGREE WITH THE DRP' S STAND THAT THIS INCOME FALLS UNDER THE CATEGORY OF 'OTHER INCO ME' AND NOT OPERATING REVENUE. NOT ONLY THAT THE INCOME DOES NO T PERTAIN TO THE RELEVANT FINANCIAL YEAR NOR THE COSTS ARE INCURRED IN THE YEAR UNDER CONSIDERATION. IF WITHOUT THE COST, THE INCOME IS I NCLUDED IN THE COMPUTATION OF OPERATIONAL PROFITS, THE SAME GETS S KEWED BECAUSE OF INCLUSION OF EXTRAORDINARY ITEMS. IT WAS DECIDED IN NUMBER OF CASES BY THE TRIBUNAL THAT INCOMES OF EXTRAORDINARY NATUR E ARE TO BE EXCLUDED AND FURTHER EXTRAORDINARY EVENTS IN ANY CO MPANY ALSO MAKE IT NON-COMPARABLE WHILE DOING EXERCISE OF FAR ANALYSIS FOR COMPARABILITY PURPOSE. FOR THE REASONS STATED ABOVE , WE AGREE WITH THE ASSESSING OFFICER/DRP THAT THIS INCOME FROM SET TLEMENT OF PATENT INFRINGEMENT CANNOT BE CONSIDERED AS OPERATI ONAL INCOME WHILE WORKING OUT THE SEGMENTAL PROFITS OR AS TOTAL PROFITS OF THE ASSESSEE FOR THE PURPOSE OF COMPARISON. AT BEST, IT CAN BE CONSIDERED AS ANOTHER SEGMENT OF INCOME FOR WHICH N O EXPENDITURE WAS CHARGED, BUT THE SAME CANNOT BE INCLUDED IN EIT HER OF THE SEGMENTAL OPERATIONS OF THE ASSESSEE. THIS GROUND I S ACCORDINGLY REJECTED. 8.1 SINCE THE ISSUE WAS ALREADY HELD AGAINST ASSES SEE AFTER CONSIDERING THE SIMILAR CONTENTIONS IN NEXT ASSESSM ENT YEAR, WE UPHOLD THE ACTION OF TPO AND REJECT ASSESSEE'S CONTENTION S. ACCORDINGLY, THIS PART OF GROUND IS CONSIDERED REJECTED. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 10 - : 8.2 COMING TO THE ISSUE IN GROUND NO. 6(II) I.E., CREDIT OF FOREIGN EXCHANGE FLUCTUATIONS OF RS. 9,56,79,559/-, THE TPO WHILE MAKING THE ADJUSTMENTS ON THE TP PROVISIONS EXCLUDED THE GAIN ON FOREIGN EXCHANGE FLUCTUATIONS OUT OF OPERATIONAL REVENUES HOLDING TH AT IT IS NOT DIRECTLY RELATED TO THE GIVEN ACTIVITY OF ASSESSEE OF MANUFA CTURING AND SELLING PHARMA PRODUCTS. THE DRP UPHELD THE ACTION OF TPO IN REMOVING FOREIGN EXCHANGE GAINS AND LOSSES FROM THE OPERATIN G RESULTS AS AN OBJECTIVE ONE. ASSESSEE IS AGGRIEVED. 8.3 IT WAS SUBMITTED THAT FOREIGN EXCHANGE GAIN AN D FOREIGN EXCHANGE LOSS SHOULD NOT BE EXCLUDED WHILE COMPUTIN G THE MARGIN OF ASSESSEE AS WELL AS COMPARABLE COMPANIES AS THE SAM E ARE ARISING DURING THE NORMAL COURSE OF BUSINESS OF ASSESSEE. LD. AR RELIED ON THE DECISION OF M/S. FOUR SOFT LTD., IN ITA NO. 1495/HY D/2010 [44 TAXMAN.COM 479] (SUPRA), M/S. CAPITAL IQ INFORMATION SYSTEMS (INDIA ) PVT. LTD., VS. DCIT IN ITA NO. 1961/HYD/2011 DT. 23 -11-2012 [32 TAXMAN.COM 21 (HYD)] AND BRIGADE GLOBAL SERVICES [33 TAXMAN.COM 618]. 8.4 LD. DR ON THE OTHER HAND SUPPORTED THE ORDER O F LOWER AUTHORITIES. 8.5 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES IN THIS REGARD. THIS ISSUE WAS ALREADY DECIDED IN FAVOUR O F ASSESSEE HOLDING THAT FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS ARE PAR T OF OPERATING MARGIN OF ASSESSEE AS WELL AS COMPARABLE COMPANIES WHILE U NDERTAKING ALP ADJUSTMENTS. THE CO-ORDINATE BENCH IN THE CASE OF M/S. CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD., VS. DCIT IN ITA NO. 1961/HYD/2011 DT. 23-11-2012 (SUPRA), HAS CONSIDERE D THE ISSUE AS UNDER: I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 11 - : '27. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PA RTIES IN THIS REGARD. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA P. LTD. (SUPRA), WHILE CONSIDERING A DI SPUTE OF SIMILAR NATURE, OBSERVED AS FOLLOWS- THE FOREIGN EXCHANGE FLUCTUATION GAINS IS NOTHING BUT AN INTEGRAL PART OF THE SALES PROCEEDS OF AN ASSESSEE CARRYING ON EXPORT BUSINESS. THE COURTS AND TRIBUNALS HAVE HEL D THAT FOREIGN EXCHANGE FLUCTUATION GAINS FORM PART OF THE SALE PROCEEDS OF EXPORTER-ASSESSEE. THE FOREIGN EXCHANGE FLUCTUATIONS INCOME CANNOT BE EXCLUDED FROM THE COM PUTATION OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY. FOLLOWING THE AFORESAID DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL, THE HYDERABAD BENCH OF THE TRIBUNAL HELD IN THE CASE OF FOUR SOFT LTD. (SUPRA) IN THE FOLLOWING MANNER- 16. WITH REGARD TO THE EXCLUSION OF GAIN ON ACCOU NT OF FOREIGN EXCHANGE FLUCTUATION WHILE COMPUTING THE NE T MARGIN, AS CLAIMED BY THE ASSESSEE, WE FIND THAT THE EXCHAN GE FLUCTUATION GAINS ARISE OUT OF SEVERAL FACTORS, FOR INSTANCE, REALISATION OF EXPORT PROCEEDS AT HIGHER RATE, IMPO RT DUES PAYABLE AT LOWER RATE. SINCE THE GAIN OR LOSS ON A CCOUNT OF EXCHANGE RATE FLUCTUATION ARISES IN THE NORMAL COUR SE OF BUSINESS TRANSACTION, THE SAME SHOULD BE CONSIDERED WHILE COMPUTING THE NET MARGIN FOR THE INTERNATIONAL TRAN SACTIONS WITH THE ASSOCIATED ENTERPRISES OF THE ASSESSEE. O UR VIEW IN THIS BEHALF IS FORTIFIED BY THE DECISIONS OF THE BA NGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA LTD. SUPRA AND BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF DEUTSCH E BANK A.G. V/S. D. CIT REPORTED IN 86 ITD 431 RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS OF THE TRIBUNAL, AND CONSIDERING THE CONTENTION OF THE ASSESSEE THAT FO R THE ASSESSMENT YEAR 2008-09 FOREIGN EXCHANGE FLUCTUATION GAIN/LOS S HAS BEEN CONSIDERED AS OPERATING MARGIN WHILE COMPUTING THE MARGIN OF COMPARABLE COMPANIES, WE HOLD THAT EVEN FOR THE YE AR UNDER APPEAL ALSO THE SAME PRINCIPLE SHOULD BE APPLIED, AND WHI LE COMPUTING THE MARGIN FOR DETERMINING THE ALP FOR THE ASSESSMENT YEAR UNDER APPEAL, THE FOREIGN EXCHANGE GAIN/LOSS HAS TO BE T AKEN AS PART OF THE OPERATING MARGIN. CONSEQUENTLY, WE ALLOW THE GROUND OF THE ASSESSEE ON THIS ISSUE AND DIRECT THE ASSESSING OF FICER TO TREAT THE FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS PART OF THE OPERATING MARGIN OF THE COMPARABLE COMPANY'. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 12 - : 8.6 IN VIEW OF THE ABOVE, WE DIRECT THE TPO TO CON SIDER THE FOREIGN EXCHANGE GAIN OR LOSS AS PART OF OPERATING PROFITS OF ASSESSEE- COMPANY. SIMILARLY, HE IS ALSO DIRECTED TO CONSIDE R THE FOREIGN EXCHANGE GAIN OR LOSS AS PART OF OPERATING PROFITS OF COMPAR ABLE COMPANIES ALSO WHILE WORKING OUT THE ALP WHILE DOING TP ADJUSTMENT S. GROUND IS CONSIDERED ALLOWED ACCORDINGLY. GROUND NO. 7 : THE DISPUTE RESOLUTION PANEL ERRED IN NOT DIRECTI NG THE DELETION OF ADJUSTMENT OF RS. 16,50,00,000/- U /S. 92CA OF THE ACT IN RESPECT OF SALES TO ASSOCIATED ENTERPRISES AND DETERMINING THE ARMS-LENGTH PRICE OF PROFIT LEVEL INDICATOR BE ING OPERATING PROFIT MARGIN AT 27.34% (OPERATING PROFIT/COST) AND 20.48 % (OPERATING PROFIT/OPERATING REVENUE) BY REJECTING THE BASIS A DOPTED BY THE TAX- PAYER U/S. 92 OF THE ACT. 9. DURING THE FINANCIAL YEAR 2006-07, THE ASSESSEE COMPANY SOLD FINISHED GOODS TO THE TUNE OF RS. 74.81 CRORES TO MATRIX LABS INC, USA, RS. 6.04 CRORES TO MYLAN PHARMACEUTICALS INC, USA AND RS. 1.02 CRORES TO XIAMEN MCHEM PHARMA, CHINA AGGREGATING TO RS. 81.87 CRORES. THE COMPANY ALSO PURCHASED RAW MATERIALS T O THE TUNE OF RS. 35.88 CRORES FROM XIAMEN MCHEM PHARMA, CHINA. THE C OMPANY FURTHER RECEIVED/EARNED AN AMOUNT OF RS. 40.52 CRORES IN RE SPECT OF PRODUCT DEVELOPMENT SERVICES RENDERED TO MYLAN LABORATORIES INC, USA. APART FROM THE ABOVE, THE COMPANY PURCHASED SAMPLES FROM DOC PHARMA, BELGIUM TO THE TUNE OF RS. 1.60 LAKHS AND AVAILED R &D SERVICES FROM EXPLORA SA, SWITZERLAND FOR RS. 29.20 LAKHS. 9.1 THE ASSESSEE IN THE TRANSFER PRICING DOCUMENTS AGGREGATED THE ABOVE MENTIONED INTERNATIONAL TRANSACTIONS INTO MANUFACTURING OF APIS ACTIVITY AND ALP WAS DETERMINED BY SELECTING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD AND ADOPTED THE OPERATING PROFIT/SALES MARGIN ON SALES AS PROFIT LE VEL INDICATOR (PLI). IT I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 13 - : HAS JUSTIFIED ITS ARMS LENGTH TRANSACTIONS BY SELE CTING COMPARABLES AND FILING A TRANSFER PRICING REPORT. 9.2 THE TPO REJECTED THE COMPARABLES SELECTED BY A SSESSEE ON THE FOLLOWING GROUNDS VIDE ITS SHOW CAUSE NOTICE DA TED 24-02-2010: I. CURRENT YEAR DATA NOT USED BUT MULTIPLE YEAR DATA A PPLIED; II. APPROPRIATE KEY WORDS ARE NOT USED; III. FILTERS APPLIED NOT PROPER. THE ASSESSEE ARGUED THAT DUE TO NON-AVAILABILITY OF COMPLETE DATA FOR CURRENT YEAR AT THE TIME OF BENCHMARKING THE INTERN ATIONAL TRANSACTIONS OF ASSESSEE AGAINST EXTERNAL COMPARABLES, THE DATA OF THE PRECEDING TWO YEARS WAS ALSO CONSIDERED, SINCE THE SAME WOULD BE REFLECTIVE OF THE CURRENT YEAR DATA. FURTHER, THE USE OF MULTIPLE YE AR DATA IS CONSISTENT WITH THE PROVISIONS OF THE RULE 10B(4) OF THE INCOM E TAX RULES. THE ASSESSEE ALSO DETAILED THE SEARCH PROCESS CARRIED O N BY IT BY USAGE OF APPROPRIATE WORDS FOR ARRIVING AT THE FINAL COMPARA BLES PER THE TP STUDY REPORT AND ALSO THE VARIOUS FILTERS APPLIED AT VARI OUS STAGES IN THE SAID SEARCH PROCESS. 9.3 ASSESSEE WITHOUT PREJUDICE TO ITS STAND THAT U SE OF MULTIPLE YEAR DATA IS CONSISTENT WITH THE PROVISIONS OF THE RULE 10B(4) OF THE INCOME TAX RULES, ALSO SUBMITTED THE COMPUTATION OF THE AVERAGE MARGIN OF THE COMPARABLES BY USING THE DATA OF ONLY THE RE LEVANT FINANCIAL YEAR I.E., FY 2006-07 AND ARRIVED AT THE AVERAGE MARGIN OF 9.83% WHICH WAS FILED WITH THE TPO. 9.4 HOWEVER, THE TPO REJECTED ASSESSEES SELECTION OF COMPARABLES AND UNDERTOOK FRESH SELECTION OF COMPAR ABLES BY HAVING I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 14 - : VARIOUS FILTERS. THE TPO SELECTED THE COMPARABLES BY GIVING THE KEY WORDS DRUGS AND PHARMACEUTICALS, BULK DRUGS AND INTERMEDIATES AND DRUG FORMULATIONS. HE ARRIVED AT ABOUT 11 COMPAN IES AND ISSUED SHOW CAUSE NOTICE TO ASSESSEE WHY THEY CANNOT BE SELECTE D FOR COMPARISON OF ALP. ASSESSEE MADE DETAILED OBJECTIONS WITH REFERE NCE TO THE FRESH SELECTION OF COMPARABLES. THEREAFTER, THE TPO REST RICTED THE COMPARISON TO ONLY TWO COMPANIES M/S. DIVIS LABS LTD., AND M/ S. BIOCON LIMITED ACCEPTING OBJECTIONS WITH REFERENCE TO OTHER COMPAN IES. ASSESSEE FILED OBJECTIONS VIDE PARA 5(B) OF THE OBJECTIONS BEFORE THE DRP. HOWEVER, DRP WAS SILENT ON THE ISSUE AND HAS NOT ADJUDICATED THE OBJECTIONS RAISED BY ASSESSEE. 9.5 LD. COUNSEL SUBMITTED THAT ASSESSEE IS IN THE BUSINESS OF ACTIVE PHARMACEUTICALS INGREDIENTS WHICH ARE GENERA LLY CALLED BULK DRUGS AND WAS NOT INVOLVED IN FORMULATIONS AT ALL. HE RE FERRED TO THE DRPS ORDER PARTICULARLY THE FINDING GIVEN IN GROUND NO. 7 THAT ASSESSEE- COMPANY IS ENGAGED IN MANUFACTURE AND SALE OF APIS AND ABOUT TO COMMENCE THE BUSINESS OF FORMULATIONS. HE SUBMITT ED THAT THE BUSINESS OF FORMULATIONS HAS NOT STARTED DURING THE YEAR AND ONLY FEW SAMPLES WERE MANUFACTURED AND ASSESSEES ENTIRE BUS INESS ACTIVITY DURING THE YEAR INVOLVED ONLY MANUFACTURING BULK DR UGS. THEREFORE, TPOS OBSERVATION THAT COMPANIES WITH FORMULATIONS ALSO ARE COMPARABLE IS NOT ACCEPTABLE. WITH REFERENCE TO M/S. DIVIS LABS LTD., IT WAS SUBMITTED THAT M/S. DIVIS LABS LTD., IS REQUIRED T O BE EXCLUDED ON THE BASIS THAT THE SAID COMPANY IS OPERATING UNDER A DI FFERENT SET OF BUSINESS FUNCTIONALITY. DIVIS IS ENGAGED IN MANUF ACTURE OF GENERIC APIS, CUSTOM SYNTHESIS OF ACTIVE INGREDIENTS AND INTERMED IATES FOR INNOVATOR COMPANIES AND OTHER SPECIALTY CHEMICALS LIKE PEPTID E BUILDING BLOCKS AND NUTRACEUTICALS. 50% OF THE TOTAL REVENUE IS EA RNED FROM CUSTOM SYNTHESIS FOR INNOVATOR CUSTOMERS. FURTHER, AS IS SEEN FROM ANNUAL I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 15 - : REPORT PER POINT # 11 OF NOTES TO ACCOUNTS, EXPORTS CONSTITUTE ABOUT 93% OF THE TOTAL SALES WHERE AS EXPORTS CONSTITUTE ABOU T 59% OF THE TOTAL SALES OF MATRIX. FURTHER, THERE IS NO R&D EXPENDITURE CO MPARABLE TO ASSESSEE. AS STATED BY THE TPO AT PARA 12.1 OF HIS ORDER, THE DEGREE OF COMPARISON, INTER ALIA, DEPENDS ON LEVEL OF MARKET AND GEOGRAPHY IN WHICH MARKET OPERATES. ACCORDINGLY, SINCE DIVIS L ABS PREDOMINANTLY OPERATES IN MARKETS OUTSIDE INDIA, THE SAME CANNOT BE CONSIDERED AS A COMPARABLE. 9.6 FURTHER, IT WAS SUBMITTED THAT BIO-CON IS ENGA GED IN MANUFACTURE OF BIO-PHARMACEUTICALS WHILE ASSESSEE I S ENGAGED IN THE MANUFACTURE OF CHEMICAL PHARMACEUTICALS. SINCE THE PRODUCT PROFILE OF THE COMPANY IS COMPLETELY DIFFERENT FROM THAT OF AS SESSEE, THE SAME IS TO BE REJECTED AS COMPARABLE. 9.7 AR FURTHER SUBMITTED THAT ASSESSEE HAS RAISED OBJECTIONS VIDE GROUND NO. 5(B) FROM PAGE 42 TO 59 AND DRP HAS NOT ADJUDICATED THE ISSUE. IT WAS THE SUBMISSION THAT THESE TWO CO MPANIES CANNOT BE TREATED AS COMPARABLE DUE TO ITS BUSINESS PROFILE A ND FURTHER AO WRONGLY REJECTED THE COMPANIES SELECTED BY ASSESSEE ON VARI OUS FILTERS. IT WAS SUBMITTED THAT CASES WHERE COMPANIES ARE INVOLVED I N FORMULATIONS AND HAVING MIXED BUSINESS SHOULD BE EXCLUDED AS ASSESSE E IS INVOLVED ONLY IN BULK DRUGS. 9.8 LD. DR HOWEVER, RELIED ON THE DETAILED ORDERS OF THE TPO. 9.9 WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE ORDERS OF THE AUTHORITIES. ON THE REASON THAT MULTIPLE YEAR DATA WAS TAKEN BY ASSESSEE SOME OF THE COMPANIES SELECTED BY IT ARE R EJECTED. TPO SHOULD HAVE CONSIDERED DATA OF THIS YEAR. MOREOVER, WHEN ASSESSEE MADE I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 16 - : DETAILED OBJECTIONS BEFORE THE DRP, DRP DID NOT ADJ UDICATE THE OBJECTION AT ALL AS CAN BE SEEN FROM THE ORDER. THEREFORE, T HIS FORUM IS HANDICAPPED TO THAT EXTENT, IN DECIDING THE ISSUE O NE WAY OR THE OTHER. SINCE THE OBJECTIONS ARE NOT EXAMINED BY THE DRP, W E ARE OF THE OPINION THAT THAT SELECTION OF COMPARABLES SHOULD BE RESTOR ED TO THE AUTHORITIES. AS CAN BE SEEN FROM THE OBJECTIONS RAISED, ASSESSEE OBJECTED SELECTION OF THESE TWO COMPANIES AS COMPARABLES. THIS REQUIRE R E-EXAMINATION BY THE TPO, AS MORE DATA WOULD HAVE COME BY THIS TIME INTO THE PUBLIC DOMAIN. THEREFORE, WE ARE OF THE OPINION THAT THE MATTER SHOULD GO BACK TO TPO WHO SHOULD CONSIDER SELECTING PROPER COMPARA BLES, AFTER APPROPRIATE FAR ANALYSIS AND BY GIVING DUE OPPORTUN ITY TO ASSESSEE, TO RE-CONSIDER THE COMPARABILITY ANALYSIS. IN CASE AS SESSEE HAS STILL OBJECTIONS ON THE PROPOSAL OF THE TPO, THEN DRP SHO ULD EXAMINE THE OBJECTIONS AND DECIDE THE ISSUE BY GIVING PROPER RE ASONS. WITH THESE OBSERVATIONS, THE ISSUE INVOLVED IN THIS GROUND IS RESTORED TO THE FILE OF TPO, BY SETTING ASIDE THE ORDER OF TPO/AO TO THAT E XTENT. GROUND NO. 8 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING ASSESSING OFFICER'S ACTION IN NOT DEDUCTING RS. 3, 31,40,155/- FROM THE RETURNED INCOME, CORRESPONDING TO ADJUSTMENT U /S. 92CA OF THE ACT, MADE BY TRANSFER PRICING OFFICER IN ASTRIX LA BORATORIES LIMITED, (A RESIDENT JV COMPANY) ON THE GROUND THAT THE AMO UNTS PAID BY THE SAID RESIDENT COMPANY TO THE ASSESSEE ARE NOT AT ARMS-LENGTH PRICE. 10. THE ISSUE IN THIS GROUND IS WITH REFERENCE TO ADJUSTMENT MADE U/S. 92CA, IN THE CASE OF ASTRIX LABORATORIES LIMITED ON THE PAYMENTS MADE TO ASSESSEE TO AN EXTENT OF RS. 3,31, 40,155/-. IN THE CASE OF JV COMPANY CALLED ASTRIX LABORATORIES, LD. TPO VIDE ORDER DT. 29- 10-2010 HELD THAT EXPENDITURE INCURRED BY ASTRIX TO THE ABOVE EXTENT CANNOT BE ALLOWED AS HE DETERMINED THE ALP TO BE NI L. WHILE ASTRIX LABORATORIES IS AGITATING THE DISALLOWANCE, ASSESSE E SOUGHT RELIEF BY REQUESTING FOR A DEDUCTION OF SAID INCOME AS IT AMO UNTS TO TAXATION OF I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 17 - : THE AMOUNT. THE DRP REJECTED THE CONTENTION STATI NG THAT THE TAXABILITY OR OTHERWISE OF AN ISSUE IN ANOTHER COMPANY WOULD N OT DETERMINE THE BASIS OF TAXATION IN THE CASE OF ASSESSEE. 10.1 THIS ISSUE WAS ALREADY DECIDED AGAINST ASSESS EE IN ITA NO. 66/HYD/2013 VIDE PARA 34 WHICH IS AS UNDER: 34. AFTER CONSIDERING THE RIVAL CONTENTIONS WE ARE NOT SURE HOW THIS GROUND COULD ARISE. AS SEEN FROM THE OBJEC TION BEFORE THE DRP, IT WAS STATED THAT THE ASSESSEE ALONG WITH AST RIX PHARMA CARE HOLDINGS SET-UP A JOINT VENTURE COMPANY CALLED ASTR IX LABORATORIES LTD. FOR THE SAME ASSESSMENT YEAR, THE TPO HELD THA T MANAGEMENT FEES AS WELL AS REIMBURSEMENT OF EXPENSES AGGREGATI NG TO RS.2,17,69,943/- INCURRED/PAID BY ASTRIX TO MATRIX IS TO BE TREATED AS A TRANSFER PRICING ADJUSTMENT AND DETERMINED THE ALP AT NIL. IT WAS FURTHER SUBMITTED THAT ITA.NO.66/HYD/2013 MYLAN LABORATORIES LTD. (FORMERLY MATRIX LABORATORIES LTD .) THE ISSUE IS PENDING IN THE CASE OF ASTRIX BUT SINCE THE AMOUNT OF MANAGEMENT FEE OF RS.1.12 CRORES AND REIMBURSEMENT OF EXPENSES AT RS.1.05 CRORES WERE ACCOUNTED BY THE ASSESSEE, THESE AMOUNT S SHOULD BE EXCLUDED IN THE HANDS OF THE ASSESSEE AS THEY ARE E XCLUDED IN THE HANDS OF ASTRIX. THIS CONTENTION OF THE ASSESSEE CA NNOT BE ACCEPTED ON THE REASON THAT THERE IS NO DISPUTE WITH REFEREN CE TO THE RECEIPT OF THESE AMOUNTS, ONE AS AN INCOME I.E., MANAGEMENT FE E OF RS.1.12 CRORES AND OTHER BEING THE REIMBURSEMENT OF EXPENSE S OF RS.1.05 CRORES. AS FAR AS THE REIMBURSEMENT OF EXPENDITURE IS CONCERNED, WE HAVE ALREADY DIRECTED IN THE EARLIER GROUND TO CONS IDER THE NATURE OF AMOUNT AND EXCLUDE FROM THE COMPUTATION FOR THE PUR POSE OF TRANSFER PRICING ON VERIFICATION. THEREFORE, TO THA T EXTENT, THE CLAIM WILL BE A DOUBLE CLAIM. WITH REFERENCE TO THE MANAG EMENT FEE, WE ARE NOT SURE WHY THERE IS AN ADJUSTMENT IN ANOTHER DOMESTIC TRANSACTION, IF CONTENTIONS OF ASSESSEE ARE CORRECT . IF TRANSACTION IS BETWEEN TWO DOMESTIC COMPANIES TRANSFER PRICING REG ULATIONS DOES NOT APPLY IN THE IMPUGNED YEAR. IF ONE DOMESTIC COM PANY PAID TO ITS AE AND ASSESSEE RECEIVES FROM AE, THE TRANSACTIONS ARE DIFFERENT IN NATURE. WHETHER THE SAME CAN BE ALLOWED IN THE HAND S OF OTHER DOMESTIC COMPANY OR NOT HAS NO BEARING IN THE ASSES SEE'S HANDS AS THE SAID AMOUNT WAS RECEIVED AND WAS ACCEPTED BY TH E ASSESSEE TO BE TAXED. WE APPROVE THE DRP OBSERVATION THAT TAXAB ILITY OR OTHERWISE OF THE AMOUNT IN ONE HAND DOES NOT AFFECT THE ADJUSTMENT IN OTHER HAND UNLESS IT IS PROVIDED SO IN THE ACT. THEREFORE, THIS GROUND OF THE ASSESSEE IS REJECTED. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 18 - : 10.2 RESPECTFULLY FOLLOWING THE SAME, WE REJECT TH E GROUNDS RAISED BY ASSESSEE. GROUND NO. 9 : THE DISPUTE RESOLUTION PANEL ERRED IN FAILING TO DIRECT ASSESSING OFFICER TO ALLOW THE DEDUCTION OF RS. 80,31,79,402/- CLAIMED U/S. 10B OF THE ACT IN RESP ECT OF EXPORT ORIENTED UNDERTAKINGS SITUATED AT PASHAMYLARAM (UN IT-7), AND JEEDIMETLA (UNIT-3.2) 11. THE FACTS LEADING TO THE ABOVE GROUND ARE THAT ASSESSEE- COMPANY IS ENGAGED IN MANUFACTURING AND SALE OF API (BULK DRUGS). THE UNIT SITUATED AT JEEDIMETLA -UNIT 3.2 IS SAID TO BE ELIGIBLE FOR CLAIMING DEDUCTION U/S. 10B OF THE ACT. AO FOLLOWING THE O RDER U/S. 263 DT. 13- 10-2010 FOR AY. 2005-06 HELD THAT UNIT IS NOT NEWLY ESTABLISHED UNDERTAKING AND WAS EXISTING PRIOR TO INCORPORATION OF PROVISIONS OF SECTION 10B AND CONDITIONS ARE NOT FULFILLED, FURTH ER, THE UNIT WAS NOT LOCATED IN EXPORT PROCESS ZONE. EVEN THOUGH HON'BL E AP HIGH COURT DIRECTED THE CIT TO EXAMINE THE APPROVALS GRANTED T O THE ELIGIBLE UNITS OF ASSESSEE IN TERMS OF FOLLOWING REGULATIONS LAID DOW N BY CENTRAL GOVT., THE CIT-4 SEEMS TO HAVE EXAMINED NEW GROUND FOR DEN YING EXEMPTION AND THE SAME SINCE BEEN DISPUTED BY ASSESSEE BEFORE THE HON'BLE HIGH COURT IN W.P.NO. 1398/11. AO FOLLOWING THE ORDERS I N EARLIER YEARS DID NOT ALLOW THE CLAIM OF ASSESSEE U/S. 10B ON THE SAI D UNIT. DRP HOWEVER, NOTICED THAT THE ISSUE IS SUBJECT TO REVISIONAL PRO CEEDINGS BY THE CIT AND THE WP IS PENDING BEFORE THE HON'BLE HIGH COURT OF AP. DRP CONSIDERED IT FIT NOT TO INTERFERE WITH A STAND OF AO, BUT HOW EVER, DIRECTED THE AO TO FOLLOW THE JUDGMENT OF HON'BLE AP HIGH COURT AS AND WHEN THE ISSUE WAS DECIDED. IT FURTHER SUGGESTED THAT THE DEMAND ON A CCOUNT OF DISALLOWANCE OF DEDUCTION BE KEPT IN ABEYANCE TILL THE DECISION OF THE HON'BLE HIGH COURT. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 19 - : 11.1 ASSESSEE HAS RAISED THIS ISSUE BUT SUBMITTED THAT THE MATTER IS SUBJUDICE. SINCE DRP HAS ALREADY GIVEN CLEAR DI RECTIONS ON THE ISSUE, WE UPHOLD THE DIRECTIONS OF DRP WITH AN OBSERVATION THAT AO SHOULD FOLLOW THE SAME AS AND WHEN THE ISSUE IS DECIDED BY THE HON'BLE HIGH COURT. THIS GROUND IS CONSIDERED ALLOWED FOR STATI STICAL PURPOSES. GROUND NO. 10 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ASSESSING OFFICER'S ACTION IN DISALLOWING THE SUPERANNUATION CONTRIBUTION OF RS. 24,90,966/- PAID TO LIC IN RESP ECT OF THE WORKING DIRECTORS OF THE COMPANY. GROUND NO. 11 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ASSESSING OFFICER'S ACTION IN DISALLOWING RS. 36,00,000/- BEING GRATUITY PAID DURING THE YEAR TO MR. N. PRAS AD FORMER EXECUTIVE CHAIRMAN AND MANAGING DIRECTOR OF THE CO MPANY ON THE GROUND THAT IT IS NOT COVERED UNDER THE PAYMEN T OF GRATUITY ACT. 12. BRIEFLY THE FACTS RELATING TO THIS ISSUE ARE, DURING THE ASSESSMENT PROCEEDING, AO NOTICED THAT ASSESSEE HAS CLAIMED DEDUCTION ON ACCOUNT OF CONTRIBUTION MADE TO SUPERA NNUATION FUND AND GRATUITY FUND FOR INCOME SPECIFIED FOR SOM E SPECIFIED DIRECTORS. IN THE NOTE SUBMITTED TO THE RETURN OF INCOME, ASSESSEE STATED THAT THE CONTRIBUTION MADE WAS SUBJ ECTED TO TDS BY INCLUDING THE SAME AS PART OF SALARY OF THE SPECIFIED DIRECTORS. IT WAS SUBMITTED, THE EXPENDITURE INCURR ED BEING WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, IT IS TO BE ALLOWED U/S 37 OF THE ACT. IN SUPPORT OF SUCH CONTE NTION, ASSESSEE RELIED ON THE FOLLOWING DECISIONS: 1. CIT VS. WESTERN INDIA PAPER AND BOARD MILLS PVT. LTD., 189 ITR 309 (BOM.); AND I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 20 - : 2. CIT VS. PUNJAB FINANCIAL CORPORATION LTD., 295 I TR 510 (P&H) 12.1 AO HOWEVER DID NOT ACCEPT THE CONTENTION OF A SSESSEE. HE WAS OF THE VIEW THAT CONTRIBUTION TO SUPERANNUAT ION FUND/ GRATUITY FUND CAN ONLY BE CLAIMED AS DEDUCTION AS P ER THE PROVISIONS OF SECTION 36(1)(IV) AND NOT U/S 37, WHI CH IS A RESIDUARY PROVISION. ACCORDINGLY, HE DISALLOWED THE CLAIM OF DEDUCTION. THOUGH THE ASSESSEE OBJECTED TO SUCH DIS ALLOWANCE BEFORE DRP, BUT, THE DRP ALSO CONFIRMED THE DISALLO WANCE. 12.2 THE LD. AR SUBMITTED BEFORE US THAT THE COMPA NY HAS INCURRED THE EXPENDITURE OF CONTRIBUTION MADE TO FU ND OF ITS DIRECTORS, WHO HOLD MORE THAN 5% SHARE IN THE COMPA NY. WHILE MAKING THE CONTRIBUTION, ASSESSEE HAS ALSO DEDUCTED TAX AT SOURCE AND HAS REMITTED THE SAME TO THE GOVERNMENT. THEREFORE, THE CONTRIBUTION MADE BEING IN THE NATURE OF EXPEND ITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS IS COVERED BY THE PROVISIONS OF SECTION 37 . IT WAS SUBMITTED THAT AS THE ASSESSEE HAS TREATED THE CONT RIBUTION AS PART OF THE SALARY OF THE SPECIFIED DIRECTORS AND H AS ALSO DEDUCTED TAX ON THE SAID AMOUNT, IT CEASES TO BE IN THE NATURE OF CONTRIBUTION TO A SUPERANNUATION/ GRATUITY FUND AND ACCORDINGLY IT IS ALLOWABLE AS EXPENDITURE U/S 37. IN SUPPORT O F SUCH CLAIM, HE RELIED UPON A DECISION OF THE HONBLE GUJARAT HI GH COURT IN CASE OF CIT VS. KARAMCHAND PREMCHAND PVT. LTD. [200 ITR 281]. THE LD. AR SUBMITTED THAT UNLESS THERE IS EXPRESS O R IMPLIED PROHIBITION UNDER OTHER PROVISIONS OF THE ACT, ANY EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS CAN BE CLAIMED AS DEDUCTION U/S 37. FOR THIS PURPOSE, H E RELIED I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 21 - : UPON A DECISION OF THE HONBLE P&H HIGH COURT IN CA SE OF CIT VS. PUNJAB FINANCIAL CORPORATION LTD., [295 ITR 510 ]. 12.3 THE LD. DR RELIED UPON THE DECISION OF THE AO AND DRP. 12.4 WE HAVE CONSIDERED THE SUBMISSIONS OF THE PAR TIES AND PERUSED THE ORDERS OF DEPARTMENTAL AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. FROM THE FACTS AND MATER IALS ON RECORD, IT IS EVIDENT THAT THE INCURRING OF EXPENDI TURE HAS NOT BEEN DOUBTED OR DISPUTED BY AO. THE ONLY REASON FOR WHICH THE AO DISALLOWED THE EXPENDITURE IS SINCE CONTRIBUTION TO SUPERANNUATION / GRATUITY FUND IS COVERED U/S 36(1) (IV) THE SAME CANNOT BE ALLOWED U/S 37. THE DRP HAS CONFIRMED THE DISALLOWANCE SOLELY FOR THE REASON THAT SIMILAR DIS ALLOWANCE WAS UPHELD BY CIT(A) FOR THE AY 2005-06. HOWEVER, ON GO ING THROUGH THE FACTS AND MATERIALS ON RECORD, WE ARE OF THE VI EW THAT THE EXPENDITURE INCURRED IS ALLOWABLE AS DEDUCTION IF N OT U/S 36(1)(IV) BUT U/S 37 OF THE ACT AS IT IS EXCLUSIVEL Y INCURRED FOR THE PURPOSE OF BUSINESS. MOREOVER, IT IS NOT DISPUT ED THAT ASSESSEE HAS DEDUCTED TAX AT THE TIME OF MAKING CON TRIBUTION TO THE FUND AND HAS TREATED IT AS PART OF SALARY OF TH E CONCERNED DIRECTORS. THAT BEING THE CASE, THE EXPENDITURE INC URRED SHOULD BE ALLOWED AS A DEDUCTION. IN THIS REGARD, WE RELY ON CIT VS. PUNJAB FINANCIAL CORPORATION LTD., [295 ITR 510] (S UPRA). SIMILAR VIEW WAS ALSO TAKEN IN LATER YEAR IN ASSE SSEES OWN CASE. ACCORDINGLY, WE DELETE THE ADDITION MADE BY THE AO. GROUND NO. 12 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ASSESSING OFFICER TO ALLOW A SUM OF RS. 5,46,8 5,050/- BEING AMOUNT DEBITED TO PROFIT & LOSS ACCOUNT IN RESPECT OF EMPLOYEE STOCK OPTION SCHEME. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 22 - : 13. THE ASSESSEE FORMULATED EMPLOYEE STOCK OPTION PLAN FOR GRANTING CERTAIN STOCK OPTIONS TO ITS EMPLOYEES/DIR ECTORS. THIS AMOUNT HAS BEEN CHARGED AS A PERSONNEL COST AND HAS BEEN A CCOUNTED IN LINE WITH THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF C HARTERED ACCOUNTANTS OF INDIA. THE ASSESSING OFFICER HELD THAT THE EXPEN DITURE IS NOT REVENUE AND IS CONTINGENT AND NOTIONAL IN NATURE. THIS ISSU E WAS CONSIDERED IN EARLIER YEAR ALSO AND THE DRP FOLLOWING THE SAME RE JECTED THE OBJECTION. IT WAS SUBMITTED THAT THE ISSUE OF ESOP WAS DECIDED BY THE HON'BLE SPECIAL BENCH OF THE ITAT BANGALORE IN THE CASE OF M/S. BIOCON LIMITED VS. DCIT (LTU) BANGALORE VIDE ITA.368 TO 371/BANG/2 010 ETC., DATED 16- 07-2013 AND ACCORDINGLY, REQUESTED FOR RESTORING TH E ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE IN THE LIGHT OF TH E FINDINGS AND DECISION OF THE SPECIAL BENCH OF THE ITAT. IN THE CASE OF DR REDDY LABORATORIES THE ISSUE WAS DECIDED AS UNDER: 9.3 AFTER HEARING THE CASE, THE SPECIAL BENCH OF TH E INCOME-TAX APPELLATE TRIBUNAL BANGALORE IN THE CASE OF BOICON LTD VS DCIT HELD THAT ESOP DISCOUNT (DIFFERENCE BETWEEN MARKET PRICE AND ISSUE PRICE) IS A DEDUCTIBLE EXPENDITURE AT THE T IME OF VESTING OF THE OPTION. AN ADJUSTMENT HAS TO BE MADE IF THE MARKET PRICE IS DIFFERENT AT THE TIME OF EXERCISE OF THE OPTION. I N THAT CASE ALSO ASSESSEE FRAMED AN EMPLOYEE STOCK OPTION PLAN (ESO P) PURSUANT ITA.NO.66/HYD/2013 MYLAN LABORATORIES LTD. (FORMER LY MATRIX LABORATORIES LTD.) TO WHICH IT GRANTED OPTIONS TO ITS EMPLOYEES TO SUBSCRIBE FOR SHARES AT THE FACE VALUE OF RS. 10. AS THE MARKET PRICE OF EACH SHARE WAS RS. 919, THE ASSESSEE CLAI MED THAT IT HAD GIVEN A DISCOUNT OF RS. 909 WHICH WAS ALLOWABLE AS A DEDUCTION AS 'EMPLOYEE COMPENSATION. THOUGH THE OPTIONS VESTED EQUALLY OVER FOUR YEARS, THE ASSESSEE CLAIMED A LARGER AMOUNT I N THE FIRST YEAR THAN WAS AVAILABLE UNDER THE SEBI GUIDELINES. THE AO & CIT(A) REJECTED THE CLAIM ON THE GROUND THAT THERE WAS NO 'EXPENDITURE'. ON APPEAL TO THE TRIBUNAL, THE ISSUE WAS REFERRED TO THE SPECIAL BENCH. HELD BY THE SPECIAL BENCH: (I) THE DIFFERENCE (DISCOUNT) BETWEEN THE MARKET P RICE OF THE SHARES AND THEIR ISSUE PRICE IS 'EXPENDITURE' IN THE HAND S OF THE ASSESSEE BECAUSE IT IS A SUBSTITUTE TO GIVING DIRECT INCENT IVE IN CASH FOR AVAILING THE SERVICES OF THE EMPLOYEES. THERE IS N O DIFFERENCE I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 23 - : BETWEEN A CASE WHERE THE COMPANY ISSUES SHARES TO THE PUBLIC AT MARKET PRICE AND PAYS A PART OF THE PREMIUM TO THE EMPLOYEES FOR THEIR SERVICES AND ANOTHER WHERE THE SHARES ARE DI RECTLY ISSUED TO EMPLOYEES AT A REDUCED RATE. IN BOTH SITUATIONS, T HE EMPLOYEES STAND COMPENSATED FOR THEIR EFFORT. BY UNDERTAKING TO ISSUE SHARES AT A DISCOUNT, THE COMPANY DOES NOT PAY ANYTHING T O ITS EMPLOYEES BUT INCURS THE OBLIGATION OF ISSUING SHARES AT A D ISCOUNTED PRICE AT A FUTURE DATE. THIS IS NOTHING BUT 'EXPENDITURE' U/S 37(1); (II) THE LIABILITY CANNOT BE REGARDED AS BEING 'CO NTINGENT' IN NATURE BECAUSE THE RENDERING OF SERVICE FOR ONE YEAR IS S INE QUA NON FOR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE S CHEME. ONCE THE SERVICE IS RENDERED FOR ONE YEAR, IT BECOMES OBLIG ATORY ON THE PART OF THE COMPANY TO HONOR ITS COMMITMENT OF ALLOWING TH E VESTING OF 25% OF THE OPTION. THE LIABILITY IS INCURRED AT THE EN D OF THE FIRST YEAR THOUGH IT IS DISCHARGED AT THE END OF THE FOURTH Y EAR WHEN THE OPTIONS ARE EXERCISED BY THE EMPLOYEES. THE FACT T HAT SOME OPTIONS ITA.NO.66/HYD/2013 MYLAN LABORATORIES LTD. (FORMER LY MATRIX LABORATORIES LTD.) MAY LAPSE DUE TO NON-EXERCISE/ RESIGNATION ETC DOES NOT MAKE THE ENTIRE LIABILITY CONTINGENT; (III) HOWEVER, THE OBLIGATION TO ISSUE SHARES AT A DISCOUNTED PREMIUM DOES NOT ARISE AT THE STAGE THE OPTIONS ARE GRANTE D. IT ARISES AT THE STAGE THAT THE OPTIONS ARE VESTED IN THE EMPLOYEES . THE AMOUNT DEDUCTIBLE HAS TO BE DETERMINED BASED ON THE PERIO D AND PERCENTAGE OF VESTING UNDER THE ESOP SCHEME; (IV) THERE IS LIKELY TO BE A DIFFERENCE IN THE QUA NTUM OF DISCOUNT AT THE STAGE OF VESTING OF THE STOCK OPTIONS (WHEN TH E DEDUCTION IS ALLOWABLE) AND AT THE STAGE OF EXERCISE OF THE OPT IONS. THE DIFFERENCE HAS TO BE ADJUSTED BY MAKING SUITABLE NORTHWARDS O R SOUTHWARDS ADJUSTMENT AT THE TIME OF EXERCISE OF THE OPTION D EPENDING ON THE MARKET PRICE OF THE SHARES THEN PREVAILING. THE FA CT THAT THE SEBI GUIDELINES DO NOT PROVIDE FOR THE ADJUSTMENT OF DI SCOUNT AT THE TIME OF EXERCISE OF OPTIONS IS IRRELEVANT BECAUSE ACCOU NTING PRINCIPLES CANNOT AFFECT THE POSITION UNDER THE INCOME-TAX AC T. (V) ON FACTS, THE ASSESSEE'S METHOD OF CLAIMING A LARGER DEDUCTION IN THE FIRST YEAR DEFIES LOGIC. AS THE OPTIONS VEST E QUALLY OVER A PERIOD OF FOUR YEARS, THE DEDUCTION OUGHT TO BE CLAIMED I N FOUR EQUAL INSTALLMENTS ON A STRAIGHT LINE BASIS. THE DECISION IN THE CASE OF RANBAXY LABORATORIES 12 4 TTJ 771 (DELHI) WAS REVERSED AND S.S.I. LTD. V. DCIT 85 TT J 1049 (CHENNAI) APPROVED, PVP VENTURES 211 TAXMAN 554 REFERRED. TH E DECISION OF I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 24 - : SPRAY ENGINEERING DEVICES LTD 53 SOT 70 (CHD) WAS ALSO APPROVED. THE ABOVE DECISIONS REFERRED BY SPECIAL BENCH WAS RELIED UPON BY ASSESSEE, THEREFORE THERE IS NO NEED TO REFER THEM AGAIN. AO IS DIRECTED TO WORK OUT THE DEDUCTION KEEPING IN MIND THE PRINCIPLE LAID DOWN BY THE SPECIAL BENCH IN THE ABOVE REFERRED CA SE, AFTER GIVING AN OPPORTUNITY TO ASSESSEE. GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 13.1 THEREFORE, CONSIDERING THE REQUEST, WE RESTOR E THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE CL AIM AFRESH IN THE LIGHT OF DECISION OF THE HON'BLE SPECIAL BENCH OF THE ITAT B ANGALORE IN THE CASE OF M/S. BIOCON (SUPRA). GROUND IS ALLOWED FOR STATI STICAL PURPOSES. GROUND NO. 13 : THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ASSESSING OFFICER'S ORDER IN REJECTING THE BAS IS FOR APPORTIONMENT OF COMMON CORPORATE OVERHEAD EXPENSE TO ALL THE UNITS OF THE COMPANY INCLUDING 100% EXPORT ORIENTE D UNDERTAKINGS ELIGIBLE FOR DEDUCTION U/S. 10B OF TH E ACT AND IN THE PROCESS REDUCING THE BENEFIT U/S. 10B BY RS. 1,32, 86,319/- FOR UNIT 3.2 AND RS. 2,17,54,027/- FOR UNIT 7. 14. THIS GROUND IS ON THE QUANTIFICATION OF AMOUNT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B AND IS LINKED TO GROUND NO.9 WHERE ELIGIBILITY ITSELF WAS DISPUTED AND THE MATTER IS S UBJUDICE. HOWEVER, ASSESSING OFFICER ALSO QUANTIFIED THE DEDUCTION TO BE ALLOWED IN CASE THE UNIT WAS CONSIDERED AS ELIGIBLE FOR DEDUCTION UNDER SECTION 10B. WHILE QUANTIFYING THE AMOUNT THE ASSESSING OFFICER ALLOCA TED THE CORPORATE OVER-HEADS AT HIGHER AMOUNT AS AGAINST AMOUNT APPOR TIONED BY THE ASSESSEE AND THEREBY, REDUCING THE PROFIT ELIGIBLE FOR BENEFIT. THE ASSESSEE IS CONTESTING THE ALLOCATION. SINCE SIMILA R ISSUE WAS PENDING IN THE EARLIER YEAR, THE LEARNED DRP DID NOT INTERVENE WITH THE ISSUE. 14.1 IT WAS SUBMITTED THAT ASSESSEE HAS IDENTIFIED THE CORPORATE OVERHEADS ON THE BASIS OF ACCEPTED COST ACCOUNTING PRINCIPLES AND ALSO GUIDANCE NOTE WITH REFERENCE TO COMPANY LAW. IT WAS SUBMITTED THAT THE I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 25 - : INDIRECT MANUFACTURING EXPENSES ARE DISTRIBUTED OVE R OPERATING DIVISIONS ON THE BASIS OF GROSS MATERIAL COST AND PERSONAL CO STS ARE DISTRIBUTED OVER OPERATING DIVISIONS ON THE BASIS OF STAFF STRE NGTH IN EACH OPERATING DIVISION AND SELLING ADMINISTRATIVE COST DISTRIBUTE D OVER OPERATING DIVISIONS ON THE BASIS OF SALES AFFECTED. IT WAS CO NTENDED THAT THIS ALLOCATION IS CONSISTENT WITH THE ASSESSEE'S ALLOCA TION IN EARLIER YEARS AND ALSO IN TUNE WITH THE PRINCIPLES LAID DOWN UNDER TH E COST ACCOUNTING PRINCIPLES AS WELL AS GUIDANCE NOTE ISSUED BY THE M INISTRY OF COMPANY AFFAIRS IN THE AREA OF INDIRECT TAX. THE LEARNED CO UNSEL RELIED ON THE DECISION OF ITA.NO.66/HYD/2013 ASSESSES OWN CASE AN D HON'BLE DELHI HIGH COURT IN THE CASE OF S.T. MICRO ELECTRONICS PV T. LTD. IN ITA.NO.928/2010 WHEREIN THE HON'BLE HIGH COURT UPHE LD THE ITAT ORDER AND IN TURN OF THE LD. CIT(A) ORDER WHEREIN THE BIF URCATION OF COMMON EXPENSES ON THE BASIS OF RATIO OF EMPLOYEES HEAD CO UNT WAS HELD REASONABLE, CONSERVATIVE AND JUSTIFIED. IT WAS THE CONTENTION THAT THE RATIONALE ADOPTED BY THE ASSESSEE SHOULD BE ACCEPTE D. 14.2 THIS ISSUE WAS CONSIDERED IN AY 2008-09 AS UN DER. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACT S. EVEN THOUGH THE ISSUE WAS PENDING IN EARLIER YEAR, WE ARE OF TH E OPINION THAT ISSUE CAN BE DECIDED INDEPENDENTLY IN THIS YEAR. AF TER CONSIDERING THE FACTS AS STATED IN THE OBJECTIONS BEFORE THE DR P AND ALSO BEFORE US, WE ARE OF THE OPINION THAT ASSESSEE HAS ALLOCAT ED THE CORPORATE OVERHEADS ON A RATIONAL BASIS BASED ON THE MATERIAL COST OF PURCHASE AND NUMBER OF PEOPLE WORKED FOR THE UNIT AND ALSO O N THE BASIS OF HEAD ACCOUNT WHICH IS REASONABLE. ADOPTING SALES TU RNOVER AS THE BASIS MAY RESULT IN SKEWED ALLOCATION. FOR EXAMPLE, IF A PARTICULAR UNIT IS PRODUCING ONLY HIGH COST/ HIGH PRICE PRODUC T, THE EFFORT AND SERVICE COST FOR THAT UNIT WILL BE LESS WHEREAS, TH E PROFIT MARGIN WILL BE MORE. IF THE UNIT IS NOT PRODUCING MUCH IN THE Y EAR AND HAS LESSER SALES, ALLOCATION OF AMOUNT ON THE BASIS OF TURNOVE R MAY RESULT IN UNDER ALLOCATION OF SERVICE COST. EVEN IN THE CASE WHERE THE UNIT STARTS PRODUCTION ONLY AT THE FAG END OF THE YEAR C OST OF WORKING ON THAT UNIT THROUGHOUT THE YEAR FOR ESTABLISHING / ST ARTING PRODUCTION MAY NOT RESULT IN ALLOCATION OF ACTUAL EXPENDITURE IF TURN OVER IS I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 26 - : CONSIDERED. IN VIEW OF THIS, SINCE ASSESSING OFFICE R HAS NOT GIVEN ANY RATIONALE IN ADOPTING THE TURNOVER AS THE BASIS, IG NORING THE ASSESSEE'S METHOD, WE ARE OF THE OPINION THAT ALLOC ATION OF EXPENDITURE AS WAS DONE BY THE ITA.NO.66/HYD/2013 M YLAN LABORATORIES LTD. (FORMERLY MATRIX LABORATORIES LTD .) ASSESSEE IS MORE RATIONALE AND IS IN TUNE WITH THE PRINCIPLES L AID DOWN BY THE INSTITUTE OF COST ACCOUNTANTS AND ALSO FOR THE PURP OSE OF COMPANY LAW. THEREFORE, CONSIDERING THE DETAILED OBJECTIONS RAISED BY THE ASSESSEE AS PLACED IN THE OBJECTIONS TO THE DRP, WE ARE OF THE OPINION THAT THE ALLOCATION BY THE ASSESSEE IS TO BE UPHELD . ASSESSING OFFICER IS DIRECTED TO ACCEPT THE ASSESSEE'S ALLOCATION OF CORPORATE OVERHEADS. ACCORDINGLY, GROUND IS ALLOWED. RESPECTFULLY FOLLOWING THE SAME WE DIRECT THE AO TO ACCEPT ASSESSEE WORKING. GROUND IS ALLOWED. GROUND NO. 14 : THE DISPUTE RESOLUTION PANEL ERRED IN NOT DIRECTI NG THE ASSESSING OFFICER TO ALLOW WEIGHTED DEDUCTION A T 150% OF RS. 2,26,00,589/- U/S. 35(2AB) OF THE ACT IN RESPECT OF CLINICAL DRUG TRIALS CARRIED OUT BY IT ON THE GROUND THAT IT IS I NCURRED OUTSIDE THE IN-HOUSE R&D. 15. THIS GROUND IS RELATING TO ASSESSEES CLAIM FO R WEIGHTED DEDUCTION U/S. 35(2AB) OF 150% OF AN AMOUNT OF RS. 2,26,00,589/-. LD. COUNSEL FOR ASSESSEE REFERRED TO FORM 3CL TO POINT OUT THAT SUCH EXPENDITURE WAS ELIGIBLE FOR WEIGHTED DEDUCTION. H E HAS CONTENDED THAT ASSESSEE IS THEREFORE IS CLAIMING WEIGHTED DEDUCTIO N ONLY TO THE EXTENT OF CERTIFICATION IN RESPECT OF CLINICAL TRIALS CARRIED OUT BY IT. HE REFERRED TO THE ORDER OF THE CO-ORDINATE BENCH IN ASSESSEES OW N CASE IN AY. 2009- 10 IN ITA NO. 611/HYD/2014 DT. 10-12-2014 TO SUBMIT THAT THE MATTER WAS REFERRED TO THE AO FOR NECESSARY EXAMINATION. THE ORDER OF CO- ORDINATE BENCH VIDE PARA 12 IS AS UNDER: 12. WHEN THE LEARNED COUNSEL FOR THE ASSESSEE WAS REQUIRED BY THE BENCH TO CLARIFY AS TO HOW THE CLAI M OF THE ASSESSEE IS COVERED BY THE ABOVE EXPLANATION, HE HAS CONTEND ED THAT THE EXPENDITURE IN QUESTION IS INCURRED BY THE ASSESSEE FOR FILING I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 27 - : APPLICATION FOR PATENT RIGHTS UNDER PATENTS ACT, 19 70. HE HAS ALSO SUBMITTED THAT THE ASSESSEE IS IN A POSITION TO SUP PORT AND SUBSTANTIATE ITS CLAIM BY FILING RELEVANT DOCUMENTA RY EVIDENCE AND HAS URGED THAT AN OPPORTUNITY MAY BE GIVEN TO THE A SSESSEE FOR THIS PURPOSE BY SENDING THE MATTER TO THE ASSESSING OFFI CER. SINCE THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOT RAISED ANY OBJECTION IN THIS REGARD, WE RESTORE THIS ISSUE TO THE FILE O F THE ASSESSING OFFICER WITH A DIRECTION TO EXAMINE THE ASSESSEES CLAIM FOR WEIGHTED DEDUCTION UNDER S.35(2AB) IN RESPECT OF EX PENDITURE INCURRED FOR REGISTERING PATENTS OUTSIDE INDIA ONLY TO THE EXTENT OF RS.73.67 LAKHS AFRESH, AFTER GIVING ASSESSEE PROPER AND SUFFICIENT OPPORTUNITY TO ESTABLISH ITS CASE IN ACCORDANCE WIT H EXPLANATION TO S.37(2AB). GROUND NO.3 IS ACCORDINGLY PARTLY ALLOWE D FOR STATISTICAL PURPOSES. 15.1 RESPECTFULLY FOLLOWING THE SAME, WE RESTORE T HE ISSUE TO THE FILE OF AO WITH THE SAME DIRECTION TO EXAMINE ASSES SEES CLAIM IN RESPECT OF EXPENDITURE INCURRED FOR CLINICAL TRIALS OUTSIDE INDIA AFTER GIVING ASSESSEE PROPER AND SUFFICIENT OPPORTUNITY TO ESTAB LISH THE CASE IN REGARD TO EXPLANATION TO SECTION 37(2AB). THIS GRO UND IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. GROUND NO. 15: THE DISPUTE RESOLUTION PANEL ERRED IN NOT DIRECTIN G THE ASSESSING OFFICER TO DELETE RS. 11,17,244/- BEI NG EXPENDITURE ATTRIBUTED UNDER RULE 8D OF INCOME TAX RULES, 1962 FOR EARNING EXEMPT DIVIDEND OF RS. 24,26,877/- FROM MUTUAL FUND S. 16. INVOKING PROVISIONS OF SECTION 14A R.W. RULE 8 D, AO DISALLOWED AN AMOUNT OF RS. 11,17,244/- AS EXPENDIT URE FOR EARNING AN AMOUNT OF RS. 24,26,877/- CLAIMED AS EXEMPT BEING D ERIVED FROM MUTUAL FUNDS. IT WAS THE ASSESSEES CONTENTION THA T IT HAS NOT INCURRED ANY DIRECT OR INDIRECT EXPENDITURE AND FOLLOWING TH E PRINCIPLES LAID DOWN BY HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WAL FORT SHARE AND STOCK BROKERS P. LTD., [326 ITR 1], THE EXPENDITURE SHOULD HAVE PROXIMATE CAUSE/CONNECTION WITH EARNING OF EXEMPT I NCOME. IT ALSO I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 28 - : FURTHER CONTENDED THAT NO BORROWED FUNDS WERE USED IN INVESTING IN MUTUAL FUNDS. AO AND DRP DID NOT ACCEPT THE CONTEN TIONS. 16.1 CONSIDERING THE RIVAL CONTENTIONS, WE ARE OF THE OPINION THAT THE ACTION OF AO CANNOT BE UPHELD. AS SEEN FROM TH E ORDER, HE INVOKED RULE 8D WHICH WAS NOT APPLICABLE FOR THE IMPUGNED A SSESSMENT YEAR. HOWEVER, DRP CONFIRMS THE DISALLOWANCE MADE UNDER R ULE 8D AS REASONABLE AMOUNT. ITAT IS HOLDING AN AMOUNT OF 2% TO 10% ON THE EXEMPT INCOME AS REASONABLE AMOUNT IN THE YEAR PR IOR TO APPLICATION OF RULE 8D. ACCORDINGLY, WE ARE OF THE OPINION THAT A N AMOUNT OF RS. 1,00,000/- CAN BE CONSIDERED AS A REASONABLE AMOUNT INCURRED FOR EARNING THE EXEMPT INCOME, CONSIDERING THAT ASSESSEE HAS MA DE INVESTMENTS AND REQUIRE PERSONNEL TO MONITOR THE SAME. FOR THE SAME. AO IS DIRECTED TO DISALLOW AN AMOUNT OF RS. 1,00,00 0/- UNDER THE PROVISIONS OF SECTION 14A. GROUND IS PARTLY ALLOWE D. GROUND NO. 16: THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ASSESSING OFFICERS ORDER IN NOT ALLOWING A) DEPRECIATION @ 12.5% BEING 50% OF NORMAL DEPRECIATI ON AMOUNTING TO RS. 5,00,000/- IN RESPECT OF NON-COMPE TE FEE OF RS. 40,00,000/- PAID IN RELATION TO CONCORD BIOTECH LIM ITED DURING THE YEAR & B) DEPRECIATION @ 25% AMOUNTING TO RS. 11,86,523/- ON BROUGHT FORWARD WRITTEN DOWN VALUE OF RS. 47,46,094/- IN RE SPECT OF NON- COMPETE FEE OF RS. 200 LAKHS PAID TO MEDISPAN LTD., BY MEDICORP TECHNOLOGIES LTD., (AMALGAMATING COMPANY) IN THE PR EVIOUS YEAR RELEVANT TO ASST. YEAR 2002-03. 17. THIS GROUND IS AGAINST THE CLAIM OF DEPRECIATI ON ON DIFFERENT AMOUNTS PAID BY THE ASSESSEE. THE SUB GROUND(B) IS WITH REFERENCE TO THE CLAIM OF DEPRECIATION OF RS. 11,86,523/- ON BROUGHT FORWARD WRITTEN DOWN VALUE OF RS. 47,46,094/- IN RESPECT OF NON-COMPETE FEE PAID TO I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 29 - : M/S. MEDISPAN LTD BY MEDICORP TECHNOLGOIES LTD. IN PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2002-2003. CONSEQUENT T O MERGER OF THE MEDICORP TECHNOLOGIES LTD. WITH THE ASSESSEE-COMPAN Y, THE DEPRECIATION WAS CLAIMED ON THE WRITTEN DOWN VALUE. EVEN THOUGH THE ASSESSEE'S CLAIM WAS CRYSTALLIZED BY THE ORDERS OF THE ITAT IN ITA.NO.201/2004- 2005 DATED 25-06-2007, WHEREIN THE PAYMENT OF FEE W AS CONSIDERED ELIGIBLE FOR DEPRECIATION, THE ASSESSING OFFICER DI D NOT GRANT THE DEPRECIATION ON THE REASON THAT REFERENCE APPLICATI ON IS PENDING BEFORE THE HON'BLE HIGH COURT AND THE ISSUE HAS NOT BEEN F INALIZED. THIS CANNOT BE A REASON FOR DENYING THE DEPRECIATION CLAIMED. S INCE, ITAT HAS ALREADY ORDERED THE DEPRECIATION TO BE ALLOWED IN A SSESSMENT YEAR 2002- 2003, CONSEQUENTLY, DEPRECIATION HAS TO BE ALLOWED ON WDV IN THIS YEAR. HE IS EMPOWERED TO TAKE RECTIFICATION PROCEEDINGS I N CASE THAT ORDER WAS NOT UPHELD BY THE HON'BLE HIGH COURT. IN VIEW OF TH IS, TO THAT EXTENT OF CLAIM OF DEPRECIATION AMOUNTING TO RS. 11,86,523/- ON BROUGHT FORWARD WRITTEN DOWN VALUE, ASSESSING OFFICER IS DIRECTED T O ALLOW THE DEPRECIATION AFTER VERIFYING THE WDV FIGURES. PART OF THE GROUND (B) IS ACCORDINGLY ALLOWED. 17.1 THE NEXT CLAIM I.E., GROUND NO.16(A) IS WITH REFERENCE TO CLAIM OF DEPRECIATION AT 12.5% BEING 50% OF NORMAL DEPRECIATION AMOUNTING TO AMOUNTING TO RS. 5,00,000/- IN RESPECT OF NON-COMPETE FEE OF RS. 40 LAKHS PAID IN RELATION TO CONCORD BIOTECH LIMITED DURING THE PREVIOUS YEAR RELEVANT TO FINANCIAL YEAR 2006-2007. IT WAS STATED THAT THE SAID AMOUNT OF RS. 40 LAKHS IS CAPITALIZED AS I NTANGIBLE ASSET IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE DURING THE YEAR A ND DEPRECIATION AT 25% IS CLAIMED U/S. 32 . AS PER AGREEMENT WITH MR. SUDHIR NAIDU, THE PAYMENT WAS IN AY. 2006-07. WITHOUT EXAMINING THE YEAR OF PAYMENT OR THE YEAR OF CAPITALIZATION, THE ASSESSING OFFICER A LSO RECORDS THE SAME IN HIS ORDER WHEREIN IT WAS STATED THAT ASSESSEE ENTER ED INTO AN INVESTMENT AGREEMENT WITH CONCORD BIOTECH LIMITED ON 10-02-200 6 AND I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 30 - : ACCORDINGLY, AS PER THE TERMS OF AGREEMENT, IT PAID AN AMOUNT OF RS. 40 LAKHS TOWARDS NON-COMPETE FEE TO ONE OF THE PROMOTE RS I.E., MR. SUDHIR VAID IN THE PRESENT ASSESSMENT YEAR I.E., 2007-08. 17.2 BEFORE THE ASSESSING OFFICER AND DRP, THE ASS ESSEE RELIED ON THE DECISION OF THE CIT VS. MEDICORP TECHNOLOGIES I NDIA LTD. WHICH WAS UPHELD BY THE ITAT, CHENNAI BENCH (SUPRA). THE LEAR NED ASSESSING OFFICER RELYING ON THE DECISIONS OF THE ITAT, CHENN AI BENCH IN THE CASE OF AB MOURYA PVT. LTD. IN ITA.NO.1293/2006 DATED 23-11 -2007 AND GURUJI ENTERTAINMENT NET WORK LTD. REPORTED IN 14 SOT 556 (DEL.); M.M. NISSIM & CO. VS. ACIT (2007) 18 SOT 274 (MUM.) AND MOTOR S URVEYORS PVT. LTD. VS. ITO 32 SOT 268 (CHENNAI) REJECTED THE CLAIM OF THE ASSESSEE AND DRP UPHELD THE ORDER OF THE AO. 17.3 LD. COUNSEL SUBMITTED THAT THE ISSUE IS DECID ED BY THE COORDINATE BENCH IN ASSESSEE'S OWN CASE, ACCORDINGL Y. THIS ISSUE WAS IN LATER YEAR IN ITA NO. 66/HYD/2013 (SUPRA) WHEREIN T HE CLAIM WAS EXAMINED AS IF THAT WAS THE FIRST YEAR OF CLAIM AND HELD AGAINST. THE ORDER IS AS UNDER: AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT THE CASES AGAINST THE ASSESSEE ARE MORE IN NUM BER AND THERE IS A CONSISTENT VIEW OF THE ITAT IN NOT ALLOWING TH E DEPRECIATION ON NON-COMPETE FEE. THIS ISSUE WHICH WAS ORIGINALLY CO NSIDERED IN THE CASE OF TECUMSE INDIA PVT. LTD. ADDL. CIT 5 ITR TRI B 50 (DEL.) WHEREIN THE PROPOSITION CANVASSED BY THE ASSESSEE T HAT NON- COMPETE FEE IS REVENUE EXPENDITURE WAS REJECTED AND HELD THAT NON- COMPETE FEE FOR ACQUISITION OF BUSINESS HAS BEEN HE LD AS CAPITAL EXPENDITURE AS THE SAME WAS INCURRED FOR THE INITIA L OUTLAY OF THE BUSINESS. FOLLOWING THE ABOVE PRINCIPLES AND THE DE CISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF HIDUSTAN CO CO BEVERAGES PVT. LTD. 331 ITR 192 (DEL), THE ITAT, CHENNAI BENC H 'A' IN ARKEMA PEROXIDES INDIA (P) LTD. VS. ACIT VIDE ITA.NO.2212/ MAD/2006 DATED 13-01-2012 HAS HELD, AS UNDER : I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 31 - : 'FROM THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. HINDUSTAN COCO COLA BEVERAGES (P.) LTD. [ 2011] 331 ITR 192 (DELHI) IT IS CLEAR THAT 'BUSINESS OR COMMERCIA L RIGHTS OF SIMILAR NATURE' ARE NOT MANUFACTURED OR PRODUCED OVER-NIGHT , BUT ARE BROUGHT INTO EXISTENCE BY EXPERIENCE AND REPUTATION . THE NON- COMPETE FEE IS OUTCOME OF AN AGREEMENT ENTERED INTO BETWEEN TWO PARTIES. IT DOES NOT REPRESENT ANY INTANGIBLE ASSET , SUCH AS, KNOW- HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRA NCHISES, ETC. THEREFORE, IN VIEW OF DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES P. LTD. NON-C OMPETE AGREEMENT WOULD NOT CREATE AN ASSET OF INTANGIBLE N ATURE ELIGIBLE FOR DEPRECIATION UNDER SECTION 32(1)(II) OF THE ACT. TH E DECISION OF THE TRIBUNAL, CHENNAI BENCH IN THE CASE OF ITO (OSD) V. MEDICORP TECHNOLOGIES INDIA LTD.[2010] 2 ITR (TRIB) 367 (CHE NNAI) WAS RENDERED PRIOR TO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES P. LTD. HENCE IT RENDERS NO HELP TO THE ASSESSEE. THEREFORE, WE ARE NOT IN AGRE EMENT WITH THE ARGUMENTS OF THE ASSESSEE THAT NON-COMPETE FEE IS A N INTANGIBLE ASSET TO WHICH PROVISIONS OF SECTION 32(1)(II) OF T HE ACT ARE APPLICABLE. THEREFORE, IN OUR CONSIDERED OPINION, T HE DEPRECIATION CANNOT BE ALLOWED ON AMOUNT OF NON-COMPETE FEE. AS CAN BE SEEN FROM THE ABOVE, THE TRIBUNAL HAS DISTINGUISHED THE DECISION IN THE CASE OF MEDICORP RELIED BY THE ASSESSEE ITSELF, WHICH IS REPORTED AT (2010) 2 ITR (TRIB.) 367 (CHENNAI). IN VIEW OF THIS, WE ARE OF THE OPINION T HAT THE DEPRECIATION CANNOT BE ALLOWED ON AN AMOUNT OF NON-COMPETE FEE, WHICH WAS IN FACT PAID TO THE MANAGING DIRECTOR OF THE COMPANY F OR NOT TAKING ANY EMPLOYMENT. THIS CANNOT BE CONSIDERED UNDER SEC TION 32(1) AS AN INTANGIBLE ASSET. 17.4 ACCORDINGLY, THE CLAIM OF DEPRECIATION ON THE ITEM (A) IS NOT ALLOWED AND TO THAT EXTENT GROUND IS REJECTED. IN THE RESULT, GROUND IS PARTLY ALLOWED. GROUND NO. 17: THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER BY HOLDING THAT THE DIFFERENCE OF RS. 8,55,50,902/- BETWEEN THE MARKET VALUE FOR THE PURPOSES OF LEVY OF STAMP DUTY WHILE REGISTERING THE SALE DEED ON 24.08.2006 AND ACTUAL SALE CONSIDERATION PER SALE AGREEMENTS D ATED I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 32 - : 30.09.2005 FOR SALE OF PETBASHEERBAD LAND AS SHORT TERM CAPITAL GAIN BY IGNORING THE FACT THAT A) THE MARKET VALUE FOR LEVY OF STAMP DUTY ON THE DATE OF TRANSFER ON 30.09.2005 (BEING THE DATE OF HANDING OVER POSSE SSION OF THE PROPERTY) IS LOWER THAN SALE CONSIDERATION, AND B) PROFIT OF RS. 1,52,66,486/- (SALE PRICE RS. 7,77 ,99,098/-, LESS COST RS. 6,25,32,612) FROM SALE OF THE SAID LAND WAS ALR EADY OFFERED AS SHORT TERM CAPITAL GAIN IN ASSESSMENT YEAR 2006-07 BASED ON THE DATE OF HANDING OVER OF THE POSSESSION OF THE PROPE RTY TO THE BUYER. GROUND NO. 18: WITHOUT PREJUDICE TO GROUND 17, THE DISPUTE RESOLUTION PANEL ERRED IN NOT DIRECTING THE ASSESSI NG OFFICER TO TREAT THE GAIN AS LONG TERM CAPITAL GAIN. 18. BRIEF FACTS RELATING TO THIS GROUND ARE THAT A SSESSEE HAS SOLD A PROPERTY BY ENTERING INTO AGREEMENT OF SALE WITH THREE PARTIES IN JUNE/SEPT. 2005 RELEVANT FOR THE AY.2006-07. THE C OMPANY OFFERED CAPITAL GAINS AS SHORT TERM CAPITAL GAIN OF RS. 1,5 2,66,486/- (SALE PRICE COST PRICE) AS THE POSSESSION WAS HANDEDOVER. TH E PROPERTY HOWEVER, WAS REGISTERED ON 24-08-2006 RELEVANT FOR IMPUGNED ASSESSMENT YEAR, AO INVOKING THE PROVISIONS OF SECTION 50C CONSIDERE D THE REGISTRATION VALUE AND REWORKED OUT THE CAPITAL GAINS BY BRING T HE DIFFERENCE TO CAPITAL GAINS AT RS. 8,55,50,992/-. THE DRP DID NO T INTERFERE AS THE PROCEEDINGS FOR AY. 2006-07 WERE REOPENED AND ARE P ENDING. 18.1 LD. COUNSEL PLACED ON RECORD THE ORDER U/S. 1 43(3) R.W.S. 147 IN AY. 2006-07 WHERE IN AO DID NOT MAKE ANY VARIATION EXCEPT STATING THAT THE ISSUE WAS DEALT WITH IN AY. 2007-08. HE PLACED HIS ARGUMENTS AS CONTENDED BEFORE DRP/AO. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 33 - : 18.2 AFTER CONSIDERING THE RIVAL CONTENTIONS AND P ERUSING THE ORDERS ON RECORD. WE CANNOT APPROVE THE ACTION OF AO IN BRINGING TO TAX IN TWO YEARS FOR THE FOLLOWING REASONS: (A) ASSESSING OFFICER HAS NOT DISPUTED THE FACT THA T PROPERTY WAS HANDED OVER IN SEPT. 2005. BY VIRTUE OF THE DECISION OF JURISDICTIONAL HIGH COURT, IN THE CASE OF POTLA NAGESWARA RAO VS. DCIT [365 ITR 249 (AP)], THE CAPITAL GAIN IS AT TRACTED THE MOMENT THE PROPERTY WAS HANDED OVER, THE SALE CONSI DERATION WAS ALSO RECEIVED. SO THE CAPITAL GAIN IS CORRECTLY OF FERED BY ASSESSEE IN AY. 2006-07 ITSELF. (B) PROVISIONS OF SECTION 50C CAN BE INVOKED BUT WH AT AO DID WAS TO BRINGING TO TAX ONLY THE DIFFERENCE IN S RO PRICE AND SALE PRICE TO TAX. HE IS BOUND TO CALCULATE THE CA PITAL GAINS. HE DID NOT BRING THE CAPITAL GAIN OFFERED IN AY. 2006- 07 TO THIS YEAR. THERE CANNOT BE COMPUTATION OF CAPITAL GAINS IN TWO ASSESSMENT YEARS ON SALE OF ONE PROPERTY. THE ACTION OF AO IS NOT ACCORDING TO THE PROVISIONS OF THE ACT. (C) AO SHOULD HAVE CONSIDERED THAT THE GAINS BECOME LONG TERM CAPITAL GAIN AS THE SAME WAS PURCHASED IN APRIL, 2003 AND ACCORDING TO AO SOLD ON 24-08-2006. BUT THE SA ME WAS BROUGHT TO TAX AS SHORT TERM CAPITAL GAIN. EVEN TH E DRP FAILED TO CONSIDER THE SAME WHEN ASSESSEE POINTED OUT. NO DIR ECTION WAS GIVEN TO AO TO TREAT IT AS LONG TERM CAPITAL GAIN. (D) DRP DID NOT INTERFERE WITH THE ORDER ON THE REA SON THAT PROCEEDINGS FOR AY. 2006-07 WERE PENDING. THE ORDER OF AO I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 34 - : IN THE REASSESSMENT PROCEEDINGS INDICATE THAT AO DI D NOT REDUCE THE CAPITAL GAINS OFFERED IN THIS YEAR. THIS INDIC ATES THAT THE ACTION OF ASSESSEE IN OFFERING SHORT TERM CAPITAL G AIN WAS ACCEPTED. (E) EVEN THOUGH, THE PROVISIONS OF SECTION 50C WAS AMENDED TO CLARIFY THAT THE SRO VALUE AS ON DATE OF AGREEMENT OF SALE HAS TO BE CONSIDERED THAT NEED NOT BE CONSIDER ED HERE AS AO ON FACTS ACCEPTED CAPITAL GAIN IN AY. 2006-07 ITSEL F. 18.3 FOR THE REASONS STATED ABOVE, THE ACTION OF A O IN BRINGING TO TAX THE DIFFERENCE ALONE CANNOT BE APPROVED. ACCOR DINGLY, THE ADDITION MADE IS SET ASIDE. GROUNDS ARE ALLOWED. GROUND NO. 19: THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ASSESSING OFFICERS ORDER IN RESTRICTING THE DEDUCTION UNDER CLAUSE (II) OF EXPLANATION TO SECTION 115JB OF THE ACT IN RESPECT OF EXPORT PROFITS FROM THE 100% EXPORT ORIENTED UNDERT AKING ELIGIBLE FOR DEDUCTION UNDER SEC. 10B OF THE ACT, TO THE AMOUNT ARRIVED AT UNDER NORMAL COMPUTATION INSTEAD OF BASING IT ON BOOK PRO FITS AND IN THE PROCESS INCREASING THE BOOK PROFITS. 19. BOTH THE LEARNED COUNSELS APPEARING FOR THE AS SESSEE AND THE DEPARTMENT HAVE AGREED THAT THE ISSUE IS SQ UARELY COVERED BY THE DECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.835 TO 837/HYD/2005 DATED 02-07- 2012 FOR AYS. 2001-02 TO 2002-03 AND 2003-04. THE CO-ORDINAT E BENCH WHILE CONSIDERING IDENTICAL NATURE OF DISPUTE, HELD AS UNDER: 10. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. THIS ISSUE IS COMMON IN ALL THESE APPEALS. WHILE THE ASS ESSEE I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 35 - : CONTESTS THE CIT (A)'S ORDER FOR NOT ALLOWING DEDUC TION UNDER CLAUSE (IV) OF' EXPLANATION ON THE ENTIRE AMOUNT OF EXPORT PROFITS COMPUTED FROM THE BASE OF BOOK PROFITS BUT INSTEAD RESTRICTING THE DEDUCTION IN TERMS OF THE PHASING O UT PER SUB- SECTION (1B), THE DEPARTMENT IS DISPUTING THE ORDER OF THE CIT(A) FOR COMPUTING THE DEDUCTION BASED ON BOOK PR OFITS INSTEAD OF THE AMOUNT AS COMPUTED UNDER SECTION 80H HC BASED ON PROFITS OF THE BUSINESS UNDER CLAUSE (BAA) . THE ASSESSEE RELIES ON THE RECENT DECISION OF THE SUPRE ME COURT IN THE CASE OF AJANTA PHARMA LTD V CIT (2010) (327 ITR 305). THE ASSESSEE SUBMITTED THAT THE APEX COURT HAS APPR OVED THE SPECIAL BENCH DECISION OF ITAT IN DCIT V SYNCOM FORMULATIONS (I) LTD. (2007) (106 ITD 193). 11. THE DR FAIRLY CONCEDED THAT THE DECISION OF THE SUPREME COURT IN THE CASE OF AJANTA PHARMA (SUPRA) IS AGAIN ST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. THE APEX COURT LAID DOWN THE LAW THAT FOR PURPOSES OF COMPUTING BO OK PROFIT, THE DEDUCTION TO BE ALLOWED UNDER CLAUSE (I V) OF EXPLANATION IS THE EXPORT PROFITS AS COMPUTED WITH REFERENCE TO BOOK PROFITS. SEC. 115JB IS A SEPARATE CODE FOR COMPANY ASSESSEES' FOR COMPUTING MINIMUM TAX PAYABLE IN THE ABSENCE / INADEQUACY OF NORMAL TAXABLE INCOME FALLI NG UNDER THE 5 HEADS OF INCOME. THE MINIMUM TAX IS TO BE COMPUTED WITH REFERENCE TO BOOK PROFITS AS PER THE AUDITED ACCOUNTS OF THE COMPANY. CONSEQUENTLY THE EXPORT PR OFITS COMPUTED UNDER THE PROVISIONS OF SEC. 80HHC BASED O N 'PROFITS OF BUSINESS OR PROFESSION' CANNOT BE SUBST ITUTED INTO THE COMPUTATION SCHEME AS PRESCRIBED IN SEC. 115JB WHICH IS AN ALTERNATIVE COMPUTATION TO THE NORMAL COMPUTA TION OF INCOME. THE COURT ALSO HELD THAT THE DEDUCTION UNDE R CLAUSE (IV) OF EXPLANATION FOR THE EXPORT PROFITS SHOULD N OT BE PHASED OUT AS PROVIDED IN SUB-SECTION (1B) OF SEC. 80HHC BECAUSE, 115JB IS AN INDEPENDENT CODE AND IT COVERS FULL EXPORT PROFITS AS THE ELIGIBLE PROFITS FOR THE PURP OSES OF BOOK PROFITS TAX AND NO PHASING IS REQUIRED TO BE CARRIE D OUT. THIS VIEW HAS BEEN REITERATED BY THE APEX COURT IN THE R ECENT CASE OF CIT V BHARI INFORMATION TECH. SYS. P. LTD I N CIVIL APPEAL NO. 33750/2009 RENDERED ON 20.10.2011. THUS, THIS GROUND IN ASSESSEES APPEALS ITA NOS. 835 TO 837/HY D/05 IS ALLOWED AND RELATED GROUND IN REVENUE APPEALS IN ITA NOS. 930 TO 932/HYD/05 IS DISMISSED. I.T.A. NO. 2123/HYD/2011 MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) :- 36 - : 19.1 RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE COORDINATE BENCH, WE DIRECT THE ASSESSING OFFICER T O COMPUTE THE BOOK PROFIT UNDER SECTION 115JB ACCORDINGLY. GR OUND IS CONSIDERED AS ALLOWED. 20. IN THE RESULT, APPEAL IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST, 2015 SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUN TANT MEMBER HYDERABAD, DATED 26 TH AUGUST, 2015 TNMM COPY TO : 1. MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABO RATORIES LTD), PLOT NO. 564/A/22, ROAD NO. 92, JUBILEE HILLS , HYDERABAD. 2. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(2), AAYAKAR BHAVAN, HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATI ON, INCOME TAX TOWERS, HYDERABAD. 5. THE ADDL. COMMISSIONER OF INCOME TAX (TRANSFER P RICING), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.