ACIT, Chandigarh V. M/s Nectar Life Sciences Ltd., New Delhi

ITA 761/CHANDI/2011

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 1501 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 year(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 20-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Additional evidence; Initiation of penalty proceedings; Revised return; Revenue expenditure; Capital expenditure; TDS
• Section: 28; 90; 154; 92C; 139; 143(3); 92; 92E; 14A; 115JB; 133(6); 37(1); 139(5); 10B; 143(1); 264; 22

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “बी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH ी एन.के .सैनी, उपा य! एवं ी स ु धांश ु ीवा&तव, या(यक सद&य BEFORE: SHRI. N.K.SAINI, VP & SHRI. SUDHANSHU SRIVASTAVA, JM ITA NO. 761/Chd/2011 Assessment Year : 2006-07 The ACIT Central Circle-II, Chandigarh Nectar Life Sciences Ltd. 401, 2 nd Floor, Greater Kailash-II New Delhi PAN NO: AABCS6468G Appellant Respondent ITA NO. 598/Chd/2012 Assessment Year : 2005-06 The DCIT Central Circle-1, Chandigarh Nectar Life Sciences Ltd. 1596, Bhagirath Place, Delhi-110006 PAN NO: AABCS6468G Appellant Respondent ! " Assessee by : Shri Sudhir Sehgal, Advocate # ! " Revenue by : Shri Sarabjeet Singh, CITDR $ % ! & Date of Hearing : 31/05/2022 '()* ! & Date of Pronouncement : 01/08/2022 आदेश/Order PER N.K. SAINI, VICE PRESIDENT These two appeals by the Department are directed against the order dt. 29/03/2012 and 28/02/20211 of the Ld. CIT(A) XX, New Delhi for the A.Y. 2005-06 and of the Ld. CIT(A) XVI, New Delhi for the A.Y. 2006-07. 2. Since the issues involved are common and the appeals were heard together so these are being disposed off by this common order for the sake of convenience and brevity. 2 3. At the first instance we will deal with the appeal in ITA No. 598/Chd/2012 for the A.Y. 2005-06. 4. Following grounds has been raised by the Department in this appeal. i) Whether on the facts of the case and in law Ld. CIT (A) was right in allowing the deduction of Rs.21,39,774/- on account of deferred revenue expenditure as claimed by the assessee, even though the said claim is not allowable u/s 37(1) of the IT. Act, 1961? ii) Whether on the facts and in the circumstances of the case Ld. CIT (A) was right in allowing the deduction of Rs. 17,50,244/- on account of pre- payment Charges paid to IDBI as claimed by the assessee, even though the said claim is not allowable u/s 37(1) of the IT. Act, 1961? iii) Whether on the facts of the case and in law Ld. CIT (A) was right in accepting the additional evidence in contravention to Rule 46A for determination of Arms Length Price following the Transactional Net Margin Method (TNMM)? iv) Whether on the facts of the case and in law Ld. CIT (A) was right in deleting the addition made due to determination of ALP by the TPO and determination of Arms Length Price following the Transactional Net Margin Method (TNMM) igorning the comparable companies suggested by the TPO in the remand report and accepting the companies suggested by the assessee, which are also found to be manufacturing different types of products? v) Whether on the facts of the case and in law Ld. CIT (A) was right in allowing the claim of non taxability of dividend of Rs. 10,24,05,617/-received from its Sri Lankan subsidiary. 5. Vide Ground No. (i) the grievance of the Department relates to the deduction of Rs. 21,39,774/- on account of deferred revenue expenditure allowed by the Ld. CIT(A). 6. The facts related to this issue in brief are that the assesse filed the return of income on 31/10/2005 declaring an income of Rs. 14,31,15,060/- which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’) on 21/08/2006 at the declared income. Later on the case was selected for scrutiny. 3 6.1 During the course of assessment proceedings the AO noticed that Schedule-XIII of the balance sheet revealed that the assessee had written off deferred revenue expenditure to the tune of Rs. 21,39,774/-. The AO asked the assessee to explain the nature of the deferred revenue expenditure and to show cause as to why the same may not be disallowed. 6.2 In response the assessee submitted that it had deferred the following revenue expenditure: (a) Advertisement and Publicity (foreign) Rs. 15,99,564/- (b) Foreign Travelling Rs. 9,55,849/- Rs. 25,55,413/- It was stated that even though the expenditure so incurred was of revenue in nature but keeping in view the nature of expenditure so incurred the management of the assessee company had expected to derive benefit over a period of five years and therefore those expenses had been deferred as per the Accounting Policy regularly followed by the assessee company and made the claim of such expenditure as deduction equal to 1/5 th of such expenses. It was submitted that a major part of the expenses was incurred by the assessee company in the A.Y. 2001-02 and the claim was accepted by the Department for the said A.Y. as well as A.Y. 2003-04. The reliance was placed on the following case laws: 1. ACIT Vs. Amtrex Appliance Ltd. (2005) 94 TTJ (Ahd.) 396. 2. Hindustan Allumunium Corporation Ltd. Vs. CIT 144 ITR 474 (Cal.). 3. CIT Vs. Jagatjit Industries Ltd. 287 ITR 46 (Del.). 4. Madras Industrial Investment Corpn. Ltd. Vs. CIT 225 ITR 802 (SC). 5. CIT Vs. A.R.J. Security Printers 264 ITR 266(Del.). 6. DCIT Vs. United Vanaspati Ltd. 88 ITD 313. 6.3 The AO however disallowed the expenses by observing as under: The submissions made by the assessee were examined n light of the decision of the court cases cited by the assessee and the facts of the case. The above said expenditure has been disallowed in the case of the assessee for the AYr . 2004-05 . For the reasons mentioned in the Assessment Order for the A.Yr 2004-05 the above said expenditure is disallowed for the A.Yr. under consideration . It may be 4 mentioned that the Indian Income Tax Act does not provide for deferrment of any expenditure except for certain expenses like the preliminary expenses which is specifically provided u/s 35 of the I.T.Act . Section 37(1) of the I.T.Act has specifically laid down certain conditions: 1. The expenditure should not be in the nature described u/s 30 to 36 of the I.T.Act. 2. It should not be in the nature of capital expenditure. 3. It should not be personal expenditure of the assessee. 4. It should have incurred in the previous year. 5. It should be in respect of business carried on by the assessee. 6. It should have been expended wholly and exciusiveiy for the purpose of such business. 7. It should not have been incurred for any purpose which is in offence or is prohibited by any law. In view of the above, tne assessee has not complied with one of the conditions laid down in the provisions of Section-37(1) of the I.T.Act that the expenditure should have been incurred by the assessee in the previous year i.e. assessment year under consideration. Therefore, the assessee's claim of deferred revenue expenditure of Rs 21,39,774/- is disallowed and added back to the total income of the assessee. Moreover, the assessee has not submitted any details of the expenditure to show the exact nature of expenditure. 7. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under; In this connection it is submitted before your honour that Id Addl C1T has disallowed the expenditure so claimed only because disallowance has been made by the AO in assessment year 2004-05. The Id. Addl. C1T before making the disallowance has not appreciated the fact that addition so made has been directed to be deleted by Id C1T(A) XVI, New Delhi vide order dated 21/11/2008 in case of A. No. 118/2006-07. Copy of said order was filed before Id Addl. CIT vide our letter dated 08-12-2008. Copy of CIT (A) XVI order for assessment year 2004-05 is enclosed herewith at page no of this paper book. It is further submitted before your honour that during the year under consideration assessee company has deferred following revenue expenditure incurred during the year:- (a) Advertisement & Publicity (Foreign) Rs. 15,99,564/ (b) Foreign Travelling Rs. 9,55,849/- Rs. 25,55,413/ Although the expenditure so incurred was of revenue in nature but keeping in view of nature of expenditure so incurred the management of the company had expected to derive benefit of such type of expenditure over a period of 5 years 1 here fore these expenses has been deferred accordingly as per accounting policy regularly been followed by the company and made claim of such expenditure as deduction equal to 5 one-fifth of such expenses. Apart from 1/5 claim of these expenses, Assessee Company has also claimed 1/5 of deferred revenue expenditure carried forward from preceding assessment years. Claim of deferred revenue expenditure has also been clarified in para 7 (Miscellaneous Expenditure) of Schedule XXI of Annual Accounts filed with return of income. In this connection it is further submitted before your honour that expenses was of revenue in nature and not disputed by assessing officer. Major part of expenses was incurred by Assessee Company in the assessment year 2001- 02. Expenses was incurred for foreign traveling expenses and exhibition expenses etc. and keeping in view of its enduring benefit nature it was decided by assessee company to claim the said revenue expenses equally in five assessment years. The claim of expenses so made was also examined by Addl. Commissioner of Income Tax Range 9, then assessing officer in A.Y. 2001-02 i.e. in the year of incurrence of expenditure and accordingly expenses as claimed by assessee company was allowed. Copy of assessment order for assessment year 2001-02 along with reply filed is annexed herewith for your honour's ready reference. Assessment for subsequent assessment year i.e for A.Y.2003-04 had also been completed u/s 143(3) of the IT. Act. Copy of said order is also enclosed herewith. The Id Addl Commissioner of Income Tax. without appreciating the correct facts of the case, and without considering the view and claim of assessee company treating the expenditure so incurred as deferred revenue expenditure, accepted by the revenue authorities in preceding assessment year, has disallowed the expenditure so claimed arbitrarily." 7.1 The Ld. CIT(A) after considering the submissions of the assessee observed that during the A.Y. 2001-02 the assessee had incurred major expenses on foreign travel, exhibition and other revenue expenses, the assessee company decided to defer the claim of those expenses in order to show the improved and realistic position of the assessee company which in turn would help in availing credit facility from the bank and by keeping in view of the enduring nature of those benefits the assessee decided to claim the expenses in five assessment years starting from A.Y. 2001-02 which had been accepted by the AO and same was also accepted for the A.Y. 2003-04. The Ld. CIT further observed that the assessee had followed this policy consistently and it was as per the accounting practice followed. The Ld. CIT(A) referred to the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT [1997] 225 ITR 802 (SC) and the decision of the ITAT 6 Ahmedabad Bench in the case of Asstt. CIT Vs. Amtrex Appliances Ltd. (2005) 94 TTJ (Ahd.)396. The Ld.CIT(A) also followed the decision of the ITAT Delhi Bench ‘F’ in ITA No. 450/Del/2009 wherein vide order dt. 13/08/2009 it was held as under: 19. On considering the submissions of both the parties and going through the orders of the authorities below, we find that the C1T (Appeals) by placing reliance on the relevant decision (supra) referred to in his order, on the basis of uncontroverted finding of facts recorded therein, has rightly allowed the claim of the assessee. Consequently, the ground no, 1 of the appeal of the revenue is rejected." 7.2 The Ld. CIT(A) by following the aforesaid decision of the ITAT Delhi Bench held that there was no justification in disallowing the deferred revenue expenses. 8. Now the Department is in appeal. 9. The Ld. CIT DR reiterated the observations made by the AO and strongly supported the assessment order dt. 08/12/2008. 10. In his rival submissions the Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the Ld. CIT(A). It was further submitted that this issue is squarely covered by the decision of the ITAT Delhi Bench ‘F’ in ITA No. 232/Del/2009 in assessee’s own case for the A.Y. 2004-05 copy of the said order was furnished which is placed on record. 11. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that an identical issue having similar facts has already been decided in favour of the assessee vide order dt. 13/08/2009 in ITA No. 232/Del/2009 for the A.Y. 2004-05 in assessee’s own case and the relevant findings have been given in para 16 to 19 of the said order which read as under: 16. On appeal the CIT (Appeals), after considering the detailed submissions of the assessee, the case law referred to in his order, as well as, on considering the assessment order passed by the Assessing Officer, directed the Assessing Officer 7 to allow 1/5 th of the deferred revenue expenditure as claimed by the assessee in the year Under consideration while observing as under: " During the assessment year 2001-02, the appellant had incurred major expenses on foreign traveling, exhibition and other expenses of revenue in nature. Directors of the Company alongwith the auditors of the appellant company decided to defer the claim Of these expenses in order to show the improved and realistic position of the company, which in turn would help in availing credit facilities from the bank. Keeping in view of there enduring nature, the appellant decided to claim the revenue expenses in five assessment years starting fro A.Y. 2001-02. As mentioned by the appellant, the appellant claimed 1/5 of these expenses in the assessment year 2001-02, the same were examined by the A.O. and allowed in the year of . occurrence. Similarly in the assessment year 2003-04 the claim of these expenses was allowed by the A.O. after examination. In the assessment years Of A.Y. 2001-02 AND 2003-04 THE Assessing Officers had examined that these expenses were of revenue nature and thereafter, they had allowed 1/5 of these expenses and remaining expenses were taken to the deferred revenue expenditure. The appellant claimed that this had been done in accordance with the accepted accounting practices, approved by ICAI and in view of the decision of the Hon’ble Apex Court in the case of madras Industrial Investment Corporation Ltd. Vs. Commissioner of Income Tax (1997) 225 ITR 802 (SC), wherein it was held that "Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in Ms books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year... There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period." Similar view was held by the jurisdictional High Court in the case of Commissioner of Income-tax vs. Jagatjit Industries Ltd. (287 ITR 46)(Del.) and ITAT Ahmedabad Bench in the case of Asstt. CIT Vs. Amtrex Appliances Ltd. (2005) 94 TTJ (Ahd) 396 quoted by the appellant and discussed, supxa. Further, the Applant had claimed deferred Revenue Expenditure in the preceding assessment years and same were allowed by the A.O. In view of the above, I agree with the contention of the appellant on this issue. Accordingly, the AO is directed to allow 1/5 th of the Deferred Revenue Expenditure, as claimed by the appellant, in the instant year.'" 17. Before us, learned DR for the revenue except placing reliance on the order of Assessing Officer was not able to controvert the factual findings recorded in the order of CIT (Appeals). 18. On the other hand, learned AR for the assessee placing strong reliance on the reasoning given in the order of CIT (Appeals) submitted that the CIT (Appeals) rightly allowed the claim of the assessee. 19. On considering the submissions of both the parties and going through the orders of the authorities below, we find that the CIT (Appeals) by placing reliance on the relevant decision (supra) referred to in his order, on the basis of 8 uncontroverted finding of facts recorded therein, has rightly allowed the claim of the assessee. Consequently, the ground no. 1 of the appeal of the revenue is rejected. So respectfully following the aforesaid referred to order of Coordinate Bench of the ITAT, Delhi, we do not see any merit in this ground of the Departmental appeal. 12. Vide Ground No. (ii) the grievance of the Department relates to the deduction of Rs. 17,50,244/-on account of pre payment charges paid to IDBI, allowed by the Ld. CIT(A). 13. The facts related to this issue in brief are that the assessee had written off pre payment charges to the tune of Rs. 17,50,244/-. The AO asked the assessee to show cause as to why the same may not be disallowed. In response the assessee submitted that during the F.Y. 2002-03 the assessee company had prepaid term loan of IDBI since rate of interest was very high. But as per the pre payment guidelines of IDBI, the term loan was repayable in three years i.e 2002- 03 and 2004-05. It was claimed that since the pre payment charges were in the nature of Revenue Expenditure, the same had been amortised over a period of three years over which the loan was repayable and accordingly an amount of Rs. 17,50,244/- was debited to P&L Account in each of the three years i.e; A.Y. 2003-4, 2004-05 and 2005-06. It was further stated that the Department had accepted the claim of the assessee for the A.Y. 2003-04 however the AO had disallowed the claim for the A.Y. 2004-05 . The AO had not find merit in the submission of the assessee and made the disallowance by observing as under: The submissions made by the assessee have been considered on merits and facts of the case. The assessee has claimed pre-payment charges over a period of three years by treating it as deferred revenue expenditure. However, following the same principal as on the issue of deferred revenue expenditure discussed above, pre-payment charges are disallowed and added back to the income of the assessee as there is no provision in the Income Tax Act providing deferment of any expenditure except for certain expenses like preliminary expenses and that the assessee has not complied with one of the conditions laid down in the previsions of Section-37(1) of the I.T.Act that the expenditure should have been incurred by the assessee in the previous year i.e. assessment 9 year under consideration. The above said expenditure has been disallowed in the case of the assessee for the AYr . 2004-05 . For the reasons mentioned in the Assessment Order for the A.Yr 2004-05 the above said expenditure is disallowed for the A.Yr. under consideration . Therefore, the assessee's claim of pre-payment charges of Rs 17,50,244/- is disallowed and added back to the total income of the assessee. 14. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under: "In this connection it is further submitted before your honour that Id Addl. CTT ii has also not appreciated the correct facts of the case and disallowance of expenditure is made arbitrarily. This issue had also been examined by |j assessing officer in assessment year 2003-04 while completing the assessment u/s 143(3) of the IT. Act. During the course of assessment proceedings It was explained to the assessing officer that assessee company was enjoying two different term loans from IDB1 attracting the higher interest rate of 14%. During the assessment year 2003-04 the assessee company negotiated with Vijaya Bank 17, Barakhamba Road, New Delhi who agreed to take over the term loan of assessee company with IDB1 at an attractive and reduced rate of interest of LIBOR + 2% which at that stage of time was working at 4% approximately. On negotiation with 1DB1, the IDBI was agreed for take over of term loan by Vijaya Bank for which Rs. 52,50,728/- was charged for prepayment charges for 2 16 years being for the remaining period of payment of term loan. Therefore it is decided by the assessee company to divide and claim the prepayment charges over the period of 3 years. Accordingly Rs. 17,50,242/- was claimed by assessee company in 3 assessment year starting with assessment year 2003-04." 14.1 The Ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing in para 4.4 and 4.5 of the impugned order as under: 4.4. In this connection it is also submitted that AO has disallowed the expenditure so claimed only because disallowance has been made by the AO in assessment year 2004-05. CIT(A)-XVI, New Delhi vide order dated 21/ 1 1/2008 in case of A. No. 118/2006-07 has held that this is an allowable expense. The matter travelled up to the ITAT. In its order dated 13.08.2009 (ITA No. 450/Del/2009) HonTale ITAT has held as follows: "25. We have gone through the orders of tax authorities below and find that the well reasoned and well discussed order of CIT (Appeals) based on uncontroverted findings of facts and rightly applying the ration of the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. (supra) does not call for any interference from our side and consequently the same is upheld. The ground No. 2 of appeal of the revenue is rejected." 10 4.5. Since the issue in this year is also the same i.e. allowability of amortization expenses which is allowed is earlier years (as decided by the Hon'ble ITAT in the assessee's own case for the AY 2004-05), this ground of the appeal is allowed in favor of the appellant. The AO is directed to delete the addition made in this regard. 15. Now the Department is in appeal. 16. The Ld. CIT DR reiterated the observations made by the AO and strongly supported the order passed by him. 17. In his rival submissions the Ld. Counsel for the assessee submitted that this issue is squarely covered in favour of the assessee vide order dt. 13/08/2009 in assessee’s own case in ITA No. 232/Del/2009 for the A.Y. 2004-05. 18. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the assessee’s appeal for the A.Y 2004-05 in ITA No. 232/Del/2009 in assessee’s own case wherein the ITAT Delhi Bench ‘F’ allowed the claim of the assessee’s vide order dt. 13/08/2009 and the relevant findings are being given in para 22 to 25 of the said order which read as under. 22. On appeal, the CIT (Appeals), considering the submissions of the assessee and observation of the Assessing Officer in the assessment order, deleted the impugned disallowance of Rs. 17,50,242/- made by the Assessing Officer while observing as under: "It is seen that appellant has made this payment of IDBI for repaying loan before stipulated date. This prepayment charges are for swapping the loan with Vijaya Bank. This swa pping was done with aview to reduce the interest burden. The IDBI was charging 14% of interest rates for the corporate loan of Rs. 1047.75 lacs. During the F.Y. 2002-03, the appellant negotiated with Vijaya Bank, Barakhamba Road and the bank agreed to swap the term loan of Rs. 1047.75 lacs with an interest rate of LIBOR + 2% whereas the prevailing interest rate at that time was LIBOR + 4%. By doing so, the appellant was able to saves substantial amount on interest costs. However, fro swapping of this loan with Vijaya Bank, IDBI charged Rs.52,50,728/- for prepayment charges for 2½ years being the remaining period of payment of term loan. This amount was spread over for a period of three years. Accordingly, The claim was made in A.Y. 2003-04 and the same was allowed by the A.O. This expenditure was incurred to save the interest costs for the company and wholly and exclusively for the purposes of the businesses. If the appellant had not done so, it would have paid interest on term loa n @14% for the A.Y. 2003-04 and subsequent years. Since the expenditure has been incurred wholly and exclusively for the business purposes and same has been divided for in three 11 years. Keeping in view the ratio laid down by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. Commissioner of Income Tax (1997) 225 ITR 802 (SC)(Supra), the expenditure is fully allowable." 23. Before us, learned DR for the revenue simply placed reliance on the reasoning given in the order of Assessing Officer but was not able to controvert the finding of facts recorded in the order of CIT (Appeals). 24. Whereas, the learned AR for the assessee placed strong reliance on the reasoning and the case law referred to in the order by the CIT (Appeals) and submitted that the CIT (Appeals) has rightly deleted the disallowance. 25. We have gone through the orders of tax authorities below and find that the well reasoned and well discussed order of CIT (Appeals) based on uncontroverted finding of facts and rightly applying the ratio of the decision of the Apex Court in the case, of Madras Industrial Investment Corporation Ltd. (supra) does not call for any interference from our side and consequently the same is upheld. The ground no.2 of appeal of the revenue is rejected. So respectfully following the aforesaid referred to order dt. 13/08/2009 in assessee’s own case in ITA No. 232/Del/2009 for the A.Y. 2004-05, we do not see any merit in this ground of the Departmental appeal. 19. Ground No. (iii) & (iv) are correlated and pertain to the deletion of the adjustment made by the AO on account of International Transaction. 20. The facts related to this issue in brief are that the assessee company was engaged in the manufacturing of both oral and sterile range of antibiotics. It had a 100% subsidiary at Sri Lanka by name Chem Pharma Pvt. Ltd. which manufactured drug intermediates. The assessee purchased intermediate products from its Sri Lankan Associated Enterprise (AE), the International Transaction related to the purchase of raw material was amounting to Rs. 6,95,54,400/-. The assessee had used Comparable Uncontrolled Price (CUP) method to justify that the said International Transaction was at arm’s length. The assessee furnished report in Form No. 3 CB under section 92E of the Act relating to International Transaction alongwith return of income. The AO in accordance with the provisions of Section 92 CA(3) of the Act made a reference to the Transfer Pricing Directorate for computation of arm’s length price for the 12 International Transaction entered into by the assessee company with its AE. The assessee produced CUP data before the TPO as under: Material Name Purchase from Associate Purchase from Uncontrolled parties Qty (Kg) Avg. Rate per Kg Qty. (Kg) Avg. Rate per Kg Cefotaxime 39450 5333.71 7475 5351.51 ATCA 13825 6614.20 6075 7674.98 GVNE 15547 13495.34 200 13869.62 MICA Acid 10150 3731.72 1775 2678.13 As a secondary evidence, the assessee also produced quotation from other raw material suppliers to show that the price paid by the assessee was lesser than price quoted by the unrelated parties. However the TPO rejected the price quotes submitted by the assessee by holding that Rule 10B(1)(a) did not allow use of such quotes. The TPO held that the rule for using CUP method envisages the use of comparable price which had been charged or paid and not which was likely to be charged or could be charged. 20.1 On primary CUP data the TPO observed that the assessee had made purchases only from one unrelated party i.e; M/s Chemical Resources, Panchkula, Haryana and that too the purchases were made only in the month of March 2005. The TPO issued notice u/s 133(6) of the Act to M/s Chemical Resource, Panchkula, Haryana and obtained the information regarding the transactions between the assessee and the said company. In response M/s Chemical Resources stated that they had not sold the above four products mentioned in Table-1 to any other party except to the assessee and incidentally these chemicals were sourced from M/s Chem Pharma Sri Lanka which is an AE of the assessee. The above four chemicals were purchased in the month of March, 2005 itself and the purchases made by M/s Chemical Resources from the assessee’s AE in the month of March 2005 were as under; Material Name Purchase Price paid by M/s Chemical Resources (Uncontrolled party) 13 Qty (Kg) Avg. Rate per Kg Cefotaxime Acid 7475 5268 ATCA 6075 7540 GVNE 200 13627 MICA Acid 1775 2656 20.2 The TPO used the average rate of the four chemicals purchased by M/s Chemical Resources from the AE of the assessee as CUP and compared the yearly average prices of those four chemicals purchased by the assessee from its AE. The TPO in his order dt. 23/09/2008 stated as under: “since the assessee itself has used the average prices for the whole year for comparability purposes and has not discharged its primary onus of providing month to month comparable prices, therefore the prices for month of March 2005 paid by the unrelated party to the AE of the assessee are compared with the average yearly prices paid, by the assessee" 20.3 The assessee stated to the TPO that the quotations from unrelated parties should be accepted as valid CUP. It was further stated that the prices of the chemicals fluctuated during the year and that the price of some of the chemical had fallen internationally in the month of March 2005. However the TPO did not accept the submission of the assessee and made a best judgment fixing of ALP based on the ALP of two chemicals. The relevant part of the order of the TPO read as under: "In view of the above-mentioned position only an estimate, based on best judgment can be made keeping in view the information already available. Consequently, it is reasonably estimated that the average percentage by which the assessee has overpaid for imports of Cefotaxime Acid and Mica Acid should be benchmarked to calculate the ALP in respect of these imports. On a percentage basis it is seen that the variation in prices by 1.2% and 28.81% in the prices of Cefotaxime Acid and Mica Acid, respectively. The average works out to 15% and therefore the prices of the imports worth Rs. 14.52 crs. will be accordingly adjusted downwards. The adjustment on this account works out to Rs. 2,1 7,90,532/ -. The T.P.O recommended the total adjustment of Rs. 3,52,96,048/- (Rs. 1,35,05,516/- for Cefataxime Acids and Mika Acids and Rs. 2,17,90,532/-on other 14 miscellaneous items). The A.O accordingly enhanced the income of the assessee by Rs. 3,52,96,048/- on account of adjustment in arm’s length price in respect of excess cost prices paid by the assessee company to its AE for Cefataxima Acids & Mika Acids amounting to Rs. 1,35,05,516/- and Rs. 2,17,90,532/- on account of other miscellaneous items. 21. Being aggrieved the assessee carried the matter of the Ld.CIT(A). 22. During the course of appellate proceedings before the Ld. CIT(A) the assessee submitted fresh set of bills in respect of Mica Acid to prove the fact that there was variations in its price during the A.Y. 2005-06. The Ld. CIT(A) sought remand report on this issue from the TPO and also asked to check the authenticity of the assessee’s claim that whether the rates of Mica Acid had fallen from February, 2005 onwards by making relevant enquiries from the parties who had purchased Mica Acid in India and from other market sources. In response the TPO in her remand report dt. 09/10/2009 stated as under: “It is submitted that 06 sales bills of Mica Acid showing sales made by independent parties to independent entities in India as well as abroad are fresh evidence in the case, not produced during the course of hearing to the TPO. The sales bills provided by the assessee were verified, and from the detailed scrutiny of the same, it is seemed that the rates of Mica Acid had been fluctuated/ fallen from 'Feb 2005 onwards. Before the TPO, the assessee itself however stated vide reply dated 19.08.2008 that no printed price list is available. The TPO has at length discussed the available information, reliance is thus placed on TPO's order." 22.1 The assessee also furnished the submissions on the observations made by the TPO in the order under section 92CA(3) of the Act, which had been incorporated by the Ld. CIT(A) in para 5.9 of the impugned order the same are reproduced verbatim as under: "(i) TPO has calculated addition by comparing yearly average sale rates of Chempharrna Pvt. Ltd. to Assessee Company with average sale rates of Chempharma Pvt. Ltd. to Chemical Resources in the month of march, 15 where as CUP method provides that comparison should be made for purchases made by assessee company from associate enterprise and from other comparable uncontrolled transaction. Thus the very basis of making addition by TPO is not correct and not as per any of the methods provided U/S 92C of the I.T. Act. 'The TPO to determined the arm length price has compared the price paid by Chemical resouces to Chempharma Pvt Limited. (li) 'The comparison of average price of March with the average price paid by Assessee Company to its AE for the purchases made during the whole year, made by the TPO is also not correct under the circumstances when price of the product was fluctuating and. varying on day to day/ month to month basis. Further without prejudice to our objection on average price of month of march paid by unrelated party to Chempharma Pvt Limited taken by TPO to work out the arm's length price of the whole year transaction of assessee company with its AE we would also like to submit that basis of addition by TPO is also not correct on account of following reasons:- (iii) Section 92C deals with computation of arm's length price in relation to an international transaction. Thus transaction can consists of number of purchases. The ID TPO has compared rates of 4 items, in which rates of 2 items were higher and rates of 2 items were lower and. he has considered only those two items where prices were higher and ignored the other two items where prices were lower for addition. When average price is taken by the TPO he must have considered the overall price paid by the assessee company for all the four items instead of taking the two items. In an international transaction, TPO has to calculate arm's length price for transaction as a whole and not partially. The reference made in the provision of law in respect of international transaction refers to the whole transactions and not a single transaction of a particular item or transactions of a single Hem for the whole year. This fact is also very much clear from the CBDT instruction no. 3 dated 20-05-2003 wherein it has been instructed to make a compulsory reference to TPO to determine the Arm's length price where aggregate value of international transactions exceeds Rs. 5.00 crore. Similarly in Instruction no.2/2003 was issued for scrutiny and for reference to TPO in cases where the assessee had entered into an international transaction whose commutative value exceeds Rs. 5.00 Crore. Since reference was made to the TPO for the commutative value of international transactions therefore TPO must have determined the arm's length for the international transaction as a whole not item wise. The overall price paid by the assessee company in respect of 4 items taken altogether is less than the price which might have been paid by the chemical resources to Chempharma Pvt Limited as evident from the annexure A attached herewith. (iv) Even only for the argument purpose, if working of the TPO for addition of Rs. Rs.1,35,05,516/- on purchase of Rs.55,02,01,298/-, in para (i) above is accepted, even then addition so made by TPO is also not justifiable and no addition should be made. Addition so made on the value paid by the assessee company comes to 2.45% ivhich is within the per missible limit of 5 % as per CBDT Circular No. 12/2001 dated 23.08.2001 which provides that "The assessing officer shall not make any adjustment to the arm's length 16 price determined by the tax payer, if such price is upto 5% less or upto 5% more than the price determined by the assessing officer. In such cases, the price declared by the tax payer may be accepted." In view of above CBDT circular, no addition is called for. This is also important to mention here that at the one hand TPO is ignoring the items for which less price is paid by the assessee company and on the other hand for determining the arrn,s length price total addition is taken into consideration as a whole. (w) Word "the price charged or paid" used in rule 1 of U)B(l)(a) should be interpreted and read in the true sense and exhaustive manner and not in the literal meaning. The Id. TPO has rejected the quotations taken by the assessee company from various independent outside country suppliers before entering into the transaction with its AE only on the literal interpretation of language used in the rule 1 of 10B(l)(a). The transfer pricing officer was under obligation to accept the quotations price under the circumstances when no price paid was available for the month in which transaction with AE is taken place, from uncontrolled parties and notices under section 133(6) sent by the TPOto various uncontrolled parties have drawn a blank. (v) The observation of TPO in para 4.6.that "the assessee has used the average of the purchases price paid by in respect of impunged raw material over the full financial year with the price paid to Chempharma is also not correct under the circumstances when quotations from independent parties were for the months in which price is paid to the AE and price quoted by these independent parties were higher than the price paid to the AE and not disputed by TPO and assessing officer. (vi) This is also important to mention here that Assessee Company has paid lesser price in the month of March, 2005 to its AE than the price paid to Chemical resources or price paid by Chemical resources to Chempharma Pvt Limited. (vii) TPO himself has observed in para 5.1 that " quotations have no sanctity whatsoever, considering that the end price of any material would differ from that due to factor that quantity, period of credit transportation costs etc while on the other hand he has compared the price of different month average with the price of different months when prices used to fluctuate and vary depending upon numerous factors and Chemical resources has purchased lesser quantity and price paid by assessee during the period of purchase made by Chemical resources is on lower side. (viii) In para 4.1 TPO at the one hand has observed that " The reply of the assessee did appear to be strange since every business advance planning is done with regard to purchases based on expected sales" and on the other hand he has rejected the quotations price which has been examined and negotiated by the managing director/directors/CEO of the company for making the purchases of raw material at lower price with suitable terms and conditions as observed by AO in para 5.1 and hence TPO is not justified in rejecting the explanation and other various 17 documents furnished by the assessee company to grrive at Arm's length price in view of provision of section 92C of the IT. Act. (ix) The observation of assessing officer that 'the assessee has not given specific reply regarding the query about the use of the price paid by M/s Chemical resources to Chempharma Private Limited' is also not correct. During the course of proceedings it is explained to TPO that price paid in the month of Feb/March can not be used to compare the price of whole/independent month under the circumstances that price paid by the company to Chempharma Private Limited is lesser than the price paid by M/s Chemical resources to Chempharma Private Limited' (x) In para 7 assessing officer has observed that transaction of Rs. 14,52,70,213/- have not been benchmarked and he has asked to show cause as to why a best judgment assessment should not be made with reference to the determination of ALP. In this connection it is submitted that assessee companyhas obtained the quotations for the items as referred in para 7 of TPO order as done for purchase of other raw materials. He has accepted the quotation obtained by the assessee company for other items in support of benchmarking under CUP although same is rejected, while working the arm's length price But for the items of Rs. 14,52,70,213 he has rejected the quotations for bench marking for the reason best known to him. (xi) To make the adjustments downwards for the transaction of Rs. 14.52 Crores assessing officer has adopted the average percentage of the items for which allegedly higher price is paid by the assessee company as worked out by the TPO ignoring the overall price paid by the company to its AE. TPO must have used in best judgment assessment, weighted average method, which is more scientific and realistic TPO has worked out disallowance is Rs. 135.06 Lacs on purchases of Rs.2482.86 Lacs, which comes to 5.44% by using weighted average method. If we consider addition @ 5.44% of balance purchase items of Rs. 1452.70 Lacs (which comes to Rs.79.03 Lacs) also, even then total addition comes to Rs.214.09 Lacs on total purchase of Rs.6954.71 Lacs, which works out to 3.08%, which is within 5% limit of CBDT Circular No. 12/2001. ( x i i ) F u r t h e r i f we apply the same percentage of 2.45% as worked out in clause iv above on balance misc.. purchase items of Rs. 14,52,70,213/'- then total addition comes to Rs. 1,70,64,636/- (35,59,120 + 1,35,05,516) on total purchase of Rs. 69,54,71,511/= which comes to 2.45% of international transaction and is with m the permissible limit. (xiii) Regarding the observation of the TPO that purchase made by chemical Resources only from M/s Chempharma and in the month of March 2005 itself and then resold the appellant company raises question about the genuineness and purpose behind the transaction and perhaps assessee company has entered into the non-related transaction only with a view to subsequently justified the purchase prices from its AE under the TP provision of IT Act. This observation of the assessing officer is also not correct. M/s Chemical Resources is regular supplier of the raw material to the appellant company. Apart from the purchase refered by TPO other purchases has also been made. So far as doubt of the assessing officer 18 that assessee Company has entered into the non-related transaction only with a view to subsequently justified trie purchase prices from its AE under the TP provision of IT Act is concerned, in this connection it is submitted that if intention of appellant company was malafi.de then appellant company might have entered into the such transaction for other items. As a matter of fact AE of the appellant company was committed to supply of said raw material to Chemical Resources in the month of March 2005 accordingly rawmaterial was supplied to Chemical Resources. Since appellant Company was in the urgent need of the said material therefore the same was purchased from the Chemical Resources. The Id TPO failed to appreciate that a person will not pay t he higher price for his own product. Since appellant company could not able to get the said raw material from, its AE on urgent need therefore said raw material was purchased from Chemical Resources. M/s Chemical resources is also assessed to tax with the department. (xiv) Regarding the reason given by the assessing officer that quotations taken from the independent parties could not be materialize is concerned. It is submitted before your honour that Assessee Company like government department has called upon the quotations from the prospective sellers to purchase the raw material. Since price of AE was much lesser than the price quoted by the independent parties therefore purchases were made from the AE. Every prudent business man will approach to the party which has quoted lower price and will pay the lesser price of a product o f its needs. Therefore the. observation of the assessing officer that merely obtaining the quotations without any purchase has no relevancy and is not acceptable to determine the arm's length pace is not correct. As per AO's observation if appellant company might have purchased a negligible quantity even a Kg from these prospective sellers, then he might have accepted the arm's length price determined by the appellant company. Your honour will also appreciate that in the government department the purchases are made from the parities who has quoted the less price and this process of making the purchases has wide recognition all over the world and has also been accepted by GAG. Apart from our above, submission, alternatively it is also submitted before your that if any addition account of adjustment made by TPO in the arms length price is to be made it should be made above the difference of 5 % being the arm's length price is being determined on the basis of estimation only. Reliance in this connection is also made on the decision of Delhi High Court in case of Sony India (P.) Limited v. CBDT 12006] 157 Taxman 125 (Delhi) and board circular no. 12/2001. Your honour's kind attention is also drawn towards the decision of ITAT (Mum) in case Dy. CIT v. Rohm and Hass (India) Pvt Ltd wherein it has been held that even where it. was an admitted position that assessee was dealing only with non resident company and was having close connection with that non-resident company because assessee company was a wholly owned subsidiary of that non-resident company still for application of section 92 it have to be established that business between resident assessee company and non-resident company was so arranged that business transaction between them produced to resident either no profit or less than ordinary profit. 19 In the appellant case the business with its AE has been carried out in the normal course. In the case of Mentor Graphics (Noida) Pvt Limited v Dy. CIT [2007; 109 ITD 101 (Delhi) it has been held that Transfer pricing is not an exact science, evaluation of transaction through which process of determination is carried is an art where mathematical certainly is indeed not possible and some approximation can not be ruled out, yet it has to be shown that analysis carried was 'judicial' and was done after taking into account all relevant facts and circumstances of the case. In view of above discussions and submissions made your honour is requested to direct the assessing officer to accept the arm lenghth price determined by the appellant company and cancel the arm's length price and order under section 92CA(3) OF TPO. Regarding the ground of appeal no. 5 in respect of direction of TPO to initiate and impose the penalty under section 271BA and 271G of the I.T Act for non maintenance and non production of documents as per referred sections with respect to the international transaction worth Rs. 14,52,70,213. In this connection it is submitted that all the necessary documents as required under the provisions of the Act was maintained by the assessee and filed/produced as and when required by TPO. More eve all the necessary documents prescribed under rule 10D of the Income Tax rules was maintained and submitted/produced before TPO and has also been observed by TPO in para 1 and para 2.1 of order under section 92CA(3) as under :- Para 1 "The documents prescribed under rule 10D of the Income Tax Rules was submitted and placed on the record." Para 2.1 "The assessee has used the CUP Method to justify the arms length nature of the transaction with it's A. E. In support, of the same, documents were filed by the assessee as prescribed under Rule 10D. The above said observation of TPO in the transfer pricing order is contrary to the recommendation made. It is further stated that in this case proceedings before TPO was finally completed number of times without any further query and then again office of TPO used to call the appellant company for further discussion but it has never been pointed out that transaction of Rs. 14,52,70,213/- has not been bench marked for the determination of arm's length price. Simply because he has rejected the quotations for the transaction worth Rs. 14.52,70,213/- therefore it appears that he has recommended to initiate the penalty under above referred provisions of law. Audit report has also been filed and is matter of record. In the audit report it has been certified by the auditor that appellant company has maintained the records as prescribed under the Income Tax. Rules in respect of determination of arm length, price therefore Id TPO is not justified in recommending the initiation of penalty proceedings under section 271BA 20 and 271G of the IT Act. Now penalty has also been imposed for which a separate appeal has also been filed. In view of above mentioned facts and circumstances of the case your honour is requested to allow the grounds of appeal no. 3 to 7 of the appellant company." 22.2 The assessee also furnished two more sets of evidence before the Ld. CIT(A) and contended that in view of the inadequacy of CUP data as held by the TPO and also due to the fact that quotation submitted were treated as unacceptable, either Profit Split Method (PSM) or Transactional Net Margin Method (TNMM) be accepted the additional evidences. The assessee submitted to the Ld. CIT(A) as under: "1. Regarding determination of arm's length price of international transaction as already been explained, that appellant company has used CUP method and has bench marked the international transaction on the basis of quotations received from independent parties. During the course of appellate proceedings before your honour's predecessor we have also filed certain copies of bills of actual transaction of independent parties in evidence that price of mica acid was declined drastically and price of product of assessee used to fluctuate depending upon the international overall market condition. Your honour's predecessor has also furnished those bills to TPO for his comments after verification of bills. The Id TPO in her remand report dated 09-10-2009 has admitted that rates of MICA Acid had been declined and fallen. Accordingly addition so made may please be deleted. 2. Further adjustments of Rs. 25,93,048/- made by TPO on purchase of Cefotaxime Acid of Rs 21,04,15,349/= works out to be 1.23% (falls within permissible range of 5%) and therefore should be deleted. 3. Adjustments of Rs 2,17,90,532/- on Misc items has been made by TPO in para 7,8 and 9 of the order by adopting the simple average method {(1.23%+28.81%)/2} of differences in rates of Cefotaxime Acid and Mica Acid. This is an adhoc addition is made by TPO without any scientific basis and also without giving any show cause on the adjustments made by TPO and thus giving any opportunity to the appellant company to revert the adjustment so made and method so adopted by TPO. In this connection this is further stated before your honour that appellant company now has also benched marked the international transaction on the basis of other methods as prescribed under rule 10B of The Income Tax Rules, 1961 which is much more appropriate method than the method adopted by the Id TPO. Since there was no occasion for the appellant to discuss the same with the TPO as no proper opportunity was given, your honour is therefore requested to admit the evidences furnished herewith in respect of determination of arm's length price in view of other methods 21 available as per rule 10B as an additional documents, under ride 46A of the Income Tax Rules, 1961. Profit split method: This method, is used by the appellant company now, because the independent enquiry conducted by Id. TPO to verify the independent rates of product in which international transaction was carried out by appellant company, has resulted, in blank as various pharma company from whom enquiry is conducted by Id TPO has denied, having dealt with the items in. which international transaction took place between appellant company and its AE. In this method we enclosing herewith following documents:- 1) Annexure 'A' in which net profits of Nectar India and Chempharma Pvt Ltd, Sri Lanka have been compared. (Actual data) 2) M/s Chempharma Pvt. Ltd , Sri Lanka was exempt from the payment of custom duty , Excise Duty and Sale Tax, because it was registered in terms of section 17(2) of the Board of Investment of Sri Lanka Law No 4 of 1978 on 18 th October 2002 .Whereas all these 3 taxes were payable in India. We are enclosing Annexure T3' where for the purpose of comparison of net profit; the following adjustments have been made to justify profits in both the companies. (a) Excise Duty @16% has been paid by Nectar in India. To make the profitability comparable, Excise Duty has been reduced from expenses of Nectar India, since Excise Duty is not payable in Srilanka. b) Custom Duty @16% has been paid by Nectar India on Import from Chempharma Pvt Ltd,Sri Lanka . Thus Custom Duty @ 16% has been added as expense on purchases by Chempharma Pvt Ltd Sri Lanka to make it comparable. After doing above adjustments, net margin of Nectar India (appellant) comes to 19.18% as compared to 14.01% of Chempharma Pvt Ltd Sri Lanka. Further Nectar India has paid CST @496 on its Domestic Sales, the effect of which has not been considered above. The appellant company keeping in view its total turnover and remuneration paid to directors of the company and other selling/administrative expenses incurred is also entitled for more profit margin for comparison of profit wliich is also not being made for sake of convenience as profit margin of appellant company is higher than its AE in Sri Lanka only after making the adjustment only on account of custom and excise duty. From the above your honour will also appreciate that that ALP determined by appellant company is also justified by Profit-Split Method also. Further the appellant, company has also compared its performance with its peer companies i.e. Aurobindo Pharma Ltd and Orchid Chemicals & Pharmaceuticals Ltd. Both these companies are listed on Stock Exchange in India and are our competitors being in identical business of bulk drug. A comparison of the same is also annexed herewith as per annexure 'C. From the comparative statement your honour will also appreciate that PUT of Nectar is 8.37 %o in comparison to PET of Aurobindo Pharma Ltd @ 22 3.70%o and Orchid Chemicals Ltd @ 4.36%. From the comparative statement your honour will also appreciate that PBT of appellant company is better than both these reputed Companies, which also shows that ALP has been arrived and calculated correctly by the appellant company in a very reasonable manner. We are enclosing the following Annual Reports for financial year 2004-05: 1) Annual Report of Nectar Lifesciences Ltd. 2) Annual Report of Orchid Chemicals & Pharmaceuticals Ltd. 3) Annual Report of Aurobindo Pharma Ltd. 4) Annual Report of Chem Pharma Pvt Ltd. I n view of above discussions and submissions made, your honour is requested to direct the TPO to accept the arm length price as determined by the appellant company and cancel the arm's length price on estimation basis determine by TPO and cancel the order under section 92CA(3) of TPO." 22.3 The Ld. CIT(A) forwarded the submissions of the assessee to the TPO on the ground that it amounted to additional evidence, the TPO in her remand report dt. 27/02/2012 made the following comments on the additional evidence: Kindly refer to your letter no.CVT(A)-XX/2011-12/583 dated 17.01.12 and 3 L O T 12 on the above subject. Subsequent to receipt of letter, the case records were traced, perused and some information was sought from the assessee vide letter no. F.NO.Addl.DIT/TPO-lI(l)/ Remand/201 l-l2 dated 10.02.12 (copy of which was endorsed to your kind self). The assessee has filed a reply letter dated 21.02.12. Copy of the same is enclosed. Based on the same remand report sought on letter dated 21.12.2011 is furnished in the following para. 2. The AR of the assessee has stated in para 1 of letter dated 21.12.2011 that the TPO in her remand report dated 09/11/2009 has admitted that rates of MICA acid had declined and therefore the addition could be deleted. However, the reference to TPO's report is only on sided. She has also referred in her report to various argument raised by the TPO in his order dated 23/09/08. Site has also stated that the assessee itself has stated vide reply dated 19.08.08 that no printed price list is available. It may be pointed out that as per rule 10(3)(c) the reliance can be placed only on price publications including stock exchange and commodity market quotations. Price publications necessarily mean publications which are in public domain and not private communications. In this case, the assessee has furnished copies of various invoices which are private communications. The main information contained in these invoices is being given below to illustrate how the same are not valid CUP:- Sl.No. Inv. Date Seller Buyer Quantity Rate-$ Remarks 1 22.01.05 Zibo Jincheng Ind. DEE Pharma, New 500 Kg. 81.18 23 Co. Ltd. China Delhi, India 2 05.02.05 Zibo Jincheng Ind. Co. Ltd. China Himant Pharam P. Ltd. Lahore, Pakistan 400 Kg. 81.93 3 05.03.05 Zhejiang Hengdian Imp. & Exp. Co. Ltd., China Zakaria-Tabriz Pharmaco Iran 2000 Kg 59.50 Overwriting in date 4 08.03.05 Zibo Jincheng Ind. Co. Ltd. China Bethulem Pharma, Addis Ababa, Ethiopia 1000 Kg. 57.53 5 26.03.05 Zhejiang Hengdian Imp. & Exp. Co. Ltd., China Phlox Pharmaceuticals Ltd. Baroda, India 2000 Kg. 60.00 Overwriting in date 6 26.03.05 Zibo Jincheng Ind. Co. Ltd. China Zakaria-Tabriz Pharmaco Iran 1500 Kg 57.00 It may be seen from the information in the above table that the copies of invoices given as proof for fall in prices of MICA acid in March 2005 belong to differing j geographies and. are for different quantities. The prices are normally higher I when the purchase is for small quantities and lower when purchased in bulk. Besides, only two invoices are in respect of purchases made by Indian parties. But these imports are from China and not from Sri Lanka, hence, they are not j exactly comparable. Prices vary a lot between medicines being manufactured by various process patents. Drug Amoxycillin-Clavulanic Acid is being sold, by Glaxo under the brand name Augmentin 625 for Rs. 40 while Mankind Pharrna sells the same drug as MOXIKIND-CV 625 for Rs.15. It is not clear from the invoices given whether the prices are for bulk drug manufactured by the same process as the prices of different manufacturers have been given. Because of the reasons given above, the fall in price of MICA acid cannot be said to be properly substantiated by the assessee. CUP data given by the assessee is private data and not from price publications. Besides, it is not for similar geographies and for similar quantities. Besides, the assessee has not demonstrated that the same is in respect of products manufactured be same process patent. Hence, the data is not comparable CUP data. 3. The assessee has quoted from page 204 of the Deloitte's book "Transfer Pricing Law and Practice in India" to state that price derived from quotation can be considered as evidence of CUP. However full page has not been given to understand the context. Besides, the same is not in consonance with the position given in rule 10D(3)(c) which required that only published data can be used. Further, the assessee has relied on pages 267 & 268 of the book "Law of Transfer Pricing in India" by Shri D.P.Mittal to substantiate the use of quotations. Though it is not possible to get the context as fill pages have not been provided; however, it is seen from the para quoted that the para states that use of data from public exchange and/or quotation medium is correct only when it routinely used in the ordinary course of business in the industry to negotiate the prices. It 24 does not help the case of the assessee as it advocates use of data even from public exchanges only when it routinely used in the ordinary course of business in the industry to negotiate the prices and not. otherwise. It is not advocating the use of quotation data from private sources and in all situations. Besides, the quotations from the books are of help to the assessee only when they explain what is laid down in Acts/ Rules and not when the authors give their own view without reference to the Rides. 4. The assessee has stated that adjustment of Rs.25,93,048/' - made by the, TPO on purchase of Cefotaxime Acid of Rs.21,04,15,349/- works out to 1.23% which falls within permissible range of 5% and hence should be deleted. It is seen that the TPO has taken price from only one party and not the arithmetic mean of prices of various parties. The range of 5% is available to the assessee only when the arithmetical mean is taken. In view of the same, the argument of the assessee is not correct. 5. The assessee was asked vide letter dated 10.02.12 to give further! evidence, if any in respect of CUP data. The assessee has not submitted any further evidence." 22.4 The Ld. CIT(A) after considering the submissions of the assessee and the remand reports of the TPO dt. 09/10/2009 and 27/02/2012 observed that the TPO had not raised any objection for the acceptability of the additional evidence. The Ld. CIT(A) referred to the decision of the ITAT Chandigarh Special Bench in the case of M/s Quark Systems Pvt. Ltd. Vs. ITO [2010-TIOL-31-ITAT-CHD-SB] wherein the assessee company M/s Quark Systems Pvt. Ltd. had chosen Datamatics Technologies Ltd. as one of its comparable company in its transfer pricing study for the A.Y. 2004-05. The TPO had also accepted the same as comparable and the Ld. CIT(A) upheld the order of the TPO with regard to the selection / rejection of comparables. However the assessee pleaded before the ITAT and stated that for various reasons Datamatics Technologies Ltd. was not comparable company and should have been rejected. The relevant portion of the said order of Special Bench read as under: 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake .in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to he preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part. 25 38 Accordingly on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has sh o w n it's prima facie case. Further claim may he examined by the Assessing Officer. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the Assessing Officer for consideration of claim of the taxpayer and make a de novo adjudication of the arm's length price after providing reasonable opportunity of being heard to the assessee. We order accordingly." 22.5 The Ld. CIT(A) after considering the submission of the assessee and the remand report of the TPO observed that the assessee had brought fresh evidence in the form of PSM / TNMM. He further observed that the assessee was solely depended on CUP data and quotations as CUP, hoping that the same would be accepted by the Department. According to him the fact of the assessee’s case were similar to that of M/s Quark Systems Pvt. Ltd. He therefore by following the decision of the Special Bench of ITAT in the case of M/s Quark Systems Pvt. Ltd. admitted the additional evidences. 22.6 The Ld. CIT(A) observed that the assessee had produced quotations for the chemicals from the third parties as a CUP data for the chemical imported from its AE, and the TPO had rejected the same. The Ld. CIT(A) agreed with the decision of the TPO that the quotation could not be used as a CUP data and that the quotation submitted by the assessee were not obtained in an open tender. He further observed that Rule 10B(1)(a)(i) specified that the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of such transactions to be the basis of comparison. He further observed that in the commercial reality, quotation is only first step of negotiation for the price and other terms and condition of delivery. From the stage of quotation to the stage of completed transaction the price defers based on geographical location, terms and condition of delivery, 26 warranty, quantum/volume of transaction, transportation cost etc. Therefore quotations as such cannot be accepted as a completed transaction and since the Rule mandates to take “price charged or paid” from completed transaction. He therefore agreed with the decision of the TPO in not accepting the quotations as CUP data. 22.7 The Ld. CIT(A) further observed that the TPO was constrained to take the available CUP data which was the invoices of third parties of the completed transactions for bench marking the International Transactions. However, it was important to note that CUP data were not available for all the four varieties of chemicals in question, imported from the assessee’s AE and that the assessee imported Cefrotaxime Acid, ATCA, GVNE and MICA Acid among others which were intermediate products for producing drugs in India. However, the TPO used the price paid for only two chemicals in the month of March, 2005 by a third party as CUP and compared the same for entire transaction of 12 months in four different chemicals, arrived at the price differences in Cefotaxime Acid & MICA Acid paid by the assessee and reduced the price paid by the assessee to its AE. As a consequence a sum of Rs. 1.35 crores was added to the income of the assessee on account of transaction of those four chemicals. 22.8 The Ld. CIT(A) observed that the evidence produced by the assessee for fall in the price of chemicals in the month of March 2005 were sent to the TPO who in remand report dt. 09/10/2009 has opined that the rate of Mica Acid had been fluctuated, fallen from February 2005 onwards. However in the subsequent remand report dt. 27/02/2012 , the TPO has revisited this issue and stated that the data provided by the assessee was not based on any publicly available data like commodity market quotation or price publication and those were based on private communications. Therefore the earlier opinion of the TPO was to be qualified. 27 22.9 The Ld. CIT(A) also observed that the invoices of only two chemicals were used to benchmark the transactions of four different chemicals. These were not comparable because of their distinctive characteristics and prices, as could be seen from the data presented, the value of those four chemicals were varying from Rs. 2656 to Rs. 13627 per Kg and this variation in price per kg multiplied by thousands of kilogram leads to huge difference in the value of imports among the four chemicals in question. Therefore, in a CUP method, comparing dissimilar products was not acceptable. The Ld. CIT(A) pointed out that the TPO in para 7 of her order mentioned that the imports of various materials from its AE amounting to Rs. 14,52,70,213/- was not benchmarked at all by the assessee. Therefore the TPO made a best judgment assessment and calculated the ALP of the 10 different chemicals. The basis of the calculation was that the variation in prices of Cefatoxime Acid and Mica Acid was 1.2% and 28.11% as compared to the ALP determined in those two chemicals and therefore the average of those two, which worked out at 15% was taken as a percentage to adjust downwards the import prices of the 10 chemicals imported from its AE as a consequence Rs. 2.17 crores were added to the income of the assessee on account of transactions in those 10 chemicals. So this method also suffers from comparing uncomparable chemicals on the one hand and using an average variation between the ALP and the actual price in two different chemicals and hence the same as the variation in the ALP of the 10 different chemicals. The Ld. CIT(A) pointed out that the ALP of the two chemicals were arrived at by taking the independent third party invoices for the March 2005 and compared to the whole year International Transaction of the assessee. Therefore this method i.e; CUP method suffered from multiple infirmities. Accordingly the Ld. CIT(A) held that with the available data, CUP could not have been used as a most appropriate method in this case. 22.10 The Ld. CIT(A) mentioned that the assessee had submitted that in none of the subsequent years the TPO had made addition and accepted the CUP as 28 most appropriate method. The Ld. CIT(A) was of the view that if the CUP data was not sufficient to cover all the transactions, it was but natural that it had to be rejected for the year under consideration. The Ld. CIT(A) observed that as an alternative the assessee had submitted that PSM should be used as supplementary method. The said submission was sent to the TPO for the remand report. In response the TPO in his remand report dt. 27/12/2012 stated as under: “5. The assessee was also asked vide letter dated 10.02.12 to establish how profit split method (PSM) is a suitable method in this case as normally PSM is the most appropriate method in cases involving complex transactions wherein both parties have complex functions and contribute with intangibles. The assessee has replied vide letter dated 21.02.12 that PSM is the most appropriate method in complex transactions, however, it cannot be said that it cannot be used in other cases. In absence of proper data for other methods, the use of PSM may be justified. However, it is seen that the assessee has applied PSM in a strange manner. It has recalculated the net profit margin % for the units in India and Sri Lanka under hypothetical tax conditions and. compared the same to justify the net profit margin % of the Indian unit. This is not the correct way of applying PSM. In PSM, global profit on a set of transactions are determined and then apportioned on the basis of FAR analysis of the assessee and AK. In this case it is seen that the Sri Lnakan unit (M/s Chempharma) has sold its finished products of Rs. 69.54 crores out of total sales ofRs.79.96 crores :he Indian unit. Even the balance has been sold to M/s Chemical Resources which had in turn sold to the Indian unit and which was attempted as a proof of " by the assessee but was foiled by the investigations made by the TPO as described in his order. So the entire sales can be said to have been made by the Sri Lankan unit to the Indian unit. These purchases are about 50% of the total raw materials of Rs. 155.03 crores consumed by the Indian unit. Since, the same form about 50% of the total transactions of the Indian unit about 50%) of the profit of the Indian unit can be said to be arising out of trie transactions with the Sn Lankan unit. This view is being taken also in view of the fact that the value addition as seen from the %o of manufacturing expenses to sales is much more in case of Indian unit (4.60%)) than for Sri Lankan unit (1.56%). Hence, consolidated profit on account of transactions which are integrated transactions involving transactions botli in Indian unit and in Sri Lankan unit becomes Consolidated profit on account of integrated transactions = 50% profit of India unit from operating activities + 100% profit of Sri Lankan unit from operating activities. = 0.5x(1848.18 -1072.31*) + (1965.37-30.92) = 0.5x 775.87 + 1934.45 = Rs. 2322.385 lakhs * "Miscellaneous income mainly comprising of dividend from Sri Lankan unit is not operational income and therefore the same has been reduced from the net profit. 29 6. In the FAR analysis of the Indian unit and Sri Lankan unit, it can be seen following functions can be attributed to Indian and Sri Lankan unit:- Functions Indian Unit Sri Lankan Unit R & D Function Yes, as it is the main co. which has set up the subsidiary in Sri Lanka with its expertise and is also manufacturing value added product. No, as the unit has been set up only to manufacture chemicals and with the help of Indian unit. Manufacturing function Yes. But the value addition is more in Indian unit. Yes. But the value addition is less in Sri Lankan unit. Marketing function Yes, as the products manufactured by the Indian unit need to be sold to outside parties No, as shown above, all the chemicals manufactured by this unit are purchased directly or indirectly by the India unit.** ** It is seen that the Indian unit has spent Rs.533.95 lakhs on selling & distribution. Sri Lankan unit has spent Rs.270.21 lakhs on selling & distribution out of which 90% has been spent on Export charges. This also contradicts the assessee's claim that Sri Lankan unit has not paid any taxes. 7. As far as the assets used are concerned, Indian unit has gross block of assets of Rs. 101.17 crores as compared to gross block of 8.6 crores of Sri Lankan unit. Liven after taking in to account, the difference in sales of the two units, the. asset intensity of the Indian unit is 4.2 times more than that of Sri Lankan unit. 8. As far as the risks are concerned, following risks can be attributed to Indian and Sri Lankan unit: Type of risk Indian Unit Sri Lankan Unit Business / Market risk Yes, since the products are being sold to outside parties, the Indian unit is subject to market risk. No, as the unit has been set up only to manufacture chemicals for supply to Indian unit. It is assured of sale of its products. Inventory risk Yes, as it has to carry inventory No, as the products are shipped to Indian unit as soon as the same are manufactured. Product liability risk Yes, as the APIs are being supplied to formulation cos. for drug formulations which required stringent quality control, To a limited extent as the Sri Lankan unit supplies only chemicals and that too to a related unit. Credit & collection risk Yes, as the products manufactured by the Indian unit need to be sold to outside parties from which collection is not assured. No, as all the chemicals sold by this unit are purchased directly or indirectly by the Indian unit, a related unit. 30 9. It can be seen from the FAR analysis that most of the functions are being performed by Indian unit. Indian unit has more asset intensity. Besides, the' Indian unit is subject to more risk. In view of the same, 70% of consolidated profits need to be attributed to Indian unit and 30% of the consolidated profits need to be attributed to Sri Lankan unit. Hence, the profit of Sri Lankan unit should be Rs.696.72 lakhs. Since, because of the price set for products, the profits of Sri Lankan unit are much higher at Rs. 1934.45 lakhs (excluding misc. income). Hence, an adjustment of Rs.1237.73 lakhs is warranted on account of PSM." 22.11 The Ld. CIT(A) forwarded the remand report of the TPO to the assessee for comments and the assesse vide submissions dt. 10/03/2012 stated as under: "Further Id TPO has stated that appellant company has not applied PSM in the correct way and he has also tried to use PSM method on the presumption of profit earned by the appellant company on international transaction in the ratio of purchases made from its AE with total purchase made and has tried to establish that 50% of the profit of the Indian unit can be said to be arising out of the transactions with Sri Lankan Unit. Further in para 6 to 9 Id TPO considering the various aspects has apportionate the consolidated net profit worked out by him in the proportion of 70% to Indian Unit and 30% of Sri Lankan Unit. Further TPO has stated that export charges paid by the appellant company contradicts the assess’s claim, that Sri Lankan Unit has not paid any taxes. In this connection it is submitted before your honour that at the one hand TPO has admitted that PSM is not. applicable in the case of appellant and on the other hand without determining the profit correctly, he has worked out the profit on presumption basis which is also not permissible under the law. The appellant company in the comparison made of net profit has also made the comparison to prove that profit earned by the appellant company is much higher than the profit earned by its AE. The allegation of Id TPO that Sri Lankan Unit has paid the taxes against the claim of appellant that no tax is paid, in this connection it is clarified before your honour that Export charges of Sri Lankan includes the following nature of expenses which cannot he said to be taxes paid by Sri Lankan Unit: (i) Hank Charges and Interest on exports Rs. 13417144 (ii) Clearing and Forwarding Charges on export Rs. 40444254 In view of above nature of expenses your honour will appreciate that the above observation of TPO is factually incorrect because no taxes has been paid on the exports by the Sri Lankan company. This is further stated before your honour that TPO has randomly recalculated the consolidated profits and its apportionment of 30% profits to Sri Lanka and 70%) profits to Indian operations ivithout considering the following facts: 1. About 50% of the manufacturing process was done in Sri Lanka and process of manufacturing by both the unit can also be evaluated separately. 2. There was no import duty on raw material and excise duty on sales in Sri Lanka, hence to this extent, the profits of Sri Lankan Unit should be higher. 31 3. 3. TPO has assumed uniform profitability on products from Sri Lanka and Products manufactured by Nectar from domestic purchase which is not correct. Product manufactured by the Appellant Company from the product of Sri Lankan Unit and domestic purchases are different and can be evaluated separately and therefore Id TPO is also not justified in estimated the net profit. In view of above mentioned facts Id. TPO is also not justified in determining the arm's length price on determining the consolidated net profit of both the unit on estimation basis and further allocating such consolidating the net profit on estimation and with the wrong presumption ignoring the process involves, other factors and tax benefits to Sri Lankan Unit. In view of above your honour is requested not to accept the adjustment proposed by Id TPO on wrong presumption and wrong method." 22.12 The Ld. CIT(A) after considering the remand report of the TPO and the comments of the assessee observed that in the absence of a clear analysis of the functions performed, assets employed and risk undertaken by the entities (FAR analysis), attribution of profit, the PSM was not possible. 22.13 The Ld. CIT(A) pointed out that the submission of the assessee lacked the FAR analysis. However the fact that the Sri Lankan unit of the assessee had an indirect tax advantage to the extent of 16% in Excise Duty and 16% Custom Duty also could not be denied and that the assessee had claimed its duty benefit while calculating the PSM and the TPO in his remand report did not agree with this and that the ratio of distribution of profits between the assessee and the Sri Lankan entity was also highly questionable. Therefore the Ld. CIT(A) held that the PSM was also not an appropriate method in this case. Accordingly the contention of the assessee to use PSM was rejected. 22.14 The Ld. CIT(A) mentioned that the assessee had also submitted a TNMM analysis in its submission dt. 21/12/2011 and compared this case with that of M/s Aurobindo Pharma Ltd. and Orchid Chemicals Pharmaceuticals Ltd. which were the peer companies of the assessee, both were listed in the stock exchange 32 and competitors in the bulk drug industry. The Ld. CIT(A) mentioned that the TPO in the remand report dt. 27/02/2012 raised the following objections: 10. The assessee has also compared net profit margin of the Indian unit with s Orchid Chemicals and M/s Aurobindo Pharrna. However, it has not specified any reasons for choosing only these companies as the comparable companies. The process of selection is not transparent. There are several companies in this segment which come to my mind which may be correct comparables e.g. Arch Pharmalabs, Dwi's Lab, Sequent Scientific, Shasun Pharrna, Wanbury etc. However, the companies should be selected on the basis of transparent criteria and should not be picked randomly. In view of the same, it is requested that the margins of M/s Orchid Chemicals and M/s Aurobindo Pharrna should not be given any consideration." 22.15 The aforesaid objections were forwarded to the assessee for comments. In response the assessee stated that the companies mentioned by the TPO were not comparable because those were in different line of products and the assessee was mainly in the bulk drug category. The assessee furnished following chart through its submission dt. 10/03/2012 as under: COMPANY Therapeutic Area/ category Manufacturing of Cefixime API NECTAR LIFESCIENCES Antibiotic (mainly Cephalosporins) Yes Aurobindo Antibiotic (wide range), Yes ORCHID Chemicals Antibiotic (mainly Cephalosporins & Penicillins), Carbapenems, and others Yes Arch Pharmalabs Lipid Lowering Agent (Atrovastatin), Calcium Channel Blocker, Anti Platelet Agent, Anti hypertensive Anti angina, Anti Asthmatic Anti Histamine Anti Diabetic, Anti Protozonal Anti Fungal, Oncology, Analgesic, Anti gout Anti Retroviral Anti parkinsonian, Hypnoticchostimulant, Anti Convulsant Anti Depressant, Anti emetic, Proton pump inhibitor, Expectorant, Decongestant No Wanbury Anti diabetic Anti Analgesic, Anti Histaminic, Inflammatory, Anti depressant,Anti Thrombotic, No 33 Anti Hypertensive, Anti Viral, Anti Epileptic, Anti Inflammatory, Anti Arthritis, Anti diabetic, Anti Psychotic, Anti Ulcer Shasun Pharma Pain management & Musculoskeletal, Hyperphosphataemia, Central Nervous system, Gastrointestinal, Anti-Infective (Cycloserine, Chlorphenesin) NO Sequent Scientific Anthelmintic, artemisinin- based combination therapy(ACT), Cancer and Viral Therapy, antipsoriatics, Antivirals, Immune Response modifier, Anesthetic Adjunct No Divi’s Lab Antidepressant, Anti-cancer, Antihistamine, Antitussive, Parkinson’s disease, Antineoplastic, Antianginal, antiarrhythmic(class IV), antihypertensive, analgesic, antipyretic, anti-inflammatory, Antiarthritic, Antihyperlipidemic, Angiotensin II receptor and other related. No It was further clarified by the assessee as under : Let us put first three companies viz. Nectar Life sciences, Aurobindo Pharma and Orchid Chemicals in GROUP A and all the other companies viz, Wanberry, Shasun Pharma, Divi's Lab, Sequent Scientific in Group B. If we compare, GROUP A, these companies are manufacturing Antibiotics Cephalosporin range of products All these Cephalosporins produced by these companies come under niche product categories and require dedicated facility for manufacturing as the processes are complex. These companies procure / produce and require more or less similar type of raw materials for their manufacturing like 7ACA, GCLE, Mica acid and others for the manufacturing of Cefixime, Cefuroxime Axetil and Ceftriaxone Sodium Sterile and. other products. One the other hand, Companies under GROUP B don't fall in the same segment as that of GROUP A. Group B companies have multi-purpose manufacturing plants and can manufacture different type of products of different therapeutic categories with the same facilities on campaign basis. For example - For Atorvastatin, a Cardiovascular Agent, the raw material required are Tri-ethyl- borane, Sodium borohydride and 2.3-DI-AMINO-NAPPIT1IALENK. Also for 34 another category - antidiabetic segment- Metformin, the API - Metformin HCl is oduced using dirnethylamine and 2-cyanoguanidine. This is further stated before your honour that suppliers of raw materials for CROUP A companies are very few in number while for raw material consumed by Group B companies are being offered by numerous suppliers. Also the usage of drugs products by Group A companies varies widely as compared to the usage of Drugs produced by Group B companies. Cephalosporins are mainly used to treat infections in different parts of the body—the ears, nose, throat, lungs, sinuses, and. skin while the companies under Group B mainly cater to the treatment of life style diseases like Alzheimer's disease, Type 2 diabetes, heart disease, metabolic syndrome, stroke, depression, obesity and many others. So, In view of above explanation, Group B companies don't fall under the same segment as Group A and neither they have the similar complex process of manufacturing and therefore appellant company has rightly compared its results with the companies in group A. In view of above your honour will appreciate that to justify the arm's length bench marking done by appellant company under cup method and to justified, that price to AE has been paid at arm's length price, comparison with the companies in the same group is done by appellant company and your honour from the comparable data given will also appreciate that profitability of the appellant company is higher than the other group manufacturing company and therefore wrong adjustment in the arm's length price has been made by Id TPO and therefore your honour is requested to delete the unjustified adjustment and addition so made and oblige." 22.16 The Ld. CIT(A) after considering the objection of the TPO and the submissions of the assessee observed that the assessee had not able to justify its International Transaction based on CUP because of lack of availability of exact CUP in this case and the best judgment decision of the TPO was not acceptable because on the basis of a limited number of invoices of one particular month, the entire International Transaction of the whole year could not be benchmarked and that the average method which the TPO had used was also not correct specially when most appropriate method used was CUP. 22.17 As regards to the PSM method as suggested by the assessee, the Ld. CIT(A) observed that as pointed out by the TPO, this method suffered from lack of proper FAR analysis. The question of treatment of absence of custom duty and excise duty in Sri Lanka was also contentious, therefore, the PSM could not 35 be used as a most appropriate method. Accordingly the TNMM was considered to be most appropriate method. 22.18 The Ld. CIT(A) observed that the company chosen by the assessee as comparables were in Indian market and those two companies namely, M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. were in bulk drug category. The Ld. CIT(A) further observed that the assessee manufactured Cefixime API (Active Pharmaceutical Ingredient) which was also manufactured by those two comparables companies who were the competitors to the assessee in the open market. Therefore the aforesaid two companies should be taken as comparables. The Ld. CIT(A) reproduced the comparable chart of financials furnished by the assessee (which was also sent to the TPO for his remand report) at page no. 39 and 40 of the impugned order as under: (Rs in Lacs) Particulars Nectar Lifesciences Aurobindo Pharma Ltd. Orchid Chemical Ltd. Sales 22068.85 115917.00 64978.55 Other income 1072.31 1656.00 3950.89 Increase in FG Stocks 174.93 1324.00 23316.09 118897.00 68929.44 Raw Materials Consumed 15503.29 65744.00 29562.55 Manufacturing Expenses 1016.81 15640.00 6667.56 Excise Duty 2385.48 7415.00 1138.70 Personnel Expenses 436.13 6622.00 5459.95 Administrative Expenses 194.32 4944.00 5888.15 Financial Expenses 779.02 3999.00 7231.00 Repair & Maintenance 40.87 1606.00 Selling & Distribution 533.95 4586.00 3959.73 Depreciation 577.43 4049.00 6189.19 Preliminary Exp. W/o 0.62 0.00 21467.92 114605.00 66096.83 Profit Before Tax 1848.17 4292.00 2832.61 PBT % of Sales 8.37% 3.70% 4.36% 36 On the basis of the aforesaid chart the Ld. CIT(A) observed that the said chart was based on the published financial results as per the profit and loss account of the companies and revealed that all the three companies i.e; the assessee and the aforesaid two comparables were in the similar range of turnover. The assessee had a turnover of Rs. 220 crores for the year and the comparables, namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. were having turnover of Rs. 1160/- crroes and Rs. 650/- crores respectively. Therefore even in terms of size of the operation they were similar. The Ld. CIT held that those two companies were comparable companies to the assessee and as the meanmargins of the other two comparables were less than the margin earned by the assessee (PBT/Sales) the International Transaction of the assessee should be held as at arm’s length and addition made due to the determination of the ALP by the TPO should be deleted. Accordingly the addition made by the AO was deleted. 23. Now the Department is in appeal. 24. The Ld. CIT DR reiterated the observations made by the TPO in his order dt. 23/09/2008 passed under section 92CA(3) of the Act. It was further submitted that the assessee itself applied CUP method and adopted its own CUP data for benchmarking of the International Transaction with its AE i.e; Sri Lankan entity. However before the Ld. CIT(A) the assesse submitted that CUP method was not the most appropriate method and the TNMM should be adopted. The assessee also furnished the additional evidences before the Ld. CIT(A). On the direction of the Ld. CIT(A), the TPO applied the TNMM method and apart from comparables chosen by the assessee had also considered other comparables for determining the ALP. However the Ld. CIT(A) considered only two companies namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. as comparables. It was stated that the Ld. CIT(A) was not justified in rejecting other five comparables considered by the TPO and that the addition 37 made by the AO on the basis of the recommendations of the TPO, was wrongly deleted by the Ld. CIT(A), the same may be restored. 25. In his rival submissions the Ld. Counsel for the Assessee, reiterated the submissions made before the authorities below and further submitted that the assessee company owned 100% of the shares of its Sri Lankan subsidiary i.e; M/s Chempharma Pvt. Ltd.(AE)from which the assessee was importing various drug intermediates used in the production of the oral and sterile range of antibiotics manufactured by the assessee company. During the year relevant to the A.Y. under consideration the assessee company entered into International Transaction for purchase of raw material with the AE and was required to bench mark for determining the ALP as per the transfer pricing provisions of the Act. The asessee chosen CUP method as a most appropriate method and claimed the International Transaction entered into by it with its AE at arm’s length. It was submitted that since the price paid to AE was lower than the price paid to non AE. Therefore, the International Transactions entered into with AE were at arm’s length. It was stated that the assessee company filed quotations from other raw material suppliers, to show that the price quoted by other parties were higher than the rates at which the same material was purchased from the AE. Therefore, the international transactions was at arm’s length. However the TPO did not agree with the submissions and the evidence furnished by the assessee and made an arbitrary adjustment of Rs. 3,52,96,048/- on account of differences in ALP of the International Transaction. 25.1 The Ld. Counsel for the assessee stated that when the matter was taken to the Ld. CIT(A) certain defects were noted in the benchmarking of prices of the transactions taken both by the assessee as well as the TPO while using the CUP method. Therefore in order to achieve reasonable basis of comparing the transactions, the assessee furnished additional evidences from time to time in the form of fluctuation in price of the material i.e; Mica to supplement its CUP data. It was submitted that the Ld. CIT(A) was well within its power to accept 38 additional evidences and there had been no contravention of Rule 46A for the reasons that each time when any sort of additional submission / evidene had been furnished by the Assessee, the same was forwarded to the TPO for her examination and comments by giving due opportunity. Reference was made to para 5.7 & 5.8 of the CIT(A)’s order. It was further submitted that the submissions made during the first appellate proceedings relating to calculation of ALP, two additional methods being PSM and TNMM were send to the TPO and her comments were called for, during the remand proceedings, the TPO called for additional information from the assessee which were duly provided as had been mentioned in para 5.11 of the impugned order. It was stated that the Ld. CIT(A) categorically stated in para 5.12 of the impugned order that the TPO in her both the remand reports did not raise any objection on the acceptability of additional evidences furnished by the assessee and had provided her comments only on merits, therefore, there was no reason for the Department to agitate the issue of admission of additional evidence by the Ld. CIT(A), particularly when the Ld. CIT(A) followed the judgment of the Special Bench of ITAT Chandigarh in the case of Quark Systems Pvt. Ltd. reported at 132 TTJ 1 wherein on similar facts the ITAT allowed the assessee to take fresh argument of dropping of comparable company for the purpose of Transfer Pricing Benchmarking which was earlier taken by the assessee as well as the TPO and the additional evidences were accepted. The said judgment of the Sepcial Bench of ITAT had subsequently been approved by the Hon’ble Punjab &Haryana High Court vide its decision dt. 16/05/2011 in ITA No. 594 of 2010. 25.2 It was submitted that the power of the Ld. CIT(A) are co-terminus with the powers of the AO and he functions as a Quasi-judicial authority. It was further submitted that the Ld. CIT(A) adopted all fair procedures in granting the TPO sufficient and ample opportunity to examine the evidences filed by the assessee and to submit comments on the same which had been duly done. Therefore the 39 Ld. CIT(A) rightly admitted the additional evidence and there was no contravention of Rule 46A. Reliance was placed on the following case laws: • Land Acquisition Collector, Improvement Trust Vs. Addl. CIT[(2017) 396 ITR 410 (P&H)] • CIT Vs. Mukta Metal Works 336 ITR 555 (P&H) • Tek Ram (Dead)Through LRs V/s Commissioner of Income Tax [357 ITR 133 (sc)] • Sanjeev Bajaj Vs. ITO (Chd Trib)[ITA No. 143/Chd/2016 dt. 14/09/2016] • CIT Vs. Safari Bikes Ltd. (2014) 41 Taxmann.com 282(P&) 25.3 As regards to the merits of the case, the Ld. Counsel for the assessee submitted that the assessee had initially used CUP method for determination of the ALP for purchases of four chemicals made by the assessee from its AE versus the same chemicals purchased from an independent entity namely M/s Chemical Resources. However the TPO did not accept the same and made certain adjustments and determined the ALP. It was stated that during the appellate proceedings before the Ld. CIT(A), the assessee furnished various arguments explaining the defects in the method adopted by the TPO which had been reproduced at para 5.9 of the impugned order. It was contended that the Ld. CIT(A) in para 5.16 of the impugned order had explained in detail as to why the CUP method adopted by the assessee as well as TPO failed to address the issue of determination of ALP due to the inherent defects and shortcomings listed by him, which justifies the action of the Ld. CIT(A) in rejection of the ALP as determined by the TPO. It was stated that TNMM is one of the most widely used method for determination of ALP of an International Transaction and is particularly used where the most direct methods like CUP etc. cannot be used for want of adequate data. It was stated that under this method, there is an entity level comparison to compare transaction between two independent enterprises versus transactions between AEs under similar circumstances. 25.4 As regards to the reasons for accepting the two comparable entities provided by the assessee vis a vis rejection of the comparables suggested by 40 the TPO, our attention was drawn towards chart reproduced by the Ld. CIT(A) in para 5.18.2 on page no. 36 of the impugned order wherein the similarity between the nature of products manufactured by the comparables selected by the assessee namely M/s Aurobindo Pharma Ltd. and Orchid Chemicals Pharmaceuticals Ltd. was identified whereas the other comparables were dealing in varied product lines. The reasons for selection of two comparables were given as under: - These entities are engaged in bulk drugs industry and are competitors to the assessee company and require dedicated facility for manufacturing as the processes are complex. - These companies require similar types of raw materials. - Suppliers for raw materials required by these companies are very few in number. - Comparative Financial figures chart of the above three companies reproduced on Page 39 clarifies that the companies are in the similar range of turnover and are similar in terms of size and operation. - Their respective shares of manufacturing activity in total turnover is large as that of the assessee. 25.5 It was accordingly submitted that the two comparables selected by the assessee were functionally similar to that of the assessee, whereas on the other hand the comparable suggested by the TPO were very much different in terms of their product line and they had multi purpose manufacturing plants and manufacture different types of products. The reliance was placed on the following case laws: • Honeywell Turbo Technologies (India) (P.) ltd. Vs. DCIT, Circle 1(2), Pune (2017) 78 Taxmann.com 342 • ASB International (P.) Ltd. V. ACIT- Circle-1, Mumbai, [2017] 78 taxmann.com 137 (Mumbai-Trib) • Sony India Private Ltd. (114 ITD 448)(Del) • Tevapharm Private Limited Vs. Addl. CIT, 147 TTJ 35 (Bom Trib.) It was further submitted that the parameter as per Dun & Bradstreet’s analysis, the companies can be classified into following categories on the basis of turnover filter : 41 • Large size companies – Sales more than 2000 Crore • Medium Size Firms – Sales between 200 Crores and 2000 Crores • Small size firms - Sales upto 200 Crores 25.6 It was stated that the assessee company and other two comparables namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. fall in the same category i.e medium size companies on the basis of their turnover. Therefore those were rightly selected as comparables. Reliance was placed on the judgment of the Bangalore Bench of the ITAT in the case of FCG Software Services (India) (P.) Ltd. Vs. ITO, Circle 11(2), 176 TTJ 145 (Bangalore- Trib). 25.7 It was further stated that the TPO in the remand report had alleged that the process of selection of comparables of two companies namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. made by the assessee was not transparent and random so should be rejected. In this regard it was submitted that no comparable could be rejected without justifying its exclusion by adducing cogent reasons. The reliance was placed on the following case laws : • Aztec Software & Technology Services Ltd. Vs. Asstt. CIT[2007] 107 ITD 141 (Bang.)(SB)(Mag.) • DCIT Vs. Nortel Networks India (P.) Ltd. [2016] 176 TTJ 25 (Delhi-Trib) • Yum Restaurants (India) (P.) Ltd. [2015] 152 ITR 773 (Delhi-Trib) It was accordingly submitted that the Ld. CIT(A) had rightly accepted the comparable companies adopted by the assessee and rejected the other comparables suggested by the TPO, since the mean margin earned by the assessee was better than the comparable companies therefore no adjustment in ALP was required and hence the impugned addition made by the TPO / AO was rightly deleted by the Ld. CIT(A). 42 26. We have considered the submissions of both the parties and perused the material available on the record. In the present case it is noticed that the assessee entered into an International Transactions with its AE, M/s Chempharma Pvt. Ltd. a Sri Lankan Subsidiary of the assessee. The assessee was required to determine the Arm’s Length Price (ALP) as per the Transfer Pricing provisions of the Act. The assessee chose CUP as a most appropriate method and concluded that the International Transaction entered by it with its AE was at arm’s length. However the TPO did not agree with explanation of the assessee and made an adjustment of Rs. 3,52,96,048/-. The TPO did not accept this explanation of the assessee that the purchases from the AE were at lower rate in comparison to the purchases from uncontrolled parties. When the matter was taken to the Ld. CIT(A), he pointed out defects in the bench marking of prices relating to the transaction done by the assessee company with its AE by using the CUP method. The Ld. CIT(A) also pointed out defects in the order of the TPO, due to number of reasons stated in the impugned order which have been discussed in the former part of this order, for the cost of repetition the same is not reproduced herein. The assessee in order to choose reasonable basis of comparing transactions, furnished additional evidences before the Ld. CIT(A) in the form of fluctuations in the price of the material purchsed i.e. MICA, to supplement its CUP Data and the calculation of ALP. The assessee proposed two additional method being Profit Split Method(PSM) and Transactional Net Margin Method(TNMM), the assessee furnished the relevant additional data in the form of financial statements of the comparable companies. The Ld. CIT(A) forwarded the submission of the assessee to the TPO for her examination and comments. The TPO during the remand proceedings called for additional informations from the assessee which were duly provided as had been mentioned in para 5.11 of the impugned order. The Ld. CIT(A) categorically stated that the TPO in his remand report did not raise any objection on the acceptability of additional evidence furnished by the assessee and had provided her comments on merits. 43 Therefore, we do not see any merit in this ground of the Departmental appeal that the Ld. CIT(A) was not right in accepting the additional evidences. Moreover the Ld. CIT(A) by following the judgment of the Special Bench of ITAT Chandigarh in the case of M/s Quark Systems Pvt. Ltd. Vs. ITO (supra) accepted the additional evidences in the interest of justice. In the instant case while accepting the additional evidences the Ld. CIT(A) not only adopted all fair procedure in granting the TPO sufficient and ample opportunity to examine the evidences, but the TPO also called further informations from the assessee and did not object to the additional evidences furnished by the assessee. Therefore, we are of the view that the Ld. CIT(A) was justified in admitting the additional evidence furnished by the assessee and there was no contravention of Rule 46A of the Income Tax Rule 1962. 26.1 In the present case, the Ld. CIT(A) explained in detail in the impugned order as to why the CUP method adopted by the assessee as well as the TPO failed to address the issue of determination of ALP due to the inherent defects and short comings particularly when the CUP data were not available for all the four varieties of chemicals imported by the assessee from its AE. The assessee imported Cefotaxime Acid, ATCA, GVNE and Mica Acid, however the TPO considered price paid for only two chemicals, in the month of March 2005 by third party and compared the same with four different chemicals for entire transaction of 12 months. Secondly the price of the chemicals in question had fallen in the month of March 2005 and therefore the invoices of third party relating to the purchases of those chemicals in the month of March 2005 should not have been used as a CUP for the rest of the 11 months. Thirdly, the TPO pointed out that import of various materials from the AE amounting to Rs. 14,52,70,213/- was not benchmarked at all by the assessee. The TPO made a best judgment assessment and calculated the ALP of ten different chemicals and the basis of calculation was that the variation in price of Cefatoxime and Mica Acid was 1.2% and 28.11% as compared to the ALP determined in these 44 two chemicals, therefore, the average of these two items which worked out to 15% was taken as percentage to adjust downwards the import price of the chemicals imported from the AE and accordingly adjustment of Rs. 2.17 crores was made. Therefore the method adopted by the TPO also suffered from the defect of the comparing uncomparable chemicals, using an average variation between the ALP and the actual price in two different chemicals, using the same as the variation in the ALP of the ten different chemicals. 26.2 In view of the above said discussion, we are of the view that the CUP method suffered from multiple infirmities and was not a most appropriate method for the transactions pertaining to the year under consideration. 26.3 As an alternative the assessee submitted that PSM should have been used as a supplementary method. However the TPO in his remand report dt. 27/02/2012 which has been reproduced in the former part of this order pointed out various short comings and defects particularly the absence of clear analysis of the functions performed, assets employed and risk undertaken by the entities (FAR analysis), attribution of profit. Therefore, the PSM was not most appropriate method. Accordingly the same was rightly rejected by the Ld. CIT(A). So there was no alternative except to treat the TNMM as most appropriate method. In the instant case, the Ld. CIT(A), pointed out that the TPO chose the comparables as per following details: COMPANY Therapeutic Area/ category Manufacturing of Cefixime API NECTAR LIFESCIENCES Antibiotic (mainly Cephalosporins) Yes Aurobindo Antibiotic (wide range), Yes ORCHID Chemicals Antibiotic (mainly Cephalosporins & Penicillins), Carbapenems, and others Yes Arch Pharmalabs Lipid Lowering Agent (Atrovastatin), Calcium Channel Blocker, Anti Platelet Agent, Anti hypertensive Anti angina, Anti Asthmatic Anti Histamine Anti Diabetic, Anti Protozonal No 45 Anti Fungal, Oncology, Analgesic, Anti gout Anti Retroviral Anti parkinsonian, Hypnoticchostimulant, Anti Convulsant Anti Depressant, Anti emetic, Proton pump inhibitor, Expectorant, Decongestant Wanbury Anti diabetic Anti Analgesic, Anti Histaminic, Inflammatory, Anti depressant,Anti Thrombotic, Anti Hypertensive, Anti Viral, Anti Epileptic, Anti Inflammatory, Anti Arthritis, Anti diabetic, Anti Psychotic, Anti Ulcer No Shasun Pharma Pain management & Musculoskeletal, Hyperphosphataemia, Central Nervous system, Gastrointestinal, Anti-Infective (Cycloserine, Chlorphenesin) NO Sequent Scientific Anthelmintic, artemisinin- based combination therapy(ACT), Cancer and Viral Therapy, antipsoriatics, Antivirals, Immune Response modifier, Anesthetic Adjunct No Divi’s Lab Antidepressant, Anti-cancer, Antihistamine, Antitussive, Parkinson’s disease, Antineoplastic, Antianginal, antiarrhythmic(class IV), antihypertensive, analgesic, antipyretic, anti-inflammatory, Antiarthritic, Antihyperlipidemic, Angiotensin II receptor and other related. No 26.4 The Ld. CIT(A) discussed at page no. 37 and 38 of the impugned order functioning as well as area in which the comparable were engaged. The assessee objected to selection of the comparable by the TPO and submitted that only two comparables namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. were in the same manufacturing activity in which the assessee was engaged and their turnover was also comparable with 46 that of the assessee. The Ld.CIT(A) categorically stated that the assessee was manufacturing Cefixime API (Active Pharmaceutical Ingredient) which was also manufactured by those two comparable companies who were competent to the assessee in the open market, therefore, those should be taken as comparable. The Ld.CIT(A) forwarded the comparable chart of the financial submitted by the assessee in respect of the comparables, to the TPO who in his remand report could not controvert this contention of the assessee that the three companies i.e; assessee and the two comparable namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. were in the similar range of turnover, in terms of size of the operation they were similar, therefore the Ld. CIT(A) was fully justified in holding that those two companies were comparable to the assessee and as the mean margin of the above said two comparables was less than the margin earned by the assessee (PBT / sales). The International Transactions of the assessee were at arm’s length. Accordingly, the addition made by the AO was rightly deleted by the Ld. CIT(A). We do not see any infirmity in the order of the Ld. CIT(A) on this issue. 27. Vide Ground No. (v) the grievance of the Department relates to the action of the Ld. CIT(A) in allowing the claim of non taxability of dividend of Rs. 10,24,05,617/-received from Sri Lankan subsidiary of the assessee. 28. The facts related to this issue in brief are that the AO during the course of assessment proceedings noted that the assessee had received dividend of Rs. 10,24,05,617/- which was deducted from the net profit in the computation of income. The AO observed that the computation of income filed by the assessee was not very clear, so, he asked the assessee to furnish the complete details of the investment through which such dividend was earned and the reason for payment of taxes at special rate of 20% alongwith the payment of taxes at normal rate. The A.O. also asked the assessee to show cause as to why not the disallowance under section 14A of the Act be made. 47 28.1 In response, the assessee submitted that it owned 9614165 equity share of SRL Rs. 10/- each of its subsidiary company at Sri Lanka namely M/s Chempharma Pvt. Ltd. It was further stated that based on the consultation with tax expert, in view of Article 10 of Agreement for avoidance of double taxation and prevention of fiscal evasion signed between India and Sri Lanka as per Notification No. GSR 342(E) dt. 19/04/1983 the assessee company was of the opinion that tax on dividend received from Sri Lankan company was payable either @ 15% but not more than 20%, hence the assessee company had opted to pay the tax @ 20%. The reference was made to the decision of the Hon’ble Supreme Court in the case of DCIT Vs. Torqouise Investment & Finance Ltd. reported at 2008 168 Taxmann 107 and it was claimed that no tax was payable in India. The assessee also furnished the revised statement of income and tax thereon and claimed refund of taxes paid on dividend on the basis of the judgment of the Hon’ble Supreme Court. However the AO did not accept the claim of the assessee by observing that the specific provision of section 239 of the Act prescribes that the claim of refund shall be made in the prescribed form and in the prescribed manner. He further observed that as per the provisions of section 239(2) of the Act such claim should only be filed one year from the last day of said assessment year and the limitation in the assessee’s case expired on 31/03/2007. The reliance was placed on the judgment of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT(2006) 284 ITR 0323 (SC) wherein it was held that the assessee could revise its claim before the AO only by filing the revised return under section139(5) of the Act. The AO observed that since in this case no revised return was filed and also there was no time available for filing the revised return, the claim of the assessee was not acceptable and hence rejected. 29. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and reiterated the submissions made before the AO. 48 29.1. The Ld. CIT(A) after considering the submissions of the assessee directed the AO to allow the claime of Rs. 10,24,05,617/- made by the assessee by observing in para 6.3 and 6.4 of the impugned order as under: 6.3 This matter was litigated in the subsequent assessment year i.e. 2006-07. On the same grounds, the AO has taxed the dividend income in the hands of the appellant. CIT(A)-XVl, New Delhi in her order dated 28.02.2011 has decided the matter in favor of the appellant. The relevant part of the decision of the CIT(A) is reproduced below: "1 have considered the observation made by the assessing officer in not allowing the claim of the appellant in view of the decision of the Supreme Court in the case of Goetze (India) Ltd. (supra) and have also gone through the judgment of the Hon'ble Apex Court. It has been held by Hon'ble Courts that the appellate authorities are competent to entertain claims made before them even if such claims were not made before the A.O. The principle underlying these judgments is that it is the duty of the tax authorities to make a fair estimate of the income of an assessee and if a claim is otherwise admissible, it is not to be denied only because it was not made before the A.O. or not made within time. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. us C1T (1999) 187 ITR 688 (SC) and recent decision of Delhi Tribunal in case of ACIT vs. Bharti Sharma (ITA No. 3140/Del/2007). In view of the above, I am convinced with the submissions of the appellant and deciding the issue involved on the merits of the case as under: As regards the A.O.'s stand that the appellant should have made this claim within a period of one year as laid down in section 239 of the IT Act, it may be mentioned that section 239 prescribes the time limit for claiming refunds whereas in the case of the appellant the claim has been made about the dividend income being exempt and not in regard to the refund. The A.O. has also sought to distinguish between the facts of the appellant's case and those in the case of M/s Turquoise Investment whereas the issue in both the cases was regarding the taxability of dividend income received from abroad (in case of the appellant it was received from Sri Lanka and in the case of M/s Turquoise investment it was received from Malaysia and as discussed in the preceding paragraphs, the provisions of the DTAAs with the two countries insofar as dividend is concerned are the same). It has also been stated in the assessment order that in view of the judgment in the case of M/s Kulandagan Chettiar which was pronounced in November 2007, the appellant had ample time to revise its claim of income upto 31 st March, 2008. However, the issue involved in the case of M/s Kulandagan Chettiar was the taxability of business income received from Malaysia and not dividend income and therefore facts of this case are not applicable in the case of appellant. Further, in clause 10(2) of the DTAAs with Sri Lanka and Malaysia for taxability of dividend income in the other contracting state, the word is used 'may' which can also not be read as 'shall' in view of various Court judgments and in above referred Supreme Court decision wherein it has been held that tax on dividend income can be charged in the contracting state where the same accrued. Undisputedly in case of the appellant company dividend from its Associate 49 Enterprise namely M/s Chempharma Pvt Limited accrued in Sri Lanka as it was declared in Sri Lanka. In view of the above said finding and considering the submission made by the appellant and observations of the assessing officer in the assessment order and remand report furnished for A.Y. 2005-06, I hold that the provisions of DTAA of India with Sri Lanka and Malaysia, arc similar so far as the taxability of dividend in concerned. As held by Hon'ble (SC) in case of Deputy CIT, Ujjain vs Torquoise & Finance Ltd (2008) 168 Taxman 107 (SC), "Dividend income earned by the assessee from a company of Malaysia is not liable to be taxed in the hands o f assessee in India under any of the provisions of the IT Act." I hereby direct the A.O, to allow the claim of non taxability of dividend of Rs. 120,72,78,330/- received from Sri Lankan Subsidiary Company for the purpose of computation of total income as well as calculation of Book Profits u/s 115JB. Accordingly grounds of appeal of nos. 2 to 4 of the appellant are allowed." 6.4. The issues for the AY 2005-06 and 2006-07 are exactly the same - the taxability of dividend received from Sri Lankan subsidiary company in the j hands of the taxpayer. I agree with the decision of the CIT (A)-XVI, New Delhi j in the assessee's own case for the subsequent assessment year. Apart from the j merits of the case, the consistency principle as enunciated in the ease of CIT vs LG Rarnamurthy (Madras HC) (110 ITR 453) also demands that the decision of the CIT(A) XVI should be accepted. In view of the above, on merits, 1 direct the AO to allow the claim of Rs. 10,24,05,617/- made by the appellant in this regard. 30. Now the Department is in appeal. 31. The Ld. CIT DR reiterated the observations made by the AO and strongly supported the assessment order passed by him. 32. In his rival submissions the Ld. Counsel for the Assessee strongly supported the impugned order passed by the Ld. CIT(A) and further submitted that this issue has been decided for the A.Y. 2006-07 in favour of the assessee and discussion has been made in para 3 to 3.2 at page no. 6 to 25 of the order dt. 28/02/2011. He relied on the said order of the Ld. CIT(A) for the A.Y 2006-07. 33. After considering the submissions of both the parties we think it appropriate that this issue may be dealt with the appeal in ITA No. 761/Chd/2011 for the A.Y. 2006-07 at the end of this order since the elaborate discussion has been made by the Ld. CIT(A) on the identical issue in the order pertaining to the A.Y 2006-07, the findings given for the said year shall apply with 50 the same force for the appeal in ITA No. 598/Chd/2012 for the A.Y. 2005-06 on this issue. 34. Now, we will deal with the appeal of the Department in ITA No. 761/Chd/2011 for the A.Y. 2006-07: 35. Following grounds have been raised in this appeal: 1. The Ld. CIT(A) has erred both in law and on facts of the case by allowing the deduction of Rs. 28,27,799/- on account of deferred revenue expenditure as claimed by the assessee. 2. The Ld. CIT(A) has erred both in law and on facts of the case by allowing the deduction on account of deferred revenue expenditure when the expenses incurred by the assessee on account of advertisement, publicity and foreign visit do not come within the purview of Sec. 35D of the I.T. Act. 3. The Ld. CIT(A) has erred both in law and on facts of the case by allowing the deduction of on account of deferred revenue expenditure even when they were not allowable u/s 37(1) of the I.T. Act, 1961. 4. The Ld. CIT(A) has erred both in law and on facts of the case by allowing the claim of non-taxability of the dividend of Rs. 20,72,78,330/- received from Shri Lankan subsidiary company. 5. The Appellant craves leave to add or amend the grounds of appeal on or before the appeal is heard and disposed off. 6. It is prayed that the order of the Commissioner of Income-tax (Appeals) be set aside and that of the A.O. be restored. 36. Ground Nos. 5 & 6 are general in nature, so do not require any comment on our part. 37. Vide Ground No. 1 to 3, the grievance of the Department relates to the deletion of addition made by the AO on account of deferred revenue expenditure. 38. Both the parties agreed that the facts relating to this issue for the year under consideration are similar to the facts of the issue involved in the A.Y. 2005- 06, therefore, same action to be taken for this issue as is taken for the A.Y. 2005- 06. 39. After considering the submissions of both the parties and the material available on the record, it is not in dispute that the facts related to this issue for 51 the A.Y. 2006-07 are identical to the facts involved to the issue in A.Y 2005-06 which we have already disposed off in the former part of this order, therefore, our findings given in the former part of this order on this issue shall apply mutatis mutandis. Accordingly we do not see any merit in these grounds of the Departmental appeal. 40. Vide Ground No. 4 the grievance of the Department relates to the allowing the claim of non taxability of dividend received from Sri Lankan Subsidiary company. 41. The facts related to this issue in brief are that during the course of assessment proceedings the AO noticed from the Schedules to the balance sheet that the assessee had received dividend to the extent of Rs. 20,72,78,330/- from its AE i.e; Sri Lankan subsidiary and a sum of Rs. 66,73,580/- being dividend income was claimed as exempt under section 10(34) of the Act. 41.1 During the course of assessment proceedings the assessee submitted to the AO as under: (a) during the year under consideration assessee company has received the dividend of Rs. 20,72,78,330/- from its subsidiary company at Sri Lanka. (b) At the time of filing of original and revised return of income, after discussion with the legal experts assessee company has offered the tax on the dividend income @15% to avoid the undue future tax liability, although issue 'whether dividend accrued in the country with whom the Government of India having the DTAA is taxable in India or not under any provision of the Income tax Act' was pending with the Hon'ble Supreme Court for it's final decision. (c) The Hon'ble Supreme Court has decided the issue on 20.02.2008 which is reported in [2008] 168 Taxman 107 (published after 13 th March, 2008). (d) In view of findings given by the apex court in February 2008, the assessee Company has during the course of the assessment proceedings for A.Y 2006-07 vide their submission dtd. 10.09.2009 has claimed as exempt the dividend income received from the Sri Lankan Company. The assesee further submitted to the AO as under: 52 "In this connection apart from provision of Article 10 of DTAA between India and Sri Lanka Government, your kind attention is also drawn towards CBDT circular No. 333 dated 2.04.1982 wherein it has been clarified that in case of conflict in the provisions of agreement for double tax avoidance and Income Tax Act, the provisions contained in agreement for double tax avoidance will prevail. So far as reason of not filing the revised return and claiming the refund in view of provision of section 239 for rejection of claim given by your honour in A. Y. 2005-06 is concerned, in this connection it is submitted that issue of taxability of dividend accrued in a company with whom DTTAA is executed was under dispute and was under consideration of Hon 'ble Supreme Court of India which was finally settled by the apex court vide order dated 20.03.2008 which was published and came to the notice after 31.03.2008 i.e after the time prescribed under the Act. Therefore neither revised return could be filed nor claim was made under section 239. It is also important to mention here and your honour will also appreciate that in the above referred case of Supreme Court case as relied upon no revised return of income was filed by the appellant and issue was raised for the first time before IT AT i.e. much after the time available for revising the return of income or claim of refund under section 139 and claim of assessee was allowed. The facts of the case are similar to the case of Assessee Company. " Further in this connection your honou's kind attention is drawn towards the board circular no. 68 dated 17.11.1971 in which it has been clarified by the board that where an assessee moves an application under section 154 pointing out that in the light of a later decision of the Supreme Court pronouncing of correct legal position, a mistake has occurred in any of the completed assessments in his case the application shall be acted upon, provided the same has been filed within time and is otherwise in order. Further your honour's kind attention is also drawn towards the decision of Hon'ble Supreme Court in case of Anchor Pressing Private Limited v. CIT [161 ITR159] wherein Hon 'ble Apex Court was in agreement with the contention of the assessee that if assessee is entitled for a relief it could not be refused merely because appellant had omitted to claim the relief in the return to income. Madras High Court in case of CIT vs. K.N. Oil Industries [142 ITR 13], Choksi Metal Refinery v. CIT [107 ITR 63(Guj) and Walchandnagar Industries Limited vs. V.S. Gaitonde. [44 ITR 260(Bom)]. In view of our above submission and decision of Hon'ble Supreme Court on the similar facts of the case, your honour is requested not to charge any tax at all under any provision of law including the provision of section 115JB of the I T Act on the dividend received from Sri Lankan Company and oblige. " 41.2 The AO however did not find merit in the submissions of the assessee for the following reasons: 53 (a) Section 239 of the Act prescribes that the claim of refund shall be made in the prescribed form and in prescribed manner. Also 239(2)© provides that such claim should only be filed within one year from the last day of such assessment year. In this pase the limitation has expired by 31 st March 2008. (b) Further the Hon'ble Supreme court of India in its judgment in the case of Goetze (India) Ltd. v. Commissioner of Income-tax (2006) 284 ITR 0323(SC) has held that the assessee can revise its claim before the assessing officer only by filing a revised return u/s139(5) of the Act. Since this claim has not been filed by the assessee by way of a revised return filed u/s 139(5) of the Act and also there is no time available for filing revised return the claim of the assessee is not acceptable and hence rejected. (c) The assessee company has relied on the judgement of the apex court in the/6ase of CIT Vs Torqouise Investments and Finance Ltd. (2008) 300ITR 001. However, in the case of the above said case the assessee had claimed refund amounting to Rs. 29,16,660/- on the basis of the credit of deemed TDS on dividend received from a Malyasaian Company ALONG WITH THE RETURN. The relevant facts of the case are reproduced below for better appreciation : "The assessee-respondent, hereinafter referred to as "the assessee", filed its return of income for the assessment year 1992-1993 declaring an income of Rs. 4,30,06,580 by showing its business as investment and finance, which was processed under section 143(1)(a) of the Income-tax Act, 1961 (for short "the Act"), on January 18, 1996, on the same income. Along with the return the assessee claimed refund amounting to Rs. 29,16,660 on the basis of credit of deemed TDS on dividend received from a Malaysian company Le.,Pan Century Edible Oils SDN.BHD, Malaysia. The Assessing Officer raised a demand of Rs. 1,07,370 after rejecting the credit claimed by the assessee on the basis of deemed credit on dividend received from the aforesaid Malaysian company. In the case of the assessee the claim of refund is on the basis of the revised computation of income filed during the course of the assessment proceedings on 10.09.2009 and not in the original return or the revised return filed by the assessee as in the case sighted above . The refund in the case of the assessee is claimed through revised computation during the assessment proceedings out of the payment made as self assessment tax. (d) In the submissions made by the assessee it has been claimed that the issue 'whether dividend accrued in the country with whom the Government of India having the DTAA is taxable in India or not under any provision of the Income tax Act' was pending with the Hon'ble Supreme Court for it's final decision. This claim is factually incorrect. The above said issue was well settled by the decision of the Apex Court in its judgement in the case of CIT Vs P.V.A,L.Kulandagan Chettiar (2004) 267ITR 654. Further , even the review I petition filed against the decision of this court was also dismissed on 1, November 2007. As such the issue was well settled by the apex court well before the assessee filed its revised return of income on 12 th March 2008 . Assessee failed to avail the opportunity vested by law within the prescribed time . 54 41.3 The AO accordingly rejected the claim of the assessee. 42. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and furnished the written submissions which had been incorporated in para 3.1 of the impugned order and read as under: "This ground of appeal is taken by appellant company against the charging of tax by assessing officer on the dividend income received from a Sri Lankan Company ignoring the decision of Hon'ble Supreme Court and other various case laws relied upon by the appellant during the course of assessment proceedings. The appellant company during the course of assessment proceedings vide its letter dated 10-09-2009 made a request to the Id Addl. CIT not to charge any tax on the dividend of Rs. 20,72,78,330/- received from Sri Lankan Company under any provision of I. T. Act. ' - ' In this connection it is submitted by the AR of the appellant that the Id Assessing officer has not appreciated the corrects facts of the case and has also ignored the board circular issued directly relating to the facts of the assessee's case and even the decision of the Hon, ble Supreme Court in case of Deputy Commissioner of Income Tax v. Torqouise Investment & Finance Limited[2008] 168 Taxman 107(SC) on the basis of which dividend income was claimed as exempt i.e. not liable to tax in India under any provision of I. T. Act. The Id Addl Commissioner of Income Tax has discussed the claim made by appellant company in para 3.1 to 3.4 at page no 2 to 4 of the assessment order and rejected the claim of appellant by making the following observation in para 3.5 and 3.6 of the assessment order as under:- "The above arguments of the assessee were examined carefully and the same are not acceptable on account of the following reasons:- (a) Section 239 of the Act prescribes that claim of refund shall be made in the prescribed form and in the prescribed manner. Also section 239(2)(c) provides that such claim should also only be filed within one year from the last day of such assessment year. In this case limitation has expired by 31 s ' March, 2008. (b) Further the Hon 'ble Supreme Court of India in its judgment in the case of Goetze (India) Ltd v. Commissioner of Income Tax (2006) 284 ITR 0323(SC) has held that the assessee can revise its claim before the assessing officer only by fding a revised return under section 139(5) of the Act. Since this claim has not been fled by assessee by way of a revised return fled u/s 139(5) of the Act and also there is no time available for filing revised return the claim of assessee is not acceptable and hence rejected. (c) The assessee company has relied on the judgment of the apex court in case of CIT Vs. Torqouise Investments and Finance Limited (2008) 300 ITR 001. However in the case of the above said case the assessee had claimed refund amounting to Rs. 29,16,660/- on the basis of the credit of deemed TDS on 55 dividend received from a Malasian Company alongwith the return. The relevant facts of the case are reproduced below jor better appreciation: - "The assessee-respondent, hereinafter referred to as "the assessee"' filed its return of income for the assessment year 1992-93 declaring an income of Rs. 4,30,06,580/- by showing its business as investment and finance, which was processed under section 143(l)(a) of the Income Tax Act, 1961 (for short 'the Act"), on January 18,1996, on the same income. Alongwith the return the assessee claimed refund amounting to Rs. 29,16,660 on the basis of credit of deemed TDS on dividend received from a Malaysian company i.e. Pan Country Edible Oils SDN,BHD, Malaysia. The Assessing Officer raised a demand of Rs. 1,07,370/- after rejecting the credit claimed by the assessee on the basis of deemed credit on dividend received from the aforesaid Malasiyan company. " In the case of assessee the claim of refund is on the basis of revised computation of income filed during the course of assessment proceedings on 10-09-2009 and not in the original return or revised return filed by the assessee as in the case cited above. The refund in the case of the assessee is claimed through revised computation during the assessment proceedings out of the payment made as self assessment tax. (d) In the submissions made by assessee it has been claimed that the 'issue whether dividend accrued in the country with whom the Government of India having the DTAA is taxable in India or not under any provision of the Income Tax Act was pending with the Hon'ble Supreme Court for it's final decision. This claim is factually incorrect. The above said issue was well settled by the decision of the Apex Court in its judgment in the case of CIT Vs. P. V.A.I. Kulandgan Chettiar (2004) 267 ITR 654. Further, even the review petition filed against the decision of this court was also dismissed on 1, November, 2007. As such the issue was well settled by the apex court well before the assessee filed its revised return of income on 12' March, 2008. Assessee failed to avail the opportunity vested by law within the prescribed time. 3.6 In view of above, the claim of assessee vide its revised Computation of Income filed during the course of assessment proceedings vide their written submission dated 10-09-2009 is not accepted andfresh claims are rejected. " The assessing officer has rejected the claim of appellant merely because no revised return of income with the limitation period as allowed under the Act is filed and claim is made by filing the revised computation. It is further submitted that the Id Addl. CIT has not rejected the claim of appellant company on the merits of the case and appears to be convinced with the claim of the appellant but has not acceded to the request of the appellant in view of the decision of Hon 'ble Supreme Court in case of Goetze (India) Limited vs Commissioner of Income Tax (2006) 284 ITR 323 and rejected the claim of appellant as also rejected for the same reason as in A. Y. 2005-06. Appeal filed by appellant for A.Y. 2005-06 has been heard before CIT(A) XX, New Delhi and order is awaited. 42.1 The assessee also highlighted the facts before the Ld. CIT(A) as under: 56 (i) During the year under consideration appellant company had filed its return of income declaring income of Rs. 14,99,88,355/- and the assessee company paid the tax of Rs. 2,47,08671/- under section 115JB of the IT. Act on book profit of Rs.32,94,48,947/-. Thereafter return was revised and tax of Rs. 2,42,08,513/-under section 115JB of the IT Act on the book profit of Rs.32,27,75,367/-adjusting the book profit declared in original return by the dividend of Rs. 66,73,580/- on mutual funds. (ii)Although dividend received by the assessee company was exempt from tax in Sri Lanka being the associated concern situated in tax free zone, but in view of deeming tax (aj, 15% in Sri Lanka, assessee company at the time offiling of return of income~on the basis of discussion with the legal experts and taking into consideration of double taxation agreement, was of the view that tax payable if any on the dividend so received shall not be more than 15%. after availing the benefit of 15% deeming tax in Sri Lanka, from the tax payable in India in view of provision of section 90 of the I.T. Act and accordingly has offered the tax @ 15% [30%(tax in India)-15% (tax in Sri Lanka) in the return of income]. (iii)During the course of assessment proceedings assessee company has claimed the dividend of Rs. 20,72,78,330/- received from its subsidiary company at Sri Lanka namely M/s Chempharma Pvt Limited as exempt and not liable to tax under any provision of the IT. Act in view of decision of Hon'ble Supreme Court in case of Deputy Commissioner of Income Tax v. Torqouise Investment & Finance Limited[2008] 168 Taxman 107(SC). Revised computation of income filed during the course of assessment proceeding vide our letter dated 10-09-2009 is enclosed herewith for your honour's ready reference. 42.2 The assessee also furnished the reply to the observations of the AO which is incorporated by the Ld. CIT(A) at page no. 9 to 17 of the impugned order for the cost of repetition the same are not reproduced herein. 42.3 The Ld. CIT(A) after considering the submissions of the assessee observed that the AO had not entertained the claim of the assessee during the assessment stage for considering the dividend income received from Sri Lanka as exempt mainly by relying on the judgment of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT(2006) 284 ITR 323, without looking into the merit of the assessee’s claim. The Ld. CIT(A) observed that the assessee was not able to revised its income by showing the dividend income received from Sri Lanka as exempted because the matter regarding taxability of dividend income received from abroad was subjudice and was decided as late as on 20/03/2008 in the case of DCIT Vs. Turquoise Investment & Finance Ltd. (2008) 57 168 Taxman 107 (SC). The Ld. CIT(A) also observed that it had been held by the Hon’ble Court that the appellate authority are competent to entertain the claims made before them even if such claims were not made before the AO and that it is the duty of the tax authorities to make a fair estimate of the income of an assesse and if a claim is otherwise admissible, it is not to be denied only because it was not made before the AO or not made with in time. Reliance was placed on the following case laws: • Jute Corporation of India Ltd. Vs. CIT(1999) 187 ITR 688 (SC) • ACIT Vs. Bharti Sharma in ITA No. 3140/Del/2007 (Delhi Trib) 42.4 The Ld. CIT(A) observed that in the case of DCIT Vs. Turquoise Investment & Finance Ltd. (supra), the Hon’ble Supreme Court was of the view that dividend income received by the assessee from a company in Malaysia was not taxable in view of Article 10 of the Double Taxation Avoidance Agreement signed between India and Malaysia which would prevail over the provisions of the IT Act, 1961, in case of any conflict between the two. The Ld. CIT(A) observed that Article-10 of the Double Taxation Avoidance Agreement(DTAA), regarding chargeability of the dividend income, signed between India and Sri Lanka was identical with Article 10 of the DTAA between India and Malaysia. The Ld. CIT(A) reproduced the Article 10 of DTAA with Sri Lanka and Malaysia at page no. 18 to 20 of the impugned order for the cost of repetition the same is not reproduced herein. 42.5 The Ld. CIT(A) mentioned that the provisions as per Article 24 of the DTAA between India and Sri Lanka, in this regard to eliminate the double taxation were as under: (2) Subject to the provisions of the law of India regarding the allowance as a credit against Indian tax of tax payable in a territory outside India (which shall not affect the general principle hereof) Sri Lanka tax payable under the law of Sri Lanka and in accordance with this Convention whether directly or by deduction on profits, income or chargeable gains from sources within Sri Lanka (excluding in the case of dividend, tax payable in respect of the 58 profits out of which the dividend is paid) or capital in Sri Lanka shall be allowed as a credit against any Indian Tax computed by reference to the same items of income or capital by reference to which the Sri Lanka tax is computed: Provided that such credit shall not exceed Indian tax (as computed before allowing any such credit), which is appropriate to the income derived from sources within Sri Lanka or to capital in Sri Lanka, so however, that where such resident is a company by which surtax is payable in India, the credit aforesaid shall be allowed in the first instance against income-tax payable by the company in India, and as to the balance if any against surtax payable by it in India. (3) For the purpose of paragraph (2) of this article, the term Sri Lanka tax payable shall be deemed to include any tax which would have been payable as Sri Lanka tax for any year but for an exemption or reduction of tax granted for that year or any part thereof under: • Any of the following provisions, that is to say sections 11,16,17,18,19, 20, 21, 22 and 85 of the Sri Lanka Inland Revenue Act No. 28 of1979 so far as they were in force on, and have not been modified since, the date of the signature of this Convention, or have been modified only in minor respects so as not to affect their general character; • Any agreement entered into u/s 17 of the Greater Colombo Economic Commission Law No. 4 of1978; • Any other provisions which may subsequently be made granting an exemption or reduction of tax which is agreed by the competent authorities to be of a substantially similar character, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character. • Further, section 11 of the Inland Revenue Act of Sri Lanka States as follows:- 11. There shall be exempt from income tax. (a) (b) (c) Any dividend paid by a company with which an agreement has been entered into on or after November 8, 1995 by the Board of Investment of Sri Lanka u/s 17 of the Board of Investment of Sri Lanka Law, No.4 of 1978 to any shareholder of that company during the period for which the profits and income of that company are exempt from income tax under the terms of that agreement or within one year therefore out of the profits and income which are exempt from income tax. 59 42.6 The Ld. CIT(A) observed that the assessee had received dividend from its subsidiary company M/s Chempharma Pvt. Ltd. which was registered on 18/10/2002 in terms of section 17(2) of the Board of investment of Sri Lanka Law No: 4 of 1978 and had entered into an agreement with the Board to set up, conduct and operate a business to manufacture drugs in Export Processing Zone at Horana. Accordingly, the assessee company was exempted from the imposition, payment and recovery of income tax in respect of the profits of the aforementioned enterprises. Another agreement was entered into by M/s Chempharma Pvt. Ltd. with the Board of Investment of Sri Lanka on 27/05/2004 as per which company was granted tax exemption for the period upto May 2009 and the provisions of Inland Revenue Act of Sri Lanka relating to the imposition, payment and recovery of income tax would not apply to the profits and income of the enterprise. According to the Ld. CIT(A) the case of the assessee company was covered by Article24(2) and 24(3) of the DTAA between India & Sri Lanka. In other words the dividend received by the assessee from its subsidiary company located in tax free zone in Sri Lanka was not exigible to tax as per Section 11 of the Inland Revenue Act of Sri Lanka. And further in view of Article 24(3) of the DTAA, the Sri Lanka tax payable also included the tax which would have been payable by the assessee company had the exemption as discussed above not been available to the assessee and its Sri Lanka tax payable was to be allowed as a credit against Indian tax on the same item of income i.e; dividend, as per the provisions of the Article 24(2) of the DTAA between India and Sri Lanka. 42.7 As regards to the AO’s stand that the assessee should have made this claim within a period of one year as laid down in section 239 which prescribes the limit for claiming refunds, whereas in the assessee’s case the claim had been made about the dividend income being exempt and not in regard to the refund. He further observed that the AO sought to distinguish between the facts of the assessee’s case and those in the case of DCIT Vs. Turquoise Investment & 60 Finance Ltd.(supra) whereas the issue in both the case was relating to taxability of dividend income received from abroad. The Ld. CIT(A) was of the view that the facts of the case of DCIT Vs. Turquoise Investment & Finance Ltd. (supra) were applicable to the assessee’s case for the following reasons: a) The assessee filed its return of Income claiming refund on the basis of credit of deemed TDS on the dividend of Rs 21,35,766/- received from a Malaysian company. b) The assessing officer rejected the claim of the assessee for credit of deemed TDS. c) Being aggrieved, assessee filed an appeal before CIT(A), which was accepted. d) Revenue, thereafter, filed appeal before Tribunal. The Tribunal disposed of the appeal of the revenue with the observation that DTAA entered into by the Government of India with the Government of Malaysia would override the provisions of the Act if they are at variance from the provisions of the Act. Hence dividend income would be taxed only in the contracting states where such income accrued. Thus Dividend income of Rs. 21,75,766/- is not to be taxed in India Under any of the provisions of the Act. e) Aggrieved by the order of the Tribunal, the department further filed appeal in the court of Madhya Pradesh, which held that Tribunal was justified in holding that dividend income derived by the assessee from a company in Malaysia is not liable to be taxed in the hands of the assessee under any of the provisions of the Act. 42.8 The Ld. CIT(A) also observed that in Clause 10(2) of the DTAAs with Sri Lanka and Malaysia for taxability of dividend income in the other contracting state, the word was used ‘may’ which can also not be read as ‘shall’ in view of various court Judgments and in the above referred decision of the Hon’ble Supreme Court wherein it has been held that tax on dividend income can be charged in the contracting state where the same accrued. Undisputedly in case of assessee company, dividend from its Associate Enterprise namely M/s Chempharma Pvt Limited accrued in Sri Lanka and it was declared in Sri Lanka, the Ld. CIT(A) by keeping in view the observations of the AO in the assessment order and remand report furnished for the A.Y. 2005-06, directed the AO to allow the claim of non taxability of dividend of Rs. 20,72,78,330/- received from Sri 61 Lankan Company for the purpose of computation of total income as well as Calculation of Book Profit under section 115JB of the Act. 43. Now the Department is in appeal. 44. The Ld. CIT DR reiterated the observations made by the AO and strongly supported the assessment order passed by him. It was further submitted that the Ld. CIT(A) was not justified in allowing the claim of the assessee which was rightly rejected by the AO. 45. In his rival submissions the Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that the relief had been granted by the Ld. CIT(A) for the reasons that the dividend arising to the assessee company from its Sri Lankan Subsidiary Company was non taxable in view of the judgment of the Hon’ble Apex Court in the case of DCIT Vs. Turquoise Investment & Finance Ltd. reported at [2008] 300 ITR 1 , wherein it has been held that the tax on dividend can only be charged in the contracting state from where such dividend accrued and the facts of the above case were related to the India-Malaysia Treaty which was similar to India-Sri Lanka Treaty. It was further submitted that in case the resident had paid any tax in any other country in respect of its income sourced in that country, India has to give appropriate credit for the tax paid in the foreign country, subject to provisions of DTAA. It was further submitted that the provisions of agreement cannot fasten a tax liability where the liability was not imposed by the local act and where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability, in case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of section 90(2) of the Act. Therefore in the instant case the relevant provisions of India – Sri Lanka DTAA(1983) were applicable and as per provisions in para 2 of Article 24 of DTAA (copy is placed 62 at page no. 62 of assessee’s paper book), in case of dividend, the foreign tax credit of Sri Lanka Tax payable was given by underlying tax credit (UTC) method which is a method to provide relief from the economic double taxation of the income and refer to the credit that may be given in the resident state, for the tax paid on the underlying profits out of which dividend was paid by the company in the source state. The reliance was placed on the following case laws: • Krishan Bharati Co-operative Ltd. Vs. ACIT (2016) 158 ITD 777 (Del Trib) • M/s MMTC Ltd. Vs. Assistant CIT in ITA No 4265/Del/2010 (Del Trib) 46. We have considered the submissions of both the parties and perused the material available on the record. In the present case, the Ld. CIT(A) categorically stated that the provisions in the India – Malaysia Treaty were similar to India Sri Lanka Treaty and the Hon’ble Apex Court in the case of DCIT Vs. Turquoise Investment & Finance Ltd.(supra) held that the dividend income from the Malaysian Company could not taxed in the hands of the assessee. In the said case the Hon’ble Apex Court affirmed the judgment of the Hon’ble High Court of the Madhy Pradesh at Indore Bench in the case of DCIT Vs. Turquoise Investment & Finance Ltd. [2008] 299 ITR 143 (MP) wherein it was held as under: “ When the Double Taxation Avoidance Agreement between India and Malaysia intends that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5 of the Income-tax Act, 1961, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant, the treaty will have to be interpreted as such and prevails over sections 4 and 5. The assessee earned dividend income in Malaysia and claimed that the dividend income accrued in Malaysia was not taxable in India. This was rejected by the Assessing Officer. The Commissioner (Appeals) allowed the claim of the assessee for credit of deemed tax deducted at source on dividend. The Tribunal held that in view of article XI of the treaty the dividend income would be taxed only in the contracting States where such income accrued.” It has been further held as under: 63 “ that the dividend income earned by the assessee in Malaysia was not taxable in the hands of the assessee in India under any of the provisions of the 1961 Act in view of the agreement between India and Malaysia.” 46.1 In the present case also as per the DTAA between India and Sri Lanka the dividend income would be taxable only in the contracting state where such income accrured and as the income accrued in Sri Lanka and the dividend income sourced from foreign subsidiary was to be considered as exempted in the hands of the Indian holding Company i.e; the assessee. We therefore considering the totality of the facts do not see any valid ground to interfere with the detailed findings given by the Ld. CIT(A) on this issue. Accordingly we do not see any merit in this ground of the Departmental appeal. 46.2 As the facts for the year under consideration are identical to the facts involved for this issue in the A.Y. 2005-06, therefore our findings given herein shall apply mutatis mutandis for this issue in the A.Y. 2005-06. 47. In the result appeals of the Department are dismissed. (Order pronounced in the open Court on 01/08/2022 ) Sd/- Sd/- स ु धांश ु ीवा&तव एन.के .सैनी, (SUDHANSHU SRIVASTAVA) ( N.K. SAINI) या(यक सद&य/ JUDICIAL MEMBER उपा य! / VICE PRESIDENT AG Date: 01/08/2022 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. $ / 0 1 The CIT(A) 5. - 2 ग 4 5 & 4 5 678 ग9 DR, ITAT, CHANDIGARH 6. ग 8 : % Guard File ( + $ By order, ; # Assistant Registrar