M/s. MERCK LTD., MUMBAI V. ACIT CIR. -6(3), MUMBAI

ITA 2393/MUM/2009

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70748 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 08-08-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 15-04-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Bad and doubtful debts; Revenue expenditure
• Section: 92C; 80HHC; 14A; 80IB; 133(6); 145; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K B ENCH, MUMBAI . . , , !'# , $ % BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ./ I.T.A. NO. 2393/MUM/2009 ( & & & & / ASSESSMENT YEAR : 2004-05 M/S. MERCK LTD., (FORMERLY E. MERCK (I) LTD., LLOYDS CENTRE POINT, UNIT NO. 21 & 22, 2 ND FLOOR, APPASAHEB MARATHE MARG, PRABHADEVI, MUMBAI-400 025 THE ACIT, CIRCLE 6(3), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 ./ I.T.A. NO. 3098/MUM/2009 ( & & & & / ASSESSMENT YEAR : 2004-05 THE ACIT, CIRCLE 6(3), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 M/S. MERCK LTD., (FORMERLT E. MERCK (I) LTD., LLOYDS CENTRE POINT, UNIT NO. 21 & 22, 2 ND FLOOR, APPASAHEB MARATHE MARG, PRABHADEVI, MUMBAI-400 025 ./ I.T.A. NO. 5596/MUM/2011 ( & & & & / ASSESSMENT YEAR : 2005-06 ./ I.T.A. NO. 8222/MUM/2010 ( & & & & / ASSESSMENT YEAR : 2006-07 ./ I.T.A. NO. 7585/MUM/2010 ( & & & & / ASSESSMENT YEAR : 2006-07 MERCK LTD. 2 M/S. MERCK LTD., (FORMERLY E. MERCK (I) LTD., LLOYDS CENTRE POINT, UNIT NO. 21 & 22, 2 ND FLOOR, APPASAHEB MARATHE MARG, PRABHADEVI, MUMBAI-400 025 THE ACIT, CIRCLE 6(3), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 ' $ ./ () ./PAN/GIR NO. : AAACE 2616F ( '* /APPELLANT ) .. ( +,'* / RESPONDENT ) '* - / REVENUE BY : ` SHRI AJEET KUMAR JAIN +,'* . - /ASSESSEE BY : MS. AARTI VISANJI . /0$ / DATE OF HEARING :08.08.2013 12& . /0$ / DATE OF PRONOUNCEMENT : 21.8.2013 3 / O R D E R PER N.K. BILLAIYA, AM: ITA NOS. 2393/M/09 & 3098/M/2009- A.Y. 2004-05 ARE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECT ED AGAINST THE VERY SAME ORDER OF THE LD. CIT(A)-XXXII, MUMBAI DT.27.12 .2008 PERTAINING TO A.Y. 2004-05. ITA NO. 5596/MUM/2001 FILED BY TH E ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A)-15 DT. 31.5.2011 FOR AS SESSMENT YEAR 2005- 06. ITA NO. 8892/MUM/2010 FILED BY THE ASSESSEE AGA INST THE ORDER OF THE DISPUTE RESOLUTION PANEL-II FOR ASSESSMENT YEAR 2006-07. AS COMMON ISSUES ARE INVOLVED IN ALL THESE APPEALS, THEY WERE HEARD TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. ITA NO. 2393/MUM/2009 A.Y. 2004-05 MERCK LTD. 3 2. GROUND NO. 1.1 RELATES TO DISALLOWANCE IN RESPEC T OF PHYSICIANS SAMPLES DISTRIBUTED AMOUNTING TO RS. 4,30,32,095/- 3. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PRO CEEDINGS WHILE SCRUTINIZING THE AUDIT REPORT FILED ALONG WITH RETU RN OF INCOME, THE ASSESSING OFFICER SOUGHT EXPLANATION RELATING TO TH E PHYSICAL QUANTITY OF STOCK STATEMENT AND DETAILS OF SHORTAGE, FREE SAMPL ES, GIVEAWAYS ETC. THE ASSESSEE FURNISHED NECESSARY DETAILS RELATING TO SA MPLE DISTRIBUTION. THE ASSESSEE CLAIMED THAT THE FREE SAMPLES CONSTITUTED 0.86% OF TOTAL SALES. THE AO WAS NOT CONVINCED WITH THE REPLY FILED BY TH E ASSESSEE. ACCORDING TO THE AO, THE SHORTAGES ARE IN HIGH PROP ORTION AND IN NO WAY CORRESPONDS TO THE 0.86% OF SAMPLES CLAIMED BY THE ASSESSEE. FURTHER, ACCORDING TO THE AO, THE ASSESSEE HAS NOT BEEN ABL E TO CONCLUSIVELY PROVE THE AMOUNT OF SAMPLES GIVEN. THE AO OBSERVE D THAT NO CREDIBLE EVIDENCE HAS BEEN GIVEN TO SUPPORT THE FIGURES AND THE FIGURES ARE NOT VERIFIABLE IN THE ABSENCE OF ADEQUATE SUPPORTING EV IDENCES FROM THE ASSESSEE, THE AO WENT ON TO MAKE THE ADDITION ON AC COUNT OF EXPENSES CLAIMED TO BE DISTRIBUTED AS SAMPLES AT RS. 4,30,32 ,095/-. 4. THE ASSESSEE AGITATED THIS ISSUE BEFORE THE LD. CIT(A). IT WAS CONTENDED BEFORE THE LD. CIT(A) THAT THE PRODUCTION OF PHYSICIAN SAMPLE AND THE DISTRIBUTION THEREOF IS A WELL RECOGNIZED , WELL ACCEPTED AND KNOWN FACTS TO EVERYBODY CONNECTED WITH THE PHARMAC EUTICAL BUSINESS AND MEDICAL PROFESSION IN THIS COUNTRY. EACH AND EVERY PHARMACEUTICAL COMPANY OPERATING IN INDIA OR ELSEWHERE IN THE WORL D, MANUFACTURE AND DISTRIBUTE THE PHYSICIAN SAMPLES YEAR AFTER YEAR AN D INCUR SUBSTANTIAL COSTS TOWARDS THE SAME. THESE EXPENSES AND COSTS ARE NOT HING ELSE BUT PROMOTIONAL COSTS TO BE INCURRED IN CONNECTION WITH PROMOTING AND MARKETING THE PRODUCTS OF THE COMPANY. IT WAS FURT HER ARGUED BY THE MERCK LTD. 4 ASSESSEE THAT THE AO ERRED WHILE DISALLOWING THE SA MPLES BY APPLYING THE PERCENTAGE OF SAMPLES TO SALES IN RESPECT OF THE EA RLIER YEAR. IT WAS CONTENDED THAT SUCH APPLICATION OF PERCENTAGE OF EA RLIER YEAR IS IRRATIONAL AND ILLOGICAL AND WITHOUT BASIS AND IS ALSO CONTRAR Y TO THE FACTS. 4.1. AFTER CONSIDERING THE FACTS AND THE SUBMISSIO NS MADE BY THE ASSESSEE, THE LD. CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT FURNISHED THE DETAILS OF SAMPLES GIVEN TO THE DOCTORS NOR HAS IT QUANTIFIED THE SAME. THE AMOUNT OF SAMPLES DISTRIBUTED IS ALSO NOT MENTI ONED IN THE SELECTED LIST OF 225 DOCTORS GIVEN BY THE ASSESSEE. THE LD. CIT(A) FURTHER OBSERVED THAT ADDRESSES OF MANY DOCTORS IS INCOMPL ETE, LEAVING VERY LITTLE SCOPE FOR VERIFICATION. EVEN ON ENQUIRY MADE TO 9 DOCTORS BY SENDING NOTICES U/S. 133(6) OF THE ACT, NONE OF THEM HAVE S HOWN FREE SAMPLES AS INCOME AND ONE OF THE ADDRESSEES HAS CATEGORICALLY REFUSED HAVING RECEIVED ANY SAMPLES. THE LD. CIT(A) WAS CONVINCED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE AND ESTABLISH THE GENUIN ENESS OF CLAIM ON EXPENDITURE ON PHYSICIAN SAMPLE CONCLUSIVELY. THE LD. CIT(A) WENT ON TO CONFIRM THE DISALLOWANCE MADE BY THE AO OBSERVIN G THAT IN A.Y. 2003-04 SIMILAR ISSUE WAS CONSIDERED BY HIS PREDEC ESSOR BASED ON SIMILAR FACTS AND THE ISSUE WAS DECIDED AGAINST THE ASSESSEE. 5. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE, TAK ING A LEAF OUT OF THIS FINDING OF THE LD. CIT(A), SUBMITTED THAT THE TRIBU NAL IN ASSESSEES OWN CASE FOR A.Y. 2003-04 VIDE ITA NO. 925/MUM/2007 HAD AN OCCASION TO CONSIDER SIMILAR ISSUE. IT IS THE SAY OF THE LD. C OUNSEL THAT THE TRIBUNAL HAS RESTORED THIS ISSUE TO THE FILES OF THE AO FOR PASSING FRESH ORDER AFTER NECESSARY EXAMINATION OF THE DETAILS FILED. 6. THE LD. DEPARTMENTAL REPRESENTATIVE COULD NOT BR ING ANY DISTINGUISHING FACTS ON RECORD. MERCK LTD. 5 7. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES. WE ALSO HAVE THE BENEFIT OF THE ORDER OF THE TRIBUNAL (SUPRA). WE FIND THAT A SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN A SSESSEES OWN CASE. AFTER CONSIDERING THE ENTIRE FACTS AND THE SUBMISSI ONS, THE TRIBUNAL THUS HELD AS UNDER: THE MATTER IN OUR VIEW REQUIRES FRESH EXAMINATION AFTER VERIFICATION OF DETAILS ABOUT NAMES AND ADDRESSES O F DOCTORS BEFORE THE AO. WE, THEREFORE, SET ASIDE THE ORDER O F CIT (A) ON THIS POINT AND RESTORE THE ISSUE TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION O F THE DETAILS FILED BY THE ASSESSEE AND AFTER ALLOWING OP PORTUNITY OF HEARING TO THE ASSESSEE. 8. WE FIND THAT THE FACTS AND THE CIRCUMSTANCES ARE SIMILAR FOR THE YEAR UNDER CONSIDERATION, THEREFORE, RESPECTFULLY FOLLOW ING THE FINDINGS OF THE TRIBUNAL IN ITA NO. 925/M/07 (SUPRA), WE RESTORE TH IS ISSUE BACK TO THE FILES OF THE AO FOR PASSING A FRESH ORDER AFTER NEC ESSARY EXAMINATION OF THE DETAILS FILED BY THE ASSESSEE AND AFTER ALLOWIN G OPPORTUNITY OF HEARING TO THE ASSESSEE. GROUND NO. 1.1 IS ALLOWED FOR STA TISTICAL PURPOSES. 9. GROUND NO. 1.2 RELATES TO TRANSFER PRICING ISSUE S. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS ENTERED INTERNATIONA L TRANSACTION WITH THE ASSOCIATED ENTERPRISES FOR MORE THAN RS. 5 CRORES T HEREFORE, A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) U/S. 92CA(1) OF THE ACT FOR COMPUTATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION U/S. 92C OF THE ACT. THE TPO PASSED AN ORDER DT. 30.11.2006 AND MADE AN UPWARD ADJUSTMENT TO ALP OF RS. 2,82,40,086/- ON ACCOUNT OF CERTAIN INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. THE ASSESSEE WAS ALLOWED AN OPPORTUNITY TO SHOW CAUSE W HY THE ALP ADOPTED BY THE TPO SHOULD NOT BE TAKEN. THE ASSESSEE FILED A DETAILED REPLY DT. MERCK LTD. 6 11.12.2006 AND STRONGLY OBJECTED TO THE ADJUSTMENTS MADE BY THE TPO AGGREGATING TO RS. 2,82,40,086/-. 9.1. IT WAS STRONGLY CONTENDED THAT THE INTERNATION AL TRANSACTION WITH THE ASSOCIATED ENTERPRISES WERE MADE AT ALP SUPPORTED B Y THE TRANSFER PRICING STUDY REPORT. THE AO DID NOT ACCEPT THE SU BMISSIONS MADE BY THE ASSESSEE STATING THAT THE ASSESSEE HAS NOT ASSI GNED ANY REASON AS TO WHY ADJUSTMENT MADE TO ALP BY THE TPO IS NOT ACCEPT ABLE. NO NEW EVIDENCE OR SUBMISSIONS HAVE BEEN MADE BY THE ASSES SEE WHEREAS ACCORDING TO THE AO, THE TPO HAS PASSED A REASONED ORDER INCORPORATING ALL THE OBJECTIONS MADE BY THE ASSESSEE. THE AO MAD E AN ADDITION OF RS. 2,82,40,086/- ON ACCOUNT OF ADJUSTMENT MADE TO ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES. 10. THE ASSESSEE CARRIED THIS MATTER BEFORE THE LD. CIT(A). IT WAS STRONGLY CONTENDED THAT THE TPO HAS ERRED IN DISREG ARDING THE MOST APPROPRIATE METHOD AS ADOPTED BY THE ASSESSEE. THE ASSESSEE HAS ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST AP PROPRIATE METHOD IN THE TRANSFER PRICING STUDY REPORT BASED O N FACTS OF THE CASE. IT WAS ARGUED BY THE ASSESSEE THAT THE TPO WITHOUT PRO VIDING ANY REASONS FOLLOWED A DIFFERENT METHODOLOGY AND SELECTED A DIF FERENT METHOD COMPLETELY DISREGARDING THE STATUTORY PROVISIONS. IT WAS FURTHER ARGUED BY THE ASSESSEE THAT THE TPO HAS ERRED IN SELECTING CUP AS THE MOST APPROPRIATE METHOD. TO SUBSTANTIATE ITS CLAIM, THE ASSESSEE SUBMITTED THAT THE TPO ERRED IN NOT TAKING COGNIZANCE OF PRICE CHA RGED BY MERCK SWISS TO OTHER MERCK ENTITIES. THE ASSESSEE FURTHER POIN TED OUT TO OTHER DEFECTS IN THE ORDER OF THE TPO. 10.1. AFTER CONSIDERING THE ENTIRE FACTS AND SUBMI SSIONS MADE BY THE ASSESSEE, THE LD. CIT(A) OBSERVED THAT THE ARGUMENT S OF THE ASSESSEE MERCK LTD. 7 REGARDING THE METHOD USED BY THE TPO, PRICE CHARGED BY MERCK SWISS TO OTHER MERCK ENTITIES REGARDING THE CUSTOMS VALUATI ON, GRANT OF OPPORTUNITY AND USE OF CONTEMPORANEOUS AND PUBLICL Y AVAILABLE DATA HAVE NO FORCE AND ARE HEREBY REJECTED. ACCORDING TO THE LD. CIT(A), THE CUP METHOD SHOULD BE THE MOST PREFERRED METHOD AND THE TPO HAS CORRECTLY TAKEN THE METHOD. HOWEVER, THE LD. CIT(A ) WENT ON TO AGREE WITH THE CONTENTION OF THE ASSESSEE WHO HAS CHALLEN GED THE ADOPTION OF THE ALP BY THE TPO OF BISOPROLOL FUMARATE ON THE BA SIS OF WEIGHTED AVERAGE PRICE METHOD INSTEAD OF NORMAL AVERAGE PRIC E METHOD. ACCORDING TO THE LD. CIT(A), AS PER THE PROVISO OF SEC. 92 C(2) OF THE ACT, ARITHMETICAL MEAN OF SUCH PRICES SHALL BE TAKE N TO BE THE ARMS LENGTH PRICE WHICH WOULD BE RS. 57,049/- PER KG INS TEAD OF RS. 48,930/- PER KG. ADOPTED BY THE TPO. THE LD. CIT(A) REVISED THE ADJUSTMENTS AT RS. 1,68,13,382/- INSTEAD OF RS. 1,80,53,722/- AND ALLOWED A RELIEF OF RS. 12,40,340/-. 10.2. THE ASSESSEE HAD FURTHER TAKEN AN ALTERNATIVE PLEA THAT ONLY THE COST OF INPUTS OF THE ACTIVE INGREDIENT USED IN MANUFACT URE OF FINISHED PRODUCTS WHO HAVE BEEN ADJUSTED BY THE TPO AND ADJUSTMENT TO THE EXTENT OF CLOSING STOCK OF THE ACTIVE INGREDIENT SHOULD BE RE DUCED BECAUSE AS PER SEC. 92 ONLY THE INCOME ARISING FROM AN INTERNATION AL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE LD. CIT(A) WAS CONVINCED WITH THIS SUBMISSIONS OF THE ASSESSEE WH O WAS OF THE FIRM BELIEF THAT ONCE THE ARMS LENGTH PRICE OF RAW MAT ERIAL IN THE FORM OF ACTIVE INGREDIENT HAVE BEEN DETERMINED, THE PRICE C ANNOT BE VARIED FOR VALUATION OF CLOSING STOCK OF RAW MATERIAL. ACCORD ING TO THE LD. CIT(A), THE PRICE OF ACTIVE INGREDIENT IN THE CLOSING STOCK SHOULD BE ADOPTED AT RS. 57,049/- PER KG AND IF THIS VALUE IS TAKEN THE CLOS ING STOCK SHALL GET REDUCED BY - AND ALLOWED AND FURTHER RELIEF OF RS. 18,86,276/-. THUS THE MERCK LTD. 8 LD. CIT(A) ALLOWED AN AGGREGATE RELIEF OF RS. 31,2 6,616/- OUT OF THE TOTAL ADDITIONS MADE ON ACCOUNT OF TP ADJUSTMENTS ON ACC OUNT OF IMPORT OF RAW MATERIALS. 10.3. ON ACCOUNT OF TRANSFER PRICE ADJUSTMENTS AMOU NTING TO RS. 1,- 1.86,364/- RELATES TO PAYMENT OF TECHNICAL KNOW-HOW FEES. THE LD. CIT(A) HAS GIVEN HIS FINDINGS AT PARA 9.5.2 OF HIS ORDER AND OBSERVED THAT THE CONSULTANCY SERVICE AGREEMENT WITH THE AE WAS R EGARDING 11 TYPES ACTIVITIES WHERE THE AE WAS TO PROVIDE ASSISTANCE T O THE ASSESSEE. THE LD. CIT(A) FURTHER OBSERVED THAT IN RESPECT OF 5 AC TIVITIES, THE AE DID NOT PROVIDE ANY SERVICE TO THE ASSESSEE AND FOR SUCH IN FORMATION/INPUTS PROVIDED BY THE AE WERE FOR THE CONSUMPTION OF CUST OMERS TO INCREASE THE SALES OF AE FOR WHICH THE ASSESSEE SHOULD NOT H AVE PAID ANY CHARGES. THEREAFTER, THE LD. CIT(A) WENT ON TO ANALYZE THE A GREEMENT OF THE ASSESSEE WITH ITS AE IN RESPECT OF 11 HEADS LISTED IN THE AGREEMENT RELATING TO TECHNICAL KNOW-HOW AND CONCLUDED THAT THE ASSESSEE HAS RECEIVED BENEFIT ONLY FOR 6 HEADS AND FOR THE REMAI NING AREAS SPECIFIED IN THE AGREEMENT, THE ASSESSEE COULD NOT ADDUCE ANY EV IDENCE REGARDING RECEIPT OF ANY SERVICES OR BENEFITS AND ACCORDINGLY AGREED WITH THE ADJUSTMENTS MADE BY THE AO/TPO IN THIS REGARD AND U PHOLD THE ACTION. 11. AGGRIEVED BY THIS DECISION OF THE LD. CIT(A) RE LATING TO THE TRANSFER PRICING ADJUSTMENTS, THE ASSESSEE IS BEFOR E US. 12. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT ON IDENTICAL FACTS IN THE EARLIER ASSESSMENT YEAR I.E. A.Y. 2003-04, THE TRIB UNAL HAS AN OCCASION TO DECIDE ON IDENTICAL FACTS AND HAS CONSIDERED CERTAI N EVIDENCES REGARDING QUALITY AND COMPARATIVE PRICE AND HAS RESTORED THE ISSUE BACK TO THE FILES OF THE LD. CIT(A) FOR PASSING FRESH ORDER. MERCK LTD. 9 13. THE LD. DEPARTMENTAL REPRESENTATIVE FAIRLY CONC EDED TO THIS SUBMISSION MADE BY THE LD. AR. 14. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOW ER AUTHORITIES AND THE ORDER OF THE TRIBUNAL IN ITA NO. 925/M/07. WE F IND THAT THE DISPUTE RELATING TO TRANSFER PRICING ADJUSTMENTS HAVE BEEN CONSIDERED BY THE TRIBUNAL AT PARA-22 PAGE 39 OF ITS ORDER. WE FIND THAT THE ASSESSEE HAS SUBMITTED AN INDEPENDENT THIRD PARTY CERTIFICATE RE GARDING THE SUPERIOR QUALITY OF THE MATERIAL IMPORTED BY THE ASSESSEE. WE ALSO FIND THAT THE ASSESSEE HAS OBTAINED THE COMPARATIVE RATE OF SALE IN THE SIMILAR PRODUCT MANUFACTURED BY TORRENT PHARMA AND UNICHEM LABORATO RIES LTD., WHICH SHOWS THAT THE ASSESSEE WAS IMPORTING AT HIGHER RAT E. RELIANCE WAS PLACED ON THE DECISION OF THE JAIPUR BENCH OF THE T RIBUNAL IN THE CASE OF ELECTRA (JAIPUR)(P). LTD. VS INSPECTING ASSTT. COM MISSIONER 26 ITD 236 WHEREIN THE TRIBUNAL ADMITTED THE ADDITIONAL EVIDEN CE. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF ELECTRA (JAIPUR)(P). LTD. (SUPRA), WE RESTORE THIS ISSUE BACK TO THE FIL ES OF THE AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGH T OF THE OBSERVATIONS MADE BY THE TRIBUNAL. WE FIND THAT THE ISSUE RELAT ING TO THE IMPORT OF RAW MATERIALS IS IDENTICAL ON FACTS AS DECIDED BY THE T RIBUNAL IN EARLIER YEAR. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ITA NO. 925/M/07 (SUPRA), WE RESTORE THIS ISSUE BACK TO THE FILES OF THE LD. CIT(A) TO DECIDE AFRESH IN THE LIGHT OF THE DECISION IN EARLIER YEA R AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 15. THE SECOND ADJUSTMENT MADE BY THE AO/TPO IS REG ARDING THE TECHNICAL KNOW-HOW FEES OF RS. 1,01,86,364/-. IT I S THE SAY OF THE LD. COUNSEL THAT ON IDENTICAL FACTS, THE TRIBUNAL HAS D ELETED THIS ADDITION IN A.Y. 2003-04 VIDE ITA NO. 925/M/07. MERCK LTD. 10 16. THE LD. DEPARTMENTAL REPRESENTATIVE COULD NOT B RING ANY DISTINGUISHING FACTS ON RECORD. 17. WE HAVE CAREFULLY PERUSED THE ORDER OF THE TRIB UNAL. THE ISSUE FINDS PLACE AT PARA-24, PAGE 62 OF THE ORDER OF THE TRIBUNAL. THE FINDINGS OF THE TRIBUNAL ARE FOUND AT PARA 24.6 AND 24.7 AT PAGE 68 TO 70 OF THE ORDER. AFTER CONSIDERING THE FACTS AND THE SUBMISS IONS, THE TRIBUNAL THUS HELD AS UNDER: WE FIND SUBSTANCE IN THE ARGUMENT ADVANCED. THE LA W IS QUITE CLEAR ON THE SUBJECT THAT TP ADJUSTMENT IS RE QUIRED TO BE MADE BY APPLYING ONE OF THE PRESCRIBED METHODS. THE TPO HAS NOT APPLIED ANY PRESCRIBED METHOD AND HAS ONLY DISALLOW ED PART OF THE EXPENSES AS DONE IN THE NORMAL ASSESSMENT, WHICH IS NOT PERMITTED UNDER TRANSFER PRICING REGULATION AS PER WHICH ADJU STMENT ON ACCOUNT OF ANY INTERNATIONAL TRANSACTION IS REQUIRE D TO BE MADE AS PER THE METHOD PRESCRIBED. THE LEARNED CIT (DR) POI NTED OUT THAT THE TPO IN RESPECT OF THE NINE SERVICES NOT AVAILED BY THE ASSESSEE HAS TREATED THE PAYMENT AS NIL SINCE NO INDEPENDENT PARTY WOULD MAKE ANY PAYMENT FOR SERVICES NOT PROVIDED. THE TPO THUS HAD APPLIED THE CUP METHOD AND MADE ADJUSTMENT ON ACCOU NT OF NINE SERVICES ON AVERAGE BASIS. 24.7 SUCH ARGUMENT IN OUR VIEW IS NOT CONVINCING. T HE ARGUMENT WOULD HAVE BEEN VALID IF FEES WAS FIXED IN RESPECT OF EACH SERVICE, WHICH WAS COMPULSORILY REQUIRED TO BE PROVIDED TO T HE ASSESSEE, BUT IT IS NOT SO IN THE PRESENT CASE. THE AGREEMENT LISTED CERTAIN SERVICES ON WHICH THE ASSESSEE REQUIRES GUIDANCE/AS SISTANCE FROM TIME TO TIME. THE ASSESSEE WAS THUS ENTITLED TO ANY OF THE SERVICES AS AND WHEN REQUIRED. THEREFORE, APPLYING CUP METHO D TO THE SERVICE NOT AVAILED BY THE ASSESSEE DURING THE YEAR IS NOT JUSTIFIED. IT WOULD HAVE BEEN APPROPRIATE IF THE AO HAD APPLIE D CUP METHOD TO THE PAYMENT MADE DURING THE YEAR BY THE ASSESSEE FOR THE THREE SERVICES AND COMPARED WITH SIMILAR PAYMENT FOR SUCH SERVICES BY AN INDEPENDENT PARTY. NO EFFORTS HAVE BEEN MADE BY TPO/AO TO DETERMINE THE MARKET VALUE OF SERVICES RECEIVED BY THE ASSESSEE DURING THE YEAR RELATING TO SAP IMPLEMENTATION AND QUALITY CONTROL TO SHOW THAT THE ASSESSEE HAD PAID MORE COMPARED TO ANY MERCK LTD. 11 INDEPENDENT PARTY FOR THE SAME SERVICES. THE ASSESS EE HAD SUBMITTED THAT IN CASE THE ASSESSEE HAD PAID TO THE AE AT MAN HOUR RATE FOR THE TECHNICAL SERVICES PROVIDED DURING THE YEAR IN RELATION TO SAP IMPLEMENTATION, THE FEES PAYABLE WOULD HAVE BEEN SIGNIFICANTLY HIGHER. THERE IS NOTHING PRODUCED BEF ORE US TO CONTROVERT THE SAID CLAIM. THE ASSESSEE HAS APPLIED TNMM WHICH SHOWS THAT THE MARGIN SHOWN BY THE ASSESSEE WAS HIG HER THAN THE COMPARABLE COMPANIES. THE CASE OF THE ASSESSEE IS A LSO SUPPORTED BY THE DECISION OF TRIBUNAL IN CASE OF MC CAN ERRIC SON INDIA PVT. LTD. (SUPRA) IN WHICH THE DECISION OF TPO TO TAKE T HE VALUE OF CERTAIN SERVICES AT NIL HAS NOT BEEN UPHELD. CONSID ERING THE ENTIRETY OF FACTS AND CIRCUMSTANCES, THE ADJUSTMENT MADE BY TPO WHICH IS NOTHING BUT DISALLOWANCE OF EXPENSES CANNO T BE UPHELD. WE, THEREFORE, SET ASIDE THE ORDER OF CIT (A) ON TH IS POINT AND DELETE THE ADDITION MADE. RESPECTFULLY FOLLOWING THE ABOVE FINDINGS OF THE T RIBUNAL, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS POINT AND DELETE THE ADDITION OF RS. 1,01,86,364/-. GROUND NO. 1.2 IS PARTLY ALLOWE D FOR STATISTICAL PURPOSE. 18. GROUND NO. 1.3 RELATES TO THE DISALLOWANCE OF R S. 5,00,000/- OUT OF DISCOUNT AND COMMISSION ON AN AD-HOC BASIS. 19. THIS ISSUE HAS BEEN DISCUSSED BY THE AO AT PAR A-10 PAGE-19 OF HIS ORDER WHEREIN THE AO HAS FOLLOWED THE FINDINGS OF T HE LD. CIT(A) FOR A.Y. 2003-04 AND HAS FINALLY CONCLUDED THAT SINCE T HE FACTS AND CIRCUMSTANCES OF THE CURRENT YEAR ARE SIMILAR, FOR WANT OF VERIFICATION, AN AMOUNT OF RS. 5,00,000/- IS DISALLOWED ON ADHOC BAS IS BEING THE EXPENDITURE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS. 20. WHEN THE MATTER WAS CARRIED BEFORE THE LD. CIT( A), THE LD. CIT(A) CONSIDERED THE GRIEVANCE AT PARA-11 OF HIS O RDER AND AT PARA 11.4, THE LD. CIT(A) HAS OBSERVED THAT SINCE THE FACTS OF THIS YEAR ARE SIMILAR, MERCK LTD. 12 AGREEING WITH MY LD. PREDECESSOR, I UPHOLD THE DISA LLOWANCE OF RS. 5,00,000/- MADE BY THE AO IN THIS REGARD. 21. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), TH E ASSESSEE IS BEFORE US. 22. WE FIND THAT BOTH THE LOWER AUTHORITIES HAVE BA SED THEIR RESPECTIVE FINDINGS ON THE BASIS OF FINDINGS GIVEN IN EARLIER ASSESSMENT YEAR. WE HAVE THE BENEFIT OF THE ORDER OF THE TRIBUNAL IN EA RLIER ASSESSMENT YEAR I.E. A.Y. 2003-04 IN ITA NO. 925/M/07. WE FIND THAT A S IMILAR ADDITION WAS CONSIDERED BY THE TRIBUNAL AT PARA-9 OF ITS ORDER AND HAS GIVEN ITS FINDING ON PARA 9.3 WHICH IS AS UNDER: IT IS HOWEVER A SETTLED LEGAL POSITION THAT EVEN I N CASES WHERE THE DETAILS AND EVIDENCES ARE NOT AVAILABLE, THE AO IS REQUIRED TO COMPUTE DISALLOWANCE ON AN OBJECTIVE BA SIS ON THE BASIS OF MATERIAL AVAILABLE ON THE RECORD. IN THIS CASE FROM COMPARATIVE DETAILS OF EXPENSES FILED WE FIND THAT EXPENSES ON ACCOUNT OF DISCOUNT AND COMMISSION HAVE BEEN CLAIME D AT .55% TOTAL SALES OF RS. 344 CRORE COMPARED TO .43% ON TU RNOVER OF RS 345 CRORE IN THE IMMEDIATE PRECEDING YEAR. THEREFOR E, IF WE COMPUTE THE EXPENDITURE THIS YEAR AT THE SAME PERCE NTAGE AS IN THE IMMEDIATE PRECEDING YEAR, THE EXPENDITURE COMES TO RS. 1.47 CRORE AGAINST THE CLAIM OF RS. 1.89 CRORE. THUS ON THE BA SIS OF CLAIM IN THE PRECEDING YEAR, THERE IS AN EXCESS CLAIM OF ABO UT 42 LAKHS. THE AO HAS MADE ESTIMATED DISALLOWANCE OF ONLY RS. 5,00 ,000/-. IN OUR VIEW THE DISALLOWANCE MADE IS QUITE REASONABLE AND THE SAME IS UPHELD. CONSIDERING THE FACTS AND THE CIRCUMSTANCES FOR TH E YEAR UNDER CONSIDERATION, WE FIND THAT THEY ARE IDENTICAL WITH THE FACTS OF PRECEDING ASSESSMENT YEAR, THEREFORE, RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNAL AS MENTIONED HEREINABOVE, THE ADDITION OF RS. 5,00,000/- IS CONFIRMED. GROUND NO. 1.3 IS DISMISSED. MERCK LTD. 13 23. GROUND NO. 1.1 RELATES TO THE DISALLOWANCE OF R S. 20,00,000/- OUT OF SALES PROMOTION EXPENSES ON ADHOC BASIS. 24. THE AO HAS DISCUSSED THIS ISSUE AT PARA-11, PAG E-20 OF HIS ORDER WHEREIN HE HAS FOLLOWED THE FINDINGS OF THE LD. CIT (A) MADE FOR A.Y. 2003-04. ACCORDING TO THE AO, SINCE THE FACTS AND CIRCUMSTANCES OF THE CURRENT YEAR ARE SIMILAR, AN AMOUNT OF RS. 20,00,00 0/- IS DISALLOWED ON ADHOC BASIS BEING THE EXPENDITURE NOT INCURRED WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS. 25. THE ASSESSEE AGITATED THIS ISSUE BEFORE THE LD. CIT(A) AND THE LD. CIT(A) HAS CONSIDERED THE GRIEVANCE OF THE ASSESSEE AT PARA-12 OF HIS ORDER AND AT PARA 12.3 THE LD. CIT(A) HAS OBSERVED THAT SIMILAR ISSUE WAS CONSIDERED BY MY LD. PREDECESSOR IN A.Y. 2003-0 4 AND THE FACTS IN THAT YEAR WERE ALSO SIMILAR. MY LD. PREDCESSOR HAD THEREFORE CONFIRMED THE ADDITION ON THIS ACCOUNT. AGREEING WITH THE DEC ISION OF MY LD. PREDCESSOR AND ALSO IN VIEW OF THE ABOVE DISCUSSION , I HEREBY HOLD THAT THE SAID ADDITION OF RS. 20 LAKHS IS JUSTIFIED AND THE SAME IS CONFIRMED. 26. AGGRIEVED BY THIS DECISION OF THE LD. CIT(A), A SSESSEE IS BEFORE US. 27. A CAREFUL PERUSAL OF THE ORDER OF THE LOWER AUT HORITIES SHOW THAT THE ADDITIONS HAVE BEEN MADE AND CONFIRMED BASED ON THE FINDINGS GIVEN IN A.Y. 2003-04. WE HAVE THE BENEFIT OF THE ORDER OF THE TRIBUNAL FOR A.Y. 2003-04 VIDE ITA NO. 925/M/07. A PERUSAL OF THE SA ME SHOW THAT SIMILAR ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL A T PARA-10 PAGE 16 OF ITS ORDER. AFTER CONSIDERING THE FACTS AND THE SUB MISSIONS, THE TRIBUNAL THUS HELD AS UNDER: MERCK LTD. 14 EVEN IF THE ASSESSEE HAS NOT FILED FULL DETAILS T HE DISALLOWANCE IS REQUIRED TO BE MADE BY AO ON AN OBJECTIVE BASIS ON THE BASIS OF MATERIAL AVAILABLE ON RECORD. THERE IS NO MATERIAL PLACED BEFORE US TO SHOW THAT THE EXPENSES CLAIMED BY ASSESSEE IS EX CESSIVE. IN FACT, WE FIND THAT THE CLAIM IS LOWER THIS YEAR. THEREFOR E, DISALLOWANCE OF EXPENSES CANNOT BE UPHELD. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) ON THIS POINT AND DELETE THE ADDITION MADE. 28. AS BOTH THE LOWER AUTHORITIES HAVE CONSIDERED T HAT THE FACTS ARE IDENTICAL TO A.Y. 2003-04, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN A.Y. 2003-04 AS MENTIONED HEREIN ABOVE, THE ADDITION OF RS. 20,00,000/- IS ACCORDINGLY DELETED. GROUND NO. 1.4 IS ALLOWED. 29. GROUND NO. 1.5 RELATES TO DISALLOWANCE OF TRAVE LLING, CONVEYANCE AND VEHICLE EXPENDITURE ON ADHOC BASIS AMOUNTING TO RS. 10,00,000/-. 30. THE AO HAS CONSIDERED THIS ISSUE AT PARA-12 PAG E-20 OF HIS ORDER WHEREIN HE HAS FOLLOWED THE FINDINGS OF THE LD. CIT (A) WHO HAS CONFIRMED THE ADDITION OF SIMILAR AMOUNT MADE IN A. Y. 2003-04 AND FOLLOWING THE SAID FINDINGS OF THE LD. CIT(A), THE AO DISALLOWED RS. 10,00,000/- ON ADHOC BASIS. 31. WHEN THE ISSUE WAS AGITATED BEFORE THE LD. CIT( A), THE CIT(A) CONFIRMED THE ADDITIONS MADE BY THE AO AS PER HIS F INDINGS AT PARA-13.3. PAGE 32 OF HIS ORDER WHEREIN HE HAS FOLLOWED THE FI NDINGS OF HIS LD. PREDECESSOR GIVEN IN A.Y. 2003-04. 32. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOW ER AUTHORITIES. WE FIND THAT BOTH THE PARTIES HAVE FOLLOWED THE FINDIN GS OF SIMILAR ADDITION GIVEN IN A.Y. 2003-04. WE HAVE THE BENEFIT OF THE ORDER OF THE TRIBUNAL FOR A.Y. 2003-04 VIDE ITA NO. 925/M/07. WE FIND TH AT THE TRIBUNAL HAS CONSIDERED SIMILAR DISALLOWANCE AT PARA-11, PAGE-18 OF ITS ORDER. AFTER MERCK LTD. 15 CONSIDERING THE FACTS AND THE SUBMISSIONS, THE TRIB UNAL THUS HELD AS UNDER: THERE IS NO MATERIAL PLACED ON RECORD BEFORE US T O SHOW THAT THE CLAIM MADE BY THE ASSESSEE IS EXCESSIVE. N O PART OF THE CLAIM CAN ALSO BE DISALLOWED ON ACCOUNT OF PERSONAL USES IN RESPECT OF VEHICLES ETC. AS THE ASSESSEE IS A COMPA NY. THEREFORE IN OUR VIEW ON THE FACTS OF THE CASE DISALLOWANCE MADE IS NOT JUSTIFIED. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT (A) AND D ELETE THE ADDITION MADE. 33. AS THE REVENUE AUTHORITIES HAVE FAIRLY CONCEDED THAT FACTS ARE IDENTICAL TO THAT OF A.Y. 2003-04, THEREFORE, RESPE CTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN A.Y. 2003-04 AS MENTION ED HEREINABOVE, THE ORDER OF THE LD. CIT(A) IS SET ASIDE AND THE ADDITI ON OF RS. 10,00,000/- IS ACCORDINGLY DELETED. GROUND NO. 1.5 IS ALLOWED. 34. GROUND NO. 1.6 RELATES TO THE GRIEVANCE OF THE ASSESSEE THAT THE LD. CIT(A) ERRED IN NOT DIRECTING TO SET OFF THE LONG TERM CAPITAL LOSS OF EARLIER YEARS AGAINST LONG TERM CAPITAL GAIN OF RS. 25,25,719/-. 35. THE ASSESSEE HAS CLAIMED SET OFF THE LONG TERM CAPITAL LOSS OF EARLIER YEARS TO THE EXTENT OF LONG TERM CAPITAL GA IN OF RS. 25,25,719/- IN THE CURRENT YEAR. THE AO HAS DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT IN A.Y. 2003-04, THE SAME WAS NOT ALLOW ED BOTH BY THE AO AND BY THE LD. CIT(A) ON THE GROUND THAT THE SALE O F PROPERTY HAS TAKEN PLACE IN EARLIER YEAR. THE LD. CIT(A) CONFIRMED TH E ACTION OF THE AO AS MENTIONED AT PARA 14.2 OF HIS ORDER WHEREIN IT HAS BEEN MENTIONED THAT ASSESSEES APPEALS REGARDING THE CLAIM OF LONG TER M CAPITAL LOSS IN RESPECT OF BOTH THE YEARS ARE PENDING IN ITAT. SIN CE THE MATTER IS SUBJUDICE BEFORE A HIGHER APPELLATE AUTHORITY AND T HE CLAIM OF THE ASSESSEE WAS HELD AGAINST THE ASSESSEE BY MY PREDEC ESSOR, THE APPELLANTS CLAIM FOR SET OFF CANNOT BE ENTERTAINED. A PERUSAL OF THE ORDER OF THE MERCK LTD. 16 TRIBUNAL IN ITA NO. 925/M/07 SHOW THAT THIS ISSUE H AS BEEN DISCUSSED BY THE TRIBUNAL AT PARA-21 PAGE-36 OF ITS ORDER AND TH E TRIBUNAL HAS GIVEN ITS FINDINGS AT PARA 21.4 OF ITS ORDER AT PAGE 39 WHERE IN THE TRIBUNAL THUS HELD AS UNDER: THEREFORE, IN OUR VIEW THE CLAIM HAS TO BE ALLOWED IN THIS YEAR. HOWEVER THE ACTUAL COMPUTATION ETC., OF THE L OSS HAS NOT BEEN EXAMINED. WE, THEREFORE RESTORE THE ISSUE TO THE FI LE OF AO FOR CONSIDERING THE CLAIM IN ACCORDANCE WITH THE LAW AF TER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. RESPECTFULLY FOLLOWING THE ABOVE FINDINGS OF THE T RIBUNAL, WE RESTORE THIS ISSUE BACK TO THE FILE OF THE AO TO AL LOW THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE FINDINGS GIVEN BY THE AO AFTER GIVING APPEAL EFFECT TO THE ORDER OF THE TRIBUNAL IN A.Y. 2003-04 . GROUND NO. 1.6 IS ALLOWED FOR STATISTICAL PURPOSE. 36. GROUND NO. 1.7 RELATES TO THE DISALLOWANCE OF W EBSITE EXPENSES TO THE TUNE OF RS. 1,94,400/-. 37. THE ASSESSEE HAS CLAIMED THE WEBSITE EXPENSES O F RS. 1,94,400/-. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, TH E AO SOUGHT EXPLANATION FROM THE ASSESSEE TO SHOW CAUSE WHY THE WEBSITE EXPENSES SHOULD NOT BE CAPITALIZED. ON RECEIVING NO PLAUSIB LE REPLY, THE AO DISALLOWED THE SUM OF RS. 1,94,400/- 38. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS CONSIDERED THIS ISSUE AT PARA 15.3 OF HI S ORDER WHEREIN HE HAD DIRECTED THE AO TO VERIFY THE DETAILS OF EXPENSES A ND IN CASE THEY ARE FOR MODIFICATION/ UPGRADATION/ MAINTENANCE OF EXISTING WEBSITE, THE SAME SHOULD BE ALLOWED AS REVENUE EXPENDITURE. MERCK LTD. 17 39. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE AO HAS QUESTIONED THE ALLOWABILITY OF THE EXPENSES MER ELY ON THE ASSUMPTION THAT THEY ARE OF CAPITAL IN NATURE THOUGH THE LD. C IT(A) HAS DIRECTED THE AO TO VERIFY THE NATURE OF EXPENSES. THE LD. COUNS EL FOR THE ASSESSEE ARGUED THAT THE EXPENSES HAVE BEEN INCURRED ONLY FO R THE UPGRADATION OF THE WEBSITE. 40. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE FINDINGS OF THE LOWER AUTHORITIES. 41. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOT IN DISPUTE THAT T HE ASSESSEE IS A WELL KNOWN PHARMACEUTICAL COMPANY AND AS PER PREVAILING PRACTI CE ACROSS THE GLOBE ALL COMPANIES ARE HAVING THEIR OWN WEBSITE WHEREIN DETAILS OF THEIR PRODUCTS ALONGWITH OTHER DETAILS ARE PROVIDED. IT IS ALSO NOT IN DISPUTE THAT SUCH WEBSITE HAS TO BE MAINTAINED REGULARLY AN D HAVE TO BE UPDATED ON DAILY BASIS. CONSIDERING THE SMALLNESS OF THIS AMOUNT I.E. RS. 1,94,400/- VIS--VIS, THE BUSINESS STRUCTURE OF THE ASSESSEE COMPANY, WE DO NOT FIND ANY REASON TO DISALLOW SUCH A SMALL AM OUNT WHICH HAS BEEN INCURRED FOR THE MAINTENANCE OF ITS WEBSITE. ACCO RDINGLY, WE DIRECT THE AO TO ALLOW THE EXPENSE OF RS. 1,94,400/-. GROUND NO. 1.7 IS ALLOWED. 42. GROUND NO. 1.8 RELATES TO DISALLOWANCE OF PRODU CT DEVELOPMENT & CLINICAL TRIAL EXPENSES OF RS. 3,91,436/-. 43. THE AO HAS DISCUSSED THIS ISSUE AT PARA 14.2 PA GE 21 OF HIS ORDER. THE AO HAS ASKED THE ASSESSEE TO FURNISH DETAILS O F PRODUCT DEVELOPMENT AND CLINICAL TRIAL EXPENSES. ON RECEIVING NO SPECI FIC SUBMISSION FROM THE ASSESSEE, THE AO DISALLOWED THE SUM OF RS. 3,91,436 /-. MERCK LTD. 18 44. THE ASSESSEE STRONGLY AGITATED THIS ISSUE BEF ORE THE LD. CIT(A). THE LD. CIT(A) HAS CONSIDERED THIS ISSUE AT PARA-16 OF HIS ORDER AND AT PARA 16.2, THE LD. CIT(A) HAS OBSERVED THAT EVEN BEFORE ME, NO SUCH DETAILS OF CLINICAL TRIAL/PRODUCT DEVELOPMENT EXPEN SES HAVE BEEN FURNISHED AND CONFIRMED THE DISALLOWANCE MADE BY THE AO. 45. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE DRE W OUR ATTENTION TO THE STATEMENT OF FACTS FILED BEFORE THE LD. CIT(A) AND SUBMITTED THAT NO SPECIFIC QUERY IN RESPECT OF THIS EXPENDITURE WAS R AISED BY THE AO, THEREFORE, THERE WAS NO QUESTION OF SUBMITTING ANY EXPLANATION THEREON. IT IS THE SAY OF THE LD. COUNSEL THAT IN THE LIGHT OF THE BUSINESS OF THE ASSESSEE, SUCH EXPENSES ARE MANDATORILY INCURRED IN THE COURSE OF RESEARCH AND DEVELOPMENT AND THEREFORE THE SAME SHO ULD BE ALLOWED. 46. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 47. AFTER CONSIDERING THE SUBMISSIONS, WE FIND FORC E IN THE CONTENTION OF THE LD. COUNSEL THAT IN THIS LINE OF BUSINESS, T HE ASSESSEE HAS TO INCUR CERTAIN EXPENDITURE ON CLINICAL TRIAL. CONSIDERING THE SMALLNESS OF THE AMOUNT OF RS. 3,91,436/-, THE SAME CANNOT BE HELD T O BE INCURRED NOT FOR THE PURPOSE OF BUSINESS. WE ACCORDINGLY DIRECT THE AO TO ALLOW THE EXPENDITURE OF RS. 3,91,436/-. GROUND NO. 1.8 IS A CCORDINGLY ALLOWED. 48. GROUND NO. 1.9 RELATES TO THE ADDITION OF RS. 1 1,00,000/- ADDED TO THE INCOME OF THE ASSESSEE IN RESPECT OF CHANGE IN THE BASIS OF INVENTORY VALUATION. MERCK LTD. 19 49. THIS ISSUE HAS BEEN DISCUSSED BY THE AO AT PARA -16 PAGE 22 OF HIS ORDER. WHILE SCRUTINIZING THE COST AUDIT REPORT EN CLOSED WITH THE RETURN OF INCOME, THE AO FOUND THAT THE AUDITORS HAVE MADE TH E FOLLOWING NOTE : DURING THE YEAR, THE COMPANY HAS CHANGED THE METHO D OF VALUING INVENTORIES FROM FIFO TO MOVING WEIGHTED AV ERAGE BASIS. AS A RESULT OF THIS CHANGE, THE VALUE OF CL OSING INVENTORY AND PBT IS LOWER BY APPROXIMATELY RS. 11 LAKHS 50. THE ASSESSEE WAS ASKED TO EXPLAIN THE REASONS F OR SHIFTING FROM FIFO TO MWA METHOD. THE ASSESSEE DID NOT FILE ANY DETAIL NOR ANY REASON FOR CHANGE. THE AO ACCORDINGLY ADDED THE SU M OF RS. 11 LAKHS. 51. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. THE LD. CIT(A) AT PARA 18.3 OF HIS OR DER HAVE OBSERVED THAT THE ASSESSEE HAS FAILED TO FURNISH THE REASONS/DETA ILS HENCE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE ITS ARGUMENTS AND CL AIM AND CONFIRMED THE ADDITIONS MADE BY THE AO. 52. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE ASSESSEE HAS SHIFTED TO THE NEW METHOD OF VALUATION OF STOCK WHICH IS A WELL RECOGNIZED METHOD AND THEREFORE NO ADVERSE INF ERENCE SHOULD BE DRAWN. IT IS THE SAY OF THE LD. COUNSEL THAT THE A SSESSEE CAN FOLLOW ANY METHOD FOR VALUATION OF ITS STOCK AND THIS DISCRETI ON GIVEN TO THE ASSESSEE CANNOT BE OBJECTED. 53. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE WHILE SUPPORTING THE ORDERS OF THE LOWER AUTHORITIES SUBMITTED THAT THE ASSESSEE IS BOUND TO FURNISH REASONS AND BONAFIDES FOR CHANGING THE METH OD OF VALUATION OF INVENTORIES WHICH THE ASSESSEE HAS FAILED, THEREFOR E, THERE IS NO ERROR IN THE ORDER OF THE LD. CIT(A). MERCK LTD. 20 54. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOT IN DISPUTE THA T THE ASSESSEE HAS NOT FURNISHED ANY DETAILS EXPLAINING THE REASON FOR CHA NGE IN THE METHOD OF VALUATION OF THE INVENTORY. IT IS ALSO NOT IN DISP UTE THAT THE ASSESSEE HAS THE OPTION TO ADOPT ANY RECOGNIZED METHOD OF VALUAT ION OF INVENTORY. HOWEVER, AT THE SAME TIME IF THE ASSESSEE IS FOLLOW ING A PARTICULAR METHOD OF VALUATION OF INVENTORY FOR SOME YEARS AND SUDDENLY CHANGES THE METHOD TO ANOTHER RECOGNIZED METHOD, IT IS INCU MBENT TO THE ASSESSEE TO JUSTIFY THE BONAFIDES OF CHANGE IN THE METHOD OF INVENTORY. IN THE INSTANT CASE, WE DO NOT FIND ANY MATERIAL EVIDENCE BROUGHT ON RECORD BY THE ASSESSEE TO JUSTIFY THE BONAFIDES OF ITS CLAIM. HOWEVER, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE RESTORE THIS ISSUE BAC K TO THE FILES OF THE AO WITH A SPECIFIC DIRECTION TO THE ASSESSEE TO FURNIS H DETAILS/EXPLANATION RELATING TO THE BONAFIDES OF THE CHANGE IN THE METH OD OF VALUATION OF INVENTORY. THE AO IS DIRECTED TO DECIDE THIS ISSUE AFRESH AFTER CONSIDERING THE DETAILS/EXPLANATION FURNISHED BY TH E ASSESSEE AND AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD. GR OUND NO. 1.9 IS ALLOWED FOR STATISTICAL PURPOSE. 55. GROUND NO. 1.10 RELATES TO THE DISALLOWANCE U/S . 14A OF THE ACT AT RS. 24,11,250/-. 56. THE AO HAS CONSIDERED THIS ISSUE AT PARA-17 OF HIS ORDER WHEREIN HE HAS OBSERVED THAT THE ASSESSEE HAS EARNED A SUM OF RS. 2,35,88,554/- BY WAY OF DIVIDEND INCOME AND THE SAME HAS BEEN CLA IMED TO BE EXEMPT. THE ASSESSEE WAS ASKED TO EXPLAIN THE EXPENSES ATTR IBUTABLE FOR EARNING THE EXEMPT INCOME. THE ASSESSEE EXPLAINED THAT THE FUNDS THAT ARE INVESTED ARE GENERATED FROM COMPANYS INTERNAL ACCR UALS. SINCE THE ASSESSEE HAS NOT BORROWED ANY FUNDS FOR INVESTMENTS , NO INTEREST IS ATTRIBUTABLE TO THE DIVIDEND INCOME. FURTHER, NO S IGNIFICANT ADMINISTRATIVE MERCK LTD. 21 EXPENDITURE IS ATTRIBUTABLE TO EARNING OF SUCH DIVI DEND INCOME. THE AO DISREGARDED THE SUBMISSIONS MADE BY THE ASSESSEE AN D COMPUTED THE DISALLOWANCE AT RS. 49,58,761/-. 57. THE ASSESSEE STRONGLY AGITATED THIS MATTER BEFO RE THE LD. CIT(A) AND THE CIT(A) HAS CONSIDERED THIS ISSUE AT PARA-19 PAGE 36 OF HIS ORDER. IT WAS STRONGLY CONTENDED BEFORE THE LD. CIT(A) THA T NO SPECIFIC EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR E ARNING THE DIVIDEND INCOME. 58. AFTER CONSIDERING THE FACTS AND SUBMISSIONS MAD E BY THE ASSESSEE, THE LD. CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT M AINTAINED SEPARATE BANK ACCOUNTS AND ACCOUNTS OF EXPENDITURE IN RESPEC T OF INVESTMENTS ON WHICH TAX FREE INCOME HAS BEEN EARNED. THE LD. CIT (A) WAS CONVINCED THAT THE DISALLOWANCE U/S. 14A R.W. RULE 8D HAVE T O BE COMPUTED IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF ITO VS DAGA CAPITAL MANAGEMENT PVT. LTD. IN ITA NO. 8057/M/03 AND COMPU TED THE DISALLOWANCE AT RS. 24,11,250/-. 59. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), TH E ASSESSEE IS BEFORE US. 60. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED WHAT HAS BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. 61. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED T HE FINDINGS OF THE LOWER AUTHORITIES. 62. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOW WELL SETTLED TH AT APPLICATION OF RULE 8D IS PROSPECTIVE AND APPLICABLE FROM A.Y. 2008-09 AS PER THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F GODREJ & BOYCE MERCK LTD. 22 MFG. CO. LTD. 328 ITR 81. HOWEVER, AT THE SAME TI ME, WE FIND THAT IN ASSESSEES OWN CASE FOR A.Y. 2007-08 THE TRIBUNAL I N ITA NO. 8120/M/2011 AT PARA-31 OF ITS ORDER HAS HELD THAT IT WILL BE REASONABLE AND FAIR TO CONSIDER 1% OF EXEMPT INCOME TOWARDS EX PENSES FOR EARNING THE DIVIDEND INCOME BY THE ASSESSEE IN THE FINANCIA L YEAR UNDER CONSIDERATION . FACTS AND CIRCUMSTANCES BEING ID ENTICAL, WE HAVE NO HESITATION IN FOLLOWING THE DECISION OF THE TRIBUNA L (SUPRA). WE ACCORDINGLY DIRECT THE AO TO RESTRICT THE DISALLOWA NCE U/S. 14A TO 1% OF THE TOTAL DIVIDEND INCOME. GROUND NO. 1.10 IS PAR TLY ALLOWED. 63. GROUND NO. 1.11 RELATES TO THE REDUCTION OF PRO FITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 80-HHC OF THE ACT BY THE FOLLOWING ITEMS: 1) INTEREST INCOME RS. 2,46,96,888/- 2) MISCELLANEOUS INCOME RS. 1,37,18,862/- 3) INSTRUMENT SERVICE CONTRACTS RS. 1,06,21,791/- 63.1. DURING THE COURSE OF THE ASSESSMENT PROCEEDIN GS, THE AO OBSERVED THAT IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE H AS SHOWN FOLLOWING OTHER INCOME: ITEM RS. INTEREST ON DEPOSITS & OTHERS 1,61,10,179/- INTEREST ON DELAYED PAYMENTS 79,84,167/- INTEREST ON IT REFUND 6,02,542/- INSURANCE CLAIMS 17,32,218/- DIVIDEND RECEIVED ON CURRENT INVESTMENTS 2,35,88,554/- MERCK LTD. 23 EXPORT INCENTIVES 1,0675,116/- INTENDING COMMISSION 3,10,22,459/- PROFIT ON SALE OF FIXED ASSETS 1,92,74,478/- PROFIT ON SALE OF CURRENT INVESTMENTS 2,22,582/- INCOME FROM INSTRUMENT SERVICE CONTRACTS 1,06,21,791/- MISCELLANEOUS INCOME 1,37,18,862/- TOTAL 13,55,52,948/- 63.2. ON FURTHER PERUSAL OF COMPUTATION OF DEDUCTIO N U/S. 80-HHC, THE AO OBSERVED THAT THE ASSESSEE HAS EXCLUDED 90% OF T HE INTEREST INCOME, SUNDRY AMOUNTS WRITTEN BACK AND EXPORT INCENTIVES F ROM THE PROFITS OF BUSINESS. THE ASSESSEE WAS ASKED TO EXPLAIN WHY IT HAS NOT EXCLUDED 100% /90% OF OTHER INCOME FROM EXPORT TURNOVER/TOTA L TURNOVER. THE ASSESSEE WAS FURTHER ASKED TO EXPLAIN THE NEXUS OF OTHER INCOME WITH DEDUCTION CLAIMED. THE ASSESSEE FILED A DETAILED R EPLY WHICH IS EXHIBITED AT PAGE-33 OF THE ASSESSMENT ORDER. THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE WHO WAS OF THE FIRM BEL IEF THAT THE ITEMS OF INCOME MENTIONED HEREINABOVE DO NOT DIRECTLY ARISE FROM THE BUSINESS OF EXPORT EVEN IF THEY ARE INCIDENTAL TO THAT BUSINESS . ACCORDING TO THE AO, AS PER EXPLANATION (BAA) BELOW SECTION 80HHC INSERT ED W.E.F. 1.4.1992, 90% OF SUCH RECEIPTS HAVE TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS BEFORE COMPUTING DEDUCTION U/S. 80-HHC (3). THE AO THEREAFTER RELIED UPON CERTAIN JUDICIAL DECISIONS AT PAGE-34 OF HIS O RDER AND REJECTED THE CONTENTION OF THE ASSESSEE THAT ONLY NET RECEIPTS A RE TO BE EXCLUDED IN RESPECT OF INTEREST. THE AO THEREAFTER COMPUTED TH E DEDUCTION U/S. 80HHC DISREGARDING THE CLAIM MADE BY THE ASSESSEE. MERCK LTD. 24 64. THE ASSESSEE CARRIED THIS ISSUE BEFORE THE LD. CIT(A) AND THE CIT(A) HAS CONSIDERED THIS ISSUE AT PARA-20 PAGE 38 OF HIS ORDER. THE ASSESSEE FURNISHED THE DETAILS RELATING TO INTEREST INCOME, INSURANCE CLAIM, INCOME FROM INSTRUMENT SERVICE CONTRACTS AND MISCEL LANEOUS INCOME BEFORE THE LD. CIT(A). IT WAS STRONGLY CONTENDED B EFORE THE LD. CIT(A) THAT THE TRIBUNAL IN EARLIER ASSESSMENT YEARS I.E. A.YRS 1996-97 & 1997- 98 HAVE HELD THAT INTEREST FROM CUSTOMERS OF LATE P AYMENT OF BILLS, INSURANCE CLAIMS AND SALE OF SCRAP SHOULD NOT BE RE DUCED FROM THE PROFITS OF THE BUSINESS. 64.1. AFTER CONSIDERING THE FACTS AND THE SUBMISSIO NS, THE LD. CIT(A) HELD THAT ITEMS OF INSURANCE CLAIMS AND RECEIPTS FR OM SALE OF SCRAP SHOULD NOT BE EXCLUDED FROM THE PROFITS OF THE BUSINESS FO R COMPUTING DEDUCTION U/S. 80-HHC OF THE ACT. THE LD. CIT(A) DID NOT CON SIDER THE EXPLANATION OF THE ASSESSEE IN RESPECT OF INTEREST INCOME, MISC ELLANEOUS INCOME AND INCOME FROM INSTRUMENT SERVICE CONTRACTS. 65. THE ASSESSEE IS BEFORE US AGAINST THIS FINDING OF THE LD. CIT(A). 66. SO FAR AS INTEREST INCOME IS CONCERNED, WE FIND THAT A SIMILAR ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES O WN CASE IN A.Y. 2003- 04 VIDE ITA NO. 925/M/07 AT PARA 16.3 PAGE 30 OF IT S ORDER WHEREIN THE TRIBUNAL HELD AS UNDER: WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIV AL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING EXC LUSION OF INTEREST ON FD AND INTEREST ON INCOME TAX REFUND FROM THE PR OFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/S 80HHC. THE INTEREST O N INCOME TAX REFUND HAS TO BE TREATED AS INCOME FROM OTHER SOURC ES AND, THEREFORE, THE ENTIRE AMOUNT IS REQUIRED TO EXCLUDE D FROM THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/S 80HHC. TH E LEARNED SENIOR COUNSEL ALSO FAIRLY AGREED THAT THE ASSESSEE HAD NO OBJECTION IF THE INTEREST ON FD WAS ALSO EXCLUDED F ROM THE PROFIT OF BUSINESS PROVIDING THE NETTING WAS ALLOWED TO THE A SSESSEE. WE FIND MERCK LTD. 25 THE CLAIM REASONABLE BECAUSE ONLY THE NET INCOME AF TER DEDUCTING THE EXPENSES INCURRED FOR EARNING OF THE INCOME HAS TO BE EXCLUDED FROM THE PROFIT OF BUSINESS. WE, THEREFORE, HOLD TH AT NET FD INTEREST HAS TO BE EXCLUDED FULLY FROM THE PROFIT OF BUSINES S. THE ISSUE OF NETTING IS, HOWEVER, RESTORED TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION AND AFTER ALLOWIN G OPPORTUNITY OF HEARING TO THE ASSESSEE. RESPECTFULLY FOLLOWING THE ABOVE FINDING OF THE TR IBUNAL, WE RESTORE THIS ISSUE OF NETTING TO THE FILE OF THE AO FOR PASSING A FRESH ORDER AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESS EE. 67. REGARDING OTHER TWO ITEMS OF INCOME I.E. MISCEL LANEOUS INCOME OF RS. 1,37,18,862/- AND INSTRUMENT SERVICE CONTRACTS AT RS. 1,06,21,791/-, WE FIND THAT THE TRIBUNAL IN A.Y. 2003-04 HAD THE O CCASION TO CONSIDER THE SIMILAR ITEMS OF INCOME AT PARA-15 PAGE 23 OF I TS ORDER. THE TRIBUNAL AT PARA 15.6 AT PAGE-28 OF ITS ORDER HELD AS UNDER: AS REGARDS THE INCOME FROM INSTRUMENTS SERVICE CON TRACTS IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT THE SERVICE CONTRACT WAS A MAINTENANCE CONTRACT IN RELATION TO EQUIPMENTS SOLD BY ASSESSEE AS A TRADING ITEM. THIS CLAIM HAS NOT BEEN CONTROVERTE D BEFORE US. THEREFORE, SUCH INCOME HAS TO BE CONSIDERED AS INTE GRAL PART OF BUSINESS OPERATIONS WHICH IS NOT REQUIRED TO BE RED UCED AS PER EXPLANATION (BAA). WE, THEREFORE, SET ASIDE THE ORD ER OF CIT (A) ON THIS POINT AND DIRECT THE AO TO NOT REDUCE 90% OF S UCH INCOME FROM PROFIT OF BUSINESS AS PER EXPLANATION (BAA). IN RELATION TO MISCELLANEOUS INCOME, IT WAS SUBMITTED THAT THESE A LSO INCLUDED SCRAP SALES, SUNDRY SALES AND CASH DISCOUNT RECEIPT S WHICH WERE INTEGRAL PART OF BUSINESS OPERATION. THIS ASPECT IN OUR VIEW REQUIRES VERIFICATION. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY VERIFI CATION. THE RECEIPTS ON ACCOUNT OF SCRAP SALES, SUNDRY SALES AN D CASH DISCOUNT IF ANY WHICH ARE INTEGRAL PART OF BUSINESS OPERATIO N WILL NOT BE REDUCED BY AO AS PER EXPLANATION (BAA). RESPECTFULLY FOLLOWING THE ABOVE FINDINGS OF THE TR IBUNAL, WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO TO D ECIDE AFRESH IN THE LIGHT MERCK LTD. 26 OF THE DIRECTIONS GIVEN BY THE TRIBUNAL IN A.Y. 200 3-04 AFTER ALLOWING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 68. GROUND NO. 1.12 RELATES TO REDUCTION OF DEPB I NCENTIVE FROM THE PROFITS IN COMPUTING THE DEDUCTION U/S. 80IB OF THE ACT. 69. A SIMILAR ISSUE CAME UP FOR HEARING BEFORE THE TRIBUNAL IN A.Y. 2003-04 IN ITA NO. 925/M/07 WHEREIN WE FIND THAT TH E TRIBUNAL HAS DISCUSSED THIS ISSUE AT PARA-13 OF ITS ORDER AND AT PARA 13.2 THE TRIBUNAL HELD AS UNDER : WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECORD S AND CONSIDERED MATTER CAREFULLY. THE DISPUTE IS REGARDI NG ALLOWABILITY OF CLAIM OF DEDUCTION U/S 80-IB IN RESPECT OF DEPB INCOME. WE FIND THAT THE ISSUE IS COVERED BY THE JUDGMENT OF H ONBLE SUPREME COURT IN CASE OF LIBERTY INDIA LTD. ( 317 ITR 218) TO WHICH BOTH THE PARTIES AGREED. THE HONBLE SUPREME COURT IN THE SA ID CASE HAVE HELD THAT SECTION 80-IB DID NOT COVER THE PROFIT FR OM THE SOURCES BEYOND THE FIRST DEGREE AND ONLY THE PROFIT OF THE ELIGIBLE BUSINESS OF UNDERTAKING COULD BE ALLOWED AS DEDUCTION. IT WA S ALSO HELD THAT DUTY DRAWBACK AND DEPB WERE NOT PROFIT DERIVED FROM THE ELIGIBLE BUSINESS. FOLLOWING THE SAID JUDGMENT OF HONBLE SU PREME COURT, WE CONFIRM THE ORDER OF CIT (A) DISALLOWING THE CLA IM. RESPECTFULLY FOLLOWING THE AFOREMENTIONED FINDINGS OF THE TRIBUNAL, WE CONFIRM THE REDUCTION OF DEPB INCOME F OR COMPUTING DEDUCTION U/S. 80IB. GROUND NO. 1.12 IS ACCORDINGL Y DISMISSED. 70. GROUND NO. 1.13 IS NOT PRESSED ACCORDINGLY IT I S DISMISSED AS NOT PRESSED. 71. GROUND NO. 1.14 RELATES TO EXCLUSION FROM THE P ROFITS OF THE BUSINESS 90% OF THE FOLLOWING ITEMS: MERCK LTD. 27 1) INTEREST ON DELAYED PAYMENT - RS. 79,8 4,167/- 2) INCOME FROM INSTRUMENT SERVICE CONTRACTS - RS. 1,06 ,21,791/- 3) MISCELLANEOUS INCOME - RS.1,37,18,862/- 4) INTEREST ON FD WITH BANKS - RS.1,43,28,772/- 72. A SIMILAR ISSUE CAME UP FOR HEARING BEFORE THE TRIBUNAL IN A.Y. 2003-04 IN ITA NO. 925/M/07 WHEREIN WE FIND THAT TH E TRIBUNAL HAS DECIDED THIS ISSUE AT PARA -15 PAGE 23 OF ITS ORDER . SO FAR AS ON DELAYED PAYMENT IS CONCERNED, THE TRIBUNAL HAS GIVEN DIRECT IONS TO AO NOT TO REDUCE SUCH INCOME ON BUSINESS PROFITS. RESPECTFUL LY FOLLOWING THE DIRECTIONS OF THE TRIBUNAL IN ITA NO. 925/M/07, WE DIRECT THE AO NOT TO REDUCE SUCH INCOME ON BUSINESS PROFITS. 73. SIMILAR DIRECTIONS HAVE BEEN GIVEN BY THE TRIBU NAL SO FAR AS INSTRUMENT SERVICE CONTRACTS AMOUNTING TO RS. 1,06, 21,791/- IS CONCERNED. THE AO IS DIRECTED TO FOLLOW THE DIRECTIONS OF THE TRIBUNAL GIVEN IN A.Y. 2003-04. 74. REGARDING MISCELLANEOUS INCOME OF RS. 1,37,18,8 62/-, WE FIND THAT THE TRIBUNAL HAS RESTORED THIS ISSUE BACK TO THE FI LE OF THE AO TO VERIFY WHETHER THESE MISCELLANEOUS INCOME INCLUDES SCRAP S ALES, SUNDRY SALES AND CASH DISCOUNT AND IF FOUND SO THEN SUCH ITEMS S HOULD NOT BE REDUCED FROM BUSINESS PROFITS. WE ACCORDINGLY DIRECT THE A O TO FOLLOW THE DIRECTIONS OF THE TRIBUNAL GIVEN IN A.Y. 2003-04. 75. THE LAST ITEM REMAINS IS INTEREST ON FD WITH BA NKS AMOUNTING TO RS. 1,43,28,772/-. WE FIND THAT THE TRIBUNAL HAS D IRECTED THE AO TO EXCLUDE 90% OF NET INTEREST AFTER NECESSARY VERIFIC ATION. FACTS BEING IDENTICAL, WE ACCORDINGLY DIRECT THE AO TO DECIDE T HIS ISSUE AFRESH AFTER MERCK LTD. 28 FOLLOWING THE DIRECTIONS OF THE TRIBUNAL GIVEN IN A .Y. 2003-04 VIDE ITA NO. 925/M/07. GROUND NO. 1.14 IS PARTLY ALLOWED FO R STATISTICAL PURPOSE. 76. GROUND NO. 1.15 RELATES TO DEDUCTION U/S. 80-I B OF THE ACT WHILE COMPUTING THE BUSINESS PROFITS FOR THE PURPOSE OF DEDUCTION U/S. 80HHC OF THE ACT. 76.1. IDENTICAL ISSUE WAS HEARD BY THE TRIBUNAL IN A.Y. 2003-04 VIDE ITA NO. 925/M/07. WE FIND THAT AT PARA 18, THE TRI BUNAL HAS CONSIDERED THIS DISPUTE REGARDING REDUCTION OF THE DEDUCTION A LLOWED U/S. 80IB FROM THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/ S. 80HHC. WE FIND THAT PARA 18.2 THE TRIBUNAL HAS FOLLOWED THE DECISI ON OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ASSOCIATED CAPSULES (P) LTD VS CIT 332 ITR 42 IN WHICH IT HAS BEEN HELD THAT THE A MOUNT OF PROFIT ALLOWED AS DEDUCTION U/S. 80-IA IS NOT REQUIRED TO BE REDUCED FROM THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/S. 8 0HHC. RESPECTFULLY FOLLOWING THE AFOREMENTIONED FINDINGS OF THE TRIBUN AL IN THE LIGHT OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT ( SUPRA), ORDER OF THE LD. CIT(A) IS SET ASIDE AND THE AO IS DIRECTED TO C OMPUTE THE DEDUCTION ACCORDINGLY. GROUND NO. 1.15 IS ALLOWED. ITA NO. 3098/MUM/2009 A.Y. 2004-05 _ REVENUES AP PEAL 77. THE ONLY GRIEVANCE OF THE REVENUE IS RELATES TO THE DELETION OF ADDITION OF RS. 78,63,967/- IN RESPECT OF BAD DEBTS . 77.1. THE AO HAS DISCUSSED THIS ISSUE AT PARA-6 PAG E-6 OF HIS ORDER. ON PERUSING THE PROFIT AND LOSS ACCOUNT, THE AO OBSERV ED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS. 78,63,967/- ON ACCOUNT OF BAD DEBTS. THE ASSESSEE WAS ASKED TO SUBMIT THE DETAILS OF BAD DEB T WRITTEN OFF. THE MERCK LTD. 29 ASSESSEE WAS ALSO ASKED TO GIVE SPECIFIC DETAILS WI TH REASONS OF WRITE OFF ALONGWITH DOCUMENTARY EVIDENCE. THE ASSESSEE FILED A DETAILED REPLY GIVING NAMES OF THE DEBTORS ALONG WITH AMOUNTS WRIT TEN OFF. COPY OF THE LEDGER ACCOUNTS WAS ALSO FURNISHED. THE REPLY FILE D BY THE ASSESSEE DID NOT FIND FAVOUR FROM THE AO. THE AO HAS GIVEN HIS OBSERVATIONS AT PARA 6.9 OF HIS ORDER AND AFTER MAKING THE AFOREMENTIONE D OBSERVATIONS, THE AO DISALLOWED THE CLAIM OF BAD DEBT OF RS. 78,63,96 7/-. 77.2. THE ASSESSEE CARRIED THIS MATTER BEFORE THE L D. CIT(A). IT WAS STRONGLY CONTENDED THAT AFTER THE AMENDMENT BROUGHT IN THE PROVISIONS OF SEC. 36(1), THE ONLY THING THAT THE ASSESSEE HAS TO ESTABLISH IS THAT IT HAS WRITTEN OFF ALL THE DEBTS. IT WAS EXPLAINED THAT T HE ASSESSEE HAS GIVEN PARTY-WISE DETAILS ALONGWITH COPY OF LEDGER ACCOUNT . AFTER CONSIDERING THE FACTS AND SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) WAS CONVINCED THAT THE DEBTS WRITTEN OFF AS BAD DEBTS HAVE TO BE ALLOWED IN THE YEAR OF WRITE-OFF SO LONG AS THE DEBTS ARE ON ACCOUNT OF TH E SALES MADE EARLIER AND WERE CHARGED TO TAX IN THE RESPECTIVE YEAR AND DELE TED THE ADDITION OF RS. 78,63,967/- 77.3. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), REVENUE IS BEFORE US. 77.4. THE LD. DR STRONGLY SUPPORTED THE FINDINGS OF THE AO. 77.5. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THE ASSESSEE HAS FULFILLED ALL THE CONDITIONS PROVIDED IN SEC. 36(1) (VII) READ WITH SEC. 36(2) OF THE ACT AND THEREFORE THE CLAIM OF BAD DEBTS DES ERVES TO BE ALLOWED. 77.6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOT IN DISPUTE THA T THE DEBTS WRITTEN OFF BY THE ASSESSEE ARE ON ACCOUNT OF THE SALES MADE IN EA RLIER YEARS WHICH HAS BEEN CHARGED TO TAX IN THE RESPECTIVE YEAR. MEANIN G THEREBY THAT THE BASIC MERCK LTD. 30 CONDITION FOR WRITE OFF OF DEBTS AS PROVIDED U/S. 3 6(2) HAS NOT BEEN DISPUTED BY THE AO. AFTER 1.4.1989 THE ASSESSEE HA S TO SHOW THAT IT HAS ACTUALLY WRITTEN OFF THE DEBTS WHICH THE ASSESSEE H AS SUCCESSFULLY SHOWN BY FILING THE NECESSARY COPY OF LEDGER ACCOUNTS OF THE RESPECTIVE PARTIES WHICH HAS BEEN ACCEPTED BY THE AO. CONSIDERING ALL THESE FACTS IN TOTALITY, WE DO NOT FIND ANY REASON TO INTERFERE WI TH THE FINDINGS OF THE LD. CIT(A) 77.7. IN THE RESULT, THE APPEAL FILED BY THE REVENU E IS DISMISSED. ITA NO. 5596/MUM/2011- A.Y. 2005-06- ASSESSEES APP EAL 78. GROUND NO. 1.1 IS GENERAL IN NATURE AND NEEDS N O ADJUDICATION. 79. THE ISSUE INVOLVED IN GROUND NO. 1.2 ARE ID ENTICAL WITH THE ISSUE IN ITA NO. 2393/M/09 FOR A.Y. 2004-05 IN GROUND NO. 1.1 AT PARAS 1 TO 8, THOUGH QUANTUM MAY DIFFER, THEREFORE, ON SIMILAR LINES, SIMILAR REASONS, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 5596/M/ 11 FOR ASSESSMENT YEAR 2005-2006 IS ALLOWED FOR STATISTICAL PURPOSE. 80. THE ISSUE INVOLVED IN GROUND NO. 1.3 ARE IDEN TICAL WITH THE ISSUE IN ITA NO. 2393/M/09 FOR A.Y. 2004-05 IN GROUND NO. 1.2 AT PARAS 9 TO 17, THOUGH QUANTUM MAY DIFFER, THEREFORE, ON SIMILA R LINES, SIMILAR REASONS, THE APPEAL FILED BY THE ASSESSEE IN ITA NO . 5596/M/11 FOR ASSESSMENT YEAR 2005-2006 IS PARTLY ALLOWED FOR STA TISTICAL PURPOSE. 81. THE ISSUE INVOLVED IN GROUND NO. 1.4 ARE IDE NTICAL WITH THE ISSUE IN ITA NO. 2393/M/09 FOR A.Y. 2004-05 IN GROUND NO. 1.10 AT PARAS 55 TO 62, THOUGH QUANTUM MAY DIFFER, THEREFORE, ON SIM ILAR LINES, SIMILAR MERCK LTD. 31 REASONS, THE APPEAL FILED BY THE ASSESSEE IN ITA NO . 5596/M/11 FOR ASSESSMENT YEAR 2005-2006 IS PARTLY ALLOWED. 82. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 5596/M/11 FOR A.Y. 2005-06 IS PARTLY ALLOWED FOR ST ATISTICAL PURPOSE. ITA NO. 8222/MUM/2010 A.Y. 2006-07 ASSESSEES A PPEAL 83. THE ISSUE INVOLVED IN GROUND NO. 1.1 ARE IDEN TICAL WITH THE ISSUE IN ITA NO. 2393/M/09 FOR A.Y. 2004-05 IN GROUND NO. 1.2 AT PARAS 9 TO 17, THOUGH QUANTUM MAY DIFFER, THEREFORE, ON SIMILA R LINES, SIMILAR REASONS, THE APPEAL FILED BY THE ASSESSEE IN ITA NO . 8222/M/10 FOR ASSESSMENT YEAR 2006-2007 IS PARTLY ALLOWED FOR STA TISTICAL PURPOSE. 84. GROUND NO. 2.1 RELATES TO DISALLOWANCE U/S. 145 A IN RESPECT OF MODVAT CREDIT. 84.1. THIS ISSUE HAS BEEN DISCUSSED AT LENGTH IN AS SESSEES OWN CASE IN A.Y. 2003-04 BY THE TRIBUNAL IN ITA NO. 925/M/07 AT PARA-3 PAGE-2 OF ITS ORDER AND THE TRIBUNAL WHILE DECIDING THIS ISSU E HAS DIRECTED THE AO TO MAKE ADJUSTMENT ON ACCOUNT OF TAX, DUTY WILL ALSO BE MADE IN THE PURCHASES. RESPECTFULLY FOLLOWING THE AFOREMENTION ED FINDINGS OF THE TRIBUNAL, WE DIRECT THE AO TO FOLLOW THE DIRECTIONS OF THE TRIBUNAL GIVEN IN A.Y. 2003-04 VIDE ITA NO. 925/M/07. THIS GROUND OF THE ASSESSEE IS ALLOWED. 85. GROUND NO. 2.2 RELATES TO DOUBLE TAXATION OF RS . 1,73,563/- . THE SOLE GRIEVANCE OF THE ASSESSEE IS THAT THE AO HAS N OT FOLLOWED THE DIRECTIONS OF THE DRP. MERCK LTD. 32 85.1. WE HAVE CAREFULLY PERUSED THE ORDERS. WE FIN D FORCE IN THE CONTENTION OF THE ASSESSEE. WE ACCORDINGLY DIRECT THE AO TO FOLLOW THE DIRECTIONS OF THE DRP AND DECIDE THIS ISSUE AFRESH. THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 86. GROUND NO. 2.3 RELATES TO CLUB EXPENSES OF RS. 11,020/-. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THAT THE AO DID NOT FOLLOW THE DIRECTIONS OF THE DRP WHICH HAS DIRECTED THE AO TO DELETE THE SAID ADDITION. 86.1. WE HAVE GONE THROUGH THE RESPECTIVE ORDERS. WE FIND FORCE IN THE SUBMISSION OF THE LD. COUNSEL. THE AO IS DIRECTED TO FOLLOW THE DIRECTIONS OF THE DRP AND DECIDE THIS ISSUE AFRESH. THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 87. GROUND NO. 2.4 RELATES TO DISALLOWANCE OF ROYAL TY PAID FOR TRADE MARK AT RS. 6,73,73,683/-. IT IS THE SAY OF THE LD . COUNSEL THAT ONCE AGAIN THE AO HAS NOT FOLLOWED THE DIRECTION OF THE DRP. WE AGREE WITH THE SUBMISSIONS OF THE LD. COUNSEL AND DIRECT THE AO TO FOLLOW THE DIRECTIONS OF THE DRP IN THIS RESPECT AND DECIDE THE ISSUE AFR ESH. THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 88. GROUND NO. 2.5 RELATES TO THE DISALLOWANCE IN R ESPECT OF COST OF PHYSICIAN SAMPLES AMOUNTING TO RS. 3,59,98,828/-. THE ISSUE INVOLVED IN THIS GROUND IS IDENTICAL WITH THE ISSUE IN ITA NO. 2393/M/09 FOR A.Y. 2004-05 IN GROUND NO. 1.1 AT PARAS 1 TO 8, THOUGH Q UANTUM MAY DIFFER, THEREFORE, ON SIMILAR LINES, SIMILAR REASONS, THE A PPEAL FILED BY THE ASSESSEE IN ITA NO. 8222/M/2010 FOR ASSESSMENT YEAR 2006-2007 IS ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 7585/MUM/2010 A.Y. 2006-07 MERCK LTD. 33 89. BEFORE CLOSING, WE FIND THAT THE ASSESSEE HAS F ILED ANOTHER APPEAL FOR A.Y. 2006-07 WHICH HAS BEEN GIVEN ITA NO. 7585/ MUM/2010. THIS IS A REPETITIVE APPEAL, ALREADY CONSIDERED IN ITA N O. 8222/M/2010, BY VIRTUE OF WHICH ITA NO. 7585/MUM/2010 BECOMES OTIOS E. 90. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 2393/M/09 FOR A.Y. 2004-05 AND ITA NO. 5596/M/2011 FOR A.Y. 2005- 06 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE AND TH E CROSS APPEAL FILED BY THE REVENUE IN ITA NO. 3098/M/09 FOR A.Y. 2004-05 I S DISMISSED AND THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 8222/M/ 10 FOR A.Y. 2006-07 IS ALLOWED FOR STATISTICAL PURPOSE. ASSESSEES APPE AL IN ITA NO. 7585/MUM/2010 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21.8.2013 3 . 2& $ 4 56 21.8.2013 2 . = SD/- SD/- (I.P. BANSAL ) (N.K. BILLAIYA) /JUDICIAL MEMBER $ / ACCOUNTANT MEMBER MUMBAI; 5 DATED 21.8.2013 . . ./ RJ , SR. PS MERCK LTD. 34 3 . +/ > &/ 3 . +/ > &/ 3 . +/ > &/ 3 . +/ > &/ / COPY OF THE ORDER FORWARDED TO : 1. '* / THE APPELLANT 2. +,'* / THE RESPONDENT. 3. ? ( ) / THE CIT(A)- 4. ? / CIT 5. @= +/ , , / DR, ITAT, MUMBAI 6. =A B / GUARD FILE. 3 3 3 3 / BY ORDER, , / +/ //TRUE COPY// C CC C / D ( D ( D ( D ( (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI MERCK LTD. 35 DATE INITIALS 1. DRAFT DICTATED ON: 8.08.2013 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 13.08.2013 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: