ITO 10(3)(4), MUMBAI V. ZYDUS ALTANA HEALTHCARE P. LTD ( NOW KNOWN AS ZYDIS NYCOMED HJEALTHCARE P. LTD), NAVI MUMBAI

ITA 4343/MUM/2009

• Counselvise Citation: 434319914 RSA 2009
• Duration Of Justice: 4 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 08-10-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 17-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: MUKESH PATEL
• Keywords: Unexplained expenditure; Business income; Depreciation; Transfer pricing; Principle of natural justice; International transaction
• Section: 143(3); 10B

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI .., !' !' !' !' .!. #$%, &' & ( BEFORE SHRI B.R. MITTAL, J.M. AND SHRI P.M. JAGTAP, AM ./ I.T.A. NO. 4343/MUM/2009 ( * + ',+ * + ',+ * + ',+ * + ',+ / / / / ASSESSMENT YEAR : 2003-04 ./ I.T.A. NO. 4013/MUM/2008 ( * + ',+ * + ',+ * + ',+ * + ',+ / / / / ASSESSMENT YEAR : 2004-05 ./ I.T.A. NO. 4206/MUM/2009 ( * + ',+ * + ',+ * + ',+ * + ',+ / / / / ASSESSMENT YEAR : 2005-06 INCOME TAX OFFICER 10(3)(4), ROOM NO. 452, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. * * * * / VS. M/S ZYDUS NYCOMED HEALTHCARE PVT. LTD. (FORMERLY M/S ZYDUS ALTANA HEALTHCARE PVT. LIMITED) C-4, MIDC, PAWNE, THANE BELAPUR ROAD, VASHI 400 705. - &' ./ PAN : AAACZO736D ( -. / // / APPELLANT ) .. ( /0-. / RESPONDENT ) APPELLANT BY SHRI AJEET KUMAR JAIN ASSESSEE BY : SHRI MUKESH PATEL *' 1 %' / // / DATE OF HEARING : 08-10-2013 23, 1 %' / DATE OF PRONOUNCEMENT : 31-10-2013 [ ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 2 &4 / O R D E R PER BENCH . : THESE THREE APPEALS PREFERRED BY THE REVENUE AGAINS T THREE SEPARATE ORDERS PASSED BY THE LD. CIT(A) XXXII, MUMBAI FOR ASSESS MENT YEARS 2003-04, 2004-05 & 2005-06 INVOLVE SOME COMMON ISSUES AND THE SAME T HEREFORE HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS SINGLE C ONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE MAIN COMMON ISSUE INVOLVED IN THESE THREE A PPEALS AS RAISED IN GROUND NO. 1 OF REVENUES APPEALS FOR ASSESSMENT YE ARS 2004-05 & 2005-06 AND IN GROUND NO. 3 OF ITS APPEAL FOR A.Y. 2003-04 RELA TES TO THE ADDITIONS MADE BY THE A.O. BY RESTRICTING OF ASSESSEES CLAIM FOR DED UCTION U/S 10B R.W.S. 80IA(10) OF THE INCOME TAX ACT, 1961 (THE ACT) WHICH HAVE BE EN DELETED BY THE LD. CIT(A). 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF KEY INTERMEDIATES WHIC H ARE USED IN THE PRODUCTION OF ANTI-ULCERANT DRUG, NAMELY PANTAPROZOLE. IT IS A JOINT VENTURE COMPANY WITH 50% STAKES OF CADILA HEALTH CAB LTD., INDIA AND OTH ER 50% OF ATLANTA PHARMA AG, GERMANY. IT ALSO ORGANIZES CLINICAL TRIAL FOR ATLANTA PHARMA AG. IN THE RETURNS OF INCOME FILED FOR THE YEARS UNDER CONSIDE RATION, DEDUCTION U/S 10B OF THE ACT WAS CLAIMED BY THE ASSESSEE. THE SAID CLAI M CAME TO BE FIRST EXAMINED BY THE A.O. IN THE SCRUTINY ASSESSMENT U/S 143(3) O F THE ACT FOR A.Y. 2004-05 WHEREIN DEDUCTION U/S 10B OF THE ACT WAS CLAIMED BY THE ASSESSEE TO THE EXTENT OF RS. 135,25,31,353/-. ON SUCH EXAMINATION, HE FOU ND THAT THE DEDUCTION U/S 10B OF THE ACT WAS CLAIMED BY THE ASSESSEE IN RESPE CT OF ITS EXPORT SALES ENTIRELY MADE TO M/S ATLANTA PHARMA AG, GERMANY IN RESPECT O F TWO ITEMS WITH CODE NAMES KSM -6 AND KSM -14. IN THIS REGARD, HE REQUIR ED THE ASSESSEE TO FURNISH, ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 3 INTER ALIA, THE COPIES OF JOINT VENTURE AGREEMENT, SUPPLY AGREEMENT AND LICENSE AND DISTRIBUTION AGREEMENT FOR HIS VERIFICATION. ON ANALYZING THE SAID AGREEMENT, HE FOUND THAT AS PER THE SUPPLY AGREEMENT, THE ASSE SSEE WAS TO EXCLUSIVELY SALE THE INTERMEDIATES TO APAG, GERMANY. HE ALSO ANALYS ED THE MANUFACTURING PROCESS INVOLVED IN THE PRODUCTION OF THE SAID INTE RMEDIATES WITH THEIR CHEMICAL EQUATIONS. HE ALSO RECORDED THE STATEMENTS OF DR. VIVEK B. KHARE AND MR. PRASHANT CHITNIS, PRODUCTION MANAGERS OF THE ASSESS EE COMPANY WHERE THEY STATED THAT THE VALUE ADDITION IN EACH STAGE OF THE MANUFACTURING PROCESS OF KSN- 6 WAS 15%. IT WAS ALSO REVEALED THAT THE TECHNICAL KNOW-HOW REQUIRED FOR THE MANUFACTURE OF INTERMEDIATES WAS OBTAINED BY THE AS SESSEE COMPANY FROM APAG, GERMANY AND ALTHOUGH THERE WAS NO TECHNOLOGY TRANSF ER PER SE FOR THE SAID INTERMEDIATES, THE ASSESSEE COMPANY GOT SUPPORT OF APAG, GERMANY AS AND WHEN REQUIRED DURING THE INITIAL PRODUCTION SET UP. HE ALSO NOTED FROM THE SUPPLY AGREEMENT THAT THE ASSESSEE COMPANY HAD BEEN GRANTE D SEMI EXCLUSIVE RIGHTS AND LICENSES TO UNDERTAKE THE MANUFACTURE AND DEVEL OPMENT OF THE INTERMEDIATES ON EXCLUSIVE BASIS BUT NO PAYMENT OF ROYALTY WAS MA DE BY THE ASSESSEE COMPANY TO APAG, GERMANY. 4. AFTER HAVING TAKEN NOTE OF ALL THE TECHNICAL DET AILS AS WELL AS THE ARRANGEMENT BETWEEN THE ASSESSEE COMPANY AND APAG, GERMANY FOR SUPPLY OF INTERMEDIATES, THE A.O. PROCEEDED TO CONSIDER THE Y IELD AND OTHER PARAMETERS PERTAINING TO THE ACTIVITY OF THE ASSESSEE COMPANY BASED ON ITS FINANCIAL RESULTS FOR A.Y. 2004-05 AS COMPARED TO ASSESSMENT YEARS 20 02-03 & 2003-04. THIS COMPARATIVE ANALYSIS MADE BY THE A.O. AS GIVEN ON P AGE NO. 24 OF THE ASSESSMENT ORDER IS EXTRACTED BELOW:- ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 4 S.NO. PARTICULARS A.Y. 2002-03 A.Y. 2003-04 A.Y. 2004-05 1. SALES 19111 KGS 74767 KGS 100302 KG 2. VALUE 254614564 1164841942 1685584102 3. VALUE OF RAW 62978686 129007220 1249232 53 MATERIAL 4. GROSS PROFIT 959062482 1439301172 5. GROSS PROFIT/ 82.33% 85% TO RATIO 6. NET PROFIT/TO RATIO (902047559) (1352745389) 77% 80% 7. MATERIAL CONSUMED/ 129007220 124923253 COST OF PRODUCTION 50% 52% 8. COST OF PRODUCTION/ 255371697 285808416 357861210 NET PROFIT RATIO 120524525 1187466572 1710606599 211.80% 415.47% 478% 5. ON THE BASIS OF ABOVE COMPARATIVE ANALYSIS, THE A.O. NOTED THAT THERE WAS SUBSTANTIAL INCREASE IN THE RATIO OF COST OF PRODUC TION TO THE TURNOVER IN THE YEAR UNDER CONSIDERATION I.E. 2004-05 AS WELL AS IN THE IMMEDIATELY PRECEDING YEAR I.E. 2003-04 AS COMPARED TO THE INITIAL YEAR I.E. A.Y. 2 002-03. AS NOTED BY THE A.O., THE ASSESSEE, HOWEVER, WAS NOT ABLE TO PROVIDE ANY BASIS FOR DETERMINING THE EXACT VALUE ADDITION. ACCORDING TO HIM, THE PROFIT EARNED BY THE ASSESSEE IN THE A.Y. 2004-05 THUS WAS NOT AN ORDINARY PROFIT AS COM PARED TO THE PROFIT EARNED BY THE ASSESSEE IN THE INITIAL YEAR I.E. A.Y. 2002-03. HE NOTED THAT THE ASSESSEE IN THIS CONNECTION COULD NOT PROVIDE ANY BASIS FOR DET ERMINATION OF SUCH HIGHER PROFITS NOR IT COULD SUBSTANTIATE THE STAND THAT TH E PROFITS SO EARNED IN A.Y. 2004- 05 WAS AN ORDINARY PROFIT. HE NOTED THAT AS PER TH E RELEVANT TERMS OF THE SUPPLY AGREEMENT, THE BASIS OF CALCULATION OF PROFIT SHOUL D HAVE BEEN BASED ON THE LOWEST SUPPLY PRICE OF KSM- 6 AND KSM-10 CHARGED BY THIRD PARTY SUPPLIERS TO APAG, GERMANY AND THIS MECHANISM OF DETERMINATION O F PROFITS WAS REQUIRED TO BE DOCUMENTED BY THE ASSESSEE. THE ASSESSEE, HOWEVE R, COULD NOT PRODUCE ANY SUCH DOCUMENTATION MAINTAINED BY IT. THE ASSESSEE ALSO COULD NOT PRODUCE THE ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 5 COST AUDIT REPORT IN ORDER TO ENABLE THE A.O. TO AS CERTAIN THE VALUE ADDITION. ACCORDING TO THE A.O., THE ELEMENT OF TECHNICAL KNO W-HOW AND PATENT WAS ALSO NOT TAKEN INTO ACCOUNT BY THE ASSESSEE COMPANY IN T HE CALCULATION OF PROFITS WHICH OUGHT TO HAVE BEEN DONE FOR DETERMINATION OF TRUE AND REASONABLE PROFITS. HE HELD THAT THE REAL INTENTION OF THE ASSESSEE THU S WAS TO MAXIMIZE THE PROFITS TO CLAIM HIGHER DEDUCTION U/S 10B OF THE ACT AND THE P ROVISIONS OF SECTION 80 IA(10) R.W.S. 10B OF THE ACT WERE CLEARLY ATTRACTED. HE A CCORDINGLY INVOKED THE SAID PROVISIONS ON THE GROUND THAT THERE EXISTED A CLOSE CONNECTION BETWEEN THE ASSESSEE COMPANY AND APAG, GERMANY AND THERE WAS AN ARRANGEMENT BETWEEN THEM IN SUCH A MANNER THAT THE BUSINESS TRANSACTION S BETWEEN THEM PRODUCED TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS. ACC ORDINGLY, HE PROCEEDED TO COMPUTE SUCH AMOUNT OF ORDINARY PROFITS AS MIGHT BE REASONABLY DEEMED TO HAVE BEEN DERIVED BY THE ASSESSEE COMPANY FROM THE BUSIN ESS ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT. FOR THIS PURPOSE, HE ADOPTED TH E PROFITS AS SHOWN BY THE ASSESSEE FOR A.Y. 2002-03 @ 211.88% BEING THE RATIO OF THE TURNOVER OF RS. 25,53,71,697/- AND THE COST OF PRODUCTION OF RS. 12 ,05,24,525/- AS REASONABLE PROFITS AND SINCE THE PROFIT SHOWN BY THE ASSESSEE FOR A.Y. 2004-05 WAS 498.25% BEING THE RATIO OF TURNOVER OF RS. 168.55 CRORES AN D COST OF PRODUCTION OF RS. 33.83 CRORES, THE DIFFERENCE OF RS. 96.87 CRORES BE ING 286.37% OF THE COST OF PRODUCTION OF RS. 33.83 CRORES WAS TREATED BY HIM A S MORE THAN NORMAL PROFIT. THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT TO THAT EXTENT ACCORDINGLY WAS DISALLOWED BY HIM. TO SUPPORT THIS CONCLUSION, THE A.O. ALSO WORKED OUT THE RAW MATERIAL COST PER KG. FOR KSM-6 AND KSM-14 ON THE BASIS OF DETAILS FURNISHED BY THE ASSESSEE AT RS. 2916/- PER KG. AND BY APPLYING THE SAME TO THE QUANTITY OF PRODUCTION, HE WORKED OUT THE TO TAL RAW MATERIAL COST WHICH SHOULD HAVE BEEN DEBITED BY THE ASSESSEE IN THE P&L ACCOUNT FOR A.Y. 2004-05 AT RS. 29.69 CRORES. SINCE THE RAW MATERIAL COST REFLE CTED IN THE P&L ACCOUNT OF THE ASSESSEE FOR A.Y. 2004-05 WAS RS. 12.49 CRORES, HE HELD THAT THE ASSESSEE HAD DELIBERATELY TRIED TO SHOW LOWER COST OF PRODUCTION TO SHOW HIGHER PROFIT IN ORDER TO CLAIM DEDUCTION U/S 10B OF THE ACT. ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 6 6. KEEPING IN VIEW THE STAND TAKEN IN THE ASSESSMEN T COMPLETED U/S 143(3) OF THE ACT VIDE AN ORDER DATED 29-10-2006 FOR A.Y. 200 4-05 DISALLOWING THE ASSESSEES CLAIM FOR DEDUCTION U/S 10B OF THE ACT T O THE EXTENT OF RS. 96.87 CRORES, THE A.O. REOPENED THE ASSESSMENT FOR A.Y. 2 003-04 AND VIDE HIS ORDER DATED 8-10-2008 PASSED U/S 143(3) R.W.S. 147 OF THE ACT, HE DISALLOWED THE ASSESSEES CLAIM FOR DEDUCTION U/S 10B ALSO IN A.Y. 2003-04 TO THE EXTENT OF RS. 55.92 CRORES BEING THE EXCESS PROFIT @ 195.68% OF T HE COST OF PRODUCTION OF RS. 28.58 CRORES FOR THAT YEAR. IN A.Y. 2005-06, THE A. O. HOWEVER ADOPTED A DIFFERENT COURSE FOR MAKING ADDITION ON THIS ISSUE. HE HELD THAT THE HIGHER RATIO OF 318.51% BETWEEN THE TURNOVER AND COST OF PRODUCTION OF A.Y. 2005-06 THAN THAT OF A.Y. 2002-03 WAS AS A RESULT OF LESS COST OF SAL ES SHOWN BY THE ASSESSEE AND THIS DIFFERENCE AMOUNTING TO RS. 73,55,61,604/- WAS TREATED BY HIM AS UNEXPLAINED EXPENDITURE ADDING THE SAME TO THE TOTA L INCOME OF THE ASSESSEE U/S 69-C OF THE ACT. 7. THE DISALLOWANCE MADE BY THE A.O. U/S 10B R.W.S. 80IB(10) OF THE ACT WAS CHALLENGED BY THE ASSESSEE IN THE APPEALS FILED BEF ORE THE LD. CIT(A). BEFORE THE LD. CIT(A), IT WAS POINTED OUT ON BEHALF OF THE ASS ESSEE THAT THE ENTIRE BASIS OF WORKING MADE BY THE A.O. TO DRAW AN ADVERSE INFEREN CE AGAINST THE ASSESSEE ON THIS ISSUE WAS GROSSLY ERRONEOUS AND THE CONCLUSION ARRIVED AT BY HIM ON THE BASIS OF SUCH ERRONEOUS WORKING TO RESTRICT THE CLA IM OF THE ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT WAS TOTALLY UNJUSTIFIE D. IT WAS SUBMITTED THAT THERE WERE SEVERAL FACTUAL ERRORS AND DISCREPANCIES IN TH E ASSESSMENTS COMPLETED BY THE A.O. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE BEFORE THE LD. CIT(A) TO POINT OUT THAT TH ERE WAS A PATENT MISTAKE IN THE ORDER OF THE A.O. FOR A.Y. 2004-05 IN COMPUTING THE COST OF RAW MATERIAL PER KG. AT RS. 2960/- INSTEAD OF THE CORRECT FIGURE OF RS. 1427/- PER KG. (A) ON PAGES 30 AND 31 OF THE ASSESSMENT ORDER, T HE LEARNED A. 0. HAS WORKED OUT THE COST OF RAW-MATERIALS CONSUMED FOR P RODUCTION OF 1 KG. OF ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 7 THE INTERMEDIATES AT RS.2,960.30 AND ON THE BASIS O F THE SAME COMPUTED THE EXPECTED AMOUNT OF COST OF RAW MATERIALS WITH R EFERENCE TO THE TOTAL QUANTITY OF INTERMEDIATES IN TERMS OF KGS. WHILE DO ING SO, HE HAS COMMITTED THE FOLLOWING FOUR GRAVE ERRORS, ON ACCOU NT OF WHICH A TOTALLY DISTORTED AND MISLEADING PICTURE, HIGHLY BIASED AND PREJUDICED AGAINST THE APPELLANT HAS BEEN SOUGHT TO BE CREATED BY HIM IN T HE ASSESSMENT ORDER: I) ON PAGE 30 OF THE ASSESSMENT ORDER, THE LEARNED A. 0. HAS COMPUTED THE COST OF RAW-MATERIAL QUANTITY CONSUMED FOR PROD UCTION OF 100 KGS. EACH OF TWO INTERMEDIATES -PRODUCED BY THE APPELLANT VIZ . KSM-14 AND KSM-6 AT RS.2,96, 030. THE PRODUCTION REFERRED TO RELATES TO 100 KGS. OF KSM-14 AND KSM-6 EACH, IN EFFECT AMOUNTING TO A TOTAL OF200 KG S. HOWEVER, ON PAGE 31 OF THE ORDER HE HAS NOTED THAT THE COST OF 100 KGS. OF INTERMEDIATES IS RS. 2,96,030 AND ACCORDINGLY WHILE ARRIVING AT THE AVER AGE COST OF RAW MATERIALS FOR 1 KG. OF INTERMEDIATES, HE HAS DIVIDED THE SAME BY 100 INSTEAD OF 200. THUS, WHILE THE AVERAGE COST OF RAW MATERIALS OF 1 KG. OF INTERMEDIATES SHOULD HAVE BEEN CORRECTLY WORKED OUT AT RS. 1480.1 5 PER KG THE LEARNED A. 0. HAS CONSIDERED THE SAME AT DOUBLE THE FIGURE VIZ . RS.2960.30. II) MOREOVER, IN THE CHART REPRODUCED BY THE LEARN ED A. 0. ON PAGE 31 OF THE ASSESSMENT ORDER, HE HAS WORKED OUT THE EXPECTE D AMOUNT OF COST OF RAW MATERIALS WITH REFERENCE TO THE AMOUNT OF SALES OF THE INTERMEDIATES IN KGS., WHEREAS THE SAME OUGHT TO HAVE BEEN WORKED OU T ON THE BASIS OF PRODUCTION OF INTERMEDIATES IN KGS.. THE CORRECT QU ANTITIES REQUIRED TO BE TAKEN INTO CONSIDERATION IN RESPECT OF THE ACTUAL P RODUCTION OF INTERMEDIATES HAVE BEEN DULY REFLECTED BY THE APPEL LANT IN THE REVISED AND CORRECTED CHART FOR THE PURPOSE COMPILED AS ANNEXUR E-I TO THE STATEMENT OF FACTS. III) MOREOVER, THE EXPECTED AMOUNT OF COST OF RAW M ATERIALS AS WORKED OUT BY THE LEARNED A. 0. IN THE CHART ON PAGE 31 HA S BEEN SO COMPUTED ON THE BASIS OF THE TOTAL QUANTITY OF SALES OF THE TWO INTERMEDIATES, INSTEAD OF WORKING OUT THE SAME ON THE BASIS OF RESPECTIVE QUA NTITIES OF PRODUCTION OF THE TWO CONCERNED INTERMEDIATES VIZ. KSM-14 AND KSM -6 AND APPLYING THE APPROPRIATE RATE OF COST OF RAW MATERIALS PER KG. F OR EACH OF THE INTERMEDIATE SEPARATELY. THE CORRECT COMPUTATION IN THIS REGARD ALSO STANDS DULY REFLECTED IN THE REVISED AND CORRECTED CHART P REPARED BY THE APPELLANT AND ENCLOSED HERETO AS ANNEXURE-I ABOVE. IV) MOREOVER, WHILE ADOPTING THE RATE OF THE RESPE CTIVE RAW-MATERIALS UTILIZED IN THE PRODUCTION OF THE TWO INTERMEDIATES KSM-14 AND KSM-6, THE LEARNED A. 0. OUGHT TO HAVE ADOPTED THE AVERAGE RAT E PER KG. ON THE BASIS OF THE ACCOUNTS DULY CERTIFIED UNDER SCHEDULE- VI OF T HE COMPANIES ACT AND FORMING PART OF THE FINAL ACCOUNTS AS DULY AVAILABL E ON RECORD WITH THE LEARNED A. 0. HIMSELF CONSIDERING THE CUMULATIVE IM PACT OF THE AFORESAID FOUR ASPECTS, THE AVERAGE EXPECTED PER KG. COST OF RAW MATERIALS ON THE BASIS AS WORKED OUT BY THE LEARNED A.O. SHOULD CORR ECTLY WORK OUT TO RS.1,42 7.37 AS AGAINST RS.2960.30 PER KG. AS COMPU TED IN THE ASSESSMENT ORDER. MOREOVER, CONSIDERING THE CORRECT RATE OF RS . 1,427.37 AS REFERRED TO ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 8 ABOVE AND APPLYING IT TO THE CORRECT QUANTITY OF PR ODUCTION (AND NOT SALES), THE EXPECTED AMOUNT OF COST OF RAW MATERIALS FOR A. Y.2004-05 WOULD WORK OUT TO RS. 13.78 CRORES AS AGAINST RS. 29.67 CRORES AS INDICATED BY THE LEARNED A. 0. IN HIS CHART. FURTHER MORE, IF THE AC TUAL AVERAGE PRICE OF EACH OF THE RAW-MATERIALS (APART FROM FOUR MAJOR RAW-MAT ERIALS REFERRED TO ABOVE) ARE TAKEN INTO CONSIDERATION IN COMPARISON TO THE H YPOTHETICAL RATES AS ADOPTED BY THE LEARNED A.0., THE EXPECTED AMOUNT OF COST OF RAW MATERIALS OF RS. 13. 78 CRORES WOULD VIRTUALLY RECONCILE WITH THE ACTUAL AMOUNT OF COST OF RAW MATERIALS OF RS. 12.49 CRORES AS REFLECTED I N THE P&L A/C. THE MISCHIEVOUS ATTEMPT ON THE PART OF THE LEARNED A.O. TO SHOW THE EXPECTED AMOUNT OF COST OF RAW MATERIALS ALMOST RS.1 7 CRORE S HIGHER THAN THE AMOUNT AS REFLECTED IN THE P&L A/C. IS GROSSLY UNJU STIFIED. 8. AS REGARDS THE A.O.S ALLEGATION THAT THE ELEME NTS OF KNOW-HOW AND PATENT WERE NOT TAKEN INTO ACCOUNT BY THE ASSESSEE IN THE COST OF PRODUCTION TO SHOW HIGHER PROFITS IN ORDER TO CLAIM HIGHER DEDUCTION U /S 10B OF THE ACT, THE FOLLOWING SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE TO CLARIFY THE POSITION:- THE LEARNED A.0. HAS FURTHER ALLEGED THAT THE APPEL LANT HAS DELIBERATELY TRIED TO SHOW THE COST OF PRODUCTION EXCLUDING THE VALUE ADDITION IN THE NATURE OF PAYMENTS SUCH AS ROYALTIES, PATENT UTILIZ ATION, TECHNICAL KNOW- HOW, ETC. HERE AGAIN, THE ALLEGATION OF THE LEANED A. 0. IS TOTALLY UNFOUNDED AND WITHOUT ANY BASIS OR JUSTIFICATION WHATSOEVER. WITHOUT SEEKING ANY CLARIFICATION IN THE MATTER FROM THE APPELLANT, THE LEARNED A.O., HAS IN PARAS 23 AND 24 OF THE ASSESSMENT ORDER, MADE HIGHL Y MISCHIEVOUS AND MISLEADING REMARKS AGAINST THE APPELLANT THAT THE ASSESSEE HAS BY DELIBERATE DESIGN NOT ONLY EXCLUDED SUCH ROYALTY PA YMENTS FROM THE PROFITS BUT HAS FAILED TO DEDUCT TAXES THEREON. IT IS PERT INENT TO NOTE THAT ARTICLE 1 Z 3 OF THE J V AGREEMENT REFERRED TO BY THE A.O., O NLY MENTIONS THE ARRANGEMENT FOR MAKING WITHHOLDING TAX IN RESPECT O F ANY PAYMENTS WHICH ARE CONSTRUED TO CONSTITUTE ROYALTIES AND MODALITY FOR OBTAINING TAX CREDIT IN THE CONTEXT OF THE DOUBLE TAX AVOIDANCE TREATY B ETWEEN INDIA AND GERMANY. IT IS PERTINENT TO NOTE THAT AS PER THE TE RMS OF THE JOINT VENTURE AGREEMENT, THERE WAS NO OBLIGATION ON THE PART OF T HE APPELLANT COMPANY TO MAKE ANY PAYMENTS ON THE ABOVE ACCOUNT AS ALLEGED B Y THE LEARNED A.O., IN RESPECT OF THE PRODUCTION OF THE TWO INTERMEDIATES KSM-6 AND KSM-14, THE PRODUCTION OF WHICH WAS TO BE EXCLUSIVELY SUPPLIED BY THE APPELLANT TO ALTANA PHARMA AG, GERMANY. TO SUPPORT HIS CONCLUSION THAT THE APPELLANT HAS N OT INCLUDED SUCH COST ATTRIBUTABLE TO VALUE ADDITION, ROYALTIES AND OTHER CHARGES, THE LEARNED A. 0. HAS AS DISCUSSED IN PARA 38 OF HIS ORDER RELIED UPO N THE CHART REPRODUCED BY HIM ON PAGE 31 OF THE ASSESSMENT ORDER. AS POINT ED OUT HEREINBEFORE, THE VERY BASIS OF DISCREPANCY AS SOUGHT TO BE HIGHL IGHTED BY THE LEARNED A.O. IN THE EXPECTED AMOUNT OF COST OF RAW MATERIAL S AND ACTUAL COST OF RAW ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 9 MATERIALS AS REFLECTED IN THE P&L A/C. DOES NOT SUR VIVE AND HENCE THE ALLEGATION BY THE LEARNED A.O. ON THIS COUNT HOLDS NO GROUND WHATSOEVER. 9. IT WAS ALSO BROUGHT TO THE NOTICE OF THE LD. CIT (A) BY THE ASSESSEE THAT WHILE MAKING ALLEGATION OF EXCESS AND UNREASONABLE PROFIT S SHOWN BY THE ASSESSEE IN THE YEARS UNDER CONSIDERATION AS COMPARED TO THE IN ITIAL YEAR I.E. A.Y. 2002-03, THE PERCENTAGE OF PROFITS WAS TAKEN BY THE A.O. AS THE RATIO OF TURNOVER TO THE COST OF PRODUCTION. IT WAS CONTENTED THAT THE SAID RATI O DID NOT REPRESENT THE PROFITABILITY OF THE ELIGIBLE BUSINESS OF THE ASSES SEE COMPANY AND SUCH WEIRD BASIS ADOPTED BY THE A.O. TO WORK OUT THE PROFITABI LITY BY COMPARING THE RATIO OF TOTAL INCOME TO THE TOTAL EXPENDITURE WAS NOWHERE I N PRACTICE. IT WAS CONTENDED THAT A CORRECT AND JUSTIFIED BASIS OF PROFIT COMPAR ISON BETWEEN TWO YEARS SHOULD HAVE BEEN EITHER THE GROSS PROFIT OR NET PROFIT OF THE RELEVANT YEARS. ACCORDINGLY, THE ASSESSEE FURNISHED THE COMPARATIVE WORKING OF G ROSS PROFIT AND NET PROFIT FOR RELEVANT ASSESSMENT YEARS BEFORE THE LD. CIT(A) AS UNDER:- A.Y. 2002-03 (A) (B) 2003-04 (A) (B) 2004-05 (A) (B) 2005-06 (A) (B) SALES 254,614,564 1,164,841,942 1,685,584,102 1,224 ,879,209` MATERIAL CONSUMED MATERIAL COST 62,978,686 127,815,174 131,047,243 12 0,881,144 ADD OPENING STOCK 43,185,998 64,961,039 66,872,950 LESS CLOSING STOCK 33,250,261 65,857,616 66,872,95 0 127,871,977 MATERIAL CONSUMED 29,728,425 11.68% 105,143,556 9.03% 129, 135,332 7.66% 59,882,117 4.89% MFG. EXPENSES 26,362,926 10.35% 80,088,610 6.88% 84,924,944 5.04% 87,647,739 7.16% DEPRECIATION 16,540,712 6.50% 32,027,939 2.75% 32,222,654 1.91% 29,314,916 2.39% TOTAL DIRECT COST 72,632,063 28.53% 217,260,105 18.65% 246,282,930 14.61% 176,844,772 14.44% GROSS PROFIT 181,982,501 71.47% 947,581,837 81.35% 1,439,301,172 85.39% 1,048,034,437 85.56% ADMN. & SELLING EXPENSES 39,734,030 15.61% 53,504,802 4.59% 94,052,515 5.58% 5 4,653,573 4.46% DEPRECIATION OTHERS 7,769,028 3.05% 14,654, 105 1.26% 16,357,554 0.97% 17,73 5,798 1.45% MISC. EXPENSES W/O 389,404 0.15% 389.40 4 0.03% 1,168,211 0.07% - 0.00% OTHER INCOME (757,133) -0.30% (22,624,630) -1.94% (25,022,497) - 1.48% (59,879,198) - 4.89% TOTAL OTHER EXPENSES 47,135,329 18,.51% 45,923,681 3.94% 86 ,555,783 5.14% 12,510,173 1.02% NET PROFIT BEFORE TAX 134,847,172 52.96% 901,658,156 77.41% 1,352,745,389 80.25% 1,035,524,264 84.54% ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 10 10. IT WAS ALSO BROUGHT TO THE NOTICE OF THE LD. CI T(A) BY THE ASSESSEE THAT A.Y. 2002- 03 WAS ITS FIRST YEAR OF PRODUCTION COMPRISING OF O NLY SEVEN MONTHS OF WORKING WHEREIN THE CAPACITY UTILIZATION WAS ONLY 38.62% WH EREAS A.Y. 2004-05 WAS COMPRISING OF TWELVE MONTHS OF MANUFACTURING ACTIVI TY WHEREIN CAPACITY UTILIZATION WAS 96.51%. IN THIS REGARD, A COMPARAT IVE CHART WAS PREPARED AND FURNISHED BY THE ASSESSEE TO SHOW THAT THERE WAS HI GHER CAPACITY UTILIZATION, HIGHER AVERAGE SALES REALISATION AND LOWER COST OF RAW MATERIAL CONSUMPTION IN A.Y. 2004-05 AS COMPARED TO A.Y. 2002-03. THE WORK ING SO FURNISHED BY THE ASSESSEE BEFORE THE LD. CIT(A) WAS AS UNDER:- ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 11 11. AFTER CONSIDERING THE SUBMISSIONS MADE ON BEHA LF OF THE ASSESSEE AND PERUSING THE MATERIAL AVAILABLE ON RECORD INCLUDING THE ORDER OF THE A.O., THE LD. CIT(A) AGREED WITH THE STAND OF THE ASSESSEE THAT T HE CONCLUSIONS ARRIVED AT BY THE A.O. ON THIS ISSUE WERE WRONG BEING PRIMARILY G UIDED BY ERRONEOUS APPRECIATION OF FACTS. IN THIS REGARD, HE IDENTIFI ED THE SIGNIFICANT POINTS BORN OUT FROM RECORD AND SUMMARIZED HIS OBSERVATIONS AND FIN DING ON THESE SIGNIFICANT POINTS IN HIS IMPUGNED ORDER AS UNDER:- I FIND THAT THE APPELLANT IS RIGHT IN POINTING OUT THAT WHILE COMPUTING THE COST OF RAW MATERIAL, QUANTITY CONSUMED FOR PRODUCT ION OF 100 KGS. EACH OF THE TWO INTERMEDIATES PRODUCED BY THE APPELLANT VIZ . KSM-14 AND KSM-6 AT RS.2,96,030/- (AS WORKED OUT AT PAGE 30 OF THE ASSE SSMENT ORDER), THE ASSESSING OFFICER HAS DIVIDED THE ABOVE BY 100 INST EAD OF 200. THE ASSESSING OFFICER SHOULD HAVE KEPT IN MIND THAT HE WAS REFERRING TO 100 KGS. OF PRODUCTION OF KSM- 14 AND 100 KGS. OF PRODU CTION OF KSM-6 EACH, IN EFFECT AMOUNTING TO 200 KGS. THUS, AS PER THE AS SESSING OFFICERS COMPUTATION, THE AVERAGE COST OF PRODUCTION OF 1 KG . OF INTERMEDIATES SHOULD HAVE BEEN WORKED OUT TO RS.1480.15 PER KG. A S AGAINST RS.2960.30 PER KG. WRONGLY COMPUTED BY HIM. (II) THE APPELLANT IS ALSO JUSTIFIED IN POINTING OU T THAT IN THE CHART REPRODUCED ON PAGE 31 OF THE ASSESSMENT ORDER, THE ASSESSING OFFICER SHOULD HAVE WORKED OUT THE EXPECTED AMOUNT OF COST OF RAW MATERIAL WITH REFERENCE TO THE PRODUCTION OF INTERMEDIATES, AS AG AINST THE BASIS OF SALES ADOPTED BY HIM. MY ATTENTION WAS DRAWN BY THE APPEL LANTS REPRESENTATIVE TO ANNEXURE-I (ANNEXED TO THIS ORDER HEREINAFTER) F ORMING PART OF THE STATEMENT OF FACTS AND GROUNDS OF APPEAL WHEREIN TH E REVISED CORRECTED CHART FOR THE PURPOSE HAS BEEN DULY WORKED OUT BY T HE APPELLANT. ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 12 (III) I ALSO FIND FORCE IN THE APPELLANTS CONTENTI ON THAT AS POINTED OUT IN THE ABOVE REFERRED CHART AT ANNEXURE-I, THE EXPECTE D AMOUNT OF COST OF RAW MATERIALS OUGHT TO HAVE BEEN WORKED OUT ON THE BASI S OF RESPECTIVE QUANTITY OF PRODUCTION OF THE TWO INTERMEDIATES KSM-14 AND K SM-6 AND APPLYING THE APPROPRIATE RATE OF COST OF RAW MATERIAL PER KG . FOR EACH OF INTERMEDIATES SEPARATELY. I FIND THAT THE ASSESSING OFFICER HAS COMPUTED THE COST OF RAW MATERIAL ON THE BASIS OF THE TOTAL QUANTITY OF THE SALES OF THE TWO INTERMEDIATES TOGETHER WHICH IS NOT THE CORRECT METHOD OF COMPUTATION. (IV) THE APPELLANT IS ALSO JUSTIFIED IN POINTING OU T THAT WHILE ADOPTING THE RATE OF THE RESPECTIVE RAW MATERIALS UTILIZED IN TH E PRODUCTION OF THE TWO INTERMEDIATES KSM14 AND KSM-6, THE ASSESSING OFFICE R OUGHT TO HAVE ADOPTED THE AVERAGE RATE PER KG. ON THE BASIS OF TH E ACCOUNTS DULY CERTIFIED UNDER SCHEDULE-VI TO THE COMPANIES ACT AND FORMING PART OF THE FINAL ACCOUNTS INSTEAD OF ADOPTING HYPOTHETICAL RATES, WH ICH WERE ALREADY AVAILABLE ON RECORD WITH THE ASSESSING OFFICER. (V) THE APPELLANT HAS AFTER CONSIDERING THE CUMULAT IVE IMPACT OF THE AFORESAID ASPECTS ENUMERATED AT (I) TO (IV) HEREINA BOVE, POINTED OUT THAT THE EXPECTED AMOUNT OF COST OF RAW MATERIALS FOR A.Y. 2 004-05 WOULD WORK OUT TO RS.13.78 CRORES AS AGAINST RS.29.69 CRORES INDIC ATED BY THE ASSESSING OFFICER IN HIS CHART. THE SAID EXPECTED AMOUNT OF C OST OF RS. 13.78 CRORES WOULD VIRTUALLY RECONCILE WITH THE ACTUAL AMOUNT OF COST OF RS.12.49 CRORES AS REFLECTED IN THE P&L ACCOUNT, IF THE ACTUAL AVER AGE COST IS ADOPTED. (VI) I ALSO FIND FORCE IN THE SUBMISSION ON BEHALF OF THE APPELLANT THAT AS PER THE TERMS OF THE SUPPLY AGREEMENT BETWEEN THE A PPELLANT AND APAG, THERE WAS NO OBLIGATION ON THE PART OF THE APPELLAN T COMPANY TO MAKE ANY PAYMENT ON ACCOUNT OF ROYALTIES, PATENT UTILIZATION , TECHNICAL KNOW-HOW ETC. THUS THE ALLEGATION OF THE ASSESSING OFFICER T HAT THE APPELLANT HAD DELIBERATELY TRIED TO SHOW THE COST OF PRODUCTION E XCLUDING THE VALUE ADDITION IN THE NATURE OF PAYMENT SUCH AS ROYALTY, PATEN UTILIZATION, TECHNICAL KNOW-HOW ETC. DOES NOT HOLD ANY VALID GRO UND AGAINST THE APPELLANT. EVEN OTHERWISE THIS CONCLUSION OF THE A. O. IS NOT VALID BECAUSE EVEN IF HIS OWN METHOD IS ADOPTED WITHOUT THE ABOVE ARITHMETICAL AND CONCEPTUAL MISTAKES, THE COST OF RAW MATERIALS WORK S OUT TO RS. 13.78 CRORES AS AGAINST THAT SHOWN IN THE P&L ACCOUNT AT RS.12.49 CRORES. THE FIGURE OF RS.13.78 CRORES IS SIGNIFICANTLY DIFFEREN T FROM HIS WRONGLY COMPUTED FIGURE OF RS.29.69 CRORES AND HENCE IT LEA VES NO SCOPE FOR HYPOTHESIS AND ASSUMPTIONS, THAT THERE IS VALUE ADD ITION IN NATURE OF PAYMENT OF ROYALTY, PATENT UTILIZATION AND TECHNICA L KNOW-HOW ETC. (VI) THE GROSS PROFIT AS PER THE P&L ACCOUNT OF THE APPELLANT HAS INCREASED MARGINALLY FROM A.Y.2002-03 TO A.Y.2004-0 5 FROM 71.47% TO 85.39% AS PER FOLLOWING CHART: ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 13 A.Y. 2002-03 A.Y. 2004-05 RS. IN CRORES (AMOUNT) % OF SALES RS. IN CRORES (AMOUNT) % OF SALES SALES 25.46 168.56 TOTAL DIRECT COST 7.26 28.53% 24.63 14.61% GROSS PROFIT (G.P) 18.20 71.47% 143.93 85.39% REASONS FOR ABOVE INCREASE IN G.P. RATE AS GIVEN BY THE APPELLANT ARE :- (A) COST OF ONE OF THE MAJOR RAW MATERIAL CALLED MA LTOL HAS GONE DOWN FROM RS.824 PER UNIT IN A.Y.2002-03 TO RS.488 PER U NIT IN A.Y.2004-05 WHICH MEANS 40% SAVINGS ON THIS ACCOUNT. (B) ON ACCOUNT OF INCREASED CAPACITY UTILIZATION FR OM FIRST YEAR I.E. A.Y.2002-03 TO THE CURRENT YEAR I.E. A.Y.2004-05 FU RTHER SAVINGS IN COST OF PRODUCTION HAVE BEEN ACHIEVED. YET ANOTHER REASON I S INCREASED ECONOMY IN PRODUCTION PROCESS ENABLING THEM TO RE-USE THE SPEN T SOLVENTS IN A.Y.2004- 05 WHICH WAS NOT POSSIBLE IN THE FIRST YEAR OF PROD UCTION I.E. A.Y.2002-03. (C) YET ANOTHER REASON IS THAT ON ACCOUNT OF INCREA SE IN PRODUCTION, FURTHER ECONOMIES IN OTHER MANUFACTURING EXPENSES L IKE POWER & FUEL, REPAIRS IN PLANT AND MACHINERY ETC. HAVE BEEN ACHIE VED AS PER CHART (REPRODUCED ON PAGES 5 TO 7 OF THIS ORDER) HAVE BEE N ACHIEVED. (D) IT IS OBVIOUS THAT DEPRECIATION ON PLANT AND MA CHINERY AS A PERCENTAGE OF SALES WILL ALSO GO DOWN IN SUCCEEDING YEARS, FIRSTLY BECAUSE WDV WILL DECREASE AND SECONDLY BECAUSE SALES ARE AL SO GOING-UP. (E) SO FAR AS INCREASE IN NET PROFIT RATE IS CONCE RNED, IT IS OBVIOUS THAT THERE WILL BE SAVINGS IN ADMINISTRATIVE AND SELLING EXPENSES OVER THE YEARS AS A PERCENTAGE OF SALES BECAUSE SALES GO UP WHEREA S THESE EXPENSES LARGELY REMAIN THE SAME. ABOVE ARGUMENTS ARE NOT ONLY CONVINCING, THEY ARE A LSO VERIFIABLE FROM THE ACCOUNTS. THE OBSERVATIONS OF THE ASSESSING OFFICER IN PARA 2 3 AND 24 OF THE ASSESSMENT ORDER ARE PURELY BASED ON ASSUMPTIONS WH ICH ARE FURTHER BASED ON WRONG AND INCORRECT APPRECIATION OF FACTS. THE A.O. HAS NEITHER CARRIED OUT ANY ENQUIRIES NOR COLLECTED ANY INDEPEN DENT EVIDENCE TO SUPPORT HIS OBSERVATIONS/ASSUMPTIONS. SUCH ASSUMPTI ONS ARE NOT WARRANTED UNLESS A TRANSACTION HAS BEEN TRACED OUT WHICH INDICATES THAT ANY SUCH PAYMENTS HAVE BEEN MADE WHICH CAN BE TERME D TO BE IN THE NATURE OF ROYALTY ETC. THE PART OF (ARTICLE 17.3) O F THE JV AGREEMENT QUOTED BY HIM HAS ALSO NOT BEEN FULLY UNDERSTOOD BEFORE DR AWING CONCLUSIONS, BECAUSE IT ALSO TALKS OF APPELLANT TAKING STEPS FOR TAX EXEMPTION FOR ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 14 WITHHOLDING TAX. THUS, ARTICLE 17.3 IS NOT AT ALL R ELEVANT BECAUSE NO TRANSACTION OF PAYMENT IN THE NATURE OF ROYALTY HAS BEEN DETECTED BY THE A.O. (IX) THE ASSESSMENT ORDER FOR A.Y.2003-04 WAS ALSO A SUBJECT MATTER OF APPEAL BEFORE THE UNDERSIGNED WHERE THE ASSESSING O FFICER HAS ACCEPTED THE P&L ACCOUNT OF THE APPELLANT. THE APPELLANT TELLS M E THAT THE A.O. HAS NOT SOUGHT TO REVISE THE ASSESSMENT FOR THAT YEAR IN VI EW OF THE FINDINGS GIVEN IN THE CURRENT YEAR FOR RESTRICTING THE EXEMPTION U /S.1OB OF THE ACT. (X) HAVING CAREFULLY GONE THOUGH THE CHART SHOWING COMPARISON OF GROSS PROFIT AND NET PROFIT FOR A.Y. 2004-05 WITH T HE BASE YEAR A.Y. 2002- 03, AS SUBMITTED BY THE APPELLANT, I FIND THAT THE REASONS GIVEN BY THE APPELLANT FOR THE RELEVANT VARIATIONS ARE BOTH LOGI CAL AND CONVINCING. AS POINTED OUT BY THE APPELLANT IN THE CHART ANALYSIS, THE PRODUCTION IN A.Y.2002-03 WAS QUITE SMALL IN COMPARISON TO THE PR ODUCTION IN A.Y. 2004- 05 AND THE CAPACITY UTILIZATION OF THE PLANT WAS TH US MUCH LOWER. THE MOST IMPORTANT FACTOR FOR CONSIDERATION IS THAT THE AVER AGE REALIZATION IN A.Y. 2004-05 WAS MUCH HIGHER AS COMPARED TO A.Y. 2002-03 , MAINLY ON ACCOUNT OF HIGHER REALIZATION AGAINST THE EURO. AS POINTED OUT BY THE APPELLANT IN ITS SUBMISSIONS, AS ALSO VERIFIABLE FROM THE SALE INVOI CES OF BOTH KSM14 AND KSM-6 FOR THE ASSESSMENT YEARS 2002-03 TO 2004-05 ( PRODUCED FOR VERIFICATION BEFORE ME BY THE APPELLANT), THE APPEL LANT IS CORRECT IN CONTENDING THAT THE SALE PRICE HAD REMAINED THE SAM E FOR ALL THE THREE YEARS UNDER CONSIDERATION. THUS THE ALLEGATION OF T HE ASSESSING OFFICER ON PAGE 25 OF THE ASSESSMENT ORDER THAT THE APPELLANT HAD CALCULATED DIFFERENT PROFIT MARGINS IN CONTRAVENTION WITH THE ARTICLES A S CONTAINED IN THE JOINT VENTURE AGREEMENT DOES NOT STAND JUSTIFIED. WHEN TH E SALE PRICE WAS CONSTANT, BUT THE APPELLANT FETCHED HIGHER RUPEE RE ALIZATION ON ACCOUNT OF THE STRENGTHENING OF THE EURO, IT WAS BOUND TO EARN HIGHER PROFITS. MOREOVER, AS EXPLAINED BY THE APPELLANT, THE COST P ER UNIT OF PRODUCTION HAD ALSO DECREASED IN A.Y. 2004-05 ON ACCOUNT OF CH EAPER AVAILABILITY OF RAW MATERIAL, RUPEE APPRECIATION AGAINST DOLLAR, BE TTER PRODUCTION AND ALSO EFFECTIVE SOLVENT RECOVERY. THE AVERAGE MANUFACTURI NG COST OF PRODUCTION HAD ALSO DECREASED ON ACCOUNT OF GREATER STABILIZAT ION OF MANUFACTURING PROCESS AND ECONOMY OF SCALE AS EXPLAINED BY THE AP PELLANT. IN VIEW OF THE ABOVE, THE RISE IN THE MARGIN OF PROFIT FOR THE YEA R UNDER CONSIDERATION AS COMPARED TO THAT OF A.Y. 2002-03 IS BOTH LOGICAL AN D CONVINCING. IN FACT, IT IS QUITE SURPRISING THAT ALTHOUGH THE APPELLANT HAD EARNED MUCH HIGHER PROFIT IN A.Y. 2003-04 AS COMPARED TO A.Y.2002-03, NO SUCH ADVERSE INFERENCE WAS DRAWN BY THE A.O. IN THAT YEAR AND TH E ASSESSMENT FOR A.Y. 2003-04 WAS DULY FINALIZED U/S. 143(3) WITHOUT DIST URBING THE APPELLANTS CLAIM FOR EXEMPTION U/S.1OB. THE ASSESSING OFFICER HAS NOT APPRECIATED THIS FACT. (XI) REFERRING TO THE TWO DECISIONS RELIED UPON BY THE APPELLANT, I FIND THAT THE RATIO OF THE SAME AS ENUMERATED HEREINBEFO RE BY THE APPELLANT IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE OF THE APPELLANT. ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 15 (XII) FROM THE STATEMENT OF FACTS AS WELL AS THE AS SESSMENT ORDER, IT IS SEEN THAT IN THE MONTH OF DECEMBER, 2006, WHEN ASSE SSMENT PROCEEDINGS WERE FINALIZED AND THE ISSUES DISCUSSED IN THE ASSE SSMENT ORDER WERE IDENTIFIED, THE APPELLANTS WERE NOT GIVEN SUFFICIEN T TIME NEITHER GIVEN A SHOW CAUSE ON THE PROPOSED ADDITION SO AS TO ENABLE THEM TO CLARIFY THE ISSUE OF COST OF PRODUCTION BEFORE THE A.O. NO SUCH CLARIFICATIONS ON THE ARITHMETICAL ANALYSIS WERE SOUGHT BY THE A.O. FROM THE APPELLANT; HENCE THE SAID ANALYSIS BY THE A.O. RESULTED IN ERRORS AND CO NSEQUENT MISTAKE IN CONCLUSIONS. THE CONTENTION OF THE APPELLANT THAT P RINCIPLE OF NATURAL JUSTICE HAS NOT BEEN FOLLOWED APPEARS TO BE TRUE IN VIEW OF THESE FACTS AND ALSO THE FACT THAT THE COPIES OF THE STATEMENTS OF TWO PRODUCTION PERSONNEL DR.V.B.KHARE AND SHRI PRASHANT CHITNIS RECORDED U/S . 131, THOUGH USED AGAINST THE APPELLANT IN THE ASSESSMENT ORDER, WERE NOT GIVEN TO APPELLANT. WHEN AOS INTENTION WAS TO MAKE SUCH A HUGE ADDITIO N OF ABOUT RS.97 CRORES, IT WAS NECESSARY FOR HIM TO GIVE THE APPELL ANT A SHOW CAUSE NOTICE AND COPIES OF ALL THE MATERIALS ON THE BASIS OF WHI CH HE PROPOSED TO MAKE THE SAID ADDITION. (XIII) THE A.O. HAS RECORDED THE STATEMENTS OF TWO PRODUCTION MANAGERS DR.V.B.KHARE AND SHRI PRASHANT CHITNIS AND ANALYSED THE SAME IN THE ASSESSMENT ORDER TO DRAW ADVERSE CONCLUSIONS AGAINS T THE APPELLANT. HOWEVER, THIS ANALYSIS IN PARAS 10 TO 12 OF THE ASS ESSMENT ORDER DOES NOT IN ANY WAY PROVE ANYTHING. THESE PERSONS WHO ARE IN CHARGE OF MANUFACTURING PROCESS HAVE NOT SAID ANYTHING WHICH CAN LEAD TO THE CONCLUSION THAT ROYALTY AND/OR TECHNICAL KNOW-HOW F EE HAS BEEN PAID THROUGH ILLEGAL CHANNELS WITHOUT RECORDING THE SAME IN THE BOOKS OF ACCOUNTS WHICH IS THE MAIN CONCLUSION DRAWN BY THE A.O. REGARDING ALLEGED ABNORMAL VALUE ADDITION TO THE FINISHED PRODUCT. (XIV) SO FAR AS THE PROVISIONS OF SECTION 801A( 10) AND I OB(7) ARE CONCERNED, THE APPLICATION OF THE SAME IS WARRANTED ONLY IN A CASE WHEN THE PROFITS ARE MORE THAN THE ORDINARY PROFITS. THE A.O. HAS TAKEN THE PROFITS OF A.Y.2002-03 TO BE THE ORDINARY PROFITS A ND COMPARED THE SAME WITH THE CURRENT YEARS PROFITS. HOWEVER, IN DOING SO, HE COMMITTED ARITHMETICAL MISTAKES AND HENCE, ARRIVED AT WRONG C ONCLUSIONS. HAD HE NOT COMMITTED ARITHMETICAL MISTAKES AND NOT USED WRONG FIGURES, HE WOULD HAVE SEEN THAT THE FIGURES OF P&L ACCOUNT MATCH WIT H THE ANALYSIS AND THERE WOULD BE NO SUCH VAST DISCREPANCY AS DESCRIBE D IN THE TABLE ON PAGE- 3 1 OF THE ASSESSMENT ORDER. (XV) YET ANOTHER OBSERVATION OF THE A.O. IN THE ASS ESSMENT ORDER IS REGARDING SUPPLY AGREEMENT AND BASIS FOR EXPORT PRI CING WITH BYKE GULDEN GROUP. ARTICLE 5.1.2 OF THE SUPPLY AGREEMENT AS WEL L AS ARTICLE 21.2 (C) JV AGREEMENT STIPULATES THAT THE INITIAL SUPPLY PRICE APPLICABLE TO FIRST CALENDAR YEAR SHALL CORRESPOND TO THE LOWEST SUPPLY PRICE CHARGED BY THIRD PARTY SUPPLIERS. IN FUTURE CALENDAR YEARS, THE SUPP LY PRICE SHALL BE FIXED AS PER THE METHOD PROVIDED IN THE SAID ARTICLE. THE A. O. HAS DRAWN AN ADVERSE INFERENCE ASSUMING THAT SUPPLY PRICE AS PER ABOVE A GREEMENT WAS NOT ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 16 FOLLOWED. HOWEVER, THE APPELLANTS NOTE ON THIS ASP ECT WHICH WAS FURNISHED BEFORE THE UNDERSIGNED AND WHICH IS ALSO EVIDENCED BY THE A.E. VIDE LETTER DTD. 11.12.2007 STATES THAT THE PRICES WERE FIXED I N ACCORDANCE WITH THE SUPPLY AGREEMENT. THE INITIAL PRICE OF KSM-6 AND KS M-14 WAS AT A MORE FAVOURABLE LEVEL IN THE FIRST CALENDAR YEAR AS COMP ARED TO LOWEST PRICE CHARGED BY THIRD PARTY SUPPLIERS WHEREAS THE PRICE CHARGED IN THE FOLLOWING CALENDAR YEARS WAS FIXED AS PER METHOD PRESCRIBED I N THE AGREEMENT. OVERALL IT IS STATED BY THE APPELLANT THAT THE EXPO RT PRICE OF THE ABOVE TWO INTERMEDIATES IS BASED ON THE LOWEST OF THE THIRD P ARTY SUPPLY PRICE TO ALTANA AG. IN VIEW OF THIS, THEREFORE, I AM OF THE OPINION THAT THE A.O. SHOULD NOT HAVE DRAWN ANY SUCH AN ADVERSE CONCLUSIO N BECAUSE IT WAS NOT FACTUALLY TRUE. ON THE BASIS OF ABOVE FINDINGS/OBSERVATIONS RECORD ED BY HIM, THE LD. CIT(A) HELD THAT THE PROFIT SHOWN BY THE ASSESSEE FOR A.Y. 2004 -05 WAS NOT MORE THAN ORDINARY PROFIT AND THE A.O. WAS NOT JUSTIFIED IN R EDUCING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT BY RS. 96 .87 CRORES FOR A.Y. 2004-05. ACCORDINGLY, HE DIRECTED THE A.O. TO ALLOW THE ASSE SSEES CLAIM FOR SUCH DEDUCTION IN FULL AT RS. 135.22 CRORES. THIS CONCLUSION ARRI VED AT BY HIM IN A.Y. 2004-05 WAS FOLLOWED BY THE LD. CIT(A) TO GIVE A SIMILAR RE LIEF TO THE ASSESSEE ON THIS ISSUE IN ASSESSMENT YEARS 2003-04 AND 2005-06 BY DIRECTIN G THE A.O. TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT. 12. THE LD. D.R. SUBMITTED THAT THE DEDUCTION U/S 10B OF THE ACT WAS CLAIMED BY THE ASSESSEE IN RESPECT OF PROFITS OF ITS ELIGIB LE BUSINESS AND THE SAME WAS RESTRICTED BY THE A.O. BY INVOKING THE PROVISIONS O F SECTION 80IA(10) OF THE ACT WHICH ARE MADE APPLICABLE EVEN IN RELATION TO THE U NDERTAKING REFERRED TO IN SECTION 10B OF THE ACT AS PER THE SPECIFIC PROVISIO NS CONTAINED IN S.S. (VII) OF SECTION 10B OF THE ACT. HE SUBMITTED THAT THE ENTIR E EXPORT TURNOVER OF THE ELIGIBLE BUSINESS WAS MADE BY THE ASSESSEE COMPANY TO ITS JO INT VENTURE PARTNER WITH WHOM IT ADMITTEDLY HAS CLOSE CONNECTION AND THE COU RSE OF BUSINESS BETWEEN THEM WAS FOUND BY THE A.O. TO BE SO ARRANGED THAT T HE BUSINESS TRANSACTIONS BETWEEN THEM PRODUCED TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH WAS EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS. HE CO NTENDED THAT THE A.O. ACCORDINGLY PROCEEDED TO COMPUTE THE PROFITS AND GA IN OF SUCH ELIGIBLE BUSINESS ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 17 FOR THE PURPOSE OF ALLOWING DEDUCTION U/S 10B OF TH E ACT BY TAKING THE AMOUNT OF PROFITS AS MIGHT BE REASONABLY DEEMED TO HAVE BEEN DERIVED THERE FROM. HE SUBMITTED THAT IT WAS FOUND BY THE A.O. IN THIS CON TEXT THAT THE PROFIT OF RS. 135.27 CRORES WAS SHOWN TO HAVE BEEN EARNED BY THE ASSESSEE IN A.Y. 2004-05 FROM THE EXPORT TURNOVER OF RS. 165.58 CRORES WHICH WAS CERTAINLY MORE THAN THE ORDINARY PROFITS. HE INVITED OUR ATTENTION TO THE WORKING GIVEN BY THE A.O. IN THE ASSESSMENT ORDER FOR A.Y. 2004-05 TO POINT OUT THAT THE RATIO BETWEEN THE TURNOVER OF THE ASSESSEE AND COST OF PRODUCTION WAS SUBSTANTIALLY HIGHER AT 498% IN A.Y. 2004-05 AS AGAINST 211% SHOWN BY THE ASSESS EE COMPANY ITSELF IN THE FIRST YEAR I.E. A.Y. 2002-03. HE CONTENDED THAT THE A.O. THEREFORE ADOPTED THE PROFIT OF THE ASSESSEE COMPANY FOR A.Y. 2002-03 AS NORMAL PROFITS OF THE ELIGIBLE BUSINESS AND THE DIFFERENCE OF 286% WAS TREATED BY HIM AS PROFIT WHICH IS MORE THAN ORDINARY PROFITS WITHIN THE MEANING OF SECTION 80IA(10) OF THE ACT. HE CONTENDED THAT THE DEDUCTION CLAIMED BY THE ASSESSE E U/S 10B OF THE ACT WAS ACCORDINGLY RESTRICTED BY THE A.O. ONLY TO THE EXTE NT OF SUCH ORDINARY PROFITS AND THE BALANCE AMOUNT WAS DISALLOWED AS PER THE PROVIS IONS OF SECTION 80IA(10) R.W.S. 10B OF THE ACT. HE SUBMITTED THAT THE A.O. A LSO SUPPORTED HIS CASE OF MORE THAN ORDINARY PROFITS SHOWN BY THE ASSESSEE FROM TH E ELIGIBLE BUSINESS BY SHOWING THAT THE RAW MATERIAL COST DEBITED BY THE A SSESSEE COMPANY IN THE P&L ACCOUNT WAS MUCH LOWER THAN THE ACTUAL COST OF RAW MATERIAL WHICH SHOULD HAVE BEEN REFLECTED AND ALTHOUGH THERE WERE CERTAIN FACT UAL MISTAKES COMMITTED BY THE A.O. IN THE WORKING MADE IN THIS BEHALF, THE LD. CI T(A) WAS NOT JUSTIFIED IN DELETING THE DISALLOWANCE MADE BY THE A.O. ON ACCOU NT OF ASSESSEES CLAIM FOR DEDUCTION U/S 10B MERELY ON THE BASIS OF SUCH FACTU AL MISTAKES. HE CONTENDED THAT THE SAID WORKING WAS GIVEN BY THE A.O. MERELY TO SUPPORT THE EXTRA ORDINARY HIGHER PROFIT SHOWN BY THE ASSESSEE FROM ITS ELIGIB LE BUSINESS AND THERE WAS NOTHING TO DISPUTE THAT THE RATIO BETWEEN THE TURNO VER AND COST OF PRODUCTION OF THE ASSESSEE FOR THE YEARS UNDER CONSIDERATION WAS MUCH HIGHER THAN THE SIMILAR RATIO SHOWN BY THE ASSESSEE COMPANY ITSELF IN THE F IRST YEAR I.E A.Y. 2002-03. HE CONTENDED THAT THE LD. CIT(A) THUS DID NOT APPRECIA TE THE SPECIFIC FINDINGS GIVEN ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 18 BY THE A.O. WHILE RESTRICTING THE CLAIM OF THE ASSE SSEE FOR DEDUCTION U/S 10B OF THE ACT AND ALLOWED RELIEF TO THE ASSESSEE ON THIS ISSUE IGNORING THAT THE DISALLOWANCE MADE BY THE A.O. WAS BASED ON THE WORK ING GIVEN BY HIM IN THE ASSESSMENT ORDER SHOWING EXTRA ORDINARY PROFITS EAR NED BY THE ASSESSEE DURING THE YEARS UNDER CONSIDERATION TAKING THE FINANCIAL RESULTS AS DECLARED BY THE ASSESSEE. 13. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, SUBMITTED THAT ASSESSMENT YEAR 2002-03 WAS THE FIRST YEAR OF THE O PERATIONS OF THE ASSESSEE COMPANY WHEREIN THE CAPACITY UTILIZATION WAS LESS. HE SUBMITTED THAT THE A.O., HOWEVER, TOOK THE PROFIT SHOWN BY THE ASSESSEE IN T HAT INITIAL YEAR AS THE ORDINARY PROFITS AND TREATED THE HIGHER PROFITS EARNED BY TH E ASSESSEE IN THE YEAR UNDER CONSIDERATION AS MORE THAN ORDINARY PROFITS TO INVO KE THE PROVISIONS OF SECTION 80IA(10) OF THE ACT AND TO DISALLOW THE CLAIM OF TH E ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT TO THE EXTENT OF SUCH EXTRA ORDINARY PROFITS. HE SUBMITTED THAT THERE WERE, HOWEVER, SEVERAL FACTUAL MISTAKES AND E RRORS COMMITTED BY THE A.O. IN THE WORKING MADE IN THIS REGARD. HE INVITED OUR ATTENTION TO SUCH WORKING GIVEN IN THE ASSESSMENT ORDER FOR A.Y. 2004-05 AND ALSO TO THE RELEVANT PORTION OF THE LD. CIT(A)S ORDER WHEREIN THE FACTUAL MISTAKES AND ERRORS COMMITTED BY THE A.O. IN THE SAID WORKING WERE POINTED OUT AND DISCU SSED. HE SUBMITTED THAT SUCH ERRORS WERE NOT ONLY COMMITTED BY THE A.O. IN THE W ORKING OF COST OF RAW MATERIAL BUT THE SAME WERE THERE EVEN IN THE COMPARATIVE WOR KING OF PROFITABILITY MADE BY THE A.O. TO ALLEGE THAT THE PROFITS AS SHOWN BY THE ASSESSEE IN A.Y. 2004-05 WAS 498% AS AGAINST 211% SHOWN IN A.Y. 2002-03. HE CON TENDED THAT THE SAID PERCENTAGE WAS WORKED OUT BY THE A.O. BY TAKING THE RATIO BETWEEN THE TURNOVER OF THE ASSESSEE COMPANY AND COST OF PRODUCTION WHIC H BY NO MEANS CAN BE REGARDED AS PROFITABILITY RATIO. HE CONTENDED THAT EVEN THE COST OF PRODUCTION WAS WORKED OUT BY THE A.O. BY TAKING THE FIGURES OF OFF ICE AND ADMINISTRATIVE EXPENSES, DEPRECIATION ETC. WHICH WAS PATENTLY WRON G. HE CONTENDED THAT THE LD. CIT(A) QUITE CORRECTLY APPRECIATED THESE FACTUAL MI STAKES AND ERRORS COMMITTED BY ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 19 THE A.O. AS POINTED OUT BY THE ASSESSEE AND PROCEED ED TO EXAMINE THE ISSUE ON THE BASIS OF COMPARATIVE GROSS PROFIT AND NET PROFI T OF THE RELEVANT YEARS. 14. THE LD. COUNSEL FOR THE ASSESSEE INVITED OUR A TTENTION TO THE WORKING OF GROSS PROFIT AND NET PROFIT OF THE RELEVANT YEARS G IVEN IN THE IMPUGNED ORDERS OF THE LD. CIT(A) TO POINT OUT THAT THE GP RATE AS SHO WN BY THE ASSESSEE FOR A.Y. 2002-03 WAS 71.47% WHICH WAS INCREASED TO 81.35%, 8 5.39% AND 88.56% FOR ASSESSMENT YEARS 2003-04, 2004-05 AND 2005-06 RESPE CTIVELY. HE SUBMITTED THAT THE GP RATE THUS WAS INCREASED ONLY BY 9.85%, 13.92% AND 14.79% IN ASSESSMENT YEARS 2003-04, 2004-05 & 2005-06 AS COMP ARED TO THE GP RATE SHOWN BY THE ASSESSEE IN A.Y. 2002-03. HE SUBMITTE D THAT THIS DIFFERENCE IN GP RATE WAS SATISFACTORILY EXPLAINED BY THE ASSESSEE B EFORE THE LD. CIT(A) BY POINTING OUT THAT AS A RESULT OF INCREASE IN CAPACITY UTILIZ ATION FROM 38.62% IN A.Y. 2002- 03 TO 96.51% IN A.Y. 2004-05, THE MANUFACTURING EXP ENSES HAD GONE DOWN BY 6.44% OF SALES IN A.Y. 2004-05 AS COMPARED TO A.Y. 2002-03. HE SUBMITTED THAT EVEN THERE WAS INCREASE IN AVERAGE SALES REALIZATIO N PER KG. OF KSM-6 AND KSM 14 IN RUPEE TERMS AS A RESULT OF INCREASE IN THE VALUE OF EURO BY 25% DURING THE RELEVANT PERIOD. HE SUBMITTED THAT THERE WAS ALSO S UBSTANTIAL DEDUCTION IN THE COST OF RAW MATERIAL TO THE EXTENT OF 40% AS A RESU LT OF DECREASE IN THE RATE OF MALTON, ONE OF THE MAJOR RAW MATERIALS FROM RS. 824 /- IN A.Y. 2002-03 TO RS. 488/- IN A.Y. 2004-05. HE CONTENDED THAT THE INCRE ASE IN GP RATE IN THE YEARS UNDER CONSIDERATION AS COMPARED TO A.Y. 2002-03 THU S WAS FOR GOOD REASONS AND ONLY AFTER HAVING SATISFIED WITH SUCH REASONS GIVEN BY THE ASSESSEE TO EXPLAIN THE INCREASE IN GP RATE, THE LD. CIT(A) HELD THAT THE A .O. WAS NOT JUSTIFIED IN RESTRICTING THE ASSESSEES CLAIM FOR DEDUCTION U/S 10B OF THE ACT BY INVOKING THE PROVISIONS OF SECTION 80IA(10) OF THE ACT. HE SUBM ITTED THAT ALTHOUGH IN THE ASSESSMENT PROCEEDINGS FOR A.Y. 2004-05, THE ASSESS EE COULD NOT PRODUCE THE COST AUDIT REPORT AS REQUIRED BY THE A.O. SINCE THE ASSESSEE WAS NOT SURE AS TO WHETHER SUCH REPORT WAS REQUIRED TO BE OBTAINED BY IT, THE ASSESSEE OBTAINED SUCH AUDIT REPORT FOR THE CALENDAR YEAR 2004 AS WEL L AS 2005 AND PRODUCED THE ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 20 SAME BEFORE THE A.O. FOR HIS VERIFICATION DURING TH E COURSE OF ASSESSMENT PROCEEDINGS FOR A.Y. 2005-06. HE INVITED OUR ATTEN TION TO THE COPIES OF SUCH REPORTS PLACED BEFORE US AND SUBMITTED THAT THERE W AS NO ADVERSE COMMENTS MADE IN THE SAID REPORT BY THE AUDITORS AND IT WAS DULY CERTIFIED THEREIN THAT COST ACCOUNT RECORDS WERE PROPERLY KEPT BY THE ASSESSEE SO AS TO GIVE A TRUE AND FAIR VIEW OF COST OF PRODUCTION AND MARGIN OF PRODUCT. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IN THE RETURNS OF INC OME FILED FOR ALL THE THREE YEARS UNDER CONSIDERATION, DEDUCTION U/S 10B OF THE ACT W AS CLAIMED BY THE ASSESSEE IN RESPECT OF THE PROFITS DERIVED FROM THE ELIGIBLE EXPORT BUSINESS, THE TURNOVER OF WHICH WAS ENTIRELY MADE BY THE ASSESSEE COMPANY TO APAG, GERMANY, ONE OF THE JOINT VENTURE PARTNERS IN THE ASSESSEE COMPANY. TH ERE IS NO DISPUTE THAT THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 10B OF THE AC T IN RESPECT OF THE PROFITS OF THE SAID ELIGIBLE BUSINESS. THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT HOWEVER WAS RESTRICTED BY THE A.O. FOR ALL THE THRE E YEARS UNDER CONSIDERATION BY INVOKING THE PROVISIONS OF SECTION 80IA(10) OF THE ACT WHICH ARE MADE APPLICABLE IN RELATION TO THE DEDUCTION U/S 10B AS PER SUB SEC TION (VII) OF THE SECTION 10B OF THE ACT. THE PROVISIONS OF SECTION 80IA(10) OF THE ACT BEING RELEVANT IN THE CONTEXT ARE EXTRACTED BELOW:- WHERE IT APPEARS TO THE ASSESSING OFFICER THAT, OW ING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELI GIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR A NY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MO RE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH EL IGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS A ND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER TH IS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HA VE BEEN DERIVED THEREFROM. 16. THERE IS NO DISPUTE THAT THE APAG, GERMANY WITH WHOM THE ENTIRE ELIGIBLE BUSINESS WAS TRANSACTED BY THE ASSESSEE COMPANY DUR ING THE YEARS UNDER ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 21 CONSIDERATION IS HAVING CLOSE CONNECTION WITH THE A SSESSEE COMPANY BEING ONE OF ITS JOINT VENTURE PARTNERS. THE QUESTION, HOWEVER, IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IT CAN BE SAID THAT THE COURSE OF SUCH BUSINESS BETWEEN THE ASSESSEE COMPANY AND APAG, GERMANY WAS SO ARRANGED THAT THE SAME PRODUCED TO THE ASSESSEE MORE THAN THE ORDINAR Y PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN SUCH ELIGIBLE BUSINESS AS CONT EMPLATED IN SECTION 80IA(10) OF THE ACT. THE CASE OF THE A.O. IN THIS REGARD IS BAS ED ON THE COMPARATIVE WORKING OF PROFITABILITY MADE BY HIM TO ALLEGE THAT THE PRO FITS SHOWN BY THE ASSESSEE FOR ALL THE THREE YEARS UNDER CONSIDERATION WERE MORE T HAN THE PROFITS SHOWN BY THE ASSESSEE FOR THE FIRST YEAR I.E. A.Y. 2002-03 WHICH WAS TAKEN BY THE HIM AS NORMAL PROFITS OF THE ASSESSEES ELIGIBLE BUSINESS. BEFORE WE DISCUSS AND EXAMINE THE CASE OF THE A.O. IN THE LIGHT OF THE SAID WORKI NG, IT IS PERTINENT TO MENTION HERE THAT THE CASE MADE OUT BY THE A.O. OF THE EXTR A ORDINARY PROFIT ALLEGEDLY SHOWN BY THE ASSESSEE IN ALL THE THREE YEARS UNDER CONSIDERATION ON THE BASIS OF THE SAID WORKING WAS ALSO SOUGHT TO BE SUPPORTED BY HIM ON OTHER GROUNDS ALSO. IN THIS REGARD, HE RECORDED THE STATEMENTS OF DR. V IVEK KHARE AND MR. PRASHANT CHITNIS, PRODUCTION MANAGERS OF THE ASSESSEE COMPAN Y TO ASCERTAIN THE EXACT VALUE OF ADDITION AT EACH STAGE OF PRODUCTION. HE A LSO REFERRED TO THE RELEVANT TERMS AND CONDITIONS OF THE SUPPLY AGREEMENT BETWEE N THE ASSESSEE COMPANY AND APAG, GERMANY TO ASCERTAIN THE MECHANISM OF DET ERMINATION OF PROFITS PROVIDED THEREIN. HE ALSO NOTED THAT THE COMPONENT S OF TECHNICAL KNOW-HOW AND PATENT CAPACITY UTILIZATION WERE NOT TAKEN INTO ACC OUNT BY THE ASSESSEE WHILE COMPUTING ITS PROFITS ELIGIBLE FOR DEDUCTION U/S 10 B OF THE ACT. HE ALSO DISCUSSED THE MANUFACTURING PROCESS INVOLVED IN THE BUSINESS OF THE ASSESSEE ALONG WITH THE CHEMICAL EQUATIONS. HE ALSO MADE AN ATTEMPT TO WORK OUT THE COST OF RAW MATERIAL REQUIRED FOR THE PRODUCTION OF 1 KG. OF FI NAL PRODUCT OF THE ASSESSEE COMPANY AND TRIED TO SHOW ON THE BASIS OF SUCH COMP UTATION THAT THE COST OF RAW MATERIAL DEBITED BY THE ASSESSEE COMPANY IN THE PRO FIT AND LOSS ACCOUNT WAS SUBSTANTIALLY LOW TO INCREASE DELIBERATELY THE PROF ITS OF ALL THE THREE YEARS UNDER CONSIDERATION IN ORDER TO CLAIM HIGHER DEDUCTION U/ S 10B OF THE ACT. HE ALSO ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 22 OBTAINED A REPORT FROM NATIONAL PHARMACEUTICAL PRIC ING AUTHORITY, DEPARTMENT OF CHEMICALS &PETROCHEMICALS, GOVT. OF INDIA BASED ON THE COST AUDIT REPORT OF THE ASSESSEE COMPANY FOR THE CALENDAR YEARS 2004, 2005 AND 2006. 17. ALTHOUGH THE ASSESSEE MADE ELABORATE SUBMISSION S BEFORE THE LD. CIT(A) TO MEET ALL THE OBJECTIONS RAISED BY THE A.O. AND ALSO POINTED OUT THE PATENT MISTAKES COMMITTED BY THE A.O. IN THE WORKING OF CO ST OF RAW MATERIAL FOR 1 KG. OF FINAL PRODUCT, WE ARE OF THE VIEW THAT THE FIRST AN D FOREMOST POINT THAT IS REQUIRED TO BE ESTABLISHED BY THE A.O. TO INVOKE THE PROVISI ONS OF SECTION 80IA(10) OF THE ACT IS TO SHOW THAT THE PROFITS SHOWN BY THE ASSESS EE FOR ALL THE THREE YEARS UNDER CONSIDERATION WERE ACTUALLY MORE THAN THE ORDINARY PROFITS AND SUCH EXTRA ORDINARY PROFITS WAS THE RESULT OF THE COURSE OF EL IGIBLE BUSINESS HAVING BEEN SO ARRANGED BETWEEN THE CONCERNED PARTIES TO PRODUCE T HE ASSESSEE SUCH EXTRA ORDINARY PROFITS. THE CRUX OF THE ISSUE THUS IS TO ASCERTAIN WHETHER THE PROFITS SHOWN BY THE ASSESSEE FOR ALL THE THREE YEARS UNDER CONSIDERATION WERE ACTUALLY MORE THAN THE ORDINARY PROFITS WHICH WAS EXPECTED T O ARISE FROM THE ELIGIBLE BUSINESS OF THE ASSESSEE COMPANY AS ALLEGED BY THE A.O. AS ALREADY NOTED, THE CASE OF SUCH EXTRA ORDINARY PROFITS WAS MADE OUT BY THE A.O. BASICALLY ON THE BASIS OF YEAR-WISE COMPARATIVE WORKING MADE BY HIM TO CONCLUDE THAT THE PROFITS FOR ALL THE THREE YEARS UNDER CONSIDERATION AS SHOW N BY THE ASSESSEE WERE MORE THAN THE PROFITS FOR THE FIRST YEAR OF THE ELIGIBLE BUSINESS OF THE ASSESSEE I.E. A.Y. 2002-03 WHICH HE ADOPTED AS THE ORDINARY PROFITS OF THE ASSESSEES ELIGIBLE BUSINESS. THE SAID WORKING MADE BY THE A.O. IS GIV EN HEREUNDER:- ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 23 SR. NO. PARTICULARS A.Y. 2002-03 A.Y. 2003-04 A.Y. 2004-05 A.Y. 2005-06 1 SALES 19111 KGS 74767 KGS 1003.2 KGS 2 VALUE 254614564 1164841942 1685584102 1224879209 3 VALUE OF RAW MATERIAL 62978686 129007220 124923253 122517171 4 GROSS PROFIT 959062482 1439301172 1064402395 5 GROSS PROFIT/TO RATIO 82.33% 85% 87% 6 NET PROFIT/TO RATIO (902047559) 77% (1352745389) 80% 85% 7 MATERIAL CONSUMED/ COST OF PRODUCTION 129007220 229643123 50% 124923253 242070851 52% 122517171 223111868 55% 8 COST OF SALES/NET PROFIT RATIO 255371697 120524525 211.80% 285808416 1187466572 415.47% 357861210 1710606599 478% 249234143 1284758407 515.48% 18. A PERUSAL OF THE ABOVE WORKING MADE BY THE A.O. CLEARLY SHOWS THAT THE YEAR-WISE PERCENTAGE WORKED OUT BY HIM WAS THE RATI O BETWEEN TOTAL TURNOVER AND COST OF SALES. THE SAID RATIO, HOWEVER, WAS WRONGL Y TREATED BY THE A.O. AS THE RATIO BETWEEN THE COSTS OF SALES/NET PROFIT IGNORIN G COMPLETELY THAT THE FIGURE OF NET PROFIT WAS NOT AT ALL TAKEN INTO ACCOUNT IN WOR KING OUT THE SAID RATIO. MOREOVER, THE ENTIRE COST OF SALES WAS TAKEN INTO C ONSIDERATION BY THE A.O. FOR MAKING THE COMPARATIVE ANALYSIS INCLUDING THE OFFIC E ADMINISTRATIVE EXPENSES, SELLING EXPENSES AND DEPRECIATION WHICH WERE NOT OF VARIABLE NATURE. THE RATIO WORKED OUT BY THE A.O. THUS WAS NOT A PROPER PROFIT LEVEL INDICATOR AND THE COMPARISON MADE BY HIM ON THE BASIS OF THE SAID RAT IO TO ALLEGE THAT THE PROFITS SHOWN BY THE ASSESSEE FOR ALL THE THREE YEARS UNDER CONSIDERATION WERE MORE THAN THE ORDINARY PROFITS AS SHOWN IN A.Y. 2002-03, IN O UR OPINION, WAS NOT CORRECT. SUCH COMPARISON WAS BOUND TO GIVE MISLEADING RESULT S AS COULD BE SEEN FROM THE COMPARATIVE PROFITABILITY WORKING FURNISHED BY THE ASSESSEE GIVING GROSS PROFIT AND NET PROFIT RATES OF THE RELEVANT YEARS WHICH AR E THE PROPER PROFIT LEVEL INDICATORS. ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 24 19. THE WORKING FURNISHED BY THE ASSESSEE BEFORE THE LD . CIT(A) GIVING COMPARATIVE GROSS PROFIT RATIO AND NET PROFIT RATIO IS GIVEN HEREUNDER:- FIGURES AS PER RESPECTIVE TAX AUDIT REPORTS A.Y. 2002-03 (A) (B) 2003-04 (A) (B) 2004-05 (A) (B) 2005-06 (A) (B) SALES 254,614,564 1,164,841,942 1,685,584,102 1,224 ,879,209` MATERIAL CONSUMED MATERIAL COST 62,978,686 127,815,174 131,047,243 12 0,881,144 ADD OPENING STOCK 43,185,998 64,961,039 66,872,950 LESS CLOSING STOCK 33,250,261 65,857,616 66,872,95 0 127,871,977 MATERIAL CONSUMED 29,728,425 11.68% 105,143,556 9.03% 129, 135,332 7.66% 59,882,117 4.89% MFG. EXPENSES 26,362,926 10.35% 80,088,610 6.88% 84,924,944 5.04% 87,647,739 7.16% DEPRECIATION 16,540,712 6.50% 32,027,939 2.75% 32,222,654 1.91% 29,314,916 2 .39% TOTAL DIRECT COST 72,632,063 28.53% 217,260,105 18.65% 246,282,930 14.61% 176,844,772 14.44% GROSS PROFIT 181,982,501 71.47% 947,581,837 81.35% 1,439,301,172 85.39% 1,048,034,437 85.56% ADMN. & SELLING EXPENSES 39,734,030 15.61% 53,504,802 4.59% 94,052,515 5.58% 5 4,653,573 4.46% DEPRECIATION OTHERS 7,769,028 3.05% 14,654, 105 1.26% 16,357,554 0.97% 17,73 5,798 1.45% MISC. EXPENSES W/O 389,404 0.15% 389.40 4 0.03% 1,168,211 0.07% - 0.00% OTHER INCOME (757,133) -0.30% (22,624,630) -1.94% (25,022,497) - 1.48% (59,879,198) - 4.89% TOTAL OTHER EXPENSES 47,135,329 18,.51% 45,923,681 3.94% 86 ,555,783 5.14% 12,510,173 1.02% NET PROFIT BEFORE TAX 134,847,172 52.96% 901,658,156 77.41% 1,352,745,389 80.25% 1,035,524,264 84.54% THE ABOVE WORKING FURNISHED BY THE ASSESSEE SHOWS T HAT THE GROSS PROFIT FOR A.Y. 2003-04, 2004-05 AND 2005-06 WAS INCREASED ONLY BY 9.87%, 13.92% AND 14.09% IN ASSESSMENT YEARS 2003-04, 2004-05 AND 200 5-06 AS COMPARED TO GROSS PROFIT RATE OF ASSESSMENT YEAR 2002-03. ON T HE OTHER HAND, THE WORKING MADE BY THE A.O. ON THE BASIS OF THE SAME FINANCIAL DATA SHOWN THE RATIO OF 415%, 478% AND 515% FOR ASSESSMENT YEARS 2003-04, 2 004-05 AND 2005-06 AS COMPARED TO 212% FOR A.Y. 2002-03 WHICH CLEARLY SHO WS THAT THE WORKING MADE BY THE A.O. DID NOT GIVE CORRECT PICTURE OF COMPARA TIVE PROFITABILITY AND GAVE A MISLEADING PICTURE ON THE BASIS OF WHICH A WRONG CO NCLUSION WAS DRAWN BY THE A.O. AS ALREADY NOTED, THE ASSESSMENT YEAR 2002-03 WAS THE FIRST YEAR OF OPERATIONS OF THE ASSESSEES ELIGIBLE BUSINESS AND CAPACITY UTILIZATION DURING THE SAID YEAR COMPRISING OF SEVEN MONTHS OF BUSINESS OP ERATION WAS QUITE LOW AT 38.62%. DURING THE SUBSEQUENT YEARS I.E. ASSESSMENT YEARS 2003-04, 2004-05 AND 2005-06 WHICH ARE UNDER CONSIDERATION, THE CAPA CITY UTILIZATION INCREASED ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 25 SUBSTANTIALLY WHICH RESULTED IN DECREASE IN MANUFAC TURING EXPENSES IN PROPORTION TO THE CORRESPONDING SALES GIVING HIGHER NET PROFIT. FOR EXAMPLE, IN A.Y. 2002-03, THE MANUFACTURING EXPENSES SUCH AS CO NSUMPTION OF STORES, REPAIRS TO PLANT WERE 10.35 % OF TOTAL SALES WHICH DECREASED TO 3.91% OF TOTAL SALES IN A.Y. 2004-05 AS A RESULT OF INCREASE IN CA PACITY UTILIZATION FROM 38.62% IN A.Y. 2002-03 TO 96.51% IN A.Y. 2004-05. THE GRO SS PROFIT FOR A.Y. 2004-05 AS COMPARED TO THAT OF A.Y. 2002-03 THUS WAS INCREASED BY ABOUT 6% AS A RESULT OF INCREASE IN CAPACITY UTILIZATION ALONE. SIMILAR EF FECT WAS THERE EVEN IN ASSESSMENT YEARS 2003-04 AND 2005-06 WHEREIN THE CA PACITY UTILIZATION WAS MUCH HIGHER THAN THAT OF A.Y. 2002-03. SIMILARLY, THE RATE OF DEPRECIATION ON TOTAL SALES WAS DECREASED FROM 6.50% IN A.Y. 2002-0 3 TO 2.75%, 1.91% AND 2.39% IN ASSESSMENT YEARS 2003-04, 2004-05 AND 2005 -06 RESPECTIVELY RESULTING IN INCREASE IN GROSS PROFIT OF THE RELEVANT YEARS T O THAT EXTENT. EVEN THE COST OF RAW MATERIAL IN TERMS OF PERCENTAGE OF SALES WAS DE CREASED IN THE YEARS UNDER CONSIDERATION AS COMPARED TO A.Y. 2002-03 AS A RESU LT OF REDUCTION IN PRICE OF ONE OF THE MAJOR RAW MATERIALS I.E. MALTON FROM RS. 824/- IN A.Y. 2002-03 TO RS. 488/- PER KG. IN A.Y. 2004-05. THERE WAS ALSO INCR EASE IN RATE OF EURO AS COMPARED TO RUPEE BY 25% DURING THE RELEVANT PERIOD WHICH RESULTED IN HIGHER AVERAGE SALES REALIZATION IN RUPEE TERMS AS DEMONST RATED BY THE ASSESSEE BEFORE THE LD. CIT(A) AS WELL AS BEFORE US. 20. THE INCREASE IN GROSS PROFIT RATE FOR THE YEARS UNDER CONSIDERATION AS COMPARED TO THAT OF A.Y. 2002-03 WHICH WAS TAKEN BY THE A.O. AS THE YEAR OF ORDINARY PROFITS THUS WAS PROPERLY EXPLAINED BY THE ASSESSEE AND KEEPING IN VIEW THE SAID EXPLANATION WHICH WAS BASED ON THE RELEVAN T FACTS AND FIGURES, WE ARE OF THE VIEW THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN HOLDING THAT THE PROFITS OF THE ASSESSEE COMPANY FROM ITS ELIGIBLE BUSINESS FOR THE YEARS UNDER CONSIDERATION COULD NOT BE REGARDED AS MORE THAN THE ORDINARY PRO FITS WHICH ARE EXPECTED TO RISE IN SUCH ELIGIBLE BUSINESS SO AS TO ATTRACT THE PROVISIONS OF SECTION 80IA(10) OF THE ACT. IN OUR OPINION, THE A.O., THEREFORE, WAS N OT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 80IA(10) OF THE ACT TO RESTRI CT THE DEDUCTION CLAIMED BY THE ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 26 ASSESSEE U/S 10B OF THE ACT AND THE LD. CIT(A) IS F ULLY JUSTIFIED IN DELETING THE ADDITION MADE BY THE A.O. BY RESTRICTING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT IN ALL THE THREE YEARS UNDER CON SIDERATION. 21. IT IS ALSO PERTINENT TO NOTE THAT APAG, GERMANY WAS A JOINT VENTURE PARTNER IN THE ASSESSEE COMPANY HAVING 50% SHARE ONLY AND I T IS DIFFICULT TO COMPREHEND AS TO HOW AND WHY IT WILL ENTER INTO ANY SORT OF AR RANGEMENT TO ALLOW THE ASSESSEE COMPANY TO MAKE MORE THAN ORDINARY PROFITS AT ITS O WN COST KNOWING FULLY WELL THAT THE BENEFIT OF SUCH ARRANGEMENT AS A RESULT OF ANY EXCESS PROFIT COULD BE SHARED BY IT ONLY TO THE EXTENT OF 50% WITH THE BAL ANCE 50% GOING TO THE OTHER JOINT VENTURE PARTY. IN THE CASE OF DIGITAL EQUIPM ENT INDIA LTD. VS. DCIT, (2006) 103 TTJ (BANG.) 359 CITED ON BEHALF OF THE ASSESSEE BEFORE THE LD. CIT(A), A SIMILAR ISSUE WAS INVOLVED WHEREIN THE DEDUCTION CL AIMED BY THE JOINT VENTURE COMPANY WAS RESTRICTED BY THE REVENUE AUTHORITIES B Y INVOKING THE PROVISIONS OF SECTION 80I(9) WHICH ARE ANALOGUES TO THE PROVISION S OF SECTION 80IA(10) OF THE ACT AND THE ADDITION MADE ON THIS ISSUE WAS DELETED BY THE TRIBUNAL HOLDING THAT THE DIGITAL GROUP WORLDWIDE, THE OVERSEAS JOINT VENTURE PARTNER WILL NOT PAY ANY UNDUE SUM TO THE JOINT VENTURE WHICH IT COULD NOT R ECOUP ENTIRELY TO THE EXCLUSION OF OTHERS. IT WAS ALSO HELD THAT MERE SU BSTANTIAL PROFIT BY ITSELF WOULD NOT GIVE RISE TO A CONCLUSION THAT THERE COULD BE A NY SUCH ARRANGEMENT TO PRODUCE MORE THAN THE ORDINARY PROFITS TO THE ASSES SEE FROM ELIGIBLE BUSINESS. 22. AS ALREADY NOTED, A DIFFERENT COURSE WAS ADOPTE D BY THE A.O. WHILE MAKING THE ADDITION ON THE SIMILAR ISSUE IN A.Y. 2005-06 B Y TREATING THE ALLEGED EXTRA ORDINARY PROFITS AS UNEXPLAINED EXPENDITURE OF THE ASSESSEE ON THE GROUND THAT COST OF SALES TO THAT EXTENT WAS NOT SHOWN BY THE A SSESSEE IN THE BOOKS OF ACCOUNT. ACCORDINGLY, THE ADDITION WAS MADE BY HIM TO THE TOTAL INCOME OF THE ASSESSEE U/S 69-C OF THE ACT. AS ALREADY HELD BY U S ON THE BASIS OF COMPARATIVE GROSS PROFIT WORKING OF THE ELIGIBLE BUSINESS OF TH E ASSESSEE COMPANY, THERE WAS NO CASE OF MORE THAN NORMAL PROFIT EARNED BY THE AS SESSEE IN A.Y. 2005-06 AS ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 27 COMPARED TO A.Y. 2002-03 AS ALLEGED BY THE A.O. AND WHATEVER INCREASE IN THE GROSS PROFIT RATE WAS THERE IN A.Y. 2005-06 AS COMP ARED TO A.Y. 2002-03, THE SAME WAS SATISFACTORILY EXPLAINED BY THE ASSESSEE. IT THEREFORE FOLLOWS THAT THERE WAS NO CASE OF ANY COST OF SALES INCURRED BY THE AS SESSEE OUTSIDE THE BOOKS OF ACCOUNT WHICH COULD BE TREATED AS UNEXPLAINED EXPEN DITURE BY INVOKING THE PROVISIONS OF SECTION 69-C OF THE ACT. MOREOVER, AS RIGHTLY CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE FOR INVOKING THE PROVISIO NS OF SECTION 69-C OF THE ACT, THE ONUS IS ON THE A.O. TO ESTABLISH THAT THE RELEV ANT EXPENDITURE WAS ACTUALLY INCURRED BY THE ASSESSEE AND THERE IS NOTHING BROUG HT ON RECORD BY THE A.O. TO DISCHARGE THIS ONUS. 23. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE IMPU GNED ORDERS OF THE LD. CIT(A) DELETING THE ADDITION MADE BY THE A.O. BY RE STRICTING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 10B OF THE ACT INVOKING THE PROVISIONS OF SECTION 80IA(10)/69-C OF THE ACT IN ALL THE YEARS UNDER CON SIDERATION AND DISMISS GROUND NO. 3 OF THE REVENUES APPEAL FOR A.Y. 2003-04, AND GROUND NO. 1 OF THE REVENUES APPEALS FOR ASSESSMENT YEARS 2004-05 AND 2005-06. 24. THE NEXT ISSUE WHICH IS RAISED IN GROUND NO. 2 OF REVENUES APPEAL FOR A.Y. 2004-05 AND 2005-06 RELATES TO THE ADDITIONS OF RS. 34,15,631/- AND RS. 14,18,133-/- MADE BY THE A.O. ON ACCOUNT OF T.P. AD JUSTMENT WHICH HAVE BEEN DELETED BY THE LD. CIT(A). 25. DURING THE YEARS UNDER CONSIDERATION I.E. ASSES SMENT YEARS 2004-05 AND 2005-06, THE ASSESSEE COMPANY HAD RECEIVED REMUNERA TION FOR RENDERING CLINICAL TRIAL SERVICES TO APAG, GERMANY, ONE OF ITS JOINT V ENTURE PARTNERS. A REFERENCE, THEREFORE, WAS MADE BY THE A.O. TO THE TPO FOR DETE RMINING THE ARMS LENGTH PRICE OF THESE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISE. IN THIS REGARD, THE TPO FOLLOWED HIS O WN ORDER FOR A.Y. 2002-03 AND IDENTIFIED ONE COMPANY AS COMPARABLE WHICH HAD SHOW N THE PROFIT MARGIN OF ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 28 21.14% AS AGAINST 5% SHOWN BY THE ASSESSEE. HE ACC ORDINGLY PROPOSED THE TP ADJUSTMENT OF RS. 34,16,631/- IN RESPECT OF THE TRA NSACTIONS OF THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISE FOR PROVIDIN G CLINICAL TRIAL SERVICES AND ACCORDINGLY ADDITION OF RS. 34,16,631/- WAS MADE BY THE A.O. TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TP ADJUSTMENT FOR A.Y . 2004-05. ON SIMILAR BASIS, ADDITION OF RS. 14,88,133/- WAS MADE BY THE A.O. TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TP ADJUSTMENT IN RESPECT OF SIMILAR INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISE IN A.Y. 2005-06. ON APPEAL, THE LD. CIT(A) DELETED THE ADDITIONS MADE BY THE A.O./TPO O N ACCOUNT OF TP ADJUSTMENT FOR BOTH THE YEARS I.E. ASSESSMENT YEARS 2004-05 & 2005-06 BY FOLLOWING HIS OWN ORDER IN ASSESSEES OWN CASE FOR A.Y. 2002-03 WHERE IN SIMILAR ADDITION WAS DELETED BY THE LD. CIT(A). 26. AT THE TIME OF HEARING BEFORE US, THE LD. REPRE SENTATIVES OF BOTH THE SIDES HAVE AGREED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2002-03 AND 2003-04 RENDERED VIDE ITS ORDER DATED 22-4-2010 IN ITA NO. 3311 & 3312/MUM/2008 WHEREIN SIMILAR ADDITIONS MADE BY THE A.O. ON ACCOU NT OF TP ADJUSTMENT WERE DELETED BY THE TRIBUNAL FOR THE FOLLOWING REASONS G IVEN IN PARA NO.9 & 10 OF ITS ORDER:- HAVING CONSIDERED THE FUNCTIONAL ASPECTS RELEVANT TO IT, WE HAVE TO EXAMINE WHETHER THE COMPARABLE CASES, AS SELECTED B Y TPO, WERE SUBSTANTIALLY SIMILAR TO THE ASSESSEES FUNCTION OR NOT. .SIRO CLINPHARM PVT. LTD WAS ENGAGED IN CONDUCTING CLINICAL TRIAL S ERVICES. PAGES 259 TO 267 OF THE PB CONTAIN ANNUAL REPORT OF SIRO CLINPHARM P VT. LTD. THE INCOME FROM RESEARCH ACTIVITY CARRIED OUT BY THE SAID COMP ANY FOR THE FINANCIAL YEAR 2001-02 WAS AT RS.1,47,30,035/- AND AS PER THE FIXED ASSET SCHEDULE, IT HAD PLANT AND MACHINERY INCLUDING LABORATORY EQU IPMENTS AGGREGATING TO RS.94,50, 182/- AS ON 31.3.2002. THUS, IT WAS AN OR GANIZATION WHICH WAS MAINLY DOING THE CLINICAL RESEARCH ACTIVITY AND, TH EREFORE, WHEN THE TPO WAS ADOPTING IT AS A BASIS FOR COMPARING THE ASSESS EES TRANSACTION THEN AS PER RULE 1OB (1)(A)(II), SHE WAS REQUIRED TO ADJUST IN REGARD TO DIFFERENCES . AS PER SUB- CLAUSE( III) OF CLAUSE (C) OF RULE 108, WHEN COST METHOD IS ADOPTED, THE NORMAL GROSS PROFIT IS REQUIRED TO BE ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, IF AN Y, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS. ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 29 THEREFORE, 17.14% MARK UP IN THE CASE OF SIRO CLINP HARM PVT. LTD WAS REQUIRED TO BE ADJUSTED BEFORE IT COULD BE MADE APP LICABLE FOR DETERMINING TARMS LENGTH PRICE IN REGARD TO INTERNATIONAL TRA NSACTION ENTERED INTO BY THE ASSESSEE. 10. LT. D.R. REFERRED TO THE DETAILS OF EXPENSES IN CURRED BY THE ASSESSEE WHICH WERE REIMBURSED BY THE ASSOCIATED CONCERN TO THE ASSESSEE CONTAINED AT PAGES 152 AND 153 OF PB AND POINTED OU T THAT THE ASSESSEE HAD INCURRED SUCH EXPENSES WHICH WERE DIRECTLY RELA TABLE TO THE RESEARCH ACTIVITY. WE FIND THE LABORATORY CHARGES PAID ARE R S. 11,875/- BUT THE PAYMENTS TO HOSPITAL. FOR INITIATING STUDY IS RS,7, 54,05OF-. THIS CLEARLY SHOWS THAT MAINLY THE ASSESSEE HAS MADE THE PAYMENT NOT FOR LABORATORY TEST BUT MAINLY TO HOSPITALS THAT CARRIED OUT THE C LINICAL TEST ON THE PATIENTS. THE ASSESSEES INFRASTRUCTURE WAS ONLY IN THE FORM OF FURNITURE, VEHICLE, OFFICE EQUIPMENTS AND COMPUTERS, WHICH WER E USED FOR GENERAL ADMINISTRATION AND IT WAS NOT SUFFICIENT FOR CARRYI NG OUT THE WHOLE RESEARCH ACTIVITY. THEREFORE, THE ASSESSEE WAS SOLELY DEPEND ENT ON THE DATA PROVIDED BY THE DOCTORS IN VARIOUS HOSPITALS. THE MAIN FUNCT ION OF THE ASSESSEE WAS TO COLLATE THE DATA AND TRANSMIT THE SAME TO BYK GU LDEN FOR WHICH IT WAS SUITABLY REIMBURSED BY BYK BY MARK UP OF 5% OVER TH E COST. THE ASSESSEES FUNCTIONS WERE MORE LIKE COORDINATOR/FACILITATOR RATHER THAN PERFORMING THE FUNCTION ITSELF. FURTHER, THE ASSESSEES SUBMIS SION THAT ITS PROFITS WERE EXEMPT U/S 10B CARRIES LOT OF SUBSTANCE BECAUSE TH E ASSESSEE WAS, IN NO WAY, BENEFITED BY CHARGING 5% MARK UP AS AGAINST 17 .14% FIXED BY TPO BECAUSE, IN ANY VIEW OF THE MATTER, THE PROFITS WER E EXEMPT. THE ASSESSEE HAS ALSO POINTED OUT THAT THE PROFITS BY THE AES HA VE BEEN SUBJECTED TO TAX IN THE RESPECTIVE OVERSEAS JURISDICTION AND, THEREF ORE, THERE IS NO NECESSITY FOR THE ASSESSEE TO TRANSFER THE PROFITS IN ANY OVE RSEAS JURISDICTION. THIS ASPECT SHOULD NOT HAVE BEEN LOST SIGHT OF WHILE EXA MINING THE ISSUE. IN VIEW OF THE ABOVE SUBMISSION, WE DO NOT FIND ANY IN FIRMITY IN THE ORDER OF LD. CIT(A) AND, ACCORDINGLY, WE UPHOLD THE SAME. 27. AS THE ISSUE INVOLVED IN THE YEARS UNDER CONSID ERATION AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF A.Y. 2002-03 AND 2003-04, WE RESPECTFULLY FOLLOW THE ORDER OF THE TRIBUNAL FO R ASSESSMENT YEARS 2002-03 & 2003-04 AND UPHOLD THE IMPUGNED ORDERS OF THE LD. C IT(A) DELETING THE ADDITIONS MADE BY THE A.O. ON ACCOUNT OF TP ADJUSTMENT. GROU ND NO. 2 OF REVENUES APPEALS FOR ASSESSMENT YEARS 2004-05 AND 2005-06 IS ACCORDINGLY DISMISSED. 28. IN GROUND NO. 1 & 2 OF ITS APPEAL FOR A.Y. 2003 -04, THE REVENUE HAS CHALLENGED THE ACTION OF THE LD. CIT(A) IN CANCELIN G THE ASSESSMENT MADE BY THE A.O. U/S 143(3) R.W.S. 147 OF THE ACT TREATING THE SAME AS INVALID. KEEPING IN ITA 4343/M/09, 4013/M/08 & 4206/M/ 09 30 VIEW OUR DECISION RENDERED ABOVE UPHOLDING THE ORDE R OF THE LD. CIT(A) DELETING THE ENTIRE ADDITION MADE BY THE A.O. ON ACCOUNT OF DISALLOWANCE U/S 10B OF THE ACT ON MERIT, THE ISSUE RELATING TO THE VALIDITY OF REASSESSMENT HAS BE COME INFRUCTUOUS/ACADEMIC AND WE DO NOT CONSIDER IT NECE SSARY OR EXPEDIENT TO ADJUDICATE UPON THE SAME. 29. IN THE RESULT, ALL THE THREE APPEALS OF THE REV ENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST OCTOBER, 2013. . &4 1 23, '& 5*6 31-10-2013 3 1 $ SD/- SD/- (B.R. MITTAL) (P.M. JAGTAP ) JUDICIAL MEMBER &' / ACCOUNTANT MEMBER MUMBAI ; 5* DATED 31-10-2013. '.*../ RK , SR. PS &4 1 /%7 8&7,% &4 1 /%7 8&7,% &4 1 /%7 8&7,% &4 1 /%7 8&7,%/ COPY OF THE ORDER FORWARDED TO : 1. -. / THE APPELLANT 2. /0-. / THE RESPONDENT. 3. 9 () / THE CIT(A)20, MUMBAI. 4. 9 / CIT 9, MUMBAI 5. 7'<$ /%* , , / DR, ITAT, MUMBAI E BENCH 6. $=+ > / GUARD FILE. &4* &4* &4* &4* / BY ORDER, 07% /% //TRUE COPY// ? ? ? ?/ // /@ # @ # @ # @ # ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI