The ACIT, Central Circle-1, Baroda V. M/s. Sun Pharmaceuticals Industries Ltd., Baroda

ITA 2400/AHD/2009

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1616 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-04-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 13-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R I PATEL
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Revenue expenditure; Capital expenditure
• Section: 133A; 115JB; 80IB; 10B; 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH (BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER & SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER) ITA. NO: 2430 & 2400/AHD/2009 (ASSESSMENT YEAR: 2005-06) SUN PHARMACEUTICAL INDUSTRIES LTD, TANDALJA, BARODA-20 V/S ASST. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE- 1, BARODA (APPELLANT) (RESPONDENT) ASST. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-1, BARODA V/S SUN PHARMACEUTICAL INDUSTRIES LTD, TANDALJA, BARODA-20 (APPELLANT) (RESPONDENT) PAN: AADCS3124K APPELLANT BY : SHRI S.N. SOPARKAR, A.R RESPONDENT BY : SHRI R.I. PATEL, CIT/D.R. ( )/ ORDER DATE OF HEARING : 26 -04-201 6 DATE OF PRONOUNCEMENT : 03 -05-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 2 1. ITA NOS. 2430 & 2400/AHD/2009 ARE APPEALS BY THE ASSESSEE AND THE REVENUE PREFERRED AGAINST THE VERY SAME ORDER OF TH E LD. CIT(A)-IV, AHMEDABAD DATED 24.02.2009 PERTAINING TO A.Y. 2005- 06. THESE CROSS APPEALS WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASS ESSEE STATED THAT THE ISSUES RAISED BY THE ASSESSEE AND THE REVENUE IN THEIR RES PECTIVE APPEALS ARE SETTLED EITHER IN FAVOUR OF THE ASSESSEE OR IN FAVO UR OF THE REVENUE BY THE EARLIER ORDER OF THE TRIBUNAL IN ASSESSEES OWN CAS E. TO SUBSTANTIATE, THE LD. COUNSEL FURNISHED THE DETAILED CHART EXPLAINING HOW THE GROUNDS OF APPEAL ARE COVERED BY THE EARLIER DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE. THE LD. D.R. FAIRLY CONCEDED TO THIS. ON SUCH CONCE SSION, WE HAVE HEARD THE RIVAL CONTENTIONS AND HAVE CAREFULLY PERUSED THE OR DERS OF THE AUTHORITIES BELOW. WE HAVE ALSO THE BENEFIT OF THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEARS. WE ACCORDINGLY DECIDE TH ESE APPEALS. ITA NO 2430/AHD/2009 FOR A.Y. 2005-06. 1 ST GROUND IS OF GENERAL IN NATURE AND NEEDS NO SEPARA TE ADJUDICATION. GROUND NO. 2 RELATES TO THE DISALLOWANCE OF OVERRID ING COMMISSION PAID TO ASSOCIATED ENTERPRISE PURSUANT TO THE ORDER OF THE TRANSFER PRICING OFFICER. 3. WHILE SCRUTINIZING THE RETURN OF INCOME, THE A .O NOTICED THAT THE ASSESSEE HAS PAID EXPORT COMMISSION OF RS. 5,17,21, 555/- TO M/S. SUN PHARMA GLOBAL INC., AN ASSOCIATE ENTERPRISE OF THE ASSESSEE. THIS ISSUE WAS REFERRED TO THE TRANSFER PRICING OFFICER FOR DETERM INATION OF ARMS LENGTH PRICE UNDER SECTION 92CA(1) OF THE ACT. THE TPO VID E ORDER DATED ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 3 17.03.2008 HAS DETERMINED ALP AT NIL. THUS, THE DIF FERENCE AMOUNT OF RS. 5,17,21,555/- WAS TREATED AS EXCESS COMMISSION PAID BY THE ASSESSEE TO ITS AE WHICH NEEDS TO BE DISALLOWED. ASSESSEE WAS ASKED TO EXPLAIN THE NATURE OF TRANSACTIONS AND WHETHER THE PAYMENT IS WITHIN A RMS LENGTH PRICE. ASSESSEE FILED A DETAILED AND ELABORATE REPLY TO SU BSTANTIATE ITS CLAIM THAT THE PAYMENT IS AT ARMS LENGTH PRICE. IT WAS BROUGH T TO THE NOTICE OF THE A.O THAT IN EARLIER ASSESSMENT YEARS I.E. A.YS. 2002-03 , 2003-04 & 2004-05, THE LD. CIT(A) HAS ACCEPTED THE NORMAL COMMISSION PAID TO THE AE AND THE ONLY GROUND WHICH THE LD. CIT(A) HAS REJECTED IS THE PAY MENT OF OVERRIDING COMMISSION WHEREIN THE LD. CIT(A) HAS DIRECTED THAT ONLY IN THOSE CASES WHERE THE OVERRIDING COMMISSION PAID TOGETHER WITH THE EXISTING COMMISSION PAID IS IN EXCESS OF 3% OF THE TURNOVER, THEN THE E XCESS HAS TO BE DISALLOWED. THE SUBMISSION OF THE ASSESSEE WAS CONS IDERED WHO DISMISSED THE SAME AND ADDED AN AMOUNT OF RS. 5,17,21,555/- O N ACCOUNT OF EXCESS COMMISSION PAID TO ITS ASSOCIATE CONCERN. 4. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CI T(A) AND REITERATED ITS CLAIM THAT THE PAYMENT IS AT ALP. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, THE LD. CIT(A) OBSERVED THAT SIMILAR Q UESTION HAD ARISEN IN ASSESSEES OWN CASE DURING ASSESSMENT YEARS 2002-03 , 2003-04 & 2004-05 WHICH WAS PARTLY DECIDED BY THE LD. CIT(A) IN FAVOU R OF THE ASSESSEE REGARDING COMMISSION PAID AND PARTLY DISMISSED WITH REGARD TO OVERRIDING COMMISSION PAID. THE LD. CIT(A) FURTHER OBSERVED TH AT SINCE THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES DURING THE YE AR UNDER APPEAL, HE DIRECTED THE A.O TO TAKE A SIMILAR VIEW AS TAKEN IN EARLIER YEARS AND ACCORDINGLY ALLOWED PARTIAL RELIEF TO THE ASSESSEE. 5. BEFORE US, THE COUNSEL FOR THE ASSESSEE STATED THAT THE TRIBUNAL HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AG AINST THE REVENUE IN ITA ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 4 NO. 1558 & 1676/AHD/2006, 1513 & 1701/AHD/2007 AND 1193 & 1287/AHD/08. THE LD. D.R. COULD NOT BRING ANY DISTI NGUISHING DECISION IN FAVOUR OF THE REVENUE. WE HAVE GIVEN A THOUGHTFUL C ONSIDERATION TO THE FACTS IN ISSUES. WE FIND FORCE IN THE CONTENTION OF THE L D. COUNSEL. AN IDENTICAL ISSUE WAS CONSIDERED AND DECIDED BY THE TRIBUNAL IN ASSESSMENT YEARS 202- 03, 2003-04 & 2004-05 (SUPRA). THE TRIBUNAL HAS CON SIDERED A SIMILAR ISSUE QUA GROUND NO. 11 OF THE APPEALS BEFORE IT AND HAVE HELD AS UNDER:- GROUND NO. 11 RELATES TO THE DISALLOWANCE OF OVERRI DING COMMISSION PAID TO ASSOCIATED ENTERPRISE. 25. THIS ISSUE RELATES TO THE TRANSFER PRICING ADJU STMENT AND HENCE HAS BEEN CONSIDERED BY THE TPO IN ITS ORDER DATED 24.03.2005 MADE U/S. 92CA(3) OF THE ACT. 26.DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PROCEEDINGS, THE TPO NOTICED THAT THE ASSESSEE HAS PAID IMPORTING COMMISSION TOWARDS ASSOCIATE ENTITY AMOUNTING TO RS. 335.63 LACS. THE ASSOCIATE ENTITY M/S. SUN PHARMA G LOBAL INC IS A SUBSIDIARY OF THE ASSESSEE COMPANY AND IS A TAX RESIDENT OF BRITISH V IRGIN ISLANDS. THE ASSESSEE CLAIMED THAT THE ASSOCIATE ENTITY PROVIDED MARKETING AND PR OMOTION TO THE ASSESSEES PRODUCTS IN THE EXPORT MARKET ON A GLOBAL BASIS. IN ITS TRANSFE R PRICING STUDY REPORT, THE ASSESSEE CONTENDED THAT THE COMMISSION PAID IS COMPARABLE TO THE COMMISSION PAID BY IT TO NON- RELATED PARTIES. IT WAS BROUGHT TO THE NOTICE OF TH E TPO THAT THE WEIGHTED AVERAGE RATE OF COMMISSION WORKS OUT TO 7.84% ON TOTAL SALES AND ON SIMILAR ARRANGEMENT IN INDIA, THE ASSESSEE HAS PAID COMMISSION @ 11% . THEREFORE THE PAYMENT IS AT ARMS LENGTH. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, THE TPO OBSERVED THAT THE ASSESSEE HAS NOT SUBMITTED ANY DOCUMENTARY EVIDENCE IN RESPECT OF IT S ARRANGEMENTS WITH ANY OF THESE PERSONS. THE TPO ALSO OBSERVED THAT THE ASSESSEE HA D FAILED TO ESTABLISH THE ARMS LENGTH NATURE OF THE TRANSACTION UNDER THE CUP METHOD. ACC ORDINGLY, THE ASSESSEE WAS ASKED TO PROVIDE THE DOCUMENTARY EVIDENCE IN SUPPORT OF THE VARIOUS SERVICES RENDERED BY THE AE. THE ASSESSEE WAS ALSO ASKED TO PROVIDE THE DETAILS OF EXPENSES INCURRED IN VARIOUS LOCATIONS OF THE WORLD BY THE AE TO ESTABLISH THE S ERVICES RENDERED BY THEM. THE ASSESSEE WAS ALSO ASKED TO PROVIDE THE DETAILS OF PERSONS EM PLOYED BY THE AE ALONG WITH THEIR ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 5 QUALIFICATION; THE ASSESSEE FILED THE NECESSARY DET AILS. THE TPO AT PARA 9 OF HIS ORDER HAD OBSERVED THAT THE ASSESSEE FAILED TO JUSTIFY THE MA RGIN OF THE SUBSIDIARY COMPANY BY COMPARING IT WITH OTHER COMPANIES INCLUDED IN SIMIL AR ACTIVITIES. AT THIS JUNCTURE, WE HAVE TO STATE THAT THIS OBSERVATION OF THE TPO IS O UT OF CONTEXT AND TOTALLY IRRELEVANT BECAUSE THE ASSESSEE IS THE TESTED PARTY AND NOT IT S AE. ASSESSEES TRANSACTIONS HAVE TO BE CONSIDERED AT ARMS LENGTH AND NOT THE PROFITABILIT Y OF THE AE. THE TPO FINALLY CONCLUDED BY HOLDING THAT THE ASSESSEE HAS FAILED TO DISCHARG E THE ONUS LAID UPON IT TO DETERMINE THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTION S. 27. ACCORDINGLY, THE ARMS LENGTH PRICE FOR THE INT ERNATIONAL TRANSACTION WAS DETERMINED AS UNDER:- (A) IN RESPECT OF OVER-RIDING COMMISSION @ 1%, NO EXPLA NATION HAS BEEN GIVEN BY THE ASSESSEE AS TO WHY THE SAID COMMISSION IS PAYABLE, PARTICULARLY IN VIEW OF THE FACT THAT ON THE SAME SALES COMMISSION IS SEPARATELY BEI NG PAID TO THIRD PARTIES. HENCE, ARMS LENGTH PRICE FOR THE SAME IS DETERMINED AT NI L. (B) REGARDING COMMISSION PAID @ 3% FOR THE OWN CUSTOMER S OF THE ASSOCIATE ENTITY, NO EVIDENCE HAS BEEN BROUGHT ON RECORD TO SHOW THAT TH E ASSOCIATE ENTITY PROCURED THESE CUSTOMERS FOR THE BENEFIT OF THE ASSESSEE. HENCE, A RMS LENGTH PRICE FOR THE SAME IS ALSO DETERMINED AT NIL. (C) REGARDING REIMBURSEMENT OF EXPENSES, THE AMOUNT IS ACCEPTED AS THE ARMS LENGTH PRICE. 28.ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A ). THE LD. CIT(A) HAS CONSIDERED THIS ISSUE AT PARA 23 OF ITS ORDER. AFTER ELABORATI NG DISCUSSING THE FINDINGS OF THE A.O, THE LD. CIT(A) DISCUSSED THE SUBMISSIONS MADE BY TH E ASSESSEE AND AFTER CONSIDERING THE FUNCTIONS PERFORMED BY THE AE AND AT PARA 23.09 OF HIS ORDER, THE LD. CIT(A) OBSERVED THAT THE ASSESSEE HAS SUBMITTED COPY OF AG REEMENT IN RELATION TO THE NATURE OF SERVICES RENDERED BY THE AE, CERTAIN E-MAIL MESSAGE S TO PROVE THE NATURE OF TRANSACTION WHICH HAS NOT BEEN PROVED FALSE BY THE TPO. THE LD. CIT(A) AGREED THAT THE TPO IS LEGALLY AND FACTUALLY WRONG IN TREATING AS IF NO TR ANSACTION HAS TAKEN PLACE. AFTER CONSIDERING THE RANGE OF COMMISSION, THE LD. CIT(A) FINALLY WAS OF THE OPINION THAT THE ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 6 COMMISSION UP TO 3% WAS REASONABLE AND AT ARM LENG TH AND REQUIRES NO ADJUSTMENT AND DIRECTED THE A.O TO DELETE THE ADDITION OF RS. 1,43,43,210/-. 29.HOWEVER, ON THE POINT OF OVERRIDING COMMISSION, THE LD. CIT(A) WAS OF THE OPINION THAT THE OVERRIDING COMMISSION IS TO BE ALLOWED ON THE SALES MADE THROUGH AE, OVERRIDING COMMISSION IS ALSO TO BE ALLOWED ON THE SALES MADE THROUGH NON -RELATED PARTIES WHERE COMMISSION IS PAID @ 3% AND OVERRIDIN G COMMISSION IS NOT TO BE ALLOWED WHERE COMMISSION IS MORE THAN 3% TO THE NON - RELATED ENTERPRISES. 30.AGGRIEVED BY THIS FINDINGS OF THE LD. CIT(A) BOT H ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY STATED THAT THE ACTION OF THE REVENUE AUTHORITIES IS BEYOND THE SCOPE OF THE PROVISIONS CONTAINED IN CHAPTER 10 OF THE ACT. IT IS THE SAY OF THE LD. COUNSEL THAT U NDER CHAPTER 10 THE ONLY POWER OF THE REVENUE AUTHORITIES IS TO SEE WHETHER THE INTERNATI ONAL TRANSACTION ENTERED INTO BY THE ASSESSEE ARE AT ARMS LENGTH OR NOT. THE LD. COUNSE L FURTHER STATED THAT IT IS NOT OPEN TO THE REVENUE AUTHORITIES UNDER CHAPTER 10 TO SEE WHE THER ANY SERVICES HAVE BEEN RENDERED BY THE AE OR NOT. THE LD. COUNSEL CONCLUDE D BY SAYING THAT IF THE REVENUE AUTHORITIES ARE OF THE OPINION THAT NO SERVICES HAV E BEEN RENDERED THE DISALLOWANCE CAN BE MADE UNDER OTHER PROVISIONS OF THE ACT. PER CONT RA, THE LD. D.R. STRONGLY SUPPORTED THE FINDINGS OF THE A.O. 31. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE TRANSFER PRICING ASSESSM ENT ORDER. THE ASSESSEE HAS PAID COMMISSION TO ITS AE AND WE FIND THAT THE BASIS FOR THE PAYMENT OF COMMISSION HAS ALSO BEEN GIVEN TO JUSTIFY IT TO BE AT ARMS LENGTH. THE TPO/A.O HAS NOWHERE DENIED THAT THE WEIGHTED AVERAGE RATE OF COMMISSION PAID BY THE ASS ESSEE IS 7.84% AS AGAINST 11% PAID TO UNRELATED PARTY. WE ALSO FIND THAT IN HIS A PPELLATE ORDER, THE FIRST APPELLATE AUTHORITY HAS OBSERVED THE RATE OF COMMISSION RANGI NG FROM 0.38% TO 33.33%, THE ASSESSEES RATE IS AT 3%. WE ALSO FIND THAT NONE OF THE REVENUE AUTHORITIES BELOW HAVE BROUGHT ANY COMPARABLE CASE ON RECORD TO SHOW THAT THE PAYMENT OF COMMISSION BY THE ASSESSEE IS NOT AT ARMS LENGTH. ON THE CONTRARY, W E FIND THAT THE A.O. HAS DISALLOWED ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 7 MERELY BECAUSE HE WAS OF THE OPINION THAT NO SERVIC ES HAVE BEEN RENDERED. THIS FINDING IS BEYOND THE PROVISIONS OF CHAPTER 10 OF THE ACT I N AS MUCH AS UNDER CHAPTER 10, THE TPO/A.O. HAS TO SEE WHETHER THE INTERNATIONAL TRANS ACTION ENTERED BY THE ASSESSEE IS AT ARMS LENGTH OR NOT. THERE ARE OTHER PROVISIONS IN THE ACT WHEREIN THE A.O. CAN TEST THE GENUINENESS OF THE TRANSACTION BUT IN ANY CASE NOT UNDER CHAPTER 10 OF THE ACT. AS MENTIONED ELSEWHERE, NO COMPARABLE CASE HAVE BEEN B ROUGHT ON RECORD WHICH COULD JUSTIFY THAT THE PAYMENT OF 3% + 1% OVERRIDING COMM ISSION IS NOT AT ARMS LENGTH, WE SET ASIDE THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE A.O. TO DELETE THE ENTIRE TRANSFER PRICING ADJUSTMENT MADE BY IT. GROUND NO. 11 IS ACC ORDINGLY ALLOWED. 6. AS OBSERVED BY THE LD. CIT(A), THERE IS NO CHAN GE IN THE FACTS AND THE CIRCUMSTANCES OF THE CASE DURING THE YEAR UNDER APP EAL. THEREFORE, RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-ORDIN ATE BENCH (SUPRA), WE DIRECT THE A.O TO DELETE THE ENTIRE TRANSFER PRICIN G ADJUSTMENT MADE BY IT. GROUND NO. 2 IS ACCORDINGLY ALLOWED. GROUND NO. 3 RELATES TO THE DISALLOWANCE OF DEDUCTI ON U/S. 10B OF THE ACT IN RESPECT OF AHMEDNAGAR UNIT. 7. WHILE SCRUTINIZING THE RETURN OF INCOME, THE A .O NOTICED THAT THE ASSESSEE HAS CLAIMED EXEMPTION OF INCOME U/S. 10B O F THE ACT AMOUNTING TO RS. 28,25,01,313/- IN RESPECT OF AHMEDNAGAR, PAN OLI AND CHENNAI UNITS. VIDE NOTICE DATED 02.08.2007, THE ASSESSEE WAS ASKE D TO EXPLAIN THE CLAIM OF DEDUCTION U/S. 10B QUA THE ORDER OF THE DEVELOPM ENT OFFICER AS SEEPZ,SEZ DATED 25.07.2006 IN WHICH LOP FOR CLAIMIN G DEDUCTION U/S. 10B HAS BEEN CANCELLED. 8. VIDE LETTER DATED 24.08.2007 WAS EXPLAINED THAT THE SAID ORDER OF THE DEVELOPMENT COMMISSIONER HAS CANCELLED LOP FOR AHME DNAGAR UNIT ONLY. FURTHER, IT WAS BROUGHT TO THE NOTICE OF THE A.O TH AT THE ASSESSEE HAS ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 8 PREFERRED AN APPEAL AGAINST THE SAID ORDER OF THE D EVELOPMENT COMMISSIONER. 9. TAKING A LEAF OUT OF THIS REPLY OF THE ASSESSEE , THE A.O DISALLOWED THE CLAIM OF DEDUCTION U/S. 10B IN RESPECT OF AHMEDNAGA R UNIT AMOUNT TO RS. 23,45,24,639/-. 10. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT( A) BUT WITHOUT ANY SUCCESS. THE LD. CIT(A) WHILE DECIDING THIS GRIEVAN CE OF THE ASSESSEE OBSERVED THAT HIS PREDECESSOR HAS ALLOWED THE CLAIM OF EXEMPTION IN RESPECT OF PANOLI UNIT IN EARLIER ASSESSMENT YEARS I.E. 200 2-03, 2003-04 & 2004-05 AND ACCORDINGLY DIRECTED THE A.O TO ALLOW THE CLAIM IN RESPECT OF PANOLI UNIT. HOWEVER, IN RESPECT OF AHMEDNAGAR UNIT, THE LD. CIT (A) OBSERVED THAT SINCE THE LOP HAS BEEN CANCELLED EXEMPTION U/S. 10B IN RE SPECT OF AHMEDNAGAR UNIT CANNOT BE ALLOWED. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT IN EARLIER YEARS, THE TRIBUNAL HAS RESTORED TH IS ISSUE TO THE FILES OF THE A.O TO BE DECIDED AFRESH. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE TRIBUNAL. THE TRIBUNAL HAS CONSIDERED THIS GRIEVANC E AT GROUND NOS. 16 & 18 TAKEN TOGETHER. HOWEVER, WE FIND THAT SINCE THESE G ROUNDS WERE NOT ADJUDICATED, THEREFORE THE MATTER WAS RESTORED BACK TO THE FILES OF THE A.O FOR FRESH ADJUDICATION. HOWEVER, WE FIND THAT DURIN G THE YEAR UNDER CONSIDERATION, BOTH THE LOWER AUTHORITIES HAVE ADJU DICATED THE ISSUE; THEREFORE, THERE IS NO REASON WHY THE MATTER SHOULD BE SENT BACK FOR FRESH ADJUDICATION. HOWEVER, WE FIND THE LOP HAS BEEN CAN CELLED VIDE ORDER DATED 25.07.2006 WHICH PERTAINS TO F.Y. 2007-08. THEREFOR E, WE DO NOT FIND ANY REASON WHY THE EXEMPTION SHOULD BE DENIED FOR THE Y EAR UNDER CONSIDERATION. SINCE IN EARLIER YEARS, THE EXEMPTIO N WAS ALLOWED. THEREFORE, WE DIRECT THE A.O TO ALLOW THE CLAIM OF DEDUCTION U /S. 10B OF THE ACT FOR THE YEAR UNDER CONSIDERATION. GROUND NO. 3 IS ACCORDING LY ALLOWED. ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 9 GROUND NO. 4 RELATES TO THE DISALLOWANCE OF TRADE M ARK REGISTRATION AND OVERSEAS PRODUCT REGISTRATION CHARGES U/S. 35(2AB). 11. ON PERUSING THE DETAILS OF R & D EXPENDITURE, THE A.O FOUND THAT THE ASSESSEE HAS CLAIMED WEIGHTED DEDUCTION @ 150% ON (A) TRADE MARK REGISTRATION CHARGES : 2,42,56,296/- (B) OVERSEAS PRODUCT REGISTRATION CHARGES : 2,00,00,508/- 12. THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM. A SSESSEE FILED A DETAILED REPLY JUSTIFYING ITS CLAIM OF WEIGHTED DEDUCTION. I T WAS EXPLAINED THAT THE EXPENDITURE INCURRED FOR PRODUCT REGISTRATION ALTHO UGH NAMED AS PRODUCT REGISTRATION EXPENDITURE IS NOT MERELY AN EXPENDITU RE FOR REGISTRATION OF THE PRODUCT, BUT IN LARGE MEASURE CONSTITUTES EXPENDITU RE FOR VALIDATION AND CONFIRMATION OF THE RESEARCH CARRIED OUT. THE A.O D ID NOT ACCEPT THE CLAIM OF THE ASSESSEE HOLDING THAT THESE EXPENSES WERE INCUR RED FOR REGISTRATION OF DRUG PATENTS IN FOREIGN COUNTRIES. THE A.O ACCORDIN GLY WITHDREW THE WEIGHTED DEDUCTION AND ALLOWED ONLY 100% OF THE SAM E AS REVENUE EXPENDITURE. 13. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) BUT WITHOUT ANY SUCCESS. WHILE DISMISSING THE GRIEVANCE OF THE ASSE SSEE, THE LD. CIT(A) FOLLOWED THE FINDINGS OF HIS PREDECESSOR GIVEN IN A .Y. 2002-03 TO 2004-05. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEARS HAS DECIDED TH IS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE IN ITA NO. 1558/AH D/2006. THE LD. D.R. COULD NOT BRING ANY DISTINGUISHING DECISION IN FAVO UR OF THE REVENUE. ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 10 14. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO TH E ORDER OF THE TRIBUNAL IN EARLIER YEARS; WE FIND THAT THE TRIBUNAL WHILE DECI DING THE ISSUE IN FAVOUR OF THE ASSESSEE HAS FOLLOWED THE DECISION OF THE CO-OR DINATE BENCH, MUMBAI IN THE CASE OF USV LTD. 54 SOT 615. FINDINGS OF THE TR IBUNAL READ AS UNDER:- 24. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW. WE FIND THAT THE LD. CIT(A) HAS SIMPLY FOLLOWED THE FINDINGS OF HIS PREDECESSOR FOR A.Y. 2000-01. WE ALSO FIND THAT THE ASSESSMENT ORDER FOR A.Y. 2000-01 HAS BEEN QUASHED BY THE TRIBUNAL VIDE A ITA NOS. 1199 & 1279/AHD/2006, WHICH MEANS THAT THE BASIS FOR UPHOL DING THE DISALLOWANCE HAS BEEN REMOVED. WE FURTHER FIND THAT ON IDENTICAL SET OF FACTS, THE MUMBAI BENCH IN THE CASE OF USV LTD. (SUPRA) HAS ALLOWED THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RESPECT OF PATENT APPLICATION. RESPECTFULLY, FOLLOWING THE FINDINGS O F THE CO-ORDINATE BENCH (SUPRA), WE DIRECT THE A.O TO DELETE THE DISALLOWANCE OF RS. 44,71,906/-. GROUND NO. 10 IS ACCORDINGLY ALLOWED. 15. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO- ORDINATE BENCH (SUPRA), WE DIRECT THE A.O TO DELETE THE DISALLOWANCE. GROUND N O. 4 IS ACCORDINGLY ALLOWED. GROUND NO. 5 RELATES TO THE EXCLUSION OF INTEREST O N LOANS TO EMPLOYEES FOR DEDUCTION U/S. 80IB. 16. THE A.O HAS EXCLUDED OTHER INCOME OF RS. 11,00 0/- FROM THE COMPUTATION OF DEDUCTION U/S. 80IB ON THE GROUND TH AT THIS AMOUNT IS NOT DERIVED FROM THE MANUFACTURING ACTIVITY. THE LD. CI T(A) CONFIRMED THE ACTION OF THE A.O FOLLOWING THE DECISION OF HIS PREDECESSO R GIVEN IN EARLIER ASSESSMENT YEARS. BEFORE US, THE LD. COUNSEL FOR TH E ASSESSEE BROUGHT TO THE NOTICE THE DECISION OF THE TRIBUNAL GIVEN IN EARLIE R ASSESSMENT YEARS AND POINTED OUT THAT THE TRIBUNAL HAS RESTORED THIS ISS UE TO THE FILES OF THE A.O WITH A DIRECTION TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE LIBERTY INDIA 3 17 ITR 218. ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 11 17. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AU THORITIES BELOW QUA THE DECISION OF THE TRIBUNAL, WE FIND FORCE IN THE CONT ENTION OF THE LD. COUNSEL. THE TRIBUNAL HAS CONSIDERED AN IDENTICAL GRIEVANCE QUA GROUND NO. 17 AND HAS DECIDED AS UNDER:- GROUND NO. 17 RELATES TO THE INCLUSION OF INCOME FR OM SCRAP SALE, MISCELLANEOUS INCOME AND INTEREST ON LOANS TO EMPLOYEES FROM PROFITS COM PUTED U/S. 80IB OF THE ACT. 39. IN SO FAR AS, INCLUSION OF SALE OF SCRAP IS CON CERNED, WE FIND THAT THE TRIBUNAL IN ITS ORDER IN ITA NOS. 3289 & 3434/AHD/2003 IN ASSESSEE S OWN CASE FOR A.Y. 2001-02 HAS FOLLOWED THE FINDINGS OF THE TRIBUNAL GIVEN IN A.Y. 1999-2000 & 2000-01 AND DIRECTED THE A.O TO RE-COMPUTE THE TURNOVER AFTER EXCLUDING THE SALE AMOUNT OF SCRAP. RESPECTFULLY, FOLLOWING THE FINDINGS OF THE TRIBUNAL (SUPA), WE D IRECT THE A.O TO DECIDE THE ISSUE IN LINE WITH THE DIRECTIONS GIVEN BY THE TRIBUNAL IN EARLIE R ASSESSMENT YEARS. IN SO FAR AS, THE ISSUE RELATING TO MISCELLANEOUS INCOME AND INTEREST ON LOANS TO EMPLOYEES, THE A.O IS DIRECTED TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA 317 ITR 218. GROUND NO. 17 IS ACCORDINGLY ALLOWED. 18. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL (SUPRA), WE DIRECT THE A.O ACCORDINGLY. GROUND NO. 5 IS TREATED AS ALLOWED STATISTICAL PURPOSE. GROUND NO. 6 RELATES TO THE REALLOCATION OF R & D E XPENSES @ 12.5% FOR COMPUTING DEDUCTION U/S. 80IB. 19. WHILE SCRUTINIZING THE RETURN OF INCOME, THE A. O FOUND THAT THE ASSESSEE HAS CLAIMED R & D REVENUE EXPENDITURE OF RS. 110,99 ,69,871/- AND R & D CAPITAL EXPENDITURE OF RS. 59,79,84,814/- TOTALING TO RS. 170,79,54,685/-. THE A.O FURTHER FOUND THAT THE ASSESSEE HAS ALLOCAT ED ONLY RS. 4,34,25,000/- ON ACCOUNT OF R & D EXPENSES IN SILVASSA II UNIT. T HE A.O WAS NOT CONVINCED WITH THE ALLOCATION AND ACCORDINGLY ASKED THE ASSES SEE TO EXPLAIN WHY THE ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 12 EXPENSES SHOULD NOT BE REALLOCATED IN THE RATIO OF TURNOVER. ASSESSEE EXPLAINED THAT IT HAS ALLOCATED THE REVENUE EXPENDI TURE ACROSS ALL ITS UNITS WHETHER MANUFACTURING BULK DRUGS OR FORMULATION DRU GS AND WHETHER CLAIMING ANY SPECIAL DEDUCTION UNDER THE ACT OR NOT . ASSESSEE FILED A DETAILED WORKING OF THE ALLOCATION OF EXPENSES. THE REPLY OF THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE A.O WHO WAS OF THE FIR M BELIEF THAT R & D EXPENSES ARE BASICALLY PERTAINING TO THE HEAD OFFIC E EXPENSES WHICH ARE NOT DIRECTLY RELATABLE TO A PARTICULAR UNIT. ACCORDING TO THE A.O, IF THE EXPENSES ARE NOT SCIENTIFICALLY DISTRIBUTE, IT MAY LEAD TO E XCESS DEDUCTION U/S. 80IB OR 10A OR 10B OF THE ACT. TAKING A LEAF OUT OF THE EAR LIER ASSESSMENT YEARS, THE A.O REALLOCATED FURTHER EXPENSES OF RS. 4,27,59,003 /- TO THE SILVASSA II UNIT. 20. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) AND REITERATED ITS CLAIM OF DEDUCTION. HOWEVER, THE LD. CIT(A) FOLLOWE D THE FINDINGS OF HIS PREDECESSOR GIVEN IN EARLIER ASSESSMENT YEARS HOLDI NG THAT THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE D URING THE YEAR UNDER APPEAL. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DECISION OF THE TRIBUNAL GIVEN IN EARLIER ASSESSMEN T YEARS AND REQUESTED FOR A SIMILAR VIEW. WE HAVE CAREFULLY CONSIDERED THE FA CTS IN ISSUE IN THIS GROUND OF APPEAL. WE HAVE ALSO GONE THROUGH THE FINDINGS O F THE TRIBUNAL GIVEN IN EARLIER ASSESSMENT YEARS IN ITA NO. 1558/AHD/2006. WE FIND THAT AN IDENTICAL ISSUE WAS CONSIDERED QUA GROUND NO. 6 BY THE TRIBUNAL AND THE FINDINGS READ AS UNDER:- GROUND NO. 6 RELATES TO THE ALLOCATION OF R & D EXP ENSES FOR DETERMINING PROFITS ELIGIBLE FOR DEDUCTION U/S. 80IB AND SECTION 10B OF THE ACT. 12. WE FIND THAT WHILE CONFIRMING THE ACTION OF THE A.O, THE LD. CIT(A) HAS FOLLOWED THE ORDER OF THE FIRST APPELLATE AUTHORITY GIVEN FOR A. Y. 2000-01. AS MENTIONED ELSEWHERE IN GROUND NO. 5 ABOVE REOPENED ASSESSMENT ORDER OF 200 0-01 HAS BEEN QUASHED BY THE TRIBUNAL IN ITA NOS. 1199 & 1279/AHD/2006. THE VERY BASIS FOR CONFIRMING THE ACTION OF ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 13 THE A.O HAS BEEN REMOVED BY THE TRIBUNAL. WE FIND T HAT THE DISPUTE AROSE BECAUSE OF THE ANSWER GIVEN BY DR. T.RAJAMANNAR, SENIOR VICE PRESI DENT OF SPARC, BARODA. IN HIS STATEMENT GIVEN ON OATH U/S. 131 OF THE ACT, IT WAS ADMITTED THAT THERE IS AN INCREASE IN THE EXPENDITURE FOR R & D FROM 10 TO 15%. 13. THE LD. COUNSEL FOR THE ASSESSEE VEHEMENTLY SUB MITTED THAT THE QUESTION RELATED TO THE RAW MATERIALS AND NOT TO ALL THE ITEMS OF EXPENDITU RE AND, THEREFORE, THE REVENUE AUTHORITIES HAVE ERRED IN GENERALIZING THE STATEMEN T OF THE SENIOR VICE PRESIDENT. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE FINDIN GS OF THE LOWER AUTHORITIES. WE HAVE ALSO CONSIDERED THE STATEMENT OF DR. T. RAJAMANNAR. UNDISPUTEDLY, THE QUESTION RELATED TO THE RAW MATERIALS AND NOT TO ALL THE ITEMS OF EX PENDITURE UNDER THIS HEAD. IN OUR CONSIDERED OPINION ONE CANNOT CARRY OUT THE ALLOCAT ION ON THE BASIS OF PICK AND CHOOSE METHOD. WE ACCORDINGLY DIRECT THE A.O TO RESTRICT THE RE-ALLOCATION ONLY TO THE RAW MATERIAL, ASSESSEE GETS PARTIAL RELIEF. 21. AS OBSERVED BY THE FIRST APPELLATE AUTHORITY, THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES. THEREFORE, RESPECTFULLY FO LLOWING THE DECISION OF THE CO-ORDINATE BENCH (SUPRA), WE HOLD ACCORDINGLY. GR OUND NO 6 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 22. WITH GROUND NO. 7, THE ASSESSEE CLAIMS THAT TH E LD. CIT(A) ERRED IN NOT ADMITTING AND ADJUDICATING GRIEVANCE RELATING TO TH E TREATMENT OF FOREIGN EXCHANGE FLUCTUATION GAIN. THE LD. COUNSEL STRAIGHT WAY DREW OUR ATTENTION TO THE DECISION OF THE TRIBUNAL GIVEN IN ITA NO. 1558/ AHD/2006 AND POINTED OUT THAT SINCE IN EARLIER YEARS ALSO. THE LD. CIT(A) HA S NOT ADJUDICATED ON THIS ISSUE AND UNLESS THE ISSUE IS ADJUDICATED UPON IN E ARLIER YEARS. THERE CANNOT BE ANY SEPARATE FINDING FOR THE YEAR UNDER CONSIDER ATION. WE FIND THAT THE TRIBUNAL AT PARA 38 OF ITS ORDER HAS MADE THE FOLLO WING OBSERVATIONS:- 38. WHILE DISCUSSING THE GRIEVANCE OF THE ASSESSEE AT PARA 30.3 AND ALSO AT PARA 32.2 OF HIS ORDER, THE LD. CIT(A) HAS OBSERVED THAT THESE G ROUNDS OF APPEAL ARE NOT EMANATING ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 14 FROM THE ACTION OF THE A.O. HENCE, CANNOT BE ENTERT AINED AT THIS STAGE. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STATED THAT LEGAL ISSUES C AN BE TAKEN UP AT ANY STAGE AND THE APPELLATE AUTHORITIES ARE BOUND TO CONSIDER SUCH LE GAL ISSUES. WE FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL SINCE BOTH THESE GROU NDS RELATES TO LEGAL ISSUES RAISED BY THE ASSESSEE NOT ENTERTAINED BY THE REVENUE AUTHORITIES . IN OUR CONSIDERED OPINION, THE MATTER DESERVES TO BE DECIDED AFRESH AS THE ASSESSEE CAN T AKE UP LEGAL ISSUES AT ANY STAGE. FOR THIS PROPOSITION, WE DRAW SUPPORT FROM THE DECISION OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF PRUTHVI BROKERS & SHARES PVT. LTD. 349 ITR 336. WE ACCORDINGLY RESTORE THIS ISSUE TO THE FILES OF THE A.O. THE A.O IS DIRECTED TO DECIDE THESE ISSUES AFRESH AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE AND AS PER THE PROVISIONS OF THE LAW. 23. WE FIND FORCE IN THE CONTENTION OF THE LD. COU NSEL UNLESS THE ISSUE IS DECIDED IN EARLIER YEARS; THE SAME CANNOT BE DECIDE D IN SUBSEQUENT YEARS. WE, THEREFORE, DIRECT THE A.O TO DECIDE THESE ISSUE S AFRESH. AFTER DECIDING THESE ISSUES IN EARLIER ASSESSMENT YEARS AND AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO. 7 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. GROUND NO. 8 RELATES TO THE DISALLOWANCE OF DEDUCTI ON U/S. 10B OF AHMEDNAGAR UNIT FOR COMPUTING BOOK PROFIT. 24. SINCE WE HAVE DIRECTED THE A.O TO ALLOW THE CL AIM OF DEDUCTION U/S. 10B FOR AHMEDNAGAR UNIT QUA GROUND NO. 3 OF THIS ORDER. WE ACCORDINGLY DIRECT THE A.O TO ALLOW THE DEDUCTION U/S. 10B FOR AHMEDNA GAR UNIT FOR COMPUTING BOOK PROFIT. GROUND NO. 8 IS ACCORDINGLY ALLOWED. GROUND NO. 9 RELATES TO THE ADDITION OF SALES MADE TO SUN PHARMACEUTICALS INDUSTRIES. ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 15 25. WHILE SCRUTINIZING THE RETURN OF INCOME, THE A .O FOUND THAT THE ASSESSEE HAS SOLD RAW MATERIALS/PRODUCTS TO SISTER CONCERN A T LOWER RATES. ASSESSEE WAS ASKED TO EXPLAIN THE TRANSACTIONS WITH ITS SIST ER CONCERN, SUN PHARMACEUTICAL INDUSTRIES. ASSESSEE FILED A DETAILE D REPLY GIVING EXHAUSTIVE LIST OF ALL THE RAW MATERIALS/PRODUCTS BEING SOLD T O ITS SISTER CONCERN VIS--VIS THIRD PARTIES ALONG WITH THE RATES AND QUANTITY SOL D. THE A.O WAS OF THE FIRM BELIEF THAT THE ASSESSEE HAS BEEN SELLING PRODUCTS TO ITS SISTER CONCERN AT A RATE LOWER THAN SOLD TO THIRD PARTIES. THE A.O OBSE RVED THAT SINCE THE ASSESSEE IS HOLDING 95% SHARE IN ITS SISTER CONCERN AND THE SISTER CONCERN IS CLAIMING 100% DEDUCTION U/S. 80IB ON ITS PROFITS. T HEREFORE, IN EFFECT THE ASSESSEE IS INDULGED IN DIVERSION OF PROFIT AND AVO IDANCE OF TAX BY SUPPRESSING THE SALE PRICE. THE A.O ACCORDINGLY MAD E AN ADDITION OF RS. 21,25,278/-. 26. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) BUT WITHOUT ANY SUCCESS. BEFORE US, THE LD. COUNSEL FOR THE ASSESSE E STATED THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN EARLIER ASS ESSMENT YEARS IN ITA NO. 1193/AHD/2008 AND HAS DECIDED THE ISSUE IN FAVOUR O F THE ASSESSEE AND AGAINST THE REVENUE. THIS ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL QUA GROUND NO. 12 AS UNDER:- GROUND NO. 12 RELATES TO THE ADDITION MADE ON ACCOU NT OF SALES TO SUN PHARMACEUTICAL INDUSTRIES. 83. THIS ISSUE HAS BEEN CONSIDERED BY THE A.O AT PARA 1 2 OF HIS ORDER. A SURVEY U/S. 133A OF THE ACT WAS CONDUCTED ON THE ASSESSEE AS WELL AS ITS SISTER CONCERN SUN PHARMACEUTICAL INDUSTRIES WHICH IS A PARTNERSHIP FI RM. DURING THE COURSE OF THE SURVEY OPERATIONS, IT WAS NOTICED THAT THE ASSESSEE HAS BE EN SELLING CERTAIN RAW MATERIALS /PRODUCTS TO ITS SISTER CONCERN AT A LOWER RATE THA N WAS SOLD TO THIRD PARTIES AND THEREBY DIVERTING THE PROFITS. ASSESSEE WAS ASKED TO EXPLAI N ITS STAND. ASSESSEE FILED A DETAILED REPLY GIVING DETAILS OF RAW MATERIALS/PRODUCTS BEIN G SOLD TO ITS SISTER CONCERN AND TO THIRD PARTIES ALONG WITH RATES AND QUANTITY SOLD. ON ANAL YSIS OF THE REPLY, THE A.O FOUND THAT ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 16 THERE WERE CERTAIN RAW MATERIALS/PRODUCTS WHICH WER E BEING SOLD TO THE SISTER CONCERN AT A LOWER RATE THAN SOLD TO THIRD PARTIES. THE A.O PR OCEEDED BY COMPUTING AN ADDITION OF RS. 19,49,930/- ON ACCOUNT OF UNREASONABLY LOW SELL ING PRICE ON SALE OF RAW MATERIALS/PRODUCTS SOLD TO ITS SISTER CONCERN. 84. AGGRIEVED BY THIS, ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 85. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STA TED THAT IT IS NOT CLEAR UNDER WHICH PROVISION OF THE ACT ADDITIONS HAVE BEEN MADE. FURT HER THE COUNSEL STATED THAT NO 80IB DEDUCTION HAS BEEN CLAIMED BY IT WHICH COULD JUSTIF Y THE ACTION OF THE A.O. PER CONTRA, THE LD. D.R. STRONGLY SUPPORTED THE FINDINGS OF THE REVENUE AUTHORITIES. 87. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW. WE AGREE WITH THE CONTENTION OF THE LD. COUNSEL THAT N O SPECIFIC SECTION HAS BEEN MENTIONED IN THE ASSESSMENT ORDER FOR MAKING THE IMPUGNED ADDITI ONS. A PERUSAL OF THE ASSESSMENT ORDER SHOW THAT THE ADDITIONS HAVE BEEN MADE BY TRE ATING THE TRANSACTIONS U/S. 40A(2) OF THE ACT. IN THAT CASE, WE HAVE TO STATE THAT PROVIS IONS OF SECTION 40A(2) ARE APPLICABLE ONLY IN RESPECT OF PAYMENTS MADE TO RELATED PARTIES MENTIONED THEREIN. BUT THE TRANSACTION BEFORE US IS OF CREDIT IN NATURE I.E. S ALES SO PROVISIONS OF SECTION 40A(2) ARE NOT AT ALL APPLICABLE. 27. RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRI BUNAL (SUPRA), WE DIRECT THE A.O TO DELETE THE ADDITION OF RS. 21,25,278/-. GROU ND NO. 9 IS ALLOWED. GROUND NO. 10 RELATES TO THE DISALLOWANCE OF EXPENS ES INCURRED ON BEHALF OF SUN PHARMACEUTICAL INDUSTRIES AMOUNTING TO RS. 13,3 5,61,482/-. 28. WHILE SCRUTINIZING THE RETURN OF INCOME, THE A .O FOUND THAT AS PER THE PARTNERSHIP DEED BETWEEN THE ASSESSEE AND SUN PHARM ACEUTICAL INDUSTRIES. THE ASSESSEE WAS ENTITLED TO DRAW YEARLY REMUNERATI ON OF 15% OF THE NET PROFITS OF THE PARTNERSHIP FIRM. THE A.O FURTHER FO UND THAT THE ASSESSEE HAS RECEIVED 15% OF NET PROFITS OF SPI AS PER THE PARTN ERSHIP DEED. HOWEVER, THE ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 17 A.O FOUND THAT SPI HAS NOT DEBITED THIS REMUNERATIO N TO ITS PROFIT AND LOSS ACCOUNT IN THE LIGHT OF EXPLANATION 4 TO SECTION 40 B OF THE ACT. THE A.O FURTHER NOTICED THAT THE ASSESSEE HAS ALSO NOT OFFE RED THIS REMUNERATION CLAIMING THAT THE REMUNERATION WOULD BE CHARGEABLE TO TAX ONLY IF THE SAME IS ALLOWED AS DEDUCTIBLE FROM THE PROFITS OF THE FI RM AND SINCE THE SAME IS NOT ALLOWED IN THE HANDS OF THE FIRM, THE SAME CANN OT BE TAXED IN THE HANDS OF THE ASSESSEE. THE A.O FOUND THAT THOUGH THE REM UNERATION HAS NOT BEEN INCLUDED BY THE ASSESSEE BUT IT HAS DEBITED ALL THE RELATED EXPENDITURE IN ITS BOOKS OF ACCOUNT. THE A.O ACCORDINGLY DISALLOWED TH E EXPENDITURE SO DEBITED TREATING THE SAME AS EXPENDITURE NOT INCURRED WHOLL Y OR EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 29. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A). AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES AND DRAWING SUPPORT FROM TH E FINDINGS GIVEN IN A.Y. 2004-05 DIRECTED THE A.O TO RECALCULATE THE DISALLO WANCE. 30. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT AN IDENTICAL ISSUE HAVE B EEN CONSIDERED BY THE TRIBUNAL IN EARLIER ASSESSMENT YEARS IN ITA NO. 119 3/AHD/2008 AND HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGA INST THE REVENUE. WE HAVE CAREFULLY CONSIDERED THE FACTS IN ISSUES RELAT ING TO THIS GROUND OF APPEAL. WE FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL. AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN ITA NO. 1193 /AHD/2008 QUA GROUND NO. 13 IN THAT APPEAL AND HAS DECIDED THE ISSUE AS UNDER:- GROUND NO. 13 RELATES TO THE DISALLOWANCE OF EXPENS ES INCURRED ON BEHALF OF SUN PHARMACEUTICAL INDUSTRIES. 88. THIS ISSUE HAS BEEN DISCUSSED BY THE A.O AT PAR A 13 OF HIS ORDER WHEREIN HE HAS MENTIONED THAT DURING THE COURSE OF SURVEY OPERATIO NS. A COPY OF PARTNERSHIP DEED BETWEEN THE ASSESSEE AND SUN PHARMACEUTICAL INDUSTR IES (SPI) WAS FOUND ALONG WITH A ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 18 COPY OF SUPPLEMENTARY PARTNERSHIP DEED. THE A.O FUR THER OBSERVED THAT AS PER THE PARTNERSHIP DEED, THE ASSESSEE WAS ENTITLED TO DRAW YEARLY REMUNERATION OF 15% OF THE NET PROFITS OF THE PARTNERSHIP FIRM. THE A.O FURTHE R OBSERVED THAT THE ASSESSEE HAD RECEIVED 15% OF NET PROFITS OF SPI RS. 15,75,55,219 /- AS PER THE AGREEMENT OF PARTNERSHIP. HOWEVER, THE A.O NOTICED THAT THE PART NERSHIP FIRM HAS NOT DEBITED THIS REMUNERATION PAID TO THE ASSESSEE BY TAKING RECOURS E TO THE PROVISIONS OF SECTION 40(B) WHEREIN REMUNERATION IS ALLOWED TO A WORKING PARTNE R WHO IS AN INDIVIDUAL. 89. THE A.O FURTHER NOTICED THAT THOUGH THE REMUNER ATION WAS NOT OFFERED FOR TAXATION BY THE ASSESSEE BUT IT HAS DEBITED THE EXPENDITURE INC URRED ON BEHALF OF THE PARTNERSHIP FIRM IN ITS BOOKS OF ACCOUNT. THE A.O WAS OF THE FIRM BE LIEF THAT THESE EXPENDITURES ARE NOT RELATED TO THE EARNING OF INCOME AND ACCORDINGLY DI SALLOWED (A) SELLING AND DISTRIBUTION EXPENSES 25,68,21,928/- SALARY AND ALLOWANCE TO FIE LD STAFF 24,12,98,724/- TOTALING TO RS. 49,81,20,652/-. THE A.O PROCEEDED BY DISALLOWING RS . 8,49,79,383/- BASED ON THE RATIO OF THE TOTAL TURNOVER OF THE ASSESSEE AND THE PARTNERS HIP FIRM SPI. 90. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MAT TER BEFORE THE LD. CIT(A). LD. CIT(A) HAS CONSIDERED THIS GRIEVANCE AT PARA 26 VIDE GROUN D NO. 25 BEFORE HIM. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, THE LD. CIT(A) WAS OF THE OPINION THAT THE ASSESSEE ALREADY HAD AN EXISTING SALES AND DISTRIBU TION NETWORK IN THE FORM OF C & F AGENT, ETC. THEREFORE THE ASSESSEE WAS NOT REQUIRED TO INCUR ANY ADDITIONAL/EXTRA EXPENSES FOR UNDERTAKING THE MARKETING FUNCTION FOR AND ON BEHALF OF PARTNERSHIP FIRM. THE LD. CIT(A) FURTHER OBSERVED THAT MOST OF THE EX PENSES INCURRED BY THE ASSESSEE FOR THE SALES WERE IN THE NATURE OF FIXED EXPENSES. HOWEVER , THERE WERE SIMILAR ADDITIONAL EXPENSES INCURRED BY THE ASSESSEE FOR CARRYING OUT THE SALES FOR AND ON BEHALF OF THE PARTNERSHIP FIRM. THE LD. CIT(A) FINALLY CONCLUDED BY HOLDING THAT THE INCREMENTAL EXPENSES INCURRED BY THE ASSESSEE IN EXCESS WHAT WA S INCURRED IN THE PRECEDING YEAR TOWARDS THE MARKETING AND DISTRIBUTION SHOULD BE AL LOCATED AND ACCORDINGLY DIRECTED THE A.O TO RECALCULATE THE DISALLOWANCE . 91. AGGRIEVED BY THIS FINDING OF THE LD.CIT(A) BOTH ASSESSEE AND THE REVENUE ARE IN APPEAL BEFORE US. THE LD. D.R. STRONGLY STATED THAT SINCE THE ASSESSEE HAS NOT SHOWN ANY INCOME FROM REMUNERATION FROM THE PARTNERSHIP FIRM. THE ASSESSEE WAS NOT ENTITLED FOR THE CLAIM OF DEDUCTION. THE LD. D.R. FURTHER STATED THAT NO BIFURCATION HAVE BEEN PROVIDED ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 19 BY THE ASSESSEE TO SHOW THE EXPENSES INCURRED FOR T HE PURPOSE OF THE BUSINESS OF THE PARTNERSHIP FIRM AND FOR THE ASSESSEE COMPANY. THE D.R. CONCLUDED BY SAYING THAT THERE IS NO ERROR IN THE FINDINGS OF THE A.O. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE CLAIM AND STATED THAT THERE IS NO BA SIS FOR ALLOCATING THE EXPENSES PRO RATA. THE LD. COUNSEL FURTHER STATED THAT THE FIRST APPEL LATE AUTHORITY FURTHER ERRED IN DISALLOWING THE EXPENDITURE ON PRO RATA BASIS ONLY ON INCREMENTAL EXPENSES. IT IS THE SAY OF THE LD. COUNSEL THAT THE DISALLOWANCE IS UNJUSTI FIABLE. 92.WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW. WE HAVE ALSO GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. THERE IS NO DENYING THAT THE PARTNERSHIP DEED HAS A PROVISION FOR THE PAYMENT OF REMUNERATION TO THE WHOLE TIME WORKING PARTNER BY VIRTUE OF WHICH THE ASSESSEE WAS ENTITLED FOR THE REMUNERATION. THERE IS ALSO NO DENYING THAT AS PER THE PROVISIONS OF SE CTION 40(B) OF THE ACT, THE REMUNERATION IS PAYABLE TO A WHOLE TIME WORKING PARTNER WHO IS A N INDIVIDUAL AND THE ASSESSEE IS A LIMITED COMPANY. THEREFORE THE ASSESSEE COULD NOT H AVE SHOWN THIS REMUNERATION AS PART OF ITS COMPUTATION OF INCOME. IT IS ALSO A FACT THA T THE PARTNERSHIP FIRM HAS ALSO NOT DEBITED THIS REMUNERATION TO ITS PROFIT AND LOSS AC COUNT. HOWEVER, THE ASSESSEE COMPANY USING ITS NETWORK HAS INCURRED CERTAIN EXPENDITURE WHICH ACCORDING TO THE REVENUE AUTHORITIES ARE NOT DIRECTLY RELATED TO EARNING OF INCOME. IN OUR UNDERSTANDING OF THE LAW AN EXPENDITURE IS ALLOWABLE IF IT IS INCURRED FOR T HE PURPOSES OF THE BUSINESS OF THE ASSESSEE AND NOT FOR THE PURPOSES OF EARNING PROFIT . AS PER THE AGREEMENT BETWEEN THE ASSESSEE COMPANY AND THE PARTNERSHIP FIRM, THE ASSE SSEE HAD ASSISTED THE PARTNERSHIP FIRM IN CARRYING ON ITS BUSINESS BY USING ITS NETWO RK FOR MARKETING THE PHARMACEUTICALS PRODUCTS SUCCESSIVELY. THUS, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ARE NOT FOR THE PURPOSES OF ITS BUSINESS. SINCE THE ASSESSEE IS HOLDING 95% IN THE PARTNERSHIP FIRM IT BECOMES THE DUTY OF THE ASSESSE E TO PROMOTE THE BUSINESS OF THE PARTNERSHIP FIRM, IN THE CAPACITY OF THE MAJORITY S TAKE HOLDER. INCIDENTALLY, THE REVENUE AUTHORITIES HAVE NOT BROUGHT ANYTHING ON RECORD WHI CH COULD SUGGEST THAT THE EXPENDITURES HAVE NOT BEEN INCURRED FOR THE PURPOSE S OF BUSINESS. BE IT ASSESSEES BUSINESS OR THE BUSINESS OF THE PARTNERSHIP FIRM WH ERE THE ASSESSEE IS A MAJORITY STAKE HOLDER. THEREFORE, IN OUR CONSIDERED OPINION, THE E XPENDITURES INCURRED BY THE ASSESSEE ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 20 COMPANY DESERVES TO BE ALLOWED AND WE DIRECT THE A. O TO DELETE THE ADDITION OF RS. 8,49,79,383/-. 31. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO- ORDINATE BENCH, WE DIRECT THE A.O TO DELETE THE ADDITION OF RS. 13,35,61,482/ -. GROUND NO. 10 IS ACCORDINGLY ALLOWED. 32. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS ALLOWED IN PART FOR STATISTICAL PURPOSE. ITA NO. 2400/AHD/2009 REVENUES APPEAL FOR A.Y. 200 5-06 GROUND NO. 1 RELATES TO THE DIRECTION TO REWORK ARM S LENGTH PRICE WITH REGARD TO COMMISSION PAID TO AE. 33. AN IDENTICAL ISSUE HAS BEEN DECIDED BY US IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE IN ASSESSEES APPEAL IN ITA NO. 2430/AHD/2009 QUA GROUND NO. 2 OF THAT APPEAL. FOR OUR DETAILED DISCU SSION THEREIN, GROUND NO. 1 IS DISMISSED. GROUND NO. 2 RELATES TO THE DIRECTION TO GRANT OF E XEMPTION U/S. 10B IN RESPECT OF PANOLI UNIT. 34. WE FIND THAT THE FIRST APPELLATE AUTHORITY HAS FOLLOWED THE FINDINGS GIVEN IN A.Y. 2002-03 TO 2004-05 WHICH HAVE BEEN CONFIRME D BY THE TRIBUNAL IN ITA NO. 1287/AHD/20008. THE TRIBUNAL HAS DECIDED TH IS ISSUE QUA GROUND NO. 2 IN THAT APPEAL AS UNDER:- GROUND NO. 2 RELATES TO THE GRANT OF EXEMPTION U/S. 10B TO PANOLI AND AHMEDNAGAR UNIT. ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 21 97.THIS ISSUE HAS BEEN ACCEPTED BY THE REVENUE IN A .Y. 2002-03, THEREFORE, WE DO NOT FIND ANY MERIT IN THIS GRIEVANCE OF THE REVENUE. FURTHER WE FIND THAT IN THE GROUNDS OF APPEAL ITSELF, THE REFERENCE GIVEN BY THE REVENUE RELATES TO THE ORDER DATED 25.07.2006 WHICH PERTAINS TO F.Y. 2006-07 AND A.Y. 2007-08 WHEREAS W E ARE IN A.Y. 2004-05, THEREFORE, THE SAID ORDER OF THE DEVELOPMENT COMMISSIONER IS NOT A PPLICABLE FOR THE YEAR UNDER CONSIDERATION. THEREFORE FOR THIS YEAR, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. HOWEVER, THE A.O IS FREE TO TA KE A DIFFERENT VIEW IN THE RELEVANT ASSESSMENT YEAR, GROUND NOS. 2 & 3 ARE DISMISSED. 35. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO- ORDINATE BENCH (SUPRA), WE HOLD ACCORDINGLY. GROUND NO. 2 IS DISMISSED. GROUND NO. 3 RELATES TO THE INCLUSION OF INTEREST O N OVERDUE BILLS IN GROSS SALES WHILE COMPUTING DEDUCTION U/S. 80IB. 36. WHILE EXAMINING THE CLAIM OF DEDUCTION, THE A. O HAS FOUND THAT THE ASSESSEE HAS INCLUDED INTEREST ON OVERDUE BILLS AMO UNTING TO RS. 44,55,000/-. THE A.O WAS OF THE FIRM BELIEF THAT IN TEREST ON OVERDUE BILLS IS NOT DERIVED FROM THE MANUFACTURING ACTIVITY AND ACC ORDINGLY EXCLUDED THE SAME FROM THE CLAIM OF DEDUCTION WHILE DOING SO; TH E A.O FOLLOWED THE FINDINGS GIVEN IN A.Y. 2002-03 TO 2004-05. 37. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) AND REITERATED ITS CLAIM. THE LD. CIT(A) WAS CONVINCED WITH THE CLAIM IN THE LIGHT OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF NIRMA INDUSTRIES LTD. 283 ITR 402 AND ACCORDINGLY DIRECTE D THE A.O TO INCLUDE THE INTEREST ON OVERDUE BILLS WHILE COMPUTING DEDUCTION U/S. 80IB. 38. SINCE THE FIRST APPELLATE AUTHORITY HAS FOLLOW ED THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT GIVEN IN THE CASE OF NIRMA INDUSTRIES LTD. ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 22 (SUPRA), WE DO NOT FIND ANY REASON TO INTERFERE WIT H THE FINDINGS OF THE LD. CIT(A). GROUND NO. 3 IS ACCORDINGLY DISMISSED. GROUND NO. 4 RELATES TO THE REALLOCATION OF R & D EXPENSES. 39. AN IDENTICAL ISSUE HAS BEEN DECIDED BY US IN A SSESSEES APPEAL IN ITA NO. 2430/AHD/2009 QUA GROUND NO. 6. FOR OUR DETAIL ED DISCUSSION THEREIN, WE CONFIRMED THE FINDINGS OF THE LD. CIT(A) AND DIS MISSED GROUND NO. 4 OF THIS APPEAL. GROUND NO. 5 RELATES TO THE DIRECTION TO EXCLUDE IN COME OF PANOLI UNIT FOR CALCULATION OF BOOK PROFIT. 40. THE A.O HAS DENIED THE CLAIM OF DEDUCTION WHIL E WORKING OUT THE BOOK PROFIT U/S. 115JB OF THE ACT SINCE HE HAD DENIED TH E EXEMPTION U/S. 10B. SINCE THE LD. CIT(A) ALLOWED THE CLAIM OF DEDUCTION IN RESPECT OF PANOLI UNIT, THEREFORE, DIRECTED THE A.O TO EXCLUDE THE INCOME W ORKING OF THE BOOK PROFIT U/S. 115JB OF THE ACT. SINCE, THIS FINDING OF THE L D. CIT(A) HAS BEEN CONFIRMED BY THE TRIBUNAL IN EARLIER YEARS IN ITA N O. 1287/AHD/2008 QUA GROUND NO. 2 OF THAT APPEAL. WE DO NOT FIND ANY REA SON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). GROUND NO. 5 IS ACCORDI NGLY DISMISSED. GROUND NO. 6 RELATES TO THE RECALCULATION OF DISALL OWANCE OF EXPENSES INCURRED ON BEHALF OF SUN PHARMACEUTICAL INDUSTRIES . 41. AN IDENTICAL ISSUE HAS BEEN DECIDED BY US IN A SSESSEES APPEAL IN ITA NO. 2430/AHD/2009 QUA GROUND NO.10. FOR OUR DETAILE D DISCUSSION THEREIN, THIS GRIEVANCE OF THE REVENUE IS DISMISSED. ITA NOS. 243 0 & 2400/AHD/2009 . A.Y. 2005-06 23 GROUND NOS. 7 & 8 ARE OF GENERAL IN NATURE AND NEED S NO SEPARATE ADJUDICATION. 42. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 03 - 05- 2016. SD/- SD/- (RAJPAL YADAV) (N. K. BILLAIYA) JUDICIAL MEMBER ACC OUNTANT MEMBER AHMEDABAD: TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD