M/s. PFIZER LTD., MUMBAI V. ACIT Rg. - 8(2), MUMBAI

ITA 3098/MUM/2006

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1690 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 19-12-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 18-05-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: BIPIN PAWAR SHRI DHANESH BAFNA
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Notional interest
• Section: 92C; 133(6); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER. I.T.A. NO. 3098/MUM/2006 ASSESSMENT YEAR : 2002-03 M/S PFIZER LIMITED, ASST. COMMISSIONER OF PATEL ESTATE, VS. INCOME-TAX-8(2), JOGESHWERI (WEST), MUMBAI. MUMBAI 400 102. PAN AAACP 3334 M APPELLANT. RESPONDENT . APPELLANT BY : SHRI BIPIN PAWAR SHRI DHANESH BAFNA RESPONDENT BY : SHRI AJ EET KUMAR JAIN DATE OF HEAR ING : 19-12-2012 DATE OF PRONOUNCE MENT : 08-03-2013 O R D E R PER P.M. JAGTAP, A.M. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LEARNED CIT(APPEALS)-8, MUMBAI DATED 14-03-2006. 2. THE MAIN ISSUE INVOLVED IN THIS APPEAL RELATES T O THE ADDITION OF RS.1,40,39,000/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) ON ACCOUNT OF TRANSFER PRICING (TP) ADJUSTMENT. 3. THE ASSESSEE IN THE PRESENT CASE IS A PHARMACEUT ICAL COMPANY OPERATING IN INDIA AND THE MAJOR THERAPEUTIC SEGMENTS IN WHICH IT HAS A PRESENCE INCLUDE VITAMINS, COUGH AND COLD PREPARATION AND ANTI-RHEUMATICS, ANTIBIOTICS A ND CARDIO-VASCULAR. THE RETURN OF 2 ITA NO. 3098/MUM/2006 INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED B Y IT ON 03-10-2002 DECLARING TOTAL INCOME OF R.85,50,92,000/-. THE SAID RETURN WAS SUB SEQUENTLY REVISED BY THE ASSESSEE ON 31-03-2004 DECLARING TOTAL INCOME OF RS.97,59,23,00 0/-. AFTER HAVING NOTICED THAT THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRA NSACTIONS WITH ITS ASSOCIATED ENTERPRISES, A REFERENCE WAS MADE BY THE AO TO THE TPO U/S 92CA( 1) OF THE ACT FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE SAID TRANSACTIONS. THE SAID INTERNATIONAL TRANSACTIONS INCLUDED CLINICAL TRIAL SERVICES PROVIDED BY THE AS SESSEE COMPANY TO ITS OVERSEAS ASSOCIATES ENTERPRISES FOR WHICH A TOTAL AMOUNT OF RS.11.88 CRORES HAD BEEN RECEIVED DURING THE YEAR UNDER CONSIDERATION. IN THE TP STUD Y REPORT FILED BY THE ASSESSEE, THE DETAILS OF VARIOUS FUNCTIONS PERFORMED, ASSETS EMPL OYED AND RISKS ASSUMED IN THE CLINICAL STUDY MANAGEMENT AND MONITORING SERVICES WERE FURN ISHED BY THE ASSESSEE AS UNDER : (A) THE FUNCTIONS PERFORMED FOR THIS ACTIVITY ARE: 1. RECEIPT OF PRELIMINARY DATA AND METHODOLOGY FOR CONDUCTING RESEARCH ACTIVITIES IN INDIA. IN CLINICAL RESEARCH TERMS, THE ASSESSEE PROVIDES PFIZ ER INC WITH PHASE-II AND PHASE-III OF RESEARCH AND TRIAL SERVICES. 2. EVALUATION OF HOSPITALS AND AGENCIES WITH WHOM THE ACTIVITY CAN BE OUTSOURCED. 3. OUTSOURCING ACTIVITIES TOO, HOSPITALS AND AGENCI ES. 4. MONITORING THE RESEARCH AND TRIALS. 5. VERIFICATION OF THE RESULTS AND TO CHECK FOR ADH ERENCE TO STANDARDS. (B) IT IS STATED THAT THE ASSESSEE DOES NOT BEAR AN Y RISK IN RESPECT OF THIS TRANSACTION. (C) IT IS STATED THAT THE ASSESSEE DOES NOT EMPLOY ANY TANGIBLE ASSET IN RESPECT OF THIS INTERNATIONAL TRANSACTION. ON THE BASIS OF ABOVE FAR ANALYSIS, SEARCH WAS CLAI MED TO BE UNDERTAKEN BY THE ASSESSEE IN THE PROWESS DATABASE WHICH COULD NOT GIVE ANY CO MPANY CARRYING ON SIMILAR CLINICAL TRIAL ACTIVITY. THE ASSESSEE, THEREFORE, WAS STATED TO HAVE EXPANDED THE SEARCH BY INCLUDING VARIOUS BUSINESS CONSULTANCY SERVICES PRO VIDERS AND IDENTIFIED FIVE COMPARABLE 3 ITA NO. 3098/MUM/2006 COMPANIES WHICH WERE ENGAGED IN GENERAL BUSINESS CO NSULTANCY SERVICES, NAMELY, M/S GILICON PROJECT SERVICES LTD., M/S KITCO LTD., M/S NIS SPARTA LTD., M/S VIMTO LABS LTD. AND M/S WATER AND POWER CONSULTANCY SERVICES INDIA LTD. ACCORDING TO THE ASSESSEE, THE AVERAGE OF THEIR OPERATING MARGIN TO COST WAS 8.35% CONSIDERING THE PROFIT MARGIN EARNED DURING THE YEARS 2000 AND 2001 AND ITS OPERATING MA RGIN TO COST BEING 10% IN RELATION TO ITS INTERNATIONAL TRANSACTIONS/INVOLVING PROVISION OF CLINICAL STUDY MANAGEMENT AND MONITORY SERVICES, THE SAID TRANSACTIONS ENTERED IN TO WERE AT ARMS LENGTH . 4. THE TPO REQUIRED THE ASSESSEE TO FURNISH CERTAIN DETAILS AND DOCUMENTS INCLUDING THE CLINICAL TRIAL SERVICES AGREEMENT ENTERED INTO BY I T WITH PFIZAR INC. ON PERUSAL OF THE SAID AGREEMENT, HE FOUND CERTAIN CLAUSES TO BE RELEVANT AND NOTED THE CONTENTS THEREOF IN HIS ORDER AS UNDER: (A) IN THE RECITAL OF THE AGREEMENT IT IS EXPLAINED THA T THE OVERSEAS ASSOCIATED ENTERPRISE IS A RESEARCH BASED HEALTHCARE COMPANY ENGAGED IN THE DI SCOVERY AND DEVELOPMENT OF INNOVATIVE HEALTHCARE PRODUCTS AND FOR THIS PURPOSE ORGANIZES AND ARRANGES THE CONDUCT OF CLINICAL TRIAL AND STUDIES INVOLVING THE TESTING OF ITS PRODUCTS IN A NUMBER OF COUNTRIES AROUND THE WORLD. IT IS EXPLAINED THAT THE ASSESSE E HAS THE RESOURCES AND EXPERTISE TO ORGANIZE AND ARRANGE THE CONDUCT OF SUCH CLINICAL T RIALS AND STUDIES INVOLVING THE TESTING OF THE HEALTHCARE PRODUCTS IN INDIA, AND TO COMPILE , STORE AND ANALYSE THE DATA GENERATED IN THE COURSE OF SUCH CLINICAL TRIALS AND STUDIES. (B) CLAUSE 2 OF THE AGREEMENT PROVIDES FOR THE OBLIGATI ONS OF THE ASSESSEE COMPANY UNDER THE AGREEMENT. IT PROVIDES THAT FOR THE PURPOSE OF ORG ANIZING AND CONDUCTING THE CLINICAL TRIALS AND ASSESSEE SHALL ENTER INTO A CLINICAL STU DY AGREEMENT WITH INSTITUTIONS SUCH AS HOSPITALS AND THE PRINCIPAL INVESTIGATOR OF THE INS TITUTION IN A PRESCRIBED FORM, WHICH WOULD CONTAIN THE PAYMENT TERMS. THE ASSESSEE IS L IABLE TO COMPILE, STORE AND ANALYSE THE DATA RECEIVED BY IT FROM THE INVESTIGATORS AND INSTITUTIONS CONDUCTING THE TRIAL AND THE SAME IS TO BE FURNISHED TO PFIZER INC AFTER ANALYSI NG THE RESULTS. THE AGREEMENT SPECIFICALLY PROVIDES THAT THE ASSESSEE SHALL BE RE SPONSIBLE FOR DATA MANAGEMENT AND ANALYSIS SERVICES TO THE OVERSEAS ENTITY. IN THIS REGARD THE ASSESSEE IS REQUIRED TO SUBMIT A PROGRESS REPORT OF THE RESULTS OF THE WORK CARRIE D OUT BY IT IN PURSUANCE TO THIS AGREEMENT AT REGULAR INTERVALS IN RESPECT OF EACH S PECIFIC PROJECT. (C) CLAUSE 5 PROVIDES THAT ALL INFORMATION OBTAINED BY THE ASSESSEE IN THE COURSE OF PROVIDING THE SERVICES WOULD BE KEPT STRICTLY CONFIDENTIAL AN D WILL NOT BE SHARED BY IT WITH ANY OTHER ENTITY. (D) CLAUSE 6 OF THE AGREEMENT PROVIDES THAT THE OVERSEA S ENTITY WOULD INDEMNIFY, DEFEND AND HOLD THE ASSESSEE AND ITS EMPLOYEES HARMLESS AGAINS T ANY LIABILITY OR LOSS THAT THEY MAY 4 ITA NO. 3098/MUM/2006 SUFFER ARISING OUT OF THE CLINICAL TRIAL PROVIDED T HAT SUCH LOSS OR DAMAGE IS NOT AS A RESULT OF ANY FAILURE ON THE PART OF THE ASSESSEE TO CARRY OUT ITS OBLIGATIONS PROPERLY OR DUE TO ITS NEGLIGENCE OR WILLFUL MISCONDUCT OR WRONGFUL ACT OR THE FAILURE ON THE PART OF THE ASSESSEE TO COMPLY WITH THE APPLICABLE LAWS, RULES AND REGUL ATIONS OF THE GOVERNMENT AND OTHER AUTHORITIES IN INDIA. CLAUSE 7 FURTHER PROVIDES THAT IN THE EVENT OF ANY FAILURE ON THE PART OF THE ASSESSEE TO CARRY OUT ITS OBLIGATIONS AND DUTIES IN ACCORDANCE WITH THE AGREEMENT OR IN THE EVENT OF ANY NEGLIGENCE OR MISCONDUCT OR WRONGFUL ACT COMMIT TED BY IT OR IN THE EVENT OF ITS FAILURE TO COMPLY WITH THE REQUIRED LAWS AND REGULATIONS, I T WOULD INDEMNIFY PFIZER INC AND ITS DIRECTORS AND EMPLOYEES AGAINST ANY LOSS OR DAMAGE THAT THEY MAY SUFFER. (E) CLAUSE 8 PROVIDES FOR THE COMPENSATION THAT THE ASS ESSEE IS ENTITLED TO UNDER THIS AGREEMENT. IT IS STATED THAT THE ASSESSEE IS ENTIT LED TO BE REIMBURSED ON ACCOUNT OF ALL DIRECT EXPENSES INCURRED BY IT IN FOR THE PERFORMAN CE OF ITS OBLIGATIONS UNDER THIS AGREEMENT. THE ASSESSEE IS ENTITLED TO A FEE CALCU LATED @ 5% OF THE DIRECT COSTS TOWARDS INDIRECT EXPENSES INCURRED, WHICH CANNOT BE READILY ALLOCATED TO THIS ACTIVITY OF CLINICAL TRIAL AND DATA MANAGEMENT SERVICES. THE ASSESSEE I S FURTHER ENTITLED TO A FEE OF 5% OF THE DIRECT COSTS AS COMPENSATION FOR ITS ACTIVITIES. (F) CLAUSE 10 OF THE AGREEMENT PROVIDES THAT ANY INVENT IONS OR DISCOVERIES IN RELATION TO THE HEALTHCARE PRODUCTS, MADE BY THE ASSESSEE IN THE CO URSE OF ITS ACTIVITIES UNDER THIS AGREEMENT WOULD BE ASSIGNED BY IT IN FAVOUR OF THE OVERSEAS ENTITY. THE TPO ALSO NOTED FROM THE DETAILS FURNISHED BY TH E ASSESSEE THAT TOTAL EXPENSES OF RS.10.80 CRORES WERE INCURRED BY THE ASSESSEE ON CL INICAL RESEARCH DEPARTMENT WHICH WERE MAINLY INCLUSIVE OF SALARY COST, TRAINING COST, OFF ICE EXPENSES, PROFESSIONAL FEES AND INVESTIGATION EXPENSES. HE ALSO NOTED THAT THE ACTI VITIES OF THE CLINICAL RESEARCH WERE CONDUCTED BY THE ASSESSEE THROUGH PFIZER GLOBLE, RESEARCH AND DEVELOPMENT GROUP WHICH WAS FUNCTIONALLY DIVIDED INTO TWO GROUPS - T HE CLINICAL STUDY MANAGEMENT AND MONITORING GROUP AND THE BIO METRI GROUP. HE ALSO N OTED THAT THE CLINICAL TRIALS WERE UNDERTAKEN THROUGH HOSPITALS AND SUCH OTHER AGENCIE S HAVING THE INFRASTRUCTURE TO CONDUCT SUCH TRIALS. 5. AFTER TAKING NOTE OF THE RELEVANT FACTS INCLUDIN G THE NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE, AN EFFORT WAS MADE BY THE TPO TO IDEN TIFY THE COMPANIES THAT ARE CLOSELY COMPARABLE TO THE ACTIVITIES CARRIED ON BY THE ASSE SSEE AND ACCORDINGLY THREE SUCH COMPANIES WERE IDENTIFIED BY HIM, NAMELY, QUINTILIS SPECTRAL INDIA P. LTD., SIRO CLINIPHARM P. LTD. AND NEEMAN INTERNATIONAL ASIA LT D. THE COPIES OF THE BALANCE SHEETS 5 ITA NO. 3098/MUM/2006 OF THESE THREE COMPANIES WERE PROVIDED BY THE TPO T O THE ASSESSEE SEEKING ITS EXPLANATION AS TO WHY THE MARKUP SHOULD NOT BE DETE RMINED ON THE BASIS OF MARGIN EARNED BY THE SAID COMPANIES IN THE YEAR 2002. THE ASSESSE E RAISED A PRELIMINARY OBJECTION IN THIS REGARD BY STATING THAT FOR THE PURPOSE OF DETE RMINING THE ARMS LENGTH PRICE, THE DATA THAT WAS NOT AVAILABLE TO IT AT THE TIME OF COMPLYI NG WITH THE TP REGULATIONS SHOULD NOT BE CONSIDERED. THE TPO DID NOT FIND THIS OBJECTION OF THE ASSESSEE TO BE SUSTAINABLE. ACCORDING TO HIM, THE PRICE OF RELEVANT INTERNATION AL TRANSACTION WAS NOT FIXED BY THE ASSESSEE ON THE BASIS OF COMPARABLE DATA AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF FILING OF THE RETURN OF INCOME AND THE ECONOMIC ANA LYSIS DONE BY IT AT THE TIME OF FILING THE RETURN OF INCOME WAS MORE IN THE NATURE OF POS TMORTEM ONLY TO TEST THE COMPARABLE TRANSACTION IN ORDER TO ESTABLISH THAT THE PRICE CH ARGED FOR INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. THE ASSESSEE ALSO CONTENDED BEFORE TH E TPO THAT THE DATA RELATING TO PRECEDING TWO YEARS SHOULD ALSO BE CONSIDERED FOR T HE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE. THE AO, HOWEVER, NOTED THAT AS PER TH E PROVISO TO RULE 10B(4), THE PRECEDING TWO YEARS DATA COULD BE CONSIDERED ONLY IF SUCH DATA REVEALS FACTS WHICH COULD HAVE INFLUENCE ON THE DETERMINATION OF THE TRANSFER PRICE IN RELATION TO THE TRANSACTIONS BEING COMPARED. AS THERE WAS NO SUCH CASE MADE OUT BY THE ASSESSEE, THE TPO HELD THAT ONLY THE DATA RELATING TO THE FINANCIAL YEAR IN WHI CH THE INTERNATIONAL TRANSACTIONS HAD BEEN ENTERED INTO COULD BE CONSIDERED FOR THE PURPO SE OF COMPARABILITY ANALYSIS. 6. AFTER OVERRULING THE PRELIMINARY OBJECTIONS RAIS ED BY THE ASSESSEE, THE TPO PROCEEDED TO MAKE THE COMPARABILITY ANALYSIS ON THE BASIS OF COMPARABLES GIVEN BY THE ASSESSEE AS WELL AS THE COMPARABLES SELECTED BY HIM. IN THIS RE GARD, HE FOUND THAT M/S NEEMAN INTERNATIONAL ASIA LTD. SELECTED BY HIM WAS A CONSI STENTLY LOSS MAKING COMPANY AND THE SAME, THEREFORE, WAS EXCLUDED BY HIM ON THIS COUNT FOR THE COMPARABILITY ANALYSIS. OUT OF THE REMAINING SEVEN COMPARABLE CASES, FIVE GIVEN BY THE ASSESSEE AND TWO SELECTED BY HIM, THE TPO ACCEPTED ONLY FOUR COMPANIES AS COMPA RABLES FOR THE FOLLOWING REASONS GIVEN IN HIS ORDER : 6 ITA NO. 3098/MUM/2006 COMPANIES REMARKS GILCON PROJECT SERVICES LTD., THIS COMPANY IS NOT FOUND IN THE PROWESS DATABASE. FROM THE BALANCE SHEET PROVIDED, VERY SKETCHY INFORMATION RELATING TO BUSINESS OF THE ASSESSEE IS AVAILABLE. IT IS SEEN THAT THIS ENTITY IS ENGAGED IN VARIOUS JOINT VENTURE ACTIVITIES, THE DETAILS OF WH ICH ARE NOT AVAILABLE IN THE BALANCE SHEET. IT IS ALSO OBSERVED THAT THE COMPANY IS A PARTNER IN A PARTNERSHIP FIRM, BUT THE PROFITS OF THAT FIRM HAS NOT BEEN RECOGNIZED IN THE COMPANYS BALANCE SHEET. HENCE THE SAME IS REJECTED AS A COMPARABLE. KITCO LTD THIS ENTITY IS MAKING AN OPERATING LOSS. AS THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER, IT CANNOT B E COMPARED WITH A LOSS MAKING ENTITY. NIS SPARTA LTD ACCEPTED VIMTA LABS LTD ACCEPTED WATER & POWER CONSULTANCY SERVICES ACCEPTED QUINTILES SPECTRAL INDIA PVT. LTD., THE ASSESSEE CONTENDS THAT THIS ENTITY IS ENGAGED I N HIGH AND CLINICAL SERVICES WHICH IS REFLECTED BY TH E VERY HIGH MARGINS. AS THE LOSS MAKING ENTITY HAS B EEN EXCLUDED, THIS COMPANY IS ALSO REJECTED. SIRCO CLINPHARM PVT LTD ACCEPTED THE AVERAGE OPERATING PROFIT ON COST OF THE FOUR CO MPARABLE COMPANIES SELECTED BY HIM WAS WORKED OUT BY THE TPO AT 18.04% AS UNDER : COMPANIES 2001-2002 NIS SPARTA LTD 9.07% VIMTA LABS LTD 27.04% WATER & POWER CONSULTANCY SERVICES INDIA LTD., 19.03% SIRO CLINPHARM PVT LTD 17.14% ARITHMETIC MEAN 18.04% SINCE THE OPERATING PROFIT MARGIN OF SIRO CLINPHARM P. LTD. AT 17.40% WAS LOWER THAN THE AVERAGE PROFIT MARGIN OF 18.04% WITHIN THE RANGE OF 5%, THE AO ADOPTED THE OPERATING PROFIT MARGIN OF 17.14% AS AT ARMS LENGTH AND APPL IED THE SAME TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE RELATING TO PROVISION OF CLINICAL TRIAL SERVICES. 7 ITA NO. 3098/MUM/2006 7. FROM THE WORKING OF ITS OPERATING PROFIT MARGIN AS FURNISHED BY THE ASSESSEE, IT WAS NOTICED BY THE TPO THAT THE ASSESSEE HAS CONSIDERED ONLY THE DIRECT COST INCURRED FOR THE PURPOSE OF CARRYING ON THE CLINICAL TRIAL ACTIVITY AND DATA MANAGEMENT SERVICE ACTIVITY. HE NOTED THAT AS PER THE TERMS OF THE RELEVANT AGREEME NT, INDIRECT COST WAS ALSO REQUIRED TO BE TAKEN INTO ACCOUNT WHICH WAS TO BE ESTIMATED AT 5% OF THE DIRECT COST. ACCORDING TO THE TPO, EVEN OTHERWISE BOTH THE DIRECT AS WELL AS INDI RECT COST WERE REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF DETERMINING THE PROFI T EARNED BY THE ASSESSEE FROM ANY ACTIVITY. HE, THEREFORE, ADDED INDIRECT COST OF RS. 54.01 LAKHS BEING 5% OF THE DIRECT COST TO THE DIRECT COST OF RS.1085.25 LAKHS INCURRED BY THE ASSESSEE TO WORK OUT THE TOTAL COST OF RS.1134.26 LAKHS AND AFTER ADDING THE OPERATING PROFIT OF RS.194.41 LAKHS CALCULATED AT 17% OF THE TOTAL COST, HE DETERMINED THE ARMS LENG TH PRICE FOR THE SERVICES RENDERED BY THE ASSESSEE COMPANY TO ITS AE AT RS.1328.68 LAKHS. SINCE THE FEES ACTUALLY CHARGED BY THE ASSESSEE FOR SUCH SERVICES WAS RS.1188.28 LAKHS , THE DIFFERENCE OF RS.140.39 LAKHS WAS QUANTIFIED BY THE TPO AS TP ADJUSTMENT WHICH W AS ADDED BY THE AO TO THE TOTAL INCOME OF THE ASSESSEE IN THE ASSESSMENT COMPLETED U/S 143(3). 8. AGGRIEVED BY THE ORDER OF THE AO PASSED U/S 143( 3), AN APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS) CHALLENGIN G, INTER ALIA, THE ADDITION MADE BY THE AO ON ACCOUNT OF TP ADJUSTMENT. DURING THE COURSE O F APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(APPEALS), VARIOUS TECHNICAL AND LEGAL I SSUES WERE RAISED BY THE ASSESSEE CHALLENGING THE VALIDITY OF REFERENCE MADE BY THE A O TO THE TPO U/S 92CA(1) AS WELL AS THAT OF THE PROCEEDINGS CONDUCTED BY THE TPO FOR DE TERMINATION OF THE ARMS LENGTH PRICE OF THE RELEVANT INTERNATIONAL TRANSACTIONS. THE LEA RNED CIT(APPEALS), HOWEVER, DID NOT FIND MERIT IN THE CONTENTIONS RAISED ON BEHALF OF T HE ASSESSEE ON THESE ISSUES AND REJECTING THE SAME, HE UPHELD THE VALIDITY OF REFERENCE MADE BY THE AO TO THE TPO U/S 92CA(1) AS WELL AS THAT OF THE ORDER OF THE TPO PASSED U/S 92C A(3) OF THE ACT. THE ASSESSEE ALSO RAISED THE PRELIMINARY ISSUE BEFORE THE LEARNED CIT (APPEALS) AS RAISED BEFORE THE TPO CHALLENGING THE USE OF DATA FOR THE COMPARABILITY A NALYSIS WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN WHEN THE TP STUDY WAS MADE BY THE ASS ESSEE AT THE TIME OF FILING ITS RETURN 8 ITA NO. 3098/MUM/2006 OF INCOME. THE ASSESSEE ALSO OBJECTED TO THE USE OF ONLY THE DATA OF RELEVANT FINANCIAL YEAR BY THE TPO FOR THE PURPOSE OF COMPARABILITY AN ALYSIS AND SUBMITTED THAT MULTIPLE YEAR DATA INCLUDING THAT OF THE IMMEDIATELY PRECEDI NG TWO YEARS SHOULD HAVE BEEN USED. THE LEARNED CIT(APPEALS), HOWEVER, FOUND THESE OBJE CTIONS OF THE ASSESSEE TO BE UNSUSTAINABLE FOR THE ELABORATE REASONS GIVEN BY HI M IN THE IMPUGNED ORDER AND OVERRULED THE SAME. AS REGARDS THE COMPARABILITY ANALYSIS, TH E ASSESSEE OBJECTED TO THE EXCLUSION OF THREE COMPARABLES BY THE TPO, VIZ. NEEMAN INTERNATI ONAL ASIA LTD., GILICON AND KITCO. THE ASSESSEE ALSO MADE AN ATTEMPT TO SHOW THAT ITS OPERATING PROFIT ON COST WAS ACTUALLY 11.66% AS AGAINST 10% TAKEN BY THE TPO. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT INDIRECT EXPENSES HAVING BEEN ALREADY INCLUDED BY I T IN THE TOTAL EXPENSES FOR THE PURPOSE OF APPLYING THE MARKUP OF 10%, THE TPO WAS NOT JUST IFIED IN TAKING THE SAME INTO CONSIDERATION SEPARATELY FOR CALCULATING THE ARMS LENGTH PRICE OF THE RELEVANT INTERNATIONAL TRANSACTIONS WHICH RESULTED IN WRONG QUANTIFICATION OF TP ADJUSTMENT. THE LEARNED CIT(APPEALS), HOWEVER, DID NOT FIND MERIT I N ANY OF THESE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE WHILE DISPUTING THE ADDITION MADE ON ACCOUNT OF TP ADJUSTMENT AFTER EXAMINING THE SAME IN THE LIGHT OF MATERIAL A VAILABLE ON RECORD INCLUDING THE ORDER OF THE TPO AS WELL AS THE RELEVANT PROVISIONS OF TH E ACT AND REJECTING THE SAME, HE CONFIRMED THE ENTIRE ADDITION OF RS.1,40,39,000/- M ADE BY THE AO/TPO. 9. THE ADDITION MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) ON ACCOUNT OF TP ADJUSTMENT HAS BEEN DISPUTED BY THE ASSESSEE IN THE PRESENT APPEAL BY RAISING THE FOLLOWING CONCISE GROUNDS AS FILED BY IT UNDER LET TER DATED MAY 17, 2010 : THE UNDER MENTIONED CONCISE GROUNDS OF APPEAL ARE I NDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER: 1. THE COMMISSIONER OF INCOME TAX(APPEAL)-VIII, MUMBAI [THE CIT(A)] ERRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE ASSISTANT COMMISSIONER OF INCOME TAX, RANGE 8(2), MUMBAI (AO) IN MAKING A TRANSFER PRICING ADJU STMENT OF RS. 1,40,39,000/- TO THE INTERNATIONAL TRANSACTION OF PROVISION OF CLINICAL STUDY MANAGEMENT AND MONITORING SUPPORT SERVICES. THE APPELLANT PRAYS THAT THE ENTIRE ADJUSTMENT OF R S. 1,40,39,000/- BE DELETED. 9 ITA NO. 3098/MUM/2006 2. WITHOUT PREJUDICE TO THE ABOVE, IN COMPUTING THE AD JUSTMENT, THE CIT(A) ERRED ON FACTS AND IN LAW IN UPHOLDING THE ACTION OF THE AO ON FOL LOWING GROUNDS: (A) DISREGARDING THE COMPARABILITY ANALYSIS PERFORMED B Y THE APPELLANT& SELECTED COMPARABLES NOT FUNCTIONALLY COMPARABLE TO APPELLAN TS SUPPORT ACTIVITY AND THEREBY CONSIDERING THE ARMS LENGTH MARGIN AS 18.04% ON CO ST; (B) ERRED IN USING SECRET DATA NOT AVAILABLE IN PUBLIC DOMAIN BY EXERCISING POWERS UNDER SECTION 133(6) OF THE INCOME TAX ACT, 1961 (ACT); (C) NOT APPRECIATING THAT NONE OF THE CONDITIONS PRESCR IBED IN SECTION 92C(3) OF THE ACT WERE SATISFIED; (D) RECOMPUTING THE OPERATING MARGIN OF THE APPELLANT B Y: I. ESTIMATING NOTIONAL INDIRECT COST AT 5% THEREBY ALT ERING THE COST BASE OF THE APPELLANT; II. INCLUDING NOTIONAL INTEREST IN THE COST BASE; AND III. NOT CONSIDERING PAYMENTS TO HOSPITALS/INSTITUTIONS AS PASS-THROUGH COSTS; (E) COMPUTING THE OPERATING MARGIN OF THE SAID COMPARAB LE USING FINANCIAL DATA OF FINANCIAL YEAR 2001-02 ONLY, INSTEAD OF PRIOR MULTI PLE YEAR DATA; AND (F) NOT ALLOWING THE BENEFIT OF (+/-) 5% RANGE OPTION A VAILABLE TO THE APPELLANT UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. IT IS PRAYED BY THE APPELLANT THAT THE ENTIRE ADJUS TMENT OF RS. 1,40,39,000/- BE DELETED. 10. AT THE TIME OF HEARING BEFORE US, THE LEARNED C OUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT GROUND NO. 1 RAISED IN THE APPEAL OF THE ASSES SEE IS GENERAL SEEKING NO SPECIFIC DECISION FROM US. HE HAS ALSO NOT PRESSED GROUND NO . 2(B), 2(C), 2(D)(III) AND 2E. THE SAME ARE ACCORDINGLY DISMISSED AS NOT PRESSED. 11. IN GROUND NO. 2(A), THE ASSESSEE HAS CHALLENGED THE COMPARABLES SELECTED BY THE AO FOR COMPARABILITY ANALYSIS AND IN SUPPORT OF THIS G ROUND, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE EXACT NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE IN RELATION TO CLINICAL TRIAL SERVICES WAS EXPLAINE D BY THE ASSESSEE BEFORE THE TPO WHICH HE HAS FAILED TO APPRECIATE. HE SUBMITTED THAT AS E XPLAINED BEFORE THE TPO, THE ASSESSEE DOES ONLY COORDINATION AND FACILITATION WORK AND N OT THE ACTUAL CLINICAL TRIALS. HE SUBMITTED THAT SUCH TRIALS ARE GOT DONE BY THE ASSE SSEE FROM THIRD PARTIES AND AS PER THE TERMS OF THE AGREEMENT AS REPRODUCED BY THE TPO IN PARAGRAPH NO. 7.1 OF HIS ORDER, NO RISK WAS TAKEN BY THE ASSESSEE. HE SUBMITTED THAT T HERE WAS NO LABORATORY OR ANY OTHER 10 ITA NO. 3098/MUM/2006 TESTING FACILITY OWNED BY THE ASSESSEE, WHERE THE ACTUAL CLINICAL TRIALS COULD BE UNDERTAKEN WHICH CLEARLY SUPPORTS THE ASSESSEES ST ATEMENT THAT CLINICAL TRIALS WERE GOT DONE BY IT FROM THE THIRD PARTIES. HE CONTENDED THA T THE ASSESSEE THUS IS NOT THE ACTUAL CLINICAL TRIAL COMPANY WHEREAS THE THREE COMPANIES IDENTIFIED BY THE TPO AS COMPARABLES ARE ACTUALLY UNDERTAKING CLINICAL TRIALS ON THEIR O WN. HE SUBMITTED THAT THE TPO, HOWEVER, HAS INCIDENTALLY TAKEN ONLY ONE OF THE SAID THREE C OMPANIES, NAMELY, SIRO CLINPHARMA P. LTD. FOR THE COMPARABILITY ANALYSIS. HE INVITED OUR ATTENTION TO THE SCHEDULE OF FIXED ASSETS OF THE SAID COMPANY AS ON 31 ST MARCH, 2002 PLACED AT PAGE NO. 369 OF HIS PAPER BOOK TO SHOW THAT SUBSTANTIAL INVESTMENT WAS MADE B Y THE SAID COMPANY IN THE PLANT AND MACHINERY INCLUDING LABORATORY EQUIPMENT. HE ALSO I NVITED OUR ATTENTION TO THE PROFIT & LOSS ACCOUNT OF THE SAID COMPANY FOR THE YEAR ENDED 31 ST MARCH, 2002 PLACED AT PAGE 372 OF HIS PAPER BOOK TO SHOW THAT SUBSTANTIAL EXPENDIT URE OF RS.12.43 LAKHS WAS INCURRED ON CLINICAL TRIAL EXPENSES. HE RELIED ON THE DECISION OF COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ZYDUS ALTANA HEALTHCARE P. LTD. VS. IT O RENDERED ON 22-04-2010 IN ITA NOS. 3311 AND 3332/MUM/2008 FOR ASSESSMENT YEARS 2002-03 AND 2003-04 AND SUBMITTED THAT THE ACTIVITIES CARRIED ON BY THE ASSESSEE IN THE SA ID CASE IN RELATION TO CLINICAL TRIALS WERE SIMILAR TO THE CASE OF THE ASSESSEE IN AS MUCH AS T HE SAME WERE LIMITED TO COORDINATION AND FACILITATION OF THE CLINICAL TRIALS AND WHILE C ONSIDERING THE CASE OF SIRO CLINPHARMA P. LTD. WHICH WAS SELECTED BY THE TPO AS COMPARABLE IN THAT CASE, THE TRIBUNAL NOTED IN PARAGRAPH NO. 9 THAT SIRO CLINPHARPA P. LTD. WAS AC TUALLY ENGAGED IN CONDUCTING CLINICAL TRIAL SERVICES HAVING REGARD TO THE SUBSTANTIAL INC OME GENERATED FROM THE RESEARCH ACTIVITY DURING THE FINANCIAL YEAR 2001-02 AS WELL AS THE PL ANT AND MACHINERY INCLUDING LABORATORY EQUIPMENT OWNED BY IT AS ON 31-03-2002. HE SUBMITTE D THAT ALTHOUGH THE TRIBUNAL IN THAT CASE HAS HELD THAT SUITABLE ADJUSTMENT SHOULD BE MA DE FOR THE FUNCTIONAL DIFFERENCE NOTED BY IT IN THE ACTIVITIES CARRIED ON BY SIRO CLINPHAR MA P. LTD., NO SUCH ADJUSTMENT CAN ACTUALLY BE MADE OR QUANTIFIED IN THE CASE OF FUNCT IONAL DIFFERENCE. HE CONTENDED THAT SINCE THE ACTIVITIES CARRIED ON BY SIRO IS DIFFEREN T FROM THE ACTIVITIES OF THE ASSESSEE AS FOUND BY THE TRIBUNAL IN THE CASE OF ZYDUS ALTANA H EALTHCARE P. LTD. (SUPRA), THE CASE OF 11 ITA NO. 3098/MUM/2006 SIRO CANNOT BE TAKEN AS COMPARABLE DUE TO THE FUNCT IONAL DIFFERENCE AND THE SAME SHOULD BE EXCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYS IS. 12. AS REGARDS THE EXCLUSION OF GILICON BY THE TPO, THE LEARNED COUNSEL FOR THE ASSESSEE INVITED OUR ATTENTION TO THE COPY OF DIRECTORS REP ORT OF THE SAID COMPANY PLACED AT PAGE NO. 405 OF ITS PAPER BOOK TO SHOW THAT THE SAID COM PANY WAS MAINLY IN THE CONSULTANCY BUSINESS DURING THE FINANCIAL YEAR 2001-02 AND THER E WAS THUS FUNCTIONAL SIMILARITY BETWEEN THE SAID COMPANY AND THE ASSESSEE. HE ALSO INVITED OUR ATTENTION TO THE BUSINESS PROFILE OF THE SAID COMPANY PLACED AT PAGE NO. 427 OF ITS PAPER BOOK TO SHOW THAT THE PRINCIPAL ACTIVITY OF THE SAID COMPANY DURING THE Y EAR UNDER CONSIDERATION WAS CONSULTING ENGINEERS AND ADVISORS. HE CONTENDED THAT THE ACTIO N OF THE TPO IN REJECTING GILICON HAVING FUNCTIONAL SIMILARITY WITH THAT OF THE ASSES SEE COMPANY WAS UNFOUNDED AND THE LEARNED CIT(APPEALS) WAS NOT JUSTIFIED IN UPHOLDING THE SAME. 13. AS REGARDS KITCO, THE LEARNED COUNSEL FOR THE A SSESSEE SUBMITTED THAT THE TPO HAS REJECTED THIS COMPANY AS A LOSS MAKING ENTITY WITHO UT APPRECIATING OR CONSIDERING THAT THE SAID COMPANY IS NOT A CONSISTENT LOSS MAKING SO AS TO JUSTIFY ITS EXCLUSION FROM THE COMPARABILITY ANALYSIS. HE INVITED OUR ATTENTION TO THE COPY OF THE DIRECTORS REPORT OF THE SAID COMPANY PLACED AT PAGE NO. 536 OF ITS PAPER BO OK TO SHOW THAT THERE WAS A NET PROFIT EARNED BY THE SAID COMPANY IN THE FINANCIAL YEAR 20 00-01 AS WELL AS 2001-02 EVEN AFTER TAX. HE CONTENDED THAT KITCO AND GILICON THUS SHOUL D HAVE BEEN INCLUDED BY THE TPO FOR THE PURPOSE OF COMPARABILITY ANALYSIS WHEREAS SIRO SHOULD HAVE BEEN EXCLUDED. 14. THE LEARNED DR, ON THE OTHER HAND, STRONGLY SUP PORTED THE ACTION OF THE AUTHORITIES BELOW IN EXCLUDING GILICON AND KITCO AND INCLUDING SIRO FOR THE PURPOSE OF COMPARABILITY ANALYSIS. AS REGARDS GILICON, HE INVITED OUR ATTENT ION TO THE PROFIT & LOSS ACCOUNT OF THE SAID COMPANY FOR THE YEAR ENDED 31 ST MARCH, 2002 PLACED AT PAGE NO. 421 OF THE PAPER BOOK TO SHOW THAT OPENING AND CLOSING WORK IN PROGR ESS OF CONSULTANCY CONTRACT WERE SHOWN. HE ALSO INVITED OUR ATTENTION TO THE SCHEDUL E OF ESTABLISHMENT EXPENSES OF THE SAID COMPANY PLACED AT PAGE NO. 424 OF THE PAPER BOOK TO SHOW THAT THE CONSULTANCY WORK 12 ITA NO. 3098/MUM/2006 WAS SUB-CONTRACTED BY GILICON GOING BY THE SUBSTANT IAL EXPENDITURE ON SUB-CONTRACTING. HE SUBMITTED THAT GILICON THUS WAS NOT ONLY FUNCTIO NALLY DIFFERENT BUT EVEN THE BUSINESS MODEL ADOPTED BY THE SAID COMPANY WAS DIFFERENT FRO M THAT OF THE ASSESSEE COMPANY. 15. AS REGARDS KITCO, HE INVITED OUR ATTENTION TO P AGE 10 OF THE TPOS REPORT TO POINT OUT THAT KITCO WAS REJECTED AS COMPARABLE BY THE TPO AF TER TAKING NOTE OF THE FACT THAT THE SAID ENTITY WAS MAKING AN OPERATING LOSS. HE INVITE D OUR ATTENTION TO THE PROFIT & LOSS ACCOUNT OF THE SAID COMPANY PLACED AT PAGE NO. 543 OF THE PAPER BOOK AND THE DETAILS OF INCOME GIVEN ON PAGE NO. 548 OF THE PAPER BOOK TO S HOW THAT IF INTEREST INCOME EARNED BY THE SAID COMPANY ON BANK DEPOSIT IS EXCLUDED FRO M THE NET PROFIT, THERE WAS AN OPERATING LOSS FOR BOTH THE FINANCIAL YEARS 2000-01 AND 2001-02. HE ALSO INVITED OUR ATTENTION TO THE PROFIT & LOSS ACCOUNT OF THE SAID COMPANY FOR THE FINANCIAL YEARS 1998-99 AND 1999-2000 PLACED AT PAGE NO. 574 OF THE PAPER B OOK TO SHOW THAT AFTER EXCLUDING THE INTEREST INCOME, THERE WAS OPERATING LOSS FOR BOTH THESE YEARS ALSO. HE CONTENDED THAT KITCO THUS WAS A CONSISTENTLY LOSS MAKING COMPANY A ND THE SAME WAS RIGHTLY EXCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 16. AS REGARDS SIRO, THE LEARNED DR RELIED ON THE O RDER OF THE TPO AND THAT OF THE LEARNED CIT(APPEALS) IN SUPPORT OF THE REVENUES CASE THAT SIRO HAS BEEN RIGHTLY INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS. AS REGARDS THE D ECISION OF THE TRIBUNAL IN THE CASE OF ZYDUS ALTANA HEALTHCARE P. LTD. (SUPRA) RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD, HE SUBMITTED THAT THE MATT ER HAS BEEN ULTIMATELY SENT BACK BY THE TRIBUNAL IN THE SAID CASE TO THE FILE OF THE AO FOR MAKING ADJUSTMENT. HE URGED THAT THE SAME COURSE MAY BE FOLLOWED EVEN IN THE PRESENT CAS E. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON THI S ISSUE AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSE E HAS CHALLENGED THE ACTION OF THE AUTHORITIES BELOW IN EXCLUDING GILICON AND KITCO AN D INCLUDING SIRO FOR THE PURPOSE OF COMPARABILITY ANALYSIS. AS REGARDS SIRO, IT IS OBS ERVED THAT THERE IS A FUNCTIONAL SIMILARITY BETWEEN THE SAID COMPANY AND THE ASSESSEE COMPANY I N AS MUCH AS BOTH OF THEM ARE 13 ITA NO. 3098/MUM/2006 ENGAGED IN THE BUSINESS OF PROVIDING SERVICES RELAT ING TO CLINICAL TRIALS. THE DIFFERENCE IS ONLY IN THE BUSINESS MODEL ADOPTED BY THESE TWO COM PANIES IN AS MUCH AS SIRO IS DOING THE CLINICAL TRIALS ON ITS OWN WHERE AS THE ASSESSE COMPANY IS GETTING THE CLINICAL TRIALS DONE FROM THE THIRD PARTIES. IN OUR OPINION, THIS DIFFERENCE IN BUSINESS MODEL ADOPTED BY SIRO CANNOT BE THE BASIS TO EXCLUDE THE SAID COMPAN Y FROM THE COMPARABILITY ANALYSIS ESPECIALLY WHEN THERE IS A FUNCTIONAL SIMILARITY IN THE MAIN BUSINESS CARRIED ON BY SIRO AS WELL AS BY THE ASSESSEE-COMPANY WHICH IS THAT OF PR OVIDING SERVICES IN RELATION TO CLINICAL TRIALS. IT IS ALSO PERTINENT TO NOTE IN THIS CONTE XT THAT THERE ARE VERY FEW COMPARABLES AVAILABLE WHICH ARE ENGAGED IN THE BUSINESS OF PROV IDING SERVICES RELATING TO CLINICAL TRIALS AND THE ASSESSEE COMPANY IN FACT HAS TAKEN COMPARAB LES WHICH ARE IN THE BUSINESS OF PROVIDING BUSINESS CONSULTANCY SERVICES FOR THE PUR POSE OF COMPARABILITY ANALYSIS. WE THEREFORE FIND MERIT IN THE ARGUMENT OF THE LD. DR THAT SIRO SHOULD BE INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS AND WHAT AT THE M OST CAN BE DONE IS TO MAKE CERTAIN ADJUSTMENTS ON ACCOUNT OF DIFFERENT BUSINESS MODEL ADOPTED BY THE SAID COMPANY AS HAS BEEN DIRECTED BY THE TRIBUNAL IN THE CASE OF ZYDUS ALTANA HEALTHCARE P. LTD. (SUPRA). ACCORDINGLY, WE DIRECT THE AO/TPO TO MAKE SUCH ADJU STMENTS AFTER TAKING INTO CONSIDERATION THE RELEVANT FACTS AND AFTER GIVING T HE ASSESSEE AN OPPORTUNITY OF BEING HEARD ON THIS ASPECT. 18. AS REGARDS GILICON, IT IS OBSERVED THAT THE SAI D COMPANY WAS EXCLUDED BY THE TPO FOR THE PURPOSE OF COMPARABILITY ANALYSIS INTER-ALIA ON THE GROUND THAT SUFFICIENT INFORMATION WAS NOT AVAILABLE ON THE BASIS OF WHICH THE EXACT N ATURE OF BUSINESS CARRIED ON BY IT COULD BE ASCERTAINED. IN THIS REGARD, THE LD. COUNSEL FO R THE ASSESSEE HAS RELIED ON THE COPY OF DIRECTORS REPORT OF THE SAID COMPANY AT PG. NO. 40 5 OF HIS PAPER BOOK TO POINT OUT THAT THE BUSINESS OF THE SAID COMPANY BEING MAINLY THAT OF CONSULTANCY BUSINESS, THERE IS A FUNCTIONAL SIMILARLY WITH THE ASSESSEE-COMPANY. HE HAS ALSO DRAWN OUR ATTENTION TO THE BUSINESS PROFILE OF THE SAID COMPANY PLACED AT PG. NO. 427 OF HIS PAPER BOOK TO POINT OUT THAT THE PRINCIPAL ACTIVITY CARRIED ON BY THE SAID COMPANY DURING THE RELEVANT YEAR WAS THAT OF CONSULTING ENGINEERS AND ADVISORS. HOWEVE R, AS POINTED OUT BY THE LD. DR FROM 14 ITA NO. 3098/MUM/2006 THE P&L A/C OF THE SAID COMPANY FOR THE YEAR ENDED ON 31-03-2002, PLACED AT PG. NO. 421 OF THE PAPER BOOK, THERE WAS OPENING AND CLOSIN G STOCK OF WORK-IN- PROGRESS OF CONSULTANCY CONTRACT SHOWN. FURTHER, THE DETAILS O F ESTABLISHMENT EXPENSES OF THE SAID COMPANY AVAILABLE AT PAGE NO. 424 OF THE PAPER BOOK SHOW THAT THE CONSULTANCY WORK WAS SUBSTANTIALLY SUB-CONTRACTED BY GILICON. MOREO VER, GILICON IS IN THE BUSINESS OF CONSULTING ENGINEERS AND ADVISORS WHICH IS FUNCTION ALLY DIFFERENT FROM THE BUSINESS OF THE ASSESSEE OF PROVIDING CLINICAL TRIAL SERVICES. KEE PING IN VIEW ALL THESE FACTS BORNE OUT FROM THE RECORD, WE ARE INCLINED TO AGREE WITH THE CONTENTION OF THE LD. DR THAT GILICON IS NOT ONLY FUNCTIONALLY DIFFERENT FROM THAT OF THE AS SESSEE COMPANY BUT EVEN THE BUSINESS MODEL ADOPTED BY THE SAID COMPANY IS DIFFERENT AND THE SAID COMPANY THEREFORE CANNOT BE INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS. 19. AS REGARDS KITCO, IT IS OBSERVED THAT THE SAID COMPANY WAS EXCLUDED BY THE TPO FOR THE PURPOSE OF COMPARABILITY ANALYSIS ON THE GROUND THAT IT WAS MAKING OPERATING LOSS. ACCORDING TO THE TPO, AS THE ASSESSEE WAS A CAPTIVE SERVICE PROVIDER, IT COULD NOT BE COMPARED WITH LOSS MAKING ENTITY. THE LD. COUNSEL FOR THE ASSESSEE IN THIS REGARD HAS DRAWN OUR ATTENTION TO THE SUMMARY OF WORKING RESUL TS GIVEN IN THE DIRECTORS REPORT OF THE SAID COMPANY PLACED AT PG. NO. 536 OF THE PAPER BOOK TO SHOW THAT THERE WAS A NET PROFIT OF RS. 10.49 LAKHS AND RS. 10.43 LAKHS EARNE D BY THE SAID COMPANY DURING THE FINANCIAL YEAR 2000-01 AND 2001-02 AFTER PAYMENT OF INCOME TAX. HE HAS CONTENDED THAT KITCO THUS, WAS NOT A LOSS MAKING COMPANY DURI NG THE RELEVANT PERIOD AS ALLEGED BY THE TPO WHILE EXCLUDING THE SAME FROM THE COMPARABI LITY ANALYSIS. THE LD. DR ON THE OTHER HAND HAS INVITED OUR ATTENTION TO THE SCHEDUL E OF INCOME OF THE SAID COMPANY AT PG. NOS. 547 & 548 OF THE PAPER BOOK TO POINT OUT THAT INTEREST ON BANK DEPOSITS OF RS. 10.90 LAKHS AND RS. 28.15 LAKHS WAS OWNED BY THE SAID COM PANY IN THE FINANCIAL YEAR 2000- 01 AND 2001-02. AS STATED IN THE SAID SCHEDULE, KI TCO HAD ALSO EARNED MISCELLANEOUS INCOME OF RS. 2.13 LAKHS IN THE FINANCIAL YEAR 2000 -01 AND THERE WAS AN AMOUNT OF RS. 3.55 LAKHS CREDITED TO THE P&L A/C ON ACCOUNT OF EX CESS TAXATION PROVISION WRITTEN BACK. IF ALL THESE ITEMS OF NON-OPERATING INCOME ARE EXCL UDED FROM THE PROFITS BEFORE INCOME 15 ITA NO. 3098/MUM/2006 TAX OF RS. 13.67 LAKHS AND RS. 19.45 LAKHS OF KITCO FOR THE FINANCIAL YEAR 2000-01 & 2001-02, WE FIND THAT THERE WAS AN OPERATING LOSS I NCURRED BY KITCO IN THE FINANCIAL YEAR 2000-01 AND 2001-02 AND THE TPO IN OUR OPINION WAS RIGHT IN EXCLUDING KITCO FROM THE COMPARABILITY ANALYSIS ON THE GROUND THAT THE SAID ENTITY MAKING CONSISTENTLY OPERATING LOSS COULD NOT BE TAKEN AS COMPARABLE WITH THE ASSE SSEE COMPANY WHICH IS A CAPTIVE SERVICE PROVIDER. 20. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE ACTI ON OF THE AUTHORITIES BELOW IN EXCLUDING GILICON AND KITCO AND INCLUDING SIRO FOR THE PURPOSE OF COMPARABILITY ANALYSIS. WE, HOWEVER, DIRECT THE AO TO ALLOW APPROPRIATE ADJ USTMENT IN THE CASE OF SIRO WHICH IS INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS ON THE GROUND OF DIFFERENT BUSINESS MODEL ADOPTED BY THE SAID COMPANY AFTER TAKING INTO CONSIDERATION ALL THE RELEVANT FACTS AND AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEI NG HEARD. GROUND NO. 2(A) IS ACCORDINGLY TREATED AS PARTLY ALLOWED. 21. IN GROUND NO. 2(D)(I), THE ASSESSEE HAS CHALLEN GED THE ACTION OF THE AUTHORITIES BELOW IN RECOMPUTING THE OPERATING PROFIT BY ESTIMATING N OTIONAL INDIRECT COST AT 5% THEREBY ALTERING THE COST BASE. 22. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CALCULATION SUBMITTED BY THE ASSESSEE BEFORE THE TPO SHOWING OPERATING PROFIT CH ARGED TO AE AS MARKUP FOR CLINICAL TRIAL SERVICES AT 10%, DIRECT COST INCURRED IN RELA TION TO THE SAID SERVICES WAS SHOWN AT RS.1080.25 LAKHS. HE SUBMITTED THAT THE SAID COST W AS ACTUALLY TOTAL COST INCURRED BY THE ASSESSEE INCLUDING DIRECT COST AS WELL AS INDIRECT COST BUT THE AO WRONGLY ASSUMED THE SAME AS ONLY THE DIRECT COST AND ADDED SEPARATELY I NDIRECT COST AT THE RATE OF 5% OF THE DIRECT COST RELYING ON THE TERMS OF THE AGREEMENT. HE INVITED OUR ATTENTION TO THE BREAKUP OF THE TOTAL COST OF RS.1080.25 LAKHS GIVEN ON PAGE NO. 58 AND 59 OF HIS PAPER BOOK TO SHOW THAT THE SAME WAS INCLUSIVE OF DIRECT COST OF RS.794.77 LAKHS AND INDIRECT COST OF RS.285.48 LAKHS. HE CONTENDED THAT THERE IS THUS A MISTAKE IN INCLUDING THE INDIRECT COST OF RS.54.01 LAKHS SEPARATELY AGAIN TO WORK OUT THE TOTAL COST INCURRED BY THE ASSESSEE AND 16 ITA NO. 3098/MUM/2006 APPLYING THE PROFIT MARGIN TO WORK OUT THE ARMS LE NGTH PRICE FOR SERVICES RENDERED BY THE ASSESSEE TO ITS AE. 23. THE LD. DR SUBMITTED THAT THE DETAILS OF THE TO TAL AMOUNT OF RS.1085.25 LAKHS AS TAKEN BY THE ASSESSEE IN ITS WORKING WERE GIVEN IN ANNEXU RE 4 TO THE SUBMISSIONS MADE BY THE ASSESSEE VIDE LETTER DATED FEBRUARY 23, 2004 FILED BEFORE THE AO/TPO. HE INVITED OUR ATTENTION TO THE COPY OF THE SAID ANNEXURE PLACED A T PAGE NO. 132 OF THE PAPER BOOK AND SUBMITTED THAT THERE IS NO INDICATION WHATSOEVER GI VEN THEREIN SHOWING INCLUSION OF DIRECT AS WELL AS INDIRECT COST IN THE TOTAL AMOUNT OF RS. 1080.25 LAKHS. HE SUBMITTED THAT THE DETAILS NOW BEING REFERRED TO BY THE LD. COUNSEL FO R THE ASSESSEE AS PLACED AT PAGE NO. 58 AND 59 SHOWING ALLOCATION OF DIRECT AS WELL AS INDI RECT COST THUS WERE NOT BEFORE THE AO/TPO WHO NEVER HAD OCCASION TO VERIFY THE SAME AN D EXAMINE THE STAND OF THE ASSESSEE BASED THEREON. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. WE AGREE IN PRINCIPLE WITH THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE THAT IF THE INDIRECT COST WAS ALREADY IN CLUDED BY THE ASSESSEE IN THE TOTAL COST OF RS. 1080.25 LAKHS INCURRED IN RELATION TO THE SERVI CES PROVIDED TO ITS AE FOR APPLYING THE MARK UP OF 10%, THERE IS NO JUSTIFICATION IN ADDING INDIRECT COST @ 5% OF THE DIRECT COST SEPARATELY AS DONE BY THE AUTHORITIES BELOW RELYING ON THE TERMS OF THE RELEVANT AGREEMENT. HOWEVER, AS SUBMITTED BY THE LD. DR, TH E STAND TAKEN BY THE ASSESSEE ABOUT INCLUSION OF INDIRECT COST OF RS. 285.48 CRORES IN THE TOTAL COST OF RS. 1080.25 LAKHS BASED ON THE BREAK-UP GIVEN ON PG.NOS. 58 & 59 OF T HE PAPER BOOK REQUIRES VERIFICATION AS THERE IS NO REFERENCE TO ANY SUCH DETAILS FURNIS HED BY THE ASSESSEE IN THE ORDER OF THE AUTHORITIES BELOW NOR THERE IS ANY FINDING GIVEN ON VERIFICATION OF SUCH DETAILS. SINCE THE LD. COUNSEL FOR THE ASSESSEE ALSO HAS NO OBJECTION IN THIS REGARD, WE RESTORE THIS ISSUE TO THE FILE OF THE AO TO VERIFY FROM THE RELEVANT RECO RD, THE STAND TAKEN BY THE ASSESSEE THAT INDIRECT COST OF RS. 285.48 LAKHS WAS ALREADY INCLU DED IN THE TOTAL COST OF RS. 1080.25 LAKHS AND IF THE SAME IS FOUND TO BE CORRECT, THE A O IS DIRECTED NOT TO ADD SEPARATELY 17 ITA NO. 3098/MUM/2006 INDIRECT COST @ 5% OF THE DIRECT COST FOR THE PURPO SE OF TRANSFER PRICING EXERCISE. GROUND NO. 2(D) IS ACCORDINGLY TREATED AS ALLOWED FOR STAT ISTICAL PURPOSES. 25. IN GROUND NO. 2(D)(II), THE ASSESSEE HAS CHALLE NGED THE ACTION OF THE AUTHORITIES BELOW IN INCLUDING NOTIONAL INTEREST IN THE COST BASE WHI LE WORKING OUT THE ARMS LENGTH PRICE. 26. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT INTEREST FREE DEPOSIT WAS PAID BY THE ASSESSEE TO LANDLORD FOR ACQUIRING ITS BUSINESS PRE MISES AND THE NOTIONAL INTEREST ATTRIBUTABLE TO THE SAID DEPOSIT WAS INCLUDED IN TH E INDIRECT COST TO BE RECOVERED FROM AE ALONG WITH THE MARKUP. HE INVITED OUR ATTENTION TO THE RELEVANT DETAILS GIVEN ON PAGE NO. 58 AND 59 TO SHOW THAT SUCH NOTIONAL INTEREST OF RS .16.01 LAKHS WAS INCLUDED BY THE ASSESSEE IN THE INDIRECT COST FORMING PART OF THE T OTAL COST OF RS.1085.25 LAKHS. HE CONTENDED THAT SINCE THIS AMOUNT OF INTEREST DID NO T REPRESENT ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE, THE TOTAL COST ACTUALLY INCURRED B Y THE ASSESSEE IN CONNECTION WITH SERVICES RENDERED TO THE AE WAS 1064.24 LAKHS AND N OT RS.1085.25 LAKHS AND SINCE THE FEES CHARGED BY THE ASSESSEE TO ITS AE FOR THE SERV ICES RENDERED WAS RS.1188.28 LAKHS, THE MARK UP ON THE COST WAS ACTUALLY 11.65% AND NOT 10% . HE SUBMITTED THAT A SIMILAR ISSUE HAS BEEN DECIDED BY THE LEARNED CIT(APPEALS) IN FAV OUR OF THE ASSESSEE IN ASSESSMENT YEAR 2003-04, APPEAL FOR WHICH IS PENDING BEFORE TH E TRIBUNAL. 27. THE LD. DR, ON THE OTHER HAND, RELIED ON THE OR DER OF THE TPO AS WELL AS THE LEARNED CIT(APPEALS) IN SUPPORT OF THE REVENUES CASE ON TH IS ISSUE. 28. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. IN OUR OPINION, IF THE RELEVANT INTEREST E XPENDITURE WAS NOT ACTUALLY INCURRED BY THE ASSESSEE AND THE SAME WAS INCLUDED IN THE TOTAL COST OF RS. 1085.25 LAKHS FOR APPLYING THE MARK UP OF 10% TO THE AE ONLY ON NOTIO NAL BASIS, THE SAME CANNOT INCLUDED IN THE COST BASE FOR THE PURPOSE OF WORKING OUT THE ARMS LENGTH PRICE. THE SAME HAS TO BE EXCLUDED FROM THE COST BASE AND WHAT SHOULD BE T AKEN AS COST BASE TO WORK OUT THE PROFIT MARGIN OF THE ASSESSEE IS THE EXPENDITURE AC TUALLY INCURRED BY THE ASSESSEE. WE THEREFORE AGREE WITH THE CONTENTION OF THE LD. COUN SEL FOR THE ASSESSEE RAISED ON THIS ISSUE 18 ITA NO. 3098/MUM/2006 AND DIRECT THE AO TO EXCLUDE THE INTEREST AMOUNT OF RS. 16.01 LAKHS FROM THE COST BASE AFTER VERIFYING THAT THE SAME WAS INCLUDED BY THE A SSESSEE ONLY ON NOTIONAL BASIS AND IT DID NOT REPRESENT THE EXPENDITURE ACTUALLY INCURRED BY THE ASSESSEE. GROUND NO. 2(D)(II) IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 29. AS REGARDS THE ISSUE RAISED IN GROUND NO.3 RELA TED TO THE ASSESSES CLAIM FOR DEPRECIATION ON ASSETS LOCATED AT ANKLESHWAR PLANT, IT IS OBSERVED THAT THE ACTION OF THE AO IN DIS-ALLOWING THE SAID CLAIM WAS UPHELD BY THE LD. CIT(A) RELYING ON THE ORDER OF HIS PREDECESSOR IN ASSESSEES OWN CASE OF AY. 2001- 02. AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, THE ORDER OF THE LD. CIT(A) FOR A Y. 2001-02 ON THE SIMILAR ISSUE WAS CHALLENGED BY THE ASSESSEE IN AN APPEAL FILED BEFOR E THE TRIBUNAL AND THE TRIBUNAL VIDE ITS ORDER DT. 18-03-2010 PASSED IN ITA NO. 8821/MUM/200 4 HAS DELETED THE DIS-ALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) ON T HIS ISSUE FOR THE FOLLOWING REASONS IN PARA NO. 14 TO 17 OF ITS ORDER. 14.WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE O RDERS OF THE A.O. AND THE CIT(A) FOR A.Y. 2000-01 THE CIT(A) HAS ALLOWED DEPRECIATION BY GIVI NG A FINDING THAT IN THE INSTANT CASE SINCE THE APPELLANT HAS NOT ACQUIRED THESE ASSETS B UT THESE FORMED PART OF THE WRITTEN DOWN VALUE OF THE ASSETS OF THE BUSINESS OF THE APPELLAN T COMPANY IN THE EARLIER ACCOUNTING YEAR, NO RESTRICTION OF THE ALLOWABILITY OF THE DEPRECIAT ION AMOUNT CAN BE IMPOSED IN TERMS OF SAID PROVISO. THE ACTION OF THE ASSESSING OFFICER IN THI S RESPECT IS THEREFORE NOT CORRECT AND HENCE CANNOT BE SUSTAINED. ACCORDINGLY THE CIT(A) HAS AL LOWED THE DEPRECIATION ON THE ANKLESHWAR UNIT. THE ISSUE IN THAT YEAR WAS THAT TH E UNIT WAS CLOSED PRIOR TO 30.09.1999 AND THE A.O. HAS RESTRICTED DEPRECIATION TO 50% OF THE ELIGIBLE AMOUNT AS THE SAME WAS NOT PUT TO USE FOR MORE THAN 180 DAYS DURING THE YEAR. IN THAT CONTEXT THE CIT(A) HAS OBSERVED THAT THE FIRST PROVISO DOES NOT APPLY TO THE FACTS OF THE CA SE. HOWEVER, DURING THE YEAR THE ENTIRE UNIT WAS NOT PUT TO USE BUT SINCE THE SAME IS FORMING PA RT OF THE BLOCK OF ASSETS OF THE MACHINERY OF THE ENTIRE COMPANYS OTHER UNIT BEING USED, EXAM INATION OF USE OF INDIVIDUAL ASSETS DOES NOT ARISE. IN THE CASE OF M/S. SWATI SYNTHETICS LTD . THE COORDINATE BENCH IN ITA NO. 1165/MUM/2006 HAS EXAMINED THE ENTIRE CASE LAWS ON THE ISSUE AND OBSERVED AS UNDER IN PARA 7.15 OF THE ORDER: - 7.15 IN THE LIGHT OF ABOVE DISCUSSIONS THE CONDITI ON/ REQUIREMENT OF SECTION OF WORD USED FOR THE PURPOSE OF BUSINESS AS PROVI DED IN SECTION 32 OF (1) OF THE ACT FOR THE CONCEPT OF DEPRECATION ON BLOCK OF ASSETS CAN BE SUMMARIZED, THAT USE OF INDIVIDUAL ASSET FOR THE PURPOSE OF BUS INESS CAN BE EXAMINED ONLY IN THE FIRST YEAR WHEN THE ASSET IS PURCHASED. IN S UBSEQUENT YEARS USE OF BLOCK OF ASSETS IS TO BE EXAMINED. EXISTENCE OF INDIVIDUA L ASSET IN BLOCK OF ASSET ITSELF AMOUNTS TO USE FOR THE PURPOSE OF BUSINESS. THIS VIEW IS FULLY SUPPORTED 19 ITA NO. 3098/MUM/2006 BY VARIOUS PROVISIONS OF THE ACT WHICH WERE AMENDED CONSEQUENCE TO THE SCHEME OF DEPRECIATION ON BLOCK OF ASSET INCLUDING TO PROVISO TO SECTION 32 OF THE ACT OF WHICH DETAILED DISCUSSION IS MADE IN ABO VE PARA OF THIS ORDER. THE SAID PROVISO TO SECTION 32 REQUIRES THAT WHERE AN ASSET IS ACQUIRED BY THE ASSESSEE DURING THE PREVIOUS YEAR AND IS PUT TO USE FOR THE PURPOSES OF BUSINESS OR PROFESSION FOR A PERIOD OF LESS THAN ON E HUNDRED AND EIGHTY DAYS IN THAT PREVIOUS YEAR, THE DEDUCTION UNDER THIS SUB -SECTION IN RESPECT OF SUCH ASSET SHALL BE RESTRICTED TO FIFTY PER CENT OF THE AMOUNT CALCULATED AT THE PERCENTAGE PRESCRIBED FOR AN ASSET UNDER CLAUSE (I) OR CLAUSE (II) OR CLAUSE (IIA)], AS THE CASE MAY BE. WHEN AN ASSET PURCHASED IS SATISFIED THE ABOVE CONDITION IN THE YEAR OF PURCHASE THAT ASSET WILL B E INCLUDED IN THE RESPECTIVE BLOCK OF ASSET. DEPRECATION FOR THAT YEAR WILL BE C ALCULATED ON WRITTEN DOWN VALUE IN ACCORDANCE WITH SECTION 43(6) OF THE ACT B Y THE INCREASE OPENING WDV BY THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK, ACQUIRED DURING THE PREVIOUS YEAR. ONCE AN ASSET IS INCLUDED IN THE BLOCK OF ASSETS ITS REMAINED IN BLOCK FOR ITS ENTIRE LIFE. THE END OF A SSET I.E. TO GO OUT FROM BLOCK IS ONLY IN ACCORDANCE WITH THE PROVISIONS OF THE AC T. THERE ARE FOLLOWING THREE SITUATIONS PROVIDED IN THE STATUTES WHEN AN INDIVID UAL ASSET OF THE BLOCK GOES OUT OF BLOCK:- 1) AN ASSET IS SOLD OR DISCARDED OR DEMOLISHED OR DESTROYED DURING THAT PREVIOUS YEAR AS PROVIDED IN SECTIONS 43(6)(C)(I)(B ) AND 32(1)(III) OF THE ACT . 2) AN ASSET NOT EXCLUSIVELY USED FOR THE PURPOSES O F THE BUSINESS OR PROFESSION BUT USED OTHER THEN BUSINESS PURPOSES AS PROVIDED IN SECTION 38(2) OF THE ACT. 3) WHERE ANY BLOCK OF ASSETS DOES NOT CEASE TO E XIST BUT THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE DEPRECIABLE ASSETS BY THE ASSESSEE DURING THE PREVI OUS YEAR EXCEEDS THE AGGREGATE OF THE AMOUNTS STATED IN SECTION 50 OF TH E ACT AND WHERE ANY BLOCK OF ASSETS CEASES TO EXIST FOR THE REASON THAT ALL THE ASSETS IN THAT BLOCK ARE TRANSFERRED DURING THE PREVIOUS YEAR. 15. AFTER CONSIDERING THE ABOVE, THE ITAT HEL D IN PARA 7.16 AS UNDER: - 7.16 IN THE CASE UNDER CONSIDERATION THE ADMITTED FACTS ARE THAT THE DIVISION OF SURAT HAD BEEN CLOSED BUT THE BLOCK OF ASSETS OF THE CLOSED UNIT, ( THE DIVISION OF SURAT) ALONG WITH OTHER ASSETS OF THE BLOCK WERE USED FOR THE PURPOSE OF BUSINESS IN EARLIER YEARS. THE YEAR UNDER CONSIDERATION IS NOT THE FIRST YEAR OF THE ASSETS ACQUIRED. THE ASSE TS OF CLOSED UNIT STILL REMAINED EXIST/PART OF THE BLOCK OF ASSETS. THE ASS ETS DID NOT FALL UNDER ANY OF THE ABOVE EXCEPTIONAL THREE CONDITIONS. THE SAID BLOCK OF ASSETS WAS USED FOR THE PURPOSE OF BUSINESS DURING THE YEAR. U NDER THE CIRCUMSTANCES THE ASSETS OF THE SAID CLOSED UNIT AMOUNTS TO USE F OR THE PURPOSE OF BUSINESS IN THE YEAR UNDER CONSIDERATION , WE ARE, THEREFORE , OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ENTITLED FOR DEPRECATION. WE A CCORDINGLY ALLOW THE CLAIM OF THE ASSESSEE. 20 ITA NO. 3098/MUM/2006 16. SIMILAR FACTS EXIST IN ASSESSEES CASE ALSO. NO T ONLY THAT IN THE CASE OF G.R. SHIPPING LTD. VS. DCIT IN ITA NO. 822/MUM/2005 SIMILAR ISSUE WAS CONSIDERED WHEREIN ONE OF THE BARGES, JAY II, WHICH WAS SUNK DURING THE YEAR WAS CONSIDERED FOR DEPRECIATION AND THE ITAT HAS ALLOWED IN PARA 10, 11 AND 12 AS UNDER: - 10. THE LEGISLATURE FELT THAT KEEPING THE DETAILS WITH REGARD TO EACH AND EVERY DEPRECIABLE ASSETS WAS TIME CONSUMING BOTH FOR THE ASSESSEE AND THE ASSESSING OFFICER. THEREFORE, THEY AMENDED THE LAW TO PROVIDE FOR ALLO WING OF THE DEPRECIATION ON THE ENTIRE BLOCK OF ASSETS INSTEAD OF EACH INDIVIDUAL A SSETS. THE BLOCK OF ASSETS HA ALSO BEEN DEFINED TO INCLUDE THE GROUP OF ASSETS FAILING WITH THE SAME CLASS OF ASSETS. HENCE, AFTER THE AMENDMENT WITH EFFECT FROM 01.04.1988, TH E INDIVIDUAL ASSETS HAVE LOST ITS IDENTIFY AND FOR THE PURPOSE OF ALLOWING OF DEPRECI ATION, ONLY THE BLOCK OF ASSETS HAS TO BE CONSIDERED. IF A BLOCK OF ASSETS IS OWNED BY THE ASSESSEE AND USED FOR THE PURPOSE OF BUSINESS, DEPRECIATION WILL BE ALLOWED. THEREFORE, THE TEST OF USER HAS TO BE APPLIED UPON THE BLOCK AS A WHOLE INSTEAD OF UPON AN INDIVI DUAL ASSET. 11. THE ABOVE PRINCIPLE HAS BEEN LAID DOWN IN THE FOLLOWING DECISIONS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE NAMELY; (A) NOTCO EXPORTS. VS. DCIT, 86 ITD 445 (HYD.), (B) ACIT VS. SRF LTD., VOL. 21SOT 122 (DEL.), & (C) UNITEX PRODUCTS LTD. VS. ITO, VOL. 22 SOT 429 (MUM.) 12.THE LD. DR HOWEVER SUBMITTED THE USER WAS A COND ITION FOR ALLOWING DEPRECIATION AND IN THIS REGARD RELIED TO THE DECISION OF THE HO N'BLE BOMBAY HIGH COURT IN THE CASE OF DINESHKUMAR GULABCHAND AGARWAL VS. CIT, 267 ITR 768 (BOM). WE HAVE PERUSED THE AFORESAID DECISION AND ARE OF THE VIEW THAT THE SAME IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THE PRESENT CASE, THE ASSESSEE HAS ALREADY USED THE ASSET FOR THE PURPOSE OF BUSINESS. THE ASSET HAS ALREADY ENTERED THE BLOCK OF ASSETS. IN THE CASE BEFORE THE HON'BLE BOMBAY HIGH COURT, THE ASSET IN QUESTION WAS NOT AT ALL PUT TO USE. WE THEREFORE, FIND THE DECISION RELIED UPON THE LD. DR IS OF NO ASSISTANCE TO THE PLEA OF THE DR. RESPECTFULLY FOLLOWING THE DECISIONS OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT THE ASSESSEE WAS ENTITLED TO CLAIM DEPRECIATIO N AND THE ASSESSING OFFICER DIRECTED TO ALLOW THE SAME. 17.THIS ORDER WAS UPHELD BY THE HON'BLE BOMBAY HIGH COURT IN ITA NO. 598 OF 2009 DATED 28 TH JULY 2009 BY FOLLOWING THE JUDGEMENT IN THE CASE O F WHITTLE ANDERSON LTD. VS. CIT 79 ITR 613 AND IN THE CASE OF CIT VS. G.N. AGARWAL (IN DIVIDUAL) 217 ITR 250. IN VIEW OF THIS, SINCE THE ASSETS HAVE BECOME PART OF THE BLOCK OF A SSETS THE ASSESSEE IS ENTITLED TO DEPRECIATION. THE LEARNED D.R.S RELIANCE ON THE DE CISION OF CIT VS. MCDOWELL COMPANY LTD. 224 CTR 22 IS NOT DIRECTLY APPLICABLE HERE. IN THE ABOVE SAID CASE THE STAND OF THE REVENUE WAS THAT MACHINERY IN RESPECT OF R&D SECTIO N WAS RELATED TO THE FAST FOOD UNIT, WHICH WAS CLOSED AND THEREFORE WAS NOT ENTITLED TO ANY DEPRECIATION BECAUSE THERE IS NO ACTUAL USAGE OF THE MACHINERY. THE STAND OF THE ASS ESSEE, ON THE OTHER HAND, WAS THAT THE MACHINERY WAS USED IN RESPECT OF FAST FOOD AND LIQU OR UNITS. THE HON'BLE SUPREME COURT HELD THAT THE BASIC ISSUE IS WHETHER IT RELATE TO BOTH T HE UNITS OR ONLY TO FAST FOOD UNIT, WHICH WAS ULTIMATELY CLOSED HAS NOT BEEN EXAMINED IN DETAIL. THEREFORE THE MATTER WAS REMITTED TO THE A.O. TO EXAMINE THIS ASPECT. SINCE THE ISSUE BEFORE THE HON'BLE SUPREME COURT WAS WITH 21 ITA NO. 3098/MUM/2006 REFERENCE TO USE OF R&D MACHINERY PERTAINING TO LIQ UOR AS WELL AS FOOD BUSINESS THE SAME WAS RESTORED BACK TO THE A.O. FOR EXAMINING THE FAC TUAL ASPECTS. HOWEVER, IN THIS CASE, THE ANKLESHWAR UNIT WAS BEING USED FOR ASSESSEES BUSIN ESS AND THESE ARE FORMING PART OF THE BLOCK OF ASSETS AND SO THE UNIT IS DEEMED TO HAVE B EEN USED FOR THE PURPOSE OF BUSINESS AND EXAMINATION OF USAGE OF INDIVIDUAL ASSETS FORMING B LOCK OF ASSETS DOES NOT ARISE ON THE LEGAL PRINCIPLES DISCUSSED ABOVE. IN VIEW OF THIS WE DIRE CT THE A.O. TO ALLOW THE DEPRECIATION. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATI ON AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERE TO ARE SIMILAR TO THAT OF 2001-02, W E RESPECTFULLY FOLLOW THE ORDER OF THE TRIBUNAL FOR THE AY. 2001-02 AND DELETE THE DIS-ALL OWANCE MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF ASSESSEE S CLAIM FOR DEPRECIATION ON ASSETS LOCATED AT ANKLESHWAR PLANT. GROUND NO.3 IS ACCORD INGLY ALLOWED. 30. AS REGARDS THE ISSUE RAISED IN GROUND NO.4 RELA TING TO THE HEAD OF INCOME UNDER WHICH INCOME ARISING FROM SUB-LEASING OF PROPERTY IS TO BE TAXED IN THE HANDS OF THE ASSESSEE WHETHER BUSINESS INCOME OR HOUSE PROPERTY INCOME, IT IS OBSERVED THAT A SIMILAR ISSUE INVOLVED IN ASSESSEES OWN CASE FOR THE AY. 1 996-97 WAS RESTORED BY THE TRIBUNAL VIDE ITS ORDER DT. 24 TH OCTOBER, 2005 PASSED IN ITA NO. 4877/MUM/01 WITH T HE FOLLOWING DIRECTIONS: AFTER HEARING BOTH THE PARITES, WE FIND MERIT IN TH E CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT A PERSON IS CONSIDERED TO BE A DEEMED OWNER U/S. 27(IIIB) WHERE AN IMMOVABLE PROPERTY IS ACQUIRED ON LEASE FOR A PERIOD OF MORE THAN 12 YEARS. HOWEVER, THERE IS AN EXCEPTION I.E., MONTH TO MONTH TENANCY. THIS ASPECT HAS NOT BEEN EXAMINED BY ANY OF THE AUTHORITIES. ACCORDINGLY, THE ORDER OF THE LD. CIT (APPEALS) IS SET ASIDE ON THIS ISSUE AND THE MATTER IS RESTORED TO THE FILE OF ASSESSING OFFICER FOR FRESH ADJUDICATION AFTER EXAMINING THE LEASE DEED AND ANY OTHER MATERIAL IN THIS REGARD TO ASCERTAIN WHET HER THE LEASE WAS ON MONTH TO MONTH BASIS. IF THE CASE OF ASSESSEE DOES NOT FALL WITHIN THE EXCEP TION, THEN THE ASSESSEE SHALL BE CONSIDERED TO BE A DEEMED OWNER OF THE PROPERTY. CONSEQUENTLY, THE INCOME WOULD BE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. WITH THESE OBSERVATI ONS, THIS GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED. AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, AO HAS ALREADY PASSED THE ORDER GIVING EFFECT TO THE ORDER OF THE TRIBUNAL FOR AY. 1996-97 ON 27-12-2005 AND A PERUSAL OF THE COPY OF THE SAID ORDER PLACED AT PG. 50 OF THE ASSESSEES PAPER BOOK SHOWS THAT AFTER THE NECESSARY VERIFICATION AS DIRECTED BY THE TRIBU NAL, THE AO HAS BROUGHT TO TAX THE RELEVANT INCOME IN THE HANDS OF THE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. KEEPING IN VIEW THE SAID ORDER PASSED B Y THE AO FOR AY. 1996-97 GIVING 22 ITA NO. 3098/MUM/2006 EFFECT TO THE ORDER OF THE TRIBUNAL, THE TRIBUNAL H AS DECIDED THE SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE FOR AY. 1998-996 AND 1999-2000 VIDE IT S COMMON ORDER DT. 7 TH AUGUST 2006 PASSED IN ITA NO. 1825 AND 2977/MUM/2003 AS WELL AS FOR AY. 2000-01, VIDE ITS ORDER DT. 22 ND AUGUST 2008 PASSED IN ITA NO. 4591/MUM/04. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATION AS WELL AS ALL THE MATERIAL FAC TS RELEVANT THERE TO ARE SIMILAR TO THE EARLIER YEARS IN WHICH A SIMILAR ISSUE HAS BEEN DEC IDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE, WE RESPECTFULLY FOLLOW THE ORDERS OF THE TRIBUNAL FOR THE SAID YEARS AND DIRECT THE AO TO ASSESSEE THE INCOME ARISING FROM SUB-LEAS ING OF PROPERTY AT EXPRESS TOWERS AS INCOME FROM HOUSE PROPERTY. GROUND NO.4 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 31. AS REGARDS GROUND NO.5, THE LD. COUNSEL FOR THE ASSESSEE HAS FAIRLY AND FRANKLY CONCEDED THAT THE ISSUE RAISED THEREIN RELATING TO CHARGING OF INTEREST U/S. 234D IS SQUARELY COVERED AGAINST THE ASSESSEE BY THE RETROSPECTIVE A MENDMENT MADE IN THE PROVISIONS OF SECTION 234D. ACCORDINGLY, THIS ISSUE IS DECIDED A GAINST THE ASSESSEE AND GROUND NO.5 IS DISMISSED. 32. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 8 TH MARCH, 2013. SD/- SD/- (VIJAY PAL RAO) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTAN T MEMBER MUMBAI, DATED: 08-03-2013. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, K-BENCH. (TRUE COPY) BY ORDER ASSTT. REGIST RAR, ITAT, MUMBAI BENCHES, MUMB AI.