The Cadila Healthcare Ltd., Ahmedabad V. The Addl.CIT., Range-1, Ahmedabad

ITA 3140/AHD/2010

• Counselvise Citation: 314020514 RSA 2010
• Duration Of Justice: 1 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 03-01-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 26-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Rule of consistency; Earning of tax free income; Source of fund; Retrospective amendment; Question of law; Cost of acquisition; Fair market value; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 14A; 115JB; 80IB; 37(1); 32

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD , . .!'#$, % & BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ./ I.T.A. NO.3140/AHD/2010 ( ( ) ( ) ( ) ( ) / / / / ASSESSMENT YEAR : 2006-07) CADILA HEALTHCARE LTD. ZYDUS TOWER OPP.ISKCON TEMPLE SATELLITE CROSS ROADS AHMEDABAD-380 015 ( ( ( ( / VS. THE ADDL.CIT RANGE-1 AHMEDABAD * % ./+, ./ PAN/GIR NO. : AAACC 6253 G ( *- / // / APPELLANT ) .. ( ./*- / RESPONDENT ) *- 0 / APPELLANT BY : 1. SHRI MUKESH M.PATEL, A.R. WITH 2. SHRI HITESH GAJARIA, C.A. ./*- 1 0 / RESPONDENT BY : 1. SHRI G.C.SRIVASTAVA, ADV. (SPECIAL COUNSEL) 2. SHRI V.K.GUPTA & 3. SHRI K.MADHUSUDAN CIT-D.R. (2 1 3% / / / / DATE OF HEARING : 05/03/2012 4') 1 3% / DATE OF PRONOUNCEMENT : 25/5/12 5 / O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE ASSESS EE DIRECTLY FILED AGAINST THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C OF I.T.ACT 1961 ( IN SHORT THE ACT ), HOWEVER, DUE TO THE INVOLVEMENT O F TRANSFER PRICING PROVISIONS THE SEQUENCE OF THE ORDERS OF THE REVENU E AUTHORITIES ARE AS UNDER :- ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 2 - (I) AN ORDER OF ADDL. COMMISSIONER OF INCOME TAX T RANSFER PRICING I AHMEDABAD PASSED U/S 92CA(3) OF THE ACT DATED 18.9.2009. (II) A DRAFT ASSESSMENT ORDER U/S 144C DATED 30.12 .2009. (III) AN ORDER OF DISPUTE RESOLUTION PANEL, AHMEDA BAD DATED 22.9.2010 THROUGH WHICH DIRECTIONS WERE ISSUED U/S 144C(5) OF THE ACT. (IV) AN ASSESSMENT ORDER U/S 143(3) R.W.S. 144C O F THE ACT DATED 28.10.2010. WE SHALL REFER THESE ORDERS WHEREVER DEEM FIT AND/O R NECESSARY WHILE DECIDING THE GROUNDS OF APPEAL RAISED BY THE APPELLANT. 2. GROUND NO. 1 READS AS UNDER :- 1. THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN DISALLOWING LEGAL AND PROFESSIONAL EXPENSES OF RS.24,00,000/ - FOR THE PROPOSED EXPANSION OF THE APPELLANTS BUSIN ESS, BY HOLDING THAT THE SAME WERE PRE-OPERATIVE EXPENSES OF A CAPI TAL NATURE. 2.1. FACTS IN BRIEF AS EMERGED FROM THE CORRESP ONDING ORDERS LISTED HEREIN ABOVE WERE THAT THE APPELLANT COMPANY IS A M ANUFACTURER AND TRADER OF PHARMACEUTICAL GOODS, DIAGNOSTIC KITS, ME DICAL INSTRUMENTS ETC. A RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION I.E. A.Y. 2006-07, THE YEAR UNDER APPEAL, WAS FILED DECLARING TOTAL IN COME AT RS. (-) 42,70,55,684/-, HOWEVER, INCOME DECLARED U/S 115 JB AT RS.148,01,16,388/-. IT MAY NOT BE OUT OF PLACE TO MENTION THAT THE SAID RETURN WAS LATER ON REVISED ON TWO OCCASIONS AND TH IS FACT HAS DULY BEEN ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 3 - RECORDED BY THE A.O. BY REFERRING THE REVISED FIGUR ES OF THE INCOME DECLARED. 2.2. ABOUT THIS GROUND THE OBSERVATION OF THE A.O. WAS THAT UNDER THE HEAD PRE-OPERATIVE EXPENSES THE ASSESSEE HAS CHARGED TO REVENUE A SUM OF RS.4 MILLION, DETAILS AS UNDER:- PARTICULARS CAPITALISED REVENUE TOTAL LEGAL & PROFESSIONAL EXPENSES -- 24,00,000 24,00,000 ASTHAMA PROJECT, MORAIYA 16,50,000 -- 16,50,000 TOTAL 16,50,000 24,00,000 40,50,000 2.3. A QUERY WAS RAISED IN RESPECT OF THE LEGA L EXPENSE OF RS.24,00,000/- AND THE ASSESSEE HAS INFORMED THAT T HE COMPANY WANTED TO SET-UP A NEW PROJECT IN THE F.YEAR2002-03 AT UTTARA NCHAL PRADESH, BUT THAT COULD NOT BE MATERIALISED AND ALTERNATIVELY I T WAS DECIDED TO SET-UP A NEW UNIT AT BADDI, HIMACHAL PRADESH. THE SAID EXPENDITURE WAS RELATED TO A PROJECT WHICH WAS NOT MATERIALISED HENCE IT WAS DECIDED TO TRANSFER FROM THE PRE-OPERATIVE EXPENSES TO C HARGE TO REVENUE UNDER THE HEAD LEGAL & PROFESSIONAL EXPENSES. IT WAS SU BMITTED THAT WHERE THE EXPENDITURE INCURRED IS NOT FOR STARTING OF A NEW LINE OF BUSINESS BUT FOR THE PURPOSE OF EXPANSION OR EXTENSION OF THE BUSINESS ALREADY BEING CARRIED ON; THEN SUCH AN EXPENDITURE IS DEDUCTIBLE AS REVENUE EXPENDITURE U/S 37(1) OF THE ACT. FOR THIS LEGAL PR OPOSITION CASE LAWS RELIED UPON ARE:- ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 4 - (1) KESORAM INDUSTRIES & COTTON MILLS 196 ITR 845 ( CAL.) (2) CAMA HOTELS LTD. 38 TTJ 21 ( AHD.) 2.4. THE A.O. WAS NOT CONVINCED AND PLACED RELIA NCE ON THE FOLLOWING DECISIONS :- I) AMBICA MILLS LTD. 236 ITR 921 (GUJ ) II) CIT VS. S.L.M. MANEKLAL INDUSTIES LTD. 107 ITR 133 (GUJ.) III) E.I.D. PARRY ( INDIA ) LTD. 257 I TR 253 (MAD.) IV) J.K. CHEMICALS LTD. 207 ITR 985 (B OM.) FINALLY, IT WAS CONCLUDED THAT THE EXPENSE S INCURRED BY THE ASSESSEE TOWARDS THE NEW PROJECT OF RS.24,00,000/- WAS CAPI TAL IN NATURE AND THE SAME WAS DISALLOWED. AS FAR AS THE DIRECTIONS OF TH E DRP IS CONCERNED, IT WAS OPINED THAT THE SAID EXPENDITURE REPRESENTED L EGAL-EXPENSES INCURRED FOR SETTING UP A NEW PROJECT. ACCORDING T O DRP THE A.O. HAS RIGHTLY PLACED RELIANCE ON CIT VS. S.L.M. MANEKLAL INDUSTRIES 107 ITR 133 ( GUJ.) AND E.I.D.PERRY 257 ITR 253 ( MAD.). A N ANOTHER DECISION OF CIT VS DIGVIJAY CEMENT 159 ITR 253 (GUJ.) WAS CITED WHEREIN EXPENDITURE WAS INCURRED ON PREPARATION OF THE FEAS IBILITY REPORT FOR THE DEVELOPMENT OF SHIPYARD, HOWEVER THE PROJECT DID NO T MATERIALIZED AND THEREFORE THE HONBLE H.C. HAS HELD THAT SAID EXPE NDITURE WAS FOR THE SETTING UP OF SHIPYARD WAS IN THE NATURE OF CAPITA L EXPENSE. THE PROPOSED DISALLOWANCE WAS THUS APPROVED. NOW THE A SSESSEE IS BEFORE US. 2.5. FROM THE SIDE OF THE REVENUE IT WAS A RGUED THAT IF AN EXPENDITURE IS FOR INITIATION OF BUSINESS OR FOR TH E EXTENSION OF THE BUSINESS THEN CAPITAL IN NATURE. RELIANCE WAS PLACE D ON DIGVIJAY CEMENT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 5 - COMPANY 159 ITR 253 (GUJ). RELIANCE WAS ALSO PLACED ON ASSAM BENGAL CEMENT 27 ITR 34(SC) AND JK CHEMICALS 207 ITR 985 (BOM). 2.6. WE HAVE HEARD BOTH THE SIDES. FOR THE SAKE OF BREVITY AND CONSIDERING THE LENGTH OF ARGUMENTS ADVANCED IN RES PECT OF THE OTHER GROUNDS WE CONSIDER IT PROPER NOT TO REPRODUCE ALL THOSE ARGUMENTS OF LD.AR TO DECIDE THIS GROUND. OTHERWISE ALSO BOTH TH E SIDES HAVE BASICALLY RELIED EITHER UPON THE SUBMISSIONS ALREAD Y MADE OR THE ORDERS OF THE REVENUE AUTHORITIES . WE HAVE STUDIED THE ADVE RSARY CASE LAWS CITED BY THE RIVAL SIDES. ON THE BASIS OF THE STUDY WE HA VE ARRIVED AT A CONCLUSION THAT THE ISSUE IS; WHETHER THE IMPUGNED EXPENDITURE WAS INCURRED FOR SETTING UP A NEW BUSINESS OR FOR SETTING UP A NEW UNIT FOR SIMILAR TYPE OF BUSINESS ALREADY IN EXISTENCE. UNDISPUTEDLY THE ASSESSEE HAD INCURRED THE LEGAL EXPENDITURE TO SET- UP A MANUFACTURING UNIT AT UTTARANCHAL IN THE F.Y. 2002-03. THE SAID P ROJECT COULD NOT BE STARTED, RESULTANTLY IT WAS DECIDED FOR THE YEAR UN DER CONSIDERATION TO TRANSFER THE PRE-OPERATIVE EXPENSES TO REVENUE UN DER THE HEAD LEGAL & PROFESSIONAL EXPENSES. THE ASSESSEE IS IN THE BUSI NESS OF MANUFACTURING OF PHARMA PRODUCTS AND THE UTTARANCHAL PRADESH PROJ ECT WAS ALSO STATED TO BE FOR THE PRODUCTION OF PHARMA PRODUCTS. WITH T HIS FACTUAL BACKGROUND WE HAVE NOTICED THAT THE DECISION OF CIT VS. AMBICA MILLS LTD. 236 ITR 921 (GUJ), RELIED UPON BY THE A.O., SA YS THAT IF EXPENSES INCURRED ARE IN CONNECTION WITH THE SETTING UP OF A NEW BUSINESS THEN SUCH EXPENSES WILL BE ON CAPITAL ACCOUNT, BUT WHE RE THE SETTING UP DOES NOT AMOUNT TO STARTING OF NEW BUSINESS BUT EXPANSIO N OR EXTENSION OF THE BUSINESS ALREADY BEING CARRIED ON BY THE ASSESSEE , EXPENSES IN ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 6 - CONNECTION WITH SUCH EXPANSION OR EXTENSION MUST BE HELD DEDUCTIBLE AS REVENUE EXPENSES. IN THE SAID CASE THE EXPENDITURE WAS FOR GETTING FEASIBILITY REPORT FOR SETTING UP A NEW MINI STEEL PLANT, A NEW LINE OF BUSINESS DIFFERENT FROM ITS EXISTING BUSINESS OF M ANUFACTURING OF STEEL TUBES. BECAUSE THE EXPENDITURE WAS FOR A NEW PROJEC T DIFFERENT FROM EXISTING BUSINESS HENCE HELD AS CAPITAL- EXPENDITU RE REVENUE HAS ALSO CITED SLM MANEKLAL 10 7 ITR 133 ( GUJ.) HOWEVER THE OBSERVATION THEREIN WAS THAT WHAT IS RE QUIRED TO BE CONSIDERED IS THE OBJECT WITH WHICH A PARTICULAR EX PENDITURE WAS INCURRED. IN THE SAID CASE THE AMOUNT WAS SPENT FOR OBTAINING AN EXPERT OPINION BY WAY OF PRELIMINARY EXPENSE FOR THE PURPOSE OF ESTAB LISHING A FOUNDRY. THE HONBLE COURT HAS SAID THAT THE PRELIMINARY EX PENDITURE WAS INCURRED FOR THE PURPOSE OF BRINGING INTO EXISTENCE A CAPITAL ASSET, THEREFORE THE PRELIMINARY EXPENDITURE ITSELF WAS AN EXPENDITURE OF CAPITAL NATURE, IT WAS HELD. THUS IN THE LIGHT OF THE CASE- LAWS DISCUSSED WE ARE OF THE VIEW THAT THE FACTUAL MATRIX OF THE CASE HAS DE MONSTRATED THAT THE EXPENDITURE IN QUESTION WAS NOT FOR SETTING UP A NE W LINE OF BUSINESS BUT FOR THE SETTING UP A NEW PRODUCTION UNIT FOR EXPANS ION OF THE SAME LINE OF BUSINESS ALREADY IN EXISTENCE HENCE ALLOWABLE AS RE VENUE EXPENDITURE. RESULTANTLY, GROUND NO.1 IS HEREBY ALLOWED. 3. GROUND NOS. 2 AND 3 READ AS UNDER:- 2. THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN MAKING AN ADDITION OF RS.5,28,92,719/- BY HOLDING THAT THE PRODUCT REGISTRATION EXPENSES AND REIMBURSEMENT OF EXPENSES FOR PRODUCT REGISTRATION SUPPORT SERVICES WERE CAPITAL IN NATURE, MERELY ELIGIBLE FOR DEPRECIATION U/S.32 AND LIABLE TO BE DISALLOWED AS BUSINESS REVENUE EXPENSES. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 7 - 3. THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS I MAKING AN ADDITION OF RS.1,35,91,171/- BY HOLDING THAT THE TRADEMARK REGISTRATION FEES AND PATENT REGISTRATION FEE S INCURRED BY THE APPELLANT WERE CAPITAL IN NATURE , MERELY ELIGIBLE FOR DEPRECIATION U/S.32 AND LIABLE TO BE DISALLOWED AS BUSINESS REVENUE EXPENSES. 3.1. THESE TWO GROUNDS ARE HEREBY CLUBBED AND TO BE DECIDED TOGETHER. BOTH THESE GROUNDS RELATE TO A SINGLE ISSUE OF TREA TING THE IMPUGNED EXPENDITURES BY THE AO AS CAPITAL EXPENDITURE, HO WEVER, THE APPELLANT HAS CLAIMED THE EXPENDITURE(S) AS REVENUE EXPENDIT URE. IN RESPECT OF PRODUCT REGISTRATION EXPENSES( GROUND NO . 2 ) IT WAS NOTED BY THE AO THAT UNDER THE HEAD MARKETING EXPENSES AN AMOU NT OF RS.2,68,03,226/-WAS DEBITED WHICH WAS RELATED TO TH E 'PRODUCT REGISTRATION EXPENSES. IT WAS EXPLAINED THAT THE P HARMACEUTICAL PRODUCTS REQUIRES REGISTRATION FROM GOVERNMENT DRUG REGULATORY AUTHORITY, THEREFORE, THE SAID EXPENDITURE WAS INCU RRED. IT WAS ALSO EXPLAINED THAT THE PHARMACEUTICAL GOODS COULD NOT B E EXPORTED TO OTHER COUNTRIES UNLESS AND UNTIL THE PRODUCTS ARE APPROVE D AND REGISTERED WITH THAT AUTHORITIES OF THE RESPECTIVE COUNTRIES. THE AO'S OBJECTION WAS THAT ONCE THE PRODUCT IS REGISTERED AND APPROVAL IS GRAN TED BY THAT COUNTRY THEN THE ASSESSEE CAN CONTINUE TO EXPORT ITS GOODS OVER A LONG PERIOD OF TIME. THE REGISTRATION THUS ENTITLES A BENEFIT OF E NDURING NATURE. IT WAS LIKE MARKETING RIGHT AND THE ASSESSEE HAS CREATED A N INTANGIBLE ASSET. AS PER AO WITHOUT GETTING THE MARKETING RIGHTS I.E. AN INTANGIBLE ASSET, THE ASSESSEE COULD NOT SELL ITS PRODUCT IN THE RESPECTI VE COUNTRIES. THE AO HAS ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 8 - PLACED ON RECORD TWO CHARTS FOR PRODUCT REGISTRATIO N EXPENSES AND REIMBURSEMENT OF EXPENSES. THESE TWO CHARTS ARE REP RODUCED BELOW:- DETAILS OF PRODUCT REGISTRATION EXPENSES NAME OF ACCOUNT EXPENSES ( ` ) TOTAL ( ` ) FROM 01/04/05 TO 30/09/05 FROM 01/10/05 TO 31/03/06 FROM 01/04/05 TO 31/03/06 PRODUCT REGISTRATION EXPENSES 6,296,905 15,688,655 21,985,560 REGISTRATION EXPENSES 639,835 1,621,308 2,261,143 PRODUCT REGISTRATION EXPENSES 1,588,829 967,694 2,556,523 TOTAL 8,525,569 18,277,657 26,803,226 REIMBURSEMENT OF EXPENSES INCURRED ON BEHALF OF CA DILA HEALTHCARE FOR PRODUCT REGISTRATION SUPPORT SERVICES NAME OF THE COMPANY EXPENSES ( ` ) TOTAL ( ` ) FROM 01/04/05 TO 30/09/05 FROM 01/10/05 TO 31/03/06 FROM 01/04/05 TO 31/03/06 ZYDUS HEALTHCARE USA LLC 17,851,991 13,112,203 30,964,194 ZYDUS FRANCE SAS 57,719 1,477,619 1,535,338 ZYDUS HEALTHCARE SA (PTY.) LTD. - 4,922,532 4,922,532 TOTAL 17,909,710 19,512,354 37,422,064 TOTAL EXPENSES 64,225,290 ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 9 - 3.2. FINALLY THE TOTAL OF THE TWO I.E.RS.6,42,52, 290/-, STATED TO BE PRODUCT REGISTRATION EXPENSES, WAS TREATED AS CAP ITAL EXPENDITURE. HOWEVER, IT WAS DECIDED TO ALLOW DEPRECIATION UNDER SECTION 32 (1) (II) OF THE ACT, AND THE SAME WAS CALCULATED AT RS.1,13,32, 571/-, HENCE THE NET DIFFERENTIAL AMOUNT I.E.RS.5,28, 92,719/- WAS ADDED IN THE TOTAL INCOME OF THE ASSESSEE. 3.3. AS FAR AS THE VIEW OF THE DRP IS CONCERNED THEY HAVE NOT AGREED THAT THE PRODUCT REGISTRATION EXPENSES WERE INCURRE D WITH A VIEW TO EXPAND THE ASSESSEE'S EXISTING BUSINESS, BOTH LOCAL AS WELL AS EXPORTS. THEY HAVE ALSO REJECTED AN ANOTHER PLEA THAT THE S AID EXPENSES REPRESENTED THE REIMBURSEMENT OF EXPENSES. THE ARGU MENT OF THE APPELLANT WAS THAT SERVICES OF THE OVERSEAS ASSOCIA TE CONCERNS WAS TOWARDS PRODUCT REGISTRATION EXPENSES AND THOSE EXP ENSES WERE REIMBURSED. ACCORDING TO DRP SINCE THE GOODS COULD NOT BE EXPORTED TO THOSE COUNTRIES UNLESS THE PRODUCT IS REGISTERED, H ENCE THE ASSESSEE HAS ACQUIRED A BENEFIT OF ENDURING NATURE AND THE NATUR E OF MARKETING RIGHTS TO THOSE COUNTRIES. THE ACTION OF THE AO WAS AFFIRM ED. 3.4. WE ARE DEALING GROUND NO. 3 SIMULTANEOUSLY DUE TO THE SIMILARITY IN THE NATURE OF THE ISSUE I.E. WHETHER THE EXPEND ITURE IN QUESTION IS CAPITAL EXPENDITURE OR REVENUE EXPENDITURE. THE ASSESSEE HAS DEBITED TRADE MARK REGISTRATION FEES AT RS.37,92,606/ AND PATENT FEES AT RS.1,25,49,880/. IN RESPECT OF TRADEMARK REGISTRA TION FEES THE EXPLANATION OF THE ASSESSEE WAS AS UNDER; -- ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 10 - AS REGARD DETAILS OF TRADE MARKS & REGISTRATION F EES, WE ARE ENCLOSING HEREWITH, COPY OF THE SAID ACCOUNT FOR TH E YEAR UNDER ASSESSMENT, MARKED AS ANNEXURE NO.-21. THE ASSESSEE COMPANY CARRIES ON THE BUSINESS OF MANUFACTURE AND SALE OF PHARMACEUTICALS WHICH ARE BRANDED WITH ITS DISTINCT IVE TRADEMARKS. IT GETS SAID TRADEMARKS REGISTERED WIT H THE REGISTRAR OF TRADE MARKS UNDER THE TRADE MARKS ACT FRO WHICH CERTAIN PRESCRIBED FEES ARE REQUIRED TO BE PAID. ALL THAT THE REGISTRATION OF TRADEMARKS DID WAS TO ENABLE THE ASSESSEE COMPANY T O OBTAIN A SPEEDY AND LESS EXPENSIVE REMEDY AGAINST THE INFRIN GEMENT OF THE TRADEMARKS. IT GIVES BENEFIT OF EXCLUSIVE RIGHT TO USE ITS TRADEMARKS. IT IS INCURRED FOR PROTECTION OF THE B USINESS OF THE COMPANY. IT IS THUS, INCURRED WHOLLY AND EXCLUSIVE LY FOR THE PURPOSES OF THE ASSESSEE COMPANYS BUSINESS ALLOWAB LE U/S.37(1) OF THE ACT. 3.5. IN RESPECT OF PATENT FEES THE EXPLANATION OF THE ASSESSEE WAS AS UNDER ;- AS REGARD DETAILS OF PATENTS REGISTRATION FEES, WE ARE ENCLOSING HEREWITH, COPY OF THE SAID ACCOUNT FOR TH E YEAR UNDER ASSESSMENT, MARKED AS ANNEXURE NO.-1. FROM THE FACTS AVAILABLE ON THE RECORD YOU COULD FIND THAT THE ASSESSEE COMP ANY CARRIES ON SCIENTIFIC RESEARCH WORK ON LARGE SCALE FOR LAST SO MANY YEARS. A PATENT IS A SET OF EXCLUSIVE RIGHTS GRANTED BY A ST ATE TO AN INVENTOR FOR A LIMITED PERIOD OF TIME FOR A PUBLIC DISCLOSUR E OF AN INVENTION. THE EXCLUSIVE RIGHT GRANTED TO A PATENTEE IN MOST C OUNTRIES IS THE RIGHT TO PREVENT OTHERS FROM MAKING OR USING THE PA TENTED INVENTION WITHOUT PERMISSION. THE EXPENSES INCURRE D BY US FOR CARRYING OUT VARIOUS PATENT REGISTRATION FORMALITIE S INCLUDING STATUTORY FEES PRESCRIBED IN DIFFERENT COUNTRIES AR E DULY REFLECTED IN THE COPY OF ACCOUNTS, AS ABOVE. ALL THAT THE REGISTRATION OF PATENTS DID WAS TO ENA BLE THE ASSESSEE COMPANY TO OBTAIN A SPEEDY AND LESS EXPENSIVE REMED Y AGAINST THE INFRINGEMENT OF THE PATENT RIGHTS. IT GIVES BENEFI T OF EXCLUSIVE RIGHT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 11 - TO USE ITS PATENTS. IT IS INCURRED FOR PROTECTION OF THE BUSINESS OF THE COMPANY. IT IS THUS, INCURRED WHOLLY AND EXCLU SIVELY FOR THE PURPOSES OF THE ASSESSEE COMPANYS BUSINESS ALLOWAB LE U/S 37(1) OF THE ACT. IN THIS REGARD WE RELY ON THE RATIO LA ID DOWN IN THE FOLLOWING DECISIONS DECIDED IN FAVOUR OF THE ASSESS EE: (I) CIT VS. FINLAY MILLS LTD. - 20 ITR 475 (SC) (II) CIT VS. CENTURY SPG., WVG., & MFG. LTD. 15 ITR 105(BOM) 3.6. THE AO HAS OPINED THAT THE ASSESSEE HAS CREATED AN INTANGIBLE ASSET. ACCORDING TO HIM SINCE AN INTANGIBLE ASSET H AS BEEN CREATED THEREFORE ELIGIBLE ONLY FOR DEPRECIATION UNDER SEC TION 32 (1) (II) OF THE ITACT. A CALCULATION WAS MADE AND THE DEPRECIATION WAS WORKED OUT AT RS.27,51,315/- AND THE NET DIFFERENTIAL AMOUNT OF R S.1,35,91,171/- WAS ADDED. 3.7. THE ASSESSEE'S CONTENTION BEFORE DRP WAS T HAT NO INTANGIBLE ASSET SUCH AS TRADEMARK OR PATENT WAS ACQUIRED BUT ONLY F EES WAS PAID FOR THE REGISTRATION. HOWEVER, THE ACTION OF THE AO WAS AFF IRMED. 3.8. LEARNED COUNSEL MR.PATEL HAS STATED THAT A P HARMACEUTICAL COMPANY CAN SELL ITS PRODUCT ONLY AFTER OBTAINING REGISTRA TION AND THAT THE EXPENDITURE WAS INCURRED FOR THE RUNNING OF THE BU SINESS THEREFORE REVENUE IN NATURE. THAT IS WHY THE PRODUCT REGIST RATION EXPENSE WAS GROUPED UNDER OTHER MARKETING EXPENSES. FOR ALLO WABILITY U/S. 37 OF THE ACT CASE LAW RELIED UPON WERE : I. VIDESH SANCHAR NIGAM 81 ITD 456 (MUM.) II. VODAFONE ESSAR GUJARAT 38 SOT 51 (AHD.) III. COMSAT MAX LTD. 29 SOT 436 (DEL.) ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 12 - IV. CORE HEALTH CARE 308 ITR 263 ( GUJ.) V. BOMBAY STEAM NAVIGATION 56 ITR 52 ( SC) ABOUT TRADEMARK & PATENT FEES THE CONTENTION WAS THAT THE PRODUCTS ARE BRANDED WITH DISTINCTIVE TRADE MARK S O THE ASSESSEE HAS EXCLUSIVE RIGHTS AND OTHERS ARE PREVENTED FOR MAKIN G USE OF SUCH PATENTED INVENTION. THIS IS THE FIRST YEAR FOR SUCH AN ADVER SE ACTION TAKEN BY THE A.O; OTHERWISE IN THE PAST YEARS IT WAS CONSTANTLY ALLOWED. RELIANCE PLACED AS FOLLOWS: I. FINLAY MILLS 20 ITR 475 (SC) II. BRAKES INDIA LTD. 9 TTJ 417 ( MAD.) 3.9. REVENUE HAS ARGUED THAT AN ENDURING BENEFIT WAS ENJOYED BY OBTAINING REGISTRATION AND THEREFORE AN INTANGIBLE ASSET HAS BEEN CREATED , HENCE ENTITLED FOR DEPRECIATION ONLY. ACCORDING TO LEARNED DR IF A BUSINESS CANNOT BE CONDUCTED WITHOUT REGISTRATION F ORMALITIES, AS PER ASSESSEE'S OWN ADMISSION, THEN NATURALLY THE EXPEND ITURE HAS GIVEN THE ASSESSEE A LONG-LASTING BENEFIT. RELIANCE WAS PLACE D AS FOLLOWS; -- I) MASCHMEIJER AROMATICS 214 ITR 22 (MAD.) II) DIGVIJAY CEMENTS 159 ITR 253 ( GUJ.) III) LAXMI SUGAR MILLS 84 ITR 439 (ALL.) IV) L & T PLASTICS 123 ITR 391 ITD 3.10. WE HAVE HEARD BOTH THE SIDES ON THIS ISS UE. WE HAVE ALSO PERUSED THE DETAILS FURNISHED IN THE FORM OF A COMP ILATION. UNDER THE HEAD OTHER MARKETING EXPENSES THE ASSESSEE HAS CL AIMED PRODUCT REGISTRATION EXPENSES. THE ASSESSEE HAS ALSO CLAIM ED TRADE-MARK REGISTRATION FEES AND PATENT REGISTRATION FEES. THE QUESTION WHICH WAS ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 13 - RAISED BY THE REVENUE DEPARTMENT WAS THAT WHETHER B Y INCURRING THOSE EXPENDITURE THE ASSESSEE HAS CREATED AN INTANGIBLE ASSET. THE REVENUE HAS ALSO RAISED A QUESTION THAT WHETHER BY INCURRING TH OSE EXPENDITURE THE ASSESSEE HAS ENJOYED LONG DRAWN ENDURING BENEFIT. W E HAVE NOTED THAT FOR PHARMACEUTICAL PRODUCT THE ASSESSEE IS REQUIRED TO OBTAIN A REGISTRATION FROM GOVERNMENT DRUG REGULATORY AUTHOR ITY. WE HAVE BEEN INFORMED THAT THE ASSESSEE COMPANY HAS OBTAINED ITS VARIOUS PRODUCTS REGISTERED IN OTHER COUNTRIES. WE HAVE ALSO BEEN IN FORMED THAT THE PHARMACEUTICAL PRODUCTS HAVE ALSO BEEN REGISTERED B Y THE LOCAL AUTHORITIES AS ALSO THE MEDICAL ASSOCIATIONS SITUATED IN INDIA. ABOUT TRADEMARK AND PATENT REGISTRATION, THE ADMITTED FACTUAL POSITION IS THAT THE ASSESSEE IS MANUFACTURING PHARMACEUTICAL PRODUCTS. THOSE PRODUC TS HAVE BEEN BRANDED WITH THEIR DISTINCTIVE TRADEMARKS. BY THE R EGISTRATION OF THE PRODUCT THE ASSESSEE HAS SAFEGUARD AGAINST INFRINGE MENT OF ITS PATENT. BY THE REGISTRATION OF TRADEMARK AND PATENT THE ASSESS EE HAS EXCLUSIVE RIGHT OF USE. BY INCURRING THE SAID EXPENDITURE THE ASSES SEE HAS PROTECTION OF ITS RUNNING BUSINESS. WITH THIS FACTUAL BACKGROUND WE H AVE EXAMINED THE CASE LAWS CITED BY BOTH THE SIDES. IT IS NOTICEABLE THAT THE ASSESSEE HAS NOT OBTAINED ANY NEW PRODUCT OR ACQUIRED ANY NEW TRADEM ARK OR ACQUIRED ANY NEW PATENT RIGHTS. THE PRODUCTS WERE STATED TO BE I N EXISTENCE AND NOTHING NEW HAS BEEN ACQUIRED OR PURCHASED BY THE A SSESSEE. THE EXPENDITURE HAS ENABLED THE ASSESSEE TO RUN THE EXI STING BUSINESS SMOOTHLY. UNDER THE FACTS AS NARRATED TO US IT IS W RONG TO SUGGEST THAT AN ASSET EITHER TANGIBLE OR INTANGIBLE WAS ACQUIRED BY THE ASSESSEE. THE ASSESSEE IS ALREADY IN THE BUSINESS OF MANUFACTURIN G OF PHARMACEUTICAL PRODUCTS. THE ASSESSEE ALSO CARRIES ON SCIENTIFIC RESEARCH WORK. FOR THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 14 - PROTECTION OF THE RESULT OF THE RESEARCH THE ASSESS EE HAS TO GET THE PATENT REGISTERED . RATHER IT IS FALLACIOUS TO PRESUME THAT AN INTANG IBLE ASSET WAS ACQUIRED. ENDURING BENEFIT IS NOT THE ONLY CRITERIA. AN ENDURING BENEFIT HAS TO BE COUPLED WITH THE ACQUISI TION OF AN ASSET . 3.11. IN THE CASE OF SHRI DIGVIJAY CEMENT [SUPRA ] THE ASSESSEE HAS INCURRED EXPENDITURE FOR OBTAINING A FEASIBILITY RE PORT FOR SETTING UP A SHIPYARD. THE SAID EXPENDITURE HAVING BEEN INCURRED WITH THE VIEW TO BRING INTO EXISTENCE AN ADVANTAGE BY CREATING AN A SSET OF PERMANENT NATURE THEREFORE THE COURT HAS CONSIDERED THAT IT W AS FOR ENDURING BENEFIT HENCE CAPITAL IN NATURE. ON THE MATTER OF PRINCIPLE AS WELL AS AUTHORITY WE ARE OF THE VIEW THAT THE RELIANCE BY THE LEARNED DR IS MISPLACED. IN THE CASE OF MASCHEMEIJER AROMATICS (SUPRA) THE FACTS HA VE REVEALED THAT THE PAYMENT WAS FOR TECHNICAL KNOW-HOW AND FOR USER OF PATENTS, DESIGNS, TRADEMARKS, LICENSES ETC. THOSE PURCHASES WERE AG AINST THE ISSUE OF SHARES. THE HONBLE COURT HAS FOUND THAT THE ASSESS EE HAS ALLOTTED SHARES TO ITS FOREIGN COLLABORATOR IN CONSIDERATION OF K NOW HOW, USE OF PATENTS, TRADEMARKS ETC. THEREFORE THE FACTS HAVE CLEARLY ST ATED THAT THERE WAS ACQUISITION OF CERTAIN RIGHTS FOR USE OF TRADEMARK AND PATENTS. ON THOSE FACTS IT WAS HELD THAT UNDOUBTEDLY THE CONSIDERATIO N PAID WAS CAPITAL IN NATURE. EVEN THIS PRECEDENT IS NOT GOING TO HELP TH E REVENUE. WE HAVE PERUSED L&T DEMAG PLASTIC ( SUPRA) AND HAVE NOTICED THAT A PAYMENT WAS MADE FOR ACQUISITION OF TRADEMARK. THE SAID COM PANY HAD ENTERED INTO AN AGREEMENT WITH L & T, WHEREBY THE LATTER PE RMITTED THE ASSESSEE TO USE ITS TRADEMARK IN CONSIDERATION OF PAYMENT O F A HUGE SUM OF RS.3 CRORES. HENCE IT WAS HELD THAT THE COST INCURR ED BY THE ASSESSEE WAS ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 15 - FOR ACQUIRING NEW TRADEMARK AND WAS A CAPITAL EXPEN DITURE. WHEREAS IN THE CASE IN HAND IT WAS NOT AN ACQUISITION OF TRADE -WORK BUT ONLY REGISTRATION OF AN EXISTING TRADE-WORK. WE THEREFOR E HOLD THAT THE RELIANCE PLACED BY THE REVENUE DO NOT TALLY WITH THE FACTS O F THE CASE IN HAND, HENCE REJECTED. 3.12. WE HEREBY HOLD THAT THE PAYMENTS IN QUESTIO N ARE INEXTRICABLY LINKED WITH THE WORKING OF THE ASSESSEE'S BUSINESS . BY INCURRING THOSE EXPENDITURE THE ASSESSEE HAS NOT ACQUIRED ANY NEW R IGHT OF PERMANENT CHARACTER. THE LICENSES OR THE REGISTRATIONS ARE R EQUIRED TO BE RENEWED AND THEREFORE PART OF THE DAY TO DAY RUNNING EXPEND ITURE OF THE BUSINESS. [ACIT VERSUS VODAFONE ESSAR GUJARAT 38 SOT 51 ( AHD .)]. IF AN EXPENDITURE CAN GIVE A BENEFIT WHICH IS SAID TO BE ENDURED FOR ONE YEAR OR EVEN ANNUALLY YEAR AFTER YEAR THEN IT IS UNREASONAB LE TO HOLD THAT ANY ENDURING BENEFIT TAKEN PLACE TO THE ASSESSEE. [COSM AT MAX LTD.29 SOT 436 (DEL.)]. AN EXPENDITURE INCURRED IN THE EXIST ING LINE OF BUSINESS IN ORDER TO RUN THE BUSINESS SMOOTHLY THEN THOUGH THE BUSINESS MAY RUN SMOOTHLY IN FUTURE IN THE YEARS TO COME BUT IN THE ABSENCE OF CREATION OF ANY NEW ASSET WE HEREBY HELD THAT SUCH AN ENDURING BENEFIT MAY NOT TANTAMOUNT TO RENDERING OF CAPITAL EXPENDITURE. [D CIT VERSUS CORE HEALTHCARE 308 ITR 263 (GUJARAT)]. A VERY IDENTICAL CASE LAW HAS ALSO BEEN CITED PRONOUNCED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VERSUS FINLEY MILLS LTD. 20 ITR 475 AND THE OPINION EXPRESSED WAS THAT AN EXPENDITURE INCURRED IN REGISTERING FOR THE FIRS T TIME ITS TRADEMARK, THEN BY REGISTRATION THE OWNER IS MERELY ABSOLVED T HEREAFTER FROM OBLIGATION TO PROVE HIS OWNERSHIP OF TRADEMARK. AS PER THE HONBLE COURT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 16 - THE EXPENDITURE IS NEITHER FOR THE CREATION OF AN A SSET NOR AN ADVANTAGE FOR EVER. WE THEREFORE HOLD THAT THIS PRECEDENT HAS DIR ECT APPLICATION ON THE PRESENT ISSUE, THEREFORE FOLLOWING THE SAME AND CON SIDERING THE TOTALITY OF THE FACTUAL MATRIX, WE HEREBY ALLOW THE CLAIM. RES ULTANTLY, GROUND NOS.2 & 3 ARE ALLOWED. 4. GROUND NO.4 READS AS UNDER :- 4. THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN MAKING AN ADDITION OF RS.13,42,49,052/- BY HOLDING THAT THE APPELLANT WAS NOT ENTITLED TO THE WEIGHTED DEDUCTIO N FOR EXPENDITURE ON SCIENTIFIC RESEARCH U/S.35(2AB) IN R ESPECT OF CLINICAL TRIAL AND BIO-EQUIVALENCE STUDY . 4.1. REVENUE OFFICER HAS NOTED THAT THE ASSESSEE H AS INCURRED EXPENDITURE ON RESEARCH AND DEVELOPMENT OF RS.78,93,71,812/-. THE ASSESSEE HAS CLAIMED 150% DEDUCTION AS PRESCRIBED UNDER SECTION 35 (2A B) I.E. RS.118,40,57,718/-. IT HAS ALSO BEEN NOTED BY THE A .O. THAT AS PER A CERTIFICATE ISSUED BY DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH, NEW DELHI, REVENUE EXPENDITURE FOR IN-HOUSE RESEARCH WAS AT RS.6413.97 LACS AND EXPENSE FOR CLINICAL TRIALS WAS AT RS.1437 LACS . AS ALLEGED BY THE AO, THE SAID CLINICAL TRIALS WERE IN CURRED OUTSIDE THE APPROVED FACILITIES. SO THE AO HAS ASKED THE ASSESS EE TO SUBSTANTIATE ITS CLAIM FOR THE ALLOWABILITY OF ENHANCED RATE OF DEDU CTION @ 150% U/S 35(2AB) OF THE ACT., ESPECIALLY WHEN THE EXPENDITUR E WAS NOT INCURRED BY THE ASSESSEE IN THE APPROVED IN-HOUSE FACILITY. THE AO HAS REITERATED THAT AS PER THE D S I R CERTIFICATE, EXPENSES OF RS.1437.50 LACS ON CLINICAL TRIAL WAS INCURRED OUTSIDE THE APPROVED FA CILITY. THERE WAS A ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 17 - REFERENCE OF SECTION 43 [4] OF THE ACT, IN WHICH TH E TERM SCIENTIFIC RESEARCH ' HAS BEEN DEFINED. EXPLANATION OF THE ASS ESSEE WAS AS UNDER:- CLINICAL DRUG TRIAL IS AN INTEGRAL PART OF THE ONGOING SCIENTIFIC RESEARCH CARRIED ON BY ANY PHARMACEUTICAL COMPANY. A DETAILED NOTE AND OVERVIEW OF CLINICAL DRUG TRIALS AND CLINI CAL RESEARCH AS EXTRACTED FROM WIKIPEDIA IS ATTACHED HEREWITH MARKE D AS ANNEXURE NO.-3 . BIOEQUIVALENCE-STUDY IS A HIGHLY SPECIALIZED CLINICAL TRIAL RESEARCH STUDY WHICH IS INTEGRALLY CONNECTED WITH THE SCIENTIFIC RESEARCH CARRIED ON BY US. A DETAILED N OTE AND OVERVIEW OF BIOEQUIVALENCE-STUDY AND CLINICAL RESEARCH AS EX TRACTED FROM WIKIPEDIA IS ATTACHED HEREWITH MARKED AS ANNEXURE N O.-4. AS EXPLAINED UNDER THE ABOVE NOTE CLINICAL DRUG TRIALS ARE A SINE QUA NON FOR OBTAINING APPROVAL OF ANY DRUG FROM THE REG ULATORY AUTHORITY. TAKING INTO CONSIDERATION OF THE IMPORTANCE OF CLIN ICAL DRUG TRIALS AS A PART AND PARCEL OF SCIENTIFIC RESEARCH, THE LE GISLATURE THOUGHT IT PRUDENT TO ADD AN EXPLANATION TO SEC. 35(2AB) TO EXPAND THE SCOPE OF ALLOWABILITY OF DEDUCTION U/S.35(2AB) ON C LINICAL TRIAL EXPENSES AND THE CONNECTED STAGE INVOLVING EXPENSES FOR REGULATORY APPROVAL WITH EFFECT FROM A.Y. 2002-03. NO WHERE IN THE SAID EXPLANATION HAS IT BEEN PRESCR IBED THAT SUCH EXPENDITURE ON CLINICAL DRUG TRIALS AND REGULATORY APPROVAL MUST BE DONE IN-HOUSE. IN FACT, THE WORDINGS USED IN SE C. 35(2AB) ARE ANY EXPENDITURE ON SCIENTIFIC RESEARCH ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY. SINCE THE EXPENDITURE ON CLINICAL DRUG TRIALS AND R EGULATORY APPROVAL IS AN INTEGRAL PART OF THE SCIENTIFIC RESE ARCH CARRIED OUT BY THE DULY APPROVED IN-HOUSE RESEARCH AND DEVELOPM ENT FACILITY OF OUR COMPANY, THE EXPENDITURE INCURRED ON IT IS V ERY MUCH ELIGIBLE FOR DEDUCTION U/S.35(2AB) OF THE ACT. WE ARE ENCLOSING HEREWITH, A COPY OF CLINICAL TRIA L EXPENSES A/C MARKED AS ANNEXURE NO.-5 . WE ARE ALSO ENCLOSING HEREWITH, A ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 18 - COPY OF ACCOUNT OF BIO-STUDY EXPENSES INCURRED IN OUR PTC R&D UNIT IN AHMEDABAD, MARKED AS ANNEXURE NO.-6 . HOWEVER THE AO HAS HELD THAT THE ENHANCED DEDUCTIO N IS AVAILABLE ON EXPENDITURE ON SCIENTIFIC RESEARCH ON IN-HOUSE RESEARCH & DEVELOPMENT AS APPROVED BY THE PRESCRIBED AUTHORIT Y AS IN SEC. 35(2AB)(1), REPRODUCED IN THE ORDER. ACCORDING TO H IM AS PER THE LANGUAGE OF THIS SECTION CLINICAL TRIAL HAS TO BE IN-HOUSE, OTHERWISE THE USE OF THIS TERMINOLOGY IN THIS SECTION WOULD BECOM E REDUNDANT. IT IS A SETTLED POSITION OF LAW THAT NO WORD USED IN THE ST ATUTE IS REDUNDANT. THE AO HAS CONCLUDED THAT THE CLINICAL TRIAL EXPENSES AND BIOEQUIVALENCE STUDY IS ALLOWABLE UNDER SEC. 35(1)(I) ONLY UP TO 1 00% AND HENCE THE EXCESS DEDUCTION BY 50% I.E. RS.13,42,49,052/- WAS NOT ALLOWED . 4.2. AFTER DISCUSSION, THE DRP HAS FURTHER ADDED THAT A MONITORING MECHANISM HAS BEEN PRESCRIBED FOR GRANTING WEIGHTED DEDUCTION UNDER SECTION 35(2AB). AN APPROVAL FOR OUT SIDE CLINICAL TRIAL IS NOT PRESCRIBED IN THE MECHANISM. THE ACTION OF THE A.O. WAS APPROV ED. 4.3. LEARNED AR MR.PATEL HAS EXPLAINED THAT THE C LINICAL TRIALS ARE CONDUCTED TO ALLOW SAFETY FOR A NEW DRUG. THESE TRI ALS TAKE PLACE ON APPROVAL BY THE APPROVED HEALTH AUTHORITY. THE APPR OVAL IS GRANTED IN A COUNTRY WHERE THE TRIAL IS TAKING PLACE. DEPENDING ON THE TYPE OF THE PRODUCT, INVESTIGATORS ENROLL HEALTHY PATIENTS/VOLU NTEERS. THE STUDY AND INVESTIGATION COMPARE THE NEW PRODUCT WITH THE CURR ENTLY PRESCRIBED TREATMENT. CLINICAL TRIALS VARY IN SIZE FROM A SING LE CENTER IN ONE COUNTRY TO MULTI-CENTER IN MULTIPLE COUNTRIES. THE BURDEN O F EXPENDITURE AND ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 19 - PAYMENT IS EITHER BORNE BY THE GOVERNMENT OF BY A P HARMACEUTICAL COMPANY. SOME OF THE EXAMPLES OF WHAT A CLINICAL TR IAL MAY BE DESIGNED TO DO ARE AS FOLLOWS:- ASSESS THE SAFETY AND EFFECTIVENESS OF A NEW MEDI CATION OR DEVICE ON A SPECIFIC KIND OF PATIENT (E.G., PATI ENTS WHO HAVE BEEN DIAGNOSED WITH ALZHEIMERS DISEASE) ASSESS THE SAFETY AND EFFECTIVENESS OF A DIFFERENT DOSE OF A MEDICATION THAT IS COMMONLY USED (E.G. 10 MG DOSE INSTEAD OF 5 MG DOSE) ASSESS THE SAFETY AND EFFECTIVENESS OF AN ALREADY MARKETED MEDICATION OR DEVICE FOR A NEW INDICATION, I.E. A DISEASE FOR WHICH THE DRUG IS NOT SPECIFICALLY AP PROVED. ASSESS WHETHER THE NEW MEDICATION OR DEVICE IS MORE EFFECTIVE FOR THE PATIENTS CONDITION THAN THE ALRE ADY USED, STANDARD MEDICATION OR DEVICE (THE GOLD STANDARD OR STANDARD THERAPY) COMPARE THE EFFECTIVENESS IN PATIENTS WITH A SPECIF IC DISEASE OF TWO OR MORE ALREADY APPROVED OR COMMON INTERVENTIONS FOR THAT DISEASE (E.G., DEVICE A VS. DEVICE B, THERAPY A VS. THERAPY B). LEARNED AR HAS INFORMED THAT THE CLINICAL TRIALS AR E CONDUCTED UNDER LAID DOWN RULES FOR TESTING OF DRUGS. PRACTIC AL EXPERIMENTATION BEING DONE TO DISCOVER THE EFFECTIVENESS OF MEDICAL DRUGS. HE HAS INFORMED THAT EVEN POST MARKETING SURVEILLANCE TRIA L ARE CONDUCTED. SUCH CLINICAL TRIALS ARE CLOSELY SUPERVISED BY APPROPRIA TE REGULATORY AUTHORITIES. ALL STUDIES THAT INVOLVE A MEDICAL OR THERAPEUTIC INTERVENTION ON PATIENTS ARE REQUIRED TO BE APPROVED BY A SUPERV ISING ETHICS COMMITTEE BEFORE PERMISSION IS GRANTED TO RUN THE T RIAL. ABOUT BIOEQUIVALENCE IT IS INFORMED THAT IN PHARMACOKIN ETICS THIS TERM IS USED TO ASSESS THE EXPECTED BIOLOGICAL EQUIVALENCE OF TWO PREPARATIONS OF ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 20 - DRUG. IF TWO PRODUCTS ARE BIOEQUIVALENT, IT MEANS T HAT THEY WOULD BE EXPECTED TO BE SAME. IN DETERMINING BIOEQUIVALENCE BETWEEN TWO PRODUCTS I.E. COMMERCIALLY-AVAILABLE BRAND PRODUCT AND TO-BE-MARKETED GENERIC PRODUCT, PHARMACOKINETIC STUDIES ARE CONDUC TED WHEREBY EACH OF THE PREPARATIONS ARE ADMINISTERED TO VOLUNTEERS, GE NERALLY HEALTHY INDIVIDUALS BUT OCCASIONALLY IN PATIENTS. LD.A.R. H AS DRAWN OUR ATTENTION ON PAGE 27 OF THE PAPER BOOK WHERE THE PARTY WISE D ETAILS OF BIO-STUDY RESEARCH EXPENSES ARE MENTIONED. IN THAT LIST PLACE S MENTIONED ARE NAVI MUMBAI, AHMEDABAD, HYDERABAD, CHENNAI, BANGALORE. T HERE IS ALSO PARTY WISE DETAILS OF CLINICAL TRIAL RESEARCH EXPEN SES OF CANADA AND USA. PAGES 28 TO 47 CONTAIN APPROVALS OR GRANT OF EXTE NSIONS BY THE DRUG CONTROLLER (INDIA) FOR BIOEQUIVALENCE STUDY. PAGES 49 ONWARDS ARE THE PERMISSIONS OF CLINICAL TRIALS GRANTED BY A CANADA AUTHORITY. FINALLY OUR ATTENTION WAS DRAWN ON FORM NO. 35 I.E. ORDER OF AP PROVAL OF IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY UNDER SECTION 35( 2AB) OF THE I.T.ACT. ADDRESSES AT WHICH SUCH RESEARCH AND DEVEL OPMENT FACILITIES ARE LOCATED HAVE ALSO BEEN MENTIONED. PLACED IN THE PAPER BOOK ON PAGE 63 IS FORM NO. 3 CL I.E. REPORT TO BE SUBMITTED BY THE PRESCRIBED AUTHORITY TO THE DIRECTOR GENERAL (INCOME-TAX EXEMP TIONS) U/S 35(2AB) OF I T ACT. FOR THE YEAR UNDER CONSIDERATION THE BR EAK-UP OF THE TOTAL COST OF IN-HOUSE RESEARCH FACILITY WAS AS UNDER:- (RUPEES IN LACS) ASST.YEAR 2006-07 LAND AND BUILDING 1241.59 CAPITAL EXPENDITURE (EXCLUDING, LAND & BUILDING) 2740.93 REVENUE EXPENSES ON BUILDING 42.25 REVENUE EXPENDITURE (EXCLUDING LAND & 6413.97 ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 21 - BUILDING) TOTAL CAPITAL + REVENUE (INCLUDING LAND & BUILDING) 10438.74 TOTAL CAPITAL + REVENUE (EXCLUDING LAND & BUILDING 9154.90 EXPENSES ON CLINICAL TRIALS OUTSIDE THE APPROVED FACILITIES NOT INCLUDED IN ABOVE 1437.50 IN SUPPORT, CASE LAWS RELIED UPON ARE AS UNDER:- I) BHARAT BIOTECH INTERNATIONAL LTD. ( ITA NO.1327/HYD /2008) II) CLARIS LIFE SCIENCE 221 CTR 301 ( GUJ.) III) RADHASWAMI SATSANG 193 ITR 321 ( SC) IV) TARABEN RAMABAI PATEL 215 ITR 323 ( GUJ.) V) NEO POLY PACK (P) LTD. 245 ITR 492 ( DEL.) VI) JH GOLTA 156 ITR 323 ( SC) 4.4. FROM THE SIDE OF THE REVENUE LD.D.R. MR.V.K .GUPTA HAS PLACED RELIANCE ON THE LANGUAGE OF SEC. 35(2AB) AND ARGUED THAT IT WAS AN ADMITTED FACTUAL POSITION THAT THE RESEARCH WAS NOT ENTIRELY CONDUCTED IN- HOUSE BUT CONDUCTED BY OUT SIDE AGENCIES. EXPENDITU RE INCURRED TOWARDS THOSE AGENCIES WAS NOT ADMISSIBLE FOR WEIGHTED DED UCTION. IN REPLY TO THE ARGUMENT ABOUT THE APPLICABILITY OF THE EXPLANA TION OF SEC.35(2AB), THE LD.DR HAS PLEADED THAT NEITHER THE MAIN SECTION HAS DEFINED IN- HOUSE NOR AFTER THE INSERTION OF THE SAID EXPLANAT ION NO POSITION HAS CHANGED. HE HAS PLEADED THAT OTHERWISE ALSO AN EXP LANATION GENERALLY DO NOT EXPAND THE SCOPE OF THE MAIN SECTION BUT ONL Y EXPLAIN ITS APPLICABILITY TO REMOVE ANY AMBIGUITY. FOR THIS AR GUMENT, LD.DR HAS PLACED RELIANCE ON PLANTATION CORPORATION OF KERALA 247 ITR 155. LD.MR.GUPTA HAS FURTHER ARGUED THAT THE EXPLANATION ONLY DEFINES THE TERM, EXPENDITURE ON SCIENTIFIC RESEARCH. ACCORD ING TO HIM, SUCH ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 22 - EXPENDITURE IS ALLOWABLE ONLY WHEN RELATED TO IN-H OUSE RESEARCH. EVEN LD.DR HAS CONTESTED THAT THE BIO-EQUIVALENCE STUDIE S ARE NEITHER CLINICAL TRIAL NOR SCIENTIFIC RESEARCH. IN RESPONSE TO THE APPLICABILITY OF PRINCIPLE OF CONSISTENCY LD.DR HAS RESPONDED THAT THE LAW O F RESJUDICATA IS NOT APPLICABLE ON TAX PROCEEDINGS, RELIANCE PLACED ON M AHENDRA MILLS 36 ITR 350 (S.C.) AND HIDER LEATHER 101 ITR 61 (GUJ.). 4.5. WE HAVE HEARD BOTH THE SIDE AND CAREFULLY PERU SED THE LAW APPLICABLE IN THE LIGHT OF THE COMPILATION FILED AN D EXPLANATION TENDERED. FOR THE PROMOTION OF SCIENTIFIC RESEARCH SO AS TO G IVE A BOOST TO SUCH ACTIVITY THE HON'BLE LAW MAKERS HAVE INTRODUCED THI S SECTION. FURTHER CONSIDERING THE IMPORTANCE OF CLINICAL DRUG TRIAL AS A PART AND PARCEL OF THE SCIENTIFIC RESEARCH AS ALSO THE OBTAINING OF AP PROVAL FROM REGULATORY AUTHORITY; IN THEIR PRUDENCE; CONSIDERED THE SAME A S A PART OF RESEARCH. IT WAS BROUGHT INTO THE STATUTE THROUGH AN EXPLANATION , REPRODUCED BELOW FOR REFERENCE:- SEC. 35(2AB)(1) WHERE A COMPANY ENGAGED IN THE BUSINESS OF BIO- TECHNOLOGY OR IN THE BUSINESS OF MANUFACTURE OR PR ODUCTION OF ANY DRUGS, PHARMACEUTICALS, ELECTRONIC EQUIPMENTS, COMPUTERS, TELECOMMUNICATION EQUIPMENTS, CHEMICALS OR ANY OTHER ARTICLE OR THING NOTIFIED BY THE BOARD INCURS ANY EXPENDITURE ON SCIENTIFIC RESEARCH (NOT BEING EXPENDITURE IN THE NATURE OF COST OF ANY LAND OR BUILDING) ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY, T HEN, THERE SHALL BE ALLOWED A DEDUCTION OF A SUM EQUAL TO ONE AND ONE-HALF TIMES OF THE EXPENDITURE SO INCURRED. [EXPLANATION : FOR THE PURPOSES OF THIS CLAUSE, 'EX PENDITURE ON SCIENTIFIC RESEARCH', IN RELATION TO DRUGS AND PHARMACEUTICALS , SHALL INCLUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL, OBTAINING APPROVAL FROM ANY REGULATORY AUTHORITY UNDER ANY CENTRAL STATE OR PROVINCIAL ACT AND FILING AN APPLICATION FOR A PATENT UNDER THE PATENTS ACT, 1970 (39 OF 197 0).] ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 23 - 4.6. AS FAR AS THE DEFINITION OF SCIENTIFIC RESEARCH IS CONCERNED, WE HAVE BEEN INFORMED THAT SECTION 43(4) HAS DEFINED THE SAME AS UNDER:- SECTION 43(4) : (I) 'SCIENTIFIC RESEARCH' MEANS ANY ACTIVITIES F OR THE EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SC IENCE INCLUDING AGRICULTURE, ANIMAL HUSBANDRY OR FISHERIES; (II) REFERENCES TO EXPENDITURE INCURRED ON SCIENTIF IC RESEARCH INCLUDE ALL EXPENDITURE INCURRED FOR THE PROSECUTION, OR THE PR OVISION OF FACILITIES FOR THE PROSECUTION, OF SCIENTIFIC RESEARCH, BUT DO NOT INC LUDE ANY EXPENDITURE INCURRED IN THE ACQUISITION OF RIGHTS IN, OR ARISIN G OUT OF, SCIENTIFIC RESEARCH; (III) REFERENCES TO SCIENTIFIC RESEARCH RELATED TO A BUSINESS OR CLASS OF BUSINESS INCLUDE (A) ANY SCIENTIFIC RESEARCH WHICH MAY LEAD TO OR FA CILITATE AN EXTENSION OF THAT BUSINESS OR, AS THE CASE MAY BE, ALL BUSINESSES OF THAT CLASS; (B) ANY SCIENTIFIC RESEARCH OF A MEDICAL NATURE WHI CH HAS A SPECIAL RELATION TO THE WELFARE OF WORKERS EMPLOYED IN THAT BUSINESS OR , AS THE CASE MAY BE, ALL BUSINESSES OF THAT CLASS; 4.7. IN THE BACKGROUND OF THESE TWO APPLICABLE PROV ISIONS, WE HAVE NOTICED THAT THE A.O.S MAIN CONCERN WAS THAT WHEN THE LAW PRESCRIBES RESEARCH TO BE DONE IN-HOUSE THEN THE WEIGHTED DE DUCTION SHOULD BE ALLOWED TO THAT EXTENT ONLY. ACCORDING TO HIM AS P ER SETTLED PROPOSITION OF LAW NO WORD IS SUPERFLUOUSLY USED IN A STATUTE B OOK. BECAUSE OF THIS MAIN REASON OF DISALLOWANCE, WE HAVE EXAMINED THE T ERM IN-HOUSE WHICH CAN BE TERMED, IN THE PRESENT CONTEXT, THAT BY UTILIZING THE STAFF OF AN ORGANIZATION OR BY UTILIZATION OF RESOURCES OF T HE ORGANIZATION IF A RESEARCH IS CONDUCTED WITHIN THE ORGANIZATION; RATH ER THAN UTILIZATION OF EXTERNAL RESOURCES OR STAFF; THEN IT CAN BE CALLED AS IN- HOUSE RESEARCH . TO FURTHER ELABORATE; SAY FOR AN EXAMPLE A SHIP IS BUILT IN-HOUSE IN A DOCK-YARD DOES NOT MEAN THAT ALL THE COMPONENT HAVE TO BE MADE WITHIN THE FOUR-WALLS OF A SHIP-YARD. AN IN-HOUSE JOB IS THAT WHEN ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 24 - A JOB IS DONE WITHIN THE ORGANIZATION AND NOT BY AN Y OTHER ORGANIZATION. THE CORPORATES THUS DEPEND UPON THEIR OWN RESEARCH DEVELOPMENT TO BE AN INSIDE-JOB. TO INNOVATE NEW PRODUCTS SUCH COR PORATES FEEL THAT INSIDE-JOB IS MORE DEPENDABLE. THEREFORE, AN INT ERNAL RESEARCH IS DISTINGUISHABLE FROM EXTERNAL RESEARCH. FOR DOING INTERNAL RESEARCH THERE CAN BE A POSSIBILITY TO MOBILIZE SOME EXTERNAL RESO URCES. BUT THAT EXTERNAL MOBILIZATION IS ONLY A PART OF THE ENTIRE IN-HOUSE RESEARCH. 4.8. IF WE CLOSELY EXAMINE THE LANGUAGE USED IN SEC TION 35(2AB)(1) ITS SAYS, QUOTE INCURS ANY EXPENDITURE ON SCIENTIFIC RESEARCH ON IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY , UNQUOTE. THE SIGNIFICANCE IS THAT THE STATUTE HAS USED THE TERMINOLOGY ON IN-HOUSE . AS PER THE DICTIONARY, MEANING OF THE WORD ON MEANS (I) IN CONTACT WITH AND SUPPORTED BY A SURFACE, (II) TO A POSITION IN CONTACT WITH SUCH A SURFACE OF, (III) IN A CONDITION OR PROCESS OF, (IV) TOWARDS OR TO, (V) DI RECTED TOWARDS, (VI) IN THE DIRECTION OF, (VII) APPLIED TO, (VIII) CLOSE TO , BESIDE, (IX) EXACTLY OR VERY NEARLY AT (X) AT THE TIME, DATE OR OCCASION OF , (XI) ENGAGED IN AND (XII) WITH RESPECT TO. THEREFORE, TO UNDERSTAND TH E INTENTION OF USING THE WORD ON WE CAN SAY THAT SCIENTIFIC RESEARCH WITH RESPECT TO IN-HOUSE RESEARCH AND DEVELOPMENT. WE CAN ALSO READ IN THI S MANNER THAT ANY EXPENDITURE ON SCIENTIFIC RESEARCH ENGAGED IN AN IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY. WE CAN ALSO READ THE SEN TENCE IN THIS MANNER THAT ANY EXPENDITURE ON SCIENTIFIC RESEARCH DIRECTED TOWARDS IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY. THEREFORE, THE LANGUAGE OF THIS SECTION DO NOT SUGGEST THAT ANY EXPENDITURE ON SCIE NTIFIC RESEARCH SHOULD BE WITHIN THE IN-HOUSE RESEARCH AND DEVELOPMENT. T HE LANGUAGE DO NOT SUGGEST THAT THE RESEARCH IS TO BE CONDUCTED WITHIN FOUR WALLS OF AN ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 25 - UNDERTAKING. HAD THE LEGISLATURE INTENDED TO RESTR ICT THE RESEARCH WITHIN THE FOUR-WALLS OF A COMPOUND, THEN THE POSSIBLE TER MINOLOGY COULD BE THAT ANY EXPENDITURE ON SCIENTIFIC RESEARCH BY A I N-HOUSE RESEARCH AND DEVELOPMENT FACILITY. THEREFORE BY USING THE WORD BY THE MEANING GETS CHANGED AND THEN IT CAN BE READ THAT THROUGH T HE ACTION OR MEANS OF IN-HOUSE RESEARCH THE EXPENDITURE IS INCURRED. WE ARE OF THE VIEW THAT CLINICAL TRIAL IS ONE OF T HE VARIOUS STEPS INVOLVED IN A SCIENTIFIC RESEARCH SPECIALLY FOR THE DEVELOPMENT IN A NEW DRUG. FOR THE PURPOSE OF CLINICAL TRIAL A PHARMAC EUTICAL COMPANY IS REQUIRED TO SET UP A IN-HOUSE RESEARCH FACILITY. T O CONDUCT THE RESEARCH THE QUALIFIED TEAM OF SCIENTISTS MAY HAVE TO COLLEC T DATAS FROM SEVERAL RESOURCES, BOTH, WITHIN THE PREMISES OR OUTSIDE TH E PREMISES. BUT THE DATAS SO COLLECTED BY THEM IS TO BE BROUGHT INTO THE IN-HOUSE RESEARCH FACILITY AND ON THE BASIS OF THOSE COLLECTED DATAS OR CLINI CAL TRIALS CARRIED OUT THE TEAM OF EXPERTS THEREAFTER ARRIVED AT A RES ULT. THEREFORE, FOR THE PURPOSE OF CONDUCTING SCIENTIFIC RESEARCH THE REQU IREMENT IS THAT IN- HOUSE RESEARCH AND DEVELOPMENT FACILITY IS TO BE CR EATED OR ESTABLISHED BY AN ORGANIZATION. EVEN BY THE INTRODUCTION OF EX PLANATION THE SCOPE OF EXPENDITURE ON SCIENTIFIC RESEARCH WAS DEFINED WH ICH IS REQUIRED TO BE IN RELATION TO DRUG AND PHARMACEUTICAL AND THUS INC LUDE EXPENDITURE INCURRED ON CLINICAL DRUG TRIAL. IN THE COMPILATIO N, THE ASSESSEE HAS PLACED SEVERAL APPROVALS THROUGH WHICH THE DIRECTOR ATE GENERAL OF HEALTH SERVICES HAS ACCEPTED THE BIO-EQUIVALENCE RE PORT OF THE STUDIES IN RESPECT OF NEW DRUGS FORM THE ASSESSEES LABORATORY . ONE OF THE APPROVAL IS FROM THE DRUG CONTROLLER GENERAL (INDIA). LIKE WISE, DIRECTORATE GENERAL OF HEALTH SERVICES (DRUG TRIAL SECTION), NI RMAN BHAVAN, NEW ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 26 - DELHI HAS INFORMED THAT THE SAID DIRECTORATE CONTIN UED TO ACCEPT THE PROTOCOLS AND THE REPORT OF THE STUDIES CONDUCTED B Y THE ASSESSEES LABORATORY. BEFORE US, THERE WAS A RECOGNITION OF RENEWAL OF SCIENTIFIC AND INDUSTRIAL RESEARCH ISSUED BY THE GOVERNMENT OF INDIA, MINISTRY OF SCIENCE AND TECHNOLOGY. THE MINISTRY OF SCIENCE AN D TECHNOLOGY HAS EXTENDED AN APPROVAL AS R&D COMPANY U/S.80-IB(8A) O F THE I.T.ACT. NUMBER OF SUCH APPROVALS AND ACCEPTANCE OF REPORTS SUBMITTED IN RESPECT OF NEW DRUGS ARE PLACED ON RECORD. EVEN BEFORE U S, IT WAS ARGUED THAT IN THE CASE CLARIS LIFE SCIENCES REPORTED AT 221 CT R 301(GUJ) :: 326 ITR 251, THE HON'BLE GUJARAT HIGH COURT HAS OPINED THAT ONCE THE SCIENTIFIC RESEARCH FACILITY IS APPROVED, THEN THE EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT FACILITY HAS TO BE ALLOWED FOR WEIG HTED DEDUCTION U/S.35(2AB) OF THE I.T.ACT. UNDER THE TOTALITY OF THE CIRCUMSTANCES OF THE CASE AND IN THE LIGHT OF THE MATERIAL PLACED BE FORE US AND THE DISCUSSION MADE HEREINABOVE, WE ARE OF THE CONSCIEN TIOUS VIEW THAT THE CONDITIONS AS PRESCRIBED U/S.35(2AB)(1) OF THE I.T. ACT HAS BEEN COMPLIED WITH BY THIS ASSESSEE , THEREFORE, ENTITLED FOR THE PRESCRIBED DEDUCTION. GROUND NO.4 OF THE ASSESSEE IS, THEREFORE, ALLOWED. 5. GROUND NO.5 READS AS UNDER :- 5. THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN MAKING A DISALLOWANCE OF RS.118,84,177/- U/S.14A. 5.1. ON PERUSAL OF THE COMPUTATION OF INCOME, IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS CLAIMED DIVIDEND INCOME OF RS.37,68,26,721/- AS EXEMPTED INCOME. AS PER AO, NO EXPENDITURE WAS OFFERED FOR DISALLOWANCE U/S.14A. IT WAS EXPLAINED THAT THE IN VESTMENT IN EQUITY ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 27 - SHARES WAS OUT OF THE OWN FUNDS. IT WAS INFORMED T HAT THE ASSESSEE HAD SHARE CAPITAL AND FREE RESERVES AS OWN FUNDS WHICH WERE USED FOR THE INVESTMENT IN THE EQUITY SHARES. IT WAS ALSO INFOR MED THAT A PUBLIC ISSUE WAS MADE BY THE ASSESSEE COMPANY IN THE MONTH OF FE BRUARY/MARCH- 2000. THE ASSESSEE HAS PLACED RELIANCE ON HERO CYCLES (323 ITR 518) [P&H]. IT WAS ALSO CONTENDED THAT THE PROVISIONS OF SECTI ON 14A(2) WERE EFFECTIVE FROM A.Y. 2007-08. HOWEVER, AS PER AO T HE SAID INVESTMENT ACTIVITY WAS AN INDEPENDENT ACTIVITY OF THE ASSESSE E. THE AO HAS PLACED RELIANCE ON RULE 8D AND HELD THAT NOT ONLY THE DIRE CT EXPENDITURE RELATING TO EXEMPT INCOME BUT ALSO THE INDIRECT EXPENDITURE LIKE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME IS TO BE COMPUTED AND THEN ONE HALF PERCENT OF THE VALUE OF INVESTMENT IS TO BE CATEGORIZED AS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. BY APPLYING THE SAID RULE, THE AO HAS WORKED OUT SUCH EXPENDITURE AT RS. 118,84,177/- U/S.14A OF IT ACT. AS FAR AS THE DRP IS CONCERNED, THE ACTION OF THE AO WAS CONFIRMED. 5.2. FROM THE SIDE OF THE ASSESSEE, LD.COUNSEL MR.P ATEL HAS REITERATED THAT THE RELEVANT INVESTMENT HAD FACTUALLY BEEN MAD E OUT OF ASSESSEES OWN FUNDS WHICH WERE IN THE SHAPE OF SHARE CAPITAL AND FREE RESERVES. LD.AR HAS PLACED RELIANCE ON THE FOLLOWING CASE LAW S:- SL.NO(S). IN THE CASE OF.. REPORTED IN/ITA NO 1. GUJARAT POWER CORPORATION LTD. TAX APPEAL NO.1587 OF 2009 DATED 28-03-2011 2. GODREJ & BOYCE MFG. CO.LTD. 234 CTR 1 (BOM.) 3. WINSOME TEXTILE 319 ITR 204 (P&H) ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 28 - 4. SHAPOORJI PALLONJI 318 ITR 417 (BOM.) 5.3. LD.AR HAS ALSO PLACED RELIANCE ON AN UNREPORTE D DECISION OF HONBLE GUJARAT HIGH COURT PRONOUNCED IN THE CASE O F CIT VS. GUJARAT POWER CORPORATION (SUPRA), WHEREIN IT WAS HELD AS U NDER:- HAVING THUS HEARD LEARNED COUNSEL FOR BOTH SIDES A ND HAVING PERUSED THE ORDERS ON RECORD, WE FIND THAT IN THE P RESENT CASE ASSESSEE HAD SUFFICIENTLY EXPLAINED ITS INVESTMENT FOR BORROWED FUNDS POINTING OUT THAT LOAN WAS OBTAINED IN ASSESS MENT YEAR 1997-1998 AND ITS MAJORITY OF THE INVESTMENT FOR TA X FREE SECURITY WERE MADE BEFORE THE SAID PERIOD. ONLY A SMALL PORT ION OF INVESTMENT WAS MADE SUBSEQUENTLY. ASSESSEE HAD DEM ONSTRATED THAT IT HAD OTHER SOURCES OF INVESTMENT AND THAT TH EREFORE, ACCORDING TO ASSESSEE NO PART OF THE BORROWED FUND COULD BE STATED TO HAVE BEEN DIVERTED TO EARN TAX FREE INCOME. WHE N CIT(APPEALS) AND TRIBUNAL BOTH ON FACTS IN THE PRESENT CASE FOUN D THAT THE ASSESSEE DID NOT INVEST BORROWED FUND FOR EARNING I NTEREST FREE INCOME, WE ARE OF THE VIEW THAT NO APPLYING PROVISI ON OF SECTION 14A OF THE ACT FOR TAXING SUCH INTEREST WAS JUSTIFI ED. NO QUESTION OF LAW THEREFORE, IS ARISING FOR OUR CONSIDERATION. 5.4. FROM THE SIDE OF THE REVENUE, LD.DRS MR. V.K.G UPTA & MR. K.MADHUSUDAN HAVE ARGUED THAT THE ONUS WAS ON THE A SSESSEE TO ESTABLISH THAT THE IMPUGNED INVESTMENT WAS ONLY MADE OUT OF T HE NON-INTEREST BEARING OWN FUNDS. ACCORDING TO THEM THE FUNDS SO GENERATED SHOULD HAVE BEEN USED FOR THE EXPANSION OF THE BUSINESS. IN RESPECT OF BOTH DIRECT AND INDIRECT EXPENSES THE PROVISIONS OF RULE -8D WERE CORRECTLY INVOKED BY THE A.O. A RELIANCE HAS ALSO BEEN PLAC ED ON HARYANA LAND RECLAMATION AND DEVELOPMENT CORPORATION 302 ITR 218 FOR THE LEGAL PROPOSITION THAT IN THE ABSENCE OF ANY EVIDENCE ON RECORD TO SHOW THAT THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 29 - PAYMENT OF BONUS, GRATUITY AND PF WERE MADE IN RESP ECT OF THE STAFF ENGAGED IN THE ASSESSEES BUSINESS OPERATION AND NO T IN RESPECT OF THE STAFF ENGAGED FOR CARRYING OUT THE WORK OF AGRICULT URE FARM, THEREFROM GENERATED EXEMPT INCOME, DEDUCTION THEREOF HELD AS NOT ALLOWABLE IN VIEW OF SECTION 14A OF IT ACT. 5.5. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES , IT IS EVIDENT FROM THE RECORD AVAILABLE BEFORE US THAT ON ONE HAND THE DIRECT NEXUS OF UTILIZATION OF ASSESSEES OWN FUNDS TOWARDS INVESTM ENT IN THE IMPUGNED EQUITY SHARES WAS NOT ESTABLISHED AND ON THE OTHER HAND FROM THE SIDE OF THE REVENUE EQUALLY IT WAS NOT PLACED ON RECORD TH AT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE THE A.O. WAS NOT SATISFIED WITH THE CLAIM BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE PROVISIONS OF RULE- 8D(2) IS TO BE APPLIED IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE IN ANY PARTICULAR INCOME CLAI MED TO BE EXEMPT INCOME. AN ANOTHER QUESTION HAS ALSO BEEN RAISED T HAT FOR THE YEAR UNDER CONSIDERATION I.E. FOR A.Y. 2006-07 THE PROVISIONS OF RULE-8D ARE NOT APPLICABLE. EVEN THEN, THIS CONTROVERSY HAS NOW BE EN RESOLVED BY HON'BLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. MUMBAI VS. DY.CIT IN INCOME TAX APPEAL NO.626 OF 2010 AND WRIT PETITION NO.758 OF 2010 ORD ER DATED 12/08/2010 [ NOW REPORTED AS 328 ITR 81(BOM)]. IN THIS JUDGEMENT AT THE END, THE HON'BLE COURT HAD RECAPITULATED THE CO NCLUSION AND PRONOUNCED THAT A FINDING IS REQUIRED THAT WHETHER THE INVESTMENT IN ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 30 - SHARES IS MADE OUT OF OWN FUNDS OR OUT OF BORROWED FUNDS. A NEXUS IS REQUIRED TO BE ESTABLISHED BETWEEN THE INVESTMENTS AND THE BORROWINGS. IN SECTION 14A OF THE ACT EXPENDITURE INCURRED I N RELATION TO EXEMPTED INCOME IS TO BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS SATISFIED THAT THE EXPENDITURE CLAIMED BY THE ASSES SEE PERTAINED TO THE SAID EXEMPTED INCOME. RATHER, THE HONBLE COURT WAS VERY SPECIFIC THAT IN CASE, IF NO SUCH EXERCISE WAS CARRIED OUT BY THE ASSESSING O FFICER THEN THE MATTER IS TO BE REMANDED BACK FOR AFRESH I NVESTIGATION. IT HAS ALSO BEEN MADE CLEAR THAT THE PROVISO TO SECTIO N 14A OF THE ACT WAS EFFECTIVE FROM 2001-02. BUT THE HON'BLE COURT HAS A LSO POINTED OUT THE IMPORTANCE OF RULE 8D OF THE I.T.RULES, 1962. IT W AS MADE CLEAR THAT SUB-SECTION (1) TO SECTION 14A WAS INSERTED WITH RE TROSPECTIVE EFFECT FROM 01/04/1962, HOWEVER, SUB-SECTIONS (2) & (3) WERE MA DE APPLICABLE WITH EFFECT FROM 01/04/2007. THE PROVISO WAS INSERTED WI TH RETROSPECTIVE EFFECT FROM 11/05/2001, HOWEVER RULE 8D WAS INSERTE D BY THE INCOME TAX (FIFTH AMENDMENT), RULES, 2008 BY PUBLICATION IN THE GAZETTE DATED 24/03/2008, RELEVANT FINDINGS ARE REPRODUCED BELOW: - A) THE ITAT HAD RECORDED A FINDING IN THE EARLIE R ASSESSMENTS THAT THE INVESTMENTS IN SHARES AND MUTUAL FUNDS HAVE BEE N MADE OUT OF OWN FUNDS AND NOT OUT OF BORROWED FUNDS AND THAT TH ERE IS NO NEXUS BETWEEN THE INVESTMENTS AND THE BORROWINGS. H OWEVER, IN NONE OF THOSE DECISIONS WAS THE DISALLOWABILITY OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME EARNED OUT OF INVESTMENTS MADE OUT OF OWN FUNDS CONSIDERED. MOREOVER, UNDER SECTION 14A, EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME C AN BE DISALLOWED ONLY IF THE ASSESSING OFFICER IS NOT SAT ISFIED WITH THE CORRECTNESS OF THE EXPENDITURE CLAIMED BY THE ASSES SEE. IN THE PRESENT CASE, NO SUCH EXERCISE HAS BEEN CARRIED OUT AND, THEREFORE, THE TRIBUNAL WAS JUSTIFIED IN REMANDING THE MATTER. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 31 - B) SECTION 14A WAS INTRODUCED BY THE FINANCE ACT 20 01 WITH RETROSPECTIVE EFFECT FROM 1 APRIL 1962. HOWEVER, I N VIEW OF THE PROVISO TO THAT SECTION, THE DISALLOWANCE THEREUNDE R COULD BE EFFECTIVELY MADE FROM ASSESSMENT YEAR 2001-2002 ONW ARDS. THE FACT THAT THE TRIBUNAL FAILED TO CONSIDER THE APPLI CABILITY OF SECTION 14A IN ITS PROPER PERSPECTIVE, FOR ASSESSMENT YEAR 2001-2002 WOULD NOT BAR THE TRIBUNAL FROM CONSIDERING DISALLO WANCE UNDER SECTION 14A IN ASSESSMENT YEAR 2002-2003. C) THE DECISIONS REPORTED IN SRIDEV ENTERPRISES (SUPRA), MUNJAL SALES CORPORATION (SUPRA) AND RADHASOAMI SATSANG (SUPRA) HOLDING THAT THERE MUST BE CONSISTENCY AND DEFINITE NESS IN THE APPROACH OF THE REVENUE WOULD NOT APPLY TO THE FACT S OF THE PRESENT CASE, BECAUSE OF THE MATERIAL CHANGE INTRODUCED BY SECTION 14A BY WAY OF STATUTORY DISALLOWANCE IN CERTAIN CASES. TH ERE, THE DECISIONS OF THE TRIBUNAL IN THE EARLIER YEARS WOUL D HAVE NO RELEVANCE IN CONSIDERING DISALLOWANCE IN ASSESSMENT YEAR 2002- 2003 IN THE LIGHT OF SECTION 14A OF THE ACT. 73. FOR THE REASONS WHICH WE HAVE INDICATED, WE HA VE COME TO THE CONCLUSION THAT UNDER SECTION 14A(1) IT IS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE IN RELATION TO THE EARNING OF INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE ACT AND IF SO TO QUANTIFY THE EXTE NT OF THE DISALLOWANCE. THE ASSESSING OFFICER WOULD HAVE TO ARRIVE AT HIS DETERMINATION AFTER FURNISHING AN OPPORTUNITY TO TH E ASSESSEE TO PRODUCE ITS ACCOUNTS AND TO PLACE ON THE RECORD ALL RELEVANT MATERIAL IN SUPPORT OF THE CIRCUMSTANCES WHICH ARE CONSIDERE D TO BE RELEVANT AND GERMANE. FOR THIS PURPOSE AND IN LIGHT OF OUR OBSERVATIONS MADE EARLIER IN THIS SECTION OF THE JUDGMENT, WE DEEM IT APPROPRIATE AND PROPER TO REMAND THE PROCEEDINGS BACK TO THE ASSESS ING OFFICER FOR A FRESH DETERMINATION. CONCLUSION : 74. OUR CONCLUSIONS IN THIS JUDGMENT ARE AS FOLLOWS ; ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 32 - I) DIVIDEND INCOME AND INCOME FROM MUTUAL FUNDS FALLIN G WITHIN THE AMBIT OF SECTION 10(33) OF THE INCOME TA X ACT 1961, AS WAS APPLICABLE FOR ASSESSMENT YEAR 2002-03 IS NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASS ESSEE. CONSEQUENTLY, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, BY VIRTUE OF THE PROVISIONS OF SECTION 14A (1); II) THE PAYMENT BY A DOMESTIC COMPANY UNDER SECTION 115 O(1) OF ADDITIONAL INCOME TAX ON PROFITS DECLARED, DISTR IBUTED OR PAID IS A CHARGE ON A COMPONENT OF THE PROFITS OF T HE COMPANY. THE COMPANY IS CHARGEABLE TO TAX ON ITS PROFITS AS A DISTINCT TAXABLE ENTITY AND IT PAYS TAX IN DIS CHARGE OF ITS OWN LIABILITY AND NOT ON BEHALF OF OR AS AN AGENT F OR ITS SHAREHOLDERS. IN THE HANDS OF THE SHAREHOLDER AS T HE RECIPIENT OF DIVIDEND, INCOME BY WAY OF DIVIDEND DO ES NOT FORM PART OF THE TOTAL INCOME BY VIRTUE OF THE PROV ISIONS OF SECTION 10(33). INCOME FROM MUTUAL FUNDS STANDS ON THE SAME BASIS; III) THE PROVISIONS OF SUB SECTIONS (2) AND (3) OF SECTI ON 14A OF THE INCOME TAX ACT 1961 ARE CONSTITUTIONALLY VALID; IV) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES A S INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES 2008 ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PARTICULARLY SUB SECTION (2) AND DO NOT OFFEND ARTI CLE 14 OF THE CONSTITUTION; V) THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES W HICH HAVE BEEN NOTIFIED WITH EFFECT FROM 24 MARCH 2008 S HALL APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09; VI) EVEN PRIOR TO ASSESSMENT YEAR 2008-09, WHEN RULE 8D WAS NOT APPLICABLE, THE ASSESSING OFFICER HAS TO ENFORC E THE PROVISIONS OF SUB SECTION (1) OF SECTION 14A. FOR THAT PURPOSE, THE ASSESSING OFFICER IS DUTY BOUND TO DET ERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 33 - INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASON ABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FA CTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTU NITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE R ECORD; VII) THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 SHALL S TAND REMANDED BACK TO THE ASSESSING OFFICER. THE ASSESS ING OFFICER SHALL DETERMINE AS TO WHETHER THE ASSESSEE HAS INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RE LATION TO DIVIDEND INCOME / INCOME FROM MUTUAL FUNDS WHICH DO ES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION, THE ASSESSING OFFICER SHALL PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ( EMPHASIS GIVEN) ON THE BASIS OF ABOVE DECISION, WE ARE ALSO OF TH E VIEW THAT IT DEPENDS ON THE FACTS OF EACH CASE. ADMITTEDLY, T HE FACT OF THE PRESENT CASE WAS THAT THE ASSESSING OFFICER HAD NOT ENQUIRE D THE ISSUE IN THE LIGHT OF THE ABOVE LEGAL PRONOUNCEMENT. SPECIALLY THE PRO NOUNCEMENT OF THE HON'BLE BOMBAY HIGH COURT WAS NOT AVAILABLE AT THAT TIME, HENCE, THE ASSESSING OFFICERS ASSESSMENT ORDER WAS DEVOID OF MERITS AS ALSO THE LAW APPLICABLE. NOW WE HAVE GOT CERTAIN GUIDELINES , THOUGH CAN NOT BE SAID TO BE EXHAUSTIVE OR COMPLETE, BUT ON THESE LIN ES, THE ASSESSING OFFICER IS EXPECTED HENCEFORTH TO COMPUTE THE CORRE CT DISALLOWANCE, NEEDLESS TO SAY AFTER PROVIDING AN ADEQUATE OPPORTU NITY OF HEARING TO THE ASSESSEE. THEREFORE, THE MATTER IS RESTORED TO BE DECIDED AFRESH IN THE LIGHT OF THIS PRECEDENT, HENCE THIS GROUND NO.5OF THE ASSESSEE MAY BE TREATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 34 - 6. GROUND NOS.6 & 7 READ AS UNDER :- 6. THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN RESTRICTING THE DEDUCTION U/S.80IC IN RESPECT OF BADDI UNIT TO RS.45.92 CRORES AS AGAINST THE APPELLANTS CLAIM OF RS.116.48 CRORES. 7. THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN RESTRICTING THE DEDUCTION U/S.80IB IN RESPECT OF GOA UNIT TO RS.17,80,758/- AS AGAINST THE APPELLANTS CLAIM OF RS.91,15,766/-. 6.1. BOTH THESE GROUNDS HAVE COMMON ISSUE AS WELL A S MUTUALLY ARGUED BY SPECIAL COUNSEL SHRI G.C.SRIVASTAVA THEREFORE CO NSOLIDATED AND HEREINBELOW DECIDED ACCORDINGLY. IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS CLAIMED A DEDUCTION OF RS.116,48,51,85 3/- U/S.80IC OF IT ACT IN RESPECT OF A UNIT SITUATED AT BADDI, HIMACHAL PRADESH . IT WAS THE SECOND YEAR OF THE UNIT. THE ASSESSEE HAS CLAI MED EXEMPTION AT 100% OF THE PROFIT OF THE SAID UNIT. AN ANOTHER FA CT HAS ALSO BEEN NOTED BY THE AO THAT THE TOTAL TURNOVER OF THE SAID UNIT AS PER P&L ACCOUNT WAS AT RS.199,13,22,749/-. THE AO HAS ALSO COMPARED THE OVERALL FINANCIAL POSITION OF THE ASSESSEE-COMPANY, HENCE IN THIS REG ARD IT WAS NOTED THAT THE TOTAL TURNOVER OF THE ASSESSEE-COMPANY WAS AT R S.1488.1 CRORES, ON WHICH PROFIT BEFORE TAX AS PER BOOKS WAS DECLARED A T RS.176.8 CORES. THE AO HAS ALSO COMPARED THE PERCENTAGE OF PROFIT OF TH E BADDI UNIT WITH OTHER UNITS AS ALSO THE OVERALL PERCENTAGE OF PROFI T OF THE COMPANY BY REPRODUCING FOLLOWING FIGURES:- ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 35 - ( ` IN MILLION) BADDI GOA ANTI- CANCER* GOA AGIOLAX GOA CONTRACT MEDITA ALL OTHER UNITS (SBUS) TAKEN TOGETHER ASSESSEE COMPANY- WHOLE TURNOVER BOOK PROFITS %AGE OF PROFITS TO TURNOVER 1991 1168 58.67 32 3 8.15 147 2 1.19 96 30 31.35 12614 565 4.48 14881 1768 11.88 CLAIM U/S.80IC 1165 0 0 0 0 1164.85 CLAIM U/S 80IB 0 0 6.3 9.1 0 15.4 6.2. THIS WAS THE START POINT OF THE CONTROVERSY. T HAT AS PER THE ALLEGATION OF THE AO, THE ASSESSEE HAD SHOWN ABNORMALLY HIGHER PROFIT @ 58.66% FOR THE BADDI UNIT. THAT THE SAID PROFIT WAS CLAIMED AS EXEMPT U/S.80IC OF IT ACT. IN THIS CONNECTION AN A NOTHER OBSERVATION OF THE AO WAS THAT IN RESPECT OF OTHER UNITS ON WHICH THERE WAS NO ELIGIBILITY OF CLAIM OF DEDUCTION EITHER U/S.80IC O R U/S.80IB, THE RATE OF PROFIT WAS SHOWN AT A VERY LOW FIGURE. 6.3. THE AO HAS, THUS MADE OUT THE CASE AGAINST THE ASSESSEE IN THE FOLLOWING MANNER BY RAISING A QUERY AS UNDER:- PLEASE REFER TO YOUR CLAIM U/S.80IC FOR BADDI UNIT AND THREE UNITS AT GOA FOR CLAIM U/S.80IB. IN THIS CONNECTIO N, IT IS SEEN THAT PROFITS EARNED FROM THESE UNITS COMPRISES OF MANUFA CTURING PROFIT, PROFIT EARNED FROM MARKETING OF PRODUCTS AN D PROFIT ON ACCOUNT OF BRAND VALUE. PLEASE EXPLAIN WHY THE DEDUCTIONS U/S.80IC & 80IB CLAIMED FOR THESE UNITS BE NOT RESTRICTED ONLY FOR MANUFACTURING PROFITS. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 36 - 6.4. IN RESPECT OF THE COMPUTATION OF DEDUCTION U/S .80IC FOR BADDI UNIT, AO HAS ADMITTEDLY DESCRIBED THAT CERTAIN EXPENDITURE , SUCH AS, MANUFACTURING EXPENSES AND DEPRECIATION WERE THE ACTUAL EXPENSES INCURRED BY THE UNIT ITSELF AND IT WAS A DIRECT COST INCURR ED AT THE BADDI UNIT DURING THE YEAR. HOWEVER, THE MARKETING EXPENSES , CORPORATE EXPENSES , INTEREST AND FINANCIAL CHARGES WERE THE INDIRECT COST NOT INCURRED AT THE BADDI UNIT DURING THE YEAR BUT BY T HE HEAD OFFICE AND THOSE WERE DEBITED TO P&L A/C OF THIS UNIT IN PROPORTION TO THE SALES RATIO . THE BASIS OF ALLOCATION, AS NOTED BY THE A.O., WA S THE BADDI SALES OVER THE TOTAL SALES OF THE COMPANY. FOR MARKETING EXP. IT WAS 34.60% OF SALES RATIO AND FOR CORPORATE EXPENSES IT WAS 15 .20%. A CHART WAS REPRODUCED BY THE AO IN THIS REGARD AND ON THAT BAS IS IT WAS OBSERVED THAT THE DIRECT COST ALLOCATED FOR WORKING OUT THE PROFITS WERE THE MANUFACTURING COST INCURRED DURING THE YEAR AND THE DEPRECIATION OF THE ASSETS DIRECTLY USED IN THE SAID UNIT. THE OTHER EX PENSES; NAMELY, MARKETING EXPENSES, CORPORATE EXPENSES AND INTEREST EXPENSES WHICH WERE INCURRED BY THE HEAD OFFICE WERE ALLOCATED ON THE SALES RATIO BASIS. THE AO HAS ALSO COMPARED THAT IN RESPECT OF CERTAIN OTHER UNITS, THE EXPENDITURE HAS NOT BEEN ALLOCATED. AS PER THE ALLE GATION, NO EXPENDITURE WHATSOEVER HAD BEEN ALLOCATED TO THE BADDI UNIT ON THE GROUND THAT THE SAID UNIT HAD NO BUSINESS CONNECTION WITH OTHER DIV ISIONS. THE AO HAS MENTIONED THAT ALTHOUGH THE ASSESSEE HAD SHOWN RESEARCH EXPENSES OF RS.817 MILLION, BUT THERE WAS NO SUCH ALLOCATION. LIKEWISE, OTHER EXPENSES, SUCH AS, MARKETING EXPENSES , INCLUDING ADVERTISEMENT EXPENSES WERE CLAIMED ENTIRELY BY THE COMPANY U/S.37(1) OF IT ACT. THE AO HAS ALSO MADE OUT A CHART OF RESEARCH AND DEVELOPMENT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 37 - EXPENSES INCURRED OVER A NUMBER OF YEARS, BUT ACCOR DING TO A.O.IT WAS NOT TAKEN INTO ACCOUNT FOR BADDI UNIT. THE AOS NE XT OBSERVATION WAS THAT LIKEWISE THE ASSESSEE HAD INCURRED HUGE AMOUNT ON MARKETING EXPENSES , BUT THOSE WERE CLAIMED AS REVENUE EXPENDITURE U/S .37(1) OF IT ACT BY THE COMPANY WITHOUT ALLOCATING TO BADDI U NIT. THE AO HAS THEREFORE TRIED TO ALLEGE THAT THE EXPENSES, SUCH A S, INDIRECT COST, ADVERTISEMENT, MARKETING EXPENSES, RESEARCH & DEVEL OPMENT EXPENSES, ETC. WERE NOT ALLOCATED TOWARDS THE PROFIT OF THE B ADDI UNIT AND IN THIS MANNER THE PROFIT OF THE BADDI UNIT WAS ESCALATED T O GET HIGHER BENEFIT OF DEDUCTION U/S.80IC OF IT ACT. THE AO HAS THEN NOT ED DOWN THAT IN THE PAST THE PRODUCTS, NOW MANUFACTURED BY THE BADDI UN IT, WERE PURCHASED FROM THE OUT- SIDE MANUFACTURERS ON PRINCIPLE TO PR INCIPLE (P 2 P) BASIS. A LIST OF 27 SUCH PRODUCTS WAS REPRODUCED BY THE AO. IT WAS OBSERVED THAT THE ASSESSMENT YEAR UNDER CONSIDERATION WAS THE SEC OND YEAR OF THE ASSESSEES CLAIM FOR DEDUCTION U/S.80IC FOR BADDI U NIT. PRIOR TO SETTING UP OF THE BADDI UNIT, THE ASSESSEE WAS PURCHASING A LL THOSE 27 PRODUCTS, NOW BEEN MANUFACTURED AT BADDI, FROM THE MANUFACTU RERS ON P 2 P BASIS. THE AO HAS ALSO DELIBERATED UPON THE TRANSACTIONS C OVERED BY P 2 P BASIS, AS COMPARED TO THE TRANSACTIONS COVERED BY LOAN AN D LICENSE BASIS. AS PER A.O.S DISCUSSION LOAN & LICENSE TRANSACTION IS A JOB-WORK KIND OF SERVICE WHERE LOAN & LICENSE PARTY USES ITS MANU FACTURING FACILITY, SKILLED LABOUR, POWER ETC. TO MANUFACTURE GOODS AS PER THE SPECIFICATION OF THE PRINCIPAL. DRUG LICENSE IS OBTAINED BY THE P RINCIPAL FOR MANUFACTURING OF THE PRODUCTS AT THE PREMISES OF T HE LLP. THE PURPOSE OF THIS DISCUSSION AS PER AO WAS THAT EARLIER WHEN THE GOODS WERE PURCHASED ON P 2 P BASIS FROM THE MANUFACTURERS THE AGREED SALE PRIC E PAID ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 38 - BY THE ASSESSEE FOR THOSE PRODUCTS WAS ALTHOUGH INC LUSIVE OF THE COST OF RAW-MATERIAL, PACKING MATERIAL, MANUFACTURING EXPEN SES, TAXES, ETC. PLUS A REASONABLE AMOUNT OF PROFIT OF THE SAID MANUFACTU RER, BUT EVEN THEN THE PRICE WAS LOWER THAN THE SELLING RATE CHARGED BY BA DDI UNIT. THE AO HAS COMPARED THE PURCHASE COST INCURRED ON P 2 P BASIS WITH THE PRODUCTION COST AND SELLING RATE FROM BADDI UNIT AND THEREUPON HE HAS WORKED OUT THAT THE AVERAGE SELLING RATE WAS HIGHER OF BADDI U NIT. AS PER THE TABULATION MADE BY THE AO, UNDISPUTEDLY THE ASSESSE E USED TO EARN A GOOD MARGIN OF PROFIT WHEN PURCHASING THE GOODS FRO M MANUFACTURERS OF THOSE GOODS ON P 2 P BASIS. IN SOME OF THE PRODUCTS (FOR E.G. AT SL. NO.1 OF THE CHART; NAMELY, OCID-20-CAP) THE PURCHASE COST O N P 2 P BASIS WAS 4.27, HOWEVER, AVERAGE SELLING RATE BY THE ASSESSEE WAS 30.10 FOR F.Y. 2003-04 AND LIKEWISE FOR F.Y. 2004-05 THE PURCHASE COST ON P 2 P BASIS WAS 4.28 AND THE AVERAGE SELLING RATE WAS 30.46.THE AO HAS THUS COMPUTED THE OVERALL PERCENTAGE OF PROFIT IN RESPEC T OF THE SAID 27 PRODUCTS, WHICH WERE STATED TO BE NOW MANUFACTURED IN BADDI UNIT. FOR F.Y. 2003-04, THE ASSESSEES PERCENTAGE OF PROFIT W AS 81%( APX.) AND FOR A.Y. 2004-05 IT WAS SAID TO BE 80%( APX.). ON THE B ASIS OF THE SAID CALCULATION, IT WAS OPINED BY THE AO THAT THE YEARS PRIOR TO THE SETTING UP OF THE BADDI UNIT, THE ASSESSEE WAS HAVING A GROSS MARGIN OF ABOUT 80% FOR THOSE 27 PRODUCTS. THE AO HAS THEN MADE OUT AN ANOTHER LIST AND COMPARED THE AVERAGE SELLING RATE OF BADDI UNIT WIT H THE AVERAGE SELLING RATE OF THE PRODUCTS PURCHASED ON P 2 P BASIS. A LIST OF THOSE 27 PRODUCTS WERE REPRODUCED IN THE TABULAR FORM IN THE BODY OF ASSESSMENT ORDER, HOWEVER, FOR THE SAKE OF BREVITY, ONLY LIMITED PORT ION ( FIRST 10), JUST FOR EXAMPLE, ARE REPRODUCED BELOW:- ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 39 - SR. NO. NAME OF THE PRODUCT PACK P TO P BADDI (OWN MFG.) PURCHASE COST FROM P2P INCLUDING TAXES AVERAGE SELLING RATE BY CHL PURCHASE COST FROM P2P INCLUDING TAXES AVERAGE SELLING RATE BY CHL COST OF PRODUCTION AVERAGE SELLING RATE (RS.) (RS.) (RS.) (RS.) (RS.) (RS.) 1. OCID-20- CAP OCID-20- CAP 10 C 15C 4.27 30.10 4.28 30.46 3.94 46.49 2. ATORVA- 10 TAB 10T 11.50 54.47 11.50 55.66 6.73 54.99 3. OXALGIN DP TB 10T 2.40 10.46 1.89 11.30 1.88 13.29 4. AMLODAC- AT-TAB 10T 2.19 21.40 2.21 21.42 1.81 21.57 5. OCID-10 CAP 10C 4.39 17.17 4.56 18.59 OCID-10 CAP 15C 4.17 32.95 6. LOSACAR- H-TAB 10T 6.60 36.61 6.12 38.15 4.11 35.18 7. LOSACAR- 50 TAB 10T 6.66 34.88 5.89 36.22 4.12 35.08 8. ATORVA- 20 TAB 10T 22.14 102.33 22.13 103.49 13.14 103.57 9. ATORVA-5 TAB 10T 5.96 15.24 5.96 15.69 3.66 15.74 10. AMLODAC- 2.5MG TAB 10T 0.63 4.00 0.60 4.71 0.35 5.23 11 TO 27 TOTAL 147.58 773.51 162.92 795.19 122.47 898.00 PROFITS 625.93 632.27 775.53 %AGE PROFIT ON AVERAGE SP 80.92 79.51 86.36 6.5. ON ACCOUNT OF ABOVE CHART, THE AO HAS THUS DEM ONSTRATED THAT THE ASSESSEE WAS HAVING A GROSS MARGIN OF PROFIT OF ABO UT 80% IN RESPECT OF THOSE 27 PRODUCTS, HOWEVER, AFTER THE BADDI UNIT WA S STARTED, THE PROFIT OF MARGIN WAS INCREASED UPTO 86% OF THE SAID UNIT. A S PER AO, AFTER THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 40 - SETTING UP OF THE MANUFACTURING UNIT AT BADDI, THE ASSESSEE HAS EARNED A FURTHER PROFIT OF 6% MORE. THEREAFTER, THE AO HAS FURTHER ELABORATED THE IMPACT OF DECLARING ADDITIONAL PROFI T THAT IT WAS JUST FOR THE PURPOSE OF CLAIMING HIGHER DEDUCTION U/S.80IC, WHICH ACCORDING TO HIM WAS ESCALATED DUE TO NON-ALLOCATION OF SOME OF THE COST INCURRED BY THE ASSESSEE-COMPANY. THE AO HAS DEVOTED FEW PARAG RAPHS (I.E.PARA- 8.26 TO PARA-8.31) IN RESPECT OF (I) MARKETING NET WORK, (II) SELLING COST, (III) DISTRIBUTION COST, (IV) ADMINISTRATIVE WORK, (V) BRAND VALUE, ETC. THE AO HAS DISCUSSED THAT SUCH COSTS WHICH WERE HANDLED BY OTHER DIVISIONS OF THE ASSESSEE-COMPANY HAVE NOT BEEN ALLOCATED TO THIS UNIT. ACCORDING TO HIM, WHEN THE GOODS ARE TRANSFERRED FROM BADDI U NIT TO THE MARKETING DIVISION FOR SELLING THE PRODUCTS, IT IS THE MANUFACTURING COST AND A REASONABLE AMOUNT OF PROFIT WHICH SHOULD HAVE BEEN CHARGED. THE REASONING GIVEN BY THE AO, FOR E.G. IS AS UNDER :- 8.26. THUS, THIS ADDITIONAL PROFIT IS THE ONLY PR OFIT WHICH IT HAS EARNED BY SETTING UP THE UNIT AT BADDI. IT IS TO BE NOTED THAT ALL MARKETING, SELLING AND DISTRIBUTION AND ADMINISTRAT IVE WORK ARE BEING HANDLED BY OTHER DIVISIONS FOR WHICH THE ASSE SSEE HAS DONE COST ALLOCATION. SO, WHEN THE GOODS ARE TRANSFERRED FROM THE BADI UNIT TO THE MARKETING DIVISION FOR SELLING THE PRODUCT, IT IS THE MANUFACTURING COST AND A REASONABLE AMOUNT OF P ROFIT WHICH SHOULD BE CHARGED BY THE BADDI UNIT. IN THE INSTANT CASE, THE BRANCH TRANSFER PRICE CAN BE THE PRICE WHICH THE P2 P SUPPLIER WAS CHARGING FOR THE PRODUCTS, BECAUSE IN ALL THE PRODU CTS, THERE IS A COST SAVING BY THE ASSESSEE ON MANUFACTURING THE GO ODS AT BADDI. FOR EXAMPLE, FOR ITEM NO2 OF THE CHART, WHERE THE C OST OF PRODUCTION IS RS.6.73 THE BRANCH TRANSFER COST CAN BE THE PRICE CHARGED BY THE P2P SUPPLIER FOR THE SAME PRODUCT I. E. RS.11.5 SIMILARLY FOR ITEM NO3, WHERE THE COST OF PRODUCTIO N IS RS.1.88 THE BRANCH TRANSFER COST CAN BE THE PRICE CHARGED BY TH E P2P SUPPLIER FOR THE SAME PRODUCT I.E. RS.2.4. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 41 - 6.6. SO, ACCORDING TO A.O. THE BRANCH TRANSFER PRICE COULD BE THE PRICE WHICH THE P2P SUPPLIER WERE CHARGING FOR THO SE PRODUCTS. THE ADDITIONAL PROFIT EARNED WAS THE PROFIT EARNED BY S ETTING UP THE BADDI UNIT. THAT ALONE COULD BE ELIGIBLE FOR 80IC DEDUCTI ON. AS PER A.OS REASONING, PRIOR TO SETTING UP THE UNIT THE ASSESSE E WAS ALREADY EARNING PROFITS ON THOSE PRODUCTS. LIKEWISE, IN RESPECT OF BRAND OF THE COMPANY IT WAS OBSERVED THAT THE BRAND IS OWNED BY THE COMPANY AND NOT BY THE UNDERTAKING AT BADDI. EVEN THE SELF GENERATED BRAN D HAS IMMENSE VALUE WHICH IS CREATED BY INCURRING HEAVY R&D EXPENSES. L IKEWISE, A HUGE MARKETING NETWORK HAS BEEN SET UP BY THE ASSESSEE-C OMPANY AND OWNED BY THE COMPANY AND NOT OWNED BY THE BADDI UNDERTAKI NG, COMMENTED BY AO. ON ACCOUNT OF BRAND AND MARKETING NET WORK THE ASSESSEE USED TO GET BETTER PROFIT WHICH WERE ACCRUED TO THE ASSE SSEE PRIOR TO THE SETTING UP OF THE BADDI UNIT IN RESPECT OF THOSE VERY PRODU CTS WHICH WERE PURCHASED FROM OTHER MANUFACTURERS ON P 2 P BASIS. THE AOS MAIN THRUST AFTER THE ELABORATE DISCUSSION WAS THAT ONLY THE MANUFACTURING PROFIT OF THE BADDI UNIT IS THE PROFIT WHICH ALONE IS ELIGIBLE FOR DEDUCTION U/S.80IC. THE ASSESSEE-COMPANY WAS GENERATING SUBSTANTIAL PROFIT ON ACCOUNT OF ITS BRAND VALUE AND MARKETING NETWORK ON THOSE PRODUCTS WHEN ACQUIRED/PURCHASED ON P 2 P BASIS. THE ULTIMATE SALE PRICE, ON THAT POINT OF TIME, AS PER AO, FOR THOSE PRODUCT S CONSISTED THE (I) PROFIT FROM MANUFACTURING OF THE PRODUCT WHICH WAS TAKEN BY P 2 P SUPPLIER, (II) PROFIT DERIVED FROM BRAND VALUE OF THE PRODUCT AND (III) PROFIT DERIVED FROM MARKETING NETWORK OF THOSE PROD UCTS. THE AO HAS THEN INVITED ATTENTION ON THE PROVISIONS OF SECTION 80IC AND OPINED THAT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 42 - THE PROFITS AND GAINS OF AN ELIGIBLE BUSINESS IS TH E ONLY SOURCE OF INCOME OF THE ASSESSEE. HE HAS REFERRED SECTION 80IC(7) R.W.S.80IA(5), SO THAT THE PROFITS OF THE ELIGIBLE UNDERTAKING IS TO BE CO MPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME. HIS CONCLUS ION WAS THAT THE SALE PRICE OF THE PRODUCTS MANUFACTURED AT THE BADDI UNI T SHOULD BE THE COST OF THE PRODUCTION PLUS A REASONABLE AMOUNT OF PROFI T WHICH SHOULD HAVE BEEN CHARGED, HOWEVER, THE AVERAGE SALE PRICE WAS E SCALATED BY CLAIMING PROFIT DERIVED ON SALE OF PRODUCTS MANUFACTURED BY BADDI UNIT WHICH ACCORDING TO HIM, THE ALLEGED HUGE PROFIT WAS NOT C ORRECT FOR THE PURPOSE OF CLAIMING THE DEDUCTION U/S.80IC OF THE IT ACT. RELEVANT PARAGRAPH NO.8.34 IS REPRODUCED BELOW:- 8.34 AS PER SECTION 80IC(7) R.W. S.80IA(5), THE PR OFITS OF THE ELIGIBLE UNDERTAKING ARE TO BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS WERE THE ONLY SOURCE OF INCOME OF THE ASSESSEE. ON THE FACTS OF THE CASE MENTIONED ABOVE, THE PROFITS CLAIMED TO HAVE B EEN DERIVED BY SALE OF PRODUCTS MANUFACTURED FROM BADDI IS NOT COR RECT. THE SALE PRICE FOR THE PRODUCT MANUFACTURED AT BADDI SHOULD CONSIST OF COST OF PRODUCTION AS WELL AS A REASONABLE AMOUNT OF PRO FIT FOR THE SAME (WHICH IN THE INSTANT CASE CAN BE TAKEN AT THE PRICE CHARGED BY THE P2P SUPPLIER WHICH INCLUDED THE COST OF THE PRODUCT AS WELL AS HIS PROFIT ON THE SAME). HOWEVER, HERE WHAT THE ASSESSEE HAS DONE IS THAT, IT HAS MERGED IN THE SALE PRICE, TH E PROFITS DERIVED FORM THE BRAND VALUE OF THE PRODUCTS AS WELL AS PRO FITS DERIVED FROM MARKETING NETWORK OF THE PRODUCTS, OF WHICH TH E ASSESSEE IS THE OWNER AND NOT THE BADDI UNDERTAKING. THE MANDA TE OF SUB- SECTION 80IA(5) IS THAT THE PROFITS ARE TO BE COMPU TED AS IF THE ELIGIBLE BUSINESS WAS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. BY THIS MANDATE, FOR DETERMINATION OF PROFIT FOR ELIGI BLE BUSINESS, THE UNDERTAKING HAS TO BE CONSIDERED IN ISOLATION. ON THIS PRESCRIPTION, THE GOODS MANUFACTURED AT BADDI COULD NOT HAVE BEEN SOLD IN THE MARKET AT THE SALE PRICE SHOWN BY THE ASSESSEE WITHOUT THE HELP OF THE BRAND VALUE OR THE MARKETIN G NETWORK WHICH IS OWNED BY THE ASSESSEE (NOT BADDI UNDERTAKI NG). WHAT THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 43 - ASSESSEE SHOULD HAVE DONE IS THAT IT SHOULD HAVE BE EN THE COST AND A REASONABLE AMOUNT OF PROFIT (AND NOT THE ENTIRE P ROFIT) AS THE BASIS OF DETERMINING THE SALE PRICE OF PRODUCT FROM BADDI. 6.7 SO IT WAS REITERATED THAT THE PRICE AT WHIC H THE SAID PRODUCTS COULD HAVE BEEN SOLD WOULD BE IN LINE WITH THE PRICE CHAR GED BY THE P 2 P MANUFACTURER. TO THAT EXTENT ONLY THE SALE PRICE O F THE PRODUCTS PRODUCED AT THE BADDI UNIT SHOULD BE TAKEN INTO ACCOUNT FOR 80IC DEDUCTION AND THE ESCALATED SALE PRICE REQUIRED TO BE REDUCED FOR COMPUTING THE PROFITS ELIGIBLE U/S.80IC. THE AO HAS SUGGESTED THAT THE AS SESSEE SHOULD HAVE PASSED ENTRIES IN ITS BOOKS OF ACCOUNTS FOR INTERNA L TRANSFER FROM BADDI UNIT TO THE HEAD OFFICE FOR MARKETING AT ARMS LENG TH PRICE. INSTEAD OF DOING SO, THE ASSESSEE HAS FOR TAXATION PURPOSES SH OWN THE ULTIMATE SALE PRICE. THE ULTIMATE SALE PRICE IS THE PRICE OF THE HEAD OFFICE WHICH OWNS THE ASSETS IN THE FORM OF BRANDS AND MARKETING NETW ORK AND AFTER CONSIDERING THE COST OF PRODUCTION THE HEAD OFFICE IN TURN SHOULD HAVE FIXED THE ULTIMATE SALE PRICE AND NOT THE BADDI UNI T. ACCORDING TO AO, AS FAR AS THE SALE PRICE IN THE HANDS OF BADDI UNIT WA S CONCERNED, THE SALE PRICE MUST BE RECORDED AT ARMS LENGTH PRICE FOR IN TERNAL TRANSFER AND NOT THE ULTIMATE SALE PRICE. 6.8 HE HAS GIVEN AN ANOTHER REASONING AND WANTED TO ANALYZE THE ISSUE FROM YET AN ANOTHER ANGLE. ACCORDING TO HIM, THE AS SETS, SUCH AS, BRAND VALUE AND MARKETING NETWORK ARE THE ASSETS OWNED BY THE ASSESSEE- COMPANY AS A WHOLE ORGANIZATION. THOSE ASSETS WERE NOT OWNED BY THE SAID UNDERTAKING, I.E. BADDI UNIT. THOSE BRANDS WER E ACQUIRED PRIOR TO THE SETTING UP OF BADDI UNIT. THE PROFITS OF THE AS SESSEE-COMPANY WERE ON ACCOUNT OF THREE REASONS; VIZ. (I) MANUFACTURING ASSETS , (II) BRAND ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 44 - ASSETS AND (III) MARKETING ASSETS . OUT OF THE THREE, ONLY THE MANUFACTURING ASSETS WAS OWNED BY THE SAID UNDERTAK ING, I.E. BADDI UNIT . HENCE THE PROFIT ONLY TO THE EXTENT OF THE MANUF ACTURING PROFIT COULD BE SAID TO BE DERIVED FROM THE BADDI UNDERTAK ING, WHICH ACCORDING TO AO, WAS ELIGIBLE FOR DEDUCTION U/S.80IC OF IT AC T. FOR THIS PROPOSITION, RELIANCE WAS PLACED ON ROLLS ROYCE PLC VS. DDIT 19 SOT 42 AND LIBERTY INDIA VS.CIT 317 ITR 218 (SC). THE AO HAS THEN ALSO DISCUSSED THE WORDS USED IN THE STATUTE AND QU OTED THAT THE WORD DERIVED FROM IS NARROWER IN CONNOTATION AS COMPAR ED TO THE WORD ATTRIBUTABLE TO. CASE LAW CITED WAS CIT VS. SUN ENGINEERING WORKS PVT.LTD. 198 ITR 297. FINALLY, THE AO HAS COMPUTED THE PROFIT ALLEGEDLY DERIVED FROM BADDI UNIT AND HELD THAT THE REMAINING PROFIT WAS DERIVED FROM EXPLOITATION OF BRAND AND MARKETING NE TWORK THUS NOT DERIVED FROM THE BADDI UNIT,HENCE NOT ELIGIBLE FOR DEDUCTION. RELEVANT PARAGRAPHS ARE REPRODUCED BELOW:- 8.48 AS DISCUSSED ABOVE, CONSIDERING THE PROVISION S OF SECTION 80IC(1) R.W. SUBSECTION (7) THEREOF W.R. SECTION 80 -IA(5) R.W. 80- IA(8), THE PROFITS DERIVED FROM THE BADDI UNIT ARE MANUFACTURING PROFITS ONLY. THIS PROFIT EARNED/SAVED COULD EASIL Y BE COMPUTED BY USING THE PRODUCT WISE QUANTITY MANUFACTURED AT BAD DI AND THE PRODUCT WISE PROFIT SAVED ON MANUFACTURING THE PROD UCTS AT BADDI AND NOT GETTING IT MANUFACTURED FORM P2P SUPPLIER. HOWEVER, DESPITE PROVIDING SUFFICIENT TIME, THE ASSESSEE HAS NOT PRODUCED PRODUCT WISE DATA FOR THE GOODS MANUFACTURED AT BAD DI. HENCE, THE DATA AS AVAILABLE FOR THE PRODUCT AS EXPLAINED IN THE CHART AT PARA 8.22 ABOVE IS BEING USED FOR THIS PURPOSE. 8.49 IT MAY BE SEEN FROM THE CHART AT PARA 8.22 ABO VE THAT IN THE EARLIER YEARS THE ASSESSEE HAS EARNED 80% AND 81% R ESPECTIVELY BY SELLING THESE PRODUCTS AFTER GETTING IT MANUFACT URED ON P2P BASIS. IN THIS YEAR THE PROFITS HAVE INCREASED TO 86%. THUS, IF IT IS ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 45 - TAKEN THAT THE ADDITIONAL 6% PROFIT HAS BEEN EARNED DUE TO ITS UNIT AT BADDI, THE PROFITS DERIVED FROM THE BADDI UNIT W OULD WORK OUT TO 6% OF TOTAL TURNOVER OF THE BADDI UNIT I.E. RS.1 1,94,79,365/-. THIS WOULD REPRESENT THE MANUFACTURING PROFITS DERI VED FROM THE BADDI UNIT. THE REMAINING PROFITS DERIVED FROM EXP LOITATION OF BRAND AND DUE TO FREE USAGE OF THE MARKETING NETWOR K ARE NOT DERIVED FROM THE BADDI UNIT AS THESE ASSETS ARE NOT OWNED IT BUT ARE OWNED BY THE ASSESSEE COMPANY. PENALTY U/S.271 (1)(C) IS SEPARATELY INITIATED FOR FURNISHING INACCURATE PART ICULARS OF INCOME. 7. IN RESPECT OF GROUND NO.7 ABOUT THE CLAIM OF DEDUCTION U/S.80IB GOA UNIT, THE AO HAS ASSIGNED THE SAME REASONING AN D WORKED OUT THE ELIGIBLE PROFIT AS UNDER:- CONTRACT MEDIA PLANT : (7 TH YEAR ): IN THE RETURN OF INCOME, THE ASSESSEE HAS CLAIMED DEDUCTION U/S.80IB OF RS.91,15 ,766/-, BEING 30% OF THE PROFITS FOR THE UNIT AS COMPUTED BY THE ASSESSEE AT RS.3,03,85,888/-. IT IS SEEN THAT THE ASSESSEE HAS SHOWN BOOK PROFITS OF 30 MILLION AGAINST TURNOVER OF 96 MILLIO N FOR THIS UNIT, WHICH WORKS OUT TO 31.35%. THIS UNIT ALSO OWNS ONL Y MANUFACTURING ASSETS. OTHER ASSETS IN THE FORM OF BRAND VALUE AS WELL AS MARKETING NETWORK ARE OWNED BY THE OTHER DI VISIONS. FOLLOWING THE SAME RATIONALE AS IN THE CASE OF BADD I UNIT, IT IS HELD THAT THE PROFITS ELIGIBLE FOR DEDUCTION U/S.80IB AR E ONLY THE MANUFACTURING PROFITS. AS HAS BEEN HELD ABOVE, THE MANUFACTURING PROFITS ARE ABOUT 6% OF THE TURNOVER. THUS, FOLLOW ING THE SAME RATIONALE AS IN THE CASE OF BADDI UNIT FOR WHICH DE DUCTION U/S.80IC IS ALLOWED, THE WORKING OF AMOUNT ALLOWABLE U/S.80I B FOR THIS UNIT IS AS UNDER: TURNOVER OF THE UNIT 96431000 PROFITS @ 6% 5785860 ADD BOOK DEPRECIATION 725000 LESS INCOME TAX DEPRECIATION 575000 PROFITS ELIGIBLE FOR DEDUCTION U/S.80IB 5935860 AMOUNT TO BE ALLOWED @ 30% 1780758 ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 46 - 7.1. AS FAR AS THE OPINION OF THE DRP IS CONCERNED, THE ASSESSEE HAS RAISED THE GROUND THAT THE AO WAS NOT JUSTIFIED IN REDUCING THE CLAIM OF DEDUCTIONS RESPECTIVELY U/S.80IC AND 80IB IN RESPEC T OF THE RESPECTIVE UNDERTAKINGS AS FOLLOWS:- NATURE OF CLAIM CLAIM MADE BY ASSESSEE(RS.) CLAIM ALLOWED BY THE AO (RS.) U/S.80IC (BADDI UNIT) 116,48,51,853 11,94,79,365 U/S.80IB (CONTRAST MEDIA UNIT AT GOA) 91,15,766 17,80,758 7.2. AFTER DETAILED DISCUSSION, DRP WAS OF THE VIEW THAT THE AO WAS RIGHT IN OBSERVING THAT THE ESTABLISHED MARKETING N ETWORK HAS PLAYED A VERY IMPORTANT ROLE IN PRICING OF THE PRODUCT AND T HE ABNORMALLY HIGH PROFIT AS SHOWN BY THE BADDI UNIT WAS ALSO PARTLY O N ACCOUNT OF FREE USAGE OF THE MARKETING NETWORK OF THE ASSESSEE-COMP ANY WHICH WAS CREATED OVER THE PERIOD OF TIME. HOWEVER, THE ASSE SSEE HAS CONTESTED THAT THE AO SHOULD NOT DISTURB THE COMPUTATION OF DEDUCT ION OF AN ELIGIBLE UNIT ON THE GROUND THAT THE PROFITS EARNED BY THE O THER UNIT OF THE ASSESSEE WERE COMPARATIVELY LOWER, RELIANCE PLACED ON ACIT VS. DELHI PRESS PATRA PRAKASHAN 103 TTJ 578 (DEL.). THE DRP WAS IN AGREEMENT WITH THE FINDING OF THE AO THAT THE PROFI T OF THE ELIGIBLE UNDERTAKING AT BADDI UNIT HAS NOT BEEN CORRECTLY WO RKED OUT BY THE ASSESSEE, BECAUSE THE INDIRECT COST INCURRED TOWARD S EXPLOITATION AND FREE USAGE OF THE MARKETING NETWORK ESTABLISHED OVER A N UMBER OF YEARS AND THE VALUE OF THE SELF GENERATED BRAND HAS NOT BEEN ALLOCATED TO THE SAID UNIT. SUCH INDIRECT COST SHOULD HAVE BEEN ALLOCA TED FOR THE BADDI UNIT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 47 - FOR THE PURPOSE OF WORKING OUT THE CORRECT PROFIT O F THE SAID UNIT. THE DRP HAS APPROVED THE CALCULATION OF THE AO AS UNDER :- 8.23 THE AO HAS OBSERVED FROM THE CHART PRODUCED AT PARA 9.22 OF THE DRAFT ORDER THAT DURING THE EARLIER YEA RS WHEN THE ASSESSEE WAS GETTING THE PRODUCTS MANUFACTURED ON P 2P BASIS WHICH ARE PRESENTLY BEING MANUFACTURED AT THE BADDI UNIT, THE ASSESSEE HAD EARNED PROFITS IN THE RANGE OF 80 TO 8 1% ON SELLING THE SAID PRODUCTS. BY GETTING THESE PRODUCTS MANUF ACTURED AT THE BADDI UNIT, THE PROFITS HAVE INCREASED TO 86%. THE AO HAS THEREFORE HELD THAT THE ADDITIONAL 6% PROFITS HAVE BEEN EARNED AS THE MANUFACTURING PROFITS DERIVED FROM THE BADDI UN IT AND THE REMAINING PROFITS OF 80% WHICH WERE ALREADY BEING D ERIVED WHEN THESE PRODUCTS WERE MANUFACTURED ON P2P BASIS WERE DUE TO THE EXPLOITATION OF BRAND AND DUE TO THE FREE USAGE OF THE MARKETING NETWORK. MANUFACTURING PROFITS FROM THE BADDI UNIT WERE ACCORDINGLY WORKED OUT BY THE AO AT 6% OF THE TOTAL TURNOVER OF THE BADDI UNIT I.E. AT RS.11,94,79,365/- AND THE DE DUCTION U/S.80IC HAS ACCORDINGLY BEEN RESTRICTED BY THE AO TO RS.11, 94,79,365/- AS AGAINST THE DEDUCTION OF RS.116.48 CRORES CLAIMED B Y THE ASSESSEE. 7.3. LIKEWISE, IN RESPECT OF THE OTHER GROUND PER TAINING TO 80IB CLAIM, THE ACTION OF THE AO WAS APPROVED IN THE FOLLOWING MANNER:- 9.3. IT IS SEEN THAT THE AO HAS RESTRICTED THE ASS ESSEES CLAIM OF DEDUCTION U/S.80IB OF RS.91,15,766/- TO RS.17,80,75 8/- FOR THE SAME REASONS AS DISCUSSED IN THE CASE OF BADDI UNIT . THE AO HAS WORKED OUT THE MANUFACTURING PROFITS OF THE SAID UN IT AT 6% OF THE TURNOVER FOLLOWING THE SAME RATIONALE AS DISCUSSED IN THE CASE OF BADDI UNIT. SINCE WE HAVE UPHELD THE ACTION OF THE AO IN DETERMINING THE MANUFACTURING PROFIT OF THE BADDI U NIT AT 6% OF THE TURNOVER, THE AOS ACTION IN RESTRICTING THE AS SESSEES CLAIM FOR DEDUCTION U/S.80IB IN RESPECT OF CONTRAST MEDIA PLA NT AT GOA FROM RS.91,15,766/- TO RS.17,80,758/- IS ACCORDINGLY CON FIRMED. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 48 - 8. FROM THE SIDE OF THE APPELLANT, LD.ARS MR.MUKE SH PATEL AND MR.HITESH GAJARIA APPEARED AND STATED THAT THE PROV ISIONS OF SECTION 80IC PROVIDES FOR DEDUCTION IN RESPECT OF ANY PROFITS A ND GAINS DERIVED BY AN ELIGIBLE UNDERTAKING. HE HAS FERVENTLY ARGUED THA T THE STATUTE DO NOT SUGGEST ANY SEGREGATION IN RESPECT OF SUCH PROFIT W ITH REGARD TO DIFFERENT OPERATIONS, SUCH AS, MANUFACTURING OPERATION AT ONE HAND AND THE MARKETING OR BRAND PROFIT ON ANOTHER HAND. HE HAS ALSO ARGUED THAT THE LANGUAGE OF 80IC IS IN RESPECT OF ANY BUSINESS RE FERRED IN SUB- SECTION(2) OF SECTION 80IC. THE STATUTE HAS THERE FORE USED A LARGER CONNOTATION, I.E. PROFITS AND GAINS OF A BUSINESS WHICH INCLUDES NOT ONLY THE MANUFACTURING GAINS BUT ANCILLARY GAINS HAVING DIRECT NEXUS WITH THE MANUFACTURING ACTIVITY ARE ELIGIBLE FOR TH E CLAIM . MR. PATEL HAS ELABORATED THAT THERE WAS NO PURPOSE OF MANUFAC TURING A PRODUCT IF THE SAME IS NOT MARKETABLE. EVEN IF SUB-SECTION(5 ) OF SECTION 80IA IS TO BE CONSIDERED, THEN THE PROFITS AND GAINS TO BE COM PUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME. HE HAS ARDENTLY PLEADED THAT THE ELIGIBLE BUSINESS MEANS THE OVERALL ACTIVI TY, I.E. MANUFACTURING OF A PRODUCT ALONG WITH THE MARKETING ACTIVITY. IN TH E PRESENT CASE, WHILE COMPUTING THE ELIGIBLE PROFIT OF BADDI UNIT, WHICH WAS THE ONLY SOURCE OF INCOME, THE OVERALL BUSINESS ACTIVITY THUS INCLUDED THE FIXING OF PRICE OF A PRODUCT ON WHICH IT COULD BE MARKETED. RATHER, IT COULD NOT BE POSSIBLE TO SEGREGATE ELIGIBLE MANUFACTURING ACTIVITY WITH T HE MARKETING OF THE PRODUCT BECAUSE BOTH THE ACTIVITIES ARE INTERCONNEC TED AND INTERLINKED. WITHOUT ONE ACTIVITY THE OTHER ACTIVITY HAS NO MEAN ING. HE HAS SUBMITTED THAT THE DECISION OF ROLLS ROYCE PLC(SUPRA) IS CLEA RLY DISTINGUISHABLE AND THE RATIO THEREIN HAS NO BEARING OR RELEVANCE O N THE FACTS OF THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 49 - APPELLANTS CASE. IN THE SAID CASE, THE ITAT DELHI BENCH WAS DEALING WITH THE PROVISIONS OF EXPLANATION 1(A) TO SEC. 9(1 )(I), WHICH PROVIDES THAT IN A CASE OF BUSINESS OF WHICH ALL OPERATIONS ARE N OT CARRIED OUT IN INDIA, THE INCOME OF THE BUSINESS DEEMED TO ACCRUE SHALL BE ONLY SUCH PART AS IS REASONABLY ATTRIBUTABLE TO THE OPERATION S CARRIED OUT IN INDIA . IN THE SAID CASE, MANUFACTURING OPERATION WAS CARRI ED ON OUTSIDE INDIA AND MARKETING WAS IN INDIA. UNDER THESE CIRCUMSTAN CES, THE ITAT WAS REQUIRED TO ALLOCATE A REASONABLE PART OF THE PROFI TS TOWARDS MANUFACTURING ACTIVITY WHICH COULD NOT BE TAXED IN INDIA AND ACCORDINGLY THE ALLOCATION OF 50% WAS DONE IN THIS REGARD. TH E AO HAS DISCUSSED THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA(SUPRA) AND ATTEMPTED TO JUSTIFY THE THEORY THAT ONLY THE P ROFIT DERIVED FROM THE MANUFACTURING ACTIVITY CAN BE SAID TO BE DERIVED FROM ELIGIBLE UNDERTAKING. IN THIS CONTEXT, THE AO HAS R EFERRED TO THE CONCEPT OF SEGMENT REPORTING UNDER THE INDIAN ACCOUNTING STANDARDS (IAS) BY THE ICAI. APPLYING THIS CONCEPT, THE AO HAS ATTEMPT ED TO JUSTIFY HIS SEGREGATION OF PROFITS. MR. PATEL HAS PLEADED THAT IT NEEDS TO BE POINTED OUT THAT THE CONCEPT OF SEGMENT REPORTING DEALS W ITH THE NATURE OF BUSINESS AND NOT THE NATURE OF ANY SPECIFIC ACTIVIT Y WITHIN THE BUSINESS, AS SOUGHT TO BE INTERPRETED BY THE AO. EVEN THE DE CISION OF THE SUPREME COURT REFERS TO EACH OF THE ELIGIBLE BUSINESSES CONSTITUTING A STAN D- ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFITS AND DOES NOT CONTEMPLATE THE COMPUTATION OF PROFITS FROM SEGREGA TED ACTIVITIES OF THE ELIGIBLE BUSINESS AS HAS BEEN DONE BY THE AO. HE HAS FURTHER SUBMITTED THAT IT IS PERTINENT TO POINT OUT THAT FIVE PRODUCT S (OUT OF THE 27 PRODUCTS) MANUFACTURED AT BADDI COMPRISE OF THE ATEN FAMILY H AVE IN FACT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 50 - CONTRIBUTED TO NEARLY 34% OF THE TOTAL SALES AND PR OFITS OF THE BADDI UNIT (REFERRED A STATEMENT). THIS BRANCH WAS PURCHASED BY THE ASSESSEE IN 2001 AND THE RELATED EXPENDITURE IN THE NATURE OF D EPRECIATION (AS PER I.T. ACT) FOR THE YEAR TO THE TUNE OF RS.705 LAKHS ON IT S WRITTEN DOWN VALUE HAS ALREADY BEEN DEBITED TO THE STAND-ALONE P & L A CCOUNT. THUS, NO DISPUTE COULD HAVE BEEN BE RAISED ON ANY COUNT TO T HE EXTENT OF 34% OF THE PROFITS CLAIMED FOR DEDUCTION, SINCE NO NOTIONA L EXPENDITURE IN RESPECT OF R & D OR BRAND DEVELOPMENT CAN BE ATTRIBUTED IN RELATION SUCH PROFITS EARNED FROM THESE NEW PRODUCTS. IN RESPECT OF OTHE R 22 PRODUCTS AT BADDI REPRESENTING SELF-GENERATED BRANDS, IT IS PERTINENT TO POINT OUT THAT THESE BRANDS WERE LAUNCHED BY THE COMPANY DURING THE PERI OD 1989 TO 2000. THE EXPENDITURE ON R & D IN THE YEARS PRECEDING THE LAUNCH OF THESE PRODUCTS WAS VERY SMALL AND INSIGNIFICANT. THEREFO RE, THE EMPHASIS OF THE LEARNED AO, HIGHLIGHTING THAT THE ASSESSEE HAD INCURRED HUGE R & D EXPENSES TO PROMOTE THESE PRODUCTS AND THAT THE SAM E HAS NOT BEEN TAKEN INTO ACCOUNT, IS WITHOUT ANY BASIS OR JUSTIFICATION . HE HAS ALSO POINTED OUT THAT DURING THE COURSE OF THE HEARING BEFORE TH E HONBLE DRP, THE ASSESSEE WAS ALSO ASKED TO JUSTIFY THAT THE SOURCIN G OF CERTAIN RAW MATERIALS FOR MANUFACTURING THE PRODUCTS AT BADDI, BEING BULK DRUGS MANUFACTURED AT THE ASSESSEES PLANTS AT ANKLESHWAR AND PATALGANGA WERE AT ARMS LENGTH AS REQUIRED U/S.80IA(8) OF THE I.T. ACT. THE ASSESSEE WAS ASKED TO PRODUCE THE INVOICES OF SOME PRODUCTS DURI NG THE PERIOD OF AUGUST, 2005, WITH A VIEW TO SHOW THE COMPARATIVE P RICES OF SUCH PRODUCTS TRANSFERRED BY THE SAID PLANTS TO BADDI AN D ACTUAL SALES MADE TO THIRD PARTIES. A STATEMENT SHOWING SUCH COMPARATIV E PRICES ALONG WITH THE COPIES OF INVOICES HAVE BEEN DULY ENCLOSED, ALS O FORMING PART OF THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 51 - COMPILATION, FROM WHICH IT IS EVIDENT THAT THE PRIC ES AT WHICH THE PRODUCTS WERE TRANSFERRED TO BADDI WERE IN FACT AT HIGHER PR ICES THAN THIRD PARTY SALES. THIS DULY SUBSTANTIATES THE ASSESSEES CONT ENTION THE PROVISIONS OF SEC.80IA(8) ARE NOT ADVERSELY ATTRACTED IN ITS CASE . THAT THE PROFIT IS NEITHER ESCALATED NOR IT WAS REDUCED BUT IT WAS TH E TRUE PROFIT EARNED IN THE NORMAL COURSE OF BUSINESS OF BADDI UNIT. HE HA S CONCLUDED BY PLACING RELIANCE ON THE FOLLOWING DECISIONS:- SL.NO(S) IN THE CASE OF. REPORTED IN. 1. BAJAJ TEMPO LTD. VS. CIT 196 ITR 188 (SC) 2. CIT VS. STRAWBOARD MANUFACTURING CO. 177 ITR 431 (SC) 3. CIT VS. VEGETABLE PRODUCTS LTD. 88 ITR 192 (SC) 4. CIT VS. SIMPSON & CO. 122 ITR 283 (MAD) 5. JANAK DEHYDRATION (P) LTD. VS. ACIT 134 TTJ (AHD ) (UO) 1 6. KHINVASARA INVESTMENT (P) LTD. VS. JT.CIT (2008) 110 ITD 198 (PUNE) 7. ITO VS. KANCHAN OIL INDUSTRIES LTD. (2005) 92 I TD 557 (KOL.) 9. FROM THE SIDE OF THE REVENUE, SPECIAL COUNSEL MR .G.C.SRIVASTAVA HAS BEEN ENGAGED TO ARGUE THESE TWO GROUNDS. HE HAS OPENED HIS ARGUMENT WITH THIS PLEADING THAT THE PROFITS AND GA INS OF AN ELIGIBLE BUSINESS, FOR THE PURPOSES OF DETERMINING THE QUANT UM OF DEDUCTION UNDER THAT SUB-SECTION BE COMPUTED AS IF SUCH ELIGIBLE BU SINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. WHERE ANY GOODS HELD FOR THE PURPOSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTH ER BUSINESS CARRIED ON BY THE ASSESSEE AND THE CONSIDERATION, IF ANY, FOR SU CH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT C ORRESPOND TO THE MARKET VALUE OF SUCH GOODS AS ON THE DATE OF THE TRANSFER , THEN, FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AN D GAINS OF SUCH ELIGIBLE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 52 - BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER HAD B EEN MADE AT THE MARKET VALUE OF SUCH GOODS AS ON THAT DATE. HE HAS THEREF ORE VEHEMENTLY CONTESTED THAT THE PROFIT OF A UNIT IS DISTINCT FROM PROFIT OF THE BUS INESS AS A WHOLE. IN THE PRESENT CASE, PROFIT OF THE ASSESSEE-COMPANY DEPENDS UPON SO MANY FACTORS, SUCH AS, GOOD-WILL OF THE BUSINESS, BRAND VALUE OF THE BUSINESS AND THE MARKET REPUTATION OF THE PRODUCTS. THE PROFITS OF THE BUSINESS OF THE ASSESSEE-COMPANY ALSO DEPENDS U PON THE MARKETING STRATEGIES ADOPTED. WHEREAS, FOR THE PURPOSE OF CLA IM OF DEDUCTION U/S.80IC, ONE HAS TO CONSIDER ONLY THE MANUFACTURIN G PROFIT. A UNIT ENGAGED IN MANUFACTURING OR PRODUCTION IS THEREFORE EXPECTED TO DRAW TRUE PROFITS DERIVED FROM MANUFACTURING ACTIVITY ON LY. 9.1. IN RESPECT OF ARGUMENT OF THE ASSESSEE THAT I N THE PAST FOR A.Y. 2005-06 THIS VERY CLAIM WAS ALLOWED BY THE AO, HENC E FOLLOWING THE RULE OF CONSISTENCY, FOR THIS YEAR AS WELL HAS TO BE ALLOWED, MR. SRIVASTAVA HAS PLEADED THAT THE PRINCIPLE OF RES JUDICATA DO NOT APPLY ON TAX CASES AND IN SUPPORT CITED A CASE LAW, VIZ. DISTRIBUTORS (VADODARA) PVT.LTD. REPORTED AT 155 ITR 120 (SC). 9.2. MR. SRIVASTAVA HAS ADVANCED HIS ARGUMENTS THAT THE LAW SUBSCRIBES THAT IF IN THE PROCESS OF THE COMPUTATION OF PROFI T OF AN ELIGIBLE BUSINESS THE AO HAS DIFFICULTY, THEN HE IS EMPOWERED TO COMP UTE SUCH PROFITS ON REASONABLE BASIS AS HE MAY DEEM FIT. IN THE PRESEN T CASE, THE AO HAS EXAMINED THE PERCENTAGE OF PROFIT IN THE PAST EARNE D BY THE COMPANY (NOT ELIGIBLE FOR DEDUCTION) AND IT WAS NOTICED THA T THE PROFITS HAVE GONE UP IN RESPECT OF A UNIT ( ELIGIBLE FOR A DEDUCTION) . THE ASSESSEES ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 53 - CONTENTION HAS NO MEANING THAT IT HAS NOT SHOWN EXO RBITANT PROFIT THIS YEAR ONLY AND THAT THE PROFIT FOR THE YEAR COMMENSU RATE WITH THE PROFITS OF EARLIER YEARS ON SALE OF SAME DRUGS. LD.SPECIAL CO UNSEL MR.SRIVASTAVA HAS CLARIFIED THAT THE DEPARTMENT IS NOT ON THE GRO UND THAT IT HAD FOUND FAULT IN THE COMPUTATION OF PROFIT OR IN THE MAINTE NANCE OF BOOKS OF ACCOUNT FOR THE PURPOSE OF WORKING OF THE PROFITS. OTHERWISE ALSO, ASSESSEE IS AT LIBERTY TO TRANSACT WITH ITSELF AT W HATEVER PRICE IT DEEM FIT AND THOSE PRICES ARE RELEVANT FOR WORKING OUT ITS NORMAL PROFIT. BUT WHAT IS RELEVANT IS THE WORKING OF ELIGIBLE PROFIT FOR THE PURPOSE OF CLAIM OF DEDUCTION. THE WORKING OF SUCH ELIGIBLE PROFIT IS CREATED BY LEGAL FICTION AS PRESCRIBED U/S.80IA(5) AND U/S.80IA(8) OF THE I.T. ACT . LD. COUNSEL HAS QUOTED SECTION 80IC(7), WHEREIN IT IS PROVIDED THAT THE PROVISIONS CONTAINED IN SUB-SECTION(5) AND SUB-SECT IONS(7) TO (12) OF SECTION 80IA SHALL APPLY TO ELIGIBLE UNDERTAKING FO R THE PURPOSE OF THIS SECTION. THEREFORE, HE HAS DRAWN OUR ATTENTION ON T HE PROVISIONS OF SECTION 80IA(5) OF IT ACT FOR THE LEGAL PROPOSITION THAT THE PROFITS OF AN ELIGIBLE BUSINESS SHALL FOR THE PURPOSE OF DETERMIN ING THE QUANTUM OF DEDUCTION BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE DURING THE PREVIOUS YEAR. H E HAS THEREFORE ARGUED THAT THE ONLY SOURCE OF INCOME SHOULD BE TAKEN INTO ACCOUNT AND NO OTHER RESOURCES OR FACTORS OF INCOME ARE REQUIRED TO BE T AKEN INTO ACCOUNT FOR THE PURPOSE OF DETERMINING THE ELIGIBLE PROFIT. TO EMPHASIZE HIS POINT OF VIEW MR. SRIVASTAVA HAS AGAIN DRAWN OUR ATTENTION ON THE PROVISIONS OF SECTION 80IA(8) OF IT ACT THAT WHERE ANY GOODS HELD FOR THE PURPOSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE OR WHERE ANY GOODS HELD FOR THE PURPOS ES OF ANY OTHER ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 54 - BUSINESS ARE TRANSFERRED TO THE ELIGIBLE BUSINESS, IN EITHER CASE, THE CONSIDERATION FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS AS ON THE DATE OF TRANSFER, THEN FOR THE PURPOSES OF THE DEDU CTION THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED A S IF THE TRANSFER IN EITHER CASE, HAD BEEN MADE AT THE MARKET VALUE OF S UCH GOODS AS ON THAT DATE. LD.SPECIAL COUNSEL HAS THEREFORE PASSIONATEL Y PLEADED THAT THIS PROVISION OF THE IT ACT EMPOWERS THE AO TO SUBSTITU TE THE VALUE OF THE TRANSACTION AS RECORDED IN THE BOOKS OF ACCOUNTS, I F IN HIS OPINION THE SAID VALUE IS NOT THE FAIR MARKET VALUE OF THE GOODS TRA NSFERRED. IN THE PRESENT CASE, THE AO HAS FAIRLY DEMONSTRATED THAT THE SALE PRICE OF THE PRODUCTS WHICH WAS RECORDED AT THE BADDI UNIT WAS NOT THE FA IR MARKET PRICE BECAUSE THOSE VERY PRODUCTS WERE PURCHASED ON P 2 P BASIS IN THE PAST AT A LOWER COST. THE COMPARATIVE CHART OF 27 PRODUCTS W AS DULY RECORDED BY THE AO, WHICH WAS BY ITSELF EXPLICITLY CLEAR AND DI RECTLY CONVEY THE STAND OF THE REVENUE. 9.3. LD.SPECIAL COUNSEL MR.SRIVASTAVA HAS ALSO TOOK SHELTER OF SECTION 40A(2)(A) FOR THE LEGAL PROPOSITION THAT IF IN THE OPINION OF THE AO AN EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REG ARD TO THE FAIR MARKET VALUE OF THE GOODS, THEN SO MUCH OF THE EXPENDITUR E WHICH IS NOT MATCHING WITH THE FAIR MARKET VALUE OF THE GOODS, T HE EXCESSIVE OR UNREASONABLE AMOUNT IS NOT TO BE ALLOWED AS A DEDUC TION. HE HAS PLEADED THAT SUCH PROVISIONS OF THE ACT HAVE THUS GIVEN UNQ UESTIONABLE POWER TO AO TO ENQUIRE ABOUT THE FAIR MARKET VALUE AND THEN ACCORDINGLY TAKE APPROPRIATE ACTION. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 55 - 9.4. LD. COUNSEL HAS ASSERTED THAT UNDISPUTEDLY , IT WAS AN INTER- DIVISION TRANSFER, HENCE IT WAS EXPECTED TO RECORD THE SAME AT ARMS LENGTH PRICE . HE HAS PLEADED THAT THE ASSESSEE IS BLOWING HO T AND COLD IN THE SAME BREATH. WHEN IT COMES TO TRANSFER OF S ERVICES AND GOODS, IT OPPOSES ARMS LENGTH PRICE ADJUSTMENT AND SAYS THAT THE EXPENSES WHICH HAVE BEEN INCURRED IN PAST NEED NOT BE TAKEN INTO C ONSIDERATION. AS DISCUSSED EARLIER, THIS LOGIC DO NOT COMMENSURATE W ITH THE PROVISIONS OF THE SECTIONS. EVEN THEN FOR ARGUMENT SAKE IF THE E XPENSES RELATABLE TO CURRENT YEAR ARE TO BE APPORTIONED; IT WAS FOUND TH AT THE ASSESSEE HAD NOT APPORTIONED EVEN A PENNY OF THE EXPENSES IN DEVELOP MENT AND RESEARCH OF NEW PRODUCTS OF BADDI UNIT. 9.5. NEXT, REVENUES COUNSEL HAS DRAWN OUR ATTENTIO N ON THE PROFIT & LOSS ACCOUNT OF THE ELIGIBLE UNIT, I.E. BADDI UNIT, (REFER PAGE NO.87 OF THE PAPER-BOOK). LD.DR HAS SAID THAT SALES TO THE TUNE OF RS.1,19,13,22,749/- WERE RECORDED FOR THE ACCOUNTING PERIOD ENDED ON 31 .3.2006. HE HAS PLEADED THAT IF THE SAID UNIT WAS TO SALE ITS PRODU CTS ON STAND ALONE BASIS, THEN THE SAID UNIT WHICH WAS ONLY TWO YEARS OLD COU LD NOT FETCH SUCH HIGH SALE PRICE. THE SAID UNIT HAS SHOWN HIGH PROFI T AT RS.1,16,82,91,400/-. THE GOODS MANUFACTURED BY THE SAID UNIT WERE TRANSFERRED TO THE MARKETING DIVISION OF THE ASSESS EE-COMPANY AND THE SALE PRICE WAS NOTED BY THE BADDI UNIT AS PER THE F INAL SALE PRICE OF THE PRODUCT. BUT THE FACT IS THAT THE MARKETING DIVISI ONS AND THE C&F ARE INVOLVED, THEREFORE THE SALES ARE REALIZED BY THE M AIN MARKETING DIVISION. HE HAS THUS PLEADED THAT THE PROFIT DERIVED FROM M ARKETING FUNCTION CANNOT BE DRAGGED TO THE MANUFACTURING UNIT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S.80IC. THE SPECIAL PROVISION IS CONFIN ED TO CERTAIN ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 56 - UNDERTAKINGS, AS DEFINED IN THE STATUTE, AND SUCH E LIGIBLE UNDERTAKINGS ARE ENTITLED FOR THE DEDUCTION OF THE PROFIT OF SU CH UNDERTAKINGS ONLY. HE HAS AGAIN DRAWN OUR ATTENTION THAT THE ONLY SOUR CE OF INCOME SHOULD BE THE ELIGIBLE SOURCE OF INCOME AND NOT OTHER SOURCES OF INCOME, SUCH AS, PROFITS OF MARKETING DIVISION OR PROFITS ON ACC OUNT OF ESTABLISHED BRAND. FOR THE ALLOCATION OF PROFIT OF MANUFACTURI NG UNIT THE MANDATE IS VERY CLEAR BECAUSE INCOME TAX RULE, 1962 CONTAINS R ULE 18BBB WHEREIN AS PER SUB-RULE(2) A SEPARATE REPORT IS TO BE FURNI SHED BY EACH UNDERTAKING AND THAT REPORT SHALL BE ACCOMPANIED BY A PROFIT & LOSS ACCOUNT AND BALANCE-SHEET OF THAT UNDERTAKING AS IF THE UNDERTA KING IS A DISTINCT ENTITY. HE HAS THEREFORE ARGUED THAT THE ALLOCATIO N OF THE PROFIT OF A MANUFACTURING UNIT SHOULD BE MADE ON STAND ALONE BA SIS. HE HAS QUESTIONED THAT HOW THE SALE PRICE OF THE PRODUCTS OF THE BADDI UNIT WERE DETERMINED AND RECORDED. BECAUSE OF THE BRAND VALU E THE SALE PRICE MUST HAVE BEEN DETERMINED BY THE MANAGEMENT AS IF THE PR OFIT IS EARNED BY THE ASSESSEE-COMPANY ON SALE OF THE PRODUCTS OF THE BAD DI UNIT. IT WAS RECORDED ON THE PRESUMPTION THAT THE SALES WERE EXE CUTED BY THE HEAD OFFICE BY CHARGING BRAND VALUE, THE NAME OF THE PRO DUCT AND THE GOODWILL OF THE COMPANY. IN ANY CASE, ACCORDING TO LD.DR, A REASONABLE EXPENDITURE SHOULD HAVE BEEN PROVIDED, SO THAT SUC H AN ABNORMAL PROFIT @ 58.66% COULD BE CHECKED. 9.6. IN SUPPORT OF THE ABOVE SUBMISSIONS, MR.SRIVA STAVA HAS PLACED ON STRONG RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. AHMEDBHAI UMARBHAI & CO. REPORTED AT 18 ITR 472(SC) FOR THE LEGAL PROPOSITION THAT, QUOTE THE PROFITS RECEIVED RELATE FIRSTLY TO HIS BUSINESS AS A MANUFACTURER, SECONDLY TO HIS TRADING OPERATIONS, AND ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 57 - THIRDLY TO HIS BUSINESS OF IMPORT AND EXPORT. PROF IT OR LOSS HAS TO BE APPORTIONED BETWEEN THESE BUSINESSES IN A BUSINESS LIKE MANNER AND ACCORDING TO WELL ESTABLISHED PRINCIPLES OR ACCOUNT ANCY. UNQUOTE. HE HAS ALSO PLACED RELIANCE ON LIBERTY INDIA VS. CIT REPORTED AT 317 ITR 218(SC). 10. WE HAVE HEARD BOTH THE SIDE AT LENGTH. THE CONTROVERSY AS RAISED BY THE ADDL.CIT MR. MAHESH KUMAR, OFFICIATING AS AO , HAS SERIOUS REPERCUSSIONS ON THE SUBJECT OF COMPUTATION OF ELI GIBLE PROFIT WHILE CLAIMING A DEDUCTION UNDER THE STATUTE. THE ADJUST MENTS AS SUGGESTED BY THE AO WHILE WORKING OUT THE MANUFACTURING PROFIT O F AN ELIGIBLE UNIT HAS A FAR REACHING CONSEQUENCES ON ALL SUCH TAX-PAY ERS; THEREFORE WE HAVE TO DEAL THIS ISSUE CAREFULLY AND LITTLE ELABORATELY , SO THAT WE CAN REACH TO A LOGICAL CONCLUSION. 10.1 TO BEGIN WITH, IT IS BETTER TO ELUCIDATE THAT THE I.T.ACT HAS ONLY DEFINED INCOME { SEC. 2(24) } AS WELL AS BUSINESS { SEC. 2(13)} BUT NOT THE TERM PROFIT AND GAINS. HOWEVER, THE SECTION WE HAVE TO DEAL WITH I.E. SEC. 80 IC REVOLVES AROUND THE TERM PROF ITS AND GAINS. AS PER SECTION 2(13) BUSINESS INCLUDES TRADE, COMMERCE OR MANUF ACTURE . IN AUXILIARY, AS PER SECTION 2(24) INCOME INCLUDES (I) PROFITS AND GAI NS. AN INCOME HAS TO HAVE A COMPONENT OF PROFITS & G AINS BUT ALL TYPE OF PROFITS & GAINS MAY NOT BE AN INCOME FOR TAX P URPOSE UNDER THE ACT. THE SECTION IN CONTROVERSY I.E. SEC. 80 IC OF THE A CT IS EMBEDDED WITH BOTH THESE TERMINOLOGY, REPRODUCED VERBATIM :- 80IC (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR AN ENTERPRISE FROM ANY BUSINESS REFERRED TO IN SUB-SECTION(2), THERE SHALL, IN ACC ORDANCE WITH ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 58 - AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE A LLOWED , IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS AND GAINS, AS SPECIFIED IN SUB-SECTION(3). 10.2 THE BUSINESS IS PRESCRIBED IN SUB-SECTI ON (2) IN THE FOLLOWING MANNER : (2) THIS SECTION APPLIES TO ANY UNDERTAKING OR ENTE RPRISE --- (A) WHICH HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUCE ANY ARTICLE OR THING THEREFORE, MANUFACTURING IS THE FIRST CRITERIA FO R THE ELIGIBILITY OF THE BUSINESS TO QUALIFY FOR THE DEDUCTION. HENCE THE PROFITS ARE REQUIRED TO BE DERIVED FROM A MANUFACTURING UNDERTAKING WHICH I S PRODUCING THE SPECIFIED ARTICLE. THAT PROFIT IS INCLUSIVE IN TH E GROSS TOTAL INCOME. AS ALREADY NOTED, THE TERMINOLOGY PROFIT HAS NOT BE EN DEFINED IN THIS ACT THEREFORE WE HAVE TAKEN THE HELP OF OTHER RESOURCES . THE BASIC QUESTION IS THAT WHAT IS THE PROFIT OF A MANUFACTURING UNI T ? FIRSTLY, THE TERM PROFIT IMPLIES A COMPARISON BE TWEEN THE STAGE OF A BUSINESS AT TWO SPECIFIC DATES SEPARATED BY AN INTERVAL OF A YEAR. THUS FUNDAMENTALLY THE MEANING IS THAT THE AMOUNT O F GAIN MADE BY THE BUSINESS DURING THE YEAR. THIS CAN BE ASCERTAINED B Y A COMPARISON OF THE ASSETS OF THE BUSINESS AT THE TWO DATES. TO DETERM INE THE PROFIT OF A MANUFACTURING UNIT THE ACCOUNTING STANDARD HAS GIVE N CERTAIN GUIDELINES, ENUMERATED IN SHORT. IN THE ACCOUNTING THE PROFIT IS THE DIFFERENCE BETWEEN THE PURCHASE PRICE AND THE COST OF BRINGING THE PRODUCT TO MARKET. A GROSS PROFIT IS EQUAL TO SALES REVENUE MINUS COST OF GOODS SOLD OR THE EXPENSES THAT CAN BE TRACED DIRECTLY TO THE PRODUCTION OF THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 59 - GOODS. RATHER, THE OPERATING PROFIT IS ALSO DEFINED AS EQUAL TO SALES REVENUE MINUS COST OF GOODS PLUS ALL EXPENSES, EXCE PT INTEREST AND TAXES. MOST OF THE MANUFACTURING COMPANIES HAVE TOTAL COS T BASED PRICING METHOD. TOTAL COST HAS, BROADLY SPEAKING, TWO COMP ONENTS; I.E. RAW- MATERIAL PLUS VALUE ADDITION (IT INCLUDES ALL OVERH EADS). THEREFORE, PROFIT MARGIN IS PRICE MINUS TOTAL COST. IN MANUFACTURING UNIT, THUS COST OF CONVERSION IS PRODUCTION OVERHEADS, SUCH AS, DIRECT LABOUR COST AND INEXTRICABLY LINKED EXPENDITURE OF PRODUCTION. IN GENERAL, EVERY MANUFACTURING CONCERN HAS FIXED MANUFACTURING CAPAC ITY. SO THE OBJECTIVE OF SUCH CONCERN OUGHT TO BE TO MAXIMIZE T HE PROFIT. NOW THE PROBLEM, AS POSED, IS THAT LET US ASSUME THAT THE S AID MANUFACTURING UNIT IS PRODUCING TWO PRODUCTS; VIZ. A & B. FOR PR ODUCTION OF A PRODUCT, LET US SAY, THERE IS LESS WORKING HOURS, B UT FETCHING MORE VALUE FOR LESS MONEY. HOWEVER, IN THE PRODUCTION OF PROD UCT B DUE TO COMPLEX PROCESS OF MANUFACTURING IT REQUIRES MORE W ORKING HOURS. FOR PRICING PRODUCT B THE SITUATION IS THAT MORE MONE Y EXPENDITURE AND MAY FETCH LESS VALUE. THEREFORE, IN THE PROCESSING DEPARTMENT IT IS NOT POSSIBLE TO SEGREGATE THE TWO COMPONENTS TO DETERMI NE THE SEGREGATED MARGINS. KEEPING THIS ACCOUNTING PRINCIPLE IN MI ND, WE REVERT BACK TO THE LANGUAGE OF SECTION 80IC WHICH SAYS THAT A DEDU CTION IS PERMISSIBLE OF SUCH PROFITS OF A SPECIFIED UNDERTAKING ENGAGED IN MANUFACTURING OF CERTAIN ARTICLE OR THING. THE BUSINESS OF THE SAID ENTERPRISE/CONCERN SHOULD BE MANUFACTURING OF ARTICLE OR THING AND THE PROFI T THEREFROM IS ELIGIBLE FOR DEDUCTION U/S.80IC IF THAT PROFIT IS PART AND P ARCEL OF THE GROSS TOTAL INCOME. AS NOTED HEREINABOVE, PROFIT IS THE DIFFER ENCE BETWEEN THE PURCHASE PRICE AND THE COST OF PRODUCTION ALONG WIT H THE COST OF BRINGING ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 60 - THE PRODUCT TO MARKET. THIS BASIC PRINCIPLE OF ACC OUNTANCY, AS APPEARED, HAVE BEEN ADOPTED BY BADDI UNIT BECAUSE AS PER PROF IT & LOSS ACCOUNT, COST OF MATERIAL, PERSONAL COST AND GENERAL EXPENSE S, CORPORATE EXPENSES WERE REDUCED FROM THE SALE PRICE TO ARRIVE AT THE PROFIT BEFORE TAX I.E. RS.116,82,91,400/-. 10.3. IT IS NOT IN DISPUTE THAT FOR BADDI UNIT TH E ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS AND THEREFORE DRAWN A SE PARATE PROFIT AND LOSS ACCOUNT. IN SUCH A SITUATION, WHETHER THE AO IS E MPOWERED TO DISTURB THE COMPUTATION OF PROFIT, IS ALWAYS A SUBJECT MATT ER OF CONTROVERSY. FROM THE SIDE OF THE ASSESSEE, RELIANCE WAS PLACED ON ACIT VS. DELHI PRESS PATRA PRAKASHAN 103 TTJ 578 (DELHI). IN THIS CASE, THE ASSESSEE WAS CLAIMING DEDUCTION U/S.80IA IN RESPECT OF A UNIT NO.4. THE SAID UNIT WAS SHOWING PROFIT @ 62%. AS AGAINST THA T, AO HAS NOTICED THAT A MARGIN OF PROFIT SHOWN BY THE ASSESSEE AS A WHOLE WAS ONLY TO THE EXTENT OF 10%. THE AO HAS THEREFORE RECOMPUTED THE PROFIT OF THE SAID UNIT BY APPLYING SUB-SECTION (10) OF SECTION 80IA A ND RESTRICTED THE PROFIT OF THE SAID UNIT TO 10% ONLY. WHILE DEALING THIS ISSUE, THE RESPECTED COORDINATE BENCH HAS CONCLUDED THAT IT WA S NOT JUSTIFIED TO DISTURB THE WORKING OF PROFIT MERELY BECAUSE THE PR OFIT RATE OF ELIGIBLE UNIT WAS SUBSTANTIALLY HIGHER THAN OVERALL RATE OF PROFIT OF OTHER UNITS OF THE ASSESSEE, MORE SO WHEN SEPARATE BOOKS WERE MAIN TAINED BY THE ASSESSEE IN RESPECT OF THE SAID ELIGIBLE UNIT. IN THE PRESENT CASE AS WELL THE AO HAS PROCEEDED TO DISTURB THE PROFIT OF THE B ADDI UNIT AND HELD THAT ONLY 6% PROFIT IS ELIGIBLE FOR DEDUCTION U/S.80IC.W HILE DOING SO, IDENTICALLY, THE AO HAS NOT PINPOINTED ANY DEFECT I N THE WORKING OF THE PROFIT OF THE BADDI UNIT. IN SUCH A SITUATION, W E CAN SAY THAT THE LEGAL ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 61 - PROPOSITION AS LAID DOWN BY DELHI BENCH CAN ALSO BE APPLIED IN THE PRESENT APPEAL AS WELL. 10.4. THE AO HAS ALSO CONCLUDED THAT ONLY THE INCREMENTAL PROFIT, REPRESENTING THE DIFFERENCE BETWEEN THE PROFITS EAR NED EARLIER WHEN THE PRODUCTS WERE PROCURED ON P2P BASIS AND THE PROFITS EARNED BY THE BADDI UNIT, SHOULD BE TREATED AS A MANUFACTURING PROFIT. THE AO HAS THEN SAID THAT EARLIER THE ASSESSEE WAS PROCURING THE PRODUCT S ON P2P BASIS AND SHOWING THE AVERAGE PROFIT AT 80%, HOWEVER, ON THE BASIS OF AVERAGE SELLING RATE OF THE PRODUCES MANUFACTURED BY BADDI UNIT THE AVERAGE PROFIT WAS GONE UP TO 86%. THE AO HAS THEREFORE RES TRICTED THE DEDUCTION ONLY AT 6%. HE HAS PLACED RELIANCE ON ROLLS ROYCE PLC VS. DDIT 19 SOT 42 . IN THAT CASE, THE ASSESSEE WAS A UK BASED COMPAN Y CARRYING ON MARKETING AND SALES ACTIVITIES IN INDIA THROUGH A S UBSIDIARY. THE SUBSIDIARY WAS ALSO RENDERING SUPPORT SERVICES TO T HE ASSESSEE, A UK BASED COMPANY. THE ASSESSEE WAS CARRYING OUT MANUFA CTURING OPERATIONS. IT WAS HELD THAT 35% OF ITS PROFITS COULD BE ATTRIB UTED TO THE MARKETING ACTIVITIES CARRIED OUT IN INDIA AND, THEREFORE, CHA RGEABLE TO TAX IN INDIA. THE FACTS OF THAT CASE WERE ALTOGETHER DIFFERENT AN D THERE WAS A FINDING THAT UNDISPUTEDLY THERE WAS A PE IN INDIA AND AS PE R INDO-UK DTAA THE INCOME HAS TO BE TAXED IN INDIA. AN ANOTHER FACT W AS THAT THERE WAS NO SEPARATE ACCOUNT OF THE ASSESSEES INDIA OPERATION AND THE AO HAD FOUND THAT ON THE BASIS OF GLOBAL ACCOUNTS THE PROFITS WE RE DETERMINED ON SALES. IN THAT CASE, MARKETING WAS SAID TO BE THE PRIMARY ACTIVITY FOR EARNING PROFIT. THE PROFIT WAS DIRECTLY DUE TO OPERATION I N INDIA. IN THAT CONTEXT THE WORD ATTRIBUTABLE WAS CONSIDERED AND THEN IT WAS HELD THAT SUCH PART OF THE INCOME AS IT WAS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 62 - OUT IN INDIA IS TAXABLE. THE EXPRESSION BUSINESS C ONNECTION WAS ALSO CONSIDERED AND THEN IT WAS FOUND THAT IT WILL INCLU DE A PERSON ACTING ON BEHALF OF A NON-RESIDENT AND CARRIED ON CERTAIN ACT IVITIES IS HAVING BUSINESS CONNECTION. A BUSINESS CONNECTION HAS TO BE REAL AND INTIMATE AND THROUGH WHICH INCOME MUST ACCRUE OR ARISE WHETH ER DIRECTLY OR INDIRECTLY TO THE NON-RESIDENT. ON THOSE FACTS, SI NCE IT WAS FOUND THAT R&D ACTIVITIES WERE CARRIED OUT BY THE ASSESSEE, TH EREFORE, 15% OF THE PROFIT WAS ALLOCATED TO THE R&D ACTIVITIES AND BALA NCE OF THE PROFIT WAS ATTRIBUTABLE TO THE MARKETING ACTIVITIES IN INDIA. THE SAID DECISION WAS ENTIRELY BASED UPON THE CONNECTIVITY OF THE MARKETI NG OPERATIONS WITH THE PROFITS. THE CBDT CIRCULAR NO.23 OF 1969 DATED 23/0 7/1969 WAS ALSO TAKEN INTO ACCOUNT WHEREIN IT WAS OPINED THAT WHERE A NON-RESIDENTS SALES TO INDIAN CUSTOMERS ARE SECURED THROUGH THE S ERVICES OF AN AGENT IN INDIA THEN THAT PROFIT IS ATTRIBUTABLE TO THE AGEN TS SERVICES. MEANING THEREBY BECAUSE OF THE CLOSE CONNECTION OF THE AGEN TS MARKETING ACTIVITY THE PROPORTIONATE PROFIT WAS ATTRIBUTED TO THE SAID ACTIVITY. CONTRARY TO THIS, THERE WAS NO FINDING THAT UPTO THE EXTENT OF 80%, THE PROFIT WAS ATTRIBUTED TO THE ASSESSEE-COMPANY. THE SEGREGATION BETWEEN 80% AND 6% WAS NOT ON ACCOUNT OF ANY EVIDENCE THROUGH WHICH IT COULD INDEPENDENTLY BE ESTABLISHED THAT THE MAJOR PORTION OF THE PROFIT COULD BE ATTRIBUTED TO THE ASSESSEE-COMPANY AND RES T OF THE PROFIT COULD ONLY BE ATTRIBUTED TO THE BADDI UNIT. 10.5. THE AO HAS ALSO MADE OUT A CASE THAT THE BOOK PROFIT PERCENTAGE OF BADDI UNIT WAS 58.67%, WHEREAS THE PROFIT OF THE ASSESSEE-COMPANY AS A WHOLE WAS 11.88%. IF WE FURTHER ELABORATE THIS ASPECT, THEN THE AO HAS ALSO GIVEN A WORKING THROUGH WHICH THE AVERAGE SELLING RATE WAS ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 63 - 86.36% OF THE BADDI UNIT. MEANING THEREBY IF WE PR ESUME FOR EXAMPLE THAT THE ASSESSEE HAS GROSS PROFIT OF 86%, THEN THE NET PROFIT WAS DISCLOSED AT 58%. A QUESTION THUS ARISES THAT WHAT BENEFICIAL PURPOSE COULD BE SERVED FOR THE REDUCTION OF GROSS PROFIT T O A LOWER PERCENTAGE OF NET PROFIT, SPECIALLY WHEN THE ALLEGATION OF THE A. O. WAS THAT THERE WAS AN ATTEMPT TO DECLARE HIGHER PROFIT OF BADDI UNIT T O GET MORE ADVANTAGE OF DEDUCTION. ON PERUSAL OF THE P&L ACCOUNT, IT IS AN ADMITTED FACTUAL POSITION THAT THE ASSESSEE HAS IN FACT DEBITED CERT AIN EXPENSES WHICH HAVE INCLUDED HEAD OFFICE EXPENSES, SUCH AS, MARKETING E XPENSES AND CORPORATE EXPENSES. MEANING THEREBY THE NET PROFIT OF THE BADDI UNIT WAS NOT MERELY PRODUCTION COST MINUS SALE PRICE, BU T THE DIFFERENCE OF SALE PRICE MINUS ALL GENERAL EXPENSES WHICH WERE AT TRIBUTABLE TO THE SALES. THEREFORE, IT IS NOT REASONABLE TO SAY THAT UNREASO NABLY THE PROFIT WAS ESCALATED. THE DIFFERENCE BETWEEN THE TWO PERCENTAGES OF PROFI T, I.E. ABOUT 28% ( G.P. N.P.) THUS REPRESENTED THE EXPEN DITURE WHICH COULD BE SAID TO BE IN RESPECT OF MARKETING NETWORK AND BRAND OF THE PRODUCT RELATED EXPENSES. THE AO HAS NOT COMPLAINED ABOUT THE ALLOCATION OF EXPENDITURE AS MADE BY THE ASSESSEE W HILE COMPUTING THE PROFIT OF THE BADDI UNIT. ONCE THE ASSESSEE HAS IT SELF TAKEN INTO ACCOUNT THE RELATED EXPENSES TO ARRIVE AT THE NET PROFIT, T HEN IT WAS NOT REASONABLE ON THE PART OF THE REVENUE DEPARTMENT TO FURTHER RE ALLOCATE THOSE EXPENSES BY CURTAILING THE PERCENTAGE OF ELIGIBLE P ROFIT. 10.6. FROM THE SIDE OF THE REVENUE, LD.SPECI AL COUNSEL HAS ARGUED THAT IN TERMS OF THE PROVISIONS OF SECTION 80IA(5) THE DEDUCTION IS TO BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. ACCORDING TO HIM, THE MANUFACTURING PROFIT WAS THE ONLY ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 64 - SOURCE OF INCOME AND THAT ALONE SHOULD BE ACCOUNTED FOR IN THE P&L ACCOUNT TO CLAIM THE DEDUCTION U/S.80IC OF THE ACT. LD. DR HAS EXPLAINED THAT AS PER THE VIEW OF THE A.O. UP-TO 80% OF THE PROFIT WAS THE RESULT OF EFFICIENT MARKETING NET WORK PLUS DUE TO THE BRAND NAME OF THE COMPANY. ONLY 6% WAS THE MANUFACTURING PROFIT , PER A.O. IT IS TRUE THAT SECTION 80IC DOES RECOGNIZED THE PROVISIONS OF SECTION 80IA . REFER, SUB- SECTION(7) OF SECTION 80IC WHICH PRESCRIBES AS FOLL OWS:- SECTION 80IC(7) : THE PROVISIONS CONTAINED IN SUB-S ECTION (5) AND SUB-SECTIONS (7) TO (12) OF SECTION 80IA SHALL, SO FAR AS MAY BE, APPLY TO THE ELIGIBLE UNDERTAKING OR ENTERPRISE UNDER THIS SECTION. DUE TO THIS REASON, OUR ATTENTION WAS DRAWN ON THE PROVISIONS OF SECTION 80IA(5) OF IT ACT; READS AS UNDER:- SECTION 80IA(5) : NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT, THE PROFITS AND GAINS OF AN ELIGIBLE BUSINESS TO WHICH THE PROVISIONS OF SUB-SECTION (1) APPLY SHALL, FOR THE PURPOSES OF DETERMINING THE QUANTUM OF DEDUCTION UNDER THAT SUB-SECTION FOR THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR OR ANY SUBSEQUENT ASSESSMENT YEAR, BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS WERE THE ONLY SOURCE OF INCOME OF THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT T O THE INITIAL ASSESSMENT YEAR AND TO EVERY SUBSEQUENT ASS ESSMENT YEAR UP TO AND INCLUDING THE ASSESSMENT YEAR FOR WHICH THE DETERMI NATION IS TO BE MADE. AS PER THIS SECTION, THE PROFITS OF AN ELIGIBLE UND ERTAKING SHALL BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. IN THIS SECTION AGAIN, THE STATUTE HAS USED THREE TERMS, I.E. PROFIT, BUSINESS AND INCOME. AS NARRATED HER EINABOVE AN INCOME HAS A WIDER EXPRESSION THAN THE PROFIT. LIKEWIS E, BUSINESS HAS ALSO A WIDER MEANING THAN THE WORD INCOME. IN THE PRESEN T CASE, ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 65 - MANUFACTURING OF PHARMACEUTICAL PRODUCTS IS DECLARE D AS ELIGIBLE BUSINESS. THEN THE QUESTION IS THAT WHAT IS THE P ROFIT OF SUCH AN ELIGIBLE BUSINESS? ON CAREFUL READING OF THIS SUB-SECTION, IT TRANSPIRES THAT THE SAID ELIGIBLE PROFIT SHOULD BE THE ONLY SOURCE OF INCOME. IF WE EXAMINE THE SEPARATE PROFIT & LOSS ACCOUNT OF BADDI UNIT, T HEN IT IS APPARENT THAT THE ONLY SOURCE OF INCOME WAS THE SALES OF THE QUALIFIED PRODUCTS. IN THE SAID P&L A/C THERE WAS NO COMPONENT OF ANY OTHER SO URCES OF INCOME EXCEPT THE SALE PRICE AND OTHERWISE ALSO THE ASSESS EE HAS CONFINED THE CLAIM ONLY IN RESPECT OF THE ELIGIBLE PROFIT WHICH WAS DERIVED FROM THE SALES OF THE PHARMACEUTICAL PRODUCTS . THIS SECTION DO NOT SUGGEST THAT THE ELIGIBLE PROFIT SHOULD BE COMPUTED FIRST BY TRA NSFERRING THE PRODUCT AT AN IMAGINARY SALE PRICE TO THE HEAD OFFICE AND THEN THE HEAD OFFICE SHOULD SALE THE PRODUCT IN THE OPEN MARKET. THERE IS NO SU CH CONCEPT OF SEGREGATION OF PROFIT. RATHER, WE HAVE SEEN THAT TH E PROFIT OF AN UNDERTAKING IS ALWAYS COMPUTED AS A WHOLE BY TAKI NG INTO ACCOUNT THE SALE PRICE OF THE PRODUCT IN THE MARKET. 10.7. THE LD.AO HAS SUGGESTED THAT THE ASS ESSEE SHOULD HAVE PASSED ENTRIES IN ITS BOOKS OF ACCOUNT BY RECORDING INTERNAL TRANSFER OF THE PRODUCT FROM BADDHI UNIT TO THE HEAD OFFICE MAR KETING UNIT AND THAT TOO AT ARMS LENGTH PRICE . FROM THE SIDE OF THE APPELLANT AN ARGUMENT WAS RAISED THAT WHAT SHOULD BE THE ARMS LENGTH PRI CE IN A SITUATION WHEN A PRODUCT IS ULTIMATELY TO BE SOLD IN THE OPEN MARK ET. WHETHER THE AO IS SUGGESTING THAT AN IMAGINARY LINE BE DRAWN TO DETER MINE THE PROFIT OF THE BADDI UNIT AT A PARTICULAR STAGE OF TRANSFER OF PRO DUCTS. DEFINITELY A DIFFICULTY WILL ARISE TO ARRIVE AT THE SALE PRICE A S SUGGESTED BY AO ON TRANSFER OF PRODUCT FROM BADDI TO HEAD OFFICE. WHA T COULD BE THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 66 - REASONABLE PROFIT WHICH IS TO BE CHARGED BY THE BAD DI UNIT WILL THEN BE A SUBJECT OF DISPUTE AND SHALL BE AN ISSUE OF CONTROV ERSY. ON THE CONTRARY, IF THE SALE PRICE IS RECORDED AT THE MARKET PRICE, WHICH IS EASILY ASCERTAINABLE, THAT WAS RECORDED IN THE BADDI UNIT ACCOUNT, THE SCOPE OF CONTROVERSY GETS MINIMAL. RATHER, THE INTENSE CON TENTION OF THE LD.AR IS THAT THE FACTS OF THE CASE HAVE EXPLICITLY DEMON STRATED THAT THE GOODS MANUFACTURED AT BADDI UNIT WERE TRANSPORTED TO VARI OUS C&F AGENTS ACROSS THE COUNTRY FOR SALE PURPOSE. THEREFORE, TH E ELIGIBLE BUSINESS IS THE MANUFACTURING OF PHARMACEUTICAL PRODUCTS AND THE ONLY SOURCE OF INCOME WAS THE PROFIT EARNED ON SALE OF THE PRODUCTS. 10.8. AN INTERESTING ARGUMENT WAS RAISED BY LD .SPECIAL COUNSEL THAT THE PROVISIONS OF SECTION 80IA(8) PRESCRIBES THE SEGREGATION OF PROF IT IN CASE OF TRANSFER OF GOODS FROM ONE UNIT TO ANOTH ER UNIT. BUT SECTION 80IA(8) READS AS FOLLOWS:- SECTION 80IA(8) : WHERE ANY [GOODS OR SERVICES] HELD FOR THE PURPOSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED T O ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE, OR WHERE ANY GOODS [OR SERVICES] HELD FOR THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY THE AS SESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE C ONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE EL IGIBLE BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS [OR SE RVICES] AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDU CTION UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHA LL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BEEN MADE AT THE MARK ET VALUE OF SUCH GOODS [OR SERVICES] AS ON THAT DATE: PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSIN G OFFICER, THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELIGIBL E BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE ASSESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAIN S ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 67 - [EXPLANATION : FOR THE PURPOSES OF THIS SUB-SECTION , 'MARKET VALUE , IN RELATION TO ANY GOODS OR SERVICES, MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. ] WHERE ANY GOODS HELD FOR THE PURPOSE OF THE ELIGIB LE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE, THEN IF THE CONSIDERATION FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DO NOT CORRESPOND TO THE MARKET VALUE OF S UCH GOODS, THEN FOR THE PURPOSES OF THE DEDUCTION THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER HAS B EEN MADE AT THE MARKET VALUE OF SUCH GOODS AS ON THAT DATE. THOUGH THE S ECTION HAS ITS OWN IMPORTANCE BUT THE AREA UNDER WHICH THIS SECTION O PERATES IS THAT WHERE ONE ELIGIBLE BUSINESS IS TRANSFERRED TO ANY OTHER B USINESS. WE AGAIN WANT TO EMPHASIS THAT THE WORD USED IN THIS SECTION IS BUSINESS AND NOT THE WORD PROFIT. WE CAN HENCE DRAW AN INFERENCE BY DESCRIBING THESE TWO WORDS AND THUS HAVE PRECISELY NOTED THAT ELIGIBLE BUSINESS HAS A DIFFERENT CONNOTATION WHICH IS NOT AT PAR OR IDENTI CAL WITH THE ELIGIBLE PROFIT. THE MATTER WE ARE DEALING IS NOT THE CASE WHERE BUS INESS AS A WHOLE IS TRANSFERRED. THIS IS A CASE WHERE MANUFAC TURING PRODUCTS WERE SOLD THROUGH C&F IN THE MARKET. EVEN THIS IS NOT T HE CASE THAT FIRST SALES WERE MADE BY THE BADDI UNIT IN FAVOUR OF THE HEAD O FFICE OR THE MARKETING UNIT AND THEREUPON THE SALES WERE EXECUTE D BY THE HEAD OFFICE TO THE OPEN MARKET. ONCE IT WAS NOT SO, THEN THE F IXATION OF MARKET VALUE OF SUCH GOOD IS OUT OF THE AMBITS OF THIS SECTION. IF THERE IS NO INTER- CORPORATE TRANSFER, THEN THE AO HAS NO RIGHT TO D ETERMINE THE FAIR MARKET VALUE OF SUCH GOODS OR TO COMPUTE THE ARMS LENGTH PRICE OF SUCH GOODS. THE AO HAS SUGGESTED TWO THINGS; FIRST THAT THERE M UST BE INTER-CORPORATE TRANSFER, AND SECOND THAT THE TRANSFER SHOULD BE AS PER THE MARKET PRICE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 68 - DETERMINED BY THE AO. BOTH THESE SUGGESTIONS ARE N OT PRACTICABLE. IF THESE TWO SUGGESTIONS ARE TO BE IMPLEMENTED, THEN A PANDORA BOX SHALL BE OPENED IN RESPECT OF THE DETERMINATION OF ARMS LEN GTH PRICE VIS A VIS A FAIR MARKET AND THEN TO ARRIVE AT REASONABLE PROFIT . RATHER A VERY COMPLEX SITUATION SHALL EMERGE. SPECIALLY WHEN THE STATUTE DO NOT SUBSCRIBE SUCH DEEMED INTER-CORPORATE TRANSFER BUT SUBSCRIBE ACTUA L EARNING OF PROFIT, THEN THE IMPUGNED SUGGESTION OF THE AO DO NOT HAVE LEGAL SANCTITY IN THE EYES OF LAW. 10.9. A VERY PERTINENT QUESTION HAS BEEN RAISED BY LD.AR MR.PATEL THAT WHAT SHOULD BE THE LINE OF DEMARCATION TO DETERMINE THE SALE PRICE OF A PRODUCT IF NOT THE MARKET PRICE . AS FAR AS THE PRESENT SYSTEM OF FIXATION OF SALE PRICE OF THE PRODUCT IS CONCERNED, A CONSIS TENT METHOD WAS ADOPTED KEEPING IN MIND THE SEVERAL FACTORS, DEPEND ING UPON THE MARKET SITUATION, WE HAVE BEEN INFORMED. BUT IF THE ASSES SEE IS COMPELLED TO DEVIATE FROM THE CONSISTENT METHOD OF PRICING, THEN ANY OTHER SUGGESTION SHALL NOT BE WORKABLE BECAUSE NO IMAGINARY LINE OF PROFIT CAN BE DRAWN, PRECISELY PLEADED BEFORE US. SO THE UNCERTAINTY I S THAT ON THE PRODUCTION COST WHAT SHOULD BE THE REASONABLE MARK-UP WHICH SH ALL COVER UP THE MARGIN OF PROFIT OF A MANUFACTURING UNIT. AND WHY AT ALL THIS COMPLEX WORKING OF COMPUTATION BE ADOPTED BY THIS ASSESSEE WHEN A VERY SIMPLE METHOD IS ADOPTED THAT ON ONE SIDE OF THE P&L A/C T HE PRODUCTION COST PLUS OVERHEADS WERE DEBITED AND ON THE OTHER SIDE O F THE P&L A/C SALE PRICE WAS CREDITED TO COMPUTED THE PROFIT. THERE A RE CERTAIN EXPENDITURE WHICH ARE NOTIONAL EXPENDITURE AND THERE ARE CERTAI N EXPENDITURE WHICH ARE SELF-GENERATED TO CREATE THE BRAND VALUE OF A P RODUCT. NATURALLY, THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 69 - ALLOCATION OF NOTIONAL EXPENDITURE PARTICULARLY IN RESPECT OF SELF-GENERATED BRAND IS A MATTER OF HYPOTHESIS AND NOT A MATTER OF REALTY. LOGICALLY IT IS NOT REALISTIC TO SET APART A VALUE OF A SELF GENERA TED BRAND WHICH HAD GROWN IN NUMBER OF YEARS. 10.10. THE SEGMENT REPORTING OF PROFIT IS ALTHOUGH IN PRACTICE BUT THE PURPOSE OF SUCH REPORTING IS ALTOGETHER DIFFERENT. SUCH SEGMENT INFORMATION IS PARTICULARLY USEFUL FOR FINANCIAL AN ALYSIS, SO THAT THE MANAGEMENT MAY KEEP A CLOSE WATCH ON THE PERFORMANC E OF THE DIVERSIFIED BUSINESS LINES. THE AREAS OF DEMARCATI ON ARE BUSINESS SEGMENT, GEOGRAPHICAL SEGMENT, ETC. BUT AS FAR AS THE REVENUE OF AN ENTERPRISE IS CONCERNED WHILE SEGMENTATION IS REQUI RED, THEN REVENUE FROM SALES TO EXTERNAL CUSTOMERS ARE REPORTED IN TH E SEGMENTED STATEMENT OF PROFIT AND LOSS. IN AN ACCOUNTING SYSTEM, AN IN TRA-COMPANY SALE BETWEEN DIVISIONS OR UNITS IS NOT REGARDED AS REVEN UE FOR THE PURPOSE OF SUCH FINANCIAL REPORTING. AS PER THE ACCOUNTING STA NDARDS AN ENTERPRISE REVENUE IGNORES IN HOUSE-SALES THAT REPRESENT REVEN UE TO ONE SEGMENT AND EXPENSE TO ANOTHER. IN THIS CONNECTION, THE AO HAS DISCUSSED THE HONBLE SUPREME COURT DECISION PRONOUNCED IN THE CA SE OF LIBERTY INDIA 317 ITR 218 (SC) . THE AO WANTED TO JUSTIFY HIS ATTEMPT OF SEGMENTATION ON THE BASIS OF THE THEORY THAT ONLY T HE PROFITS DERIVED DUE TO MANUFACTURING ACTIVITY CAN BE SAID TO BE DERIVED FROM ELIGIBLE UNDERTAKING. IT WAS CONTESTED BY AR BEFORE US THAT THE SEGMENT REPORTING IS ABOUT THE SEGREGATION OF BUSINESS AND NOT ABOUT THE SEGREGATION OF ANY SPECIFIC ACTIVITY. IN THE CASE OF LIBERTY INDIA( SUPRA) IT WAS OBSERVED THAT THE IT ACT BROADLY PROVIDES TW O TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT LINKED INCENTIVES AN D PROFIT LINKED ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 70 - INCENTIVES. THE COURT WAS DISCUSSING CHAPTER VIA W HICH PROVIDES INCENTIVE IN THE FORM OF TAX DEDUCTIONS TO THE CATE GORY OF PROFIT LINKED INCENTIVES. THE INCENTIVE IS LINKED WITH GENERATI ON OF OPERATIONAL PROFIT. THEREFORE, THE RESPECTED PARLIAMENT HAS CO NFINED THE GRANT OF DEDUCTIONS ONLY DERIVED FROM ELIGIBLE BUSINESS. EA CH ELIGIBLE BUSINESS CONSTITUTES A STAND ALONE ITEM IN THE MATTER OF COM PUTATION OF PROFIT. THE COURT HAS SAID THAT BECAUSE OF THIS REASON THE CONC EPT OF SEGMENT REPORTING WAS INTRODUCED IN INDIAN ACCOUNTING STAN DARDS. LD.COUNSEL MR.SRIVASTAVA HAS ARGUED THAT THE DEDUCTION U/S.80I C IS A PROFIT LINKED INCENTIVE. ONLY THE OPERATIONAL PROFIT HAS TO BE CL AIMED FOR 80IC DEDUCTION. ACCORDING TO HIM, EACH OF THE ELIGIBLE BUSINESS CONSTITUTES A STAND ALONE ITEM IN THE MATTER OF COMPUTATION OF PR OFIT. FOR THE COMPUTATION OF PROFIT OF AN ELIGIBLE BUSINESS THE W ORD USED IS DERIVED IN SECTION 80IC WHICH IS A NARROWER CONNOTATION, AS COMPARED TO THE WORD ATTRIBUTABLE. IN OTHER WORDS, BY USING TH E EXPRESSION PROFITS DERIVED BY AN UNDERTAKING, PARLIAMENT INTENDED TO COVER SUCH SOURCES NOT BEYOND THE FIRST DEGREE, I.E. THE FIRST DEGREE OF MANUFACTURING ACTIVITY. THE LAW PRONOUNCED BY THE HONBLE SUPREME COURT IS FINAL AND SHOULD NOT BE DISPUTED. HOWEVER, A JUDGEMENT IS TO BE COR RECTLY INTERPRETED. 10.11. FINALLY, ON THE QUESTION OF SEGMENTATION O F PROFIT A VEHEMENT RELIANCE WAS PLACED ON AN OLD PRECEDENT NAMELY CIT VS. AHMEDBHAI UMARBHAI & CO. REPORTED AT 18 ITR 472(SC). FACTS OF THAT CASE WAS THAT THE ASSESSEE HAD OWNED THREE MILLS AT BOMBAY A ND ONE AT RAICHUR(HYDERABAD). THE ASSESSEE WAS MANUFACTURIN G OIL FROM GROUND- NUTS. THE PRODUCED AT RAICHUR, HYDERABAD IS PARTLY SOLD AT RAICHUR AND ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 71 - PARTLY IN BOMBAY. THE QUESTION WAS IN RESPECT OF T HE LIABILITY UNDER EXCESS PROFIT TAX ACT (EPT ACT) FOR THE OIL MANUFAC TURED AT RAICHUR BUT SOLD IN BOMBAY. THE CONTROVERSY WAS THAT THE ASSES SEE HAD CONTENDED THAT A PART OF THE PROFITS DERIVED FROM SALES IN BR ITISH INDIA OF THE OIL MANUFACTURED AT RAICHUR WAS ATTRIBUTABLE TO THE MAN UFACTURING OPERATIONS AT RAICHUR WHICH ARE AN ESSENTIAL PART OF THEIR BUS INESS AND THAT SUCH PROFIT MUST BE EXCLUDED FROM THE ASSESSMENT UNDER E PT ACT. IT WAS NARRATED THAT IN OTHER WORDS, THE ACT BRINGS WITHIN ITS AMBIT ALL INCOME IN THE CASE OF A PERSON RESIDENT IN BRITISH INDIA WHIC H ACCRUES OR ARISES OR WHICH IS DEEMED TO ACCRUE OR ARISE TO HIM IN BRITIS H INDIA DURING THE ACCOUNTING YEAR. IF SEC. 5 OF THE ACT STOPPED SHOR T AT THAT STAGE, IT WAS UNDOUBTED THAT IN THE CASE OF THE RESPONDENT WHO IS A RESIDENT IN BRITISH INDIA ALL HIS INCOME, NO MATTER WHERE IT AROSE, WIT HIN BRITISH INDIA OR WITHOUT BRITISH INDIA, WOULD BE CHARGEABLE TO EXCES S PROFITS TAX JUST IN THE SAME WAY AS IT CHARGEABLE TO INCOME-TAX UNDER THE I NDIAN IT ACT. THE WHOLE OF HIS INCOME ARISING IN RAICHUR HAS LEGITIMA TELY BEEN TAXED UNDER THAT ACT. IN THAT DECISION ALSO, THE WORD BUSINESS WAS DEFINED, I.E. BUSINESS INCLUDES ANY TRADE, COMMERCE OR MANUFACTUR E. IT HAS ALSO BEEN SAID THAT ALL BUSINESSES, TO WHICH THE SAID LAW APP LIED, CARRIED ON BY THE SAME PERSON SHALL BE TREATED AS ONE BUSINESS FOR TH E PURPOSE OF THE SAID ACT. THE QUESTION WAS ABOUT THE MANUFACTURING ACTIV ITY AND IT WAS CONTENDED THAT IF A MAN IS A MANUFACTURER AS WELL A S A SELLER OF GOODS, THEN IN HIS CASE THE TERM PART OF A BUSINESS MEAN S CARRYING ON ALL THE TWO ACTIVITIES TOGETHER AND THEREFORE CONSTITUTE TH E PART OF THE BUSINESS. ONE OF THE HONBLE JUDGES HAS SAID THAT THE ACTIVIT IES WHICH THE ASSESSEE CARRIED ON AT RAICHUR WAS CERTAINLY A BUSINESS OF T HE ASSESSEE. ON ONE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 72 - HAND, IT WAS ARGUED THAT THE ACCRUAL OF PROFIT MUST NECESSARILY BE AT THE PLACE WHERE THE SALE PROCEEDS ARE RECEIVED OR REALIZED. BUT ON THE OTHER HAND, IT WAS ARGUED THAT THE PROFITS RECEIVED RELATE (I) FIRSTLY TO HIS BUSINESS AS A MANUFACTURE, (II) SECONDLY TO HIS TRA DING OPERATIONS AND (III) THIRDLY TO HIS BUSINESS OF EXPORT. ON THAT BASIS, IT WAS OPINED THAT THE PROFIT OR LOSS HAS TO BE APPORTIONED BETWEEN THESE BUSINESSES IN A BUSINESS LIKE MANNER AND ALSO ACCORDING TO WELL EST ABLISHED PRINCIPLE OF ACCOUNTANCY. THIS APPORTIONMENT OF PROFITS BETWEEN A NUMBER OF BUSINESSES WHICH ARE CARRIED ON BY THE SAME PERSON AT DIFFERENT PLACES DETERMINES ALSO THE PLACE OF ACCRUAL OF PROFIT. THE ACT OF SALE IS THE MODE OF REALIZING THE PROFITS. IF THE GOODS ARE SOLD TO A THIRD PERSON AT MILL PREMISES, ONE COULD HAVE SAID THAT THE PROFIT S AROSE BY REASON OF SALE. THE PROFIT WOULD ONLY BE ASCRIBED TO THE BUS INESS OF MANUFACTURE AND WOULD ARISE AT THE MILL PREMISES. MERELY BECAU SE A MILL OWNER HAS STARTED ANOTHER BUSINESS ORGANIZATION IN THE NATURE OF SALE DEPOT, THAT CANNOT WHOLLY DEPRIVE THE BUSINESS OF MANUFACTURE O F ITS PROFITS, THOUGH THERE MAY HAVE TO BE APPORTIONMENT IN SUCH A CASE B ETWEEN THE BUSINESS OF MANUFACTURE AND BUSINESS OF SHOP KEEPING. THE QU ESTION WHICH WAS ANSWERED WAS THAT WHETHER IN RESPECT OF THE MANUFAC TURING BUSINESS OF THE ASSESSEE IN RAICHUR, PROFITS ACCRUE OR ARISE AN D IF SO, AT WHAT PLACE. ONE OF THE HONBLE JUDGES HAS OPINED THAT THE MANUF ACTURING PROFIT ARISE AT THE PLACE OF MANUFACTURE AND THAT THE SALE PROFI TS ARISE AT THE PLACE OF SALE AND THAT THE APPORTIONMENT HAS TO BE MADE BETW EEN THE TWO, THOUGH THE PLACE OF RECEIPTS AND REALIZATION OF THE PROFIT S IS THE PLACE WHERE THE SALES ARE MADE. SIMULTANEOUSLY IT WAS ALSO OPINED THAT THE MANUFACTURING PROFIT COULD NOT BE SAID TO HAVE ACCR UED AT THAT PLACE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 73 - BECAUSE THERE WAS NOTHING DONE FROM WHICH THE PROFI TS COULD ACCRUE. THERE WAS AN INTERESTING CONTRADICTION BECAUSE OF T HE DIVERGENT VIEWS AND IT WAS ALSO EXPRESSED THAT IT WAS A FALLACY TO REGARD THE PROFITS AS ARISING SOLELY AT THE PLACE OF SALE. IT WAS SAID T HAT THE REVENUE OF THE COMPANY ARE DERIVED FROM A SERIES OF OPERATION, INC LUDING THE PURCHASE OF RAW-MATERIALS OR PARTLY MANUFACTURED ARTICLES, C OMPLETELY MANUFACTURING ITS PRODUCTS AND TRANSPORTING AND SEL LING THEM, AND RECEIVING THE PROCEEDS OF SUCH SALES. THE ESSENCE OF ITS PROFIT-MAKING BUSINESS IS A SERIES OF OPERATIONS AS A WHOLE. 10.12 WE HAVE CAREFULLY PERUSED THIS DECISION OF THE HONBLE SUPREME COURT AS CITED BY THE SPECIAL COUNSEL MR.SRIVASTAVA . AT THE OUTSET, WE WANT TO PLACE ON RECORD THAT THE ENTIRE ISSUE BEFOR E THE HONBLE SUPREME COURT WAS IN RESPECT OF THIRD PROVISO TO SECTION 5 OF EPT ACT. THE SAID PROVISO WAS DULY A REPRODUCED IN PARA-40 OF THE ORD ER AND FOR READY REFERENCE TYPED BELOW:- PROVIDED FURTHER THAT THIS ACT SHALL NOT APPLY TO ANY BUSINESS THE WHOLE OF THE PROFITS OF WHICH ACCRUE OR ARISE IN AN INDIAN STATE, AND WHERE THE PROFITS OF A PART OF A BUSINESS ACCRU E OR ARISE IN AN INDIAN STATE, SUCH PART SHALL, FOR THE PURPOSES OF THIS PROVISION, BE DEEMED TO BE A SEPARATE BUSINESS THE WHOLE OF THE PROFITS OF WHICH ACCRUE OR ARISE IN AN INDIAN STATE, AND THE OTHER P ART OF THE BUSINESS SHALL, FOR ALL THE PURPOSES OF THIS ACT, B E DEEMED TO BE A SEPARATE BUSINESS. THE POINT FOR CONSIDERATION WAS THAT WHETHER ON TH OSE FACTS THE THIRD PROVISO TO SECTION 5 COULD BE INVOKED. THE M ANUFACTURING ACTIVITY OF MAKING GROUND-NUT OIL WAS CARRIED OUT AT RAICHU R (HYDERABAD) WHICH WAS TREATED AS A SEPARATE BUSINESS WITHIN THE MEANI NG OF THE SAID PROVISO ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 74 - AND THEREUPON IT WAS CLAIMED AS EXEMPT BEING CARRIE D OUT WITHIN THE TERRITORIAL JURISDICTION OF INDIAN STATE. SO THE COURT HAS OBSERVED THAT TO SUCCEED IN THEIR CLAIM, IT IS INCUMBENT UPON THE AS SESSEE TO SHOW THAT THERE WAS IN FACT A PART OF A BUSINESS AND THAT THE PROFIT HAD ACTUALLY ACCRUED OR AROSE IN THAT PART OF AN INDIAN STATE. THE COURT HAS CLEARLY STATED IN PARA-41 THAT BOTH THE ELEMENTS SHOULD FOU ND EXIST AND THEN ONLY THE BUSINESS COULD BE TREATED AS A SEPARATE BUSINES S. HOWEVER, THE SAID PROVISO HAS PROPOUNDED ONLY DEEMING PROVISIONS, AS IS APPARENT FROM THE LANGUAGE OF THE SECTION ITSELF. FOR THE PURP OSE OF THE SAID SECTION, IT WAS DEEMED TO BE A SEPARATE BUSINESS. THE WHOLE OF THE PROFITS OF WHICH ACCRUE IN AN INDIAN STATE AND THE OTHER PART OF THE BUSINESS BE DEEMED TO BE A SEPARATE BUSINESS. IN PARA-44, THE HONBLE C OURT HAS DISCUSSED THE PROBLEM WITH REFERENCE TO CERTAIN DECISIONS OF ENGL ISH COURTS AND THEN MADE AN OBSERVATION THAT IT HAD BEEN HELD THAT IF S EPARATION IS POSSIBLE IN SUCH CASES, THE PROPER COURSE IS TO FOLLOW THAT SEV ER THE PROFITS OF THE TWO BUSINESSES AND ASSESS ACCORDINGLY. THE RESULT OF T HE DISCUSSION WAS THAT THE PROFITS OF THE TWO BUSINESSES WERE DIRECTED TO BE APPORTIONED. SIMULTANEOUSLY, THE HONBLE COURT HAS ALSO MADE AN OBSERVATION, QUOTE IT IS TRUE THAT THESE ARE CASES WHERE SEVERAL BUSIN ESSES WERE AMALGAMATED AND CARRIED ON TOGETHER, OR MORE OF WHI CH WERE NOT LIABLE TO TAX OR EXCESS PROFITS DUTY; BUT THE PRINCIPLE OF APPORTIONMENT UPON WHICH THESE CASES WERE DECIDED COULD, IN MY OPINION , BE APPLIED WITH EQUAL PROPRIETY TO CASES WHERE ONE PART OF THE BUSI NESS IS DISTINCT AND SEPARATE FROM THE OTHER PARTS AND IS CAPABLE OF EAR NING PROFITS SEPARATELY. UNQUOTE. THE HONBLE JUDGE WAS THEREFORE VERY M UCH CONCERN ABOUT THE FACT THAT THE BUSINESS SHOULD BE CAPABLE OF EARNING ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 75 - PROFITS SEPARATELY. RATHER, IN THE SUBSEQUENT PARAS IT WAS FURTHER MA DE CLEAR THAT THE MANUFACTURING PROFIT COULD BE SUB-DI VIDED ONLY IF THERE WAS NO INSUPERABLE/CHALLENGING DIFFICULTY IN MAKING SU CH APPORTIONMENT. A POSSIBILITY WAS THEREFORE DISCUSSED THAT THERE COUL D BE APPORTIONMENT OF THE NET PROFIT THAT ACCRUE TO THE BUSINESS OF THE A SSESSEE AND ONE PORTION OF IT COULD BE ALLOTTED TO THAT PART OF THE BUSINES S WHICH RELATES TO THE MANUFACTURE OF THE SAID COMMODITY WHICH WAS ULTIMAT ELY SOLD IN THE MARKET. THE RAICHUR FACTORY CERTAINLY HAS BUSINESS CONNECT ION IN BRITISH INDIA FOR A PART OF THE OIL MANUFACTURED BY IT IS S OLD THROUGH THE BOMBAY ESTABLISHMENT OF THE ASSESSEE. THAT ALL THE OPERATI ONS OF THE RAICHUR BUSINESS ARE NOT CARRIED ON IN BOMBAY. THEREFORE, THE PROFITS THAT WOULD BE DEEMED UNDER THIS SECTION TO ACCRUE OR ARISE IN BOMBAY WILL ONLY BE THE PROFITS WHICH MAY REASONABLY BE ATTRIBUTED TO T HAT PART OF THE OPERATIONS CARRIED ON IN BOMBAY, THAT IS TO SAY, TO SALE OF PART OF ITS OIL IN BOMBAY. IN THIS CONTEXT, AN OBSERVATION WAS MADE THAT A TRADE IS COMPLETED AT A PLACE WHERE A BUSINESS TRANSACTION I S CLOSED. PROFITS OF A BUSINESS ARE UNDOUBTEDLY NOT RECEIVED TILL THE COMMODITY ARE SOLD AND THEY ARE ASCERTAINED ONLY WHEN THE SALE TAKE PL ACE. THIS ASPECT HAS NOT BEEN DOUBTED OR CHALLENGED EVEN IN THE SAID ORD ER. BUT IN THE SAID ORDER THE QUESTION WAS THAT IF A PART OF A BUSINESS CONSISTED OF MANUFACTURING ACTIVITY AND THAT ACTIVITY CAN BE SEG REGATED SO AS TO COMPUTE THE YIELD PROFIT, THEN WHETHER SUCH PROFIT ACCRUE ONLY AT THE PLACE WHERE THE MANUFACTURE ARE SOLD. TO ANSWER THI S QUESTION, THE HONBLE COURT HAS COMMENTED IN PARA-49 THAT THERE W AS NO EXPRESS DIRECTION AS TO APPORTIONMENT IN THE THIRD PROVISO TO SECTION-5 OF EPT ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 76 - ACT. THE OPINION EXPRESSED WAS VERY SPECIFIC THAT A PROFIT CAN ACCRUE IN RESPECT TO THAT PART OF A BUSINESS ONLY WHEN APPORT IONMENT IS POSSIBLE. THE HONBLE COURT HAS SAID THAT ONLY ON THE SAID AS SUMPTION THAT APPORTIONMENT WAS POSSIBLE THE SAID PROVISO WAS BAS ED UPON THAT PRESUMPTION ONLY. IF NO APPORTIONMENT CAN BE MADE IN RESPECT OF THE PROCESS OF A PARTICULAR BUSINESS, THEN THAT WILL NO T BE CONSIDERED TO BE A PART OF THE BUSINESS AT ALL AND HELD THAT THE PROVI SO WILL NOT APPLY. IT WAS CONCLUDED THAT THE PRINCIPLE OF APPORTIONMENT WAS I MPLIED THEREIN. AFTER THIS DETAILED DISCUSSION, WE THUS ARRIVE AT T HE CONCLUSION THAT THE PRINCIPLE OF APPORTIONMENT WAS THE CRITERIA FOR SEG REGATING THE MANUFACTURING PROFIT IF IT WAS FEASIBLE TO DO SO. A S AGAINST THAT IN THE PRESENT CASE THE ASSESSEE HAS COMPUTED THE PROFIT O F THE BADDI UNIT ON THE BASIS OF THE WELL ACCEPTED PRINCIPLE OF ACCOUNT ANCY THAT A PROFIT IS ACCRUED WHERE A TRANSACTION IS CLOSED, MEANING THER EBY THE PROFIT ARISES SOLELY AT THE TIME OF SALE. 10.13. AFTER THE DETAILED DISCUSSION, BEFORE WE CLOSE THE CONTROVERSY WE WOULD LIKE TO EXPRESS THAT THE AOS PROPOSITION OF SEGMENTATION OF ELIGIBLE PROFIT OF THE MANUFACTURING UNIT WAS NOT A LTOGETHER MEANINGLESS. THIS APPROACH OF THE AO CANNOT BE BRUSHED ASIDE ON THE FACT OF IT. BUT AT PRESENT, WHEN THE METHOD OF ACCOUNTING AS APPLICABL E UNDER THE STATUTE, DO NOT SUGGEST SUCH SEGREGATION OR BIFURCATION, THE N IT IS NOT FAIR TO DRAW AN IMAGINARY LINE TO COMPUTE A SEPARATE PROFIT OF T HE BADDI UNIT. THE BADDI UNIT HAS IN FACT COMPUTED ITS PROFIT AS PER A SEPARATELY MAINTAINED BOOKS OF ACCOUNT OF THE ELIGIBLE MANUFACTURING ACTI VITY. TO IMPLEMENT THE METHOD OF THE COMPUTATION AT STAND ALONE BASIS, AS CONVEYED BY THE AO, THE MANUFACTURING UNIT HAS PREPARED A PROFIT & LOSS ACCOUNT OF ITS ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 77 - MANUFACTURING-CUM-SALE BUSINESS ACTIVITY. IF THE S TATUTE WANTED TO DRAW SUCH LINE OF SEGREGATION BETWEEN THE MANUFACTURING ACTIVITY AND THE SALE ACTIVITY, THEN THE STATUTE SHOULD HAVE MADE A SPECI FIC PROVISION OF SUCH DEMARCATION. BUT AT PRESENT THE LEGAL STATUS IS THA T THE STATUTE HAS ONLY CHOSEN TO GIVE THE BENEFIT TO ANY BUSINESS OF DRUG MANUFACTURING ACTIVITY WHICH IS INCURRING EXPENDITURE ON RESEARC H ACTIVITY IS ELIGIBLE FOR THIS PRESCRIBED WEIGHTED DEDUCTION. THE SEGREGA TION AS SUGGESTED BY THE AO HAS FIRST TO BE BROUGHT INTO THE STATUTE AND THEN TO BE IMPLEMENTED. WITHOUT SUCH LAW, IN OUR CONSIDERED O PINION, IT WAS NOT FAIR AS ALSO NOT JUSTIFIABLE ON THE PART OF THE AO TO DISTURB THE METHOD OF ACCOUNTING OF THE ASSESSEE REGULARLY FOLLOWED IN TH E NORMAL COURSE OF BUSINESS. IT IS TRUE THAT OTHERWISE NO FALLACY OR MISTAKE WAS DETECTED IN THE BOOKS OF ACCOUNTS OF BADDI UNIT PREPARED ON STA ND ALONE BASIS THROUGH WHICH THE ONLY SOURCE OF INCOME/PROFIT WAS THE MANUFACTURING OF THE SPECIFIED PRODUCTS. WE THEREFORE HOLD THAT THE AOS ACTION OF SEGREGATION WAS MERELY BASED UPON A HYPOTHESIS, HEN CE HEREBY REJECTED. THESE TWO GROUNDS NOS.6 & 7 ARE ALLOWED. 11. GROUND NO.8 READS AS UNDER :- THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN MAKING AN ADDITION OF RS.23,81,922/- AS UPWARD ADJUSTMENT ON INTERNATIONAL TRANSACTIONS UNDER THE PROVISIONS RELATING TO TRANSFER PRICING. 11.1. THE MATTER WAS REFERRED U/S.92CA OF THE IT AC T TO THE TPO AND VIDE AN ORDER U/S.92CA(3) DATED 18/09/2009, HE HAS RECORDED THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AS REPOR TED IN FORM 3CEB. IT WAS NOTED THAT THE ASSESSEE-COMPANY HAD PAID SERVICE CHARGES @ ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 78 - 10% MARK-UP TO M/S.ZYDUS HEALTHCARE (U.S.A.) LLC. THE NATURE OF SERVICES WERE STATED TO BE MAINLY IN RESPECT OF PRO DUCT REGISTRATION SERVICES. BESIDES, ASSESSEE HAS MADE REIMBURSEMENT OF EXPENSES INCURRED. IT WAS ALSO NOTED THAT SIMILAR REIMBURS EMENT OF EXPENSES FOR PRODUCT REGISTRATION WERE ALSO MADE TO ZYDUS HEALTH CARE SOUTH AFRICA AND ZYDUS FRANCE, BUT NO SERVICE CHARGES PAID TO THOSE ASSOCIATE ENTERPRISES. THE ASSESSEE-COMPANY HAS SUBMITTED F .A.R. ANALYSIS AS FOLLOWS:- (A) FUNCTIONS PERFORMED : CADILA IS ENGAGED IN MANUFACTURING FORMULATIONS AND APIS. IT UNDERTAKES RESEARCH AND DEVELOPMENT, MANUFACTURING AND PRODUCT PROMOTION ACTIVITIES. ZY DUS LLC IS INVOLVED IN REGISTRATION OF PHARMACEUTICAL PRODUCTS OF CADILA IN OVERSEAS LOCATIONS SUCH AS USA ETC. AS WELL AS IN PROVIDING MARKETING SUPPORT SERVICES. IN RELATION TO THE PRO CESS OF OBTAINING PRODUCT REGISTRATION, CADILA SUPPLIES ALL THE INFORMATION / DATA REQUIRED FOR SUBMISSION TO THE R ELEVANT AUTHORITIES. CADILA PREPARES AND COMPILES COMPLETE SET OF REGISTRATION DOSSIERS FOR OBTAINING REGISTRATION WI TH THE CONCERNED REGULATORY AUTHORITY IN THE RESPECTIVE JU RISDICTION FOR E.G. US FOOD & DRUG ADMINISTRATION IN RESPECT OF US MARKET. CADILA ALSO OWNS THE INTELLECTUAL PROPERTY RIGHTS R ELATED TO THE PRODUCTS REGISTERED BY ZYDUS LLC. (B) RISK ASSUMED : ZYDUS LLC RENDERS PRODUCT REGISTRATION SUPPORT SERVICES EXCLUSIVELY TO CADILA. AS SUCH, ZYDUS LLC DOES NOT FACE ANY SIGNIFICANT BUSINESS RISK . SPECIALLY, ZYDUS LLC DOES NOT UNDERTAKE MARKET RISK, CONTRACT RISK AND CREDIT RISK WITH REGARD TO ITS TRANSACTIONS WITH CADILA. 11.2 AFTER STUDYING THE FAR ANALYSIS, THE ASSESSEE HAS CHOSEN ZYDUS (USA) LLC AS A TESTED PARTY. AS FAR AS SELECTION OF COMPARABLE COMPANY WAS CONCERNED, IT WAS REQUIRED TO BE IDENTI FIED THAT THOSE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 79 - COMPANIES MUST BE CARRYING SIMILAR FUNCTIONS AND OP ERATING IN SIMILAR MARKETS. THE ASSESSEE HAS THUS CHOSEN THOSE COMPANI ES CARRYING OUT THE FOLLOWING SERVICES:- A) ADVERTISING SERVICES B) DIRECT MAIL ADVERTISING SERVICES C) BUSINESS SERVICES D) GENERAL MANAGEMENT SERVICES E) MANAGEMENT CONSULTING SERVICES 11.3. FACTS AS DISCUSSED BY THE TPO WERE THAT THE A SSESSEE HAS REIMBURSED EXPENSES INCURRED FOR PRODUCT REGISTRATI ON BY ZYDUS HEALTHCARE (USA) LLC OF RS.3,09,64,194/-. A MARK-U P FOR CHARGES @ 10% HAS ALSO BEEN PAID TO ZYDUS HEALTHCARE (USA) LL C. IT WAS AN ADMITTED FACTUAL POSITION THAT PAYMENT TO M/S. ZYDU S (SA) AND PAYMENT TO ZYDUS FRANCE RESPECTIVELY OF RS.49,22,532/- AND RS.15,35,338/- WAS ALSO IN RESPECT OF REIMBURSEMENT OF EXPENSES FOR PR ODUCT REGISTRATION. IT WAS ALSO AN ADMITTED POSITION THAT MARK-UP OF 10% W AS NOT GRANTED TO THESE TWO AES. THE EXPLANATION OF THE ASSESSEE WAS THAT BEFORE ANY PHARMACEUTICAL COMPANY COULD SELL THE PRODUCT IN US A IT IS ESSENTIAL TO OBTAIN REGISTRATION FROM US FOOD & DRUG ADMINISTRAT ION (FDA). THE ZYDUS (USA) LLC HAD A QUALIFIED PERSON ON BOARD. OTHERWISE THE WORK CARRIED OUT BY ZYDUS LLC WAS A ZERO RISK ADMINISTRA TIVE OPERATION. IN FACT, IT WAS A NON-BUSINESS OPERATION WHICH DID NOT HAVE ANY PROFIT MOTIVE. A DISTINCTION WAS DESCRIBED TO THE TPO THAT THE PRODUCT REGISTRATION CHARGES AS REIMBURSED TO ZYDUS (USA) L LC, I.E AE, WAS NOT ENGAGED IN INDEPENDENT BUSINESS. WHEREAS NO PRODUCT REGISTRATION CHARGES WERE PAID TO OTHER AES THEY BEING ENGAGED I N INDEPENDENT BUSINESS, THEREFORE, THERE WAS NO QUESTION OF PAYME NT OF ANY MARK-UP ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 80 - CHARGES. HOWEVER, THE SAID CLAIM WAS NOT ACCEPTED BY THE TPO AND HE HAS DEMONSTRATED AS FOLLOWS:- CLAUSE 13(A) CLAUSE 13(B) CLAUSE 13(C) ZUYDUS HEALTHCARE (USA) L.L.C., U.S.A. (ZYDUS LLC) REIMBURSEMENT OF EXPENSES INCURRED ON BEHALF OF THE ASSESSEE FOR PRODUCT REGISTRATION 3,09,64,194 ZYDUS HEALTHCARE S.A. (PTY.) LTD. REIMBURSEMENT OF EXPENSES INCURRED ON BEHALF OF THE ASSESSEE FOR PRODUCT REGISTRATION 49,22,532 ZYDUS FRANCE SAS, FRANCE REIMBURSEMENT OF EXPENSES INCURRED ON BEHALF OF THE ASSESSEE FOR PRODUCT REGISTRATION 15,35,338 THE TPO HAS THUS CONCLUDED THAT THE SERVICES CHARGE S @ 10% WAS RECOMMENDED FOR UPWARD ADJUSTMENT IN THE FOLLOWING MANNER:- 5.7. IN VIEW OF ABOVE, THE EXPLANATION SUBMITTED B Y THE ASSESSEE IS REJECTED AND THE TRANSACTION IS BEING TREATED AS MERE REIMBURSEMENT OF EXPENSES AND NO MARK UP IS ALLOWED FOR THESE ZERO RISK ADMINISTRATIVE OPERATIONS I.E. NON BUSINE SS OPERATION. IN VIEW OF ABOVE RS.32,61,124/- (ZYDUC LLC HAS SHOWN RS.32,61,124/- AS SERVICE CHARGES INCOME WHICH IS 1 0% OF TOTAL EXPENSES INCURRED IN THIS BEHALF OF RS.3,26,11,245/ - IN PLACE OF RS.29,77,402/- SHOWN BY THE ASSESSEE IN 3CEB REPORT ) IS ADDED BACK TO THE INCOME. TOTAL UPWARD ADJUSTMENT RS.32,61,124/- ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 81 - 11.4. INTERESTINGLY, WHEN THE MATTER REACHED TO DRP, IT WAS DIRECTED TO AO TO ALLOW A MARK-UP OF 2% INSTEAD OF NIL AS PER THE FOLLOWING DIRECTIONS:- 1.9. IN VIEW OF THE FACT THAT THE ASSESSEE HAD ST ATED VIDE LETTER DT. 4/6/2008 THAT THERE WAS NO GLOBAL TRANSFER PRICING POLICY, NO METHOD ADOPTED WITH RESPECT TO EACH INTERNATIONAL T RANSACTION AND HOW THE TRANSFER PRICE WAS ACTUALLY COMPUTED, IN CO NTRADICTION TO THE SUBMISSIONS NOW BEING MADE THAT MARK UP HAS BEE N PAID TO THOSE AES WHO ARE NOT ENGAGED IN INDEPENDENT ACTIVI TY AND ALSO THE FACT THAT, ZYDUS USA HAD NOT PURCHASED ANY GOOD S FROM ITS PARENT COMPANY OR OTHER ASSOCIATED COMPANIES WHICH MEANS THAT IT HAD ALSO CARRIED OUT THE BUSINESS INDEPENDENTLY, THE MARK UP OF RS.29,77,402/-, BEING 10% OF THE REIMBURSED EXPENDI TURE IS EXCESSIVE. TAKING THE TYPE OF SERVICES RENDERED IN TO CONSIDERATION AS ALSO THE EFFORTS REQUIRED TO BE MADE, IN OUR CON SIDERED OPINION, A MARK UP OF 2% WOULD MEET THE ENDS OF JUSTICE. TH E AO IS DIRECTED TO ALLOW A MARK UP OF 2% INSTEAD OF NIL AL LOWED BY HIM. 11.5. IN THIS REGARD, WE HAVE HEARD BOTH THE SIDES. FROM THE SIDE OF THE ASSESSEE, A SEPARATE COMPILATION FOR TRANSFER PRICI NG ISSUE WAS FURNISHED AND THE CASE LAWS CITED ARE AS FOLLOWS:- SL.NO(S). IN THE CASE OF.. REPORTED IN/ITA NO 1. SONY INDIA (P) LTD. VS. DCIT DELHI ITAT (2008) 114 ITD 448 2. SKODA AUTO INDIA (P) LTD. VS. ACIT PUNE ITAT (2009) 30 SOT 319 3. CUSTOMER SERVICES INDIA (P) LTD. VS. ASST.CIT DELHI ITAT (2009) 30 SOT 486 (DEL) 4. SAP LABS INDIA (P) LTD. VS. ACIT BANGALORE ITAT ITA NO.418/BANG/2008 & OTHERS.. ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 82 - 11.6. FROM THE SIDE OF THE REVENUE, LD.DR MR.GUPTA STATED AT THE OUTSET THAT A REASONABLE RELIEF OF 2% MARK-UP HAS ALREADY BEEN ALLOTTED BY THE DRP AND, THEREFORE, NO FURTHER RELIEF SHOULD BE GRA NTED. CERTAIN DECISIONS OF THE TRIBUNAL HAVE ALSO BEEN QUOTED AS FOLLOWS:- SL.NO(S). IN THE CASE OF.. ITA NO(S) 1. DCIT VS. M/S.DELOITTE CONSULTING INDIA PVT.LTD. 1082 & 1084 /HYD/2010 FOR A.Y. 2004-05 (CROSS APPEALS) DATED 22/07/2011 2. M/S.MARUBENI INIDA PVT.LTD. VS. ADDL..CIT 809/DEL/2009 & OTHERS FOR A.Y. 2002-03 DATED 18/03/2011 3. M/S.BAYER MATERIAL SCIENCE P.LTD. VS. ADDL.CIT 7977/MUM/2010 FOR A.Y. 2006-07 DATED 16/12/2011 11.7 HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES , WE HAVE NOTICED THAT THE MAIN CONTENTION BEFORE US IS WHETHER TO GR ANT THE BENEFIT PRESCRIBED U/S.92C(2) OF IT ACT. THE ASSESSEE HAS FURNISHED THE FOLLOWING CALCULATION:- PARTICULARS AMOUNT (INR) TOTAL COST A 29,774,020 ADD MARK-UP @ 10% PAID BY CADILA TO ZYDUS US B 2,977,402 TOTAL AMOUNT PAID BY CADILA TO ZYDUS US FOR AVAILING PRODUCT REGISTRATION AND MARKETING SUPPORT SERVICES C = A + B 32,751,422 MARK-UP @ 2# AS DIRECTED BY DRP D = A *2% 595,480 ARMS LENGTH PRICE ARRIVED AT BASED ON E = A +D 30, 369,500 ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 83 - DIRECTION OF DRP ORDER APPLYING THE 5% BENEFIT AS PROVIDED IN SECOND PROVISO TO SECTION 92C(2) F = E*1.05 31,887,975 ADJUSTMENT FOR DIFFERENCE BETWEEN THE AMOUNT PAID AND THE ARMS LENGTH PRICE AFTER ALLOWING THE 5% BENEFIT G = C F 863,447 HOWEVER, IN THIS REGARD, FOR THE PURPOSE OF COMPUT ATION OF ARMS LENGTH PRICE U/S.92C FIRST OF ALL MOST APPROPRIATE METHOD IS TO BE DECIDED AND THEREAFTER AS PER THE PROVISIONS OF SECTION 92C (2) THE BENEFIT OF VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMI NED AND THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN IS PRESCRIBED AS FOLLOWS:- 92C(2): THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMIN ED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNAT IONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT E XCEED [FIVE PER CENT OF THE LATTER], THE PRICE AT WHICH THE INTERNA TIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. 11.8 THE MATTER REQUIRES RECONSIDERATION AT THE LEV EL OF THE AO ONLY TO EXAMINE THE CORRECTNESS OF THE COMPUTATION AS SUGGE STED BY THE ASSESSEE ACCORDING TO WHICH THE ADJUSTMENT TO THE EXTENT OF RS.8,63,447/- IS SUGGESTED. AS FAR AS THE PART RELIEF GRANTED BY TH E DRP BY ALLOWING ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 84 - MARK-UP @ 2% IS CONCERNED, WE ARE OF THE VIEW THAT CONSIDERING THE TOTALITY OF THE CIRCUMSTANCES OF THE CASE, AS ALSO THE CASE LAWS CITED, ONCE THERE IS NO DISPUTE ABOUT THE MOST APPROPRIATE METH OD BEING ADOPTED BY BOTH THE SIDES, THE SAID DIRECTION OF THE DRP NEED NOT TO BE DISTURBED. THE AO HAS TO SIMPLY EXAMINE THE SAID CALCULATION I N THE LIGHT OF THE SECOND PROVISO TO SECTION 92C(2) OF IT ACT AND IF A NY RELIEF IS PERMISSIBLE, THEN THE SAME CAN BE GRANTED BUT AS PE R LAW. WITH THESE DIRECTIONS THIS GROUND NO.8 BE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 12. GROUND NO.9 READS AS UNDER :- THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN MAKING THE FOLLOWING ADJUSTMENTS WHILE COMPUTING TH E BOOK PROFITS U/S.115JB. A. PROVISION FOR DOUBTFUL DEBTS - RS.1,19,45,326/ - B. EXPENSES DISALLOWED U/S.14A` - RS.1,18,84,177 /- 12.1. THE AO HAS NOTICED THAT THE ASSESSEE HAD SHOW N INCOME U/S.115JB AT RS.149,11,23,887/-. HOWEVER, IT WAS NOTICED THAT PROVISION FOR DOUBTFUL DEBT WERE NOT ADDED TO THE BOOK PROFIT. AS PER THE PROVISIONS OF SECTION 115JB, EXPLANATION-1 THE ASSESSEE WAS AS KED TO EXPLAIN WHY THE SAME WAS NOT ADDED. THE ONLY SUBMISSION OF THE ASSESSEE WAS THAT THE ISSUE AS RAKED UP BY THE AO IS CONTROVERSIAL, H ENCE NOT ADDED VOLUNTARILY. BEING NOT SATISFIED, THE PROVISIONS O F DOUBTFUL DEBTS WAS ADDED TO THE BOOK PROFIT. 13. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES , WE ARE OF THE CONSIDERED VIEW THAT NOW THIS ISSUE STOOD SETTLED IN FAVOUR OF THE REVENUE BY THE ORDER OF THE HONBLE DELHI HIGH COUR T PRONOUNCED IN THE ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 85 - CASE OF INDO RAMA SYNTHETICS 320 ITR 340 (DEL.). RESPECTFULLY FOLLOWING THIS PRECEDENT, WE HEREBY DISMISS THIS PA RT OF THE GROUND OF THE ASSESSEE. 13.1. THE SECOND LIMB OF THIS GROUND IS IN RESPECT OF EXPENSES DISALLOWED U/S.14A OF IT ACT. THE AOS VERSION WAS THAT IN VIEW OF CLAUSE(F) EXPLANATION-1 TO SECTION 115JB THE SAID ADJUSTMENT SHOULD HAVE BEEN MADE. ACCORDING TO AO, THE AMOUNT DISAL LOWED U/S.14A IS LIABLE TO BE ADDED AS PER THE PROVISION OF SEC.115J B R.W.EXPLANTION-1, CLAUSE(F) WHICH MANDATES THAT THE EXPENDITURE DEBIT ED TO PROFIT & LOSS ACCOUNT A/C. INCURRED IN RELATION TO INCOME EXEMPT U/S.10 IS TO BE ADDED FOR COMPUTATION OF BOOK PROFIT. HOWEVER, THIS VERY ISSUE NOW STOOD SETTLED BY GOETZE LTD. 32 SOT 101 (DEL.), WHEREIN I T WAS HELD AS UNDER: WE HAVE CONSIDERED THE FACTS OF THE CASE AND RIVAL SUBMISSIONS. WE MAY AT THE OUTSET CONSIDER THE PROVISIONS CONTAINED IN CLAUSE (F) OF THE EXPLANATION TO SECTION 115JA AND SUB-SECTION (1) OF SECTION 14A OF THE ACT. UNDER THE AFORESAID CLAUSE (F), THE AMOUNT OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH ANY OF THE PROVISI ONS OF CHAPTER III APPLIES HAS TO BE ADDED TO THE BOOK PROFIT. UNDER T HE PROVISION CONTAINED IN SECTION 14A, NO DEDUCTION IS TO BE ALL OWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. S INCE WE ARE DEALING WITH THE ISSUE OF EXPENDITURE RELATING TO DIVIDEND INCOME, A MATTER FALLING UNDER CHAPTER III, IT BECOMES CLEAR ON PERU SAL OF THESE TWO PROVISIONS THAT THEY ARE SIMILAR IN NATURE. CLAUSE (F) USES THE WORDS 'EXPENDITURE RELATABLE TO ANY INCOME', WHILE SECTIO N 14A USES THE WORDS 'EXPENDITURE INCURRED BY THE ASSESSEE IN RELA TION TO INCOME'. THESE WORDS HAVE THE SAME MEANING. WE MAY ALSO ADD HERE THAT SECTION 14A CONTAINS TWO MORE SUB-SECTIONS, SUB-SEC TION (2) AND SUB- SECTION (3), WHICH DO NOT FIND A PLACE IN THE CLAUS E (F). THEREFORE, INSOFAR AS COMPUTATION OF ADJUSTED BOOK PROFIT IS C ONCERNED, PROVISIONS OF SUB-SECTION (2) AND SUB-SECTION (3) OF SECTION 1 4A CANNOT BE IMPORTED INTO CLAUSE (F). ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 86 - ONCE THE RESPECTED CO-ORDINATE BENCH HAS TAKEN A VI EW IN RESPECT OF THESE VERY PROVISIONS OF THE ACT, AS RAISED BEFO RE US, THEREFORE FOLLOWING THE SAME THIS PART OF THE GROUND IS ALLOW ED. 13.2. RESPECTFULLY FOLLOWING THE AFORESAID DECISION , THIS GROUND NO.9 IS PARTLY ALLOWED. 14. GROUND NO.10 READS AS UNDER : THAT THE LEARNED ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN ALLOWING THE DEDUCTION OF RS.5,50,000/- U/S.80G INS TEAD OF RS.27,57,600/- (CORRECTLY ALLOWABLE PURSUANT TO INC REASE IN THE GROSS TOTAL INCOME), WITHOUT ANY DISCUSSION IN THIS REGARD IN THE ASSESSMENT ORDER. 14.1. THE LD.AR HAS STATED THAT THIS GROUND IN FACT IS CONSEQUENTIAL IN NATURE, HENCE NOT TO BE CONTESTED PRESENTLY. IN VI EW OF THIS STATEMENT, THE GROUND BEING NOT CONTESTED IS HEREBY DISMISSED. 15. GROUND NO.11 READS AS UNDER : 11. THAT THE LEARNED ASSESSING OFFICER ERRED IN LA W AND ON FACTS IN NOT ALLOWING THE BENEFIT OF CARRY FORWARD OF MAT CREDIT OF RS.1,65,98,236/- RELATING TO A.Y. 2000-01 U/S.115JAA IN THE TAX COMP UTATION AS PER THE NOTICE OF DEMAND U/S.156. 15.1. AS FAR AS THIS GROUND IS CONCERNED, THE ORDER S OF THE REVENUE AUTHORITIES ARE NOT VERY ELABORATE, HOWEVER, IN OUR AMPLE OPINION, THE SCHEME OF LEVYING THE MINIMUM ALTERNATIVE TAX (MAT) ON ZERO COMPANIES WAS INTRODUCED BY THE FINANCE ACT, 1996 W ITH EFFECT FORM 1.4.1997. A NEW SECTION 115JAA WAS ALSO INSERTED T O PROVIDE FOR A TAX- CREDIT SCHEME BY WHICH MAT PAID CAN BE CARRIED FORW ARD FOR SET OFF ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 87 - AGAINST REGULAR TAX PAYABLE DURING THE SUBSEQUENT Y EARS, SUBJECT TO CERTAIN CONDITIONS. IN A DECISION OF ITAT CHENNAI BENCH PR ONOUNCED IN THE CASE OF ITO VS. DATA SOFTWARE RESEARCH COMPANY (INTERNAT IONAL) PVT.LTD. 126 ITD 442 (CHENNAI) IT WAS CLARIFIED THAT THE CARRIED FORWARD OF MAT CREDIT IS AVAILABLE FOR A PERIOD OF 5 + 1 YEARS. S INCE THE NECESSARY FACTS ARE YET TO BE EXAMINED IN THE LIGHT OF THE ABOVE PR ECEDENCE, THEREFORE, WE REFER THIS GROUND BACK TO THE STAGE OF THE ASSESSIN G OFFICER TO DECIDE ACCORDINGLY. RESULTANTLY, THIS GROUND MAY BE TREAT ED AS ALLOWED BUT FOR STATISTICAL PURPOSES. 16. GROUND NO.12 READS AS UNDER : 12. THAT THE LEARNED ASSESSING OFFICER ERRED IN LA W AND ON FACTS IN MECHANICALLY INITIATING PENALTY PROCEEDINGS U/S.271 (1)(C) OF THE I.T. ACT IN RESPECT OF EACH OF THE ADDITIONS MADE BY HIM IN RESPECT OF GROUNDS 1 TO 9 HEREINABOVE, ON THE GROUND THAT THE ASSESSEE H AS FURNISHED INACCURATE PARTICULARS OF INCOME, IGNORING THE DECI SION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. RELIANCE PETR OPRODUCTS (P) LTD. (2010) 322 ITR 158 (SC), WHICH WAS SQUARELY BINDING ON HIM. 16.1. AT PRESENT, THIS GROUND IS PRE-MATURE, HENCE DISMISSED. 17. GROUND NO.13 READS AS UNDER : 13. THAT THE LEARNED ASSESSING OFFICER ERRED IN LA W AND ON FACTS IN ENHANCING THE INTEREST CHARGEABLE U/S.234B. 17.1. THIS GROUND IS CONSEQUENTIAL IN NATURE, HENCE DISMI SSED. 18. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. SD/- SD/- ( . .!'#$ ) ( ) % ( A.K. GARODIA ) ( M UKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL ME MBER AHMEDABAD; DATED 25/ 5 /2012 63..(, .(../ T.C. NAIR, SR. PS ITA NO.3140/AHD /2010 CADILA HEALTHCARE LTD. VS. ADDL.CIT ASST.YEAR 2006-07 - 88 - 5 1 .7 8 7) 5 1 .7 8 7) 5 1 .7 8 7) 5 1 .7 8 7)/ COPY OF THE ORDER FORWARDED TO : 1. *- / THE APPELLANT 2. ./*- / THE RESPONDENT. 3. 9 / CONCERNED CIT 4. 9() / THE CIT(A)-CONCERNED 5. 7 >> >/ // / + + + + ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD 1. DATE OF DIRECT DICTATION ON COMPUTER.(STARTED ON 1 6.4.12 LATER ON DICTION- PAD PAGES 1 TO 10 ATTACHED) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 15.4.12/24.5.12 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S25/5/12 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 25/5/12 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER