Appeal details
Counselvise Citation
[2021] 109 COUNSELVISE.COM (IT) 3494 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 7 month(s) 24 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
05-03-2021
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
F
Assessment Year
2011-2012
Appeal Filed On
11-07-2017
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 4845/MUM/2017 ASSESSMENT YEAR: 2010-11 M/S USV PRIVATE LIMITED, ARVIND VITHAL GANDHI CHOWK, BSD MARG, GOVANDI, MUMBAI-400088. VS. DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 5(1), 19 TH FLOOR, AIR INDIA BUILDING, NARIMAN POINT, MUMBAI-400020 PAN NO. AAACU 1366 N APPELLANT RESPONDENT ITA NO. 4914/MUM/2017 ASSESSMENT YEAR: 2010-11 DCIT CENTRAL CIRCLE 5(1), R. NO. 1928, 19 TH FLOOR, AIR INDIA BUILDING, NARIMAN POINT, MUMBAI 400020. VS. M/S USV PRIVATE LIMITED, ARVIND VITHAL GANDHI CHOWK, BSD MARG, GOVANDI, MUMBAI-400088. PAN NO. AAACU 1366 N APPELLANT RESPONDENT ITA NO. 4846/MUM/2017 ASSESSMENT YEAR: 2011-12 M/S USV PRIVATE LIMITED, ARVIND VITHAL GANDHI CHOWK, BSD MARG, GOVANDI, MUMBAI-400088. VS. DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 5(1), 19 TH FLOOR, AIR INDIA BUILDING, NARIMAN POINT, MUMBAI - 400020 PAN NO. AAACU 1366 N APPELLANT RESPONDENT ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 2 ITA NO. 4915/MUM/2017 ASSESSMENT YEAR: 2011-12 DCIT CENTRAL CIRCLE 5(1), R. NO. 1928, 19 TH FLOOR, AIR INDIA BUILDING, NARIMAN POINT, MUMBAI 400020 VS. M/S USV PRIVATE LIMITED, ARVIND VITHAL GANDHI CHOWK, BSD MARG, GOVANDI, MUMBAI-400088. PAN NO. AAACU 1366 N APPELLANT RESPONDENT ASSESSEE BY : MR. RAJAN VORA, AR REVENUE BY : MR. MANPREET DUGGAL, DR DATE OF HEARING : 10/12/2020 DATE OF PRONOUNCEMENT : 05/03/2021 ORDER PER N.K. PRADHAN, A.M. THE CAPTIONED CROSS APPEALS- FILED BY THE ASSESSEE AS WELL AS REVENUE ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME (APPEALS)-58, MUMBAI [IN SHORT CIT(A)] AND ARISE OUT OF THE ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT 1961 (THE ACT). AS COMMON ISSUES A RE INVOLVED, WE ARE PROCEEDING TO DISPOSE THEM OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. WE BEGIN WITH THE ASSESSMENT YEAR (AY) 2010-11. ITA NO. 4845/MUM/2017 ASSESSMENT YEAR: 2010-11 (ASSESSEES APPEAL) 2. THE ASSESSEE IS A LEADING HEALTH CARE COMPANY EN GAGED IN THE BUSINESS OF RESEARCH, DEVELOPMENT, MANUFACTURE, MARKETING AN D SALE OF VARIOUS DRUGS, DOSAGE FORMS, ACTIVE PHARMACEUTICAL INGREDIENTS (AP IS) AND OTHER PRODUCTS. IT ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 3 MANUFACTURES BULK DRUGS, DRUG INTERMEDIATES, TABLET S & CAPSULES, CREAM LIQUIDS AND POWDERS. IT'S FOCUS IS IN THE AREAS OF BRANDED GENERICS, APIS AND BIO-SIMILARS. THE THERAPEUTIC SEGMENTS COVERED IN I NDIA BY IT INCLUDE DIABETES, CARDIOVASCULAR, NUTRITIONAL, RESPIRATORY, DERMATOLO GY, GYNECOLOGY, PEDIATRICS AND CNS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR AY 2010 -11 ON 29.09. 2010 DECLARING TOTAL INCOME OF RS.95,84,64,170/-. THEREA FTER, IT REVISED THE SAME ON 14.02.2011, REPORTING A TOTAL INCOME OF RS.87,30,88 ,182/- UNDER NORMAL PROVISIONS OF THE ACT AND RS.2,66,38,60,976/- UNDE R MAT. 3. THE 1 ST , 2 ND AND 3 RD GROUND OF APPEAL RELATE TO DISALLOWANCE OF EXPENDITURE U/S 37(1) OF THE ACT AND RAISE THE FOLL OWING: 1 THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING THAT THE INDIAN MEDICAL C OUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULA TIONS, 2002 ('MCI REGULATIONS') WERE NOT APPLICABLE TO THE APPELLANT AND ACCORDINGLY, NO DISALLOWANCES UNDER CIRCULAR NO. 05/2012 DATED 1 AU GUST 2012 ISSUED BY THE CBDT CAN BE MADE; 2 WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING THAT THE CIRCULAR NO. 05/2012 DATED 1 AUGUST 2012 I SSUED BY CENTRAL BOARD OF DIRECT TAXES ('CBDT) IS NOT APPLICABLE FOR AY 2010- 11 AND ACCORDINGLY, NO DISALLOWANCES CAN BE MADE UNDER THE CBDT CIRCULAR R EAD WITH THE MCI GUIDELINES; 3 THE LD. CIT(A) HAS ERRED IN DISALLOWING AN AMOUNT OF RS.4,74,63,002/- (NET DISALLOWANCE AFTER 80-IC DEDUCTION IS RS.3,13,63 55 2/-) UNDER SECTION 37(1) INCURRED UNDER VARIOUS HEADS OF EXPENSES SUCH AS DO CTORS' SPENDS, GIFTS & EXTERNAL AND INTERNAL CONFERENCE, ETC. WHEN SUCH EX PENDITURE WAS NOT INCURRED BY THE APPELLANT FOR ANY PURPOSE WHICH IS AN OFFENC E OR WHICH IS PROHIBITED BY LAW. ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 4 4. THE ASSESSING OFFICER (AO) DISALLOWED EXPENSES T O THE TUNE OF RS.6,36,20,838/- INCURRED BY THE ASSESSEE UNDER SEC TION 37(1) OF THE ACT, ON THE GROUND THAT THE SAME WAS IN VIOLATION OF THE MC I REGULATIONS AND CONSEQUENTLY, WAS IN VIOLATION OF THE CIRCULAR NO. 5/2012 DATED 01 AUGUST 2012 ISSUED BY THE CBDT. THE DETAILS OF EXPENDITURE DISALLOWED BY THE AO ARE AS UNDER : SR NO PARTICULARS AMOUNT (RS) RELIEF GRANTED BY CIT(A) BALANCE DISALLOWANCE 1. BRAND REMINDERS 51,41,416 51,41,416 -- 2. DOCTOR ADVISORY 3,11,400 -- 3,11,400 3. DOCTOR SPENDS 5,50,65,898 1,02,05,797 4,48,60,101 4. EXTERNAL CONFERENCE INTERNATIONAL 13,73,145 -- 13,73,145 5. GIFTS 9,18,357 -- 9,18,375 6. INTERNATIONAL CONFERENCE USV 2,62,106 2,62,106 -- 7. SALES PROMOTION EXPENSES 5,48,516 5,48,516 -- TOTAL 6,36,20,838 1,61,57,835 4,74,63,021 LESS: AMOUNTS SPENT IN EXEMPT UNITS @ 33.92% 2,15,80,188 54,80,738 1,60,99,470 TOTAL DISALLOWANCE 4,20,40,650 1,06,77,097 3,13,63,551 5. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE F ILED AN APPEAL BEFORE THE LD. CIT(A). WE FIND THAT VIDE ORDER DATED 27.04.2017, THE LD. CIT(A) ALLOWED PARTIAL RELIEF TO THE ASSESSEE AND UPHELD DISALLOWA NCE OF RS.3,13,63,552/- (NET DISALLOWANCE AFTER SECTION 80-IC DEDUCTION) INCURRE D BY THE ASSESSEE U/S 36(1) BY HOLDING THAT (I) MCI REGULATIONS SPECIFICA LLY FORBID ACCEPTANCE OF GIFTS, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRAN TS IN INDIVIDUAL CAPACITY, GRANT FOR MARKET RESEARCH, (II) IF THE EXPENDITURE MADE BY THE ASSESSEE IS IN THE NATURE OF AN ITEM COVERED BY REGULATIONS, THEN SUCH EXPENDITURE IS MADE FOR A PURPOSE PROHIBITED BY LAW, (III) MCI REGULATI ONS HAVE BEEN ISSUED UNDER THE AUTHORITY OF AN ACT OF PARLIAMENT AND HENCE, HA VE THE FORCE IN LAW, (IV) MCI REGULATIONS WERE INTRODUCED ON 14.10.2009 AND ARE E FFECTIVE FROM THE DATE OF ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 5 THEIR PUBLICATION IN THE GAZETTE OF INDIA ; THE BOA RDS CIRCULAR IS MERELY A CLARIFICATORY CIRCULAR ELABORATING CERTAIN ISSUES W ITH REFERENCE TO THESE REGULATIONS. 6. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SUBM ITS THAT NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR A PURPOSE WHI CH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. IT IS EXPLAINED BY HIM THAT T HE CODE OF CONDUCT LAID DOWN IN THE MCI REGULATION APPLIES ONLY TO MEDICAL PRACT ITIONERS AND NOT TO PHARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR IN DUSTRIES. IN THIS REGARD, RELIANCE IS PLACED BY HIM ON THE DECISIONS OF THE T RIBUNAL IN THE CASE OF DCIT V. PHL PHARMA P LTD (ITA NO. 4605/MUM/2014) (MUMBAI TRIBUNAL ); INDIA MEDTRONIC PRIVATE LIMITED V. DCIT (ITA 1600/MUM/2015); MUMBAI TRIBUNAL, INDIA MEDTRONIC PRIVATE LIMITED V. DCIT (ITA NO. 601/MUM/2018) (MUMBAI TRIBUNAL); INDIA MEDTRONIC PRIVATE LIMITED V. DCIT (ITA 7263/MUM/2018) (MUMBAI TRIBUNAL) ; ARISTO PHARMACEUTICAL PVT. LTD (ITA NO. 5563 & 6129/MUM-2014) (MUMBAI TRIBUNAL) ; ARISTO PHARMACEUTICAL PVT. LTD (ITA NO. 6680/MUM/2012, 5553/MUM/ 2014, 5479/ MUM/2015) (MUMBAI TRIBUNAL) ; ESAOTE INDIA (NS) LTD . (ITA NO. 55/AHD/2016) DATED 31 JULY 2018 (AHD); ARISTO PHARMACEUTICALS (P.) LTD (107 TAXMANN.COM 119) (MUM TRIB); ACIT V. LA RENON HALTHCARE PRIVATE LIMITED (ITA NO. 2380/AHD/2015, 3327/AHD/2016, 1811 & 1812/AHD/2017); CADILA PHARMA LTD. (85 TAXMANN.COM 354) (AHD TRIB); SOLVAY PHARMA INDIA LIMITED V. CIT (169 ITD 13) DATED 11 JANUARY 2018 (MUMBAI TRIBUNAL). THUS I T IS ARGUED THAT THE MCI GUIDELINES DO NOT APPLY TO PHARMACEUTICAL COMPANIES . FURTHER IT IS EXPLAINED THAT THE SAID CIRCULAR SHA LL BE APPLICABLE PROSPECTIVELY W.E.F. THE DATE OF CIRCULAR I.E. 01.0 8.2012 HAS HELD IN THE CASE OF ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 6 SYNCOM FORMULATIONS V. DCIT (ITA NO. 6429 & 6428/MUM/2012); MACLEODS PHARMACEUTICALS LTD. V. ACIT (161 ITD 291) (MUMBAI TRIBUNAL); UCB INDIA (P.) LTD. V. ITO [ITA NO. 6681 OF 2013 (MUMBAI TRIBUNAL)]; CADILA PHARMACEUTICALS LTD. [2017] 85 TAXMANN.COM 354 (AHMEDABAD TRIBUNAL) . THUS IT IS STATED THAT THE MCI REGULATIONS DO NOT APPLY TO THE ASSESSEE AN D HENCE, NO DISALLOWANCE U/S 37(1) OF THE ACT R.W. CIRCULAR NO. 5 OF 2012 DA TED 01.08.2012 ISSUED BY CBDT CAN BE MADE. STATING THAT NEITHER THE LD. CIT(A) NOR THE DEPART MENT HAVE HELD/ARGUED THAT THE EXPENSES INCURRED TOWARDS PAYM ENTS TO THE DOCTORS IS NOT A BUSINESS EXPENDITURE, THE ONLY QUESTION IS WH ETHER THE EXPENDITURE IS DISALLOWABLE UNDER THE EXPLANATION TO SECTION 37(1) OF THE ACT BEING VIOLATIVE OF MCI GUIDELINES OR NOT. IT IS EXPLAINED BY HIM TH AT WHEN IT IS AGREED THAT AN EXPENDITURE IS AN ALLOWABLE BUSINESS EXPENDITURE AS PER THE PROVISIONS OF THE ACT, THEN BY INVOKING THE PROVISIONS OF MCI GUIDELI NES, AD-HOC DISALLOWANCES CANNOT BE MADE TO THE TOTAL INCOME WITHOUT ANY BASI S. RELIANCE IS PLACED BY HIM ON THE ORDER OF THE TRIBUNAL IN JOHNSON & JOHNSON LTD . (35 CCH 275) (MUM-TRIB.) ACCEPTED BY THE DEPARTMENT BEFORE THE B OMBAY HIGH COURT (ITA NO. 2441 OF 2013 DATED 04.07.2016), WHEREIN IT HAS BEEN HELD THAT AFTER THE EXPENDITURE IS HELD TO BE FOR THE PURPOSE OF BUSINE SS, THEN AD-HOC DISALLOWANCES CANNOT BE MADE TREATING THE SAME AS N ON-BUSINESS EXPENDITURE. THUS IT IS STATED BY THE LD. COUNSEL THAT THE AO BE DIRECTED TO DELETE AD-HOC DISALLOWANCES OF EXPENSES AMOUNTING TO RS.3,13,63,5 52/- WHICH HAS BEEN UPHELD BY LD. CIT(A). 7. PER CONTRA , THE LD. DEPARTMENTAL REPRESENTATIVE (DR) SUBMITS THAT IF THE EXPENDITURE MADE BY THE ASSESSEE IS IN THE NATURE O F AN ITEM COVERED BY THE ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 7 MCI REGULATIONS, THEN SUCH EXPENDITURE IS MADE FOR A PURPOSE PROHIBITED BY LAW; IT IS NOT RELEVANT THAT IT IS THE DOCTOR WHO I S COMMITTING THE OFFENCE OR UNLAWFUL ACTIVITY BY ACCEPTING THE CONSIDERATION; T HE AMOUNT SHOULD NOT BE TREATED AS EXPENSE FOR THE PURPOSE OF BUSINESS. REF ERRING TO THE ORDER OF THE CIT(A), IT IS STATED BY HIM THAT MCI REGULATIONS HA VE BEEN ISSUED UNDER THE AUTHORITY OF AN ACT OF PARLIAMENT AND HENCE, HAVE T HE FORCE IN LAW. FURTHER, IT IS ARGUED BY HIM THAT MCI REGULATIONS HAVE BEEN INT RODUCED ON 14.10.2009 AND ARE EFFECTIVE FROM THE DATE OF THEIR PUBLICATIO N IN THE GAZETTE OF INDIA; THE BOARDS CIRCULAR IS MERELY A CLARIFICATORY CIRCULAR ELABORATING CERTAIN ISSUES WITH REFERENCE TO THESE REGULATIONS AND HENCE THE D ATE OF ISSUE OF BOARDS CIRCULAR OR ITS CONTENT IS IMMATERIAL. IN THIS REGA RD, RELIANCE IS PLACED BY HIM ON THE JUDGMENT OF THE HONBLE HIMACHAL PRADESH HIG H COURT IN THE CASE OF CONFEDERATION OF PHARMACEUTICAL INDUSTRY V. CBDT , WHEREIN IT IS HELD THAT BOARDS CIRCULAR IS VALID AND MCI GUIDELINES GOVERN ING PROFESSIONAL ETHICS OF DOCTORS IS SALUTARY WHICH IS IN THE INTEREST OF PUB LIC AND PATIENTS. THUS THE LD. DR SUBMITS THAT THE DISALLOWANCE MADE BY THE AO BE AFFIRMED. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISIONS ARE GIVEN BELOW. IT IS WELL-SETTLED THAT THE CODE OF CONDUCT LAID D OWN IN MCI REGULATION APPLIES ONLY TO MEDICAL PRACTITIONERS AND NOT TO PH ARMACEUTICAL COMPANIES OR ALLIED HEALTH SECTOR INDUSTRIES. THIS IS ALSO CONFI RMED BY THE EXECUTIVE COMMITTEE OF MCI THAT THE CODE OF ETHICS IS APPLICA BLE TO INDIVIDUAL MEDICAL PRACTITIONERS AND NOT SOCIETY OR AN ASSOCIATION. FU RTHER, THERE IS A SEPARATE UNIFORM CODE FOR PHARMACEUTICAL MARKETING PRACTICE, WHICH NEEDS TO BE ADOPTED AND COMPLIED BY PHARMACEUTICAL INDUSTRY. HE NCE, HAD MCI ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 8 REGULATIONS BEEN APPLICABLE TO PHARMACEUTICAL COMPA NIES OR MEDICAL DEVICE COMPANIES, THERE WOULD NOT BE ANY NEED FOR A SEPARA TE CODE FOR THE PHARMACEUTICAL INDUSTRY. THERE IS NO DISPUTE THAT I N THE DECISIONS RELIED ON BY THE LD. COUNSEL MENTIONED AT PARA 6 HEREINABOVE, IT IS HELD THAT MCI REGULATIONS ARE NOT APPLICABLE TO PHARMACEUTICAL CO MPANIES. ALSO IT IS WELL-SETTLED THAT THE CBDT CIRCULAR NO. 5 OF 2012 SHALL BE APPLICABLE PROSPECTIVELY W.E.F. THE DATE OF CIRCULA R I.E. 01.08.2012. THERE IS NO DISPUTE THAT IN THE DECISIONS RELIED ON BY THE LD. COUNSEL MENTIONED AT PARA 6 HEREINABOVE, IT IS HELD THAT CBDT CIRCULAR IS APPLI CABLE PROSPECTIVELY. THEREFORE, NO DISALLOWANCE U/S 37(1) OF THE ACT R.W . CIRCULAR NO. 5 OF 2012 DATED 01.08.2012 ISSUED BY CBDT CAN BE MADE. IN THE INSTANT CASE, NEITHER THE LD. CIT(A) NOR TH E DEPARTMENT HAVE HELD/ARGUED THAT THE EXPENSES INCURRED TOWARDS PAYM ENTS TO THE DOCTORS IS NOT A BUSINESS EXPENDITURE. THE ONLY QUESTION IS WH ETHER THE EXPENDITURE IS DISALLOWABLE UNDER THE EXPLANATION TO SECTION 37(1) OF THE ACT, BEING VIOLATIVE OF MCI GUIDELINES OR NOT. WE ARE OF THE CONSIDERED VIEW THAT WHEN AN EXPENDI TURE IS AN ALLOWABLE BUSINESS EXPENDITURE AS PER THE PROVISIONS OF THE A CT, THEN BY INVOKING THE PROVISIONS OF MCI GUIDELINES, AD-HOC DISALLOWANCE C ANNOT BE MADE TO THE TOTAL INCOME WITHOUT ANY BASIS. IN THIS REGARD, WE RELY O N THE ORDER OF THE TRIBUNAL IN THE CASE OF JOHNSON & JOHNSON LTD . (SUPRA) ACCEPTED BY THE DEPARTMENT BEFORE THE HONBLE BOMBAY HIGH COURT (ITA NO. 2441 OF 2013 DATED 04.07.2016), WHEREIN IT HAS BEEN HELD THAT AFTER TH E EXPENDITURE IS HELD TO BE ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 9 FOR THE PURPOSE OF BUSINESS, THEN AD-HOC DISALLOWAN CES CANNOT BE MADE TREATING THE SAME AS NON-BUSINESS EXPENDITURE. IN VIEW OF THE ABOVE FACTUAL SCENARIO AND POSITION OF LAW, WE DIRECT THE AO TO DELETE THE DISALLOWANCES OF EXPENSES UPHELD B Y THE CIT(A). THUS THE 1 ST , 2 ND AND 3 RD GROUNDS OF APPEAL ARE ALLOWED. 9. THE 4 TH , 5 TH , 6 TH , 7 TH GROUND OF APPEAL RELATE TO WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT. THESE GROUNDS OF APPEAL READ AS UNDER : 4 THE LD. CIT(A) ERRED IN NOT ALLOWING WEIGHTED DEDUC TION OF EXPENDITURE OF RS.19,93,51,575/- CLAIMED BY THE APPELLANT UNDER SE CTION 35(2AB) OF THE ACT; 5 THE LD. CIT(A) ERRED BY INADVERTENTLY REFERRING TO PARA 6 OF THE ORDER OF INCOME TAX APPELLATE TRIBUNAL ('ITAT') IN THE APPELLANT'S OWN CASE IN AY 2009-10 [WHICH IS IN CONTEXT OF CERTAIN ELIGIBLE EXPENSES O F RS.21,87,858/-(I.E. SETTING-UP OF EFFLUENT TREATMENT PLANT, ETC.) INCURRED BY THE APPELLANT BUT NOT CONSIDERED BY DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH (D SIR)], WHILE ADJUDICATING THE ISSUE OF WEIGHTED DEDUCTION FOR EXPENDITURE INCURRE D ON CLINICAL TRIALS, FOREIGN PATENT FILING FEES AND FOREIGN CONSULTANCY FEES WHI CH ARE DISCUSSED BY ITAT IN PARA 3.4, 4 AND 4.1 OF THE SAID ORDER, 6 THE LD. CIT(A) ERRED IN NOT FOLLOWING THE DECISION OF ITAT FOR AY 2008-09 AND AY 2009-10 , WHEREIN THE ITAT HAS ALLOWED WEIGHTED DEDUCTION FOR EXPENDITURE INCURRED ON CLINICAL TRIALS, FOREIGN PATENT FILING FEES AND FOREIGN CONSULTANCY FEES AND AY 2007-08, WHEREIN THE ITAT HAS ALLOWED WEIGHT ED DEDUCTION FOR EXPENDITURE INCURRED ON FOREIGN PATENT FILING FEES UNDER PATENT ACT AND FOREIGN CONSULTANCY FEES; 7 THE LD. CIT(A) ERRED IN ALLOWING WEIGHTED DEDUCTION UNDER SECTION 35(2AB) OF THE ACT ON THE TOTAL R&D EXPENDITURE INCURRED BY TH E APPELLANT AFTER NETTING OFF OF INCOME OF RS.33,84,325/- FROM SALE OF PRODUCTS E MANATING FROM R&D WORK AND RS.1,34,227/- FROM SALE OF R&D ASSETS. ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 10 10. IN VIEW OF THE RECTIFICATION ORDER PASSED BY TH E LD. CIT(A), THE 5 TH & 6 TH GROUND OF APPEAL BECOMES INFRUCTUOUS. WE TURN TO TH E 4 TH AND 7 TH GROUND OF APPEAL. THE ASSESSEE HAS EARNED INCOME FROM SALE OF PRODUC TS EMANATING FROM R & D WORK AMOUNTING TO RS.33,84,325/- AND SALE OF R&D ASSETS AMOUNTING TO RS.1,34,227/-. IT HAD FILED ADDITIONAL GROUND BEFOR E THE LD. CIT(A) ON WEIGHTED DEDUCTION U/S 35(2AB) STATING THAT RELIEF BE GRANTE D FOR GROSS EXPENDITURE WITHOUT NETTING OFF INCOME FROM SALE OF PRODUCTS EM ANATING FROM R&D WORK OF RS.33,84,325/- AND SALE OF R&D ASSETS OF RS.1,34,22 7/-. THE LD. CIT(A) DISALLOWED THE CLAIM OF NOT NETTING OFF THE RECEIPTS OF RS.33,84,325/- ON THE BASIS THAT NO EVIDENCE WAS FU RNISHED IN RESPECT OF THE NATURE OF INCOME. PLACING RELIANCE ON THE ORDER OF THE TRIBUNAL IN THE CASE OF MICROLABS LTD. (2015) 62 TAXMANN.COM 60 (BANG-TRIB.), LATER ON APP ROVED BY THE KARNATAKA HIGH COURT, HE REJECTED THE CLAIM OF NOT NETTING OFF RECEIPTS ON SALE OF R&D ASSETS OF RS.1,34,227/-. 11. BEFORE US, THE LD. COUNSEL SUBMITS THAT THE ASS ESSEE HAD UNDERTAKEN SALE OF SCRAP OF CERTAIN PLANT & MACHINERY, OFFICE EQUIP MENT AND FURNITURE OF THE R&D UNIT DURING THE YEAR UNDER CONSIDERATION AMOUNT ING TO RS.1,34,227/- WHICH WERE NO LONGER REQUIRED BY THE UNIT. FURTHER, IT HAD ALSO EARNED CERTAIN INCOME AMOUNTING TO RS.33,84,325/- ON SALE OF PRODU CTS FROM R&D UNIT TO ASSESSEES VIABLE CUSTOMERS (BUSINESS DEVELOPMENT) FOR THEIR FURTHER ANALYSIS TESTING TO MAKE SURE IF ASSESSEES PRODUCT EMANATIN G FROM THE R&D MEETS THEIR REQUIREMENT OR NOT. BASED ON THEIR ANALYSIS A ND TESTING, CUSTOMERS SOMETIMES CHOOSE TO ENTER INTO CONTRACTS WITH THE A SSESSEE FOR FURTHER ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 11 COMMERCIAL SALE OF LARGER BATCH SIZES. SUCH INCOME IS RECORDED UNDER THIS HEAD. IT IS SUBMITTED BY THE LD. COUNSEL THAT THE SAME I SSUE WAS ADJUDICATED UPON BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2008-09 AND AY 2009-10. BASED UPON AN ASSESSMENT OF ALL FACTS, THE TRIBUNAL IN PARA 9 OF THE ORDER HAS RESTORED BACK THE MATTER TO THE AO FOR STATISTICAL PURPOSES. THE TRIBUNAL HELD AS UNDER : THE AO IS DIRECTED TO VERIFY THE CLAIM OF THE ASSE SSEE AND ALLOW THE SAME AFTER VERIFICATION IN THE LIGHT OF THE DECISION OF THE TR IBUNAL IN THE CASE OF ACIT V. WOCKHARDT LTD. IN ITA NO. 71/M/07. THE ADDITIONAL G ROUNDS ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSE. PURSUANT TO THE DIRECTION OF THE TRIBUNAL, THE ORD ER GIVING EFFECT FOR AY 2008-09 AND AY 2009-10 WAS PASSED. AFTER, THE DIREC TIONS PROVIDED BY THE ITAT, THE DEPARTMENT HAS NOT PREFERRED AN APPEAL BE FORE THE HIGH COURT. THUS IT IS STATED THAT IN VIEW OF THE FINALITY OF THE IS SUE, THE ASSESSEES APPEAL FOR ALLOWING EXPENDITURE ON GROSS BASIS MAY BE ALLOWED. 12. ON THE OTHER HAND, THE LD. DR RELIES ON THE ORD ER OF THE AO AND SUBMITS THAT IN ITS CLAIM STATEMENT WITH DSIR, THE ASSESSEE HAS CLAIMED SIMILAR AMOUNT AS REFLECTED IN TAX AUDIT REPORT AND AS CLAIMED IN THE RETURN OF INCOME. DESPITE THESE FACTS, DSIR HAS RESTRICTED THE CLAIM TO THE EXTENT OF AMOUNT CERTIFIED AND REPORTED IN THE ANNUAL REPORT. IT IS STATED THAT IN ABSENCE OF ANY DETAILS/CLARIFICATION ON THE DSIR CERTIFICATE, IT N EEDS TO BE CONSIDERED THAT DSIR HAS INTENTIONALLY NOT ALLOWED SUCH EXPENSES AN D ASSESSEE WOULD NEED TO REFER THE MATTER BACK TO DSIR FOR THE PURPOSE OF CE RTIFYING THE CLAIM OF THE SAID DIFFERENCE AMOUNT AS CLAIMED BY THE ASSESSEE. THUS IT IS STATED THAT THE AO HAS ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 12 RIGHTLY NOT ALLOWED THE CLAIM OF THE ASSESSEE FOR W EIGHTED DEDUCTION U/S 35(2AB) IN RESPECT OF RS.1.41 LACS TOWARDS MARKET R ESEARCH RELATED ACTIVITIES AND INTEREST AND RS.2,52,85,664/- ON FOREIGN CONSUL TANCY CHARGES AND CORRECTLY RESTRICTED TO 100% ONLY U/S 35(1)(I) AND 35(1)(IV) AS AGAINST 150% CLAIMED BY THE ASSESSEE. THUS IT IS STATED THAT THE AO HAS CORRECTLY DISALLOWED THE EXCESS CLAIM OF DEDUCTION OF RS.1,27,13,332/- F OR WHICH THERE IS NO APPROVAL OF THE SPECIFIED AUTHORITY. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. IN THE CASE OF MICROLABS LTD. (SUPRA), THE TRIBUNAL HAS HELD THAT WHERE THE ASSESSEE-COMPANY ENGAGED IN THE BUSINESS OF PHARMACEUTICALS RECEIVED PRODUCT DEVELOPMENT CHARGES WHICH WERE C REDITED THE PROFIT AND LOSS ACCOUNT AS A PART OF NORMAL SALES, SAME WAS NO T TO BE REDUCED FROM EXPENDITURE INCURRED BY THE ASSESSEE ON CARRYING OU T SCIENTIFIC RESEARCH ON WHICH SECTION 35(2AB) DEDUCTION HAD TO BE ALLOWED. THE TRIBUNAL HELD AS UNDER : IN RESPECT OF SALE OF PRODUCTS ACQUIRED EMANATING OUT OF RESEARCH AND DEVELOPMENT WORK DONE IN AN APPROVED FACILITY, THE SALE PROCEED S NEED NOT BE REDUCED FROM THE RESEARCH AND DEVELOPMENT EXPENDITURE. IN OUR VIEW, THE REASON FOR NOT INCLUDING SALES REALIZATION ARISING OUT OF PRODUCTS EMANATING OUT OF RESEARCH AND DEVELOPMENT WORK DONE AND SOLD IS BECAUSE SUCH SALES WOULD BE R EFLECTED AS RECEIPTS BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS AND INCOME FROM B USINESS WOULD BE COMPUTED TREATING SUCH SALE AS PART OF BUSINESS RECEIPTS. AS MENTIONED EARLIER, THE SAME ISSUE WAS ADJUDICAT ED UPON BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2008-09 AND AY 2009-10. THE TRIBUNAL IN PARA 9 OF THE ORDER HAS RESTORED BACK THE MATTER TO THE AO FOR STATISTICAL ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 13 PURPOSES. PURSUANT TO THE DIRECTION OF THE TRIBUNAL , THE AO PASSED ORDER GIVING EFFECT FOR THE ABOVE ASSESSMENT YEARS. AFTER THE DIRECTIONS PROVIDED BY THE TRIBUNAL, THE DEPARTMENT HAS NOT PREFERRED AN A PPEAL BEFORE THE HIGH COURT. THUS THE ISSUE HAVING ATTAINED FINALITY IN A SSESSEES OWN CASE, WE DIRECT THE AO TO ALLOW EXPENDITURE ON GROSS BASIS. WE MAKE IT CLEAR THAT THIS FINDING IS SPECIFIC TO THE PRESENT APPEAL ONLY. THUS THE 4 TH AND 7 TH GROUNDS OF APPEAL ARE ALLOWED. 14. THE 8 TH TO 11 TH GROUND OF APPEAL DEAL WITH APPLICABILITY OF SECTIO N 50C OF THE ACT ON TRANSFER OF LEASE HOLD LANDS. THESE GROU NDS OF APPEAL READ AS UNDER: 8 THE LD. CIT(A) ERRED IN CONFIRMING THAT THE PROVISI ONS OF SECTION 50C OF THE ACT WAS APPLICABLE WHILE COMPUTING CAPITAL GAINS ON TRA NSFER OF LEASEHOLD RIGHTS IN LAND BY THE APPELLANT; 9 THE LD. CIT(A) FAILED TO APPRECIATE THAT THE PROVIS IONS OF SECTION 50C OF THE ACT WOULD BE APPLICABLE ONLY TO TRANSFER OF A CAPITAL A SSET BEING LAND OR BUILDING, OR BOTH AND NOT TO LEASEHOLD RIGHTS/ASSIGNMENT OF LEAS EHOLD RIGHTS; 10 THE LD. CIT(A) FAILED TO APPRECIATE THAT THE SALE C ONSIDERATION OF RS.2,87,00,000/- DETERMINED FOR TRANSFER OF LEASEHO LD RIGHTS IN LAND WAS AS PER THE RATES PRESCRIBED BY THE MAHARASHTRA INDUSTRIAL DEVELOPMENT CORPORATION (MIDC) REGULATIONS; 11 WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) ERRE D IN NOT RESTRICTING THE APPLICATION OF PROVISIONS OF SECTION 50C TO THE VAL UE OF BUILDING ONLY; 15. THE ASSESSEE HAD ACQUIRED LEASEHOLD RIGHTS IN L AND SITUATED IN PLOT NO. 18/1 IN ROHA INDUSTRIAL AREA, VILLAGE DHATAV, RAIGA D ADMEASURING 34,263 SQ. MTRS, FACTORY BUILDING HAVING BUILT UP AREA OF 9,40 6 SQ MTRS AND RESIDENTIAL BUILDING HAVING BUILT UP AREA OF 1,249 SQ. MTRS FRO M THE BOMBAY DYEING AND MANUFACTURING COMPANY LIMITED ('BOMBAY DYEING') IN AY 2004-05 WHO IN ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 14 TURN HAD OBTAINED THE SAID PROPERTY ON LEASE FROM M AHARASHTRA INDUSTRIAL DEVELOPMENT CORPORATION ('MIDC') VIDE INDENTURE OF LEASE DATED 14 DECEMBER 1983. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE E NTERED INTO DEED OF ASSIGNMENT DATED 25 JANUARY 2010 WITH M/S ROHA CARB ONATES PVT. LTD ('ROHA') WHEREIN THE LEASEHOLD RIGHTS IN LAND ADMEA SURING 34,263 SQ MTRS, FACTORY BUILDING HAVING BUILT UP AREA OF 3,427.63 S Q MTRS AND RESIDENTIAL BUILDING HAVING BUILT UP AREA OF 1,249 SQ. MTRS WER E TRANSFERRED TO ROHA FOR A LUMP SUM CONSIDERATION OF RS.2,87,00,000/- AFTER OB TAINING APPROVAL FROM MIDC. THE STAMP VALUE OF THE PROPERTY WAS RS.3,87,9 7,500/-. THE STAMP DUTY AUTHORITIES HAVE CONSIDERED RS.2,87,00,000/- TOWARD S LEASEHOLD LAND AND RS.1,00,97,500/- TOWARDS THE FACTORY AND RESIDENTIA L BUILDING STANDING THEREON. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE REA LIZED THAT THEY HAD OMITTED OFFERING CAPITAL GAINS EARNED ON TRANSFER O F LEASEHOLD LAND IN THE RETURN OF INCOME AND THEREFORE VOLUNTARILY OFFERED THE SAME TO TAX BEFORE THE AO. FURTHER, THE ASSESSEE PLACED RELIANCE ON VARIOU S JUDICIAL PRECEDENTS AND STATED THAT THE PROVISIONS OF SECTION 50C OF THE AC T WERE APPLICABLE ONLY TO TRANSFER OF A CAPITAL ASSET BEING LAND OR BUILDING OR BOTH AND NOT TO LEASEHOLD RIGHTS AND HENCE ADOPTED THE VALUE OF RS.2,87,00,00 0/- AS THE SALE CONSIDERATION FOR COMPUTING CAPITAL GAINS. HOWEVER, THE AO WAS NOT CONVINCED WITH THE ABOVE SU BMISSION AND HELD THAT ASSESSEE HAD NOT ONLY SOLD THE LEASEHOLD RIGHT S AND THE LAND BUT ALSO THE LEASEHOLD RIGHTS IN THE BUILDING STANDING ON IT. TH EREFORE, HE TREATED THE ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 15 SALE/ASSIGNMENT OF LEASEHOLD RIGHTS AS TRANSFER OF CAPITAL ASSET BEING LAND OR BUILDING OR BOTH. ACCORDINGLY, HE CONCLUDED THAT TH E PROVISIONS OF SECTION 50C OF THE ACT WERE APPLICABLE AND ACCORDINGLY ADOPTED STAMP DUTY VALUATION AS SALES CONSIDERATION AMOUNTING TO RS.3,87,97,500/- I NSTEAD OF RS.2,87,00,000/- AS CONSIDERED BY THE ASSESSEE. 16. IN APPEAL, THE LD. CIT(A) RELYING ON THE ORDER OF THE TRIBUNAL, MUMBAI BENCH IN THE CASE OF SHAVO NORGREN PVT. LTD. (2013) 33 TAXMANN.COM 491 HELD THAT THE PROVISIONS OF SECTION 50C ARE APPLICABLE T O THE ASSESSEE ON TRANSFER OF LEASEHOLD RIGHTS. 17. BEFORE US, THE LD. COUNSEL REFERS TO COPY OF DE ED OF ASSIGNMENT BETWEEN THE ASSESSEE AND MIDC AND SUBMITS THAT THE PROVISIO NS OF SECTION 50C ARE APPLICABLE IN CASE OF TRANSFER OF PROPERTY, BEING L AND OR BUILDING OR BOTH. HOWEVER, THESE PROVISIONS WILL NOT COME INTO PLAY I N A CASE WHERE ONLY LEASEHOLD RIGHTS ARE ASSIGNED. IN THIS CONTEXT RELI ANCE IS PLACED BY HIM ON THE DECISION IN KANCAST (P) LTD. (ITA NO. 1265/PN/2011) DATED 19 JANUARY 2015 (PUNE TRIB.); HEATEX PRODUCTS PVT. LTD. (ITA NO. 270/2014) DATED 26 JULY 2016 ; GREENFIED (389 ITR 68) (BOM HC) ; EVEREST INDUSTRIES LTD. (ITA NO. 815/M/2017) DATED 15 SEPTEMBER 2017 (MUMBAI-TRIB.) ; ATUL PURANIK (132 ITD 499) (MUM TRIB.); FARID GULMOHAMED (46 CCH 300) (MUM). ON THE OTHER HAND, THE LD. DR RELIES ON THE ORDER OF THE LD. CIT(A). 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. IN THE INSTANT CASE, THE OWNERSHIP OF TH E LAND AND SUPERSTRUCTURE ON THE SAME WAS WITH MIDC AND WITH THE APPROVAL OF MIDC, THE SAID LEASEHOLD RIGHTS WERE TRANSFERRED FROM BOMBAY DYEING TO THE A SSESSEE. AT PAGE NO. 3 OF ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 16 DEED OF ASSIGNMENT DATED 31.03.2004 ENTERED INTO BE TWEEN BOMBAY DYEING AND THE ASSESSEE, THE PARA READS AS UNDER : AND WHEREAS MIDC HAS BY ITS LETTER NUMBER MIDC/ROM /ROHA/18/475/04 DATED 31 MARCH 2004 GRANTED ITS PERMISSION FOR THE TRANSF ER AND ASSIGNMENT OF THE SAID PROPERTY BY THE ASSIGNOR TO THE ASSIGNEE. AFTER ACQUISITION OF LAND, THE FACTORY AND THE RE SIDENTIAL BUILDING, THE ASSESSEE AGREED IN THE AGREEMENT DATED 31.03.2004 T HAT IT WOULD OBTAIN PERMISSION FROM MIDC FOR DEMOLISHING THE SUPERSTRUC TURE OF THE SAID LAND. IN PAGE NO. 3 OF THE DEED OF ASSIGNMENT ENTERED INTO B ETWEEN THE ASSESSEE AND BOMBAY DYEING, WE COME ACROSS THE FOLLOWING PARA : AND WHEREAS SINCE THE FACTOR BUILDING AND RESIDENT IAL STAFF BUILDING ARE OLD AND IN DILAPIDATED CONDITION AND NOT OF ANY USE TO THE ASS IGNEE, THE ASSIGNEE AFTER OBTAINING PERMISSION OF THE MIDC FOR THE TRANSFER O F ASSIGNMENT OF THE LEASEHOLD INTEREST IN THE LEASE DATED DECEMBER 14, 1983, WILL DEMOLISH THE FACTORY BUILDING AND RESIDENTIAL STAFF BUILDING. THUS IT IS CRYSTAL CLEAR THAT THE ASSESSEE HAD NO RIGHTS TO CONSTRUCT OR SUB-PLOT OR ASSIGN THE RIGHTS TO ANYONE WITHOUT OBT AINING APPROVAL FROM MIDC. IN FACT THE ASSESSEE ONLY HAD LIMITED RIGHTS TO UND ERTAKE CONSTRUCTION ON THE SAID LAND. THE ASSESSEE HAS ASSIGNED THE LEASEHOLD RIGHTS ONLY AFTER OBTAINING APPROVAL FROM MIDC. IN SHAVO NORGREN (P.) LTD . (SUPRA), RELIED ON BY THE LD. CIT(A), THE TRIBUNAL BASED ON THE READING OF DEED OF ASSIGNMENT OBSERVED THAT EVEN THOUGH THE DOCUMENT WAS A DEED OF ASSIGNMENT, BUT O N PERUSAL OF TERMS OF THE DOCUMENT, SUBSTANTIAL AND ABSOLUTE POWER OVER THE P ROPERTY INCLUDING THE DEVELOPMENT RIGHT WERE TRANSFERRED TO THE ASSESSEE. THE TRIBUNAL, IN ABSENCE ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 17 OF HAVING DOCUMENTS ON RECORD, REMANDED THE MATTER TO THE AO DIRECTING HIM TO DETERMINE WHETHER THE ASSESSEE HAS TRANSFERRED T HE PLOT OF LAND OR ONLY THE LEASEHOLD RIGHT IN THE PLOT OF LAND AND ACCORDINGLY DETERMINE APPLICABILITY OF SECTION 50C. HOWEVER, IN THE INSTANT CASE, THE ASSESSEE DID NOT HAVE THE RIGHT TO CONSTRUCT/TRANSFER/SUB-PLOT OR ASSIGN THE PROPERTY WITHOUT OBTAINING THE APPROVAL FROM MIDC AND ACCORDINGLY THE ASSESSEE HAD LIMITED RIGHTS IN THE LEASEHOLD PROPERTY UNLIKE THE COMPLETE RIGHT FOR DE VELOPMENT OF PROPERTY AVAILABLE TO THE ASSESSEE IN SHAVO NORGREN (P.) LTD. (SUPRA). THEREFORE, THE PRESENT CASE IS DISTINGUISHABLE FROM THE ABOVE DECI SION. IN ATUL G. PURANIK (SUPRA) THE TAXPAYER WHO WAS ALLOTTED BY CIDCO LEASEHOLD RIGHTS IN RESPECT OF PLOT OF LAND FOR 60 YEARS TRANSFERRED TO THIRD PARTY FOR CONSIDERATION OF RS. 2.5 CRORE. FOR AY 20 06-07, THE AO INVOKED SECTION 50C AND COMPUTED CAPITAL GAINS BY ADOPTING STAMP DUTY VALUE AT RS. 2.88 CRORE. ITAT ACCEPTED TAXPAYER'S CONTENTION THA T TRANSFER OR ASSIGNMENT OF LEASEHOLD RIGHTS IS NOT TRANSFER OF LAND PER SE AND HENCE PROVISIONS OF SECTION 50C WILL HAVE NO APPLICABILITY TO CASE OF LEASEHOLD INTEREST. ITAT ALSO ACCEPTED THE CONTENTION THAT SECTION 50C BEING DEEMING FICTI ON SHOULD BE CONSTRUED STRICTLY TO APPLY ONLY TO CASE OF TRANSFER OF LAND OR BUILDING PER SE. DEPARTMENT HAS NOT CONTESTED THE AFORESAID JUDGMENT BEFORE THE HIGH COURT WHICH IS REFERRED BY BOMBAY HIGH COURT IN HEATEX PRODUCTS PRIVATE LIMITED (ITA 270/2014) DATED 26 JULY 2016. IN THE CASE OF GREENFIELD HOTELS & ESTATE (P.) LTD. (SUPRA), THE HONBLE BOMBAY HIGH COURT HELD THAT THE PROVISIONS OF SECTI ON 50C CANNOT BE INVOKED ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 18 TO COMPUTE CAPITAL GAINS ARISING ON TRANSFER OF LEA SEHOLD RIGHTS IN LAND AND BUILDING. IN VIEW OF THE ABOVE FACTUAL SCENARIO AND POSITION OF LAW, WE DIRECT THE AO TO DELETE THE ADDITION MADE BY APPLYING THE PROV ISIONS OF SECTION 50C OF THE ACT. ACCORDINGLY, THE 8 TH TO 11 TH GROUNDS OF APPEAL ARE ALLOWED. 19. THE 12 TH TO 17 TH GROUND OF APPEAL RELATE TO TRANSFER PRICING. THESE GROUNDS OF APPEAL READ AS UNDER : 12 THE LD. CIT(A) ERRED IN RE-COMPUTING THE ARM'S LENG TH PRICE ('ALP') OF THE INTERNATIONAL TRANSACTION PERTAINING TO SALE OF PHA RMACEUTICAL PRODUCTS BY THE APPELLANT TO ITS AE AND CONFIRMING AN ADJUSTMENT OF RS.1,06,49,598/-TO THE INCOME OF THE APPELLANT U/S 92CA(4) OF THE ACT; 13 THE LD. CIT(A) ERRED IN REJECTING THE TRANSACTIONAL NET MARGIN METHOD ('TNMM') ADOPTED BY THE APPELLANT FOR DETERMINATION OF ARM'S LENGTH PRICE IN CONNECTION WITH ITS INTERNATIONAL TRANSACTION RELAT ING TO SALE OF PHARMACEUTICAL PRODUCTS TO ITS AE; 14 THE LD. CIT(A) ERRED IN ADOPTING COMPARABLE UNCONTR OLLED PRICE ('CUP') METHOD, WHICH REQUIRES HIGH DEGREE OF SIMILARITIES IN PRODUCTS, FUNCTIONS, RISKS ETC. FOR DETERMINING THE ARM'S LENGTH PRICE IN RESP ECT OF APPELLANT'S INTERNATIONAL TRANSACTION RELATING TO SALE OF PHARMACEUTICAL PROD UCTS TO ITS AE; 15 THE LD. CIT(A) FAILED TO APPRECIATE THAT CUP CANNOT BE APPLIED IN SALE OF PHARMACEUTICAL PRODUCTS TO AE VIS-A-VIS NON-AES DUE TO DIFFERENCES INTER ALIA INCLUDING MANUFACTURING PROCESS, REGULATORY REGIME, CHANNEL OF DISTRIBUTION, QUANTITY DIFFERENCES, FOB VS CIF BASIS OF SALE, MAR KETING & DISTRIBUTION FUNCTION, GEOGRAPHICAL & PRODUCT DIFFERENCES, ETC. AND ALSO C REDIT RISKS BORNE, MARKET SIZE, CONTRACTUAL TERMS, GROWTH, COMPETITION INTENSITY AN D OTHER DISSIMILARITIES; 16 WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) SHOU LD HAVE COMPARED THE NET MARGIN EARNED FOR SALE OF METFORMIN TO AE IN US VIS -A-VIS NON-AE'S IN EUROPEAN ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 19 AND REGULATED MARKET THEREBY APPLYING INTERNAL TNMM AS MOST APPROPRIATE METHOD; 17 WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT(A) ERRE D IN NOT GRANTING AN ADJUSTMENT FOR DIFFERENCES BETWEEN SALES MADE TO AE S VIS-A-VIS NON-AES WHILE APPLYING CUP METHOD, INTER-ALIA INCLUDING THE FOLLO WING. A MARKETING EXPENSES COMPUTED BASED ON INDIVIDUAL STR ENGTH OF PRODUCT METFORMIN VIS-A-VIS THE CURRENTLY GRANTED ADJUSTMEN T CONSIDERING ALL STRENGTHS OF PRODUCT METFORMIN TOGETHER; B PROFIT ATTRIBUTABLE TO ENTREPRENEURIAL RISK UNDERTA KEN FOR SALES MADE TO NON-AES VIS-A-VIS SALES MADE TO AES; C QUANTITY OF PRODUCT METFORMIN SOLD TO AES VIS-A-VIS NON-AES. 20. THE LD. CIT(A) VIDE ORDER DATED 27.04.2017 HAS TAKEN INTO CONSIDERATIO N THE CLAIM OF THE ASSESSEE THAT TRANSFER PRICING ADJ USTMENT SHOULD BE RESTRICTED TORS.1,08,37,845/- AS COMPUTED BELOW: PARTICULARS RATE P/U ADJUSTMENT FOR METFORMIN 1000 MG SALE PRICE PER TABLET TO NON- AES USED AS CUP BY THE LEARNED TPO A 1.17 ADJUSTMENT ON ACCOUNT OF MARKETING AND OTHER EXPENSES B 0.16 MARK-UP ON MARKETING EXPENDITURE C = B*11% 0.0176 ADJUSTMENT ON ACCOUNT OF MARKETING PERSONNEL COST D 0.01 THEREFORE, ADJUSTED CUP PRICE PER TABLET E = A-B-C-D 0.98 PRICE PER TABLET OF AE F 0.85 5% AS PER SECTION 92 (C) G = F*5% 0.04 DIFFERENCE IN THE PRICE PER TABLET CHARGED TO AE AND ADJUSTED CUP PRICE PER TABLET H = E-F 0.13 TRANSFER PRICING ADJUSTMENT (FOR 1000MG) I=0.13* 3,61,61,900 47,01,047 ADJUSTMENT FOR METFORMIN 500 MG SALE PRICE PER TABLET TO NON- AES USED AS J 0.68 ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 20 CUP BY THE LEARNED TPO ADJUSTMENT ON ACCOUNT OF MARKETING AND OTHER EXPENSES K 0.09 MARK-UP ON MARKETING EXPENDITURE L=K*11% 0.0099 ADJUSTMENT ON ACCOUNT OF MARKETING PERSONNEL COST M 0.01 THEREFORE, ADJUSTED CUP PRICE PER TABLET N = J-K-L-M 0.57 PRICE PER TABLET OF AE O 0.51 5% AS PER SECTION 92 (C) P=O*5% 0.03 DIFFERENCE IN THE PRICE PER T ABLET CHARGED TO AE AND ADJUSTED CUP PRICE PER TABLET Q = N-O 0.06 TRANSFER PRICING ADJUSTMENT (FOR 500MG) R= 0.06* 7,44,80,500 44,63,830 ADJUSTMENT FOR METFORMIN 850MG SALE PRICE PER TABLET TO NON- AES USED AS CUP BY THE LD. TPO S 1.15 ADJUSTMENT ON ACCOUNT OF MARKETING AND OTHER EXPENSES T 0.17 MARK - UP ON MARKETING EXPENDITURE U=T*11% 0.0187 ADJUSTMENT ON ACCOUNT OF MARKETING PERSONNEL COST V 0.01 THEREFORE, ADJUSTED CUP PRICE PER TABLET W=S - T - U - V 0.95 PRICE PER TABLET OF AE X 0.79 5% AS PER SECTION 92 (C) Y=X*5% 0.04 DIFFERENCE IN THE PRICE PER TABLET CHARGED TO AE AND ADJUSTED CUP PRICE PER TABLET Z=W-X 0.16 TRANSFER PRICING ADJUSTMENT (FOR 850MG) A1=0.16* 1,04,24,800 16,67,968 TOTAL TRANSFER PRICING ADJUSTMENT I+R+A1 1,08,37,845 HOWEVER, THE LD. CIT(A) HELD THAT (I) THE ASSESSEE HAS FAILED TO ADDUCE ANY EVIDENCE THAT THE CHEMICAL VARIATIONS OR USE OF DIFFERENT BULK DRUGS RESULTS IN HIGHER PRICE FOR THE DRUG SOLD IN EUROPEAN MARKE TS VIS--VIS THOSE SOLD IN US MARKETS, (II) THE BASIC CHEMICAL COMPOSITION AS WELL AS THE PROCESS FOR MANUFACTURING IS SIMILAR ; THE REGISTRATION OF DOSS IERS MAY HAVE DIFFERENT PROCESSES BUT THAT DOES NOT REQUIRE ANY ADDITIONAL PROCESS WHICH WOULD RESULT ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 21 IN INCREASE IN COST ; THE FACT THAT THE TWO PRODUCT S CANNOT BE SOLD IN ALTERNATE MARKETS WOULD NOT MEAN THAT THEY ARE FUNCTIONALLY D IFFERENT, (III) THE ASSESSEE HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO SUBSTANTI ATE THAT THE VARIATION IN VOLUME BETWEEN THE AMOUNTS SOLD TO AE AND NON-AES W OULD INVITE VOLUME DISCOUNTS, (IV) THE DRUG REGULATION IN US IS VERY S TRINGENT AND STARTS FROM THE MANUFACTURING LEVEL ITSELF AND IS VERY CLOSELY MONI TORED; THE REGISTRATION REQUIREMENTS AT USFDA AS WELL AS COSTS OF LEGAL CHA LLENGE ARE SUBSTANTIALLY HIGHER IN US MARKETS THAN IN EU MARKETS ; HENCE ORD INARILY, THE PRICE OF DRUGS SOLD IN US MARKETS ARE GENERALLY HIGHER THAN THE PR ICE OF DRUGS SOLD IN EU MARKETS, (V) THE CLAIM OF THE ASSESSEE THAT IT IS F ORCED TO SELL THE DRUGS AT LOWER MARGINS IN US BECAUSE OF HIGHER COMPETITION IS NOT FOUND TENABLE AS THE MARGINS OF THE AE IN US IS FOUND TO BE SIGNIFICANTL Y HIGHER THAN THAT OF THE ASSESSEE ITSELF, IN SPITE OF LIMITED FUNCTIONS PERF ORMED BY THE AE, (VI) THE RULES ALLOW USE OF A METHOD, AFTER MAKING SUITABLE ADJUST MENTS WHILE COMPARING THE TRANSACTIONS; THE ADJUSTMENTS EFFECTED BY THE AO AR E CORRECT, (VII) THE DOSSIERS ARE PREPARED BY THE ASSESSEE AND THEN PASSED ON TO THE AE FOR REGISTRATION IN THE COUNTRY OF SALE ; THE DOSSIERS DO NOT SHIFT THE RISK OF THE ASSESSEE AS THEY ARE INTEGRALLY CONNECTED WITH THE FACILITY WHERE TH E DRUGS ARE MANUFACTURED ; BOTH THE R&D, THE CLINICAL STUDY AND THE MANUFACTUR ING HAVE BEEN DONE BY THE ASSESSEE AND IT HAS ENTIRE ONUS WITH REFERENCE TO T HE DRUG SOLD IN THE MARKET; THE ASSESSEE HAS NOT PROVIDED COPY OF DOSSIERS OR A NY DOCUMENT FILED WITH USFDA, WHICH INDICATES TRANSFER OF RISKS AS CLAIMED BY THE ASSESSEE ; (VIII) HAVING A USFDA COMPLAINT MANUFACTURING FACILITY IS EXPENSIVE AND CRITICAL FOR US MARKETS AND HENCE IT IS WRONG TO CONCLUDE THAT T ESTING REQUIREMENTS ARE HIGHER IN EU AS COMPARED TO SUCH US REQUIREMENTS AN D HENCE THE PRICING OF EU MARKETS WOULD BE HIGHER; (IX) IT IS POSSIBLE TO MAKE ACCURATE ADJUSTMENTS ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 22 WITH REGARD TO THE AE SALES ON FOB BASIS WHILE THE EU SALES ARE ON CIF; (X) THE TPO HAS ALLOWED CREDIT FOR THE FUNCTIONAL DIFFERENC E WHILE COMPUTING ADJUSTMENT USING CUP METHOD ; (XI) AS REGARDS THE V ARIOUS RISKS CLAIMED BY THE ASSESSEE THE TPO HAS CONCLUDED THAT SUCH RISKS ARE NOT OF A NATURE THAT THEY WOULD REQUIRE ADJUSTMENT IN PRICES OF THE PROD UCT; (XII) THE PRICE OF THE PRODUCT WITH SUITABLE ADJUSTMENTS, WOULD BE A FAIR AND ACCEPTABLE CUP FOR THE AE TRANSACTIONS IN RESPECT OF THE PROJECT; (XIII) T HE SEGMENTAL MARGIN ARRIVED BY THE ASSESSEE ARE NOT ACCEPTABLE AND HENCE TNMM A DOPTED BY THE ASSESSEE CANNOT BE ACCEPTED; (XIV) REGARDING THE CONTENTION OF THE ASSESSEE THAT MARKETING ACTIVITIES ARE A SEPARATE AND IMPORTANT F UNCTION AND THEREFORE A MARK UP OF 11% SHOULD BE ALLOWED TOWARDS THE VALUE ADDED MARKETING FUNCTION OF THE ASSESSEE, IT IS HELD THAT THAT A RE TURN OF 11% ON COST IS FOUND TO BE REASONABLE. AS EVIDENT FROM THE 12 TH GROUND OF APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ABOVE ORDER OF THE LD. CIT(A) RE-COMPUTING THE ALP OF THE INTERNATIONAL TRANSACTION PERTAINING TO SALE OF PHARMACEUTICAL PR ODUCTS BY THE ASSESSEE TO ITS AE AND CONFIRMING AN ADJUSTMENT OF RS.1,06,49,5 98/- TO THE INCOME OF THE ASSESSEE U/S 92CA(4) OF THE ACT. 21. THE LD. COUNSEL SUBMITS THAT THE ASSESSEE HAS A DOPTED TNMM AS THE MOST APPROPRIATE METHOD, SELECTING ITSELF AS THE TE STED PARTY AND ADOPTING OP/OC AS THE PROFIT LEVEL INDICATOR (PLI) ; IN THIS REGARD, SINCE THE OPERATING MARGIN OF THE ASSESSEE AT 15% ON OPERATING COSTS (F ROM THIS SEGMENT) WAS HIGHER VIS--VIS THE WEIGHTED AVERAGE YEAR THREE YE AR MARGIN (9.48%) AS WELL AS THE AVERAGE SINGLE YEAR UPDATED MARGIN EARNED BY COMPARABLE COMPANIES (9.55%-AS ASKED BY TPO DURING THE COURSE OF TRANSFE R PRICING PROCEEDINGS), ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 23 THE SAID TRANSACTION WAS CONSIDERED TO MEET THE ARM S LENGTH TEST FROM AN INDIAN TRANSFER PRICING PERSPECTIVE; IN ABSENCE OF COMPARABLE DATA FOR APPLICATION OF ANY DIRECT METHOD OF COMPARABILITY, TNMM WAS CONSIDERED AS A PREFERRED METHOD FOR UNDERTAKING THE TRANSFER PRICI NG ANALYSIS. IT IS ARGUED THAT THE LD. CIT(A) ACCEPTED THE INTERNATIONAL TRAN SACTION OF SALE OF PHARMA PRODUCTS (PORTION PERTAINING TO SALE OF OTHER PRODU CTS) TO BE AT ARMS LENGTH, HOWEVER REJECTED THE REMAINING PORTION (SALE OF MET FORMIN PRODUCT) AND CONFIRMED TP ADJUSTMENT ON SUCH PORTION AFTER ALLOW ING CERTAIN ADJUSTMENTS IN CONNECTION WITH ADOPTION OF CUP AS MOST APPROPRI ATE METHOD. IN THIS REGARD, IT IS STATED THAT THE LD. CIT(A) CANNOT COM PARE THE EXPORT SALES OF METFORMIN MADE TO AE (I.E. US MARKET) VIS--VIS NON -AE (I.E. NON-US MARKET). IN THIS REGARD, IT IS EXPLAINED BY HIM THAT THERE A RE KEY DIFFERENCES BETWEEN THE AE AND NON-AE MARKETS (I.E. US AND EUROPE RESPE CTIVELY) LIKE DIFFERENCE IN BUSINESS MODELS, CHANNEL DISTRIBUTION, ANDA/MARKET AUTHORIZATION APPROVALS, PRICING AND MARKET RISK. ELABORATING FURTHER, THE L D. COUNSEL DRAWS OUR ATTENTION TO (I) DIFFERENCES IN FUNCTIONS PERFORMED BY THE ASSESSEE IN CONNECTION WITH SALE OF PRODUCTS IN THE US VIS--VI S EUROPEAN MARKETS, (II) DIFFERENCES IN RISKS ASSUMED BY ASSESSEE IN CONNECT ION WITH SALE OF PRODUCTS IN THE US VIS--VIS EUROPEAN MARKETS, (III) DIFFERE NCE IN FUNCTIONS UNDERTAKEN FOR THE US AND EUROPEAN MARKETS, (IV) DIFFERENCE IN QUANTITY OF SALES TO AE AND NON-AE MARKETS, (V) DIFFERENCE IN THE PRODUCTS SOLD BY THE ASSESSEE TO THE US AND EUROPE MARKETS. THUS IT IS STATED BY THE LD. COUNSEL THAT FOR THE PURPOSE OF APPLYING CUP, MINOR DIFFERENCES IN CONTRACTUAL TERMS OR ECONOMIC CONDITIONS CAN MATERIALLY AFFECT THE COMPARABILITY AND WILL NOT PRODUCE RELIA BLE DATA; AS PER THE RULES, IF ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 24 THERE ARE SIGNIFICANT DIFFERENCES IN THE PRODUCTS B EING COMPARED, AND IF REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO E LIMINATE THE EFFECT OF SUCH DIFFERENCES, THE CUP METHOD WILL NOT APPLY; AC CORDINGLY, CUP CANNOT BE APPLIED IN CASE OF THE ASSESSEE GIVEN THAT THERE AR E SIGNIFICANT PRODUCT DIFFERENCES, AND THAT REASONABLE ACCURATE ADJUSTMEN TS CANNOT BE MADE TO ACCOUNT FOR SUCH DIFFERENCES. ADDITIONALLY, IT IS S UBMITTED THAT THERE IS NO QUESTION OF SHIFTING PROFITS OUTSIDE INDIA, CONSIDE RING THAT ALL PROFITS EARNED BY THE ASSESSEE ARE TAXED IN INDIA AND IT IS ONLY A TI MING DIFFERENCE AS THE AES PROFITS ARE ULTIMATELY RECEIVED BACK IN INDIA; TAXA TION IN THE US IS AT A HIGHER RATE THAN IN INDIA, AND THE ASSESSEE IS ALSO PAYING TAX ON DIVIDEND RECEIVED. THUS THE LD. COUNSEL EXPLAINS THAT SINCE CUP REQUI RES A STRICT AND HIGH DEGREE OF COMPARABILITY, EVEN THE SLIGHTEST DIFFERE NCES IDENTIFIED, BETWEEN THE FUNCTIONS AND RISKS OR EVEN THE PRODUCT THEMSELVES, WHILE UNDERTAKING TRANSFER PRICING ANALYSIS WOULD RENDER CUP METHOD A S NOT APPLICABLE. BRINGING OUT THE DIFFERENCE IN NATURE OF TRANSACTI ON I.E. (I) BUSINESS MODEL, (II) SPECIFICATIONS AND (III) PRICE COMPARIS ON AND LIKELY DIFFERENCES IN RISKS ASSUMED I.E. (A) MARKET RISK AND (B) CREDIT R ISK, IT IS STATED THAT THERE ARE KEY DIFFERENCES BETWEEN THE ASSESSEE AND THE CASE O F SERDIA PHARMACEUTICALS (INDIA) PVT. LTD. (ITA NO. 2469/MUM/06, 3032/MUM/07 & 2531/M/08) UPO N WHICH THE TPO HAS PLACED RELIANCE. IT IS STATED THAT THE AUDITED SEGMENTALS INCLUDING NET MARGINS OF THE PRODUCT METFORMIN FOR ITS AE AND NON-AE SEGMENT AS A PART OF ADDITIONAL EVIDENCE WAS FILED BEFORE THE LD. CIT(A). THE ACTUA L PRICE CHARGED FOR METFORMIN SALES TO AE IN US MARKET IS LESS THAN THE PRICE CHARGED TO NON-AES ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 25 IN THE EUROPE MARKET. HOWEVER, AS THE ASSESSEE HAS EARNED A NET OPERATING MARGIN OF 24.6% FROM METFORMIN SALES TO AE, WHICH I S HIGHER THAN THE NET OPERATING MARGIN OF 23.3% FROM METFORMIN SALES TO N ON-AES AND THUS THE SAME COULD BE CONCLUDED TO BE AT ARMS LENGTH. THUS IT IS STATED THAT INTERNAL TNMM IS TO BE CONSIDERED AS MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION IN QUESTION. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED TH AT EVEN IN CASE CUP IS CONSIDERED AS MOST APPROPRIATE METHOD AS PROPOSED B Y THE TPO/LD. CIT(A) VARIOUS ADJUSTMENTS ON ACCOUNT OF SIGNIFICANTLY HIG HER FUNCTIONS AND RISKS UNDERTAKEN BY THE ASSESSEE IN EUROPE VERSUS US MARK ET SHOULD BE ALLOWED. IN THIS CONNECTIONS, RELIANCE WAS PLACED ON THE DECISI ON BY THE HONBLE DELHI HIGH COURT IN THE CASE OF ROLLS ROYCE PLC V. DIT (339 ITR 147), WHEREIN 35% OF THE TOTAL PROFIT HAS BEEN ATTRIBUTED TO MARKET ACTI VITIES UNDERTAKEN. ALSO IT IS STATED THAT THE VOLUME OF PRODUCTS SOLD HAVE A DIRE CT IMPACT ON THE SALE PRICE I.E. THE HIGHER THE VOLUME OF SALES, THE LOWER THE SALE PRICE. AGAIN IT IS STATED THAT THERE ARE HUGE DIFFERENCES IN THE QUANTITY SOL D TO NON-AES IN EUROPE VIS- -VIS IN US. TO SUM UP, THE LD. COUNSEL SUBMITS THAT CUP CANNOT BE APPLIED IN CASE OF THE ASSESSEE GIVEN THAT THERE IS SIGNIFICANT PRODUC T, FUNCTIONAL RISK, GEOGRAPHICAL, QUANTITY, PRICE ETC. DIFFERENCES AND ACCORDINGLY, THE ANALYSIS UNDERTAKEN BY THE ASSESSEE CONSIDERING TNMM AS THE MOST APPROPRIATE METHOD AND COMPARING ITS NET MARGINS WITH OTHER COM PARABLE COMPANIES IN INDIA SHOULD BE UPHELD. ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 26 HOWEVER, WITHOUT PREJUDICE TO THE ABOVE, THE LD. C OUNSEL SUBMITS THAT EVEN IF CUP IS TO BE ADOPTED AS MAM, THE ASSESSEE S HOULD BE ALLOWED THE ABOVEMENTIONED ADJUSTMENTS BECAUSE OF DIFFERENCES I N SALES MADE TO AE VIS-- VIS NON-AES. 21.1 BROADLY STATED, THE ARGUMENTS OF THE LD. COUNS EL ARE THAT THE COMPARABILITY ANALYSIS UNDERTAKEN BY THE ASSESSEE W AS BASED ON WELL ACCEPTED TRANSFER PRICING PRINCIPLES, IN THE ABSENC E OF ANY INFORMATION TO THE CONTRARY; THEREFORE, IT IS INAPPROPRIATE TO REJECT THE COMPARABILITY ANALYSIS WHICH WAS UNDERTAKEN BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT R.W. THE RULES. IT IS STATED THAT THE LD. C IT(A) CONFIRMED THE ADJUSTMENT MADE BY THE AO/TPO IN RESPECT OF ONLY PART OF THE T OTAL PRODUCTS AND ACCEPTED THE REMAINING EXPORTS MADE BY THE ASSESSEE AT ARMS LENGTHS AND THEREFORE, HE CANNOT ACCEPT TNMM FOR ONLY PART OF THE SAME TRANSA CTION. THE LD. COUNSEL RELIES ON THE DECISION IN AMPHENOL INTERCONNECT INDIA PVT. LTD. (302 ITR 131) (BOM HC); WRIGLEY INDIA (ITA NO. 5648/DEL/2012) (DEL TRIB.); UCB INDIA PVT. LTD. (121 ITD 131) (MUM) ; DISHMAN PHARMACEUTICALS & CHEMICALS LTD. (45 SOT 37) (AHD TRIB.). ON SPECIFIC FUNCTIONAL DIFFERENCES, THE LD. COUNSE L RELIES ON THE DECISION IN AZTECH SOFTWARE & TECHNOLOGY SERVICES LTD. V. ACIT (249 ITR (AT) 32) BANG ITAT SPECIAL BENCH, MENTOR GRAPHICS (NOIDA) PVT. LTD. V. DEPUTY COMMISS IONER OF INCOME TAX (109 ITD 101) DEL ITAT, FIRMENICH AROMATICS (INDIA) (P.) LTD. [2019] 106 TAXMANN.COM 166 (MUMBAI-TRIB.) FIRMENICH AROMATICS PRODUCTION (INDIA) PRIVATE LIMITED V. INCOME TAX OFFICER-9(3)( 2) MUM ITAT , INTERNET INDIA PRIVATE LIMITED (2010) 39 SOT 93 MUM ITAT, DCIT/ACIT, CIRCLE 4(1) , KOLKATA V. M/S EMAMI LIMITED (1065 & 1066/KOL/2017), DELHI ITAT IN THE ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 27 CASE OF MOSER BAER INDIA (TS-624-ITAT-2015(DEL)-TP] AND KOLKATA TRIBUNAL IN THE CASE OF EMAMI LIMITED [ITA NO. 1066/KOL/2017]. THE LD. COUNSEL SUBMITS THAT WITHOUT PREJUDICE TO THE ABOVE, IF ADJUSTMENT ON ACCOUNT OF MARKETING EXPENSES AND ENT REPRENEURIAL RISKS ARE ADOPTED, TRANSFER PRICING ADJUSTMENT REDUCES TO RS. 20,61,578/- IN AY 2010-11 AND RS. NIL IN AY 2011-12. FINALLY, IT IS SUBMITTED BY THE LD. COUNSEL THAT TH E ASSESSEE HAS EARNED A NET OPERATING MARGIN OF 24.6% FROM SALE METFORMIN T O ITS AE WHEREAS THE NET OPERATING MARGIN FROM SALE OF METFORMIN TO NON-AE I S 23.3% AND SINCE THE MARGINS EARNED FROM AE SEGMENT IS MORE THAN THE MAR GINS EARNED FROM NON- AE SEGMENT, THE TRANSACTIONS WERE HELD TO BE AT ARM S LENGTH AS REQUIRED UNDER THE INDIAN REGULATIONS. 22. ON THE OTHER HAND, THE LD. DR SUBMITS THAT THE ASSESSEE HAS NOT PRODUCED BEFORE THE TPO ANY EVIDENCE TO SUBSTANTIAT E THAT MARKETING AND OVERHEAD EXPENSES WERE INCURRED ONLY FOR THE NON-AE . REFERRING TO THE ORDER OF THE LD. CIT(A), IT IS STATED BY HIM THAT THE ASS ESSEE HAS FAILED TO ADDUCE ANY EVIDENCE THAT THE CHEMICAL VARIATIONS OR USE OF DIF FERENT BULK DRUGS RESULT IN HIGHER PRICE FOR THE DRUG SOLD IN EUROPEAN MARKETS VIS-A-VIS THOSE SOLD IN US MARKETS. THUS IT IS STATED THAT THE PRODUCTS MANUFA CTURED FOR SALE IN THE US MARKET IS SIMILAR TO THE PRODUCTS MANUFACTURED FOR SALE IN THE EUROPEAN MARKET. AS PER HIM THE BASIC CHEMICAL COMPOSITION A S WELL AS PROCESS FOR MANUFACTURING IS SIMILAR AND MERE DEVIATION IN PRIN TING OR SOME ADDITIONAL INGREDIENTS WOULD NOT RESULT IN INCREASE IN COST OF THE DRUG ; THE REGISTRATION OF ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 28 DOSSIERS MAY HAVE DIFFERENT PROCESSES BUT THAT DOES NOT REQUIRE ANY ADDITIONAL PROCESS WHICH WOULD RESULT IN INCREASING COST. FURTHER, THE LD. DR SUBMITS THAT THE ASSESSEE HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO SUBSTANTIATE THAT THE VARIATI ON IN VOLUME BETWEEN THE AMOUNTS SOLD TO AE AND NON-AES WOULD INVITE VOLUME DISCOUNTS. EXPLAINING THAT THE DRUG REGULATION IN US IS VERY STRINGENT AN D COMPANIES PLANNING FOR DRUG SALES IN US HAVE TO INVEST HEAVILY IN USFDA AP PROVED FACILITIES, IT IS STATED BY HIM THAT THE ASSESSEE HAS NOT DEMONSTRATED THAT BECAUSE OF THE CAP ON LOWER PRICES OR BECAUSE OF MARKET FORCES, THE STREE T PRICE OF DRUGS SOLD BY THE ASSESSEE IS LOWER IN US AND HIGHER IN EU. IN ADDITION TO THE ABOVE, THE LD. DR SUBMITS THAT THE ASSESSEE HAS NOT PROVIDED TO THE LD. CIT(A) THE COPY OF DOSSIERS OR ANY DOCUMENT FILED WITH USFDA WHICH INDICATES TRANSFER OF RISKS AS CLAIMED BY THE ASSESSEE. THUS IT IS SUMMARIZED BY HIM THAT IN CASE OF A GEN ERIC DRUG, THE MANUFACTURERS WOULD BE SELLING DRUGS IN EACH MARKET AND HENCE, THE PRICES WOULD NOT VARY SIGNIFICANTLY AND THEREFORE, THE PRI CE OF THE PRODUCT, WITH SUITABLE ADJUSTMENTS WOULD BE A FAIR AND ACCEPTABLE CUP FOR THE AE TRANSACTIONS IN RESPECT OF THIS PRODUCT. WITH THE ABOVE SUBMISSIONS, THE LD. DR SUBMITS THA T THE ORDER PASSED BY THE LD. CIT(A) BE AFFIRMED. 23. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS FOR OUR DECISIONS ARE GIVEN BELOW. ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 29 WE FIND MERIT IN THE CONTENTIONS OF THE LD. COUNSE L THAT THE LD. CIT(A) HAS CONFIRMED THE ADJUSTMENT MADE BY THE AO/TPO IN RESPECT OF ONLY PART OF THE TOTAL PRODUCTS AND ACCEPTED THE REMAINING EXPOR TS MADE BY THE ASSESSEE AT ARMS LENGTH AND THUS HE CANNOT ACCEPT TNMM FOR ONLY PART OF THE SAME TRANSACTION. THUS IT IS INCONGRUOUS ON THE PART OF THE LD. CIT(A) ACCEPTING THE INTERNATIONAL TRANSACTION OF SALE OF PHARMA PRODUCT S (PORTION PERTAINING TO SALE OF OTHER PRODUCTS) TO BE AT ARMS LENGTH, HOWE VER REJECTING THE REMAINING PORTION (SALE OF METFORMIN PRODUCT) AND CONFIRMING TP ADJUSTMENT ON SUCH PORTION AFTER ALLOWING CERTAIN ADJUSTMENT WITH ADOP TION OF CUP AS THE MOST APPROPRIATE METHOD. IN THE INSTANT CASE, WE FIND THAT THE TPO HAS STRA IGHT PROCEEDED TO APPLY CUP METHOD. THE TPO HAS NOT EXAMINED THE APPLICABIL ITY AND RELEVANCE OF TNMM. 23.1 AT THIS JUNCTURE, IT WOULD BE RELEVANT TO DISC USS THE TNMM. IT IS ALSO NECESSARY TO REFER TO RULE 10B OF THE INCOME TAX RU LES, 1962 WHICH PROVIDES FOR DETERMINATION OF ALP UNDER SECTION 92C OF THE A CT. SUB-RULE(1) OF RULE 10B CONTAINS PROVISIONS IN RELATION TO VARIOUS METH ODS OF CALCULATION OF ALP AS PROVIDED UNDER SECTION 92C OF THE ACT AND TNMM READS AS UNDER: '10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION OR A SPECI FIED DOMESTIC TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING T HE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- I. THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION ENT ERED INTO WITH AN ASSOCIATED ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 30 ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE; II. THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUM BER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; III. THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION OR THE SPECIF IED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEE N THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; IV. THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AN D REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MAR GIN REFERRED TO IN SUB-CLAUSE (III); V. THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKE N INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION. 23.2 WE REFER HERE TO RULE 10B(2), WHICH READS AS UNDER: '(2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARAB ILITY OF AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION WITH AN UNCONTR OLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: A. THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; B. THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; C. THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLI CITLY HOW THE RESPONSIBILITIES, ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 31 RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RE SPECTIVE PARTIES TO THE TRANSACTIONS; D. CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LO CATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, C OSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL.' 23.3 THE HONBLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS (P.) LTD. V. CIT (2015) 60 TAXMANN.COM 355 (DELHI) HAS HELD THAT : 20. IN ORDER FOR THE BENCHMARKING STUDIES TO BE RELIAB LE FOR THE PURPOSES OF DETERMINING THE ALP, IT WOULD BE ESSENTIAL THAT THE ENTITIES SELECTED AS COMPARABLES ARE FUNCTIONALLY SIMILAR AND ARE SUBJECT TO THE SIM ILAR BUSINESS ENVIRONMENT AND RISKS AS THE TESTED PARTY. IN ORDER TO IMPUTE AN AL P TO A CONTROLLED TRANSACTION, IT WOULD BE ESSENTIAL TO ENSURE THAT THE INSTANCES OF UNCONTROLLED ENTITIES/TRANSACTIONS SELECTED AS COMPARABLES ARE SIMILAR IN ALL MATERIAL ASPECTS THAT HAVE ANY BEARING ON THE VALUE OR THE PROFITABILITY, AS THE CASE MAY BE, OF THE TRANSACTION. ANY FACTOR, WHICH HAS AN INFLUENCE ON THE PLI, WOULD BE MATERIA L AND IT WOULD BE NECESSARY TO ENSURE THAT THE COMPARABLES ARE ALSO EQUALLY SUBJEC TED TO THE INFLUENCE OF SUCH FACTORS AS THE TESTED PARTY. THIS WOULD, OBVIOUSLY, INCLUDE BUSINESS ENVIRONMENT; THE NATURE AND FUNCTIONS PERFORMED BY THE TESTED PARTY AND THE COMPARABLE ENTITIES; THE VALUE ADDITION IN RESPECT OF PRODUCTS AND SERVICES PROVIDED BY PARTIES; THE BUSINESS MODEL; AND THE ASSETS AND RESOURCES EMPLOYED. IT CA NNOT BE DISPUTED THAT THE FUNCTIONS PERFORMED BY AN ENTITY WOULD HAVE A MATER IAL BEARING ON THE VALUE AND PROFITABILITY OF THE ENTITY. IT IS, THEREFORE, OBVI OUS THAT THE COMPARABLES SELECTED AND THE TESTED PARTY MUST BE FUNCTIONALLY SIMILAR FOR A SCERTAINING A RELIABLE ALP BY TNMM. RULE 10B(2) OF THE INCOME TAX RULES, 1962 ALS O CLEARLY INDICATES THAT THE COMPARABILITY OF CONTROLLED TRANSACTIONS WOULD BE J UDGED WITH REFERENCE TO THE FACTORS AS INDICATED THEREIN. CLAUSE (A) AND (B) OF RULE 10B(2) EXPRESSLY INDICATE THAT THE SPECIFIC CHARACTERISTICS OF THE SERVICES PROVID ED AND THE FUNCTIONS PERFORMED ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 32 WOULD BE FACTORS FOR CONSIDERING THE COMPARABILITY OF UNCONTROLLED TRANSACTIONS WITH CONTROLLED TRANSACTIONS. [EMPHASIS UNDERLINED BY US] FURTHER, THEIR LORDSHIPS CONCLUDED THAT : 43. IN OUR VIEW, THE AFORESAID APPROACH WOULD NOT BE APPOSITE. INSOFAR AS IDENTIFYING COMPARABLE TRANSACTIONS/ENTITIES IS CON CERNED, THE SAME WOULD NOT DIFFER IRRESPECTIVE OF THE TRANSFER PRICING METHOD ADOPTED. IN OTHER WORDS, THE COMPARABLE TRANSACTIONS/ENTITIES MUST BE SELECTED O N THE BASIS OF SIMILARITY WITH THE CONTROLLED TRANSACTION/ENTITY. COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS HAS TO BE JUDGED, INTER ALIA, WITH REF ERENCE TO COMPARABILITY FACTORS AS INDICATED UNDER RULE 10B(2) OF THE INCOME TAX RULES , 1962. COMPARABILITY ANALYSIS BY TNMM METHOD MAY BE LESS SENSITIVE TO CERTAIN DIS SIMILARITIES BETWEEN THE TESTED PARTY AND THE COMPARABLES. HOWEVER, THAT CANNOT BE THE CONSIDERATION FOR DILUTING THE STANDARDS OF SELECTING COMPARABLE TRANSACTIONS/ ENTITIES. A HIGHER PRODUCT AND FUNCTIONAL SIMILARITY WOULD STRENGTHEN THE EFFICACY OF THE METHOD IN ASCERTAINING A RELIABLE ALP. THEREFORE, AS FAR AS POSSIBLE, THE CO MPARABLES MUST BE SELECTED KEEPING IN VIEW THE COMPARABILITY FACTORS AS SPECIF IED. WIDE DEVIATIONS IN PLI MUST TRIGGER FURTHER INVESTIGATIONS/ANALYSIS. 44. CONSIDERATION FOR A TRANSACTION WOULD REFLECT T HE FUNCTIONS PERFORMED, THE SIGNIFICANT ACTIVITIES UNDERTAKEN, THE ASSETS OR RE SOURCES USED/CONSUMED, THE RISKS ASSUMED. THUS, COMPARISON OF ACTIVITIES UNDERTAKEN/ FUNCTIONS PERFORMED IS IMPORTANT FOR DETERMINING THE COMPARABILITY BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS/ENTITY. IT WOULD NOT BE APPOSITE TO IG NORE FUNCTIONAL DISSIMILARITY ONLY FOR THE REASON THAT ITS IMPACT MAY BE REDUCED ON AC COUNT OF USING ARITHMETICAL MEAN OF THE PLI. THE DRP HAD NOTED THAT ECLERX WAS FUNCT IONALLY DISSIMILAR, BUT IGNORED THE SAME RELYING ON AN ASSUMPTION THAT THE FUNCTION AL DISSIMILARITY WOULD BE SUBSUMED IN THE PROFIT MARGIN. AS NOTED, THE CONTEN T OF SERVICES PROVIDED BY THE ASSESSEE AND THE ENTITIES IN QUESTION WERE NOT SIMI LAR. IN ADDITION, THERE WERE ALSO ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 33 FUNCTIONAL DISSIMILARITIES BETWEEN THE ASSESSEE AND THE TWO ENTITIES IN QUESTION. IN OUR VIEW, THESE COMPARABILITY FACTORS COULD NOT BE IGNORED BY THE TRIBUNAL. WHILE USING TNMM, THE SEARCH FOR COMPARABLES MAY BE BROAD ENED BY INCLUDING COMPARABLES OFFERING SERVICES/PRODUCTS WHICH ARE NO T ENTIRELY SIMILAR TO THE CONTROLLED TRANSACTION/ENTITY. HOWEVER, THIS CAN BE DONE ONLY IF (A) THE FUNCTIONS PERFORMED BY THE TESTED PARTY AND THE SELECTED COMP ARABLE ENTITY ARE SIMILAR INCLUDING THE ASSETS USED AND THE RISKS ASSUMED; AN D (B) THE DIFFERENCE IN SERVICES/PRODUCTS OFFERED HAS NO MATERIAL BEARING O N THE PROFITABILITY. [EMPHASIS UNDERLINED BY US] 23.4 IN UCB INDIA (P.) LTD. (SUPRA) RELIED ON BY THE LD. COUNSEL, THE TRIBUNAL HAS QUOTED AT LENGTH THE FOLLOWING PARAGRAPHS OF TP GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS I SSUED BY OECD: 70. SECTION 92C(1) REFERS TO ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION. RULE 10B(1)(E) READ WITH SECTION 92C D EALS WITH TNMM, AND IT REFERS TO ONLY NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION OR A CLASS OF SUCH TRANSACTION, BUT NOT OPERATIONAL MA RGINS OF ENTERPRISES AS A WHOLE. PARAGRAPH 3.26 OF TRANSFER PRICING GUIDELINES FOR M ULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS ISSUED BY OECD READS AS FOLLOWS : '3.26 THE TRANSACTIONAL NET MARGIN METHOD EXAMINES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (E.G., COSTS, SALES, ASSETS) THAT A TAXPAYER REALIZES FROM A CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE AP PROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF CHAPTER I). THUS, A TRANSACTIONAL NET MARGIN METHOD OPERATES IN A MANNER SIMILAR TO THE COST PLUS AND RESALE PRICE ME THODS. THIS SIMILARITY MEANS THAT IN ORDER TO BE APPLIED RELIABLY, THE TRANSACTIONAL NET MARGIN METHOD MUST BE APPLIED IN A MANNER CONSISTENT WITH THE MANNER IN WHICH THE RESALE PRICE OR COST PLUS METHOD IS APPLIED. THIS MEANS IN PARTICULAR THAT TH E NET MARGIN OF THE TAXPAYER FROM THE CONTROLLED TRANSACTION (OR TRANSACTIONS THAT AR E APPROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF CHAPTER I) SHOULD IDEALLY BE ESTA BLISHED BY REFERENCE TO THE NET ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 34 MARGIN THAT THE SAME TAXPAYER EARNS IN COMPARABLE U NCONTROLLED TRANSACTIONS. WHERE THIS IS NOT POSSIBLE, THE NET MARGIN THAT WOU LD HAVE BEEN EARNED IN COMPARABLE TRANSACTIONS BY AN INDEPENDENT ENTERPRIS E MAY SERVE AS A GUIDE. A FUNCTIONAL ANALYSIS OF THE ASSOCIATED ENTERPRISE AN D, IN THE LATTER CASE, THE INDEPENDENT ENTERPRISE IS REQUIRED TO DETERMINE WHE THER THE TRANSACTIONS ARE COMPARABLE AND WHAT ADJUSTMENTS MAY BE NECESSARY TO OBTAIN RELIABLE RESULTS. FURTHER, THE OTHER REQUIREMENTS FOR COMPARABILITY, AND IN PARTICULAR THOSE OF PARAGRAPHS 3.34 TO 3.40, MUST BE APPLIED.' 71. PARAGRAPH 3.42 OF TRANSFER PRICING GUIDELINES F OR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS ISSUED BY OECD READS AS FOLLOWS : '3.42 AN ANALYSIS UNDER THE TRANSACTIONAL NET MARGI N METHOD SHOULD CONSIDER ONLY THE PROFITS OF THE ASSOCIATED ENTERPRISE THAT ARE A TTRIBUTABLE TO PARTICULAR CONTROLLED TRANSACTIONS. THEREFORE, IT WOULD BE INAPPROPRIATE TO APPLY THE TRANSACTIONAL NET MARGIN METHOD ON A COMPANY-WIDE BASIS IF THE COMPAN Y ENGAGES IN A VARIETY OF DIFFERENT CONTROLLED TRANSACTIONS THAT CANNOT BE AP PROPRIATELY COMPARED ON AN AGGREGATE BASIS WITH THOSE OF AN INDEPENDENT ENTERP RISE. SIMILARLY, WHEN ANALYZING THE TRANSACTIONS BETWEEN THE INDEPENDENT ENTERPRISE S TO THE EXTENT THEY ARE NEEDED, PROFITS ATTRIBUTABLE TO TRANSACTIONS THAT ARE NOT S IMILAR TO THE CONTROLLED TRANSACTIONS UNDER EXAMINATION SHOULD BE EXCLUDED FROM THE COMPA RISON. FINALLY, WHEN PROFIT MARGINS OF AN INDEPENDENT ENTERPRISE ARE USED, THE PROFITS ATTRIBUTABLE TO THE TRANSACTIONS OF THE INDEPENDENT ENTERPRISE MUST NOT BE DISTORTED BY CONTROLLED TRANSACTIONS OF THAT ENTERPRISE.' 23.5 HAVING REGARD TO THE ABOVE WELL-SETTLED PRINCI PLES DELINEATING THE INGREDIENTS OF TNMM AND KEEPING IN MIND THE FACTS I N THE PRESENT CASE, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THE ABOVE GROU NDS OF APPEAL AND RESTORE THE MATTER TO THE FILE OF THE TPO/AO TO PASS AN ORD ER AFRESH AS PER RULE 10B. WE HOLD THAT TNMM IS THE MOST APPROPRIATE METHOD IN THE PRESENT CASE AND WHILE USING TNMM, THE SEARCH FOR COMPARABLES MAY BE BROADENED BY THE ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 35 ASSESSEE AS WELL AS REVENUE BY INCLUDING COMPARABLE S. HOWEVER, THIS CAN BE DONE ONLY IF (A) THE FUNCTIONS PERFORMED BY THE TES TED PARTY AND THE SELECTED COMPARABLE ENTITY ARE SIMILAR INCLUDING THE ASSETS USED AND THE RISKS ASSUMED; AND (B) THE DIFFERENCE IN SERVICES/PRODUCT S OFFERED HAS NO MATERIAL BEARING ON THE PROFITABILITY. WE DIRECT THE ASSESSE E TO FILE THE RELEVANT DOCUMENTS/EVIDENCE BEFORE THE TPO/AO. AS THE ABOVE GROUNDS OF APPEAL ARE RESTORED TO THE FILE OF THE TPO/AO, WE ARE NOT ADVE RTING TO THE CASE LAWS REFERRED BY THE LD. COUNSEL. THUS THE 12 TH TO 17 TH GROUNDS OF APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. 24. THE ASSESSEE HAS FILED AN ADDITIONAL GROUND STA TING THE FOLLOWING : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE APPELLANT SUBMITS THAT DEDUCTION IN RESPECT OF EDUCATION CESS ON INCOME TA X PAID DURING THE YEAR OUGHT TO BE ALLOWED AS A DEDUCTION WHILE COMPUTING THE TOTAL INCOME. THE ABOVE ADDITIONAL GROUND IS A PURELY LEGAL ONE AND FOLLOWING THE DECISION IN NTPC V. CIT (1998) 229 ITR 383 (SC), WE ADMIT IT FOR ADJUDICAT ION. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SESA GOA LTD. (TAX APPEAL NO. 18 OF 2013) HAS HELD THAT EDUCATION CESS IS AN AL LOWABLE BUSINESS EXPENDITURE AND NOT SUBJECT TO DISALLOWANCE U/S 40( A)(II) OF THE ACT. ALSO THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CHAMBAL FERTILIZERS & CHEMICALS LTD. (102CCH 0202) (2018) HAS HELD THAT EDUCATION CESS L IABILITY IS ELIGIBLE FOR DEDUCTION WHILE COMPUTING THE TOTAL INCOME. IN VIEW OF THE ABOVE DIRECT DECISION, WE ALLOW THE ADDITIONAL GROUND OF APPEAL. ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 36 25. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ITA NO. 4914/MUM/2017 ASSESSMENT YEAR: 2010-11 (REVENUES APPEAL) 26 THE 1 ST GROUND OF APPEAL READS AS UNDER : 1. WHETHER THE LD. CIT(A) HAS ERRED IN FACTS AND LAW I N DELETING THE DISALLOWANCE OF RS.4,24,334/- AND RS.51,41,416/- (10% OF RS.42,4 3,338/- AND 20% OF RS.52,62,07,082/- RESPECTIVELY) MADE ON ACCOUNT OF BRAND REMINDERS HOLDING THAT NO DIRECT BENEFIT HAS BEEN PASSED ON TO DOCTOR S WHEN THE ASSESSEE COMPANY ITSELF SUBMITTED THAT SUCH ITEMS WERE RANDO MLY DISTRIBUTED. 27. THE LD. CIT(A) HAS HELD THAT BRAND REMINDERS LI KE MARKERS, FRAMES, PAPER WEIGHT, TABLE WATCHES ETC. WERE NOT DIRECTLY GIVEN TO DOCTORS OR THE BENEFITS HAVE DIRECTLY BEEN TO DOCTORS, HENCE, ASSU MPTION THAT 10% (RS.4,24,334/-) TO 20% (RS.51,41,416/-) WOULD HAVE BEEN GIVEN TO DOCTORS IS NOT CORRECT. ACCORDINGLY, HE HELD THAT THESE EXPENS ES ARE NOT IN VIOLATION OF MCI GUIDELINES. 28. BEFORE US, THE LD. DR RELIES ON THE ORDER OF TH E AO, WHEREAS THE LD. COUNSEL SUPPORTS THE ORDER PASSED BY THE LD. CIT(A) . 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE FIND THAT THESE EXPENSES INCURRED COM PRISE LARGELY OF LOW VALUE MEMENTOES LIKE PEN, PEN DRIVES, TOWELS, EATABLES, C OSMETICS ETC. WITH AN INDIVIDUAL VALUE OF RS.5000/- OR LESS, MEANT FOR DI STRIBUTION TO STOCKISTS/DRUGGISTS/CHEMISTS/PARAMEDICAL PERSONS FO R BRAND RECALL/TARGET COMPLETION/INCENTIVE TO PROMOTE AND MARKET ASSESSEE S PRODUCTS/AS A GOODWILL GESTURE DURING FESTIVAL/BIRTHDAYS ETC. TO MAINTAIN/ENHANCE BUSINESS ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 37 RELATIONSHIPS. THUS IT IS CRYSTAL CLEAR THAT THE AF ORESAID EXPENDITURE IS SALES PROMOTION EXPENDITURE INCURRED FOR THE PURPOSE OF E NHANCING THE ASSESSEES BUSINESS AND IS THUS INCURRED WHOLLY AND EXCLUSIVEL Y FOR THE PURPOSE OF BUSINESS AND THEREFORE ALLOWABLE AS DEDUCTION U/S 3 7(1) OF THE ACT. IN VIEW OF THE ABOVE FACTS, WE AFFIRM THE ORDER OF THE LD. CIT(A) AND DISMISS THE 1 ST GROUND OF APPEAL. 30. THE 2 ND AND 3 RD GROUND OF APPEAL RELATE TO WEIGHTED DEDUCTION U/S 35AB OF THE ACT. THESE GROUNDS READ AS UNDER: 2. WHETHER THE LD. CIT(A) HAS ERRED IN FACTS AND LAW I N ALLOWING THE CLAIM OF WEIGHTED DEDUCTION UNDER SECTION 35(2AB) OF THE IT ACT MADE BY THE ASSESSEE COMPANY DURING THE COURSE OF ASSESSMENT PROCEEDINGS (AND NOT IN THE RETURN OF INCOME) IN RESPECT OF EXPENDITURE NOT APPROVED BY T HE DSIR AND INCURRED BY THE ASSESSEE ON FOREIGN PATENT FILING FEES AND CLIN ICAL TRIALS CONDUCTED OUTSIDE THE R & D FACILITY. 3. WHETHER THE LD. CIT(A) HAS ERRED IN FACTS AND LAW I N ALLOWING THE CLAIM OF WEIGHTED DEDUCTING U/S 35(2AB) OF THE IT ACT MADE B Y THE ASSESSEE COMPANY IN RESPECT OF EXPENDITURE NOT APPROVED BY THE DSIR AND INCURRED BY THE ASSESSEE ON FOREIGN CONSULTANCY OBTAINED FROM OUTSIDER THE R & D FACILITY. 31. AS MENTIONED EARLIER, THE TRIBUNAL IN ASSESSEE S OWN CASE FOR AY 2008- 09 AND AY 2009-10 VIDE ORDER DATED 28.02.2015 HAD H ELD THAT EXPENSES INCURRED ON CLINICAL TRIAL, PATENT FILING FEES AND FOREIGN CONSULTANCY ARE ELIGIBLE FOR WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT. ALSO THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. CADILA HEALTHCARE (263 CTR 686) (GUJ) HAS HELD THAT THE TAXPAYER WAS ELIGIBLE FOR WEIGHTED DEDUCTION OF CLINICAL TRIALS CONDUCTED OUTSIDE THE FACILITY BECAUSE BY ITS VERY NATURE, CL INICAL TRIALS CANNOT BE ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 38 CONDUCTED INSIDE THE APPROVED R&D FACILITY. FURTHER MORE, DENIAL OF DEDUCTION WILL RESULT IN DILUTING THE BENEFIT ENVISAGED BY TH E SECTION AS ALSO RENDERING MEANINGLESS A SPECIFIC EXPLANATION TO THE SECTION WHICH PROVIDES THAT R&D EXPENDITURE INCLUDES CLINICAL DRUG TRIALS. THE RELE VANT EXTRACTS FROM THE ABOVE DECISION ARE AS FOLLOWS: ..MERELY BECAUSE THE PRESCRIBED AUTHORITY SEGREG ATED THE EXPENDITURE INTO TWO PARTS, NAMELY, THOSE INCURRED WITHIN THE IN-HOUSE F ACILITY AND THOSE THAT WERE INCURRED OUTSIDE, IN OUR OPINION, BY ITSELF WOULD N OT BE SUFFICIENT TO DENY THE BENEFIT TO THE ASSESSEE UNDER SECTION 35(2AB) OF THE ACT. IT IS NOT AS IF THAT THE SAID AUTHORITY WAS ADDRESSING THE ISSUE FOR DEDUCTION UNDER SECTIO N 35(2AB) OF THE ACT IN RELATION TO THE QUESTION ON HAND. THE CERTIFICATE ISSUED WAS ONLY FOR THE PURPOSE OF LISTING THE TOTAL EXPENDITURE UNDER THE RULES (EMPHASIS UNDERLINED BY US) FOLLOWING THE ABOVE DECISIONS, WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE 2 ND & 3 RD GROUND OF APPEAL. 32. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 33. FOR AY 2011-12 (ITA NO. 4846/M/2017) IN THE CAS E OF ASSESSEES APPEAL, THE GROUNDS OF APPEAL RELATING TO (I) DISAL LOWANCE OF EXPENDITURE U/S 37(1) OF THE ACT; (II) WEIGHTED DEDUCTION U/S 35(2A B) AND (III) TRANSFER PRICING ARE SIMILAR TO THE CONCERNED GROUNDS OF APP EAL FOR AY 2010-11 (ITA NO. 4845/M/2017). FOR AY 2011-12 (ITA NO. 4915/M/2017) IN THE CASE O F REVENUES APPEAL, THE 1 ST , 2 ND , 3 RD GROUNDS OF APPEAL ARE SIMILAR TO AY 2010-11 (ITA N O. 4914/M/2017). ITA NO. 4845/M/2017 & ORS M/S USV PRIVATE LIMITED 39 34. FACTS BEING IDENTICAL, OUR DECISION FOR THE AY 2010-11 APPLIES MUTATIS MUTANDIS TO AY 2011-12. TO SUM UP, FOR AYS 2010-11 AND 2011-12, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED, WHEREAS THE APPEAL FILE D BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 05/03/2021 SD/- SD/- (SAKTIJIT DEY) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; DATED: 05/03/2021 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSISTANT REGISTRAR) ITAT, MUMBAI
