EVONIK DEBUSSA INDIA P. LTD, MUMBAI V. ASST CIT (OSD) CIR 3(1), MUMBAI

ITA 7653/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9386 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 22-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 11-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: DIPESH GADA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Notional interest; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . , , ! '# ! '# ! '# ! '#, ,, , $ $ $ $ BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 7653/MUM./2011 ( & ' (' / ASSESSMENT YEAR : 200708 ) EVONIK DEGUSSA INDIA P. LTD. KRISLON HOUSE, SAKIVIHAR ROAD SAKINAKA, ANDHERI (E), MUMBAI 400 072 .. )* / APPELLANT & V/S ASSTT . COMMISSIONER OF INCOME TAX OSD CIRCLE3(1), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... +,)* / RESPONDENT ) . / PERMANENT ACCOUNT NUMBER AAACH3690Q & '.! / 0 / ASSESSEE BY : MR. KANCHAN KAUSHAL A/W MR. PRASAD PARDIWALA AND MR. DIPESH GADA 1 / 0 / REVENUE BY : MR. AJEET KUMAR JAIN & / !2 / DATE OF HEARING 22.10.2012 ' 3( / !2 / DATE OF ORDER 21.11.2012 ' ' ' ' / ORDER +, +, +, +, PER BENCH THE PRESENT APPEAL PREFERRED BY THE ASSESSEE, IS DI RECTED AGAINST THE FINAL IMPUGNED ASSESSMENT ORDER DATED 13 TH SEPTEMBER 2011, WHICH HAS BEEN PASSED IN PURSUANCE OF THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION EVONIK DEGUSSA INDIA P. LTD. 2 PANELI (FOR SHORT DRP ), MUMBAI, UNDER SECTION 144C OF THE INCOME TAX ACT, 1961 FOR THE QUANTUM OF ASSESSMENT FOR THE ASS ESSMENT YEAR 2007 08. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSES SEE: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED ASSESSING OFFICER (AO)/ DISPUTE RESOLUTION PANEL (DRP)/ TRANSFER PRICING OFFICER (TPO) ERRED IN MAKING AN U PWARD ADJUSTMENT OF RS.68,47,532/- TO THE INCOME OF THE A PPELLANT IN RESPECT OF PROVISION OF RESEARCH AND DEVELOPMENT SU PPORT SERVICES BY - A. REJECTING COMPARABLES FROM THE SET PROVIDED BY T HE APPELLANT; B. INCLUDING COMPANIES WHICH ARE NOT FUNCTIONALLY C OMPARABLE; C. DENYING RISK ADJUSTMENT TO THE APPELLANT TO ACCO UNT FOR DIFFERENCES BETWEEN THE RISK PROFILE OF COMPARABLES AND THE APPELLANT; D. USING CURRENT YEARS FINANCIAL DATA (I.E. FINANC IAL YEAR 2006-07) AS AGAINST AVERAGE MARGIN OF 3 YEARS OF COMPARABLE COMPANIES; AND E. DENYING (+/-) 5% RANGE BENEFIT AVAILABLE UNDER P ROVISO TO SECTION 920(2) OF THE INCOME-TAX ACT, 1961 (THE ACT ). THE APPELLANT PRAYS THAT THE AO BE DIRECTED TO DELE TE THE AFOREMENTIONED ADJUSTMENT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED AO/ DRP/ TPO ERRED IN MAKING A NOTIONAL ADD ITION OF RS. 9,83,383/- TOWARDS INTEREST ON PERCEIVED DELAY IN C OLLECTION OF RECEIVABLES FROM THE ASSOCIATES ENTERPRISES. THE APPELLANT PRAYS THAT THE AFOREMENTIONED NOTIONA L ADDITION BE DELETED. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED AO / DRP ERRED IN TREATING NETWORK ACCESSES CHARGES (GROUPED UNDER THE HEAD SOFTWARE EXPENSES) AS CAPIT AL EXPENDITURE AND THEREBY NOT ALLOWING THE SAME AS DEDUCTION UNDE R SECTION 37(1) OF THE ACT. THE APPELLANT PRAYS THAT THE AO BE DIRECTED TO DELE TE THE AFOREMENTIONED DISALLOWANCE. WITHOUT PREJUDICE TO GROUND NO.3 ABOVE, THE LEARNED A.O. / DRP ERRED IN NOT GRANTING DEPRECIATION AT THE RATE OF 6 0% AS PER ENTRY III(5) OF TABLE OF RATES OF DEPRECIATION READ WITH SECTION 32(1)(II) OF THE ACT R/W RULE 5 OF THE I.T. RULES, 1632. EVONIK DEGUSSA INDIA P. LTD. 3 THE APPELLANT PRAYS THAT THE A.O. BE DIRECTED TO AL LOW DEPRECIATION AT THE RATE OF 60% ON NETWORK ACCESS CHARGES. 2. THE RELEVANT FACTS, APROPOS GROUND NO.1, ARE THAT T HE ASSESSEE, EVONIK DEGUSSA INDIA (P) LTD., IS A FULLY OWNED SUB SIDIARY OF EVONIK DEGUSSA GMBH, A SPECIALTY CHEMICAL COMPANY HEADQUA RTERED AT GERMANY. THE ASSESSEES MAIN BUSINESS IS PROVIDING SUPPORT SERVICES FOR THE VARIOUS DIVISION OF EVONIK GROUP OF COMPANIES W HICH ARE BIFURCATED INTO TWO PARTS FIRSTLY, MARKETING, PROMOTION AND COORDINATE SUPPORT SERVICES AND SECONDLY, TESTING AND ANALYTICAL SUPPO RT SERVICES. DURING THE YEAR, THE ASSESSEE HAD FOLLOWING INTERNATIONAL TRAN SACTIONS WITH ITS ASSOCIATE ENTERPRISE (IN SHORT A.E ). S.NO. NATURE OF TRANSACTION AMOUNT FOR A.Y. 200708(RS.) 1. PROVISION OF SUPPORT SERVICES 8,99,77,540 2. PROVISION OF SUPPORT SERVICES IN CONNECTION WITH RESEARCH AND DEVELOPMENT 6,32,42,198 3. PAYMENT FOR NETWORK ACCESS 12,60,835 4. PAYMENT OF SEMINAR / TRAINING FEES 3,05,007 5. RECOVERY OF EXPENSES 4,10,904 TOTAL: 15,51,96,484 3. THE ASSESSEE HAD PREPARED SEPARATE SEGMENT FOR THE TRANSACTION OF RENDERING R&D SUPPORT SERVICES AND MARKETING SUPPOR T SERVICES. FOR ITS R&D SUPPORT SERVICES, THE ASSESSEE HAD SHOWN PROFIT MARGIN ON OPERATING COST AT 20.75%, AS PER ITS SEGMENTAL ACCOUNT. IT HA S BENCHMARKED ITS INTERNATIONAL TRANSACTION UNDER TRANSACTIONAL NET MARGINAL METHOD (IN SHORT TNMM ) AS MOST APPROPRIATE METHOD. IN ITS TRANSFER PRICI NG STUDY REPORT FOR COMPARABILITY ANALYSIS, THE ASSESSEE HAS INITIALLY IDENTIFIED 16 COMPARABLE COMPANIES WHEREIN THE ARITHMETIC MEAN OF THE OPERATING PROFIT TO THE TOTAL COST WORKED OUT TO 11.87% BASED ON THR EE YEARS AVERAGE. AS AGAINST THIS, THE ASSESSEES OPERATING PROFIT TO TH E TOTAL COST IN THE RELEVANT EVONIK DEGUSSA INDIA P. LTD. 4 SEGMENT WAS AT 20.75%. THUS, IT WAS CLAIMED THAT TH E ASSESSEES MARGIN WERE AT ARMS LENGTH. DURING THE COURSE OF THE TRAN SFER PRICING PROCEEDINGS, THE TRANSFER PRICING OFFICER (FOR SHOR T TPO ) DIRECTED THE ASSESSEE TO SUBMIT THE MARGIN OF COMPARABLE COMPANI ES USING ONLY THE RELEVANT YEAR DATA (I.E., F.Y. 200607). IN RESPONS E TO THIS, THE ASSESSEE SUBMITTED 12 COMPARABLES OUT OF WHICH SEVEN WERE CL AIMED TO BE DIRECTLY COMPARABLE AND FIVE COMPANIES HAVING SEGMENTAL DATA COMPARABLE TO THE ASSESSEE. THE ARITHMETIC MEAN OF THE OPERATING PROF IT / TOTAL COST (OP/TC) WORKED OUT AT 14.13%. 4. THE TPO OBSERVED THAT COMPARABLES SELECTED BY THE A SSESSEE HAS NOT RESULTED INTO APPROPRIATE SET OF COMPARABLES AS IT HAS EXCLUDED MANY COMPANIES CONSIDERED TO BE COMPARABLE FOR R&D AND S UPPORT SERVICES. THE TPO IN HIS SEARCH FOR COMPARABLES, IDENTIFIED NEW C OMPARABLES, ONE OF WHICH WAS COMMON TO THE ASSESSEES SET OF COMPARABL ES. THE ASSESSEE IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED BY THE TPO AS TO WHY THE EIGHT NEW COMPANIES SHOULD NOT BE SELECTED, FILED DETAIL OBJECTIONS BEFORE THE TPO WITH REGARD TO THE DATA AND FUNCTIONAL ANALYSIS , TURNOVER, ETC. THE TPO REJECTED THE ASSESSEES CONTENTIONS AND FINALLY INCLUDED 19 COMPARABLE COMPANIES SOME OF THEM WHICH WERE ADOPTE D BY THE ASSESSEE ALSO. THE ARITHMETIC MEAN MARGIN OF THESE 19 COMPAR ABLES WAS WORKED OUT AT 27.30% AS AGAINST 20.75% EARNED BY THE ASSES SEE. ACCORDINGLY, AN UPWARD ADJUSTMENT OF RS. 34,81,318 IN THE ARMS LENGTH PRICE (IN SHORT ALP) WAS MADE TO THE INCOME OF THE ASSESSEE. 5. THE ASSESSEE, AGAINST THE ADJUSTMENT SO MADE BY THE TPO IN ALP, FILED DETAIL OBJECTIONS BEFORE THE DRP, THAT THE COMPARABLES IDENTIFIED BY THE TPO WERE NOT APPROPRIATE CONSIDERING THE NATURE OF ACTIVITY UNDERTAKEN BY THE ASSESSEE I.E., TESTING AND ANALYTICAL SERVIC ES. THE DRP DIRECTED THE ASSESSEE TO UNDERTAKE FRESH COMPARABILITY ANALYSIS. IN RESPONSE, THE ASSESSEE SUBMITTED ITS RESULTS WHEREBY NINE COMPARA BLE COMPANIES WERE IDENTIFIED AND THE ARITHMETIC MEAN OF THE OPERATING MARGIN OF SUCH NINE EVONIK DEGUSSA INDIA P. LTD. 5 COMPARABLE COMPANIES WORKED OUT AT 9.94%. LIST OF S UCH COMPANIES PROVIDED BEFORE THE DRP WERE AS FOLLOWS: S.NO. NAME OF THE COMPANY PROFIT LEVEL INDICATOR (%) 1. CHOKSI LABORATORIES LTD. 33.78% 2. VIMTA LABS LTD. 25.26% 3. DOLPHIN MEDICAL SERVICES LTD. 8.31% 4. N.G. INDUSTRIES LTD. 18.10% 5. TRANSGENE BIOTEK LTD. DIAGNOSTIC 22.68% 6. GVK BIOSIENCES P. LTD. 26.68% 7. TOG LIFESICENCES LTD. 26.06% 8. A D S DIAGNOSTIC LTD. DIAGNOSTIC 24.96% 9. MAX NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD. 46.73% ARITHMETIC MEAN (ARMS LENGTH MARKUP) 9.94% ASSESSEES MARGIN 20.75% 6. THE DRP, HOWEVER, AFTER CALLING FOR THE REMAND REPO RT FROM THE TPO, ARRIVED AT FINAL SET OF SIX COMPANIES WHEREIN THE A RITHMETIC MEAN WAS ARRIVED AT 33.63% . THE LIST OF SUCH SIX COMPANIES WERE AS UNDER: S.NO. NAME OF THE COMPANY PROFIT LEVEL INDICATOR (% ) / OPTC 1. CHOKSI LABORATORIES LTD. 33.78% 2. VIMTA LABS LTD. 25.26% 3. TCG LIFESCIENCE 26.06% 4. CELESTIAL LABS LTD. 58.35% 5. GVK BIOSCIENCE 26.68% EVONIK DEGUSSA INDIA P. LTD. 6 6. BIOCON LTD. (SEG.) 31.63% ARITHMETIC MEAN : 33.63% 7. THESE SIX COMPARABLES WERE ARRIVED AFTER REJECTING DIAGNOSTIC COMPANIES AND LOSS MAKING COMPANIES WHICH WERE SELE CTED BY THE ASSESSEE AND TWO NEW COMPARABLE COMPANIES WERE ADDE D VIZ. CELESTIAL LABS LTD. AND BIOCON LTD. (SEGMENTAL). THUS, AFTER THE DIRECTION OF THE DRP, THE ADJUSTMENT IN ALP WAS ENHANCED TO RS. 68,47,532, AS AGAINST ADJUSTMENT MADE BY THE TPO AT RS. 34,81,318. 8. BEFORE US, THE LEARNED COUNSEL, MR. KANCHAN KAUSHAL , REPRESENTING THE ASSESSEE, AFTER REFERRING TO THE FACTS AND CONT ENTIONS RAISED BEFORE THE TPO AS WELL AS THE DRP, SUBMITTED THAT THE INCLUSIO N OF THE TWO COMPARABLE COMPANIES VIZ. CELESTIAL LABS LTD. AND B IOCON LTD., IS WHOLLY ERRONEOUS AS THEY WERE FUNCTIONALLY NOT COMPARABLE AND REJECTION OF OTHER COMPANIES ON THE GROUND THAT THEY WERE DIAGNOSTIC C OMPANIES, WERE ALSO NOT TENABLE AS THEY WERE ALSO INVOLVED IN SIMILAR T YPE OF BUSINESS ACTIVITY I.E., TESTING AND ANALYTICAL SERVICES. INSOFAR AS T HE TWO LOSS MAKING COMPANIES I.E., ADS DIAGNOSTIC LTD. AND MAX NEEMAN MEDICAL INTERNATIONAL (ASIA) LTD. ARE CONCERNED, IT WAS SUB MITTED THAT THESE BEING LOSS MAKING COMPANIES, THEREFORE, THE SAME ARE NOT BEING PRESSED BY THE ASSESSEE IN THIS PARTICULAR CASE. REGARDING INCLUSI ON OF CELESTIAL LABS LTD., HE SUBMITTED THAT COMPANY IS ENGAGED IN THE BUSINES S OF SUPPORTING PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES WITH CUS TOMIZED I.T. SOLUTIONS. THE COMPANY IS ALSO INVOLVED IN COMMERCI AL PRODUCTION AND MARKETING OF ENZYMES AND NEUTRACEUTICALS. THE MAIN SERVICES RENDERED BY THE SAID COMPANY WERE MOSTLY SWFTWARE DEVELOPMENT, BIO INFORMATIC SERVICES AND DATA WAREHOUSING AND MINING. IN SUPPO RT OF HIS CONTENTIONS, HE DREW OUR ATTENTION TO PAGE125, WHICH IS PART OF THE DIRECTORS REPORT OF CELESTIAL LABS LTD. WHEREIN IT HAS BEEN MENTIONED T HAT THE COMPANY HAS DEVELOPED A DRUG DESIGN TOOL, CELLSUITE FOR STRUCTU RE BASE DRUG DESIGN. FURTHER, THIS COMPANY IS ALSO INVOLVED IN SOFTWARE DEVELOPED AND PRODUCTS FOR ITS CUSTOMER LIKE SAP SERVICES AND CELL SANJIVA NI PRODUCTS. HE FURTHER EVONIK DEGUSSA INDIA P. LTD. 7 DREW OUR ATTENTION TO PAGES141 AND 144, WHEREIN IT HAS BEEN MENTIONED THAT ASSESSEES MAIN TURNOVER IS FROM BIOINFORMATI C SERVICE DATA WAREHOUSING AND MINING SOFTWARE DEVELOPMENT PRODUCT S AND SERVICES. THUS, THE FUNCTIONAL PROFILE OF THE SAID COMPANY IS ENTIRELY DIFFERENT FROM THE ASSESSEE AND THE SAME IS NOT COMPARABLE. IN SUP PORT OF HIS CONTENTION THAT CELESTIAL LABS LTD. FUNCTIONALLY COMPARABLE TO TESTING AND ANALYTICAL SERVICES, HE RELIED UPON THE DECISION OF A COORDIN ATE BENCH OF THE TRIBUNAL RENDERED IN TEVAPHARMA P. LTD., ITA NO.6623/MUM./20 11, VIDE ORDER DATED 23 RD DECEMBER 2011. 9. REGARDING INCLUSION OF 'BIOCON LTD., WHEREIN SEGME NTAL DATA OF CONTRACT RESEARCH SEGMENT WAS TAKEN BY THE TPO, HE SUBMITTED THAT BIOCON LTD. IS DOING CONTRACT RESEARCH WORK FOR BIO CON GROUP AND SUBSIDIARY AND IS FUNCTIONALLY NOT COMPARABLE TO TH E BUSINESS OF THE ASSESSEE. AFTER REFERRING TO THE PAGES428 AND 453 OF THE PAPER BOOK, WHICH ARE THE PART OF THE ANNUAL REPORT OF BIOCON L TD., HE POINTED OUT THAT THE COMPANY IS ENGAGED IN THE MANUFACTURE OF BIOTEC HNOLOGY PRODUCTS AND FURTHER IT IS ORGANIZED INTO TWO BUSINESS SEGMENTS I.E., ENZYMES AND ACTIVE PHARMACEUTICAL INGREDIENTS. REGARDING SEGMENTAL SEL ECTION BY THE TPO, HE SUBMITTED THAT CONTRACT RESEARCH SEGMENT IS NOT AVA ILABLE IN ANNUAL REPORT OF BIOCON LTD., ON STAND ALONE BUT THE SAME HAS BEE N IDENTIFIED IN THE CONSOLIDATED ANNUAL REPORT OF BIOCON LTD. IN THE SA ID CONSOLIDATED ANNUAL REPORT, THE CONTRACT RESEARCH SEGMENT OF BIOCON LTD . RELATES TO TWO SUBSIDIARIES I.E., CLINIGENE INTERNATIONAL LTD. A ND SYNGENE INTERNATIONAL LTD. AND IT IS A JOINT VENTURE OF BIOCON BIOPHARMA CEUTICAL P. LTD. AFTER REFERRING TO PAGE595 OF THE PAPER BOOK WHICH IS CO NSOLIDATED ANNUAL REPORT OF BIOCON LTD., HE POINTED OUT THAT BIOCON L TD. SHOWS FOLLOWING SEGMENT UNDER THE SEGMENTAL INFORMATION I.E., ENZYM E, PHARMA, CONTRACT RESEARCH SEGMENT AND JOINT VENTURE SEGMENT. INSOFAR AS ENZYME & PHARMA SEGMENT IS CONCERNED, THE SAME RELATES TO BI OCON LTD. AND JOINT VENTURE SEGMENT IS ALSO SEPARATELY IDENTIFIED SEGME NT OF JOINT VENTURE OF BIOCON PHARMACEUTICALS. THE REVENUE OF CONTRACT RES EARCH SEGMENT IS CLOSE TO CLINIGENE INTERNATIONAL LTD. AND SYNGENE INTERNA TIONAL LTD. REGARDING EVONIK DEGUSSA INDIA P. LTD. 8 CLINIGENE INTERNATIONAL LTD., HE SUBMITTED THAT THE COMPANY IS WHOLLY OWNED SUBSIDIARY OF BIOCON LTD. AND IS ENGAGED IN D ISCOVERING NEW BIO MARKERS AND IS DISCOVERING NEW DISEASES SUBSETS AND NOVEL DATA BASED ON PHARMA COGENOMICS. THUS, THE FUNCTIONAL PERFORMANC E AND THE NATURE OF ACTIVITY BY CLINIGENE INTERNATIONAL LTD. IS DIFFERE NT FROM ASSESSEES BUSINESS OF TESTING AND ANALYTICAL SERVICES. HE FUR THER HIGHLIGHTED THAT THE RELATED PARTY TRANSACTION IN THE SAID CASE WAS APPR OXIMATELY 38% OF SALES AND THE NET WORTH OF THE COMPANY HAS BEEN ERODED IN THE PAST TWO YEARS AND TURNED NEGATIVE. BASED ON THIS ANALYSIS, SPECIF ICALLY HAVING SUBSTANTIAL RELATED PARTY TRANSACTION, HE SUBMITTED THAT THIS C OMPANY CANNOT BE TAKEN AS COMPARABLE. REGARDING ANOTHER SUBSIDIARY SYNGENE INTERNATIONAL LTD., HE SUBMITTED THAT IT IS ENGAGED IN THE CUSTOMIZED R ESEARCH SERVICE PROVIDER WITH PRODUCT SET OF SERVICES IN DRUG DEVEL OPMENT PROCESS FROM DISCOVER TO SUPPLY OF DEVELOPMENT COMPOUNDS. IT HAS TWO SETS OF INCOME I.E., CONTRACT RESEARCH FEES AND SALES OF COMPOUNDS . HE REFERRED TO THE BUSINESS OPERATION AND PROFILE OF THE SAID COMPANY FROM ITS WEBSITE TO SHOW THAT ITS FUNCTION IS ENTIRELY DIFFERENT FROM T HE FUNCTIONAL PROFILE OF THE COMPANY. THUS, HE CONCLUDED THAT BIOCON LTD., EVEN AS PER ITS SEGMENTAL PROFILE, CANNOT BE TAKEN AS COMPARABLE. 10. REGARDING REJECTION OF 3 DIAGNOSTIC COMPANIES, HE S UBMITTED THAT THESE COMPANIES ARE NOT ONLY PROVIDING DIAGNOSTIC S ERVICES, BUT ARE ALSO DOING TESTING AND ANALYTICAL SERVICES WHICH INCLUDE LAB RESEARCH AND ANALYTICAL FACILITIES FOR CERTAIN PRODUCTS. THUS, F UNCTIONS OF THESE COMPANIES ARE AKIN TO THAT OF THE ASSESSEE. HE PROCEEDED TO R EFERRED TO THE ENTIRE BUSINESS PROFILE AND ACTIVITIES CARRIED OUT BY THES E DIAGNOSTIC COMPANY. THUS, HE SUBMITTED THAT THREE DIAGNOSTIC COMPANIES SHOULD BE INCLUDED WHILE TAKING LIST OF COMPARABLES AND TWO COMPANY VI Z. CELESTIAL LABS LTD. AND BIOCON LTD. SHOULD BE EXCLUDED. ONCE THIS EXERC ISE IS TAKEN AND THEIR ARITHMETIC MEAN OF THE FINALLY SELECTED COMPANIES I S WORKED OUT THEN THE ARITHMETIC MEAN WILL COME TO 22.98% WHICH IS QUITE NEAR ASSESSEES MARGIN OF 20.75% AND IF BENEFIT OF SAFE HARBOUR OF +/ 5% IS GIVEN, THEN NO ADJUSTMENT IS CALLED FOR. BESIDES RAISING THE AF ORESAID CONTENTIONS, THE EVONIK DEGUSSA INDIA P. LTD. 9 LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT BOT H THE AUTHORITIES I.E., DRP AND THE TPP HAS DENIED THE RISK ADJUSTMENT TO T HE ASSESSEE ON ACCOUNT OF DIFFERENCE BETWEEN RISK PROFILE OF THE C OMPARABLES AND THE ASSESSEE. HE SUBMITTED THAT THERE IS A DIFFERENCE I N THIS PROFILE WITH THE COMPANIES DEALING WITH PRINCIPAL TO PRINCIPAL BASIS TO ITS CUSTOMERS AND THE COMPANIES WHICH ARE CAPTIVE SERVICE PROVIDER, SET U P BY ITS PARENT COMPANY. HE POINTED OUT THAT THERE ARE VARIOUS RISK PROFILE LIKE MARKET RISK, CREDIT RISK SERVICES, LIABILITY RISK, R&D RIS K, ETC., WHICH MAKES HUGE DIFFERENCES IN THE PROFIT MARGIN AND MOST OF THESE RISKS ARE NOT UNDERTAKEN BY THE ASSESSEE. THE COMPANIES, WHO ARE TAKING MORE RISK WILL HAVE MORE PROFITS, THEREFORE, THE SAME CANNOT BE COMPARED WIT H THE ASSESSEE. IN SUPPORT OF THIS CONTENTIONS, HE RELIED UPON THE FOL LOWING CASE LAWS: EGAIN COMMUNICATIONS P. LTD. (PUNE TRIBUNAL 23 S OT 385) SKODA AUTO INDIA P. LTD., (PUNE TRIBUNAL 30 SOT 3 19) MENTOR GRAPHICS (NOIDA) P. LTD. (DELHI 18 SOT 78) PHILLIPS SOFTWARE CENTRE P. LTD. (BANGALORE 119 T TJ 721) AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. (BANGAL ORE ITA NO.584/BANG./2006) 11. PER CONTRA , THE LEARNED DEPARTMENTAL REPRESENTATIVE REGARDING EXCLUSION OF THREE DIAGNOSTIC COMPANIES BY THE TPO, REFERRED TO THE BUSINESS PROFILE OF THE SAID COMPANIES FROM THE REC ORDS AVAILABLE IN THE ASSESSEES PAPER BOOK AND SUBMITTED THAT THE ASSESS EE IS NOT AT ALL A DIAGNOSTIC COMPANY BUT CONDUCTS ONLY LAB RESEARCH A ND ANALYTICAL SERVICES. FOR E.G., IN THE CASE OF DOLPHIN MEDICAL SERVICES, HE SUBMITTED THAT THE COMPANY IS UNDERTAKING CT SCAN, MRI, COLOUR DOPPLER , ETC. FROM THE PROFIT & LOSS ACCOUNT OF THE SAID COMPANY, AS APPEARING AT PAGE209 OF THE PAPER BOOK, HE SUBMITTED THAT NO SEGMENTAL DETAILS HAVE BEEN PROVIDED TO BIFURCATE THE REVENUES GENERATED OUT OF ACTIVITIES CARRIED OUT BY IT AND ALSO THE TURNOVER OF THE SAID COMPANY IS ONLY RS. 2.96 CRORES. REGARDING TRANSGENE BIOTEK LTD., WHICH IS ALSO A DIAGNOSTIC C OMPANY, HE SUBMITTED THAT THE SAID COMPANY HAS UNDERTAKEN DEVELOPMENT OF NEW VACCINE AND IS EVONIK DEGUSSA INDIA P. LTD. 10 HOLDING PATENT RIGHTS. THEREFORE, THE SAID COMPANY CANNOT BE COMPARABLE AT ALL WITH THAT OF THE ASSESSEE. HE REFERRED TO TH E DIRECTORS REPORT APPEARING AT PAGES151153, TO DEMONSTRATE THAT THE ACTIVITIES OF THE SAID COMPANY ARE ENTIRELY DIFFERENT WITH THE BUSINESS PR OFILE AND FUNCTION OF THE ASSESSEE COMPANY. REGARDING OTHER DIAGNOSTIC COMPAN Y ALSO, HE REFERRED TO THE BUSINESS PROFILE AND THE SALES REVENUE TO SH OW THAT THE FUNCTION OF THESE COMPANIES NATURE OF REVENUE AND BUSINESS OPER ATIONS WERE ENTIRELY DIFFERENT FROM THAT OF THE ASSESSEE COMPANY. 12. REGARDING INCLUSION OF CELESTIAL LABS LTD., HE DR EW OUR ATTENTION TO THE PROFIT & LOSS ACCOUNT OF THE SAID COMPANY AS AP PEARING AT PAGE135 AND SUBMITTED THAT THE REVENUE FROM SALE OF SERVICE S CONSTITUTED 96% WHEREAS REVENUE FROM SALE OF PRODUCTS IS LESS THAN 4%. THEREFORE, THE SAID COMPANY HAS RIGHTLY BEEN INCLUDED. MOREOVER, H E SUBMITTED THAT THERE IS NO SEGMENTAL REPORT OF THIS COMPANY AS THE TURNOVER IS LESS THAN RS. 50 CRORES. REGARDING INCLUSION OF BIOCON LTD., H E SUBMITTED THAT IN T.P. REPORT, THE ASSESSEE HAS ITSELF TAKEN THIS COM PANY AS A COMPARABLE COMPANY, THEREFORE, WHY THE ASSESSEE IS NOW OBJECTI NG TO INCLUSION OF SUCH COMPANY. HE, THUS, STRONGLY RELIED UPON THE DI RECTIOINS OF THE DRP AND THE ORDER OF THE ASSESSING OFFICER. 13. ON THE ISSUE OF RISK ADJUSTMENT, HE SUBMITTED THAT THIS ISSUE HAS NEITHER BEEN RAISED BEFORE THE TPO NOR HAS BEEN DEC IDED BY THE DRP. THEREFORE, THIS IS A PLEA TAKEN BEFORE THE TRIBUNAL FOR THE FIRST TIME. EVEN OTHERWISE ALSO, HE SUBMITTED THAT IN THE T.P. REPOR T, THE ASSESSEE HAS NOT MADE ANY KIND OF RISK ADJUSTMENT. THEREFORE, THE PL EA OF RISK ADJUSTMENT CANNOT BE GIVEN NOW AFTER THE DRPS DIRECTION. HE S UBMITTED THAT IN THE CASE OF CAPTIVE SERVICE PROVIDER, WHICH ARE MOSTLY DEALING WITH SINGLE CUSTOMER, THERE IS ALWAYS A VERY HIGH RISK BECAUSE ONCE SUCH A CUSTOMER IS LOST, THE ENTIRE BUSINESS GETS AFFECTED. THE CRE DIT RISK IS ALSO VERY MUCH IN THE CASE OF CAPTIVE SERVICE PROVIDER. HE HIGHLIG HTED THAT THERE CAN BE HUNDREDS OF RISK BUT THE SAME HAS TO BE ESTABLISHED AND TO BE QUANTIFIED EVONIK DEGUSSA INDIA P. LTD. 11 BY THE ASSESSEE. ONCE THERE COULD NOT BE ANY QUANTI FICATION, RISK ADJUSTMENT CANNOT BE ALLOWED. 14. IN THE REJOINDER, REGARDING BIOCON LTD., THE LEARNE D COUNSEL SUBMITTED THAT THE SAID COMPANY WAS INITIALLY INCLU DED BECAUSE IT WAS TAKEN ON THE BASIS OF THREE YEAR DATA AND WAS REJEC TED BY THE ASSESSEE IN THE FRESH RESEARCH CONDUCTED AFTER TPOS DIRECTION. THE DRP HAS RESORTED TO CHERRY PICKING TO TAKE THE COMPANIES HAVING VERY HIGH PROFITABILITY MARGIN FROM THE SET OF THE COMPARABLES GIVEN EITHER BY THE ASSESSEE OR BY THE TPO. REGARDING OBJECTION OF THE RISK ADJUSTMENT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, HE SUBMITTED THAT THE RISK PROFILE OF THE CAPTIVE SERVICE PROVIDER AND INDEPENDENT ENTERPRISE CANNOT BE THE SAME AS THE RISK UNDERTAKEN BY THE FORMER IS FAR LESS AN D, THEREFORE, THE PROFIT ALSO IS NOT AS HIGH AS THAT OF THOSE ENTERPRISE WHI CH TAKE HIGHER RISK. 15. REGARDING REJECTION OF OTHER DIAGNOSTIC COMPANIES, HE REITERATED HIS SUBMISSION THAT ONE OF THE MAJOR FUNCTIONS WAS RESE ARCH AND ANALYTICAL SERVICES, THEREFORE, THE SAME CAN BE SAID TO BE COM PARABLE COMPANIES. 16. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS OF THE PARTIES, PERUSED THE MATERIAL PLACED ON RECORD, AS HAVE BEEN REFERRED TO AT THE TIME OF HEARING AND ALSO THE ORDERS OF THE TPO AS W ELL AS THE DRP. THE ONLY ISSUE BEFORE US IS WHETHER TWO COMPARABLE COMP ANIES NAMELY CELESTIAL LABS LTD. AND BIOCON LTD. (SEGMENTAL) CAN BE SAID TO BE INCLUDABLE IN THE SET OF COMPARABLE TAKEN BY THE TP O AFTER DIRECTIONS OF THE DRP AND ALSO THE REJECTION OF THREE DIAGNOSTIC COMP ANIES BY THE TPO. THE SUMMARY OF THE LIST OF COMPARABLES ACCEPTED BY THE ASSESSEE AS WELL AS BY THE TPO AND REJECTION BY THE TPO AND INCLUDED BUT O BJECTED BY ASSESSEE ARE AS UNDER: SL.NO. NAME OF THE COMPARABLES PROFIT LEVEL INDICATOR (PLI) DISPOSITION SUMMARY REASONS FOR ACCEPTANCE 1. CHOKSI LABORATORIES LTD. 33.78% ACCEPTED BOTH BY THE ASSESSEE AS WELL AS BY THE TPO 2. GVK BIOSCIENCE P. LTD. 26.68% ACCEPTED BOTH BY THE ASSESSEE AS WELL AS BY THE TPO EVONIK DEGUSSA INDIA P. LTD. 12 3. TCG LIFESCIENCE LTD. 26.06% ACCEPTED BOTH BY THE ASSESSEE AS WELL AS BY THE TPO 4. VIMTA LABS LTD. 25.26% ACCEPTED BOTH BY THE ASSESSEE AS WELL AS BY THE TPO 5. DOLPHIN MEDICAL SERVICES LTD. 8.31% REJECTED BY THE TPO ON THE GROUND THAT THE COMPANY IS ENGAGED IN DIAGNOSTIC SERVICES TO WHICH ASSESSEE HAS OBJECTED TO. 6. MAX NEEMAN MEDICAL INTERNA TIONAL LTD. (-)46.73% REJECTED BY THE TPO ON THE GROUND THAT THE COMPANY IS ENGAGED IN DIAGNOSTIC SERVICES TO WHICH ASSESSEE HAS OBJECTED TO. 7. ADS DIAGNOSTIC LTD. DIAGNOSTIC (-)24.96% REJECTED BY THE TPO ON THE GROUND THAT THE COMPANY IS ENGAGED IN DIAGNOSTIC SERVICES TO WHICH ASSESSEE HAS OBJECTED TO. 8. TRANSGENE BIOTEK LTD. DIAGNOSTIC SEGMENT 22.68% REJECTED BY THE TPO ON THE GROUND THAT THE COMPANY IS ENGAGED IN DIAGNOSTIC SERVICES TO WHICH ASSESSEE HAS OBJECTED TO. 9. N.G. INDUSTRIES LTD. 18.10% REJECTED BY THE TPO ON THE GROUND THAT THE COMPANY IS ENGAGED IN DIAGNOSTIC SERVICES TO WHICH ASSESSEE HAS OBJECTED TO. 10. CELESTIAL LABS LTD. 58.35% ACCEPTED NEW COMPARABLE INTRODU CED BY THE TPO ON THE GROUND THAT IT IS ENGAGED IN THE RESEARCH SERVICES. THIS HAS BEEN OBJECTED BY THE ASSESSEE. 11. BIOCON LTD. SEGMENT 31.65% ACCEPTED NEW COMPARABLE INTRODU CED BY THE TPO ON THE GROUND THAT IT IS ENGAGED IN THE RESEARCH SERVICES. THIS HAS BEEN OBJECTED BY THE ASSESSEE. INSOFAR AS THE COMPANIES LISTED AT SERIAL NUMBER 6 AND 7 I.E., ADS DIAGNOSTIC LTD. AND MAX NEEMAN MEDICAL INTERNATIONA L (ASIA) LTD. ARE CONCERNED, THE ASSESSEE HAS NOT PRESSED FOR THE EXC LUSION OF THE SAID COMPANIES BEING VERY HEAVY LOSS MAKING COMPANIES. EVONIK DEGUSSA INDIA P. LTD. 13 17. THE ASSESSEE IS A FULLY OWNED SUBSIDIARY OF EVONIK DEGUSSA GMBH AND IS PROVIDING SUPPORT SERVICES VIZ. MARKETING PR OMOTION COORDINATION AND TESTING AND ANALYTICAL SUPPORT SERVICES FOR EVO NIK GROUP OF COMPANIES. THUS, THE ASSESSEE IS A KIND OF CAPTIVE SERVICE PRO VIDER TO ITS AE. INSOFAR AS THE SEGMENTAL DATA OF THE SUPPORT SERVICES IN CO NNECTION WITH RESEARCH AND DEVELOPMENT, THE ASSESSEE HAD SHOWN THE PROFIT MARGIN OF 20.75% ON THE OPERATING COST IN RELATION TO ITS INTERNATIONAL TRANSACTIONS. IT WAS THIS PROFIT MARGIN, THE TPO HAS REJECTED THE ASSESSEES COMPARABLES SHOWN BY THE ASSESSEE IN ITS T.P. REPORT. 18. SINCE, THE ISSUE INVOLVED BEFORE US IS INCLUSION AN D EXCLUSION OF CERTAIN COMPANIES, THEREFORE, WE PROCEED TO ANALYZE SUCH COMPARABLES VERY BRIEFLY. COMING TO THE INCLUSION OF CELESTIAL LABS LTD., IT IS SEEN THAT THE SAID COMPANY IS ENGAGED IN THE BUSINESS OF SUPP ORTING PHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES WITH CUSTOMISED INFORMA TION TECHNOLOGY SOLUTION. IT IS MAINLY ENGAGED IN THE SOFTWARE DEVE LOPMENT IN DRUG DESIGNING TOOL, BIO INFORMATIC SERVICE AND DATA WAR EHOUSING. MORE THAN 96% OF ITS REVENUE IS FROM THIS SERVICE WHICH ARE M OSTLY IN THE NATURE OF DRUG DESIGNING TOOLS AND SAP SERVICES. THE PROFILE OF THE COMPANY, AS HIGHLIGHTED BY THE LEARNED COUNSEL FOR THE ASSESSEE (WHICH ARE ILLUSTRATED IN PARA 8 ABOVE), SHOWS THAT ITS FUNCTIONS ARE ENTI RELY DIFFERENT FROM THAT OF THE ASSESSEE COMPANY WHICH IS MAINLY INTO TESTIN G AND ANALYTICAL SERVICE IN R&D. WHILE CARRYING OUT COMPARABILITY ANALYSIS, ONE HAS TO EXAMINE THE FUNCTIONAL PROFILE OF THE COMPANY AND THE ATTRIBUTE S OF THE PRODUCTS AND SERVICES PROVIDED. IF THE PRODUCTS AND SERVICES ARE DIFFERENT, THEN IT BECOMES VERY DIFFICULT TO COMPARE THE PLI WITH THE TESTED PARTY. THE FUNCTIONAL ANALYSIS SHOWS THAT THIS COMPANY IS MAIN LY ENGAGED IN DEVELOPMENT OF SPECIFIC TYPE SOFTWARE SERVICES AND PRODUCTS. THUS, CELESTIAL LABS LTD. WHICH IS MAINLY A SOFTWARE DEVE LOPMENT COMPANY AND ENGAGED IN BIO INFORMATIC SERVICES CANNOT BE SAID T O BE FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE AND, THEREFORE , IT CANNOT BE INCLUDED FOR COMPARABILITY ANALYSIS IN THE SET OF COMPARABLE S TAKEN BY THE TPO. EVONIK DEGUSSA INDIA P. LTD. 14 ACCORDINGLY, WE UPHOLD THE CONTENTIONS OF THE ASSES SEE THAT THE SAID COMPANY CANNOT BE INCLUDED. 19. REGARDING INCLUSION OF BIOCON LTD., INSOFAR AS CONT RACT RESEARCH SEGMENT TAKEN BY THE TPO IS CONCERNED, WE FIND MERI TS IN THE CONTENTIONS OF THE LEARNED COUNSEL THAT ITS CONTRACT RESEARCH S EGMENT RELATES TO TWO SUBSIDIARY OF BIOCON LTD. I.E., CLINIGENE INTERNATI ONAL LTD. AND SYNGENE INTERNATIONAL LTD. THE FORMER COMPANY CANNOT BE INC LUDED AT ALL FOR THE PRELIMINARY REASON THAT ITS RELATED PARTY TRANSACTI ON IS APPROXIMATELY 38% OF ITS SALES, THEREFORE, IT CANNOT BE HELD TO BE A FIT CASE FOR COMPARISON OF A CONTROLLED TRANSACTION WITH AN UNCONTROLLED TRANSAC TION. ON THIS GROUND ALONE, THE DATA OF THE SAID COMPANY CANNOT BE INCLU DED FOR COMPARABILITY ANALYSIS. INSOFAR AS SYNGENE INTERNATIONAL LTD., TH IS COMPANY IS AGAIN 99% SUBSIDIARY OF BIOCON LTD. AND IS ENGAGED AS A CUSTO M RESEARCH SERVICE PROVIDER IN THE DRUG DEVELOPMENT PROCESS FROM DISCO VERY TO SUPPLY OF DEVELOPMENT COMPOUNDS. FROM ANNUAL REPORT, IT IS SE EN THAT THE OCMPANY HAS TWO SETS OF INCOME ONE FROM CONTRACT RESEARCH FEES AND SALE OF COMPOUNDS. HOWEVER, IN THE ABSENCE OF SEGMENTAL INF ORMATION REGARDING CONTRACT RESEARCH AND MANUFACTURING ACTIVITIES, IT IS DIFFICULT TO ANALYSE ITS MAIN REVENUE AND PROFIT MARGIN FROM THE CONTRACT RE SEARCH WORK. EVEN OTHERWISE ALSO, APPARENTLY IT IS SEEN THAT ITS FUNC TIONAL PROFILE IS DIFFERENT WITH THAT OF THE ASSESSEE COMPANY. THUS, GOING BY T HE SEGMENTAL DATA OF BIOCON LTD. WITH REGARD TO CONTRACT RESEARCH SEGMEN T, WE DO NOT FIND ANY MERIT IN THE INCLUSION OF THE SAID COMPANY BY THE T PO IN THE SET OF COMPARABLES FOR DETERMINING THE ALP IN THE CASE OF THE ASSESSEE. HENCE, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE SE T OF COMPARABLES. 20. NOW, COMING TO THE VARIOUS DIAGNOSTIC COMPANIES EXC LUDED BY THE TPO VIZ. DOLPHIN MEDICAL SERVICES LTD., TRANSGENE B IOTEK LTD. AND N.G. INDUSTRIES LTD., WE FIND FROM THE PERUSAL OF RECORD PRODUCED BEFORE US, THAT NOT ONLY THE FUNCTIONAL PROFILE OF THESE COMPA NIES ARE DIFFERENT BUT THE CHARECTERISTIC OF THE SERVICES RENDERED ARE ALSO DI FFERENT. FOR E.G., DOLPHIN MEDICAL SERVICES LTD., AS POINTED OUT BY THE LEARNE D DEPARTMENTAL EVONIK DEGUSSA INDIA P. LTD. 15 REPRESENTATIVE, IS ENGAGED IN DIAGNOSTIC SERVICES L IKE CT SCAN, MRI, COLOUR DOPPLER, ETC., WHICH IS ENTIRELY DIFFERENT FROM R&D , TESTING AND ANALYTICAL SERVICES PERFORMED BY THE ASSESSEE. THESE SERVICES CANNOT BE COMPARED WITH THE BUSINESS ACTIVITY CARRIED ON BY THE ASSESS EE. IN THE CASE OF TRANSGENE BIOTECH, IT IS SEEN THAT IT IS ENGAGED IN THE BUSINESS OF PRE CLINICAL AND CLINICAL RESEARCH SERVICE FOR BIOPHARM A AND AS POINTED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, THIS COMPA NY IS INVOLVED IN DEVELOPING HUMAN VACCINES AND HAS PATENT RIGHTS OF VARIOUS PRODUCTS AND VACCINES DEVELOPED BY IT. THUS, THIS COMPANY CANNOT BE COMPARED WITH THE ACTIVITIES OF THE ASSESSEE COMPANY WHICH IS IN R&D AND ANALYTICAL SERVICES. SIMILAR IS THE CASE OF N.G. INDUSTRIES LTD. WHICH I S ALSO PURELY A DIAGNOSTIC AND MEDICAL COMPANY AND ITS SERVICES ARE ENTIRELY D IFFERENT FROM THAT OF ASSESSEE. THUS, THESE THREE COMPANIES HAS RIGHTLY B EEN REJECTED BY THE TPO FROM THE SET OF COMPARABLES AND THE CONTENTIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE TO INCLUDE THESE THREE COM PANIES FOR THE PURPOSE OF COMPARABILITY ANALYSIS IS HEREBY REJECTED. 21. IN VIEW OF OUR AFORESAID FINDINGS, ONLY FOUR SET OF COMPANIES WHICH HAS BEEN ACCEPTED BY BOTH THE TPO AS WELL AS THE AS SESSEE VIZ. CHOKSI LABS LTD., VIMTA LAB LTD., G.V.K. BIOSCIENCES P. LT D. AND TCG LIFESCIENCE LTD., SHOULD BE INCLUDED FOR THE PURPOSES OF COMPAR ABILITY ANALYSIS AND THE ARITHMETIC MEAN OF THE PLI OF THESE FINAL SET OF CO MPANIES BY TAKING OPERATING PROFIT OF THE TOTAL COST SHOULD BE TAKEN FOR THE PURPOSE OF DETERMINING THE ALP. 22. REGARDING THE PLEA OF RISK ADJUSTMENT ON ACCOUNT OF DIFFERENCE BETWEEN THE RISK PROFILE OF THE COMPARABLES AND THE ASSESSEE, WE FIND THAT NEITHER THE TPO NOR THE DRP HAS DEALT WITH THE ASSE SSEES CONTENTIONS / OBJECTIONS. THEREFORE, IN THE INTEREST OF JUSTICE, WE ARE OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RESTORED BACK T O THE FILE OF THE TPO, WHO WILL EXAMINE THE ASSESSEES CONTENTIONS ON THIS SCORE AND DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH THE LAW AFTER PROVI DING DUE AND EFFECTIVE EVONIK DEGUSSA INDIA P. LTD. 16 OPPORTUNITY OF REPRESENTING THE CASE TO THE ASSESSE E. WE ORDER ACCORDINGLY. GROUND NO.1, IS THUS, PARTLY ALLOWED. 23. IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE ADD ITION OF RS. 9,83,383, ON ACCOUNT OF NOTIONAL ADDITION TOWARDS I NTEREST ON THE AMOUNT RECEIVABLE FROM THE A.E. 24. THE TPO OBSERVED THAT THE ASSESSEE HAS GIVEN CREDIT OF THIRTY DAYS IN THE INVOICES RAISED AGAINST THE A.E. HOWEVER, THERE HAS BEEN DELAY IN MAKING THE PAYMENT BY THE A.E. BEYOND THE STIPULATE D CREDIT PERIOD AND ON SUCH DELAYED PAYMENT, THE ASSESSEE HAS NOT CHARG ED ANY INTEREST. ACCORDINGLY, HE COMPUTED THE INTEREST @ ONE PERCENT PER MONTH FOR THE PERIOD OF DELAY BEYOND THIRTY DAYS AND ACCORDINGLY HE WORKED OUT THE NOTIONAL INTEREST TO BE RECEIVED BY THE ASSESSEE AT RS. 9,83,383. 25. OBJECTION BEFORE THE DRP BY THE ASSESSEE WAS REJECT ED. 26. LEARNED COUNSEL SHRI KANCHAN KAUSHAL SUBMITTED THAT THE ASSESSEE IS A ZERO DEBT COMPANY AND IT DOES NOT HAVE ANY BOR ROWINGS FROM EXTERNAL SOURCES, THEREFORE, IT IS NOT REQUIRED TO PAY ANY I NTEREST. THERE HAVE BEEN SOME SITUATIONS THAT THERE HAS BEEN DELAY IN MAKING THE PAYMENTS BY THE A.ES BEYOND THE NORMAL CREDIT PERIOD, HOWEVER, NO I NTEREST HAS BEEN CHARGED FOR THE REASON THAT THERE IS NO INTEREST CO ST TO THE ASSESSEE. MOREOVER, THERE IS NO SUCH AGREEMENT BETWEEN THE AS SESSEE AND THE A.E. TO CHARGE INTEREST ON DELAYED PAYMENTS. HE, THEREFO RE, CONTENDED THAT CHARGING OF NOTIONAL INTEREST IN THE INTERNATIONAL TRANSACTION IS WHOLLY ERRONEOUS. LEARNED COUNSEL FURTHER POINTED OUT THAT THE ASSESSEE HAS BEEN RAISING THE BILLS ON QUARTERLY BASIS AND THE P AYMENT HAS THUS RECEIVED AFTER THE BILLS ONLY. THEREFORE, THE DELAY CANNOT BE ATTRIBUTED PURELY ON ACCOUNT OF DELAYED PAYMENTS MADE BY THE A .ES. MOREOVER, THE BUSINESS TRANSACTION HAS TO BE DECIDED BETWEEN THE TWO PARTIES AND THERE CANNOT BE ANY PRESUMPTION BY THE A.O. ABOUT CHARGIN G OF NOTIONAL INTEREST ON SUCH DELAYED PAYMENT. EVONIK DEGUSSA INDIA P. LTD. 17 27. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER H AND, RELYING UPON THE ORDER OF THE TPO AND DRPS DIRECTION, SUBM ITTED THAT IN SOME CASES DELAY IS OF MORE THAN 200 DAYS AND IF ONE HAS TO JUDGE IN RELATION TO THE THIRD PARTY WHETHER SUCH A LONG CREDIT WOULD HA VE BEEN GIVEN BY THE ASSESSEE. THEREFORE, THE TPO HAS RIGHTLY CHARGED TH E INTEREST. 28. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS A ND THE ORDERS OF THE TPO AS WELL AS THE DIRECTION OF THE DRP, WE FIN D THAT THE ASSESSEE HAS NO INTEREST LIABILITY AND IT DOES NOT HAVE ANY EXTE RNAL BORROWINGS. EVEN IF THE PAYMENTS HAVE BEEN MADE BY THE A.E. BEYOND THE NORMAL CREDIT PERIOD, THERE IS NO INTEREST COST TO THE ASSESSEE. MOREOVER, THERE IS NO SUCH AGREEMENT WHEREBY INTEREST IS TO BE CHARGED ON SUCH A DELAYED PAYMENT. FROM THE SUMMARY OF PAYMENT SUBMITTED BY T HE LEARNED COUNSEL, IT IS SEEN THAT THE BILLING IS DONE ON QUA RTERLY BASIS AND, ACCORDINGLY, THE PAYMENT IS BEING RECEIVED. THEREFO RE, THE DELAY IS NOT WHOLLY ON ACCOUNT OF LATE PAYMENT BY THE A.ES ONLY. MOREOVER, THE T.P. ADJUSTMENT CANNOT BE MADE ON HYPOTHETICAL AND NOTIO NAL BASIS UNTIL AND UNLESS THERE IS SOME MATERIAL ON RECORD THAT THERE HAS BEEN UNDER CHARGING OF REAL INCOME. THUS, ON THE FACTS AND CIR CUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT ADDITION AN ACCOUNT OF N OTIONAL INTEREST RELATING TO ALLEGED DELAYED PAYMENT IN COLLECTION OF RECEIVA BLES FROM THE A.ES, IS UNCALLED FOR ON THE FACTS OF THE PRESENT CASE AND I S, ACCORDINGLY, DELETED. 29. IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE ASS ESSING OFFICERS ACTION OF TREATING NETWORK ACCESS CHARGES AS CAPITA L EXPENDITURE. 30. THE ASSESSING OFFICER ON PERUSAL OF ACCOUNTS FOUND THAT THE ASSESSEE HAS DEBITED A SUM OF RS. 12,60,835, IN THE PROFIT & LOSS ACCOUNT UNDER THE HEAD SOFTWARE EXPENSES. IN RESPONSE TO THE SHOW C AUSE NOTICE AS TO WHY THE SAID EXPENDITURE MAY NOT BE TREATED AS CAPITAL IN NATURE, IT WAS SUBMITTED BY THE ASSESSEE THAT THE EXPENDITURE HAV E BEEN INCURRED TOWARDS THE PAYMENT MADE TO THE GROUP ENTITIES TO WARDS EMAIL EVONIK DEGUSSA INDIA P. LTD. 18 INFRASTRUCTURE AND NETWORK ACCESS CHARGES. SINCE T HESE EXPENDITURES WERE INCURRED FOR THE PURPOSE OF SMOOTH AND EFFICIENT RU NNING OF BUSINESS, THE SAME IS TO BE TREATED AS REVENUE IN NATURE. THE AS SESSING OFFICER REJECTED THE SAID CONTENTION OF THE ASSESSEE ON THE GROUND T HAT THE ASSESSEE HAS NOT GIVEN THE DETAILS OF ALL THE INFRASTRUCTURE INS TALLED. HE HELD THAT MRE NOMENCLATURE OF SOFTWARE EXPENDITURE SHOWS THAT I T RELATES TO ONLY AS CAPITAL EXPENDITURE. 31. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE U S THAT THE PAYMENT HAS BEEN MADE FOR EMAIL INFRASTRUCTURE PRO VIDED BY THE PARENT COMPANIES FOR PROVIDING COMMUNICATION FACILITY BETW EEN THE PERSONNEL OF THE ASSESSEE WITH OUTSIDE BUSINESS PARTNERS. THE PA RENT COMPANIES HAVE PROVIDED VIRTUAL PRIVATE NETWORK (VPM) WHICH IS A S ECURED INTERNET ACCESS NETWORK TO VARIOUS SYSTEMS TO BE USED BY THE EMPLOY EES OF THE ASSESSEE FOR DAYTODAY FUNCTIONING. HE SUBMITTED THAT THE E MAIL INFRASTRUCTURE ARE NOT OWNED BY THE ASSESSEE AND THE EXPENDITURES HAVE BEEN INCURRED FOR ACCESSING THE SAID INFRASTRUCTURE, THEREFORE, T HE SAME IS TO BE TREATED AS REVENUE EXPENDITURE. 32. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER AS WELL AS TH E DIRECTION OF THE DRP. 33. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS OF THE PARTIES, PERUSED THE MATERIAL PLACED ON RECORD AS WELL AS TH E ORDER PASSED BY THE ASSESSING OFFICER. FROM THE RECORDS, IT IS SEEN THA T THE ASSESSEE HAS MADE THE PAYMENT FOR AVAILING EMAIL INFRASTRUCTURE LIKE LOTUS NOTES ACCOUNTS FOR THE EMPLOYEES, USAGE OF VPN, NETWORK INFRASTRUCTURE EXCESS SERVICE WHICH ARE OWNED BY THE PARENT COMPANY AND NOT BY THE ASSE SSEE. THE ASSESSEE IS MAKING THE PAYMENT FOR USING THIS EMAIL INFRAST RUCTURE FACILITIES FOR COMMUNICATION BETWEEN EMPLOYEES OF THE ASSESSEE AND OUTSIDE BUSINESS PARTNERS. SUCH FACILITIES OF SECURED INTERNET FACIL ITIES, FACILITATES THE DAY TODAY BUSINESS OPERATION OF THE ASSESSEE AND DOES NOT BRING INTO AN EXISTENCE ANY ENDURING BENEFIT OR CREATION OF A NEW ASSET TO THE ASSESSEE. IT IS NOT A CAPITAL SOFTWARE EXPENDITURE AS HELD BY THE ASSESSING OFFICER EVONIK DEGUSSA INDIA P. LTD. 19 EVEN THOUGH THE SAME HAS BEEN CLASSIFIED UNDER THE HEAD SOFTWARE EXPENDITURE. THUS, ON THESE FACTS AND CIRCUMSTANCE S, WE HOLD THAT SUCH AN EXPENDITURE IS PURELY REVENUE IN NATURE AND IS A LLOWABLE UNDER SECTION 37(1) OF THE ACT. CONSEQUENTLY, GROUND NO.3 IS ALLO WED. 34. GROUND NO.4, IS AN ALTERNATIVE GROUND FOR GIVING DE PRECIATION ON SOFTWARE EXPENDITURE, THE SAME HAS BECOME INFRUCTUO US IN VIEW OF OUR FINDING GIVEN IN GROUND NO.3, ABOVE. THUS, THIS GRO UND IS DISMISSED AS INFRUCTUOUS. 35. . !4 & '.! / ' 5! / 1! 67 8 35. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ' / ( 9 :&4 21/11/2012 / ; 8 ORDER PRONOUNCED IN THE OPEN COURT ON 21/11/2012. SD SD/- /- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER S SD/- D/- ! ! ! ! '# '# '# '# AMIT SHUKLA JUDICIAL MEMBER MUMBAI, :& :& :& :& DATED: 21/11/2012 ' / +!< =<(! / COPY OF THE ORDER FORWARDED TO : (1) & '.! / THE ASSESSEE; (2) 1 / THE REVENUE; (3) >() / THE CIT(A); (4) > / THE CIT, MUMBAI CITY CONCERNED; (5) < A; +!& , , / THE DR, ITAT, MUMBAI; (6) ;B' C / GUARD FILE. +! / TRUE COPY '& / BY ORDER +2 1. DE 2 / PRADEEP J. CHOWDHURY .F &1 D / SR. PRIVATE SECRETARY G / 6 1 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI