Appeal Details
Counselvise Citation
[2021] 107 COUNSELVISE.COM (IT) 7796 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 6 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
03-09-2021
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
Ahmedabad
Assessment Year
2012-2013
Appeal Filed On
10-02-2017
Judgement Text
, IN THE INCOME TAX APPELLATE TRIBUNAL, D BENCH, AHMEDABAD BEFORE JUSTICE P.P. BHATT, PRESIDENT AND WASEEM AHMED, ACCOUNTANT MEMBER ./ ITA NO.360/AHD/2017 / ASSTT. YEAR: 2012-2013 SUN PHARMACEUTICAL INDUSTRIES LTD., (ERSTWHILE RANBAXY LABORATORIES LIMITED, (RLL) NOW MERGED WITH SUN PHARMACEUTICAL INDUSTRIES LIMITED) SPARC, TANDALJA, VADODARA-390020. PAN: AADCS3124K (PAN OF ERSTWHILE RLL-AAACR0127N) VS. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(1)(1), VADODARA. (APPLICANT) (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR, SR. ADVOCATE WITH SHRI PARIN SHAH, & SHRI VARTIK CHOKSI, A.RS REVENUE BY : SHRI M.S.A. KHAN, CIT.D.R /DATE OF HEARING : 17/08/2021 /DATE OF PRONOUNCEMENT: 03/09/2021 /O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE SEPARATE ORDERS OF THE DISPUTE RESOLUTION PANEL-II, MUMBAI [DRP IN SHORT] VIDE ORDER DATED 30/12/2016 ARISING IN THE ASSESSMENT ORDERS PASSED UNDER S. 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') DATED 31/03/2016 RELEVANT TO ASSESSMENT YEAR (AY) 2012-13. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- THE APPELLANT RAISES DIE FOLLOWING GROUNDS OF APPEAL, WHICH ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER: 1. RE:ORDER PASSED BY THE LD. ASSESSING OFFICER PURSUANT TO DIRECTIONS OF LD. DRP IS BAD IN LAW: 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSMENT ORDER ('THE ORDER') DATED 23.01.2017 PASSED BY THE LEARNED ASSESSING OFFICER (THE 'LD. AO') U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (THE 'ACT 1 ) IN CASE OF ERSTWHILE RANBAXY LABORATORIES LIMITED (NOW MERGED WITH THE APPELLANT) SUFFERS FROM A JURISDICTIONAL DEFECT AS NO ASSESSMENT CAN BE MADE ON A DISSOLVED / AMALGAMATING COMPANY AND THEREFORE, THE ORDER IS VOID AB INITIO. 2. WITHOUT PREJUDICE TO THE ABOVE, 2.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSMENT ORDER PASSED BY THE LD. AO UNDER SECTION 143(3) IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE HON'BLE DISPUTE RESOLUTION PANEL (THE 'HON'BLE DRP 1 ) U/S 144C OF THE ACT IS BAD IN LAW. 2.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE ADDITIONS / DISALLOWANCES PROPOSED IN THE DRAFT ASSESSMENT ORDER PASSED BY THE LD. AO WITHOUT JUDICIOUSLY CONSIDERING THE FACTUAL AND LEGAL OBJECTIONS RAISED BY THE APPELLANT. THE HON'BLE DRP ERRED ON FACTS AND IN LAW IN NOT DIRECTING THE LD. AO TO DELETE VARIOUS ADDITIONS / DISALLOWANCE, WHICH WERE SQUARELY COVERED IN FAVOUR OF THE APPELLANT BY THE ORDER(S) OF THE APPELLATE AUTHORITIES IN EARLIER YEARS. 3. RE: ADDITION ON ACCOUNT TRANSFER PRICING RS. 10,350,600,000/-: 3.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN NOT ACCEPTING THE OVERSEAS ASSOCIATED ENTERPRISES ('AE') AS TESTED PARRY, BEING THE LEAST COMPLEX OF THE TRANSACTING ENTITIES, AND ALSO SINCE THE ISSUE HAS BEEN ADJUDICATED IN THE FAVOUR OF THE APPELLANT BY THE HONORABLE INCOME TAX APPELLATE TRIBUNAL ('ITAT 1 ) IN APPELLANT'S OWN CASE IN A.Y. 2008-09 (ITA NO. 196/DEL/2013), AND THE FACTS AND CIRCUMSTANCES OF THE CASE REMAIN UNCHANGED. 3.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/TPO FAILED AND THE HON'BLE DRP FURTHER FAILED TO APPRECIATE THAT THE TAX DEPARTMENT HAD ALREADY ENTERED INTO AN ADVANCE PRICING AGREEMENT (APA) WITH THE APPELLANT FOR AY 2014-15 ON THE PRINCIPAL ISSUE OF SELECTION OF FOREIGN AE AS A TESTED PARTY AND HENCE THE SAME PRINCIPLE BEING A LEGAL PRINCIPLE OUGHT TO HAVE BEEN FOLLOWED IN THE YEAR UNDER QUESTION AS THERE WERE NO CHANGES IN FUNCTIONS, ASSETS AND RISKS ('FAR') OF THE TRANSACTING PARTIES. 3.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN DISREGARDING THE ALP BENCHMARKING PROCESS CARRIED OUT BY THE APPELLANT IN RESPECT OF TRANSFER PRICING DOCUMENTATION ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 3 MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 ('RULES'): 1. BY REJECTING THE AGGREGATION APPROACH ADOPTED BY APPELLANT FOR BENCHMARKING ITS TRANSACTIONS WITH ASSOCIATED ENTERPRISES; 2. BY REJECTING THE APPROACH ADOPTED BY THE APPELLANT OF UNDERTAKING A REGIONAL BENCHMARKING IN THE TP REPORT WHICH IS IN LINE WITH THE GLOBALLY ACCEPTED TP PRINCIPLES AND ALSO ACCEPTED BY CBDT IN THE APA ENTERED INTO WITH APPELLANT FOR AY 2014-15; 3. BY HOLDING THAT RELEVANT AND SUFFICIENT FINANCIAL DATA IS NOT AVAILABLE FOR THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT AND QUESTIONING THE AUTHENTICITY OF THE FINANCIAL DATA OF FOREIGN COMPARABLE WITHOUT APPRECIATING THAT THE DATABASE USED BY THE APPELLANT WAS A GLOBALLY ACCEPTED ONE; AND 4. BY DISREGARDING THE SEGMENTED FINANCIAL STATEMENTS OF AES AS FURNISHED BY THE APPELLANT, THEREBY HOLDING THAT THERE IS NOTHING ON RECORD TO DEMONSTRATE THAT THE MARGINS EARNED BY THE AES IS DUE TO THE INTERNATIONAL TRANSACTION THAT NEEDS TO BE BENCHMARKED. 3.4 WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO/TPO ERRED AND THE HON'BLE DRP FURTHER ERRED IN CONSIDERING THE APPELLANT AS THE TESTED PARTY WHILE DETERMINING THE ALP ON THE FOLLOWING COUNTS-. 1. IN CONSIDERING FOLLOWING NON-OPERATING EXPENSES AS OPERATING EXPENSE: A. AMOUNT PAID ON ACCOUNT OF US PDA SETTLEMENT AS OPERATING EXPENSE WHILE WORKING OUT THE PROFIT LEVEL INDICATOR (OPERATING PROFIT TO OPERATING COST) OF THE ASSESSEE. B. AMOUNT PAID ON ACCOUNT OF PRODUCT LIABILITY CLAIMS AS OPERATING EXPENSE WHILE WORKING OUT THE PROFIT LEVEL INDICATOR (OPERATING PROFIT TO OPERATING COST) OF THE ASSESSEE. 2. IN CARRYING OUT FRESH SEARCH PROCESS FOR DETERMINING COMPARABLE COMPANIES MARGIN WITH SIGNIFICANT VARIATIONS AND ERRORS WITHOUT APPRECIATING THAT THE APPELLANT HAD CARRIED OUT ITS SUPPLEMENTARY ANALYSIS DILIGENTLY AND BASED ON THE AVAILABLE RECORDS, HENCE THE SAME CANNOT BE REJECTED. 4. RE: DISALLOWANCE U/S 14A READ WITH RULE 8D - RS 5,45,95,563/-: 4.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED IN PROPOSING AND HON'BLE DRP FURTHER ERRED IN CONFIRMING THE DISALLOWANCE OF ADDITIONAL AMOUNT OF RS. 5,45,95,563/- U/S 14A OF THE ACT BY INVOKING THE PROVISIONS OF RULE 8D OF INCOME-TAX RULES, 1962 WITHOUT APPRECIATING THAT THE APPELLANT HAD SUO MOTO DISALLOWED A SUM OF RS. 79,59,355/- IN ITS COMPUTATION OF INCOME AND THEREBY ERRED IN: 1. MECHANICALLY INVOKING RULE 8D WITHOUT FIRST RECORDING ITS SATISFACTION AS TO THE CORRECTNESS OF THE EXPENSES DISALLOWED BY THE APPELLANT; . 2. NOT APPRECIATING THAT THE APPELLANT HAD NOT RECEIVED ANY EXEMPT INCOME DURING THE YEAR UNDER CONSIDER AD ON; ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 4 3. NOT APPRECIATING THAT SINCE THE APPELLANT HAD SUFFICIENT OWN FUNDS TO MAKE THE INVESTMENTS, PRESUMPTION OUGHT TO BE MADE THAT INVESTMENTS WERE MADE FROM INTEREST FREE FUNDS AND NOT BORROWED FUNDS; 4. INCLUDING STRATEGIC INVESTMENTS WITHOUT APPRECIATING THAT SUCH INVESTMENTS WERE MADE FOR FURTHERANCE OF BUSINESS OBJECTIVES AND NOT WITH THE PURPOSE OF EARNING EXEMPT INCOME. 4.2 WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN COMPUTING THE AMOUNT OF DISALLOWANCE U/S 14A R.W.R. 8D. 1. IN CONSIDERING THE INTEREST ON SPECIFIC BORROWINGS AS PART OF INTEREST COST WHILE WORKING OUT THE DISALLOWANCE UNDER RULE 8D. 2. IN WORKING OUT THE DISALLOWANCE U/S. 14A ON THE BASIS OF GROSS INTEREST WITHOUT REDUCING THE INTEREST EARNED BY THE APPELLANT. 5. RE: ADDITION OF EXPENSE DISALLOWED U/S 14A IN COMPUTING BOOK PROFIT U/S 115JB RS 6,25,54,918/- 5.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED IN PROPOSING AND HON'BLE DRP FURTHER ERRED IN CONSIDERING THE AMOUNT DISALLOWED U/S 14A IN THE COMPUTATION OF NORMAL INCOME, AS AMOUNT TO BE ADDED FOR COMPUTING BOOK PROFIT UNDER SECTION 115JB WITHOUT APPRECIATING THAT THE PROVISIONS OF SEC. 115JB AND SEC. 14A ARE DEEMING PROVISIONS ENACTED UNDER THE INCOME-TAX ACT WHICH ARE TO BE MADE OPERATIVE ONLY TO THE EXTENT OF THE DEEMING FICTION CREATED THEREIN. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THAT BOTH SEC. 115JB AND SEC. 14A ARE MUTUALLY EXCLUSIVE AND THERE OUGHT NOT TO BE ANY DISALLOWANCE OF AMOUNT DISALLOWED U/S. 14A WHILE COMPUTING THE BOOK PROFIT U/S. 115JB. 5.2 WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN COMPUTING THE AMOUNT OF DISALLOWANCE U/S 14A R.W.R. 8D .1 IN CONSIDERING THE INTEREST ON SPECIFIC BORROWINGS AS PART OF INTEREST COST WHILE WORKING OUT THE DISALLOWANCE UNDER RULE 8D. .2 IN WORKING OUT THE DISALLOWANCE U/S. 14A ON THE BASIS OF GROSS INTEREST WITHOUT REDUCING THE INTEREST EARNED BY THE APPELLANT. 6. RE: DISALLOWANCE OF DEDUCTION U/S 35(2AB)- RS 4,40,22.43.7027- 6.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED IN PROPOSING AND HON'BLE DRP FURTHER ERRED IN CONFIRMING THE DEDUCTION U/S 35(2AB) OF THE ACT TO THE RUNE OF RS. 4,40,22,43,702/- ON THE GROUND THAT APPELLANT HAD NOT FILED FORM 3CL ISSUED BY DEPARTMENT OF SCIENTIFIC AND INDUSTRY RESEARCH (DSIR) WITHOUT APPRECIATING THAT: .1 THE FURNISHING OF FORM NO. 3CM IS SUFFICIENT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 35(2AB) AND THAT THE DSIR HAS CONSISTENTLY ISSUED FORM NO. 3CM IN RESPECT OF THE R&D FACILITIES OF THE APPELLANT; ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 5 .2 THERE IS NO PROVISION UNDER THE ACT MANDATING THE APPROVAL OF THE PRESCRIBED AUTHORITY I.E. DSIR IN FORM NO. 3CL TO BE A PRE-REQUISITE FOR THE PURPOSE OF CLAIMING WEIGHTED DEDUCTION OF REVENUE AND CAPITAL EXPENDITURE U/S 35(2AB). 6.2 WITHOUT PREJUDICE TO THE ABOVE, THE CAPITAL EXPENDITURE INCURRED AS PART OF R&D ACTIVITIES OUGHT TO BE ALLOWED DEDUCTION @100% U/S 35(L)(IV) AS THE SAID EXPENSES ARE INCURRED TOWARDS SCIENTIFIC RESEARCH RELATED TO THE BUSINESS OF THE APPELLANT. 6.3 WITHOUT PREJUDICE TO THE ABOVE, DEPRECIATION ON CAPITAL R&D EXPENDITURE U/S 32(1) OUGHT TO HAVE BEEN ALLOWED. 7. RE: CONTRIBUTION TO RANBAXY COMMUNITY HEALTHCARE SOCIETY (RCHS) AND RANBAXY SCIENCE FOUNDATION (RSF) - RS 2,83,30,000/-: 7.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN NOT ALLOWING THE CONTRIBUTIONS MADE TO RANBAXY COMMUNITY HEALTHCARE SOCIETY (RCHS) AND RANBAXY SCIENCE FOUNDATION ('RSF') UNDER THE PROVISIONS OF SECTION 37(1) OF THE ACT WITHOUT APPRECIATING THT THE CONTRIBUTION WAS MADE IN FURTHERANCE OF BUSINESS OBJECTIVE OF THE APPELLANT COMPANY AND THE SAME HAS BEEN DECIDED IN EARLIER YEARS BY THE DELHI HIGH COURT IN THE APPELLANT'S FAVOUR. 7.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN HOLDING THAT PAYMENTS MADE BY THE APPELLANT WERE IN THE NATURE OF ADVERTISEMENT AND PUBLICITY EXPENSE, AND THEREFORE, LIABLE TO DEDUCTION OF TAX AT SOURCE AND ON ACCOUNT OF FAILURE TO DEDUCT TAX, THE SAME WERE DISALLOWABLE U/S 40(A)(IA) OF THE ACT. 7.3 WITHOUT PREJUDICE TO THE ABOVE, THE HON'BLE DRP / LD. AO OUGHT TO HAVE APPRECIATED THAT SINCE THE PAYMENTS HAD ALREADY BEEN MADE DURING THE YEAR UNDER CONSIDERATION AND NOTHING WAS PAYABLE AS AT THE END OF THE RELEVANT YEAR, THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WERE NOT APPLICABLE AND CONSEQUENTLY THE ENTIRE AMOUNT WAS ALLOWABLE AS DEDUCTION U/S 37(1). 7.4 WITHOUT PREJUDICE TO THE ABOVE, THAT THE HON'BLE DRP / LD. AO FAILED TO APPRECIATE THAT SINCE THE PAYMENTS WERE NOT TAXABLE IN THE HANDS OF RCHS AND RSF, THERE WAS NO REQUIREMENT TO MAKE ANY DISALLOWANCE UNDER THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 8. DISALLOWANCE OF DEDUCTION U/S 8QIB / 80IC - RS 809.576.144/-: 8.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN NOT APPRECIATING THE FACTS IN APPELLANT'S CASE AND ALSO MISINTERPRETING THE SAME WHILE DISALLOWING ENTIRE DEDUCTION CLAIMED UNDER SECTIONS 80-IB AND 80-ICOFTHEACT. 8.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN HOLDING THAT THE APPELLANT HAS FAILED TO FILE A PROPER CLAIM WITHIN THE MEANING OF S. 80IA(7) OF THE ACT R.W.R. 18BBB(2) OF THE INCOME-TAX RULES, 1962, BY NOT ACCEPTING THE REVISED CERTIFICATE IN FORM 10CCB FILED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS ALONG WITH THE PROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET OF ALL THE ELIGIBLE UNDERTAKINGS. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 6 8.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN EXCEEDING ITS JURISDICTION IN HOLDING THAT THE APPELLANT WAS NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTIONS 80-IB & 80-IC OF THE ACT FOR THE YEAR UNDER CONSIDERATION, WITHOUT APPRECIATING THAT ON IDENTICAL FACTS, DEDUCTION HAD ALWAYS BEEN ALLOWED IN THE EARLIER YEAR(S) (EXCEPT FOR ASSESSMENT YEARS 2008-09 TO 2011-12). THE HON'BLE DRP / LD. AO OUGHT TO HAVE APPRECIATED THAT DETERMINATION OF ELIGIBILITY FOR ALLOWANCE OF DEDUCTION U/S 80-IB & 80-IC OF THE ACT IS RELEVANT ONLY IN THE FIRST YEAR AND NOT IN SUBSEQUENT YEARS OF CLAIM. 8.4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN DENYING THE DEDUCTION AND INTER ALIA ARRIVING AT VARIOUS CONCLUSIONS WHICH ARE COMPLETELY CONTRARY TO THE FACTS AND THE LAW IN AS MUCH AS: .1 THE APPELLANT DID NOT MAINTAIN SEPARATE BOOKS OF ACCOUNTS AND DID NOT SUBMIT THE PROFIT AND LOSS AND BALANCE SHEET OF THE NEW INDUSTRIAL UNDERTAKINGS, WITHOUT APPRECIATING THAT REVISED 10CCB SUBMITTED BY THE APPELLANT ALREADY CONTAINED THE REQUISITE INFORMATION. .2 THE SELLING AND DISTRIBUTION ACTIVITY CONSTITUTED A SEPARATE PROFIT CENTRE AND THAT FOR THE PURPOSE OF WORKING OUT THE PROFITS AND GAINS OF THE NEW INDUSTRIAL UNDERTAKINGS THE APPELLANT SHOULD HAVE COMPUTED ONLY THE PROFITS FROM THE MANUFACTURING ACTIVITY; .3 IN MODIFYING THE ALLOCATION OF EXPENDITURE ON AN ARBITRARY BASIS WITHOUT APPRECIATING THAT DETAILED ASSUMPTIONS AND JUSTIFICATIONS WERE SUBMITTED ALONGWITH THE FORM 10CCB FOR ALLOCATING EXPENSES TO THE NEW INDUSTRIAL UNDERTAKINGS; .4 IN COMPLETELY MISINTERPRETING THE PROVISIONS OF S. 801A (8) IN HOLDING THAT ONLY THE PROFITS FROM THE MANUFACTURING ACTIVITY ARE ELIGIBLE FOR DEDUCTION AND ALLEGING THAT THE PROFITS SO COMPUTED WOULD RESULT IN LOSS 8.5 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN ALLEGING THAT THE APPELLANT HAS USED TAX ARBITRAGE BY DIVERTING EXPENSES RELATING TO DEDUCTIBLE PROFITS OF THE UNDERTAKING TO TAXABLE PROFITS OF THE COMPANY AND BY DIVERTING INCOME NOT RELATING TO DEDUCTIBLE PROFIT OF THE UNDERTAKING FROM TAXABLE INCOME OF THE COMPANY TO CLAIM A HIGHER DEDUCTIBLE PROFITS U/S 80IB & 80IC WITHOUT APPRECIATING THE FACT THAT DURING THE YEAR UNDER CONSIDERATION THE APPELLANT HAD INCURRED LOSSES UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AND THUS THERE WAS NO TAX ARBITRAGE. 9. RE: DISALLOWANCE OF AMOUNTS PAID TO M/S TEVA PHARMACEUTICAL INDUSTRIES LIMITED, ISRAEL ('TEVA ISRAELI RS. 1804,07,24,038/-: 9.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED IN PROPOSING AND THE HON'BLE DRP FURTHER ERRED IN CONFIRMING THE DISALLOWANCE OF ENTIRE AMOUNT OF RS. 1804,07,24,038/- PAID TO TEVA ISRAEL BY ALLEGEDLY TREATING THE SAME AS CLANDESTINE PAYMENT WITHOUT APPRECIATING THAT THE AMOUNT WAS PAID TO TEVA ISRAEL AS PER THE AGREEMENT ENTERED INTO BETWEEN APPELLANT AND TEVA USA AND TAX @ MAXIMUM RATE OF 42.02% HAS BEEN DEDUCTED AT SOURCE BEFORE REMITTING THE PAYMENT TO TEVA ISRAEL AND THEREBY ERRED IN: .1 ALLEGEDLY REGARDING THE COMMERCIAL ARRANGEMENT BETWEEN THE APPELLANT AND TEVA PHARMACEUTICALS USA, INC. (TEVA USA) AS SHAM TRANSACTION AND ALSO IN HOLDING ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 7 THAT THE TRANSACTION WAS ENTERED TO EVADE TAX WITHOUT FURNISHING ANY BASIS / EVIDENCE; .2 ALLEGING THAT THERE WAS NO BUSINESS AND COMMERCIAL RATIONALE FOR ENTERING INTO THE SAID TRANSACTION WITH TEVA USA, WITHOUT APPRECIATING THAT CARRYING OUT BUSINESS OPERATIONS IS A PREROGATIVE OF THE TAXPAYER AND TAX DEPARTMENT CANNOT DECIDE HOW THE BUSINESS OUGHT TO HAVE BEEN CONDUCTED; .3 HOLDING THAT THE SAID PAYMENT WAS MADE IN CONSIDERATION OF AN ILLEGAL AND AND-COMPETITIVE AGREEMENT WITHOUT APPRECIATING THAT ONLY A PARTICULAR ANCILLARY CLAUSE IN THE AGREEMENT WAS ALLEGED TO BE ANTI-COMPETITIVE AND THAT THE SAID PAYMENTS WERE MADE PURSUANT TO THE PROFIT SHARING CLAUSE IN THE AGREEMENT. 9.2 WITHOUT PREJUDICE TO GROUND NO. 9.1.3, THE 'NO CHALLENGE' CLAUSE IN THE AGREEMENT WHICH WAS REGARDED AS UNLAWFUL HAS SUBSEQUENTLY BEEN RENDERED UNENFORCEABLE AND NULL AND VOID PURSUANT TO SIGNING OF THE 'ASSURANCE OF DISCONTINUANCE' BY THE APPELLANT AND ACCORDINGLY, THE AGREEMENT IS COMPLETELY LEGITIMATE AND ENFORCEABLE IN LAW. 9.3 WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN DISALLOWING THE AMOUNT PAID TO TEVA ISRAEL BY TREATING THE SAME AS CAPITAL EXPENDITURE. 9.4 WITHOUT PREJUDICE TO THE ABOVE, THE HON'BLE DRP / LD. AO OUGHT TO HAVE APPRECIATED THAT TPO HAS TREATED THE AMOUNT PAID TO TEVA ISRAEL AS OPERATING EXPENDITURE FOR COMPUTING PLI AS A RESULT OF WHICH THE ADDITION ON ACCOUNT OF TRANSFER PRICING HAS PRO RATA INCREASED AND THEREFORE DISALLOWANCE OF SAME UNDER NORMAL PROVISIONS RESULTS IN THE SAME AMOUNT BEING CONSIDERED TWICE FOR MAKING ADDITION RESULTING IN DOUBLE DISALLOWANCE. 10. RE: DISALLOWANCE OF AMOUNTS PAID TO US PDA PURSUANT TO SETTLEMENT AGREEMENT OF RS. 1827,65,57,864/- AND PLEA AGREEMENT OF RS. 768.30,00.000 /- AGGREGATING TO RS.25.95.95.57.864/- 10.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN NOT ALLOWING RS. 25,95,95,57,864/- BEING AGGREGATE AMOUNT PAID TO US FDA PURSUANT TO SETTLEMENT AGREEMENT (AMOUNTING TO RS. 1827,65,57,864/-) AND PLEA AGREEMENT (AMOUNTING TO RS. 768,30,00,000/-) ALLEGING THAT THE SAID PAYMENT IS FOR INFRINGEMENT OF LAW WITHOUT APPRECIATING THAT ONLY A COMPETENT COURT OF LAW AND NOT THE TAX OFFICER CAN DETERMINE WHETHER APPELLANT HAS COMMITTED AN OFFENCE OR INFRACTION OF LAW AND THAT IN NO COURT OF LAW, THE APPELLANT WAS HELD GUILTY FOR THE ALLEGED OFFENCE AND FURTHER ERRED IN: .1 NOT APPRECIATING THAT THE SETTLEMENT AND PLEA AGREEMENT WAS PART OF OVERALL PACKAGE OFFERED AND THUS, THE SAME WAS ACCEPTED BY THE APPELLANT CONSIDERING THE COMMERCIAL EXPEDIENCY AND COMMERCIAL RATIONALE AND ACCORDINGLY OUGHT TO HAVE BEEN ALLOWED AS BUSINESS EXPENDITURE. WITHOUT PREJUDICE, THE AMOUNT OF RS. 1827,65,57,864/- PAID PURSUANT TO THE SETTLEMENT AGREEMENT IS IN THE NATURE OF DISCHARGE OF CIVIL LIABILITY AND THEREFORE ALLOWABLE U/S 37(1). .2 INVOKING PROVISIONS OF EXPLANATION 1 TO S. 37(1), WITHOUT APPRECIATING THAT THE SAME WERE NOT APPLICABLE IN THE GIVEN CASE ON ACCOUNT OF THE FOLLOWING: ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 8 A. APPELLANT HAS ONLY MADE PROVISION OF EXPENSE IN BOOKS AND THEREFORE EXPENDITURE IS NOT 'INCURRED' IN TERMS OF EXPLANATION 1 TO S. 37(1) B. EXPENDITURE SO PAID WAS NOT FOR 'ANY PURPOSE' WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW C. PROVISIONS ARE APPLICABLE ONLY TO VIOLATIONS UNDER THE INDIAN LAW AND NOT THE FOREIGN LAWS D. ALLEGED VIOLATION RELATING TO CGMP REQUIREMENT, WHICH IS A PROCEDURAL REQUIREMENT, IS NOT COVERED BY THE SAID EXPLANATION. .3 HOLDING THAT THE SAID EXPENDITURE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE APPELLANT WITHOUT CONSIDERING THE DISTRIBUTORSHIP AGREEMENT ENTERED BY THE APPELLANT. .4 NOT APPRECIATING THAT THERE HAS BEEN NO ACCRUAL OF ADVANTAGE OF ENDURING NATURE TO THE APPELLANT IN THE CAPITAL FIELD NOR HAS IT FORMED A PART OF THE PROFIT- MAKING APPARATUS OF THE APPELLANT'S BUSINESS. .5 TREATING THE ENTIRE EXPENSE AS A PRIOR PERIOD EXPENSE WITHOUT APPRECIATING THAT IT WAS THE EXPENDITURE FOR THE YEAR UNDER CONSIDERATION. .6 TREATING THE ENTIRE EXPENSE AS A CONTINGENT LIABILITY WITHOUT APPRECIATING THAT IT CRYSTALLIZED DURING THE YEAR UPON SIGNING OF THE CONSENT DECREE AND ONLY QUANTIFICATION WAS DONE SUBSEQUENTLY. 10.2 WITHOUT PREJUDICE TO THE ABOVE, THE HON'BLE DRP / LD. AO OUGHT TO HAVE APPRECIATED THAT TPO HAS TREATED THE AMOUNT PAID TO US PDA PURSUANT TO SETTLEMENT AGREEMENT AS OPERATING EXPENDITURE FOR COMPUTING PLI AS A RESULT OF WHICH THE ADDITION ON ACCOUNT OF TRANSFER PRICING HAS PRO RATA INCREASED AND THEREFORE DISALLOWANCE OF SAME UNDER NORMAL PROVISIONS RESULTS IN THE SAME AMOUNT BEING CONSIDERED TWICE FOR MAKING ADDITION RESULTING IN DOUBLE DISALLOWANCE. 10.3 WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN DISALLOWING THE INTEREST COMPONENT, CONNECTICUT SETTLEMENT AND RELATOR'S FEES AMOUNTING TO RS. 393,857,864/- AND TREATING THE SAME AT PAR WITH AMOUNT PAID UNDER SETTLEMENT AGREEMENT WITHOUT APPRECIATING THAT THE SAME WERE INDEPENDENTLY ALLOWABLE U/S. 37(1). 11. RE: ADDITION OF AMOUNTS PAID TO US FDA WHILE COMPUTING BOOK PROFIT U/S 115JB RS. 2648.00.00.0007-: 11.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN DISALLOWING PROVISION MADE ON ACCOUNT OF US PDA SETTLEMENT WHILE COMPUTING BOOK PROFIT MERELY ON THE GROUND THAT IT WAS IN THE NATURE OF UNASCERTAINED LIABILITY. 11.2 THE HON'BLE DRP / LD. AO OUGHT TO HAVE APPRECIATED THAT THE LIABILITY HAD BEEN CRYSTALLIZED AS ON THE DATE OF SIGNING CONSENT DECREE (20TH DECEMBER 2011) AND ONLY QUANTIFICATION WAS DONE SUBSEQUENTLY. 12. RE: DISALLOWANCE OF EXPENDITURE INCURRED FOR DOCTORS FOR PROMOTION OF BUSINESS RS. 13,616,611/-: ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 9 12.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN DISALLOWING THE SELLING AND DISTRIBUTION EXPENDITURE ALLEGEDLY INCURRED ON DOCTORS/MEDICAL PRACTITIONERS WITHOUT APPRECIATING THE FACT THAT THE EXPENDITURE INCURRED IS FOR THE PROMOTION OF THE BUSINESS AND WAS IN FURTHERANCE OF ITS BUSINESS OBJECTIVES AND FURTHER ERRED IN: .1 NOT APPRECIATING THAT THE PROVISIONS OF INDIAN MEDICAL COUNCIL REGULATIONS, 2002, ARE NOT APPLICABLE TO THE PHARMACEUTICAL COMPANIES AND HENCE ANY EXPENDITURE INCURRED ON SALES PROMOTION WOULD BE ALLOWED AS BUSINESS EXPENDITURE BEING IN FURTHERANCE OF ITS BUSINESS OBJECTIVES. .2 RELYING ON THE CBDT CIRCULAR WHILE DISALLOWING THE AMOUNT OF EXPENDITURE WITHOUT APPRECIATING THAT DEPARTMENT CIRCULAR ARE NOT BINDING ON THE APPELLANT AND SAME HAS BEEN TIME AND AGAIN UPHELD BY VARIOUS JUDICIAL AUTHORITIES. 13. RE: DISALLOWANCE OF MARK TO MARKET LOSS RS. 667,29.40.000 /- 13.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FARTHER ERRED IN DISALLOWING THE MARKED TO MARKET (MTM) LOSS ON FORWARD CONTRACTS BY TREATING THE SAME AS CONTINGENT LIABILITIES IN UTTER DISREGARD OF THE LAW LAID DOWN BY THE HON'BLE SUPREME COURT DECISION IN CASE OF WOODWARD GOVERNOR INDIA (P) LTD 312 ITR 254. 13.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED WITHOUT APPRECIATING THAT IN THE PREVIOUS ASSESSMENT YEARS, MTM GAIN HAS BEEN CHARGED TO TAX BY DEPARTMENT AND FOLLOWING THE PRINCIPLE OF CONSISTENCY, MTM LOSS OUGHT TO BE ALLOWED AS DEDUCTION IN THE CURRENT YEAR. 14. RE: DISALLOWANCE OF HEDGING CHARGES TREATING IT AS CAPITAL LOSS RS. 113,524,211/- 14.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FARTHER ERRED IN DISALLOWING HEDGING CHARGES WITHOUT APPRECIATING THAT HEDGING CHARGES AMOUNT TO 'INTEREST' AS DEFINED U/S 2(28A) AND THEREFORE, FULLY ALLOWABLE AS DEDUCTION U/S 36(1)(III) OF THE ACT AS PROVISO TO SECTION 36(1)(III) IS NOT ATTRACTED. 14.2 WITHOUT PREJUDICE TO THE ABOVE, THE HEDGING CHARGES ARE AKIN TO BANK CHARGES AND HENCE OUGHT TO HAVE BEEN ALLOWED AS REVENUE EXPENDITURE U/S. 37(1) OF THE ACT. 14.3 WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO GROSSLY ERRED IN DISREGARDING THE DIRECTIONS PASSED BY THE HON'BLE DRP IN NOT ADDING THE HEDGING CHARGES INCURRED TOWARDS INVESTMENT MADE IN OVERSEAS SUBSIDIARY COMPANIES TO THE COST OF ACQUISITION OF SUCH INVESTMENTS. 15. RE: NON-ALLOWANCE OF INTEREST RATE SWAP AS REVENUE EXPENDITURE RS. 1,77,95,255/- 15.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN NOT ALLOWING EXPENDITURE ON ACCOUNT OF INTEREST RATE SWAP BY TREATING THE SAME AS CAPITAL EXPENDITURE WITHOUT APPRECIATING THAT THE SUCH EXPENSE AMOUNTS TO 'INTEREST' AS DEFINED U/S 2(28A) AND ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 10 THEREFORE, FULLY ALLOWABLE AS DEDUCTION U/S 36(L)(III) OF THE ACT AS PROVISO TO SECTION 36(L)(III) IS NOT ATTRACTED. 15.2 WITHOUT PREJUDICE TO THE ABOVE, INTEREST RATE SWAP EXPENSES OUGHT TO BE ALLOWED AS REVENUE EXPENDITURE U/S 37(1) OF THE ACT. 15.3 WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO GROSSLY ERRED IN DISREGARDING THE DIRECTIONS PASSED BY THE HON'BLE DRP IN NOT ADDING THE INTEREST RATE SWAP EXPENSES INCURRED TOWARDS INVESTMENT MADE IN OVERSEAS SUBSIDIARY COMPANIES TO THE COST OF ACQUISITION OF SUCH INVESTMENTS. 16. RE: NON-ALLOWANCE OF WEIGHTED DEDUCTION U/S 35(2AB) ON COST OF ASSETS INCURRED RS. 2,50,48,153 /- 16.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN NOT ALLOWING WEIGHTED DEDUCTION ON THE COST OF ASSETS PROVIDED TO THE EMPLOYEES WORKING IN APPROVED R&D FACILITIES UNDER SECTION 35(2AB) OF THE ACT MERELY ON THE GROUND THAT THE APPELLANT DID NOT FURNISH FORM NO. 3CL. IN DOING SO, THE HON'BLE DRP / LD. AO FAILED TO APPRECIATE THAT .1 THE FURNISHING OF FORM NO. 3CM IS SUFFICIENT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 35(2AB) AND THAT THE DSIR HAS CONSISTENTLY ISSUED FORM NO. 3CM IN RESPECT OF THE R&D FACILITIES OF THE APPELLANT; .2 THERE IS NO PROVISION UNDER THE ACT MANDATING THE APPROVAL OF THE PRESCRIBED AUTHORITY I.E. DSIR IN FORM NO. 3CL TO BE A PRE-REQUISITE FOR THE PURPOSE OF CLAIMING WEIGHTED DEDUCTION OF REVENUE AND CAPITAL EXPENDITURE U/S 35(2AB). 16.2 WITHOUT PREJUDICE TO THE ABOVE, THE CAPITAL EXPENDITURE INCURRED AS PART OF R&D ACTIVITIES OUGHT TO BE ALLOWED DEDUCTION @100% U/S 35(L)(IV) AS THE SAID EXPENSES ARE INCURRED TOWARDS SCIENTIFIC RESEARCH RELATED TO THE BUSINESS OF THE APPELLANT. 16.3 WITHOUT PREJUDICE TO THE ABOVE, DEPRECIATION ON CAPITAL R&D EXPENDITURE U/S 32(1) OUGHT TO HAVE BEEN ALLOWED. 17. RE: NON ALLOWANCE OF DEDUCTION OF EMPLOYEE COMPENSATION (ESOP) EXPENSES U/S 37(1) RS. 12.72.94.945/- 17.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO GROSSLY ERRED AND HON'BLE DRP FURTHER ERRED IN NOT ALLOWING DEDUCTION U/S 37(1) ON ACCOUNT OF DEFERRED EMPLOYEE COMPENSATION (ESOP) EXPENSES DEBITED TO PROFIT & LOSS ACCOUNT WITHOUT APPRECIATING THAT SUCH ESOP EXPENSES IS AKIN TO EMPLOYEE COMPENSATION COST. 18. RE: INTEREST U/S 234B AND 234C: 18.1 THE LD. AO GROSSLY ERRED IN COMPUTING INTEREST U/S 234B AND 234C OF THE ACT. 19. RE: INITIATION OF PENALTY PROCEEDINGS U/S. 271(1)(C) 19.1 THE ASSESSING OFFICER ERRED IN INITIATING PENALTY PROCEEDINGS U/S. 271(1)(C) ON DISALLOWANCES CARRIED OUT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 11 20. THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHDRAW ALL OR ANY GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 3. THE FIRST ISSUE RAISED BY THE ASSESSEE IN GROUND NOS. 1 AND 2 ARE GENERAL AND CONSEQUENTIAL IN NATURE. THEREFORE, NO SEPARATE ADJUDICATION IS REQUIRED FOR THE SAME. HENCE, WE DISMISS THEM AS INFRUCTUOUS. 4. THE SECOND ISSUE RAISED BY THE ASSESSEE IN GROUND NOS. 3 IS THAT THE LD. DRP ERRED IN CONFIRMING THE UPWARD ADJUSTMENT MADE BY THE AO/TPO AMOUNTING TO RS. 1035,06,00,000/- ON ACCOUNT OF INTERNATIONAL TRANSACTION WITH AES BY TREATING IT (THE ASSESSEE) AS A TESTED PARTY. 5. THE NECESSARY FACTS AS EMERGING FROM THE ORDER OF AUTHORITIES BELOW ARE THAT THE ASSESSEE IS A LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF PHARMACEUTICALS PRODUCTS, BULKS DRUGS AND TRADING ACTIVITY. THE AO/TPO DURING THE ASSESSMENT PROCEEDING CARRIED OUT UNDER SECTION 143(3) R.W.S. 92C(3) OF THE ACT OBSERVED THAT THE ASSESSEE HAS ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. THE DETAILS OF SUCH TRANSACTIONS STAND AS UNDER: THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISES DURING THIS YEAR ARE SUMMARIZED IN THE TABLE BELOW: NO. NATURE OF INTERNATIONAL TRANSACTION AMOUNT METHOD 1 SALES OF API 36, 51,36,54,734 TNMM 2 PURCHASE OF ROW MATERIAL 1,22,90,224 TNMM Q SALE OF DOSAGES 1,35,54,03,596 TNMM 4 PURCHASE OF DOSAGES 3,01,21,907 TNMM 5 SALE OF FORMULATIONS 9,97,49,18,944 TNMM (> ROYALTY RECEIVED 18,92,33,849 TNMM/ CUP 7 ROYALTY PAID 14,09,931 CUP 8 TECHNICAL FEES RECEIVED 1,82,39,346 TNMM ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 12 9 SALE OF MACHINES, SPARES AND CONSUMABLES 9,83,22,756 TNMM 10 TESTING CHARGES PAID 23,52,95,659 TNMM 11 CONTRACT MANUFACTURING PAID 24,46,55,163 TNMM 12 BUSINES S SUPPORT SERVICE PAID 23,70,47,749 TNMM 13 MARKET RESEARCH SERVICE PAID 39,98,51,690 TNMM 14 REGULATORY CHARGES PAID 24,90,28,491 TNMM 15 MARKETING AND BUSINESS SUPPORT 48,76,425 CUP 16 BIO - ANALYSIS CHARGES RECEIVED 2,79,96,668 TNMM 17 ALLOCATION OF SAP RECEIVED 2,45,74,500 OTHER METHOD 18 PRODUCT QUALITY CLAIMS PAID 14,06,25,552 TNMM 19 REIMBURSEMENT PAID 9,30,90,705 CUP 20 REIMBURSEMENT OF EXPENSES 16,67,68,939 CUP TOTAL 50,01,74,06,828 5.1 THE ASSESSEE DURING THE ASSESSMENT PROCEEDING FILED ITS TRANSFER PRICING STUDY REPORT TREATING ITS FOREIGN AES AS TESTED PARTY. HOWEVER THE TPO FOUND THAT THE ISSUE OF SELECTION OF TESTED PARTY IN THE ASSESSEES OWN CASE WAS HEARD BY THE ITAT DELHI BENCH REPORTED IN 2008-TIOL-75-ITAT-DEL FOR THE 2009-10 & 2010-11 WHEREIN IT WAS OBSERVED THAT THE LESS COMPLEX PARTY SHOULD BE SELECTED AS TESTED PARTY AS WELL AS THE RELEVANT INFORMATION WITH RESPECT TO SUCH TESTED SHOULD BE AVAILABLE IN THE PUBLIC DOMAIN. ACCORDINGLY, THE TPO REJECTED THE CONTENTION OF THE ASSESSEE TREATING THE AES AS TESTED PARTY FOR THE PURPOSE OF COMPUTING THE ALP AND REQUIRED THE ASSESSEE TO PROVIDE THE SUPPLEMENTARY TRANSFER PRICING REPORT CONSIDERING THE ASSESSEE AS THE TESTED PARTY. 5.2 IN RESPONSE TO SHOW CAUSE NOTICE THE ASSESSEE, WITHOUT PREJUDICE TO ITS CONTENTION THAT ITS AES SHOULD BE TREATED AS TESTED PARTY, FILED THE REVISED TP REPORT CONSIDERING ITSELF AS THE TESTED PARTY. THE ASSESSEE IN THE REVISED TP REPORT USED ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 13 TNMM AS THE MOST APPROPRIATE METHOD AND USED OP/TC AS THE PLI AND ARRIVED AT ITS PLI 42.20% ONLY. 5.3 THE ASSESSEE IN ITS REVISED TP STUDY HAS SELECTED 9 COMPARABLES AND CALCULATED PLI, TAKING THREE YEARS AVERAGE MARGIN AT 18.95% ONLY. ACCORDINGLY, THE ASSESSEE CLAIMED THAT ITS TRANSACTIONS WITH THE AES HAD BEEN ENTERED AT ARM LENGTH PRICE AND NO ADJUSTMENT IS REQUIRED. 5.4 HOWEVER, THE TPO REJECTED THE REVISED TP STUDY REPORT OF THE ASSESSEE FOR USING MULTIPLE YEAR DATA WITH RESPECT TO ITS COMPARABLES AFTER REFERRING THE PROVISION OF RULE 10B(4) OF INCOME TAX RULES AND VARIOUS JUDGMENT IN THIS REGARD. IN VIEW OF THE ABOVE TPO FINALLY HELD THAT SINGLE YEAR DATA SHOULD BE USED FOR CALCULATING ALP OF THE COMPARABLES. 5.5 FURTHER, THE TPO ALSO MODIFIED THE FILTER USED BY THE ASSESSEE FOR SELECTING THE COMPARABLES. ACCORDINGLY, THE AO/ TPO FOUND THAT 5 COMPANIES OUT OF 9 COMPANIES SELECTED BY THE ASSESSEE WHICH WERE FIT TO BE USED AS COMPARABLES. ACCORDINGLY, THE TPO WORKED OUT THE AVERAGE MARGIN OF REMAINING 5 COMPARABLE COMPANIES AT 21.36% AS THE PLI OF SUCH COMPARABLES. 5.6 THE TPO FURTHER REVISED THE PLI OF THE ASSESSEE BY MAKING THE ADJUSTMENT OF FDA SETTLEMENT EXPENSES CLAIMED BY IT AND BY DELETING CERTAIN EXPENSES FROM THE OPERATING COST AS DETAILED BELOW: (I) FOREIGN EXCHANGE LOSS (II) PROVISION FOR DOUBTFUL TRADE DEBTS (III) PROVISION FOR DOUBTFUL LOANS AND ADVANCES (IV) PROVISION FOR DIMINISHING IN VALUE OF INVESTMENT 5.7 AFTER MAKING THE ABOVE ADJUSTMENTS, THE TPO WORKED OUT THE PLI OF THE ASSESSEE AT (-5.92%) ONLY. IN VIEW OF THE ABOVE FACTS, THE TPO ISSUED SCN TO THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 14 ASSESSEE PROPOSING THE UPWARD ADDITION/ADJUSTMENT AMOUNTING TO RS. 2500.78 CRORES ONLY WITH RESPECT TO ITS INTERNATIONAL TRANSACTIONS WITH ITS AE. 5.8 THE ASSESSEE AGAINST SUCH SHOW CAUSE NOTICE SUBMITTED ITS COMMENTS ON THE FILTERS USED BY THE TPO FOR THE SELECTION OF THE COMPARABLES AND AS WELL AS POINTED OUT THE ERROR IN THE PLI COMPUTED BY THE TPO BASED ON SUCH COMPARABLES. 5.9 CONSIDERING THE OBJECTION RAISED BY THE ASSESSEE, TPO ACCEPTED THE ERROR IN COMPUTATION OF PLI OF COMPARABLES. AS SUCH THE TPO WORKED OUT THE NEW PLI (OP/OC RATIO) AT 19.89% AS THE AVERAGE MEAN OF THE COMPARABLES BY OBSERVING AS UNDER: SR.NO COMPANY NAME OP/OC% 1 SUVEN LIFE SCIENCES LTD. 15.04 2 TORRENT PHARMACEUTICALS LTD. 20.96 3 CIPLA LTD 27.33 4 AJANTA PHARMA LTD. 20.43 5 ALEMBIC LTD 15.71 19.89% 5.10 FURTHER THE TPO REVISED THE PLI OF THE ASSESSEE AT -1.40% AS PER THE REVISED COMPUTATION OF INCOME BY OBSERVING AS UNDER: S.NO. PARTICULARS AMOUNT FIN INR MILLION) 1 SALES/OPERATING INCOME 86256.12 2 OTHER INCOME 0 TOTAL OPERATING REVENUE 86256.12 3 TOTAL EXPENSES AS PER P/L ACCOUNT 76458.74 LESS: FOREIGN EXCHANGE LOSS 3961.41 PROVISION FOR DOUBTFUL TRADE DEBTS 16 ,79 ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 15 PROVISION FOR DOUBTFUL LOANS & ADVANCES 5.60 INTEREST EXPENSES 658.0S AMORTIZATION AMOUNT 266.96 FIXED ASSETS WRITTEN OFF 22.91 AMOUNTS WRITTEN OFF 24.32 IMPAIRMENT LOSSES 1023.6 PROVISION FOR DIMINISHING VALUE OF INVE STMENT 12.50 ADD: FDA SETTLEMENT EXPENSES 17012.72 REVISED TOTAL EXPENSES 87479.32 4 OPERATING PROFIT ( - )1223.2 5 OP/OC % ( - )1.40% 5.11 ACCORDINGLY, THE TPO COMPUTED THE UPWARD ADJUSTMENT AMOUNTING TO RS. 10,35,06,00,000/- I.E., DIFFERENCE BETWEEN THE ALP AND ACTUAL PRICE CHARGED BY THE ASSESSEE. THUS, THE AO IN HIS DRAFT ASSESSMENT ORDER MADE AN ADDITION, TAKING THE BASIS OF TPO ORDER, AMOUNTING TO RS. 10,35,06,00,000/- TO THE TOTAL INCOME OF THE ASSESSEE. 6. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP WHO REJECTED THE CONTENTION OF THE ASSESSEE BY OBSERVING AS UNDER:- 5.1 THE PRESENT DRP HAS NOTED THAT THIS ISSUE HAS BEEN DEALT WITH BY THE EARLIER DRP FOR THE AY 2011-12 AND IT HAS REJECTED THE CONTENTION OF THE ASSESSEE TO SELECT FOREIGN AES AS THE TESTED PARTIES AND HAVE UPHELD THE ORDER PASSED BY THE TPO IN THIS CONTEXT. ALSO, THE DRP IN THE A.Y. 2011-12 HAS REJECTED THE VARIOUS CONTENTIONS OF THE ASSESSEE COMPANY BASED ON THE ADVANCE PRICING AGREEMENT ENTERED BY THE ASSESSEE COMPANY FOR AY 2014-15. THE FACTS AND CIRCUMSTANCES OF THE CASE REMAINS THE SAME IN THE PRESENT YEAR UNDER ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 16 CONSIDERATION AND HENCE FOLLOWING THE ORDERS OF THE EARLIER DRP, THE VARIOUS GROUNDS OF OBJECTION RAISED BY THE ASSESSEE COMPANY ON THIS ISSUE NEEDS TO BE REJECTED. 5.2 IT IS ALSO NOTED BY THE PRESENT DRP THAT THE HON'BLE ITAT IN ASSESSEE'S OWN CASE FOR AY 2004-05 HAS REJECTED THE SELECTION OF FOREIGN TESTED PARTY BY OBSERVING THAT IT COULD HAVE BEEN APPRECIATED, IF AN ENTITY IN A SPECIFIC COUNTRY WAS SOUGHT TO BE COMPARED WITH SOME SIMILAR ENTITY IN THAT VERY COUNTRY, SINCE GEOGRAPHICAL SITUATION INFLUENCE TRANSFER PRICING IN SEVERAL WAYS. 5.3 DURING THE DRP PROCEEDINGS, THE ASSESSEE HAS ALSO CONTENDED THAT THE ABOVE ISSUE HAS ALREADY BEEN ADJUDICATED IN ITS FAVOUR BY THE HON'BLE DELHI TRIBUNAL IN AY 2008-09, WHEREIN THE SELECTION OF FOREIGN AES AS A TESTED PARTY FOR THE COMPARABILITY EXERCISE HAS BEEN APPROVED. HOWEVER, A PERUSAL OF THE RECORD REVEALS THAT THE REVENUE HAS NOT ACCEPTED THIS DECISION OF THE HON'BLE ITAT AND THE FOLLOWING SUBSTANTIAL QUESTION OF LAW HAS BEEN RAISED BEFORE THE HON'BLE HIGH COURT:- (1) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE I.T.A.T. WAS JUSTIFIED IN DIRECTING TO DELETE THE ADDITION OF RS. 238.16 CRORE HOLDING THAT OVERSEAS ASSOCIATED ENTERPRISES CAN BE ACCEPTED AS 'TESTED PARTY ' WHEN THERE IS NO INSTANCES OF TRANSACTIONS BETWEEN UNRELATED PARTIES? '. (2) 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE I.T.A.T. WAS JUSTIFIED IN DIRECTING THAT ADVANCE PRICING AGREEMENT WITH CBDT FOR A.Y.2014- 15 DATED 07/08/2015 CAN ALSO BE RETROSPECTIVELY APPLIED IN A. Y.2008-09? ' 5.4 THE ABOVE DISCUSSION MAKES IT CLEAR THAT THE VARIOUS ISSUES IN RELATION TO THE TP ADJUSTMENT ARE BEING CONTESTED BY THE REVENUE BEFORE THE HON'BLE GUJARAT HIGH COURT. SINCE, THE ENTIRE ISSUE OF TP ADJUSTMENT IS BEFORE THE HON'BLE GUJARAT HIGH COURT, THE DRP REFRAINS FROM MAKING ANY FURTHER COMMENT ON MERITS. HENCE, THE DRP HAS NOT GIVEN ANY OPINION ON MANY OF WITHOUT PREJUDICE GROUNDS RAISED BY THE ASSESSEE COMPANY. 5.5 IT IS PERTINENT TO NOTE THAT THE DRP IS A CONTINUATION OF THE ASSESSMENT PROCEEDINGS, AS IT IS ONLY THE DRAFT ASSESSMENT ORDER, WHICH IS BEING CHALLENGED BEFORE IT. THE FINAL ASSESSMENT ORDER IS YET TO BE PASSED BY THE ASSESSING OFFICER. HENCE, THE DRP IS NOT AN APPELLATE AUTHORITY, BUT IS PART OF THE CONTINUING ASSESSMENT PROCEEDINGS. A SIMILAR VIEW HAS BEEN ECHOED BY THE DIVISION BENCH OF THE HON'BLE BOMBAY HIGH COURT, WHILE DECIDING THE WRIT PETITION FILED BY VODAFONE INDIA SERVICES PVT. LTD. VS UNION OF INDIA AND OTHERS, WHEREIN THE FOLLOWING OBSERVATION WITH REGARDS TO DRP HAS BEEN MADE :- 'THE PROCEEDING BEFORE THE DRP IS NOT AN APPEAL PROCEEDING BUT A CORRECTING MECHANISM IN THE NATURE OF A SECOND LOOK AT THE PROPOSED ASSESSMENT ORDER BY HIGH FUNCTIONARIES OF THE REVENUE KEEPING IN MIND THE INTEREST OF THE ASSESSEE. IT IS A CONTINUATION OF THE ASSESSMENT PROCEEDINGS TILL SUCH TIME A FINAL ORDER OF ASSESSMENT WHICH IS APPEALABLE IS PASSED BY THE ASSESSING OFFICER. THIS ALSO FINDS SUPPORT FROM SECTION 144C(6), WHICH ENABLES THE DRP TO COLLECT EVIDENCE OR CAUSE ANY ENQUIRY TO BE WQDE BEFORE GIVING DIRECTIONS TO THE ASSESSING OFFICER UNDER SECTION 144C(5 . THE DRP PROCEDURE CAN ONLY BE INITIATED BY AN ASSESSEE OBJECTING TO THE DRAFT ASSESSMENT ORDER. THIS WOULD ENABLE CORRECTION IN THE PROPOSED ORDER (DRAFT ASSESSMENT ORDER) BEFORE A FINAL ASSESSMENT ORDER IS PASSED. THEREFORE, WE ARE OF THE VIEW THAT IN IHE PRESENT FACTS THIS ISSUE COULD BE AGITATED BEFORE AND RECTIFIED BY THE DRP.' 5.6 WITH DUE RESPECT TO THE ORDER OF THE HONBLE ITAT, TO KEEP THE ISSUE ALIVE AND TO PROTECT THE INTEREST OF REVENUE, THE DRP IS OF THE CONSIDERED OPINION THAT THE GROUND OF OBJECTION RAISED BY THE ASSESSEE COMPANY NEEDS TO BE REJECTED. ACCORDINGLY, THE GROUND OF OBJECTION IS DECIDED IN FAVOUR OF REVENUE AND AGAINST THE ASSESSEE COMPANY ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 17 7. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP, THE ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD. AR, BEFORE US, AT THE OUTSET SUBMITTED THAT ITS AES HAD BEEN ACCEPTED AS A TESTED PARTY IN ITS OWN CASE BY THE ORDER OF ITAT DELHI BENCHES IN ITA 196/DEL/2013 FOR THE AY 2008-09 VIDE ORDER DATED 25-4-2016, REPORTED IN 68 TAXMANN.COM 322. ACCORDINGLY, THE AR CONTENDED THAT THE AES OF THE ASSESSEE SHOULD BE TREATED AS THE TESTED PARTY. THE LD. AR ALSO CLAIMED THAT IN THE SUBSEQUENT ASSESSMENT YEARS, THE TPO HAD ACCEPTED THE AES OF THE ASSESSEE AS THE TESTED PARTY. 9. ON THE OTHER HAND, THE LD. DR BEFORE US VEHEMENTLY SUBMITTED THAT THE FACTS OF THE CASE IN ITA NO. 196/DEL/2013 WERE DIFFERENT FROM THE PRESENT FACTS OF THE CASE. AS PER THE LD. DR THESE FACTUAL DIFFERENCES INCLUDE CONDITIONS MENTIONED IN THE APA, CALCULATION OF THE PLI, FINANCIAL DATA OF AES, ETC WHICH WERE NOT BROUGHT TO THE NOTICE OF THE HONBLE ITAT IN ITA 196/DEL/2013. THEREFORE, THE LD. DR ARGUED IN LENGTH THAT THE HONBLE TRIBUNAL CAN DIFFER WITH THE VIEW OF THE DELHI TRIBUNAL WHICH WAS TAKEN IN THE PRECEDING AY 2008-09 IN ITA 196/DEL/2013. THE LD. DR MADE WRITTEN SUBMISSION VIDE LETTER DATED 16-05-2018 WHICH IS PLACED ON RECORD. 10. THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. 11. THE LD. AR IN HIS REJOINDER SUBMITTED THAT THE FACTS OF THE CASE ON HAND ARE IDENTICAL TO THE FACTS OF THE CASE OF THE PRECEDING AY 2008-09. THEREFORE THE HONBLE TRIBUNAL CANNOT CHANGE THE STAND TAKEN IN THE EARLIER AY WHILE DECIDING THE IDENTICAL ISSUE IN THE YEAR UNDER CONSIDERATION. THE LD. AR FURTHER SUBMITTED THAT THE HIGH COURT IS THE RIGHT FORUM WHICH CAN ALTER THE STAND OF THE ITAT OR OTHERWISE THE MATTER NEEDS TO BE REFERRED TO THE SPECIAL BENCH. 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. AT THE OUTSET WE FIND THAT IN THE IDENTICAL SET OF FACTS & CIRCUMSTANCES, THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 18 ITAT DELHI BENCH, IN THE OWN CASE OF THE ASSESSEE, IN THE AY 2008-09 BEING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-4-2016, REPORTED IN 68 TAXMANN.COM 322, HAS HELD THAT AES SHOULD BE ACCEPTED AS TESTED PARTY BEING THE LEAST COMPLEX FOR COMPARABILITY ANALYSIS OF INTERNATIONAL TRANSACTION WITH THE ASSESSEE. THE RELEVANT EXTRACT OF THE ORDER IS REPRODUCED AS UNDER: 18. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. WE HAVE ALSO PERUSED THE RELEVANT PARAGRAPHS OF THE SEVERAL DOCUMENTS RELIED UPON BEFORE US IN THE FORM OF TWO PAPER BOOK VOLUMES, ONE SUPPLEMENTARY PAPER BOOK AND ONE DECISION PAPER BOOK ON TRANSFER PRICING ISSUES. 19. GENERALLY, IN TRANSFER PRICING COMPARABILITY ANALYSIS, THE TESTED PARTY IS USUALLY THE PARTY PARTICIPATING IN A TRANSACTION FOR WHICH PROFITABILITY MOST RELIABLY CAN BE ASCERTAINED AND FOR WHICH THE RELIABLE DATA OF COMPARABLES CAN BE FOUND AND THE TESTED PARTY WILL TYPICALLY BE THE PARTY WITH LEAST INTANGIBLES. 2 0. AS PER SECTION 92C(1) OF THE ACT, ALP OF THE INTERNATIONAL TRANSACT IS REQUIRED TO BE DETERMINED USING ANY OF THE PROFIT BASED PRESCRIBED METHODS, BEING THE MOST APPROPRIATE METHOD (MAM) HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTIONS. HOWEVER, IN ORDER TO DETERMINE THE MAM FOR DETERMINING THE ALP, IT IS FIRST NECESSARY TO SELECT THE 'TESTED PARTY'. THE TRANSFER PRICING LEGISLATION IN INDIA DOES NOT PROVIDE ANY GUIDANCE ON THE CONCEPT OF 'TESTED PARTY'; HOWEVER, THERE ARE SOME DECISIONS ON THIS ISSUE, WHICH CAN BE OF GREAT HELP. 21. IN ORDER TO UNDERSTAND THE CONCEPT OF TESTED PARTY, ONE NEED TO REFER TO THE TRANSFER PRICING LEGISLATIONS OF DEVELOPED COUNTRIES WHERE THE PRINCIPLES OF TRANSFER PRICING HAVE BEEN IN USE FOR A LONG TIME AND ACT AS A GUIDING FORCE FOR ALL THE DEVELOPING ECONOMIES. THE TRANSFER PRICING GUIDELINES ISSUED BY THE US INTERNAL REVENUE SERVICES UNDER SECTION 482 PROVIDE AND DISCUSS THE CONCEPT OF TRANSFER PRICING. SECTION 1.482-5 OF THE US TRANSFER PRICING REGULATIONS STATE THAT 'THE TESTED PARTY WILL BE THE PARTICIPANT IN THE CONTROLLED TRANSACTION WHOSE OPERATING PROFIT ATTRIBUTABLE TO THE CONTROLLED TRANSACTIONS CAN BE VERIFIED USING THE MOST RELIABLE DATA AND REQUIRING THE FEWEST AND MOST RELIABLE ADJUSTMENTS, AND FOR WHICH RELIABLE DATA REGARDING UNCONTROLLED COMPARABLES CAN BE LOCATED. CONSEQUENTLY, IN MOST CASES THE TESTED PARTY WILL BE THE LEAST COMPLEX OF THE CONTROLLED TAXPAYERS AND WILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUISH IT FROM POTENTIAL UNCONTROLLED COMPARABLES. THUS, IN A SENSE, THE TESTED PARTY WOULD HAVE LESSER RISK AS COMPARED TO THE OTHER TRANSACTING PARTY OR THE REAL ENTREPRENEUR. 22. AS PER THE OECD TRANSFER PRICING GUIDELINES 2010, WHEN APPLYING A COST PLUS, RESALE PRICE OR TRANSACTIONAL NET MARGIN METHOD, IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-UP ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHOICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE TRANSACTION. AS A GENERAL RULE, THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED IN THE MOST RELIABLE MANNER AND FOR WHICH THE MOST RELIABLE COMPARABLES CAN BE FOUND, I.E. IT WILL MOST OFTEN BE THE ONE THAT HAS THE LEAST COMPLEX FUNCTIONAL ANALYSIS. 23. AS PER UNTPM 2013, '5.3.3. SELECTION OF THE TESTED PARTY 5.3.3.1.WHEN APPLYING THE COST PLUS METHOD, RESALE PRICE METHOD OR TRANSACTIONAL NET MARGIN METHOD IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-UP ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 19 THE CHOICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE CONTROLLED TRANSACTION. ATTRIBUTES OF CONTROLLED TRANSACTION(S) WILL INFLUENCE THE SELECTION OF THE TESTED PARTY (WHERE NEEDED). THE TESTED PARTY NORMALLY SHOULD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FOR COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN ASSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESSARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT DATA ON COMPARABLES IS FURNISHED TO THE TAX ADMINISTRATION AND VICE VERSA IN ORDER FOR THE LATTER TO BE ABLE TO VERIFY THE SELECTION AND APPLICATION OF THE TRANSFER PRICING METHOD.' 24. THE OECD GUIDELINES AT PARA NO.3.18 PROVIDES AS UNDER:- '3.18 WHEN APPLYING A COST PLUS, RESALE PRICE OR TRANSACTIONAL NET MARGIN METHOD AS DESCRIBED IN CHAPTER II, IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-UP ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHOICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE TRANSACTION. AS A GENERAL RULES, THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED IN THE MOST RELIABLE MANNER AND FOR WHICH THE MOST RELIABLE COMPARABLES CAN BE FOUND I.E. IT WILL MOST OFTEN BE THE ONE THAT HAS THE LESS COMPLEX FUNCTIONAL ANALYSIS. 3.19 THIS CAN BE ILLUSTRATED AS FOLLOWS. ASSUME THAT COMPANY A MANUFACTURES TWO TYPES OF PRODUCTS, P1 AND P2 THAT IT SELLS TO COMPANY B, AN ASSOCIATED ENTERPRISE IN ANOTHER COUNTRY. ASSUME THAT A IS FOUND TO MANUFACTURE P1 PRODUCTS USING VALUABLE, UNIQUE INTANGIBLES THAT BELONG TO B AND FOLLOWING TECHNICAL SPECIFICATION SET BY B. ASSUME THAT IN THIS P1 TRANSACTION, A ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NOT MAKE ANY VALUABLE, UNIQUE CONTRIBUTION IN RELATION TO THE TRANSACTION. THE TESTED PARTY FOR THIS P1 TRANSACTION WOULD MOST OFTEN BE A. ASSUME NOW THAT A IS ALSO MANUFACTURING P2 PRODUCTS FOR WHICH IT OWNS AND USES VALUABLE UNIQUE INTANGIBLES SUCH AS VALUABLE PATENTS AND TRADEMARKS, AND FOR WHICH B ACTS AS A DISTRIBUTOR. ASSUME THAT IN THIS P2 TRANSACTION, B ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NOT MAKE ANY VALUABLE, UNIQUE CONTRIBUTION IN RELATION TO THE TRANSACTION. THE TESTED PART FOR THE P2 TRANSACTION WOULD MOST OFTEN BE B.' 25. FROM THE ABOVE GUIDANCE CERTAIN PRINCIPLES EMERGES IN SELECTION OF TESTED PARTY (A) THE CHOICE AVAILABLE OF TESTED PARTY FOR COMPARABILITY ONLY IN CUP METHOD, TNMM AND 'OTHER METHOD', IN OTHER METHODS SUCH AS RPM AND CPM CHOICE OF SELECTING A TESTED PARTY IS NOT AVAILABLE. IN ANY CASE, IT IS NOT REQUIRED IN PROFIT SPLIT METHOD. (B) THE TESTED PARTY NORMALLY SHOULD BE THE LEAST COMPLEX PARTY TO THE CONTROLLED TRANSACTIONS. (C) AVAILABILITY OF MOST RELIABLE DATA OF TESTED PARTY AND REQUIREMENT OF MINIMUM ADJUSTMENTS IS ALSO ONE OF THE MOST IMPORTANT ASPECTS IN SELECTION OF TESTED PARTY. (D) THERE IS NO BAR AGAINST THE SELECTION OF TESTED PARTY EITHER LOCAL PARTY OR FOREIGN PARTY. NEITHER INCOME TAX ACT AND NOR ANY GUIDELINES ON TRANSFER PRICING PROVIDES SO. THEREFORE SELECTION OF TESTED PARTY IS T O FURTHER THE OBJECT OF COMPARABILITY ANALYSIS BY MAKING IT LESS COMPLEX AND REQUIRING FEWER ADJUSTMENTS. (E) THERE MAY BE MANY CIRCUMSTANCES WHERE THE DATA RELATED TO ONE PARTY TO THE CONTROLLED TRANSACTION MAY BE AVAILABLE EASILY, READILY AND IN ABUND ANCE. HOWEVER THE FIRST STEP IS TO LOOK AT THE FAR STUDY OF THAT PARTY AND IF FOUND TO BE COMPLEX THAN OTHER PARTY, THEN SUCH PARTY SHOULD BE REJECTED AS TESTED PARTY AND PREFERENCE MAY BE GIVEN TO ANOTHER ENTITY WHICH IS LEAST COMPLEX AND IS HAVING REASON ABLY RELIABLE DATA FOR COMPARABILITY. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 20 THEREFORE, THE DRIVING FORCE IN SELECTION OF TESTED PARTY SHOULD BE THE LEAST COMPLEX FAR OF THE PARTY THAN THE VOLUME OF COMPARABLE DATA. IN THIS BACKGROUND, WE PROCEED TO DECIDE THE ISSUE. 26. APPELLANT HAS ENTERED INTO ADVANCE PRICING AGREEMENT UNDER SECTION 92CC OF THE ACT ON 07 AUGUST 2015 WITH CBDT FOR AY 2014-15. ACCORDING TO PARA, 1(F) OF THAT AGREEMENT TESTED PARTY MEANS ASSOCIATED PARTIES AS LISTED IN APPENDIX 1. ACCORDING TO THE ANNEXURE-1, IT HAS BEEN AGREED BETWEEN THE PARTIES THAT THE TNMM WITH PLI OF OPERATING PROFIT MARGIN COMPUTED BASED ON AUDITED FINANCIALS OF AE, BEING THE TESTED PARTY, SHALL BE THE METHOD TO BENCHMARK THE COVERED TRANSACTIONS IN THE CASE. IN ORDER TO SELECT THE COMPARABLES REGIONAL BENCHMARKING SHALL BE APPLIED IN CASE COUNTRY-BY-COUNTRY BENCHMARKING IS NOT FEASIBLE THE SAME SHALL BE PREFERRED OVER REGIONAL BENCH MARKING. IN THAT APPENDIX, CBDT HAS AGREED TO BENCHMARK SOUTH AFRICAN, IRELAND AND ROMANIA AES BENCHMARKING REGION AS EUROPE. IN CASE OF NIGERIA, MALAYSIA AND MOROCCO THE REGIONAL BENCHMARKING HAS BEEN ACCEPTED OF ASIA. IN CASE OF SOUTH AFRICA, PERU THE BENCHMARKING OF EUROPE AND IN CASE OF EGYPT, BRAZIL AND THAILAND BENCHMARKING OF ASIA IS ACCEPTED. ACCORDING TO PARANO.5, IT IS ALSO EMPHATICALLY MENTIONED THAT FOREIGN AES ARE THE TESTED PARTIES. IT IS ALSO IMPORTANT TO NOTICE THAT HOW THIS AGREEMENT HAS BEEN REACHED BETWEEN THE PARTIES. PAGE NO 500 WHERE IN IT IS HELD THAT APPLICANT I.E. APPELLANT IS AN ENTREPRENEUR MANUFACTURER WHERE IN THE FUNCTIONS PERFORMED BY IT ARE (A) R & D FOR BOTH THE PRODUCTS AND PROCESSES (B) PRODUCTION AND SUPPLY OF FORMULATIONS AND APIS (C) PROVISION OF TECHNICAL SUPPORT AND QUALITY CONTROL PROCESS FOR THE AES (D) APPLICATION FOR REGULATORY APPROVALS FROM FOREIGN GOVERNMENTS (E) MANAGEMENT SUPPORT IN THE RISK ASSUMED BY APPELLANT IS DISCUSSED AT PAGE NO 502 TO 505 OF THE PAPER BOOK. AFTER THAT PAGE NO 505 TO 523 THE FUNCTIONS PERFORMED BY EACH OF THE AES AND RISK ASSUMED IS DISCUSSED. IT SHOWS THAT THE FUNCTIONS PERFORMED BY AES ARE VERY LIMITED AND NATURALLY, CONSEQUENT RISKS ASSUMED ARE LESS. AFTER THAT AT PAGE NO 525 AND 526 OF THE PAPER BOOK WHERE IN IT IS AGREED THAT MANNER IN WHICH SEGMENTATION OF THE AES WOULD BE COMPUTED BEING DECEMBER/MARCH YEAR END WHICH WOULD BE CERTIFIED BY THE INDEPENDENT COST ACCOUNTANTS. IT IS FURTHER PROVIDED THAT IN CASE OF AES ARE SECONDARY MANUFACTURERS AS WELL AS LOW RISK DISTRIBUTORS MARGINS WOULD BE COMPUTED SEPARATELY. THEREFORE, APA HAS BEEN AGREED ON THE WHOLE MECHANISM OF COMPUTATION OF ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. 27. IT IS ALSO IMPORTANT 28. THE ISSUE THAT ARISES IS THOUGH APA IS SIGNED FOR AY 2014-15 CAN IT HAVE ANY IMPACT ON THE TRANSACTIONS FOR THE YEAR UNDER APPEAL. ACCORDING TO THE APA IT SHALL APPLY IN RESPECT TO PREVIOUS YEAR 2013-14 RELEVANT TO AY 2014-15, HOWEVER PRINCIPALS LAID DOWN FOR COMPARABILITY ANALYSIS IN THAT DOES HAVE A GREATER PERSUASIVE VALUE. IT IS NOT THE CASE OF THE ASSESSEE THAT APA SHOULD BE APPLIED FOR THIS YEAR BUT IT IS THE PRAYER THAT PRINCIPLES LAID DOWN BY THE HIGHEST REVENUE AUTHORITY SHOULD BE ACCEPTED BY REVENUE AT LEAST FOR THE PURPOSE OF STARTING THE FIRST STEP OF COMPARABILITY ANALYSIS FOR THIS YEAR AS THE NATURE OF INTERNATIONAL TRANSACTIONS, FAR OF APPELLANT AND AES RESPECTIVELY ARE SIMILAR. THE AVAILABILITY OF DATA IS ALSO ON THE SIMILAR LINES AS AGREED IN APA. THOUGH THE CRITICAL ASSUMPTIONS REFERRED TO A SET OF TAXPAYER RELATED FACTS, IT MENTIONS THAT THIS APA WOULD NOT HAVE ANY EFFECT ON OTHER YEARS. MAY THAT BE THE CASE, BUT THE CONCEPT AND THE METHODOLOGY LAID DOWN IN APA CAN HAVE THE GUIDANCE VALUE FOR THE REVENUE AUTHORITIES FOR THE PURPOSES OF COMPARABILITY ANALYSIS. THE MAIN INTENT OF THE ADVANCE PRICING AGREEMENTS IS TO PROTECT THE FAIR SHARE OF ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 21 THE REVENUE OF THE STATES IN SIMPLE AND EFFICIENT MANNER AND TO PROTECT THE TAX BASE. NEED FOR ADVANCE PRICING AGREEMENTS ARE EMERGING OUT OF CURRENT GLOBAL COMPLEX ECONOMIC SITUATIONS AND ITS IMPACT ON REVENUE OF TAX COMPELLING GOVERNMENTS TO INTENSIFY AND STREAMLINE THEIR TRANSFER PRICING COMPLIANCE EFFORTS TO REDUCE THE DISADVANTAGE IN STAKING THEIR CLAIM FOR TAX. HIGHER RISK OF DISPUTES MAY BE REDUCED BY THE ADVANCE PRICING AGREEMENTS. ON THE SAME INTENTIONS AND OBJECTS, THE LD. TPO IS ALSO REQUIRED TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE FOR THIS YEAR. THEREFORE, THE AGREEMENT ENTERED INTO BY CBDT WITH THE ASSESSEE, WHICH HAS CONSIDERED ALL THE ASPECTS OF THE MANNER OF DETERMINATION OF ALP WHICH ARE ALSO SIMILAR FOR THE THIS YEAR, SHOULD BE GIVEN HIGHEST SANCTITY AND THEREFORE MECHANISM SUGGEST IN THAT AGREEMENT SHOULD BE NECESSARILY FOLLOWED IN DETERMINING ALP OF THE TRANSACTIONS FOR THIS YEAR. 29. THOUGH IN THE APA SIGNED BY THE ASSESSEE THERE IS NO 'ROLL BACK PROVISIONS' FOR THE YEAR UNDER APPEAL, HOWEVER WE ANALYSES THE CIRCUMSTANCES, WHICH PROVIDES FOR APPLYING THAT RULE. RULE 10MA OF THE INCOME TAX RULES 1962 PROVIDES FOR THE ROLL BACK PROVISIONS AS UNDER : '10MA. (1) SUBJECT TO THE PROVISIONS OF THIS RULE, THE AGREEMENT MAY PROVIDE FOR DETERMINING THE ARM'S LENGTH PRICE OR SPECIFY THE MANNER IN WHICH ARM'S LENGTH PRICE SHALL BE DETERMINED IN RELATION TO THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE PERSON DURING THE ROLLBACK YEAR (HEREINAFTER REFERRED TO AS 'ROLLBACK PROVISION'). (2) THE AGREEMENT SHALL CONTAIN ROLLBACK PROVISION IN RESPECT OF AN INTERNATIONAL TRANSACTION SUBJECT TO THE FOLLOWING, NAMELY: (I) THE INTERNATIONAL TRANSACTION IS SAME AS THE INTERNATIONAL TRANSACTION TO WHICH THE AGREEMENT (OTHER THAN THE ROLLBACK PROVISION) APPLIES; (II) THE RETURN OF INCOME FOR THE RELEVANT ROLLBACK YEAR HAS BEEN OR IS FURNISHED BY THE APPLICANT BEFORE THE DUE DATE SPECIFIED IN EXPLANATION 2 TO SUB- SECTION (1) OF SECTION 139; (III) THE REPOR T IN RESPECT OF THE INTERNATIONAL TRANSACTION HAD BEEN FURNISHED IN ACCORDANCE WITH SECTION 92E; (IV) THE APPLICABILITY OF ROLLBACK PROVISION, IN RESPECT OF AN INTERNATIONAL TRANSACTION, HAS BEEN REQUESTED BY THE APPLICANT FOR ALL THE ROLLBACK YEARS IN WHICH THE SAID INTERNATIONAL TRANSACTION HAS BEEN UNDERTAKEN BY THE APPLICANT; AND (V) THE APPLICANT HAS MADE AN APPLICATION SEEKING ROLLBACK IN FORM 3CEDA IN ACCORDANCE WITH SUB-RULE (5); (3) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-RULE (2), ROLLBACK PROVISION SHALL NOT BE PROVIDED IN RESPECT OF AN INTERNATIONAL TRANSACTION FOR A ROLLBACK YEAR, IF, (I) THE DETERMINATION OF ARM'S LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTION FOR THE SAID YEAR HAS BEEN SUBJECT MATTER OF AN APPEAL BEFORE THE APP ELLATE TRIBUNAL AND THE APPELLATE TRIBUNAL HAS PASSED AN ORDER DISPOSING OF SUCH APPEAL AT ANY TIME BEFORE SIGNING OF THE AGREEMENT; OR (II) THE APPLICATION OF ROLLBACK PROVISION HAS THE EFFECT OF REDUCING THE TOTAL INCOME OR INCREASING THE LOSS, AS THE CASE MAY BE, OF THE APPLICANT AS DECLARED IN THE RETURN OF INCOME OF THE SAID YEAR.' ON READING ABOVE RULE, IT IS CLEAR THAT IF THE INTERNATIONAL TRANSACTIONS ARE SAME IN THE YEAR OF APA AND THE YEAR FOR WHICH ROLL BACK IS APPLIED, ROLL BACK IS ALLOWED TO THE ASSESSEE ON CERTAIN NORMAL CONDITION OF FILING RETURN OF INCOME, REPORT OF ACCOUNTANT AND A REQUEST IN SPECIFIED FORMAT. OFF COURSE, IT HAS ALSO NORMAL REVENUE SAFEGUARDING EXCLUSION CLAUSES OF INCOME GOING BELOW THE RETURNED INCOME AND WHERE ITAT HAS PASSED AN ORDER ON THE SUBJECT. THEREFORE EVEN THE RULES PROVIDE THAT IF THE INTERNATIONAL TRANSACTIONS ARE SAME IN ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 22 THE YEAR OF APA AND IN THE PAST YEAR THAN BOTH THE PARTIES, ASSESSEE AND CBDT MAY AGREE FOR APPLYING THE AGREEMENTS CONTAINED IN APA AGREED. IN THE PRESENT CASE, IT IS NOT DISPUTED THAT THE INTERNATIONAL TRANSACTIONS IN BOTH THE YEARS ARE NOT SAME. THEREFORE, WE DRAW SUPPORT FROM RULE 10 MA OF INCOME TAX RULES 1962 IN APPLYING THE METHODOLOGY AS ACCEPTED IN APA FOR THE IMPUGNED YEAR IN APPEAL. 30. AS THE FAR ANALYSIS OF THE YEAR UNDER APA AS WELL AS THE YEAR UNDER APPEAL ARE SIMILAR AND IT IS ALSO AN ESTABLISHED FACT THAT THE TESTED PARTIES SELECTED BY THE APA I.E. FOREIGN AES ARE LEAST COMPLEX AND ADEQUATE FINANCIAL DATA FOR COMPARISON ON REGION BASIS/COUNTRY BASIS ARE AVAILABLE AND FURTHER THE FINANCIAL TRANSACTIONS ARE SAME, WE HOLD THAT BASED ON APA FOR A Y 2014-15 THE SELECTION OF TESTED PARTY SHOULD BE TAKEN AS FOREIGN AE FOR THE CURRENT YEAR TOO. 31. ON LOOKING AT THE TP STUDY REPORT OF THE ASSESSEE PLACED AT PAGE NOS. 409 TO 478 OF PAPER BOOK VOLUME-II AS WELL AS THE ORDER OF TPO IT IS APPARENT THAT ASSESSEE HAS ALSO ADOPTED REGION BASED ANALYSIS AND ALSO COUNTRY BY COUNTRY ANALYSIS OF COMPARABLE WHERE THEY ARE AVAILABLE. THEREFORE, IN THE TP STUDY REPORT AS FAR AS THE TESTED PARTY IS CONCERNED WE DO NOT AGREE WITH THE OBSERVATION OF THE TPO THAT NO COMPARABLES ARE AVAILABLE. IT RUNS CONTRARY TO THE FINDING OF THE CBDT IN APA. 32. COMING BACK TO THE ORDER OF COORDINATE BENCH IN CASE OF ASSESSEE FOR AY 2004-05 IT IS APPARENT THAT TRIBUNAL HAS ACCEPTED THAT LEAST COMPLEX PARTY TO THE TRANSACTION SHOULD BE TAKEN AS TESTED PARTY. IN THAT YEAR DUE TO THE WEAKNESS OF THE TP DOCUMENTATION OF THE ASSESSEE WHERE ASSESSEE COMPARED THE OPERATING MARGIN OF ALL THE OVERSEAS AES WITH REFERENCE TO A SINGLE SET OF COMPARABLES SELECTED FROM AROUND THE WORLD WITHOUT ANY REGARD TO THE FUNCTIONAL AND GEOGRAPHICAL DISSIMILARITIES. IN THAT SET OF FACTS, COORDINATE BENCH HAS HELD THAT SUCH COMPARABILITY ANALYSIS IS NOT APPROPRIATE AND THEREFORE IN ABSENCE OF COMPARABLE DATA THERE WAS NO OPTION BUT TO UPHOLD THE APPELLANT AS A TESTED PARTY. THEREFORE, COORDINATE BENCH HAS UPHELD THE PRINCIPLE THAT TESTED PARTY SHOULD BE LEAST COMPLEX BUT ON THE FACTS OF THE CASE FOR THAT YEAR ON NON-AVAILABILITY OF COMPARABLE DATA, IT IS SO HELD. IN THE CURRENT YEAR, THE APPELLANT HAS ADDUCED REASONABLY COMPARATIVE DATA BASED ON REGION AND COUNTRY FOR COMPARING THE FOREIGN AES. THEREFORE THE FACTS IN THE PRESENT YEAR ARE QUITE DISTINCT THAN THE YEAR DECIDED BY ITAT I.E. A.Y. 2004-05. IN VIEW OF THIS, WE REJECT THE REASONS ASSIGNED BY LD. TPO FOR REJECTING THE SELECTION OF OVERSEAS AE AS THE TESTED PARTY. 33. LD. AR HAS CITED MANY DECISIONS, WHICH ARE ON THE PRINCIPLE OF SELECTION OF TESTED PARTY, WHICH IS LEAST COMPLEX. WE ARE OF THE VIEW THAT THERE IS NO DISPUTE ON THIS PRINCIPLE AS IT IS WELL RECOGNIZED AND WELL ACCEPTED IN ALL THOSE DECISIONS. THIS TOO HAS BEEN HELD BY COORDINATE BENCH IN THE CASE OF THE ASSESSEE FOR A.Y. 2004-05. WE HAVE PERUSED THOSE DECISIONS AND APPLIED THE SAME IN REASONING AND OUR FINDINGS. FOR THE SAKE OF BREVITY WE REFER THE DECISION OF COORDINATE BENCH IN GENERAL MOTORS INDIA (P.) LTD. (SUPRA) WHERE IN MAJORITY OF THE DECISIONS WERE CONSIDERED ON THE ISSUE OF SELECTION OF 'TESTED PARTY' AND IT HELD AS UNDER :- '11.1. WE SHALL NOW PROCEED TO PERUSE THE JUDICIAL VIEWS ON THE ISSUE. THE CASE LAWS RELIED ON BY THE ASSESSEE IS AS UNDER: (I) MASTEK LIMITED V. ADDL. CIT IN ITA NO.3120/AHD/2010 DT.29.02.2012: IN THIS CASE, THE QUESTION CAME UP FOR CONSIDERATION BEFORE THE EARLIER BENCH OF THIS TRIBUNAL WAS AS TO WHETHER A MINUTE EXAMINATION OF FUNCTIONAL PROFILE IS NECESSARY FOR THE SELECTION OF COMPARABLES AND THE ANSWER GIVEN WAS THAT FUNCTIONAL PROFILE MUST BE FIRST EXAMINED AND AFTER THAT PROCEED TO SELECT THE COMPARABLE. IN THIS CASE, THE COMPARABLES CHOSEN BY THE ASSESSEE WERE DISCUSSED BY THE TPO AND THOSE WERE DISCARDED FOR THE BASIC REASON THAT THE COMPANIES THOSE QUOTED BY THE ASSESSEE WERE DEALING IN PRODUCT DISTRIBUTION WHEREAS THE TPO WAS OF THE VIEW THAT THE AE WAS NOTHING BUT 'FRONT OFFICE' OF THE ASSESSEE AND SIMPLY ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 23 ENGAGED IN MARKETING ACTIVITY. AFTER DUE CONSIDERATION OF THE ISSUE, THE HON'BLE BENCH HAD OBSERVED THUS: '16.1 (ON PAGE 47) IT IS CLEAR THAT ARM'S LENGTH PRICE IS TO BE DETERMINED BY TAKING RESULT OF COMPARABLE TRANSACTIONS AND THOSE TRANSACTIONS MUST BE IN COMPARABLE CIRCUMSTANCES. IT IS THEREFORE REQUIRED TO HAVE A PROPER STUDY OF SPECIFIC CHARACTERISTICS OF CONTROLLED TRANSACTION. IT IS ALSO REQUIRED THAT THERE SHOULD BE PROPER STUDY OF FUNCTIONS PERFORMED TO MATCH THE IDENTICAL SITUATIONS UNDER WHICH FUNCTIONS HAVE BEEN PERFORMED. THEN RISK PROFILE IS ALSO REQUIRED TO BE COMPARED. WE MAY LIKE TO ADD THAT THERE ARE SO MANY PERSPECTIVES WHICH WERE REQUIRED TO BE COMPARED AND IN THIS CONNECTION THE HON'BLE COURTS HAVE ALSO SUGGESTED SO, SUCH AS, COMPARISON OF FUNCTIONAL PROFILE, SIMILARITY IN RESPECT OF ASSETS EMPLOYED AND A THOROUGH SCREENING OF THE COMPARABLES ETC. HENCE, IN THE PRESENT CASE, IT IS NECESSARY TO CONSIDER AN ANALYSIS THAT WHETHER THE COMPARABLES SELECTED BY THE TPO HAD ANALOGOUS FUNCTIONAL PROFILE TO THAT OF FUNCTIONAL PROFILE OF THE ASSESSEE. IT IS TRUE THAT FUNCTIONAL PROFILE AND ASSETS AND RISK ANALYSIS WAS MADE AVAILABLE BUT THAT IS TO BE CORRECTLY UNDERSTOOD IN THE LIGHT OF THE NATURE OF INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH THE SAID AE. A SIMILAR PROBLEM WAS CONSIDERED BY ITAT DELHI BENCH IN THE CASE OF BECHTEL INDIA PVT. LTD. V. DCIT (2011- TII-07-ITAT-DEL-TP) WHERE THE ASSESSEE STATED TO BE ENGAGED IN THE BUSINESS OF PROVIDING ELECTRONIC DATA SUPPORT SERVICE TO AE AND THE DIFFICULTY AROSE THAT THE SAID FUNCTION WAS COMPARED WITH THE COMPANIES ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE. SO THE QUESTION WAS THAT WHETHER A MINUTE EXAMINATION OF FUNCTIONAL PROFILE IS NECESSARY FOR THE PURPOSE OF SELECTION OF COMPARABLES AND THE ANSWER GIVEN WAS THAT FUNCTIONAL PROFILE MUST BE FIRST EXAMINED AND AFTER THAT PROCEEDS TO SELECT THE COMPARABLES. INTERESTINGLY, IN THE PRESENT CASE NOW BEFORE US, COMPARABLES CHOSEN BY THE ASSESSEE WERE DISCUSSED BY THE TPO AND THOSE WERE DISCARDED. THE BASIC REASON FOR REJECTION OF THOSE COMPARABLES WAS THAT THE COMPANIES THOSE WERE QUOTED BY THE ASSESSEE WERE DEALING IN PRODUCT DISTRIBUTION WHEREAS THE TPO WAS OF THE VIEW THAT THE AE WAS NOTHING BUT 'FRONT OFFICE' OF THE ASSESSEE AND SIMPLE ENGAGED IN MARKING ACTIVITY. IN THIS CONTEXT, WE ARE OF THE VIEW THAT IN ORDER TO DETERMINE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, FIRST IT IS NECESSARY TO SELECT THE 'TESTED PARTY' AND SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRIMA FACIE CANNOT BE DISTINGUISHED FROM POTENTIAL UNCONTROLLED COMPARABLES.' WE ARE IN AGREEMENT WITH THE FINDINGS OF THE EARLIER BENCH (SUPRA) THAT SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE. (II) DEVELOPMENT CONSULTANTS (P.) LTD. V. ACIT 136 TTJ 129 & FOLLOWED BY SONY INDIA (P.) LTD. V. DY. CIT [2008] 114 ITD 448/315 ITR 150 (DELHI): THE ISSUE BEFORE THE TRIBUNAL WAS THAT THE CIT (A) HAD CONFIRMED THE ADJUSTMENTS TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES BASED AT BAHAMAS, USA WITHOUT CONSIDERING THE SUBMISSIONS AND THE FINANCIAL OF THE AES EXPLAINING THE FACTS ETC. IN CASE OF THE MERITS OF THE CASE FOR INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH TKC, THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE WAS AS UNDER: '26, 1 TO 3** ....4. TKS IS THE ENTREPRENEUR COMPANY AND HAS CREATED SIGNIFICANT MARKETING INTANGIBLES OVER THE YEARS. IT USES ITS MARKETING INTANGIBLES TO GENERATE THE WORK AND ASSUMES ALL THE MARKET, PRICE AND PRODUCT RISKS. TKC CAME OUT THE WORK ON ITS OWN, ONLY PARTS OF THE JOB ARE SUB-CONTRACTED TO THE ASSESSEE FOR ITS CONVENIENCE. FUTHER, BEING AN ENTREPRENEUR COMPANY, IT IS DIFFICULT TO DETERMINE THE PROFITS OF ATKC WITH RESPECT TO WORK DOWNLOADED TO INDIA (AS THE REVENUE RECEIVED FOR WORK OFF-SHORED TO INDIA CANNOT BE SEPARATELY IDENTIFIED). FURTHER, THE REVENUE GENERATED FROM THE SERVICES PROVIDED BY THE ASSESSEE WOULD FORM ONLY A SMALL PART OF THE ENTIRE OPERATIONS. THE VALUE OF ENGINEERING DRAWING AND DESIGN SERVICES RENDERED BY THE ASSESSEE TO TKC FOR AY 2002-04 WAS RS. 1,58,43,923/- AND FOR AY 2004-05 IT WAS RS. 1,45,77,704/-. THE VALUE OF SERVICE FORMS APPROXIMATELY 6% TO 7% OF THE COST OF SALES TO ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 24 TKC. HENCE, THIS SHRI RAHUL MITRA ARGUED, SHOWS THAT TESTING THE MARGINS OF TKC WOULD NOT SERVE THE PURPOSE OF DETERMINING THE ARM'S LENGTH NATURE OF THE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH TKC. HENCE, THE RECOURSE AVAILABLE TO TEST THE ARM'S LENGTH PRICE OF THE SERVICES RENDERED BY THE ASSESSEE TO TKC IS TO TEST THE MARGINS FROM THE INDIAN SIDE. IN VIEW OF THE DISCUSSION ON TESTED PART EARLIER, THE ASSESSEE WAS SELECTED AS THE TESTED PARTY BEING LEAST COMPLEX OF THE TWO ENTITIES. HENCE, THE TRANSFER PRICING ANALYSIS IN THIS CASE WAS DONE FROM THE INDIAN SIDE, WHEREIN, THE MARGINS OF THE ASSESSEE WITH RESPECT TO SERVICES PROVIDED TO TKC WERE COMPARED INTERNALLY WITH SERVICES PROVIDED TO OTHER THIRD PARTIES IN FOREIGN MARKET. TAKING INTO ACCOUNT THE DIVERGENT SUBMISSIONS, THE HON'BLE TRIBUNAL HAD RECORDED ITS FINDINGS THAT '33. BASED ON FACTS AND OUR FINDINGS OF THE CASE, AFTER DUE CONSIDERATION OF ALL THE FACTS, WE CONCLUDE THAT THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WITH DATACORE USA IS CORRECT AND ON THE BASIS OF THE ANALYSIS IT IS SEEN THAT TRANSACTION UNDERTAKEN BY THE TAXPAYER WITH DATACORE US IS AT ARM'S LENGTH FOR BOTH THE ASSESSMENT YEARS.' (III) IN THE CASE OF RANBAXY LABORATORIES LTD. V. ADDL. CIT110 ITD 428, THE HON'BLE DELHI TRIBUNAL HAD RECORDED ITS FINDINGS THAT '58. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THE TESTED PARTY NORMALLY SHOULD BE THE PARTY IN RESPECT OF WHICH RELIABLE DATA FOR COMPARISON IS EASILY AND READILY AVAILABLE AND FEWEST ADJUSTMENTS IN COMPUTATIONS ARE NEEDED. IT MAY BE LOCAL OR FOREIGN ENTITY, I.E., ONE PARTY TO THE TRANSACTION. THE OBJECT OF TRANSFER PRICING EXERCISE IS TO GATHER RELIABLE DATA, WHICH CAN BE CONSIDERED WITHOUT DIFFICULTY BY BOTH THE PARTIES, I.E., TAXPAYER AND THE REVENUE. IT IS ALSO TRUE THAT GENERALLY LEAST OF THE COMPLEX CONTROLLED TAXPAYER SHOULD BE TAKEN AS A TESTED PARTY. BUT WHERE COMPARABLE OR ALMOST COMPARABLE, CONTROLLED AND UNCONTROLLED TRANSACTIONS OR ENTITIES ARE AVAILABLE, IT MAY NOT BE RIGHT TO ELIMINATE THEM FROM CONSIDERATION BECAUSE THEY LOOK TO BE COMPLEX. IF THE TAXPAYER WISHES TO TAKE FOREIGN AE AS A TESTED PARTY, THEN IT MUST ENSURE THAT IT IS SUCH AN ENTITY FOR WHICH THE RELEVANT DATA FOR COMPARISON IS AVAILABLE IN PUBLIC DOMAIN OR IS FURNISHED TO THE TAX ADMINISTRATION. THE TAXPAYER IS NOT THEN ENTITLED TO TAKE A STAND THAT SUCH DATA CANNOT BE CALLED FOR OR INSISTED UPON FROM THE TAXPAYER.' IN SUBSTANCE, A FOREIGN ENTITY (A FOREIGN AE) COULD ALSO BE TAKEN AS A TESTED PARTY FOR COMPARISON. 11.2. AT THIS JUNCTURE, WE WOULD LIKE TO REFER TO THE UNITED NATION'S PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES WHEREIN THE SELECTION OF THE TESTED PARTY HAS BEEN DEALT WITH. THIS MANUAL HAS BEEN THE WORK OF MANY AUTHORS WHICH INCLUDED INDIA, NORWAY, NIGERIA, ITALY, USA, NETHERLANDS, BRAZIL, CHINA, OECD, JAPAN ETC. FOR READY REFERENCE, THE RELEVANT PORTION OF IT OBSERVATION IS EXTRACTED AS UNDER: '5.3.3. SELECTION OF THE TESTED PARTY: 5.3.3.1. WHEN APPLYING THE COST PLUS METHOD, RESALE PRICE METHOD OR TRANSACTIONAL NET MARGIN METHOD (SEE FURTHER CHAPTER 6) IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-UP ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHOICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE CONTROLLED TRANSACTION. ATTRIBUTES OF CONTROLLED TRANSACTION(S) WILL INFLUENCE THE SELECTION OF THE TEST PARTY (WHERE NEEDED). THE TESTED PARTY NORMALLY SHOULD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FOR COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN ASSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESSARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT DATA ON COMPARABLES IS FURNISHED TO THE TAX ADMINISTRATION AND VICE VERSA IN ORDER FOR THE LATTER TO BE ABLE TO VERIFY THE SELECTION AND APPLICATION OF THE TRANSFER PRICING METHOD.' ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 25 WITH REGARD TO THE CHALLENGES EMERGING IN TRANSFER PRICING IN INDIA, IT HAS BEEN OBSERVED AS UNDER: '10.4. EMERGING TRANSFER PRICING CHALLENGES IN INDIA 10.4.1. TRANSFER PRICING REGULATIONS IN INDIA 10.4.1.3 THE INDIAN TRANSFER PRICING ADMINISTRATION PREFERS INDIAN COMPARABLES IN MOST CASES AND ALSO ACCEPTS FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN ASSOCIATED ENTERPRISE IS THE LESS OR LEAST COMPLEX ENTITY AND REQUISITE INFORMATION IS AVAILABLE ABOUT THE TESTED PARTY AND COMPARABLES. 11.2.1 IT WAS ALSO VOUCHED DURING THE COURSE OF HEARING BY THE LEARNED SR. COUNSEL THAT THE FINANCIAL DETAILS INCLUDING OPERATING MARGIN OF COMPARABLE COMPANIES ALONG WITH THE BACK- UP COMPUTATIONS WERE FURNISHED BEFORE THE TPO IN THE TRANSFER PRICING DOCUMENTATION [SOURCE: PAGES 113 TO 210 OF THE TRANSFER PRICING STUDY]. THIS CONTRADICTS THE ASSERTION OF THE LEARNED DR THAT THE ASSESSEE HAD NOT FURNISHED ANY FINANCIAL INFORMATION OF THE COMPARABLE COMPANIES. 11.2.2 THE UNITED NATION'S PRACTICAL MANUAL ON TRANSFER PRICING ALSO CONTRADICTS THE TPO'S ARGUMENT THAT GMDAT SHOULD NOT BE SELECTED AS THE TESTED PARTY AS THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE DOESN'T FALL WITHIN HIS JURISDICTION AND HE CAN NEITHER CALL FOR ANY ADDITIONAL INFORMATION NOR SCRUTINIZE THEIR BOOKS OF ACCOUNTS ETC., 11.2.3 HOWEVER, WE FIND INCONSISTENCY IN THE STAND OF THE TPO TO THE EFFECT THAT WHILE REJECTING THE ASSESSEE'S APPROACH FOR SELECTING GMDAT AS THE TESTED PARTY BY CITING A REASON THAT THERE WAS NO RELIABLE DATA AVAILABLE FOR BOTH GMDAT AND COMPARABLES AND, THEREFORE, GMDAT CANNOT BE TAKEN AS THE 'TESTED PARTY', HOWEVER, ON THE SAME BREATH, AS RIGHTLY HIGHLIGHTED BY THE ASSESSEE, THE TPO HAD TAKEN GMDAT AS THE TESTED PARTY WHILE MAKING ADJUSTMENT TO TRANSACTION RELATING TO PAYMENT OF ROYALTY BY GMI TO GMDAT. 11.2.4 REBUTTING THE REVENUE'S ALLEGATION MADE DURING THE COURSE OF PROCEEDINGS THAT THE SEGMENTAL FINANCIAL STATEMENT OF GMDAT WAS NOT RELIABLE, THE ASSESSEE REITERATES THAT THE SEGMENTAL DATA RELIED UPON FOR BENCHMARKING INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF CKD KITS AND COMPONENTS WAS COMPLETELY RELIABLE AND WAS BASED ON SOUND ALLOCATION KEYS. TO SUBSTANTIATE ITS CLAIM, THE ASSESSEE HAS ALSO FURNISHED A REPORT ON FACTUAL FINDINGS CERTIFIED BY THE STATUTORY AUDITORS DELOITTE ANJIN LLC. 11.2.5 MOREOVER, WE FIND THAT THE DRP HAD NOT CONSIDERED IN GREAT DETAIL THE PLEA OF THE ASSESSEE AS TO WHY GMDAT SHOULD NOT BE SELECTED AS THE TESTED PARTY FOR ANALYZING THE INTER-COMPANY TRANSACTIONS. INSTEAD, THE DRP HAD, IN A CRYPTIC MANNER, CONCLUDED THAT THE RESULTS OF ASSESSEE HAVE TO BE COMPARED WITH THE STAND ALONE RESULTS OF MAHINDRA & MAHINDRA IN THE AUTOMOTIVE SEGMENT. 11.2.6 IN THIS CONNECTION, WE TEND TO RECALL THE RULING OF THE HON'BLE JURISDICTIONAL HIGH COURT [SPECIAL CIVIL APPLICATION NO.8179 OF 2010 DATED 31.8.2010] IN THE CASE OF AIA ENGINEERING LTD. V. DISPUTE RESOLUTION PATEL THROUGH SECRETARY-DRP & 1. AFTER DUE CONSIDERATION OF RIVAL SUBMISSIONS, THE HON'BLE COURT HAD RULED THUS '16. . . . . .IF THE DISPUTE RESOLUTION PANEL WAS OF THE OPINION THAT THE APPLICATION DATED 22.4.2010 COULD NOT HAVE BEEN ENTERTAINED, IT SHOULD HAVE CONSIDERED THE OBJECTIONS FILED BY THE PETITION ON MERITS. AS A CONSEQUENCE OF THE IMPUGNED ORDER, FIRSTLY THE OBJECTIONS RAISED BY THE PETITIONER HAVE NOT BEEN DECIDED, SECONDLY, IN VIEW OF THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL, THE PETITIONER WOULD NOT BE IN A POSITION TO AVAIL OF THE REMEDY OF APPEAL BEFORE COMMISSIONER (APPEALS) AGAINST THE DRAFT ASSESSMENT ORDER; AND THIRDLY, IN THE LIGHT OF THE OBSERVATION MADE BY THE DISPUTE RESOLUTION ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 26 PANEL THAT THE PETITIONER HAS CHOSEN TO WITHDRAW THE OBJECTIONS, PREFERRING ANY APPEAL AGAINST THE IMPUGNED ORDER BEFORE ANY FORUM WOULD BE AN EXERCISE IN FUTILITY, AS NO APPEAL WOULD BE ENTERTAINED AGAINST AN ORDER PASSED ON A CONCESSION. THUS, THE DISPUTE RESOLUTION PANEL HAS VIRTUALLY CLOSED ALL DOORS FOR THE PETITIONER. IN THE CIRCUMSTANCES, IMPUGNED ORDER OF THE DISPUTE RESOLUTION PANEL SUFFERS FROM THE VIDE OF BEING CONTRARY TO THE RECORD AS WELL AS NON-APPLICATION OF MIND, IN AS MUCH AS THE PETITIONER HAD NEVER SOUGHT WITHDRAWAL OF THE OBJECTIONS FILED BY IT. THE IMPUGNED ORDER ALSO CAUSES IMMENSE PREJUDICE TO THE PETITIONER AS RECORDED HEREINABOVE. IN THE CIRCUMSTANCES, THE IMPUGNED ORDER OF THE DISPUTE RESOLUTION PANEL, THEREFORE, CANNOT BE SUSTAINED. . . . . . .' 11.3 WE SHALL NOW PERUSE THE CASE LAWS ON WHICH THE LEARNED DR HAD PLACED RELIANCE IN THE FINDINGS OF THE HON'BLE MUMBAI TRIBUNALS IN THE CASES OF (I) AURIONPRO SOLUTIONS LTD. V. ADDL. CIT IN ITA NO.7872/MUM/2011 DATED 12.4.2013; AND (II) M/S ONWARD TECHNOLOGIES LTD. V. DCIT (OSD) IN ITA NO.7985/MUM/2010 DATED 30.4.2013. (I) IN THE CASE OF AURIONPRO SOLUTIONS LTD. (SUPRA ), THE ISSUE BEFORE THE HON'BLE BENCH WAS THAT THE ASSESSEE ENGAGED IN THE BUSINESS OF SOFTWARE DEVEL OPMENT AND WEB DESIGNING SERVICES AND THAT THE ASSESSEE HAD LENT LOANS TO ITS AES STATIONED AT USA, SINGAPORE AND BAHRAIN. THE ASSESSEE HAD CLAIMED THAT THE SAID LOANS AS WORKING CAPITAL ADVANCED TO ITS 100% SUBSIDIARY OUTSIDE INDIA. WHEN THE ISSUE WAS REF ERRED TO TPO, THE TPO TOOK A VIEW THAT AS IN A THIRD PARTY COMPARABLE SITUATION, ADVANCES WOULD BEAR INTEREST AND, THEREFORE, NEED TO CHARGE A MARKUP AS PER CUP METHOD. ACCORDINGLY, THE TPO PROPOSED TO BENCHMARK THE LOANS AT DOLLAR DENOMINATED LIBO [LONDON INTER BANK OPERATIVE] RATE PLUS MARK UP OF 3%. WHEN THE ISSUE LANDED UP BEFORE THE DRP, THE DRP HAD, AFTER ANALYZING THE ISSUE, DIRECTED THE AO/TPO TO COMPUTE THE INTEREST ON LOANS TO AE @ 14% PER ANNUM THEREBY ENHANCED THE TRANSFER PRICING ADJUSTMENT. AG GRIEVED ASSESSEE TOOK UP THE ISSUE WITH THE TRIBUNAL. THE HON'BLE TRIBUNAL, AFTER DUE CONSIDERATION OF THE ISSUE IN DEPTH AND FOR THE REASONS RECORDED THEREIN, DIRECTED THE AO/TPO TO DETERMINE THE ARM'S LENGTH INTEREST AT LIBOR PLUS 2% ON THE MONTHLY CLOSI NG BALANCE OF ADVANCES DURING THE FY. WE HAVE, WITH DUE REGARDS, PERUSED THE ISSUE AND THE FINDINGS OF THE HON'BLE BENCH IN DETAIL. IRONICALLY, THE MAIN ISSUE BEFORE THE BENCH WAS THE PERCENTAGE OF THE INTEREST TO BE CALCULATED ON THE LOAN ADVANCED BY THE ASSESSEE TO ITS FOREIGN AES. WE ARE, THEREFORE, OF THE VIEW THAT THIS CASE IS NOT DIRECTLY APPLICABLE TO THE ISSUE UNDER DISPUTE. (II) IN THE CASE OF M/S. ONWARD TECHNOLOGIES LTD. (SUPRA ) AS RELIED ON BY THE REVENUE, IT IS OBSERVED THAT THE ASSESSEE, A PARENT COMPANY HAD INTERNATIONAL TRANSACTION WITH ITS AES. WITH REGARD TO IT ENABLED SERVICES PROVIDE TO ITS AES, THE ASSESSEE HAD CHOSEN SIX COMPARABLES WITH ITS FOREIGN AES AS A TESTED PARTY. THE TPO HAD IGNORED THE WORKING OF THE ASSESSEE WHEREBY SELECT ING 20 COMPARABLE CASES. WHEN THE ISSUE REACHED BEFORE THE TRIBUNAL FOR RESOLVE, THE HON'BLE BENCH HAD, AFTER HAVING CONSIDERED RIVAL SUBMISSIONS, RECORDED ITS FINDINGS, AMONG OTHERS, AS UNDER: SO, IT IS THE PROFIT ACTUALLY REALIZED BY THE INDIAN ASSESSEE FROM THE TRANSACTION WITH ITS FOREIGN AE WHICH IS COMPARED WITH THAT OF THE COMPARABLES. THERE CAN BE NO QUESTION OF SUBSTITUTING THE PROFIT REALIZED BY THE INDIAN ENTERPRISE FROM ITS FOREIGN AE WITH THE PROFIT REALIZED BY THE FOREIGN AE FROM THE ULTIMATE CUSTOMERS FOR THE PURPOSES OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF THE INDIAN ENTERPRISE WITH ITS FOREIGN AE. THE SCOPE OF TP ADJUSTMENT UNDER THE INDIAN TAXATION LAW IS LIMITED TO TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE. IT CAN NEITHER CALL FOR ALSO ROPING IN AND TAXING IN INDIA THE MARGIN FROM THE ACTIVITIES UNDERTAKEN BY THE FOREIGN AE NOR CAN IT CURTAIL THE PROFIT ARISING OUT OF TRANSACTION BETWEEN THE INDIAN AND FOREIGN AE AT ARM'S LENGTH. THE CONTENTION OF THE LD. AR IN CONSIDERING THE PROFIT OF THE FOREIGN AE AS 'PROFIT A' FOR THE PURPOSES OF COMPARISON WITH PROFIT OR COMPARABLES, BEING 'PROFIT B', TO DETERMINE THE ALP OF TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE, MISSES THE WOOD FROM THE TREE BY MAKING THE SUBSTANTIVE SECTION 92 OTIOSE AND THE DEFINITION OF 'INTERNAL TRANSACTION' U/S 92B AND RULE 10B REDUNDANT. THIS IS PATENTLY AN UNACCEPTABLE POSITION HAVING NO SANCTION OF THE INDIAN TRANSFER PRICING LAW. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 27 BORROWING A CONTRARY MANDATE OF THE TP PROVISIONS OF OTHER COUNTRIES AND READING IT INTO OUR PROVISIONS IS NOT PERMISSIBLE. THE REQUIREMENT UNDER OUR LAW IS TO COMPUTE THE INCOME FROM AN INTERNATIONAL TRANSACTION BETWEEN TWO AES HAVING REGARD TO ITS ALP AND THE SAME IS REQUIRED TO BE STRICTLY ADHERED TO AS PRESCRIBED. THIS CONTENTION IS, THEREFORE, REPELLED.' WITH HAVE DULY PERUSED THE FINDINGS OF THE HON'BLE BENCH CITED SUPRA. IN THIS CONNECTION, WE WOULD LIKE TO POINT OUT THAT VARIOUS TRIBUNALS HAVE TAKEN DIVERGENT VIEWS IN RESPECT OF SELECTION OF 'TESTED PARTY'. TO ILLUSTRATE, THE EARLIER BENCH OF THIS TRIBUNAL IN THE CASE OF MASTEK LIMITED ITA NO.3096/AHD/2010 (AY- 2006-07) (SUPRA) HAD STRESSED THAT (AT THE COST OF REPETITION) 'WE ARE OF THE VIEW THAT IN ORDER TO DETERMINE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, FIRST IT IS NECESSARY TO SELECT THE 'TESTED PARTY' AND SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRIMA FACIE CANNOT BE DISTINGUISHED FROM POTENTIAL UNCONTROLLED COMPARABLES'. THE HON'BLE CALCUTTA TRIBUNAL IN THE CASE OF DEVELOPMENT CONSULTANTS (P.) LTD. (SUPRA) HAD RECORDED ITS FINDINGS THAT '33. BASED ON FACTS AND OUR FINDINGS OF THE CASE, AFTER DUE CONSIDERATION OF ALL THE FACTS, WE CONCLUDE THAT THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WITH DATACORE USA IS CORRECT AND ON THE BASIS OF THE ANALYSIS IT IS SEEN THAT TRANSACTION UNDERTAKEN BY THE TAXPAYER WITH DATACORE US IS AT ARM'S LENGTH FOR BOTH THE ASSESSMENT YEARS.' THIRDLY, THE HON'BLE DELHI TRIBUNAL IN THE CASE OF RANBAXY LABORATORIES LIMITED (SUPRA) TOOK A STAND THAT 'IF THE TAXPAYER WISHES TO TAKE FOREIGN AE AS A TESTED PARTY, THEN IT MUST ENSURE THAT IT IS SUCH AN ENTITY FOR WHICH THE RELEVANT DATA FOR COMPARISON IS AVAILABLE IN PUBLIC DOMAIN OR IS FURNISHED TO THE TAX ADMINISTRATION.' THEN, THE UNITED NATION'S PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES HAD OBSERVED THAT '5.3.3.1. . . . . . THE TESTED PARTY NORMALLY SHOULD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FOR COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN ASSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESSARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT DATA ON COMPARABLES IS FURNISHED TO THE TAX ADMINISTRATION. . . . . .' 11.4. CONSIDERING THE DIVERGENT VIEWS EXPRESSED BY VARIOUS TRIBUNALS (SUPRA) AND MAJORITY OF THEM WERE IN FAVOUR OF SELECTING THE 'TESTED PARTY' EITHER FROM LOCAL OR FOREIGN PARTY AND THE UNITED NATION'S PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES HAD OBSERVED THAT 'IT MAY BE THE LOCAL OR THE FOREIGN PARTY', WE TEND TO AGREE WITH THE SAME.' 34. ABOVE DECISION REPRODUCED BY US COVERS MANY DIVERGENT VIEWS OF THE COORDINATE BENCHES AND AFTER CONSIDERING THEM COORDINATE BENCH HAS REITERATED ALL THE PRINCIPLES NOTED BY US FOR SELECTION OF TESTED PARTY. HENCE, WE ALSO DRAW STAUNCH SUPPORT FROM THAT DECISION. 35. THEREFORE, FOR THE REASONS STATED ABOVE, GROUND NO 2.2 OF THE APPEAL IS ALLOWED WITH A DIRECTION THAT OVERSEAS ASSOCIATED ENTERPRISES ARE ACCEPTED AS 'TESTED PARTY' BEING THE LEAST COMPLEX OF THE TRANSACTING ENTITY FOR THE YEAR FOR COMPARABILITY ANALYSIS OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE-APPELLANT. 36. AS WE HAVE ALREADY DECIDED THE FIRST STEP OF COMPARABILITY ANALYSIS IN GROUND NO 2.2 OF THE APPEAL WE SET ASIDE OTHER GROUNDS NOS. 2 TO 7 EXCEPT 2.2 TO THE FILE OF TPO TO COMPUTE ALP OF THE INTERNATIONAL TRANSACTIONS ACCORDINGLY. IN THE RESULT GROUND NOS. 2 TO 7 EXCEPT ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 28 GROUND NO.2.2 ARE ALLOWED FOR STATISTICAL PURPOSES. NEEDLESS TO SAY THAT LD. TPO/AO SHALL GIVE DUE WEIGHTAGE TO THE ADVANCE PRICING AGREEMENT SIGNED BY THE ASSESSEE WITH CBDT ON OTHER ISSUES ALSO (OTHER THAN THE ISSUE OF 'SELECTION OF TESTED PARTY') FOR DETERMINATION OF ALP AND IN CASE OF ANY DIVERGENT VIEW, THE ASSESSEE SHALL BE GRANTED AN ADEQUATE OPPORTUNITY TO SUBSTANTIATE ANY CLAIM/ARGUMENTS ON THE MANNER OF DETERMINATION OF ALP. 12.1 BEFORE US, NO MATERIAL HAS BEEN PLACED ON RECORD BY THE REVENUE TO DEMONSTRATE THAT THE DECISIONS OF TRIBUNAL AS DISCUSSED ABOVE HAS BEEN SET ASIDE / STAYED OR OVERRULED BY THE HIGHER JUDICIAL AUTHORITIES. LIKEWISE, THE REVENUE BEFORE US HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. 12.2 WE ALSO NOTE THAT THE IMPUGNED ISSUE HAS ALSO BEEN ADMITTED BY THE HONBLE GUJARAT HIGH COURT IN TAX APPEAL NO. 853 OF 2016 AGAINST THE ORDER OF THE ITAT DELHI BENCH I NEW DELHI BEARING ITA NO. 196/DEL/2013 FOR THE AY 2008-09. THE RELEVANT PROPOSED QUESTION OF LAW AS FRAMED BEFORE THE HONBLE COURT READS AS UNDER: [1] WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ITAT WAS JUSTIFIED IN DIRECTING TO DELETE THE ADDITION OF RS. 238.16 CRORES HOLDING THAT OVERSEAS ASSOCIATED ENTERPRISE CAN BE ACCEPTED AS TESTED PARTY WHERE THERE IS NO INSTANCES OF TRANSACTIONS BETWEEN UNRELATED PARTIES ? 12.3 THUS THE IMPUGNED ISSUE IS PENDING BEFORE THE HONBLE GUJARAT HIGH COURT, THEREFORE WE DO NOT FIND ANY REASON TO REFER THE MATTER TO THE SPECIAL BENCH AS ARGUED BY THE LD. AR FOR THE ASSESSEE. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE DECISION IN THE OWN CASE OF THE ASSESSEE, WE RESTORE THE ISSUE TO THE FILE OF THE TPO FOR THE DETERMINATION OF ALP OF INTERNATIONAL TRANSACTIONS WITH THE AES FOR FRESH ADJUDICATION CONSIDERING ITS AES AS THE TESTED PARTY. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 13. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 4 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ADDITION FOR RS. 5,45,95,563/- MADE BY THE AO BY INVOKING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE INCOME TAX RULE WITHOUT APPRECIATING THAT IT HAS ALREADY MADE SUO-MOTO DISALLOWANCE OF RS. 79,59,355/- IN THE COMPUTATION OF INCOME. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 29 14. THE AO DURING THE ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE IN ITS BALANCE SHEET AS ON 31/03/2012 HAD SHOWN INVESTMENTS OF RS. 423.90 CRORES IN INDIAN COMPANIES AND RS. 3,242.27/- CRORES IN FOREIGN SUBSIDIARIES. THE ASSESSEE HAS DECLARED TAXABLE DIVIDEND INCOME AMOUNTING TO RS. 95,47,360/ RECEIVED FROM FOREIGN SUBSIDIARIES WHICH WAS OFFERED TO TAX. THE ASSESSEE HAS SUO-MOTO DISALLOWED OF RS. 79,59,355/- UNDER SECTION 14A OF THE ACT IN ITS COMPUTATION OF INCOME. 14.1 ON A QUESTION BY THE AO ABOUT THE DISALLOWANCE UNDER SECTION 14A R.W.R. 8D OF INCOME TAX RULES, THE ASSESSEE SUBMITTED THAT IT HAS INTEREST FREE OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVE & SURPLUS OF RS. 3978.28 CRORES WHEREAS THE AVERAGE INVESTMENT IS OF RS. 512.56 CRORES ONLY. THEREFORE, IT IS CLEAR THAT THE INVESTMENT HAS BEEN MADE OUT OF ITS OWN FUND OF THE ASSESSEE. 14.2 THE ASSESSEE FURTHER SUBMITTED THAT IT HAS TREASURY DIVISION WHICH LOOKS AFTER THE COMPANYS FUND MANAGEMENT AND INVESTMENT WHETHER DOMESTIC OR FOREIGN, ETC. THE SAID DEPARTMENT FOR THE YEAR UNDER CONSIDERATION HAS INCURRED AN EXPENSE OF RS. 5,08,80,151/- ONLY. ACCORDINGLY, A PROPORTIONATE AMOUNT OF RS. 79,59,355/- OUT OF TOTAL EXPENSES IN RATIO OF FOREIGN AND DOMESTIC INVESTMENT HAS ALREADY BEEN DISALLOWED U/S 14A OF THE ACT FOR THE INVESTMENT MADE IN INDIAN COMPANIES. 14.3 HOWEVER, AO DISREGARDED THE CONTENTION OF THE ASSESSEE AND HELD THAT ASSESSEE COULD NOT ESTABLISH THE NEXUS BETWEEN ITS FUND AND INVESTMENT MADE IN ORDER TO JUSTIFY THAT THE BORROWED FUNDS WERE USED IN THE IMPUGNED INVESTMENTS. THE ASSESSEE ALSO DID NOT MAINTAIN ANY SEPARATE BOOKS OF ACCOUNTS OR SEPARATE BANK ACCOUNTS. THE ASSESSEE HAS A SEPARATE TREASURY FUND DIVISION AND PERSONNEL WORKING THERE ARE GETTING HUGE SALARY ONLY TO MAKE THE KEY DECISION OF INVESTMENTS. FURTHER, WITHOUT THE APPROVAL OF TOP MANAGEMENTS SUCH BIG INVESTMENTS CANNOT BE MADE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 30 14.4 ACCORDINGLY, THE AO CALCULATED THE EXPENSES DISALLOWABLE UNDER RULE 8D FOR RS. 3,24,92,066/- AND RS. 3,00,62,852/- AGGREGATING TO RS. 5,45,95,563/- (RS. 6,25,54,918/- RS. 79,59,355/-) AND ADDED TO THE TOTAL INCOME OF ASSESSEE. 15. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO LD. DRP WHO CONFIRMED THE ORDER OF THE AO AFTER PLACING RELIANCE ON THE ORDER OF ITS PREDECESSOR FOR THE AY 2008-09 WHEREIN IT WAS HELD THAT ASSESSEE HAD NOT PROVIDED ANY BASIS FOR SUO-MOTO DISALLOWANCE. THE ASSESSEE HAS ALSO NOT MAINTAINED ANY SEPARATE BOOKS OF ACCOUNT OR SEPARATE DETAILS FOR THE PURPOSE OF INVESTMENT ACTIVITY. 16. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP THE ASSESSEE IS IN APPEAL BEFORE US. 17. THE LD. AR BEFORE US SUBMITTED THAT IN THE IDENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR THE A.Y. 2008-09, ITAT DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 DATED 25.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 18. ON THE OTHER HAND, THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. 19. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT IN THE AY 2008-09 BEING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-4-2016, REPORTED IN 68 TAXMANN.COM 322, HELD AS UNDER: 51. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. IN THIS CASE ASSESSEE HIMSELF HAS DISALLOWED RS.3311708/- WHICH ITSELF IS FAR MORE IN EXCESS OF EXEMPT INCOME. HON'BLE DELHI HIGH COURT IN JOINT INVESTMENTS (P.) LTD. V. CIT [2015] 59 TAXMANN.COM 295/233 TAXMAN 117/372 ITR 694 HAS HELD THAT: '9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY DISCLOSED WHY THE APPELLANT/ASSESSEE'S CLAIM FOR ATTRIBUTING RS. 2,97,440 AS A DISALLOWANCE UNDER S. 14A HAD TO BE REJECTED. TAIKISHA ENGG. INDIA LTD. (SUPRA) SAYS THAT THE JURISDICTION TO PROCEED FURTHER AND DETERMINE AMOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNTS AND REJECTION IF ANY OF THE ASSESSEE'S CLAIM OR EXPLANATION. THE SECOND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 31 BY THE AO-AN ASPECT WHICH IS COMPLETELY UNNOTICED BY THE CIT (A) AND THE TRIBUNAL. THE THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS RS. 48,90,000, THE DISALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARLY 110 PER CENT OF THAT SUM, I.E., RS. 52,56,197. BY NO STRETCH OF IMAGINATION CAN S. 14A OR R. 8D BE INTERPRETED TO MEAN THAT THE ENTIRE TAX-EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR DISALLOWANCE IS INDICATED IN S. 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE 'INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME'. THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE.' THEREFORE, ACCORDING TO US, AS SUCH NO FURTHER DISALLOWANCE U/S 14A CAN BE IMPUTED. FURTHERMORE, WE DID NOT FIND ANY SATISFACTION OF THE AO WITH REGARD TO EXAMINATION OF THE BOOKS OF ACCOUNT OF THE ASSESSEE THAT HOW DISALLOWANCE ALREADY OFFERED BY ASSESSEE OF RS.3311708/- WHICH ARE ALSO CERTIFIED BY THE TAX AUDITOR IS INCORRECT. IN ABSENCE OF SUCH SATISFACTION AO DOES NOT HAVE ANY AUTHORITY TO INVOKE PROVISIONS OF RULE 8D. ON THIS COUNT ALSO THE ADDITION CANNOT BE UPHELD. HON'BLE DELHI HIGH COURT IN CASE OF CIT V. TAIKISHA ENGG. LTD. [2015] 54 TAXMANN.COM 109/229 TAXMAN 143/370 ITR 338 HAS HELD AS UNDER : 13. WE NEED NOT, THEREFORE, GO ON TO SUB RULE (2) TO RULE 8D OF THE RULES UNTIL AND UNLESS THE ASSESSING OFFICER HAS FIRST RECORDED THE SATISFACTION, WHICH IS MANDATED BY SUB-SECTION (2) TO SECTION 14A OF THE ACT AND SUB RULE (1) TO RULE 8D OF THE RULES. 14. THE VIEW AND LEGAL RATIO EXPRESSED ABOVE IS NOT BEING ELUCIDATED FOR THE FIRST TIME. THE DELHI HIGH COURT IN MAXOPP INVESTMENT LTD.V. CIT [2012] 347 ITR 272/203 TAXMAN 364/15 TAXMANN.COM 390 HAS OBSERVED:- 'SCOPE OF SUB-SECTIONS (2) AND (3) OF SECTION 14A SUB-SECTION (2) OF SECTION 14 A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE THE PROVISION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF THE ASSESSING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB- SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER, IF SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 32 BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. RULE 8D 'AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE EXPRESSION USED IS - 'SUCH METHOD AS MAY BE PRESCRIBED'. WE HAVE ALREADY MENTIONED ABOVE THAT BY VIRTUE OF NOTIFICATION NO.45 OF 2008, DATED MARCH 24, 2008, THE CENTRAL BOARD OF DIRECT TAXES INTRODUCED RULE 8D IN THE SAID RULES. THE SAID RULE 8D ALSO MAKES IT CLEAR THAT WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE OF A PREVIOUS YEAR, IS NOT SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT FOR SUCH PREVIOUS YEAR, THE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF THE EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2) OF RULE 8D. WE MAY OBSERVE THAT RULE 8D (1) PLACES THE PROVISIONS OF SECTION 14A(2) AND (3) IN THE CORRECT PERSPECTIVE. AS WE HAVE ALREADY SEEN, WHILE DISCUSSING THE PROVISIONS OF SUB-SECTIONS (2) AND (3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB-RULE (2) OF RULE 8D OF THE SAID RULES. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REJECTS THE CLAIM OF THE ASSESSEE IN THIS REGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND COMPONENT BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST (OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I)) INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE - ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECTION 14A OF THE SAID ACT. IT IS, THEREFORE, CLEAR THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS - (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE (2) OF RULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COMPUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE. AND, IN CASES WHERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN.' 15. EVEN EARLIER THE BOMBAY HIGH COURT IN GODREJ AND BOYCE MFG. CO. LTD. (SUPRA) HAD REFERRED TO SECTION 14(2) OF THE ACT AND OBSERVED: 'UNDER SUB-SECTION (2), THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. THE METHOD, HAVING REGARD TO THE MEANING OF THE EXPRESSION 'PRESCRIBED' IN SECTION 2(33), MUST BE PRESCRIBED BY ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 33 RULES MADE UNDER THE ACT. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF THE ASSESSING OFFICER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH THE PRESCRIBED METHOD, ARISES IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE ASSESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT PART OF THE TOTAL INCOME. MOREOVER, THE SATISFACTION OF THE ASSESSING OFFICER HAS TO BE ARRIVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB-SECTION (2) DOES NOT IPSO FACTO ENABLE THE ASSESSING OFFICER TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE ASSESSING OFFICER MUST, IN THE FIRST INSTANCE, DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE ARRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT MAY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNISH AN OBJECTIVE BASIS FOR THE ASSESSING OFFICER TO ARRIVE AT A SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE ASSESSING OFFICER NOT BEING SO SATISFIED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW. SUB-SECTION (3) OF SECTION 14A PROVIDES FOR THE APPLICATION OF SUB-SECTION (2) ALSO TO A SITUATION WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. UNDER THE PROVISO, IT HAS BEEN STIPULATED THAT NOTHING IN THE SECTION WILL EMPOWER THE ASSESSING OFFICER, FOR AN ASSESSMENT YEAR BEGINNING ON OR BEFORE APRIL 1, 2001, EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154.' 16. EQUALLY ILLUMINATING ARE THE FOLLOWING OBSERVATIONS IN GODREJ AND BOYCE MFG. CO. LTD. (SUPRA) '. . . HOWEVER, IF THE ASSESSEE DOES NOT MAINTAIN SEPARATE ACCOUNTS, IT WOULD BE NECESSARY FOR THE ASSESSING OFFICER TO DETERMINE THE PROPORTION OF EXPENDITURE INCURRED IN RELATION TO THE DIVIDEND BUSINESS (I.E., EARNING EXEMPT INCOME). IT IS FOR EXACTLY SUCH SITUATIONS THAT A MACHINERY/METHOD FOR COMPUTING THE PROPORTION OF EXPENDITURE INCURRED IN RELATION TO THE DIVIDEND BUSINESS HAS BEEN PROVIDED BY WAY OF SECTION 14A(2)/(3) AND RULE 8D.' 17. MORE IMPORTANT AND RELEVANT FOR US ARE THE OBSERVATIONS IN GODREJ AND BOYCE MFG. CO. LTD. (SUPRA) ON REQUIREMENT AND STIPULATION OF SATISFACTION BEING RECORDED BY THE ASSESSING OFFICER WITH REFERENCE TO THE ACCOUNTS UNDER SECTION 14(2) OF THE ACT AND RULE 8D(1) OF THE RULES. IT WAS OBSERVED: 'PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEGUARD TO THE INVOCATION OF THE POWER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME BY ADOPTION OF THE PRESCRIBED METHOD. THE INVOCATION OF THE POWER IS MADE CONDITIONAL ON THE OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. WHEN A STATUTE POSTULATES THE SATISFACTION OF THE ASSESSING OFFICER 'COURTS WILL NOT READILY DEFER TO THE CONCLUSIVENESS OF AN EXECUTIVE AUTHORITY'S OPINION AS TO THE EXISTENCE OF A MATTER OF LAW OR FACT UPON WHICH THE VALIDITY OF THE EXERCISE OF THE POWER IS PREDICATED'. (M.A. RASHEED V. STATE OF KERALA [1974] AIR 1974 SC 2249*). A DECISION BY THE ASSESSING OFFICER HAS TO BE ARRIVED AT IN GOOD FAITH ON RELEVANT CONSIDERATIONS. THE ASSESSING OFFICER MUST FURNISH TO THE ASSESSEE A REASONABLE OPPORTUNITY TO SHOW CAUSE ON THE CORRECTNESS OF THE CLAIM MADE BY HIM. IN THE EVENT THAT THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE MUST RECORD REASONS FOR HIS CONCLUSION. THESE SAFEGUARDS WHICH ARE IMPLICIT IN THE REQUIREMENTS OF FAIRNESS AND FAIR PROCEDURE UNDER ARTICLE 14 MUST BE OBSERVED BY THE ASSESSING OFFICER WHEN HE ARRIVES AT HIS SATISFACTION UNDER SUB-SECTION (2) OF SECTION 14A. AS WE SHALL NOTE SHORTLY HEREAFTER, SUB-RULE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 34 (1) OF RULE 8D HAS ALSO INCORPORATED THE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTION 14A BEFORE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRESCRIBED UNDER SUB-RULE (2).' 18. IT IS IN THIS CONTEXT WE FEEL THAT THE FINDINGS RECORDED BY THE CIT (A) AND THE TRIBUNAL ARE APPROPRIATE AND RELEVANT. THE CLEAR FINDINGS ARE THAT THE ASSESSEE HAD SUFFICIENT FUNDS FOR MAKING INVESTMENTS IN SHARES AND MUTUAL FUNDS. THE SAID FINDINGS COUPLED WITH THE FAILURE OF THE ASSESSING OFFICER TO HOLD AND RECORD HIS SATISFACTION CLINCHES THE ISSUE IN FAVOUR OF THE RESPONDENT ASSESSEE AND AGAINST THE REVENUE. THE SELF OR VOLUNTARY DEDUCTIONS MADE BY THE ASSESSEE WERE NOT REJECTED AND HELD TO BE UNSATISFACTORY, ON EXAMINATION OF ACCOUNTS. JUDGMENTS IN TIN BOX CO. (SUPRA), RELIANCE UTILITIES AND POWER LTD. (SUPRA), SUZLON ENERGY LTD. (SUPRA) AND EAST INDIA PHARMACEUTICAL WORKS LTD. (SUPRA) WOULD BE RELEVANT IF THE SATISFACTION OF THE ASSESSING OFFICER IS IN ISSUE, AND SUCH QUESTION OF SATISFACTION IS WITH REFERENCE TO THE ACCOUNTS'.' THEREFORE, IN VIEW OF ABOVE TWO DECISIONS OF HON'BLE JURISDICTIONAL HIGH COURT WE HOLD THAT NO SUCH FURTHER DISALLOWANCE OVER AND ABOVE WHAT IS ADMITTED BY THE ASSESSEE CAN BE MADE. HENCE, GROUND NO. 10 OF THE APPEAL OF THE ASSESSEE IS ALLOWED AND DISALLOWANCE OF RS.74066105/- U/S 14A OF THE ACT IS DIRECTED TO BE DELETED. 19.1 FURTHER BEFORE US, NO MATERIAL HAS BEEN PLACED ON RECORD BY THE REVENUE TO DEMONSTRATE THAT THE DECISIONS OF TRIBUNAL AS DISCUSSED ABOVE HAS BEEN SET ASIDE/ STAYED OR OVERRULED BY THE HIGHER JUDICIAL AUTHORITIES. LIKEWISE, THE REVENUE BEFORE US HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE DECISION IN THE OWN CASE OF THE ASSESSEE, WE SET ASIDE THE FINDING OF THE LD. DRP AND DIRECT THE AO TO DELETE THE ADDITION MADE BY HIM. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 20. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 5 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ORDER OF THE AO BY MAKING ADJUSTMENT OF RS. 6,25,54,918/- WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT TAKING THE AMOUNT OF DISALLOWANCE MADE U/S 14A R.W.R. 8D OF INCOME TAX RULES. 21. THE AO WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT, ALSO ADDED RS. 6,25,54,918/- AS DISALLOWED U/S 14A R.W.R. 8D OF INCOME TAX RULES AS PER THE CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT. 22. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO THE LD. DRP WHO REJECTED THE GROUND OF OBJECTION OF THE ASSESSEE BY OBSERVING THAT ACTION OF AO IS IN CONFORMITY WITH CLAUSE (F) OF THE EXPLANATION 1 TO SECTION 115JB OF THE ACT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 35 23. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP, THE ASSESSEE IS IN APPEAL BEFORE US. 24. THE LD. AR BEFORE US SUBMITTED THAT IN THE IDENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR THE A.Y. 2008-09, ITAT DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 VIDE ORDER DATED 25.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 25. ON THE OTHER HAND, THE LD. DR BEFORE US VEHEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. THE LD. DR ALSO SUBMITTED THAT SUO-MOTO DISALLOWANCE MADE BY THE ASSESSEE SHOULD BE CONSIDERED FOR THE DISALLOWANCE IN CONFORMITY WITH CLAUSE (F) OF THE EXPLANATION 1 TO SECTION 115JB. 26. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT IN THE AY 2008-09 BEING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-4-2016, REPORTED IN 68 TAXMANN.COM 322, HAS HELD AS UNDER: 55. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE LD. AO HAS IMPUTED THE ADDITION U/S 115JB OF THE ACT AS DISALLOWANCE COMPUTED U/S 14A, READ WITH RULE 8D OF THE INCOME TAX RULE, 1962. AS WE HAVE ALREADY DELETED THE DISALLOWANCE AS PER GROUND NO.10 OF THE APPEAL WHEREIN WE HAVE HELD THAT THE AMOUNT OF DISALLOWANCE CANNOT BE WORKED OUT BY LD. AO WITHOUT RECORDING SATISFACTION ON EXAMINATION OF BOOKS ABOUT THE CORRECTNESS OF DISALLOWANCE MADE BY THE ASSESSEE WHICH IN THIS CASE HAS BEEN MADE BY ASSESSEE OF RS.3311708/-.WE HAVE ALSO HELD THAT DISALLOWANCE CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. HENCE, NOW NO DISALLOWANCE SURVIVES U/S 14A OF THE ACT SO FAR AS NORMAL COMPUTATION OF TOTAL INCOME OF THE APPELLANT. THE AO HAS ADDED TO THE BOOK PROFIT AMOUNT OF EXPENSE DISALLOWED U/S.14A APPLYING RULE 8D OF THE INCOME TAX ACT. AS PER OUR CONSIDERED VIEW, NO ADDITION U/S.115JB IS WARRANTED FOR AMOUNT OF DISALLOWANCE U/S.14A OF THE IT ACT. OUR VIEW IS SUPPORTED BY FOLLOWING DECISIONS : (I) CADILA HEALTHCARE LTD. V. ADDL. CIT [2012] 21 TAXMANN.COM 483/67 SOT 110 (URO)(AHD. - TRIB.); (II) RELIANCE INDUSTRIAL INFRASTRUCTURE LTD. [IT APPEAL NOS. 69 & 70 (MUM) OF 2009, DATED 5 - 4-2013]; (III) ESSARTELEHOLDINGS LTD. [IT APPEAL NO. 3850 (MUM.) OF 2010, DATED 29-7-2011]; ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 36 (IV) J.K. PAPER LTD. [IT APPEAL NOS. 979 (AHD.) OF 2006 & 4027 & 4080 (AHD.) OF 2008]; (V) NATIONAL COMMODITY DERIVATIVES EXCHANGE LTD. [IT APPEAL NO. 2923 (MUM) OF 2010, DATED 26-8-2011]; AND (VI) QUIPPO TELECOM INFRASTRUCTURE LTD. [IT APPEAL NO. 4931 (DE1HI) OF 2010, DATED 18-2 - 2011]. RESPECTFULLY FOLLOWING THE PROPOSITIONS LAID DOWN IN THE PREVIOUSLY MENTIONED DECISIONS, WE DIRECT THE LD. AO TO EXCLUDE THE AMOUNT OF ADDITION OF RS.7,66,40,105/- MADE U/S.14A, WHILE COMPUTING THE BOOK PROFIT U/S.115JB.IN VIEW OF THIS WE ALLOW GROUND NO.11 OF THE APPEAL. 26.1 FURTHER BEFORE US, NO MATERIAL HAS BEEN PLACED ON RECORD BY THE REVENUE TO DEMONSTRATE THAT THE DECISIONS OF TRIBUNAL AS DISCUSSED ABOVE HAS BEEN SET ASIDE/ STAYED OR OVERRULED BY THE HIGHER JUDICIAL AUTHORITIES. LIKEWISE, THE REVENUE BEFORE US HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE DECISION IN THE OWN CASE OF THE ASSESSEE, WE SET ASIDE THE FINDING OF THE LD. DRP AND DIRECT THE AO TO DELETE THE ADJUSTMENT MADE BY HIM UNDER SECTION 115JB OF THE ACT. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 27. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 6 IS THAT THE LD. DRP ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 440,22,43,702/-U/S 35(2AB) OF THE ACT ON THE GROUND THAT THE ASSESSEE HAD NOT FILED FORM 3CL ISSUED BY THE DSIR. 28. DURING THE ASSESSMENT PROCEEDING, THE AO FOUND THAT THE ASSESSEE HAD CLAIMED WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT IN RESPECT OF R & D REVENUE EXPENDITURE @100% AMOUNTING TO RS. 379,68,07,423/- AND CAPITAL EXPENDITURE @200% OF ACTUAL EXPENDITURE AMOUNTING TO RS. 60,54,36,279/- ONLY. HOWEVER THE ASSESSEE DID NOT FILE THE REQUISITE CERTIFICATE ISSUED BY THE PRESCRIBED AUTHORITY I.E. DSIR IN FORM 3CL. ACCORDINGLY AN EXPLANATION WAS SOUGHT FROM THE ASSESSEE BY THE AO. 28.1 THE ASSESSEE CONTENTED THAT THE ISSUANCE OF FORM 3CL WAS NOT ITS OBLIGATION. THEREFORE, IT CANNOT BE DENIED THE BENEFITS WHICH WERE OTHERWISE AVAILABLE TO IT ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 37 MERELY BECAUSE OF NON-ISSUANCE OF FORM 3CL WHICH WAS THE RESPONSIBILITY OF THE DSIR. THE ASSESSEE FURTHER CONTENDED THAT IT HAD FULFILLED ALL THE CONDITIONS FOR CLAIMING DEDUCTION U/S 35(2AB) OF THE AC. THE ASSESSEE COMPANY HAS FILED FORM NO. 3CH (ORDER OF APPROVAL FOR IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY) ISSUED BY SECRETARY, D.S.R.I.R, NEW DELHI DATED 05-09-2012 IN SUPPORT OF ITS CONTENTIONS. 28.2 HOWEVER, THE AO REJECTED THE CONTENTION OF THE ASSESSEE AND DISALLOWED THE DEDUCTION OF RS. 440,22,43,702/-CLAIMED U/S 35(2AB) OF THE ACT AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE ON THE REASONING THAT THE ASSESSEE FAILED TO FILE FORM 3CL ISSUED BY THE DSIR. 29. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP WHO HAS CONFIRMED THE ORDER OF THE AO BY FOLLOWING THE ORDER OF HIS PREDECESSOR. 30. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP, THE ASSESSEE IS IN APPEAL BEFORE US. 31. THE LD. AR BEFORE US SUBMITTED THAT IN THE IDENTICAL FACTS AND CIRCUMSTANCES THIS TRIBUNAL IN THE OWN CASE OF THE ASSESSEE FOR THE A.Y. 2009-10, BEARING ITA NO. 1390/AHD/2016 VIDE ORDER DATED 22.12.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 32. ON THE OTHER HAND, THE LD. DR BEFORE US VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 33. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT THE COORDINATE BENCH OF THIS ITAT IN THE OWN CASE OF ASSESSEE BEARING ITA NO 1390/AHD/2013 RELEVANT TO A.Y. 2009-10 INVOLVING THE IDENTICAL FACTS & CIRCUMSTANCES HAS HELD AS UNDER: 7. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO RIVAL CONTENTIONS AS WELL AS LD. PCIT'S CONCERN EXPRESSED IN ORDER REVISING THE ABOVE REGULAR ASSESSMENT. WE DEEM ITS APPROPRIATE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 38 AT THIS STAGE TO THROW SOME LIGHT ON THE NATURE AND AMBIT OF FORM 3CL. THE SAME COMES UNDER RULE 6(7A) OF THE INCOME TAX RULES, 1962 FRAMED UNDER THE PROVISIONS OF THE ACT. THE SUB RULE IS RELEVANT FOR APPROVAL OF EXPENDITURE INCURRED ON IN HOUSE RESEARCH & DEVELOPMENT FACILITY BY A COMPANY U/S.35(2AB). SUB CLAUSE (B) THEREOF IS THE SPECIFIC PROVISION THERETO STIPULATING THAT THE PRESCRIBED AUTHORITY SHALL SUBMIT ITS REPORT IN RELATION TO THE APPROVAL OF IN HOUSE RESEARCH & DEVELOPMENT FACILITY IN FORM NO.3CL TO THE DIRECTOR GENERAL (INCOME TAX EXEMPTIONS) WITHIN 60 DAYS OF ITS GRANTING APPROVAL. THE SAME IS MERELY IN THE FORM OF INTIMATION TO BE SENT FROM PRESCRIBED AUTHORITY'S END TO THE DEPARTMENT. AN ASSESSEE ENGAGED IN SUCH RESEARCH & DEVELOPMENT ACTIVITY HAVING ALREADY OBTAINED FORM 3CM APPROVAL OF ITS FACILITY HAS NO ROLE TO PLAY IN SUCH CORRESPONDENCE. WE NOTICE THAT A CO-ORDINATE BENCH OF THIS TRIBUNAL IN ACIT VS. M/S. TORRENT PHARMACEUTICALS ITA NO.3569/AHD/2004 DECIDED ON 13.11.2009 HOLDS THAT THE IMPUGNED WEIGHTED DEDUCTION IS NOT TO BE RESTRICTED TO THE EXTENT OF THE AMOUNT OF THE NECESSARY EXPENDITURE INCURRED STATED IN SUCH FORM 3CL. WE FURTHER FIND THAT HON'BLE JURISDICTIONAL HIGH COURT'S DECISION IN CIT VS. CLARIS LIFESCIENCES LTD. (2010) 326 ITR 251 (GUJARAT) UPHOLDS THIS TRIBUNAL'S DECISION IN THE VERY ASSESSEE'S CASE OBSERVING THAT EXPENSES INCURRED BEFORE FORM 3CM APPROVAL CANNOT BE DENIED FOR THE PURPOSE OF SECTION 35(2AB) WEIGHTED DEDUCTION. WE FOLLOW THE VERY REASONING TO OPINE THAT FACTS OF THE INSTANT CASE RATHER GO A STEP FURTHER WHEREIN THE APPELLANT HAS ONLY CLAIMED THOSE EXPENSES WHICH RELATE TO THE TIME PERIOD AS APPROVED IN THE FORM 3CM. WE ACCORDINGLY HOLD THAT THE ASSESSEE IS VERY MUCH ENTITLED FOR CLAIMING THE ABOVE CAPITAL AND REVENUE EXPENSES INCURRED ON IN HOUSE RESEARCH AND DEVELOPMENT AMOUNTING TO RS.237,77,05,310/-. THE ASSESSING OFFICER HAD RIGHTLY HELD IT ENTITLED FOR THE ABOVE WEIGHTED DEDUCTION AFTER VERIFYING ALL NECESSARY PARTICULARS DURING THE COURSE OF SCRUTINY. 33.1 THE VIEW TAKEN BY THE COORDINATE BENCH AS DISCUSSED ABOVE WAS SUBSEQUENTLY UPHELD BY THE JUDGMENT OF HONBLE GUJARAT HIGH COURT IN TAX APPEAL NO. 541 OF 2017, DATED 14-08-2017. 33.2 IN VIEW OF THE ABOVE, THE IDENTICAL ISSUE RAISED BEFORE US IN THE GROUND NO. 6 WHICH HAS ALREADY BEEN CONSIDERED BY THE TRIBUNAL AS DISCUSSED ABOVE, THEREFORE WE ARE TAKING THE SAME VIEW. ACCORDINGLY WE ALLOW THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 35(2AB) OF THE ACT. HENCE THE GROUND NO. 6 OF THE ASSESSEE IS ALLOWED. 34. THE NEXT ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 7 IS THAT THE LD. DRP ERRED IN CONFIRMING THE DISALLOWANCE OF DEDUCTION FOR THE CONTRIBUTION MADE TO RANBAXY COMMUNITY HEALTHCARE SOCIETY (FOR SHORT RCHS) AND RANBAXY SCIENCE FOUNDATION (FOR SHORT RCF) AMOUNTING TO RS. 2,53,30,000/- AND RS. 30,00,000/- RESPECTIVELY. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 39 35. THE ASSESSEE COMPANY MADE A CONTRIBUTION OF RS. 2,53,30,000/ TO RANBAXY COMMUNITY HEALTHCARE SOCIETY (RCHS) AND RS. 30,00,000/- TO RANBAXY SCIENCE FOUNDATION (RSF) IN THE YEAR UNDER CONSIDERATION. AS PER THE ASSESSEE, SUCH CONTRIBUTION WAS ELIGIBLE FOR DEDUCTION U/S 80G OF THE ACT. BUT THE SAME HAS NOT BEEN CLAIMED DUE TO LOSS IN THE RETURN OF INCOME. HOWEVER, THE ASSESSEE ALTERNATIVELY CLAIMED THE SAME AS BUSINESS EXPENDITURE U/S 37/35 OF THE ACT THROUGH A NOTE. THE ASSESSEE IN THIS CONNECTION SUBMITTED THAT THE HONBLE ITAT DELHI IN ITS OWN CASE BEARING ITA NO. 3925/DEL/2002 RELEVANT TO A.Y. 1997-98 HAD HELD THAT CONTRIBUTION MADE TO RSF & RCHS ARE EXPENDITURE FOR THE PURPOSE OF PROMOTING THE BUSINESS OF THE COMPANY. THUS THE SAME IS ALLOWABLE AS BUSINESS EXPENDITURE U/S 37 OF THE ACT. 35.1 HOWEVER, THE AO FOUND THAT ORDER OF THE ITAT PERTAINING TO THE EARLIER YEAR HAS BEEN CHALLENGED WHICH IS PENDING BEFORE THE HONBLE HIGH COURT OF DELHI. ACCORDINGLY, THE AO REJECTED THE SUBMISSION OF THE ASSESSEE AND HELD THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S 80G OF THE ACT. THE AO FURTHER OBSERVED THAT THE RECIPIENTS DID NOT SHOW THE AMOUNT AS TAXABLE RECEIPTS BUT ACCOUNTED AS DONATIONS. 35.2 THE AO ALSO NOTICED THAT THE ASSESSEE HAS ALSO NOT DEDUCTED TDS ON SUCH EXPENDITURE, THEREFORE THE SAME CANNOT BE ALLOWED AS DEDUCTION U/S 40(A)(IA) OF THE ACT. HENCE, THE AO DISALLOWED THE CLAIM OF THE ASSESSEE BEING BUSINESS EXPENDITURE U/S 37 OF THE ACT MADE THROUGH NOTE. 36. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP WHO HAS CONFIRMED THE ORDER OF THE AO. 37. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP, THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 40 38. THE LD. AR BEFORE US SUBMITTED THAT IN THE OWN CASE OF ASSESSEE BEARING ITA NO 196/DEL/2013 FOR A.Y. 2008-09, THE HONBLE ITAT DELHI IN IDENTICAL FACTS AND CIRCUMSTANCES DECIDED THE ISSUE IN ITS FAVOR. 39. ON THE OTHER HAND, THE LD. DR BEFORE US VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 40. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT IN THE AY 2008-09 BEARING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-4-2016, HELD AS UNDER: 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. IN VIEW OF THE DECISION OF HON'BLE DELHI HIGH COURT IN CASE OF ASSESSEE FOR AY 1997-98 ORDER DATED 17.03.2012 IN ITA NO.743/2008 AND 20.11.2012 FOR AY 2002-03 TO 2005-06, WE REVERSE THE DECISION OF THE AO AND DIRECT TO DELETE THE DISALLOWANCE OF RS.47 LACS AND RS.1250000/- OF CONTRIBUTION MADE BY APPELLANT TO RANBAXY COMMUNITY HEALTHCARE SOCIETY AND RANBAXY SCIENCE FOUNDATION. FURTHERMORE REGARDING FAILURE TO DEDUCT TAX ON THIS SUM, LD. DR. COULD NOT POINT OUT PARTICULAR SECTION, WHICH WARRANTS DEDUCTION OF TAX AT SOURCES ON THIS PAYMENT. THEREFORE, WE ALSO HOLD THAT IN ABSENCE OF SPECIFIC SECTION UNDER WHICH THE TAX IS REQUIRED TO BE DEDUCTED ON SUCH CONTRIBUTION WITHOUT THEIR BEING ANY SERVICE RENDERED BY THE RECIPIENT OF THE CONTRIBUTION DISALLOWANCE U/S 40A(IA) ALSO CANNOT BE MADE. IN THE RESULT GROUND NO.9 OF THE APPEAL IS ALLOWED. 40.1 BEFORE US, NO MATERIAL HAS BEEN PLACED ON RECORD BY THE REVENUE TO DEMONSTRATE THAT THE DECISIONS OF TRIBUNAL AS DISCUSSED ABOVE HAS BEEN SET ASIDE / STAYED OR OVERRULED BY THE HIGHER JUDICIAL AUTHORITIES. LIKEWISE, THE REVENUE BEFORE US HAS NOT PLACED ANY CONTRARY BINDING DECISION IN ITS SUPPORT. IN VIEW OF THE ABOVE AND RESPECTFULLY FOLLOWING THE DECISION IN THE OWN CASE OF THE ASSESSEE, WE SET ASIDE THE FINDING OF THE LD. DRP AND DIRECT THE AO TO DELETE THE ADDITION MADE BY HIM. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 41. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 8 IS THAT THE LD. DRP ERRED IN REJECTING THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 80IB/IC OF THE ACT AMOUNTING TO RS. 80,95,76,144/- ONLY. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 41 42. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS CLAIMED A DEDUCTION FOR RS. 80,95,76,144/- UNDER SECTION 80IB/ 80IC OF THE ACT IN RESPECT OF ITS PLANTS LOCATED IN GOA AND HIMACHAL PRADESH. THE NECESSARY DETAILS FOR THE DEDUCTION CLAIMED UNDER SECTION 80IB/ 80IC OF THE ACT STAND AS UNDER: UNIT AMOUNT OF DEDUCTION YEAR OF CLAIM ESOMEPRAZOLE PLANT - POANTA SAHIB NIL 1 ST YEAR OF CLAIM FORMULATION PLANT BADDI 3,27,485,591 3 RD YEAR OF CLAIM NEW SCG PLANT - POANTA SAHIB 23,05,89,547 6 TH YEAR OF CLAIM NEW TABLE PLAN! - 1 PAONTA SAHIB NIL 3 RD YEAR OF CLAIM NEW TABLET PLANT - II PAONTA SAHIB NIL 7 LH YEAR OF CLAIM NEW TABLET PLANT - III PAONTA SAHIB 37,66,66,487 5 LB YEAR OF CLAIM TABLET PLANT - BATAMANDI NIL 1 ST 'YEAR OF CLAIM OINTEMENT BLOCK BATAMANDI NIL 1 ST YEAR OF CLAIM 42.1 THE AO DURING THE ASSESSMENT PROCEEDINGS OBSERVED THAT THE AUDITOR IN THE FORM NO. 10CCB ISSUED BY HIM MADE CERTAIN COMMENTS AS NARRATED BELOW: I) THE ASSESSEE DOES NOT MAINTAIN INDEPENDENT BOOKS OF ACCOUNT, INDEPENDENT TRIAL BALANCE FOR ELIGIBLE UNIT WHICH IS BASIC DOCUMENTS. FURTHER SALE EFFECTED BY THE INDUSTRIAL UNDERTAKINGS ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB/ 80IC OF THE ACT HAVE BEEN RECORDED AT THE SALE PRICE WHICH WAS CHARGED FROM THE CUSTOMERS. THUS THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION THE 80IA (5) AND 80IA (8) OF THE ACT. AS SUCH THE ASSESSEE WAS REQUIRED TO RECORD THE SALES AT A PRICE AT WHICH THE PRODUCTS WERE TRANSFERRED BY THE ELIGIBLE UNDERTAKING TO THE OTHER UNIT OF THE ASSESSEE NAMELY SELLING AND DISTRIBUTION DEPARTMENT. IT IS FOR THE REASONS THAT THE ASSESSEE HAS NOT ALLOCATED THE COST INCURRED BY ITS SELLING AND DISTRIBUTION DEPARTMENT WHILE DETERMINING THE PROFIT OF THE ELIGIBLE UNDERTAKING. II) THE ASSESSEE HAS ALLOCATED HEAD OFFICE EXPENSES TO THE TUNE OF 75% TO THE ELIGIBLE UNDERTAKINGS WHICH WAS FURTHER BIFURCATED AMONG THE ELIGIBLE UNDERTAKINGS ON THE BASIS OF THEIR TURNOVER. AS SUCH THERE WAS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 42 NO BASIS SPECIFIED FOR ALLOCATING HEAD OFFICE EXPENSES TO THE TUNE OF 75% TO THE ELIGIBLE UNDERTAKINGS. FURTHERMORE, ALL THE EXPENSES INCURRED BY THE HEAD OFFICE WERE NOT ALLOCATED TO THE ELIGIBLE UNITS. III) SIMILARLY THE RESEARCH AND DEVELOPMENT EXPENSES HAVE BEEN ALLOCATED TO THE TUNE OF 30% IN THE RATIO OF SALES TO THE ELIGIBLE UNDERTAKINGS WITHOUT ADDUCING ANY JUSTIFICATION. IV) THE INTEREST COST HAS BEEN ALLOCATED ON THE BASIS OF NET AVERAGE CAPITAL EMPLOYED TO THE ELIGIBLE UNDERTAKINGS AND FOR THIS NO JUSTIFICATION WAS PROVIDED. 42.2 THE AO IN ADDITION TO THE ABOVE ALSO OBSERVED THAT THE ASSESSEE HAD NOT PROVIDED THE FINANCIAL STATEMENTS OF THE ELIGIBLE UNDERTAKINGS SEPARATELY AS REQUIRED UNDER RULE 18BBB(2) OF INCOME TAX RULES. THE ASSESSEE HAS JUST PROVIDED THE INCOME AND EXPENDITURE ACCOUNT WHICH IS NOTHING BUT SELF-SERVING DOCUMENT. 42.3 IN VIEW OF THE ABOVE, THE AO SOUGHT CLARIFICATION FROM THE ASSESSEE BY ISSUING A SHOW CAUSE NOTICE TO JUSTIFY THE CLAIM MADE UNDER SECTION 80IB/80IC OF THE ACT. THE ASSESSEE IN COMPLIANCE TO IT SUBMITTED AS UNDER: I. IT HAS CLAIMED THE DEDUCTION UNDER SECTION 80IB/80IC OF THE ACT IN RESPECT OF THE PRODUCTS MANUFACTURED BY UNIT WHICH ARE ELIGIBLE UNDER THE ACT. II. THE DEDUCTION WAS CLAIMED UNDER SECTION 80IB/80IC OF THE ACT ON THE BASIS OF THE AUDIT REPORTS IN FORM NO. 10CCB WHICH CONTAINS ALL THE INFORMATION ABOUT THE MANNER AND THE BASIS OF ALLOCATION OF THE EXPENSES TO THE ELIGIBLE UNITS. FURTHER THE AMOUNT DETERMINED IN THE EARLIER YEARS FOR THE DEDUCTION UNDER SECTION 80IB/80IC OF THE ACT WAS ACCEPTED BY THE REVENUE. III. THE RESEARCH AND DEVELOPMENT EXPENSES INCURRED BY IT IN THE YEAR UNDER CONSIDERATION HAVE NO CONNECTION WITH THE PRODUCTS MANUFACTURED BY THE ELIGIBLE UNDERTAKING. THUS ONLY 30% OF THE TOTAL RESEARCH AND DEVELOPMENT EXPENSES WERE CONSIDERED REASONABLE TO APPORTION TO THESE ELIGIBLE UNDERTAKINGS. AS SUCH IN THE EARLIER YEAR THE BASIS OF ALLOCATION OF 30% OF THE TOTAL RESEARCH AND DEVELOPMENT EXPENSES WAS ACCEPTED BY THE REVENUE. IV. THERE WAS AN ESTABLISHED SYSTEM TO WORK OUT THE PROFIT FOR EACH INDUSTRIAL UNDERTAKING WHICH IS ELIGIBLE FOR DEDUCTION. FURTHER PROFIT DETERMINED FOR ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 43 EACH INDUSTRIAL UNDERTAKING WAS DULY CERTIFIED BY THE AUDITOR IN HIS AUDIT REPORT IN FORM 10CCB. THE MISCELLANEOUS INCOME IN RESPECT OF WHICH THE DEDUCTION WAS CLAIMED WAS HAVING DIRECT NEXUS WITH THE ACTIVITIES OF THE INDUSTRIAL UNDERTAKING. ACCORDINGLY THESE WERE DETERMINED AS PER THE ESTABLISHED SYSTEM APPLICABLE TO THE ELIGIBLE UNDERTAKINGS. V. THE OTHER INCOMES WHICH ARE NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB/80IC OF THE ACT WERE NOT CONSIDERED WHILE DETERMINING THE PROFIT OF THE ELIGIBLE UNDERTAKINGS. AS SUCH THERE WAS THE PROPER COMPLIANCE OF THE PROVISIONS OF SECTION 80IA(5) OF THE ACT. VI. THE SELLING AND THE DISTRIBUTION UNIT IS NOT A SEPARATE UNDERTAKING WHICH REQUIRES DETERMINING THE PROFIT SEPARATELY. IN FACT SUCH UNIT IS FACILITATING THE PRODUCTS MANUFACTURED BY THE ELIGIBLE UNDERTAKING. THEREFORE THERE IS NO QUESTION OF DETERMINING THE ALP FOR THE TRANSFER OF THE GOODS EFFECTED BY THE ELIGIBLE UNDERTAKING TO SUCH UNIT I.E. SELLING AND DISTRIBUTION. VII. THE ACTIVITIES CARRIED OUT BY THE HEAD OFFICE ARE NOT LIMITED TO THE PRODUCTS MANUFACTURED BY THE ELIGIBLE UNDERTAKINGS. AS SUCH THE HEAD OFFICE IS MANAGING THE BUSINESS OF TRADING IN ACTIVE PHARMACEUTICAL INGREDIENTS (FOR SHORT API) AND MEDICAL EQUIPMENT BESIDES SUPERVISING THE OPERATIONS OF THE MANUFACTURING UNDERTAKINGS. IN ADDITION TO THE ABOVE THE HEAD OFFICE ALSO PERFORMING OTHER FUNCTIONS RELATING TO STRATEGIC PLANNING, INVESTOR RELATIONS, CORPORATE COMMUNICATIONS, DEALING WITH VARIOUS DEPARTMENTS/MINISTRIES OF THE GOVERNMENT OF INDIA, CORPORATE AFFAIRS, SHAREHOLDERS SERVICING, RAISING EQUITY AND OTHER FUNDS AND COMPLIANCE OF APPLICABLE LEGAL PROVISIONS. THEREFORE THE HEAD OFFICE EXPENSES WERE ALLOCATED TO THE ELIGIBLE UNDERTAKING TO THE TUNE OF 75%. 42.4 HOWEVER, THE AO DISAGREED WITH THE CONTENTION OF THE ASSESSEE BY OBSERVING AS UNDER: I. THE ASSESSEE IS NOT MAINTAINING SEPARATE BOOKS OF ACCOUNTS FOR EACH INDUSTRIAL UNDERTAKING WHICH IS THE VIOLATION OF THE PROVISIONS OF SECTION 80IA(7) R.W.R. 18BBB(2) AND 80IB/80IC OF THE ACT. THEREFORE THE AUDITOR HAS TAKEN THE GLOBAL SALE PRICE WHILE DETERMINING THE DEDUCTION UNDER SECTION 80IB/80IC OF THE ACT. SIMILARLY THERE WAS NO BASIS FOR ALLOCATING THE HEAD OFFICE EXPENSES AND RESEARCH AND DEVELOPMENT EXPENSES TO THE TUNE OF 75% AND 30% RESPECTIVELY TO THE ELIGIBLE UNDERTAKINGS. THE PROFIT AND LOSS ACCOUNT PREPARED FOR EACH ELIGIBLE UNIT USING SAP/ ERP SYSTEM WAS MEANT FOR SELF-SERVING I.E. MANAGEMENT. THEREFORE THE GLOBAL SALE PRICE WAS USED TO DETERMINE THE PROFIT OF EACH ELIGIBLE UNDERTAKING. THE ASSESSEE HAS NOT DETERMINED THE ALP FOR THE PRODUCTS TRANSFERRED BY THE ELIGIBLE UNDERTAKINGS TO THE SELLING AND DISTRIBUTION UNIT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 44 II. THE MANUFACTURING COST EXCEPT RAW MATERIAL HAS BEEN ALLOCATED TO THE ELIGIBLE AND NON-ELIGIBLE UNDERTAKING WHICH TRANSPIRES THAT THERE WAS NO STANDALONE SYSTEM USED BY THE ELIGIBLE UNDERTAKING FOR DETERMINING THE PROFIT ELIGIBLE FOR DEDUCTION UNDER SECTION 80IB/80IC OF THE ACT. III. THE SELLING AND THE DISTRIBUTION UNIT OF THE ASSESSEE IS IN ITSELF ARE PROFIT CENTRE AND CARRIES OUT A DISTINCT ACTIVITY. THEREFORE THE INCOME OF SUCH UNIT CANNOT BE ATTRIBUTED TO THE MANUFACTURING ACTIVITY OF THE ELIGIBLE UNDERTAKING. THEREFORE THE PROFIT OF THIS UNIT NEEDS TO BE REDUCED FROM THE PROFIT OF THE ELIGIBLE UNDERTAKING. AS SUCH THE ACTIVITY CARRIED OUT BY THE ELIGIBLE UNDERTAKING CANNOT BE MERGED WITH THE ACTIVITY OF SELLING AND DISTRIBUTION UNIT. IV. SIMILARLY THE PROFIT EARNED BY THE ASSESSEE ON ACCOUNT OF THE USE OF THE BRAND NAME NAMELY RANBAXY CANNOT BE MERGED WITH THE PROFIT OF THE ELIGIBLE UNDERTAKING. 42.5 IN VIEW OF THE ABOVE, THE AO DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 80IB/80IC OF THE ACT FOR RS. 80,95,76,144/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 43. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP AGAINST THE ORDER OF AO. THE LD. DRP CONFIRMED THE ORDER OF THE AO BY OBSERVING THAT THE IDENTICAL ISSUE HAS ALREADY BEEN ADJUDICATED BY HIS PREDECESSOR IN THE OWN CASE OF THE ASSESSEE FOR THE PRECEDING ASSESSMENT YEAR. AS SUCH THE PREDECESSOR LD. DRP REJECTED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER: 15.1 THE PRESENT DRP HAS NOTED THAT THE DRP FOR THE A.Y. 2010-1 1 HAS UPHELD THE ACTION OF THE AO ON THIS ISSUE AND THE RELEVANT EXCERPTS OF THE DIRECTIONS ARE REPRODUCED HEREUNDER:- '9.4 THE CLAIM FOR DEDUCTION U/S 80IB/80SC OF RS. 79,54,52,843/- HAS THEREFORE BEEN REJECTED BY THE AO. THIS ISSUE HAS ALSO BEEN DECIDED AGAINST THE ASSESSEE IN A.Y. 2008-09 & 2009-10 RESPECTIVELY BY THE DRP, THROUGH THE ASSESSEE HAS FILED APPEALS BEFORE THE LION 'BLE IT A T DELHI. THE DRP WHILE REJECTING ASSESSEE'S OBJECTION, HELD THAT THE ISSUE IS PURELY ACADEMIC AS THE ASSESSEE IS HAVING HEAVY CURRENT YEAR AS WELL AS BROUGHT FORWARD LOSSES. FURTHER, NONE OF THE UNITS ARE CLAIMING DEDUCTIONS FOR THE FIRST YEAR AS THE FINDING OF THE DEDUCTIONS FOR THE FIRST YEAR IS RELEVANT TO ALLOW THE DEDUCTIONS IN SUBSEQUENT YEARS, IF OTHER CONDITIONS ARE MET. BY FOLLOWING RULES OF CONSISTENCY AND BASED ON FACTS OF THE CASE, THEREFORE THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 45 MATTER UNDER CONSIDERATION IS DECIDED AGAINST THE ASSESSEE BY THE DRP. ASSESSEE GETS NO DIRECT RELIEF ON THIS GROUND OF OBJECTION.' 15.2 THE PRESENT DRP HAS ALSO NOTED THAT THE DRP-2, NEW DELHI HAS FOR THE A.Y. 2011-12 UPHELD THE ACTION OF THE AO ON THIS ISSUE. 15.3 THE ASSESSEE HAS ALSO CONTENDED THAT THE ABOVE ISSUE HAS ALREADY BEEN ADJUDICATED IN ITS BY THE HON'BLE DELHI TRIBUNAL IN AY 2008-09. A PERUSAL OF THE RECORD REVEALS THAT THE REVENUE HAS NOT ACCEPTED THIS DECISION OF THE HON'BLE ITAT AND THE FOLLOWING SUBSTANTIAL QUESTION OF LAW HAS BEEN RAISED BEFORE THE HON'BLE GUJARAT HIGH COURT :- 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL ON ACCOUNT OF DISALLOWANCE OF CLAIM U/S.80IB/80IC ON THE ACT WHEN (I) SELLING & DISTRIBUTIONS EXPENSES AND OTHER COMMON EXPENSES WERE NOT PROPERLY APPROPRIATED AMONGST THE UNITS ELIGIBLE FOR DEDUCTION U/S.80IB/80IC (IT) WHEN FORM 10CCB AS PRESCRIBED UNDER RULE 18BBB(2) R.W.S.80IB & 80IC WERE NOT SUBMITTED WITH THE TAX AUDIT REPORT (HI) WHEN SEPARATE BOOKS OF ACCOUNTS WERE NOT MAINTAINED FOR ELIGIBLE UNITS (IV) WHEN SALES MADE BY ELIGIBLE UNITS WERE NOT RECORDED ON ERP/SAP AT ARM'S LENGTH PRICE (ALP) (IV) WHEN OTHER INCOME DO NOT QUALIFY FOR DEDUCTION U/S.80IB/801C?'. 15.4 WITH DUE RESPECT TO THE ORDER OF THE HON'BLE ITAT, IN ORDER TO KEEP THE ISSUE ALIVE AND TO PROTECT THE INTEREST OF REVENUE, THE DRP IS OF THE CONSIDERED OPINION THAT THE GROUND OF OBJECTION RAISED BY THE ASSESSEE COMPANY NEEDS TO BE REJECTED. ACCORDINGLY, THE GROUND OF OBJECTION IS DECIDED IN FAVOUR OF REVENUE AND AGAINST THE ASSESSEE COMPANY AND NO DIRECTIONS ARE BEING ISSUED TO THE AO ON THIS ISSUE. 44. IN VIEW OF THE ABOVE ORDER OF PREDECESSOR LD. DRP ON THE IDENTICAL ISSUE, THE LD. DRP DID NOT EXAMINE THE ISSUE AGAIN BUT FOLLOWED THE DECISION OF DRP-II FOR THE AY 2008-09 IN THE OWN CASE OF THE ASSESSEE. ACCORDINGLY, THE LD. DRP UPHELD THE ORDER OF AO. 45. AGAINST THE ORDER OF THE LD. DRP, THE ASSESSEE IS IN APPEAL BEFORE US. 46. THE LD. AR BEFORE US SUBMITTED THAT IN THE OWN CASE OF THE ASSESSEE FOR THE A.Y. 2008-09, INVOLVING IDENTICAL FACTS AND CIRCUMSTANCES THE HONBLE ITAT DELHI IN ITA NO. 196/DEL/2013 DATED 25.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 47. ON THE OTHER HAND, THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 46 48. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE BACKDROP OF ABOVE STATED DISCUSSION, WE FIND THAT THE IMPUGNED ISSUE IS COVERED BY THE ORDER OF DELHI ITAT IN THE OWN CASE OF ASSESSEE IN ITS FAVOUR FOR THE ASSESSMENT YEAR 2008-09 IN ITA NO. 196/DEL/2013 DATED 25.04.2016. THE RELEVANT EXTRACT OF THE ORDER IS REPRODUCED AS UNDER: 68. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. DURING THE YEAR ASSESSEE HAS CLAIMED DEDUCTION U/S 80IB AND 80IC AS UNDER: NAME OF UNIT SECTION UNDER WHICH CLAIMED YEAR OF ESTABLISHM ENT YEAR OF CLAIM INITIAL YEAR OF THE CLAIM AMOUNT CLAIMED REMARKS GOA PLANT 80IB 31.03.200 2 7 TH 2002-03 90204832 PROFIT FOR YEAR IS RS. 300682774/- AND DEDUCTION IS CLAIM @ 30% OF THE ELIGIBLE PROFIT. NEW TABLET PLANT I 80IC 31.03.200 5 4 TH 2005-06 RS.22057951 0 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR NEW TABLET PLANT II 80IC 31.03.200 6 3 RD 2006-07 RS.15614293 0 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR NEW SGC PLANT 80IC 31.03.200 7 2 ND 2007-08 RS.37638522 8 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR NEW TABLET PLANT- III 80IC 31.03.200 8 1 ST 2008-09 RS.52350900 6 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR 69. IN CASE OF GOA PLANT, THE DEDUCTION WAS CLAIMED FIRSTLY IN AY 2002-03 AND SUBSEQUENTLY ISSUE WAS REOPENED FOR VERIFICATION OF THIS CLAIM U/S 147 OF THE ACT AND SUBSEQUENTLY IN ORDER U/S 143(3) RWS 147 OF THE ACT, THE CLAIM OF THE ASSESSEE WAS ACCEPTED. HENCE, THE CLAIM WAS EXAMINED AND ALLOWED FOR THIS UNIT IN THE INITIAL YEAR. 70. REGARDING CLAIM OF DEDUCTION U/S 80IC OF THE ACT IN CASE OF NEW TABLET PLANT-I THE INITIAL YEAR OF DEDUCTION IS AY 2005-06. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE SUBMITTED COPY OF AUDITED ACCOUNTS OF NEW INDUSTRIAL UNDERTAKING AND SUBMITTED THE BASIS FOR COMPUTATION OF THE PROFIT ELIGIBLE FOR DEDUCTION FOR THESE UNDERTAKINGS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSEE WAS SPECIFICALLY ASKED TO EXPLAIN THE REASONS AND BASIS FOR APPORTIONMENT OF 30% R&D EXPENDITURE AND 75% OF THE HEAD OFFICE EXPENSES TO THIS NEW UNDERTAKING. ASSESSEE EXPLAINED VIDE LETTER 02.12.2008 AND AFTER GOING THROUGH THE SUBMISSION MADE THE ASSESSEE AND BASED ON ALLOCATION EXPLAINED BY THE ASSESSEE, PROFITS OF THE UNDERTAKING U/S 80IB/80IC WERE ACCEPTED BY THE AO. THEREFORE, IN THE INITIAL YEAR THE CLAIM OF DEDUCTION FOR THE UNIT NEW TABLET PLANT-I WAS CLAIMED, EXAMINED AND ALLOWED. 71. IN CASE OF NEW TABLET PLANT-II WHICH WAS SET UP IN AY 2006-07, THE ASSESSEE DID NOT CLAIM ANY DEDUCTION IN VIEW OF PROVISION OF SECTION 80A(2). ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 47 72. SIMILARLY, IN CASE OF NEW SGC PLANT WHICH WAS SET IN AY 2007-08 THE ASSESSEE DID NOT CLAIM ANY DEDUCTION FOR THAT YEAR IN VIEW OF THE PROVISION OF SECTION 80A(2) OF THE ACT AS THE GROSS TOTAL INCOME OF THE ASSESSEE WAS NEGATIVE. 73. IN CASE OF NEW TABLET PLANT-III, THIS IS THE FIRST YEAR OF DEDUCTION AND ASSESSEE HAS CLAIMED THE SAME IN RETURN OF INCOME AND IT IS UNDER DISPUTE IN THIS APPEAL. 74. IT IS ARGUMENT OF THE LD. AR THAT IT IS THE WELL SETTLED PROPOSITION OF LAW THAT WHERE THE ACT PROVIDES FOR THE DEDUCTION FOR A CERTAIN TERM PERIOD THE REVENUE IS REQUIRED TO EXAMINE THE CLAIM OF DEDUCTION AND ITS ELIGIBILITY TO EXAMINE WHETHER ALL STATUTORY CONDITIONS ARE SATISFIED IN THE FIRST YEAR IN WHICH THE APPELLANT CLAIMS THE DEDUCTION. IF REVENUE DOES NOT DISTURB THE CLAIM OF THE ASSESSEE IN THAT YEAR, IT IS NOT OPEN TO REVENUE TO DISALLOW THE DEDUCTION IN THE SUBSEQUENT YEARS. THE VARIOUS AUTHORITIES CITED BY THE LD. AR ARE SPECIFICALLY ON THE POINT IN FAVOUR OF THE ASSESSEE. THE CONTENTION OF THE REVENUE THAT THIS IS THE FIRST YEAR IN WHICH THE METHODOLOGY OF CLAIM OF DEDUCTION OF THE ASSESSEE IS BEING VERIFIED IS NOT ACCORDANCE WITH THE PREVIOUS ASSESSMENT ORDERS PASSED BY THE AO WITH RESPECT TO DEDUCTION U/S 80IB WITH RESPECT TO GOA PLANT AND DEDUCTION U/S 80IC OF THE ACT FOR NEW TABLET PLANT- I. ON PERUSAL OF THOSE ORDERS, IT IS APPARENT THAT THESE DEDUCTIONS CLAIMED BY THE ASSESSEE IN THE INITIAL YEAR OF THIS INDUSTRIAL UNDERTAKING HAVE BEEN EXAMINED IN DETAIL AND THEN ALLOWED BY THE REVENUE AFTER MAKING ENQUIRY. IN VIEW OF THIS, THE ARGUMENT OF THE REVENUE CANNOT BE ACCEPTED THAT THESE DEDUCTIONS HAVE NOT BEEN EXAMINED. FOR THIS FINDING, WE HAVE MATERIAL ON RECORD THE ASSESSMENT HISTORY IN THE FORM OF ASSESSMENT ORDERS OF THE ASSESSEE FOR THOSE YEARS. HOWEVER IN CASE OF NEW TABLET PLANT-II AND NEW SGC PLANT IT IS APPARENT THAT IN ABSENCE OF POSITIVE GROSS TOTAL INCOME NO DEDUCTION WAS CLAIMED FOR AYS 2006-07 AND 2007-08 AND THEREFORE THE CLAIM OF DEDUCTION BY THE ASSESSEE FOR THESE TWO PLANTS IS THE FIRST YEAR OF EXAMINATION OF CLAIM. OBVIOUSLY NEW TABLET PLANT-III HAS BEEN SET UP DURING THIS YEAR ONLY AND THEREFORE AY 2008-09 IS THE FIRST YEAR OF EXAMINATION OF THE CLAIM OF THE ASSESSEE BY THE AO. BEFORE US THE LD. DR HAS NOT POINTED OUT ANY CHANGES IN THE FACTS OR LAW RELATING TO THOSE YEAS WITH THE FACTS OF THIS YEAR WITH RESPECT TO DEDUCTION CLAIMED BY THE ASSESSEE WITH RESPECT TO GOA PLANT AND NEW TABLET PLANT I. THEREFORE, DEDUCTION RELATED TO THESE PLANTS CANNOT BE QUESTIONED IN THIS YEAR AFRESH WITHOUT DISTURBING THE DEDUCTION IN INITIAL YEAR OF THE CLAIM. OUR VIEW IS ALSO SUPPORTED BY THE DECISIONS OF VARIOUS HON'BLE HIGH COURTS, ONE OF THE LEADING JUDICIAL PRECEDENT QUOTED BEFORE US IS OF HON'BLE DELHI HIGH COURT IN CASE OF CIT V. DELHI PRESS PATRA PARAKASHAN (P) LTD. [2013] 355 ITR 14/217 TAXMAN 288/34 TAXMANN.COM 3 (DELHI) WHERE IN IT IS HELD THAT: '69. THE NEXT CONTROVERSY THAT NEEDS TO BE ADDRESSED IS WHETHER IT WAS OPEN FOR THE ASSESSING OFFICER TO DENY THE BENEFIT OF SECTION 80-I OF THE ACT TO THE ASSESSEE HAVING ALLOWED BENEFIT TO THE ASSESSEE IN THE PRECEDING THREE YEARS. IT IS CONTENDED ON BEHALF OF THE ASSESSEE THAT IT WAS NECESSARY FOR THE ASSESSING OFFICER TO BE CONSISTENT WITH THE ASSESSMENT FOR THE EARLIER YEARS. THE QUESTION AS TO THE QUALIFICATION OF UNIT NOS. 2 & 3 AS INDUSTRIAL UNDERTAKINGS AROSE IN THE EARLIER YEARS AND THE ASSESSING OFFICER HAD ACCEPTED THAT UNIT NOS. 2 & 3 QUALIFIED FOR DEDUCTION UNDER SECTION 80-I OF THE ACT IN THE EARLIER YEARS. BY VIRTUE OF SECTION 80-I(5) OF THE ACT DEDUCTION UNDER SECTION 80-I OF THE ACT WAS AVAILABLE TO AN ASSESSEE IN THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE INDUSTRIAL UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLES OR THINGS (SUCH ASSESSMENT YEAR BEING THE INITIAL ASSESSMENT YEAR) AND EACH OF THE SEVEN ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR. THIS NECESSARILY IMPLIED ONCE THE ISSUE AS TO ELIGIBILITY UNDER SECTION 80-I OF THE ACT WAS EXAMINED AND ALLOWED IN THE INITIAL ASSESSMENT, THE SAME WAS ALLOWABLE IN THE SUBSEQUENT YEARS ALSO UNLESS THERE WAS ANY MATERIAL CHANGE IN THE SUCCEEDING YEARS. 70. IT IS WELL SETTLED LAW THAT THE PRINCIPLES OF RES JUDICATA DO NOT APPLY TO INCOME TAX PROCEEDINGS AND ASSESSMENT FOR EACH YEAR IS AN INDEPENDENT PROCEEDING. IT IS NOW EQUALLY WELL ESTABLISHED THAT ISSUES THAT HAVE BEEN SETTLED AND ACCEPTED OVER ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 48 A PERIOD OF TIME SHOULD NOT BE REVISITED IN SUBSEQUENT ASSESSMENT YEARS IN ABSENCE OF ANY MATERIAL CHANGE WHICH WOULD JUSTIFY THE CHANGE IN VIEW. 71. THE SUPREME COURT IN THE CASE OF RADHA SOAMI SATSANG (SUPRA) HAS HELD THAT UNLESS THERE IS A MATERIAL CHANGE IN JUSTIFYING THE REVENUE TO TAKE A DIFFERENT VIEW THE EARLIER VIEW WHICH HAS BEEN SETTLED AND ACCEPTED OF A SEVERAL YEARS SHOULD NOT BE DISTURBED. THE RELEVANT EXTRACT FROM THE SAID JUDGMENT IS QUOTED BELOW: 'WE ARE AWARE OF THE FACT THAT STRICTLY SPEAKING RES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. AGAIN, EACH ASSESSMENT YEAR BEING A UNIT, WHAT IS DECIDED IN ONE YEAR MAY NOT APPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. ON THESE REASONINGS IN THE ABSENCE OF ANY MATERIAL CHANGE JUSTIFYING THE REVENUE TO TAKE A DIFFERENT VIEW OF THE MATTER- AND IF THERE WAS NOT CHANGE IT WAS IN SUPPORT OF THE ASSESSEE- WE DO NOT THINK THE QUESTION SHOULD HAVE BEEN REOPENED AND CONTRARY TO WHAT HAD BEEN DECIDED BY THE COMMISSIONER OF INCOME-TAX IN THE EARLIER PROCEEDINGS, A DIFFERENT AND CONTRADICTORY STAND SHOULD HAVE BEEN TAKEN. WE ARE, THEREFORE, OF THE VIEW THAT THESE APPEALS SHOULD BE ALLOWED AND THE QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE, NAMELY, THAT THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE INCOME DERIVED BY THE RADHA SOAMI SATSANG WAS ENTITLED TO EXEMPTION UNDER SS. 11 AND 12 OF THE INCOME TAX ACT OF 1961.' 72. THE DECISION OF THE SUPREME COURT IN THE CASE RADHASOAMISATSANG (SUPRA) WAS ON THE FACTS WHERE THE QUESTION AS TO THE ENTITLEMENT FOR EXEMPTION UNDER SECTION 4(3)(I) OF THE INCOME TAX ACT, 1922 HAD NOT BEEN GRANTED FOR THE ASSESSMENT YEAR 1939-40. THE ASSESSEE HAD CHALLENGED THE ASSESSMENT ORDER WHICH WAS ACCEPTED BY THE APPELLATE ASSISTANT COMMISSIONER WHO UPHELD THE ASSESSEE'S CLAIM FOR EXEMPTION. THIS VIEW WAS CONSISTENTLY FOLLOWED BY THE SUCCESSIVE ASSESSING OFFICERS TILL 1963-64. IN THESE CIRCUMSTANCES, THE SUPREME COURT HELD THAT THE VIEW THAT HAD BEEN SETTLED AND ACCEPTED OVER A PERIOD OF YEARS SHOULD NOT BE ALLOWED TO BE DISTURBED. 73. THIS COURT IN THE CASE OF LAGAN KALA UPVAN (SUPRA), FOLLOWING THE DECISION OF THE SUPREME COURT IN THE CASE OF RADHASOAMISATSANG (SUPRA) HAS ALSO HELD THAT WHERE A PARTICULAR VIEW HAS BEEN ACCEPTED BY THE ASSESSING OFFICER TO SEVERAL YEARS THE SAME CANNOT BE PERMITTED TO BE DEPARTED FROM UNLESS THERE IS SOME MATERIAL FACTS THAT JUSTIFIED SUCH A CHANGE. SIMILAR VIEW HAS BEEN EXPRESSED BY THIS COURT IN THE CASE OF MODI INDUSTRIES LTD. (SUPRA). IN THIS CASE, WHILE CONSIDERING A CLAIM OF DEDUCTION MADE BY AN ASSESSEE UNDER SECTION 80J OF THE ACT, THIS HIGH COURT HELD AS UNDER: 'THE SECOND QUESTION RELATES TO THE CLAIM OF THE ASSESSEE FOR DEDUCTION UNDER SECTION 80J OF THE INCOME TAX ACT IN RESPECT OF ITS NEW UNIT NAMELY 10 TON FURNANCE DIVISION AND STEEL UNIT 'B'. THIS CASE PERTAINS TO THE ASSESSMENT YEAR 1976-77. A PERUSAL OF THE ORDER OF THE ASSESSING OFFICER WOULD REVEAL THAT FOR THE FIRST TIME, CLAIM UNDER SECTION 80J OF THE ACT WAS MADE BY THE ASSESSEE IN THE ASSESSMENT YEAR 1973-74. THE ASSESSEE WAS DENIED THAT CLAIM BY THE ASSESSING OFFICER. FOR THIS REASON, THE ASSESSING OFFICER DENIED THE CLAIM IN THIS ASSESSMENT YEAR AS WELL, TAKING NOTE OF THE FACT THAT THE MATTER PERTAINING TO 1973-74 WAS PENDING BEFORE THE INCOME TAX TRIBUNAL. IT IS A MATTER OF RECORD THAT THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 1973-74 WAS ALLOWED BY THE INCOME TAX APPELLATE TRIBUNAL. THE EFFECT THEREOF WAS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 49 THAT THE ASSESSEE WAS GRANTED THE REQUISITE DEDUCTION UNDER SECTION 80J OF THE ACT FOR THE ASSESSMENT YEAR 1973-74. THE DEPARTMENT HAS SOUGHT REFERENCE UNDER SECTION 256(1) OF THE ACT WHICH REFERENCE APPLICATION WAS ALSO REJECTED BY THE TRIBUNAL. LIKEWISE, FOR THE ASSESSMENT YEARS 1974-75 AND 1975-76, THE CLAIMS OF THE ASSESSEE WERE ALLOWED. THE ASSESSEE, ONCE GIVEN THE DEDUCTION UNDER SECTION 80J OF THE ACT IS ENTITLED TO SUCH A DEDUCTION FOR A PERIOD OF 5 YEARS. IF THE ASSESSEE HAS BEEN ALLOWED THE BENEFIT OF SECTION 80J IN THE LAST THREE PRECEDING YEARS, THERE IS NO REASON TO DENY THE SAME FOR THE INSTANT ASSESSMENT YEAR. WE, THEREFORE, ANSWER THIS ISSUE ALSO IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE.' 74. IN THE PRESENT CASE, THE CLAIM OF THE ASSESSEE UNDER SECTION 80-I OF THE ACT WAS EXAMINED AND ALLOWED BY THE ASSESSING OFFICER FOR THREE YEARS PRECEDING THE ASSESSMENT YEAR 1991-1992. IT IS RELEVANT TO NOTE THAT ASSESSMENTS IN THE EARLIER YEARS I.E. RELATING TO ASSESSMENT YEAR 1988-89, 1989-1990 AND 1990-1991 HAS NOT BEEN DISTURBED BY THE ASSESSING OFFICER AND THERE HAS BEEN NO CHANGE THAT COULD JUSTIFY THE ASSESSING OFFICER ADOPTING A DIFFERENT VIEW IN THE ASSESSMENT YEARS 1991- 92 AND THEREAFTER. AS STATED HEREINBEFORE, IN CERTAIN CASES WHERE THE ISSUES INVOLVED HAVE ATTAINED FINALITY ON ACCOUNT OF THE SUBJECT MATTER OF DISPUTE HAVING BEEN FINALLY ADJUDICATED, THE QUESTION OF REOPENING AND REVISITING THE SAME ISSUE AGAIN IN SUBSEQUENT YEARS WOULD NOT ARISE. THIS IS BASED ON THE PRINCIPLE THAT THERE SHOULD BE FINALITY IN ALL LEGAL PROCEEDINGS. THE SUPREME COURT IN THE CASE OF PARASHURAM POTTERY WORKS CO. LTD. V. ITO [1977] 106 ITR 1 HAD HELD AS UNDER: '...........THAT THE POLICY OF LAW IS THAT THERE MUST BE A POINT OF FINALITY IN ALL LEGAL PROCEEDINGS, THAT STALE ISSUES SHOULD NOT BE REACTIVATED BEYOND A PARTICULAR STAGE AND THAT LAPSE OF TIME MUST INDUCE REPOSE IN AND SET AT REST JUDICIAL AND QUASI- JUDICIAL CONTROVERSIES AS IT MUST IN OTHER SPHERES OF HUMAN ACTIVITY....' 75. IN THE FACTS OF THE PRESENT CASE, WHERE ALTHOUGH THE ASSESSING OFFICER HAS ALLOWED THE ASSESSEE DEDUCTION UNDER SECTION 80-I OF THE ACT IN THE PRECEDING YEARS, ONE MAY STILL HAVE CERTAIN RESERVATIONS AS TO WHETHER THE ISSUE OF ELIGIBILITY OF UNIT NOS. 2 AND 3 FULFILLING THE CONDITIONS HAS BEEN FINALLY SETTLED, SINCE THE QUESTION HAS NOT BEEN A SUBJECT MATTER OF ANY APPELLATE PROCEEDINGS IN THE YEARS PRECEDING THE ASSESSMENT YEAR 1991-92. HOWEVER, THERE IS YET ANOTHER ASPECT WHICH NEEDS TO BE CONSIDERED. BY VIRTUE OF SECTION 80-I(5) OF THE ACT, DEDUCTION UNDER SECTION 80-I OF THE ACT IS AVAILABLE TO AN ASSESSEE IN RESPECT OF THE ASSESSMENT YEAR (REFERRED TO AS THE INITIAL ASSESSMENT YEAR) RELEVANT TO THE PREVIOUS YEAR IN WHICH THE INDUSTRIAL UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLES OR THINGS, OR TO OPERATE ITS COLD STORAGE PLANT OR PLANTS OR THE SHIP IS FIRST BROUGHT INTO USE OR THE BUSINESS OF THE HOTEL STARTS FUNCTIONING OR THE COMPANY COMMENCES WORK BY WAY OF REPAIRS TO OCEAN-GOING VESSELS OR OTHER POWERED CRAFT. SUCH DEDUCTION IS ALSO AVAILABLE FOR THE SEVEN ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR. SURELY IN CASES WHERE AN ASSESSEE IS HELD TO BE ELIGIBLE FOR DEDUCTION IN THE INITIAL ASSESSMENT YEAR, THE SAME CANNOT BE DENIED IN THE SUBSEQUENT ASSESSMENT YEARS ON THE GROUND OF INELIGIBILITY SINCE THE SET OF FACTS WHICH ENABLE AN ASSESSEE TO CLAIM TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 80-I OF THE ACT OCCUR IN THE PREVIOUS YEAR RELEVANT TO THE INITIAL ASSESSMENT YEAR AND HAVE TO BE EXAMINED IN THE INITIAL ASSESSMENT YEAR. IN SUCH CASES, WHERE THE FACTS ON THE BASIS OF WHICH THE DEDUCTIONS ARE CLAIMED ARE SUBJECT MATTER OF AN EARLIER ASSESSMENT YEAR AND DO NOT ARISE IN THE CURRENT ASSESSMENT YEAR, IT WOULD NOT BE POSSIBLE FOR AN ASSESSING OFFICER TO TAKE A DIFFERENT VIEW IN THE CURRENT ASSESSMENT YEAR WITHOUT ALTERING OR REOPENING THE ASSESSMENT PROCEEDINGS IN WHICH THE ELIGIBILITY TO CLAIM THE DEDUCTION HAS BEEN ESTABLISHED. 76. IN CASES WHERE DEDUCTION IS GRANTED UNDER SECTION 80-I OF THE ACT, THE APPLICABILITY OF THE SECTION IS DETERMINED IN THE YEAR IN WHICH THE NEW INDUSTRIAL ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 50 UNDERTAKING IS ESTABLISHED. THE QUALIFICATION AS TO WHETHER ANY INDUSTRIAL UNDERTAKING FULFILLS THE CONDITION AS SPECIFIED UNDER SECTION 80-I OF THE ACT HAS TO BE DETERMINED IN THE YEAR IN WHICH THE NEW INDUSTRIAL UNDERTAKING IS ESTABLISHED. ALTHOUGH THE DEDUCTION UNDER SECTION 80-I OF THE ACT IS AVAILABLE FOR THE ASSESSMENT YEARS SUCCEEDING THE INITIAL ASSESSMENT YEAR, THE CONDITIONS FOR AVAILING THE BENEFIT ARE INEXTRICABLY LINKED WITH THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR IN WHICH THE NEW UNDERTAKING WAS FORMED. IN SUCH CIRCUMSTANCES, IT WOULD NOT BE POSSIBLE FOR AN ASSESSING OFFICER TO REJECT THE CLAIM OF AN ASSESSEE FOR DEDUCTION UNDER SECTION 80-I OF THE ACT ON THE GROUND THAT THE INDUSTRIAL UNDERTAKING IN RESPECT OF WHICH DEDUCTION IS CLAIMED DID NOT FULFIL THE CONDITIONS AS SPECIFIED IN SECTION 80- I(2) OF THE ACT, WITHOUT UNDERMINING THE BASIS ON WHICH THE DEDUCTION WAS GRANTED TO THE ASSESSEE IN THE INITIAL ASSESSMENT YEAR. THIS IN OUR VIEW WOULD NOT BE PERMISSIBLE UNLESS THE PAST ASSESSMENTS ARE ALSO DISTURBED. 77. THE ASSESSING OFFICERS OVER A PERIOD OF THREE YEARS BEING ASSESSMENT YEARS 1988-89, 1989-1990 AND 1990-1991 HAVE CONSISTENTLY ACCEPTED THE CLAIM OF THE ASSESSEE FOR DEDUCTION UNDER 80-I OF THE ACT AND IT WOULD NOT BE OPEN FOR THE ASSESSING OFFICER TO DENY THE DEDUCTION UNDER SECTION 80-I OF THE ACT ON THE GROUND OF NON FULFILMENT OF THE CONDITIONS UNDER 80-I(2) OF THE ACT WITHOUT DISTURBING THE ASSESSMENT FOR THE ASSESSMENT YEARS RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNIT NOS. 2 & 3 WERE ESTABLISHED. 78. THIS VIEW HAS ALSO BEEN ACCEPTED BY A DIVISION BENCH OF GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRIES (SUPRA). IN THAT CASE, THE GUJARAT HIGH COURT HELD THAT WHERE RELIEF OF A TAX HOLIDAY HAD BEEN GRANTED TO AN ASSESSEE IN AN INITIAL ASSESSMENT YEAR IN WHICH THE CONDITIONS FOR GRANT OF TAX HOLIDAY HAD TO BE EXAMINED, DENIAL OF RELIEF IN THE SUBSEQUENT YEARS WOULD NOT BE PERMISSIBLE WITHOUT DISTURBING THE ASSESSMENT IN THE INITIAL ASSESSMENT YEAR. THE RELEVANT EXTRACT FROM THE DECISION OF THE GUJARAT HIGH COURT IN SAURASHTRA CEMENT & CHEMICAL INDUSTRIES (SUPRA) IS QUOTED BELOW: 'THE NEXT QUESTION TO WHICH THE TRIBUNAL ADDRESSED ITSELF, AND NO OUR OPINION RIGHTLY, WAS WHETHER THE TRIBUNAL WAS JUSTIFIED IN REFUSING TO CONTINUE THE RELIEF OF TAX HOLIDAY GRANTED TO THE ASSESSEE-COMPANY FOR THE ASSESSMENT YEAR 1968-69, IN THE ASSESSMENT YEAR UNDER REFERENCE, THAT IS, 1969-70, WITHOUT DISTURBING THE RELIEF GRANTED FOR THE INITIAL YEAR. IT SHOULD BE STATED THAT THERE IS NO PROVISION IN THE SCHEME OF S. 80J SIMILAR TO THE ONE WHICH WE FIND IN THE CASE OF DEVELOPMENT REBATE WHICH COULD BE WITHDRAWN IN SUBSEQUENT YEARS FOR BREACH OF CERTAIN CONDITIONS. NO DOUBT, THE RELIEF OF TAX HOLIDAY UNDER S. 80J CAN BE WITHHELD OR DISCONTINUED PROVIDED THE RELIEF GRANTED IN THE INITIAL YEAR OF ASSESSMENT IS DISTURBED OR CHANGED ON VALID GROUNDS. BUT WITHOUT DISTURBING THE RELIEF GRANTED IN THE INITIAL YEAR, THE ITO CANNOT EXAMINE THE QUESTION AGAIN AND DECIDE TO WITHHOLD OR WITHDRAW THE RELIEF WHICH HAS BEEN ALREADY ONCE GRANTED.' 79. THE DIVISION BENCH OF THE BOMBAY HIGH COURT IN THE CASE OF PAUL BROTHERS (SUPRA) HAS ALSO ADOPTED THE VIEW EXPRESSED BY THE GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT & CHEMICAL INDUSTRIES (SUPRA).' FOR THE SAKE OF BREVITY, WE DO NOT REPRODUCE OTHER DECISIONS CITED BY LD. AR THAT REITERATES THE SAME PRINCIPLES THAT IN ABSENCE OF ANY CHANGE IN FACTS / LAW ETC. DURING INTERVENING PERIOD THE DEDUCTION GRANTED AFTER EXAMINATION IN INITIAL YEAR OF A TAX HOLIDAY PERIOD IT CANNOT BE QUESTIONED IN SUBSEQUENT YEARS. 75. THEREFORE, WE HOLD THAT AS THE DEDUCTION WITH RESPECT TO GOA PLANT U/S 80IB WHICH IS IN THE 7TH YEAR OF ITS CLAIM OUT OF 10 YEARS, HAS EARNED ELIGIBLE PROFIT OF RS. 300682774/- AND DEDUCTION THEREON IS CLAIMED AT THE RATE OF 30% THEREOF AMOUNTING TO RS. 90204832/- AND NEW TABLET PLANT-I U/S 80IC FOR WHICH THIS IS THE 4TH YEAR OF THE CLAIM AND ASSESSEE HAS CLAIMED 100% OF ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 51 THE ELIGIBLE PROFIT AMOUNTING TO RS. 220579510/- AS DEDUCTION, CANNOT BE DISALLOWED IN THIS YEAR. 76. COMING TO THE SECOND ARGUMENT THAT THE REVENUE SHOULD FOLLOW THE CONSISTENCY AND WHERE POSITION HAS BEEN ACCEPTED AND DETERMINED BY THE DEPARTMENT AFTER EXAMINATION OF THE FACTS AND WHERE THERE IS NO CHANGE EITHER IN THE FACTS OR IN LAW THAN THE EARLIER DECISION TAKEN BY THE REVENUE SHOULD BE ADHERED TO. LD. DR DID NOT POINT OUT ANY CHANGES IN THE FACTS AND/OR LAW IN THE YEAR IN WHICH DEDUCTIONS GRANTED IN EARLIER YEARS WITH RESPECT TO IMPUGNED YEAR. WE HAVE CAREFULLY CONSIDERED THE ARGUMENT OF THE LD. AR AND WE DO NOT SEE ANY DISPUTE ON THE PRINCIPLE OF CONSISTENCY AS IT HAS ALREADY BEEN PROPOUNDED BY HON'BLE SUPREME COURT AND VARIOUS OTHER HON'BLE HIGH COURTS. THE LATEST IN POINT OF TIME IS EXCEL INDUSTRIES LTD. (SUPRA) WHERE HON'BLE SUPREME COURT HAS HELD THAT: '28. SECONDLY, AS NOTED BY THE TRIBUNAL, A CONSISTENT VIEW HAS BEEN TAKEN IN FAVOUR OF THE ASSESSEE ON THE QUESTIONS RAISED, STARTING WITH THE ASSESSMENT YEAR 1992-93, THAT THE BENEFITS UNDER THE ADVANCE LICENCES OR UNDER THE DUTY ENTITLEMENT PASS BOOK DO NOT REPRESENT THE REAL INCOME OF THE ASSESSEE. CONSEQUENTLY, THERE IS NO REASON FOR US TO TAKE A DIFFERENT VIEW UNLESS THERE ARE VERY CONVINCING REASONS, NONE OF WHICH HAVE BEEN POINTED OUT BY THE LEARNED COUNSEL FOR THE REVENUE. 29. IN RADHASOAMISATSANGSAOMIBAGH V. CIT [1992] 193 ITR 321/60 TAXMAN 248 (SC) THIS COURT DID NOT THINK IT APPROPRIATE TO ALLOW THE RECONSIDERATION OF AN ISSUE FOR A SUBSEQUENT ASSESSMENT YEAR IF THE SAME 'FUNDAMENTAL ASPECT' PERMEATES IN DIFFERENT ASSESSMENT YEARS. IN ARRIVING AT THIS CONCLUSION, THIS COURT REFERRED TO AN INTERESTING PASSAGE FROM HOYSTEADV.COMMISSIONER OF TAXATION 1926 AC 155 (PC) WHEREIN IT WAS SAID: 'PARTIES ARE NOT PERMITTED TO BEGIN FRESH LITIGATION BECAUSE OF NEW VIEWS THEY MAY ENTERTAIN OF THE LAW OF THE CASE, OR NEW VERSIONS WHICH THEY PRESENT AS TO WHAT SHOULD BE A PROPER APPREHENSION BY THE COURT OF THE LEGAL RESULT EITHER OF THE CONSTRUCTION OF THE DOCUMENTS OR THE WEIGHT OF CERTAIN CIRCUMSTANCES. IF THIS WERE PERMITTED, LITIGATION WOULD HAVE NO END, EXCEPT WHEN LEGAL INGENUITY IS EXHAUSTED. IT IS A PRINCIPLE OF LAW THAT THIS CANNOT BE PERMITTED AND THERE IS ABUNDANT AUTHORITY REITERATING THAT PRINCIPLE. THIRDLY, THE SAME PRINCIPLE, NAMELY, THAT OF SETTING TO REST RIGHTS OF LITIGANTS, APPLIES TO THE CASE WHERE A POINT, FUNDAMENTAL TO THE DECISION, TAKEN OR ASSUMED BY THE PLAINTIFF AND TRAVERSABLE BY THE DEFENDANT, HAS NOT BEEN TRAVERSED. IN THAT CASE ALSO A DEFENDANT IS BOUND BY THE JUDGMENT, ALTHOUGH IT MAY BE TRUE ENOUGH THAT SUBSEQUENT LIGHT OR INGENUITY MIGHT SUGGEST SOME TRAVERSE WHICH HAD NOT BEEN TAKEN.' 30. REFERENCE WAS ALSO MADE TO PARASHURAM POTTERY WORKS LTD. V. ITO [1977] 106 ITR 1 (SC) AND THEN IT WAS HELD: 'WE ARE AWARE OF THE FACT THAT STRICTLY SPEAKING RES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. AGAIN, EACH ASSESSMENT YEAR BEING A UNIT, WHAT IS DECIDED IN ONE YEAR MAY NOT APPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. ON THESE REASONINGS IN THE ABSENCE OF ANY MATERIAL CHANGE JUSTIFYING THE REVENUE TO TAKE A DIFFERENT VIEW OF THE MATTER - AND IF THERE WAS NO CHANGE IT WAS IN SUPPORT OF THE ASSESSEE - WE DO NOT THINK THE QUESTION SHOULD HAVE BEEN REOPENED AND CONTRARY TO WHAT HAD BEEN DECIDED BY THE COMMISSIONER OF INCOME TAX IN THE EARLIER PROCEEDINGS, A DIFFERENT AND CONTRADICTORY STAND SHOULD HAVE BEEN TAKEN.' 31. IT APPEARS FROM THE RECORD THAT IN SEVERAL ASSESSMENT YEARS, THE REVENUE ACCEPTED THE ORDER OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE AND DID NOT PURSUE THE MATTER ANY FURTHER BUT IN RESPECT OF SOME ASSESSMENT YEARS THE MATTER WAS TAKEN UP IN APPEAL BEFORE THE BOMBAY HIGH COURT BUT WITHOUT ANY SUCCESS. THAT BEING SO, THE REVENUE CANNOT BE ALLOWED TO FLIP-FLOP ON THE ISSUE AND IT OUGHT LET THE MATTER REST RATHER THAN SPEND THE TAX PAYERS' MONEY IN PURSUING LITIGATION FOR THE SAKE OF IT.' ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 52 77. THEREFORE, FOLLOWING THIS PRINCIPAL ALSO WE ARE OF THE VIEW THAT DEDUCTION FOR THE YEAR CLAIMED BY THE ASSESSEE WITH RESPECT TO ITS GOA UNIT AND NEW TABLET PLANT-I CANNOT BE DISTURBED ON THE PRINCIPLE OF CONSISTENCY ALSO. FURTHER, THIS ARGUMENT CANNOT BE TAKEN SHELTER REGARDING THE CLAIM OF THE ASSESSEE FOR NEW TABLET PLANT-II, SGC PLANT AND NEW TABLET PLANT-III. 78. THE THIRD ARGUMENT ADVANCED BY THE ASSESSEE IS THAT THE ACCOUNTS OF THE ASSESSEE ARE BEING MAINTAINED ON SAP ERP SYSTEM, WHICH PROVIDES SEPARATE BOOKS OF ACCOUNTS RESULTING INTO INDEPENDENT BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE ELIGIBLE UNIT. FOR THIS LD., AR EXPLAINED IN DETAIL HOW THE ERP SYSTEM WORKS AND HOW IT GENERATES INDIVIDUAL PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF THE INDUSTRIAL UNITS. IN THE PRESENT BUSINESS ENVIRONMENT AND LOOKING TO THE NATURE OF THE BUSINESS AND THE SIZE OF THE OPERATION OF THE COMPANY, IT IS APPARENT THAT IT IS MULTI PRODUCT, MULTI-LOCATION COMPANY. THE ASSESSEE HAS MADE A CLAIM OF VARIOUS UNITS, WHICH IS SUBMITTED BEFORE US FROM PAGE NOS.974 TO 1038 OF PAPER BOOK VOLUME NO.IV. THE DETAILS OF THIS IS TABULATED AS UNDER: NAME OF THE UNIT DATE OF AUDIT REPORT AS PER RULE 18BBB SUPPORTED BY THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE UNIT PAGE NO. OF PB VOLUME IV GOA UNIT 31.01.2012 YES 974-986 NEW TABLET PLANT-I 31.01.2012 YES 987-999 NEW TABLET PLANT- II 31.01.2012 YES 1000-1012 NEW SCG PLANT 31.01.2012 YES 1013-1025 NEW TABLET PLANT- III 31.01.2012 YES 1026-1038 79. ON EXAMINATION OF THE ABOVE STATED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE ABOVE INDUSTRIAL UNDERTAKING WHERE THE CLAIM OF THE DEDUCTION OF THE ASSESSEE IS WORKED OUT AND CERTIFIED BY THE INDEPENDENT ACCOUNTANT IS PREPARED BASED ON SIMILAR ACCOUNTING POLICIES AND PRACTICES. IT IS ALSO APPARENT THAT THE PROFIT AND LOSS AND THE BALANCE SHEET HAVE BEEN PREPARED ON RATIONAL BASIS AFTER ALLOCATION OF PROPER EXPENDITURE, WHICH HAS BEEN FOLLOWED BY THE ASSESSEE CONSISTENTLY AND BASED ON THE ACCOUNTING PRACTICES FOLLOWED IN EARLIER YEARS. THE MAIN REASON FOR ASKING OF SEPARATE BOOKS OF ACCOUNTS OF THE ELIGIBLE UNDERTAKING IS ONLY TO VERIFY THAT WHETHER THE ASSESSEE HAS COMPUTED THE ELIGIBLE PROFITS FOR DEDUCTION HAS SOME SANCTITY OR NOT. ASSESSEE HAS CONSISTENTLY FOLLOWED ALLOCATION OF 75% OF HEAD OFFICE EXPENSES TO THE INDIVIDUAL UNDERTAKING BASED ON SALES CLOCKED BY THE INDIVIDUAL UNITS. THIS PRACTICE HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE IN PAST YEAR AND THE REVENUE AS STATED BY US EARLIER WITH RESPECT TO AY 2002-03 ONWARDS, HAS ACCEPTED IT. THE ASSESSEE HAS IN BRIEF AND SUCCINCTLY HAS EXPLAINED THE RATIONALE BEHIND ALLOCATION OF EACH EXPENDITURE TO THE VARIOUS UNITS. REGARDING R&D EXPENDITURE THE ASSESSEE HAS ALSO FOLLOWED THE PRACTICE APPORTIONING 30% TO THE INDIVIDUAL UNDERTAKING IN THE RATIO OF SALES. THIS METHODOLOGY IS BASED ON LOGICAL REASONING AND CONSISTENTLY FOLLOWED BY THE ASSESSEE WHICH HAS BEEN ACCEPTED BY THE REVENUE IN PAST IN CASE OF ASSESSMENT OF THE ASSESSEE. THE LD. AO HAS HELD THAT THE ASSESSEE HAS MAINTAINED COMMON BOOKS OF ACCOUNTS AND THEREFORE AS SEPARATE BOOKS OF ACCOUNTS ARE NOT MAINTAINED THEREFORE PROFIT CANNOT BE ASCERTAIN CORRECTLY. WE HAVE EXAMINED THESE ARGUMENTS AND WE ARE OF THE VIEW THAT AS ASSESSEE IS MAINTAINING ITS FINANCIAL AND OPERATIONAL RECORDS ON SAP ERP SYSTEMS THE ASSESSEE CAN AT ANY MOMENT OF TIME ON ANY DAY AFTER EVERY TRANSACTION CAN PRODUCE THE PRODUCT WISE, UNITS WISE, GEOGRAPHY WISE, INDEPENDENT PROFIT AND LOSS ACCOUNT AND BALANCE- SHEETS. THEREFORE, IN OUR OPINION THE CONTENTION OF THE LD. AO THAT COMMON BOOKS OF ACCOUNT ARE MAINTAINED AND NOT SEPARATE BOOKS OF ACCOUNT IS DEVOID OF ANY MERIT. AS SUCH, ASSESSEE HAS CONTENDED THAT PROVISION OF SECTION 80IB AND 80IC DOES NOT PROVIDE THAT ASSESSEE SHOULD MAINTAIN SEPARATE BOOKS OF ACCOUNTS WITH RESPECT TO ELIGIBLE UNDERTAKING. IT ONLY PROVIDES AS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 53 PER PROVISION 80IA(7) THAT THE 'ACCOUNTS' OF THE UNDERTAKING FOR THE PREVIOUS YEAR FOR WHICH DEDUCTION IS CLAIM SHOULD HAVE BEEN AUDITED BY AN 'ACCOUNTANT'. THE PROVISION OF THE SECTION DOES NOT TALK ABOUT MAINTENANCE OF 'SEPARATE BOOKS OF ACCOUNTS'. PROVISIONS OF SECTION 80IA(7) ARE AS UNDER : '(7) 38 [THE DEDUCTION] UNDER SUB-SECTION (1) FROM PROFITS AND GAINS DERIVED FROM AN 39 [UNDERTAKING] SHALL NOT BE ADMISSIBLE UNLESS THE ACCOUNTS OF THE 39 [UNDERTAKING] FOR THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR FOR WHICH THE DEDUCTION IS CLAIMED HAVE BEEN AUDITED BY AN ACCOUNTANT, AS DEFINED IN THE EXPLANATION BELOW SUB-SECTION (2) OF SECTION 288, AND THE ASSESSEE FURNISHES, ALONG WITH HIS RETURN OF INCOME, THE REPORT OF SUCH AUDIT IN THE PRESCRIBED FORM 40 DULY SIGNED AND VERIFIED BY SUCH ACCOUNTANT.' 80. RULE 18BBB OF THE INCOME TAX RULES GOVERNING THE CERTIFICATE BY AN ACCOUNTANT PROVIDES AS UNDER : 98 '[FORM OF AUDIT REPORT FOR CLAIMING DEDUCTION UNDER SECTION 80-I OR 80-IA OR 99 [80-IB OR SECTION 80-IC]. 18BBB . (1) THE REPORT OF THE AUDIT OF THE ACCOUNTS OF AN ASSESSEE, WHICH IS REQUIRED TO BE FURNISHED UNDER SUB-SECTION (7) OF SECTION 80-IA OR SUB-SECTION (7) OF SECTION 80-I, EXCEPT IN THE CASES OF MULTIPLEX THEATRES AS DEFINED IN SUB-SECTION (7A) OF SECTION 80-IB OR CONVENTION CENTRES AS DEFINED IN SUB-SECTION (7B) OF SECTION 80-IB 1[OR HOSPITALS IN RURAL AREAS AS DEFINED IN SUB-SECTION (11B) OF SECTION 80-IB], SHALL BE IN FORM NO. 10CCB. (2) A SEPARATE REPORT IS TO BE FURNISHED BY EACH UNDERTAKING OR ENTERPRISE OF THE ASSESSEE CLAIMING DEDUCTION UNDER SECTION 80-I OR 80-IA OR 80-IB1[OR 80-IC] AND SHALL BE ACCOMPANIED BY THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF THE UNDERTAKING OR ENTERPRISE AS IF THE UNDERTAKING OR THE ENTERPRISE WERE A DISTINCT ENTITY. (3) IN THE CASE OF AN ENTERPRISE CARRYING ON THE BUSINESS OF DEVELOPING OR OPERATING AND MAINTAINING OR DEVELOPING, OPERATING AND MAINTAINING AN INFRASTRUCTURE FACILITY, THE FORM SHALL BE ACCOMPANIED BY A COPY OF THE AGREEMENT OF THE ENTERPRISE WITH THE CENTRAL GOVERNMENT OR THE STATE GOVERNMENT OR THE LOCAL AUTHORITY FOR CARRYING ON THE BUSINESS OF DEVELOPING OR OPERATING AND MAINTAINING OR DEVELOPING, OPERATING AND MAINTAINING THE INFRASTRUCTURE FACILITY. (4) IN ANY OTHER CASE, THE FORM SHALL BE ACCOMPANIED BY A COPY OF THE AGREEMENT, APPROVAL OR PERMISSION, AS THE CASE MAY BE, TO CARRY ON THE ACTIVITY SIGNED OR ISSUED BY THE CENTRAL GOVERNMENT OR THE STATE GOVERNMENT OR THE LOCAL AUTHORITY FOR CARRYING ON THE ELIGIBLE BUSINESS.' THIS RULE ALSO DOES NOT PROVIDE FOR MAINTENANCE OF 'SEPARATE BOOKS OF ACCOUNTS'.IN VIEW OF THE READING OF SECTION 80IA(7) AND RULE 18BBB, WE ARE OF THE VIEW THAT LAW DOES NOT PROVIDE THAT FOR CLAIMING DEDUCTION UNDER THOSE SECTIONS THERE IS REQUIREMENT TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS. 81. AT THIS POINT OF TIME WE TAKE NOTE OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF ARISUDANA SPINNING MILLS LTD. V CIT [2012] 26 TAXMANN.COM 39/210 TAXMAN 233/348 ITR 385, WHICH PROVIDES GUIDANCE ON THE ISSUE OF MAINTENANCE OF SEPARATE ACCOUNT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 80IA OF THE ACT. FACTS BEFORE THE HON'BLE SUPREME COURT WERE THAT THE ASSESSING OFFICER FOUND THAT THE ASSESSEE-COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF YARN. THE ASSESSEE DERIVED, DURING THE RELEVANT ASSESSMENT YEAR, A GROSS TOTAL INCOME OF RS. 51,82,666/- FROM WHAT IT CALLED 'MANUFACTURING ACTIVITY'. IT DENIED THAT IT HAD UNDERTAKEN ANY TRADING ACTIVITY DURING THE YEAR IN QUESTION. ON THE SAID SUM OF RS. 51,82,666/-, THE ASSESSEE CLAIMED DEDUCTION AT THE RATE OF THIRTY PER CENT UNDER SECTION 80IA OF THE ACT AMOUNTING TO RS. 15,54,800/-. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD NOT MAINTAINED A SEPARATE TRADING AND PROFIT AND LOSS ACCOUNT FOR THE GOODS MANUFACTURED. IN THE ASSESSMENT YEAR IN QUESTION, IT APPEARS THAT THE ASSESSEE HAD SOLD RAW WOOL, WOOL WASTE, TEXTILE, AND KNITTING CLOTHS. WHEN A QUERY WAS RAISED, THE ASSESSEE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 54 CONTENDED THAT, BUSINESS EXIGENCIES IN THE ASSESSMENT YEAR IN QUESTION, IT HAD SOLD THE ABOVE ITEMS. HOWEVER, ACCORDING TO THE ASSESSEE, THE SALE OF RAW WOOL, WOOL WASTE, ETC., WOULD NOT DISENTITLE IT FROM CLAIMING THE BENEFIT UNDER SECTION 80IA OF THE ACT ON THE TOTAL SUM OF RS. 51,82,666/- AT THE RATE OF 30%. DEPARTMENT FOUND THAT THE ASSESSEE HAS NOT MAINTAINED THE ACCOUNTS FOR MANUFACTURE OF YARN ACTUALLY PRODUCED AS A PART OF INDUSTRIAL UNDERTAKING. CONSEQUENTLY, THE ASSESSING OFFICER WORKED OUT, ON HIS OWN, THE MANUFACTURING ACCOUNT, AS INDICATED IN HIS ORDER, GIVING A BIFURCATION IN TERMS OF QUANTITY OF RAW WOOL PRODUCED. ON APPEAL BEFORE HON'BLE COURT IT WAS HELD AS UNDER : '4. IN OUR VIEW, THE FINDINGS GIVEN BY ITAT AND THE HIGH COURT ARE FINDINGS OF FACT. IN THIS CASE, WE ARE NOT CONCERNED WITH THE INTERPRETATION OF SECTION 80IA OF THE ACT. ON FACTS, WE FIND THAT THE ASSESSEE OUGHT TO HAVE MAINTAINED A SEPARATE ACCOUNT IN RESPECT OF RAW MATERIAL WHICH IT HAD SOLD DURING THE ASSESSMENT YEAR. IF THE ASSESSEE HAD MAINTAINED A SEPARATE ACCOUNT, THEN, IN THAT EVENT, A CLEAR PICTURE WOULD HAVE EMERGED WHICH WOULD HAVE INDICATED THE INCOME ACCRUED FROM THE MANUFACTURING ACTIVITY AND THE INCOME ACCRUED ON THE SALE OF RAW MATERIAL. WE DO NOT KNOW THE REASON WHY SEPARATE ACCOUNTS WERE NOT MAINTAINED FOR THE RAW MATERIAL SOLD AND FOR THE INCOME DERIVED FROM MANUFACTURE OF YARN.' ON READING OF THE ABOVE DECISION, IT IS APPARENT THAT THE MAIN PURPOSES OF THE MAINTENANCE OF SEPARATE ACCOUNT ARE TO DEDUCE CORRECT PROFIT ELIGIBLE FOR DEDUCTION. HON'BLE SUPREME COURT IN ABOVE DECISION HAS ALSO HELD IN THE BACKGROUND OF THE FACTS THAT ASSESSEE DID NOT PRODUCE SEPARATE PROFIT AND LOSS ACCOUNT OF THE ELIGIBLE UNDERTAKING. HOWEVER, IN THE CASE OF THE ASSESSEE SUCH PROFIT AND LOSS ACCOUNT WAS PRODUCED ALONG WITH THE REPORT OF THE ACCOUNTANT SINCE BEGINNING. THEREFORE, ASSESSEE HAS MAINTAINED SEPARATE ACCOUNT OF THE PROFIT ELIGIBLE FOR INDUSTRIAL UNDERTAKING. IN THIS CASE, AN ACCOUNTANT HAS AUDITED ASSESSEE'S ACCOUNTS OF THE ELIGIBLE INDUSTRIAL UNDERTAKINGS AND THEREFORE IT COMPLIES WITH THE LETTER AND SPIRIT OF THE PROVISIONS OF INCOME TAX ACT. AS MENTIONED EARLIER ASSESSEE HAS FURNISHED THE SEPARATE REPORT OF THE UNDERTAKING WHICH IS ACCOMPANIED BY THE PROFIT AND LOSS ACCOUNT OF EACH OF UNDERTAKING COMPLYING WITH THE PROVISIONS OF SECTION 80IA(7) OF THE ACT AND CORRESPONDING RULE 18BBB OF THE INCOME TAX RULES 1962. IN VIEW OF THIS, THE ARGUMENT OF THE REVENUE THAT SEPARATE BOOKS OF ACCOUNTS ARE REQUIRED TO BE MAINTAINED WITH RESPECT TO EACH UNIT DOES NOT HAVE ANY SUPPORT OF THE INCOME TAX ACT OR RULES FRAMED THEREUNDER. 82. NONETHELESS, ASSESSEE HAS MAINTAINED BOOKS OF ACCOUNTS OF THE WHOLE UNDERTAKING ON SAP ERP SYSTEMS FROM WHICH ON ANY DAY THE INDEPENDENT PROFIT AND LOSS ACCOUNT AND BALANCE SHEET AS WELL AS THE RESPECTIVE LEDGERS, CASHBOOK AND BANKBOOK AND JOURNAL OF ANY INDEPENDENT INDUSTRIAL UNDERTAKING IS AVAILABLE. ACCORDING TO SECTION 2(12A) OF THE INCOME TAX ACT BOOKS OF ACCOUNTS HAVE BEEN DEFINED AS UNDER : '(12A) 42A 'BOOKS OR BOOKS OF ACCOUNT' INCLUDES LEDGERS, DAY-BOOKS, CASH BOOKS, ACCOUNT-BOOKS AND OTHER BOOKS, WHETHER KEPT IN THE WRITTEN FORM OR AS PRINTOUTS OF DATA STORED IN A FLOPPY, DISC, TAPE OR ANY OTHER FORM OF ELECTROMAGNETIC DATA STORAGE DEVICE;]' ON READING OF THE ABOVE, IT IS APPARENT ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS, WHICH ARE ON THE SAP ERP SYSTEM, WHICH PROVIDES TRANSACTION-BY-TRANSACTION LEDGERS, DAYBOOKS, CASHBOOKS, AND OTHER BOOKS SUCH AS QUANTITATIVE DETAILS AND STOCK REGISTERS. THE LD. AO WAS OF THE VIEW THAT AS THE BOOKS OF ACCOUNTS ARE MAINTAINED FOR THE ENTITY AS A WHOLE, IT HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR THE ELIGIBLE INDUSTRIAL UNDERTAKING. IT WILL FURTHER BE APPRECIATED THAT THE PRIMARY PURPOSE OF MAINTAINING SEPARATE BOOKS OF ACCOUNT IN ANY PROVISION OF THE ACT IS ONLY TO ENABLE THE ASSESSING OFFICER TO VERIFY THAT DEDUCTION UNDER ANY PARTICULAR PROVISION HAS BEEN CORRECTLY COMPUTED. IF FROM ANY SYSTEM/ SOFTWARE, IDENTIFIED AND SEPARATE ACCOUNTS RELATABLE TO ANY PARTICULAR UNIT/ UNDERTAKING ARE DISCERNIBLE AND ARE CAPABLE OF BEING GENERATED, THE SAME, IN OUR VIEW, IS SUFFICIENT COMPLIANCE WITH THE REQUIREMENT OF MAINTENANCE OF SEPARATE BOOKS OF ACCOUNT, IF ANY. HOWEVER, IT IS TO BE NOTED IN PRESENT ERA OF TECHNOLOGICAL EVOLUTION THAT OLD AGE NOTIONS OF THE MAINTENANCE OF ACCOUNTS AND BUSINESS RECORDS DO NOT SURVIVE AND BUSINESS ENTITY TODAY SURVIVES ON REAL TIME INFORMATION ON EACH ASPECT OF ITS BUSINESS PROCESS. IN THIS ERA WHEN AN ENTITY MAINTAINS ITS ACCOUNTING AND BUSINESS RECORDS ON ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 55 ENTERPRISE RESOURCE PLANNING SYSTEM, WHICH IS A STANDARD PROCEDURE OR PROGRAM TO OPTIMIZE ALL BUSINESS PROCESSES INCLUDING SALES, LOGISTICS, PRODUCTION, QUALITY, FINANCE OF AN ENTITY AND SAP IS A NAME OF SOFTWARE PRODUCT AND IT'S A COMPANY NAME TOO WHICH A LEADING PROVIDER OF THESE SOLUTIONS, IT IS RATHER INCORRECT TO SAY THAT SEPARATE BOOKS OF ACCOUNTS ARE NOT MAINTAINED BY THE ASSESSEE. EVIDENCE LED BEFORE LD. AO IN THE FORM OF PROFIT AND LOSS ACCOUNTS, BEFORE LD. DRP IN THE FORM OF THE PROFIT AND LOSS ACCOUNT AND COMPLETE BALANCE SHEETS OF THE UNDERTAKING, BEFORE 'ACCOUNTANT' WHO CERTIFIED THE DEDUCTION OF THE UNITS, ITS BALANCE SHEET AND PROFIT AND LOSS ACCOUNTS AND BEFORE US ALL THESE RECORDS ARE ATTACHED IN THE FORM OF PAPER BOOK WHICH ARE QUOTED BY US ABOVE. IN VIEW OF SUCH OVERWHELMING EVIDENCE, WE REJECT CONTENTION OF LD. AO AND LD. DRP THAT ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS. WE HOLD THAT ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS FROM WHICH CORRECT PROFIT CAN BE DEDUCED AT ANY TIME OF THE EACH OF THE ELIGIBLE UNDERTAKING. OUR VIEW ALSO GETS SUPPORT FROM THE DECISION OF COORDINATE BENCH IN CASE OF IN CASE OF SMR BUILDERS (P) LTD. (SUPRA) WHERE IN IT IS HELD THAT: '37. SECTION 80-IA(7) WHICH IS APPLICABLE TO THE PROVISIONS OF SEC. 80-IB REQUIRES THE ACCOUNTS OF THE ELIGIBLE UNDERTAKING TO BE AUDITED AND A CERTIFICATE TO BE FILED. THE ESSENCE OF THIS REQUIREMENT IS THAT, AT ANY GIVEN TIME THE FINANCIAL POSITION OF THE UNDERTAKING, SHOULD BE ASCERTAINABLE. THE INTENT IS THAT THE PROFITS OF THE UNDERTAKING ELIGIBLE FOR THE DEDUCTION CAN BE PROPERLY IDENTIFIED. THIS REQUIRES MAINTENANCE OF ACCOUNTS IN SUCH A FASHION THAT THE SALES OF THE ELIGIBLE BUSINESS ARE KNOWN, THE EXPENSES - BOTH DIRECT AND INDIRECT ARE IDENTIFIABLE AND THE COMMON EXPENSES ARE APPORTIONED. THE DETAILS FILED BEFORE CIT(A) CLEARLY DEMONSTRATE THAT IN THE CASE OF THE ASSESSEE, THE PROFITS OF THE ELIGIBLE UNIT CAN BE CLEARLY ASCERTAINED FROM THE ACCOUNTS MAINTAINED. EXPENSES INCURRED FOR THE PROJECT ARE KNOWN AND ALL INCOMES, INCLUDING INDIRECT INCOME ARISING TO THE PROJECT HAVE BEEN CONSIDERED. THE ACCOUNTS HAVE ALSO BEEN AUDITED AND A CERTIFICATE, AS REQUIRED, HAS BEEN FILED. THIS BEING SO, THE ASSESSING OFFICER HAS ERRED IN HOLDING THAT SEPARATE ACCOUNTS WERE NOT MAINTAINED FOR THE ELIGIBLE BUSINESS AND THAT THE ASSESSEE IS, THEREFORE, NOT ELIGIBLE FOR DEDUCTION U/S. 80IB(10) OF THE ACT.' 83. ADDRESSING THE NEXT ARGUMENTS OF THE REVENUE THAT THERE ARE CERTAIN ITEMS OF OTHER INCOME, WHICH ARE REDUCED FROM THE COMPUTATION OF TOTAL INCOME THEN THE MANUFACTURING ACTIVITY RESULTS IN LOSS. FOR THIS, PROPOSITION LD. DR DREW OUR ATTENTION TO PAGE NO 51 OF THE ASSESSMENT ORDER WHERE LD. AO HAS STATED THAT ASSESSEE HAS EARNED ROYALTY INCOME OF RS 18.91 CRS, (II) EXPORT INCENTIVES OF RS 78.93 CRORES, (III) SUNDRIES AND MISCELLANEOUS INCOME RS 33.74 CR AND INCOME FROM TRADING ACTIVITY OF RS 94.25 CRORES TOTALLING TO RS 225.83 CRS. IT WAS STATED THAT THE GROSS TOTAL INCOME OF THE ASSESSEE IS RS. 178.64 CRORES AND IF THE ABOVE STATED INCOME ARE EXCLUDED I.E. OF RS 225.83 CRORES THE TOTAL INCOME OF THE ASSESSEE WILL RESULT IN TO LOSS AND THEREFORE THERE IS NO PROFIT IN MANUFACTURING ACTIVITY OF THE ASSESSEE AND HENCE NO DEDUCTION IS ALLOWABLE TO THE ASSESSEE. ON THIS ASPECT WE HAVE CAREFULLY PERUSED THE COMPUTATION OF TOTAL INCOME FILED BY THE ASSESSEE WHICH IS AT PAGE NO 1145 TO 1155 OF THE PAPER BOOK WHERE THE GROSS TOTAL INCOME OF THE ASSESSEE IS RS. 3347340467 AND CLAIM OF THE DEDUCTION U/S 80 IB/IC OF THE ACT OF RS 1366821506/-. THEREFORE, IT IS APPARENT THAT ASSESSEE'S DEDUCTION IS NOT EXCEEDING THE GROSS TOTAL INCOME OF THE ASSESSEE. WE HAVE PERUSED THE PROVISION OF SECTION 80A OF THE ACT WHICH PROVIDES AS UNDER : ' DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME. 80A. (1) IN COMPUTING THE TOTAL INCOME OF AN ASSESSEE, THERE SHALL BE ALLOWED FROM HIS GROSS TOTAL INCOME, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS CHAPTER, THE DEDUCTIONS SPECIFIED IN SECTIONS 80C TO 48[80U]. (2) THE AGGREGATE AMOUNT OF THE DEDUCTIONS 49 UNDER THIS CHAPTER SHALL NOT, IN ANY CASE, EXCEED THE GROSS TOTAL INCOME OF THE ASSESSEE.' THE ONLY CONDITION THAT IS PRESCRIBED U/S 80A OF THE ACT IS THAT DEDUCTION ALLOWABLE TO THE ASSESSEE UNDER CH VIA CANNOT EXCEED THE GROSS TOTAL INCOME OF THE ASSESSEE. HERE AS ALREADY MENTIONED GROSS TOTAL INCOME OF THE ASSESSEE IS RS. 3347340467/- AND OUT OF WHICH DEDUCTION U/S 80 G OF THE ACT IS A CLAIMED AT RS. 11672734/- AND DEDUCTION U/S 80 IB AND IC OF THE ACT OF ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 56 RS 1366821506/- OF THE ACT TOTALING TO RS. 1378494420/-. THIS RESULTS IN TO TAXABLE INCOME FOR RS 1968846227/-. THEREFORE THIS GROUND OF OBJECTION OF THE REVENUE IS UNSUSTAINABLE IN VIEW OF THE CLEAR PROVISIONS OF SECTION 80A OF THE INCOME TAX ACT. 84. REGARDING ALLOCATION KEY OF 'SALES' FOR ALLOCATION OF COMMON EXPENSE , THE R & D EXPENSES PRIMARILY REPRESENTS COST RELATED TO THE DEVELOPMENT OF 'NEW' MEDICINAL PRODUCTS. IT IS ONLY AFTER INNOVATION OF THE NEW PRODUCT THAT THE SAME IS PRODUCED. IN THESE CIRCUMSTANCES, THE APPELLANT, IN LINE WITH THE TRADITIONAL ALLOCATION METHODOLOGY ADOPTED IN THE EARLIER YEARS APPORTIONED 30% OF SUCH R&D EXPENSES TO THE INDIVIDUAL UNDERTAKINGS IN THE RATIO OF SALES. FURTHER, THERE IS NO EVIDENCE LAID DOWN BY REVENUE THAT THAT IN THE EVENT OF THE APPELLANT DECIDING TO COMMERCIALLY EXPLOIT THE BENEFITS OF THE R & D WORKS, THE PRODUCTS WOULD BE MANUFACTURED BY THE SAID UNITS. FURTHER ON ALLOCATION OF HEAD OFFICE EXPENSES WE FULLY AGREE THAT IT RELATES TO COSTS THAT HAVE BEEN INCURRED ON AN ENTITY LEVEL AND PERTAINS TO THE COMPANY AS A WHOLE. APPELLANT HAS APPORTIONED 75% OF SUCH HEAD OFFICE EXPENSES TO THE INDIVIDUAL UNDERTAKINGS BASED ON SALES. THIS METHOD OF ALLOCATION HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE SINCE COMMENCEMENT, WHICH IS DULY CERTIFIED BY THE AUDITORS AND ACCEPTED IN THE ASSESSMENTS COMPLETED IN THE PAST. WE DO NOT FIND ANY IRRATIONALITY IN THE AL ABOVE ALLOCATION KEYS ADOPTED BY THE ASSESSEE FIRSTLY AND FOR THE REASON THAT IT HAS BEEN ACCEPTED BY THE REVENUE IN PAST IT CANNOT BE DISPUTED NOW IN SUBSEQUENT YEARS WITHOUT THERE BEING ANY CHANGE IN THE FACTS AND / OR LAW. HONOURABLE DELHI HIGH COURT IN THE CASE OF EHPT INDIA (P.) LTD.(SUPRA) WHERE IN ALLOCATION OF EXPENSES BASED ON HEAD COUNTS AND TURNOVER IS UPHELD TO STRESS THAT THERE IS NO BAR IN LAW FOR COMMON EXPENSES TO BE ALLOCATED ON A SCIENTIFIC/ RATIONAL BASIS TO THE ELIGIBLE UNIT HAS HELD AS UNDER : '10. THE PROVISIONS OF SUB-SECTION (4) OF SECTION 10A, RELIED UPON BY THE ASSESSING OFFICER, APPLY FOR THE PURPOSE OF SEGREGATING THE PROFITS OF THE BUSINESS INTO EXPORT PROFITS AND DOMESTIC PROFITS. IT IS A STATUTORY FORMULA FOR ASCERTAINING WHAT ARE PROFITS DERIVED FROM THE EXPORT OF THE ELIGIBLE ITEMS. IT HAS TO BE READ WITH SUB-SECTION (1). IT SAYS THAT THE EXPORT PROFITS HAVE TO BE APPORTIONED ON THE BASIS OF THE RATIO WHICH THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF ALL THE BUSINESSES OF THE ELIGIBLE UNDERTAKING. WE ARE NOT IN THE PRESENT CASE CONCERNED WITH SUB-SECTION (4). THAT SUB-SECTION WILL APPLY WHEN THE COMBINED PROFITS - PROFITS OF THE EXEMPT UNIT AND THOSE OF THE NON-EXEMPT UNIT - HAVE BEEN ASCERTAINED; THE NEXT STEP WILL BE TO APPORTION THEM ON THE BASIS OF THE RATIO WHICH THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER. WHAT WE ARE CONCERNED HEREIN IS THE STAGE BEFORE THAT. WE ARE CONCERNED HEREIN WITH THE METHOD BY WHICH THE INDIRECT OR COMMON EXPENSES - EXPENSES WHICH ARE INCURRED FOR BOTH THE EXEMPT AND TAXABLE UNITS - ARE TO BE APPORTIONED BETWEEN THE TWO UNITS. TO APPLY THE FORMULA PRESCRIBED IN SUB-SECTION (4) MAY BE APPROPRIATE IN A GIVEN CASE CONSIDERING ITS PECULIAR FACTS. BUT APPLYING THE SAME FORMULA TO ALL CASES OF APPORTIONMENT WITHOUT HAVING REGARD TO THE HISTORY OF ASSESSMENTS AND OTHER RELEVANT FACTORS MAY NOT BE JUSTIFIED. 11. IN HUKAM CHAND MILLS LTD. (SUPRA), IN THE CONTEXT OF APPORTIONING PROFITS ACCRUING TO THE ASSESSEE UNDER THE SEVERAL CATEGORIES OF BUSINESSES CARRIED ON BY HIM IN BRITISH INDIA, IT WAS HELD THAT THE QUESTION AS TO THE METHOD OF APPORTIONMENT WAS ESSENTIALLY ONE OF FACT DEPENDING UPON THE CIRCUMSTANCES OF THE CASE. IT WAS RECOGNIZED THAT IN THE ABSENCE OF ANY STATUTORY OR FIXED FORMULA, ANY FINDING ON THE QUESTION WOULD INVOLVE AN ELEMENT OF GUESS WORK AND THAT 'THE ENDEAVOR CAN ONLY BE TO BE APPROXIMATE AND THERE CANNOT IN THE VERY NATURE OF THINGS BE GREAT PRECISION AND EXACTNESS IN THE MATTER' (AT PAGE 552). IN THE RECENT JUDGMENT OF THE SUPREME COURT IN CIT V. BILAHARI INVESTMENT (P.) LTD. [2008] 299 ITR 1/168 TAXMAN 95, THE FACTS WERE THESE. THE ASSESSEE WAS SUBSCRIBING TO CHITS AND WAS MAINTAINING THE ACCOUNTS ON MERCANTILE BASIS. THE DISCOUNT ON THE CHITS, WHICH WAS ACTUALLY THE PROFIT ARISING TO THE ASSESSEE, WAS DECLARED AT THE END OF THE CHIT PERIOD, WHICH AT TIMES EXCEED A PERIOD OF 12 MONTHS. THIS METHOD ADOPTED BY THE ASSESSEE WAS BEING ACCEPTED BY THE DEPARTMENT FOR A NUMBER OF YEARS. HOWEVER, FOR THE ASSESSMENT YEARS 1991-92 TO 1997-98 THE ASSESSING OFFICER TOOK THE VIEW THAT THE DISCOUNT ON THE CHITS SHOULD BE ASSESSED EVERY YEAR, TAKING INTO ACCOUNT THE NUMBER OF INSTALMENTS PAID AND REMAINING TO BE PAID. THE CONTENTION OF THE ASSESSEE WAS THAT THE METHOD ADOPTED BY HIM HAS BEEN CONSISTENTLY ACCEPTED IN THE PAST AND THERE WAS NO JUSTIFICATION FOR ANY DEPARTURE. ACCEPTING THE SUBMISSION, THE SUPREME COURT HELD AS UNDER: ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 57 'AS STATED ABOVE, WE ARE CONCERNED WITH THE ASSESSMENT YEARS 1991-92 TO 1997-98. IN THE PAST, THE DEPARTMENT HAD ACCEPTED THE COMPLETED CONTRACT METHOD AND BECAUSE OF SUCH ACCEPTANCE, THE ASSESSEE, IN THESE CASES, HAVE FOLLOWED THE SAME METHOD OF ACCOUNTING, PARTICULARLY IN THE CONTEXT OF CHIT DISCOUNT. EVERY ASSESSEE IS ENTITLED TO ARRANGE ITS AFFAIRS AND FOLLOW THE METHOD OF ACCOUNTING, WHICH THE DEPARTMENT HAS EARLIER ACCEPTED. IT IS ONLY IN THOSE CASES WHERE THE DEPARTMENT RECORDS A FINDING THAT THE METHOD ADOPTED BY THE ASSESSEE RESULTS IN DISTORTION OF PROFITS, THE DEPARTMENT CAN INSIST ON SUBSTITUTION OF THE EXISTING METHOD. FURTHER, IN THE PRESENT CASES, WE FIND FROM THE VARIOUS STATEMENTS PRODUCED BEFORE US, THAT THE ENTIRE EXERCISE, ARISING OUT OF CHANGE OF METHOD FROM THE COMPLETED CONTRACT METHOD TO DEFERRED REVENUE EXPENDITURE, IS REVENUE NEUTRAL. THEREFORE, WE DO NOT WISH TO INTERFERE WITH THE IMPUGNED JUDGMENT OF THE HIGH COURT.' IN THE LIGHT OF THE OBSERVATIONS OF THE SUPREME COURT IN HUKAM CHAND MILLS LTD. (SUPRA), IN A CASE WHERE ALTERNATIVE METHODS OF APPORTIONMENT OF THE EXPENSES ARE RECOGNIZED AND THERE IS NO STATUTORY OR FIXED FORMULA, THE ENDEAVOUR CAN ONLY BE TOWARDS APPROXIMATION WITHOUT ANY GREAT PRECISION OR EXACTNESS. IF SUCH IS THE ENDEAVOUR, IT CAN HARDLY BE SAID THAT THERE IS AN ATTEMPT TO DISTORT THE PROFITS. ON THE CONTRARY, AS WE HAVE ALREADY POINTED OUT, DISTORTION OF PROFITS MAY ARISE IF THE CONSISTENTLY ADOPTED AND ACCEPTED METHOD OF APPORTIONMENT IS SOUGHT TO BE DISTURBED IN A FEW YEARS, ESPECIALLY IN A CASE SUCH AS THE PRESENT ONE WHERE THE DEDUCTION UNDER SECTION 10A IS AVAILABLE OVER A PERIOD OF TEN YEARS AND ONLY IN SOME YEARS THE METHOD OF APPORTIONMENT OF INCOME IS DISTURBED. IN OTHER WORDS, THERE IS NO 'JUST CAUSE' MADE OUT FOR ABANDONING THE PAST METHOD.' [UNDERLINE AND BOLD SUPPLIED BY US EXTRACTED FROM TAXMANN.COM] IN VIEW OF THE ABOVE DECISION OF HONOURABLE DELHI HIGH COURT, ALLOCATION KEYS OF R & D EXPENSES AS WELL AS COMMON EXPENSES HAVE RATIONAL, ACCEPTED BY REVENUE IN PAST YEARS, THERE IS NO JUSTIFICATION THAT HOW IT DISTORTS PROFIT, IN ABSENCE OF COMPELLING REASONS TO CHANGE I.E. 'JUST CAUSE', WE REJECT THE STAND OF REVENUE IN NOT ACCEPTING THE ABOVE ALLOCATION METHODOLOGY ADOPTED BY THE APPELLANT. 85. COMING TO THE NEXT ARGUMENT OF THE REVENUE THAT THE SALES RECORDED BY THE INDEPENDENT UNITS ARE NOT ARM'S LENGTH. FOR THIS ARGUMENT OF THE REVENUE A DEEPER EXAMINATION OF SUB- SECTION 8 OF SECTION 80(IA) OF THE ACT IS REQUIRED WHICH PROVIDES FOR INTER UNIT TRANSFER OF GOODS AND SERVICES SHOULD BE AT THE MARKET VALUE OF THE GOODS AND SERVICES WHICH MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARY FETCH IN THE OPEN MARKET. FIRSTLY LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THERE IS NO INTER UNIT TRANSFER OF ANY GOODS AND SERVICES AND THEREFORE PROVISIONS OF SECTION 80(IA)(8) DOES NOT APPLY. THIS FACT HAS REMAINED UNCONTROVERTED. NONE OF THE TRANSACTION HAS BEEN POINTED BEFORE US, WHICH SHOWS THAT THERE IS INTER UNIT TRANSFER OF GOODS OR SERVICES. THEREFORE IN ABSENCE OF ANY INSTANCES OF SUCH TRANSFER OF GOODS OR SERVICES POINTED OUT BEFORE US BY REVENUE WE ARE OF THE VIEW THAT PROVISION OF SECTION 80IA(8) ARE NOT ATTRACTED. 86. FURTHER, IT IS SUBMITTED BY THE ASSESSEE THAT VARIOUS UNITS ARE MANUFACTURING DIFFERENT PRODUCTS AND FINAL PRODUCTS ARE SOLD IN THE OPEN MARKET. SALES OF EACH OF THE UNIT ARE ACCOUNTED IN THE PROFIT AND LOSS ACCOUNT BY THE APPELLANT OF THAT UNIT. IT IS NOT POINTED OUT BEFORE US THAT WHAT IS THE MATERIAL OR SERVICES THAT HAS NOT BEEN ACCOUNTED FOR BY THE ASSSEESS AS SALES AND IT IS NOT AT THE MARKET RATE AND WHAT IS THE MARKET RATE OF SUCH PRODUCT OR SERVICES SOLD BY THOSE UNITS. IT IS EMPHATICALLY STATED THAT THERE IS NO INTER UNIT TRANSFER OF THE GOODS OR SERVICES. IN VIEW OF THE ABOVE, WE DO NOT HAVE ANY OPTION BUT TO REJECT THE OBJECTION OF THE REVENUE OF INVOKING SECTION 80 IA (8) OF THE ACT ON THIS ISSUE. 87. IT IS ONE OF THE CONTENTION OF REVENUE THAT SELLING AND DISTRIBUTION ACTIVITY IS ITSELF A SEPARATE PROFIT CENTER AND THEREFORE WHATEVER SERVICES HAVE BEEN PROVIDED BY THE SELLING AND DISTRIBUTION ARM OF THE COMPANY TO THE ELIGIBLE UNDERTAKING SHOULD HAVE BEEN CHARGED AND REDUCED FROM THE PROFIT OF THE INDUSTRIAL UNDERTAKING AFTER VALUING SERVICE OF SELLING AND DISTRIBUTION ARM OF THE COMPANY AT MARKET RATE. AT PRESENT ASSESSEE HAS ALLOCATED IT AT COST. THEREFORE, LD. AO HAS INVOKED PROVISIONS OF SECTION 80 IA (8) OF THE ACT. IT IS NOT DISPUTE THAT THAT PRODUCTS MANUFACTURED BY THESE INDUSTRIAL UNITS ARE SOLD BY SELLING AND DISTRIBUTION ARM OF THE ASSESSEE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 58 AND THE COST INCURRED IS ALLOCATED TO THESE RESPECTIVE UNITS ON THE BASIS OF APPROPRIATE ALLOCATION KEY OF 'SALES'. LD. AR OF THE APPELLANT RELYING ON THE DECISION OF COORDINATE BENCH OF CADILA HEALTHCARE LTD. (SUPRA) HAS SUBMITTED THAT THERE CANNOT BE ANY SPECIFIC DEMARCATION BETWEEN MANUFACTURING AND SELLING ACTIVITIES OF THE ASSESSEE AND PROFIT ACCRUES ONLY AT THE TIME OF SALES OF THE GOODS ONLY. THEREFORE, THE CONTENTION OF THE REVENUE THAT SELLING AND DISTRIBUTION FUNCTION OF THE ASSESSEE IS A SEPARATE PROFIT CENTER IS REQUIRED TO BE REJECTED AT THRESHOLD. WE HAVE CAREFULLY CONSIDERED THE ARGUMENT OF LD. AR AND OF THE REVENUE ON THIS POINT AS WELL AS THE LD. AO AND LD. DRP. WE ARE OF THE VIEW THAT THIS ARGUMENT IS ALMOST SIMILAR TO THE ARGUMENT RAISED BY THE REVENUE IN THE CASE OF CADILA HEALTHCARE LTD. (SUPRA) COORDINATE BENCH HAS DEALT WITH THESE ARGUMENTS FROM ALL THE ANGLES OF THE CONTROVERSY AND HAS HELD AS UNDER : '9.4 LD. COUNSEL HAS ASSERTED THAT UNDISPUTEDLY, IT WAS AN 'INTER-DIVISION TRANSFER', HENCE IT WAS EXPECTED TO RECORD THE SAME AT ARM'S LENGTH PRICE. HE HAS PLEADED THAT THE ASSESSEE IS BLOWING HOT AND COLD IN THE SAME BREATH. WHEN IT COMES TO TRANSFER OF SERVICES AND GOODS, IT OPPOSES ARM'S LENGTH PRICE ADJUSTMENT AND SAYS THAT THE EXPENSES WHICH HAVE BEEN INCURRED IN PAST NEED NOT BE TAKEN INTO CONSIDERATION. AS DISCUSSED EARLIER, THIS LOGIC DO NOT COMMENSURATE WITH THE PROVISIONS OF THE SECTIONS. EVEN THEN FOR ARGUMENT SAKE IF THE EXPENSES RELATABLE TO CURRENT YEAR ARE TO BE APPORTIONED; IT WAS FOUND THAT THE ASSESSEE HAD NOT APPORTIONED EVEN A PENNY OF THE EXPENSES IN DEVELOPMENT AND RESEARCH OF NEW PRODUCTS OF BADDI UNIT. 9.5 NEXT, REVENUE'S COUNSEL HAS DRAWN OUR ATTENTION 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 PRODUCTS ON STAND ALONE BASIS, THEN THE SAID UNIT WHICH WAS ONLY TWO YEARS OLD COULD NOT FETCH SUCH HIGH SALE PRICE. THE SAID UNIT HAS SHOWN HIGH PROFIT AT RS. 1,16,82,91,400/-. THE GOODS MANUFACTURED BY THE SAID UNIT WERE TRANSFERRED TO THE MARKETING DIVISION OF THE ASSESSEE-COMPANY AND THE SALE PRICE WAS NOTED BY THE BADDI UNIT AS PER THE FINAL SALE PRICE OF THE PRODUCT. BUT THE FACT IS THAT THE MARKETING DIVISIONS AND THE C&F ARE INVOLVED, THEREFORE THE SALES ARE REALIZED BY THE MAIN MARKETING DIVISION. HE HAS THUS PLEADED THAT THE PROFIT DERIVED FROM 'MARKETING FUNCTION' CANNOT BE DRAGGED TO THE MANUFACTURING UNIT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S.80IC. THE SPECIAL PROVISION IS CONFINED TO CERTAIN UNDERTAKINGS, AS DEFINED IN THE STATUTE, AND SUCH ELIGIBLE UNDERTAKINGS ARE ENTITLED FOR THE DEDUCTION OF THE PROFIT OF SUCH UNDERTAKINGS ONLY. HE HAS AGAIN DRAWN OUR ATTENTION THAT THE ONLY SOURCE OF INCOME SHOULD BE THE ELIGIBLE SOURCE OF INCOME AND NOT OTHER SOURCES OF INCOME, SUCH AS, PROFITS OF MARKETING DIVISION OR PROFITS ON ACCOUNT OF ESTABLISHED BRAND. FOR THE ALLOCATION OF PROFIT OF MANUFACTURING UNIT THE MANDATE IS VERY CLEAR BECAUSE INCOME TAX RULE, 1962 CONTAINS RULE 18BBB WHEREIN AS PER SUB-RULE(2) A SEPARATE REPORT IS TO BE FURNISHED BY EACH UNDERTAKING AND THAT REPORT SHALL BE ACCOMPANIED BY A PROFIT & LOSS ACCOUNT AND BALANCE-SHEET OF THAT UNDERTAKING AS IF THE UNDERTAKING IS A DISTINCT ENTITY. HE HAS THEREFORE ARGUED THAT THE ALLOCATION OF THE PROFIT OF A MANUFACTURING UNIT SHOULD BE MADE ON STAND ALONE BASIS. HE HAS QUESTIONED THAT HOW THE SALE PRICE OF THE PRODUCTS OF THE BADDI UNIT WERE DETERMINED AND RECORDED. BECAUSE OF THE BRAND VALUE THE SALE PRICE MUST HAVE BEEN DETERMINED BY THE MANAGEMENT AS IF THE PROFIT IS EARNED BY THE ASSESSEE-COMPANY ON SALE OF THE PRODUCTS OF THE BADDI UNIT. IT WAS RECORDED ON THE PRESUMPTION THAT THE SALES WERE EXECUTED BY THE HEAD OFFICE BY CHARGING BRAND VALUE, THE NAME OF THE PRODUCT AND THE GOODWILL OF THE COMPANY. IN ANY CASE, ACCORDING TO LD. DR, A REASONABLE EXPENDITURE SHOULD HAVE BEEN PROVIDED, SO THAT SUCH AN ABNORMAL PROFIT @ 58.66% COULD BE CHECKED. 9.6 IN SUPPORT OF THE ABOVE SUBMISSIONS, MR. SRIVASTAVA HAS PLACED ON STRONG RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT V. AHMEDBHAIUMARBHAI& CO. [1950] 18 ITR 472 FOR THE LEGAL PROPOSITION THAT, QUOTE 'THE PROFITS RECEIVED RELATE FIRSTLY TO HIS BUSINESS AS A MANUFACTURER, SECONDLY TO HIS TRADING OPERATIONS, AND THIRDLY TO HIS BUSINESS OF IMPORT AND EXPORT. PROFIT OR LOSS HAS TO BE APPORTIONED BETWEEN THESE BUSINESSES IN A BUSINESS LIKE MANNER AND ACCORDING TO WELL ESTABLISHED PRINCIPLES OR ACCOUNTANCY.' UNQUOTE. HE HAS ALSO PLACED RELIANCE ON LIBERTY INDIA (SUPRA) . ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 59 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 'ELIGIBLE PROFIT' WHILE CLAIMING A DEDUCTION UNDER THE STATUTE. THE ADJUSTMENTS AS SUGGESTED BY THE AO WHILE WORKING OUT THE MANUFACTURING PROFIT OF AN ELIGIBLE UNIT HAS A FAR REACHING CONSEQUENCES ON ALL SUCH TAX-PAYERS; 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 'PROFITS AND GAINS'. AS PER SECTION 2(13) 'BUSINESS' INCLUDES TRADE, COMMERCE OR MANUFACTURE. IN AUXILIARY, AS PER SECTION 2(24) 'INCOME' INCLUDES (I) PROFITS AND GAINS. AN 'INCOME' HAS TO HAVE A COMPONENT OF 'PROFITS & GAINS' BUT ALL TYPE OF 'PROFITS & GAINS' MAY NOT BE AN 'INCOME' FOR TAX PURPOSE UNDER THE ACT. THE SECTION IN CONTROVERSY I.E. SEC. 80 IC OF THE ACT 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 ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED, 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-SECTION (2) IN THE FOLLOWING MANNER : (2) THIS SECTION APPLIES TO ANY UNDERTAKING OR ENTERPRISE (A) WHICH HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUCE ANY ARTICLE OR THING THEREFORE, 'MANUFACTURING' IS THE FIRST CRITERIA FOR THE ELIGIBILITY OF THE 'BUSINESS' TO QUALIFY FOR THE DEDUCTION. HENCE THE 'PROFITS' ARE REQUIRED TO BE DERIVED FROM A MANUFACTURING UNDERTAKING WHICH IS PRODUCING THE SPECIFIED ARTICLE. THAT 'PROFIT' IS INCLUSIVE IN THE 'GROSS TOTAL INCOME'. AS ALREADY NOTED, THE TERMINOLOGY 'PROFIT' HAS NOT BEEN 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 UNIT? FIRSTLY, THE TERM 'PROFIT' IMPLIES A COMPARISON BETWEEN THE STAGE OF A BUSINESS AT TWO SPECIFIC DATES SEPARATED BY AN INTERVAL OF A YEAR. THUS FUNDAMENTALLY THE MEANING IS THAT THE AMOUNT OF GAIN MADE BY THE BUSINESS DURING THE YEAR. THIS CAN BE ASCERTAINED BY A COMPARISON OF THE ASSETS OF THE BUSINESS AT THE TWO DATES. TO DETERMINE THE 'PROFIT' OF A MANUFACTURING UNIT THE ACCOUNTING STANDARD HAS GIVEN 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 GOODS. RATHER, THE 'OPERATING PROFIT' IS ALSO DEFINED AS EQUAL TO SALES REVENUE MINUS COST OF GOODS PLUS ALL EXPENSES, EXCEPT INTEREST AND TAXES. MOST OF THE MANUFACTURING COMPANIES HAVE 'TOTAL COST' BASED PRICING METHOD. TOTAL COST HAS, BROADLY SPEAKING, TWO COMPONENTS; I.E. RAW-MATERIAL PLUS VALUE ADDITION (IT INCLUDES ALL OVERHEADS). 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 CAPACITY. SO THE OBJECTIVE OF SUCH CONCERN OUGHT TO BE TO MAXIMIZE THE PROFIT. NOW THE PROBLEM, AS POSED, IS THAT LET US ASSUME THAT THE SAID MANUFACTURING UNIT IS PRODUCING TWO PRODUCTS; VIZ. 'A' & 'B'. FOR PRODUCTION OF 'A' PRODUCT, LET US SAY, THERE IS LESS WORKING HOURS, BUT FETCHING MORE VALUE FOR LESS MONEY. HOWEVER, IN THE PRODUCTION OF PRODUCT 'B' DUE TO COMPLEX PROCESS OF MANUFACTURING IT REQUIRES MORE WORKING HOURS. FOR PRICING PRODUCT 'B' THE SITUATION IS THAT MORE MONEY EXPENDITURE AND MAY FETCH LESS VALUE. THEREFORE, IN THE PROCESSING DEPARTMENT IT IS NOT POSSIBLE TO SEGREGATE THE TWO COMPONENTS TO DETERMINE THE SEGREGATED MARGINS. KEEPING THIS ACCOUNTING PRINCIPLE IN MIND, WE REVERT BACK TO THE LANGUAGE OF SECTION 80IC WHICH SAYS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 60 THAT A DEDUCTION 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 PROFIT THEREFROM IS ELIGIBLE FOR DEDUCTION U/S.80IC IF THAT PROFIT IS PART AND PARCEL OF THE GROSS TOTAL INCOME. AS NOTED HEREINABOVE, PROFIT IS THE DIFFERENCE BETWEEN THE PURCHASE PRICE AND THE COST OF PRODUCTION ALONG WITH THE COST OF BRINGING THE PRODUCT TO MARKET. THIS BASIC PRINCIPLE OF ACCOUNTANCY, AS APPEARED, HAVE BEEN ADOPTED BY BADDI UNIT BECAUSE AS PER PROFIT & LOSS ACCOUNT, COST OF MATERIAL, PERSONAL COST AND GENERAL EXPENSES, 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 THE ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS AND THEREFORE DRAWN A SEPARATE PROFIT AND LOSS ACCOUNT. IN SUCH A SITUATION, WHETHER THE AO IS EMPOWERED TO DISTURB THE COMPUTATION OF PROFIT, IS ALWAYS A SUBJECT MATTER OF CONTROVERSY. FROM THE SIDE OF THE ASSESSEE, RELIANCE WAS PLACED ON ADDL. CIT V. DELHI PRESS PATRAPRAKASHAN [2006] 10 SOT 74 (DELHI) (URO). 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 THAT, 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 AND RESTRICTED THE PROFIT OF THE SAID UNIT TO 10% ONLY. WHILE DEALING THIS ISSUE, THE RESPECTED COORDINATE BENCH HAS CONCLUDED THAT IT WAS NOT JUSTIFIED TO DISTURB THE WORKING OF PROFIT MERELY BECAUSE THE PROFIT RATE OF ELIGIBLE UNIT WAS SUBSTANTIALLY HIGHER THAN OVERALL RATE OF PROFIT OF OTHER UNITS OF THE ASSESSEE, MORE SO WHEN SEPARATE BOOKS WERE MAINTAINED 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 BADDI UNIT AND HELD THAT ONLY 6% PROFIT IS ELIGIBLE FOR DEDUCTION U/S.80IC.WHILE DOING SO, IDENTICALLY, THE AO HAS NOT PINPOINTED ANY DEFECT IN THE WORKING OF THE 'PROFIT' OF THE BADDI UNIT. IN SUCH A SITUATION, WE CAN SAY THAT THE LEGAL 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 EARNED 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 PRODUCTS 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 RESTRICTED THE DEDUCTION ONLY AT 6%. HE HAS PLACED RELIANCE ON ROLLS ROYCE PLC (SUPRA). IN THAT CASE, THE ASSESSEE WAS A UK BASED COMPANY CARRYING ON MARKETING AND SALES ACTIVITIES IN INDIA THROUGH A SUBSIDIARY. THE SUBSIDIARY WAS ALSO RENDERING SUPPORT SERVICES TO THE ASSESSEE, A UK BASED COMPANY. THE ASSESSEE WAS CARRYING OUT MANUFACTURING OPERATIONS. IT WAS HELD THAT 35% OF ITS PROFITS COULD BE ATTRIBUTED TO THE MARKETING ACTIVITIES CARRIED OUT IN INDIA AND, THEREFORE, CHARGEABLE TO TAX IN INDIA. THE FACTS OF THAT CASE WERE ALTOGETHER DIFFERENT AND THERE WAS A FINDING THAT UNDISPUTEDLY THERE WAS A PE IN INDIA AND AS PER INDO-UK DTAA THE INCOME HAS TO BE TAXED IN INDIA. AN ANOTHER FACT WAS THAT THERE WAS NO SEPARATE ACCOUNT OF THE ASSESSEE'S INDIA OPERATION AND THE AO HAD FOUND THAT ON THE BASIS OF GLOBAL ACCOUNTS THE PROFITS WERE DETERMINED ON SALES. IN THAT CASE, MARKETING WAS SAID TO BE THE PRIMARY ACTIVITY FOR EARNING PROFIT. THE PROFIT WAS DIRECTLY DUE TO OPERATION IN 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 OUT IN INDIA IS TAXABLE. THE EXPRESSION 'BUSINESS CONNECTION' WAS ALSO CONSIDERED AND THEN IT WAS FOUND THAT IT WILL INCLUDE A PERSON ACTING ON BEHALF OF A NON-RESIDENT AND CARRIED ON CERTAIN ACTIVITIES IS HAVING BUSINESS CONNECTION. A BUSINESS CONNECTION HAS TO BE REAL AND INTIMATE AND THROUGH WHICH INCOME MUST ACCRUE OR ARISE WHETHER DIRECTLY OR INDIRECTLY TO THE NON-RESIDENT. ON THOSE FACTS, SINCE IT WAS FOUND THAT R&D ACTIVITIES WERE CARRIED OUT BY THE ASSESSEE, THEREFORE, 15% OF THE PROFIT WAS ALLOCATED TO THE R&D ACTIVITIES AND BALANCE OF THE PROFIT WAS ATTRIBUTABLE TO THE MARKETING ACTIVITIES IN INDIA. THE SAID DECISION WAS ENTIRELY BASED UPON THE CONNECTIVITY OF THE MARKETING OPERATIONS WITH THE PROFITS. THE CBDT CIRCULAR NO.23 OF 1969 DATED 23/07/1969 WAS ALSO TAKEN INTO ACCOUNT WHEREIN IT WAS OPINED THAT WHERE A NON-RESIDENT'S SALES TO INDIAN CUSTOMERS ARE SECURED ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 61 THROUGH THE SERVICES OF AN AGENT IN INDIA THEN THAT PROFIT IS ATTRIBUTABLE TO THE AGENT'S SERVICES. MEANING THEREBY BECAUSE OF THE CLOSE CONNECTION OF THE AGENT'S 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 REST 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 86.36% OF THE BADDI UNIT. MEANING THEREBY IF WE PRESUME 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 TO 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 TO 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 CERTAIN EXPENSES WHICH HAVE INCLUDED HEAD OFFICE EXPENSES, SUCH AS, MARKETING EXPENSES AND CORPORATE EXPENSES. MEANING THEREBY THE NET PROFIT OF THE BADDI UNIT WAS NOT MERELY PRODUCTION COST MINUS SALE PRICE, BUT THE DIFFERENCE OF SALE PRICE MINUS ALL GENERAL EXPENSES WHICH WERE ATTRIBUTABLE TO THE SALES. THEREFORE, IT IS NOT REASONABLE TO SAY THAT UNREASONABLY THE PROFIT WAS ESCALATED. THE DIFFERENCE BETWEEN THE TWO PERCENTAGES OF PROFIT, I.E. ABOUT 28% ( G.P. - N.P.) THUS REPRESENTED THE EXPENDITURE 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 WHILE COMPUTING THE PROFIT OF THE BADDI UNIT. ONCE THE ASSESSEE HAS ITSELF TAKEN INTO ACCOUNT THE RELATED EXPENSES TO ARRIVE AT THE NET PROFIT, THEN IT WAS NOT REASONABLE ON THE PART OF THE REVENUE DEPARTMENT TO FURTHER REALLOCATE THOSE EXPENSES BY CURTAILING THE PERCENTAGE OF ELIGIBLE PROFIT. 10.6 FROM THE SIDE OF THE REVENUE, LD. SPECIAL 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 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 FOLLOWS: 'SECTION 80IC(7) : THE PROVISIONS CONTAINED IN SUB-SECTION (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 TO THE INITIAL ASSESSMENT YEAR AND TO EVERY SUBSEQUENT ASSESSMENT YEAR UP TO AND INCLUDING THE ASSESSMENT YEAR FOR WHICH THE DETERMINATION IS TO BE MADE.' AS PER THIS SECTION, THE PROFITS OF AN ELIGIBLE UNDERTAKING SHALL BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. IN THIS SECTION AGAIN, THE STATUTE HAS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 62 USED THREE TERMS, I.E. 'PROFIT', 'BUSINESS' AND 'INCOME'. AS NARRATED HEREINABOVE AN 'INCOME' HAS A WIDER EXPRESSION THAN THE 'PROFIT'. LIKEWISE, 'BUSINESS' HAS ALSO A WIDER MEANING THAN THE WORD 'INCOME'. IN THE PRESENT CASE, MANUFACTURING OF PHARMACEUTICAL PRODUCTS IS DECLARED AS 'ELIGIBLE BUSINESS'. THEN THE QUESTION IS THAT WHAT IS THE PROFIT 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, THEN 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 SOURCES OF INCOME EXCEPT THE SALE PRICE AND OTHERWISE ALSO THE ASSESSEE 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 TRANSFERRING 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 SUCH CONCEPT OF SEGREGATION OF PROFIT. RATHER, WE HAVE SEEN THAT THE PROFIT OF AN UNDERTAKING IS ALWAYS COMPUTED AS A WHOLE BY TAKING INTO ACCOUNT THE SALE PRICE OF THE PRODUCT IN THE MARKET. 10.7 THE LD. AO HAS SUGGESTED THAT THE ASSESSEE SHOULD HAVE PASSED ENTRIES IN ITS BOOKS OF ACCOUNT BY RECORDING INTERNAL TRANSFER OF THE PRODUCT FROM BADDHI UNIT TO THE HEAD OFFICE MARKETING UNIT AND THAT TOO AT ARM'S LENGTH PRICE. FROM THE SIDE OF THE APPELLANT AN ARGUMENT WAS RAISED THAT WHAT SHOULD BE THE ARM'S LENGTH PRICE IN A SITUATION WHEN A PRODUCT IS ULTIMATELY TO BE SOLD IN THE OPEN MARKET. WHETHER THE AO IS SUGGESTING THAT AN IMAGINARY LINE BE DRAWN TO DETERMINE THE PROFIT OF THE BADDI UNIT AT A PARTICULAR STAGE OF TRANSFER OF PRODUCTS. DEFINITELY A DIFFICULTY WILL ARISE TO ARRIVE AT THE SALE PRICE AS SUGGESTED BY AO ON TRANSFER OF PRODUCT FROM BADDI TO HEAD OFFICE. WHAT COULD BE THE REASONABLE PROFIT WHICH IS TO BE CHARGED BY THE BADDI UNIT WILL THEN BE A SUBJECT OF DISPUTE AND SHALL BE AN ISSUE OF CONTROVERSY. 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 CONTENTION OF THE LD.AR IS THAT THE FACTS OF THE CASE HAVE EXPLICITLY DEMONSTRATED THAT THE GOODS MANUFACTURED AT BADDI UNIT WERE TRANSPORTED TO VARIOUS C&F AGENTS ACROSS THE COUNTRY FOR SALE PURPOSE. THEREFORE, THE 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 PROFIT IN CASE OF TRANSFER OF GOODS FROM ONE UNIT TO ANOTHER 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 TO 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 ASSESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS [OR SERVICES] AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BEEN MADE AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THAT DATE: PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSING OFFICER, THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELIGIBLE BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE ASSESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. 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 ELIGIBLE 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 SUCH GOODS, THEN ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 63 FOR THE PURPOSES OF THE DEDUCTION THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER HAS BEEN MADE AT THE MARKET VALUE OF SUCH GOODS AS ON THAT DATE. THOUGH THE SECTION HAS ITS OWN IMPORTANCE BUT THE AREA UNDER WHICH THIS SECTION OPERATES IS THAT WHERE ONE ELIGIBLE BUSINESS IS TRANSFERRED TO ANY OTHER BUSINESS. 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 IDENTICAL WITH THE 'ELIGIBLE PROFIT'. THE MATTER WE ARE DEALING IS NOT THE CASE WHERE BUSINESS AS A WHOLE IS TRANSFERRED. THIS IS A CASE WHERE MANUFACTURING PRODUCTS WERE SOLD THROUGH C&F IN THE MARKET. EVEN THIS IS NOT THE CASE THAT FIRST SALES WERE MADE BY THE BADDI UNIT IN FAVOUR OF THE HEAD OFFICE OR THE MARKETING UNIT AND THEREUPON THE SALES WERE EXECUTED BY THE HEAD OFFICE TO THE OPEN MARKET. ONCE IT WAS NOT SO, THEN THE FIXATION 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 DETERMINE THE FAIR MARKET VALUE OF SUCH GOODS OR TO COMPUTE THE ARM'S LENGTH PRICE OF SUCH GOODS. THE AO HAS SUGGESTED TWO THINGS; FIRST THAT THERE MUST BE INTER-CORPORATE TRANSFER, AND SECOND THAT THE TRANSFER SHOULD BE AS PER THE MARKET PRICE DETERMINED BY THE AO. BOTH THESE SUGGESTIONS ARE NOT PRACTICABLE. IF THESE TWO SUGGESTIONS ARE TO BE IMPLEMENTED, THEN A PANDORA BOX SHALL BE OPENED IN RESPECT OF THE DETERMINATION OF ARM'S LENGTH 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 INTERCORPORATE TRANSFER BUT SUBSCRIBE ACTUAL 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 CONSISTENT METHOD WAS ADOPTED KEEPING IN MIND THE SEVERAL FACTORS, DEPENDING UPON THE MARKET SITUATION, WE HAVE BEEN INFORMED. BUT IF THE ASSESSEE 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 IS THAT ON THE PRODUCTION COST WHAT SHOULD BE THE REASONABLE MARK-UP WHICH SHALL 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 THE PRODUCTION COST PLUS OVERHEADS WERE DEBITED AND ON THE OTHER SIDE OF THE P&L A/C SALE PRICE WAS CREDITED TO COMPUTED THE PROFIT. THERE ARE CERTAIN EXPENDITURE WHICH ARE NOTIONAL EXPENDITURE AND THERE ARE CERTAIN EXPENDITURE WHICH ARE SELF-GENERATED TO CREATE THE BRAND VALUE OF A PRODUCT. NATURALLY, THE 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 GENERATED 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 ANALYSIS, SO THAT THE MANAGEMENT MAY KEEP A CLOSE WATCH ON THE PERFORMANCE OF THE DIVERSIFIED BUSINESS LINES. THE AREAS OF DEMARCATION ARE BUSINESS SEGMENT, GEOGRAPHICAL SEGMENT, ETC. BUT AS FAR AS THE REVENUE OF AN ENTERPRISE IS CONCERNED WHILE SEGMENTATION IS REQUIRED, THEN REVENUE FROM SALES TO EXTERNAL CUSTOMERS ARE REPORTED IN THE SEGMENTED STATEMENT OF PROFIT AND LOSS. IN AN ACCOUNTING SYSTEM, AN INTRA-COMPANY SALE BETWEEN DIVISIONS OR UNITS IS NOT REGARDED AS REVENUE FOR THE PURPOSE OF SUCH FINANCIAL REPORTING. AS PER THE ACCOUNTING STANDARDS AN ENTERPRISE REVENUE IGNORES IN HOUSE-SALES THAT REPRESENT REVENUE TO ONE SEGMENT AND EXPENSE TO ANOTHER. IN THIS CONNECTION, THE AO HAS DISCUSSED THE HON'BLE SUPREME COURT DECISION PRONOUNCED IN THE CASE OF LIBERTY INDIA (SUPRA). THE AO WANTED TO JUSTIFY HIS ATTEMPT OF SEGMENTATION ON THE BASIS OF THE THEORY THAT ONLY THE 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 TWO TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT LINKED INCENTIVES AND PROFIT LINKED INCENTIVES. THE COURT WAS DISCUSSING CHAPTER VIA WHICH PROVIDES INCENTIVE IN THE FORM ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 64 OF TAX DEDUCTIONS TO THE CATEGORY OF 'PROFIT LINKED INCENTIVES'. THE INCENTIVE IS LINKED WITH GENERATION OF 'OPERATIONAL PROFIT'. THEREFORE, THE RESPECTED PARLIAMENT HAS CONFINED THE GRANT OF DEDUCTIONS ONLY DERIVED FROM ELIGIBLE BUSINESS. EACH ELIGIBLE BUSINESS CONSTITUTES A STAND ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFIT. THE COURT HAS SAID THAT BECAUSE OF THIS REASON THE CONCEPT OF 'SEGMENT REPORTING' WAS INTRODUCED IN INDIAN ACCOUNTING STANDARDS. LD. COUNSEL MR. SRIVASTAVA HAS ARGUED THAT THE DEDUCTION U/S.80IC IS A PROFIT LINKED INCENTIVE. ONLY THE OPERATIONAL PROFIT HAS TO BE CLAIMED FOR 80IC DEDUCTION. ACCORDING TO HIM, EACH OF THE ELIGIBLE BUSINESS CONSTITUTES A STAND ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFIT. FOR THE COMPUTATION OF PROFIT OF AN ELIGIBLE BUSINESS THE WORD USED IS 'DERIVED' IN SECTION 80IC WHICH IS A NARROWER CONNOTATION, AS COMPARED TO THE WORD 'ATTRIBUTABLE'. IN OTHER WORDS, BY USING THE 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 HON'BLE SUPREME COURT IS FINAL AND SHOULD NOT BE DISPUTED. HOWEVER, A JUDGEMENT IS TO BE CORRECTLY INTERPRETED. 10.11 FINALLY, ON THE QUESTION OF SEGMENTATION OF PROFIT A VEHEMENT RELIANCE WAS PLACED ON AN OLD PRECEDENT NAMELY AHMEDBHAI UMARBHAI& CO. (SUPRA). FACTS OF THAT CASE WAS THAT THE ASSESSEE HAD OWNED THREE MILLS AT BOMBAY AND ONE AT RAICHUR (HYDERABAD). THE ASSESSEE WAS MANUFACTURING OIL FROM GROUNDNUTS. THE PRODUCED AT RAICHUR, HYDERABAD IS PARTLY SOLD AT RAICHUR AND PARTLY IN BOMBAY. THE QUESTION WAS IN RESPECT OF THE LIABILITY UNDER EXCESS PROFIT TAX ACT (EPT ACT) FOR THE OIL MANUFACTURED AT RAICHUR BUT SOLD IN BOMBAY. THE CONTROVERSY WAS THAT THE ASSESSEE HAD CONTENDED THAT A PART OF THE PROFITS DERIVED FROM SALES IN BRITISH INDIA OF THE OIL MANUFACTURED AT RAICHUR WAS ATTRIBUTABLE TO THE MANUFACTURING OPERATIONS AT RAICHUR WHICH ARE AN ESSENTIAL PART OF THEIR BUSINESS AND THAT SUCH PROFIT MUST BE EXCLUDED FROM THE ASSESSMENT UNDER EPT 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 WHICH ACCRUES OR ARISES OR WHICH IS DEEMED TO ACCRUE OR ARISE TO HIM IN BRITISH INDIA DURING THE ACCOUNTING YEAR. IF SEC. 5 OF THE ACT STOPPED SHORT 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, WITHIN BRITISH INDIA OR WITHOUT BRITISH INDIA, WOULD BE CHARGEABLE TO EXCESS PROFITS TAX JUST IN THE SAME WAY AS IT CHARGEABLE TO INCOME-TAX UNDER THE INDIAN IT ACT. THE WHOLE OF HIS INCOME ARISING IN RAICHUR HAS LEGITIMATELY BEEN TAXED UNDER THAT ACT. IN THAT DECISION ALSO, THE WORD 'BUSINESS' WAS DEFINED, I.E. BUSINESS INCLUDES ANY TRADE, COMMERCE OR MANUFACTURE. IT HAS ALSO BEEN SAID THAT ALL BUSINESSES, TO WHICH THE SAID LAW APPLIED, CARRIED ON BY THE SAME PERSON SHALL BE TREATED AS ONE BUSINESS FOR THE PURPOSE OF THE SAID ACT. THE QUESTION WAS ABOUT THE MANUFACTURING ACTIVITY AND IT WAS CONTENDED THAT IF A MAN IS A MANUFACTURER AS WELL AS A SELLER OF GOODS, THEN IN HIS CASE THE TERM 'PART OF A BUSINESS' MEANS CARRYING ON ALL THE TWO ACTIVITIES TOGETHER AND THEREFORE CONSTITUTE THE PART OF THE BUSINESS. ONE OF THE HON'BLE JUDGES HAS SAID THAT THE ACTIVITIES WHICH THE ASSESSEE CARRIED ON AT RAICHUR WAS CERTAINLY A BUSINESS OF THE ASSESSEE. ON ONE 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 TRADING 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 ESTABLISHED 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 PROFITS AROSE BY REASON OF SALE. THE PROFIT WOULD ONLY BE ASCRIBED TO THE BUSINESS OF MANUFACTURE AND WOULD ARISE AT THE MILL PREMISES. MERELY BECAUSE A MILL OWNER HAS STARTED ANOTHER BUSINESS ORGANIZATION IN THE NATURE OF SALE DEPOT, THAT CANNOT WHOLLY DEPRIVE THE BUSINESS OF MANUFACTURE OF ITS PROFITS, THOUGH THERE MAY HAVE TO BE APPORTIONMENT IN SUCH A CASE BETWEEN THE BUSINESS OF MANUFACTURE AND BUSINESS OF SHOP KEEPING. THE QUESTION WHICH WAS ANSWERED WAS THAT WHETHER IN RESPECT OF THE MANUFACTURING BUSINESS OF THE ASSESSEE IN RAICHUR, PROFITS ACCRUE OR ARISE AND IF SO, AT WHAT PLACE. ONE OF THE HON'BLE JUDGES HAS OPINED THAT THE MANUFACTURING ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 65 PROFIT ARISE AT THE PLACE OF MANUFACTURE AND THAT THE SALE PROFITS ARISE AT THE PLACE OF SALE AND THAT THE APPORTIONMENT HAS TO BE MADE BETWEEN THE TWO, THOUGH THE PLACE OF RECEIPTS AND REALIZATION OF THE PROFITS IS THE PLACE WHERE THE SALES ARE MADE. SIMULTANEOUSLY IT WAS ALSO OPINED THAT THE MANUFACTURING PROFIT COULD NOT BE SAID TO HAVE ACCRUED AT THAT PLACE BECAUSE THERE WAS NOTHING DONE FROM WHICH THE PROFITS COULD ACCRUE. THERE WAS AN INTERESTING CONTRADICTION BECAUSE OF THE 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 THAT THE REVENUE OF THE COMPANY ARE DERIVED FROM A SERIES OF OPERATION, INCLUDING THE PURCHASE OF RAW-MATERIALS OR PARTLY MANUFACTURED ARTICLES, COMPLETELY MANUFACTURING ITS PRODUCTS AND TRANSPORTING AND SELLING 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 HON'BLE SUPREME COURT AS CITED BY THE SPECIAL COUNSEL MR. SRIVASTAVA. AT THE OUTSET, WE WANT TO PLACE ON RECORD THAT THE ENTIRE ISSUE BEFORE THE HON'BLE 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 ORDER 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 ACCRUE 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 PART OF THE BUSINESS SHALL, FOR ALL THE PURPOSES OF THIS ACT, BE DEEMED TO BE A SEPARATE BUSINESS.' THE POINT FOR CONSIDERATION WAS THAT WHETHER ON THOSE FACTS THE THIRD PROVISO TO SECTION 5 COULD BE INVOKED. THE MANUFACTURING ACTIVITY OF MAKING GROUND-NUT OIL WAS CARRIED OUT AT RAICHUR (HYDERABAD) WHICH WAS TREATED AS A SEPARATE BUSINESS WITHIN THE MEANING OF THE SAID PROVISO AND THEREUPON IT WAS CLAIMED AS EXEMPT BEING CARRIED OUT WITHIN THE TERRITORIAL JURISDICTION OF INDIAN STATE. SO THE COURT HAS OBSERVED THAT TO SUCCEED IN THEIR CLAIM, IT IS INCUMBENT UPON THE ASSESSEE 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 FOUND EXIST AND THEN ONLY THE BUSINESS COULD BE TREATED AS A SEPARATE BUSINESS. HOWEVER, THE SAID PROVISO HAS PROPOUNDED ONLY DEEMING PROVISIONS, AS IS APPARENT FROM THE LANGUAGE OF THE SECTION ITSELF. FOR THE PURPOSE 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 HON'BLE COURT HAS DISCUSSED THE PROBLEM WITH REFERENCE TO CERTAIN DECISIONS OF ENGLISH COURTS AND THEN MADE AN OBSERVATION THAT IT HAD BEEN HELD THAT IF SEPARATION IS POSSIBLE IN SUCH CASES, THE PROPER COURSE IS TO FOLLOW THAT SEVER THE PROFITS OF THE TWO BUSINESSES AND ASSESS ACCORDINGLY. THE RESULT OF THE DISCUSSION WAS THAT THE PROFITS OF THE TWO BUSINESSES WERE DIRECTED TO BE APPORTIONED. SIMULTANEOUSLY, THE HON'BLE COURT HAS ALSO MADE AN OBSERVATION, QUOTE 'IT IS TRUE THAT THESE ARE CASES WHERE SEVERAL BUSINESSES WERE AMALGAMATED AND CARRIED ON TOGETHER, OR MORE OF WHICH 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 BUSINESS IS DISTINCT AND SEPARATE FROM THE OTHER PARTS AND IS CAPABLE OF EARNING PROFITS SEPARATELY.' UNQUOTE. THE HON'BLE JUDGE WAS THEREFORE VERY MUCH CONCERN ABOUT THE FACT THAT THE BUSINESS SHOULD BE CAPABLE OF EARNING PROFITS SEPARATELY. RATHER, IN THE SUBSEQUENT PARAS IT WAS FURTHER MADE CLEAR THAT THE MANUFACTURING PROFIT COULD BE SUB-DIVIDED ONLY IF THERE WAS NO INSUPERABLE/CHALLENGING DIFFICULTY IN MAKING SUCH APPORTIONMENT. A POSSIBILITY WAS THEREFORE DISCUSSED THAT THERE COULD BE APPORTIONMENT OF THE NET PROFIT THAT ACCRUE TO THE BUSINESS OF THE ASSESSEE AND ONE PORTION OF IT COULD BE ALLOTTED TO THAT PART OF THE BUSINESS WHICH RELATES TO THE MANUFACTURE OF THE SAID COMMODITY WHICH WAS ULTIMATELY SOLD IN THE MARKET. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 66 THE RAICHUR FACTORY CERTAINLY HAS BUSINESS CONNECTION IN BRITISH INDIA FOR A PART OF THE OIL MANUFACTURED BY IT IS SOLD THROUGH THE BOMBAY ESTABLISHMENT OF THE ASSESSEE. THAT ALL THE OPERATIONS 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 THAT 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 IS CLOSED. PROFITS OF A BUSINESS ARE UNDOUBTEDLY NOT 'RECEIVED' TILL THE COMMODITY ARE SOLD AND THEY ARE ASCERTAINED ONLY WHEN THE SALE TAKE PLACE. THIS ASPECT HAS NOT BEEN DOUBTED OR CHALLENGED EVEN IN THE SAID ORDER. BUT IN THE SAID ORDER THE QUESTION WAS THAT IF A PART OF A BUSINESS CONSISTED OF MANUFACTURING ACTIVITY AND THAT ACTIVITY CAN BE SEGREGATED SO AS TO COMPUTE THE YIELD PROFIT, THEN WHETHER SUCH PROFIT ACCRUE ONLY AT THE PLACE WHERE THE MANUFACTURE ARE SOLD. TO ANSWER THIS QUESTION, THE HON'BLE COURT HAS COMMENTED IN PARA-49 THAT THERE WAS NO EXPRESS DIRECTION AS TO APPORTIONMENT IN THE THIRD PROVISO TO SECTION-5 OF EPT ACT. THE OPINION EXPRESSED WAS VERY SPECIFIC THAT A PROFIT CAN ACCRUE IN RESPECT TO THAT PART OF A BUSINESS ONLY WHEN APPORTIONMENT IS POSSIBLE. THE HON'BLE COURT HAS SAID THAT ONLY ON THE SAID ASSUMPTION THAT APPORTIONMENT WAS POSSIBLE THE SAID PROVISO WAS BASED UPON THAT PRESUMPTION ONLY. IF NO APPORTIONMENT CAN BE MADE IN RESPECT OF THE PROCESS OF A PARTICULAR BUSINESS, THEN THAT WILL NOT BE CONSIDERED TO BE A PART OF THE BUSINESS AT ALL AND HELD THAT THE PROVISO WILL NOT APPLY. IT WAS CONCLUDED THAT THE PRINCIPLE OF APPORTIONMENT WAS IMPLIED THEREIN. AFTER THIS DETAILED DISCUSSION, WE THUS ARRIVE AT THE CONCLUSION THAT THE PRINCIPLE OF APPORTIONMENT WAS THE CRITERIA FOR SEGREGATING THE MANUFACTURING PROFIT IF IT WAS FEASIBLE TO DO SO. AS AGAINST THAT IN THE PRESENT CASE THE ASSESSEE HAS COMPUTED THE PROFIT OF THE BADDI UNIT ON THE BASIS OF THE WELL ACCEPTED PRINCIPLE OF ACCOUNTANCY THAT A PROFIT IS ACCRUED WHERE A TRANSACTION IS CLOSED, MEANING THEREBY 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 AO'S PROPOSITION OF SEGMENTATION OF ELIGIBLE PROFIT OF THE MANUFACTURING UNIT WAS NOT ALTOGETHER MEANINGLESS. THIS APPROACH OF THE AO CANNOT BE BRUSHED ASIDE ON THE FACT OF IT. BUT AT PRESENT, WHEN THE METHOD OF ACCOUNTING AS APPLICABLE UNDER THE STATUTE, DO NOT SUGGEST SUCH SEGREGATION OR BIFURCATION, THEN IT IS NOT FAIR TO DRAW AN IMAGINARY LINE TO COMPUTE A SEPARATE PROFIT OF THE BADDI UNIT. THE BADDI UNIT HAS IN FACT COMPUTED ITS PROFIT AS PER A SEPARATELY MAINTAINED BOOKS OF ACCOUNT OF THE ELIGIBLE MANUFACTURING ACTIVITY. 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 MANUFACTURING-CUM-SALE BUSINESS ACTIVITY. IF THE STATUTE WANTED TO DRAW SUCH LINE OF SEGREGATION BETWEEN THE MANUFACTURING ACTIVITY AND THE SALE ACTIVITY, THEN THE STATUTE SHOULD HAVE MADE A SPECIFIC PROVISION OF SUCH DEMARCATION. BUT AT PRESENT THE LEGAL STATUS IS THAT THE STATUTE HAS ONLY CHOSEN TO GIVE THE BENEFIT TO 'ANY BUSINESS OF DRUG MANUFACTURING ACTIVITY' WHICH IS INCURRING EXPENDITURE ON RESEARCH ACTIVITY IS ELIGIBLE FOR THIS PRESCRIBED WEIGHTED DEDUCTION. THE SEGREGATION AS SUGGESTED BY THE AO HAS FIRST TO BE BROUGHT INTO THE STATUTE AND THEN TO BE IMPLEMENTED. WITHOUT SUCH LAW, IN OUR CONSIDERED OPINION, 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 THE 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 STAND ALONE BASIS THROUGH WHICH THE ONLY SOURCE OF INCOME/PROFIT WAS THE MANUFACTURING OF THE SPECIFIED PRODUCTS. WE THEREFORE HOLD THAT THE AO'S ACTION OF SEGREGATION WAS MERELY BASED UPON A HYPOTHESIS, HENCE HEREBY REJECTED. THESE TWO GROUNDS NOS.6 & 7 ARE ALLOWED.' WE HAVE CAREFULLY PERUSED THIS DECISION AND NOTE THAT THE CONTROVERSY IN THIS GROUND OF APPEAL WITH RESPECT TO APPLICABILITY OF SECTION 80 IA (8) OF THE ACT, ON MARKETING AND OTHER SELLING DISTRIBUTION AS WELL AS RESEARCH AND DEVELOPMENT SERVICES PROVIDED BY THE UNDERTAKING AS A WHOLE TO THE ELIGIBLE INDUSTRIAL UNDERTAKING AT THE COST OR MARKET RATE FOR WORKING OUT THE ELIGIBLE PROFIT FOR DEDUCTION, HAS BEEN DECIDED. LD. DR COULD NOT POINT OUT ANY OTHER CONTRARY JUDGMENT TO THE DECISION CITED BY THE LD. AR. THEREFORE, WE RESPECTFULLY FOLLOWING THE ABOVE DECISION OF COORDINATE BENCH HOLD THAT PROVISIONS OF SECTION 80IA(8) OF THE ACT DOES NOT APPLY TO THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 67 ASSESSEE ON TRANSFER OF SERVICES OF MARKETING DIVISION OF THE COMPANY TO THE ELIGIBLE INDUSTRIAL UNDERTAKING WHOSE PROFITS ARE CLAIMED AS DEDUCTIBLE. 88. FURTHER LD. AO HAS ALSO GIVEN ONE OF REASON THAT THE CLAIM OF THE ASSESSEE IS NOT ADMISSIBLE BECAUSE OF THE REASON THAT ALONG WITH FORM NO.10CCB ASSESSEE WAS REQUIRED TO FILE THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE ELIGIBLE UNDERTAKING. IT IS ADMITTED FACT THAT ASSESSEE DID NOT FILE BALANCE SHEET ALONG WITH FORM NO.10CCB BUT HAS FILED PROFIT AND LOSS ACCOMPANIED WITH THAT AUDIT REPORT. SUBSEQUENTLY, BEFORE LD. DRP, THOSE WERE FILED AND WERE AVAILABLE WITH LD. DRP AS WELL AS WITH AO AT THE TIME OF FRAMING FINAL ASSESSMENT ORDER. HENCE IT IS CONTENDED BY THE LD. AR THAT SUBSTANTIAL COMPLIANCES HAS BEEN MADE BY THE ASSESSEE BY FILING THE PROFIT AND LOSS ACCOUNT AND COMPLETE COMPLIANCE BEFORE PASSING OF THE FINAL ASSESSMENT ORDER BY FILING THE BALANCE SHEET. HENCE, LD. AR CONTENDED THAT IF THE FULL DETAILS ARE AVAILABLE WITH THE AO BEFORE PASSING OF ASSESSMENT ORDER MERELY BECAUSE THERE IS SOME TECHNICAL DEFAULT DEDUCTION CANNOT BE DENIED. THIS ARGUMENT WAS EXAMINED AND IT IS FOUND THAT ASSESSEE HAS SUBMITTED THE PROFIT AND LOSS ACCOUNT ALONG WITH FORM NO.10CCB AND LATER ON ALSO THE BALANCE SHEET BEFORE FINALIZATION OF FINAL ASSESSMENT ORDER I.E. THOSE WERE FILED BEFORE THE DRP, WE ARE OF THE VIEW THAT ASSESSEE CANNOT BE DENIED THE DEDUCTION MERELY FOR THIS REASONS. FURTHER, THE BALANCE SHEET FILED LATER ON BY THE ASSESSEE ALSO DID NOT CONTAIN ANY ERROR OR ANY FACT, WHICH COULD HAVE SHOWN THAT DEDUCTION CLAIMED BY THE ASSESSEE, IS ERRONEOUS. IT IS ALSO IMPORTANT TO NOTE THAT NO ADVERSE REMARK IS MADE EITHER BY THE LD. AO OR BY LD. DRP ON THE BALANCE SHEET OF THE ELIGIBLE UNDERTAKINGS THOUGH IT WERE AVAILABLE BEFORE THEM FOR PROPER VERIFICATION AND EXAMINATION. LD. AR OF THE APPELLANT HAS SUBMITTED A PLETHORA OF JUDICIAL PRECEDENTS COVERING THIS ISSUE ON THIS ISSUE WE REFER TO THE DECISION OF HONOURABLE DELHI HIGH COURT ON THIS ISSUE RENDERED IN CASE OF AXIS COMPUTER INDIA (P.) LTD. (SUPRA) WHERE IN IT IS HELD THAT '2. THIS COURT HAS ALREADY INTERPRETED THE LATTER PROVISIONS AND HAS HELD THE SAME TO BE DIRECTORY AND NOT MANDATORY. THE CONTENTION OF THE REVENUE WAS THAT UNLESS AND UNTIL THE AUDIT REPORT IS FILED ALONG WITH THE RETURN, THE BENEFIT OF SECTION 10A COULD NOT BE AVAILABLE TO THE ASSESSEE. RECENTLY, WE HAVE CONSIDERED THE IDENTICAL PROVISIONS OF SECTION 80-IA(7) IN THE CASE OF CIT V. CONTIMETERS ELECTRICALS (P.) LTD. [IT APPEAL NO. 1366 OF 2008, DECIDED ON 2-12-2008] AND HELD THAT AS LONG AS THE AUDIT REPORT IS FILED BEFORE THE FRAMING OF THE ASSESSMENT, THE PROVISIONS OF SECTION 80-IA(7) WOULD BE COMPLIED WITH INASMUCH AS THE SAME ARE DIRECTORY AND NOT MANDATORY. A SIMILAR VIEW WOULD HAVE TO BE TAKEN IN THE PRESENT CASE ALSO INASMUCH AS THE PROVISIONS ARE THE SAME. CONSEQUENTLY, WE DO NOT FIND ANY FAULT WITH THE CONCLUSIONS ARRIVED AT BY THE TRIBUNAL. NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDERATION. THE APPEAL IS DISMISSED.' [UNDERLINE SUPPLIED BY US] IN THIS CASE, APPELLANT HAS ALREADY FILED THE AUDIT REPORT AND THE PROFIT AND LOSS ACCOUNT OF THE UNITS HOWEVER; THE PROFIT AND LOSS ACCOUNT WAS FILED BEFORE LD. DRP BUT IN ANY WAY AVAILABLE WITH LD. DRP AND LD. AO AT THE TIME OF FINALIZATION OF THE ASSESSMENT ORDER. IN THE DECISION CITED BEFORE US HONOURABLEDELHI HIGH COURT HAS HELD THAT EVEN IF THE AUDIT REPORT IS NOT FILED THEN ALSO THE DEDUCTION CANNOT BE DENIED IF SAME IS FILED BEFORE FINALIZATION OF ASSESSMENT. THEREFORE CASE OF THE ASSESSEE STANDS ON THE BETTER FOOTING. NO OTHER CONTRARY DECISION WAS PUT BEFORE US BY REVENUE. HENCE, WE DO NOT WISH TO AGREE TO THE CONTENTION OF THE REVENUE THAT AS THE BALANCE SHEETS WERE NOT FILED BY THE ASSESSEE OF THOSE ELIGIBLE INDUSTRIAL UNDERTAKING WHOLE OF THE DEDUCTION IS NOT ALLOWABLE TO THE ASSESSEE. 89. COMING TO THE COMPUTATION OF THE ELIGIBLE INCOME OF THE ASSESSEE FOR ALL THE ELIGIBLE UNITS, LD. AO COULD NOT POINT OUT ANY ERROR EXCEPT DEALT WITH BY US WHICH ARE NOT ON THE ISSUE OF FACTS OF THE CASE BUT ALL OF THEM ARE ON LEGAL GROUNDS, WHICH WE HAVE ANSWERED IN PRECEDING PARAGRAPHS OF THIS ORDER. IN VIEW OF CLAIM OF THE ASSESSEE SUPPORTED BY THE AUDITED CERTIFICATE AS PROVIDE U/S 80IA(7) OF THE ACT READ WITH RULE 18BBB AND SUPPORTED BY THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEETS OF THE ASSESSEE, ALLOCATION OF ALL THE EXPENSES BASED ON THE ACCEPTED FORMULA WHICH THE ASSESSEE IS APPLYING FOR LAST SEVERAL YEARS AND WHICH HAS ALSO NOT BEEN DISPUTED BY THE LD. AO IN PAST YEARS AND ALLOCATION KEY OF 'SALES' OF THE UNITS IS ALSO NOT DISPUTED, IT DESERVES TO BE ACCEPTED. WE ARE ALSO OF THE VIEW THAT ALLOCATION OF THE EXPENSES ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 68 ARE ON RATIONAL BASIS AND ACCEPTED BY REVENUE IN EARLIER YEARS WITH RESPECT TO ELIGIBLE UNITS CLAIMING DEDUCTION FOR THOSE YEARS. THEREFORE, ALONG WITH THE OLD UNITS I.E. GOA PLANT AND NEW TABLET PLANT -I OF THE ASSESSEE ALONG WITH THE NEW TABLET PLANT NO -II AND III AND NEW SCG PLANT DEDUCTION U/S 80IB AND 80IC IS ALLOWABLE AS COMPUTED BY THE ASSESSEE. 90. NOW WE COME TO THE LAST GROUND OF OBJECTION RAISED BY THE REVENUE THAT THIS MATTER OF EXAMINATION OF CLAIM OF THE ASSESSEE SHOULD BE SET ASIDE BACK TO THE FILE OF LD. AO FOR FRESH VERIFICATION AND FOR THIS LD. DR. RELIED ON THE DECISION OF COORDINATE BENCH AMARNATH REDDY (SUPRA). AGAINST THIS LD. AR RAISED THE OBJECTION THAT THIS ISSUE SHOULD NOT BE SET ASIDE AS ONLY LAW POINTS ARE INVOLVED IN THIS ISSUE AND NO FURTHER FACTS ARE REQUIRED TO BE EXAMINED. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS ON THIS ISSUE. WE HAVE NOTED THE ABOVE CITED DECISION IN ASSTT. CIT V. AMARNATH REDDY WHERE IN IT IS HELD AS UNDER : '6. NOW, LET US EXAMINE WHETHER THE PLEA SOUGHT TO BE RAISED BY THE LD. D.R. CAN BE ADMITTED BY THE TRIBUNAL OR NOT. THOUGH SEVERAL AUTHORITIES HAVE BEEN CITED IN THE COURSE OF HEARING, THE BASIC JUDGMENT IS THAT IN THE CASE OF HUKUMCHAND MILLS LTD. (SUPRA). IN THAT CASE, IN ORDER TO ARRIVE AT THE CORRECT WRITTEN DOWN VALUE OF THE ASSETS, THE TRIBUNAL PERMITTED THE DEPARTMENT TO RAISE A PLEA TO FIND OUT WHETHER THE ASSESSEE WAS ALLOWED ANY DEPRECIATION UNDER AN ENACTMENT WHICH WAS IN FORCE EARLIER, I.E., BEFORE THE INDIAN INCOME-TAX ACT WAS MADE APPLICABLE TO THE ASSESSEE. THE COURT HELD THAT THE SUBJECT-MATTER OF THE APPEAL BEFORE THE TRIBUNAL WAS THE QUESTION AS TO WHAT SHOULD BE THE PROPER WRITTEN DOWN VALUE OF THE ASSETS FOR CALCULATING THE DEPRECIATION ALLOWANCE UNDER THE INDIAN INCOME-TAX ACT. IT WAS CERTAINLY OPEN TO THE DEPARTMENT, IN THE APPEAL FILED BY THE ASSESSEE BEFORE THE TRIBUNAL, TO SUPPORT THE FINDING OF THE AAC WITH REGARD TO THE WRITTEN DOWN VALUE ON ANY OF THE GROUNDS DECIDED AGAINST IT. IN THE CASE BEFORE THE SUPREME COURT, EARLIER ENACTMENT WAS TO BE REFERRED TO, WHEREAS IN THE PRESENT CASE ONLY A DIFFERENT PROVISION OF THE SAME ENACTMENT HAS TO BE CONSIDERED. THEREFORE, I SEE NO REASON AS TO WHY THE PLEA OF THE LD. D.R. CANNOT BE ACCEPTED. IN THE PRESENT CASE, OF COURSE, THE DEPARTMENT IS THE APPELLANT UNLIKE IN THE CASE OF HUKUMCHAND MILLS LTD. (SUPRA). BUT, IN MY VIEW, IT MAKES NO DIFFERENCE. THE DEPARTMENT IS AGGRIEVED BY THE DELETION OF DISALLOWANCE OF EXPENDITURE WHICH DISALLOWANCE WAS MADE UNDER ONE PARTICULAR PROVISION. THE SUBJECT-MATTER OF THE APPEAL WAS WHETHER THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS ALLOWABLE OR NOT. IF IT WAS NOT DISALLOWABLE UNDER ONE PARTICULAR PROVISION BUT IS DISALLOWABLE UNDER ANY OTHER PROVISION, THE SUBJECT-MATTER, VIZ., THE ALLOWABILITY OF EXPENDITURE REMAINS THE SAME. THERE ARE A NUMBER OF DECISIONS IN WHICH IT HAS BEEN HELD THAT THE TRIBUNAL CAN BASE ITS DECISION ON A GROUND NOT RAISED BEFORE THE APPELLATE AUTHORITY OR IN THE GROUNDS OF APPEAL BEFORE IT BUT IS NOT BOUND TO DO SO. IT IS NOT PRECLUDED FROM CONSIDERING A POINT WHICH ARISES OUT OF THE APPEAL MERELY BECAUSE SUCH POINT HAD NOT BEEN RAISED OR URGED BY EITHER PARTY AT THE EARLIER STAGE OF THE PROCEEDINGS. SOME OF THESE DECISIONS, ONLY TO NAME A FEW, ARE CIT V. INDIAN EXPRESS (MADURAI) (P.) LTD. [1983] 140 ITR 705 (MAD.), CIT V. AC PAUL [1983] 142 ITR 811 (MAD.) AND CIT V. ICE SUPPLIERS CORPN. [1967] 64 ITR 195 (PUNJ.). IN FACT, THE JURISDICTIONAL HIGH COURT HAS EXPLAINED THE RATIO IN THE CASE OF HUKUMCHAND MILLS LTD. (SUPRA) VERY ELABORATELY. IT HAS PARTICULARLY EXPLAINED THE FOLLOWING OBSERVATION OF THE SUPREME COURT IN THE CASE OF HUKUMCHAND MILLS LTD. (SUPRA) : 'THE TRIBUNAL HAS, HOWEVER, DISCRETION NOT TO ADMIT ANY FRESH PLEA BEING PUT FORWARD WHEN IT WOULD INVOLVE INVESTIGATION OF FACTS.' EXPLAINING THE ABOVE OBSERVATION, THE MADRAS HIGH COURT IN THE CASE OF N.P. SARASWATHIAMMAL (SUPRA) OBSERVED AS FOLLOWS AT PAGE 23 OF THE REPORT : 'WE DO NOT REGARD THE LAST OBSERVATION AS A FETTER ON THE TRIBUNAL'S JURISDICTION TO ADMIT A NEW PLEA. FOR, THE POWER TO LISTEN TO A NEW CONTENTION AND DECIDE THE APPEAL ON THAT BASIS HAS BEEN SPELLED OUT BY THE SUPREME COURT FROM THE TERMS OF THE STATUTE. THE EXERCISE OF THAT POWER DOES NOT DEPEND ON THE PRESENCE OF ANY OTHER FACTOR, EXCEPTING THAT THE NEW PLEA COMES FROM A PARTY TO THE APPEAL. EVEN IN A CASE WHERE FRESH FACTS ARE CALLED FOR TO DECIDE THE NEW PLEA, THE TRIBUNAL WOULD HAVE JURISDICTION TO ENTERTAIN THAT PLEA. HOW THE TRIBUNAL WISHES TO GET AT THE RELEVANT FACTS IN ORDER TO DECIDE THE NEW POINT MAY BE QUITE A DIFFERENT THING. THE TRIBUNAL ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 69 MAY EITHER REMAND THE MATTER FOR THE PURPOSE, OR PROCEED TO INVESTIGATE THE FACTS THEMSELVES. IN THIS PART OF THE DECISION-MAKING ALONE, THERE IS SCOPE FOR THE PLAY OF THE TRIBUNAL'S DISCRETION. AS TO THE VERY POWER TO ENTERTAIN A NEW PLEA, THAT IS NOT TO BE RULED OUT, MERELY BECAUSE A CONSIDERATION THEREOF WOULD CALL FOR FURTHER FACTS TO BE GONE INTO. IN HUKUMCHAND MILLS' DECISION [1967] 63 ITR 232, THE SUPREME COURT LAID DOWN NO FETTER ON THE TRIBUNAL'S POWERS. THAT CASE, INDEED, WAS A CASE WHERE THE NEW PLEA RAISED BY THE DEPARTMENT BEFORE THE TRIBUNAL COULD NOT BE CONSIDERED WITHOUT A FURTHER INVESTIGATION INTO FACTS. NEVERTHELESS, THE TRIBUNAL ENTERTAINED THE PLEA, AND REMITTED THE CASE TO THE ITO FOR THE ASCERTAINMENT OF THE RELEVANT FACTS. THE SUPREME COURT, IN THEIR DECISION UPHELD NOT ONLY THE DEPARTMENT'S NEW PLEA, BUT ALSO THE TRIBUNAL'S ORDER OF REMAND BASED ON THE NEW PLEA.' IN THE LIGHT OF THE ABOVE DISCUSSION, I AGREE WITH THE VIEW TAKEN BY THE LD. J.M. TO HOLD THAT THE PLEA RAISED BY THE LD. D.R. IS TO BE ACCEPTED AND THE MATTER IS TO BE REMANDED TO THE ASSESSING OFFICER FOR CONSIDERING THE CLAIM OF THE ASSESSEE FOR CLAIMING DEDUCTION OF UNACCOUNTED EXPENDITURE UNDER SECTION 37(1) OF THE ACT.' IN THE ABOVE CASE THE ISSUE AS SET ASIDE TO THE FILE OF THE LD. AO TO DECIDE AND EXAMINE THE FACTS IN THE COURSE OF HEARING BEFORE THE TRIBUNAL, THE REVENUE RAISED A FRESH PLEA THAT THE ASSESSING OFFICER SHOULD HAVE INVOKED THE PROVISIONS OF SECTION 37(1) AND REQUESTED THE BENCH TO REMIT BACK THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO CONSIDER THE ALLOWABILITY OR OTHERWISE OF THE EXPENDITURE UNDER SECTION 37(1). WE DO NOT FIND THAT ANY SUCH FRESH PLEA IS RAISED BY THE REVENUE DURING THE COURSE OF HEARING WHICH IS NOT TAKEN BY THE LD. AO OR LD. DRP. ON FACTUAL POINTS, NOTHING HAS BEEN ALLEGED BY REVENUE, WHICH REMAINS TO BE EXAMINED, WHICH IS BROUGHT TO OUR NOTICE. IN ABSENCE OF ANY FRESH PLEA BY THE REVENUE, WE ARE AFRAID THAT WE CANNOT AGREE WITH THE CONTENTION OF REVENUE. OUR THIS REASON ALSO GETS THE SUPPORT FROM THE DECISION OF COORDINATE BENCH IN ZUARI LEASING & FINANCE CORPN. LTD. V. ITO [2008] 112 ITD 205 (DELHI) (TM) WHERE IN ITS HELD THAT : '10. IT IS CLEAR FROM ABOVE THAT PRIMARY POWER, RATHER OBLIGATION OF THE TRIBUNAL, IS TO DISPOSE OF THE APPEAL ON MERITS. THE INCIDENTAL POWER TO REMAND, IS ONLY AN EXCEPTION AND SHOULD BE SPARINGLY USED WHEN IT IS NOT POSSIBLE TO DISPOSE OF THE APPEAL FOR WANT OF RELEVANT EVIDENCE, LACK OF FINDING OR INVESTIGATION WARRANTED BY THE CIRCUMSTANCES OF THE CASE. REMAND IN A CASUAL MANNER AND FOR THE SAKE OF REMAND ONLY OR AS A SHORT CUT, IS TOTALLY PROHIBITED. IT HAS TO BE BORNE IN MIND THAT LITIGANTS IN OUR COUNTRY HAVE TO WAIT FOR LONG TO HAVE FRUIT OF LEGAL ACTION AND EXPECT THE TRIBUNAL TO DECIDE ON MERIT. IT IS, THEREFORE, ALL THE MORE NECESSARY THAT MATTER SHOULD BE DECIDED ON MERIT WITHOUT ALLOWING ONE OF THE PARTIES BEFORE THE TRIBUNAL TO HAVE ANOTHER INNING, PARTICULARLY WHEN SUCH PARTY HAD FULL OPPORTUNITY TO ESTABLISH ITS CASE. UNNECESSARY REMANDS, WHEN RELEVANT EVIDENCE IS ON RECORD, BELIES LITIGANT'S LEGITIMATE EXPECTATIONS AND IS TO BE DEPRECATED. HAVING REGARD TO AFORESAID PRINCIPLE, IT IS NECESSARY TO LOOK INTO RECORDS TO SEE WHETHER THERE IS SUFFICIENT MATERIAL ON RECORD TO DISPOSE OF THE ISSUE ON MERIT AND THERE IS NO NEED TO REMAND THE ISSUE TO PROVIDE A FRESH INNING TO THE REVENUE.' THEREFORE, IN VIEW OF THE ABOVE DECISION AND IN ABSENCE OF ANY FRESH PLEA BY ANY OF THE PARTIES WE DONOT INTEND TO AGREE WITH THE REQUEST OF REVENUE TO SET ASIDE THIS ISSUE TO THE FILE OF LD. AO. 91. IN VIEW OF ABOVE GROUND NO. 12 OF THE APPEAL OF THE ASSESSEE WITH RESPECT TO CLAIM OF DEDUCTION U/S 80IC AND 80IB OF THE ACT AMOUNTING TO RS1,36,68,21,506/- IS ALLOWED. 48.1 IN VIEW OF THE ABOVE, WE NOTE THAT THE ISSUE AS DISCUSSED ABOVE IS COVERED BY THE ORDER OF DELHI TRIBUNAL. MOREOVER, WE ALSO NOTE THAT THE LD. DRP HAS ALSO RELIED ON THE ORDER OF ITS PREDECESSOR WHICH HAS BEEN REVERSED BY THE ITAT AS DISCUSSED ABOVE. IN VIEW OF THE ABOVE DISCUSSION AND FOLLOWING THE ORDER OF THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 70 ITAT DELHI WHERE THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 80IB/80IC WAS ALLOWED BASED ON REASONING AS DISCUSSED ABOVE. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 49. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 9 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ADDITION MADE BY AO FOR THE PAYMENT MADE BY THE ASSESSEE TO TEVA PHARMACEUTICALS, ISRAEL FOR RS. 18,04,07,24,038/- BY TREATING THE PAYMENT MADE BY THE ASSESSEE TO TEVA PHARMACEUTICALS AS CLANDESTINE PAYMENT . 50. THERE IS A MEDICINE NAMELY LIPITOR USED FOR REDUCING THE RISK OF HEART ATTACK AND CHOLESTEROL LEVEL WHICH HAS HIGHLY IN DEMAND IN THE US MARKET. THE PATENT FOR THE IMPUGNED MEDICINE WAS WITH PFIZER INC. THE ASSESSEE COMPANY WAS PLANNING TO MANUFACTURE AND SALE THE GENERIC VERSION OF IMPUGNED MEDICINE. FOR THAT PURPOSE THE ASSESSEE FILED AN ABBREVIATED NEW DRUGS APPLICATION (FOR SHORT ANDAS) DATED 19 TH AUGUST 2002 WITH US FDA UNDER PARAGRAPH (IV) OF PATENT CERTIFICATION BY ASSERTING PATENT OF PFIZER INC. IS INVALID, UNENFORCEABLE, OR WILL NOT BE INFRINGED BY THE MANUFACTURING AND SALE OF NEW GENERIC MEDICINE. ACCORDINGLY, A LITIGATION WITH REGARD TO THE VALIDITY OF THE PATENT OF PFIZER INC. HAS BEGUN BETWEEN ASSESSEE AND M/S PFIZER INC. 50.1 SUBSEQUENTLY OTHER GENERIC DRUGS MANUFACTURER (SUCH AS M/S TEVA PHARMACEUTICALS USA INC. DATED 29 TH DECEMBER) ALSO FILED ANDA FOR IMPUGNED MEDICINE UNDER PARAGRAPH (IV) OF CERTIFICATION. ACCORDINGLY M/S PFIZER INC FILED SUIT AGAINST SUBSEQUENT ANDA FILER ALSO. 50.2 HOWEVER, SUBSEQUENTLY, THE ASSESSEE AND PFIZER INC REACHED TO THE UNDERSTANDING WHERE THE LATER ALLOWED THE FORMER TO MANUFACTURE AND SALE GENERIC VERSION OF THE IMPUGNED PRODUCT WITH EFFECT FROM 30 TH NOVEMBER 2011 VIDE SETTLEMENT DEED DATED 17 TH JUNE 2008. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 71 50.3 HOWEVER IN THE MONTH OF FEBRUARY 2009, THE MANUFACTURING FACILITIES OF THE ASSESSEE LOCATED AT DEVAS (MP) AND POANTA SAHIB (HP) IN INDIA WERE BANNED BY THE US FDA FOR VIOLATION OF CURRENT GOODS MANUFACTURING PRACTICES (CGMP). AS PER THE ASSESSEE, THESE MANUFACTURING FACILITIES COULD HAVE BEEN USED FOR THE PURPOSE OF MANUFACTURING THE IMPUGNED MEDICINE FOR SALE IN THE MARKET OF USA. 50.4 THE ASSESSEE, SUBSEQUENTLY, ON 4 TH DECEMBER 2009 MOVED AN APPLICATION FOR APPROVAL OF ITS MANUFACTURING FACILITY OF ITS US SUBSIDIARY NAMELY OHM LABORATORIES INC LOCATED AT NEW JERSEY WITH US FDA WHICH WAS PENDING FOR THE APPROVAL EVEN AFTER THE LAPSE OF 1 YEAR PERIOD FROM THE DATE OF APPLICATION FOR APPROVAL. 50.5 NEVERTHELESS, THE ASSESSEE WAS UNSURE ABOUT THE APPROVAL OF MANUFACTURING FACILITY OF ITS IMPUGNED SUBSIDIARY COMPANY BASED IN US. THOUGH ASSESSEE WAS HAVING TENTATIVE APPROVAL WHICH MEANS THAT IT HAS FULFILLED ALL THE SUBSTANTIVE REQUIREMENT TO GET FINAL APPROVAL AND ALSO BEING FIRST TO FILE ANDA WAS SURE TO GET 180 DAYS EXCLUSIVITY PERIOD AS A REWARD FOR TAKING RISK OF PATENT LITIGATION. HOWEVER IT WAS UNDER THE FEAR THAT IN CASE IF ITS MANUFACTURING FACILITY NOT GET APPROVED AT TIME, IT WILL NOT BE ABLE TO MARKET THE IMPUGNED MEDICINE. IN SUCH A SCENARIO ITS RIGHT TO EXCLUSIVITY WILL BE FORFEITED AND SUBSEQUENT APPLICANT OF ANDA WILL GET THE APPROVAL FOR EXCLUSIVITY, WHICH WILL RESULT IN LOSS OF BUSINESS OPPORTUNITY BESIDES THE LOSS OF BRAND/GOODWILL ETC. TO IT. ACCORDINGLY, THE ASSESSEE ALONG WITH ITS ASSOCIATES TO AVOID THE OPPORTUNITY LOSS ENTERED INTO AN AGREEMENT WITH M/S TEVA PHARMACEUTICALS USA INC. (TEVA USA) VIDE AGREEMENT DATED 7 TH DECEMBER 2010, WHO IS THE SECOND FILER OF ANDA. AS PER THE AGREEMENT IF ASSESSEE UNABLE TO GET FDA APPROVAL AND M/S TEVA GETS TENTATIVE APPROVAL DURING THE INTERIM PERIOD AND INFORM ASSESSEE ABOUT HAVING READY WITH PRELAUNCH QUANTITY BY ISSUING READY DATE NOTICE. THEN THE ASSESSEE WILL EITHER RELINQUISH OR SELECTIVELY WAIVE OF ITS EXCLUSIVE RIGHT AND M/S TEVA USA WILL MANUFACTURE THE IMPUGNED MEDICINE WHICH WAS TO BE SOLD JOINTLY I.E. GROUP OF THE ASSESSEE AND M/S TEVA USA. IN LIEU THE ASSESSEE WILL GET CONSIDERATION OF $15 MILLION AS ONE TIME COMPENSATION AND 50% SHARE IN PROFITS ARISE FROM THE SALE OF IMPUGNED MEDICINE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 72 50.6 M/S TEVA USA GOT THE TENTATIVE APPROVAL VIDE LETTER DATED 12 TH JANUARY 2011 AND ALSO MAKE PAYMENT OF ONE TIME COMPENSATION OF $ 15 MILLION BY 13 TH JULY 2011. M/S TEVA USA ALSO PREPARED/MANUFACTURED THE PRE-LAUNCH QUANTITY AND ACCORDINGLY SERVED A READY DATE NOTICE DATED 23 RD NOVEMBER 2011 TO THE ASSESSEE. ACCORDINGLY THE ASSESSEE WAS REQUIRED TO WAIVE OFF ITS RIGHT IN FAVOUR OF M/S TEVA USA AND ALSO TO SERVE A LETTER TO THE US FDA, NOTIFYING THAT IT HAS WAIVED ITS EXCLUSIVE RIGHTS IN FAVOUR OF M/S TEVA USA. BUT THE ASSESSEE REFUSED TO DO SO. 50.7 AS SUCH, THE ASSESSEE HAS NOT WAIVED OF ITS RIGHT FOR THE REASON THAT MANUFACTURING FACILITY OF ITS SUBSIDIARY BASED IN NEW JERSEY USA GOT THE APPROVED BY FDA VIDE LETTER DATED 30-11-2011. THE ASSESSEE ALSO GETS THE FINAL APPROVAL OF ITS ANDA, THUS DECIDED TO MANUFACTURE THE IMPUGNED MEDICINE FROM ITS OWN APPROVED FACILITY. IT WAS EXPLAINED BY THE ASSESSEE THAT THE SOLE PURPOSE OF HAVING THE AGREEMENT WITH M/S TEVA USA DATED 7 TH DECEMBER 2010 THAT IT DID NOT HAD ITS APPROVED MANUFACTURING FACILITY DURING THE RELEVANT POINT OF TIME. HOWEVER, AS THE ASSESSEE GETS THE APPROVAL OF ITS MANUFACTURING FACILITY, IT DECIDED NOT TO AVAIL THE MANUFACTURING FACILITY OF TEVA. IT IS FOR THE REASON THAT THE ASSESSEE WANTED TO ESTABLISH ITS BRAND AND REPUTATION IS IN THE MARKET WHICH WAS POSSIBLE ONLY IF THE ASSESSEE CARRIES OUT MANUFACTURING OF THE IMPUGNED MEDICINES AT ITS OWN WITHOUT INVOLVING THE NAME OF ANY OTHER PARTY. BESIDES THIS, THE ASSESSEE WANTED TO BOOST THE MORALE OF THE EMPLOYEES, IMPROVE THE SUPPLY CHAINS AND HAVE THE EXPOSURE AND EXPERIENCE NEW GENERIC MEDICINES. 50.8 THE ACT OF THE ASSESSEE FOR NOT NOTIFYING THE WAIVER OF ITS EXCLUSIVE RIGHT IN FAVOUR OF M/S TEVA USA AS PER THE AGREEMENT DATED 7 TH DECEMBER 2010 WAS CONSIDERED BY M/S TEVA USA AS BREACH OF CONTRACT. ACCORDINGLY, M/S TEVA USA FILED A SUIT IN THE US DISTRICT COURT OF SOUTHERN DISTRICT OF NEW YORK AGAINST THE ASSESSEE. HOWEVER, THE ASSESSEE TO AVOID THE PROTRACTED LITIGATION COST, DISRUPTION OF THE BUSINESS AND DAMAGE OF GOODWILL /REPUTATION REACHED OUT OF COURT SETTLEMENT AND ACCORDINGLY ENTERED INTO REVISED AGREEMENT 7 TH DECEMBER 2011 EFFECTIVE FROM ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 73 30 TH NOVEMBER 2011 WITH M/S TEVA USA. IN THE REVISED AGREEMENT ALL THE CONTENTS OF THE ORIGINAL AGREEMENT WERE SIMILAR EXCEPT THE FOLLOWINGS: I. THE ASSESSEE SHALL MANUFACTURE AND SALE THE IMPUGNED MEDICINE INSTEAD OF M/S TEVA AND WILL SHARE 50% PROFIT DERIVED FROM SUCH SALE II. M/S TEVA SHALL NOT SALE THE IMPUGNED MEDICINE DURING THE EXCLUSIVE PERIOD OF THE ASSESSEE FOR 180 DAYS EXCEPT UNDER THE SPECIFIED CIRCUMSTANCES. IF M/S TEVA DOES SO, THEN IT SHALL SHARE 50% OF THE PROFIT FROM THE SALE OF SUCH IMPUGNED MEDICINE WITH THE ASSESSEE. III. THE ASSESSEE AND M/S TEVA WILL NOT CHALLENGE EACH OTHER RIGHT TO EXCLUSIVITY WITH REGARD TO ANDA FOR A PERIOD OF 2 YEAR. IV. THE AGREEMENT WILL TERMINATE AFTER EXPIRY OF 180 DAYS PERIOD OF EXCLUSIVITY. 50.9 IN VIEW OF THE ABOVE REVISED AGREEMENT, THE ASSESSEE HAS MADE PAYMENT OF 18296.77 BEING 50 % OF THE PROFIT EARNED FROM THE SALE OF IMPUGNED MEDICINE. HOWEVER SUCH PAYMENT WERE MADE TO M/S TEVA PHARMACEUTICALS INDUSTRIES LTD (TEVA ISRAEL) PURSUANT TO LETTER DATED 22 ND MARCH 2012 RECEIVED FROM M/S TEVA PHARMACEUTICALS USA INC (TEVA USA). WHERE M/S TEVA USA INFORMED THAT ITS HAS ASSIGNED THE AGREEMENT IN FAVOUR OF ITS HOLDING COMPANY TEVA ISRAEL BEING ECONOMIC OWNER AND THE PRODUCER OF THE IMPUGNED PRODUCT. AS PER THE ASSESSEE SUCH AMOUNT HAS BEEN PAID WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND ACCORDINGLY CLAIMED AS REVENUE EXPENSES IN BOOKS OF ACCOUNT. 50.10 HOWEVER, THE AO DISREGARDED THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT THE ASSESSEE WAS HAVING ABSOLUTE AND EXCLUSIVE RIGHT FOR A PERIOD OF 180 DAYS BEGINNING FROM 30 TH NOVEMBER 2011 TO SALE THE IMPUGNED MEDICINES. FOR SUCH EXCLUSIVE PERIOD OF TIME, IT WAS NOT POSSIBLE FOR M/S TEVA USA TO SALE HIS PRODUCTS IN THE USA MARKET IN THOSE PERIOD. THUS THE CONTENTION OF THE ASSESSEE THAT IT HAS ENTERED INTO AN AGREEMENT WITH TEVA USA IN ORDER TO PROTECT ITS BUSINESS INTEREST DURING THE EXCLUSIVE PERIOD GIVEN TO THE ASSESSEE BY THE US FDA IS MISPLACED. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 74 ACCORDINGLY THE WHOLE OF THE AGREEMENT AND THE REVISED AGREEMENT IS NOTHING BUT THE CAMOUFLAGE AND ARE CLANDESTINELY DEAL WHICH WAS MADE TO AVOID THE PAYMENT OF TAX. THUS THE ENTIRE TRANSACTION IS THE SHAM TRANSACTION. 50.11 LIKEWISE, AT THE TIME OF ORIGINAL AGREEMENT BETWEEN THE ASSESSEE AND THE M/S TEVA USA DATED 7 TH DECEMBER 2010 THERE WAS NO RIGHT AVAILABLE TO THE ASSESSEE WHICH IT CAN RELINQUISH IN FAVOUR OF THE PARTY. FURTHERMORE, THE RELINQUISHMENT OF RIGHT PROHIBITED UNDER ANDA RULES IN FAVOUR OF ANY SPECIFIC PARTY. 50.12 ORIGINALLY, THE AGREEMENT WAS MADE BETWEEN THE ASSESSEE AND THE TEVA USA BUT SUBSEQUENTLY THE RIGHT WAS ASSIGNED TO TEVA ISRAEL AND ACCORDINGLY THE ASSESSEE MADE THE PAYMENT TO TEVA ISRAEL AFTER DEDUCTING THE TDS. AS SUCH, THE PROCESS OF ASSIGNMENT WAS CARRIED OUT TO DIVERT THE INCOME TO TEVA ISRAEL WHICH IS ENJOYING TAX HOLIDAY. HAD THIS ASSIGNMENT NOT BEEN DONE, THE TEVA USA WOULD HAVE PAID THE TAXES UNDER THE TREATY IN INDIA AS WELL AS IN USA. 50.13 SIMILARLY THE ASSESSEE IS ALSO ENJOYING THE BENEFIT OF TAX DEDUCTION BY CLAIMING THE IMPUGNED EXPENDITURE WHICH IS NOT CONNECTED TO ITS BUSINESS. 50.14 THE CONTENTS AS APPEARING IN THE REVISED AGREEMENT DATED 07 TH DECEMBER 2011 WHEREIN IT WAS AGREED BETWEEN THE PARTIES NOT TO CHALLENGE EACH OTHER WITH RESPECT TO RIGHT TO EXCLUSIVITY OR FIRST TO FILE EXCLUSIVITY. SUCH CONTENTS HAVE BEEN HELD AS UNLAWFUL BY ATTORNEY GENERAL OAG OF SOUTHERN DISTRICT COURT OF NEW YORK. 50.15 THERE WAS NO REASON FOR THE ASSESSEE TO ENTER INTO THE AGREEMENT WITH TEVA ISRAEL AS TEVA ISRAEL HAS NO LOCUS STANDI. 50.16 THE EXPENDITURE WAS RECORDED IN THE BOOKS OF ACCOUNTS MUCH BEFORE THE ASSIGNMENT MADE BY THE PARTIES INVOLVED IN FAVOUR OF TEVA ISRAEL. BUT THE ASSESSEE FAILED TO DEDUCT TDS AT THE TIME OF RECORDING SUCH EXPENDITURE. AS SUCH THE ASSESSEE, DEDUCTED THE TDS AT THE TIME OF PAYMENT WHICH WAS MADE AFTER THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 75 ASSIGNMENT. THUS THE ACT OF THE ASSESSEE SUCH AS THAT IT WAS THE PART OF THE DEVICE ADOPTED BY TEVA GROUP IN ORDER TO AVOID THE TAX LIABILITY. THUS THE IMPUGNED EXPENDITURE CANNOT BE SAID TO HAVE BEEN INCURRED WHOLLY AND SOCIALLY FOR THE PURPOSE OF THE BUSINESS. 50.17 SINCE, THE TDS HAS BEEN DEDUCTED IN THE NAME OF TEVA ISRAEL INSTEAD OF TEVA USA WHICH IS THE VIOLATION OF THE PROVISIONS OF THE ACT THOUGH AGREEMENT WAS ENTERED WITH TEVA USA. EVEN AFTER THE ASSIGNMENT, THEREFORE ASSESSEE WAS UNDER THE OBLIGATION TO DEDUCT THE TDS IN THE NAME OF TEVA USA ONLY. BUT THE ASSESSEE HAS NO DONE SO WHICH IS A DEFAULT UNDER THE PROVISIONS OF TDS AND THEREFORE SUCH PAYMENT CANNOT BE ALLOWED AS DEDUCTION. 50.18 AT THE TIME OF ORIGINAL AGREEMENT DATED 7 TH DECEMBER 2010, THERE WAS NO TENTATIVE APPROVAL AVAILABLE WITH THE TEVA USA. AS SUCH, THE TENTATIVE APPROVAL WAS RECEIVED BY TEVA USA DATED 1 ST DECEMBER 2011 WHEREAS THE ASSESSEE GOT THE APPROVAL 30 TH NOVEMBER 2011. AS SUCH THE ASSESSEE GOT THE APPROVAL FROM US FDA PRIOR TO THE APPROVAL GIVEN TO TEVA USA. THUS TEVA USA HAD NO RIGHT OF WHATSOEVER AND THEREFORE THERE WAS NO REASON FOR THE ASSESSEE TO PAY 50% SHARE OF THE PROFIT AS COMPENSATION WITHOUT GETTING ANY SERVICES FROM TEVA. 50.19 AS SUCH, THE PAYMENT WAS MADE TO TEVA USA TO ELIMINATE THE COMPETITION AND SUCH PAYMENT CANNOT BE CATEGORIZED AS REVENUE IN NATURE. IT IS FOR THE REASON THAT THE ASSESSEE OUT OF SUCH PAYMENT SHALL GET THE BENEFIT OF ENDURING NATURE AND THEREFORE THE SAME SHOULD BE TREATED AS CAPITAL IN NATURE. 50.20 IN VIEW OF THE ABOVE, THE AO DISREGARDED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ORDER OF THE AO. 50.21 THE DRP ALSO CONFIRMED THE FINDING OF THE AO BY OBSERVING AS UNDER: 17.10 BASED ON THE ABOVE FACTS AND MATERIAL ON RECORD, THE DRP HAS NOTED THAT BECAUSE OF THE \ ARRANGEMENT/ AGREEMENTS REFERRED ABOVE, THE ASSESSE COMPANY HAS MADE PAYMENT OF RS.18,51,74,65,338/- DIRECTLY TO TEVA, ISRAEL INSTEAD OF TEVA. USA. THUS, BY ENTERING VARIOUS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 76 AGREEMENTS / ARRANGEMENT, IT AVOIDED TAX PAYMENT IN USA AS WELL AS IN INDIA. WHILE INDIA- USA TREATY MAKES THE 'OTHER INCOME' TAXABLE IN INDIA, THIS IS NOT THE CASE, UNDER THE INDIA- ISRAEL TREATY. STILL FURTHER, THE ENTIRE INCOME IN THE HANDS OF TEVA, ISRAEL ENJOYS A TAX-FREE STATUS UNTIL 2013, AS IT HAD BEEN GRANTED 'APPROVED ENTERPRISE' STATUS BY THE GOVT. OF ISRAEL. THUS, IT IS A CLEAR CASE OF TREATY SHOPPING WITH A VIEW TO EVADE TAX.ALSO, THE CONTENTION OF THE ASSESSE COMPANY THAT TAX HAS BEEN DEDUCTED ON THE ENTIRE AMOUNT AT MAXIMUM RATE OF 42.02%, DOESN'T HELP THE ASSESSEE, AS TEVA, ISRAEL WILL GET CREDIT FOR THE DEDUCTED TAX AND SINCE THE INCOME IN THE HANDS OF TEVA, ISRAEL IS TAX-FREE, THE SAME SHALL BE REFUND TO IT. THUS, THE DRP IS OF THE CONSIDERED OPINION THAT BECAUSE OF THE ARRANGEMENT, NO TAXES HAS BEEN PAID ON THE TRANSACTION WORTH RS.18,51,74,65,338/- IN ANY OF THE COUNTRIES VIZ. INDIA, USA AND ISRAEL. 17.11 TO SUM UP, THE DRP AGREES WITH THE VARIOUS FINDINGS, CONCLUSIONS AND OBSERVATIONS MADE BY THE AO IN THE DRAFT ASSESSMENT ORDER, WHICH IN BRIEF ARE AGAIN REPRODUCED HEREUNDER:- 1. IF AT ALL RANBAXY LABORATORIES LTD HAD ANY LIABILITY, IT WAS TOWARDS TEVA PHARMACEUTICAL USA INC., AS THE AGREEMENT OF RANBAXY LABORATORIES LTD. WAS WITH TEVA PHARMACEUTICAL USA INC. AND NOT WITH TEVA PHARMACEUTICAL INDUSTRIES LTD, ISRAEL. 2. IT IS NOT SHOWN BY THE ASSESSEE COMPANY THAT TEVA PHARMACEUTICAL USA HAD GOT TENTATIVE APPROVAL FROM PDA BEFORE THE SIGNING OF THE AGREEMENT DATED 07.12.2010AND IT ONLY GOT TENTATIVE APPROVAL AS PER LETTER DATED 01.12.2011. 3. AT THE TIME OF AGREEMENT DATED 07.12.2011, RANBAXY LABORATORIES LTD HAD ALREADY GOT THE CLEARANCE FROM PDA FOR MARKETING ITS GENERIC VERSION OF ATORVASTATIN CALCIUM, IT HAS ALREADY REACHED SETTLEMENT WITH THE ORIGINAL PATENT HOLDER PFIZER AND IT ALSO HAD CLEARANCE TO MANUFACTURE THE SAME AT THE MANUFACTURING FACILITY AT OHM INC.. WHICH IS A SUBSIDIARY COMPANY OF RANBAXY LABORATORIES LTD. THUS, THERE WAS NO NEED OF ENTERING INTO AGREEMENT WITH TEVA PHARMACEUTICAL INC. USA. 4. FROM THE POINT OF VIEW OF THE AGREEMENT DATED 07.12.2011, IT TRANSPIRES THAT RANBAXY LABORATORIES LTD HAD AGREED TO SHARE ITS 50% PROFIT WITH TEVA PHARMACEUTICALS INC. USA. THUS, RANBAXY LABORATORIES LTD APPLIED ITS INCOME AFTER IT HAS BEEN EARNED, WHILE MAKING PAYMENT TOTEVA, ISRAEL. THEREFORE, THE SAID PAYMENTS DO NOT QUALIFY AS DEDUCTION U/S 37(1) UNDER THE HEAD BUSINESS AND PROFESSION. 5.THE AGREEMENT WITH TEVA PHARMACEUTICAL INC. USA WAS ONLY FOR SHARING OF PROFIT AND IF THERE WAS A LOSS TO RANBAXY LABORATORIES LTD, THE SAME COULD NOT BE PASSED ON TO TEVA PHARMACEUTICAL INC. USA. THUS, PURELY IT IS A ONE-SIDED AGREEMENT, WHEREIN MONEY HAS FLOWN TO TEVA ISRAEL FROM THE ASSESSE COMPANY. 6. THE SO-CALLED NOTICE OF ASSIGNMENT DATED 22.03.2012 TO TEVA PHARMACEUTICAL LTD, ISRAEL BY TEVA PHARMACEUTICAL USA IS A SELF-SERVING ARRANGEMENT AND A COLORABLE DEVICE-THIS IS CLEAR FROM THE FACT THAT RANBAXY INDIA STARTED MAKING PROVISIONS IN RESPECT OF TEVA PHARMACEUTICAL LTD FROM 31.12.2011 & WHICH WAS PAID FROM 28.03.2012 TO AS LATE AS 03.12.2013, EVEN THOUGH THE ASSESSEE HAS CLAIMED THE WHOLE EXPENDITURE FOR THE YEAR UNDER CONSIDERATION. 7. FURTHERMORE, THE SAID PAYMENT IS ALSO NOT ALLOWABLE BECAUSE PAYMENT TO ELIMINATE COMPETITION AND/OR AMOUNT PAID TO A COMPETITOR IS A CAPITAL EXPENDITURE. HELD SO IN VARIOUS CASES SUCH AS ASSAM BENGAL CEMENT CO. LTD VS C1T 27 1TR 34 (SC); BEHARILAL BENI PRASAD VS CIT 35 1TR 576 (P&H); HEWLETT PACKARD INDUSTRIES LTD VS DCIT 85 VTD 455 (DEL) ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 77 8. THE MERE FACT THAT PAYMENT HAS BEEN MADE UNDER CONTRACT OR AGREEMENT IS NOT CONCLUSIVE THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS. IJAYSHTEE TEA AND INDUSTRIES LTD 272 1TR 193 (CAL.); PREMIER BREWERIES LTD 279 1TR 51] 9. FURTHER, ATTORNEY GENERAL OF USA ALSO HELD THE 'NO CHALLENGE PROVISION' IN THE AGREEMENT AS 'UNLAWFUL & ILLEGAL UNDER THE ANTITRUST LAWS'. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, THE DRP IS OF THE CONSIDERED OPINION THAT EXPENSES AMOUNTING RS.1804.07,24,038/- HAS BEEN RIGHTLY DISALLOWED BY THE AO. 51. BEING AGGRIEVED THE ASSESSEE IS APPEAL BEFORE US. 52. THE LEARNED AR FOR THE ASSESSE BEFORE US CONTENTED THAT M/S TEVA HAS BEEN DEFINED IN THE AGREEMENT DATED 7 TH DECEMBER 2010 AND IN REVISED AGREEMENT DATED 7 TH DECEMBER 2011 AS TEVA USA AND ITS AFFILIATES. FURTHERMORE, CLAUSE 10.2 OF REVISED AGREEMENT HAS AUTHORIZED TO ASSIGN THE CONTRACTUAL RIGHTS ARISING FROM THE AGREEMENT TO ANY 3 RD PARTY OR ITS AFFILIATES. THUS, THERE WAS THE ENABLING PROVISION IN SUCH AGREEMENT DATED 7 TH DECEMBER 2011. ACCORDINGLY M/S TEVA USA ASSIGNED ITS RIGHTS TO TEVA ISRAEL VIDE LETTER DATED 22 ND MARCH 2012. ACCORDINGLY, THE ASSESSEE HAS MADE THE PAYMENT TO TEVA ISRAEL AFTER WITHHOLDING THE TAX @ 42.024% ON THE ABOVE PAYMENT. AS PER THE ASSESSEE PAYMENT TO TEVA ISRAEL WAS A VALID PAYMENT WHICH WAS ARISING IN TERMS OF THE AGREEMENT. THE LEARNED AR FURTHER CONTENDED THAT THERE IS NO DIFFERENCE FROM TAXABILITY POINT OF VIEW EVEN THE PAYMENT IS MADE TO TEVA USA. IT IS FOR THE REASON THAT IN EITHER CASE, THE IMPUGNED AMOUNT IS NOT TAXABLE IN INDIA UNDER THE PROVISIONS OF DTAA AS WELL AS UNDER THE PROVISIONS OF SECTION 9(1)(VI) AND 9(1)(VII) OF THE ACT. HOWEVER, THE ASSESSEE AS A MATTER OF ABUNDANT CAUTION, HAS DEDUCTED THE TDS AT THE RATE 42.024% ON THE ABOVE PAYMENT. MOREOVER, THE ASSESSEE WAS UNDER THE CONTRACTUAL OBLIGATION TO MAKE THE PAYMENT FOR THE REASONS AS CONTENDED IN THE ORDER OF AUTHORITIES BELOW. THEREFORE IT DOES NOT MAKE ANY DIFFERENCE EVEN THE PAYMENT HAS BEEN MADE TO THE GROUP COMPANY OF THE TEVA USA ON REQUEST. IF ANY QUESTION ARISES FROM THE TAXABILITY POINT OF VIEW, THEN THE REVENUE SHOULD RAISE THE QUESTION TO THE PARTY TO WHOM THE PAYMENT HAS BEEN MADE AFTER DEDUCTING THE WITHHOLDING TAX. ACCORDINGLY, NO TAX WAS EVADED IN THE GIVEN FACTS AND CIRCUMSTANCES ON ACCOUNT OF PAYMENT MADE TO TEVA ISRAEL. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 78 53. ADMITTEDLY, AT THE TIME OF ORIGINAL AGREEMENT DATED 7 TH DECEMBER 2010 WITH THE TEVA USA, THERE WAS NO APPROVAL (ANDA) RECEIVED FROM THE US FDA BY THE ASSESSEE. HOWEVER THE ASSESSEE ACQUIRED A LICENSE FROM THE PFIZER FOR THE SALE OF GENERIC VERSION OF IMPUGNED MEDICINE WITH EFFECT FROM 30 TH NOVEMBER 2011 SUBJECT TO ANDA EXCLUSIVITY APPROVAL BUT SUCH ANDA APPROVAL WAS CERTAIN TO GET FROM US FDA AS PER THE PREVAILING PRACTICE/LAW AS IT (THE ASSESSEE ) WAS THE FIRST TO FILE ANDA. SINCE THE ASSESSEE MANUFACTURING FACILITIES WERE UNDER THE RED ALERT/BANNED DURING THE RELEVANT TIME, IT WAS APPEARING TO BE IMPOSSIBLE FOR THE ASSESSEE TO LAUNCH THE IMPUGNED MEDICINE ON THE APPOINTED DATE OR DURING THE PERIOD OF EXCLUSIVITY. LIKEWISE, ITS APPLICATION FOR APPROVAL OF MANUFACTURING FACILITY OF THE SUBSIDIARY COMPANY BASED IN USA WAS PENDING BEFORE THE US FDA DURING THE RELEVANT POINT OF TIME. IN SUCH FACTS AND CIRCUMSTANCES, THE ASSESSEE WAS UNSURE TO AVAIL THE BENEFIT OF LICENSE RECEIVED FROM PFIZER AFTER PROLONGED LITIGATION. THUS THERE WAS NO OPTION AVAILABLE TO THE ASSESSEE TO SAFEGUARD ITS INTEREST EXCEPT TO ENTER INTO AN AGREEMENT WITH TEVA USA BY RELINQUISHING ITS RIGHT WHICH IS ALSO PERMITTED UNDER THE RULE OF ANDA. 54. THE LEARNED AR FURTHER SUBMITTED THAT THE TPO WHILE WORKING OUT THE PLI OF THE ASSESSEE HAS TREATED THE IMPUGNED PAYMENT AS OPERATING EXPENDITURE AND THEREFORE THE SAME WAS REDUCED FROM THE PROFIT OF THE ASSESSEE. THEREAFTER, THE TPO COMPARED THE PLI OF THE ASSESSEE WITH THE COMPARABLES. THE ACTION OF THE TPO SUGGEST THAT THE IMPUGNED PAYMENT REPRESENTS THE BUSINESS EXPENDITURE WHEREAS THE AO HAS TREATED THE SAME PAYMENT AS CLANDESTINE AND THEREFORE THE SAME CANNOT BE ALLOWED AS EXPENDITURE WHILE COMPUTING THE BUSINESS PROFIT OF THE ASSESSEE. THUS, THE FINDING OF THE TPO AND THE AO ARE AGAINST EACH OTHER AND FURTHER LEADING TO DOUBLE ADDITION UNDER THE TP PROVISIONS AS WELL AS NORMAL PROVISIONS OF THE ACT. 55. THE LEARNED AR FURTHER SUBMITTED THAT BOTH THE PARTIES NAMELY RANBAXY AND TEVA ARE LISTED COMPANIES AND HAVING NO CONNECTION OF WHATSOEVER. THEREFORE, THE PAYMENT TO TEVA ISRAEL CANNOT BE TREATED AS CAMOUFLAGE WHICH WAS PAID AFTER ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 79 TAKING THE APPROVAL OF THE RBI. LIKEWISE, THE PAYMENT WAS ACCEPTED BY THE SHAREHOLDERS IN AGM, SEBI AND ROC. THEREFORE, SUCH PAYMENT CANNOT BE TREATED AS BOGUS AND DISALLOWED UNDER THE ACT. 56. THE LEARNED AR FOR THE ASSESSEE ALSO CONTENDED THAT THE PAYMENT HAS BEEN MADE TO TEVA ISRAEL IN CONSEQUENCE TO THE COMPENSATION AGREEMENT WHICH RELATES TO THE BUSINESS AND THE SAME WAS QUANTIFIED BASED ON THE PERCENTAGE OF PROFIT. THEREFORE SUCH PAYMENT REPRESENTS THE REVENUE EXPENDITURE. LIKEWISE THERE HAS NOT COME ANY ASSETS INTO EXISTENCE OR BENEFIT TO THE ASSESSEE OF ENDURING NATURE. IT IS FOR THE REASON THAT THE AGREEMENT WAS ONLY FOR 180 DAYS WHICH IS LESS THAN FOR A PERIOD OF ONE YEAR. THEREFORE SUCH PAYMENT CANNOT BE TREATED AS CAPITAL IN NATURE. 57. THE LEARNED DR BEFORE US VEHEMENTLY SUPPORTED THE STAND OF THE AUTHORITIES BELOW BY REITERATING THE FINDINGS CONTAINED IN THE RESPECTIVE ORDERS WHICH WE HAVE ALREADY ADVERTED TO IN THE PRECEDING PARAGRAPH. AS PER THE LEARNED DR, THERE WAS NO NECESSITY FOR THE ASSESSEE TO ENTER INTO THE ORIGINAL AGREEMENT WITH TEVA USA DATED 7 TH DECEMBER 2010. IT IS BECAUSE THE ASSESSEE HAS ALREADY MADE AN APPLICATION FOR THE AMENDMENT OF ANDA DATED 4 TH DECEMBER 2009 TO INCLUDE THE MANUFACTURING FACILITY OF ITS SUBSIDIARY COMPANY BASED IN USA. FURTHER IT WAS MOST LIKELY THAT THE MANUFACTURING FACILITY OF SUBSIDIARY WILL GET APPROVED BY VIRTUE OF RANBAXY BEING THE 1 ST APPLICANT OF ANDA. ACCORDINGLY NO PRUDENT PERSON WILL ENTER INTO THE AGREEMENT WITH THIS RIVAL PARTY AND THAT TOO BEING WITHOUT THERE BEING ANY COMPELLING CIRCUMSTANCE AND CIRCUMSTANCES TO DO SO. 57.1 THE LEARNED DR ALSO CONTENDED THAT THE ORIGINAL AGREEMENT WITH TEVA USA IS VOID FOR THE REASON THAT IT WAS TO RESTRAIN THE TRADE AND STOP THE COMPETITION WHICH IS INVALID UNDER THE INDIAN LAW AS WELL AS US ANTI-TRUST LAWS. ACCORDINGLY NO REFERENCE CAN BE MADE TO SUCH AGREEMENT AND CONSEQUENTLY THE PAYMENT MADE IN PURSUANCE TO SUCH AGREEMENT WAS NOT INCURRED FOR THE PURPOSE OF THE BUSINESS. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 80 57.2 ASSUMING, THE ORIGINAL AGREEMENT WAS NOT VOID BUT ENFORCEABLE ON THE HAPPENING OF CERTAIN EVENTS IN FUTURE, THUS SUCH AGREEMENT WAS CONTINGENT IN NATURE AND THEREFORE HAVING NO FORCE. 57.3 THERE WAS THE CLAUSE OF TERMINATION OF THE AGREEMENT WHICH COULD HAVE BEEN INVOKED BY THE ASSESSEE IF IT DECIDED NOT TO HONOUR THE AGREEMENT AS MUTUALLY AGREED. THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 58. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD BEFORE US, ESPECIALLY THE IMPUGNED ORDERS AND THE CASE LAW CITED THEREIN AND ALSO CITED BY THE LEARNED AR OF THE ASSESSEE AND THE DR AS DISCUSSED AFORESAID. BEFORE GOING INTO THE FACT LETS UNDERSTAND THE ANDA APPROVAL IN THE LIGHT OF RULES PRESCRIBED BY THE US-FDA. 58.1 IN THE USA, A PHARMACEUTICAL COMPANY BEFORE LAUNCHING NEW DRUGS HAVE TO FILE AN APPLICATION NAMELY NEW DRUGS APPLICATION (NDA) FOR APPROVAL. ALONG WITH THE APPLICATION APPROVAL SEEKER ALSO HAS TO SUBMIT INFORMATION REGARDING SAFETY PROTOCOL & EFFECTIVENESS OF DRUG, USAGE AND TRAIL INFORMATION, PATENT INFORMATIONS ETC. BASED ON ABOVE THE US FDA APPROVE THE NEW DRUGS (LISTED DRUG) AND SIMULTANEOUSLY PUBLISH THE ENTIRE INFORMATION REGARDING SUCH DRUG FOR PUBLIC IN APPROVED DRUG PRODUCTS WITH THERAPEUTIC EQUIVALENCE EVALUATION KNOWN AS ORANGE BOOKS. US FDA ACT PROVIDES THAT A GENERIC MANUFACTURER MAY BY REFERRING THE LISTED DRUG AND RELYING UPON THE PREVIOUS FINDING OF FDA ABOUT SUCH LISTED DRUG CAN PRODUCE THE GENERIC VERSION OF THE SAME. FOR THAT THE GENERIC MANUFACTURER HAS TO OBTAIN AN APPROVAL BY FILING THE FORM KNOWN AS ANDA. WHILE FILLING THE FORM ANDA, THE APPELLANT HAS TO SPECIFY ONE OF 4 SPECIFIED CERTIFICATIONS REGARDING PATENT OF REFERRED LISTED DRUG PROVIDED UNDER FD & C ACT OF USA WHICH ARE AS FOLLOWS: 1. THAT SUCH PATENT INFORMATION HAS NOT BEEN SUBMITTED BY THE NDA HOLDER FOR LISTING IN THE ORANGE BOOK (A PARAGRAPH I CERTIFICATION). 2. THAT SUCH PATENT HAS EXPIRED (A PARAGRAPH II CERTIFICATION). 3. THE DATE ON WHICH SUCH PATENT WILL EXPIRE (A PARAGRAPH III CERTIFICATION). ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 81 4. THAT SUCH PATENT IS INVALID, UNENFORCEABLE, OR WILL NOT BE INFRINGED BY THE MANUFACTURE, USE, OR SALE OF THE NEW DRUG FOR WHICH THE APPLICATION IS SUBMITTED (A PARAGRAPH IV CERTIFICATION). 58.2 IF, AN APPLICANT WISHES TO SEEK APPROVAL OF ITS ANDA BEFORE THE EXPIRY OF A LISTED PATENT BY CHALLENGING THE VALIDITY OF A PATENT, CLAIMING THAT A PATENT WOULD NOT BE INFRINGED BY THE PRODUCT PROPOSED IN THE ANDA, OR CLAIMING THE PATENT AS UNENFORCEABLE, THE APPLICANT MUST SUBMIT A PARAGRAPH IV CERTIFICATION TO US FDA. SIMULTANEOUSLY THE APPELLANT OF ANDA MUST HAVE TO GIVE NOTICE TO EACH PATENT HOLDER SPECIFYING THE LEGAL AND FACTUAL BASIS FOR CHALLENGING THE PATENT IN PARAGRAPH IV CERTIFICATION. UPON RECEIVING SUCH NOTICE THE PATENT HOLDERS MAY START PATENT LITIGATION AGAINST SUCH APPELLANT OF ANDA. THUS THE APPELLANT WHO CHALLENGED THE VALIDITY AND ENFORCEABILITY OF PATENT TAKES THE RISK OF PATENT LITIGATION, THEREFORE US FDA PROVIDES INCENTIVE TO SUCH APPELLANT BY GRANTING 180 DAYS PERIOD OF EXCLUSIVITY ON BASIS OF FIRST TO FILE ANDA UNDER PARAGRAPH IV OF CERTIFICATION. 58.3 IF THE ANDA OF APPELLANT MEETS THE SUBSTANTIVE REQUIREMENT, THEN FDA GIVES A TENTATIVE APPROVAL TO THE APPELLANT WHICH MEANS THAT ITS ANDA IS READY FOR APPROVAL BUT FINAL APPROVAL IS NOT GRANTED DUE TO PATENT IS YET TO EXPIRE OR EXCLUSIVITY PERIOD YET TO EXPIRE. HOWEVER SUCH EXCLUSIVITY PERIOD OF 180 DAYS MAY BE FORFEITED BY THE FDA IN CERTAIN CIRCUMSTANCES SUCH AS: 1. FAILURE TO MARKET 2. WITHDRAWAL OF APPLICATION 3. AMENDMENT OF CERTIFICATION 4. FAILURE TO GET TENTATIVE APPROVAL 5. ENTERING INTO AGREEMENT WITH OTHER APPLICANT, OR PATENT HOLDER ETC. 58.4 INSOFAR AS THE FACTUAL POSITION RELATING TO THE AFORESAID ISSUE IS CONCERNED, THERE IS NO DISPUTE. THERE ARE CERTAIN UNDISPUTED FACTS WHICH LISTED BELOW: I. THE ASSESSEE WAS 1 ST TO FILE ANDA BEFORE US FDA AND THEREFORE IT WAS ENTITLED FOR 1 ST TO FILE EXCLUSIVITY RIGHTS TO MANUFACTURE AND SALE THE IMPUGNED PRODUCT FOR 180 DAYS EFFECTIVE FROM 30 TH NOVEMBER 2011. IN ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 82 OTHER WORDS, THERE WAS NO POSSIBILITY FOR ANY OTHER COMPETITOR INCLUDING TEVA USA TO ENTER INTO THE US MARKET FOR THE IMPUGNED MEDICINE UNTIL 31 ST MAY 2012. II. TEVA USA, BEING SECOND TO FILE ANDA WOULD GET THE APPROVAL TO MANUFACTURE AND SALE FOR IMPUGNED MEDICINE IN THE US MARKET ONLY AFTER 31 ST MAY 2012. III. THE ASSESSEES MANUFACTURING FACILITIES IN INDIA AT DEVAS MADHYA PARADESH AND PAONTA SAHIB HIMACHAL PRADESH WHICH WERE PART OF ANDA WERE BANNED BY THE US FDA FOR VIOLATION OF CGMP SINCE FEBRUARY 2009. ACCORDINGLY, THE ASSESSEE MOVED AN AMENDMENT APPLICATION IN ITS ORIGINAL ANDA TO INCORPORATE MANUFACTURING FACILITY OF SUBSIDIARY OHM LABORATORIES LOCATED AT USA. IV. THE US FDA FINALLY GRANTED THE APPROVAL TO THE ASSESSEE FOR THE MANUFACTURING OF IMPUGNED PRODUCT IN THE MANUFACTURING FACILITY OF OHM LABORATORIES AT USA VIDE DATED 30-11-2011. 58.5 MOVING AHEAD, WE NOTE THAT THERE WAS THE AGREEMENT BETWEEN THE ASSESSEE AND TEVA USA DATED 7 TH DECEMBER 2010 ON THE FOLLOWING TERMS AND CONDITIONS: I. IF ASSESSEE FAILED TO GET APPROVAL OR TENTATIVE APPROVAL, BUT II. M/S TEVA USA GETS TENTATIVE APPROVAL, AND III. M/S TEVA USA & ITS ASSOCIATES PRODUCED REQUIRED PRELAUNCH QUANTITY BY 28 TH JUNE 2011, AND IV. SERVE READY DATE NOTICE SPECIFYING PRELAUNCH QUANTITY AND TENTATIVE APPROVAL OR CONFIRMATION FROM FDA INDICATING THE FINAL APPROVAL OF TEVA ANDA NOT EARLIER THAN 30 TH JUNE 2011 AND NOT LATER THAN 30 TH NOVEMBER 2011 V. THEN THE ASSESSEE I.E. RANBAXY SHALL RELINQUISH OR WAIVE OFF ITS RIGHT TO EXCLUSIVITY AND DELIVER A LETTER TO THIS EFFECT TO FDA AS WELL AS M/S TEVA WITHIN 2 BUSINESS DAYS. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 83 VI. IN CONSIDERATION M/S TEVA SHALL PAY ONETIME PAYMENT OF $15 MILLION TO THE ASSESSEE AND ALSO SHARE PROFIT ARISES FROM THE SALE OF SUCH PRODUCT IN EQUAL PROPORTION WITH THE ASSESSEE. 58.6 IT IS ALSO SIGNIFICANT TO NOTE THAT THE ASSESSEE WAS CONFIDENT ENOUGH FOR GETTING THE APPROVAL FROM ANDA TO MANUFACTURE AND SALE OF ITS IMPUGNED MEDICINE/PRODUCT WITH EFFECT FROM 30 NOVEMBER 2011. THIS FACT HAS NOT BEEN DISPUTED BY THE REVENUE. THE RELEVANT FINDING IN THE ORDER OF THE AO IN THIS REGARD READS AS UNDER: 1.13 IN THE INSTANT CASE, RANBAXY BEING THE FIRST FILER OF ANDA (FILED ON 19.08.2002) AND HAVING MOVED THE ANDA APPLICATION PRIOR TO TEVA PHARMACEUTICALS, SHOULD HAVE BEEN ENTITLED TO 180 DAYS EXCLUSIVELY PERIOD UNDER THE US FDA REGULATIONS. 58.7 LIKEWISE, THE FINDING OF THE LEARNED DRP ON THE ABOVE POINT I.E. THE ASSESSEE GET THE APPROVAL FOR THE EXCLUSIVITY PERIOD IS ALSO EXTRACTED BELOW: 17.4 IN THE INSTANT CASE, RANBAXY BEING THE FIRST FILER OF ANDA AND HAVING MOVED THE ANDA APPLICATION PRIOR TO TEVA PHARMACEUTICAL S, WAS NATURALLY ENTITLED TO ' 180 DAYS EXCLUSIVITY PERIOD' UNDER THE US PDA REGULATIONS. IT WAS CLAIMED BY THE ASSESSEE THAT RANBAXY'S ABILITY TO SECURE NECESSARY REGULATORY APPROVAL FROM THE US PDA TO ENJOY THE SAID EXCLUSIVITY PERIOD WAS THROWN INTO DOUBT WHEN THE US FDA IMPOSED AN ALERT IN SEPTEMBER, 2008 BARRING IMPORTS OF CERTAIN GENERICS FROM RANBAXY INDIA, RANBAXY USA AND TEVA USA ENTERED INTO AN AGREEMENT DATED DECEMBER 7, 2010(ORIGINAL AGREEMENT) 58.8 THE LEARNED DR IN HIS WRITTEN SUBMISSION DATED 18 TH AUGUST 2021 HAS ALSO CONTENDED AS FOLLOWS: (VI) RANBAXY USA GETS APPROVAL OF AMENDED APPLICATION UNDER ANDA BY US FDA IN (30 TH NOV. 2011) WHICH WAS ALREADY KNOWN AS IS CLEAR FROM THE SETTLEMENT DATED 17-06-2008 WITH PFIZER AND THE ACTIVITIES OF RANBAXY & TEVA, 58.9 A CONJOINT READING OF THE ABOVE FACTS PROVES THAT THERE WAS NO AMBIGUITY ABOUT THE FACT THAT THE ASSESSEE WAS AUTHORIZED TO SALE IMPUGNED MEDICINE FOR THE EXCLUSIVE PERIOD OF 180 DAYS BEGINNING FROM 30 TH NOVEMBER 2011. 58.10 NOW THE ISSUE ARISES HOW THE ASSESSEE SHALL MANUFACTURE THE IMPUGNED MEDICINES DURING THE EXCLUSIVE PERIOD GRANTED TO IT BY US FDA TO SALE IN THE US MARKET. IT IS FOR THE REASON THAT THE MANUFACTURING FACILITIES IN INDIA WERE BANNED ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 84 BY THE US FDA AND THE MANUFACTURING FACILITY OF ITS SUBSIDIARY COMPANY BASED IN USA WAS NOT APPROVED BY THE US FDA DURING THE RELEVANT PERIOD OF TIME, THOUGH THE APPLICATION FOR THE SAME WAS FILED DATED 04 TH DECEMBER 2009 FOR THE APPROVAL TO US FDA . THE APPROVAL FINALLY CAME FROM US FDA DATED 30-11-2011 FOR THE MANUFACTURING FACILITY BASED IN USA IN THE CASE OF OHM LABORATORIES INC. BUT IT WAS NOT POSSIBLE FOR THE ASSESSEE TO FORESEE THAT ITS MANUFACTURING FACILITY IN USA WILL EVENTUALLY GET APPROVED BEFORE THE BEGINNING OF EXCLUSIVE PERIOD ALLOTTED TO IT. FURTHER THE FDA LAW ALSO PROVIDED THAT IN CASE THE APPELLANT IS UNABLE TO MARKET THE PRODUCT THEN APPLICANT RIGHT TO EXCLUSIVITY WILL GET FORFEITED. IN OTHER WORDS, THERE WAS GENUINE FEAR IN THE MIND OF THE ASSESSEE ABOUT THE ACTIVITY OF MANUFACTURING TO BE CARRIED OUT FOR THE IMPUGNED MEDICINE. ON THE TOP OF IT, THE ASSESSEE STARTED ITS R & D ACTIVITIES IN THE YEAR 1997 FOR MANUFACTURING THE GENERIC MEDICINE OF LIPITOR AS EVIDENT FROM THE SUBMISSION OF THE LD. DR WHICH IS REPRODUCED AS UNDER: ON EXPIRY OF THE PATENT OF PFIZER INC., US ON ITS DRUG, LIPITOR AND RRL HAVING DEVELOPED THE DO HOW OF MANUFACTURING ATORVASTATIN SODIUM (R & D WAS STARTED IN 1997), THE ACTIVE PHARMACEUTICAL INGREDIENT (API) OF LIPITOR RANBAXY USA INC. FILED AS APPLICATION IN AUG. 2002 58.11 THEREAFTER, THE ASSESSEE IN THE YEAR 2002-03 BEING 1 ST APPLICANT, MOVED AN APPLICATION (ANDA) BEFORE US FDA TO MANUFACTURE AND SALE OF GENERIC VERSION OF LIPITOR. THE ASSESSEE IN THE ANDA ALSO CHALLENGED THE VALIDITY OF THE PATENT OF M/S PFIZER INC. WHICH GOT SETTLED BY WAY OF SETTLEMENT AGREEMENT WITH THE PFIZER VIDE SETTLEMENT AGREEMENT DATED 17 TH JUNE 2008. AS PER THE SETTLEMENT, PFIZER GRANTED LICENSE TO THE ASSESSEE TO MANUFACTURE AND SALE OF THE IMPUGNED GENERIC VERSION OF THE MEDICINE WITH EFFECT FROM 30 TH NOVEMBER 2011. THUS FROM THE ABOVE, IT CAN BE INFERRED THAT THE ASSESSEE TO MANUFACTURE THE IMPUGNED MEDICINE HAS PERFORMED A LONG JOURNEY AFTER CROSSING VARIOUS HURDLES. THEREFORE, IT WAS QUITE NATURAL FOR THE ASSESSEE OR ANYBODY ELSE TO TAKE EVERY PRECAUTION THAT IT SHOULD NOT LOSE THIS OPPORTUNITY FOR ANY SMALL OR THE BIG REASON, ESPECIALLY IN THE CIRCUMSTANCES WHEN IT IS KNOWN FACT THAT IT WAS A VERY PROFITABLE VENTURE FOR 180 DAYS. SIMILARLY, IF THE ASSESSEE FAILS TO AVAIL THE OPPORTUNITY FOR 180 DAYS AS DISCUSSED ABOVE, IT WILL BRING A LOT OF DISCOMFORT TO THE EMPLOYEES AND EVENTUALLY THE MORALS OF EMPLOYEES WILL GO DOWN BESIDES THE LOSS OF REPUTATION/ GOODWILL IN THE MARKET OF THE ASSESSEE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 85 ACCORDINGLY, IT APPEARS THAT THE ASSESSEE IN THE INTEREST OF BUSINESS HAS ENTERED AND TO AVOID ANY POSSIBLE EVENTUALITY IN FUTURE HAS ENTERED IN THE AGREEMENT WITH TEVA USA. 58.12 EVENTUALLY, THE ASSESSEE GETS THE APPROVAL OF ITS MANUFACTURING FACILITY BASED IN USA IN CASE OF ITS SUBSIDIARY COMPANY NAMELY OHM LABORATORIES INC. FROM THE US FDA VIDE LETTER DATED 30-11-2011. IN SUCH FACTS AND CIRCUMSTANCES, THE ASSESSEE HAS NOT HONORED ITS AGREEMENT WITH TEVA USA BY NOT ACCEPTING READY DATE NOTICE DATED 23 RD NOVEMBER 2011. ACCORDINGLY, A SUIT WAS FILED BY TEVA USA AGAINST THE ASSESSEE DATED 29 TH NOVEMBER 2011 IN THE US DISTRICT COURT OF SOUTHERN DISTRICT OF NEW YORK. 58.13 THE RELEVANT ALLEGATIONS FRAMED BY THE TEVA USA AGAINST THE ASSESSEE IN THE SUIT FILED BY IT ARE SUMMARIZED AS UNDER: 1. THE ASSESSEE HAS CONTRACTUAL OBLIGATION TO HONOUR THE CONTRACT. 2. THE BREACH CAUSED IRREPARABLE, UNRECOVERABLE, AND LARGELY UNQUANTIFIABLE LOSS. 3. THE BREACH IS LIKELY TO CAUSE SIGNIFICANT HARM TO ITS REPUTATION WITH CUSTOMER. 58.14 THE ASSESSEE IN ORDER TO AVOID PROTRACTED LITIGATION COST, POTENTIAL COMPENSATION BY THE AUTHORITIES IN CASE OF ADJUDICATION AGAINST IT, SAVE ITS ENERGY TO FOCUS ON ITS MAIN ACTIVITIES MADE A REVISED AGREEMENT WITH M/S TEVA, USA DATED 7 TH DECEMBER 2011 EFFECTIVE FROM 30 TH NOVEMBER 2011 OUT OF THE COURT SETTLEMENT. THE CHANGES MADE IN THE REVISED AGREEMENTS HAVE ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPH. 58.15 FROM THE ABOVE, IT IS TRANSPIRED THAT THE REVISED AGREEMENT WAS ENTERED BY THE ASSESSEE WITH TEVA USA TO AVOID THE MANUFACTURING RIGHTS BEING CONFERRED TO THE TEVA AS PER THE ORIGINAL AGREEMENT DATED 7-12-2010. AS SUCH THE ASSESSEE WANTED TO MANUFACTURE THE PRODUCT AT ITS OWN IN ORDER TO BUILD ITS GOODWILL IN THE US MARKET. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 86 58.16 AT THIS JUNCTURE, WE ARE ALSO CONSCIOUS TO THE FACT THAT THERE WAS NO CLAUSE IN THE ORIGINAL AGREEMENT DATED 7 TH DECEMBER 2010 UNDER WHICH THE ASSESSEE COULD HAVE OPTED TO GET OUT FROM SUCH AGREEMENT. IT WAS POSSIBLE WHEN THE OTHER PARTY WAS NOT ABLE TO HONOUR THE CONDITIONS OF THE AGREEMENT WHEREAS THE OTHER PARTY HAS FULFILLED ALL THE CONDITIONS AS PRESCRIBED IN THE AGREEMENT. 58.17 THE NEXT CONTROVERSY ARISES WHETHER THE ASSESSEE WAS AUTHORIZED TO MAKE THE PAYMENT TO TEVA ISRAEL WHEREAS THE ORIGINAL AGREEMENT AS WELL AS THE AMENDED AGREEMENT DATED 7 TH DECEMBER 2010 AND 7 TH DECEMBER 2011 RESPECTIVELY WERE MADE BETWEEN THE ASSESSEE, RPI AND TEVA USA. IN THIS CONNECTION, WE FIND IMPORTANT TO REFER THE RELEVANT CLAUSES OF THE ORIGINAL AGREEMENT AND REVISED AGREEMENT WHERE TEVA HAS BEEN DEFINED AS TEVA USA AND ITS ASSOCIATES WHICH READS AS UNDER: TEVA MEANS TEVA, AND TO THE EXTENT THE SUBJECT RIGHT OR OBLIGATION HEREUNDER WAS PROPERLY ASSIGNED TO ITS AFFILIATE PURSUANT TO THE TERMS OF THIS AGREEMENT, THEN TEVA AND SUCH AFFILIATE. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX TEVA MEANS TEVA, AND TO THE EXTENT THE SUBJECT RIGHT OR OBLIGATION HEREUNDER WAS PROPERLY ASSIGNED TO ITS AFFILIATE PURSUANT TO THE TERMS OF THIS AGREEMENT, THEN TEVA AND SUCH AFFILIATE. 58.18 FURTHER, THE CLAUSE 10.2 OF REVISED AGREEMENT CONTAIN THE UNDERSTANDING WITH REGARD TO ASSIGNMENT OF RIGHTS AND LIABILITIES WHICH READS AS UNDER: 10.2 SUCCESSORS AND ASSIGNS: ASSIGNMENT, THE TERMS AND PROVISIONS HEREOF SHALL INURE TO THE BENEFIT OF, AND BE BINDING UPON THE PARTIES AND THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS. NO PARTY SHALL ASSIGN, ENCUMBER OR OTHERWISE TRANSFER (OR ATTEMPT TO DO ANY OF THE FOREGOING) THIS AGREEMENT OR ANY PART OF IT TO ANY THIRD PARTY WITHOUT THE PRIOR WRITTEN CONSENT OF THE OTHER PARTY, WHICH CONSENT MAY BE WITHHELD BY SUCH PARTY IN ITS SOLE AND ABSOLUTE 1 DISCRETION; PROVIDED, HOWEVER, THAT A PARTY MAY, UPON NOTICE TO THE OTHER PARTY BUT WITHOUT \ OBTAINING THE CONSENT OF THE OTHER PARTY, ASSIGN THIS AGREEMENT (IN WHOLE OR IN PART) OR DELEGATE \ ANY OF ITS RIGHTS OR OBLIGATIONS HERE UNDER TO ANY OF ITS AFFILIATES OR TO ANY SUCCESSOR IN INTEREST (0 I SUCH PARTY'S BUSINESS, WHETHER BY MERGER, SALE OF ASSETS OR OTHERWISE. IN THE CASE OF AN (ASSIGNMENT TO AN AFFILIATE, THE ASSIGNING PARTY SHALL REMAIN LIABLE FOR THE FULL AND TIMELY PERFORMANCE BY SUCH AFFILIATE OF ALL THE OBLIGATIONS OF THE ASSIGNING PARTY HEREUNDER. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 87 58.19 ON READING THE ABOVE CLAUSES, IT IS REVEALED THAT EITHER OF THE PARTY WAS AUTHORIZED TO ASSIGN THE SAME TO THE 3 RD PARTY OR ITS AFFILIATES. IT IS ALSO TRANSPIRED THAT THERE WAS A SPECIFIC CLAUSE IN THE AGREEMENT FOR ASSIGNING THE RIGHTS TO 3 RD PARTY AND ITS AFFILIATES. ACCORDINGLY, WE FIND THAT BOTH THE PARTIES OF THE AGREEMENT HAVE ACTED WITHIN THE CLAUSES SPECIFIED IN THE AGREEMENTS. ACCORDINGLY, IT CANNOT BE SAID THAT THE ASSESSEE WAS PARTY IN THE TREATY SHOPPING TO EXTEND THE BENEFITS TO THE GROUP OF TEVA. IN OTHER WORDS, IN THE ABSENCE OF THE ABOVE CLAUSE FOR THE ASSIGNMENT, IF THE ASSESSEE WOULD HAVE MADE THE PAYMENT TO TEVA ISRAEL, THEN THE CONTENTION OF THE REVENUE WOULD HAVE BEEN HELD GOOD THAT THE ASSESSEE WAS INVOLVED IN SOME ARRANGEMENT. IT IS ALSO IMPORTANT TO NOTE THAT CLAUSES OF THE ASSIGNMENTS WERE APPEARING IN BOTH THE ORIGINAL AS WELL AS IN THE REVISED AGREEMENT. IT IS ALSO EQUALLY IMPORTANT TO NOTE THAT THE ASSESSEE HAS MADE PAYMENT AFTER THE DEDUCTION OF WITHHOLDING TAX AT THE RATE OF 42.024% AND THEREFORE THE INTENTION OF THE ASSESSEE CANNOT BE DOUBTED THAT THE PAYMENT HAS BEEN MADE TO TEVA ISRAEL IN ORDER TO EXTEND THE TAX BENEFIT TO THE GROUP OF TEVA. IT IS ALSO NOT OUT OF THE PLACE TO MENTION THAT BOTH THE ASSESSEE AND M/S TEVA GROUP ARE THE LEADERS IN THEIR INDUSTRIES AND NOT RELATED TO EACH OTHER DIRECTLY OR INDIRECTLY. IN OTHER WORDS, THEY ARE THE COMPETITORS TO EACH OTHER. THE QUESTION OF EXTENDING THE BENEFIT ARISES AMONG THE TRANSACTIONS CARRIED OUT WITHIN THE GROUP OF THE ASSESSEE. AS BOTH THE GROUPS ARE STRANGER AND COMPETITOR TO EACH OTHER, IT IS VERY UNLIKELY THAT THE ASSESSEE HAS CAMOUFLAGED THE TRANSACTIONS BY SUPPRESSING/MISLEADING THE FACTS UNTIL AND UNLESS SOME GLARING FACTS ARE BROUGHT ON RECORD BY THE REVENUE SUGGESTING THAT THE TRANSITION ON HAND IS NOT FREE FROM THE CLUTCHES OF MANIPULATIONS. MERELY, ON THE BASIS OF SUSPICION, THE TRANSACTION CANNOT BE TREATED AS SHAM OR BASED ON TREATY SHOPPING. FURTHERMORE, THE REFUND OF INCOME TAX HAS NOT BEEN GIVEN TO TEVA ISRAEL. AS SUCH CLAIM OF THE TEVA ISRAEL SEEKING THE REFUND OF INCOME TAX HAS BEEN DISPUTED BY THE REVENUE WHICH IS PENDING FOR ADJUDICATION. THEREFORE, IN THE GIVEN FACTS AND CIRCUMSTANCES, THERE CANNOT BE RAISED ANY DOUBT ON THE GENUINENESS OF THE PAYMENT MADE TO TEVA ISRAEL ON THE REASONING THAT IT IS EXEMPTED IN THE HANDS OF RECIPIENT IN ITS COUNTRY. IN THIS REGARD WE DRAW SUPPORT AND GUIDANCE FROM JUDGMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF PCIT VS. SHRENO LIMITED ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 88 REPORTED IN 127 TAXMANN.COM 813 WHEREIN THE FINDING OF THE TRIBUNAL WAS UPHELD WHICH IS EXTRACTED BELOW: NOW, IF THAT CONCERN WAS SUFFERING HUGE LOSS, THEN THAT CANNOT BE THE REASON TO DISALLOW CLAIM OF THE ASSESSEE. IF THIS TYPE OF LOGIC IS BEING ACCEPTED, THEN EVERY BUSINESS ORGANIZATION WAS REQUIRED TO SHOW PROFIT ONLY. THIS IS A MISPLACED NOTION AT THE END OF THE LD. CIT(A) FOR REJECTING THE CLAIM OF THE ASSESSEE. 58.20 ADMITTEDLY, THE ASSESSEE GOT EXCLUSIVE RIGHTS FOR MARKETING THE PRODUCTS NAMELY LIPITOR FOR 180 DAYS BY THE APPROVAL OF US FDA AND IN SUCH A SITUATION EVEN TEVA USA WAS BARRED TO ENTER INTO THE MARKET OF THE USA DESPITE HAVING THE APPROVAL FROM THE US FDA DATED 1 ST DECEMBER 2011. BUT SUCH APPROVAL TO TEVA USA WAS ONLY EFFECTIVE AFTER 31 MAY 2012. THIS FACT HAS NOT BEEN DISPUTED BY THE REVENUE. AS PER THE REVENUE THERE WAS NO FEAR TO THE ASSESSEE TO CARRY OUT THE ACTIVITY OF MARKETING ITS PRODUCT DURING SUCH EXCLUSIVE PERIOD ALLOTTED BY US FDA. ACCORDINGLY THERE WAS NO NEED TO SHARE THE PROFIT WITH TEVA USA AS PER THE AMENDED AGREEMENT DATED 7 TH DECEMBER 2011. AS SUCH TEVA USA WAS NOT IN A POSITION TO CONFER ANY BENEFIT TO THE ASSESSEE UNDER THE AMENDED AGREEMENT DATED 7 TH DECEMBER 2011. IN THIS CONNECTION WE NOTE THAT THE REVENUE HAS MISUNDERSTOOD THE FACTS OF THE PRESENT CASE. THE ASSESSEE HAS NOT SHARED ITS PROFIT WITH THE TEVA USA UNDER THE EXPECTATION OF ANY BENEFIT FROM TEVA USA. BUT IT WAS PAID FOR THE REASON THAT THE ASSESSEE IN THE ORIGINAL AGREEMENT DATED 7 TH DECEMBER 2010 AGREED TO WAIVE OF ITS RIGHT TO EXCLUSIVITY FOR SALE OF MEDICINE LIPITOR IN FAVOUR OF TEVA USA WITH THE UNDERSTANDING THAT TEVA USA WILL PRODUCE THE IMPUGNED MEDICINE ON ITS OWN COST AND BOTH TEVA USA AND THE ASSESSEE SHALL JOINTLY SALE THE PRODUCTS AND SHARE THE PROFIT ARISING FROM SUCH SALE EQUALLY. THE REASON FOR HAVING SUCH AGREEMENT HAS ALREADY BEEN ELABORATED IN THE PRECEDING PARAGRAPH. BUT THE ASSESSEE DID NOT HONOUR THE AGREEMENT AS IT GOT THE APPROVAL FOR ITS MANUFACTURING FACILITY BASED IN THE USA IN THE CASE OF THE SUBSIDIARY COMPANY. THUS IN SUCH A SITUATION, THE ASSESSEE DECIDED TO MANUFACTURE AND SALE ITS PRODUCTS AT ITS OWN WHICH WILL GENERATE CREATE REPUTATION/GOODWILL AND EVENTUALLY IMPROVE THE MORALS OF THE EMPLOYEES. AGAINST THE DECISION OF THE ASSESSEE, THE TEVA USA HAS FILED SUIT ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 89 IN THE US DISTRICT COURT WHICH WAS SETTLED BY AGREEING THAT THE ASSESSEE SHALL SHARE 50% OF THE PROFIT FROM THE SALE OF LIPITOR MEDICINE. ALL THESE DOCUMENTS SUCH AS ORIGINAL AGREEMENT, CASE FILE BY THE TEVA USA, SETTLEMENT WITH THE ASSESSEE WITH THE TEVA USA AND THE ORDER OF US DISTRICT COURT OF SOTHERN DISTRICT OF NEW YORK WERE AVAILABLE BEFORE THE AUTHORITIES. THEREFORE, IF WE READ ALL THESE DOCUMENTS IN AGGREGATION, THEN CANNOT BE SAID THAT THE WHOLE OF THE ARRANGEMENT AS DISCUSSED ABOVE IS A CAMOUFLAGE FOR SOME CLANDESTINELY DEAL BETWEEN 2 PARTIES. 58.21 LIKEWISE, IT WAS ALSO ALLEGED BY THE REVENUE THAT AT THE TIME OF AGREEMENT DATED 7 TH DECEMBER 2010 THERE WAS NO RIGHT AVAILABLE TO THE ASSESSEE FROM THE US FDA AND THEREFORE IT CANNOT BE SAID THE ASSESSEE HAS RELINQUISHED OR WAIVED THE RIGHT IN FAVOUR OF TEVA USA. TO OUR HUMBLE UNDERSTANDING THE AO AGAIN MISUNDERSTOOD THE CONTEXT OF ORIGINAL AGREEMENT. THERE WAS NO RIGHT RELINQUISHED IN SUCH AGREEMENT AS SUCH IT WAS AGREED BETWEEN THE PARTIES OF THE AGREEMENT THAT UPON OCCURRENCE OF CERTAIN EVENT RANBAXY WILL RELINQUISH OR WAIVE OF ITS RIGHT TO EXCLUSIVITY IN FAVOR OF TEVA USA. THIS FACT CAN BE VERIFIED FROM THE PREAMBLE OF THE AGREEMENT DATED 7 TH DECEMBER 2010 WHICH READS AS UNDER: WHEREAS, IN ORDER TO MAKE THE PRODUCT MORE QUICKLY AVAILABLE TO CONSUMERS IN THE TERRITORY, RANBAXY DESIRES TO EITHER SELECTIVELY WAIVE OR RELINQUISH ITS FIRST TO FILE EXCLUSIVITY RIGHTS, CONTINGENT UPON THE OCCURRENCE OF CERTAIN EVENTS, FOR THE PRODUCT IN FAVOR OF THE TEVA ANDA, AND TEVA DESIRES LHAT RANBAXY EFFECT SUCH SELECTIVE WAIVER OR RELINQUISHMENT, AND TEVA AND RANBAXY DESIRE TO ENTER INTO A BUSINESS RELATIONSHIP FOR THE SALE OF THE TEVA PRODUCT IN THE TERRITORY (AS HEREINAFTER DEFINED), ALL ON THE TERMS AND CONDITIONS, AND SUBJECT TO THE CONTINGENCIES, OF THIS AGREEMENT. 58.22 M/S TEVA USA UPON OCCURRENCE OF CONTINGENT EVENT PERFORMED ITS PART PROMISES BUT THE RANBAXY DID NOT HONOUR THE SAME. HENCE TEVA USA PROCEEDED TO FILE SUIT AGAINST THE ASSESSEE. THUS REVISED AGREEMENT WAS ENTERED WITH VIEW TO AVOID UNNECESSARY LITIGATION WHICH WOULD HAVE CAUSED LONG PROTRACTED COST TO THE BOTH THE PARTIES. THUS THE ASSESSEE AGREED TO SHARE PROFIT WITH TEVA WHICH IS IN NATURE OF COMPENSATION PAID FOR DEFAULT OF BUSINESS OBLIGATION. SUCH COMPENSATION IS ALLOWABLE BUSINESS EXPENSES OR LOSSES. IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FROM THE ORDER OF COORDINATE BENCH OF BANGALORE ITAT IN CASE OF CANARA ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 90 HOUSING DEVELOPMENT COMPANY VS. CIT REPORTED IN [2017] 81 TAXMANN.COM 472 WHEREIN IT WAS HELD AS UNDER: IT IS PERTINENT TO NOTE THAT WHEN THE COMPENSATION IS DETERMINED BETWEEN THE PARTIES AS PER THE FAIR MARKET PRICE AS ON THE DATE THEN MERELY BECAUSE THE ASSESSEE AGREED TO SETTLE THE DISPUTE BY MUTUAL COMPROMISED TERMS CANNOT BE A REASON OF DOUBTING THE GENUINENESS OF THE CLAIM. FURTHER THE ACTUAL PAYMENT OF THE COMPENSATION HAS NOT BEEN DISPUTED THEREFORE, WHEN THE ASSESSEE HAS REALIZED IN DEFINITE TERMS THAT IT WOULD NOT BE POSSIBLE FOR IT TO HONOUR THE COMMITMENT AND OBLIGATION UNDER THE AGREEMENT THEN THE LIABILITY ARISES UNDER THE AGREEMENT IS A CERTAIN LIABILITY THOUGH THE QUANTUM OF THE SAME COULD HAVE BEEN DETERMINED SUBSEQUENTLY. 58.23 AT THIS STAGE A QUESTION ALSO STRIKES TO OUR MIND WHETHER THE REVENUE CAN INTERFERE IN THE DECISION-MAKING OF THE ASSESSEE WHO IS CARRYING OUT ITS BUSINESS ACTIVITIES. IN THIS CONNECTION WE NOTE THAT THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. DHANRAJGIRJI RAJA NARASINGIRJI 91 ITR 544 (SC), HAS HELD THAT IT IS NOT OPEN TO DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE. 58.24 LIKEWISE, IN THE CASE OF CIT VS. WAL CHAND AND CO. (P) LTD. 65 ITR 381 (SC), WHEREIN IT HAS BEEN, INTER ALIA, HELD THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS HAS TO BE ADJUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. 58.25 WE ALSO NOTE THAT THE HONBLE SUPREME COURT IN THE CASE OF [ SASSON J. DAVID & CO. (P) LTD. V. CIT REPORTED IN [1979] 118 ITR 261/1 TAXMAN 485 (SC)] HAS OBSERVED THAT THE EXPRESSION 'WHOLLY & EXCLUSIVELY' USED IN SECTION 10(2)(XV) OF THE INCOME-TAX ACT, 1922 (WHICH CORRESPONDS TO SECTION 37(1) OF THE INCOME-TAX ACT, 1961) DOES NOT MEAN 'NECESSARY'. ORDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF HIS OR ITS BUSINESS. SUCH AN EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY. IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS, THE ASSESSEE CAN CLAIM DEDUCTION EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH AN EXPENDITURE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 91 58.26 THE LAW IS WELL SETTLED THAT BUSINESS DECISIONS OF ASSESSEE CANNOT BE THE SUBJECT MATTER OF CONSIDERATION OF REVENUE AUTHORITIES. HOW HE HAS TO EARN INCOME? HOW AND WHAT TYPE OF EXPENSES HE HAS TO INCUR? WHAT TYPE OF BUSINESS HE SHALL BE DOING. WHAT WILL BE THE NATURE OF THE BUSINESS? THE ASSESSEE HAS TO DECIDE IT. REVENUE AUTHORITIES CANNOT SIT ON THE ARM CHAIR OF A BUSINESSMAN. THE NATURE OF BUSINESS OF THE ASSESSEE CANNOT BE CHALLENGED BY ANY AUTHORITY WHETHER ASSESSEE IS COMPETENT OF DOING THE BUSINESS OR NOT COMPETENT. IT IS THE ASSESSEE WHO HAS TO DECIDE HOW TO EARN THE INCOME. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT THE DECISION TAKEN BY THE ASSESSEE FOR COMPENSATING TO TEVA USA CANNOT BE QUESTIONED BY THE REVENUE. 58.27 THE NEXT CONTROVERSY ARISES WHETHER THE PAYMENT WAS MADE TO ELIMINATE THE COMPETITION BETWEEN THE ASSESSEE AND TEVA USA. IN THIS REGARD WE NOTE THAT THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE GOT THE EXCLUSIVE RIGHT TO MANUFACTURE THE MEDICINE AND TO MARKET THE SAME FOR A PERIOD OF 180 DAYS. AS SUCH THERE WAS NO COMPETITION OF ANY TYPE FOR SUCH 180 DAYS BETWEEN THE ASSESSEE AND TEVA USA. IT IS FOR THE REASON THAT M/S TEVA USA WAS NOT ALLOWED TO ENTER INTO THE US MARKET IN CONNECTION WITH THE MEDICINE NAMELY LIPITOR. ACCORDINGLY WE HOLD THAT DURING THE PERIOD OF EXCLUSIVITY THERE WAS NO COMPETITOR OF THE ASSESSEE IN THE MARKET OF THE USA AS FAR AS THE ISSUE OF GENERIC MEDICINE IS CONCERN AND THEREFORE IT CANNOT BE SAID THAT THE COMPENSATION WAS PAID BY THE ASSESSEE TO ELIMINATE THE COMPETITION. FURTHERMORE, THE APPROVAL WAS GRANTED TO THE ASSESSEE ONLY FOR A LIMITED PERIOD OF 180 DAYS WHICH IS LESS THAN THE PERIOD OF ONE YEAR. THEREFORE, ON THIS REASONING THAT THE IMPUGNED COMPOSITION PAID BY THE ASSESSEE CANNOT BE SAID AS CAPITAL EXPENDITURE ON THE REASONING THAT IT WAS PAID TO ELIMINATE THE COMPETITION. 58.28 IT IS ALSO NOT OUT OF THE PLACE TO MENTION THAT THE ASSESSEE HAS RECEIVED A SUM OF 15 CRORES IN PURSUANCE TO THE ORIGINAL AGREEMENT DATED 7 TH DECEMBER 2010 MADE WITH TEVA USA WHICH WAS OFFERED TO TAX AND THE SAME WAS ACCEPTED BY THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 92 REVENUE. IN OTHER WORDS THE REVENUE HAS ACCEPTED PART OF THE AGREEMENT AS FAR AS $15 MILLION IS CONCERNED BUT NOT ADMITTING THE PAYMENT OF COMPENSATION MADE TO TEVA ISRAEL WHICH IS ALSO ARISING FROM THE SAME AGREEMENT. IN OUR CONSIDERED VIEW THE REVENUE CANNOT ACCEPT PART OF THE AGREEMENT FAVOURING TO IT AND REJECT PART OF THE AGREEMENT WITHOUT ASSIGNING ANY VALID REASONS. THE REVENUE EITHER SHOULD HAVE ACCEPTED THE ENTIRE AGREEMENT OR SHOULD HAVE REJECTED THE SAME IN ENTIRETY. IT IS NOT EXPECTED FROM THE REVENUE TO ACCEPT PART OF THE AGREEMENT AND REJECT PART OF THE AGREEMENT WHICH IS NOT A GOOD PRACTICE. 58.29 THE SETTLEMENT AGREEMENT WHICH IS GIVING RISE TO THE COMPENSATION PAID BY THE ASSESSEE WAS ENTERED DATED 7 TH OF DECEMBER 2011 I.E. WITHIN THE FINANCIAL YEAR UNDER CONSIDERATION CORRESPONDING TO THE ASSESSMENT YEAR 2012-13. THEREFORE, IT CANNOT BE SAID THAT THE LIABILITIES INCURRED AGAINST SUCH CONTRACTS/AGREEMENT BY THE ASSESSEE WERE CONTINGENT IN NATURE. THE LEARNED DR AT THE TIME OF HEARING HAS RELIED ON VARIOUS JUDGMENTS, BUT THE SAME ARE DISTINGUISHABLE FROM THE FACTS OF THE CASE ON HAND. IN THOSE JUDGMENTS AS WELL THERE WAS NO DENIAL FOR DENYING THE DEDUCTION IF THE EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS. 58.30 IN THE LIGHT OF THE ABOVE STATED DISCUSSION, WE HOLD THAT THE PAYMENT TO THE TEVA ISRAEL HAS BEEN MADE BY THE ASSESSEE AS A MATTER OF COMMERCIAL EXPEDIENCY WHICH IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. THUS THE GROUND APPEAL OF THE ASSESSEE IS ALLOWED. 59. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 10 IS THAT THE LEARNED DRP ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AO FOR RS. 25,95,95,57,864/- ( SETTLEMENT AGREEMENT OF RS. 1827,65,57,864/- + PLEA AGREEMENT OF RS 768,30,00000/-) UNDER SECTION 37 OF THE ACT ON ACCOUNT OF PAYMENT MADE TO US FDA FOR THE SETTLEMENT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 93 60. THE ASSESSEE HAS MANY MANUFACTURING PLANTS INCLUDING TWO PLANTS LOCATED AT DISTRICT SIRMOUR (PAONTA SAHIB), HIMACHAL PRADESH AND DEWAS, MADHYA PRADESH. THE DISPUTE ON HAND RELATE TO THESE MANUFACTURING PLANTS. THESE MANUFACTURING PLANTS ARE USED TO MANUFACTURE PHARMACEUTICAL PRODUCTS WHICH WERE EXPORTED TO USA. THESE MANUFACTURING PLANTS WERE TO MAINTAIN CERTAIN QUALITY STANDARDS OF CURRENT GOOD MANUFACTURING PRACTICE (FOR SHORT CGMP) AS PRESCRIBED BY US FDA OTHERWISE IT WAS NOT POSSIBLE FOR THE ASSESSEE TO EXPORT THE PHARMACEUTICAL PRODUCTS TO USA. 60.1 TO ENSURE CGMP IN THE MANUFACTURING PLANTS OF THE ASSESSEE AS DISCUSSED ABOVE, AN INSPECTION WAS CARRIED OUT BY US FDA DURING THE PERIOD FROM 20 TH FEBRUARY 2006 TO 25 TH FEBRUARY 2006 AND 27 TH FEBRUARY TO 2 ND MARCH 2006 AT HIMACHAL PRADESH AND DEWAS MADHYA PRADESH RESPECTIVELY. 60.2 AS A RESULT OF INSPECTION, THE US FDA FOUND CERTAIN DEVIATIONS FROM THE PRESCRIBED CGMP AS DETAILED UNDER: I. PANOTA SAHIB INSPECTION IN 2006, THE US FDA FOUND INCOMPLETE TESTING RECORDS AND AN INADEQUATE PROGRAM TO ASSESS THE STABILITY CHARACTERISTICS OF DRUGS. II. DEWAS FACILITY INSPECTION IN 2006, THE US FDA FOUND INCOMPLETE TESTING RECORDS AND AN INADEQUATE PROGRAM TO ASSESS THE STABILITY CHARACTERISTICS OF DRUGS AS WELL AS SIGNIFICANT CGMP DEVIATION. 61. THEREAFTER, IN THE YEAR 2007, A SUIT WAS ALSO FILED BY WHISTLE BLOWER, SHRI DINESH S. THAKUR (RELATOR OF THE SETTLEMENT) IN US DISTRICT COURT IN THE DISTRICT OF MARYLAND FOR CIVIL AND CRIMINAL ALLEGATION ON ACCOUNT OF VIOLATION OF US LAWS. 61.1 SUBSEQUENTLY, IN THE YEAR 2008 THE ASSESSEE WAS ISSUED OBSERVATION LETTER AND ALERT LETTER FROM US FDA. IN THESE LETTERS IT WAS PROPOSED TO BAN THE IMPORT OF PHARMACEUTICAL PRODUCTS TO USA FROM THE MANUFACTURING PLANTS OF THE ASSESSEE AS DISCUSSED ABOVE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 94 62. AS A RESULT OF BAN ON THE EXPORT TO USA ON ACCOUNT OF THE ALLEGATIONS AS DISCUSSED ABOVE, THE BUSINESS OF THE ASSESSEE WAS GETTING AFFECTED. ACCORDINGLY THE ASSESSEE IN VIEW OF PROTECTING ITS OVERALL BUSINESS AND COMMERCIAL EXPEDIENCY HAVE ENTERED INTO THE CONSENT DECREE WITH US FDA IN THE MONTH OF DECEMBER 2011 TO SETTLE THE SUIT OR RESOLVE THE EXISTING ADMINISTRATIVE ACTION WITHOUT ADMITTING THE GUILT, WHICH WAS APPROVED BY THE DISTRICT COURT OF MARYLAND DATED 25-1-2012. 62.1 BASED ON THE CONSENT DECREE (CD) APPROVED BY THE MARYLAND DISTRICT COURT DATED 25-01-2012 SETTLEMENT AND PLEA AGREEMENT PROCESS WERE INITIATED WITH UNITED STATE DEPARTMENT OF JUSTICE (DOJ). AT THE SAME TIME THE ASSESSEE BASED ON THE NEGOTIATION CREATED PROVISIONS IN THE BOOKS OF ACCOUNTS FOR USD 500 MILLION REPRESENTING LUMP-SUM AMOUNT FOR SETTLEMENT AS WELL AS PLEA AGREEMENT. HOWEVER, THE ASSESSEE DID NOT CLAIM THE SAME IN THE ORIGINAL RETURN OF INCOME. AS SUCH THE ASSESSEE DISALLOWED THE SAME IN THE COMPUTATION OF INCOME. 62.2 SUBSEQUENTLY, THE SETTLEMENT FOR CIVIL LIABILITY WAS FINALIZED IN THE MONTH OF MAY 2013 FOR USD 350 MILLION AND INTEREST THEREON WITH EFFECT FROM 1 ST FEBRUARY 2012. ACCORDINGLY, SETTLEMENT AGREEMENT TO THAT EFFECT WAS SIGNED BETWEEN ASSESSEE AND ITS AE BASED USA AND DOJ ACTING ON BEHALF VARIOUS DEPARTMENTS AND PARTICIPATING STATES DATED 8-5-2013. IN ADDITION ASSESSEE AND ITS ASSOCIATE ALSO AGREED TO COMPENSATE THE RELATOR/WHISTLE BLOWER, SHRI DINESH S. THAKUR FOR AN AMOUNT OF USD 6.8 MILLION. THE ASSOCIATES OF THE ASSESSEE WHO WERE THE PART OF SETTLEMENT AGREEMENT STAND AS UNDER: (I) RANBAXY INC. (USA) (II) RANBAXY PHARMACEUTICALS INC. (USA) (III) RANBAXY LABORATORIES INC. (USA) (IV) OHM LABORATORIES INC. (USA) (V) RANBAXY USA INC. (USA) ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 95 62.3 SIMILARLY CRIMINAL LIABILITY WAS ALSO FINALISED FOR USD 150 MILLION IN THE MONTH OF MAY 2013 AND PLEA AGREEMENT TO THAT EFFECT WAS SINGED BETWEEN M/S RANBAXY USA INC AND DOJ IN THE YEAR MAY 2013. 62.4 BESIDE THE ABOVE THE ASSESSEE AND ITS AE SEPARATELY ENTERED INTO SETTLEMENT AGREEMENT WITH STATE OF CONNECTICUT AND OREGON WHICH WERE SETTLED FOR USD 2,27,080.46/- AND USD 23,37,288/- RESPECTIVELY. 62.5 THEREAFTER THE ASSESSEE AND ITS ASSOCIATES APPOINTED TP CONSULTANT NAMELY PWC FOR ALLOCATION OF AMOUNT PAID TO DOJ IN CONSEQUENCE OF SETTLEMENT AND PLEA AGREEMENT BETWEEN THEM. AS PER THE REPORT OF CONSULTANT NAMELY PWC, THE ASSESSEE CLAIMED THE FOLLOWING AMOUNT IN THE REVISED RETURN OF INCOME. 1. RS. 17,10,27,23,000/- (RS. 17,92,70,00,000/- CLAIMED IN CURRENT YEAR LESS RS. 91,42,77,000/- REVERSED IN SUBSEQUENT BEING RELATES TO AE) ON ACCOUNT OF CIVIL LIABILITY USD 350 MILLION . 2. RS. 52.29 MILLION ON ACCOUNT OF INTEREST PAYABLE ON CIVIL LIABILITY OF USD 350. 3. RS. 330.53 MILLION ON ACCOUNT OF COMPENSATION PAID TO RELATOR/WHISTLE BLOWER. 4. RS. 11.04 MILLION ON ACCOUNT OF SETTLEMENT WITH THE STATE OF CONNECTICUT 62.6 HOWEVER THE ASSESSEE DID NOT CLAIM ITS SHARE IN THE AMOUNT PAID IN CONSEQUENCE OF PLEA AGREEMENT OF CRIMINAL LIABILITY (USD 150 MILLION) IN RETURN OF INCOME BUT CLAIMED THE SAME THROUGH A SEPARATE NOTE DURING THE ASSESSMENT PROCEEDING FOR RS. 768.3 CRORES BEING BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE ACT. 63. HOWEVER, THE AO DURING THE ASSESSMENT PROCEEDINGS REQUIRED THE ASSESSEE TO FURNISH CERTAIN DETAILS AND FOR THIS PURPOSE ISSUED A SHOW CAUSE NOTICE. THE DETAILS SOUGHT BY THE AO STAND AS UNDER: PLEASE FURNISH THE DATE WISE DETAILS OF PAYMENT OF SAID AMOUNT & FURNISH COPY OF LEDGER ACCOUNT AND HOW IT IS ACCOUNTED IN P & L A/C ? PLEASE FURNISH DATE WISE / YEAR WISE PROVISION MADE FOR PAYMENT TO DOJ IN AUDITED ACCOUNTS? PLEASE FURNISH DATE WISE DETAILS OF PAYMENT MADE TO DOJ ALONG WITH MANNER OF PAYMENT AND MENTION NAME OF THE RECIPIENT OF THE PAYMENT & DEDUCTION OF TDS THEREON. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 96 PLEASE SHOW AND JUSTIFY ALLOWABILITY OF PAYMENT MADE TO DOJ WITH PARTICULAR EMPHASIS ON FOLLOWING ISSUES: I. WHY THE SAID PAYMENT IS NOT CONSIDERED AS PAYMENT MADE FOR INFRACTION OF LAW WITHIN CONDITION OF SECTION 37(1) OF THE ACT ? II. WITHOUT PREJUDICE TO ABOVE, WHY THE SAID PAYMENT SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE? III. SINCE THE ABOVE SAID PAYMENT DOES NOT PERTAIN TO AY 2012 2013, PLEASE JUSTIFY ALLOWABILITY OF THE SAID PAYMENT IN THIS CONTEXT, IV. AS THE SAID PAYMENT APPEARS TO BE IN THE NATURE OF CONTINGENT LIABILITY, PLEASE JUSTIFY ALLOWABILITY OF A CONTINGENT LIABILITY, V. WITHOUT PREJUDICE TO ABOVE, PLEASE SHOW CAUSE AS TO WHY IT SHOULD NOT BE TREATED AS CAPITAL LOSS? IN CASE OF SETTLEMENT OF CRIMINAL CASE, THE PAYMENT MADE IS CLAIMED BY WAY OF NOTES TO COMPUTATION OF TOTAL INCOME. HENCE, IT IS SEEN THAT SUCH PAYMENT IS NOT ALLOWABLE ON THE POINTS CONTAINED IN PARA 5 ABOVE AND ALSO, BECAUSE RANBAXY LABORATORIES LIMITED WAS NOT EVEN A PARTY TO THIS SETTLEMENT. PLEASE FURNISH YOUR REPLY ON THIS CONTEXT AND ON THE POINTS CONTAINED IN PARA 5 ABOVE IN CONTEXT OF CRIMINAL SETTLEMENT PAYMENTS? 64. THE ASSESSEE IN RESPONSE TO SUCH SHOW CAUSE NOTICE SUBMITTED THAT THE PAYMENT MADE TO THE USA AS A RESULT OF SETTLEMENT AGREEMENT DOES NOT REPRESENT THE INCOME RECEIVED OR TO BE RECEIVED OR ACCRUE OR ARISE OR DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA AS PER THE PROVISIONS OF SECTION 5 OF THE ACT. THEREFORE, THERE WAS NO QUESTION OF DEDUCTING THE TDS UNDER SECTION 195 OF THE ACT. 64.1 THE ASSESSEE FURTHER SUBMITTED THAT THE EXPENSES IN DISPUTE HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. THE PAYMENT UNDER THE SETTLEMENT AGREEMENT WAS PAID TO AVOID THE ADVERSE EFFECT ON THE BUSINESS, DISRUPTION OF THE BUSINESS, APPROVAL OF THE FUTURE PRODUCTS, REPUTATION, GOODWILL, EMPLOYEES MORAL, MANAGEMENT TIME AND RESOURCES FROM LITIGATION. THE PAYMENT WAS MADE PRIMARILY TO AVOID THE DELAY, UNCERTAINTY, INCONVENIENCE AND THE EXPENSES ON PROTRACTED LITIGATION OF THE CLAIM. EVEN THE ALLEGATIONS WERE NOT PROVED BY THE COURT OF USA. THEREFORE, THE PAYMENT MADE IN CONSEQUENCE TO THE SETTLEMENT DOES NOT REPRESENT A PENALTY/FINE OR COMPENSATION OF ANY INFRINGEMENT OF LAW. 64.2 LIKEWISE THE PLEA AGREEMENT WAS THE PART OF OVERALL SETTLEMENT AND THEREFORE THE SAME CANNOT BE READ IN ISOLATION. THE PLEA AGREEMENT WAS COMPULSORY TO ENTER THE SETTLEMENT DEED. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 97 64.3 MOREOVER SUCH EXPENSES ARE NOT AN OFFENCE OR PROHIBITED UNDER THE LAW AS PROVIDED UNDER EXPLANATION 1 TO SECTION 37 OF THE ACT. THE SETTLEMENT WAS MADE ON ACCOUNT OF PROCEDURAL NON-COMPLIANCE SUCH AS NON-MAINTENANCE OF TEST DATA, FAILURE TO HAVE ADEQUATE TESTING PROGRAM. LIKEWISE, THERE WAS NO ALLEGATION SO AS TO HOLD THE PHARMACEUTICAL DRUGS MANUFACTURED BY THE ASSESSEE WERE NOT FIT FOR CONSUMPTION. RATHER, US FDA ON VARIOUS OCCASIONS HAVE ISSUED CLARIFICATIONS TO THE CONSUMERS STATING THAT THE DRUGS IS FIT FOR THE CONSUMPTIONS AND THE PATIENTS SHOULD NOT DISCONTINUE THE USE OF THE SAME IF THEY HAVE ALREADY PURCHASED. ACCORDINGLY, THE ASSESSEE CONTENDED THAT THERE WAS NO VIOLATION OF LAW, PROHIBITING THE ASSESSEE TO CLAIM THE DEDUCTION UNDER SECTION 37(1) OF THE ACT. 64.4 WITHOUT PREJUDICE TO THE ABOVE THERE WAS NO VIOLATION OF THE LAW PREVAILING IN INDIA. IF AT ALL THERE WAS ANY VIOLATION THEN IT WAS VIOLATION OF THE LAW OF A COUNTRY OUTSIDE INDIA. IT IS THE SETTLED LAW THAT PROVISIONS SPECIFIED UNDER EXPLANATION 1 TO SECTION 37(1) OF THE ACT SHALL NOT BE APPLIED WITH RESPECT TO THE VIOLATIONS COMMITTED IN A COUNTRY OUTSIDE INDIA. THUS THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 37 OF THE ACT CANNOT BE DENIED. FURTHERMORE THE EXPLANATION 1 OF SECTION 37(1) OF THE ACT WAS BROUGHT TO DISALLOW THE PAYMENT MADE ON ACCOUNT OF PROTECTION, MONEY EXTORTION, HAFTA, BRIBES ETC AS BUSINESS EXPENSES WHEREAS THE COMPENSATION IN THE PRESENT CASE WAS PAID TO AVOID THE LITIGATION. 64.5 IT WAS ALSO CONTENDED THAT THE PAYMENT WAS MADE TO THE USA AFTER ENTERING INTO THE SETTLEMENT AGREEMENTS IN ORDER TO RESUME ITS MANUFACTURING ACTIVITIES. THEREFORE, SUCH PAYMENT WAS MADE IN THE COURSE OF THE BUSINESS. LIKEWISE, THERE WAS NEITHER ANY BENEFIT OF ENDURING NATURE ACCRUING TO THE ASSESSEE NOR ANY CAPITAL ASSETS IS COMING INTO EXISTENCE OUT OF SUCH PAYMENT. ACCORDINGLY, THE IMPUGNED EXPENDITURE CANNOT BE TREATED AS CAPITAL IN NATURE. 64.6 ADMITTEDLY, THE LIABILITY UPON THE ASSESSEE ACCRUED ONCE IT HAS ENTERED INTO A CONSENT DECREE IN THE MONTH OF MONTH OF DECEMBER 2011 WHICH WAS APPROVED BY THE DISTRICT COURT OF MARYLAND, USA IN THE MONTH OF JANUARY 2012. ACCORDINGLY, THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 98 ASSESSEE BEING A PRUDENT BUSINESSPERSON HAS ACCOUNTED FOR SUCH LIABILITY IN THE YEAR UNDER CONSIDERATION AS PER THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. ADMITTEDLY, THE AMOUNT WAS QUANTIFIED AFTER THE SETTLEMENT AGREEMENT WHICH WAS ENTERED IN THE MONTH OF MAY 2013, BUT THE LIABILITY WAS QUANTIFIED BASED ON MOST RELIABLE ESTIMATE POSSIBLE AS PER AS 29. 64.7 THE ASSESSEE FURTHER SUBMITTED THAT THE LIABILITY ACCRUED TO IT ON ACCOUNT OF NON-COMPLIANCE OF CGMP OF US FDA IN THE FACTORIES WHICH WERE ENGAGED IN EXPORTING THE GOODS TO USA. THEREFORE, THERE REMAINS NO DOUBT THAT SUCH LIABILITY/COMPENSATION RELATES TO THE BUSINESS OF THE ASSESSEE AND THEREFORE SUCH LOSS CANNOT BE TERMED AS CAPITAL LOSS. THE COMPENSATION BEING A TRADING LOSS IS AN ELIGIBLE UNDER SECTION 37 OF THE ACT. 64.8 HOWEVER, THE AO BEING DISSATISFIED WITH THE CONTENTION OF THE ASSESSEE HELD THAT THE EXPENSES INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF THE BUSINESS. THEREFORE THE SAME CANNOT BE ALLOWED AS DEDUCTION UNDER EXPLANATION 1 TO SECTION 37 OF THE ACT. THE ASSESSEE, INDEED HAS MADE THE PAYMENT ON ACCOUNT OF INFRINGEMENT OF LAW AS EVIDENT FROM THE WEBSITE OF DOJ. AS SUCH, THE EXPENSES RELATES TO THE VIOLATION COMMITTED BY THE ASSESSEE OF THE GUIDELINES ISSUED BY US FDA. 64.9 LIKEWISE, HAD THE PAYMENT NOT BEEN MADE TO DOJ, IT WAS NOT POSSIBLE FOR THE ASSESSEE TO CARRY ON ITS MANUFACTURING ACTIVITY WHICH WOULD HAVE ADVERSELY AFFECTED THE BUSINESS OF THE ASSESSEE. AS SUCH THE ASSESSEE MADE THE PAYMENT TO DOJ TO CONTINUE ITS BUSINESS ACTIVITIES. THEREFORE, THE ASSESSEE AFTER MAKING THE DUE PAYMENT GETS THE BENEFIT OF CONTINUING THE BUSINESS WHICH REPRESENTS THE BENEFIT OF ENDURING NATURE. THUS, SUCH EXPENSES HAS TO BE TREATED AS CAPITAL IN NATURE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 99 64.10 ADMITTEDLY, THE OBSERVATION LETTER WAS RECEIVED BY THE ASSESSEE IN THE 2008, THUS THE PAYMENT MADE BY THE ASSESSEE REPRESENTS THE PRIOR PERIOD EXPENDITURE AND THEREFORE THE SAME CANNOT BE ALLOWED AS DEDUCTION. 64.11 THE AMOUNT OF LIABILITY WAS QUANTIFIED BASED ON THE SETTLEMENT AGREEMENT MADE ON 13 TH MAY 2013 AND THEREFORE SUCH PAYMENT DOES NOT RELATE TO THE YEAR UNDER CONSIDERATION. IN OTHER WORDS, IF THE LIABILITY WAS CRYSTALLISED IN THE FINANCIAL YEAR 2013-14 THUS ANY PROVISION RELATING TO SUCH LIABILITY IS MADE IN THE FINANCIAL YEAR 2011-12 WOULD BE IN THE NATURE OF CONTINGENT LIABILITY. LIKEWISE, THE RPI USA DEMANDED THE PAYMENT FROM THE ASSESSEE IN THE FINANCIAL YEAR 2013-14 ON THE REASONING THAT IT PERTAINS TO THE ASSESSEE. 64.12 IT WAS ALSO OBSERVED THAT ALL THE PAYMENTS WERE MADE TO DOJ BY RPI USA BEING THE MAIN PARTY AS ITS NAME WAS APPEARING IN ALL THE CONCERNED DECREE AND THE SETTLEMENT AGREEMENTS. THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE HAS INCURRED THE IMPUGNED EXPENSES IN THE COURSE OF ITS BUSINESS ACTIVITIES. 64.13 IN VIEW OF THE ABOVE, THE AO DISALLOWED THE DEDUCTION FOR RS. 1827,65,57,864/-(1788,27,00,000/- IN RESPECT OF AGREEMENT AND 39,38,57,864/-IN RESPECT OF REIMBURSEMENT OF RELATORS ATTORNEY FEES & COST) AND ADDED TO THE TOTAL INCOME OF ASSESSEE AND ALSO REJECTED THE CLAIM MADE BY THE ASSESSEE BY WAY NOTE FOR RS. 8597.30 CRORES. 65. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP WHO ALSO REJECTED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER: 66.1 THE SETTLEMENT AGREEMENT CAME INTO EXISTENCE DATED 5 TH SEPTEMBER 2013 WHEREIN THE AMOUNT OF LIABILITY WAS QUANTIFIED. AS SUCH, THE AMOUNT OF LIABILITY WAS NOT QUANTIFIED IN PURSUANCE TO THE CONSENT DECREE. THUS, THERE WAS NO LIABILITY CRYSTALLIZED IN THE YEAR UNDER CONSIDERATION FOR THE REASONS AS DISCUSSED ABOVE. AS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 100 SUCH THE LIABILITY OF USD 500 MILLION WAS CRYSTALLIZED IN THE ASSESSMENT YEAR 2014- 15 AND NOT IN THE YEAR UNDER CONSIDERATION. 66.2 ADMITTEDLY, THE SETTLEMENT AGREEMENTS WERE ENTERED BETWEEN ASSESSEE ALONG WITH ITS GROUP COMPANIES LOCATED IN USA ESPECIALLY RANBAXY PHARMACEUTICALS INC USA. HOWEVER, THE ASSESSEE HAS PAID THE SUM OF US DOLLAR 500 MILLION TO USA AFTER ALLOCATING THE US DOLLAR OF 26 MILLION TO ITS ASSOCIATE RPI. AS SUCH, IT IS NOT CLEAR WHY THE ASSESSEE HAS BORNE THE ENTIRE AMOUNT BY CLAIMING THE SAME IN ITS BOOKS OF ACCOUNTS. 66.3 LIKEWISE, AS PER THE SETTLEMENT AGREEMENT AND PLEA AGREEMENT, IT IS CLEAR THAT THE SERIOUS ALLEGATIONS WERE LEVIED AGAINST THE RANBAXY AND ITS INDIVIDUALS. THEREFORE IT IS CLEAR THAT EXPLANATION 1 TO SECTION 37(1) OF THE ACT APPLICABLE IN THE PRESENT FACTS AND CIRCUMSTANCES AS THE PAYMENT IS MADE AGAINST THE VIOLATION OF US FDA RULES. THEREFORE THE DRP WAS OF THE CONSIDERED OPINION THAT EVEN ON MERITS THE EXPENSES CANNOT BE ALLOWED AS DEDUCTION. THUS THE LEARNED DRP UPHELD THE FINDING OF THE AO. 67. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT (A), THE ASSESSEE IS IN APPEAL BEFORE US. 68. THE LEARNED AR BEFORE US SUBMITTED THAT THE MAJOR SOURCE OF THE ASSESSEES BUSINESS WAS FROM THE UNITED STATE OF AMERICA BUT DUE TO RED FLAG ON IMPORT FROM ITS MANUFACTURING FACILITY IN INDIA AND SUBSEQUENT SUIT FILED IN THE US COURTS, ITS BUSINESS WAS GETTING HAMPERED. FURTHER, THE LITIGATION WAS TIME TAKING PROCESS, INVOLVING HUGE COST, DIVERSION OF MANAGEMENT TIME AND DAMAGE TO REPUTATION. THEREFORE, THE ASSESSEE ALONG WITH ITS AE ENTERED INTO CONSENT DECREE FOR SETTLEMENT WITHOUT ADMITTING TO GUILTY OF ANY ALLEGATION MADE AGAINST IT IN ORDER TO PROTECT ITS BUSINESS INTEREST. HENCE, THE AMOUNT INCURRED IN THE SETTLEMENT AGREEMENT IN SUCH CIRCUMSTANCES IS WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSE AND ALLOWABLE UNDER SECTION 37 OF THE ACT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 101 68.1 THE LEARNED AR FURTHER SUBMITTED THAT SAID AMOUNT OF USD 500 MILLION WAS AS A RESULT OF CONSENT DECREE APPROVED BY US DISTRICT COURT OF MARYLAND IN THE MONTH OF JANUARY 2012. FURTHER, THE AMOUNT OF USD 500 MILLION WAS ALSO QUANTIFIED AT THE SAME TIME EXCEPT THE ALLOCATION TOWARDS CIVIL OR CRIMINAL LIABILITY, WHICH CAN BE VERIFIED FROM THE EMAIL EXCHANGED BETWEEN ITS ATTORNEY SHRI W. WARREN HAMEL AND SHRI ROANN NICHOLS OF DOJ. THUS THE AMOUNT WAS CRYSTALIZED IN THE YEAR UNDER CONSIDERATION I.E. A.Y. 2012-13 ONLY. THEREFORE NO INFERENCE CAN BE DRAWN AGAINST ASSESSEE MERELY FOR THE REASON THAT THE QUANTIFICATION OF AMOUNT UNDER DIFFERENT HEADS WAS NOT AVAILABLE. THE LEARNED AR IN THIS REGARD PLACED HIS RELIANCE ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CALCUTTA AND CO LTD VS. CIT REPORTED IN 37 ITR 1, METAL BOX CO. OF INDIA LTD VS. THEIR WORKMAN 73 ITR 53 AND BHARAT EARTH MOVERS VS. CIT 245 ITR 428. 68.2 THE LEARNED AR ALSO SUBMITTED THERE WAS NOT ANY INFRINGEMENT OF LAW COMMITTED BY THE ASSESSEE. AS SUCH THE ALLEGATION MADE BY THE US FDA WITH REGARDS TO ITS MANUFACTURING FACILITIES WERE OF PROCEDURAL DEFAULT ONLY. IN NONE OF THE SUIT FILED IN THE COURTS OF USA AGAINST THE ASSESSEE, OR ITS AE WERE FOUND GUILTY OF ANY OTHER DEFAULT AS ALLEGED AGAINST IT. THE CONSENT DECREE WAS ENTERED, WITHOUT ADMITTING GUILTY, WITH A VIEW TO RESOLVE THE DISPUTE IN ORDER TO PROTECT BUSINESS INTEREST. THEREFORE, THE ASSESSEE CANNOT BE PENALISED MERE ON THE BASIS OF SOME ALLEGATION MADE AGAINST IT WHICH WERENT PROVED. THE LEARNED AR DREW OUR ATTENTION ON THE CONSENT DECREE, SETTLEMENT AGREEMENTS AND CONTENDED THAT IT IS CLEAR FROM THESE DOCUMENT THAT THE ASSESSEE NOT FOUND GUILTY OF ANY MISCONDUCT OR INFRINGEMENT OF ANY LAW. THE LEARNED AR FURTHER CONTENDED THAT PLEA AGREEMENT ENTERED BETWEEN AE RANBAXY USA INC AND DOJ WHERE RANBAXY USA INC WAS PLEADED GUILTY FOR THE REASON THAT PLEA AGREEMENT WAS OF PART OF PACKAGE DEAL. IN OTHER WORD IN ORDER TO ENTER INTO SETTLEMENT AGREEMENT FOR CIVIL LIABILITY THE ASSESSEE GROUP WAS TO ENTER INTO PLEA AGREEMENT. THEREFORE, THE ASSESSEE WAS NOT GUILTY IN THE PLEA AGREEMENT AS THERE WAS NOT ANY FINDING THAT ASSESSEE GROUP VIOLATED ANY LAW. AS SUCH THE PLEA AGREEMENT WAS THE PART OF PACKAGED DEAL OF THE CONSENT ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 102 DECREE WITH DOJ WHICH WAS NECESSARY FOR RESOLVING THE DISPUTE. THE LEARNED AR ACCORDINGLY CONTENDED THAT ANY COMPENSATION PAID TO RESOLVE AN ONGOING LITIGATION WITHOUT BEING FOUND GUILTY CANNOT BE TERMED AS PAYMENT FOR INFRINGEMENT OF ANY LAW. THE LEARNED AR IN THIS REGARD PLACED RELIANCE ON THE JUDGMENT OF HONBLE DELHI HC IN CASE OF CIT VS. DESSICANT ROTORS INTERNATIONAL (P) LTD REPORTED IN 347 ITR 32. 68.3 WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE WORD 'LAW' REFERRED TO IN EXPLANATION 1 TO SEC. 37(1) OF THE ACT IS ONLY THE 'LAW OF THE LAND' I.E. LAWS IN FORCE IN INDIA. THUS THE VIOLATION OF LAW OUTSIDE INDIA CANNOT BE CONSTRUED AS INFRINGEMENT OF LAW IN INDIA SO AS TO ATTRACT THE PROVISIONS OF SECTION 37(1) OF THE ACT. 68.4 WITHOUT PREJUDICE TO THE ABOVE THE LEARNED AR ALSO SUBMITTED THE TPO WHILE WORKING OUT THE PROFIT LEVEL INDICATOR FOR TP STUDY HAS CONSIDERED THE IMPUGNED AMOUNT AS OPERATING EXPENSES. THEREFORE, THE SAME AMOUNT CANNOT BE CONSIDERED AS OTHERWISE UNDER NORMAL COMPUTATION OF INCOME BY THE REVENUE. AS SUCH INCONSISTENT VIEW OF THE REVENUE WILL LEAD DOUBLE TAXATION IN THE HAND OF ASSESSEE WHICH IS PROHIBITED UNDER THE ACT. 68.5 WITHOUT PREJUDICE TO THE ABOVE AND WITHOUT ADMITTING THAT THE PAYMENT WAS FOR VIOLATION OF ANY LAW, THE LD. AR FURTHER CONTENDED THAT THE AMOUNT TOWARDS THE SETTLEMENTS/ PLEA AGREEMENTS INCURRED BY RPI WAS ON ACCOUNT OF THE NON- COMPLIANCE OF CGMP OF ITS FACTORIES IN INDIA. THEREFORE IT WAS UNDER THE OBLIGATION TO INDEMNIFY ITS AE BEING RPI IN TERMS OF THE DISTRIBUTION AGREEMENT PLACED ON PAGES 755 TO 781 OF THE PAPER BOOK. THEREFORE SUCH EXPENDITURES ARE ELIGIBLE FOR DEDUCTION UNDER SECTION 37(1) OF THE ACT. 68.6 ON THE OTHER HAND, THE LD. DR, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THERE WERE CERTAIN DEVIATIONS FOUND DURING THE INSPECTION CARRIED OUT BY US FDA WITH RESPECT TO NON-ADHERENCE OF CGMP IN THE FACTORIES OF THE ASSESSEE. NON-COMPLIANCE OF CGMP MAY LEAD TO SERIOUS CONSEQUENCES ESPECIALLY ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 103 IN THE SECTOR OF PHARMACEUTICAL INDUSTRIES. IT IS FOR THE REASON THAT NON-ADHERENCE OF CGMP MAY SEVERELY IMPACT THE HEALTH AND THE LIFE OF THE PERSONS AND THEREFORE IT IS A VERY BRUTAL CRIME. BESIDES PUTTING THE LIFE OF THE CONSUMER AT RISK, THE ASSESSEE WAS ALSO AFFECTING THE BUSINESS PROSPECT OF OTHER ENTERPRISES OF THE COUNTRY. AS SUCH THE ASSESSEE BY NOT MAINTAINING THE CGMP STANDARDS WAS DAMAGING THE IMAGE OF THE COUNTRY. ACCORDINGLY, THE LEARNED AR CONTENDED THAT THERE CANNOT BE ANY DEDUCTION TO THE ASSESSEE FOR THE ALLEGED PENALTY PAID TO USA. THE LEARNED DR IN SUPPORT OF HIS CONTENTION VEHEMENTLY RELIED ON VARIOUS JUDGMENTS WHICH HAVE BEEN INCORPORATED IN THE WRITTEN SUBMISSION FILED BY HIM. 68.7 THE LEARNED DR FURTHER SUBMITTED THAT THE INFRINGEMENT OF LAW WAS COMMITTED BY THE ASSESSEE IN A COUNTRY OUTSIDE INDIA. BUT, THE RATIO PROPOUNDED BY THE VARIOUS COURTS WHEREIN THE DEDUCTION WAS DENIED FOR INFRINGEMENT OF LAW ENFORCEABLE IN INDIA, WILL ALSO APPLY FOR THE INFRINGEMENTS COMMITTED BY THE ASSESSEE OUTSIDE INDIA. THE RELEVANT SUBMISSION OF THE LEARNED AR ON THIS POINT READS AS UNDER: TRUE THESE CASE LAWS ARE ON PENALTIES FOR INFRINGEMENT OF LAW OF THE LAND. BUT THE RATIOS WILL APPLY TO ALL INFRINGEMENTS IN INDIA OR OUTSIDE. THE ARGUMENT IS TWO FOLD: DOES NOT THE EXPLANATION 1 TO SECTION 37(1) OF THE ACT IMPLY THAT THERE CAN BE VIOLATIONS OF LAW AND PENALTIES FOR SUCH INFRINGEMENTS DURING THE COURSE OF CARRYING OF BUSINESS WHICH WOULD ALSO QUALIFY TO HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THEREFORE THE LEGISLATION BROUGHT IN THE EXPLANATION 1 BY THE FINANCE (NO. 2} ACT 1998 WEF J 01.04.1962 TO EXPRESSLY PROHIBIT ALLOWING OF EXPENSES RELATED TO OFFENCE OR WHAT IS PROHIBITEC BY LAW, BUT HAVING SAID THIS IT IS NOT NECESSARY TO INVOKE THE EXPLANATION 1 TO THE SECTION 37(1) AND TO RESTRICT OURSELVES AND THERE BY ALLOW A VIOLATOR OF A LAW THAT TOO BY WAY OF CRIMIN; OFFENCE UNDER THE FOOD / DRUGS ADULTERATION ACTS TO GET AWAY WITH ITS FELONY AND ALSO TO TAKE BENEFIT UNDER THE TAX STATUTE. PLEASE REMIND OURSELVES THAT THERE WERE NO SECTION IN THE\ INCOME TAX ACT, 1922 AS OF THE NATURE OF SECTIONS 68 TO 69D IN THE INCOME TAX ACT 1961, BUT STILLL THE COURTS WERE UPHOLDING THE ADDITIONS OF THE CREDITS, INVESTMENTS AND EXPENSES NOT SATISFACTORILY EXPLAINED TO THE TOTAL INCOME. AS TO THE FACADE OF SETTLEMENTS AND THERE BY ASSERTING THE AMOUNTS PAID AS PART OF BUSINESS EXPEDIENCY, IT IS STATED THAT THE SETTLEMENT AMOUNTS, IF AT ALL, ARE MERELY EUPHEMISM FOR PENALTIES. THE SETTLEMENT ORDERS DO NOT TAKE AWAY OR IN ANY MANNER DILUTE THE NATURE OF THE ALLEGED CRIMINAL OFFENSES LEVELED AGAINST THE APPELLANT AND THE PAYMENTS PAID UNDER THE PLEA BARGAIN TO BE PENALTIES. IN THE SETTLEMENTS THE CHARGES FRAMED HAVE BEEN ADMITTED BY RANBAXY, THE PLEA BARGAIN DOES NOT EXONERATE THE CHARGED PERSON. ON RECORD THE CHARGES LEVELED REMAIN. ALTERNATIVELY, WAS SETTLEMENT REQUIRED IF THERE WAS NO FAULT BY WAY OF ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 104 COMMISSION OR OMISSION BY RANBAXY. SO ARE THE SETTLEMENT AMOUNTS ANY KIND OF FEES, CESS OR TAX? ANSWER IS NO. MY PROPOSITION AND ASSERTION IS THAT THE PAYMENTS, WHATEVER THE APPELLANT MIGHT CALL WHETHER CIVIL LIABILITIES SETTLEMENT OR CRIMINAL LIABILITIES SETTLEMENT, ARE IN SUBSTANCE PENALTIES FOR THE INFRINGEMENT OF LAW IN THIS CASE THE VIOLATION OF FDA STIPULATIONS ON ADULTERATION OF DRUGS MARKETED AND NOT MAINTAINING PROPER RECORDS, TESTING & REPORTING FROM ITS MANUFACTURING FACILITIES. THE TWO CASE LAWS RELIED UPON BY THE APPELLANT AS TO THE ALLOWABLITY OF FINES IMPOSED OUTSIDE INDIA ARE THE DECISION OF THE HON'BLE DELHI HC IN CIT VS. DESICCANT ROTORS INTERNATIONAL P LTD. 12 TAXMANN.COM 373 (DEL.) ON PAGES 166 TO 173 OF THE APPELLANT'S PAPER BOOK AND THE DECISION DATED 13.11.2019 OF HON'BLE ITAT HYDERABAD A BENCH IN MYLAN LABORATORIES LTD. VS. DOT, CIRCLE 16(2), HYDERABAD (ITA NO. 2335/HYD/2018 FOR AY 2014-15) ON PAGES 198 TO 238 OF THE APPELLANT'S PAPER BOOK. IT IS SEEN THAT BOTH THE CASE ARE RELATED TO INFRINGEMENT OF PATENT LAWS AND THEREFORE THEY WERE IN THE NATURE OF CIVIL OFFENSES BECAUSE UNDER THE PATENT LAW VIOLATION IS SUBJECT TO MERE DAMAGES ONLY. THESE ARE BUSINESS AND TRADING VIOLATIONS. WHEREAS THE CASE OF THE APPELLANT IS OF FELONY, CHARGE OF CRIMINAL OFFENSES AND THEREFORE THESE TWO CASES DO NOT PROTECT THE APPELLANT. THE HON'BLE BENCH ON APPRECIATION OF THE SEVERITY OF THE CHARGES AGAINST THE APPELLANT AND IN VIEW OF THE PROPER INTERPRETATION OF SECTION 37 OF THE ACT SHOULD NOT GRANT ANY RELIEF TO THE APPELLANT ON THE AMOUNT DISALLOWED OF RS.1827.65 CRORE. IN THE WORDS OF THE HON'BLE HIGH COURT OF KARNATAKA, VIOLATION OF LAW HAS TO BE CURBED AS OTHERWISE VIOLATION WOULD BE PREMIUM FOR VIOLATORS FOR THE PURPOSE OF TAX BENEFITS. PS: SUBSEQUENT TO THE DEPARTMENT'S SUBMISSION ON 17 LH AUG. 2021 THE LD. COUNSEL OF THE APPELLANT CLARIFIED TO THE HON'BLE BENCH THAT THE APPELLANT I.E. RANBAXY LABORATORIES LTD. WAS NOT THE PARTY TO THE PLEA AGREEMENT BECAUSE IT IS US VS. RANBAXY USA INC. A. IN THIS REGARD IT IS TO BRING TO THE KIND ATTENTION OF THE HON'BLE BENCH THAT BOTH THE CIVIL SETTLEMENT AGREEMENT {FOR US $ 350 MN) AND THE PLEA AGREEMENT (FOR US $150 MN) FLOW FROM THE CONSENT DECREE IN WHICH RANBAXY LABORATORIES LTD. WAS THE 1 ST PARTY AS PLAINTIFF ALONG WITH ITS SUBSIDIARY RANBAXY INC. AS 2 ND PLAINTIFF. B. FURTHER DEFENCE OF THE LD.COUNSEL OF THE APPELLANT WAS RELIANCE ON THE COMMUNICATION DATED 25.11.2015 (PAGES 719 TO 723 OF APPELLANTS PAPER BOOK FROM ITS OWN ATTORNEY IN THE CASE, MR.WARREN HAMEL. THE SAID COMMUNICATION CANNOT BE RELIED UPON BECAUSE IT IS OF NO EVIDENTIARY VALUE BEING SELF GENERATED AND SELF SERVING DOCUMENT. 69. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. FROM THE PRECEDING DISCUSSION, WE NOTE THAT THE ASSESSEE HAS PAID A SUM OF RS. 25089.58 MILLIONS IN-PURSUANT TO THE SETTLEMENTS/ PLEA AGREEMENTS FOR THE ALLEGED NON-COMPLIANCE OF CGMP AS PRESCRIBED BY THE US FDA WHICH RESULTED VARIOUS SUIT AGAINST ASSESSEE GROUP IN THE USA. THE SAME WAS DISALLOWED BY THE AO ON VARIOUS REASONS WHICH HAVE ALREADY BEEN DISCUSSED IN THE PRECEDING PARAGRAPHS. SUBSEQUENTLY THE LD. DRP CONFIRMED THE ORDER OF THE AO. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 105 69.1 CGMP REFERS TO THE CURRENT GOOD MANUFACTURING PRACTICE REGULATIONS ENFORCED BY THE FDA. CGMPS PROVIDE FOR SYSTEMS THAT ASSURE PROPER DESIGN, MONITORING, AND CONTROL OF MANUFACTURING PROCESSES AND FACILITIES. HOWEVER, THERE ARE SERIOUS CONSEQUENCES OF NON-COMPLIANCE OF CGMP. MEDICINE CAN BE DANGEROUS ENOUGH WHEN IT IS NOT PREPARED ACCORDING TO THE PRESCRIBED GUIDELINES. IN SITUATIONS WHERE CURRENT GOOD MANUFACTURING PRACTICES WERENT FOLLOWED, THE DEPARTMENT OF JUSTICE AND HEALTH AND HUMAN SERVICES HAVE THE AUTHORITY TO TAKE ACTIONS AGAINST ANY MANUFACTURING COMPANY THAT VIOLATES GOOD MANUFACTURING PRACTICES. 69.2 NOW COMING TO THE FACTS OF THE CASE ON HAND. THE PROCEEDINGS WERE INITIATED AGAINST THE ASSESSEE IN THE COURT OF US WHEN IT WAS FOUND DURING THE INSPECTION THAT THE ASSESSEE WAS NOT COMPLYING WITH THE STANDARDS OF CGMP. HOWEVER, THE ASSESSEE BEFORE THE VERDICT OF THE COURT HAS ENTERED INTO THE CONSENT DECREE AND FURTHER IN PURSUANCE TO SUCH CONSENT DECREE ENTERED INTO THE SETTLEMENTS WITH THE GOVERNMENT OF USA THROUGH DOJ. THE CONSENT DECREE WAS ENTERED BY THE ASSESSEE IN THE MONTH OF DECEMBER 2011 WHICH WAS APPROVED BY THE US DISTRICT COURT OF MARYLAND IN THE MONTH OF JANUARY 2012. 69.3 A CONSENT DECREE IS A LEGAL AGREEMENT THAT IS REACHED BETWEEN A COMPANY AND THE GOVERNMENT (IN THIS CASE, DOJ). IT IS A NEGOTIATED AGREEMENT DETAILING THE VOLUNTARY ACTIONS PLEDGED BY THE AFFECTED COMPANY TO REMEDY NON-CONFORMANCES, INCLUDING SYSTEMS IMPROVEMENTS, AND TO AVOID FDA LITIGATION. FDA USES CONSENT DECREES TO CHANGE THE OVERALL CORPORATE CULTURE IN COMPLIANCE MATTERS BY PULLING THE COMPANY OUT OF A PATTERN OF LONG-STANDING CGMP PROBLEMS AND RAISING IT TO CURRENT STANDARDS. A CONSENT DECREE COMMITS THE COMPANY TO PERFORM CORRECTIVE ACTIONS IN A TIMELY MANNER, AS VERIFIED BY A THIRD PARTY. 69.4 BASED ON THE CONSENT DECREE WHICH WAS APPROVED BY COMPETENT COURT, THE ASSESSEE STARTED NEGOTIATION WITH DOJ AND ENTERED INTO THE SETTLEMENT AGREEMENTS IN THE YEAR MAY 2013. NOW THE QUESTION ARISES WHETHER THE CONSENT DECREE SHOULD BE VIEWED AS AN OFFENCE PROVIDED UNDER EXPLANATION 1 TO SECTION 37(1) OF THE ACT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 106 THE WORD CONSENT DECREE ITSELF SUGGESTS THAT THE OFFENCE HAS NOT BEEN FRAMED UNDER THE PROVISIONS OF LAW BY THE ORDER OF THE COURT. BUT THE PARTY HAS RESOLVED THE SAME BY ENTERING INTO THIS CONSENT DECREE FOR VARIOUS REASONS WHICH WAS ALSO ACCEPTED BY THE OTHER PARTY I.E. FDA IN THE PRESENT CASE. THESE REASONS MAY INCLUDE TO AVOID THE LITIGATION COST, DAMAGE OF THE REPUTATION/GOODWILL, LITIGATION TIME ETC. ON PERUSAL OF THE CONSENT DECREE WE NOTE THAT THE ASSESSEE HAS OUT RIGHTLY DENIED TO ACCEPT ANY ALLEGATION. THE RELEVANT PORTION OF THE CONSENT DECREE READS AS UNDER: THE UNITED STATES OF AMERICA, PLAINTIFF, BY ITS UNDERSIGNED ATTORNEYS, HAVING FILED ITS COMPLAINT FOR INJUNCTIVE RELIEF AGAINST DEFENDANTS, RANBAXY LABORATORIES LTD. AND RANBAXY, INC. CORPORATION (CORPORATE DEFENDANTS) AND DALE ADKISSON (WHO WAS HIRED BY RANBAXY LABORATORIES LTD., AND ASSUMED THE POSITION OF SENIOR VICE PRESIDENT, HEAD GLOBAL QUALITY IN JANUARY 2010, AFTER ALL OF THE ACTIVITIES ALLEGED IN THE COMPLAINT HAD OCCURRED), ARUN SAWHNEY (WHO ASSUMED THE POSITION OF MANAGING DIRECTOR OF RANBAXY LABORATORIES, LTD. ON AUGUST 20, 2010 AFTER ALL THE ACTIVITIES ALLEGED IN THE COMPLAINT HAD OCCURRED), AND VENKATACHALAM KRISHNAN, REGIONAL DIRECTOR AMERICAS (COLLECTIVELY, DEFENDANTS), AND DEFENDANTS HAVING APPEARED AND HAVING CONSENTED TO THE ENTRY OF THIS CONSENT DECREE OF PERMANENT INJUNCTION (THE DECREE), WITHOUT CONTEST AND BEFORE ANY TESTIMONY HAD BEEN TAKEN AND WITHOUT ADMITTING OR DENYING ANY ALLEGATION OF THE COMPLAINT AND DISCLAIMING ANY LIABILITY IN CONNECTION THEREWITH, AND THE UNITED STATES OF AMERICA, HAVING CONSENTED TO THIS DECREE. 69.5 BASED ON THE CONSENT DECREE, SETTLEMENT AGREEMENTS WERE MADE AS DETAILED UNDER: 1. SETTLEMENT AGREEMENT BETWEEN ASSESSEE GROUP AND DOJ ON BEHALF VARIOUS DEPARTMENTS OF UNITED STATES AND PARTICIPATING STATES, PLACED AT PAGES 668 TO 696 OF PAPER BOOK. 2. PLEA AGREEMENT BETWEEN M/S RANBAXY USA INC AND DOJ, PLACED AT PAGES 697 TO 718 OF PAPER BOOK. 3. SETTLEMENT AGREEMENT BETWEEN ASSESSEE GROUP AND STATE OF CONNECTICUT, PLACED AT PAGES 724 TO 741 OF PAPER BOOK 4. SETTLEMENT AGREEMENT BETWEEN ASSESSEE GROUP AND STATE OF OREGON, PLACED AT PAGES 742 TO 753 69.6 ON PERUSAL OF ALL THE SETTLEMENT AGREEMENT AS MENTIONED ABOVE IT IS FOUND THE ASSESSEE HAS NOT ADMITTED OR FOUND GUILTY OF ANY MISCONDUCT OR VIOLATION OF LAW. FOR READY REFERENCE THE RELEVANT PORTION OF SETTLEMENT AGREEMENT BETWEEN ASSESSEE AND DOJ IS REPRODUCED HEREUNDER: ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 107 THIS AGREEMENT IS NEITHER AN ADMISSION OF LIABILITY BY RANBAXY, EXCEPT TO THE EXTENT ADMITTED BY RANBAXY USA, INC. UNDER THE TERMS OF THE PLEA AGREEMENT, NOR A CONCESSION BY THE UNITED STATES THAT ITS CLAIMS ARE NOT WELL FOUNDED. RANBAXY EXPRESSLY DENIES THE CONTENTIONS AND ALLEGATIONS OF THE UNITED STATES AND RELATOR AS DESCRIBED IN THE COVERED CONDUCT AND SET FOURTH HEREIN AND IN THE CIVIL ACTION, AND DENIES THAT IN ENGAGED IN ANY WRONGFUL CONDUCT, EXCEPT AS TO SUCH ADMISSIONS THAT RANBAXY USA, INC. IS REQUIRED TO MAKE UNDER THE TERMS OF THE PLEA AGREEMENT. 69.7 THE COPY OF THE PLEA AGREEMENT IS PLACED ON PAGES 697 TO 718 OF THE PAPER BOOK. ON PERUSAL OF THE SAME WE NOTE THAT, PLEA AGREEMENT WAS PART OF OVERALL SETTLEMENT OFFER MADE BY THE DOJ TO RESOLVE THE ISSUE. AS SUCH THE PLEA AGREEMENT WAS DEPENDENT UPON THE CIVIL SETTLEMENT MEANING THEREBY THAT IF ASSESSEE CHOOSES TO ENTER A SETTLEMENT FOR CIVIL LIABILITY THEN IT HAS TO ENTER INTO PLEA AGREEMENT ALSO. THE RELEVANT PORTION OF THE PLEA AGREEMENT IS REPRODUCED AS UNDER: THIS LETTER, TOGETHER WITH THE SEALED SUPPLEMENT, CONFIRM THE PLEA AGREEMENT THAT HAS BEEN OFFERED TO THE DEFENDANT BY THE UNITED STATES ATTORNEYS OFFICE FOR THE DISTRICT OF MARYLAND AND THE CONSUMER PROTECTION BRANCH OF THE U.S DEPARTMENT OF JUSTICE (COLLECTIVELY THIS OFFICER. THE AGREEMENT WILL BE PRESENTED TO THE COURT PURSUANT TO FEDERAL RULE OF CRIMINAL PROCEDURE 11(C)(1)(C). THIS AGREEMENT IS CONTINGENT UPON EXECUTION OF A CIVIL SETTLEMENT AGREEMENT BETWEEN RANBAXY USA, INC. AND THE UNITED STATES. IF THE DEFENDANT ACCEPTS THIS OFFER, PLEASE HAVE A RESPONSIBLE CORPORATE OFFICER EXECUTE IT IN THE SPACES PROVIDED BELOW. THE TERMS OF THE ARGUMENT ARE AS FOLLOWS: 69.8 ON CONJOINT READING OF THE ABOVE AGREEMENTS, THERE REMAINS NO DOUBT THAT THE ASSESSEE HAS NOT ADMITTED OR FOUND GUILTY OF MISCONDUCT OR BREACH OF LAW. 69.9 IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT CANNOT BE INVOKED IN THE GIVEN FACTS AND CIRCUMSTANCES FOR THE REASONS THAT THERE WAS NO OFFENCE PROVED AGAINST THE ASSESSEE. 69.10 IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FROM THE ORDER OF MUMBAI TRIBUNAL IN THE CASE OF DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(3)(1), MUMBAI V. ANIL DHIRAJLAL AMBANI REPORTED IN 93 TAXMANN.COM 492 WHEREIN IT WAS HELD AS UNDER: NOW COMING TO THE ARGUMENT OF LEARNED DR, THAT THE REASON FOR FILING THE CONSENT APPLICATION AND PAYING THE SETTLEMENT FEE/CONSENT CHARGES IS THE ALLEGED FACT THAT THE ASSESSEE WAS APPREHENSIVE OF THE SERIOUS CONSEQUENCES OF THE OFFENCE COMMITTED BY IT IS WITHOUT ANY BASIS. THERE IS NOTHING WHATSOEVER TO SUPPORT THIS CONTENTION EXCEPT THE IPSI DIXIT OF THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 108 REVENUE. THE ASSESSEE HAS ALWAYS SUBMITTED THAT THERE WAS NO OFFENCE. EVEN THE CONSENT APPLICATION WAS FILED WITHOUT ADMITTING GUILT. THERE IS NO FINDING OR ORDER BY ANY AUTHORITY. IT IS LOGICAL TO HOLD THAT THE ASSESSEE WAS APPREHENSIVE OF THE TOLL THAT A LONG WINDED LITIGATION - BOTH, IN TERMS OF TIME, COST AND HASSLE AS ALSO IN TERMS OF REPUTATION - WOULD TAKE. THE FACT THAT THE CONSENT APPLICATION PROPOSED BY THE RESPONDENT WAS ACCEPTED BY SEBI ALSO ON THE FOOTING THAT THE RESPONDENT HAS PAID THE SETTLEMENT 'WITHOUT ADMITTING OR DENYING THE CHARGES' INDICATES THAT THE SEBI WAS NOT UNAWARE OF THE OUTCOME OF ITS CASE AGAINST THE RESPONDENT. THERE IS NO REASON TO BELIEVE OR INFER THAT CONSENT APPLICATION WITHOUT ADMITTING GUILT AMOUNTS TO EVIDENCE OF AN OFFENCE HAVING BEEN COMMITTED. 48. IN VIEW OF THE ABOVE DISCUSSION, WE CAN SAFELY OBSERVE THAT THE DETAILED FINDINGS RECORDED BY CIT(A) ARE AS PER MATERIAL ON RECORD AN REQUIRE NO INTERFERENCE ON OUR PART. ACCORDINGLY, THERE IS NO INFIRMITY IN THE ORDER OF THE CIT(A) FOR DELETING DISALLOWANCE MADE BY INVOKING EXPLANATION TO 37(1) OF THE IT ACT. 69.11 WE ALSO DRAW SUPPORT AND GUIDANCE FROM THE JUDGMENT OF HONBLE DELHI HIGH COURT IN CASE OF DESSICANT ROTORS INTERNATIONAL (P.) LTD (SUPRA) WHEREIN IT WAS HELD AS UNDER: AT THE OUTSET, THE SUBMISSION OF THE ASSESSEE THAT THE PARAMOUNT AND GOVERNING CONSIDERATION BEHIND SUCH A SETTLEMENT/AGREEMENT COULD BE TO AVOID THE EXPENSES AND UNCERTAINTY OF FURTHER LITIGATION WAS TO BE ACCEPTED. IT IS A MATTER OF COMMON KNOWLEDGE THAT LITIGATION CAN TURN OUT TO BE QUITE EXPENSIVE AND IT CANNOT BE EVEN POSSIBLE, WHAT TO TALK OF FEASIBLE, FOR A SMALL TIME/MIDDLE LEVEL COMPANY IN INDIA LIKE THE ASSESSEE TO LITIGATE IN US COURT. FURTHERMORE, THE SETTLEMENT AGREEMENT CONTAINED A SPECIFIC RECITAL TO THIS EFFECT INASMUCH AS IT RECORDS 'WHEREAS, IN ORDER TO AVOID THE EXPENSES OR UNCERTAINTY OR FURTHER LITIGATION, THE PARTIES DESIRED TO SETTLE AND ADJUST ALL DIFFERENCES AND CONTROVERSIES AMONG THEMSELVES SUBJECT TO THE TERMS OF THIS AGREEMENT.' NO DOUBT IN THE AGREEMENT, THE ASSESSEE ACCEPTED THE PATENT OF SEMCO. THAT BY ITSELF WOULD NOT MEAN THAT THE ASSESSEE ALSO ACCEPTED THAT IT WAS INFRINGING THE SAID PATENT. SECONDLY, PAYMENT WAS MADE BY THE ASSESSEE TO SEMCO FOR 'LOSS OF GOODWILL AND DAMAGES TO ITS CAPITAL AND FOR TERMINATING OF CASE IN US COURTS' AS WAS CLEARLY MENTIONED IN THE AGREEMENT. NO FINDING WAS GIVEN BY ANY COURT THAT THE ASSESSEE HAD VIOLATED THE PATENT RIGHT OF SEMCO. [PARA 18] 69.12 WITHOUT PREJUDICE TO THE ABOVE, WITH RESPECT TO THE PLEA AGREEMENT, WE NOTE THAT THERE WAS THE AGREEMENT BETWEEN THE US FDA AND RANBAXY USA INC. THE COPY OF THE PLEA AGREEMENT IS PLACED ON PAGES 697 TO 718 OF THE PAPER BOOK. IN OTHER WORDS, THE ASSESSEE WAS NOT THE PARTY TO IT. ACCORDINGLY, IT CAN BE INFERRED THAT THERE WAS NO CRIME COMMITTED BY THE ASSESSEE. THE QUESTION ALSO ARISES WHY THE ASSESSEE IS CLAIMING THE EXPENSES IN ITS BOOKS OF ACCOUNTS WHEN IT IS NOT THE PARTY TO THE AGREEMENT. UNDOUBTEDLY, THE PROCEEDINGS INITIATED ON ACCOUNT OF NON- COMPLIANCE OF CGMP BY THE ASSESSEE IN ITS FACTORIES LOCATED IN INDIA. RPI WAS PROCURING THE GOODS FROM INDIA WHICH WAS SUPPLIED BY THE ASSESSEE FROM ITS FACTORIES. THEREFORE, THE CONSEQUENCES FACED BY THE RPI WAS THE NON-COMPLIANCE OF ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 109 CGMP IN INDIA BY THE ASSESSEE. THEREFORE, THE ASSESSEE WAS UNDER THE OBLIGATION TO COMPENSATE THE LOSSES INCURRED BY THE RPI ON ACCOUNT OF ITS MISTAKE. 69.13 NOW LET US PROCEED TO EXAMINE THE FACT FROM A DIFFERENT ANGLE WHETHER THE NON-COMPLIANCE OF CGMP REQUIRES THE INVOCATION OF THE EXPLANATION 1 TO SECTION 37 (1) OF THE ACT. THE PROVISIONS OF SECTION 37(1) OF THE ACT PROVIDES THE DEDUCTION OF THE BUSINESS EXPENDITURE NOT COVERED BY EARLIER SECTIONS 30 TO 36 IN COMPUTING THE TAXABLE INCOME SUBJECT TO CERTAIN CONDITIONS. THE PROVISIONS READS AS UNDER: 'ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36, AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, SHALL BE ALLOWED IN COMPUTING THE INCOME, CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. 69.14 THE FOLLOWING ARE THE INGREDIENTS OF SECTION 37 OF THE ACT : (I) EXPENDITURE SHOULD NOT BE COVERED UNDER THE SPECIFIC SECTIONS, I.E., 30 TO 36 OF THE ACT; (II) EXPENDITURE SHOULD NOT BE OF CAPITAL NATURE; (III) EXPENDITURE SHOULD HAVE BEEN INCURRED DURING THE PREVIOUS YEAR; (IV) EXPENDITURE SHOULD NOT BE OF A PERSONAL NATURE; (V) EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION. 69.15 ALL OF THE FIVE CONDITIONS MENTIONED ABOVE ARE TO BE SATISFIED BEFORE CLAIMING ANY EXPENSE AS A DEDUCTION UNDER THIS SECTION. 69.16 AN EXPLANATION WAS ADDED TO THIS SUB-SECTION BY THE FINANCE (NO. 2) ACT, 1998 WITH EFFECT FROM APRIL 1, 1962 WHICH READS AS UNDER: 'FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE, INCURRED BY AN ASSESSEE FOR ANY PURPOSE, WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW, SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION, AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE'. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 110 69.17 THE EXPLANATION WAS BROUGHT IN THE STATUTE IN THE YEAR IN 1998 WHICH MADE APPLICABLE RETROSPECTIVELY FROM 1 ST APRIL, 1962. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL 1998 EXPOUNDS THE PURPOSE FOR WHICH THIS EXPLANATION WAS BROUGHT UNDER THE STATUTE WHICH READS AS UNDER: IT IS PROPOSED TO INSERT AN EXPLANATION AFTER SUB-SECTION (I) OF SECTION 37 TO CLARIFY THAT NO ALLOWANCE SHALL BE MADE IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THIS PROPOSED AMENDMENT WILL RESULT IN DISALLOWANCE OF THE CLAIM MADE BY CERTAIN TAX PAYERS OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY, EXTORTION, HAFTA, BRIBES, ETC. AS BUSINESS EXPENDITURE. 69.18 THE EXPLANATION IS COUCHED AS A DECLARATION SO AS TO CREATE A FICTION WHEREBY ANY EXPENDITURE INCURRED BY ANY ASSESSEE FOR ANY PURPOSE ( I ) WHICH IS AN OFFENCE, OR ( II ) WHICH IS PROHIBITED BY LAW, SHALL NOT BE TREATED AS INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THIS DECLARATION ITSELF MAKES SUCH AN EXPENDITURE AN INELIGIBLE ITEM FOR DEDUCTION IN THE COMPUTATION OF INCOME FROM BUSINESS OR PROFESSION. HOWEVER, TO MAKE IT MORE CLEAR, THE EXPLANATION FURTHER PROVIDES THAT NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. 69.19 THE WORD 'OFFENCE' HAS NOT BEEN DEFINED UNDER THE INCOME TAX ACT. HOWEVER, IT IS DEFINED UNDER SECTION 3(38) OF THE GENERAL CLAUSES ACT, 1887 WHICH IS REPRODUCED AS UNDER: 'OFFENCE' SHALL MEAN ANY ACT OR OMISSION MADE PUNISHABLE BY ANY LAW FOR THE TIME BEING IN FORCE;'. 69.20 THE WORD/EXPRESSION 'PROHIBITED BY LAW' HAS ALSO NOT BEEN DEFINED UNDER THE INCOME TAX ACT. HOWEVER IT MAY BE REGARDED TO ANY ACT OF THE PARTY WHICH IS EXPLICITLY OR IMPLIEDLY BARRED BY STATUTE. IT REFERS THE ACT OF PROHIBITING BY AUTHORITY. 69.21 ADMITTEDLY, THE ALLEGED DEFAULT WHICH COMPELLED THE ASSESSEE GROUP TO PAY THE AMOUNT OF USD 500 MILLION WAS ALLEGED TO BE COMMITTED IN A COUNTRY OUTSIDE INDIA. THUS THE CONTROVERSY ARISES WHETHER THE DEFAULT COMMITTED BY THE ASSESSEE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 111 IN A COUNTRY OUTSIDE INDIA, THE PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT CAN BE ATTRACTED. IN THIS REGARD WE FIND THAT THE EXPRESSION 'PROHIBITED BY LAW' CAN ONLY MEAN PROHIBITED BY LAW IN FORCE IN INDIA. THE EXPRESSION 'PROHIBITED BY LAW' AS USED IN THE EXPLANATION TO SECTION 37(1) HAS THE SAME CONTEXTUAL IMPORT AS THE EXPRESSION 'FORBIDDEN BY LAW' AS USED IN SECTION 23 OF THE INDIAN CONTRACT ACT, 1872. THIS CAME UP FOR THE CONSIDERATION OF THE FULL BENCH IN THE CASE OF ABDUL HAMEED V. MOHD. ISHAQ AIR 1975 ALL. 166 WHEREIN THE ALLAHABAD HIGH COURT OBSERVED AS UNDER: '12. THE EXPRESSION 'LAW' HAS NOT BEEN DEFINED IN THE CONTRACT ACT, NOR IN THE U. P. GENERAL CLAUSES ACT, 1904, BUT IN THE CENTRAL GENERAL CLAUSES ACT, 1897, 'INDIAN LAW' IS DEFINED IN SECTION 3(29) AS BELOW: ''INDIAN LAW' SHALL MEAN ANY ACT, ORDINANCE, REGULATION, RULE, ORDER, BYE-LAW OR OTHER INSTRUMENT WHICH BEFORE THE COMMENCEMENT OF THE CONSTITUTION HAD THE FORCE OF LAW IN ANY PROVINCE OF INDIA OR PART THEREOF, OR THEREAFTER HAS THE FORCE OF LAW IN ANY PART A STATE OR PART C STATE OR PART THEREOF, BUT DOES NOT INCLUDE ANY ACT OF PARLIAMENT OF THE UNITED KINGDOM OR ANY ORDER IN COUNCIL, RULE OR OTHER INSTRUMENT MADE SUCH ACT.' 69.22 AT THIS JUNCTURE, IT IS ALSO IMPORTANT TO REFER THE ORDER OF THE HYDERABAD TRIBUNAL IN THE CASE OF MYLAN LABORATORIES LTD. VS. DCIT REPORTED IN 113 TAXMANN.COM 6 WHERE IT HAS BEEN HELD THAT THE PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT CAN BE INVOKED WHERE THERE IS AN OFFICE COMMITTED UNDER THE LAW APPLICABLE FOR THE TIME BEING IN FORCE IN INDIA. THUS THE OFFICE COMMITTED BY THE ASSESSEE UNDER THE PROVISIONS OF FOREIGN LAW CANNOT BE SUBJECT TO THE PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT. THE RELEVANT EXTRACT OF THE ORDER IS REPRODUCED AS UNDER: 8.9 THUS, FROM THE ABOVE DECISIONS, IT IS CLEAR THAT WHAT HAS TO BE DISALLOWED UNDER EXPLANATION 1 TO SEC.37(1) OF THE ACT IS A PAYMENT MADE, FOR CONTRAVENTION OF LAWS IN FORCE IN INDIA AND NOT OF ANY FOREIGN COUNTRY. THE LAWS ARE SPECIFIC TO EACH OF THE COUNTRIES ACCORDING TO THEIR RULES AND REGULATIONS AND AN OFFENCE IN ONE COUNTRY MAY NOT BE SO IN ANOTHER COUNTRY. THEREFORE, WE AGREE WITH THE CONTENTIONS OF LD.COUNSEL FOR THE ASSESSEE THAT IT IS ONLY PAYMENT MADE FOR CONTRAVENTION OF LAWS IN FORCE IN INDIA THAT DISALLOWANCE UNDER EXPLANATION 1 TO SEC.37(1) OF THE ACT IS TO BE MADE. 69.23 IT BECOMES NECESSARY, IN VIEW OF THE ABOVE, TO SEE WHETHER CONTRAVENTION OF THE LAW COMMITTED BY THE ASSESSEE PERTAINS TO INDIAN LAW OR FOREIGN LAW. IN THE GIVEN CASE, THE PROCEEDINGS WERE INITIATED FOR THE ALLEGED DEFAULT COMMITTED IN A ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 112 COUNTRY OUTSIDE INDIA. THEREFORE, THERE CANNOT ANY DISALLOWANCE FOR THE IMPUGNED PENALTY UNDER EXPLANATION 1 TO SECTION 37(1) OF THE ACT. 69.24 MOVING AHEAD WE NOTE THAT BEFORE INVOKING THE EXPLANATION 1 TO SECTION 37(1) OF THE ACT, IT IS NECESSARY TO UNDERSTAND THE PROVISIONS OF THE SCHEME OF THE RELEVANT STATUTE IN RESPECT OF WHICH THE OFFENCE HAS BEEN COMMITTED BY THE ASSESSEE. IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FROM THE JUDGMENT OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. PARTHASARATHY [1995] 78 TAXMAN 470 WHEREIN IT WAS HELD AS UNDER: THE LATEST RULINGS OF THE SUPREME COURT IN THE CASES OF PRAKASH COTTON MILLS (P.) LTD. V. CIT [1993] 201 ITR 684 AND CIT V. AHMEDABAD COTTON MFG. CO. LTD. [1994] 205 ITR 163 , GIVE A WIDER SCOPE TO CONSIDER THE QUESTION IN A BROAD SPECTRUM ANALYSIS, IN EXAMINING THE SCHEME OF THE PROVISIONS OF THE RELEVANT STATUTE, PROVIDING FOR PAYMENT OF SUCH IMPORTS, NOTWITHSTANDING THE NOMENCLATURE OF THE IMPOST AS GIVEN BY THE STATUTE, TO FIND OUT WHETHER IT IS COMPENSATORY OR PENAL IN NATURE. THE AUTHORITY HAS TO ALLOW DEDUCTION UNDER SECTION 37(1) WHENEVER SUCH EXAMINATION OF THE SCHEME OF THE PROVISIONS OF THE RELEVANT STATUTE REVEALS THE CONCERNED IMPOST TO BE PURELY COMPENSATORY IN NATURE. WHENEVER SUCH IMPOST IS FOUND TO BE OF COMPOSITE NATURE, THAT IS, PARTLY OF COMPENSATORY NATURE AND PARTLY OF PENAL NATURE, THE AUTHORITIES ARE OBLIGED TO BIFURCATE THE TWO COMPONENTS OF THE IMPOST AND GIVE DEDUCTION TO THAT COMPONENT PART WHICH IS COMPENSATORY IN NATURE AND REFUSE TO GIVE DEDUCTION TO THAT COMPONENT WHICH IS PENAL IN NATURE. 69.25 SUCH UNDERSTANDING IS REQUIRED TO FIND OUT WHETHER SUCH PENALTY IN THE COMPENSATORY NATURE OR PANEL IN NATURE. THE COURTS HAVE HELD THAT THE PENALTY WHICH IS IN THE NATURE OF COMPENSATION ARE ALLOWABLE DEDUCTION AND THEREFORE THESE PENALTIES ARE OUTSIDE THE PURVIEW OF THE PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT. IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FROM THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF PRAKASH COTTON MILLS P. LTD. V. CIT (1993) 201 ITR 684, 690-91(SC), STANDARD BATTERIES LTD. V. ERR (1995) 211 ITR 444, 446(SC), SWADESHI COTTON MILLS CO. LTD. V. ERR. (1998) 233 ITR 199, 202(SC) AND HONBLE HIGH COURT OF ANDHRA PRADESH CIT V. BHARAT TELEVISION PVT. LTD (1996) 218 ITR 173(AP), CIT V. HYDERABAD ALLWYN METAL WORKS LTD., (1988) 172 ITR 113. 121 (AP) 70.26 WE NOTE THAT THERE CAN BE INSTANCES THAT A PENALTY LEVIED IN THE FOREIGN LAW IS COMPENSATORY IN NATURE AND VICE VERSA. ACCORDINGLY IT IS NECESSARY TO UNDERSTAND THE SCHEME THE PROVISIONS OF THE RELEVANT STATUTE. BUT THE REVENUE HAS FAILED TO ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 113 BRING ANYTHING ON RECORD WHETHER THE PENALTY IS IN THE NATURE COMPENSATION OR PENAL IN NATURE. IT IS BECAUSE THERE WAS NO CHARGE FRAMED AGAINST THE ASSESSEE. AS SUCH THE DISPUTE WAS AMICABLY RESOLVED BY ENTERING INTO CONSENT DECREE AS DISCUSSED ABOVE. 69.26 ANOTHER NOTEWORTHY POINT IS THAT THE EXPLANATION TO SECTION 37(1) IS A DEEMING PROVISION. IT ONLY CREATES A LEGAL FICTION. NEXT, THE EXPLANATION COMES INTO PLAY WHEN EXPENDITURE, THOUGH INCURRED FOR BUSINESS PURPOSE, IS COUPLED WITH PURPOSE WHICH IS OFFENCE OR PROHIBITED BY LAW. IT MAY BE THAT A PARTICULAR PAYMENT MADE BY THE ASSESSEE UNDER A STATUTORY PROVISION, THOUGH CALLED A PENALTY, IS A COMPOSITE ONE COMPRISING BOTH A PENALTY AND A COMPENSATION FOR DELAYED PAYMENT. UNDER SECTION 37(1), ONLY THAT PORTION OF SUCH PAYMENT HAVING COMPOSITE NATURE WHICH IS ATTRIBUTABLE TO ITS COMPENSATORY CHARACTER CAN ONLY BE ALLOWED AS A DEDUCTION. THE OTHER PORTION WHICH IS ATTRIBUTABLE TO ITS PENALTY NATURE CANNOT BE ALLOWED AS A DEDUCTION UNDER SECTION 37(1) BECAUSE SUCH PAYMENT IS FOR INFRACTION OF LAW 69.27 THE NEXT CONTROVERSY ARISES WHETHER THE IMPUGNED AMOUNT RELATES TO THE YEAR UNDER CONSIDERATION OR IT REPRESENTS THE CONTINGENT LIABILITY. ON PERUSAL OF THE CONSENT DECREE ENTERED IN THE YEAR DECEMBER 2011 WHICH WAS APPROVED IN JANUARY 2012, THE AMOUNT OF THE PAYMENT WAS NOT QUANTIFIED. AS SUCH THE AMOUNT WAS QUANTIFIED AT THE TIME OF SETTLEMENT AGREEMENT WHICH WAS ENTERED IN THE MONTH OF MAY 2013. ACCORDINGLY IT WAS CONTENDED BY THE LEARNED DR THAT THE IMPUGNED AMOUNT REPRESENTS THE CONTINGENT LIABILITY. IT IS BECAUSE THE AMOUNT WAS QUANTIFIED IN MAY 2013. IN THIS CONNECTION, WE NOTE THAT ADMITTEDLY, THE AMOUNT WAS NOT QUANTIFIED AT THE TIME OF CONSENT DECREE. BUT THE LIABILITY HAS CERTAINLY ACCRUED ON THE ASSESSEE ONCE THE CONSENT DECREE WAS ENTERED AND APPROVED BY THE US DISTRICT COURT OF MARYLAND IN JANUARY 2012. WE FURTHER NOTE THAT THE LEARNED AR HAD DRAWN OUR ATTENTION ON EMAIL CONVERSATION BETWEEN ITS ATTORNEY AND AUTHORITY OF DOJ WHEREIN AN AMOUNT OF USD 500 MILLION WAS INFORMED TO THE ASSESSEE AS LUMP-SUM ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 114 FIGURE FOR OVERALL SETTLEMENT OF CIVIL AS WELL AS CRIMINAL LIABILITY. THE RELEVANT CORRESPONDENCE OF THE EMAILS ARE ENCLOSED AS ANNEXURE-1. 69.28 ON PERUSAL OF THE ABOVE EMAILS, THERE REMAINS NO AMBIGUITY THAT THE LIABILITY WAS VERY MUCH QUANTIFIED IN THE YEAR UNDER CONSIDERATION. THE AMOUNT MENTIONED IN THE EMAILS WAS SUBSEQUENTLY CONFIRMED IN THE SETTLEMENT AGREEMENT WHICH WAS ENTERED IN THE YEAR MAY 2013. THUS IN SUCH A SITUATION, THE LIABILITY IN THE YEAR UNDER QUESTION CANNOT BE TREATED AS CONTINGENT LIABILITY. 69.29 IT WAS ALSO SUBMITTED THAT THE OBSERVATION LETTER WAS RECEIVED BY THE ASSESSEE IN THE YEAR 2008 THUS THE IMPUGNED AMOUNT REPRESENTS THE PRIOR PERIOD EXPENSES AND THEREFORE THE SAME CANNOT BE ALLOWED AS DEDUCTION. IN THIS CONNECTION WE NOTE THAT THE OBSERVATION LETTER WAS RECEIVED IN THE YEAR 2008 BUT THAT DOES NOT MAKE THE ASSESSEE ACCOUNTABLE TO MAKE THE PROVISIONS IN THE BOOKS OF ACCOUNTS. IT IS BECAUSE AT THAT POINT OF TIME THERE WAS NO WHISPER SO AS TO HOLD THAT THE ASSESSEE WAS THINKING TO ENTER INTO THE CONSENT DECREE. THEREFORE, WE FIND NO FORCE IN THE ARGUMENT OF THE LEARNED DR. 69.30 A QUESTION WAS ALSO RAISED THAT THE IMPUGNED AMOUNT OF PENALTY WAS ALLOWING THE ASSESSEE TO CONTINUE BUSINESS AND THEREFORE THE ASSESSEE BY WAY OF THIS SETTLEMENT AGREEMENT WAS ABLE TO GET THE BENEFIT OF ENDURING NATURE. ACCORDINGLY SUCH AMOUNT OF LIABILITY SHOULD BE TREATED AS CAPITAL IN NATURE. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS BEEN DOING THE BUSINESS IN THE US MARKET SINCE MANY YEARS. HOWEVER, THE BUSINESS OF THE ASSESSEE CAME TO HALT ONCE THERE WAS AN ALERT NOTICE ISSUED BY THE US FDA WITH REGARD TO IMPORT OF DRUGS/PRODUCT MANUFACTURED AT ASSESSEE CERTAIN FACILITIES IN INDIA. IN FACT THE ASSESSEE BY MAKING THE IMPUGNED PAYMENT WAS ABLE TO RESUME ITS BUSINESS. THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE HAS GOT ANY BENEFIT OF ENDURING NATURE. THEREFORE THE IMPUGNED PAYMENT CANNOT BE TREATED AS CAPITAL IN NATURE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 115 69.31 WE ALSO AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE TPO AND THE AO HAS TAKEN DIFFERENT STAND WITH RESPECT TO THE AMOUNT PAID IN DISPUTE AS DISCUSSED ABOVE. THE TPO WHILE WORKING OUT THE PROFIT LEVEL INDICATOR OF THE ASSESSEE HAS TREATED THE SAID AMOUNT Y AS OPERATING EXPENSES WHEREAS THE AO HAS DISALLOWED THE SAME IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 37 OF THE ACT. IN OUR CONSIDERED VIEW THE TPO AND THE AO ARE PART OF THE INCOME TAX DEPARTMENT AND THEREFORE THERE HAS TO BE CONSISTENCY IN THE APPROACHES OF BOTH THE AUTHORITIES. AS SUCH THE AUTHORITIES SHOULD NOT TAKE DIFFERENT STAND WHILE DETERMINING THE TAXABLE INCOME OF THE ASSESSEE OTHERWISE IT WOULD LEAD TO THE DOUBLE ADDITION WHICH IS NOT DESIRABLE UNDER THE PROVISIONS OF THE ACT. 69.32 IN VIEW OF THE ABOVE AND AFTER CONSIDERING THE FACTS IN TOTALITY, WE ARE OF THE VIEW THAT THE ASSESSEE IS ENTITLED FOR THE DEDUCTION FOR THE PAYMENT MADE BY IT AS A RESULT OF SETTLEMENT AGREEMENTS AS DISCUSSED ABOVE UNDER THE PROVISIONS OF SECTION 37 1 OF THE ACT. THE IMPUGNED PAYMENT NOT BE TREATED AS PENALTY IN THE NATURE OF PROVIDED UNDER EXPLANATION 1 TO SECTION 37 1 OF THE ACT. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 70. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 11 IS THAT THE LD. DRP ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 2648.00 CRORES WHILE COMPUTING THE PROFIT U/S 115JB OF THE ACT BY TREATING THE PAYMENT MADE BY THE ASSESSEE TO US FDA AS UNASCERTAINED LIABILITIES. 71. THE FACT OF THE ISSUE ON HAND IS CONTINUING FROM THE IMMEDIATE PREVIOUS GROUND OF APPEAL. THE ASSESSEE ON ACCOUNT OF AMOUNT PAYABLE TO THE DEPARTMENT OF JUSTICE OF USA (DOJ) ON SETTLEMENT IN PURSUANCE TO THE CONSENT DECREE APPROVED BY THE US DISTRICT COURT OF MARYLAND CLAIMED PROVISION OF RS. 2684,00,00,000/-IN THE BOOKS OF ACCOUNT. HOWEVER, THE AO WAS OF THE VIEW THAT DURING THE YEAR UNDER CONSIDERATION THE SETTLEMENT BETWEEN DOJ AND ASSESSEE/ ITS ASSOCIATE WAS UNDER NEGOTIATION. THEREFORE THE LIABILITY WAS NOT ASCERTAINED DURING THE YEAR. AS SUCH, THERE WAS NO SPECIFIC INFORMATION AVAILABLE QUANTIFYING THE AMOUNT AT THAT TIME. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 116 ACCORDINGLY, THE AO DISALLOWED THE SAME UNDER THE PROVISION OF MAT UNDER SECTION 115JB OF ACT BEING UNASCERTAINED PROVISION. 72. THE LEARNED DRP ALSO CONFIRMED THE ACTION OF THE AO BY OBSERVING AS UNDER: 22.1 FOR THE CLAIM OF RS. 26.480 MILLIONS IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSE COMPANY \ HAS ANNEXED A NOTE TO THE 'FINANCIAL STATEMENT FOR THE YEAR ENDING 31 S ' MARCH 2012', WHICH IS REPRODUCED HEREUNDER:- 'ON 20 DECEMBER 2011, THE COMPANY AGREED TO ENTER INTO A CONSENT DECREE WITH THE FOOD AND DRUG ADMINISTRATION ('PDA') OF THE UNITED STATES OF AMERICA ('USA ') AS A STEP TOWARDS RESOLVING THE EXISTING ADMINISTRATIVE ACTIONS TAKEN BY THE PDA AGAINST THE COMPANY'S PAONTA SAHIB AND DEWAS FACILITIES. THE CONSENT DECREE WAS APPROVED BY THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND ON 26 JANUARY 2012 AND WENT INTO EFFECT ON THE SAME DATE. THE CONSENT DECREE ESTABLISHES CERTAIN REQUIREMENTS INTENDED TO FURTHER STRENGTHEN THE COMPANY'S PROCEDURES FOR ENSURING THE INTEGRITY OF DATA IN ITS US APPLICATIONS AND GOOD MANUFACTURING PRACTICES ITS PAONTA SAHIB AND DEWAS FACILITIES. SUCCESSFUL COMPLIANCE WITH THE TERMS OF THE CONSENT DECREE IS REQUIRED FOR THE COMPANY TO RESUME SUPPLY OF PRODUCTS FROM THE DEWAS AND PAONTA SAHIB FACILITIES TO THE USA. FURTHER, THE COMPANY IS NEGOTIATING TOWARDS A SETTLEMENT WITH THE DEPARTMENT OF JUSTICE ('DOJ') OF THE USA FOR RESOLUTION OF POTENTIAL CIVIL AND CRIMINAL ALLEGATIONS BY DOJ. ACCORDINGLY, THE COMPANY HAS RECORDED A PROVISION OF RS.26,430 (USD 500 MILLION) DURING THE CURRENT YEAR, WHICH THE COMPANY BELIEVES WILL BE SUFFICIENT TO RESOLVE ALL POTENTIAL CIVIL AND CRIMINAL LIABILITY. ' 22.2 THE NOTE CLEARLY STATES THAT THE ASSESSEE COMPANY IS NEGOTIATING TOWARDS A SETTLEMENT WITH THE DEPARTMENT OF JUSTICE OF THE USA FOR RESOLUTION OF POTENTIAL CIVIL AND CRIMINAL CASES, THUS AS PER THE NOTE ITSELF, THE LIABILITY IS YET TO CRYSTALLIZE. THE DRP HAS DISCUSSED IN DETAILS, WHILE DISPOSING OF THE GROUND OF OBJECTION NO. 8 & 9 THAT THE AMOUNT PAID TO US PDA IS NOT AN ASCERTAINED LIABILITY FOR THE YEAR UNDER CONSIDERATION. 22.3 AS PER CLAUSE (C) UNDER EXPLANATION 1, THE BOOK PROFITS ARE TO BE INCREASED BY UNASCERTAINED LIABILITIES. ACCORDINGLY, THE AMOUNT OF EXPENSES CLAIMED BY WAY OF PROVISIONS AMOUNTING TO RS.2648,00,00,000/- HAS BEEN RIGHTLY DISALLOWED BY THE AO FOR WORKING OUT BOOK PROFIT U/S 115JB OF THE ACT. 73. BEING AGGRIEVED BY THE DIRECTION OF THE DRP THE ASSESSEE IS IN APPEAL BEFORE US. 74. THE LEARNED AR FOR THE ASSESSEE BEFORE US SUBMITTED THAT IMPUGNED AMOUNT WAS REPRESENTING THE ACTUAL LIABILITY. THEREFORE THE SAME SHOULD TREATED ASCERTAINED LIABILITY AND HENCE IT SHOULD BE ALLOWED AS DEDUCTION FROM THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 117 75. ON THE CONTRARY THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 76. WE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTEDLY THE LOWER AUTHORITIES HAVE DISALLOWED THE PROVISION MADE BY THE ASSESSEE IN THE BOOKS OF ACCOUNT UNDER SECTION 115JB OF THE ACT ON REASONING THAT SUCH PROVISION IS NOT ASCERTAINED LIABILITY. HOWEVER, IN THIS REGARD IT IS PERTINENT TO NOTE THAT WE HAVE ALLOWED THE CLAIM OF THE ASSESSEE TREATING THE PROVISIONS AS THE COST INCURRED IN THE COURSE OF THE BUSINESS IN THE YEAR UNDER CONSIDERATION UNDER NORMAL COMPUTATION OF INCOME. THUS THERE REMAINS NO AMBIGUITY TO THE FACT THAT THE AMOUNT WAS CRYSTALIZED IN THE YEAR UNDER CONSIDERATION. THE REASONING FOR HOLDING THE AMOUNT WAS CRYSTALIZED IN THE YEAR UNDER CONSIDERATION HAS ALREADY BEEN DISCUSSED IN PRECEDING PARAGRAPH OF THIS ORDER WHILE DEALING WITH GROUND NO. 10 OF THE ASSESSEE. ACCORDINGLY WE SET ASIDE THE ORDER OF THE LD. DRP AND DIRECT THE AO TO DELETE THE DISALLOWANCE MADE UNDER SECTION 115JB OF THE ACT FOR THE ELIGIBLE AMOUNT AS PER THE LAW. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 77. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 12 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ADDITION MADE BY THE AO AMOUNTING TO RS. 1,36,16,611/- REPRESENTING THE EXPENSES INCURRED ON DOCTORS FOR PROMOTION OF BUSINESS. 78. DURING THE ASSESSMENT PROCEEDING, THE AO ON VERIFICATION OF LEDGER ACCOUNT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES OBSERVED THAT ASSESSEE HAS INCURRED EXPENSES TO THE EXTENT OF RS. 1,36,16,611/- FOR THE DISTRIBUTION OF GIFT & PROVIDING HOSPITALITY TO THE DOCTORS/MEDICAL PRACTITIONERS. AS PER THE AO SUCH EXPENSES ARE NOT ALLOWABLE UNDER EXPLANATION 1 TO SECTION 37(1) OF THE ACT. ON QUESTION BY THE AO, THE ASSESSEE SUBMITTED THE DETAILS OF THE EXPENSES INCURRED ON VARIOUS DOCTORS AND MEDICAL PRACTITIONERS AS GIVEN HEREIN BELOW: ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 118 S. NO. PARTICULARS AMOUNT 1 CLINICAL/HOSPITAL EQUIPMENT 13,17,085/- 2 BOOKS & PERIODICALS 24,69,540/- 3 SPONSORSHIP/GIFTS 98,29,986/- TOTAL 1,36,16,611/- 78.1 AS PER THE ASSESSEE, IT WAS REQUIRED TO ENGAGE THE DOCTOR AND OTHER MEDICAL PRACTITIONERS FOR THE PURPOSE OF RESEARCH & DEVELOPMENT OF PHARMACEUTICAL PRODUCT, FEEDBACK OF PRODUCT, IMPROVING THE QUALITY OF EXISTING PRODUCTS, REVIEW THE SIDE EFFECTS OF THE PRODUCTS AND DYNAMIC INTERCHANGE OF NEW DISEASES. 78.2 ASSESSEE FURTHER SUBMITTED THAT FOR GETTING THE ABOVE MENTIONED INFORMATION, IT PROVIDES THE MEDICAL EQUIPMENTS TO THE DOCTOR AND MEDICAL PRACTITIONERS FOR FURTHERANCE OF MEDICAL PROFESSION. 78.3 ASSESSE ALSO PROVIDES BOOKS TO THE DOCTORS AND MEDICAL PRACTITIONERS FOR UPDATING THEIR KNOWLEDGE AND PROVIDE THE RELEVANT INFORMATION IN ORDER TO GET THE FEED-BACK FROM THEM AS MENTIONED ABOVE. 78.4 LIKEWISE, THE ASSESSEE ALSO PROVIDES VARIOUS SPONSORSHIP AND ACCESSORIES TO VARIOUS DOCTOR IN LIEU OF VALUABLE FEEDBACK AND SUGGESTION. THESE ACCESSORIES ARE THE ITEMS LIKE CALENDAR, STATIONERIES, DIARIES WHICH ARE PROVIDED TO DOCTORS/ MEDICAL PRACTITIONERS. THIS ACT OF THE ASSESSEE ALSO CREATES ITS GOODWILL IN MIND OF THE DOCTORS/MEDICAL PRACTITIONERS AND WHICH EVENTUALLY HELPS THE PROMOTION OF BUSINESS. THE ASSESSEE ALSO SUBMITTED THAT THE CIRCULAR NO. 5/2012 ISSUED BY THE CBDT DATED 01/08/2012 IS NOT BINDING ON IT. 78.5 SIMILARLY, THE IMC GUIDELINES ARE ALSO NOT APPLICABLE TO THE ASSESSEE BECAUSE IT IS ENGAGED IN THE BUSINESS OF PHARMACEUTICALS WHEREAS THE IMC GUIDELINES ARE APPLICABLE TO THE DOCTORS ASSOCIATED WITH IT. THUS, IT IS ALSO CLEAR THAT THE ASSESSEE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 119 HAS NOT VIOLATED ANY LAW. THEREFORE EXPLANATION 1 TO SECTION 37(1) OF THE ACT IS NOT APPLICABLE TO THE ASSESSEE. 78.6 HOWEVER THE AO REJECTED THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT MCI IS A STATUTORY BODY WHICH REGULATE THE REGISTRATION OF THE DOCTORS AND MONITORS THE PRACTICE OF THE DOCTORS IN INDIA. THE MCI HAS IMPOSED PROHIBITION ON MEDICAL PRACTITIONERS FROM ACCEPTING GIFTS, TRAVEL FACILITIES, HOSPITALITY, CASH OR MONETARY GRANTS FROM PHARMACEUTICALS AND ALLIED HEALTH CARE SECTOR INDUSTRY. 78.7 THE AO FURTHER OBSERVED THAT CBDT HAS ALSO ISSUED CIRCULAR BEARING NO. 5/12 DATED 01/08/2012 PROHIBITING SUCH KIND OF FREEBIES TO THE DOCTORS WHICH IS IN VIOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002. ACCORDINGLY, SUCH EXPENSES SHALL BE INADMISSIBLE UNDER SECTION 37(1) OF THE INCOME TAX ACT BEING AN EXPENSE PROHIBITED BY THE LAW. THUS, THE DISALLOWANCE SHALL BE MADE IN THE HANDS OF SUCH PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDUSTRIES OR OTHER ASSESSEE WHICH HAVE PROVIDED AFORESAID FREEBEES AND CLAIMED THE SAME AS A DEDUCTIBLE EXPENSE IN ITS ACCOUNTS AGAINST INCOME. IN VIEW OF THE ABOVE, THE AO DISALLOWED THE EXPENSES OF RS. 1,36,16,611/- U/S 37(1) OF THE ACT AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 79. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO LD. DRP WHO CONFIRMED THE ORDER OF THE AO BY OBSERVING AS UNDER: 24.1 THIS GROUND OF OBJECTION IS AGAINST THE ACTION OF THE AO IN DISALLOWING PAYMENTS AGGREGATING TO RS. 1,36,16,611/- MADE TO HEALTHCARE PROFESSIONALS (DOCTORS) BY INVOKING EXPLANATION 1 TO SECTION 37(1) OF THE ACT. 24.2 THE DRP HAS NOTED THAT PAYMENTS WORTH RS. 1,36,16,611/- ARE MADE TOWARDS SPONSORSHIP FOR ATTENDING CONFERENCES, MEDICAL EQUIPMENTS, TRAVEL FACILITIES AND HOSPITALITY PROVIDED TO MEDICAL PRACTITIONERS OR MEDICAL ASSOCIATIONS. THESE EXPENSES ARE IN THE NATURE OF FREEBIES PROVIDED TO MEDICAL PRACTITIONERS WHICH ARE STRICTLY PROHIBITED IN TERMS OF THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 ('IMC REGULATIONS'). HENCE, SUCH EXPENSES ARE NOT ALLOWABLE WITHIN THE MEANING OF SECTION 37(1) READ WITH EXPLANATION 1 OF THE ACT BEING INCURRED FOR PURPOSES WHICH ARE OFFENCE AND ARE ALSO PROHIBITED BY LAW. 24.3 IN THIS REGARD, REFERENCE MAY BE MADE TO THE CBDT'S CIRCULAR NO. 5/2012 DATED 1 AUG 2012, WHICH CLEARLY STATES THAT FREEBIES IN THE NATURE OF GIFT, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT RECEIVED BY MEDICAL PRACTITIONERS AND THEIR PROFESSIONAL ASSOCIATIONS ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 120 FROM THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR ARE TO BE DISALLOWED UNDER THE EXPLANATION TO SECTION 37(1) OF THE I.T. ACT 1961. THE CONTENT OF THE BOARD'S CIRCULAR BEING CLEARLY APPLICABLE TO THE FACTS OF THE PRESENT CASE, IS REPRODUCED BELOW:- 'CIRCULAR NO. 5/2012, DT. 1ST AUGUST, 2012 INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRY 01/08/2012 BUSINESS EXPENDITURE SECTION 37(1), IT HAS BEEN BROUGHT TO THE NOTICE OF THE HOARD THAT SOME PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES ARE PROVIDING FREEBEES (FREEBIES) TO MEDICAL PRACTITIONERS AND THEIR PROFESSIONAL ASSOCIATIONS IN VIOLATION OF THE REGULATIONS ISSUED BY MEDICAL COUNCIL OF INDIA (THE 'COUNCIL'), WHICH IS A REGULATORY BODY CONSTITUTED UNDER THE MEDICAL COUNCIL ACT, 1956. 2. THE COUNCIL IN EXERCISE OF ITS STATUTORY POWERS AMENDED THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 (THE REGULATIONS) ON 10-12-2009 IMPOSING A PROHIBITION ON THE MEDICAL PRACTITIONER AND THEIR PROFESSIONAL ASSOCIATIONS FROM TAKING ANY GIFT, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT FROM THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES. 3. SECTION 37(1) OF INCOME TAX ACT PROVIDES FOR DEDUCTION OF ANY REVENUE EXPENDITURE (OTHER THAN THOSE FAILING UNDER SECTIONS 30 TO 36) FROM THE BUSINESS INCOME IF SUCH EXPENSE IS LAID OUT/EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. HOWEVER, THE EXPLANATION APPENDED TO THIS SUB-SECTION DENIES CLAIM OF ANY SUCH EXPENSE, IF THE SAME HAS BEEN INCURRED FOR A PURPOSE WHICH IS EITHER AN OFFENCE OR PROHIBITED BY LAW. THUS, THE CLAIM OF ANY EXPENSE INCURRED IN PROVIDING ABOVE MENTIONED OR SIMILAR FREEBEES IN VIOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 SHALL BE INADMISSIBLE UNDER SECTION 37(1) OF THE INCOME TAX ACT BEING AN EXPENSE PROHIBITED BY THE LAW. THIS DISALLOWANCE SHALL BE MADE IN THE HANDS OF SUCH PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDUSTRIES OR OTHER ASSESSEE WHICH HAS PROVIDED AFORESAID FREEBEES AND CLAIMED IT AS A DEDUCTIBLE EXPENSE IN ITS ACCOUNTS AGAINST INCOME. 4. IT IS ALSO CLARIFIED THAT THE SUM EQUIVALENT TO VALUE OF FREEBEES ENJOYED BY THE AFORESAID MEDICAL PRACTITIONER OR PROFESSIONAL ASSOCIATIONS IS ALSO TAXABLE AS BUSINESS INCOME OR INCOME FROM OTHER SOURCES AS THE CASE MAY BE DEPENDING ON THE FACTS OF EACH CASE. THE ASSESSING OFFICERS OF SUCH MEDICAL PRACTITIONER OR PROFESSIONAL ASSOCIATIONS SHOULD EXAMINE THE SAME AND TAKE AN APPROPRIATE ACTION. THIS MAY BE BROUGHT TO THE NOTICE OF ALL THE OFFICERS OF THE CHARGE FOR NECESSARY ACTION. [F. NO. 225/142/2012- ITA.IIJ' 24.4 IT IS TO BE NOTED THAT THE REGULATIONS NOTIFIED BY MCI IN PURSUANCE TO SECTION 20A(1) OF THE INDIAN MEDICAL COUNCIL ACT, 1956 RELATING TO STANDARDS OF PROFESSIONAL CONDUCT AND ETIQUETTE AND CODE OF ETHICS, PROHIBITS RECEIVING OF SUCH PAYMENTS BY DOCTORS. IN THIS REGARD, ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 121 SPECIAL REFERENCE MAY BE-MADE TO CHAPTER 6 OF MCI REGULATIONS, WHICH PROHIBITS FREEBIES LIKE GIFT, COMMISSION, BONUS ETC. FOR DOCTORS. 24.5 THE HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF J.K. PANTHAKI & CO, VS. ITO REPORTED IN (2012) 246 CTR 0059 : (2011) 64 DTR 0283 : (2012) 344 ITR 0329 HAS HELD THAT IF THE ASSESSEE COMMITS AN OFFENCE UNDER ANY LAW IN THE COURSE OF HIS BUSINESS AND INCURS EXPENDITURE FOR ANY PURPOSE IN CONNECTION WITH THE SAID OFFENCE, THE SAID AMOUNT IS NOT DEDUCTIBLE UNDER SECTION 37 OF THE I.T. ACT 1961. THE RELEVANT EXCERPTS OF THE JUDGMENT ARE REPRODUCED HERE UNDER:- 'THE COMMISSION SAID TO HAVE BEEN PAID IS NOT A COMPENSATION TO THE DIRECTORS OF THE COMPANY FOR ANY SERVICE RENDERED TO THE ASSESSEE. FROM THE UNDISPUTED TACTS IT IS CLEAR THAT A HIGHER AMOUNT WAS AGREED TO BE PAID FOR PERFORMING THE CONTRACT. SUBSEQUENTLY, THE CONSIDERATION FOR THE CONTRACT WAS REDUCED. HOWEVER, BEFORE THE SAID REDEDUCTION IN COST, THE ASSESSEE HAD BEEN PAID THE ENTIRE COST OF THE CONTRACT. IF THE CONSTRUCTION COST WAS REDUCED THE EXCESS AMOUNT RECEIVED HAD TO BE RETURNED. THE ASSESSEE SHOULD HAVE RETURNED THE SAID MONEY TO THE PERSON WHO PAID IT I.E., THE COMPANY. THEREFORE, PAYMENT BY THE ASSESSEE IS OF AN AMOUNT LEGALLY LIABLE TO BE RETURNED TO THE COMPANY. INSTEAD OF RETURNING TO THE COMPANY, SAME MAY BE TAKEN AS RETURNED TO DIRECTORS FOR/ON BEHALF OF THE COMPANY. THEREFORE, IN LAW, THE ASSESSEE WAS LEGALLY BOUND TO RESTORE THE DIFFERENCE IN PRICE TO THE PERSON WHO PAID THE SAID AMOUNT. THEREFORE WHAT IS REPAID BY THE ASSESSEE CANNOT BE CONSTRUED AS COMMISSION AT ALL, AS CONTENDED BY HIM. IT IS A CASE OF RETURN OF THE ADVANTAGE WHICH HE OBTAINED UNDER THE CONTRACT, TO THE PERSON WHO IS LAWFULLY ENTITLED TO THE SAME. INSTEAD OF RESTORING THE ADVANTAGE TO THE COMPANY WHICH PAID HIM THE AMOUNT, HE HAS REPAID THE SAID AMOUNT TO THE DIRECTORS OF THE COMPANY. THE SAID PAYMENT IS NOT MADE FOR ANY SERVICES RENDERED BY THEM. THEREFORE, THE SAID AMOUNT CANNOT BE CONSTRUED AS COMMISSION OR EXPENDITURE INCURRED UNDER S. 37 SO AS TO BE ELIGIBLE FOR BEING DEDUCTED IN ARRIVING AT INCOME OF THE ASSESSES UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', BECAUSE IT IS NOT AN EXPENDITURE LAID DOWN OR EXPENDED FULLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. (PARA 18) YET ANOTHER WAY OF LOOKING AT THINGS IS. THERE IS A CLEAR CASE OF COLLUSION BETWEEN THE DIRECTORS OF THE COMPANY AND THE ASSESSEE. IN THE TENDER WHICH IS FLOATED, THEY HAVE SUBMITTED PRICES WHICH ARE HIGHER THAN THE NORMAL PRICE. ACCORDINGLY PAYMENT IS MADE. AFTER AWARDING THE CONTRACT, THEY HAVE REDUCED THE PRICE AND AGREED TO RECEIVE THE DIFFERENCE OF PRICE IN THEIR NAME. THE ASSESSEE HAS OBLIGED THEM. IT IS OBVIOUS THAT IT IS A KICK BACK OR BRIBE. IT IS AN ILLEGAL GRATIFICATION. IT IS A SCHEME ADOPTED TO SIPHON OUT THE MONEY BELONGING TO THE COMPANY. THEY WANT TO LEND RESPECTABILITY TO IT BY CALLING IT AS A 'COMMISSION'. THEREFORE, SEEN FROM ANY ANGLE, IT CANNOT BE CONSTRUED AS AN EXPENDITURE AT ALL, LET ALONE COMMISSION. (PARA 19) THE EXPLANATION TO S. 37 DECLARES THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. THE WORD 'OFFENCE' HAS NOT BEEN DEFINED UNDER THE ACT. HOWEVER, CHAPTER XXII DEALS WITH OFFENCES AND PROSECUTIONS. IT REFERS TO VARIOUS SECTIONS UNDER THE ACT AND NON-COMPLIANCE WITH THOSE PROVISIONS ARE PUNISHABLE WITH PUNISHMENT AS PRESCRIBED THEREIN. WILLFUL ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 122 ATTEMPT TO EVADE TAX IS AN OFFENCE UNDER THE ACT. THE WORD 'OFFENCE' HAS TO BE UNDERSTOOD IN THE CONTEXT OF AN OFFENCE GENERALLY UNDER ANY ACT. IT FOLLOWS THAT IF THE ASSESSEE COMMITS AN OFFENCE UNDER ANY LAW IN THE COURSE OF HIS BUSINESS AND INCURS EXPENDITURE FOR ANY PURPOSE IN CONNECTION WITH THE SAID OFFENCE, THE SAID AMOUNT IS NOT DEDI4CTIBLE UNDER S. 37. NO EXPENSE WHICH IS PAID BY WAY OF PENALTY FOR A BREACH OF THE LAW CAN BE SAID TO BE AN AMOUNT WHOLLY AND EXCLUSIVELY LAID FOR THE PURPOSE OF THE BUSINESS. ANYTHING DONE WHICH IS AN INFRACTION OF THE LAW AND IS VISITED WITH A PENALTY CANNOT ON GROUNDS OF PUBLIC POLICY BE SAID TO BE A COMMERCIAL EXPENSE FOR THE PURPOSE OF A BUSINESS OR A DISBURSEMENT MADE FOR THE PURPOSES OF EARNING THE PROFITS OF SUCH BUSINESS. PENALTIES WHICH ARE INCURRED FOR INFRACTION OF THE LAW ARE NOT A NORMAL INCIDENT OF BUSINESS AND THEY FALL ON THE ASSESSEE IN SOME CHARACTER OTHER THAN THAT OF A TRADER. A PENALTY CANNOT BE REGARDED AS AN EXPENDITURE WHOLLY AND EXCLUSIVELY LAID FOR THE PURPOSE OF THE BUSINESS. PARAS 35 & 36) INFRACTION OF THE LAW IS NOT A NORMAL INCIDENT OF BUSINESS. ONLY SUCH DISBURSEMENTS CAN BE DEDUCTED AS ARE REALLY INCIDENTAL TO THE BUSINESS ITSELF. THEY CANNOT BE DEDUCTED IF THEY FALL ON THE ASSESSEE IN SOME CHARACTER OTHER THAN THAT OF A TRADER. IT IS WELL SETTLED THAT CONTRACTS WHICH ARE PROHIBITED BY STATUTE, THE PROHIBITION BEING EITHER EXPRESS OR IMPLIED, WOULD BE ILLEGAL AND UNENFORCEABLE IF THEY ARE ENTERED INTO IN CONTRAVENTION OF THE STATUTE. WHERE A CONTRACT IS EXPRESSLY OR BY IMPLICATION FORBIDDEN BY STATUTE, NO COURT WILL LEND ITS ASSISTANCE TO GIVE EFFECT TO SUCH CONTRACT. A DISTINCTION IS SOMETIMES MADE BETWEEN CONTRACTS ENTERED INTO WITH THE OBJECT OF COMMITTING AN ILLEGAL ACT AND CONTRACTS EXPRESSLY OR IMPLIEDLY PROHIBITED BY STATUTE. THE DISTINCTION IS THAT IN THE FORMER CLASS ONE HAS ONLY TO LOOK AND SEE WHAT ACTS THE STATUTE PROHIBITS; IT DOES NOT MATTER WHETHER OR NOT IT PROHIBITS A CONTRACT. IN THE LATTER CLASS, ONE HAS TO CONSIDER NOT WHAT ACT THE STATUTE PROHIBITS, BUT WHAT CONTRACTS IT PROHIBITS. ANY AGREEMENT WHICH TENDS TO BE INJURIOUS TO THE PUBLIC OR AGAINST THE PUBLIC GOOD IS INVALIDATED ON THE GROUND OF PUBLIC POLICY. THE QUESTION WHETHER A PARTICULAR AGREEMENT IS CONTRARY TO PUBLIC POLICY IS A QUESTION OF LAW, TO BE DETERMINED LIKE ANY OTHER QUESTION OF LAW BY THE PROPER APPLICATION OF LEGAL PRINCIPLES AND PRIOR DECISIONS. CONTENTION THAT IF WHAT IS PAID BY WAY OF COMMISSION IS HELD TO BE BRIBE, IT IS ONLY RECEIPT OF BRIBE OR PAYMENT OF BRIBE TO A PUBLIC SERVANT WHICH IS AN OFFENCE AND IT IS NOT AN OFFENCE IF PAID OR RECEIVED BY A PERSON OTHER THAN PUBLIC SERVANT, AND THEREFORE IT DOES NOT FALL WITHIN THE MISCHIEF OF THE EXPLANATION TO S. 37 IS NOT SUSTAINABLE. THE CONSIDERATION OR OBJECT OF AN AGREEMENT IS LAWFUL UNLESS THE COURT REGARDS IT AS IMMORAL OR OPPOSED TO PUBLIC POLICY. IF THE CONSIDERATION OR OBJECT OF AN AGREEMENT IS UNLAWFUL, THEN THE SAID AGREEMENT IS VOID. THEN THE SAID AGREEMENT IS NOT ENFORCEABLE BY LAW. ILLUSTRATION (J) TO S. 23 OF THE CONTRACT ACT, BRINGS HOME THE POINT EXPLICITLY. THEREFORE, UNDER THE INDIAN LAW AN AGREEMENT TO PAY ILLEGAL GRATIFICATION IS EXPRESSLY DECLARED AS IMMORAL AND CONSEQUENTLY SUCH AN AGREEMENT IS VOID AND NOT ENFORCEABLE. IT IS NOT THE JUDGE OR THE COURT WHICH IS DECLARING SUCH ACT AS IMMORAL. THE LAW DECLARES IT AS IMMORAL. THOUGH LAW IS DIFFERENT FROM MORALITY, IN THE CASE OF ILLEGAL GRATIFICATION PAYABLE UNDER AN AGREEMENT THERE IS CONVERGENCE OF VIEWS. THERE ARE LAWS IN THE COUNTRY EXPRESSLY DECLARING PAYMENT OF BRIBE AND RECEIPT OF BRIBE BY PUBLIC SERVANTS AS AN OFFENCE AND PUNISHABLE UNDER THE CRIMINAL LAW OF THE COUNTRY. THE CIVIL LAW HAS WIDER APPLICATION AND IT DECLARES THAT SUCH PAYMENT OF BRIBE IS IMMORAL AND THE AGREEMENT IS VOID AB INITIO. IN THIS CONTEXT THE PHRASE 'PROHIBITED BY LAW' USED IN THE EXPLANATION TO S. 37, HAS WIDER CONNOTATION. IT INCLUDES EXPENDITURE INCURRED BY WAY OF PAYMENT OF BRIBE, ALTHOUGH IT IS LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. AS THE INDIAN LAWS DECLARE SUCH AGREEMENTS AS VOID, IT IS UNENFORCEABLE. THE DOCTRINE OR RULE OF PARI DELICTO IS THE EMBODIMENT OF THE PRINCIPLE THAT THE COURTS WILL REFUSE TO ENFORCE AN ILLEGAL AGREEMENT AT THE INSTANCE OF A PERSON ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 123 WHO IS HIMSELF A PARTY TO AN ILLEGALITY OR FRAUD. IT IS A MAXIM OF LAW, ESTABLISHED, NOT FOR THE BENEFIT OF EITHER OF THE PARTIES TO THE LITIGATION, BUT IS FOUNDED ON THE PRINCIPLES OF PUBLIC POLICY, WHICH WILL NOT ASSIST A PARTY WHO HAS PAID OVER MONEY, OR HANDED OVER PROPERTY, IN PURSUANCE OF AN ILLEGAL OR IMMORAL CONTRACT, TO RECOVER IT BACK: FOR 'THE COURTS WILL NOT ASSIST AN ILLEGAL TRANSACTION IN ANY RESPECT'. THE MAXIM IS THEREFORE, INTIMATELY CONNECTED WITH THE MORE COMPREHENSIVE RULE OF LAW, EX TURPI CAUSA NON ORITURACTIO, ON ACCOUNT OF WHICH NO COURT WILL ALLOW ITSELF TO BE MADE THE INSTRUMENT OF ENFORCING OBLIGATIONS ALLEGED TO ARISE OUT OF A CONTRACT OR TRANSACTION WHICH IS ILLEGAL, AND THE MAXIM MAY BE SAID TO BE A BRANCH OF THAT COMPREHENSIVE RULE. IF HE REQUIRES AID FROM THE ILLEGAL TRANSACTION TO ESTABLISH HIS CASE, THE COURT WILL NOT ENTERTAIN HIS CLAIM. (PARAS 38, 39 & 41 TO 43) IN THE PRESENT DAY CONTEXT, THE MALADY OF CORRUPTION IS ENTERING INTO ALL THE VITAL ORGANS OF THE SOCIETY AND SITUATION HAS REACHED WHERE THESE ILLEGAL ACTS HAVE BEEN ACCEPTED AS A NORMAL PRACTICE AND THE ATTEMPT TO PREVENT, LET ALONE ERADICATE CORRUPTION, IS BEYOND REACH. IF THE COURTS WERE TO ACCORD THEIR APPROVAL TO SUCH TRANSACTIONS, THAT WOULD BE THE END OF THE RULE OF LAW AND AMOUNTS TO UPHOLDING IMMORAL ACTIONS BY LAW COURTS. SUCH AN ACTION GETS CREDIBILITY AND RESPECT AND IT WILL BE PERPETUATED WITH THE SUPPORT OF THE COURT ORDERS. WHEN RECEIPT OF BRIBE AND PAYMENT OF BRIBE BY PUBLIC SERVANTS IS HELD TO BE AN OFFENCE AND THE PARLIAMENT HAS PASSED LEGISLATION FOR PREVENTING THE SAME, MERELY BECAUSE THOSE LAWS ARE NOT APPLICABLE TO PRIVATE PERSONS, IT CANNOT BE SAID THAT IT IS MORAL. RECEIVING OR PAYING BRIBE IS A CRIME. PERSONS INDULGING IN THE SAME CANNOT BE PROTECTED BY LA\V COURTS. THE COURTS CANNOT EXTEND THEIR AID TO UPHOLD SUCH TRANSACTIONS. IN THAT VIEW OF THE MATTER, EVEN IF IT IS NOT AN OFFENCE AS CONTENDED CERTAINLY, IT IS IMMORAL AND IT CAUSES INJURY TO PUBLIC AND THEREFORE THE EXPENDITURE INCURRED IN SUCH IMMORAL ACTS CANNOT BE CONSTRUED AS EXPENDITURE INCURRED FOR THE PURPOSE OF PROFITS AND GAINS OF BUSINESS OR PROFESSION AND THE BENEFIT OF DEDUCTION OR ALLOWANCE UNDER THE PARLIAMENTARY LEGISLATION CANNOT BE EXTENDED TO SUCH PERSONS OR TO SUCH EXPENDITURE. SUCH A QUESTION WOULD FALL WITHIN THE EXPLANATION OF S. 37 AND IS NOT DEDUCTIBLE UNDER S. 37. J.K. PANTHAKI & CO. VS. ITO (2011) 57 DTR (BANG) (TRIB) 233 : (2011) 139 TTJ (BANG) 337AFFIRMED.'(PARA 45) 24.6 IN VIEW OF THE ABOVE LEGAL AND FACTUAL POSITION, THIS GROUND OF OBJECTION OF THE ASSESSEE COMPANY IS REJECTED. 80. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP THE ASSESSEE IS IN APPEAL BEFORE US. 81. THE LD. AR BEFORE US SUBMITTED THAT THE CIRCULAR ISSUED BY THE MCI IS NOT APPLICABLE TO THE PHARMACEUTICAL COMPANIES. AS SUCH THE CIRCULAR ISSUED BY THE MCI IS MEANT FOR MEDICAL PRACTITIONERS. LIKEWISE, THE CBDT CIRCULAR IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 124 82. ON THE OTHER HAND, THE LD. DR SUBMITTED THE CIRCULAR ISSUED BY MCI IS APPLICABLE ON THE PHARMACEUTICAL COMPANIES AND VEHEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. 83. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE MATERIAL AVAILABLE ON RECORDS. FROM THE PRECEDING DISCUSSION, WE FIND THE EXPENSES INCURRED BY THE ASSESSEE AS DISCUSSED ABOVE HAVE BEEN HELD IN VIOLATION OF THE MCI REGULATIONS 2002. THEREFORE THE SAME WAS DISALLOWED AFTER REFERRING THE CBDT CIRCULAR BEARING NO. 5/2012 DATED 1-8-2012 UNDER EXPLANATION 1 TO SECTION 37(1) OF THE ACT. NOW THE FOLLOWING QUESTIONS ARISE FOR OUR ADJUDICATION. I. WHETHER THE EXPENSES INCURRED BY GIVING FREEBIES TO THE DOCTORS ARE PROHIBITED BY THE MEDICAL COUNCIL OF INDIA (MCI) AND THEREFORE, THE SAID EXPENSES ARE NOT ELIGIBLE FOR DEDUCTION UNDER THE EXPLANATION 1 TO SECTION 37(1) OF THE INCOME-TAX ACT. II. WHETHER THE DISALLOWANCE OF RS. 1,36,16,611/- BEING FREEBIES GIVEN BY THE ASSESSEE TO DOCTORS ARE PROHIBITED BY VIRTUE OF THE PROVISIONS OF CBDT CIRCULAR BEARING NO. 5/2012 ISSUED ON 1-8-2021 UNDER EXPLANATION 1 TO SECTION 37(1) OF THE ACT. 83.1 AT THIS JUNCTURE, WE REFER THE SAID CBDT CIRCULAR NO. 5/2012 DATED 01.08.2012 WHICH IS REPRODUCED AS UNDER: INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRY CIRCULAR NO. 5/2012 [F. NO. 225/142/2012-ITA.II], DATED 1-8-2012 IT HAS BEEN BROUGHT TO THE NOTICE OF THE BOARD THAT SOME PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES ARE PROVIDING FREEBEES (FREEBIES) TO MEDICAL PRACTITIONERS AND THEIR PROFESSIONAL ASSOCIATIONS IN VIOLATION OF THE REGULATIONS ISSUED BY MEDICAL COUNCIL OF INDIA (THE 'COUNCIL') WHICH IS A REGULATORY BODY CONSTITUTED UNDER THE MEDICAL COUNCIL ACT, 1956. 2. THE COUNCIL IN EXERCISE OF ITS STATUTORY POWERS AMENDED THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 (THE REGULATIONS) ON 10-12-2009 IMPOSING A PROHIBITION ON THE MEDICAL PRACTITIONER AND ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 125 THEIR PROFESSIONAL ASSOCIATIONS FROM TAKING ANY GIFT, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT FROM THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES. 3. SECTION 37(1) OF INCOME TAX ACT PROVIDES FOR DEDUCTION OF ANY REVENUE EXPENDITURE (OTHER THAN THOSE FAILING UNDER SECTIONS 30 TO 36) FROM THE BUSINESS INCOME IF SUCH EXPENSE IS LAID OUT/EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. HOWEVER, THE EXPLANATION APPENDED TO THIS SUB-SECTION DENIES CLAIM OF ANY SUCH EXPENSE, IF THE SAME HAS BEEN INCURRED FOR A PURPOSE WHICH IS EITHER AN OFFENCE OR PROHIBITED BY LAW. THUS, THE CLAIM OF ANY EXPENSE INCURRED IN PROVIDING ABOVE MENTIONED OR SIMILAR FREEBEES IN VIOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 SHALL BE INADMISSIBLE UNDER SECTION 37(1) OF THE INCOME TAX ACT BEING AN EXPENSE PROHIBITED BY THE LAW. THIS DISALLOWANCE SHALL BE MADE IN THE HANDS OF SUCH PHARMACEUTICAL OR ALLIED HEALTH SECTOR INDUSTRIES OR OTHER ASSESSEE WHICH HAS PROVIDED AFORESAID FREEBEES AND CLAIMED IT AS A DEDUCTABLE EXPENSE IN ITS ACCOUNTS AGAINST INCOME. 4. IT IS ALSO CLARIFIED THAT THE SUM EQUIVALENT TO VALUE OF FREEBEES ENJOYED BY THE AFORESAID MEDICAL PRACTITIONER OR PROFESSIONAL ASSOCIATIONS IS ALSO TAXABLE AS BUSINESS INCOME OR INCOME FROM OTHER SOURCES AS THE CASE MAY BE DEPENDING ON THE FACTS OF EACH CASE. THE ASSESSING OFFICERS OF SUCH MEDICAL PRACTITIONER OR PROFESSIONAL ASSOCIATIONS SHOULD EXAMINE THE SAME AND TAKE AN APPROPRIATE ACTION. 83.2 A PERUSAL OF THE ABOVE CIRCULAR REVEALS THAT CBDT HAS ISSUED THE CIRCULAR AS DISCUSSED ABOVE AFTER MAKING A REFERENCE TO THE CIRCULARS ISSUED BY THE MEDICAL COUNCIL OF INDIA KNOWN AS 'INDIAN MEDICAL COUNCIL PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002'. THIS CIRCULAR OF MCI REGULATES THE CONDUCT, ETIQUETTE AND ETHICS OF THE REGISTERED MEDICAL PRACTITIONERS. LIKEWISE, THE CHAPTER 6 OF THE CIRCULAR/REGULATION/NOTIFICATION PROHIBITS THE DOCTORS TO TAKE ANY ADVANTAGES DIRECTLY OR INDIRECTLY FROM THE PHARMACEUTICAL COMPANIES AND ALLIED HEALTH SECTOR INDUSTRIES. IN CASE ANY MEDICAL PRACTITIONER IS FOUND GUILTY FOR CARRYING OUT ANY UNETHICAL PRACTICE, A DISCIPLINARY ACTION CAN BE TAKEN AGAINST THE DOCTOR BY THE MCI. 83.3 WE HAVE ALSO PERUSED THE GUIDELINES/REGULATIONS /NOTIFICATIONS OF 'INDIAN MEDICAL COUNCIL PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002'. HOWEVER WE FIND THAT THERE WAS NO MENTION IN THE SAID REGULATION/ NOTIFICATION/ CIRCULAR ISSUED BY THE MCI COVERING PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES. AT THE TIME OF HEARING, THE LEARNED DR HAS ALSO NOT BROUGHT ANYTHING ON RECORD SUGGESTING THAT THE REGULATIONS FRAMED BY THE MCI WERE APPLICABLE TO THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 126 PHARMACEUTICAL INDUSTRIES IN ANY MANNER DIRECTLY OR INDIRECTLY. IN OTHER WORDS, TO OUR UNDERSTANDING, SUCH REGULATIONS MADE BY THE MCI WERE MEANT FOR THE DOCTORS/MEDICAL PRACTITIONERS AND THEREFORE THE SAME CANNOT BOUND THE PHARMACEUTICAL INDUSTRIES AND ALLIED HEALTH SECTOR COMPANIES. 83.4 IN THIS CONNECTION, WE DRAW SUPPORT AND GUIDANCE FROM THE ORDER OF DELHI TRIBUNAL IN THE CASE OF DCIT VS. PHL PHARMA P LTD. REPORTED IN 78 TAXMANN.COM 36 WHEREIN IT WAS HELD THAT INDIAN MEDICAL COUNCIL REGULATION OF 2002 HAS JURISDICTION TO TAKE ACTION ONLY AGAINST THE MEDICAL PRACTITIONERS AND NOT TO HEALTH SECTOR INDUSTRY. THE RELEVANT EXTRACT OF THE ORDER READS AS UNDER: 8. FROM A PERUSAL OF ABOVE AMENDMENT/NOTIFICATION IN THE MCI REGULATION, IT IS QUITE CLEAR AGAIN THAT SAME IS APPLICABLE FOR MEDICAL PRACTITIONERS ONLY AND THE CENSURE/ACTION WHICH HAS BEEN SUGGESTED BY IT IS ONLY ON MEDICAL PRACTITIONERS AND NOT FOR PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES. THE VIOLATION OF THE AFORESAID REGULATION WOULD NOT ONLY ENSURE A REMOVAL OF A DOCTOR FROM THE INDIAN MEDICAL REGISTER OR STATE MEDICAL REGISTER FOR A CERTAIN PERIOD OF TIME AND IT DOES NOT IMPINGE UPON THE CONDUCT OF PHARMACEUTICAL COMPANIES. THIS IMPORTANT DISTINCTION HAS TO BE KEPT IN MIND THAT REGULATION ISSUED BY MEDICAL COUNCIL OF INDIA IS QUA THE DOCTORS/MEDICAL PRACTITIONERS AND NOT FOR THE PHARMACEUTICAL COMPANIES. AS A LOGICAL COROLLARY TO IT, IF THERE IS ANY VIOLATION OR PROHIBITION AS PER MCI REGULATION IN TERMS OF SECTION 37(1) R.W. EXPLANATION 1, THEN IT IS ONLY MEANT FOR MEDICAL PRACTITIONERS AND NOT FOR PHARMACEUTICAL COMPANY (ASSESSEE COMPANY) FOR CLAIMING THE EXPENDITURE. 84.5 FROM THE ABOVE ORDER OF DELHI TRIBUNAL, THERE REMAINS NO AMBIGUITY THAT THE MEDICAL COUNCIL OF INDIA HAS NO JURISDICTION TO PASS ANY ORDER OR REGULATION AGAINST ANY HOSPITAL OR ANY HEALTH CARE SECTOR UNDER ITS 2002 REGULATION AS DISCUSSED ABOVE. SO ONCE THE INDIAN MEDICAL COUNCIL REGULATION DOES NOT HAVE ANY JURISDICTION NOR HAS ANY AUTHORITY UNDER LAW UPON THE PHARMACEUTICAL COMPANY OR ANY ALLIED HEALTH SECTOR INDUSTRY, THEN SUCH A REGULATION CANNOT HAVE ANY PROHIBITORY EFFECT ON THE PHARMACEUTICAL COMPANY LIKE THE ASSESSEE. IF MEDICAL COUNCIL REGULATION DOES NOT HAVE ANY JURISDICTION UPON PHARMACEUTICAL COMPANIES AND IT IS NOT APPLICABLE UPON PHARMA COMPANIES, THEN, IN OUR CONSIDERED VIEW, THERE WAS NO VIOLATION OF THE PROVISIONS OF SECTION 37(1) OF THE ACT. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 127 84.6 WITHOUT PREJUDICE TO THE ABOVE WE ALSO NOTE THAT THE CIRCULAR ISSUED BY CBDT AS DISCUSSED ABOVE IS APPLICABLE FOR THE ASSESSMENT YEAR 2013-14 WHEREAS THE YEAR UNDER CONSIDERATION PERTAINS TO THE ASSESSMENT YEAR 2012-13. THEREFORE THE CIRCULAR ISSUED BY THE CBDT CANNOT BE APPLIED FOR THE YEAR UNDER CONSIDERATION. IN HOLDING SO WE DRAW SUPPORT AND GUIDANCE FROM THE ORDER OF THIS TRIBUNAL IN THE CASE OF ITO VS. SUNFLOWER PHARMACY REPORTED IN 88 TAXMANN.COM 326 WHEREIN IT WAS HELD THAT SUCH CIRCULAR WAS APPLICABLE FROM THE AY 2013-14 BY OBSERVING AS UNDER : WE FIND THAT THE ISSUE IS NO LONGER RES INTEGRA AND HAS BEEN EXAMINED BY THE COORDINATE BENCH OF TRIBUNAL IN SYNCOM FORMULATIONS (I) LTD. VS. DCIT IN ITA NOS.6429 & 6428/MUM/2012 ORDER DATED 23/12/2015. THE RELEVANT OPERATIVE PARA OF THE ORDER OF THE COORDINATE BENCH IS REPRODUCED HEREUNDER:- '5. WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT RECEIVING OF GIFTS BY DOCTORS WAS PROHIBITED BY MCI GUIDELINES, GIVING OF THE SAME BY MANUFACTURER IS NOT PROHIBITED UNDER ANY LAW FOR THE TIME BEING IN FORCE. GIVING SMALL GIFTS BEARING COMPANY LOGO TO DOCTORS DOES NOT TANTAMOUNT TO GIVING GIFTS TO DOCTORS BUT IT IS REGARDED AS ADVERTISING EXPENSES. AS REGARDS SPONSORING DOCTORS FOR CONFERENCES AND EXTENDING HOSPITALITY, PHARMACEUTICALS COMPANIES HAVE BEEN SPONSORING PRACTICING DOCTORS TO ATTEND PRESTIGIOUS CONFERENCES SO THAT THEY GATHER CONTEMPORARY KNOWLEDGE ABOUT MANAGEMENT OF CERTAIN ILLNESS/DISEASE AND LEARN ABOUT NEWER THERAPIES. WE FOUND THAT THE DISALLOWANCE WAS MADE BY THE AO BY RELYING ON THE CBDT CIRCULAR DATED 01.08.2012 ONWARDS. HOWEVER, THE CIRCULAR WAS NOT APPLICABLE BECAUSE IT WAS INTRODUCED W.E.F. 01.08.2012. I.E. ASSESSMENT YEAR 2013-2014. WHEREAS, THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION IS 2010- 2011 AND 2011-2012. ACCORDINGLY, WE DO NOT FIND ANY MERIT IN THE DISALLOWANCE SO MADE BY THE AO IN BOTH THE ASSESSMENT YEARS UNDER CONSIDERATION.' 85. IN VIEW OF THE ABOVE WE HOLD THAT THE CIRCULAR ISSUED BY THE CBDT AS DISCUSSED ABOVE IS NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION AND CONSEQUENTLY THE DISALLOWANCE CANNOT BE MADE IN THE YEAR UNDER CONSIDERATION ON ACCOUNT OF FREEBIES GIVEN TO THE MEDICAL PRACTITIONERS BEING THE AY 2012-13. HENCE, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 86. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 13 IS THAT THE LD. DRP ERRED IN DISALLOWING THE MARK TO MARKET LOSS OF RS. 3,331.61 CRORES SUFFERED BY THE ASSESSEE FOR PROTECTION OF CURRENCY FLUCTUATION. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 128 87. AT THE OUTSET, THE LD. AR BEFORE US SUBMITTED THAT HE HAD BEEN INSTRUCTED BY THE ASSESSEE NOT TO PRESS GROUND NO. 13 AS DISCUSSED ABOVE. THEREFORE WE DISMISS THE SAME AS NOT PRESSED. 88. THE NEXT INTERCONNECTED ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 14 & 15 IS THAT THE DRP ERRED IN DISALLOWING THE HEDGING CHARGES OF RS. 11,35,24,211/- ON HEDGING CONTRACTS AND NOT ALLOWING THE INTEREST SWAP EXPENDITURE OF RS. 1,77,95,255/- CLAIMED BY WAY OF NOTE TO PROTECT THE ECB LOANS BY TREATING IT CAPITAL EXPENDITURE. 89. THE AO FROM THE REVISED COMPUTATION OF INCOME OBSERVED THAT THE ASSESSEE HAS RAISED ECB FOR CAPITAL INVESTMENT IN ITS OVERSEAS SUBSIDIARY. FURTHER ASSESSEE ENTERED INTO CERTAIN HEDGING CONTRACTS AGAINST THE EXCHANGE RATE VOLATILITY AND HAS INCURRED EXPENDITURE OF RS. 11,35,24,211/- ON ACCOUNT OF HEDGING CHARGES AND CLAIM IT AS ALLOWABLE EXPENSES. ON QUESTION BY THE AO, THE ASSESSEE SUBMITTED THAT THESE EXPENSE WERE INCURRED AT THE TIME OF ENTERING INTO THE HEDGING CONTRACT AND THESE EXPENSES ARE SIMILAR TO BANK CHARGES NOT LIKE MTM FOREX SETTLEMENT PAYMENT AT THE YEAR END. 89.1 THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE CLAIM FALL WITHIN THE DEFINITION OF SECTION 2(28A) OF THE INCOME TAX ACT. 89.2 THE ASSESSEE ALSO SUBMITTED THAT IT HAS BORROWED MONEY FOR THE PURPOSE OF INVESTMENT IN FOREIGN SUBSIDIARY WHICH IS FOR THE PURPOSE OF BUSINESS AND ARE STRATEGIC IN NATURE. FURTHER, THE INCOME FROM THE INVESTMENT ARE TAXABLE IN ITS HAND, THEREFORE EXPENSES IN RELATION TO SUCH INVESTMENT ARE ALLOWABLE AS DEDUCTION. 89.3 WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSEE ALSO SUBMITTED THAT IN THE EARLIER YEAR, THE REVENUE HAS TAXED THE GAIN ARISING FROM SUCH FORWARD CONTRACT. THEREFORE REVENUE SHOULD APPLY THE SAME PRINCIPAL ON CONSISTENT BASIS AND ALLOW THE EXPENDITURE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 129 89.4 HOWEVER THE AO REJECTED THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT LOSS WAS RELATED TO HEDGING OF RUPEE LOAN WITH DOLLAR LOAN AND THIS TRANSACTION IS NOT ELIGIBLE TRANSACTION AND THE LOSS WILL BE TREATED AS SPECULATION LOSS U/S 43(5) OF THE ACT. ACCORDINGLY, THE AO DISALLOWED THE EXPENSES AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 90. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP AND SUBMITTED THAT ITS CLAIM DOES NOT FALL WITHIN THE DEFINITION OF SECTION 43(5) OF THE ACT. THE TERM COMMODITY USED IN SECTION 43(5) OF THE ACT COULD NOT BE EXTENDED TO INCLUDE FOREIGN CURRENCY. 91. HOWEVER THE LD. DRP CONFIRMED THE ACTION OF THE AO BY OBSERVING THAT IT IS CLEAR THAT THE ASSESSEE HAS RAISED LOAN FOR THE PURPOSE OF INVESTMENT IN ITS SUBSIDIARIES. ACCORDINGLY THE HEDGING EXPENSES WILL INCREASE THE COST OF INVESTMENT, AND SUCH EXPENSES ARE NOT ALLOWABLE AS REVENUE EXPENSES. 92. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP THE ASSESSEE IS IN APPEAL BEFORE US. 93. THE LD. AR BEFORE US SUBMITTED THAT IN THE IDENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR THE A.Y. 2008-09, ITAT DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 DATED 25.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 94. ON THE OTHER HAND, THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. 95. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. IT WAS POINTED OUT BY THE LD. AR THAT THE ISSUE WAS COVERED IN FAVOR OF THE ASSESSEE IN ITS OWN CASE AS DISCUSSED ABOVE. THE CONTENTION OF THE LD. AR WAS ALSO NOT CONTROVERTED BY THE LD. DR APPEARING ON BEHALF OF REVENUE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 130 AT THE TIME OF HEARING. AT THIS JUNCTURE, WE ARE INCLINED TO REFER THE ORDER OF THE ITAT AS DISCUSSED ABOVE AND REPRODUCED HEREUNDER: WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND WE SET ASIDE THIS GROUND OF APPEAL TO THE FILE OF AO TO VERIFY THE AMOUNT OF EXPENDITURE INCURRED BY THE ASSESSE ON ACCOUNT OF FLUCTUATION OF FOREIGN EXCHANGE ; AND IF THEY ARE ON CAPITAL ACCOUNT RELATED TO ACQUISITION OF ASSET THEN TO GRANT DEPRECIATION THEREON IN ACCORDANCE WITH THE PROVISIONS OF LAW. IN CASE IF THIS EXPENDITURE IS FOUND TO BE OF REVENUE NATURE THEN ALLOW THE SAME U/S 37(1) OF THE ACT 95.1 IN PRINCIPAL WE AGREE WITH THE FINDING OF THE ITAT AS DISCUSSED ABOVE WITH SMALL MODIFICATION. IN THE PRESENT CASE THE QUESTION OF CLAIMING THE DEPRECIATION DOES NOT ARISE FOR THE REASON THAT THE ISSUE RELATES TO THE INVESTMENT MADE IN THE FOREIGN SUBSIDIARIES. AS SUCH THE INVESTMENT IN SHARES OF FOREIGN SUBSIDIARY DOES NOT ATTRACT THE PROVISIONS OF SECTION 32 OF THE ACT. 95.2 MOVING FURTHER, WE ALSO NOTE THAT THE ASSESSEE IN ITS SUBMISSION BEFORE THE AO HAS ALREADY MADE ALTERNATE CONTENTION TO TREAT THE HEDGING EXPENDITURE AS CAPITAL EXPENDITURE WHICH HAS BEEN ACCEPTED BY THE REVENUE. THUS IT APPEARS THERE IS NO GRIEVANCE TO THE ASSESSEE. HOWEVER, THE INTEREST SWAP REQUIRES RE- CONSIDERATION BY THE AO IN THE LIGHT OF ABOVE ORDER OF THE ITAT AS DISCUSSED ABOVE. NEVERTHELESS, WE ARE RESTORING BOTH THE ISSUE OF THE ASSESSEE TO THE FILE OF THE AO FOR FRESH ADJUDICATION AS PER LAW WITH GETTING INFLUENCE WITH OUR OBSERVATIONS AS DISCUSSED ABOVE. ACCORDINGLY THE GROUND OF APPEAL BEARING NOS. 14 & 15 IN THE APPEAL OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 96. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 16 IS THAT THE LD. DRP ERRED IN NOT ADJUDICATING THE CLAIM OF WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT ON THE COST OF ASSETS PROVIDED TO EMPLOYEES WORKING IN APPROVED R&D FACILITIES. 97. THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS CLAIMED EXPENSES OF RS. 2,50,48,153/- U/S 35(2AB) OF THE ACT BY WAY OF NOTE AND STATED THAT AT THE TIME OF PREPARATION OF REPORT IN RESPECT OF EXPENDITURE CLAIMED U/S 35(2AB) OF THE ACT, AUDITOR EXCLUDED FROM THE COST OF ASSETS AMOUNTING TO RS. 2,50.48.153/- PROVIDED TO THE EMPLOYEES ENGAGED IN RESEARCH ACTIVITIES. THEREFORE ASSESSEE HAS CLAIMED ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 131 ONLY 100% DEDUCTION ON SUCH EXPENSES. HOWEVER THE ASSESSEE WAS ELIGIBLE TO CLAIM 200% DEDUCTION U/S 35(2AB) OF THE ACT. ACCORDINGLY, THE ASSESSEE REQUESTED TO ALLOW THE SAME AT THE TIME OF FINALIZATION OF ASSESSMENT. 97.1 HOWEVER THE AO REJECTED THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT THE ASSESSEE HAS NOT CLAIMED THE SAME IN THE COMPUTATION OF INCOME BUT ONLY CLAIMED BY WAY OF NOTES TO THE RETURN OF INCOME. 98. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. DRP WHO CONFIRMED THE ACTION OF THE AO BY OBSERVING AS UNDER: 32.1 THE DRP HAS TAKEN NOTE OF THE FACT THAT THERE IS NO VARIATION OF INCOME, WHICH HAS BEEN MADE BY THE AO ON THIS ISSUE IN THE DRAFT ASSESSMENT ORDER. AS PER THE PROVISIONS OF SECTION 144C OF THE IT. ACT 1961, THE ASSESSEE CAN FILE HIS OBJECTIONS ONLY ON THE VARIATIONS MADE BY THE AO TO THE RETURNED INCOME / LOSS, WHICH ARE PREJUDICIAL TO THE INTEREST OF THE ASSESSEE. THUS, TECHNICALLY, THE ABOVE GROUND OF OBJECTION DOESN'T REQUIRE ADJUDICATION BY THE DRP. 32.2 FURTHER, THE FACT IS THAT THE ASSESSEE HAS NEITHER CLAIMED THE IMPUGNED EXPENSES IN THE ORIGINAL RETURN OF INCOME NOR IN THE REVISED RETURN OF INCOME. HOWEVER, THESE EXPENSES HAVE BEEN CLAIMED, AS A DEDUCTION DURING THE ASSESSMENT PROCEEDINGS. IN THE CASE OF GOETZE (INDIA) LTD. (284 1TR 323), THE HON'BLE SUPREME COURT HAS HELD THAT THE ASSESSING OFFICER CANNOT ENTERTAIN ANY CLAIM FOR ALLOWING DEDUCTION RESULTING IN A REDUCTION IN THE TOTAL INCOME RETURNED, WHICH IS NOT CLAIMED IN THE ORIGINAL RETURN OR A REVISED RETURN. 32.3 ALSO, THE DRP HAS HELD ON AN EARLIER GROUND OF OBJECTION THAT THE WEIGHTED DEDUCTION U/S.35(2AB) IS NOT AVAILABLE TO THE ASSESSEE COMPANY IN THE ABSENCE OF THE STATUTORY FORM 3 CL. ACCORDINGLY, THIS GROUND OF OBJECTION OF THE ASSESSEE COMPANY IS REJECTED AND NO DIRECTIONS ARE BEING ISSUED TO THE AO. 99. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP THE ASSESSEE IS IN APPEAL BEFORE US. 100. THE LD. AR BEFORE US SUBMITTED THAT IN THE IDENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR THE A.Y. 2008-09, THE DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 DATED 25.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 100.1 ON THE OTHER HAND, THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 132 101. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE MATERIAL AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE DELHI ITAT IN ITA NO. 196/DEL/2013, RELEVANT TO AY 2008- 09, VIDE ORDER DATED 25-4-2016, HELD AS UNDER: WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND WE ARE OF THE VIEW THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE APPELLANT BY DECISION OF ITAT IN ASSESSEE'S OWN CASE. HOWEVER, NEITHER THE AO NOR THE LD. DRP HAS APPLIED ITS MIND TO THE FACTS OF THIS CASE AND HAS NOT ADJUDICATED ON THE ISSUE. FACTS OF THIS EXPENDITURE WITH ADEQUATE DETAILS ARE ALSO NOT RECORD BEFORE US. THEREFORE WE SET ASIDE THIS GROUND OF APPEAL TO THE FILE OF AO TO VERIFY THE CLAIM MADE BY THE ASSESSEE AND IF THE FACTS AND CIRCUMSTANCES ARE SIMILAR TO THE ISSUE DECIDED BY THE ITAT IN CASE OF ASSESSEE FOR EARLIER YEARS SAME MAY BE ALLOWED. IN THE RESULT, GROUND 13 OF THE APPEAL IS ALLOWED WITH ABOVE DIRECTION. 101.1 THE GROUND RAISED BEFORE US IS IDENTICAL TO THE ISSUE RAISED BEFORE DELHI ITAT IN THE CASE NO. 196/DEL/2013. HENCE TAKING THE SAME VIEW ON SUCH ISSUE, WE SET ASIDE THE ORDER OF LD. CIT-A TO THE AO FOR FRESH ADJUDICATION. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED WITH THE SAME DIRECTION STATED ABOVE. 102. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUND NO. 17 IS THAT THE LD. DRP ERRED IN HOLDING THE COMPENSATION ON ESOP AMOUNTING TO RS. 12,72,94,935/- NOT ALLOWABLE. 103. THE ASSESSEE HAS GRANTED CERTAIN EMPLOYEE STOCK OPTION PLAN TO ITS EMPLOYEES WHEREIN EMPLOYEES WERE VESTED WITH CERTAIN RIGHT TO TAKE THE SHARE OF THE COMPANY AT A PRICE LOWER THAN THE MARKET PRICE WITHIN THE VESTING PERIOD. THE ASSESSEE AS PER THE SEBI GUIDELINES AMORTIZED THE DIFFERENCE BETWEEN THE MARKET PRICE AND ISSUE PRICE OVER THE VESTING PERIOD BY DEBITING THE P&L ACCOUNT. THE ASSESSEE ALSO CLAIMED THAT IF ANY EMPLOYEE DOES NOT EXERCISE HIS RIGHT, SUBSEQUENTLY THE COMPANY REVERSES THE AMORTIZED AMOUNT BY CREDITING THE SAME TO THE PROFIT AND LOSS ACCOUNT. 103.1 THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAS DEBITED/AMORTIZED RS. 12,72,94,945/- IN ITS PROFIT & LOSS ACCOUNT ON ACCOUNT OF ESOP BUT ADDED BACK TO THE SAME IN THE COMPUTATION OF INCOME. AS SUCH THE ASSESSEE HAS NOT CLAIMED THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 133 IMPUGNED AMOUNT IN INCOME RETURN FOR THE REASON THAT HONBLE ITAT DELHI IN ASSESSEES OWN CASE IN ITA NO. 1855/D/2004 FOR THE AY 2001-02 VIDE ORDER DATED 12-06-2009 HAS DECIDED THE ISSUE AGAINST THE ASSESSEE. HOWEVER THE ASSESSEE CLAIMED THE DEDUCTION FOR THE SAME BY WAY NOTES TO THE RETURN OF INCOME. HOWEVER, THE AO DENIED ADJUDICATE THE SAME. 104. THE AGGRIEVED ASSESSEE CARRIED THE MATTER TO THE LD. DRP AND SUBMITTED THAT ESOP IS A REVENUE EXPENSES AND INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. FURTHER, THE ACCOUNTING TREATMENT MADE BY THE ASSESSEE HAVE BEEN PRESCRIBED BY THE GUIDELINE OF THE SEBI. THEREFORE, THE DIFFERENCE BETWEEN THE MARKET PRICE AND EXERCISE PRICE OF A SHARE IS EXPENSES WHICH ARE INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS. 105. HOWEVER, LD. DRP DISREGARDED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ACTION OF AO BY OBSERVING AS UNDER: 34.1 THE DRP HAS NOTED THAT THE ASSESSEE HAS OFFERED SHARE OPTIONS TO CERTAIN ELIGIBLE EMPLOYEES IN TERMS OF ITS ESOP SCHEMES. THE SHARES WERE OFFERED TO THE EMPLOYEES AT A PRICE, WHICH WAS LOWER THAN THE PREVAILING MARKET PRICE. THE DIFFERENCE BETWEEN THE TWO WAS TREATED AS 'EMPLOYEES COMPENSATION', WHICH WAS AMORTIZED IN THE BOOKS ON STRAIGHT LINE BASIS OVER THE 5 YEARS OF VESTING PERIOD. DURING THE CURRENT YEAR UNDER CONSIDERATION, A SUM OF RS.12,72,94,945/-WAS CLAIMED ON THIS ACCOUNT BY WAY OF NOTE I' ATTACHED TO THE REVISED RETURN OF INCOME. IN THIS REGARD, THE ASSESSEE HAS FURTHER STATED THAT THE SAID DEDUCTION WAS NOT CLAIMED IN THE ORIGINAL & REVISED RETURN, AS A MATTER OF ABUNDANT PRECAUTION. 34.2 THE DRP HAS TAKEN NOTE OF THE FACT THAT THERE IS NO VARIATION OF INCOME, WHICH HAS BEEN MADE BY THE AO ON THIS ISSUE IN THE DRAFT ASSESSMENT ORDER. AS PER THE PROVISIONS OF SECTION 144C OF THE IT. ACT 1961, THE ASSESSEE CAN FILE HIS OBJECTIONS ONLY ON THE VARIATIONS MADE BY THE AO TO THE RETURNED INCOME / LOSS, WHICH ARE PREJUDICIAL TO THE INTEREST OF THE ASSESSEE. THUS, TECHNICALLY, THE ABOVE GROUND OF OBJECTION DOESN'T REQUIRE ADJUDICATION BY THE DRP. 34.3 FURTHER, THE FACT IS THAT THE ASSESSEE HAS NEITHER CLAIMED THE IMPUGNED EXPENSES IN THE ORIGINAL RETURN OF INCOME NOR IN THE REVISED RETURN OF INCOME. HOWEVER, THESE EXPENSES HAVE BEEN CLAIMED, AS A DEDUCTION DURING THE ASSESSMENT PROCEEDINGS. IN THE CASE OF GOETZE (INDIA) LTD. (284 ITR 323), THE HON'BLE SUPREME COURT HAS HELD THAT THE ASSESSING OFFICER CANNOT ENTERTAIN ANY CLAIM FOR ALLOWING DEDUCTION RESULTING IN A REDUCTION IN THE TOTAL INCOME RETURNED, WHICH IS NOT CLAIMED IN THE ORIGINAL RETURN OR A REVISED RETURN. 34.4 THE ASSESSEE HAS ALSO CONTENDED THAT THE ABOVE ISSUE HAS ALREADY BEEN ADJUDICATED IN ITS FAVOUR BY THE HON'BLE DELHI TRIBUNAL IN AY 2008-09. A PERUSAL OF THE RECORD REVEALS THAT THE REVENUE HAS NOT ACCEPTED THIS DECISION OF THE HON'BLE ITAT AND THE FOLLOWING SUBSTANTIAL \ QUESTION OF LAW HAS BEEN RAISED BEFORE THE HON'BLE GUJARAT HIGH COURT:- ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 134 'WHETHER ON THE FADS AND CIRCUMSTANCES OF THE CASE AND LAW, THE I.T.A.T. WAS JUSTIFIED IN DELETING THE ADDITION MADE OF RS. 1,03,33,543/- ON ACCOUNT OF NON- CRYSTALIZED NOTIONAL CAPITAL EXPENSES UNDER ESOP? ' 34.5 WITH DUE RESPECT TO THE ORDER OF THE HON'BLE ITAT, IN ORDER TO KEEP THE ISSUE ALIVE AND TO PROTECT THE INTEREST OF REVENUE, THE DRP IS OF THE CONSIDERED OPINION THAT THE GROUND OF OBJECTION \ RAISED BY THE ASSESSEE COMPANY NEEDS TO BE REJECTED. ACCORDINGLY, THE GROUND OF OBJECTION IS DECIDED IN FAVOUR OF REVENUE AND AGAINST THE ASSESSEE COMPANY. 106. AGGRIEVED BY THE DIRECTION OF LD. DRP, THE ASSESSEE IS IN APPEAL BEFORE US. 107. THE LD. AR BEFORE US SUBMITTED THAT THE ISSUE IS COVERED IN FAVOR OF THE ASSESSEE BY THE ORDER OF THE HONBLE DELHI TRIBUNAL IN OWN CASE OF ASSESSEE IN ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-04-2016. 108. THE LD. DR BEFORE US VEHEMENTLY SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. 109. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE COORDINATE BENCH DELHI IATA IN OWN CASE OF THE ASSESSEE, RELEVANT TO A.Y. 2008-09 IN ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-4-2016, REPORTED IN 68 TAXMANN.COM 322, HELD AS UNDER: 41. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE ISSUE IS NOW SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HON'BLE MADRAS HIGH COURT IN PVP VENTURES (SUPRA), WHERE IN IT IS HELD THAT AMOUNT OF DIFFERENCE BETWEEN THE MARKET VALUE OF THE SHARES ISSUE UNDER ESOP ALLOTTED TO THE EMPLOYEES DEBITED TO THE PROFIT AND LOSS ACCOUNT IN ACCORDANCE TO SEBI GUIDELINES IS AN ASCERTAIN LIABILITY AND ALLOWABLE AS REVENUE EXPENDITURE U/S 37(1) OF THE ACT. IT IS ALSO NOTEWORTHY THAT THE DECISION IN THE CASE OF THE ASSESSEE IN EARLIER YEARS WHERE THIS DEDUCTION WAS DENIED HAS BEEN CONSIDERED BY THE SPECIAL BENCH OF TRIBUNAL IN CASE OF BIOCON LTD. (SUPRA) AS UNDER : '9.2.8 THOUGH DISCOUNT ON PREMIUM IS NOTHING BUT AN EXPENDITURE U/S 37(1), IT IS WORTH NOTING THAT THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 HAS GONE TO THE EXTENT OF COVERING 'LOSS' IN CERTAIN CIRCUMSTANCES WITHIN THE PURVIEW OF 'EXPENDITURE' AS USED IN SECTION IN 37(1). IN THAT CASE, THE ASSESSEE INCURRED ADDITIONAL LIABILITY DUE TO EXCHANGE RATE FLUCTUATION ON A REVENUE ACCOUNT. THE ASSESSING OFFICER DID NOT ALLOW DEDUCTION U/S 37. WHEN THE MATTER FINALLY REACHED THE HON'BLE SUPREME COURT, THEIR LORDSHIPS NOTICED THAT THE WORD 'EXPENDITURE' HAS NOT BEEN DEFINED IN THE ACT. THEY HELD THAT : 'THE WORD 'EXPENDITURE' IS, THEREFORE, REQUIRED TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS USED. SECTION 37 ENJOINS THAT ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS SHOULD BE ALLOWED IN COMPUTING THE ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 135 INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. IN SECTIONS 30 TO 36 THE EXPRESSION 'EXPENDITURE INCURRED', AS WELL AS ALLOWANCE AND DEPRECIATION, HAS ALSO BEEN USED. FOR EXAMPLE DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN SECTION 32, THEREFORE, THE PARLIAMENT HAS USED EXPRESSION 'ANY EXPENDITURE' IN SECTION 37 TO COVER BOTH. THEREFORE, THE EXPRESSION 'EXPENDITURE' AS USED IN SECTION 37 MADE IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVERS AN AMOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE'. FROM THE ABOVE ENUNCIATION OF LAW BY THE HON'BLE SUMMIT COURT, THERE REMAINS NO DOUBT WHATSOEVER THAT THE TERM 'EXPENDITURE' IN CERTAIN CIRCUMSTANCES CAN ALSO ENCOMPASS 'LOSS' EVEN THOUGH NO AMOUNT IS ACTUALLY PAID OUT. EX CONSEQUENTI, THE ALTERNATIVE ARGUMENT OF THE LD. DR THAT DISCOUNT ON SHARES IS 'LOSS' AND HENCE CAN'T BE COVERED U/S 37(1), ALSO DOES NOT HOLD WATER IN THE LIGHT OF THE ABOVE JUDGMENT. IN VIEW OF THE ABOVE DISCUSSION, WE, WITH UTMOST RESPECT, ARE UNABLE TO CONCUR WITH THE VIEW TAKEN IN RANBAXY LABORATORIES LTD. (SUPRA).' FURTHER WHETHER THE ESOP EXPENDITURE IS A CONTINGENT LOSS HAS ALSO BEEN CONSIDERED IN THE SAME DECISION AS UNDER : 'B. IS DISCOUNT A CONTINGENT LIABILITY ? 9.3.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE IMPUGNED ORDER BY CONTENDING THAT THE ENTITLEMENT TO ESOP DEPENDS UPON THE FULFILMENT OF SEVERAL CONDITIONS LAID DOWN UNDER THE SCHEME. IT IS ONLY WHEN ALL SUCH CONDITIONS ARE FULFILLED AND THE EMPLOYEES RENDER SERVICES DURING THE VESTING PERIOD THAT THE QUESTION OF ANY ASCERTAINED LIABILITY CAN ARISE. HE SUBMITTED THAT DURING THE ENTIRE VESTING PERIOD, IT IS ONLY A CONTINGENT LIABILITY AND NO DEDUCTION IS ADMISSIBLE UNDER THE PROVISIONS OF THE ACT FOR A CONTINGENT LIABILITY. THE OPTIONS SO GRANTED MAY LAPSE DURING THE VESTING PERIOD ITSELF BY REASON OF TERMINATION OF EMPLOYMENT OR SOME OF THE EMPLOYEES MAY NOT CHOOSE TO EXERCISE THE OPTION EVEN AFTER RENDERING THE SERVICES DURING THE VESTING PERIOD. IT WAS, THEREFORE, ARGUED THAT THE DISCOUNT IS NOTHING BUT A CONTINGENT LIABILITY DURING THE VESTING PERIOD NOT CALLING FOR ANY DEDUCTION. IN THE OPPOSITION, THE LEARNED AR SUBMITTED THAT THE AMOUNT OF DISCOUNT CLAIMED BY THE ASSESSEE AS DEDUCTION IS NOT A CONTINGENT LIABILITY BUT AN ASCERTAINED LIABILITY. HE STATED THAT IN THE ESOP 2000, THERE IS A VESTING PERIOD OF FOUR YEARS, WHICH MEANS THAT THE OPTIONS TO THE EXTENT OF 25% OF THE TOTAL GRANT WOULD VEST WITH THE ELIGIBLE EMPLOYEES AT THE END OF FIRST YEAR AFTER RENDERING UNHINDERED SERVICE FOR ONE YEAR AND IT WOULD GO ON TILL THE COMPLETION OF FOUR YEARS. 9.3.2 IT IS A TRITE LAW AND THERE CAN BE NO QUARREL OVER THE SETTLED LEGAL POSITION THAT DEDUCTION IS PERMISSIBLE IN RESPECT OF AN ASCERTAINED LIABILITY AND NOT A CONTINGENT LIABILITY. SECTION 31 OF THE INDIAN CONTRACT ACT, 1872 DEFINES 'CONTINGENT CONTRACT' AS 'A CONTRACT TO DO OR NOT DO SOMETHING, IF SOME EVENT, COLLATERAL TO SUCH CONTRACT DOES NOT HAPPEN'. WE NEED TO DETERMINE AS TO WHETHER THE LIABILITY ARISING ON THE ASSESSEE-COMPANY FOR ISSUING SHARES AT A DISCOUNTED PREMIUM CAN BE CHARACTERIZED AS A CONTINGENT LIABILITY IN THE LIGHT OF THE DEFINITION OF CONTINGENT CONTRACT. FROM THE STAND POINT OF THE COMPANY, THE OPTIONS UNDER ESOP 2000 VEST WITH THE EMPLOYEES AT THE RATE OF 25% ONLY ON PUTTING IN SERVICE FOR ONE YEAR BY THE EMPLOYEES. UNLESS SUCH SERVICE IS RENDERED, THE EMPLOYEES DO NOT QUALIFY FOR SUCH OPTIONS. IN OTHER WORDS, RENDERING OF SERVICE FOR ONE YEAR IS SINE QUA NON FOR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE SCHEME. ONCE THE SERVICE IS RENDERED FOR ONE YEAR, IT BECOMES OBLIGATORY ON THE PART OF THE COMPANY TO HONOR ITS COMMITMENT OF ALLOWING THE VESTING OF 25% OF THE OPTION. IT IS AT THE END OF THE FIRST YEAR THAT THE COMPANY INCURS LIABILITY OF FULFILLING ITS PROMISE OF ALLOWING PROPORTIONATE DISCOUNT, WHICH LIABILITY WOULD BE ACTUALLY DISCHARGED AT THE END OF THE FOURTH YEAR WHEN THE OPTIONS ARE EXERCISED BY THE EMPLOYEES. NOW THE QUESTION ARISES AS TO WHETHER THE LIABILITY AT THE END OF EACH YEAR CAN BE CONSTRUED AS A CONTINGENT ONE? 9.3.3 THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428/112 TAXMAN 61 DEALT WITH THE DEDUCTIBILITY OR OTHERWISE OF PROVISION FOR LIABILITY TOWARDS ENCASHMENT OF EARNED LEAVE. IN THAT CASE, THE COMPANY FLOATED BENEFICIAL SCHEME FOR ITS EMPLOYEES FOR ENCASHMENT OF LEAVE. THE EARNED LEAVE COULD BE ACCUMULATED UP TO CERTAIN DAYS. THE ASSESSEE CREATED PROVISION OF RS. 62.25 LAKH FOR ENCASHMENT OF ACCRUED LEAVE AND CLAIMED DEDUCTION FOR ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 136 THE SAME. THE ASSESSING OFFICER HELD IT TO BE A CONTINGENT LIABILITY AND HENCE NOT A PERMISSIBLE DEDUCTION. WHEN THE MATTER FINALLY CAME UP BEFORE THE HON'BLE SUPREME COURT, IT WAS HELD THAT THE PROVISION FOR MEETING THE LIABILITY FOR ENCASHMENT OF EARNED LEAVE BY THE EMPLOYEE WAS AN ADMISSIBLE DEDUCTION. IN HOLDING SO, THE HON'BLE APEX COURT OBSERVED THAT : 'THE LAW IS SETTLED : IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN.' FROM THE ABOVE ENUNCIATION OF LAW BY THE HON'BLE SUPREME COURT, IT IS MANIFEST THAT A DEFINITE BUSINESS LIABILITY ARISING IN AN ACCOUNTING YEAR QUALIFIES FOR DEDUCTION EVEN THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WE CONSIDER IT OUR EARNEST DUTY TO MENTION THAT THE LEGISLATURE HAS INSERTED CLAUSE (F) TO SECTION 43B BY PROVIDING THAT 'ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER IN LIEU OF ANY LEAVE AT THE CREDIT OF HIS EMPLOYEE' SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID. WITH THIS LEGISLATIVE AMENDMENT, THE APPLICATION OF THE RATIO DECIDENDI IN THE CASE OF BHARAT EARTH MOVERS (SUPRA) TO THE PROVISION FOR LEAVE ENCASHMENT HAS BEEN NULLIFIED. HOWEVER, THE PRINCIPLE LAID DOWN IN THE SAID JUDGMENT IS ABSOLUTELY INTACT THAT A LIABILITY DEFINITELY INCURRED BY AN ASSESSEE IS DEDUCTIBLE NOTWITHSTANDING THE FACT THAT ITS QUANTIFICATION MAY TAKE PLACE IN A LATER YEAR. THE MERE FACT THAT THE QUANTIFICATION IS NOT PRECISELY POSSIBLE AT THE TIME OF INCURRING THE LIABILITY WOULD NOT MAKE AN ASCERTAINED LIABILITY A CONTINGENT. 9.3.4 ALMOST TO THE SIMILAR EFFECT, THERE IS ANOTHER JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD.V. CIT [2009] 314 ITR 62/180 TAXMAN 422 . IN THAT CASE, THE ASSESSEE-COMPANY WAS ENGAGED IN SELLING CERTAIN PRODUCTS. AT THE TIME OF SALE, THE COMPANY PROVIDED A STANDARD WARRANTY THAT IN THE EVENT OF CERTAIN PART BECOMING DEFECTIVE WITHIN 12 MONTHS FROM THE DATE OF COMMISSIONING OR 18 MONTHS FROM THE DATE OF DISPATCH, WHICHEVER IS EARLIER, THE COMPANY WOULD RECTIFY OR REPLACE THE DEFECTIVE PARTS FREE OF CHARGE. THIS WARRANTY WAS GIVEN UNDER CERTAIN CONDITIONS STIPULATED IN THE WARRANTY CLAUSE. THE ASSESSEE MADE A PROVISION FOR WARRANTY AT RS. 5.18 LAKH TOWARDS THE WARRANTY CLAIM LIKELY TO ARISE ON THE SALES EFFECTED BY THE ASSESSEE. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND THAT THE LIABILITY WAS MERELY A CONTINGENT LIABILITY AND HENCE NOT ALLOWABLE AS DEDUCTION U/S 37 OF THE ACT. WHEN THE MATTER FINALLY CAME UP BEFORE THE HON'BLE SUPREME COURT, IT ENTITLED THE ASSESSEE TO DEDUCTION ON THE 'ACCRUAL' CONCEPT BY HOLDING THAT A PROVISION IS RECOGNIZED WHEN : '(A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION : AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION'. RESULTANTLY, THE PROVISION WAS HELD TO BE DEDUCTIBLE. 9.3.5 WHEN WE CONSIDER THE FACTS OF THE PRESENT CASE IN THE BACKDROP OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS (SUPRA) AND ROTORK CONTROLS INDIA (P.) LTD. (SUPRA), IT BECOMES VIVID THAT THE MANDATE OF THESE CASES IS APPLICABLE WITH FULL FORCE TO THE DEDUCTIBILITY OF THE DISCOUNT ON INCURRING OF LIABILITY ON THE RENDITION OF SERVICE BY THE EMPLOYEES. THE FACTUM OF THE EMPLOYEES BECOMING ENTITLED TO EXERCISE OPTIONS AT THE END OF THE VESTING PERIOD AND IT IS ONLY THEN THAT THE ACTUAL AMOUNT OF DISCOUNT WOULD BE DETERMINED, IS AKIN TO THE QUANTIFICATION OF THE PRECISE LIABILITY TAKING PLACE AT A FUTURE DATE, THEREBY NOT DISTURBING THE OTHERWISE LIABILITY WHICH STOOD INCURRED AT THE END OF THE EACH YEAR ON AVAILING THE SERVICES. 9.3.6 AS REGARDS THE CONTENTION OF THE LD. DR ABOUT THE CONTINGENT LIABILITY ARISING ON ACCOUNT OF THE OPTIONS LAPSING DURING THE VESTING PERIOD OR THE EMPLOYEES NOT CHOOSING TO EXERCISE THE OPTION, WE FIND THAT NORMALLY IT IS PROVIDED IN THE SCHEMES OF ESOP THAT THE VESTED OPTIONS THAT LAPSE DUE TO NON-EXERCISE AND/OR UNVESTED OPTIONS THAT GET CANCELLED DUE TO RESIGNATION OF THE EMPLOYEES OR OTHERWISE, WOULD BE AVAILABLE FOR GRANT AT A FUTURE DATE OR WOULD BE AVAILABLE FOR ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 137 BEING RE-GRANTED AT A FUTURE DATE. IF WE CONSIDER IT AT MICRO LEVEL QUA EACH INDIVIDUAL EMPLOYEE, IT MAY SOUND CONTINGENT, BUT IF VIEW IT AT MACRO LEVEL QUA THE GROUP OF EMPLOYEES AS A WHOLE, IT LOSES THE TAG OF 'CONTINGENT' BECAUSE SUCH LAPSING OPTIONS ARE UP FOR GRABS TO THE OTHER ELIGIBLE EMPLOYEES. IN ANY CASE, IF SOME OF THE OPTIONS REMAIN UNVESTED OR ARE NOT EXERCISED, THE DISCOUNT HITHERTO CLAIMED AS DEDUCTION IS REQUIRED TO BE REVERSED AND OFFERED FOR TAXATION IN SUCH LATER YEAR. WE, THEREFORE, HOLD THAT THE DISCOUNT IN RELATION TO OPTIONS VESTING DURING THE YEAR CANNOT BE HELD AS A CONTINGENT LIABILITY.' IN VIEW OF THIS, WE CANNOT FOLLOW THE DECISION OF COORDINATE BENCH IN CASE OF THE ASSESSEE ITSELF FOR EARLIER YEARS. NO OTHER CONTRARY DECISION HAS BEEN BROUGHT TO OUR NOTICE BY LD. DR. THEREFORE ORDER OF AO IS REVERSED HOLDING THAT RS.10333543/- BEING DEFERRED EMPLOYEES COMPENSATION DEBITED TO THE PROFIT AND LOSS ACCOUNT IS ALLOWABLE U/S 37(1) OF THE ACT. 42. LD. AO HAS FURTHER HELD THAT EVEN OTHERWISE THIS DEDUCTION IS HIT BY PROVISION OF SECTION 40A(IA) OF THE ACT AND AS NO TAX IS DEDUCTED ON THIS PAYMENT IT IS DISALLOWABLE. NO SUCH PROVISION FOR DEDUCTION OF TAX AT SOURCES ON THIS EXPENDITURE HAS BEEN BROUGHT TO OUR NOTICE. THEREFORE WE HOLD THAT PROVISIONS OF SECTION 40A(IA) DOES NOT APPLY TO 'PAYMENT OF SALARIES' FOR THE YEAR UNDER APPEAL. HENCE, THIS ARGUMENT OF THE REVENUE IS ALSO REJECTED. IN THE RESULT GROUND NO 8 OF THE APPEAL IS ALLOWED. 109.1 IN VIEW OF THE IDENTICAL ISSUE RAISED BEFORE US IN THE GROUND NO. 17 WHICH HAS ALREADY BEEN CONSIDERED BY THE ITAT DELHI AS DISCUSSED ABOVE, WE ARE TAKING THE SAME VIEW. ACCORDINGLY WE ALLOW THE DEDUCTION OF THE ESOP EXPENSES. HENCE THE GROUND NO. 17 OF THE ASSESSEE IS ALLOWED. 110. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR THE STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 03/09/2021 AT AHMEDABAD. SD/- SD/- (JUSTICE P.P.BHATT) (WASEEM AHMED) PRESIDENT ACCOUNTANT MEMBER (TRUE COPY) AHMEDABAD; DATED 03/09/2021 MANISH ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 138 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION : 23/08/2021 AND SELF-DICTATION ON DRAGON BY HONBLE MEMBER 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING 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 DICTATING MEMBER FOR PRONOUNCEMENT .. 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. : 03/09/2021 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK. 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER.. DATE OF DESPATCH OF THE ORDER 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) 5. , / DR, ITAT, 6. / GUARD FILE. ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 139 ANNEXURE FORMING PART OF THIS ORDER IN ITA NO.360/AHD/2017 FOR A.Y. 2012-13 IN THE CASE OF CASE OF SUN PHARMACEUTICAL INDUSTRIES LTD (ERSTWHILE RANBAXY LABORATORIES LTD) VS. DCIT ITA NO.360/AHD/2017 ASSTT. YEAR 2012-13 140 SD/- SD/- (JUSTICE P.P.BHATT) (WASEEM AHMED) PRESIDENT ACCOUNTANT MEMBER
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