Ranbaxy Laboratories Ltd., Delhi V. DCIT, New Delhi

ITA 781/DEL/2015

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 1955 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 26-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 09-02-2015

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE JUSTICE P.P. BHATT, PRESIDENT AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER 1. ./IT(TP)A NO. 1782/DEL/2014 2. ./IT(TP)A NO. 781/DEL/2015 ( / ASSESSMENT YEARS : 2009-10 & 2010-11) RANBAXY LABORATORIES LTD. 12 TH FLOOR, DEVIKA TOWER 6, NEHRU PLACE, NEW DELHI 110 019 / VS. THE DCIT CIRCLE-21(1), NEW DELHI/ ADDL.CIT RANGE-15 NEW DELHI ./ ./ PAN/GIR NO. : AAACR0127N ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI S.N.SOPARKAR, SHRI VARTIK CHOKSHI, MS.URVASHI SHODHAN & SHRI P.SHAH, ARS / RESPONDENT BY : SHRI MAHESH SHAH, CIT-DR / DATE OF HEARING 05/08/2019 !'# / DATE OF PRONOUNCEMENT 05/09/2019 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEALS HAVE BEEN FILED AT THE INSTAN CE OF THE ASSESSEE AGAINST THE SEPARATE ORDERS OF THE DISPUTE RESOLUTION PANEL-II, NEW DELHI [ DRP IN SHORT] VIDE ORDER DATED 27/12/ 2013 & 04/12/2014 ARISING IN THE ASSESSMENT ORDERS PASSED UNDER S.14 3(3) R.W.S.144C OF THE INCOME TAX ACT, 1961(HEREINAFTER REFERRED TO AS 'TH E ACT') DATED 30/01/2014 AND DATED NIL (FOR AY 2010-11) RELEVANT TO ASSESSMENT YEARS (AYS) 2009-10 & 2010-11 RESPECTIVELY. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 2 - FIRST, WE TAKE UP ITA NO. 1782/DEL/2014 AY 2009-10 THIS APPEAL IS PREFERRED BY ASSESSEE (HEREINAFTER R EFERRED TO AS APPELLANT) AGAINST THE ORDER PASSED BY THE ASSESS ING OFFICER (HEREINAFTER REFERRED AS AO) UNDER SECTION 143(3) READ WITH SE CTION 144C OF THE INCOME TAX ACT,1961 (HEREINAFTER REFERRED AS THE ACT) DATED 30.01.2014 AS PER THE DIRECTION OF LEARNED DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED AS DRP)-II DATED 27.12.2013. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL AS UNDER:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE , AND IN LAW, THE ASSESSMENT ORDER DATED 30.01.2014 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (THE ACT') IN PURSUANCE OF THE DIRECT IONS ISSUED BY THE LEARNED DISPUTE RESOLUTION PANEL ('LD. DRP') IS ILLEGAL AND BAD IN LAW. 1.1 THAT THE LD. DRP ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADDITIONS/ DISALLOWANCES PROPOSED IN THE DRAFT ASSESSMENT ORDE R PASSED BY THE ASSESSING OFFICER, WITHOUT JUDICIOUSLY CONSIDERING THE FACTUA L AND LEGAL OBJECTIONS FILED AGAINST THE SAID ORDER. 1.2 THAT THE DRP ERRED ON FACTS AND IN LAW IN NOT DIRECTING THE ASSESSING OFFICER TO DELETE VARIOUS ADDITIONS/ DISALLOWANCE, WHICH WERE SQUARELY COVERED IN FAVOUR OF THE APPELLANT BY THE ORDER(S) OF THE A PPELLATE AUTHORITIES FOR EARLIER YEARS. 1.3 THAT THE DRP ERRED ON FACTS AND IN LAW IN NOT INDEPENDENTLY CONSIDERING/ DIRECTING THE ASSESSING OFFICER TO CON SIDER CERTAIN CLAIMS MADE BY WAY OF NOTES FORMING INTEGRAL PART OF THE RETURN ON THE GROUND THAT THE SAID CLAIMS WERE NOT MADE IN THE RETURN AND NO VARIATION WAS PROPOSED ON THE SAID CLAIMS IN THE DRAFT ASSESSMENT ORDER. 2. THAT THE LD. DRP ERRED, BOTH ON FACTS AND IN LA W, IN CONFIRMING THE ADDITION OF RS.145,13,17,725 BY HOLDING THAT THE AP PELLANT'S INTERNATIONAL RELATED PARTY TRANSACTIONS DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE AS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 3 - ENVISAGED UNDER THE ACT AND IN DOING SO THE LD. DRP HAS GROSSLY ERRED IN AGREEING WITH THE LD. TRANSFER PRICING OFFICER'S (' TPO') ACTION OF: 2.1 DISREGARDING THE ARM'S LENGTH PRICE ('ALP') AND THE METHODICAL BENCHMARKING PROCESS CARRIED OUT BY THE APPELLANT I N THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY IT IN TERMS OF S ECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 ('RULES '); 2.2 NOT ACCEPTING THE OVERSEAS ASSOCIATED ENTERPR ISES ('AES') AS THE TESTED PARTY, BEING THE LEAST COMPLEX OF THE TRANSACTING E NTITIES AND INSTEAD CONSIDERING THE APPELLANT AS THE TESTED PARTY, THU S VIOLATING THE BASIC PRINCIPLES OF TP. 2.3 DISREGARDING THE APPROACH ADOPTED BY THE APPE LLANT OF UNDERTAKING A REGIONAL BENCHMARKING IN THE TP REPORT WHICH IS IN LINE WITH THE GLOBALLY ACCEPTED TP PRINCIPLES. 2.4 HOLDING THAT RELEVANT AND SUFFICIENT FINANCIA L DATA IS NOT AVAILABLE FOR THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT. 2.5 HOLDING THAT FINANCIAL ACCOUNTS OF THE OVERSE AS AES NEED TO BE RE-CASTED FROM APRIL TO MARCH AND IGNORING THE FACT THAT THE FINANCIALS OF THE OVERSEAS COMPARABLES FURNISHED IN THE TP REPORT HAVE SIMILAR PERIOD AS THAT OF THE AES. 3. THAT THE LD. AO/DRP ERRED IN MODIFYING THE SUPP LEMENTARY ECONOMIC ANALYSIS CONDUCTED BY THE APPELLANT, TAKING APPELLA NT AS THE TESTED PARTY AND WHILE DOING SO THE LD. AO/DRP HAS GROSSLY ERRED BY: 3.1 DISREGARDING THE ALP AND THE METHODICAL BENC HMARKING PROCESS CARRIED OUT BY THE APPELLANT WHILE PREPARING THE SUPPLEMENT ARY ECONOMIC ANALYSIS AS SUBMITTED BEFORE THE LD. DRP AND LD. TPO IN ORDER T O MEET THEIR REQUIREMENTS; 3.2 DISREGARDING THE APPROACH ADOPTED BY THE APPE LLANT OF USING THE MULTIPLE YEAR/ PRIOR AVAILABLE YEAR'S DATA IN THE SUPPLEMENT ARY ECONOMIC ANALYSIS AND HOLDING THAT CURRENT YEAR (I.E. FINANCIAL YEAR 2008 -09) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING TP DOCUMENTATION; 3.3 RESORTING TO ARBITRARY REJECTION OF LOW PROFI T MAKING COMPANIES BASED ON ERRONEOUS AND FACTUALLY INCORRECT REASONS; IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 4 - 3.4 SELECTING RANDOM COMPANIES AS COMPARABLES WITHOUT P ROVIDING A SEARCH STRATEGY AND THEREBY UNDERTAKING CHERRY PICKING OF COMPARABLES WITH THE SOLE OBJECTIVE OF MAKING THE ADJUSTMENT; 3.5 MODIFYING THE SEARCH STRATEGY CONSISTENTLY AP PLIED BY THE APPELLANT AND INCLUDING CERTAIN COMPANIES THAT ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS A SSUMED; 3.6 BY NOT ALLOWING APPROPRIATE ECONOMIC ADJUSTME NT FOR RESEARCH AND DEVELOPMENT EXPENSES UNDERTAKEN TO ENHANCE COMPARAB ILITY; 3.7 NOT APPRECIATING THAT TP ADJUSTMENT CANNOT EX CEED THE TOTAL PROFIT MADE BY THE OVERSEAS AES FROM THE INTERNATIONAL TRANSACT IONS ENTERED INTO WITH THE APPELLANT COMPANY. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/DRP HAS ERRED IN DISREGARDING SOUND TP PRINCIPLE S AND JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUS TMENT. 5. THAT THE LD. AO/DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT DEFERRED EMPLOYEE COMPENSATION DEBITED TO THE PROFIT & LOSS ACCOUNT (P&L) PURSUANT TO COMPANY'S EMPLOYEES STOCK OPTION SCHEME (ESOP) A MOUNTING TO RS. 6,84,523 IS NOT ALLOWABLE AS DEDUCTION. 5.1 THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN HO LDING THAT EMPLOYEES COMPENSATION EXPENSE CLAIMED BY THE APPELLANT DID N OT REPRESENT A CRYSTALLIZED LIABILITY AND THE CLAIM BEING WITHOUT ANY EVIDENCE, RANDOM IN NATURE, HENCE NOT ALLOWABLE AS DEDUCTION. 5.2 THAT THE AO/DRP FURTHER ERRED ON FACTS AND IN L AW IN HOLDING THAT SINCE THE APPELLANT DID NOT DEDUCT ANY TAX AT SOURCE, THE AMOUNT CLAIMED WAS DISALLOWABLE UNDER SECTION 40(A)(IA) OF THE ACT. 5.3 WITHOUT PREJUDICE, THAT THE AO/DRP FAILED TO AP PRECIATE THAT: (A) TAX WAS NOT DEDUCTIBLE ON MERE ISSUANCE OF OPTIONS AND (B) NO DISALLOWANCE, IN ANY CASE, CAN BE MADE UNDER SECTION 40(A)(IA) OF THE AC T ON ACCOUNT OF ALLEGED NON-DEDUCTION OF TAX ON PAYMENTS MADE IN THE NATURE OF 'EMOLUMENTS' TO EMPLOYEES. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 5 - 5.4 WITHOUT PREJUDICE, THAT THE AO/DRP ERRED ON FAC TS AND IN LAW IN NOT EVEN ALLOWING DEDUCTION OF EMPLOYEE COMPENSATION EXPENSE RELATING TO OPTIONS ACTUALLY EXERCISED BY ASSESSEE'S EMPLOYEES PURSUANT TO COMPANY'S ESOP. 6. THAT THE LD. AO/DRP ERRED ON FACTS AND IN LAW I N TREATING RS 21,79,471, BEING REVERSAL OF DEFERRED EMPLOYEES COMPENSATION C REDITED TO THE PROFIT & LOSS ACCOUNT ON ACCOUNT OF NON EXERCISE OF OPTIONS BY ITS EMPLOYEES, AS INCOME OF THE ASSESSEE, WITHOUT APPRECIATING THE FACT THAT THE EXPENSE IN RELATION TO SUCH INCOME HAD ALREADY BEEN DISALLOWED IN EARLIER YEARS. 6.1 THAT THE LD. AO / DRP FAILED TO APPRECIATE THAT REVERSAL OF EXPENSE, WHICH WAS NEVER ALLOWED AS DEDUCTION IN THE PREVIOUS YEAR (S) CANNOT BE HELD TO BE INCOME OF THE ASSESSEE. 6.2 THAT THE LD. DRP ERRED IN HOLDING THAT THE REVE RSAL OF EXPENSE SHOULD BE TREATED AS INCOME OF THE ASSESSEE, EVEN IF SUCH EXP ENSE WAS DISALLOWED IN EARLIER YEAR(S), ONLY BECAUSE THE MATTER HAD NOT AT TAINED FINALITY, DESPITE ACKNOWLEDGING THAT THE SAME WOULD TANTAMONT TO DOUB LE TAXATION OF THE SAME AMOUNT. 7. THAT THE LD. AO ERRED ON FACTS AND IN LAW IN NO T FOLLOWING THE DIRECTIONS OF THE HON'BLE DRP AND ALLOWING DEDUCTION IN RESPECT O F CONTRIBUTION OF RS.22,50,000 AND RS. 50,00,000 MADE TO RANBAXY COMM UNITY HEALTHCARE SOCIETY (RCHS) AND RANBAXY SCIENCE FOUNDATION RESPE CTIVELY UNDER THE PROVISIONS OF SECTIONS 37 OF THE ACT. 7.1 THAT LD. AO ERRED ON FACTS AND IN LAW IN HOLDIN G THAT THE AFORESAID AMOUNTS CONSTITUTED DONATION, ELIGIBLE FOR DEDUCTIO N UNDER SECTION 80G OF THE ACT. 7.2 THAT THE LD. AO/DRP ERRED ON FACTS AND IN LAW I N HOLDING THAT PAYMENTS MADE BY THE APPELLANT WERE IN THE NATURE OF ADVERTI SEMENT AND PUBLICITY EXPENSE ON WHICH TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE AND CONSEQUENTLY THE CONTRIBUTION CLAIMED WAS DISALLOWABLE UNDER SEC TION 40(A)(IA) OF THE ACT. 8. THAT THE LD. AO/DRP ERRED ON FACTS AND IN LAW IN DISALLOWING RS. 11,68,23,115 UNDER SECTION 14A OF THE ACT, BY APPLY ING THE FORMULA PRESCRIBED IN RULE 8D OF THE INCOME TAX RULES, 1962 ('THE RULE S'). IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 6 - 8.1 THAT THE LD. AO/DRP ERRED ON FACTS AND IN LAW IN PROCEEDING TO MAKE DISALLOWANCE UNDER SECTION 14A OF THE ACT SIMPLY ON THE BASIS OF METHOD/ FORMULA PRESCRIBED IN RULE 8D OF THE RULES, WITHOUT APPRECIATING THAT: (A) THERE IS NOTHING ON RECORD TO DISPUTE THE CONTE NTION OF THE APPELLANT THAT NO EXPENDITURE, OVER AND ABOVE EXPENDITURE SUO-MOTO DI SALLOWED BY THE APPELLANT WAS ACTUALLY INCURRED IN RELATION TO THE EXEMPT INC OME; (B) PRECONDITIONS FOR APPLYING RULE 8D AS PRESCRIBE D IN SUB-SECTIONS (2)1 (3) OF SECTION 14A OF THE ACT WERE NOT SATISFIED. 8.2 THAT THE AO/ DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THERE WAS NO NEXUS BETWEEN ANY INTEREST EXPENDITURE INCURRED BY THE APPELLANT AND THE EXEMPT INCOME AND CONSEQUENTLY, NO PART OF INTEREST EXPENDITURE WAS, IN ANY CASE, DISALLOWABLE UNDER SECTION 14A OF THE ACT. 8.3 THAT THE AO / DRP ERRED ON FACTS AND IN LA W IN HOLDING THAT THE PRIMARY REASONS FOR MAKING INVESTMENT WAS TO EARN EXEMPT IN COME, FOR MAKING DISALLOWANCE UNDER SECTION14A OF THE ACT, WHICH IS IN COMPLETE DISREGARD TO MATERIAL PLACED ON RECORD BY THE APPELLANT. 8.4 WITHOUT PREJUDICE, THAT THE AO ERRED ON FA CTS AND IN LAW IN COMPUTING THE AMOUNT OF DISALLOWANCE AS PER RULE 8D OF THE RU LES. 9. THAT THE LD. AO/DRP FURTHER ERRED ON FACTS AND IN LAW IN MAKING UPWARD ADJUSTMENT OF RS. 11,68,23,115 WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT, WITHOUT APPRECIATING THAT: (A) ADJUSTMENT, IF ANY, COULD HAVE ONLY BEEN MADE O UT OF EXPENDITURE ACTUALLY DEBITED TO THE AUDITED ACCOUNTS; (B) THE METHOD/ FORMULA PRESCRIBED IN RULE 8D OF TH E RULES WAS NOT RELEVANT FOR COMPUTING BOOK PROFIT. 10. THAT THE LD. AO/DRP ERRED ON FACTS AND IN LAW I N NOT APPRECIATING THE FACTS IN THE CASE OF THE ASSESSEE CASE AND MISINTER PRETING THE SAME WHILE PROPOSING THE DISALLOWANCE OF ENTIRE DEDUCTION CLAI MED UNDER SECTIONS 80-IB AND 80-IC OF THE ACT. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 7 - 10.1 THAT THE LD. DRP ERRED ON FACTS AND IN LAW IN NOT INDEPENDENTLY ADJUDICATING THE ISSUE OF ELIGIBILITY OF THE ASSESS EE TO CLAIM DEDUCTION UNDER SECTION 80-IB & 80-IC OF THE ACT IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND MERELY RELYING ON THE FINDINGS FOR ASSESSMENT Y EAR 2008-09. 10.2 THAT THE LD. AO/ DRP ERRED ON FACTS AND IN LAW IN DENYING THE DEDUCTION CLAIMED ON THE GROUND THAT SEPARATE BALAN CE SHEET AND PROFIT AND LOSS ACCOUNT WERE ALLEGEDLY NOT MAINTAINED BY THE A PPELLANT FOR THE ELIGIBLE UNITS/ UNDERTAKING, THEREBY VIOLATING THE CONDITION PRESCRIBED IN SECTION 80IA(7) OF THE ACT. 10.3 THAT THE LD.AO/ DRP FAILED TO APPRECIATE TH AT THE DEDUCTION CLAIMED BY THE APPELLANT UNDER SECTIONS 80IB/ 1C OF THE ACT WA S DULY SUPPORTED BY AUDIT REPORT(S) IN FORM 10CCB AND ACCOUNTS MAINTAINED IN SAP/ ERP BASED ELABORATE, COMPREHENSIVE AND ROBUST ACCOUNTING SYST EM/ SOFTWARE. 10.4 THAT THE LD.AO/ DRP EXCEEDED JURISDICTION I N HOLDING THAT THE APPELLANT WAS NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTIONS 80-IB/ 80-IC OF THE ACT FOR THE YEAR UNDER CONSIDERATION, WITHOUT A PPRECIATING THAT ON IDENTICAL FACTS DEDUCTION HAD ALWAYS BEEN ALLOWED IN THE EARL IER YEAR(S) (EXCEPT FOR ASSESSMENT YEAR 2008-09). 10.5 THAT THE AO/ DRP ERRED ON FACTS AND IN LAW IN ALLEGING THAT THE APPELLANT VIOLATED THE PROVISIONS OF SUB-SECTIONS ( 5) AND (8) OF SECTION 80IA OF THE ACT. 10.6 THAT THE LD. AO/ DRP ERRED ON FACTS AND IN LAW, IN MISINTERPRETING THE APPLICABLE LEGAL PROVISIONS AND PLACING RELIANCE ON JUDICIAL PRECEDENTS NOT APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE WHIL E CONFIRMING THE DISALLOWANCE OF ENTIRE DEDUCTION CLAIMED UNDER SECTIONS 80-LB AN D 80-IC OF THE ACT. 10.7 THAT THE LD. AO/DRP ERRED ON FACTS AND IN L AW, IN PROPOSING ALTERNATE COMPUTATION MECHANISM (PARTICULARLY IN PARAS B-1, B -2, C AND D OF THE IMPUGNED ORDER) TO ARRIVE AT THE PROFITS ELIGIBLE F OR DEDUCTION UNDER SECTIONS 80-LB AND 80-IC OF THE ACT, DISREGARDING THE METHOD PRESCRIBED UNDER THE ACT. 10.8 THAT THE LD. AO/DRP ERRED ON FACTS AND IN L AW IN NOT EVALUATING THE ADDITIONAL INFORMATION FILED BY THE ASSESSEE IN SUP PORT OF DEDUCTION CLAIMED UNDER SECTION 80-LB AND SECTION 80-IC OF THE ACT AN D ESTABLISHING CONCLUSIONS MERELY ON THE BASIS OF PREVIOUS ASSESSMENT YEAR'S O RDER. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 8 - 11. THAT THE LD. AO/DRP ERRED ON FACTS AND IN LAW I N DISALLOWING MARK TO MARKET LOSSES OF RS.3,331.61 CRORES, SUFFERED BY TH E APPELLANT IN RELATION TO FORWARD CONTRACTS ENTERED INTO FOR PROTECTION AGAIN ST CURRENCY FLUCTUATION, BY HOLDING THE SAME TO BE 'CONTINGENT IN NATURE'. 11.1 WITHOUT PREJUDICE, THAT IN CASE MARK TO MAR KET LOSS IS HELD TO BE NON- DEDUCTIBLE FOR THE YEAR UNDER ASSESSMENT, THE REVER SAL OF LOSS / GAIN ON MARK TO MARKET, IF ANY, IN SUBSEQUENT YEAR(S) BE NOT HELD A S TAXABLE. 11.2 THAT THE AO/ DRP ERRED ON FACTS AND IN LAW IN DISALLOWING THE MARK TO MARKET LOSSESS PRIMARILY RELYING UPON THE INSTRUCTI ON ISSUED BY THE CBDT. 12. THAT THE LD.DRP ERRED ON FACTS AND IN LAW IN EN HANCING THE BOOK PROFIT BY RS. 14,316,320,000 UNDER SECTION 115JB OF THE ACT O N ACCOUNT OF MARK TO MARKET LOSSES DEBITED TO PROFIT & LOSS ACCOUNT, BY TREATING THE SAME AS 'CONTINGENT IN NATURE'. 13. THAT THE LD.AO/DRP ERRED ON FACTS AND IN LAW IN RE-COMPUTING THE CAPITAL GAIN/ LOSS ON TRANSFER OF LEASEHOLD LAND ALONGWITH BUILDING AT JEJURI IN THE ASSESSMENT YEAR UNDER CONSIDERATION. 13.1 THAT THE LD. AO / DRP ERRED IN NOT ACCEPTI NG/CONSIDERING THE VALUATION REPORT CERTIFIED BY AN INDEPENDENT VALUER IN RESPEC T OF THE LEASEHOLD LAND TRANSFERRED BY THE APPELLANT. 14. THAT THE LD.AO/DRP ERRED ON FACTS AND IN LAW IN DISALLOWING RS. 1,88,38,333 (NET OF DEPRECIATION), BEING THE AMOUNT OF NON-COMPETE FEE PAID BY THE APPELLANT IN THE ASSESSMENT YEAR UNDER CONSIDER ATION, BY TREATING THE SAME AS CAPITAL IN NATURE. 15. THAT THE LD.AO/DRP ERRED ON FACTS AND IN LAW IN NOT ADJUDICATING THE CLAIM OF WEIGHTED DEDUCTION UNDER SECTION 35(2AB) O F THE ACT, ON THE COST OF ASSETS PROVIDED TO THE EMPLOYEES WORKING IN APPROVE D RESEARCH & DEVELOPMENT (R&D) FACILITIES AND ENGAGED IN EXECUTI ON OF R&D ACTIVITIES. 16. THAT THE LD.AO/DRP ERRED ON FACTS AND IN LAW IN NOT ADJUDICATING THE ISSUE OF ALLOWABILITY OF CLAIM OF DEDUCTION OF RS. 8,17,9 7,608, BEING THE DEMAND RAISED BY MINISTRY OF CHEMICALS & FERTILIZERS, GOVE RNMENT OF INDIA. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 9 - 17. THAT THE LD.AO/DRP ERRED ON FACTS AND IN LAW IN NOT ADJUDICATING THE ISSUE OF ADJUSTMENT OF EXCHANGE FLUCTUATIONS ON EXTERNAL COMMERCIAL BORROWINGS, HEDGING CONTRACTS IN RELATION THERETO AND HEDGING C HARGES TO THE COST OF CAPITAL ASSETS, AND ALLOWING DEPRECIATION THEREON A S PART OF ACTUAL COST OF THE DEPRECIABLE ASSETS. 18. THAT THE LD. AO/DRP ERRED IN MAKING ARBITRARY/ EXTRANEOUS OBSERVATIONS BASED ON CONJECTURES/ SURMISES AND UNSOUND PRESUMPT IONS, WHICH ARE NOT IN ACCORDANCE WITH THE FACTS OF THE CASE. 19. THAT THE LD.AO ERRED ON FACTS AND IN LAW IN LAW IN CHARGING INTEREST UNDER SECTIONS 234B AND234DOFTHEACT. 20. THAT THE LD.AO ERRED ON FACTS AND IN LAW IN WIT HDRAWING INTEREST UNDER SECTION 244A OF THE ACT. 21. THAT THE ABOVE GROUNDS OF OBJECTION ARE INDEPEN DENT OF, AND WITHOUT PREJUDICE TO ONE ANOTHER. 22. THAT THE APPELLANT CRAVES LEAVE TO ALTER, AMEN D OR WITHDRAW ALL OR ANY GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 3. THE ISSUES RAISED BY THE ASSESSEE IN GROUND NOS. 1 AND 18 TO 22 ARE GENERAL AND CONSEQUENTIAL IN NATURE. THEREFORE, NO SEPARATE ADJUDICATION IS REQUIRED FOR THE SAME. HENCE, WE DISMISS THE SAM E. 4. THE INTERCONNECTED ISSUE RAISED BY THE ASSE SSEE IN GROUND NOS. 2 TO 4 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ADDIT ION MADE BY THE AO /TPO AMOUNTING TO RS. 145,13,17,725/- ON ACCOUNT OF THE TRANSACTION WITH AES BY CONSIDERING THE ASSESSEE AS A TESTED P ARTY. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 10 - 5. THE BRIEFLY STATED FACTS ARE THAT THE ASSESSE E IS A LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADIN G OF PHARMACEUTICALS PRODUCTS, BULKS DRUGS AND TRADING ACTIVITY. THE CAS E OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS SELECTED UNDER SCR UTINY UNDER SECTION 143(3) OF THE ACT. THE AO DURING THE ASSESSMENT PRO CEEDING OBSERVED THAT THE ASSESSEE HAS ENTERED INTO VARIOUS INTERNAT IONAL TRANSACTIONS WITH ITS ASSOCIATE'S ENTERPRISES AS DETAILED UNDER: NO. NATURE OF TRANSACTION METHOD VALUE OF TRANSACTION 1. SALE OF APIS TNMM 191,97,60,604 2. SALE OF DOSAGE FORMULATIONS TNMM 11,61,56,39,623 3. SALE OF MACHINES, SPARES AND CONSUMABLES TNMM 32,28,25,272 4. PURCHASE OF DOSAGE FORMULATIONS TNMM 166,72,389 5. ALLOCATION OF SAP LICENSE AND MAINTENANCE CHARGES CUP 170,28,507 6. MARKET RESEARCH AND SUPPORT SERVICES AVAILED TNMM 98,09,41,232 7. PROVISION OF TECHNICAL SERVICES TNMM 92,62,500 8. ROYALTIES RECEIVED - 9,04,05,537 9. ROYALTIES PAID - 14,19,094 10. CONTRACT MANUFACTURING SERVICES AVAILED TNMM 12,73,85,701 11. PRODUCT QUALITY CLAIMS PAID TNMM 167,22,61,314 12. SALE OF FIXED ASSETS TNMM 1,28,64,240 13. TESTING CHARGES PAID TNMM 20,43,14,512 14. PURCHASE OF RAW MATERIAL/PACKING MATERIAL TNMM 1,60,21,796 TOTAL 17,006,802,321 IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 11 - 5.1. THE ASSESSEE DURING THE ASSESSMENT PROCEEDIN G FILED ITS TRANSFER PRICING STUDY REPORT TREATING ITS AES AS TESTED PA RTY. THE ASSESSEE FURTHER JUSTIFIES ITS STAND TREATING THE AES AS TESTED PAR TY ON THE REASONS AS DISCUSSED IN BRIEF HEREIN BELOW: I. THE AES ARE ENGAGED SIMPLY IN THE SALES AND DISTRI BUTION ACTIVITIES. II. THE ASSESSEE IS ENGAGED IN THE MANUFACTURING ACTIVI TIES. III. THERE IS NO INTANGIBLE PROPERTY RIGHT OWN BY THE AE S. 5.2 IN VIEW OF THE ABOVE, THE ASSESSEE CLAIMED T HAT THE AES ASSUME THE LESSER RISK AND CARRY A LESS COMPLEX FUNCTION AS CO MPARE TO IT. ACCORDINGLY, ASSESSEE CONSIDERS ITS AES AS TESTED IN ITS TRANSFER PRICING STUDY. 5.3. THE ASSESSEE TO DETERMINE THE ALP OF THE INT ERNATIONAL TRANSACTIONS WITH THE AES GROUPED ALL INTERNATIONAL TRANSACTION IN 4 CLASSES WHICH ARE RECORDED ON PAGE NOS. 2 & 3 IN THE ORDER OF THE TPO . THE BASIS OF CATEGORIZING THE INTERNATIONAL TRANSACTIONS IN 4 CL ASSES IS DETAILED AS UNDER: 4.5. CHARACTERISATION OF AES 4.5.1. BASED ON ABOVE ANALYSIS OF THE FUNCTIONS PE RFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY THE RLL AND THE AES, IT IS POSSIBLE TO CHARACTERIZE THE AES INTO THE FOLLOWING CLASSES : IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 12 - CLASS I: FOR CLASS I TRANSACTIONS, RLLS AES ACT AS A DISTRIBUTOR OF PHARMACEUTICAL PRODUCTS EXPOSED TO N ORMAL RISKS WHILE PERFORMING ONLY MARKETING AND DISTRIBUTION FU NCTIONS. CLASS II: FOR CLASS II TRANSACTIONS, RLLS AES ACT AS A SECONDARY MANUFACTURER AND DISTRIBUTOR EXPOSED TO N ORMAL RISKS WHILE CARRYING OUT SECONDARY MANUFACTURING, M ARKETING AND DISTRIBUTION OF PHARMACEUTICAL PRODUCTS. CLASS III : FOR CLASS III TRANSACTIONS, RLLS AES ACT AS A MARKET RESEARCH AND SUPPORT SERVICE PROVIDERS EXPOS ED TO NORMAL RISK. 5.4. THE ASSESSEE ACCORDINGLY BENCH MARKED THE T RANSACTION WITH THE AES USING DIFFERENT METHODS AND PLI FOR DIFFERENT CLASSES OF THE TRANSACTIONS AS DETAILED UNDER: CLASS METHOD PLI CLASS I TNMM OP/SALES CLASS II TNMM OP/SALES CLASS III TNMM OP/TC CLASS IV CUP - 5.5. THE ASSESSEE FURTHER FILED THE COUNTRY WISE LIST OF ITS AES WITH WHOM IT ENTERED INTO THE INTERNATIONAL TRANSACTIONS DURING THE YEAR UNDER CONSIDERATION AS RECORDED ON PAGE 6 & 7 IN THE ORDE R OF THE TPO. FURTHER THE ASSESSEE CATEGORIZED ALL ITS 30 AES IN THE DIF FERENT REGIONS BASED ON GEOGRAPHICAL LOCATION. 5.6. SUCH CATEGORIZATION OF AES AS PER REGION A ND CLASS OF TRANSACTION IS BEING ESTABLISHED TO CARRY OUT THE BENCHMARKING WITH THE COMPARABLES IN THE RELEVANT REGIONS FOR THE SPECIFIC CLASS OF T RANSACTION. IN VIEW OF THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 13 - CLASS OF TRANSACTION AND REGION WISE AES, ASSESSEE IDENTIFIED THE VARIOUS COMPARABLES FROM DATABASE WHICH ARE AVAILABLE ON PA RA 5.3/5.4 ON PAGES 7 TO 9 OF TPO ORDER AND SHOWS THE PLI OF THE COMPAR ABLES OF EACH REGION AND CLASS OF TRANSACTION. 5.7. ACCORDINGLY, AFTER COMPARING THE PLI OF T HE COMPARABLE WITH THE PLI OF AES, ASSESSEE CLAIMED THAT THE MARGIN EARNE D BY THE AES FALLS WITHIN THE PARAMETERS SET OUT FOR BENCHMARKING OF T HE RESPECTIVE TRANSACTIONS. 5.8. THE TPO AFTER CONSIDERING THE TRANSFER PRI CING APPROACH ADOPTED BY THE ASSESSEE OBSERVED TWO SITUATIONS FOR BENCHMA RKING OF TRANSACTION AS DETAILED UNDER: COMPARING THE RESULTS OF ONE AE SITUATED IN X COUNT RY WITH A COMPARABLE SITUATED IN Y COUNTRY OR NO BENCHMARKING SINCE NO COMPARABLE IN THAT PARTICU LAR COUNTRY IS SELECTED. 5.9 THE TPO ALSO OBSERVED THAT THE COMPARABILITY OF THE TRANSACTIONS SHOULD BE JUDGED BASED ON THE GEOGRAPHICAL LOCATION OF THE RESPECTIVE PARTIES AS PER THE OECD GUIDELINES AND RULE 10B(2) OF INCOME TAX RULES,1962, 5.10. THE TPO FURTHER OBSERVED THAT AS PER THE G UIDELINES OF OECD, WHERE THE COMPARABLES ARE NOT AVAILABLE THEN PRAGMA TIC SOLUTION MIGHT NEED TO BE FOUND ON A CASE TO CASE BASIS USING A SY STEMATIC APPROACH TO IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 14 - GET THE UNCONTROLLED TRANSACTION TAKING PLACE IN TH E SAME INDUSTRY BUT IN OTHER GEOGRAPHIC MARKETS. 5.11. THE ISSUE OF SELECTION OF TESTED PARTY IN THE ASSESSEES CASE WAS HEARD BY THE ITAT DELHI BENCH REPORTED IN 2008-TIOL -75-ITAT-DEL WHEREIN IT WAS OBSERVED THAT THE LESS COMPLEX TESTE D PARTY SHOULD BE SELECTED IN SUCH A WAY THAT THE RELEVANT INFORMATIO N SHOULD BE AVAILABLE IN THE PUBLIC DOMAIN. FURTHER THE TESTED PARTY SHOU LD BE COMPARED WITH THE COMPARABLES AVAILABLE IN THE SIMILAR GEOGRAPHIC AL SITUATION. 5.12. THE TPO ALSO OBSERVED THAT THE ASSESSEE WAS HELD AS TESTED BY THE TRIBUNAL IN ITS CASE REPORTED IN 2008-TIOL-75-I TAT-DEL WHEREIN IT WAS ALSO OBSERVED THAT THE COMPARISON SHOULD BE CAR RIED OUT WITH THE SIMILAR ENTITY IN THAT VERY COUNTRY BECAUSE GEOGRAP HICAL SITUATIONS IN SEVERAL WAYS MAY INFLUENCE THE TRANSFER PRICING. 5.13. FURTHER, THE TPO OBSERVED THAT SOCIAL ECONO MIC AND GEOGRAPHICAL FACTORS PLAY A SIGNIFICANT ROLE IN THE MARKETING OF THE DRUGS. FOR EXAMPLE, A DRUG MIGHT BE SUBSIDIZED IN ONE COUNTRY BUT NOT I N ANOTHER COUNTRY, THE DEMAND OF THE DRUG OF AIDS, CANCER, MAY BE MORE IN ONE GEOGRAPHICAL REGION BUT NOT IN OTHER. 5.14. IN ADDITION TO THE ABOVE, THE TPO FURTHER OBSERVED THAT THE ACCOUNTING POLICIES, DEPRECIATION RATE, GOVERNMENT REGULATION ABOUT IP AND DRUG PRICING OF THE COMPARABLES WOULD BE DIFFER ENT FROM THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 15 - ASSESSEE. SIMILARLY, THE ASSESSEE AND FOREIGN PART IES HAVE DIFFERENT ACCOUNTING YEAR WHICH NEEDS TO BE RECAST IN THE REQ UIRED SUITABLE MANNER. 5.15. IN VIEW OF THE ABOVE AND AFTER CONSIDERING THE ORDER OF ITAT DELHI (SUPRA) , THE TPO CONCLUDED THAT THE SELECTION OF COMPARABL ES FROM A DIFFERENT GEOGRAPHIC REGION IS NOT ACCEPTABLE TRE ATING THE AES AS THE TESTED PARTY. ACCORDINGLY, TPO REJECTED THE TP STUD Y AND REQUIRED THE ASSESSEE TO PROVIDE THE SUPPLEMENTARY TRANSFER PRIC ING REPORT CONSIDERING THE ASSESSEE AS THE TESTED PARTY. 5.16. IN RESPONSE TO SHOW CAUSE NOTICE THE ASSE SSEE WITHOUT PREJUDICE TO ITS ABOVE CONTENTION FILED THE REVISED TP STUDY TREATING ITSELF AS THE TESTED PARTY. THE ASSESSEE IN THE REVISED TP STUDY USED TNMM AS MOST APPROPRIATE METHOD AND USED OP/TC AS THE PLI BEFORE THE ECONOMIC CONDITION AND AFTER ECONOMIC CONDITION AND ARRIVED AT THE PLI 6.32% AND 19.47% RESPECTIVELY. THE ASSESSEE MADE THE ECONOMIC ADJUSTMENT IN RESPECT OF R&D COST AND LOSS OF CONTRIBUTION DUE TO US REGULATORY CONDITIONS WHILE DETERMINING ITS PLI AFTER ADJUSTME NT. 5.17. THE ASSESSEE IN ITS REVISED TP STUDY HAS SELECTED 8 COMPARABLE AND TAKEN THREE YEARS AVERAGE MARGIN CALCULATED AT 14.55%. ACCORDINGLY, THE ASSESSEE CLAIMED THAT ITS TRANSACTIONS WITH THE AES HAD BEEN ENTERED AT ARM LENGTH PRICE. 5.18. THE TPO AFTER CONSIDERING THE REVISED TP STUDY REJECTED THE CLAIM OF THE ASSESSEE FOR USING MULTIPLE YEAR DATA AFTER REFERRING TO THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 16 - PROVISION OF RULE 10B(4) AND VARIOUS JUDGMENT IN TH IS REGARD. IN VIEW OF THE ABOVE TPO FINALLY HELD THAT SINGLE YEAR DATA SH OULD BE USED FOR CALCULATING ALP. 5.19. FURTHER, THE TPO ALSO MODIFIED THE FILTER U SED BY THE ASSESSEE FOR SELECTING THE COMPARABLES. ACCORDINGLY, ALL THE COM PANIES SELECTED BY THE ASSESSEE AS COMPARABLES FAILED TO FIT IN THE FILTER USED BY HIM (TPO) EXCEPT ONE. ACCORDINGLY, THE TPO FURTHER SELECTED T HE NEW COMPARABLE AND WORKED OUT AVERAGE MARGIN AT 21.95% AS THE PLI OF SUCH COMPARABLES. 5.20. THE TPO FURTHER REVISED THE PLI OF THE ASSE SSEE AFTER DISALLOWING THE ADJUSTMENT CONCERNING LOSS ON CONTRIBUTION TO U S REGULATORY CONDITION, R&D EXPENSES AND SOME OTHER EXPENSES WHI CH WERE TREATED BY THE ASSESSEE AS NON-OPERATING EXPENSES BUT THE T PO TREATED THEM AS OPERATING EXPENSES. THUS THE TPO DETERMINED THE PLI OF THE ASSESSEE AT - 5.35%. 5.21. IN VIEW OF THE ABOVE FACTS, THE TPO ISSUED SCN TO THE ASSESSEE PROPOSING THE UPWARD ADDITION/ADJUSTMENT AMOUNTING TO RS. 1245.66 CRORES. 5.22. THE ASSESSEE AGAINST SUCH SHOW CAUSE NOTICE SUBMITTED ITS COMMENTS ON NEW COMPARABLES AND THE FILTER USED BY THE TPO. ACCORDINGLY, THE ASSESSEE PROVIDED 4 OTHER COMPANIE S TO CONSIDER AS COMPARABLES HAVING CURRENT R&D EXPENSE 3% TO 4% OF SALES, NAMELY IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 17 - ALEMBIC LTD., CADILA PHARMACEUTICALS LTD., IPCA LAB ORATORIES LTD. AND ORCHID CHEMICALS & PHARMACEUTICALS LTD. 5.23. CONSIDERING THE OBJECTION RAISED BY THE ASS ESSEE, TPO ACCEPTED SOME OF THE POINTS RELATED TO COMPARABLE SELECTED A ND FILTERS SUGGESTED BY THE ASSESSEE. THE TPO ACCORDINGLY USED REVISED COMP ARABLES AND FILTERS. AS SUCH THE TPO WORKED OUT THE NEW PLI (OP/OC RATIO ) AT 21.36% AS THE AVERAGE MEAN OF THE COMPARABLES. 5.24. FURTHER, THE ASSESSEE DEMANDED THE ECONOMIC ADJUSTMENT ON ACCOUNT OF NON- OPERATING EXPENSES SUCH AS R&D EXPE NSES, LEGAL EXPENSES RELATED TO FDA PROCEEDINGS. 5.25. AFTER CONSIDERING THE SUBMISSION MADE BY TH E ASSESSEE AS ABOVE, TPO REVISED THE PLI OF THE ASSESSEE AT 9.94%. 5.26. ACCORDINGLY, THE TPO COMPUTED THE UPWARD AD JUSTMENT AMOUNTING TO RS. 461,17,50,000/- I.E., DIFFERENCE B ETWEEN THE ALP AND ACTUAL PRICE CHARGED BY THE ASSESSEE. THE AO AFTER GETTING TPO REPORT IN HIS DRAFT ASSESSMENT ORDER MADE AN ADDITION TAKING THE BASIS OF TPO ORDER AMOUNTING TO RS. 461,17,50,000/- TO THE TOTAL INCOME OF THE ASSESSEE. 5.27. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD.DRP WHO PARTLY ALLOWED THE APPEAL OF THE ASSESSEE BY OB SERVING AS UNDER:- IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 18 - ' 5.1. IN OBJECTION 3.1, THE ASSESSEE HAS REITERA TED THE OBJECTION DEALT WITH IN GROUNDS OF OBJECTION 2.1 TO 2.5 BY STATING THAT THE TPO HAS REJECTED EVEN THE SUPPLEMENTARY ECONOMIC ANALYSIS CONDUCTED BY THE AS SESSEE DURING THE TP PROCEEDINGS. TPO HAS GIVEN THE SUPPLEMENTARY ANALY SIS OF THE ASSESSEE IN PARA 6 OF HIS ORDER AND GIVEN THE REASONS WHY THE S AME NEEDS TO BE REJECTED IN SUBSEQUENT PARAGRAPH 7 AND IN THE SHOW CAUSE NOTICE . THE REASONS GIVEN BY THE TPO ARE VALID AND COGENT. THE DRP HAS EXAMINED THE MATTER AND COMES TO THE CONCLUSION THAT THE TPO WAS RIGHT IN REJECTI NG EVEN THE SUPPLEMENTARY TP DOCUMENTATION FOR THE REASONS GIVEN IN THE TP OR DER. 5.2. OBJECTION 3.2 IS ON THE ISSUE OF USE OF SINGLE YEAR DATA. THIS ISSUE REGARDING USE OF SINGLE YEAR DATA HAS BE EN EXAMINED IN DETAIL IN TPO'S ORDER. BRIEFLY SUMMARIZED, DRP FINDS THAT, TH E ARGUMENTS PUT FORTH BY TPO ARE BASED ON THE LAW 35 IT EXISTS. THERE ARE VARIOUS RULINGS IN FAVOUR OF USING SINGLE YEAR DATA. AS PER WELL SETTLED LAW, SINGLE YEAR DATA HAS TO BE CONSIDERED UNLESS THE ASSESSEE DEMONSTRATES THAT PRIOR YEAR'S DATA HAS HAD AN INFL UENCE ON THE SETTING OF TRANSFER PRICE OF INTERNATIONAL TRANSACTION EITHER AT THE TIME OF SETTING THEM OR BY WAY OF ADJUSTING THEM SUBSEQUENT TO ENTERING INT O THE INTERNATIONAL TRANSACTION TO ALIGN THEM TO THE ARM'S LENGTH PRICE . THIS IS A CONDITION PRECEDENT FOR USER OF THE MULTIPLE YEAR FINANCIAL D ATA. RELIANCE IS PLACED ON THE FOLLOWING DECISIONS:- I) AZTEC SOFTWARE 107 ITD (AT) 141(SB) (BANG). II) MENTOR GRAPHIC 109 ITD 101 (DEL) III) HONEYWELL LTD. 209-TIOL-104 (AT) (PUNE) THE PROVISO CAN BE INVOKED ONLY IF IT IS ESTABLISHE D THAT EARLIER YEARS CIRCUMSTANCES DO HAVE A BEARING ON THE PERFORMANCE OF THE YEAR UNDER AUDIT. IN SCHEFENACKER MOTHERSON LTD. VS. ITO 2009-TIOL-37 6-ITAT DELHI HAS ALSO UPHELD THE USE OF CURRENT YEAR DATA. IN VIEW OF THIS, ONLY SINGLE YEAR DATA SHOULD BE TA KEN FOR BENCHMARKING INTERNATIONAL TRANSACTION. THE ACTION OF THE TPO I S UPHELD. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 19 - 5.3. OBJECTION 3.3 TO 3.5 ARE ON THE SELECTION OF C OMPARABLES BASED ON DIFFERENT FILTERS. THE ASSESSEE HAS STATED THAT TP O HAS ERRED WHILE APPLYING THESE FILTERS WHICH HAVE RESULTED INTO INACCURATE C OMPARABLES. 5.3.1. AS NOTICED FROM THE SUBMISSION OF THE ASSESS EE, THERE IS NO DISAGREEMENT ON THE USE OF NET WORTH, MANUFACTURING SALES TO TOT AL SALES AND SALES TURNOVER FILTERS. THE TPO HAS USED NET FIXED ASSETS TO TO TAL SALES FILTER AS 25% WHEREAS ASSESSEE HAS RESTRICTED IT TO 15%. EXPORT SALES TO SALES IS CONSIDERED AT 25% BY THE TPO WHEREAS ASSESSEE HAS TAKEN THE SAME AS 3 0%. THE RELATED PARTY FILTER IS TAKEN AT 15% BY THE ASSESSEE WHEREAS TPO HAS TAKEN IT AS 25%. HOWEVER, MAJOR DISPUTE IS ON ACCOUNT OF TOTAL R&D/S ALES FILTER, EXPORT SALES FILTER AND RPT FILTER. THESE ARE DISCUSSED IN THE FOLLOWING PARAGRAPHS. 5.3.2. R&D/SALES FILTER THE ASSESSEE HAS, IN PRINCIPLE, AGREED THAT R&D FIL TER IS AN APPROPRIATE FILTER. HOWEVER, THE ONLY LIMITED QUESTION IS WHETHER IT SH OULD BE AT 3% OR 4%. THE TPO HAS GIVEN THE REASON IN HIS TP ORDER ON PAGE 32 AND 33. THE ASSESSEE HAS R&D EXPENSES TO THE TOTAL SALES AT 9.93%. COMP ARED TO A NORMAL COMPANY, THIS IS SUBSTANTIAL R&D EXPENDITURE. THE TPO HAS COUNTERED THE ARGUMENT OF THE ASSESSEE IN PARA 10.4. THE ASSESSE E IS INCURRING SUBSTANTIAL R&D EXPENDITURE AND THIS IS GROWING. PHARMACEUTICA L COMPANIES ARE DRIVEN BY R&D AND ASSESSEE IS IN THE HIGHER BRACKET OF PHA RMACEUTICAL COMPANIES WHICH ARE LEADING IN R&D ACTIVITIES. THEREFORE, TP O IS CORRECT IN APPLYING R&D FILTER AT 4% OF R&D/SALES. DRP DOES NOT FIND A NY REASON TO CHANGE THIS FILTER. 5.3.3. EXPORT SALES FILTER THE TPO HAS USED EXPORT SALES FILTER AT 25% WHEREAS THE ASSESSEE IS USING AT 30%. THERE IS NOT MERIT IN THE ARGUMENT OF THE ASS ESSEE THAT THE FILTER SHOULD BE AT 30% RATHER THAN 25%. SINCE THE TPO HAS USED DIFFERENT FILTERS IN THE MULTIPLY OF 25, IT IS APPRECIABLE IF THE SAME IS RE TAINED IT IS SEEN THAT THIS IS THE NORMAL FILTER APPLIED IN ACROSS THE CASES BY THE TP O. IT MAY ARBITRARY TO CHANGE THEM. AS THERE IS NO MUCH DIFFERENCE BETWEE N 25% AND 30% FILTER, THE OBJECTION OF THE APPELLANT IS REJECTED. 5.3.4. RPT FILTER TPO HAS REJECTED THE COMPANY HAVING MORE THAN 25% R ELATED PARTY TRANSACTIONS (RPT). TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 20 - TRANSACTION UNDER CONSIDERATION, SUCH TRANSACTIONS SHOULD BE COMPARED WITH UNCONTROLLED TRANSACTIONS OF SIMILAR NATURE, I.E. T RANSACTIONS BETWEEN WHO UNRELATED PARTIES. THE COMPANIES HAVING MORE THAN 25% RELATED PARTY TRANSACTIONS COULD NOT BE TREATED AS OPERATING IN U NCONTROLLED ENVIRONMENT AND RPT COULD HAVE SUBSTANTIAL IMPACT ON MARGINS OF SUCH COMPANIES. THE TAXPAYER HAS ARGUED THAT THERE IS NO RATIONAL BASIS FOR APPLYING THE THRESHOLD LIMIT OF 25% OF TOTAL COST. THE AR REFERRED TO THE DELHI'S, ITAT DECISION IN THE CASE OF SONY INDIA WHERE A LIMIT OF 10-15% WAS UPHE LD. WE HAVE CAREFULLY CONSIDERED THE ABOVE OBJECTIONS OF THE TAXPAYER. WE ARE NOT INCLINED TO INTERFERE IN THE TPO'S ACTION. CASES HAVING SOME RP T CAN BE TAKEN AS COMPARABLE AS THEY DO NOT MATERIALLY AFFECT THE PRI CE/MARGINS. THIS VIEW HAS BEEN UPHELD BY VARIOUS ITAT'S INCLUDING ITAT, DELHI . IN THE CASE OF SONY INDIA LTD. ITAT, DELHI DID NOT LAY DOWN ANY THRESHOLD LIM IT FOR APPLYING RPT FILTER. THIS WAS CLARIFIED BY ITAT, DELHI IN THEIR SUBSEQUE NT DECISION IN THE CASE OF GLOBAL LOGIC INDIA P LTD (2011-TII-35-ITAT-DEL-TP). REFERENCE MAY ALSO BE MADE TO ITAT, HYDERABAD'S DECISION IN THE CASE OF A DP P LTD (2011-TLL-44- ITAT-HYD-TP) AND M/S DELOITTE CONSULTING INDIA P LT D: ITA NO. 1082/HYD/2010 DATED 22.7.2011. IN THE AFORESAID DEC ISIONS, THE THRESHOLD LIMIT OF 25% WAS ACCEPTED BY THE ITAT. IN THE CASE OF ST MICROELETRONICS (2011-TII- 63-ITAT-DEL-TP) ALSO THIS LIMIT HAS BEEN IMPLIEDLY UPHELD. THE RATIONALE OF 25% THRESHOLD LIMIT PROVIDED IN SECTION CLAUSE (A) & (B) OF SUB-SECTION (2) OF SECTION 92A OF THE ACT WHICH DEFINE THE TERM 'ASSOC IATED ENTERPRISE'. THIS GIVES A GOOD INDICATION FOR APPLYING THE BRIGHT LIN E TEST FOR THE PURPOSES OF RPT ALSO. THEREFORE, THIS PANEL DECLINES TO INTERFE RE WITH THE STAND BY THE TPO IN THIS REGARD. 5.3.5. FILTERS ARE A MEANS TO GET GOOD COMPARABLE COMPANIE S AND THEY ARE NOT AN 'END' IN ITSELF. ON GOING THROUGH THE ORDER OF T HE TPO, DRP FINDS THAT THE FILTERS ARE RATIONALLY APPLIED TO REDUCE THE NUMBER OF COMPARABLES TO A MANAGEABLE LEVEL FOR AN IN-DEPTH ANALYSIS OF THE FU NCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN. IN VIEW OF THIS, THE RE IS NO MERIT IN THE ARGUMENT OF THE ASSESSEE THAT FILTERS ARE ARBITRARI LY EMPLOYED. NO EXACT COMPARABLE IS AVAILABLE IN REALITY. THE EN DEAVOR IS TO FIND OUT A COMPARABLE WHICH IS IN THE SIMILAR LINE OF BUSINESS AND HAVING SIMILAR ASSETS AND RISKS PROFILE. THE TPO CANNOT BE FAULTED FOR SE LECTING THESE COMPARABLES SO LONG AS THE TPO HAS SHARED THESE COMPARABLES WIT H THE APPELLANT THROUGH THE SHOW CAUSE NOTICE. RELIANCE IS PLACED ON THE DE CISION OF DCIT VS. DELOITEE CONSULTING INDIA PVT. LTD. (ITA NOS. 1082 & 1084 OF 2010). IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 21 - ' 40. ....... WE FIND THAT THERE ARE SEVERAL FACTOR S SUCH AS MARKET RISKS, ENVIRONMENTAL RISK ENTREPRENEURIAL RISK AND FUNCTIO NAL RISK ETC., WHICH AFFECT THIS MATTER AND WHICH ULTIMATELY AFFECT THE RESULTS OF THE COMPANY. ALL THE AFORESAID FACTORS MAKE IT IMPRACTICABLE TO ANY AUTH ORITY TO FIND OUT EXACT DUPLICATE COMPANY OF THE ASSESSEE AS COMPARABLE. SO ME VARIATION BOUND TO EXIST. WE FIND THAT THE TPO HAD MADE EFFORTS TO IDE NTIFY THE COMPARABLES WHOSE FUNCTIONS ARE SIMILAR TO THE ASSESSEE COMPANY BY AP PLYING FILTER QUANTITATIVELY AND QUALITATIVELY TO ELIMINATE THE DIFFERENCES BETW EEN THE ASSESSEE COMPANIES WITH THAT OF COMPARABLE COMPANIES TO NEUTRALIZE THE AFORESAID RISK FACTORS.' IN VIEW OF THIS, THERE IS NO MERIT IN THE ARGUMENT OF THE ASSESSEE THAT TPO HAS CHOSEN OR REJECTED COMPARABLES ARBITRARILY. 5.3.6. IN THE FOLLOWING PARAGRAPHS, THE COMPARABLE CHOSEN AND REJECTED BY THE TPO ARE DISCUSSED. CADILA HEALTHCARE THE ASSESSEE HAS OBJECTED TO THIS COMPARABLE BECAUS E IT HAS RPT OF 24%. THE DRP HAS JUSTIFIED THE FILTER OF RPT AT 25% AS ABOVE . THEREFORE, THIS COMPANY SHOULD BE RETAINED IN THE LIST OF COMPARABLES AS IT IS IN THE SIMILAR LINE OF BUSINESS USING SIMILAR FUNCTIONS, ASSETS AND RISKS. TORRENT PHARMACEUTICALS LTD. THIS COMPANY HAS EXPORT TURNOVER OF AROUND 25%. IT APPEARS THAT ASSESSEE WANTED TO EXCLUDE THIS COMPANY BY ADOPTING 30% EXPO RT FILTER. THIS COMPANY IS KNOWN AS COMPETITOR TO THE ASSESSEE IN THE MARKE T. THEREFORE, THERE IS NO JUSTIFICATION TO EXCLUDE THIS COMPANY. IT IS THE MA RKET CONDITION, MARKET SIZE AND FUNCTIONAL SIMILARITY WHICH DETERMINE THE COMPA RABILITY ANALYSIS. A KNOWN COMPETITOR WILL BE A GOOD COMPARABLE FOR TP PURPOSE ALSO. THEREFORE, USE OF THIS COMPARABLE IS JUSTIFIED. USV LTD. THE TPO HAS ACCEPTED THIS COMPANY FOR THE REASONS T HAT THIS COMPANY IS ENGAGED IN BIOTECHNOLOGY AND CONTRACT MANUFACTURING . AS PER THE SUBMISSION OF THE ASSESSEE ALSO, THIS COMPANY IS IN COLLABORAT ION WITH DEPARTMENT OF BIOTECHNOLOGY, GOVT. OF INDIA. TPO HAS GIVEN ELABOR ATE REASON WHY THIS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 22 - COMPANY SHOULD BE ACCEPTED AS A COMPARABLE ON PAGE NO. 36 TO 39 OF THE TP ORDER. THEREFORE, DRP IS CONFIRMING THE ORDER OF TH E TPO. ALEMBIC LTD., IPCA LABORATORIES LTD., ORCHID CHEMI CALS & PHARMACEUTICALS LTD., NEULAND LABORATORIES LTD, ORCHID CHEMICALS & PHARMACEUTICAL LTD, NATCO PHARMA LTD. AND AJANTA PHARMA LTD. THE TPO HAS GIVEN THE REASON WHY R &D FILTER SHOULD BE AT 4%. THIS FILTER IS UPHELD BY THE DRP IN THE EARLIER PARAGRAPHS. THEREF ORE, THERE IS NO JUSTIFICATION TO INCLUDE THESE COMPANIES, SINCE THE Y ARE FAILING IN R&D FILTER. THEREFORE, THE ACTION OF THE TPO IS UPHELD. 5.4. IN OBJECTION 3.6, THE ASSESSEE HAS ASKED FO R ECONOMIC ADJUSTMENT FOR R&D EXPENSES. THE MAIN ARGUMENT OF THE ASSESSEE IS THAT R&D HAS HIGH RISK AND RATE OF OBSOLESCENCE OF DRUGS AND TECHNOLOGY IS VERY HIGH; THE R&D EXPENDITURE HAS A DECLINING RETURN AND PRODUCTIVITY ; THEREFORE, THERE SHOULD BE ECONOMIC ADJUSTMENT TO THE MARGIN OF THE ASSESSEE; FURTHER, THE ASSESSEE HAS STATED THAT THERE NEEDS TO BE AN ADJUSTMENT BECAUSE OF LOSS OF CONTRIBUTION OF SALES IN THE US MARKET. 5.4.1. TPO HAS REJECTED THIS CLAIM OF THE ASSESSEE BECAUSE IT IS DIFFICULT TO QUANTIFY A REASONABLY ACCURATE ADJUSTMENT AS CONTEM PLATED IN RULE 10B(3)(II). 5 4.2. DRP HAS CONSIDERED THE SUBMISSION OF THE A SSESSEE CAREFULLY. THE R&D EXPENDITURE HAS CERTAINLY CONTRIBUTED TO THE REVEN UE OF THE ASSESSEE. IT IS DIFFICULT TO QUANTIFY THE RISK OF R&D IN A PHARMAC EUTICAL COMPANY. ASSESSEE IS A FULL RISK BEARING ENTITIES. THEREFORE, IT IS UNSCIENTIFIC TO SAY THAT SUCH ADJUSTMENT SHOULD BE MADE IN THE HANDS OF THE ASSES SEE FORGETTING THAT THE COMPARABLES ALSO NEED TO BE ADJUSTED FN THE SAME WA Y. IN THE SCARCITY OF DATA ABOUT THE COMPARABLES, IT IS IMPOSSIBLE TO CARRY OU T SUCH ADJUSTMENTS. THEREFORE, DRP UNHOLDS THE ACTION OF THE TPO. 5.5. IN OBJECTION 3.7, THE ASSESSEE HAS CONTENDE D THAT THERE HAS TO BE PROPORTIONAL ADJUSTMENT TO THE EXTENT OF INTERNATIO NAL TRANSACTION. THE DRP, PLACING RELIANCE ON THE RULINGS PRONOUNCED BY THE HON'BIE DELHI BENCH OF THE ITAT IN THE CASE OF IL JIN ELECTRONICS (I) PVT. LTD. [2010 36 SOT 227], AND BY THE HON'BIE BANGALORE BENCH IN THE CAS E OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT LTD. (IT 1231/ BANG-2010), IS O F THE VIEW THAT PROPORTIONAL IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 23 - ADJUSTMENT IS JUSTIFIED. IN THE SAID RULINGS, THE I TAT HAS HELD THAT THE ADJUSTMENT MADE TO THE TRANSFER PRICES OF THE TAXPA YER SHOULD BE PROPORTIONAL TO THE QUANTUM OF INTERNATIONAL TRANSACTIONS ENTERE D INTO BY IT. RESPECTFULLY FOLLOWING THE SAME IT IS HELD, IN THE FACTS AND CIR CUMSTANCES OF THIS CASE, THAT PROPORTIONATE ADJUSTMENT IS JUSTIFIED. TPO IS DIREC TED TO CALCULATE THE PROPORTIONAL ADJUSTMENT AND RESTRICT THE ADDITION O N ACCOUNT OF DETERMINATION OF ALP TO THAT EXTENT ONLY. 5.6. IN OBJECTION 3.8, THE ASSESSEE HAS ARGUED THAT THE TOTAL ADJUSTMENT CANNOT EXCEED THE TOTAL PROFIT MADE BY THE OVERSEAS ASSOCI ATED ENTITIES. 5.6.1. DRP HAS CAREFULLY CONSIDERED THIS ISSUE. IT IS OF T HE CONSIDERED VIEW OF THE DRP THAT THE ADJUSTMENT BEING CARRIED OUT IN TH E DETERMINATION OF THE INTERNATIONAL TRANSACTION IS BASED ON THE METHODS PRESCRIBED IN THE INCOME TAX ACT AND RULES AND THEREFORE ONCE THESE METHODS ARE PROPERLY APPLIED, THE TPO HAS NO CHOICE BUT TO ARRIVE AT THE ARM'S LENGTH PRICE. THE ADDITION MADE ON ACCOUNT OF SUCH DETERMINATION OF ALP IS CERTAINL Y A DEEMING FICTION. THEREFORE, EVEN THOUGH IT MAY LOOK UNREASONABLE, ST ILL THE ADDITION MADE BY THE TPO IS AS PER LAW. AS IT IS ESTABLISHED JURISPR UDENCE ON TAXATION, EQUITY IS AN ALIEN CONCEPT IN TAX LAWS. THEREFORE, THIS OBJEC TION OF THE ASSESSEE IS REJECTED. 6. IN OBJECTION 4, THE ASSESSEE HAS STATED THAT TPO HAS NOT RELIED ON THE SOUND TP PRINCIPLES AND JUDICIAL PRONOUNCEMENTS IN INDIA. FOR THE READY REFERENCE, OBJECTION 4 IS REPRODUCED BELOW: 4. THAT THE LD. AO/TPO HAS ERRED IN DISREGARDI NG SOUND TP PRINCIPLES AND JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUSTMENT. 6.1. ON EXAMINATION, DRP FINDS THAT THE VARIOUS ITA T DECISIONS HAS BEEN ACKNOWLEDGED BY THE TPO AND DISTINCTION ON FACTS AN D LAW MADE BASED ON THE FACTS OF THE CASE, DRP RELIES ON THE DECISION IN TH E CASE OF INTERRA INFORMATION TECHNOLOGIES (INDIA) (P.) LTD. -VS- DEPUTY COMMISSI ONER OF INCOME-TAX, CIRCLE 11(1), NEW DELHI (2012-ITS-2021-ITAT) DATED OCTOBER 31, 2012, WHEREIN IT IS HELD THAT THE FACTS ARE MOST IMPORTAN T WHILE DECIDING THE CASES IN TRANSFER PRICING PROCEEDINGS AND THE APPLICATION OF THE RATIO OF THE RULING IN ONE CASE DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THAT CASE. IN THE ABSENCE OF DISCUSSION OF THE FACTS OF CASE DECIDED BY THE HON' BIE ITAT OR THE HIGH COURTS OR THE SUPREME COURT, IT IS NOT J POSSIBLE TO APPRE CIATE HOW THE RATIO IS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 24 - APPLICABLE TO THE PRESENT CASE. IN VIEW OF THIS, TH IS GROUND OF OBJECTION OF THE ASSESSEE IS REJECTED. FURTHER, IT SHOULD BE MENTIO NED THAT TPO HAS RELIED ON THE DECISION OF THE ITAT IN THE CASE OF THE ASSESSE E ITSELF. 6. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP, T HE ASSESSEE IS IN APPEAL BEFORE US. 7. THE LD. AR AT THE OUTSET SUBMITTED THAT ITS A ES HAD BEEN ACCEPTED AS A TESTED PARTY IN ITS CASE BY THE ORDER OF THIS ITAT IN ITA 196/DEL/2013 VIDE ORDER DATED 25-4-2016, REPORTED I N 68 TAXMANN.COM 322. ACCORDINGLY, THE AR CONTENDED THAT THE AES OF THE ASSESSEE SHOULD BE TREATED AS THE TESTED PARTY. THE LD. AR ALSO CLA IMED THAT IN THE SUBSEQUENT ASSESSMENT YEARS, THE TPO HAD ACCEPTED T HE AES OF THE ASSESSEE AS THE TESTED PARTY. 8. ON THE OTHER HAND, THE LD. DR BEFORE US VEHEM ENTLY SUBMITTED THAT THE FACTS OF THE CASE IN ITA 196/DEL/2013 WERE DIFF ERENT FROM THE PRESENT FACTS OF THE CASE. AS PER THE LD. DR THESE FACTUAL DIFFERENCES INCLUDE REGARDING CONDITIONS MENTIONED IN THE APA, CALCULAT ION OF THE PLI, FINANCIAL DATA OF AES, ETC WHICH WERE NOT BROUGHT T O THE NOTICE OF THE HONBLE ITAT IN ITA 196/DEL/2013. THEREFORE, THE LD . DR ARGUED IN LENGTH THAT THE HONBLE TRIBUNAL CAN DIFFER WITH TH E VIEW OF THE DELHI TRIBUNAL WHICH WAS TAKEN IN THE IMMEDIATE PRECEDING AY 2008-09 IN ITA 196/DEL/2013. THE LD. DR ALSO FILED THE COMPARI SON SHEET TO HIGH LIGHT THE DIFFERENCES BETWEEN THE FACTS OF THE CASE FOR THE YEAR UNDER CONSIDERATION VIZ A VIZ IN THE IMMEDIATELY PRECEDIN G ASSESSMENT YEAR IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 25 - 2008-09 WHICH IS PLACED ON RECORD. THE LD. DR VEHEM ENTLY SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. 9. THE LD. AR IN HIS REJOINDER SUBMITTED THAT THE FACTS OF THE CASE ON HAND ARE IDENTICAL TO THE FACTS OF THE CASE OF THE PRECEDING AY 2008-09. THEREFORE THE HONBLE TRIBUNAL CANNOT CHANGE THE ST AND TAKEN IN THE IMMEDIATE PRECEDING AY IN THE YEAR UNDER CONSIDERAT ION. THE LD. AR FURTHER SUBMITTED THAT THE HIGH COURT IS THE RIGHT FORUM WHICH CAN ALTER THE STAND OF THE ITAT OR OTHERWISE THE MATTER NEEDS TO BE REFERRED TO THE SPECIAL BENCH. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE MATERIALS AVAILABLE ON RECORDS. AT THE OUTSET WE FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT DELHI BENCH IN THE AY 2008-09 BEING ITA NO. 196/DEL/2013 VIDE ORDE R DATED 25-4- 2016, REPORTED IN 68 TAXMANN.COM 322, HELD THAT AE S ARE ACCEPTED AS TESTED PARTY BEING THE LEAST COMPLEX FOR COMPARABIL ITY ANALYSIS OF INTERNATIONAL TRANSACTION OF THE ASSESSEE. THE RELE VANT EXTRACT OF THE ORDER IS REPRODUCED AS UNDER: 18. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . WE HAVE ALSO PERUSED THE RELEVANT PARAGRAPHS OF THE SEVERAL DOCU MENTS RELIED UPON BEFORE US IN THE FORM OF TWO PAPER BOOK VOLUMES, ONE SUPPL EMENTARY PAPER BOOK AND ONE DECISION PAPER BOOK ON TRANSFER PRICING ISSUES. 19. GENERALLY, IN TRANSFER PRICING COMPARABILITY ANALY SIS, THE TESTED PARTY IS USUALLY THE PARTY PARTICIPATING IN A TRANSACTION FO R WHICH PROFITABILITY MOST RELIABLY CAN BE ASCERTAINED AND FOR WHICH THE RELIA BLE DATA OF COMPARABLES CAN BE FOUND AND THE TESTED PARTY WILL TYPICALLY BE THE PARTY WITH LEAST INTANGIBLES. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 26 - 20. AS PER SECTION 92C(1) OF THE ACT, ALP OF THE INTER NATIONAL TRANSACT IS REQUIRED TO BE DETERMINED USING ANY OF THE PROFIT B ASED PRESCRIBED METHODS, BEING THE MOST APPROPRIATE METHOD (MAM) HAVING REGA RD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTIONS. HOWEVER, IN O RDER TO DETERMINE THE MAM FOR DETERMINING THE ALP, IT IS FIRST NECESSARY TO S ELECT THE 'TESTED PARTY'. THE TRANSFER PRICING LEGISLATION IN INDIA DOES NOT PROV IDE ANY GUIDANCE ON THE CONCEPT OF 'TESTED PARTY'; HOWEVER, THERE ARE SOME DECISIONS ON THIS ISSUE, WHICH CAN BE OF GREAT HELP. 21. IN ORDER TO UNDERSTAND THE CONCEPT OF TESTED PARTY , ONE NEED TO REFER TO THE TRANSFER PRICING LEGISLATIONS OF DEVELOPED COUNTRIE S WHERE THE PRINCIPLES OF TRANSFER PRICING HAVE BEEN IN USE FOR A LONG TIME A ND ACT AS A GUIDING FORCE FOR ALL THE DEVELOPING ECONOMIES. THE TRANSFER PRIC ING GUIDELINES ISSUED BY THE US INTERNAL REVENUE SERVICES UNDER SECTION 482 PROV IDE AND DISCUSS THE CONCEPT OF TRANSFER PRICING. SECTION 1.482-5 OF THE US TRANSFER PRICING REGULATIONS STATE THAT 'THE TESTED PARTY WILL BE TH E PARTICIPANT IN THE CONTROLLED TRANSACTION WHOSE OPERATING PROFIT ATTRIBUTABLE TO THE CONTROLLED TRANSACTIONS CAN BE VERIFIED USING THE MOST RELIABLE DATA AND RE QUIRING THE FEWEST AND MOST RELIABLE ADJUSTMENTS, AND FOR WHICH RELIABLE DATA R EGARDING UNCONTROLLED COMPARABLES CAN BE LOCATED. CONSEQUENTLY, IN MOST C ASES THE TESTED PARTY WILL BE THE LEAST COMPLEX OF THE CONTROLLED TAXPAYERS AN D WILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUI SH IT FROM POTENTIAL UNCONTROLLED COMPARABLES. THUS, IN A SENSE, THE TES TED PARTY WOULD HAVE LESSER RISK AS COMPARED TO THE OTHER TRANSACTING PA RTY OR THE REAL ENTREPRENEUR. 22. AS PER THE OECD TRANSFER PRICING GUIDELINES 2010, WHEN APPLYING A COST PLUS, RESALE PRICE OR TRANSACTIONAL NET MARGIN METH OD, IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FIN ANCIAL INDICATOR (MARK-UP ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHOICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTION AL ANALYSIS OF THE TRANSACTION. AS A GENERAL RULE, THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED IN THE MOST RELIABLE MANNER AND FOR WHICH THE MOST RELIABLE COMPARABLES CAN BE FOUND, I.E. IT WIL L MOST OFTEN BE THE ONE THAT HAS THE LEAST COMPLEX FUNCTIONAL ANALYSIS. 23. AS PER UNTPM 2013, '5.3.3. SELECTION OF THE TESTED PARTY 5.3.3.1.WHEN APPLYING THE COST PLUS METHOD, RESALE PRICE METHOD OR TRANSACTIONAL NET MARGIN METHOD IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MA RK-UP ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHO ICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS O F THE CONTROLLED TRANSACTION. ATTRIBUTES OF CONTROLLED TRANSACTION(S ) WILL INFLUENCE THE SELECTION OF THE TESTED PARTY (WHERE NEEDED). THE T ESTED PARTY NORMALLY IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 27 - SHOULD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FOR COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PA RTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN ASSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESSARY RELEVANT INFORMATION ABOU T IT AND SUFFICIENT DATA ON COMPARABLES IS FURNISHED TO THE TAX ADMINIS TRATION AND VICE VERSA IN ORDER FOR THE LATTER TO BE ABLE TO VERIFY THE SE LECTION AND APPLICATION OF THE TRANSFER PRICING METHOD.' 24. THE OECD GUIDELINES AT PARA NO.3.18 PROVIDES AS UN DER:- '3.18 WHEN APPLYING A COST PLUS, RESALE PRICE OR TR ANSACTIONAL NET MARGIN METHOD AS DESCRIBED IN CHAPTER II, IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-U P ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHO ICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS O F THE TRANSACTION. AS A GENERAL RULES, THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED IN THE MOST RELIABLE MANNER AND FOR WHICH THE MOST RELIABLE COMPARABLES CAN BE FOUND I.E. IT WILL MOST OFTEN BE THE ONE THAT HAS THE LESS COMPLEX FUNCTIONAL ANALYSIS. 3.19 THIS CAN BE ILLUSTRATED AS FOLLOWS. ASSUME THA T COMPANY A MANUFACTURES TWO TYPES OF PRODUCTS, P1 AND P2 THAT IT SELLS TO C OMPANY B, AN ASSOCIATED ENTERPRISE IN ANOTHER COUNTRY. ASSUME THAT A IS FOU ND TO MANUFACTURE P1 PRODUCTS USING VALUABLE, UNIQUE INTANGIBLES THAT BE LONG TO B AND FOLLOWING TECHNICAL SPECIFICATION SET BY B. ASSUME THAT IN TH IS P1 TRANSACTION, A ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NOT MAKE ANY VAL UABLE, UNIQUE CONTRIBUTION IN RELATION TO THE TRANSACTION. THE TE STED PARTY FOR THIS P1 TRANSACTION WOULD MOST OFTEN BE A. ASSUME NOW THAT A IS ALSO MANUFACTURING P2 PRODUCTS FOR WHICH IT OWNS AND USES VALUABLE UNI QUE INTANGIBLES SUCH AS VALUABLE PATENTS AND TRADEMARKS, AND FOR WHICH B AC TS AS A DISTRIBUTOR. ASSUME THAT IN THIS P2 TRANSACTION, B ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NOT MAKE ANY VALUABLE, UNIQUE CONTRIBUTION IN RELAT ION TO THE TRANSACTION. THE TESTED PART FOR THE P2 TRANSACTION WOULD MOST OFTEN BE B.' 25. FROM THE ABOVE GUIDANCE CERTAIN PRINCIPLES EMERGES IN SELECTION OF TESTED PARTY (A) THE CHOICE AVAILABLE OF TESTED PAR TY FOR COMPARABILITY ONLY IN CUP METHOD, TNMM AND 'OTHER METHOD', IN OTHER METHODS SUCH AS R PM AND CPM CHOICE OF SELECTING A TESTED PARTY IS NOT AVAILABLE. IN AN Y CASE, IT IS NOT REQUIRED IN PROFIT SPLIT METHOD. (B) THE TESTED PARTY NORMALLY SHOULD BE THE LEAST COMPLEX PARTY TO THE CONTROLLED TRANSACTIONS. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 28 - (C) AVAILABILITY OF MOST RELIABLE DATA OF TESTED PARTY AND REQUIREMENT OF MINIMUM ADJUSTMENTS IS ALSO ONE OF THE MOST IMPORTA NT ASPECTS IN SELECTION OF TESTED PARTY. (D) THERE IS NO BAR AGAINST THE SELECTION OF TESTED PARTY EITHER LOCAL PARTY OR FOREIGN PARTY. NEITHER INCOME TAX ACT AND NOR ANY G UIDELINES ON TRANSFER PRICING PROVIDES SO. THEREFORE SELECTION OF TESTED PARTY IS TO FURTHER THE OBJECT OF COMPARABILITY ANALYSIS BY MAKING IT LESS COMPL EX AND REQUIRING FEWER ADJUSTMENTS. (E) THERE MAY BE MANY CIRCUMSTANCES WHERE THE DATA RELA TED TO ONE PARTY TO THE CONTROLLED TRANSACTION MAY BE AVAILABLE EASILY, REA DILY AND IN ABUNDANCE. HOWEVER THE FIRST STEP IS TO LOOK AT THE FAR STUDY OF THAT PARTY AND IF FOUND TO BE COMPLEX THAN OTHER PARTY, THEN SUCH PARTY SHO ULD BE REJECTED AS TESTED PARTY AND PREFERENCE MAY BE GIVEN TO ANOTHER ENTITY WHICH IS LEAST COMPLEX AND IS HAVING REASONABLY RELIABLE DATA FOR COMPARAB ILITY. THEREFORE, THE DRIVING FORCE IN SELECTION OF TESTED PARTY SHOULD BE THE LEAST COMPL EX FAR OF THE PARTY THAN THE VOLUME OF COMPARABLE DATA. IN THIS BACKGROUND, WE PROCEED TO DECIDE THE ISSUE. 26. APPELLANT HAS ENTERED INTO ADVANCE PRICING AGREEME NT UNDER SECTION 92CC OF THE ACT ON 07 AUGUST 2015 WITH CBDT FOR AY 2014-15. ACCORDING TO PARA, 1(F) OF THAT AGREEMENT TESTED PARTY MEANS ASS OCIATED PARTIES AS LISTED IN APPENDIX 1. ACCORDING TO THE ANNEXURE-1, IT HAS BEE N AGREED BETWEEN THE PARTIES THAT THE TNMM WITH PLI OF OPERATING PROFIT MARGIN COMPUTED BASED ON AUDITED FINANCIALS OF AE, BEING THE TESTED PARTY , SHALL BE THE METHOD TO BENCHMARK THE COVERED TRANSACTIONS IN THE CASE. IN ORDER TO SELECT THE COMPARABLES REGIONAL BENCHMARKING SHALL BE APPLIED IN CASE COUNTRY-BY- COUNTRY BENCHMARKING IS NOT FEASIBLE THE SAME SHALL BE PREFERRED OVER REGIONAL BENCH MARKING. IN THAT APPENDIX, CBDT HAS AGREED TO BENCHMARK SOUTH AFRICAN, IRELAND AND ROMANIA AES BENCHMARKING REGION AS EUROPE. IN CASE OF NIGERIA, MALAYSIA AND MOROCCO THE REGIONAL BENCHMARKING HAS BEEN ACCEPTED OF ASIA. IN CASE OF SOUTH AFRICA, PERU THE BENCHMARKING OF EUROPE AND IN CASE OF EGYPT, BRAZIL AND THAILAND BENCHMARK ING OF ASIA IS ACCEPTED. ACCORDING TO PARANO.5, IT IS ALSO EMPHATICALLY MENT IONED THAT FOREIGN AES ARE THE TESTED PARTIES. IT IS ALSO IMPORTANT TO NOTICE THAT HOW THIS AGREEMENT HAS BEEN REACHED BETWEEN THE PARTIES. PAGE NO 500 WHERE IN IT IS HELD THAT APPLICANT I.E. APPELLANT IS AN ENTREPRENEUR MANUFAC TURER WHERE IN THE FUNCTIONS PERFORMED BY IT ARE (A) R & D FOR BOTH THE PRODUCTS AND PROCESSES (B) PRODUCTION AND SUPPLY OF FORMULATIONS AND APIS (C) PROVISION OF TECHNICAL SUPPORT AND QUALITY CONTROL PROCESS FOR THE AES IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 29 - (D) APPLICATION FOR REGULATORY APPROVALS FROM FOREIGN G OVERNMENTS (E) MANAGEMENT SUPPORT IN THE RISK ASSUMED BY APPELLANT IS DISCUSSED AT PA GE NO 502 TO 505 OF THE PAPER BOOK. AFTER THAT PAGE NO 505 TO 523 THE FUNCT IONS PERFORMED BY EACH OF THE AES AND RISK ASSUMED IS DISCUSSED. IT SHOWS THA T THE FUNCTIONS PERFORMED BY AES ARE VERY LIMITED AND NATURALLY, CONSEQUENT R ISKS ASSUMED ARE LESS. AFTER THAT AT PAGE NO 525 AND 526 OF THE PAPER BOOK WHERE IN IT IS AGREED THAT MANNER IN WHICH SEGMENTATION OF THE AES WOULD BE CO MPUTED BEING DECEMBER/MARCH YEAR END WHICH WOULD BE CERTIFIED BY THE INDEPENDENT COST ACCOUNTANTS. IT IS FURTHER PROVIDED THAT IN CASE OF AES ARE SECONDARY MANUFACTURERS AS WELL AS LOW RISK DISTRIBUTORS MARG INS WOULD BE COMPUTED SEPARATELY. THEREFORE, APA HAS BEEN AGREED ON THE W HOLE MECHANISM OF COMPUTATION OF ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. 27. IT IS ALSO IMPORTANT 28. THE ISSUE THAT ARISES IS THOUGH APA IS SIGNED FOR AY 2014-15 CAN IT HAVE ANY IMPACT ON THE TRANSACTIONS FOR THE YEAR UNDER A PPEAL. ACCORDING TO THE APA IT SHALL APPLY IN RESPECT TO PREVIOUS YEAR 2013 -14 RELEVANT TO AY 2014- 15, HOWEVER PRINCIPALS LAID DOWN FOR COMPARABILITY ANALYSIS IN THAT DOES HAVE A GREATER PERSUASIVE VALUE. IT IS NOT THE CASE OF T HE ASSESSEE THAT APA SHOULD BE APPLIED FOR THIS YEAR BUT IT IS THE PRAYER THAT PRINCIPLES LAID DOWN BY THE HIGHEST REVENUE AUTHORITY SHOULD BE ACCEPTED BY REV ENUE AT LEAST FOR THE PURPOSE OF STARTING THE FIRST STEP OF COMPARABILITY ANALYSIS FOR THIS YEAR AS THE NATURE OF INTERNATIONAL TRANSACTIONS, FAR OF APPELL ANT AND AES RESPECTIVELY ARE SIMILAR. THE AVAILABILITY OF DATA IS ALSO ON TH E SIMILAR LINES AS AGREED IN APA. THOUGH THE CRITICAL ASSUMPTIONS REFERRED TO A SET OF TAXPAYER RELATED FACTS, IT MENTIONS THAT THIS APA WOULD NOT HAVE ANY EFFECT ON OTHER YEARS. MAY THAT BE THE CASE, BUT THE CONCEPT AND THE METHODOLO GY LAID DOWN IN APA CAN HAVE THE GUIDANCE VALUE FOR THE REVENUE AUTHORITIES FOR THE PURPOSES OF COMPARABILITY ANALYSIS. THE MAIN INTENT OF THE ADVA NCE PRICING AGREEMENTS IS TO PROTECT THE FAIR SHARE OF THE REVENUE OF THE STA TES IN SIMPLE AND EFFICIENT MANNER AND TO PROTECT THE TAX BASE. NEED FOR ADVANC E PRICING AGREEMENTS ARE EMERGING OUT OF CURRENT GLOBAL COMPLEX ECONOMIC SIT UATIONS AND ITS IMPACT ON REVENUE OF TAX COMPELLING GOVERNMENTS TO INTENSIFY AND STREAMLINE THEIR TRANSFER PRICING COMPLIANCE EFFORTS TO REDUCE THE D ISADVANTAGE IN STAKING THEIR CLAIM FOR TAX. HIGHER RISK OF DISPUTES MAY BE REDUC ED BY THE ADVANCE PRICING AGREEMENTS. ON THE SAME INTENTIONS AND OBJECTS, THE LD. TPO IS ALSO REQUIRED TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION S OF THE ASSESSEE FOR THIS YEAR. THEREFORE, THE AGREEMENT ENTERED INTO BY CBDT WITH THE ASSESSEE, WHICH HAS CONSIDERED ALL THE ASPECTS OF THE MANNER OF DET ERMINATION OF ALP WHICH ARE ALSO SIMILAR FOR THE THIS YEAR, SHOULD BE GIVEN HIGHEST SANCTITY AND THEREFORE MECHANISM SUGGEST IN THAT AGREEMENT SHOUL D BE NECESSARILY FOLLOWED IN DETERMINING ALP OF THE TRANSACTIONS FOR THIS YEAR. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 30 - 29. THOUGH IN THE APA SIGNED BY THE ASSESSEE THERE IS NO 'ROLL BACK PROVISIONS' FOR THE YEAR UNDER APPEAL, HOWEVER WE A NALYSES THE CIRCUMSTANCES, WHICH PROVIDES FOR APPLYING THAT RUL E. RULE 10MA OF THE INCOME TAX RULES 1962 PROVIDES FOR THE ROLL BACK PR OVISIONS AS UNDER : '10MA. (1) SUBJECT TO THE PROVISIONS OF THIS RULE, THE AGREEMENT MAY PROVIDE FOR DETERMINING THE ARM'S LENGTH PRICE OR SPECIFY T HE MANNER IN WHICH ARM'S LENGTH PRICE SHALL BE DETERMINED IN RELATION TO THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE PERSON DURING THE ROLLBACK YEAR (HEREINAFTER REFERRED TO AS 'ROLLBACK PROVISION'). (2) THE AGREEMENT SHALL CONTAIN ROLLBACK PROVISION IN RESPECT OF AN INTERNATIONAL TRANSACTION SUBJECT TO THE FOLLOWING, NAMELY: (I) THE INTERNATIONAL TRANSACTION IS SAME AS THE INTERN ATIONAL TRANSACTION TO WHICH THE AGREEMENT (OTHER THAN THE ROLLBACK PROVIS ION) APPLIES; (II) THE RETURN OF INCOME FOR THE RELEVANT ROLLBACK YEAR HAS BEEN OR IS FURNISHED BY THE APPLICANT BEFORE THE DUE DATE SPECIFIED IN E XPLANATION 2 TO SUB- SECTION (1) OF SECTION 139; (III) THE REPORT IN RESPECT OF THE INTERNATIONAL TRANSACT ION HAD BEEN FURNISHED IN ACCORDANCE WITH SECTION 92E; (IV) THE APPLICABILITY OF ROLLBACK PROVISION, IN RESPECT OF AN INTERNATIONAL TRANSACTION, HAS BEEN REQUESTED BY THE APPLICANT FO R ALL THE ROLLBACK YEARS IN WHICH THE SAID INTERNATIONAL TRANSACTION HAS BEEN U NDERTAKEN BY T HE APPLICANT; AND (V) THE APPLICANT HAS MADE AN APPLICATION SEEKING ROLLB ACK IN FORM 3CEDA IN ACCORDANCE WITH SUB-RULE (5); (3) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-RULE (2), ROLLBACK PROVISION SHALL NOT BE PROVIDED IN RESPECT OF AN INTERNATIONA L TRANSACTION FOR A ROLLBACK YEAR, IF, (I) THE DETERMINATION OF ARM'S LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTION FOR THE SAID YEAR HAS BEEN SUBJECT MATTER OF AN APP EAL BEFORE THE APPELLATE TRIBUNAL AND THE APPELLATE TRIBUNAL HAS PASSED AN O RDER DISPOSING OF SUCH APPEAL AT ANY TIME BEFORE SIGNING OF THE AGREEMENT; OR (II) THE APPLICATION OF ROLLBACK PROVISION HAS THE EFFEC T OF REDUCING THE TOTAL INCOME OR INCREASING THE LOSS, AS THE CASE MAY BE, OF THE APPLICANT AS DECLARED IN THE RETURN OF INCOME OF THE SAID YEAR.' ON READING ABOVE RULE, IT IS CLEAR THAT IF THE INTE RNATIONAL TRANSACTIONS ARE SAME IN THE YEAR OF APA AND THE YEAR FOR WHICH ROLL BACK IS APPLIED, ROLL BACK IS ALLOWED TO THE ASSESSEE ON CERTAIN NORMAL CONDIT ION OF FILING RETURN OF IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 31 - INCOME, REPORT OF ACCOUNTANT AND A REQUEST IN SPECI FIED FORMAT. OFF COURSE, IT HAS ALSO NORMAL REVENUE SAFEGUARDING EXCLUSION CLAU SES OF INCOME GOING BELOW THE RETURNED INCOME AND WHERE ITAT HAS PASSED AN ORDER ON THE SUBJECT. THEREFORE EVEN THE RULES PROVIDE THAT IF T HE INTERNATIONAL TRANSACTIONS ARE SAME IN THE YEAR OF APA AND IN THE PAST YEAR THAN BOTH THE PARTIES, ASSESSEE AND CBDT MAY AGREE FOR APPLYING T HE AGREEMENTS CONTAINED IN APA AGREED. IN THE PRESENT CASE, IT IS NOT DISPU TED THAT THE INTERNATIONAL TRANSACTIONS IN BOTH THE YEARS ARE NOT SAME. THEREF ORE, WE DRAW SUPPORT FROM RULE 10 MA OF INCOME TAX RULES 1962 IN APPLYING THE METHODOLOGY AS ACCEPTED IN APA FOR THE IMPUGNED YEAR IN APPEAL. 30. AS THE FAR ANALYSIS OF THE YEAR UNDER APA AS WELL AS THE YEAR UNDER APPEAL ARE SIMILAR AND IT IS ALSO AN ESTABLISHED FA CT THAT THE TESTED PARTIES SELECTED BY THE APA I.E. FOREIGN AES ARE LEAST COMP LEX AND ADEQUATE FINANCIAL DATA FOR COMPARISON ON REGION BASIS/COUNTRY BASIS A RE AVAILABLE AND FURTHER THE FINANCIAL TRANSACTIONS ARE SAME, WE HOLD THAT B ASED ON APA FOR A Y 2014- 15 THE SELECTION OF TESTED PARTY SHOULD BE TAKEN AS FOREIGN AE FOR THE CURRENT YEAR TOO. 31. ON LOOKING AT THE TP STUDY REPORT OF THE ASSESSEE PLACED AT PAGE NOS. 409 TO 478 OF PAPER BOOK VOLUME-II AS WELL AS THE ORDER OF TPO IT IS APPARENT THAT ASSESSEE HAS ALSO ADOPTED REGION BASED ANALYSI S AND ALSO COUNTRY BY COUNTRY ANALYSIS OF COMPARABLE WHERE THEY ARE AVAIL ABLE. THEREFORE, IN THE TP STUDY REPORT AS FAR AS THE TESTED PARTY IS CONCERNE D WE DO NOT AGREE WITH THE OBSERVATION OF THE TPO THAT NO COMPARABLES ARE AVAI LABLE. IT RUNS CONTRARY TO THE FINDING OF THE CBDT IN APA. 32. COMING BACK TO THE ORDER OF COORDINATE BENCH IN CA SE OF ASSESSEE FOR AY 2004-05 IT IS APPARENT THAT TRIBUNAL HAS ACCEPTED T HAT LEAST COMPLEX PARTY TO THE TRANSACTION SHOULD BE TAKEN AS TESTED PARTY. IN THAT YEAR DUE TO THE WEAKNESS OF THE TP DOCUMENTATION OF THE ASSESSEE WH ERE ASSESSEE COMPARED THE OPERATING MARGIN OF ALL THE OVERSEAS AES WITH R EFERENCE TO A SINGLE SET OF COMPARABLES SELECTED FROM AROUND THE WORLD WITHOUT ANY REGARD TO THE FUNCTIONAL AND GEOGRAPHICAL DISSIMILARITIES. IN THA T SET OF FACTS, COORDINATE BENCH HAS HELD THAT SUCH COMPARABILITY ANALYSIS IS NOT APPROPRIATE AND THEREFORE IN ABSENCE OF COMPARABLE DATA THERE WAS N O OPTION BUT TO UPHOLD THE APPELLANT AS A TESTED PARTY. THEREFORE, COORDIN ATE BENCH HAS UPHELD THE PRINCIPLE THAT TESTED PARTY SHOULD BE LEAST COMPLEX BUT ON THE FACTS OF THE CASE FOR THAT YEAR ON NON-AVAILABILITY OF COMPARABLE DAT A, IT IS SO HELD. IN THE CURRENT YEAR, THE APPELLANT HAS ADDUCED REASONABLY COMPARATIVE DATA BASED ON REGION AND COUNTRY FOR COMPARING THE FOREIGN AES . THEREFORE THE FACTS IN THE PRESENT YEAR ARE QUITE DISTINCT THAN THE YEAR D ECIDED BY ITAT I.E. A.Y. 2004-05. IN VIEW OF THIS, WE REJECT THE REASONS ASS IGNED BY LD. TPO FOR REJECTING THE SELECTION OF OVERSEAS AE AS THE TESTE D PARTY. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 32 - 33. LD. AR HAS CITED MANY DECISIONS, WHICH ARE ON THE PRINCIPLE OF SELECTION OF TESTED PARTY, WHICH IS LEAST COMPLEX. WE ARE OF THE VIEW THAT THERE IS NO DISPUTE ON THIS PRINCIPLE AS IT IS WELL RECOGNIZED AND WELL ACCEPTED IN ALL THOSE DECISIONS. THIS TOO HAS BEEN HELD BY COORDINATE BEN CH IN THE CASE OF THE ASSESSEE FOR A.Y. 2004-05. WE HAVE PERUSED THOSE DE CISIONS AND APPLIED THE SAME IN REASONING AND OUR FINDINGS. FOR THE SAKE OF BREVITY WE REFER THE DECISION OF COORDINATE BENCH IN GENERAL MOTORS INDI A (P.) LTD. (SUPRA) WHERE IN MAJORITY OF THE DECISIONS WERE CONSIDERED ON THE ISSUE OF SELECTION OF 'TESTED PARTY' AND IT HELD AS UNDER :- '11.1. WE SHALL NOW PROCEED TO PERUSE THE JUDICIAL VIEWS ON THE ISSUE. THE CASE LAWS RELIED ON BY THE ASSESSEE IS AS UNDER: (I) MASTEK LIMITED V. ADDL. CIT IN ITA NO.3120/AHD/ 2010 DT.29.02.2012: IN THIS CASE, THE QUESTION CAME UP FOR CONSIDERATIO N BEFORE THE EARLIER BENCH OF THIS TRIBUNAL WAS AS TO WHETHER A MINUTE EXAMINA TION OF FUNCTIONAL PROFILE IS NECESSARY FOR THE SELECTION OF COMPARABLES AND T HE ANSWER GIVEN WAS THAT FUNCTIONAL PROFILE MUST BE FIRST EXAMINED AND AFTER THAT PROCEED TO SELECT THE COMPARABLE. IN THIS CASE, THE COMPARABLES CHOSEN BY THE ASSESSEE WERE DISCUSSED BY THE TPO AND THOSE WERE DISCARDED FOR T HE BASIC REASON THAT THE COMPANIES THOSE QUOTED BY THE ASSESSEE WERE DEALING IN PRODUCT DISTRIBUTION WHEREAS THE TPO WAS OF THE VIEW THAT THE AE WAS NOT HING BUT 'FRONT OFFICE' OF THE ASSESSEE AND SIMPLY ENGAGED IN MARKETING ACTIVI TY. AFTER DUE CONSIDERATION OF THE ISSUE, THE HON'BLE BENCH HAD O BSERVED THUS: '16.1 (ON PAGE 47) IT IS CLEAR THAT ARM'S LENGTH PR ICE IS TO BE DETERMINED BY TAKING RESULT OF COMPARABLE TRANSACTIONS AND THOSE TRANSACTIONS MUST BE IN COMPARABLE CIRCUMSTANCES. IT IS THEREFORE REQUIRED TO HAVE A PROPER STUDY OF SPECIFIC CHARACTERISTICS OF CONTROLLED TRANSACTION. IT IS ALSO REQUIRED THAT THERE SHOULD BE PROPER STUDY OF FUNCTIONS PERFORMED TO MA TCH THE IDENTICAL SITUATIONS UNDER WHICH FUNCTIONS HAVE BEEN PERFORME D. THEN RISK PROFILE IS ALSO REQUIRED TO BE COMPARED. WE MAY LIKE TO ADD TH AT THERE ARE SO MANY PERSPECTIVES WHICH WERE REQUIRED TO BE COMPARED AND IN THIS CONNECTION THE HON'BLE COURTS HAVE ALSO SUGGESTED SO, SUCH AS, COM PARISON OF FUNCTIONAL PROFILE, SIMILARITY IN RESPECT OF ASSETS EMPLOYED A ND A THOROUGH SCREENING OF THE COMPARABLES ETC. HENCE, IN THE PRESENT CASE, IT IS NECESSARY TO CONSIDER AN ANALYSIS THAT WHETHER THE COMPARABLES SELECTED BY T HE TPO HAD ANALOGOUS FUNCTIONAL PROFILE TO THAT OF FUNCTIONAL PROFILE OF THE ASSESSEE. IT IS TRUE THAT FUNCTIONAL PROFILE AND ASSETS AND RISK ANALYSIS WAS MADE AVAILABLE BUT THAT IS TO BE CORRECTLY UNDERSTOOD IN THE LIGHT OF THE NATU RE OF INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE WITH THE SA ID AE. A SIMILAR PROBLEM WAS CONSIDERED BY ITAT DELHI BENCH IN THE CASE OF B ECHTEL INDIA PVT. LTD. V. DCIT (2011- TII-07-ITAT-DEL-TP) WHERE THE A SSESSEE STATED TO BE ENGAGED IN THE BUSINESS OF PROVIDING ELECTRONIC DAT A SUPPORT SERVICE TO AE AND THE DIFFICULTY AROSE THAT THE SAID FUNCTION WAS COMPARED WITH THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 33 - COMPANIES ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE. SO THE QUESTION WAS THAT WHETHER A MINUTE EXAMINATION OF F UNCTIONAL PROFILE IS NECESSARY FOR THE PURPOSE OF SELECTION OF COMPARABL ES AND THE ANSWER GIVEN WAS THAT FUNCTIONAL PROFILE MUST BE FIRST EXAMINED AND AFTER THAT PROCEEDS TO SELECT THE COMPARABLES. INTERESTINGLY, IN THE PRESE NT CASE NOW BEFORE US, COMPARABLES CHOSEN BY THE ASSESSEE WERE DISCUSSED B Y THE TPO AND THOSE WERE DISCARDED. THE BASIC REASON FOR REJECTION OF T HOSE COMPARABLES WAS THAT THE COMPANIES THOSE WERE QUOTED BY THE ASSESSEE WER E DEALING IN PRODUCT DISTRIBUTION WHEREAS THE TPO WAS OF THE VIEW THAT T HE AE WAS NOTHING BUT 'FRONT OFFICE' OF THE ASSESSEE AND SIMPLE ENGAGED I N MARKING ACTIVITY. IN THIS CONTEXT, WE ARE OF THE VIEW THAT IN ORDER TO DETERM INE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, FIRS T IT IS NECESSARY TO SELECT THE 'TESTED PARTY' AND SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRIMA FACIE CANNOT BE DISTINGUISHED FROM POTENTIAL UNCONTROLLED COMPARABLES.' WE ARE IN AGREEMENT WITH THE FINDINGS OF THE EARLIE R BENCH (SUPRA) THAT SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD N OT BE UNIQUE. (II) DEVELOPMENT CONSULTANTS (P.) LTD. V. ACIT 136 TTJ 129 & FOLLOWED BY SONY INDIA (P.) LTD. V. DY. CIT [2008] 114 ITD 4 48/315 ITR 150 (DELHI) : THE ISSUE BEFORE THE TRIBUNAL WAS THAT THE CIT (A) HAD CONFIRMED THE ADJUSTMENTS TO THE INTERNATIONAL TRANSACTIONS OF TH E ASSESSEE WITH ITS AES BASED AT BAHAMAS, USA WITHOUT CONSIDERING THE SUBMI SSIONS AND THE FINANCIAL OF THE AES EXPLAINING THE FACTS ETC. IN C ASE OF THE MERITS OF THE CASE FOR INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSES SEE WITH TKC, THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE WAS AS UN DER: '26, 1 TO 3** ....4. TKS IS THE ENTREPRENEUR COMPANY AND HAS CREA TED SIGNIFICANT MARKETING INTANGIBLES OVER THE YEARS. IT USES ITS MARKETING I NTANGIBLES TO GENERATE THE WORK AND ASSUMES ALL THE MARKET, PRICE AND PRODUCT RISKS. TKC CAME OUT THE WORK ON ITS OWN, ONLY PARTS OF THE JOB ARE SUB-CONT RACTED TO THE ASSESSEE FOR ITS CONVENIENCE. FUTHER, BEING AN ENTREPRENEUR COMP ANY, IT IS DIFFICULT TO DETERMINE THE PROFITS OF ATKC WITH RESPECT TO WORK DOWNLOADED TO INDIA (AS THE REVENUE RECEIVED FOR WORK OFF-SHORED TO INDIA C ANNOT BE SEPARATELY IDENTIFIED). FURTHER, THE REVENUE GENERATED FROM TH E SERVICES PROVIDED BY THE ASSESSEE WOULD FORM ONLY A SMALL PART OF THE ENTIRE OPERATIONS. THE VALUE OF ENGINEERING DRAWING AND DESIGN SERVICES RENDERED BY THE ASSESSEE TO TKC FOR AY 2002-04 WAS RS. 1,58,43,923/- AND FOR AY 2004-05 IT WAS RS. 1,45,77,704/-. THE VALUE OF SERVICE FORMS APPROXIMA TELY 6% TO 7% OF THE COST OF SALES TO TKC. HENCE, THIS SHRI RAHUL MITRA ARGUE D, SHOWS THAT TESTING THE MARGINS OF TKC WOULD NOT SERVE THE PURPOSE OF D ETERMINING THE ARM'S LENGTH NATURE OF THE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH TKC. HENCE, THE RECOURSE AVAILABLE TO TEST THE ARM'S LEN GTH PRICE OF THE SERVICES IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 34 - RENDERED BY THE ASSESSEE TO TKC IS TO TEST THE MARG INS FROM THE INDIAN SIDE. IN VIEW OF THE DISCUSSION ON TESTED PART EARLIER, THE ASSESSEE WAS SELECTED AS THE TESTED PARTY BEING LEAST COMPLEX OF THE TWO ENTITIE S. HENCE, THE TRANSFER PRICING ANALYSIS IN THIS CASE WAS DONE FROM THE IND IAN SIDE, WHEREIN, THE MARGINS OF THE ASSESSEE WITH RESPECT TO SERVICES PR OVIDED TO TKC WERE COMPARED INTERNALLY WITH SERVICES PROVIDED TO OTHER THIRD PARTIES IN FOREIGN MARKET. TAKING INTO ACCOUNT THE DIVERGENT SUBMISSIO NS, THE HON'BLE TRIBUNAL HAD RECORDED ITS FINDINGS THAT '33. BASED ON FACTS AND OUR FINDINGS OF THE CASE, A FTER DUE CONSIDERATION OF ALL THE FACTS, WE CONCLUDE THAT THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATION AL TRANSACTION WITH DATACORE USA IS CORRECT AND ON THE BASIS OF THE ANA LYSIS IT IS SEEN THAT TRANSACTION UNDERTAKEN BY THE TAXPAYER WITH DATACOR E US IS AT ARM'S LENGTH FOR BOTH THE ASSESSMENT YEARS.' (III) IN THE CASE OF RANBAXY LABORATORIES LTD. V. A DDL. CIT110 ITD 428 , THE HON'BLE DELHI TRIBUNAL HAD RECORDED ITS FINDINGS T HAT '58. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THE TESTED PARTY NORMALLY SHOULD BE THE PAR TY IN RESPECT OF WHICH RELIABLE DATA FOR COMPARISON IS EASILY AND READILY AVAILABLE AND FEWEST ADJUSTMENTS IN COMPUTATIONS ARE NEEDED. IT MAY BE LOCAL OR FOREIGN ENTITY, I.E., ONE PARTY TO THE TRANSACTION. THE OBJECT OF TRANSFER PRICING EXE RCISE IS TO GATHER RELIABLE DATA, WHICH CAN BE CONSIDERED WITHOUT DIFFICULTY BY BOTH THE PARTIES, I.E., TAXPAYER AND THE REVENUE. IT IS ALSO TRUE THAT GENE RALLY LEAST OF THE COMPLEX CONTROLLED TAXPAYER SHOULD BE TAKEN AS A TESTED PAR TY. BUT WHERE COMPARABLE OR ALMOST COMPARABLE, CONTROLLED AND UNCONTROLLED T RANSACTIONS OR ENTITIES ARE AVAILABLE, IT MAY NOT BE RIGHT TO ELIMINATE THE M FROM CONSIDERATION BECAUSE THEY LOOK TO BE COMPLEX. IF THE TAXPAYER WI SHES TO TAKE FOREIGN AE AS A TESTED PARTY, THEN IT MUST ENSURE THAT IT IS SUCH AN ENTITY FOR WHICH THE RELEVANT DATA FOR COMPARISON IS AVAILABLE IN PUBLIC DOMAIN OR IS FURNISHED TO THE TAX ADMINISTRATION. THE TAXPAYER IS NOT THEN EN TITLED TO TAKE A STAND THAT SUCH DATA CANNOT BE CALLED FOR OR INSISTED UPON FRO M THE TAXPAYER.' IN SUBSTANCE, A FOREIGN ENTITY (A FOREIGN AE) COULD ALSO BE TAKEN AS A TESTED PARTY FOR COMPARISON. 11.2. AT THIS JUNCTURE, WE WOULD LIKE TO REFER TO T HE UNITED NATION'S PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES WHEREIN THE SELECTION OF THE TESTED PARTY HAS BEEN DEALT WITH. THIS MANUA L HAS BEEN THE WORK OF MANY AUTHORS WHICH INCLUDED INDIA, NORWAY, NIGERIA, ITALY, USA, NETHERLANDS, BRAZIL, CHINA, OECD, JAPAN ETC. FOR RE ADY REFERENCE, THE RELEVANT PORTION OF IT OBSERVATION IS EXTRACTED AS UNDER: '5.3.3. SELECTION OF THE TESTED PARTY: IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 35 - 5.3.3.1. WHEN APPLYING THE COST PLUS METHOD, RESALE PRICE METHOD OR TRANSACTIONAL NET MARGIN METHOD (SEE FURTHER CHAPTE R 6) IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FIN ANCIAL INDICATOR (MARK-UP ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHOICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTION AL ANALYSIS OF THE CONTROLLED TRANSACTION. ATTRIBUTES OF CONTROLLED TRANSACTION(S ) WILL INFLUENCE THE SELECTION OF THE TEST PARTY (WHERE NEEDED). THE TESTED PARTY NORMALLY SHOULD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHO ULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FOR COMPARABILITY I S AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN ASSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESSARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT DATA ON COMPARA BLES IS FURNISHED TO THE TAX ADMINISTRATION AND VICE VERSA IN ORDER FOR THE LATT ER TO BE ABLE TO VERIFY THE SELECTION AND APPLICATION OF THE TRANSFER PRICING M ETHOD.' WITH REGARD TO THE CHALLENGES EMERGING IN TRANSFER PRICING IN INDIA, IT HAS BEEN OBSERVED AS UNDER: '10.4. EMERGING TRANSFER PRICING CHALLENGES IN INDI A 10.4.1. TRANSFER PRICING REGULATIONS IN INDIA 10.4.1.3 THE INDIAN TRANSFER PRICING ADMINISTRATION PREFERS INDIAN COMPARABLES IN MOST CASES AND ALSO ACCEPTS FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN ASSOCIATED ENTERPRISE IS THE LESS OR LEAST COMPLEX ENTITY AND REQUISITE INFORMATION IS AVAILABLE ABOUT THE TESTED PARTY AND COMPARABLES. 11.2.1 IT WAS ALSO VOUCHED DURING THE COURSE OF HEA RING BY THE LEARNED SR. COUNSEL THAT THE FINANCIAL DETAILS INCLUDING OPERAT ING MARGIN OF COMPARABLE COMPANIES ALONG WITH THE BACK-UP COMPUTATIONS WERE FURNISHED BEFORE THE TPO IN THE TRANSFER PRICING DOCUMENTATION [SOURCE: PAGES 113 TO 210 OF THE TRANSFER PRICING STUDY]. THIS CONTRADICTS THE ASSER TION OF THE LEARNED DR THAT THE ASSESSEE HAD NOT FURNISHED ANY FINANCIAL INFORM ATION OF THE COMPARABLE COMPANIES. 11.2.2 THE UNITED NATION'S PRACTICAL MANUAL ON TRAN SFER PRICING ALSO CONTRADICTS THE TPO'S ARGUMENT THAT GMDAT SHOULD NO T BE SELECTED AS THE TESTED PARTY AS THE COMPARABLE COMPANIES SELECTED B Y THE ASSESSEE DOESN'T FALL WITHIN HIS JURISDICTION AND HE CAN NEITHER CALL FOR ANY ADDITIONAL INFORMATION NOR SCRUTINIZE THEIR BOOKS OF ACCOUNTS ETC., 11.2.3 HOWEVER, WE FIND INCONSISTENCY IN THE STAND OF THE TPO TO THE EFFECT THAT WHILE REJECTING THE ASSESSEE'S APPROACH FOR SE LECTING GMDAT AS THE TESTED PARTY BY CITING A REASON THAT THERE WAS NO R ELIABLE DATA AVAILABLE FOR BOTH GMDAT AND COMPARABLES AND, THEREFORE, GMDAT CA NNOT BE TAKEN AS THE 'TESTED PARTY', HOWEVER, ON THE SAME BREATH, AS RIGHTLY HIGHLIGHTED BY THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 36 - ASSESSEE, THE TPO HAD TAKEN GMDAT AS THE TESTED PAR TY WHILE MAKING ADJUSTMENT TO TRANSACTION RELATING TO PAYMENT OF RO YALTY BY GMI TO GMDAT. 11.2.4 REBUTTING THE REVENUE'S ALLEGATION MADE DURI NG THE COURSE OF PROCEEDINGS THAT THE SEGMENTAL FINANCIAL STATEMENT OF GMDAT WAS NOT RELIABLE, THE ASSESSEE REITERATES THAT THE SEGMENTA L DATA RELIED UPON FOR BENCHMARKING INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF CKD KITS AND COMPONENTS WAS COMPLETELY RELIABLE AND WAS BASED ON SOUND ALLOCATION KEYS. TO SUBSTANTIATE ITS CLAIM, THE ASSESSEE HAS ALSO FU RNISHED A REPORT ON FACTUAL FINDINGS CERTIFIED BY THE STATUTORY AUDITORS DELO ITTE ANJIN LLC. 11.2.5 MOREOVER, WE FIND THAT THE DRP HAD NOT CONSI DERED IN GREAT DETAIL THE PLEA OF THE ASSESSEE AS TO WHY GMDAT SHOULD NOT BE SELECTED AS THE TESTED PARTY FOR ANALYZING THE INTER-COMPANY TRANSACTIONS. INSTEAD, THE DRP HAD, IN A CRYPTIC MANNER, CONCLUDED THAT THE RESULTS OF ASS ESSEE HAVE TO BE COMPARED WITH THE STAND ALONE RESULTS OF MAHINDRA & MAHINDRA IN THE AUTOMOTIVE SEGMENT. 11.2.6 IN THIS CONNECTION, WE TEND TO RECALL THE RU LING OF THE HON'BLE JURISDICTIONAL HIGH COURT [SPECIAL CIVIL APPLICATIO N NO.8179 OF 2010 DATED 31.8.2010] IN THE CASE OF AIA ENGINEERING LTD. V. D ISPUTE RESOLUTION PATEL THROUGH SECRETARY-DRP & 1. AFTER DUE CONSIDER ATION OF RIVAL SUBMISSIONS, THE HON'BLE COURT HAD RULED THUS '16. . . . . .IF THE DISPUTE RESOLUTION PANEL WAS O F THE OPINION THAT THE APPLICATION DATED 22.4.2010 COULD NOT HAVE BEEN ENT ERTAINED, IT SHOULD HAVE CONSIDERED THE OBJECTIONS FILED BY THE PETITION ON MERITS. AS A CONSEQUENCE OF THE IMPUGNED ORDER, FIRSTLY THE OBJECTIONS RAISED B Y THE PETITIONER HAVE NOT BEEN DECIDED, SECONDLY, IN VIEW OF THE DIRECTIONS I SSUED BY THE DISPUTE RESOLUTION PANEL, THE PETITIONER WOULD NOT BE IN A POSITION TO AVAIL OF THE REMEDY OF APPEAL BEFORE COMMISSIONER (APPEALS) AGAI NST THE DRAFT ASSESSMENT ORDER; AND THIRDLY, IN THE LIGHT OF THE OBSERVATION MADE BY THE DISPUTE RESOLUTION PANEL THAT THE PETITIONER HAS CHOSEN TO WITHDRAW TH E OBJECTIONS, PREFERRING ANY APPEAL AGAINST THE IMPUGNED ORDER BEFORE ANY FO RUM WOULD BE AN EXERCISE IN FUTILITY, AS NO APPEAL WOULD BE ENTERTA INED AGAINST AN ORDER PASSED ON A CONCESSION. THUS, THE DISPUTE RESOLUTION PANEL HAS VIRTUALLY CLOSED ALL DOORS FOR THE PETITIONER. IN THE CIRCUMSTANCES, IMP UGNED ORDER OF THE DISPUTE RESOLUTION PANEL SUFFERS FROM THE VIDE OF BEING CON TRARY TO THE RECORD AS WELL AS NON-APPLICATION OF MIND, IN AS MUCH AS THE PETIT IONER HAD NEVER SOUGHT WITHDRAWAL OF THE OBJECTIONS FILED BY IT. THE IMPUG NED ORDER ALSO CAUSES IMMENSE PREJUDICE TO THE PETITIONER AS RECORDED HER EINABOVE. IN THE CIRCUMSTANCES, THE IMPUGNED ORDER OF THE DISPUTE RE SOLUTION PANEL, THEREFORE, CANNOT BE SUSTAINED. . . . . . .' IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 37 - 11.3 WE SHALL NOW PERUSE THE CASE LAWS ON WHICH THE LEARNED DR HAD PLACED RELIANCE IN THE FINDINGS OF THE HON'BLE MUMBAI TRIB UNALS IN THE CASES OF (I) AURIONPRO SOLUTIONS LTD. V. ADDL. CIT IN ITA NO .7872/MUM/2011 DATED 12.4.2013; AND (II) M/S ONWARD TECHNOLOGIES LTD. V. DCIT (OSD) IN ITA NO.7985/MUM/2010 DATED 30.4.2013. (I) IN THE CASE OF AURIONPRO SOLUTIONS LTD. (SUPRA ), THE ISSUE BEFORE THE HON'BLE BENCH WAS THAT THE ASSESSEE ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND WEB DESIGNING SERVICES AND THAT THE ASSESSEE HAD LENT LOANS TO ITS AES STATIONED AT USA, SINGAPORE AND BAHRAIN. THE ASSESSEE HAD CLAIMED THAT THE SAID LOANS AS WORKING CAPITAL ADVA NCED TO ITS 100% SUBSIDIARY OUTSIDE INDIA. WHEN THE ISSUE WAS REFERR ED TO TPO, THE TPO TOOK A VIEW THAT AS IN A THIRD PARTY COMPARABLE SITUATIO N, ADVANCES WOULD BEAR INTEREST AND, THEREFORE, NEED TO CHARGE A MARKUP AS PER CUP METHOD. ACCORDINGLY, THE TPO PROPOSED TO BENCHMARK THE LOAN S AT DOLLAR DENOMINATED LIBO [LONDON INTER BANK OPERATIVE] RATE PLUS MARK UP OF 3%. WHEN THE ISSUE LANDED UP BEFORE THE DRP, THE DRP HA D, AFTER A NALYZING THE ISSUE, DIRECTED THE AO/TPO TO COMPUTE THE INTEREST ON LOANS TO AE @ 14% PER ANNUM THEREBY ENHANCED THE TRANSFER PRICING ADJ USTMENT. AGGRIEVED ASSESSEE TOOK UP THE ISSUE WITH THE TRIBUNAL. THE H ON'BLE TRIBUNAL, AFTER DUE CONSIDERATION OF THE IS SUE IN DEPTH AND FOR THE REASONS RECORDED THEREIN, DIRECTED THE AO/TPO TO DETERMINE THE ARM'S LENGTH I NTEREST AT LIBOR PLUS 2% ON THE MONTHLY CLOSING BALANCE OF ADVANCES DURING T HE FY. WE HAVE, WITH DUE REGARDS, PERUSED THE ISSUE AND THE FINDINGS OF THE HO N'BLE BENCH IN DETAIL. IRONICALLY, THE MAIN ISSUE BEFORE THE BENCH WAS THE PERCENTAGE OF THE INTEREST TO BE CALCULATED ON THE LOAN ADVANCED BY T HE ASSESSEE TO ITS FOREIGN AES. WE ARE, THEREFORE, OF THE VIEW THAT THIS CASE IS NOT DIRECTLY APPLICABLE TO THE ISSUE UNDER DISPUTE. (II) IN THE CASE OF M/S. ONWARD TECHNOLOGIES LTD. (SUPRA ) AS RELIED ON BY THE REVENUE, IT IS OBSERVED THAT THE ASSESSEE, A PARENT COMPANY HAD INTERNATIONAL TRANSACTION WITH ITS AES. WITH REGARD TO IT ENABLED SERVICES PROVIDE TO ITS AES, THE ASSESSEE HAD CHOSEN SIX COMPARABLES WITH I TS FOREIGN AES AS A TESTED PARTY. THE TPO HAD IGNORED THE WORK ING OF THE ASSESSEE WHEREBY SELECTING 20 COMPARABLE CASES. WHEN THE ISS UE REACHED BEFORE THE TRIBUNAL FOR RESOLVE, THE HON'BLE BENCH HAD, AFTER HAVING CONSIDERED RIVAL SUBMISSIONS, RECORDED ITS FINDINGS, AMONG OTHERS, A S UNDER: SO, IT IS THE PROFIT ACTUALLY REALIZED BY THE INDIA N ASSESSEE FROM THE TRANSACTION WITH ITS FOREIGN AE WHICH IS COMPARED WITH THAT OF THE COMPARABLES. THERE CAN BE NO QUESTION OF SUBSTITUTING THE PROFIT REALI ZED BY THE INDIAN ENTERPRISE FROM ITS FOREIGN AE WITH THE PROFIT REALIZED BY THE FOREIGN AE FROM THE ULTIMATE CUSTOMERS FOR THE PURPOSES OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF THE INDIAN ENTERPRISE WITH ITS FOREIGN AE. THE SCOPE OF TP ADJUSTMENT UNDER THE INDIAN TAXATION LA W IS LIMITED TO TRANSACTION IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 38 - BETWEEN THE ASSESSEE AND ITS FOREIGN AE. IT CAN NEI THER CALL FOR ALSO ROPING IN AND TAXING IN INDIA THE MARGIN FROM THE ACTIVITIES UNDERTAKEN BY THE FOREIGN AE NOR CAN IT CURTAIL THE PROFIT ARISING OUT OF TRA NSACTION BETWEEN THE INDIAN AND FOREIGN AE AT ARM'S LENGTH. THE CONTENTION OF T HE LD. AR IN CONSIDERING THE PROFIT OF THE FOREIGN AE AS 'PROFIT A' FOR THE PURPOSES OF COMPARISON WITH PROFIT OR COMPARABLES, BEING 'PROFIT B', TO DETERMI NE THE ALP OF TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE, MISSES THE WOOD FROM THE TREE BY MAKING THE SUBSTANTIVE SECTION 92 OTIOSE AND THE DE FINITION OF 'INTERNAL TRANSACTION' U/S 92B AND RULE 10B REDUNDANT. THIS I S PATENTLY AN UNACCEPTABLE POSITION HAVING NO SANCTION OF THE INDIAN TRANSFER PRICING LAW. BORROWING A CONTRARY MANDATE OF THE TP PROVISIONS OF OTHER COUN TRIES AND READING IT INTO OUR PROVISIONS IS NOT PERMISSIBLE. THE REQUIREMENT UNDER OUR LAW IS TO COMPUTE THE INCOME FROM AN INTERNATIONAL TRANSACTIO N BETWEEN TWO AES HAVING REGARD TO ITS ALP AND THE SAME IS REQUIRED T O BE STRICTLY ADHERED TO AS PRESCRIBED. THIS CONTENTION IS, THEREFORE, REPELLED .' WITH HAVE DULY PERUSED THE FINDINGS OF THE HON'BLE BENCH CITED SUPRA. IN THIS CONNECTION, WE WOULD LIKE TO POINT OUT THAT VARIOUS TRIBUNALS HAVE TAKEN DIVERGENT VIEWS IN RESPECT OF SELECTION OF 'TESTED PARTY'. TO ILLUSTRATE, THE EARLIER BENCH OF THIS TRIBUNAL IN THE CASE OF MASTE K LIMITED ITA NO.3096/AHD/2010 (AY- 2006-07) (SUPRA) HAD STRESSED THAT (AT THE COST OF REPETITION) 'WE ARE OF THE VIEW THAT IN ORDER TO DETERMINE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, FIRST IT IS NECESSARY TO SELECT THE 'TESTED PARTY' AND SUCH A SELECTED PARTY SHOULD BE LEAST CO MPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRIMA FACIE CANNOT BE DISTINGUISHED FROM POTENTIAL UNCONTROLLED COMPARABLES'. THE HON'BLE CALCUTTA TRIBUNAL IN THE CASE OF DEVELO PMENT CONSULTANTS (P.) LTD. (SUPRA) HAD RECORDED ITS FINDINGS THAT '33. BASED ON FACTS AND OUR FINDINGS OF THE CASE, A FTER DUE CONSIDERATION OF ALL THE FACTS, WE CONCLUDE THAT THE ANALYSIS UNDERTAKEN BY THE ASSESSEE TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATION AL TRANSACTION WITH DATACORE USA IS CORRECT AND ON THE BASIS OF THE ANA LYSIS IT IS SEEN THAT TRANSACTION UNDERTAKEN BY THE TAXPAYER WITH DATACOR E US IS AT ARM'S LENGTH FOR BOTH THE ASSESSMENT YEARS.' THIRDLY, THE HON'BLE DELHI TRIBUNAL IN THE CASE OF RANBAXY LABORATORIES LIMITED (SUPRA) TOOK A STAND THAT 'IF THE TAXPAYER WISHES TO TAKE FOREIGN AE AS A TES TED PARTY, THEN IT MUST ENSURE THAT IT IS SUCH AN ENTITY FOR WHICH THE RELEVANT DA TA FOR COMPARISON IS AVAILABLE IN PUBLIC DOMAIN OR IS FURNISHED TO THE TAX ADMINIS TRATION.' IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 39 - THEN, THE UNITED NATION'S PRACTICAL MANUAL ON TRANS FER PRICING FOR DEVELOPING COUNTRIES HAD OBSERVED THAT '5.3.3.1. . . . . . THE TESTED PARTY NORMALLY SHOUL D BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHOULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FOR COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE F OREIGN ASSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECESS ARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT DATA ON COMPARABLES IS FURN ISHED TO THE TAX ADMINISTRATION. . . . . .' 11.4. CONSIDERING THE DIVERGENT VIEWS EXPRESSED BY VARIOUS TRIBUNALS (SUPRA) AND MAJORITY OF THEM WERE IN FAVOUR OF SELECTING TH E 'TESTED PARTY' EITHER FROM LOCAL OR FOREIGN PARTY AND THE UNITED NATION'S PRAC TICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES HAD OBSERVED THAT 'IT MAY BE THE LOCAL OR THE FOREIGN PARTY', WE TEND TO AGREE WITH THE SAME.' 34. ABOVE DECISION REPRODUCED BY US COVERS MANY DIVERG ENT VIEWS OF THE COORDINATE BENCHES AND AFTER CONSIDERING THEM COORD INATE BENCH HAS REITERATED ALL THE PRINCIPLES NOTED BY US FOR SELEC TION OF TESTED PARTY. HENCE, WE ALSO DRAW STAUNCH SUPPORT FROM THAT DECISION. 35. THEREFORE, FOR THE REASONS STATED ABOVE, GROUND NO 2.2 OF THE APPEAL IS ALLOWED WITH A DIRECTION THAT OVERSEAS ASSOCIATED E NTERPRISES ARE ACCEPTED AS 'TESTED PARTY' BEING THE LEAST COMPLEX OF THE TRANS ACTING ENTITY FOR THE YEAR FOR COMPARABILITY ANALYSIS OF INTERNATIONAL TRANSACTION S OF THE ASSESSEE- APPELLANT. 36. AS WE HAVE ALREADY DECIDED THE FIRST STEP OF COMPA RABILITY ANALYSIS IN GROUND NO 2.2 OF THE APPEAL WE SET ASIDE OTHER GROU NDS NOS. 2 TO 7 EXCEPT 2.2 TO THE FILE OF TPO TO COMPUTE ALP OF THE INTERNATIO NAL TRANSACTIONS ACCORDINGLY. IN THE RESULT GROUND NOS. 2 TO 7 EXCEP T GROUND NO.2.2 ARE ALLOWED FOR STATISTICAL PURPOSES. NEEDLESS TO SAY THAT LD. TPO/AO SHALL GIVE DUE WEIGHTAGE TO THE ADVANCE PRICING AGREEMENT SIGNED B Y THE ASSESSEE WITH CBDT ON OTHER ISSUES ALSO (OTHER THAN THE ISSUE OF 'SELECTION OF TESTED PARTY') FOR DETERMINATION OF ALP AND IN CASE OF ANY DIVERGE NT VIEW, THE ASSESSEE SHALL BE GRANTED AN ADEQUATE OPPORTUNITY TO SUBSTANTIATE ANY CLAIM/ARGUMENTS ON THE MANNER OF DETERMINATION OF ALP. 10. 1. AS THE FACTS IN THE CASE ON HAND ARE IDENT ICAL TO THE FACTS OF THE CASE AS DISCUSSED ABOVE, THEREFORE WE ARE BOUND TO FOLLOW THE SAME. WE CANNOT CHANGE THE STAND WITH THE VIEW TAKEN BY THE ITAT IN THE OWN CASE OF THE ASSESSEE. REGARDING THIS WE FIND SUPPORT & G UIDANCE FROM THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 40 - JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE O F CIT V. L.G. RAMAMURTHI 1977 CTR (MAD.) 416 : [1977] 110 ITR 453 (MAD.) WHEREIN IT WAS HELD AS UNDER: 'NO TRIBUNAL OF FACT HAS ANY RIGHT OR JURISDICTION TO COME TO A CONCLUSION ENTIRELY CONTRARY TO THE ONE REACHED BY ANOTHER BENCH OF THE SAME TRIBUNAL ON THE SAME FACTS. IT MAY BE THAT THE MEMBERS WHO CONSTITUTED T HE TRIBUNAL AND DECIDED ON THE EARLIER OCCASION WERE DIFFERENT FROM THE MEMBERS WH O DECIDED THE CASE ON THE PRESENT OCCASION. BUT WHAT IS RELEVANT IS NOT THE P ERSONALITY OF THE OFFICERS PRESIDING OVER THE TRIBUNAL OR PARTICIPATING IN THE HEARING B UT THE TRIBUNAL AS AN INSTITUTION. IF IT IS TO BE CONCEDED THAT SIMPLY BECAUSE OF THE CHA NGE IN THE PERSONNEL OF THE OFFICERS WHO MANNED THE TRIBUNAL, IT IS OPEN TO THE NEW OFFI CERS TO COME TO A CONCLUSION TOTALLY CONTRADICTORY TO THE CONCLUSION WHICH HAD B EEN REACHED BY THE EARLIER OFFICERS MANNING THE SAME TRIBUNAL ON THE SAME SET OF FACTS, IT WILL NOT ONLY SHAKE THE CONFIDENCE OF THE PUBLIC IN JUDICIAL PROCEDURE AS S UCH, BUT IT WILL ALSO TOTALLY DESTROY SUCH CONFIDENCE. THE RESULT OF THIS WILL BE CONCLUS IONS BASED ON ARBITRARINESS AND WHIMS AND FANCIES OF THE INDIVIDUALS PRESIDING OVER THE COURTS OR THE TRIBUNALS AND NOT REACHED OBJECTIVELY ON THE BASIS OF THE FACTS P LACED BEFORE THE AUTHORITIES. IF A BENCH OF A TRIBUNAL ON THE IDENTICAL FACTS IS ALLOWED TO COME TO A CONCLUSION DIRECTLY OPPOSED TO THE CONCLUSION REACHED BY ANOTH ER BENCH OF THE TRIBUNAL ON AN EARLIER OCCASION, THAT WILL BE DESTRUCTIVE OF THE I NSTITUTIONAL INTEGRITY ITSELF. THAT IS THE REASON WHY IN A HIGH COURT, IF A SINGLE JUDGE TAKES A VIEW DIFFERENT FROM THE ONE TAKEN BY ANOTHER JUDGE ON A QUESTION OF LAW, HE DOE S NOT FINALLY PRONOUNCE HIS VIEW AND THE MATTER IS REFERRED TO A DIVISION BENCH. SIM ILARLY IF A DIVISION BENCH DIFFERS FROM THE VIEW TAKEN BY ANOTHER DIVISION BENCH IT DO ES NOT EXPRESS DISAGREEMENT AND PRONOUNCE ITS DIFFERENT VIEWS, BUT HAS THE MATTER P OSTED BEFORE A FULLER BENCH FOR CONSIDERING THE QUESTION. IF THAT IS THE POSITION E VEN WITH REGARD TO A QUESTION OF LAW, THE POSITION WILL BE A FORTIORI WITH REGARD TO A QU ESTION OF FACT. IF THE TRIBUNAL WANTS TO TAKE AN OPINION DIFFERENT FROM THE ONE TAKEN BY AN EARLIER BENCH, IT SHOULD PLACE THE MATTER BEFORE THE PRESIDENT OF THE TRIBUNAL, SO THAT HE COULD HAVE THE CASE REFERRED TO A FULL BENCH OF THE TRIBUNAL CONSISTING OF THREE OR MORE MEMBERS FOR WHICH THERE IS PROVISION IN THE IT ACT ITSELF.' 10.2. WE ALSO FIND THAT THE HONBLE SUPREME COU RT CASE OF AMBIKA PARSAD MISHRA VS. STATE OF U.P.AND OTHERS VIDE WRIT PETITION NO 1543 OF 1977 VIDE ORDER DATED 09-05-1980 HAS TAKEN THE SIMI LAR VIEW AS TAKEN BY THE HONBLE HIGH COURT (SUPRA) AS UNDER: THUS WE GET THE STATUTORY PERSPECTIVE OF AGRARIAN REFORM AND SO, THE CONSTITUTIONALITY OF THE ACT HAS TO BE TESTED ON TH E TOUCHSTONE OF ART 31A WHICH IS THE RELEVANT PROTECTIVE ARMOUR FOR LAND REFORM L AWS. EVEN HERE, WE MUST STATE THAT WHILE WE DO REFER TO THE RANGE OF CONSTI TUTIONAL IMMUNITY ART. 31A CONFERS ON AGRARIAN REFORM MEASURES WE DO NOT REST OUR DECISION ON THAT IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 41 - PROVISION. INDEPENDENTLY OF ART. 31A , THE IMPUGNED LEGISLATION CAN WITHSTAND CONSTITUTIONAL INVASION AND SO THE FURTHER CHALLENG E TO ART. 31A ITSELF IS OF NO CONSEQUENCE. THE COMPREHENSIVE VOCABULARY OF THAT P URPOSEFUL PROVISION OBVIOUSLY CATCHES WITHIN ITS PROTECTIVE NET THE PRE SENT ACT AND, BROADLY SPEAKING, THE ANTISEPTIC EFFECT OF THAT ARTICLE IS SUFFICIENT TO IMMUNISE THE ACT AGAINST INVALIDATION TO THE EXTENT STATED THEREIN. THE EXTREME ARGUMENT THAT ART. 31A ITSELF IS VOID AS VIOLATIVE OF THE BASIC STRUCTURE OF THE CONSTITUTION HAS BEEN NEGATIVED BY MY LEARNED BROTH ER, BHAGWATI, J. IN A KINDRED GROUP OF CASES OF ANDHRA PRADESH. THE AMULE T OF ART. 31A IS, THEREFORE, POTENT, SO FAR AS IT GOES, BUT BEYOND IT S AMBIT IT IS STILL POSSIBLE, AS COUNSEL HAVE ENDEAVOURED, TO SPIN OUT SOME SOUND AR GUMENT TO NULLIFY ONE SECTION OR THE OTHER. SURELY, THE LEGISLATURE CANNO T RUN AMOK IN THE BLIND BELIEF THAT ART. 31A IS OMNIPOTENT. WE WILL EXAMINE THE ALLEGED INFIRMI TIES IN DUE COURSE. IT IS SIGNIFICANT THAT EVEN APART FROM THE MANY DECISIONS UPHOLDING ART. 31A , GOLAK NATH'S CASE DECIDED BY A BENCH OF 11 JUDGES , WHILE HOLDING THAT THE CONSTITUTION (FIRST AMENDMEN T) ACT EXCEEDED THE CONSTITUENT POWER STILL CATEGORICALLY DECLARED THAT THE SAID AMENDMENT AND A FEW OTHER LIKE AMENDMENTS WOULD BE HELD GOOD BASED ON THE DOCTRINE OF PROSPECTIVE OVER-RULING. THE RESULT, FOR OUR PURPOS E, IS THAT EVEN GOLAK NATH'S CASE HAS HELD ART. 31A VALID. THE NOTE STRUCK BY LATER CASES REVERSING GOLAKNATH DOES NOT MILITATE AGAINST THE VIRES OF ART. 31A. SUFFICE IT TO SAY THAT IN THE KESAVANANDA BHARATI'S CASE. ARTICLE 31A WAS CHALLENGED AS BEYOND THE AMENDATORY POWER OF PARLIAMENT AND, THEREFORE, INVA LID. BUT, AFTER LISTENING TO THE MARATHON ERUDITION FROM EMINENT COUNSEL, A 1 3 JUDGES BENCH OF THIS COURT UPHELD THE VIRES OF ARTICLE 31A IN UNEQUIVOCAL TERMS. THAT DECISION BINDS, ON THE SIMPLE SCORE OF STARE DECISIS AND THE CONSTITUTIONAL GROUND OF ART. 141. EVERY NOW DISCOVERY OR ARGUMENTATIVE NOVELTY CANNO T UNDO OR COMPEL RECONSIDERATION OF A BINDING PRECEDENT. IN T HIS VIEW, OTHER SUBMISSIONS SPARKLING WITH CREATIVE INGENUITY AND P RESENTED WITH HIGH- PRESSURE ADVOCACY, CANNOT PERSUADE US TO RE-OPEN, W HAT WAS LAID DOWN FOR THE GUIDANCE OF THE NATION AS A SOLEMN PRE-POSION B Y THE EPIC FUNDAMENTAL RIGHTS CASE. FROM KAMESHWAR SINGH AND GOLAK NATH (S UPRA) THROUGH KESAVANANDA (SUPRA) AND KANAN DEVAN TO GWALIOR RAYO NS AND AFTER ART. 31A HAS STOOD JUDICIAL SCRUTINY ALTHOUGH, AS STATED EA RLIER, WE DO NOT BASE THE CONCLUSION ON ART. 31A. EVEN SO, IT IS FUNDAMENTAL THAT THE NATION'S CONSTITUTION IS NOT KEPT IN CONSTANT UNCERTAINTY BY JUDICIAL REVIEW EVERY SEASON BECAUSE IT PARALYSES, BY PERENNIAL SUSPENSE, ALL LEGISLATIVE AND ADMINISTRATIVE ACTION ON VITAL ISSUES DETERRED BY T HE BROODING THREAT OF FORENSIC BLOWUP. THIS, IF PERMITTED, MAY WELL BE A KIND OF JUDICIAL DESTABILISATION OF STATE ACTION TOO DANGEROUS TO BE INDULGED IN SAVE WHERE NATIONAL. CRISIS OF GREAT MOMENT TO THE LIFE, LIBER TY AND SAFETY OF THIS COUNTRY AND ITS MILLIONS ARE AT STAKE, OR THE BASIC DIRECTI ON OF THE NATION ITSELF IS IN PERIL OF A SHAKEUP. IT IS SURELY WRONG TO PROVE JUS TICE ROBERTS OF THE UNITED STATES SUPREME COURT RIGHT WHEN HE SAID. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 42 - 10.3 WE ALSO NOTE THAT THE IMPUGNED ISSUE HAS BEE N ADMITTED BY THE HONBLE GUJARAT HIGH COURT IN TAX APPEAL NO. 853 OF 2016 AGAINST THE ORDER OF THE ITAT DELHI BENCH I NEW DELHI BEARING ITA NO. 196/DEL/2013 FOR THE AY 2008-09. THE RELEVANT PROPO SED QUESTION OF LAW AS FRAMED BEFORE THE HONBLE COURT READS AS UND ER: [1] WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE ITAT WAS JUSTIFIED IN DIRECTING TO DELETE THE ADDIT ION OF RS. 238.16 CRORES HOLDING THAT OVERSEAS ASSOCIATED ENTERPRISE CAN BE ACCEPTED AS TESTED PARTY WHERE THERE IS NO INSTANCES OF TR ANSACTIONS BETWEEN UNRELATED PARTIES ? 10.4 THUS THE IMPUGNED ISSUE IS PENDING BEFORE THE HONBLE GUJARAT HIGH COURT, THEREFORE WE DO NOT FIND ANY REASON TO REFER THE MATTER TO THE SPECIAL BENCH AS ARGUED BY THE LD. AR FOR THE ASSES SEE. 10.5 IN VIEW OF THE IDENTICAL ISSUE RAISED BEFOR E US IN THE GROUND OF APPEAL NO. 2 WHICH HAS ALREADY BEEN CONSIDERED BY T HE ITAT DELHI, WE ARE TAKING THE SAME VIEW AND ACCORDINGLY THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 10.6 AS WE HAVE RESTORED THE ISSUE TO THE FILE O F THE TPO FOR FRESH ADJUDICATION CONSIDERING THE AES AS TESTED PARTY, OTHER GROUNDS NOS. 3 AND 4 DO NOT REQUIRE TO BE ADJUDICATED SEPARATELY. THEREFORE, WE DISMISS THE SAME. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 43 - 11. THE ISSUE RAISED BY THE ASSESSEE IN THE GROU ND NO. 5 AND 6 IS THAT THE LD. DRP ERRED IN HOLDING THE COMPENSATION ON ESOP A MOUNTING TO RS. 6,84,523/- IS NOT ALLOWABLE AND THE REVERSAL OF COM PENSATION OF ESOP AMOUNTING TO RS. 21,79,471/- AS INCOME OF THE ASSES SEE WHICH WAS NOT ALLOWED AS A DEDUCTION IN EARLIER YEARS. 12. THE ASSESSEE HAS GRANTED CERTAIN EMPLOYEE ST OCK OPTION PLAN TO ITS EMPLOYEES WHEREIN EMPLOYEES WERE VESTED WITH CERTAI N RIGHT TO TAKE THE SHARE OF THE COMPANY AT A PRICE LOWER THAN THE MARK ET PRICE WITHIN THE VESTING PERIOD. THE ASSESSEE AS PER THE SEBI GUIDEL INES AMORTIZED THE DIFFERENCE BETWEEN THE MARKET PRICE AND ISSUED PRIC E OVER THE VESTING PERIOD BY DEBITING THE P&L ACCOUNT. THE ASSESSEE AL SO CLAIMED THAT IF ANY EMPLOYEE DOES NOT EXERCISE ITS RIGHT, SUBSEQUEN TLY THE COMPANY REVERSES THE AMORTIZED AMOUNT BY CREDITING THE SAME TO THE PROFIT AND LOSS ACCOUNT. 12.1. THE ASSESSEE DURING THE YEAR UNDER CONSIDERAT ION HAS DEBITED/AMORTIZED RS. 6,84,523/- AND CREDITED/ REVE RSED RS. 21,79,471/- ON ACCOUNT OF ESOP WHICH WAS NOT EXERCISED BY THE E MPLOYEES. THUS THE ASSESSEE IN EFFECT CREDITED NET AMOUNT OF RS. 14,94 ,948/- IN ITS P&L ACCOUNT. HOWEVER, THE COMPANY HAS NOT CLAIMED THE E XPENSE OF RS. 6,84,523/- IN ITR DUE TO THE FACT THAT HONBLE ITAT DELHI IN ASSESSEES CASE IN ITA NO. 1855/D/2004 FOR THE AY 2001-02 VIDE ORDER DATED 12- 06-2009 HELD THAT ESOP EXPENSES ARE NOT ALLOWABLE. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 44 - 12.2. THE ASSESSEE ALSO NOT OFFERED TAX ON THE RE VERSAL OF RS. 21,79,471/- AS THE COMPANY HAS FILED AN APPEAL IN DELHI HIGH CO URT AND IN NOTES TO ACCOUNT THE ASSESSEE MENTIONED THAT COMPANY RESERVE S ITS RIGHT TO OFFER THE TAX U/S 41(1) IN CASE MATTER DECIDES AGAINST IT . 12.3. AO NOTED THE FACTS ABOVE FROM THE NOTES TO ACCOUNTS AND ISSUED A NOTICE TO THE ASSESSEE TO EXPLAIN THE SAME. 12.4. IN RESPONSE TO THE NOTICE, THE ASSESSEE SUB MITTED THAT THE DIFFERENCE BETWEEN MARKET PRICE AND THE ISSUE PRICE IS A BENEFIT TO EMPLOYEES. THEREFORE, DEFERRED EMPLOYEE COMPENSATIO N IS A COMPONENT OF EMPLOYEE REMUNERATION AND ACTUAL LOSS TO THE COM PANY. THEREFORE, THIS IS ONLY A MODE OF DISCHARGING THE LIABILITY OF EMPL OYEES, AND IT IS AN ASCERTAINED LIABILITY. ACCORDINGLY, THE ASSESSEE CO NTENDED THAT THE AMOUNT DEBITED/AMORTIZED IN ITR OF EARLIER YEARS HAD BEEN CORRECTLY CLAIMED BY FOLLOWING HONBLE SUPREME COURT IN CASE OF MADRAS I NDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT (225 ITR 802). 12.5. HOWEVER, AO DISREGARDED THE CONTENTION OF T HE ASSESSEE AND HELD THAT EMPLOYEES COMPENSATION OF RS. 6,84,523/- HAS N OT BEEN CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION. ACCORDINGLY TH E SAME IS NOT ALLOWABLE EXPENSES. THE AO ALSO OBSERVED THAT AMOUN T OF BENEFIT GRANTED TO ASSESSEE IS IN THE NATURE OF BONUS, COMM ISSION, OR PERQUISITE ETC. AND THE ASSESSEE HAS NOT BEEN CONSIDERED AS PA RT OF SALARY WHILE DEDUCTING THE TDS ON SALARY. ACCORDINGLY, AO HELD T HAT EVEN OTHERWISE IT IS DISALLOWED U/S 40(A)(IA) OF THE ACT. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 45 - 12.6. IN VIEW OF THE ABOVE, THE AO HELD THAT REV ERSAL OF RS. 21,79,471/- IN RESPECT OF OPTION NOT EXERCISED BY THE EMPLOYEE IS IN THE NATURE OF INCOME AS ASSESSEE COULD NOT DEMONSTRATE WHETHER SU CH EXPENSES WERE DISALLOWED AS A DEDUCTION IN THE RESPECTIVE YEARS. ACCORDINGLY, THE AO MADE THE ADDITION OF RS. 21,79,471/- TO THE INCOME OF THE ASSESSEE. 13. THE AGGRIEVED ASSESSEE CARRIED THE MATTER TO LD. DRP AND SUBMITTED THAT SUCH AN OPTION HAD BEEN GRANTED TO EMPLOYEES W ITH AN OBJECTIVE TO INCREASE THE PRODUCTIVITY OF EMPLOYEES AND TO INCRE ASE THE PROFIT OF THE ASSESSEE. THEREFORE, THE DIFFERENCE BETWEEN THE MAR KET PRICE AND EXERCISE PRICE OF A SHARE IS EXPENSES WHICH ARE INCURRED WHO LLY AND EXCLUSIVELY FOR BUSINESS. 13.1. THE ASSESSEE ALSO SUBMITTED THAT ONCE THE O PTION HAS BEEN GRANTED TO THE EMPLOYEE IT IS BINDING ON A COMPANY TO ISSUE THE SHARES AS AND WHEN THE EMPLOYEE EXERCISES HIS RIGHT. THEREFORE, T HE LIABILITY ON PART OF ASSESSEE CRYSTALLIZES AT THE TIME OF GRANTING ESOP. THE SAME PRINCIPLE HAS ALSO BEEN LAID DOWN BY THE SEBI. THEREFORE, THE SAME IS ALLOWED IN THE YEAR IN WHICH IT IS CLAIMED. 13.2. HOWEVER, LD. DRP DISREGARDED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ACTION OF AO BY FOLLOWING THE ORDER O F LD. DRP FOR AY 2008-09 WHEREIN IT WAS HELD THAT DEFERRED EMPLOYEES COMPENSATION FALLS UNDER THE CATEGORY OF PROVISION. ACCORDINGLY THE LD . DRP CONFIRMED THE ORDER OF THE AO. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 46 - 14. AGGRIEVED BY THE DIRECTION OF LD. DRP, THE A SSESSEE IS IN APPEAL BEFORE US. REGARDING THE ESOP EXPENSES AMOUNTING TO 6,84,523/- 15. THE LD. AR BEFORE US SUBMITTED THAT THE ISSU E IS COVERED IN FAVOR OF THE ASSESSEE IN ITS CASE BY THE ORDER OF DELHI TRIB UNAL IN ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-04-2016. 16. THE LD. DR BEFORE US SUBMITTED THAT THE BENE FIT UNDER ESOP EXTENDED TO THE EMPLOYEES IS TREATED AS PERQUISITES . ACCORDINGLY, THE ASSESSEE WAS UNDER THE OBLIGATION TO DEDUCT THE TDS UNDER SECTION 192 OF THE ACT. BUT THE ASSESSEE HAS CLAIMED SUCH EXPENSES WITHOUT DEDUCTING THE TDS. THUS THE IMPUGNED EXPENSES CANNOT BE ALLOW ED UNDER SECTION 40(A)(IA) OF THE ACT. THE LD. DR VEHEMENTLY SUPPORT ED THE ORDER OF THE LOWER AUTHORITIES. 17. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH T HE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORDS. AT THE OUTSET, W E FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT IN THE AY 2008-09 BEING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-4- 2016, REPORTED IN 68 TAXMANN.COM 322, HELD AS UNDER : 41. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . THE ISSUE IS NOW SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF HON'BLE MADRAS HIGH COURT IN PVP VENTURES (SUPRA), WHERE IN IT IS HELD THAT AMOUNT OF DIFFERENCE BETWEEN THE MARKET VALUE OF THE SHARES ISSUE UNDER ESOP ALLOTTED TO THE EMPLOYEES DEBITED TO THE PROFIT AND LOSS ACCOUNT IN ACCORDANCE TO SEBI IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 47 - GUIDELINES IS AN ASCERTAIN LIABILITY AND ALLOWABLE AS REVENUE EXPENDITURE U/S 37(1) OF THE ACT. IT IS ALSO NOTEWORTHY THAT THE DE CISION IN THE CASE OF THE ASSESSEE IN EARLIER YEARS WHERE THIS DEDUCTION WAS DENIED HA S BEEN CONSIDERED BY THE SPECIAL BENCH OF TRIBUNAL IN CASE OF BIOCON LTD. (S UPRA) AS UNDER : '9.2.8 THOUGH DISCOUNT ON PREMIUM IS NOTHING BUT AN EXPENDITURE U/S 37(1), IT IS WORTH NOTING THAT THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 HAS GONE TO THE EXTENT OF COVERING 'LOSS' IN CERTA IN CIRCUMSTANCES WITHIN THE PURVIEW OF 'EXPENDITURE' AS USED IN SECT ION IN 37(1). IN THAT CASE, THE ASSESSEE INCURRED ADDITIONAL LIABILITY DUE TO E XCHANGE RATE FLUCTUATION ON A REVENUE ACCOUNT. THE ASSESSING OFFICER DID NOT AL LOW DEDUCTION U/S 37. WHEN THE MATTER FINALLY REACHED THE HON'BLE SUPREME COURT, THEIR LORDSHIPS NOTICED THAT THE WORD 'EXPENDITURE' HAS NOT BEEN DE FINED IN THE ACT. THEY HELD THAT : 'THE WORD 'EXPENDITURE' IS, THEREFORE, REQUI RED TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS USED. SECTION 37 ENJOINS THA T ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSI NESS SHOULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PRO FITS AND GAINS OF BUSINESS OR PROFESSION'. IN SECTIONS 30 TO 36 THE E XPRESSION 'EXPENDITURE INCURRED', AS WELL AS ALLOWANCE AND DEPRECIATION, H AS ALSO BEEN USED. FOR EXAMPLE DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN SECTION 32, THEREFORE, THE PARLIAMENT HAS USED EXPRESSION 'ANY EXPENDITURE ' IN SECTION 37 TO COVER BOTH. THEREFORE, THE EXPRESSION 'EXPENDITURE' AS US ED IN SECTION 37 MADE IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVERS AN A MOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE'. FROM THE ABOVE ENUNCIATION OF LAW BY THE HON'BLE SUMMIT COURT, THERE REMAINS NO DOUBT WHATSOEVER THAT THE TERM 'EX PENDITURE' IN CERTAIN CIRCUMSTANCES CAN ALSO ENCOMPASS 'LOSS' EVEN THOUGH NO AMOUNT IS ACTUALLY PAID OUT. EX CONSEQUENTI, THE ALTERNATIVE ARGUMENT OF THE LD. DR THAT DISCOUNT ON SHARES IS 'LOSS' AND HENCE CAN'T BE COVERED U/S 37(1), ALSO DOES NOT HOLD WATER IN THE LIGHT OF THE ABOVE JUDGMENT. IN VIEW O F THE ABOVE DISCUSSION, WE, WITH UTMOST RESPECT, ARE UNABLE TO CONCUR WITH THE VIEW TAKEN IN RANBAXY LABORATORIES LTD. (SUPRA).' FURTHER WHETHER THE ESOP EXPENDITURE IS A CONTINGEN T LOSS HAS ALSO BEEN CONSIDERED IN THE SAME DECISION AS UNDER : 'B. IS DISCOUNT A CONTINGENT LIABILITY ? 9.3.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPO RTED THE IMPUGNED ORDER BY CONTENDING THAT THE ENTITLEMENT TO ESOP DEPENDS UPON THE FULFILMENT OF SEVERAL CONDITIONS LAID DOWN UNDER THE SCHEME. IT I S ONLY WHEN ALL SUCH CONDITIONS ARE FULFILLED AND THE EMPLOYEES RENDER S ERVICES DURING THE VESTING PERIOD THAT THE QUESTION OF ANY ASCERTAINED LIABILI TY CAN ARISE. HE SUBMITTED THAT DURING THE ENTIRE VESTING PERIOD, IT IS ONLY A CONT INGENT LIABILITY AND NO DEDUCTION IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 48 - IS ADMISSIBLE UNDER THE PROVISIONS OF THE ACT FOR A CONTINGENT LIABILITY. THE OPTIONS SO GRANTED MAY LAPSE DURING THE VESTING PER IOD ITSELF BY REASON OF TERMINATION OF EMPLOYMENT OR SOME OF THE EMPLOYEES MAY NOT CHOOSE TO EXERCISE THE OPTION EVEN AFTER RENDERING THE SERVICES DURING THE VESTING PERIOD. IT WAS, THEREFORE, ARGUED THAT THE DISCOUNT IS NOTHING BUT A CONTINGENT LIABILITY DURING THE VESTING PERIOD NOT CALLING FOR ANY DEDUCTION. I N THE OPPOSITION, THE LEARNED AR SUBMITTED THAT THE AMOUNT OF DISCOUNT CLAIMED BY THE ASSESSEE AS DEDUCTION IS NOT A CONTINGENT LIABILITY BUT AN ASCERTAINED LIABI LITY. HE STATED THAT IN THE ESOP 2000, THERE IS A VESTING PERIOD OF FOUR YEARS, WHIC H MEANS THAT THE OPTIONS TO THE EXTENT OF 25% OF THE TOTAL GRANT WOULD VEST WITH TH E ELIGIBLE EMPLOYEES AT THE END OF FIRST YEAR AFTER RENDERING UNHINDERED SERVICE FO R ONE YEAR AND IT WOULD GO ON TILL THE COMPLETION OF FOUR YEARS. 9.3.2 IT IS A TRITE LAW AND THERE CAN BE NO QUARREL OVER THE SETTLED LEGAL POSITION THAT DEDUCTION IS PERMISSIBLE IN RESPECT OF AN ASCE RTAINED LIABILITY AND NOT A CONTINGENT LIABILITY. SECTION 31 OF THE INDIAN CONT RACT ACT, 1872 DEFINES 'CONTINGENT CONTRACT' AS 'A CONTRACT TO DO OR NOT D O SOMETHING, IF SOME EVENT, COLLATERAL TO SUCH CONTRACT DOES NOT HAPPEN'. WE NE ED TO DETERMINE AS TO WHETHER THE LIABILITY ARISING ON THE ASSESSEE-COMPA NY FOR ISSUING SHARES AT A DISCOUNTED PREMIUM CAN BE CHARACTERIZED AS A CONTIN GENT LIABILITY IN THE LIGHT OF THE DEFINITION OF CONTINGENT CONTRACT. FROM THE STA ND POINT OF THE COMPANY, THE OPTIONS UNDER ESOP 2000 VEST WITH THE EMPLOYEES AT THE RATE OF 25% ONLY ON PUTTING IN SERVICE FOR ONE YEAR BY THE EMPLOYEES. U NLESS SUCH SERVICE IS RENDERED, THE EMPLOYEES DO NOT QUALIFY FOR SUCH OPT IONS. IN OTHER WORDS, RENDERING OF SERVICE FOR ONE YEAR IS SINE QUA NON F OR BECOMING ELIGIBLE TO AVAIL THE BENEFIT UNDER THE SCHEME. ONCE THE SERVICE IS R ENDERED FOR ONE YEAR, IT BECOMES OBLIGATORY ON THE PART OF THE COMPANY TO HO NOR ITS COMMITMENT OF ALLOWING THE VESTING OF 25% OF THE OPTION. IT IS AT THE END OF THE FIRST YEAR THAT THE COMPANY INCURS LIABILITY OF FULFILLING ITS PROMISE OF ALLOWING PROPORTIONATE DISCOUNT, WHICH LIABILITY WOULD BE ACTUALLY DISCHAR GED AT THE END OF THE FOURTH YEAR WHEN THE OPTIONS ARE EXERCISED BY THE EMPLOYEE S. NOW THE QUESTION ARISES AS TO WHETHER THE LIABILITY AT THE END OF EACH YEAR CAN BE CONSTRUED AS A CONTINGENT ONE? 9.3.3 THE HON'BLE SUPREME COURT IN BHARAT EARTH MOV ERS V. CIT [2000] 245 ITR 428/112 TAXMAN 61 DEALT WITH THE DEDUCTIBILITY OR OTHERWISE OF PROVI SION FOR LIABILITY TOWARDS ENCASHMENT OF EARNED LEAVE. IN TH AT CASE, THE COMPANY FLOATED BENEFICIAL SCHEME FOR ITS EMPLOYEES FOR ENCASHMENT OF LEAVE. THE EARNED LEAVE COULD BE ACCUMULATED UP TO CERTAIN DAYS. THE ASSESS EE CREATED PROVISION OF RS. 62.25 LAKH FOR ENCASHMENT OF ACCRUED LEAVE AND CLAI MED DEDUCTION FOR THE SAME. THE ASSESSING OFFICER HELD IT TO BE A CONTINGENT LI ABILITY AND HENCE NOT A PERMISSIBLE DEDUCTION. WHEN THE MATTER FINALLY CAME UP BEFORE THE HON'BLE SUPREME COURT, IT WAS HELD THAT THE PROVISION FOR M EETING THE LIABILITY FOR ENCASHMENT OF EARNED LEAVE BY THE EMPLOYEE WAS AN A DMISSIBLE DEDUCTION. IN HOLDING SO, THE HON'BLE APEX COURT OBSERVED THAT : 'THE LAW IS SETTLED : IF A IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 49 - BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACC OUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE T O BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIM ATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBL E. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. TH E LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHA RGED IS NOT CERTAIN.' FROM THE ABOVE ENUNCIATION OF LAW BY THE HON'BLE SUPREME COU RT, IT IS MANIFEST THAT A DEFINITE BUSINESS LIABILITY ARISING IN AN ACCOUNTIN G YEAR QUALIFIES FOR DEDUCTION EVEN THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WE CONSIDER IT OUR EARNEST DUTY TO MENTION TH AT THE LEGISLATURE HAS INSERTED CLAUSE (F) TO SECTION 43B BY PROVIDING THAT 'ANY SU M PAYABLE BY THE ASSESSEE AS AN EMPLOYER IN LIEU OF ANY LEAVE AT THE CREDIT OF H IS EMPLOYEE' SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOU S YEAR IN WHICH SUCH SUM IS ACTUALLY PAID. WITH THIS LEGISLATIVE AMENDMENT, THE APPLICATION OF THE RATIO DECIDENDI IN THE CASE OF BHARAT EARTH MOVERS (SUPRA ) TO THE PROVISION FOR LEAVE ENCASHMENT HAS BEEN NULLIFIED. HOWEVER, THE PRINCIP LE LAID DOWN IN THE SAID JUDGMENT IS ABSOLUTELY INTACT THAT A LIABILITY DEFI NITELY INCURRED BY AN ASSESSEE IS DEDUCTIBLE NOTWITHSTANDING THE FACT THAT ITS QUANTI FICATION MAY TAKE PLACE IN A LATER YEAR. THE MERE FACT THAT THE QUANTIFICATION I S NOT PRECISELY POSSIBLE AT THE TIME OF INCURRING THE LIABILITY WOULD NOT MAKE AN A SCERTAINED LIABILITY A CONTINGENT. 9.3.4 ALMOST TO THE SIMILAR EFFECT, THERE IS ANOTHE R JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P.) LTD.V. CIT [2009] 314 ITR 62/180 TAXMAN 422 . IN THAT CASE, THE ASSESSEE-COMPANY WAS ENGAGED IN SELLING CERTAIN PRODUCTS. AT THE TIME OF SALE, THE COMPANY PROVIDED A STANDARD WARRANTY THAT IN THE EVENT OF CERTAIN PART BECOMING DEFECTIVE WITHIN 12 MONTHS FROM THE DATE OF COMMISSIONING OR 18 MONTHS FROM TH E DATE OF DISPATCH, WHICHEVER IS EARLIER, THE COMPANY WOULD RECTIFY OR REPLACE THE DEFECTIVE PARTS FREE OF CHARGE. THIS WARRANTY WAS GIVEN UNDER CERTA IN CONDITIONS STIPULATED IN THE WARRANTY CLAUSE. THE ASSESSEE MADE A PROVISION FOR WARRANTY AT RS. 5.18 LAKH TOWARDS THE WARRANTY CLAIM LIKELY TO ARISE ON THE SALES EFFECTED BY THE ASSESSEE. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND THAT THE LIABILITY WAS MERELY A CONTINGENT LIABILITY AND HEN CE NOT ALLOWABLE AS DEDUCTION U/S 37 OF THE ACT. WHEN THE MATTER FINALLY CAME UP BEFORE THE HON'BLE SUPREME COURT, IT ENTITLED THE ASSESSEE TO DEDUCTION ON THE 'ACCRUAL' CONCEPT BY HOLDING THAT A PROVISION IS RECOGNIZED WHEN : '(A) AN ENTER PRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THA T AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION : AND (C) A RELIA BLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION'. RESULTANTLY, THE PROVISI ON WAS HELD TO BE DEDUCTIBLE. 9.3.5 WHEN WE CONSIDER THE FACTS OF THE PRESENT CAS E IN THE BACKDROP OF THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN BHARAT EA RTH MOVERS (SUPRA) IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 50 - AND ROTORK CONTROLS INDIA (P.) LTD. (SUPRA), IT BEC OMES VIVID THAT THE MANDATE OF THESE CASES IS APPLICABLE WITH FULL FORCE TO THE DE DUCTIBILITY OF THE DISCOUNT ON INCURRING OF LIABILITY ON THE RENDITION OF SERVICE BY THE EMPLOYEES. THE FACTUM OF THE EMPLOYEES BECOMING ENTITLED TO EXERCISE OPTIONS AT THE END OF THE VESTING PERIOD AND IT IS ONLY THEN THAT THE ACTUAL AMOUNT O F DISCOUNT WOULD BE DETERMINED, IS AKIN TO THE QUANTIFICATION OF THE PR ECISE LIABILITY TAKING PLACE AT A FUTURE DATE, THEREBY NOT DISTURBING THE OTHERWISE L IABILITY WHICH STOOD INCURRED AT THE END OF THE EACH YEAR ON AVAILING THE SERVICES. 9.3.6 AS REGARDS THE CONTENTION OF THE LD. DR ABOUT THE CONTINGENT LIABILITY ARISING ON ACCOUNT OF THE OPTIONS LAPSING DURING TH E VESTING PERIOD OR THE EMPLOYEES NOT CHOOSING TO EXERCISE THE OPTION, WE F IND THAT NORMALLY IT IS PROVIDED IN THE SCHEMES OF ESOP THAT THE VESTED OPT IONS THAT LAPSE DUE TO NON- EXERCISE AND/OR UNVESTED OPTIONS THAT GET CANCELLED DUE TO RESIGNATION OF THE EMPLOYEES OR OTHERWISE, WOULD BE AVAILABLE FOR GRAN T AT A FUTURE DATE OR WOULD BE AVAILABLE FOR BEING RE-GRANTED AT A FUTURE DATE. IF WE CONSIDER IT AT MICRO LEVEL QUA EACH INDIVIDUAL EMPLOYEE, IT MAY SOUND CONTINGE NT, BUT IF VIEW IT AT MACRO LEVEL QUA THE GROUP OF EMPLOYEES AS A WHOLE, IT LOS ES THE TAG OF 'CONTINGENT' BECAUSE SUCH LAPSING OPTIONS ARE UP FOR GRABS TO TH E OTHER ELIGIBLE EMPLOYEES. IN ANY CASE, IF SOME OF THE OPTIONS REMAIN UNVESTED OR ARE NOT EXERCISED, THE DISCOUNT HITHERTO CLAIMED AS DEDUCTION IS REQUIRED TO BE REVERSED AND OFFERED FOR TAXATION IN SUCH LATER YEAR. WE, THEREFORE, HOLD TH AT THE DISCOUNT IN RELATION TO OPTIONS VESTING DURING THE YEAR CANNOT BE HELD AS A CONTINGENT LIABILITY.' IN VIEW OF THIS, WE CANNOT FOLLOW THE DECISION OF C OORDINATE BENCH IN CASE OF THE ASSESSEE ITSELF FOR EARLIER YEARS. NO OTHER CONTRAR Y DECISION HAS BEEN BROUGHT TO OUR NOTICE BY LD. DR. THEREFORE ORDER OF AO IS REVE RSED HOLDING THAT RS.10333543/- BEING DEFERRED EMPLOYEES COMPENSATION DEBITED TO THE PROFIT AND LOSS ACCOUNT IS ALLOWABLE U/S 37(1) OF THE ACT. 42. LD. AO HAS FURTHER HELD THAT EVEN OTHERWISE THIS DE DUCTION IS HIT BY PROVISION OF SECTION 40A(IA) OF THE ACT AND AS NO TAX IS DEDU CTED ON THIS PAYMENT IT IS DISALLOWABLE. NO SUCH PROVISION FOR DEDUCTION OF TA X AT SOURCES ON THIS EXPENDITURE HAS BEEN BROUGHT TO OUR NOTICE. THEREFO RE WE HOLD THAT PROVISIONS OF SECTION 40A(IA) DOES NOT APPLY TO 'PAYMENT OF SALAR IES' FOR THE YEAR UNDER APPEAL. HENCE, THIS ARGUMENT OF THE REVENUE IS ALSO REJECTE D. IN THE RESULT GROUND NO 8 OF THE APPEAL IS ALLOWED. 18. IN VIEW OF THE IDENTICAL ISSUE RAISED BEFORE US IN THE GROUND OF APPEAL NO. 5 WHICH HAS ALREADY BEEN CONSIDERED BY T HE ITAT DELHI AS DISCUSSED ABOVE, WE ARE TAKING THE SAME VIEW. ACCOR DINGLY WE ALLOW THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 51 - DEDUCTION OF THE ESOP EXPENSES. HENCE THE GROUND OF APPEAL NO. 5 OF THE ASSESSEE IS ALLOWED. REGARDING THE REVERSAL OF ESOP EXPENSES IN P/L ACCO UNT AMOUNTING TO RS. 21,79.471/- 19. THE LEARNED AR BEFORE US SUBMITTED THAT THE PR OVISIONS WERE NOT ALLOWED AS A DEDUCTION IN THE EARLIER YEARS, THEREF ORE, THE SAME CANNOT BE MADE SUBJECT TO TAX IN THE YEAR UNDER CONSIDERATION . 20. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT THERE IS NO DETAIL AVAILABLE ON RECORD SUGGESTING THAT THE AMOUNT OF P ROVISION WRITTEN BACK IN THE YEAR UNDER CONSIDERATION HAS SUFFERED TAX IN THE EARLIER YEARS. THEREFORE, THE MATTER CAN BE SET ASIDE TO THE FILE OF THE AO FOR FRESH EXAMINATION AS PER THE PROVISIONS OF LAW. THE LEARN ED DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 21. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. REGARDING THE REVERSAL OF DEFE RRED EMPLOYEES COMPENSATION CREDITED TO PROFIT & LOSS ACCOUNT, WE FIND FORCE IN THE ARGUMENT OF THE LEARNED AR THAT IF THE SAME AMOUNT OF PROVISION HAS SUFFERED TAX THE IN THE EARLIER YEARS, THEN THIS TH E CANNOT BE MADE SUBJECT TO TAX IN THE YEAR UNDER CONSIDERATION. THE LEARNED AR IN SUPPORT OF HIS CLAIM HAS ALSO FILED THE DETAILS DEMONSTRATING THE YEARS IN WHICH SUCH AMOUNT WAS SUFFERED TO TAX. THE DETAILS ARE PLACED ON RECORD. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 52 - 22. HOWEVER, WE NOTE THAT SUCH DETAILS WERE NOT PR OVIDED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES. THEREFORE WE ARE INCLINED TO RESTORE THIS ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICA TION IN ACCORDANCE WITH THE PROVISIONS OF LAW AFTER CONSIDERING THE DETAILS FILED BY THE ASSESSEE BEFORE US. HENCE THE GROUND OF APPEAL OF THE ASSESS EE IS ALLOWED FOR STATISTICAL PURPOSES. HENCE THE GROUND OF APPEAL NO 6 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 23. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO 7 IS THAT THE LD. DRP ERRED IN CONFIRMING THE DISALLOWANCE OF DEDUCTION I N RESPECT OF CONTRIBUTION OF RS. 22,50,000/- AND RS. 50,00,000/- MADE TO RANBAXY COMMUNITY HEALTHCARE SOCIETY ( FOR SHORT RCHS) AND RANBAXY SCIENCE FOUNDATION (FOR SHORT RCF). 24. THE ASSESSEE COMPANY MADE A CONTRIBUTION OF RS.22,50,000/ TO RCHS AND RS.50,00,000/- TO RSF AND CLAIMED AS DEDUC TION U/S 80G BUT THE DEDUCTION HAS NOT BEEN SET OFF DUE TO A LOSS IN THE RETURN. 24.1. FURTHER, THE ASSESSEE CLAIMED THE SAME AS B USINESS EXPENDITURE U/S 37/35 OF THE ACT. THE ASSESSEE IN THIS CONNECTION S UBMITTED THAT THE HONBLE ITAT, NEW DELHI ON THE SAME ISSUE IN THE AS SESSEES CASE HAD HELD THAT CONTRIBUTION MADE TO RCF & RCHS ARE EXPEN DITURE FOR THE PURPOSE OF PROMOTING THE BUSINESS OF THE COMPANY AN D IS ALLOWABLE AS BUSINESS EXPENDITURE U/S 37 OF THE ACT. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 53 - 24.2. HOWEVER, THE AO REJECTED THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT THE EARLIER YEAR CASE IS PENDING BEF ORE THE HONBLE HIGH COURT OF DELHI. ACCORDINGLY, THE AO REJECTED THE SU BMISSION OF THE ASSESSEE AND HELD THAT THE ASSESSEE ENTITLED FOR DE DUCTION U/S 80G OF THE ACT. THE AO FURTHER OBSERVED THAT THE RECIPIENTS DI D NOT SHOW THE AMOUNT AS TAXABLE RECEIPTS BUT ACCOUNTED AS DONATIONS. 24.3. THE AO ALSO NOTICED THAT THE ASSESSEE HAS ALSO NOT DEDUCTED TDS ON SUCH EXPENDITURE, THEREFORE THE SAME CANNOT BE A LLOWED AS DEDUCTION U/S 40(A)(IA) OF THE ACT. HENCE, THE AO DISALLOWED THE SAID EXPENDITURE AS BUSINESS EXPENDITURE U/S 37 OF THE ACT. 25. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL BE FORE THE LD.DRP WHO HAS CONFIRMED THE ORDER OF THE AO. 26. BEING AGGRIEVED BY THE ORDER OF THE DRP, THE ASSESSEE IS IN APPEAL BEFORE US: 27. THE LD. AR BEFORE US SUBMITTED THAT IN THE I DENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR T HE A.Y. 2008-09, ITAT DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 DATED 2 5.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 28. ON THE OTHER HAND, THE LD. DR BEFORE US VEHE MENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 54 - 29. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT IN THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT IN THE AY 2008-09 BEING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25-4- 2016, REPORTED IN 68 TAXMANN.COM 322, HELD AS UNDER : 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . IN VIEW OF THE DECISION OF HON'BLE DELHI HIGH COURT IN CASE OF ASSESSEE FOR AY 1997-98 ORDER DATED 17.03.2012 IN ITA NO.743/2008 AND 20.11.2012 FOR AY 2002-03 TO 2005-06, WE REVERSE THE DECISION OF THE AO AND DIRECT TO DEL ETE THE DISALLOWANCE OF RS.47 LACS AND RS.1250000/- OF CONTRIBUTION MADE BY APPELLANT TO RANBAXY COMMUNITY HEALTHCARE SOCIETY AND RANBAXY SCIENCE FO UNDATION. FURTHERMORE REGARDING FAILURE TO DEDUCT TAX ON THIS SUM, LD. DR. COULD NOT POINT OUT PARTICULAR SECTION, WHICH WARRANTS DEDUCT ION OF TAX AT SOURCES ON THIS PAYMENT. THEREFORE, WE ALSO HOLD THAT IN ABSEN CE OF SPECIFIC SECTION UNDER WHICH THE TAX IS REQUIRED TO BE DEDUCTED ON SUCH CO NTRIBUTION WITHOUT THEIR BEING ANY SERVICE RENDERED BY THE RECIPIENT OF THE CONTRIBUTION DISALLOWANCE U/S 40A(IA) ALSO CANNOT BE MADE. IN THE RESULT GROU ND NO.9 OF THE APPEAL IS ALLOWED. 30. IN VIEW OF THE IDENTICAL ISSUE RAISED BEFOR E US IN THE GROUND OF APPEAL NO. 7 WHICH HAS ALREADY BEEN CONSIDERED BY T HE ITAT DELHI AS DISCUSSED ABOVE, WE ARE TAKING THE SAME VIEW. ACCOR DINGLY, WE ALLOW THE GROUND OF APPEAL OF THE ASSESSEE. 31. THE ISSUE RAISED BY THE ASSESSEE IN THE GROU ND NO. 8 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ADDITION FOR RS. 11,68, 23,115/- MADE BY THE AO UNDER SECTION 14A OF THE ACT. 32. THE AO DURING THE ASSESSMENT PROCEEDINGS OBS ERVED THAT THE ASSESSEE IN ITS BALANCE SHEET AS ON 31/03/2009 HAD SHOWN INVESTMENTS OF RS. 621.21 CRORES IN INDIAN COMPANIES AND RS. 3021. 22/- CRORES IN IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 55 - FOREIGN SUBSIDIARIES. THE ASSESSEE HAS EARNED RS. 1 ,10,01,040/- AS DIVIDEND INCOME FROM FOREIGN SUBSIDIARIES WHICH WAS OFFERED TO TAX. 32.1. THE ASSESSEE ALSO DECLARED A DIVIDEND OF R S. 3600/- ONLY FROM INDIAN COMPANIES WHICH WAS CLAIMED AS EXEMPT UNDER SECTION 10(34) OF THE ACT. ON A QUESTION BY THE AO ABOUT THE APPLICAB ILITY OF THE DISALLOWANCE UNDER SECTION 14A R.W.R. 8D OF INCOME TAX RULES, THE ASSESSEE SUBMITTED THAT IT HAS ITS OWN FUND IN THE FORM OF AVERAGE SHARE CAPITAL AND RESERVE & SURPLUS OF RS. 2692.16 CRORES WHEREAS THE AVERAGE INVESTMENT IS OF RS. 625.60 CRORES ONLY. THEREFORE, IT IS CLEAR THAT THE INVESTMENT HAS BEEN MADE OUT OF ITS OWN FUND OF THE ASSESSEE. 32.2. THE ASSESSEE FURTHER SUBMITTED THAT IT HAS ITSTREASURY DIVISION WHO LOOK AFTER THE COMPANYS FUND MANAGEMENT. ACCORDING LY, A PROPORTIONATE AMOUNT OF RS. 69,39,512/- ABOUT SHARES OF INDIAN CO MPANY HAS ALREADY BEEN DISALLOWED U/S 14A OF THE ACT. 32.3. HOWEVER, AO DISREGARDED THE CONTENTION OF T HE ASSESSEE AND HELD THAT ASSESSEE COULD NOT ESTABLISH THE NEXUS BETWEEN ITS FUND AND INVESTMENT MADE. THE ASSESSEE ALSO DID NOT MAINTAIN ANY SEPARATE BOOKS OR SEPARATE BANK ACCOUNTS. THE ASSESSEE HAS A SEPAR ATE TREASURY FUND DIVISION AND PERSONNEL WORKING THERE WHO ARE GETTIN G HUGE SALARY ONLY TO MAKE THE KEY DECISION OF INVESTMENTS. FURTHER, WITH OUT THE APPROVAL OF TOP MANAGEMENTS SUCH BIG INVESTMENTS CANNOT BE MADE . IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 56 - 32.4. ACCORDINGLY, THE AO CALCULATED THE EXPENS ES DISALLOWABLE UNDER RULE 8D(2)(II) FOR RS. 9,24,69,627/- AND UNDER RULE 8D(2)(III)RS. 3,12,93,000/- AND ADDED THE TOTAL RS. 11,68,23,115/ - (RS. 12,37,62,627/- RS. 69,39,512/-) TO THE TOTAL INCOME OF ASSESSEE. 33. AGGRIEVED ASSESSEE PREFERRED AN APPEAL TO L D. DRP WHO CONFIRMED THE ORDER OF THE AO AFTER PLACING ITS RELIANCE ON T HE ORDER OF ITS PREDECESSOR FOR THE AY 2008-09 WHEREIN IT WAS HELD THAT ASSESSEE HAD NOT PROVIDED ANY BASIS FOR SUO-MOTO DISALLOWANCE. THE ASSESSEE HAS ALSO NOT MAINTAINED ANY SEPARATE BOOKS OF ACCOUNT OR SEPARAT E DETAILS FOR THE PURPOSE OF INVESTMENT ACTIVITY. 34. BEING AGGRIEVED BY THE ORDER OF THE LD.DRP THE ASSESSEE IS IN APPEAL BEFORE US. 35. THE LD. AR BEFORE US SUBMITTED THAT IN THE ID ENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR T HE A.Y. 2008-09, ITAT DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 DATED 2 5.04.2016 HAS DECIDED THE IMPUGNED IN ITS FAVOR. 36. ON THE OTHER HAND, THE LD. DR VEHEMENTLY SUP PORTED THE ORDER OF AUTHORITIES BELOW. 37. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSE D THE MATERIAL AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT I N THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT IN THE AY 2008- IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 57 - 09 BEING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25- 4-2016, REPORTED IN 68 TAXMANN.COM 322, HELD AS UNDER: 51. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . IN THIS CASE ASSESSEE HIMSELF HAS DISALLOWED RS.3311708/- WHICH ITSELF IS FAR MORE IN EXCESS OF EXEMPT INCOME. HON'BLE DELHI HIGH COURT IN JOINT INVESTMEN TS (P.) LTD. V. CIT [2015] 59 TAXMANN.COM 295/233 TAXMAN 117/372 ITR 694 HAS HELD THAT: '9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY DIS CLOSED WHY THE APPELLANT/ASSESSEE'S CLAIM FOR ATTRIBUTING RS. 2,97 ,440 AS A DISALLOWANCE UNDER S. 14A HAD TO BE REJECTED. TAIKISHA ENGG. IND IA LTD. (SUPRA) SAYS THAT THE JURISDICTION TO PROCEED FURTHER AND DETERMINE A MOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNTS AND REJECTION IF ANY OF THE ASSESSEE'S CLAIM OR EXPLANATION. THE SECOND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE AO-AN ASPECT WHICH IS COMPLETEL Y UNNOTICED BY THE CIT (A) AND THE TRIBUNAL. THE THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREA S THE ENTIRE TAX EXEMPT INCOME IS RS. 48,90,000, THE DISALLOWANCE ULTIMATEL Y DIRECTED WORKS OUT TO NEARLY 110 PER CENT OF THAT SUM, I.E., RS. 52,56,19 7. BY NO STRETCH OF IMAGINATION CAN S. 14A OR R. 8D BE INTERPRETED TO M EAN THAT THE ENTIRE TAX- EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR D ISALLOWANCE IS INDICATED IN S. 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE 'INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EXEMPT INCOME'. THI S PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENT IRE AMOUNT AS HAS HAPPENED IN THIS CASE.' THEREFORE, ACCORDING TO US, AS SUCH NO FURTHER DISA LLOWANCE U/S 14A CAN BE IMPUTED. FURTHERMORE, WE DID NOT FIND ANY SATISFACT ION OF THE AO WITH REGARD TO EXAMINATION OF THE BOOKS OF ACCOUNT OF THE ASSESSEE THAT HOW DISALLOWANCE ALREADY OFFERED BY ASSESSEE OF RS.3311708/- WHICH A RE ALSO CERTIFIED BY THE TAX AUDITOR IS INCORRECT. IN ABSENCE OF SUCH SATISFACTI ON AO DOES NOT HAVE ANY AUTHORITY TO INVOKE PROVISIONS OF RULE 8D. ON THIS COUNT ALSO THE ADDITION CANNOT BE UPHELD. HON'BLE DELHI HIGH COURT IN CASE OF CIT V. TAIKISHA ENGG. LTD. [2015] 54 TAXMANN.COM109/229 TAXMAN 143/370 ITR 338 HAS HELD AS UNDER : 13. WE NEED NOT, THEREFORE, GO ON TO SUB RULE (2) T O RULE 8D OF THE RULES UNTIL AND UNLESS THE ASSESSING OFFICER HAS FIRST RECORDED THE SATISFACTION, WHICH IS MANDATED BY SUB-SECTION (2) TO SECTION 14A OF THE A CT AND SUB RULE (1) TO RULE 8D OF THE RULES. 14. THE VIEW AND LEGAL RATIO EXPRESSED ABOVE IS NOT BEING ELUCIDATED FOR THE FIRST TIME. THE DELHI HIGH COURT IN MAXOPP INVESTMENT LTD .V. CIT [2012] 347 ITR 272/203 TAXMAN 364/15 TAXMANN.COM 390 HAS OBSERVED:- 'SCOPE OF SUB-SECTIONS (2) AND (3) OF SECTION 14A S UB-SECTION (2) OF SECTION 14 A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE AS SESSING OFFICER IS TO IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 58 - DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE E XAMINE THE PROVISION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF THE ASSESSING OF FICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. I N OTHER WORDS, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINA TION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME W OULD BE TRIGGERED ONLY IF THE ASSESSING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEND ITURE. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO EXEMPT I NCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SATISFIED WITH T HE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB-SE CTION (3) IS NOTHING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB-SEC TION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN IN CURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO C ASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RE LATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSESSING OFFICER, IF SATISFIED WIT H THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO E XPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUN T OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSE SSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BO TH CASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT O F EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCORDANCE WITH THE PRESCRIBED METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO E XPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFF ICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. RULE 8D 'AS WE HAVE ALREADY NOTICED, SUB-SECTION (2) OF SEC TION 14A OF THE SAID ACT REFERS TO THE METHOD OF DETERMINATION OF THE AMOUNT OF EXP ENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE EXPRESSION USED IS - 'SUCH ME THOD AS MAY BE PRESCRIBED'. WE HAVE ALREADY MENTIONED ABOVE THAT BY VIRTUE OF N OTIFICATION NO.45 OF 2008, DATED MARCH 24, 2008, THE CENTRAL BOARD OF DIRECT T AXES INTRODUCED RULE 8D IN THE SAID RULES. THE SAID RULE 8D ALSO MAKES IT CLEA R THAT WHERE THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE OF A PREVIOUS YEAR, IS NOT IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 59 - SATISFIED WITH (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE; OR (B) THE CLAIM MADE BY THE ASSESSEE THA T NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT FOR SUCH PREVIOUS YEAR, THE ASSE SSING OFFICER SHALL DETERMINE THE AMOUNT OF THE EXPENDITURE IN RELATION TO SUCH I NCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2) OF RULE 8D. WE MAY OBSER VE THAT RULE 8D (1) PLACES THE PROVISIONS OF SECTION 14A(2) AND (3) IN THE COR RECT PERSPECTIVE. AS WE HAVE ALREADY SEEN, WHILE DISCUSSING THE PROVISIONS OF SU B-SECTIONS (2) AND (3) OF SECTION 14A, THE CONDITION PRECEDENT FOR THE ASSESS ING OFFICER TO HIMSELF DETERMINE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DISSATISFACTION WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MA DE BY THE ASSESSEE OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPE NDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICA TED IN SUB-RULE (2) OF RULE 8D OF THE SAID RULES. IT IS, THEREFORE, CLEAR THAT DETERMINATION OF THE A MOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE ASSESSING OFFICER REJECTS THE CLAIM OF THE ASSESSEE IN THIS R EGARD. IF ONE EXAMINES SUB-RULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR DETERMI NING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME W HICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND COMPONENT BEING COMPUT ED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EX PENDITURE BY WAY OF INTEREST (OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAU SE (I)) INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME , TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN A RTIFICIAL FIGURE - ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INC OME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BALANCE SHEETS OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE TH E EXPENDITURE IN RELATION TO EXEMPT INCOME AND IT IS THIS AMOUNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECTION 14A OF THE SAID ACT. IT IS, THEREFORE , CLEAR THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEM PT INCOME HAS TWO ASPECTS - (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDITURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB-RULE (2) OF RULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COM PUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE. AND, IN CASES WH ERE THE INDIRECT EXPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE O F ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN.' IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 60 - 15. EVEN EARLIER THE BOMBAY HIGH COURT IN GODREJ AN D BOYCE MFG. CO. LTD. (SUPRA) HAD REFERRED TO SECTION 14(2) OF THE A CT AND OBSERVED: 'UNDER SUB-SECTION (2), THE ASSESSING OFFICER IS RE QUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCO RDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. THE METHOD, HAVING REGARD TO THE MEANING OF THE EXPRESSION 'PRESCRIBED' IN SECTION 2(33), MUST BE PRESCRIBED B Y RULES MADE UNDER THE ACT. WHAT MERITS EMPHASIS IS THAT THE JURISDICTION OF TH E ASSESSING OFFICER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO S UCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME, IN ACCORDANCE WITH T HE PRESCRIBED METHOD, ARISES IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF THE EXPENDITURE WHICH THE AS SESSEE CLAIMS TO HAVE INCURRED IN RELATION TO INCOME WHICH DOES NOT PART OF THE TO TAL INCOME. MOREOVER, THE SATISFACTION OF THE ASSESSING OFFICER HAS TO BE ARR IVED AT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. HENCE, SUB-SECTION (2) DO ES NOT IPSO FACTO ENABLE THE ASSESSING OFFICER TO APPLY THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE A SSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME IS CORRECT. THE ASSESSING OFFICER MUST, IN T HE FIRST INSTANCE, DETERMINE WHETHER THE CLAIM OF THE ASSESSEE IN THAT REGARD IS CORRECT AND THE DETERMINATION MUST BE MADE HAVING REGARD TO THE ACCOUNTS OF THE A SSESSEE. THE SATISFACTION OF THE ASSESSING OFFICER MUST BE ARRIVED AT ON AN OBJE CTIVE BASIS. IT IS ONLY WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM O F THE ASSESSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD THAT M AY BE PRESCRIBED. IN A SITUATION WHERE THE ACCOUNTS OF THE ASSESSEE FURNIS H AN OBJECTIVE BASIS FOR THE ASSESSING OFFICER TO ARRIVE AT A SATISFACTION IN RE GARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE OF THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , THERE WOULD BE NO WARRANT FOR TAKING RECOURSE TO THE METHOD PRESCRIBED BY THE RULES. FOR, IT IS ONLY IN THE EVENT OF THE ASSESSING OFFICER NOT BEING SO SATISFI ED THAT RECOURSE TO THE PRESCRIBED METHOD IS MANDATED BY LAW. SUB-SECTION ( 3) OF SECTION 14A PROVIDES FOR THE APPLICATION OF SUB-SECTION (2) ALSO TO A SI TUATION WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE AC T. UNDER THE PROVISO, IT HAS BEEN STIPULATED THAT NOTHING IN THE SECTION WILL EM POWER THE ASSESSING OFFICER, FOR AN ASSESSMENT YEAR BEGINNING ON OR BEFORE APRIL 1, 2001, EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE AS SESSMENT OR REDUCING THE REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIA BILITY OF THE ASSESSEE UNDER SECTION 154.' 16. EQUALLY ILLUMINATING ARE THE FOLLOWING OBSERVAT IONS IN GODREJ AND BOYCE MFG. CO. LTD. (SUPRA) '. . . HOWEVER, IF THE ASSESSEE DOES NOT MAINTAIN S EPARATE ACCOUNTS, IT WOULD BE NECESSARY FOR THE ASSESSING OFFICER TO DETERMINE TH E PROPORTION OF EXPENDITURE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 61 - INCURRED IN RELATION TO THE DIVIDEND BUSINESS (I.E. , EARNING EXEMPT INCOME). IT IS FOR EXACTLY SUCH SITUATIONS THAT A MACHINERY/METHOD FOR COMPUTING THE PROPORTION OF EXPENDITURE INCURRED IN RELATION TO T HE DIVIDEND BUSINESS HAS BEEN PROVIDED BY WAY OF SECTION 14A(2)/(3) AND RULE 8D.' 17. MORE IMPORTANT AND RELEVANT FOR US ARE THE OBSE RVATIONS IN GODREJ AND BOYCE MFG. CO. LTD. (SUPRA) ON REQUIREMENT AND STIP ULATION OF SATISFACTION BEING RECORDED BY THE ASSESSING OFFICER WITH REFERENCE TO THE ACCOUNTS UNDER SECTION 14(2) OF THE ACT AND RULE 8D(1) OF THE RULES. IT WA S OBSERVED: 'PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEGUARD TO T HE INVOCATION OF THE POWER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION T O THE EARNING OF NON-TAXABLE INCOME BY ADOPTION OF THE PRESCRIBED METHOD. THE IN VOCATION OF THE POWER IS MADE CONDITIONAL ON THE OBJECTIVE SATISFACTION OF T HE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HA VING REGARD TO THE ACCOUNTS OF THE ASSESSEE. WHEN A STATUTE POSTULATES THE SATISFA CTION OF THE ASSESSING OFFICER 'COURTS WILL NOT READILY DEFER TO THE CONCLUSIVENES S OF AN EXECUTIVE AUTHORITY'S OPINION AS TO THE EXISTENCE OF A MATTER OF LAW OR F ACT UPON WHICH THE VALIDITY OF THE EXERCISE OF THE POWER IS PREDICATED'. (M.A. RAS HEED V. STATE OF KERALA [1974] AIR 1974 SC 2249*). A DECISION BY THE ASSESSING OFF ICER HAS TO BE ARRIVED AT IN GOOD FAITH ON RELEVANT CONSIDERATIONS. THE ASSESSIN G OFFICER MUST FURNISH TO THE ASSESSEE A REASONABLE OPPORTUNITY TO SHOW CAUSE ON THE CORRECTNESS OF THE CLAIM MADE BY HIM. IN THE EVENT THAT THE ASSESSING OFFICE R IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE, HE M UST RECORD REASONS FOR HIS CONCLUSION. THESE SAFEGUARDS WHICH ARE IMPLICIT IN THE REQUIREMENTS OF FAIRNESS AND FAIR PROCEDURE UNDER ARTICLE 14 MUST BE OBSERVE D BY THE ASSESSING OFFICER WHEN HE ARRIVES AT HIS SATISFACTION UNDER SUB-SECTI ON (2) OF SECTION 14A. AS WE SHALL NOTE SHORTLY HEREAFTER, SUB-RULE (1) OF RULE 8D HAS ALSO INCORPORATED THE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTIO N 14A BEFORE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRESCRIBED UND ER SUB-RULE (2).' 18. IT IS IN THIS CONTEXT WE FEEL THAT THE FINDINGS RECORDED BY THE CIT (A) AND THE TRIBUNAL ARE APPROPRIATE AND RELEVANT. THE CLEAR FI NDINGS ARE THAT THE ASSESSEE HAD SUFFICIENT FUNDS FOR MAKING INVESTMENTS IN SHAR ES AND MUTUAL FUNDS. THE SAID FINDINGS COUPLED WITH THE FAILURE OF THE ASSESSING OFFICER TO HOLD AND RECORD HIS SATISFACTION CLINCHES THE ISSUE IN FAVOUR OF THE RE SPONDENT ASSESSEE AND AGAINST THE REVENUE. THE SELF OR VOLUNTARY DEDUCTIONS MADE BY THE ASSESSEE WERE NOT REJECTED AND HELD TO BE UNSATISFACTORY, ON EXAMINAT ION OF ACCOUNTS. JUDGMENTS IN TIN BOX CO. (SUPRA), RELIANCE UTILITIES AND POWE R LTD. (SUPRA), SUZLON ENERGY LTD. (SUPRA) AND EAST INDIA PHARMACEUTICAL WORKS LT D. (SUPRA) WOULD BE RELEVANT IF THE SATISFACTION OF THE ASSESSING OFFIC ER IS IN ISSUE, AND SUCH QUESTION OF SATISFACTION IS WITH REFERENCE TO THE ACCOUNTS'. ' THEREFORE, IN VIEW OF ABOVE TWO DECISIONS OF HON'BL E JURISDICTIONAL HIGH COURT WE HOLD THAT NO SUCH FURTHER DISALLOWANCE OVER AND ABOVE WHAT IS ADMITTED BY THE ASSESSEE CAN BE MADE. HENCE, GROUND NO. 10 OF T HE APPEAL OF THE ASSESSEE IS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 62 - ALLOWED AND DISALLOWANCE OF RS.74066105/- U/S 14A O F THE ACT IS DIRECTED TO BE DELETED. 38. IN VIEW OF THE IDENTICAL ISSUE RAISED BEFORE US IN THE GROUND OF APPEAL NO 8 WHICH IS ALREADY CONSIDERED BY THE ITAT DELHI, WE ARE TAKING THE SAME VIEW AND DELETE THE ADDITION MADE B Y THE AO. HENCE THE GROUND NO OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 39. THE ISSUE RAISED BY THE ASSESSEE IN THE GRO UND NO. 9 IS THAT THE LD. DRP ERRED IN CONFIRMING THE UPWARD ADJUSTMENT FOR R S. 11,68,23,115/- WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT FOR THE DISALLOWANCE MADE U/S 14A OF THE ACT. 40. THE AO WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT, ALSO ADDED RS. 11,68,23,115/- AS DISALLOWED U/S 14A AS PER THE EXPLANATION TO SECTION 115JB. 41. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL T O THE LD. DRP WHO REJECTED THE GROUND OF OBJECTION OF THE ASSESSEE BY OBSERVING THAT ACTION OF AO IS IN CONFORMITY WITH CLAUSE (F) OF THE EXPLA NATION 1 TO SECTION 115JB. 42. AGGRIEVED BY THE ORDER OF THE LD. DRP, THE A SSESSEE IS IN APPEAL BEFORE US. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 63 - 43. THE LD. AR BEFORE US SUBMITTED THAT IN THE I DENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR T HE A.Y. 2008-09, ITAT DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 DATED 2 5.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 44. ON THE OTHER HAND, THE LD. DR BEFORE US VE HEMENTLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. THE LD. DR ALSO SUBMITT ED THAT THE SUO MOTO DISALLOWANCE MADE BY THE ASSESSEE SHOULD BE CONSIDE RED FOR THE DISALLOWANCE IN CONFORMITY WITH CLAUSE (F) OF THE E XPLANATION 1 TO SECTION 115JB. 45. WE HAVE HEARD THE RIVAL CONTENTION AND PERUS ED THE MATERIALS AVAILABLE ON RECORDS. AT THE OUTSET, WE FIND THAT I N THE IDENTICAL FACTS & CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE, THE ITAT IN THE AY 2008- 09 BEING ITA NO. 196/DEL/2013 VIDE ORDER DATED 25- 4-2016, REPORTED IN 68 TAXMANN.COM 322, HELD AS UNDER: 55. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . THE LD. AO HAS IMPUTED THE ADDITION U/S 115JB OF THE ACT AS DISALL OWANCE COMPUTED U/S 14A, READ WITH RULE 8D OF THE INCOME TAX RULE, 1962. AS WE HAVE ALREADY DELETED THE DISALLOWANCE AS PER GROUND NO.10 OF THE APPEAL WHEREIN WE HAVE HELD THAT THE AMOUNT OF DISALLOWANCE CANNOT BE WORKED OU T BY LD. AO WITHOUT RECORDING SATISFACTION ON EXAMINATION OF BOOKS ABOU T THE CORRECTNESS OF DISALLOWANCE MADE BY THE ASSESSEE WHICH IN THIS CAS E HAS BEEN MADE BY ASSESSEE OF RS.3311708/-.WE HAVE ALSO HELD THAT DIS ALLOWANCE CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME. HENCE, NOW NO DISALLOW ANCE SURVIVES U/S 14A OF THE ACT SO FAR AS NORMAL COMPUTATION OF TOTAL IN COME OF THE APPELLANT. THE AO HAS ADDED TO THE BOOK PROFIT AMOUNT OF EXPENSE D ISALLOWED U/S.14A APPLYING RULE 8D OF THE INCOME TAX ACT. AS PER OUR CONSIDERED VIEW, NO ADDITION U/S.115JB IS WARRANTED FOR AMOUNT OF DISAL LOWANCE U/S.14A OF THE IT ACT. OUR VIEW IS SUPPORTED BY FOLLOWING DECISIONS : (I) CADILA HEALTHCARE LTD. V. ADDL. CIT [2012] 21 TAXMANN.COM 483/67 SOT IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 64 - 110 (URO)(AHD. - TRIB.) ; (II) RELIANCE INDUSTRIAL INFRASTRUCTURE LTD. [IT APPEAL NOS. 69 & 70 (MUM) OF 2009, DATED 5-4-2013]; (III) ESSARTELEHOLDINGS LTD. [IT APPEAL NO. 3850 (MUM.) O F 2010, DATED 29-7- 2011]; (IV) J.K. PAPER LTD. [IT APPEAL NOS. 979 (AHD.) OF 2006 & 4027 & 4080 (AHD.) OF 2008]; (V) NATIONAL COMMODITY DERIVATIVES EXCHANGE LTD. [IT APPEAL NO. 2923 (MUM) OF 2010, DATED 26-8-2011]; AND (VI) QUIPPO TELECOM INFRASTRUCTURE LTD. [IT APPEAL NO. 4931 (DE1HI) OF 2010, DATED 18-2-2011]. RESPECTFULLY FOLLOWING THE PROPOSITIONS LAID DOWN I N THE PREVIOUSLY MENTIONED DECISIONS, WE DIRECT THE LD. AO TO EXCLUDE THE AMOU NT OF ADDITION OF RS.7,66,40,105/- MADE U/S.14A, WHILE COMPUTING THE BOOK PROFIT U/S.115JB.IN VIEW OF THIS WE ALLOW GROUND NO.11 OF THE APPEAL. 46. IN VIEW OF THE IDENTICAL ISSUE RAISED BEFORE US IN THE GROUND OF APPEAL NO. 9 WHICH IS ALREADY CONSIDERED BY THE ITA T DELHI, WE ARE TAKING THE SAME VIEW AND DELETE THE ADDITION MADE B Y THE AO. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 47. THE ISSUE RAISED BY THE ASSESSEE IN THE GROU ND NO. 10 IS THAT THE LD. DRP ERRED IN REJECTING THE ENTIRE DEDUCTION CLAIMED BY THE ASSESSEE U/S 80IB/IC OF THE ACT AMOUNTING TO RS. 58,85,85,232/-. 48. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAS CLAIMED A DEDUCTION FOR RS. 58,85,85,232/- UNDER SECTION 80IB / 80IC OF THE ACT IN RESPECT OF ITS PLANTS LOCATED IN GOA AND HIMACHAL P RADESH. THE NECESSARY IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 65 - DETAILS FOR THE DEDUCTION UNDER SECTION 80IB/ 80IC OF THE ACT STAND AS UNDER: 10. DEDUCTION U/S.80IB/80IC : 10.1 DURING THE YEAR UNDER CONSIDERATION, THE ASS ESSEE HAS MADE A CLAIM U/S.80IB/80IC OF A SUM OF RS.58,85,85,222/-. THE ASSESSEE HAS ATTACHED HIS CLAIM WITH THE RETURN OF INCOME AS PER STATEMENTS TO COMPUTATION OF INCOME VIDE ATTACHMENT 11. THE ASSE SSEE HAS CLAIMED THE SAME ON UNDERTAKING IN BACKWARD AREA FOR DEDUCT ION U/.80IB AND FACILITIES AT PAONTA SAHIB, HIMACHAL PRADESH FOR DE DUCTION U/S.80IC. THE CHART BRINGS OUT THE SALES AND CLAIMED NET PROF IT OF THE VARIOUS FACILITIES ALONG WITH THE DEDUCTION CLAIMED. (RS.IN CRO RES) NAME OF THE PLANT SALES NET PROFIT DEDUCTION U/S.80IB/80IC GOA PLANT (80IB) 122.21 21.70 06.51 NEW TABLET PLANT-1 57.72 2.45 2.45 NEW TABLET PLANT II 290.95 - (NO DEDUCTION CLAIMED) NEW SGC PLANT 108.62 40.25 40.25 NEW TABLET PLANT-III 96.77 9.64 9.64 TOTAL 385.32 74.04 58.85 48. THE AO DURING THE ASSESSMENT PROCEEDINGS OBS ERVED THAT THE AUDITOR IN THE FORM NO. 10CCB ISSUED BY HIM MADE CE RTAIN COMMENTS AS NARRATED BELOW: I) THE SALE EFFECTED BY THE INDUSTRIAL UNDERTAKINGS EL IGIBLE FOR DEDUCTION UNDER SECTION 80IB/ 80IC OF THE ACT HAVE BEEN RECORDED AT THE SALE PRICE WHICH WAS CHARGED FROM T HE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 66 - CUSTOMERS. THUS THE ASSESSEE HAS VIOLATED THE PROVI SIONS OF SECTION THE 80IA READ WITH SECTION 80IC(7) OF THE A CT. AS SUCH THE ASSESSEE WAS REQUIRED TO RECORD THE SALES AT A PRICE AT WHICH THE PRODUCTS WERE TRANSFERRED BY THE ELIGI BLE UNDERTAKING TO THE OTHER UNIT OF THE ASSESSEE NAMEL Y SELLING AND DISTRIBUTION DEPARTMENT. IT IS BECAUSE OF THE F ACT THAT THE ASSESSEE HAS NOT ALLOCATED THE COST INCURRED BY ITS SELLING AND DISTRIBUTION DEPARTMENT WHILE DETERMINING THE PROFI T OF THE ELIGIBLE UNDERTAKING. II) THE ASSESSEE HAS ALLOCATED HEAD OFFICE EXPENSES TO THE TUNE OF 75% TO THE ELIGIBLE UNDERTAKINGS WHICH WAS FURTH ER BIFURCATED AMONG THE ELIGIBLE UNDERTAKINGS ON THE B ASIS OF THEIR TURNOVER. AS SUCH THERE WAS NO BASIS SPECIFIE D FOR ALLOCATING HEAD OFFICE EXPENSES TO THE TUNE OF 75% TO THE ELIGIBLE UNDERTAKINGS. FURTHERMORE, ALL THE EXPENSE S INCURRED BY THE HEAD OFFICE WERE NOT ALLOCATED TO THE ELIGIB LE UNITS. III) SIMILARLY THE RESEARCH AND DEVELOPMENT EXPENSES HAV E BEEN ALLOCATED TO THE TUNE OF 30% IN THE RATIO OF SALES TO THE ELIGIBLE UNDERTAKINGS WITHOUT ADDUCING ANY JUSTIFIC ATION. IV) THE INTEREST COST HAS BEEN ALLOCATED ON THE BASIS O F NET AVERAGE CAPITAL EMPLOYED TO THE ELIGIBLE UNDERTAKIN GS AND FOR THIS NO JUSTIFICATION WAS PROVIDED. 48.1. THE AO IN ADDITION TO THE ABOVE ALSO OBSERV ED THAT THE ASSESSEE HAD NOT PROVIDED THE FINANCIAL STATEMENTS OF THE EL IGIBLE UNDERTAKINGS SEPARATELY AS REQUIRED UNDER RULE 18BBB(2) OF INCOM E TAX RULES. THE ASSESSEE HAS JUST PROVIDED THE INCOME AND EXPENDITU RE ACCOUNT WHICH WAS PREPARED FOR SELF-SERVING PURPOSES. 48.2. THE ASSESSEE AS A WHOLE GROUP HAS SHOWN LO SSES EVEN THOUGH IT HAS DECLARED GROSS TURNOVER AMOUNTING TO RS. 4,151. 79 CRORES. HOWEVER, THE ASSESSEE IN RESPECT OF ELIGIBLE UNDERTAKING HAS DECLARED PROFIT IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 67 - @19.22% DESPITE HAVING VERY LESS TURNOVER AMOUNTING TO RS. 385.32 CRORES AND CLAIMED THE DEDUCTION UNDER SECTION 80IB / 80IC OF THE ACT AGAINST SUCH PROFIT. 49. IN VIEW OF THE ABOVE, THE AO SOUGHT CLARIF ICATION FROM THE ASSESSEE BY ISSUING A SHOW CAUSE NOTICE TO JUSTIFY THE CLAIM UNDER SECTION 80IB/80IC OF THE ACT. THE ASSESSEE IN COMPLIANCE TO IT SUBMITTED AS UNDER: I. IT HAS CLAIMED THE DEDUCTION UNDER SECTION 80IB/80I C OF THE ACT IN RESPECT OF THE PRODUCTS MANUFACTURED BY IT WHICH ARE ELIGIBLE UNDER THE ACT. II. THE DEDUCTION WAS CLAIMED UNDER SECTION 80IB/80IC O F THE ACT ON THE BASIS OF THE AUDIT REPORTS IN FORM NO. 10CCB WHICH CONTAINS ALL THE INFORMATION ABOUT THE MANNER AND T HE BASIS OF ALLOCATION OF THE EXPENSES TO THE ELIGIBLE UNITS. THE AMOUNT DETERMINED IN THE EARLIER YEARS FOR THE DEDUCTION U NDER SECTION 80IB/80IC OF THE ACT WAS ACCEPTED BY THE REVENUE. III. THE RESEARCH AND DEVELOPMENT EXPENSES INCURRED BY I T IN THE YEAR UNDER CONSIDERATION HAVE NO CONNECTION WITH TH E PRODUCTS MANUFACTURED BY THE ELIGIBLE UNDERTAKING. THUS ONLY 30% OF THE TOTAL RESEARCH AND DEVELOPMENT EXPENSES WERE CONSID ERED REASONABLE TO APPORTION TO THESE ELIGIBLE UNDERTAKI NGS. AS SUCH IN THE EARLIER YEAR THE BASIS OF ALLOCATION OF 30% OF THE TOTAL RESEARCH AND DEVELOPMENT EXPENSES WAS ACCEPTED BY T HE REVENUE. IV. THERE WAS AN ESTABLISHED SYSTEM TO WORK OUT THE PRO FIT FOR EACH INDUSTRIAL UNDERTAKING WHICH IS ELIGIBLE FOR DEDUCT ION. FURTHER PROFIT DETERMINED FOR EACH INDUSTRIAL UNDERTAKING W AS DULY CERTIFIED BY THE AUDITOR IN HIS AUDIT REPORT IN FOR M 10CCB. THE MISCELLANEOUS INCOME IN RESPECT OF WHICH THE DEDUCT ION WAS CLAIMED WAS HAVING DIRECT NEXUS WITH THE ACTIVITIES OF THE INDUSTRIAL UNDERTAKING. ACCORDINGLY THESE WERE DETE RMINED AS PER THE ESTABLISHED SYSTEM APPLICABLE TO THE ELIGIB LE UNDERTAKINGS. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 68 - V. THE OTHER INCOMES WHICH ARE NOT ELIGIBLE FOR DEDUCT ION UNDER SECTION 80IB/80IC OF THE ACT WERE NOT CONSIDERED WH ILE DETERMINING THE PROFIT OF THE ELIGIBLE UNDERTAKINGS . AS SUCH THERE WAS THE PROPER COMPLIANCE OF THE PROVISIONS O F SECTION 80IA(5) OF THE ACT. VI. THE SELLING AND THE DISTRIBUTION UNIT IS NOT A SEPA RATE UNDERTAKING WHICH REQUIRES DETERMINING THE PROFIT S EPARATELY. IN FACT SUCH UNIT IS FACILITATING THE PRODUCTS MANUFAC TURED BY THE ELIGIBLE UNDERTAKING. THEREFORE THERE IS NO QUESTIO N OF DETERMINING THE ALP FOR THE TRANSFER OF THE GOODS E FFECTED BY THE ELIGIBLE UNDERTAKING TO SUCH UNIT I.E. SELLING AND DISTRIBUTION. VII. THE ACTIVITIES CARRIED OUT BY THE HEAD OFFICE ARE N OT LIMITED TO THE PRODUCTS MANUFACTURED BY THE ELIGIBLE UNDERTAKI NGS. AS SUCH THE HEAD OFFICE IS MANAGING THE BUSINESS OF TR ADING IN ACTIVE PHARMACEUTICAL INGREDIENTS (FOR SHORT API) A ND MEDICAL EQUIPMENT BESIDES SUPERVISING THE OPERATIONS OF THE MANUFACTURING UNDERTAKINGS. IN ADDITION TO THE ABOV E THE HEAD OFFICE ALSO PERFORMING OTHER FUNCTIONS RELATING TO STRATEGIC PLANNING, INVESTOR RELATIONS, CORPORATE COMMUNICATI ONS, DEALING WITH VARIOUS DEPARTMENTS/MINISTRIES OF THE GOVERNME NT OF INDIA, CORPORATE AFFAIRS, SHAREHOLDERS SERVICING, RAISING EQUITY AND OTHER FUNDS AND COMPLIANCE OF APPLICABLE LEGAL PROV ISIONS. THEREFORE THE HEAD OFFICE EXPENSES WERE ALLOCATED T O THE ELIGIBLE UNDERTAKING TO THE TUNE OF 75%. HOWEVER, THE AO DISAGREED WITH THE CONTENTION OF TH E ASSESSEE BY OBSERVING AS UNDER: I. THE ASSESSEE IS NOT MAINTAINING SEPARATE BOOKS OF A CCOUNTS FOR EACH INDUSTRIAL UNDERTAKING WHICH IS THE VIOLAT ION OF THE PROVISIONS OF SECTION 80IA(7)/ R.W.R. 18BBB(2) AND 80IB/80IC OF THE ACT. THEREFORE THE AUDITOR HAS TAK EN THE GLOBAL SALE PRICE WHILE DETERMINING THE DEDUCTION U NDER SECTION 80IB/80IC OF THE ACT. SIMILARLY THERE WAS N O BASIS FOR ALLOCATING THE HEAD OFFICE EXPENSES AND RESEARC H AND DEVELOPMENT EXPENSES TO THE TUNE OF 75% AND 30% RESPECTIVELY TO THE ELIGIBLE UNDERTAKINGS. THE PROF IT AND LOSS ACCOUNT PREPARED FOR EACH ELIGIBLE UNIT USING SAP/ ERP IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 69 - SYSTEM WAS MEANT FOR SELF-SERVING I.E. MANAGEMENT. THEREFORE THE GLOBAL SALE PRICE WAS USED TO DETERMI NE THE PROFIT OF EACH ELIGIBLE UNDERTAKING. THE ASSESSEE H AS NOT DETERMINED THE ALP FOR THE PRODUCTS TRANSFERRED BY THE ELIGIBLE UNDERTAKINGS TO THE SELLING AND DISTRIBUTI ON UNIT. II. THE MANUFACTURING COST EXCEPT RAW MATERIAL HAS BEEN ALLOCATED TO THE ELIGIBLE AND NON-ELIGIBLE UNDERTAK ING WHICH TRANSPIRES THAT THERE WAS NO STANDALONE SYSTEM USED BY THE ELIGIBLE UNDERTAKING FOR DETERMINING THE PROFIT ELI GIBLE FOR DEDUCTION UNDER SECTION 80IB/80IC OF THE ACT. III. THE DEDUCTION IS CLAIMED BY THE ASSESSEE IN THE EAR LIER YEARS UNDER SECTION 80IB/80IC OF THE ACT WERE PENDING FOR THE ASSESSMENTS UNDER SECTION 147 OF THE ACT. THEREFORE IT CANNOT BE CONCLUDED THAT THE DEDUCTION WAS ALLOWED TO THE ASSESSEE IN THE IDENTICAL FACTS AND CIRCUMSTANCES I N THE EARLIER YEARS. IV. THE SELLING AND THE DISTRIBUTION UNIT OF THE ASSESS EE IS IN ITSELF ARE PROFIT CENTRE AND CARRIES OUT A DISTINCT ACTIVITY. THEREFORE THE INCOME OF SUCH UNIT CANNOT BE ATTRIBU TED TO THE MANUFACTURING ACTIVITY OF THE ELIGIBLE UNDERTAKING. THEREFORE THE PROFIT OF THIS UNIT NEEDS TO BE REDUCED FROM TH E PROFIT OF THE ELIGIBLE UNDERTAKING. AS SUCH THE ACTIVITY CARR IED OUT BY THE ELIGIBLE UNDERTAKING CANNOT BE MERGED WITH THE ACTIVITY OF SELLING AND DISTRIBUTION UNIT. V. SIMILARLY THE PROFIT EARNED BY THE ASSESSEE ON ACCO UNT OF THE USE OF THE BRAND NAME NAMELY RANBAXY CANNOT BE MERG ED WITH THE PROFIT OF THE ELIGIBLE UNDERTAKING. 50. IN VIEW OF THE ABOVE, THE AO DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 80IB/80IC OF THE ACT FOR RS. 58,85,85,232/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 70 - 51. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFOR E THE LD. DRP AGAINST THE ORDER OF AO. 52. THE DRP CONFIRMED THE ORDER OF THE AO BY OBS ERVING AS UNDER: 52.1. DRP OBSERVED THE IDENTICAL ISSUE IS ALREAD Y ADJUDICATED BY THE PREDECESSOR IN THE CASE OF THE ASSESSEE FOR THE PRE CEDING ASSESSMENT YEAR. PREDECESSOR DRP REJECTED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER. 10.3. WE HAVE GONE THROUGH THE FACTS OF THE CAS E. THE SUBMISSION OF THE ASSESSEE HAS ALSO BEEN CONSIDERED VERY CAREFULL Y. IT IS SEEN THAT IDENTICAL OBJECTIONS WERE RAISED AGAINST IDENTICAL PROPOSED ACTION OF AO OF REJECTING THE CLAIM U/S.80IB/80IC ON IDENTICA L FACTS. THE DRP-II IN AY 2008-09 HAS NOT ACCEPTED THE OBJECTION OF THE ASSESSEE. WHILE REJECTING THE CLAIM OF THE ASSESSEE, IT HAS BEEN OB SERVED BY DRP-II AS UNDER: WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND HAVE PERUSED THE MATERIAL ON RECORD. IT IS SEEN THAT THE ASSESS EE IS NOT MAINTAINING SEPARATE BOOKS OF ACCOUNT BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE UNITS/UNDERTAKINGS IN RESPECT OF . IS CLAIMING DEDUCTION UNDER SECTION 80-I/80IC OF THE INCOME TAX ACT, 1961. FUR THER, THE ASSESSEE HAS NOT FURNISHED PROPER SEPARATE REPORT IN RESPECT OF UNITS/UNDERTAKINGS IN THE FORM NO.10CCB AS REQUIRED UNDER RULE 18BBHB(2) OF THE INCOME TAX RULES, 1962 READ WITH S ECTION 80IA(7) OF THE INCOME TAX ACT, 1961, IN RESPECT OF WHICH IT IS CLAIMING DEDUCTION UNDER SECTION 80IB/80IC OF THE INCOME TAX ACT, 1961 . ALSO THE ASSESSEE HAS NOT ALLOCATED EXPENSES RELATING TO MANUFACTURIN G ACTIVITY PROPERLY AND HAS ALSO NOT DETERMINED THE PROFITS OF THE UNIT S/UNDERTAKINGS IN RESPECT OF WHICH IT IS CLAIMING DEDUCTION UNDER SEC TION 80IB/80IC OF THE INCOME TAX ACT AS PER THE PROVISIONS OF SECTION 80I A(8) OF THE INCOME TAX ACT, 1961. IF THE PROFIT OF THESE UNITS/UNDERT AKINGS IS CALCULATED IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 71 - AFTER ATTRIBUTING RELEVANT EXPENSES AND AFTER INCOR PORATING ARMS LENGTH PRICE, THE INCOME OF THESE UNITS/UNDERTAKINGS IS LO SS AND THUS THESE UNITS/UNDERTAKINGS ARE NOT ELIGIBLE FOR ANY DEDUCTI ON 80IB/80IC OF THE INCOME TAX ACT, 1961, AS HELD BY THE AO. AS THE PR INCIPLE OF RES- JUDICATA IS NOT APPLICABLE TO THE INCOME TAX PROCEE DINGS, THEREFORE, THE CONTENTION OF THE ASSESSEE THAT IT HAD BEEN ALLOWED SIMILAR DEDUCTION IN THE EARLIER YEARS IS ALSO NOT ACCEPTABLE. IN VIEW OF THESE FACTS, THIS OBJECTION OF THE ASSESSEE IN RESPECT OF PROPOSED AC TION OF AO OF ALLOWING ENTIRE DEDUCTION OF RS.136,68,21,506/- CLA IMED BY THE ASSESSEE UNDER SECTION 80IB/80IC OF THE INCOME TAX ACT, 1961 , IS REJECTED. 53. IN VIEW OF THE ABOVE ORDER OF PREDECESSOR D RP ON THE IDENTICAL ISSUE, IT DID NOT EXAMINE THE ISSUE AGAIN AND THERE FORE FOLLOWED THE DECISION OF DRP-II IN AY 2008-09. ACCORDINGLY, DRP UPHELD THE ORDER OF AO. 54. AGAINST THE ORDER OF THE DRP, THE ASSESSEE P REFERRED AN APPEAL BEFORE US. 55. THE LD. AR BEFORE US SUBMITTED THAT IN THE ID ENTICAL FACTS AND CIRCUMSTANCES IN THE OWN CASE OF THE ASSESSEE FOR T HE A.Y. 2008-09, ITAT DELHI TRIBUNAL IN ITA NO. 196/DEL/2013 DATED 2 5.04.2016 HAS DECIDED THE IMPUGNED ISSUE IN ITS FAVOR. 56. ON THE OTHER HAND, THE LD. DR VEHEMENTLY SUPP ORTED THE ORDER OF AUTHORITIES BELOW. 57. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. IN VIEW OF THE BRIEF FACTS AND CIRCUMSTANCES IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 72 - DISCUSSED IN THE PREVIOUS PARAGRAPH, WE FIND THAT T HE IMPUGNED ISSUE IS COVERED BY THE ORDER OF DELHI ITAT IN THE CASE OF A SSESSEE IN WHICH THE EXACTLY THE SAME ISSUE WAS ADJUDICATED FOR THE ASSE SSMENT YEAR 2008-09 IN ITA NO. 196/DEL/2013 DATED 25.04.2016 IN ITS FAV OUR. THE RELEVANT EXTRACT OF THE ORDER IS REPRODUCED AS UNDER: 68. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS. DURING THE YEAR ASSESSEE HAS CLAIMED DEDUCTION U/S 80IB AND 80IC AS UNDER: NAME OF UNIT SECTION UNDER WHICH CLAIMED YEAR OF ESTABLISHM ENT YEAR OF CLAIM INITIAL YEAR OF THE CLAIM AMOUNT CLAIMED REMARKS GOA PLANT 80IB 31.03.2002 7 TH 2002-03 90204832 PROFIT FOR YEAR IS RS. 300682774/- AND DEDUCTION IS CLAIM @ 30% OF THE ELIGIBLE PROFIT. NEW TABLET PLANT I 80IC 31.03.2005 4 TH 2005-06 RS.220579510 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR NEW TABLET PLANT II 80IC 31.03.2006 3 RD 2006-07 RS.156142930 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR NEW SGC PLANT 80IC 31.03.2007 2 ND 2007-08 RS.376385228 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR NEW TABLET PLANT- III 80IC 31.03.2008 1 ST 2008-09 RS.523509006 IT IS ELIGIBLE FOR DEDUCTION @100% OF PROFIT FOR THE YEAR 69. IN CASE OF GOA PLANT, THE DEDUCTION WAS CLAIMED FI RSTLY IN AY 2002-03 AND SUBSEQUENTLY ISSUE WAS REOPENED FOR VERIFICATION OF THIS CLAIM U/S 147 OF THE ACT AND SUBSEQUENTLY IN ORDER U/S 143(3) RWS 147 OF THE ACT, THE CLAIM OF THE ASSESSEE WAS ACCEPTED. HENCE, THE CLAIM WAS EXAMINE D AND ALLOWED FOR THIS UNIT IN THE INITIAL YEAR. 70. REGARDING CLAIM OF DEDUCTION U/S 80IC OF THE ACT I N CASE OF NEW TABLET PLANT-I THE INITIAL YEAR OF DEDUCTION IS AY 2005-06 . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE SUBMITTED COPY OF AUDITED ACCOUNTS OF NEW INDUSTRIAL UNDERTAKING AND SUBMITTED THE BASIS FOR COMPUTATION OF THE PROFIT ELIGIBLE FOR DEDUCTION FOR THESE UNDERTAKING S. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSEE WAS SPECIFICALLY AS KED TO EXPLAIN THE REASONS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 73 - AND BASIS FOR APPORTIONMENT OF 30% R&D EXPENDITURE AND 75% OF THE HEAD OFFICE EXPENSES TO THIS NEW UNDERTAKING. ASSESSEE E XPLAINED VIDE LETTER 02.12.2008 AND AFTER GOING THROUGH THE SUBMISSION M ADE THE ASSESSEE AND BASED ON ALLOCATION EXPLAINED BY THE ASSESSEE, PROF ITS OF THE UNDERTAKING U/S 80IB/80IC WERE ACCEPTED BY THE AO. THEREFORE, IN TH E INITIAL YEAR THE CLAIM OF DEDUCTION FOR THE UNIT NEW TABLET PLANT-I WAS CLAIM ED, EXAMINED AND ALLOWED. 71. IN CASE OF NEW TABLET PLANT-II WHICH WAS SET UP IN AY 2006-07, THE ASSESSEE DID NOT CLAIM ANY DEDUCTION IN VIEW OF PRO VISION OF SECTION 80A(2). 72. SIMILARLY, IN CASE OF NEW SGC PLANT WHICH WAS SET IN AY 2007-08 THE ASSESSEE DID NOT CLAIM ANY DEDUCTION FOR THAT YEAR IN VIEW OF THE PROVISION OF SECTION 80A(2) OF THE ACT AS THE GROSS TOTAL INCOME OF THE ASSESSEE WAS NEGATIVE. 73. IN CASE OF NEW TABLET PLANT-III, THIS IS THE FIRST YEAR OF DEDUCTION AND ASSESSEE HAS CLAIMED THE SAME IN RETURN OF INCOME A ND IT IS UNDER DISPUTE IN THIS APPEAL. 74. IT IS ARGUMENT OF THE LD. AR THAT IT IS THE WELL S ETTLED PROPOSITION OF LAW THAT WHERE THE ACT PROVIDES FOR THE DEDUCTION FOR A CERTAIN TERM PERIOD THE REVENUE IS REQUIRED TO EXAMINE THE CLAIM OF DEDUCTI ON AND ITS ELIGIBILITY TO EXAMINE WHETHER ALL STATUTORY CONDITIONS ARE SATISF IED IN THE FIRST YEAR IN WHICH THE APPELLANT CLAIMS THE DEDUCTION. IF REVENU E DOES NOT DISTURB THE CLAIM OF THE ASSESSEE IN THAT YEAR, IT IS NOT OPEN TO REVENUE TO DISALLOW THE DEDUCTION IN THE SUBSEQUENT YEARS. THE VARIOUS AUTH ORITIES CITED BY THE LD. AR ARE SPECIFICALLY ON THE POINT IN FAVOUR OF THE ASSE SSEE. THE CONTENTION OF THE REVENUE THAT THIS IS THE FIRST YEAR IN WHICH THE ME THODOLOGY OF CLAIM OF DEDUCTION OF THE ASSESSEE IS BEING VERIFIED IS NOT ACCORDANCE WITH THE PREVIOUS ASSESSMENT ORDERS PASSED BY THE AO WITH RESPECT TO DEDUCTION U/S 80IB WITH RESPECT TO GOA PLANT AND DEDUCTION U/S 80IC OF THE ACT FOR NEW TABLET PLANT- I. ON PERUSAL OF THOSE ORDERS, IT IS APPARENT THAT THESE DEDUCTIONS CLAIMED BY THE ASSESSEE IN THE INITIAL YEAR OF THIS INDUSTRIAL UNDERTAKING HAVE BEEN EXAMINED IN DETAIL AND THEN ALLOWED BY THE REVENUE AFTER MAKING ENQUIRY. IN VIEW OF THIS, THE ARGUMENT OF THE REVENUE CANNOT BE ACCEPTED THAT THESE DEDUCTIONS HAVE NOT BEEN EXAMINED. FOR THIS FINDING , WE HAVE MATERIAL ON RECORD THE ASSESSMENT HISTORY IN THE FORM OF ASSESS MENT ORDERS OF THE ASSESSEE FOR THOSE YEARS. HOWEVER IN CASE OF NEW TABLET PLAN T-II AND NEW SGC PLANT IT IS APPARENT THAT IN ABSENCE OF POSITIVE GROSS TOTAL INCOME NO DEDUCTION WAS CLAIMED FOR AYS 2006-07 AND 2007-08 AND THEREFORE T HE CLAIM OF DEDUCTION BY THE ASSESSEE FOR THESE TWO PLANTS IS THE FIRST YEAR OF EXAMINATION OF CLAIM. OBVIOUSLY NEW TABLET PLANT-III HAS BEEN SET UP DURI NG THIS YEAR ONLY AND THEREFORE AY 2008-09 IS THE FIRST YEAR OF EXAMINATI ON OF THE CLAIM OF THE ASSESSEE BY THE AO. BEFORE US THE LD. DR HAS NOT PO INTED OUT ANY CHANGES IN THE FACTS OR LAW RELATING TO THOSE YEAS WITH THE FA CTS OF THIS YEAR WITH RESPECT IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 74 - TO DEDUCTION CLAIMED BY THE ASSESSEE WITH RESPECT T O GOA PLANT AND NEW TABLET PLANT I. THEREFORE, DEDUCTION RELATED TO THESE PLA NTS CANNOT BE QUESTIONED IN THIS YEAR AFRESH WITHOUT DISTURBING THE DEDUCTION I N INITIAL YEAR OF THE CLAIM. OUR VIEW IS ALSO SUPPORTED BY THE DECISIONS OF VARI OUS HON'BLE HIGH COURTS, ONE OF THE LEADING JUDICIAL PRECEDENT QUOTED BEFORE US IS OF HON'BLE DELHI HIGH COURT IN CASE OF CIT V. DELHI PRESS PATRAPARAK ASHAN (P) LTD. [2013] 355 ITR 14/217 TAXMAN 288/34 TAXMANN.COM 3 (DELHI) WHERE IN IT IS HELD THAT: '69. THE NEXT CONTROVERSY THAT NEEDS TO BE ADDRESSE D IS WHETHER IT WAS OPEN FOR THE ASSESSING OFFICER TO DENY THE BENEFIT OF SECTION 80-I OF THE ACT TO THE ASSESSEE HAVING ALLOWED BENEFIT TO THE A SSESSEE IN THE PRECEDING THREE YEARS. IT IS CONTENDED ON BEHALF OF THE ASSESSEE THAT IT WAS NECESSARY FOR THE ASSESSING OFFICER TO BE CONSI STENT WITH THE ASSESSMENT FOR THE EARLIER YEARS. THE QUESTION AS T O THE QUALIFICATION OF UNIT NOS. 2 & 3 AS INDUSTRIAL UNDERTAKINGS AROSE IN THE EARLIER YEARS AND THE ASSESSING OFFICER HAD ACCEPTED THAT UNIT NO S. 2 & 3 QUALIFIED FOR DEDUCTION UNDER SECTION 80-I OF THE ACT IN THE EARLIER YEARS. BY VIRTUE OF SECTION 80-I(5) OF THE ACT DEDUCTION UNDE R SECTION 80-I OF THE ACT WAS AVAILABLE TO AN ASSESSEE IN THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE INDUSTRIAL UNDERTAKING B EGINS TO MANUFACTURE OR PRODUCE ARTICLES OR THINGS (SUCH ASS ESSMENT YEAR BEING THE INITIAL ASSESSMENT YEAR) AND EACH OF THE SEVEN ASSESSMENT YEARS IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR. THIS NECESSARILY IMPLIED ONCE THE ISSUE AS TO ELIGIBILITY UNDER SECT ION 80-I OF THE ACT WAS EXAMINED AND ALLOWED IN THE INITIAL ASSESSMENT, THE SAME WAS ALLOWABLE IN THE SUBSEQUENT YEARS ALSO UNLESS THERE WAS ANY MATERIAL CHANGE IN THE SUCCEEDING YEARS. 70. IT IS WELL SETTLED LAW THAT THE PRINCIPLES OF R ES JUDICATA DO NOT APPLY TO INCOME TAX PROCEEDINGS AND ASSESSMENT FOR EACH Y EAR IS AN INDEPENDENT PROCEEDING. IT IS NOW EQUALLY WELL ESTA BLISHED THAT ISSUES THAT HAVE BEEN SETTLED AND ACCEPTED OVER A PERIOD O F TIME SHOULD NOT BE REVISITED IN SUBSEQUENT ASSESSMENT YEARS IN ABSE NCE OF ANY MATERIAL CHANGE WHICH WOULD JUSTIFY THE CHANGE IN VIEW. 71. THE SUPREME COURT IN THE CASE OF RADHASOAMISATS ANG (SUPRA) HAS HELD THAT UNLESS THERE IS A MATERIAL CHANGE IN JUST IFYING THE REVENUE TO TAKE A DIFFERENT VIEW THE EARLIER VIEW WHICH HAS BE EN SETTLED AND ACCEPTED OF A SEVERAL YEARS SHOULD NOT BE DISTURBED . THE RELEVANT EXTRACT FROM THE SAID JUDGMENT IS QUOTED BELOW: 'WE ARE AWARE OF THE FACT THAT STRICTLY SPEAKING RE S JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. AGAIN, EACH ASSESS MENT YEAR BEING A UNIT, WHAT IS DECIDED IN ONE YEAR MAY NOT APPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH T HE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY O R THE OTHER AND IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 75 - PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPROPRIATE TO AL LOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. ON THESE REASONINGS IN THE ABSENCE OF ANY MATERIAL CHANGE JUSTIFYING THE REVENUE TO TAKE A DIFFERENT VIEW OF THE MATTER- AND IF THERE WAS NOT CHANGE IT WAS IN SUPPORT OF THE ASSESSEE- WE DO NOT THINK THE QUESTION SHOULD HAVE BEEN REOPENED AND CONTRARY TO WHAT HAD BEEN DECIDED BY THE COMMISSIONER OF INCOME-TAX IN THE EARLIER PROCE EDINGS, A DIFFERENT AND CONTRADICTORY STAND SHOULD HAVE BEEN TAKEN. WE ARE, THEREFORE, OF THE VIEW THAT THESE APPEALS SHOULD BE ALLOWED AND THE QUESTION SHOULD BE ANSWERED IN THE AFFIRMATIVE, NAM ELY, THAT THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE INCOME D ERIVED BY THE RADHASOAMISATSANG WAS ENTITLED TO EXEMPTION UNDER S S. 11 AND 12 OF THE INCOME TAX ACT OF 1961.' 72. THE DECISION OF THE SUPREME COURT IN THE CASE RADHASOAMISATSANG (SUPRA) WAS ON THE FACTS WHE RE THE QUESTION AS TO THE ENTITLEMENT FOR EXEMPTION UNDER SECTION 4 (3)(I) OF THE INCOME TAX ACT, 1922 HAD NOT BEEN GRANTED FOR THE ASSESSME NT YEAR 1939-40. THE ASSESSEE HAD CHALLENGED THE ASSESSMENT ORDER WH ICH WAS ACCEPTED BY THE APPELLATE ASSISTANT COMMISSIONER WHO UPHELD THE ASSESSEE'S CLAIM FOR EXEMPTION. THIS VIEW WAS CONSISTENTLY FOL LOWED BY THE SUCCESSIVE ASSESSING OFFICERS TILL 1963-64. IN THES E CIRCUMSTANCES, THE SUPREME COURT HELD THAT THE VIEW THAT HAD BEEN SETT LED AND ACCEPTED OVER A PERIOD OF YEARS SHOULD NOT BE ALLOWED TO BE DISTURBED. 73. THIS COURT IN THE CASE OF LAGAN KALA UPVAN (SUP RA), FOLLOWING THE DECISION OF THE SUPREME COURT IN THE CASE OF RADHASOAMISATSANG (SUPRA) HAS ALSO HELD THAT WHE RE A PARTICULAR VIEW HAS BEEN ACCEPTED BY THE ASSESSING OFFICER TO SEVERAL YEARS THE SAME CANNOT BE PERMITTED TO BE DEPARTED FROM UNLESS THERE IS SOME MATERIAL FACTS THAT JUSTIFIED SUCH A CHANGE. SIMILA R VIEW HAS BEEN EXPRESSED BY THIS COURT IN THE CASE OF MODI INDUSTR IES LTD. (SUPRA). IN THIS CASE, WHILE CONSIDERING A CLAIM OF DEDUCTION M ADE BY AN ASSESSEE UNDER SECTION 80J OF THE ACT, THIS HIGH COURT HELD AS UNDER: 'THE SECOND QUESTION RELATES TO THE CLAIM OF THE AS SESSEE FOR DEDUCTION UNDER SECTION 80J OF THE INCOME TAX ACT IN RESPECT OF ITS NEW UNIT NAMELY 10 TON FURNANCE DIVISION AND STEEL UNIT 'B'. THIS CASE PERTAINS TO THE ASSESSMENT YEAR 1976-77. A PERUSAL OF THE ORDER OF THE ASSESSING OFFICER WOULD REVEAL THAT FOR THE FIRST T IME, CLAIM UNDER SECTION 80J OF THE ACT WAS MADE BY THE ASSESSEE IN THE ASSESSMENT YEAR 1973-74. THE ASSESSEE WAS DENIED THAT CLAIM BY THE ASSESSING OFFICER. FOR THIS REASON, THE ASSESSING OFFICER DENIED THE C LAIM IN THIS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 76 - ASSESSMENT YEAR AS WELL, TAKING NOTE OF THE FACT TH AT THE MATTER PERTAINING TO 1973-74 WAS PENDING BEFORE THE INCOME TAX TRIBUNAL. IT IS A MATTER OF RECORD THAT THE APPEAL FILED BY T HE ASSESSEE FOR THE ASSESSMENT YEAR 1973-74 WAS ALLOWED BY THE INCOME T AX APPELLATE TRIBUNAL. THE EFFECT THEREOF WAS THAT THE ASSESSEE WAS GRANTED THE REQUISITE DEDUCTION UNDER SECTION 80J OF THE ACT FO R THE ASSESSMENT YEAR 1973-74. THE DEPARTMENT HAS SOUGHT REFERENCE U NDER SECTION 256(1) OF THE ACT WHICH REFERENCE APPLICATION WAS A LSO REJECTED BY THE TRIBUNAL. LIKEWISE, FOR THE ASSESSMENT YEARS 1974-7 5 AND 1975-76, THE CLAIMS OF THE ASSESSEE WERE ALLOWED. THE ASSESSEE, ONCE GIVEN THE DEDUCTION UNDER SECTION 80J OF THE ACT IS ENTITLED TO SUCH A DEDUCTION FOR A PERIOD OF 5 YEARS. IF THE ASSESSEE HAS BEEN A LLOWED THE BENEFIT OF SECTION 80J IN THE LAST THREE PRECEDING YEARS, THER E IS NO REASON TO DENY THE SAME FOR THE INSTANT ASSESSMENT YEAR. WE, THEREFORE, ANSWER THIS ISSUE ALSO IN FAVOUR OF THE ASSESSEE AND AGAIN ST THE REVENUE.' 74. IN THE PRESENT CASE, THE CLAIM OF THE ASSESSEE UNDER SECTION 80-I OF THE ACT WAS EXAMINED AND ALLOWED BY THE ASSESSING O FFICER FOR THREE YEARS PRECEDING THE ASSESSMENT YEAR 1991-1992. IT I S RELEVANT TO NOTE THAT ASSESSMENTS IN THE EARLIER YEARS I.E. RELATING TO ASSESSMENT YEAR 1988-89, 1989-1990 AND 1990-1991 HAS NOT BEEN DISTU RBED BY THE ASSESSING OFFICER AND THERE HAS BEEN NO CHANGE THAT COULD JUSTIFY THE ASSESSING OFFICER ADOPTING A DIFFERENT VIEW IN THE ASSESSMENT YEARS 1991-92 AND THEREAFTER. AS STATED HEREINBEFORE, IN CERTAIN CASES WHERE THE ISSUES INVOLVED HAVE ATTAINED FINALITY ON ACCOU NT OF THE SUBJECT MATTER OF DISPUTE HAVING BEEN FINALLY ADJUDICATED, THE QUESTION OF REOPENING AND REVISITING THE SAME ISSUE AGAIN IN SU BSEQUENT YEARS WOULD NOT ARISE. THIS IS BASED ON THE PRINCIPLE THA T THERE SHOULD BE FINALITY IN ALL LEGAL PROCEEDINGS. THE SUPREME COUR T IN THE CASE OF PARASHURAM POTTERY WORKS CO. LTD. V. ITO [1977] 106 ITR 1 HAD HELD AS UNDER: '...........THAT THE POLICY OF LAW IS THAT THERE MU ST BE A POINT OF FINALITY IN ALL LEGAL PROCEEDINGS, THAT STALE ISSUES SHOULD NOT BE REACTIVATED BEYOND A PARTICULAR STAGE AND THAT LAPSE OF TIME MU ST INDUCE REPOSE IN AND SET AT REST JUDICIAL AND QUASI-JUDICIAL CONTROV ERSIES AS IT MUST IN OTHER SPHERES OF HUMAN ACTIVITY....' 75. IN THE FACTS OF THE PRESENT CASE, WHERE ALTHOUG H THE ASSESSING OFFICER HAS ALLOWED THE ASSESSEE DEDUCTION UNDER SE CTION 80-I OF THE ACT IN THE PRECEDING YEARS, ONE MAY STILL HAVE CERT AIN RESERVATIONS AS TO WHETHER THE ISSUE OF ELIGIBILITY OF UNIT NOS. 2 AND 3 FULFILLING THE CONDITIONS HAS BEEN FINALLY SETTLED, SINCE THE QUES TION HAS NOT BEEN A SUBJECT MATTER OF ANY APPELLATE PROCEEDINGS IN THE YEARS PRECEDING THE ASSESSMENT YEAR 1991-92. HOWEVER, THERE IS YET ANOT HER ASPECT WHICH IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 77 - NEEDS TO BE CONSIDERED. BY VIRTUE OF SECTION 80-I(5 ) OF THE ACT, DEDUCTION UNDER SECTION 80-I OF THE ACT IS AVAILABL E TO AN ASSESSEE IN RESPECT OF THE ASSESSMENT YEAR (REFERRED TO AS THE INITIAL ASSESSMENT YEAR) RELEVANT TO THE PREVIOUS YEAR IN WHICH THE IN DUSTRIAL UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE ARTICLES OR THINGS , OR TO OPERATE ITS COLD STORAGE PLANT OR PLANTS OR THE SHIP IS FIRST B ROUGHT INTO USE OR THE BUSINESS OF THE HOTEL STARTS FUNCTIONING OR THE COM PANY COMMENCES WORK BY WAY OF REPAIRS TO OCEAN-GOING VESSELS OR OT HER POWERED CRAFT. SUCH DEDUCTION IS ALSO AVAILABLE FOR THE SEVEN ASSE SSMENT YEARS IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR. SURELY IN CASES WHERE AN ASSESSEE IS HELD TO BE ELIGIBLE FOR DEDUCT ION IN THE INITIAL ASSESSMENT YEAR, THE SAME CANNOT BE DENIED IN THE S UBSEQUENT ASSESSMENT YEARS ON THE GROUND OF INELIGIBILITY SIN CE THE SET OF FACTS WHICH ENABLE AN ASSESSEE TO CLAIM TO BE ELIGIBLE FO R DEDUCTION UNDER SECTION 80-I OF THE ACT OCCUR IN THE PREVIOUS YEAR RELEVANT TO THE INITIAL ASSESSMENT YEAR AND HAVE TO BE EXAMINED IN THE INIT IAL ASSESSMENT YEAR. IN SUCH CASES, WHERE THE FACTS ON THE BASIS O F WHICH THE DEDUCTIONS ARE CLAIMED ARE SUBJECT MATTER OF AN EAR LIER ASSESSMENT YEAR AND DO NOT ARISE IN THE CURRENT ASSESSMENT YEA R, IT WOULD NOT BE POSSIBLE FOR AN ASSESSING OFFICER TO TAKE A DIFFERE NT VIEW IN THE CURRENT ASSESSMENT YEAR WITHOUT ALTERING OR REOPENING THE A SSESSMENT PROCEEDINGS IN WHICH THE ELIGIBILITY TO CLAIM THE D EDUCTION HAS BEEN ESTABLISHED. 76. IN CASES WHERE DEDUCTION IS GRANTED UNDER SECTI ON 80-I OF THE ACT, THE APPLICABILITY OF THE SECTION IS DETERMINED IN T HE YEAR IN WHICH THE NEW INDUSTRIAL UNDERTAKING IS ESTABLISHED. THE QUAL IFICATION AS TO WHETHER ANY INDUSTRIAL UNDERTAKING FULFILLS THE CON DITION AS SPECIFIED UNDER SECTION 80-I OF THE ACT HAS TO BE DETERMINED IN THE YEAR IN WHICH THE NEW INDUSTRIAL UNDERTAKING IS ESTABLISHED. ALTH OUGH THE DEDUCTION UNDER SECTION 80-I OF THE ACT IS AVAILABLE FOR THE ASSESSMENT YEARS SUCCEEDING THE INITIAL ASSESSMENT YEAR, THE CONDITI ONS FOR AVAILING THE BENEFIT ARE INEXTRICABLY LINKED WITH THE PREVIOUS Y EAR RELEVANT TO THE ASSESSMENT YEAR IN WHICH THE NEW UNDERTAKING WAS FO RMED. IN SUCH CIRCUMSTANCES, IT WOULD NOT BE POSSIBLE FOR AN ASSE SSING OFFICER TO REJECT THE CLAIM OF AN ASSESSEE FOR DEDUCTION UNDER SECTION 80-I OF THE ACT ON THE GROUND THAT THE INDUSTRIAL UNDERTAKING I N RESPECT OF WHICH DEDUCTION IS CLAIMED DID NOT FULFIL THE CONDITIONS AS SPECIFIED IN SECTION 80-I(2) OF THE ACT, WITHOUT UNDERMINING THE BASIS ON WHICH THE DEDUCTION WAS GRANTED TO THE ASSESSEE IN THE INITIA L ASSESSMENT YEAR. THIS IN OUR VIEW WOULD NOT BE PERMISSIBLE UNLESS TH E PAST ASSESSMENTS ARE ALSO DISTURBED. 77. THE ASSESSING OFFICERS OVER A PERIOD OF THREE Y EARS BEING ASSESSMENT YEARS 1988-89, 1989-1990 AND 1990-1991 H AVE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 78 - CONSISTENTLY ACCEPTED THE CLAIM OF THE ASSESSEE FOR DEDUCTION UNDER 80- I OF THE ACT AND IT WOULD NOT BE OPEN FOR THE ASSES SING OFFICER TO DENY THE DEDUCTION UNDER SECTION 80-I OF THE ACT ON THE GROUND OF NON FULFILMENT OF THE CONDITIONS UNDER 80-I(2) OF THE A CT WITHOUT DISTURBING THE ASSESSMENT FOR THE ASSESSMENT YEARS RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNIT NOS. 2 & 3 WERE ESTABLISHED. 78. THIS VIEW HAS ALSO BEEN ACCEPTED BY A DIVISION BENCH OF GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT & CHEMI CAL INDUSTRIES (SUPRA). IN THAT CASE, THE GUJARAT HIGH COURT HELD THAT WHERE RELIEF OF A TAX HOLIDAY HAD BEEN GRANTED TO A N ASSESSEE IN AN INITIAL ASSESSMENT YEAR IN WHICH THE CONDITIONS FOR GRANT OF TAX HOLIDAY HAD TO BE EXAMINED, DENIAL OF RELIEF IN THE SUBSEQU ENT YEARS WOULD NOT BE PERMISSIBLE WITHOUT DISTURBING THE ASSESSMENT IN THE INITIAL ASSESSMENT YEAR. THE RELEVANT EXTRACT FROM THE DECI SION OF THE GUJARAT HIGH COURT IN SAURASHTRA CEMENT & CHEMICAL INDUSTRI ES (SUPRA) IS QUOTED BELOW: 'THE NEXT QUESTION TO WHICH THE TRIBUNAL ADDRESSED ITSELF, AND NO OUR OPINION RIGHTLY, WAS WHETHER THE TRIBUNAL WAS JUSTI FIED IN REFUSING TO CONTINUE THE RELIEF OF TAX HOLIDAY GRANTED TO THE A SSESSEE-COMPANY FOR THE ASSESSMENT YEAR 1968-69, IN THE ASSESSMENT YEAR UNDER REFERENCE, THAT IS, 1969-70, WITHOUT DISTURBING THE RELIEF GRA NTED FOR THE INITIAL YEAR. IT SHOULD BE STATED THAT THERE IS NO PROVISIO N IN THE SCHEME OF S. 80J SIMILAR TO THE ONE WHICH WE FIND IN THE CASE OF DEVELOPMENT REBATE WHICH COULD BE WITHDRAWN IN SUBSEQUENT YEARS FOR BR EACH OF CERTAIN CONDITIONS. NO DOUBT, THE RELIEF OF TAX HOLIDAY UND ER S. 80J CAN BE WITHHELD OR DISCONTINUED PROVIDED THE RELIEF GRANTE D IN THE INITIAL YEAR OF ASSESSMENT IS DISTURBED OR CHANGED ON VALID GROU NDS. BUT WITHOUT DISTURBING THE RELIEF GRANTED IN THE INITIAL YEAR, THE ITO CANNOT EXAMINE THE QUESTION AGAIN AND DECIDE TO WITHHOLD O R WITHDRAW THE RELIEF WHICH HAS BEEN ALREADY ONCE GRANTED.' 79. THE DIVISION BENCH OF THE BOMBAY HIGH COURT IN THE CASE OF PAUL BROTHERS (SUPRA) HAS ALSO ADOPTED THE VIEW EXPRESSE D BY THE GUJARAT HIGH COURT IN THE CASE OF SAURASHTRA CEMENT & CHEMI CAL INDUSTRIES (SUPRA).' FOR THE SAKE OF BREVITY, WE DO NOT REPRODUCE OTHER DECISIONS CITED BY LD. AR THAT REITERATES THE SAME PRINCIPLES THAT IN ABSENCE OF A NY CHANGE IN FACTS / LAW ETC. DURING INTERVENING PERIOD THE DEDUCTION GRANTED AFT ER EXAMINATION IN INITIAL YEAR OF A TAX HOLIDAY PERIOD IT CANNOT BE QUESTIONED IN SUBSEQUENT YEARS. 75. THEREFORE, WE HOLD THAT AS THE DEDUCTION WITH RESP ECT TO GOA PLANT U/S 80IB WHICH IS IN THE 7TH YEAR OF ITS CLAIM OUT OF 10 YEA RS, HAS EARNED ELIGIBLE PROFIT OF RS. 300682774/- AND DEDUCTION THEREON IS CLAIMED AT THE RATE OF 30% THEREOF AMOUNTING TO RS. 90204832/- AND NEW TABLET PLANT-I U/S 80IC FOR WHICH THIS IS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 79 - THE 4TH YEAR OF THE CLAIM AND ASSESSEE HAS CLAIMED 100% OF THE ELIGIBLE PROFIT AMOUNTING TO RS. 220579510/- AS DEDUCTION, CANNOT B E DISALLOWED IN THIS YEAR. 76. COMING TO THE SECOND ARGUMENT THAT THE REVENUE SHO ULD FOLLOW THE CONSISTENCY AND WHERE POSITION HAS BEEN ACCEPTED AN D DETERMINED BY THE DEPARTMENT AFTER EXAMINATION OF THE FACTS AND WHERE THERE IS NO CHANGE EITHER IN THE FACTS OR IN LAW THAN THE EARLIER DECISION TAKEN BY THE REVENUE SHOULD BE ADHERED TO. LD. DR DID NOT POINT OUT ANY CHANGES IN THE FACTS AND/OR LAW IN THE YEAR IN WHICH DEDUCTIONS GRANTED IN EARLIER YEARS W ITH RESPECT TO IMPUGNED YEAR. WE HAVE CAREFULLY CONSIDERED THE ARGUMENT OF THE LD . AR AND WE DO NOT SEE ANY DISPUTE ON THE PRINCIPLE OF CONSISTENCY AS IT HAS A LREADY BEEN PROPOUNDED BY HON'BLE SUPREME COURT AND VARIOUS OTHER HON'BLE HIG H COURTS. THE LATEST IN POINT OF TIME IS EXCEL INDUSTRIES LTD. (SUPRA) WHER E HON'BLE SUPREME COURT HAS HELD THAT: '28. SECONDLY, AS NOTED BY THE TRIBUNAL, A CONSISTE NT VIEW HAS BEEN TAKEN IN FAVOUR OF THE ASSESSEE ON THE QUESTIONS RAISED, STA RTING WITH THE ASSESSMENT YEAR 1992-93, THAT THE BENEFITS UNDER THE ADVANCE L ICENCES OR UNDER THE DUTY ENTITLEMENT PASS BOOK DO NOT REPRESENT THE REAL INC OME OF THE ASSESSEE. CONSEQUENTLY, THERE IS NO REASON FOR US TO TAKE A D IFFERENT VIEW UNLESS THERE ARE VERY CONVINCING REASONS, NONE OF WHICH HAVE BEE N POINTED OUT BY THE LEARNED COUNSEL FOR THE REVENUE. 29. IN RADHASOAMISATSANGSAOMIBAGH V. CIT [1992] 193 ITR 321/60 TAXMAN 248 (SC) THIS COURT DID NOT THINK IT APPROPRIATE TO ALLOW T HE RECONSIDERATION OF AN ISSUE FOR A SUBSEQUENT ASSESSMENT YEAR IF THE SAME 'FUNDAMENTAL ASPECT' PERMEATES IN DIFFERENT ASSESSMENT YEARS. IN ARRIVIN G AT THIS CONCLUSION, THIS COURT REFERRED TO AN INTERESTING PASSAGE FROM HOYST EADV.COMMISSIONER OF TAXATION 1926 AC 155 (PC) WHEREIN IT WAS SAID: 'PARTIES ARE NOT PERMITTED TO BEGIN FRESH LITIGATIO N BECAUSE OF NEW VIEWS THEY MAY ENTERTAIN OF THE LAW OF THE CASE, OR NEW VERSIO NS WHICH THEY PRESENT AS TO WHAT SHOULD BE A PROPER APPREHENSION BY THE COURT O F THE LEGAL RESULT EITHER OF THE CONSTRUCTION OF THE DOCUMENTS OR THE WEIGHT OF CERTAIN CIRCUMSTANCES. IF THIS WERE PERMITTED, LITIGATION WOULD HAVE NO END, EXCEPT WHEN LEGAL INGENUITY IS EXHAUSTED. IT IS A PRINCIPLE OF LAW THAT THIS CA NNOT BE PERMITTED AND THERE IS ABUNDANT AUTHORITY REITERATING THAT PRINCIPLE. THIR DLY, THE SAME PRINCIPLE, NAMELY, THAT OF SETTING TO REST RIGHTS OF LITIGANTS , APPLIES TO THE CASE WHERE A POINT, FUNDAMENTAL TO THE DECISION, TAKEN OR ASSUME D BY THE PLAINTIFF AND TRAVERSABLE BY THE DEFENDANT, HAS NOT BEEN TRAVERSE D. IN THAT CASE ALSO A DEFENDANT IS BOUND BY THE JUDGMENT, ALTHOUGH IT MAY BE TRUE ENOUGH THAT SUBSEQUENT LIGHT OR INGENUITY MIGHT SUGGEST SOME TR AVERSE WHICH HAD NOT BEEN TAKEN.' 30. REFERENCE WAS ALSO MADE TO PARASHURAM POTTERY W ORKS LTD. V. ITO [1977] 106 ITR 1 (SC) AND THEN IT WAS HELD: 'WE ARE AWARE OF THE FACT THAT STRICTLY SPEAKING RES JUDICATA DOES NOT APPLY TO INCOME-TAX PROCEEDINGS. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 80 - AGAIN, EACH ASSESSMENT YEAR BEING A UNIT, WHAT IS D ECIDED IN ONE YEAR MAY NOT APPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOU ND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WOULD NOT BE AT ALL APPRO PRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. ON THESE REASON INGS IN THE ABSENCE OF ANY MATERIAL CHANGE JUSTIFYING THE REVENUE TO TAKE A DIFFERENT VIEW OF THE MATTER - AND IF THERE WAS NO CHANGE IT WAS IN SUPPO RT OF THE ASSESSEE - WE DO NOT THINK THE QUESTION SHOULD HAVE BEEN REOPENED AN D CONTRARY TO WHAT HAD BEEN DECIDED BY THE COMMISSIONER OF INCOME TAX IN T HE EARLIER PROCEEDINGS, A DIFFERENT AND CONTRADICTORY STAND SHOULD HAVE BEE N TAKEN.' 31. IT APPEARS FROM THE RECORD THAT IN SEVERAL ASSE SSMENT YEARS, THE REVENUE ACCEPTED THE ORDER OF THE TRIBUNAL IN FAVOUR OF THE ASSESSEE AND DID NOT PURSUE THE MATTER ANY FURTHER BUT IN RESPECT OF SOM E ASSESSMENT YEARS THE MATTER WAS TAKEN UP IN APPEAL BEFORE THE BOMBAY HIG H COURT BUT WITHOUT ANY SUCCESS. THAT BEING SO, THE REVENUE CANNOT BE ALLOW ED TO FLIP-FLOP ON THE ISSUE AND IT OUGHT LET THE MATTER REST RATHER THAN SPEND THE TAX PAYERS' MONEY IN PURSUING LITIGATION FOR THE SAKE OF IT.' 77. THEREFORE, FOLLOWING THIS PRINCIPAL ALSO WE ARE OF THE VIEW THAT DEDUCTION FOR THE YEAR CLAIMED BY THE ASSESSEE WITH RESPECT TO IT S GOA UNIT AND NEW TABLET PLANT-I CANNOT BE DISTURBED ON THE PRINCIPLE OF CON SISTENCY ALSO. FURTHER, THIS ARGUMENT CANNOT BE TAKEN SHELTER REGARDING THE CLAI M OF THE ASSESSEE FOR NEW TABLET PLANT-II, SGC PLANT AND NEW TABLET PLANT-III . 78. THE THIRD ARGUMENT ADVANCED BY THE ASSESSEE IS THA T THE ACCOUNTS OF THE ASSESSEE ARE BEING MAINTAINED ON SAP ERP SYSTEM, WH ICH PROVIDES SEPARATE BOOKS OF ACCOUNTS RESULTING INTO INDEPENDENT BALANCE SHEE T AND PROFIT AND LOSS ACCOUNT OF THE ELIGIBLE UNIT. FOR THIS LD., AR EXPLAINED IN DE TAIL HOW THE ERP SYSTEM WORKS AND HOW IT GENERATES INDIVIDUAL PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF THE INDUSTRIAL UNITS. IN THE PRESENT BUSINESS ENVIRONME NT AND LOOKING TO THE NATURE OF THE BUSINESS AND THE SIZE OF THE OPERATION OF THE C OMPANY, IT IS APPARENT THAT IT IS MULTI PRODUCT, MULTI-LOCATION COMPANY. THE ASSESSEE HAS MADE A CLAIM OF VARIOUS UNITS, WHICH IS SUBMITTED BEFORE US FROM PAGE NOS.9 74 TO 1038 OF PAPER BOOK VOLUME NO.IV. THE DETAILS OF THIS IS TABULATED AS U NDER: NAME OF THE UNIT DATE OF AUDIT REPORT AS PER RULE 18BBB SUPPORTED BY THE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT OF THE UNIT PAGE NO. OF PB VOLUME IV GOA UNIT 31.01.2012 YES 974-986 NEW TABLET PLANT-I 31.01.2012 YES 987-999 NEW TABLET 31.01.2012 YES 1000-1012 IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 81 - PLANT-II NEW SCG PLANT 31.01.2012 YES 1013-1025 NEW TABLET PLANT-III 31.01.2012 YES 1026-1038 79. ON EXAMINATION OF THE ABOVE STATED BALANCE SHEET A ND PROFIT AND LOSS ACCOUNT OF THE ABOVE INDUSTRIAL UNDERTAKING WHERE T HE CLAIM OF THE DEDUCTION OF THE ASSESSEE IS WORKED OUT AND CERTIFIED BY THE IND EPENDENT ACCOUNTANT IS PREPARED BASED ON SIMILAR ACCOUNTING POLICIES AND P RACTICES. IT IS ALSO APPARENT THAT THE PROFIT AND LOSS AND THE BALANCE SHEET HAVE BEEN PREPARED ON RATIONAL BASIS AFTER ALLOCATION OF PROPER EXPENDITURE, WHICH HAS BEEN FOLLOWED BY THE ASSESSEE CONSISTENTLY AND BASED ON THE ACCOUNTING P RACTICES FOLLOWED IN EARLIER YEARS. THE MAIN REASON FOR ASKING OF SEPARATE BOOKS OF ACCOUNTS OF THE ELIGIBLE UNDERTAKING IS ONLY TO VERIFY THAT WHETHER THE ASSE SSEE HAS COMPUTED THE ELIGIBLE PROFITS FOR DEDUCTION HAS SOME SANCTITY OR NOT. ASS ESSEE HAS CONSISTENTLY FOLLOWED ALLOCATION OF 75% OF HEAD OFFICE EXPENSES TO THE IN DIVIDUAL UNDERTAKING BASED ON SALES CLOCKED BY THE INDIVIDUAL UNITS. THIS PRACTIC E HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE IN PAST YEAR AND THE REVEN UE AS STATED BY US EARLIER WITH RESPECT TO AY 2002-03 ONWARDS, HAS ACCEPTED IT. THE ASSESSEE HAS IN BRIEF AND SUCCINCTLY HAS EXPLAINED THE RATIONALE BEHIND ALLOC ATION OF EACH EXPENDITURE TO THE VARIOUS UNITS. REGARDING R&D EXPENDITURE THE AS SESSEE HAS ALSO FOLLOWED THE PRACTICE APPORTIONING 30% TO THE INDIVIDUAL UND ERTAKING IN THE RATIO OF SALES. THIS METHODOLOGY IS BASED ON LOGICAL REASONING AND CONSISTENTLY FOLLOWED BY THE ASSESSEE WHICH HAS BEEN ACCEPTED BY THE REVENUE IN PAST IN CASE OF ASSESSMENT OF THE ASSESSEE. THE LD. AO HAS HELD THAT THE ASSESSEE HAS MAINTAINED COMMON BOOKS OF ACCOUNTS AND THEREFORE AS SEPARATE BOOKS O F ACCOUNTS ARE NOT MAINTAINED THEREFORE PROFIT CANNOT BE ASCERTAIN COR RECTLY. WE HAVE EXAMINED THESE ARGUMENTS AND WE ARE OF THE VIEW THAT AS ASSE SSEE IS MAINTAINING ITS FINANCIAL AND OPERATIONAL RECORDS ON SAP ERP SYSTEM S THE ASSESSEE CAN AT ANY MOMENT OF TIME ON ANY DAY AFTER EVERY TRANSACTION C AN PRODUCE THE PRODUCT WISE, UNITS WISE, GEOGRAPHY WISE, INDEPENDENT PROFIT AND LOSS ACCOUNT AND BALANCE- SHEETS. THEREFORE, IN OUR OPINION THE CONTENTION OF THE LD. AO THAT COMMON BOOKS OF ACCOUNT ARE MAINTAINED AND NOT SEPARATE BOOKS OF ACCOUNT IS DEVOID OF ANY MERIT. AS SUCH, ASSESSEE HAS CONTENDED THAT PROVISI ON OF SECTION 80IB AND 80IC DOES NOT PROVIDE THAT ASSESSEE SHOULD MAINTAIN SEPA RATE BOOKS OF ACCOUNTS WITH RESPECT TO ELIGIBLE UNDERTAKING. IT ONLY PROVIDES A S PER PROVISION 80IA(7) THAT THE 'ACCOUNTS' OF THE UNDERTAKING FOR THE PREVIOUS YEAR FOR WHICH DEDUCTION IS CLAIM SHOULD HAVE BEEN AUDITED BY AN 'ACCOUNTANT'. THE PR OVISION OF THE SECTION DOES NOT TALK ABOUT MAINTENANCE OF 'SEPARATE BOOKS OF AC COUNTS'. PROVISIONS OF SECTION 80IA(7) ARE AS UNDER : '(7) 38 [THE DEDUCTION] UNDER SUB-SECTION (1) FROM PROFITS AND GAINS DERIVED FROM AN 39 [UNDERTAKING] SHALL NOT BE ADMISSIBLE UNLESS THE AC COUNTS OF IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 82 - THE 39 [UNDERTAKING] FOR THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR FOR WHICH THE DEDUCTION IS CLAIMED HAVE BEEN AUDITED BY AN ACCOUNTANT, AS DEFINED IN THE EXPLANATION BELOW SUB-SECTION (2) OF SECTION 288, AND THE ASSESSEE FURNISHES, ALONG WITH HIS RETURN OF INCOME, THE REP ORT OF SUCH AUDIT IN THE PRESCRIBED FORM 40 DULY SIGNED AND VERIFIED BY SUCH ACCOUNTANT.' 80. RULE 18BBB OF THE INCOME TAX RULES GOVERNING THE C ERTIFICATE BY AN ACCOUNTANT PROVIDES AS UNDER : 98 '[FORM OF AUDIT REPORT FOR CLAIMING DEDUCTION UNDER SECTION 80-I OR 80-IA OR 99 [80-IB OR SECTION 80-IC]. 18BBB . (1) THE REPORT OF THE AUDIT OF THE ACCOUNTS OF AN ASSESSEE, WHICH IS REQUIRED TO BE FURNISHED UNDER SUB-SECTION (7) OF S ECTION 80-IA OR SUB-SECTION (7) OF SECTION 80-I, EXCEPT IN THE CASES OF MULTIPL EX THEATRES AS DEFINED IN SUB- SECTION (7A) OF SECTION 80-IB OR CONVENTION CENTRES AS DEFINED IN SUB-SECTION (7B) OF SECTION 80-IB 1[OR HOSPITALS IN RURAL AREAS AS DEFINED IN SUB-SECTION (11B) OF SECTION 80-IB], SHALL BE IN FORM NO. 10CCB . (2) A SEPARATE REPORT IS TO BE FURNISHED BY EACH UN DERTAKING OR ENTERPRISE OF THE ASSESSEE CLAIMING DEDUCTION UNDER SECTION 80-I OR 80-IA OR 80-IB1[OR 80- IC] AND SHALL BE ACCOMPANIED BY THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF THE UNDERTAKING OR ENTERPRISE AS IF THE UN DERTAKING OR THE ENTERPRISE WERE A DISTINCT ENTITY. (3) IN THE CASE OF AN ENTERPRISE CARRYING ON THE BU SINESS OF DEVELOPING OR OPERATING AND MAINTAINING OR DEVELOPING, OPERATING AND MAINTAINING AN INFRASTRUCTURE FACILITY, THE FORM SHALL BE ACCOMPAN IED BY A COPY OF THE AGREEMENT OF THE ENTERPRISE WITH THE CENTRAL GOVERN MENT OR THE STATE GOVERNMENT OR THE LOCAL AUTHORITY FOR CARRYING ON T HE BUSINESS OF DEVELOPING OR OPERATING AND MAINTAINING OR DEVELOPING, OPERATI NG AND MAINTAINING THE INFRASTRUCTURE FACILITY. (4) IN ANY OTHER CASE, THE FORM SHALL BE ACCOMPANIE D BY A COPY OF THE AGREEMENT, APPROVAL OR PERMISSION, AS THE CASE MAY BE, TO CARRY ON THE ACTIVITY SIGNED OR ISSUED BY THE CENTRAL GOVERNMENT OR THE STATE GOVERNMENT OR THE LOCAL AUTHORITY FOR CARRYING ON THE ELIGIBLE BUSINESS.' THIS RULE ALSO DOES NOT PROVIDE FOR MAINTENANCE OF 'SEPARATE BOOKS OF ACCOUNTS'.IN VIEW OF THE READING OF SECTION 80IA(7) AND RULE 18B BB, WE ARE OF THE VIEW THAT LAW DOES NOT PROVIDE THAT FOR CLAIMING DEDUCTION UNDER THOSE SECTIONS THERE IS REQUIREMENT TO MAINTAIN SEPARATE BOOKS OF ACCOUNTS. 81. AT THIS POINT OF TIME WE TAKE NOTE OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF ARISUDANA SPINNING MILLS LTD. V CIT [2012] 26 TAXMANN.COM 39/210 TAXMAN 233/348 ITR 385 , WHICH PROVIDES GUIDANCE ON THE ISSUE OF MAINTENAN CE OF SEPARATE ACCOUNT FOR THE PURPOSE OF CLAIMING DEDUCT ION U/S 80IA OF THE ACT. FACTS BEFORE THE HON'BLE SUPREME COURT WERE THAT THE ASSE SSING OFFICER FOUND THAT THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 83 - ASSESSEE-COMPANY WAS ENGAGED IN THE BUSINESS OF MAN UFACTURING OF YARN. THE ASSESSEE DERIVED, DURING THE RELEVANT ASSESSMENT YE AR, A GROSS TOTAL INCOME OF RS. 51,82,666/- FROM WHAT IT CALLED 'MANUFACTURING ACTI VITY'. IT DENIED THAT IT HAD UNDERTAKEN ANY TRADING ACTIVITY DURING THE YEAR IN QUESTION. ON THE SAID SUM OF RS. 51,82,666/-, THE ASSESSEE CLAIMED DEDUCTION AT THE RATE OF THIRTY PER CENT UNDER SECTION 80IA OF THE ACT AMOUNTING TO RS. 15,54,800/ -. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD NOT MAINTAINED A SEPARATE TRA DING AND PROFIT AND LOSS ACCOUNT FOR THE GOODS MANUFACTURED. IN THE ASSESSMENT YEAR IN QUESTION, IT APPEARS THAT THE ASSESSEE HAD SOLD RAW WOOL, WOOL WASTE, TEXTILE, AN D KNITTING CLOTHS. WHEN A QUERY WAS RAISED, THE ASSESSEE CONTENDED THAT, BUSINESS E XIGENCIES IN THE ASSESSMENT YEAR IN QUESTION, IT HAD SOLD THE ABOVE ITEMS. HOWEVER, ACCORDING TO THE ASSESSEE, THE SALE OF RAW WOOL, WOOL WASTE, ETC., WOULD NOT DISEN TITLE IT FROM CLAIMING THE BENEFIT UNDER SECTION 80IA OF THE ACT ON THE TOTAL SUM OF R S. 51,82,666/- AT THE RATE OF 30%. DEPARTMENT FOUND THAT THE ASSESSEE HAS NOT MAINTAIN ED THE ACCOUNTS FOR MANUFACTURE OF YARN ACTUALLY PRODUCED AS A PART OF INDUSTRIAL UNDERTAKING. CONSEQUENTLY, THE ASSESSING OFFICER WORKED OUT, ON HIS OWN, THE MANUFACTURING ACCOUNT, AS INDICATED IN HIS ORDER, GIVING A BIFURC ATION IN TERMS OF QUANTITY OF RAW WOOL PRODUCED. ON APPEAL BEFORE HON'BLE COURT IT WA S HELD AS UNDER : '4. IN OUR VIEW, THE FINDINGS GIVEN BY ITAT AND THE HIGH COURT ARE FINDINGS OF FACT. IN THIS CASE, WE ARE NOT CONCERNED WITH THE I NTERPRETATION OF SECTION 80IA OF THE ACT. ON FACTS, WE FIND THAT THE ASSESSEE OUGHT TO HAVE MAINTAINED A SEPARATE ACCOUNT IN RESPECT OF RAW MATERIAL WHICH IT HAD SOL D DURING THE ASSESSMENT YEAR. IF THE ASSESSEE HAD MAINTAINED A SEPARATE ACCOUNT, THEN, IN THAT EVENT, A CLEAR PICTURE WOULD HAVE EMERGED WHICH WOULD HAVE INDICAT ED THE INCOME ACCRUED FROM THE MANUFACTURING ACTIVITY AND THE INCOME ACCR UED ON THE SALE OF RAW MATERIAL. WE DO NOT KNOW THE REASON WHY SEPARATE AC COUNTS WERE NOT MAINTAINED FOR THE RAW MATERIAL SOLD AND FOR THE IN COME DERIVED FROM MANUFACTURE OF YARN.' ON READING OF THE ABOVE DECISION, IT IS APPARENT TH AT THE MAIN PURPOSES OF THE MAINTENANCE OF SEPARATE ACCOUNT ARE TO DEDUCE CORRE CT PROFIT ELIGIBLE FOR DEDUCTION. HON'BLE SUPREME COURT IN ABOVE DECISION HAS ALSO HELD IN THE BACKGROUND OF THE FACTS THAT ASSESSEE DID NOT PRODU CE SEPARATE PROFIT AND LOSS ACCOUNT OF THE ELIGIBLE UNDERTAKING. HOWEVER, IN TH E CASE OF THE ASSESSEE SUCH PROFIT AND LOSS ACCOUNT WAS PRODUCED ALONG WITH THE REPORT OF THE ACCOUNTANT SINCE BEGINNING. THEREFORE, ASSESSEE HAS MAINTAINED SEPARATE ACCOUNT OF THE PROFIT ELIGIBLE FOR INDUSTRIAL UNDERTAKING. IN THIS CASE, AN ACCOUNTANT HAS AUDITED ASSESSEE'S ACCOUNTS OF THE ELIGIBLE INDUSTRIAL UNDE RTAKINGS AND THEREFORE IT COMPLIES WITH THE LETTER AND SPIRIT OF THE PROVISIO NS OF INCOME TAX ACT. AS MENTIONED EARLIER ASSESSEE HAS FURNISHED THE SEPARA TE REPORT OF THE UNDERTAKING WHICH IS ACCOMPANIED BY THE PROFIT AND LOSS ACCOUNT OF EACH OF UNDERTAKING COMPLYING WITH THE PROVISIONS OF SECTION 80IA(7) OF THE ACT AND CORRESPONDING RULE 18BBB OF THE INCOME TAX RULES 1962. IN VIEW OF THIS, THE ARGUMENT OF THE REVENUE THAT SEPARATE BOOKS OF ACCOUNTS ARE REQUIRE D TO BE MAINTAINED WITH IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 84 - RESPECT TO EACH UNIT DOES NOT HAVE ANY SUPPORT OF T HE INCOME TAX ACT OR RULES FRAMED THEREUNDER. 82. NONETHELESS, ASSESSEE HAS MAINTAINED BOOKS OF ACCO UNTS OF THE WHOLE UNDERTAKING ON SAP ERP SYSTEMS FROM WHICH ON ANY DA Y THE INDEPENDENT PROFIT AND LOSS ACCOUNT AND BALANCE SHEET AS WELL AS THE R ESPECTIVE LEDGERS, CASHBOOK AND BANKBOOK AND JOURNAL OF ANY INDEPENDENT INDUSTR IAL UNDERTAKING IS AVAILABLE. ACCORDING TO SECTION 2(12A) OF THE INCOM E TAX ACT BOOKS OF ACCOUNTS HAVE BEEN DEFINED AS UNDER : '(12A) 42A 'BOOKS OR BOOKS OF ACCOUNT' INCLUDES LEDGERS, DAY- BOOKS, CASH BOOKS, ACCOUNT-BOOKS AND OTHER BOOKS, WHETHER KEPT IN THE WRITTEN FORM OR AS PRINTOUTS OF DATA STORED IN A FLOPPY, DISC, TAPE OR ANY OTHER FORM OF ELECTROMAGNETIC DATA STORAGE DEVICE;]' ON READING OF THE ABOVE, IT IS APPARENT ASSESSEE HA S MAINTAINED SEPARATE BOOKS OF ACCOUNTS, WHICH ARE ON THE SAP ERP SYSTEM, WHICH PROVIDES TRANSACTION-BY- TRANSACTION LEDGERS, DAYBOOKS, CASHBOOKS, AND OTHER BOOKS SUCH AS QUANTITATIVE DETAILS AND STOCK REGISTERS. THE LD. AO WAS OF THE VIEW THAT AS THE BOOKS OF ACCOUNTS ARE MAINTAINED FOR THE ENTITY AS A WHOLE, IT HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR THE ELIGIBLE INDUSTRIAL UNDER TAKING. IT WILL FURTHER BE APPRECIATED THAT THE PRIMARY PURPOSE OF MAINTAINING SEPARATE BOOKS OF ACCOUNT IN ANY PROVISION OF THE ACT IS ONLY TO ENABLE THE A SSESSING OFFICER TO VERIFY THAT DEDUCTION UNDER ANY PARTICULAR PROVISION HAS BEEN C ORRECTLY COMPUTED. IF FROM ANY SYSTEM/ SOFTWARE, IDENTIFIED AND SEPARATE ACCOU NTS RELATABLE TO ANY PARTICULAR UNIT/ UNDERTAKING ARE DISCERNIBLE AND AR E CAPABLE OF BEING GENERATED, THE SAME, IN OUR VIEW, IS SUFFICIENT COMPLIANCE WIT H THE REQUIREMENT OF MAINTENANCE OF SEPARATE BOOKS OF ACCOUNT, IF ANY. H OWEVER, IT IS TO BE NOTED IN PRESENT ERA OF TECHNOLOGICAL EVOLUTION THAT OLD AGE NOTIONS OF THE MAINTENANCE OF ACCOUNTS AND BUSINESS RECORDS DO NOT SURVIVE AND BU SINESS ENTITY TODAY SURVIVES ON REAL TIME INFORMATION ON EACH ASPECT OF ITS BUSI NESS PROCESS. IN THIS ERA WHEN AN ENTITY MAINTAINS ITS ACCOUNTING AND BUSINESS REC ORDS ON ENTERPRISE RESOURCE PLANNING SYSTEM, WHICH IS A STANDARD PROCEDURE OR P ROGRAM TO OPTIMIZE ALL BUSINESS PROCESSES INCLUDING SALES, LOGISTICS, PROD UCTION, QUALITY, FINANCE OF AN ENTITY AND SAP IS A NAME OF SOFTWARE PRODUCT AND IT'S A COMPANY NAME TOO WHICH A LEADING PROVIDER OF THESE SOLUTIONS, IT IS RATHER INCORRECT TO SAY THAT SEPARATE BOOKS OF ACCOUNTS ARE NOT MAINTAINED BY TH E ASSESSEE. EVIDENCE LED BEFORE LD. AO IN THE FORM OF PROFIT AND LOSS ACCOUN TS, BEFORE LD. DRP IN THE FORM OF THE PROFIT AND LOSS ACCOUNT AND COMPLETE BALANCE SHEETS OF THE UNDERTAKING, BEFORE 'ACCOUNTANT' WHO CERTIFIED THE DEDUCTION OF THE UNITS, ITS BALANCE SHEET AND PROFIT AND LOSS ACCOUNTS AND BEFORE US ALL THESE RE CORDS ARE ATTACHED IN THE FORM OF PAPER BOOK WHICH ARE QUOTED BY US ABOVE. IN VIEW OF SUCH OVERWHELMING EVIDENCE, WE REJECT CONTENTION OF LD. AO AND LD. DR P THAT ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNTS. WE HOLD THAT ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS FROM WHICH CORRECT PROFI T CAN BE DEDUCED AT ANY TIME OF THE EACH OF THE ELIGIBLE UNDERTAKING. OUR VIEW A LSO GETS SUPPORT FROM THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 85 - DECISION OF COORDINATE BENCH IN CASE OF IN CASE OF SMR BUILDERS (P) LTD. (SUPRA) WHERE IN IT IS HELD THAT: '37. SECTION 80-IA(7) WHICH IS APPLICABLE TO THE PR OVISIONS OF SEC. 80-IB REQUIRES THE ACCOUNTS OF THE ELIGIBLE UNDERTAKING TO BE AUDI TED AND A CERTIFICATE TO BE FILED. THE ESSENCE OF THIS REQUIREMENT IS THAT, AT ANY GIVEN TIME THE FINANCIAL POSITION OF THE UNDERTAKING, SHOULD BE ASCERTAINABL E. THE INTENT IS THAT THE PROFITS OF THE UNDERTAKING ELIGIBLE FOR THE DEDUCTION CAN B E PROPERLY IDENTIFIED. THIS REQUIRES MAINTENANCE OF ACCOUNTS IN SUCH A FASHION THAT THE SALES OF THE ELIGIBLE BUSINESS ARE KNOWN, THE EXPENSES - BOTH DIRECT AND INDIRECT ARE IDENTIFIABLE AND THE COMMON EXPENSES ARE APPORTIONED. THE DETAILS FI LED BEFORE CIT(A) CLEARLY DEMONSTRATE THAT IN THE CASE OF THE ASSESSEE, THE P ROFITS OF THE ELIGIBLE UNIT CAN BE CLEARLY ASCERTAINED FROM THE ACCOUNTS MAINTAINED. E XPENSES INCURRED FOR THE PROJECT ARE KNOWN AND ALL INCOMES, INCLUDING INDIRE CT INCOME ARISING TO THE PROJECT HAVE BEEN CONSIDERED. THE ACCOUNTS HAVE ALS O BEEN AUDITED AND A CERTIFICATE, AS REQUIRED, HAS BEEN FILED. THIS BEIN G SO, THE ASSESSING OFFICER HAS ERRED IN HOLDING THAT SEPARATE ACCOUNTS WERE NOT MA INTAINED FOR THE ELIGIBLE BUSINESS AND THAT THE ASSESSEE IS, THEREFORE, NOT E LIGIBLE FOR DEDUCTION U/S. 80IB(10) OF THE ACT.' 83. ADDRESSING THE NEXT ARGUMENTS OF THE REVENUE THAT THERE ARE CERTAIN ITEMS OF OTHER INCOME, WHICH ARE REDUCED FROM THE COMPUTATIO N OF TOTAL INCOME THEN THE MANUFACTURING ACTIVITY RESULTS IN LOSS. FOR THIS, P ROPOSITION LD. DR DREW OUR ATTENTION TO PAGE NO 51 OF THE ASSESSMENT ORDER WHE RE LD. AO HAS STATED THAT ASSESSEE HAS EARNED ROYALTY INCOME OF RS 18.91 CRS, (II) EXPORT INCENTIVES OF RS 78.93 CRORES, (III) SUNDRIES AND MISCELLANEOUS INCO ME RS 33.74 CR AND INCOME FROM TRADING ACTIVITY OF RS 94.25 CRORES TOTALLING TO RS 225.83 CRS. IT WAS STATED THAT THE GROSS TOTAL INCOME OF THE ASSESSEE IS RS. 178.64 CRORES AND IF THE ABOVE STATED INCOME ARE EXCLUDED I.E. OF RS 225.83 CRORES THE TOTAL INCOME OF THE ASSESSEE WILL RESULT IN TO LOSS AND THEREFORE THERE IS NO PROFIT IN MANUFACTURING ACTIVITY OF THE ASSESSEE AND HENCE NO DEDUCTION IS ALLOWABLE TO THE ASSESSEE. ON THIS ASPECT WE HAVE CAREFULLY PERUSED THE COMPUTATI ON OF TOTAL INCOME FILED BY THE ASSESSEE WHICH IS AT PAGE NO 1145 TO 1155 OF TH E PAPER BOOK WHERE THE GROSS TOTAL INCOME OF THE ASSESSEE IS RS. 3347340467 AND CLAIM OF THE DEDUCTION U/S 80 IB/IC OF THE ACT OF RS 1366821506/-. THEREFORE, IT IS APPARENT THAT ASSESSEE'S DEDUCTION IS NOT EXCEEDING THE GROSS TOTAL INCOME O F THE ASSESSEE. WE HAVE PERUSED THE PROVISION OF SECTION 80A OF THE ACT WHI CH PROVIDES AS UNDER : ' DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME. 80A. (1) IN COMPUTING THE TOTAL INCOME OF AN ASSESSEE, T HERE SHALL BE ALLOWED FROM HIS GROSS TOTAL INCOME, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS CHAPTER, THE DEDUCTIONS SPECIFIED IN SECTIONS 80C TO 48[80U]. (2) THE AGGREGATE AMOUNT OF THE DEDUCTIONS 49 UNDER THIS CHAPTER SHALL NOT, IN ANY CASE, EXCEED THE GROSS TOTAL INCOME OF THE ASSE SSEE.' IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 86 - THE ONLY CONDITION THAT IS PRESCRIBED U/S 80A OF TH E ACT IS THAT DEDUCTION ALLOWABLE TO THE ASSESSEE UNDER CH VIA CANNOT EXCEE D THE GROSS TOTAL INCOME OF THE ASSESSEE. HERE AS ALREADY MENTIONED GROSS TOTAL INCOME OF THE ASSESSEE IS RS. 3347340467/- AND OUT OF WHICH DEDUCTION U/S 80 G OF THE ACT IS A CLAIMED AT RS. 11672734/- AND DEDUCTION U/S 80 IB AND IC OF THE AC T OF RS 1366821506/- OF THE ACT TOTALING TO RS. 1378494420/-. THIS RESULTS IN T O TAXABLE INCOME FOR RS 1968846227/-. THEREFORE THIS GROUND OF OBJECTION OF THE REVENUE IS UNSUSTAINABLE IN VIEW OF THE CLEAR PROVISIONS OF SECTION 80A OF T HE INCOME TAX ACT. 84. REGARDING ALLOCATION KEY OF 'SALES' FOR ALLOCATION OF COMMON EXPENSE , THE R & D EXPENSES PRIMARILY REPRESENTS COST RELATED TO T HE DEVELOPMENT OF 'NEW' MEDICINAL PRODUCTS. IT IS ONLY AFTER INNOVATION OF THE NEW PRODUCT THAT THE SAME IS PRODUCED. IN THESE CIRCUMSTANCES, THE APPELLANT, IN LINE WITH THE TRADITIONAL ALLOCATION METHODOLOGY ADOPTED IN THE EARLIER YEARS APPORTIONED 30% OF SUCH R&D EXPENSES TO THE INDIVIDUAL UNDERTAKINGS IN THE RATIO OF SALES. FURTHER, THERE IS NO EVIDENCE LAID DOWN BY REVENUE THAT THAT IN TH E EVENT OF THE APPELLANT DECIDING TO COMMERCIALLY EXPLOIT THE BENEFITS OF TH E R & D WORKS, THE PRODUCTS WOULD BE MANUFACTURED BY THE SAID UNITS. FURTHER ON ALLOCATION OF HEAD OFFICE EXPENSES WE FULLY AGREE THAT IT RELATES TO COSTS TH AT HAVE BEEN INCURRED ON AN ENTITY LEVEL AND PERTAINS TO THE COMPANY AS A WHOLE . APPELLANT HAS APPORTIONED 75% OF SUCH HEAD OFFICE EXPENSES TO THE INDIVIDUAL UNDERTAKINGS BASED ON SALES. THIS METHOD OF ALLOCATION HAS BEEN CONSISTENTLY FOL LOWED BY THE ASSESSEE SINCE COMMENCEMENT, WHICH IS DULY CERTIFIED BY THE AUDITO RS AND ACCEPTED IN THE ASSESSMENTS COMPLETED IN THE PAST. WE DO NOT FIND A NY IRRATIONALITY IN THE AL ABOVE ALLOCATION KEYS ADOPTED BY THE ASSESSEE FIRST LY AND FOR THE REASON THAT IT HAS BEEN ACCEPTED BY THE REVENUE IN PAST IT CANNOT BE DISPUTED NOW IN SUBSEQUENT YEARS WITHOUT THERE BEING ANY CHANGE IN THE FACTS AND / OR LAW. HONOURABLE DELHI HIGH COURT IN THE CASE OF EHPT IND IA (P.) LTD.(SUPRA) WHERE IN ALLOCATION OF EXPENSES BASED ON HEAD COUNTS AND TURNOVER IS UPHELD TO STRESS THAT THERE IS NO BAR IN LAW FOR COMMON EXPENSES TO BE ALLOCATED ON A SCIENTIFIC/ RATIONAL BASIS TO THE ELIGIBLE UNIT HAS HELD AS UND ER : '10. THE PROVISIONS OF SUB-SECTION (4) OF SECTION 1 0A, RELIED UPON BY THE ASSESSING OFFICER, APPLY FOR THE PURPOSE OF SEGREGA TING THE PROFITS OF THE BUSINESS INTO EXPORT PROFITS AND DOMESTIC PROFITS. IT IS A S TATUTORY FORMULA FOR ASCERTAINING WHAT ARE PROFITS DERIVED FROM THE EXPORT OF THE ELI GIBLE ITEMS. IT HAS TO BE READ WITH SUB-SECTION (1). IT SAYS THAT THE EXPORT PROFI TS HAVE TO BE APPORTIONED ON THE BASIS OF THE RATIO WHICH THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF ALL THE BUSINESSES OF THE ELIGIBLE UNDERTAKING. WE ARE NOT IN THE PRESENT CASE CONCERNED WITH SUB-SECTION (4). THAT SUB-SECTION WILL APPLY W HEN THE COMBINED PROFITS - PROFITS OF THE EXEMPT UNIT AND THOSE OF THE NON-EXE MPT UNIT - HAVE BEEN ASCERTAINED; THE NEXT STEP WILL BE TO APPORTION THE M ON THE BASIS OF THE RATIO WHICH THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOV ER. WHAT WE ARE CONCERNED HEREIN IS THE STAGE BEFORE THAT. WE ARE CONCERNED H EREIN WITH THE METHOD BY WHICH THE INDIRECT OR COMMON EXPENSES - EXPENSES WH ICH ARE INCURRED FOR BOTH IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 87 - THE EXEMPT AND TAXABLE UNITS - ARE TO BE APPORTIONE D BETWEEN THE TWO UNITS. TO APPLY THE FORMULA PRESCRIBED IN SUB-SECTION (4) MAY BE APPROPRIATE IN A GIVEN CASE CONSIDERING ITS PECULIAR FACTS. BUT APPLYING T HE SAME FORMULA TO ALL CASES OF APPORTIONMENT WITHOUT HAVING REGARD TO THE HISTORY OF ASSESSMENTS AND OTHER RELEVANT FACTORS MAY NOT BE JUSTIFIED. 11. IN HUKAM CHAND MILLS LTD. (SUPRA), IN THE CONTE XT OF APPORTIONING PROFITS ACCRUING TO THE ASSESSEE UNDER THE SEVERAL CATEGORI ES OF BUSINESSES CARRIED ON BY HIM IN BRITISH INDIA, IT WAS HELD THAT THE QUESTION AS TO THE METHOD OF APPORTIONMENT WAS ESSENTIALLY ONE OF FACT DEPENDING UPON THE CIRCUMSTANCES OF THE CASE. IT WAS RECOGNIZED THAT IN THE ABSENCE OF ANY STATUTORY OR FIXED FORMULA, ANY FINDING ON THE QUESTION WOULD INVOLVE AN ELEMEN T OF GUESS WORK AND THAT 'THE ENDEAVOR CAN ONLY BE TO BE APPROXIMATE AND THERE CA NNOT IN THE VERY NATURE OF THINGS BE GREAT PRECISION AND EXACTNESS IN THE MATT ER' (AT PAGE 552). IN THE RECENT JUDGMENT OF THE SUPREME COURT IN CIT V. BILA HARI INVESTMENT (P.) LTD. [2008] 299 ITR 1/168 TAXMAN 95 , THE FACTS WERE THESE. THE ASSESSEE WAS SUBSCRIBING TO CHITS AND WAS MAINTAINING THE ACCOUN TS ON MERCANTILE BASIS. THE DISCOUNT ON THE CHITS, WHICH WAS ACTUALLY THE PROFI T ARISING TO THE ASSESSEE, WAS DECLARED AT THE END OF THE CHIT PERIOD, WHICH AT TI MES EXCEED A PERIOD OF 12 MONTHS. THIS METHOD ADOPTED BY THE ASSESSEE WAS BEI NG ACCEPTED BY THE DEPARTMENT FOR A NUMBER OF YEARS. HOWEVER, FOR THE ASSESSMENT YEARS 1991-92 TO 1997-98 THE ASSESSING OFFICER TOOK THE VIEW THAT TH E DISCOUNT ON THE CHITS SHOULD BE ASSESSED EVERY YEAR, TAKING INTO ACCOUNT THE NUM BER OF INSTALMENTS PAID AND REMAINING TO BE PAID. THE CONTENTION OF THE ASSESSE E WAS THAT THE METHOD ADOPTED BY HIM HAS BEEN CONSISTENTLY ACCEPTED IN TH E PAST AND THERE WAS NO JUSTIFICATION FOR ANY DEPARTURE. ACCEPTING THE SUBM ISSION, THE SUPREME COURT HELD AS UNDER: 'AS STATED ABOVE, WE ARE CONCERNED WITH THE ASSESSM ENT YEARS 1991-92 TO 1997- 98. IN THE PAST, THE DEPARTMENT HAD ACCEPTED THE CO MPLETED CONTRACT METHOD AND BECAUSE OF SUCH ACCEPTANCE, THE ASSESSEE, IN THESE CASES, HAVE FOLLOWED THE SAME METHOD OF ACCOUNTING, PARTICULARLY IN THE CONTEXT O F CHIT DISCOUNT. EVERY ASSESSEE IS ENTITLED TO ARRANGE ITS AFFAIRS AND FOLLOW THE M ETHOD OF ACCOUNTING, WHICH THE DEPARTMENT HAS EARLIER ACCEPTED. IT IS ONLY IN THOS E CASES WHERE THE DEPARTMENT RECORDS A FINDING THAT THE METHOD ADOPTED BY THE AS SESSEE RESULTS IN DISTORTION OF PROFITS, THE DEPARTMENT CAN INSIST ON SUBSTITUTION OF THE EXISTING METHOD. FURTHER, IN THE PRESENT CASES, WE FIND FROM THE VARIOUS STAT EMENTS PRODUCED BEFORE US, THAT THE ENTIRE EXERCISE, ARISING OUT OF CHANGE OF METHOD FROM THE COMPLETED CONTRACT METHOD TO DEFERRED REVENUE EXPENDITURE, IS REVENUE NEUTRAL. THEREFORE, WE DO NOT WISH TO INTERFERE WITH THE IMPUGNED JUDGM ENT OF THE HIGH COURT.' IN THE LIGHT OF THE OBSERVATIONS OF THE SUPREME COU RT IN HUKAM CHAND MILLS LTD. (SUPRA), IN A CASE WHERE ALTERNATIVE METHODS O F APPORTIONMENT OF THE EXPENSES ARE RECOGNIZED AND THERE IS NO STATUTORY O R FIXED FORMULA, THE ENDEAVOUR CAN ONLY BE TOWARDS APPROXIMATION WITHOUT ANY GREAT PRECISION OR EXACTNESS. IF SUCH IS THE ENDEAVOUR, IT CAN HARDLY BE SAID THAT THERE IS AN ATTEMPT IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 88 - TO DISTORT THE PROFITS. ON THE CONTRARY, AS WE HAVE ALREADY POINTED OUT, DISTORTION OF PROFITS MAY ARISE IF THE CONSISTENTLY ADOPTED AN D ACCEPTED METHOD OF APPORTIONMENT IS SOUGHT TO BE DISTURBED IN A FEW YE ARS, ESPECIALLY IN A CASE SUCH AS THE PRESENT ONE WHERE THE DEDUCTION UNDER SECTIO N 10A IS AVAILABLE OVER A PERIOD OF TEN YEARS AND ONLY IN SOME YEARS THE METH OD OF APPORTIONMENT OF INCOME IS DISTURBED. IN OTHER WORDS, THERE IS NO 'J UST CAUSE' MADE OUT FOR ABANDONING THE PAST METHOD.' [UNDERLINE AND BOLD SU PPLIED BY US EXTRACTED FROM TAXMANN.COM] IN VIEW OF THE ABOVE DECISION OF HONOURABLE DELHI H IGH COURT, ALLOCATION KEYS OF R & D EXPENSES AS WELL AS COMMON EXPENSES HAVE RATI ONAL, ACCEPTED BY REVENUE IN PAST YEARS, THERE IS NO JUSTIFICATION THAT HOW I T DISTORTS PROFIT, IN ABSENCE OF COMPELLING REASONS TO CHANGE I.E. 'JUST CAUSE', WE REJECT THE STAND OF REVENUE IN NOT ACCEPTING THE ABOVE ALLOCATION METHODOLOGY ADOP TED BY THE APPELLANT. 85. COMING TO THE NEXT ARGUMENT OF THE REVENUE THAT TH E SALES RECORDED BY THE INDEPENDENT UNITS ARE NOT ARM'S LENGTH. FOR THIS AR GUMENT OF THE REVENUE A DEEPER EXAMINATION OF SUB-SECTION 8 OF SECTION 80(I A) OF THE ACT IS REQUIRED WHICH PROVIDES FOR INTER UNIT TRANSFER OF GOODS AND SERVICES SHOULD BE AT THE MARKET VALUE OF THE GOODS AND SERVICES WHICH MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARY FETCH IN THE OPEN MARKET. F IRSTLY LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THERE IS NO INTER UNIT TRANSFER OF ANY GOODS AND SERVICES AND THEREFORE PROVISIONS OF SECTION 80(IA)(8) DOES NOT APPLY. THIS FACT HAS REMAINED UNCONTROVERTED. NONE OF THE TRANSACTION HAS BEEN PO INTED BEFORE US, WHICH SHOWS THAT THERE IS INTER UNIT TRANSFER OF GOODS OR SERVICES. THEREFORE IN ABSENCE OF ANY INSTANCES OF SUCH TRANSFER OF GOODS OR SERVI CES POINTED OUT BEFORE US BY REVENUE WE ARE OF THE VIEW THAT PROVISION OF SECTIO N 80IA(8) ARE NOT ATTRACTED. 86. FURTHER, IT IS SUBMITTED BY THE ASSESSEE THAT VARI OUS UNITS ARE MANUFACTURING DIFFERENT PRODUCTS AND FINAL PRODUCTS ARE SOLD IN T HE OPEN MARKET. SALES OF EACH OF THE UNIT ARE ACCOUNTED IN THE PROFIT AND LOSS AC COUNT BY THE APPELLANT OF THAT UNIT. IT IS NOT POINTED OUT BEFORE US THAT WHAT IS THE MATERIAL OR SERVICES THAT HAS NOT BEEN ACCOUNTED FOR BY THE ASSSEESS AS SALES AND IT IS NOT AT THE MARKET RATE AND WHAT IS THE MARKET RATE OF SUCH PRODUCT OR SERV ICES SOLD BY THOSE UNITS. IT IS EMPHATICALLY STATED THAT THERE IS NO INTER UNIT TRA NSFER OF THE GOODS OR SERVICES. IN VIEW OF THE ABOVE, WE DO NOT HAVE ANY OPTION BUT TO REJECT THE OBJECTION OF THE REVENUE OF INVOKING SECTION 80 IA (8) OF THE ACT ON THIS ISSUE. 87. IT IS ONE OF THE CONTENTION OF REVENUE THAT SELLIN G AND DISTRIBUTION ACTIVITY IS ITSELF A SEPARATE PROFIT CENTER AND THEREFORE WHATE VER SERVICES HAVE BEEN PROVIDED BY THE SELLING AND DISTRIBUTION ARM OF THE COMPANY TO THE ELIGIBLE UNDERTAKING SHOULD HAVE BEEN CHARGED AND REDUCED FR OM THE PROFIT OF THE INDUSTRIAL UNDERTAKING AFTER VALUING SERVICE OF SEL LING AND DISTRIBUTION ARM OF THE COMPANY AT MARKET RATE. AT PRESENT ASSESSEE HAS ALL OCATED IT AT COST. THEREFORE, LD. AO HAS INVOKED PROVISIONS OF SECTION 80 IA (8) OF THE ACT. IT IS NOT DISPUTE THAT THAT PRODUCTS MANUFACTURED BY THESE INDUSTRIAL UNIT S ARE SOLD BY SELLING AND IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 89 - DISTRIBUTION ARM OF THE ASSESSEE AND THE COST INCUR RED IS ALLOCATED TO THESE RESPECTIVE UNITS ON THE BASIS OF APPROPRIATE ALLOCA TION KEY OF 'SALES'. LD. AR OF THE APPELLANT RELYING ON THE DECISION OF COORDINATE BENCH OF CADILA HEALTHCARE LTD. (SUPRA) HAS SUBMITTED THAT THERE CANNOT BE ANY SPECIFIC DEMARCATION BETWEEN MANUFACTURING AND SELLING ACTIVITIES OF THE ASSESSEE AND PROFIT ACCRUES ONLY AT THE TIME OF SALES OF THE GOODS ONLY. THEREF ORE, THE CONTENTION OF THE REVENUE THAT SELLING AND DISTRIBUTION FUNCTION OF T HE ASSESSEE IS A SEPARATE PROFIT CENTER IS REQUIRED TO BE REJECTED AT THRESHOLD. WE HAVE CAREFULLY CONSIDERED THE ARGUMENT OF LD. AR AND OF THE REVENUE ON THIS POINT AS WELL AS THE LD. AO AND LD. DRP. WE ARE OF THE VIEW THAT THIS ARGUMENT IS ALMOS T SIMILAR TO THE ARGUMENT RAISED BY THE REVENUE IN THE CASE OF CADILA HEALTHC ARE LTD. (SUPRA) COORDINATE BENCH HAS DEALT WITH THESE ARGUMENTS FROM ALL THE A NGLES OF THE CONTROVERSY AND HAS HELD AS UNDER : '9.4 LD. COUNSEL HAS ASSERTED THAT UNDISPUTEDLY, IT WAS AN 'INTER-DIVISION TRANSFER', HENCE IT WAS EXPECTED TO RECORD THE SAME AT ARM'S LENGTH PRICE. HE HAS PLEADED THAT THE ASSESSEE IS BLOWING HOT AND COLD I N THE SAME BREATH. WHEN IT COMES TO TRANSFER OF SERVICES AND GOODS, IT OPPOSES ARM'S LENGTH PRICE ADJUSTMENT AND SAYS THAT THE EXPENSES WHICH HAVE BEEN INCURRED IN PAST NEED NOT BE TAKEN INTO CONSIDERATION. AS DISCUSSED EARLIER, THIS LOGI C DO NOT COMMENSURATE WITH THE PROVISIONS OF THE SECTIONS. EVEN THEN FOR ARGUMENT SAKE IF THE EXPENSES RELATABLE TO CURRENT YEAR ARE TO BE APPORTIONED; IT WAS FOUND THAT THE ASSESSEE HAD NOT APPORTIONED EVEN A PENNY OF THE EXPENSES IN DEVELOP MENT AND RESEARCH OF NEW PRODUCTS OF BADDI UNIT. 9.5 NEXT, REVENUE'S COUNSEL HAS DRAWN OUR ATTENTION ON THE PROFIT & LOSS ACCOUNT OF THE ELIGIBLE UNIT, I.E. BADDI UNIT, (REF ER PAGE NO.87 OF THE PAPER- BOOK). LD. DR HAS SAID THAT SALES TO THE TUNE OF RS . 1,19,13,22,749/- WERE RECORDED FOR THE ACCOUNTING PERIOD ENDED ON 31.3.20 06. HE HAS PLEADED THAT IF THE SAID UNIT WAS TO SALE ITS PRODUCTS ON STAND ALO NE BASIS, THEN THE SAID UNIT WHICH WAS ONLY TWO YEARS OLD COULD NOT FETCH SUCH H IGH SALE PRICE. THE SAID UNIT HAS SHOWN HIGH PROFIT AT RS. 1,16,82,91,400/-. THE GOODS MANUFACTURED BY THE SAID UNIT WERE TRANSFERRED TO THE MARKETING DIVISIO N OF THE ASSESSEE-COMPANY AND THE SALE PRICE WAS NOTED BY THE BADDI UNIT AS P ER THE FINAL SALE PRICE OF THE PRODUCT. BUT THE FACT IS THAT THE MARKETING DIVISIO NS AND THE C&F ARE INVOLVED, THEREFORE THE SALES ARE REALIZED BY THE MAIN MARKET ING DIVISION. HE HAS THUS PLEADED THAT THE PROFIT DERIVED FROM 'MARKETING FUN CTION' CANNOT BE DRAGGED TO THE MANUFACTURING UNIT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S.80IC. THE SPECIAL PROVISION IS CONFINED TO CERTAIN UNDERTAKIN GS, AS DEFINED IN THE STATUTE, AND SUCH ELIGIBLE UNDERTAKINGS ARE ENTITLED FOR THE DEDUCTION OF THE PROFIT OF SUCH UNDERTAKINGS ONLY. HE HAS AGAIN DRAWN OUR ATTENTION THAT THE ONLY SOURCE OF INCOME SHOULD BE THE ELIGIBLE SOURCE OF INCOME AND NOT OTHER SOURCES OF INCOME, SUCH AS, PROFITS OF MARKETING DIVISION OR PROFITS O N ACCOUNT OF ESTABLISHED BRAND. FOR THE ALLOCATION OF PROFIT OF MANUFACTURING UNIT THE MANDATE IS VERY CLEAR BECAUSE INCOME TAX RULE, 1962 CONTAINS RULE 18BBB W HEREIN AS PER SUB-RULE(2) IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 90 - A SEPARATE REPORT IS TO BE FURNISHED BY EACH UNDERT AKING AND THAT REPORT SHALL BE ACCOMPANIED BY A PROFIT & LOSS ACCOUNT AND BALANCE- SHEET OF THAT UNDERTAKING AS IF THE UNDERTAKING IS A DISTINCT ENTITY. HE HAS THEREFORE ARGUED THAT THE ALLOCATION OF THE PROFIT OF A MANUFACTURING UNIT SH OULD BE MADE ON STAND ALONE BASIS. HE HAS QUESTIONED THAT HOW THE SALE PRICE OF THE PRODUCTS OF THE BADDI UNIT WERE DETERMINED AND RECORDED. BECAUSE OF THE B RAND VALUE THE SALE PRICE MUST HAVE BEEN DETERMINED BY THE MANAGEMENT AS IF T HE PROFIT IS EARNED BY THE ASSESSEE-COMPANY ON SALE OF THE PRODUCTS OF THE BAD DI UNIT. IT WAS RECORDED ON THE PRESUMPTION THAT THE SALES WERE EXECUTED BY THE HEAD OFFICE BY CHARGING BRAND VALUE, THE NAME OF THE PRODUCT AND THE GOODWI LL OF THE COMPANY. IN ANY CASE, ACCORDING TO LD. DR, A REASONABLE EXPENDITURE SHOULD HAVE BEEN PROVIDED, SO THAT SUCH AN ABNORMAL PROFIT @ 58.66% COULD BE C HECKED. 9.6 IN SUPPORT OF THE ABOVE SUBMISSIONS, MR. SRIVAS TAVA HAS PLACED ON STRONG RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT I N THE CASE OF CIT V. AHMEDBHAIUMARBHAI& CO. [1950] 18 ITR 472 FOR THE LEGAL PROPOSITION THAT, QUOTE 'THE PROFITS RECEIVED RELAT E FIRSTLY TO HIS BUSINESS AS A MANUFACTURER, SECONDLY TO HIS TRADING OPERATIONS, A ND THIRDLY TO HIS BUSINESS OF IMPORT AND EXPORT. PROFIT OR LOSS HAS TO BE APPORTI ONED BETWEEN THESE BUSINESSES IN A BUSINESS LIKE MANNER AND ACCORDING TO WELL EST ABLISHED PRINCIPLES OR ACCOUNTANCY.' UNQUOTE. HE HAS ALSO PLACED RELIANCE ON LIBERTY INDIA (SUPRA) . 10. WE HAVE HEARD BOTH THE SIDE AT LENGTH. THE CONT ROVERSY AS RAISED BY THE ADDL. CIT MR. MAHESH KUMAR, OFFICIATING AS AO, HAS SERIOU S REPERCUSSIONS ON THE SUBJECT OF COMPUTATION OF 'ELIGIBLE PROFIT' WHILE C LAIMING A DEDUCTION UNDER THE STATUTE. THE ADJUSTMENTS AS SUGGESTED BY THE AO WHI LE WORKING OUT THE MANUFACTURING PROFIT OF AN ELIGIBLE UNIT HAS A FAR REACHING CONSEQUENCES ON ALL SUCH TAX-PAYERS; THEREFORE WE HAVE TO DEAL THIS ISS UE CAREFULLY AND LITTLE ELABORATELY, SO THAT WE CAN REACH TO A LOGICAL CONC LUSION. 10.1 TO BEGIN WITH, IT IS BETTER TO ELUCIDATE THAT THE I.T. ACT HAS ONLY DEFINED 'INCOME' (SEC. 2(24)) AS WELL AS 'BUSINESS' (SEC. 2 (13)) BUT NOT THE TERM 'PROFIT AND GAINS'. HOWEVER, THE SECTION WE HAVE TO DEAL WI TH I.E. SEC. 80 IC REVOLVES AROUND THE TERM 'PROFITS AND GAINS'. AS PER SECTION 2(13) 'BUSINESS' INCLUDES TRADE, COMMERCE OR MANUFACTURE. IN AUXILIARY, AS PE R SECTION 2(24) 'INCOME' INCLUDES (I) PROFITS AND GAINS. AN 'INCOME' HAS TO HAVE A COMPONENT OF 'PROFITS & GAINS' BUT ALL TYPE OF 'PROFITS & GAINS' MAY NOT BE AN 'INCOME' FOR TAX PURPOSE UNDER THE ACT. THE SECTION IN CONTROVERSY I.E. SEC. 80 IC OF THE ACT IS EMBEDDED WITH BOTH THESE TERMINOLOGY, REPRODUCED VERBATIM : '80IC (1) WHERE THE GROSS TOTAL INCOME OF AN ASSESS EE INCLUDES ANY PROFITS AND GAINS DERIVED BY AN UNDERTAKING OR AN ENTERPRISE FR OM ANY BUSINESS REFERRED TO IN SUB-SECTION (2), THERE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED, IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE, A DEDUCTION FROM SUCH PROFITS AND GAINS, AS SPECIFIED IN SUB-SECTION(3)'. 10.2 THE 'BUSINESS' IS PRESCRIBED IN SUB-SECTION (2 ) IN THE FOLLOWING MANNER : IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 91 - (2) THIS SECTION APPLIES TO ANY UNDERTAKING OR ENTE RPRISE (A) WHICH HAS BEGUN OR BEGINS TO MANUFACTURE OR PRO DUCE ANY ARTICLE OR THING THEREFORE, 'MANUFACTURING' IS THE FIRST CRITERIA FO R THE ELIGIBILITY OF THE 'BUSINESS' TO QUALIFY FOR THE DEDUCTION. HENCE THE 'PROFITS' A RE REQUIRED TO BE DERIVED FROM A MANUFACTURING UNDERTAKING WHICH IS PRODUCING THE SP ECIFIED ARTICLE. THAT 'PROFIT' IS INCLUSIVE IN THE 'GROSS TOTAL INCOME'. AS ALREAD Y NOTED, THE TERMINOLOGY 'PROFIT' HAS NOT BEEN DEFINED IN THIS ACT THEREFORE WE HAVE TAKEN THE HELP OF OTHER RESOURCES. THE BASIC QUESTION IS THAT WHAT IS THE ' PROFIT' OF A MANUFACTURING UNIT? FIRSTLY, THE TERM 'PROFIT' IMPLIES A COMPARISON BET WEEN THE STAGE OF A BUSINESS AT TWO SPECIFIC DATES SEPARATED BY AN INTERVAL OF A YE AR. THUS FUNDAMENTALLY THE MEANING IS THAT THE AMOUNT OF GAIN MADE BY THE BUSI NESS DURING THE YEAR. THIS CAN BE ASCERTAINED BY A COMPARISON OF THE ASSETS OF THE BUSINESS AT THE TWO DATES. TO DETERMINE THE 'PROFIT' OF A MANUFACTURING UNIT T HE ACCOUNTING STANDARD HAS GIVEN CERTAIN GUIDELINES, ENUMERATED IN SHORT. IN T HE ACCOUNTING THE 'PROFIT' IS THE DIFFERENCE BETWEEN THE PURCHASE PRICE AND THE C OST OF BRINGING THE PRODUCT TO MARKET. A 'GROSS PROFIT' IS EQUAL TO SALES REVENUE MINUS COST OF GOODS SOLD OR THE EXPENSES THAT CAN BE TRACED DIRECTLY TO THE PRODUCT ION OF THE GOODS. RATHER, THE 'OPERATING PROFIT' IS ALSO DEFINED AS EQUAL TO SALE S REVENUE MINUS COST OF GOODS PLUS ALL EXPENSES, EXCEPT INTEREST AND TAXES. MOST OF THE MANUFACTURING COMPANIES HAVE 'TOTAL COST' BASED PRICING METHOD. T OTAL COST HAS, BROADLY SPEAKING, TWO COMPONENTS; I.E. RAW-MATERIAL PLUS VA LUE ADDITION (IT INCLUDES ALL OVERHEADS). THEREFORE, PROFIT MARGIN IS PRICE MINUS TOTAL COST. IN MANUFACTURING UNIT, THUS COST OF CONVERSION IS PRODUCTION OVERHEA DS, SUCH AS, DIRECT LABOUR COST AND INEXTRICABLY LINKED EXPENDITURE OF PRODUCTION. IN GENERAL, EVERY MANUFACTURING CONCERN HAS FIXED MANUFACTURING CAPAC ITY. SO THE OBJECTIVE OF SUCH CONCERN OUGHT TO BE TO MAXIMIZE THE PROFIT. NO W THE PROBLEM, AS POSED, IS THAT LET US ASSUME THAT THE SAID MANUFACTURING UNIT IS PRODUCING TWO PRODUCTS; VIZ. 'A' & 'B'. FOR PRODUCTION OF 'A' PRODUCT, LET US SAY, THERE IS LESS WORKING HOURS, BUT FETCHING MORE VALUE FOR LESS MONEY. HOWE VER, IN THE PRODUCTION OF PRODUCT 'B' DUE TO COMPLEX PROCESS OF MANUFACTURING IT REQUIRES MORE WORKING HOURS. FOR PRICING PRODUCT 'B' THE SITUATION IS THA T MORE MONEY EXPENDITURE AND MAY FETCH LESS VALUE. THEREFORE, IN THE PROCESSING DEPARTMENT IT IS NOT POSSIBLE TO SEGREGATE THE TWO COMPONENTS TO DETERMINE THE SEGRE GATED MARGINS. KEEPING THIS ACCOUNTING PRINCIPLE IN MIND, WE REVERT BACK TO THE LANGUAGE OF SECTION 80IC WHICH SAYS THAT A DEDUCTION IS PERMISSIBLE OF SUCH PROFITS OF A SPECIFIED UNDERTAKING ENGAGED IN MANUFACTURING OF CERTAIN ART ICLE OR THING. THE BUSINESS OF THE SAID ENTERPRISE/CONCERN SHOULD BE MANUFACTUR ING OF ARTICLE OR THING AND THE PROFIT THEREFROM IS ELIGIBLE FOR DEDUCTION U/S. 80IC IF THAT PROFIT IS PART AND PARCEL OF THE GROSS TOTAL INCOME. AS NOTED HEREINAB OVE, PROFIT IS THE DIFFERENCE BETWEEN THE PURCHASE PRICE AND THE COST OF PRODUCTI ON ALONG WITH THE COST OF BRINGING THE PRODUCT TO MARKET. THIS BASIC PRINCIPL E OF ACCOUNTANCY, AS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 92 - APPEARED, HAVE BEEN ADOPTED BY BADDI UNIT BECAUSE A S PER PROFIT & LOSS ACCOUNT, COST OF MATERIAL, PERSONAL COST AND GENERA L EXPENSES, CORPORATE EXPENSES WERE REDUCED FROM THE SALE PRICE TO ARRIVE AT THE 'PROFIT BEFORE TAX' I.E. RS. 116,82,91,400/-. 10.3 IT IS NOT IN DISPUTE THAT FOR BADDI UNIT THE A SSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS AND THEREFORE DRAWN A SEPARATE PR OFIT AND LOSS ACCOUNT. IN SUCH A SITUATION, WHETHER THE AO IS EMPOWERED TO DI STURB THE COMPUTATION OF PROFIT, IS ALWAYS A SUBJECT MATTER OF CONTROVERSY. FROM THE SIDE OF THE ASSESSEE, RELIANCE WAS PLACED ON ADDL. CIT V. DELHI PRESS PAT RAPRAKASHAN [2006] 10 SOT 74 (DELHI) (URO) . IN THIS CASE, THE ASSESSEE WAS CLAIMING DEDUCTION U/S.80IA IN RESPECT OF A UNIT NO.4. THE SAID UNIT WAS SHOWING P ROFIT @ 62%. AS AGAINST THAT, AO HAS NOTICED THAT A MARGIN OF PROFIT SHOWN BY THE ASSESSEE AS A WHOLE WAS ONLY TO THE EXTENT OF 10%. THE AO HAS THEREFORE RECOMPUTED THE PROFIT OF THE SAID UNIT BY APPLYING SUB-SECTION (10) OF SECTION 8 0IA AND RESTRICTED THE PROFIT OF THE SAID UNIT TO 10% ONLY. WHILE DEALING THIS ISSUE , THE RESPECTED COORDINATE BENCH HAS CONCLUDED THAT IT WAS NOT JUSTIFIED TO DI STURB THE WORKING OF PROFIT MERELY BECAUSE THE PROFIT RATE OF ELIGIBLE UNIT WAS SUBSTANTIALLY HIGHER THAN OVERALL RATE OF PROFIT OF OTHER UNITS OF THE ASSESS EE, MORE SO WHEN SEPARATE BOOKS WERE MAINTAINED BY THE ASSESSEE IN RESPECT OF THE S AID ELIGIBLE UNIT. IN THE PRESENT CASE AS WELL THE AO HAS PROCEEDED TO DISTUR B THE PROFIT OF THE BADDI UNIT AND HELD THAT ONLY 6% PROFIT IS ELIGIBLE FOR DEDUCT ION U/S.80IC.WHILE DOING SO, IDENTICALLY, THE AO HAS NOT PINPOINTED ANY DEFECT I N THE WORKING OF THE 'PROFIT' OF THE BADDI UNIT. IN SUCH A SITUATION, WE CAN SAY THA T THE LEGAL PROPOSITION AS LAID DOWN BY DELHI BENCH CAN ALSO BE APPLIED IN THE PRES ENT APPEAL AS WELL. 10.4 THE AO HAS ALSO CONCLUDED THAT ONLY THE INCREM ENTAL PROFIT, REPRESENTING THE DIFFERENCE BETWEEN THE PROFITS EARNED EARLIER W HEN THE PRODUCTS WERE PROCURED ON P2P BASIS AND THE PROFITS EARNED BY THE BADDI UNIT, SHOULD BE TREATED AS A MANUFACTURING PROFIT. THE AO HAS THEN SAID THAT EARLIER THE ASSESSEE WAS PROCURING THE PRODUCTS ON P2P BASIS AND SHOWING THE AVERAGE PROFIT AT 80%, HOWEVER, ON THE BASIS OF AVERAGE SELLING RATE OF THE PRODUCES MANUFACTURED BY BADDI UNIT THE AVERAGE PROFIT WAS GONE UP TO 86% . THE AO HAS THEREFORE RESTRICTED THE DEDUCTION ONLY AT 6%. HE HAS PLACED RELIANCE ON ROLLS ROYCE PLC (SUPRA). IN THAT CASE, THE ASSESSEE WAS A UK BASED COMPANY CARRYING ON MARKETING AND SALES ACTIVITIES IN INDIA THROUGH A S UBSIDIARY. THE SUBSIDIARY WAS ALSO RENDERING SUPPORT SERVICES TO THE ASSESSEE, A UK BASED COMPANY. THE ASSESSEE WAS CARRYING OUT MANUFACTURING OPERATIONS. IT WAS HELD THAT 35% OF ITS PROFITS COULD BE ATTRIBUTED TO THE MARKETING ACTIVI TIES CARRIED OUT IN INDIA AND, THEREFORE, CHARGEABLE TO TAX IN INDIA. THE FACTS OF THAT CASE WERE ALTOGETHER DIFFERENT AND THERE WAS A FINDING THAT UNDISPUTEDLY THERE WAS A PE IN INDIA AND AS PER INDO-UK DTAA THE INCOME HAS TO BE TAXED IN I NDIA. AN ANOTHER FACT WAS THAT THERE WAS NO SEPARATE ACCOUNT OF THE ASSESSEE' S INDIA OPERATION AND THE AO HAD FOUND THAT ON THE BASIS OF GLOBAL ACCOUNTS THE PROFITS WERE DETERMINED ON SALES. IN THAT CASE, MARKETING WAS SAID TO BE THE P RIMARY ACTIVITY FOR EARNING IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 93 - PROFIT. THE PROFIT WAS DIRECTLY DUE TO OPERATION IN INDIA. IN THAT CONTEXT THE WORD 'ATTRIBUTABLE' WAS CONSIDERED AND THEN IT WAS HELD THAT SUCH PART OF THE INCOME AS IT WAS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA IS TAXABLE. THE EXPRESSION 'BUSINESS CONNECTION' WAS A LSO CONSIDERED AND THEN IT WAS FOUND THAT IT WILL INCLUDE A PERSON ACTING ON B EHALF OF A NON-RESIDENT AND CARRIED ON CERTAIN ACTIVITIES IS HAVING BUSINESS CO NNECTION. A BUSINESS CONNECTION HAS TO BE REAL AND INTIMATE AND THROUGH WHICH INCOME MUST ACCRUE OR ARISE WHETHER DIRECTLY OR INDIRECTLY TO THE NON- RESIDENT. ON THOSE FACTS, SINCE IT WAS FOUND THAT R&D ACTIVITIES WERE CARRIED OUT BY T HE ASSESSEE, THEREFORE, 15% OF THE PROFIT WAS ALLOCATED TO THE R&D ACTIVITIES A ND BALANCE OF THE PROFIT WAS ATTRIBUTABLE TO THE MARKETING ACTIVITIES IN INDIA. THE SAID DECISION WAS ENTIRELY BASED UPON THE CONNECTIVITY OF THE MARKETING OPERAT IONS WITH THE PROFITS. THE CBDT CIRCULAR NO.23 OF 1969 DATED 23/07/1969 WAS AL SO TAKEN INTO ACCOUNT WHEREIN IT WAS OPINED THAT WHERE A NON-RESIDENT'S S ALES TO INDIAN CUSTOMERS ARE SECURED THROUGH THE SERVICES OF AN AGENT IN INDIA T HEN THAT PROFIT IS ATTRIBUTABLE TO THE AGENT'S SERVICES. MEANING THEREBY BECAUSE OF THE CLOSE CONNECTION OF THE AGENT'S MARKETING ACTIVITY THE PROPORTIONATE PROFIT WAS ATTRIBUTED TO THE SAID ACTIVITY. CONTRARY TO THIS, THERE WAS NO FINDING TH AT UPTO THE EXTENT OF 80%, THE PROFIT WAS ATTRIBUTED TO THE ASSESSEE-COMPANY. THE SEGREGATION BETWEEN 80% AND 6% WAS NOT ON ACCOUNT OF ANY EVIDENCE THROUGH W HICH IT COULD INDEPENDENTLY BE ESTABLISHED THAT THE MAJOR PORTION OF THE PROFIT COULD BE ATTRIBUTED TO THE ASSESSEE-COMPANY AND REST OF THE PROFIT COULD ONLY BE ATTRIBUTED TO THE BADDI UNIT. 10.5 THE AO HAS ALSO MADE OUT A CASE THAT THE BOOK PROFIT PERCENTAGE OF BADDI UNIT WAS 58.67%, WHEREAS THE PROFIT OF THE ASSESSEE -COMPANY AS A WHOLE WAS 11.88%. IF WE FURTHER ELABORATE THIS ASPECT, THEN T HE AO HAS ALSO GIVEN A WORKING THROUGH WHICH THE AVERAGE SELLING RATE WAS 86.36% OF THE BADDI UNIT. MEANING THEREBY IF WE PRESUME FOR EXAMPLE THAT THE ASSESSEE HAS GROSS PROFIT OF 86%, THEN THE NET PROFIT WAS DISCLOSED AT 58%. A QU ESTION THUS ARISES THAT WHAT BENEFICIAL PURPOSE COULD BE SERVED FOR THE REDUCTIO N OF GROSS PROFIT TO A LOWER PERCENTAGE OF NET PROFIT, SPECIALLY WHEN THE ALLEGA TION OF THE A.O. WAS THAT THERE WAS AN ATTEMPT TO DECLARE HIGHER PROFIT OF BADDI UN IT TO GET MORE ADVANTAGE OF DEDUCTION. ON PERUSAL OF THE P&L ACCOUNT, IT IS AN ADMITTED FACTUAL POSITION THAT THE ASSESSEE HAS IN FACT DEBITED CERTAIN EXPENSES W HICH HAVE INCLUDED HEAD OFFICE EXPENSES, SUCH AS, MARKETING EXPENSES AND CORPORATE EXPENSES. MEANING THEREBY THE NET PROFIT OF THE BADDI UNIT WAS NOT MERELY PRO DUCTION COST MINUS SALE PRICE, BUT THE DIFFERENCE OF SALE PRICE MINUS ALL GENERAL EXPENSES WHICH WERE ATTRIBUTABLE TO THE SALES. THEREFORE, IT IS NOT REA SONABLE TO SAY THAT UNREASONABLY THE PROFIT WAS ESCALATED. THE DIFFERENCE BETWEEN TH E TWO PERCENTAGES OF PROFIT, I.E. ABOUT 28% ( G.P. - N.P.) THUS REPRESENTED THE EXPENDITURE WHICH COULD BE SAID TO BE IN RESPECT OF MARKETING NETWORK AND BRAN D OF THE PRODUCT RELATED EXPENSES. THE AO HAS NOT COMPLAINED ABOUT THE ALLOC ATION OF EXPENDITURE AS MADE BY THE ASSESSEE WHILE COMPUTING THE PROFIT OF THE BADDI UNIT. ONCE THE ASSESSEE HAS ITSELF TAKEN INTO ACCOUNT THE RELATED EXPENSES TO ARRIVE AT THE NET IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 94 - PROFIT, THEN IT WAS NOT REASONABLE ON THE PART OF T HE REVENUE DEPARTMENT TO FURTHER REALLOCATE THOSE EXPENSES BY CURTAILING THE PERCENTAGE OF ELIGIBLE PROFIT. 10.6 FROM THE SIDE OF THE REVENUE, LD. SPECIAL COUN SEL HAS ARGUED THAT IN TERMS OF THE PROVISIONS OF SECTION 80IA(5) THE DEDUCTION IS TO BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF T HE ASSESSEE. ACCORDING TO HIM, THE MANUFACTURING PROFIT WAS THE ONLY SOURCE OF INC OME AND THAT ALONE SHOULD BE ACCOUNTED FOR IN THE P&L ACCOUNT TO CLAIM THE DEDUC TION U/S.80IC OF THE ACT. LD. DR HAS EXPLAINED THAT AS PER THE VIEW OF THE A.O. U P-TO 80% OF THE PROFIT WAS THE RESULT OF EFFICIENT MARKETING NET WORK PLUS DUE TO THE BRAND NAME OF THE COMPANY. ONLY 6% WAS THE MANUFACTURING PROFIT, PER A.O. IT IS TRUE THAT SECTION 80IC DOES RECOGNIZED THE PROVISIONS OF SECTION 80IA . REFER, SUB-SECTION (7) OF SECTION 80IC WHICH PRESCRIBES AS FOLLOWS: 'SECTION 80IC(7) : THE PROVISIONS CONTAINED IN SUB- SECTION (5) AND SUB-SECTIONS (7) TO (12) OF SECTION 80IA SHALL, SO FAR AS MAY BE , APPLY TO THE ELIGIBLE UNDERTAKING OR ENTERPRISE UNDER THIS SECTION.' DUE TO THIS REASON, OUR ATTENTION WAS DRAWN ON THE PROVISIONS OF SECTION 80IA(5) OF IT ACT; READS AS UNDER: 'SECTION 80IA(5) : NOTWITHSTANDING ANYTHING CONTAIN ED IN ANY OTHER PROVISION OF THIS ACT, THE PROFITS AND GAINS OF AN ELIGIBLE BUSI NESS TO WHICH THE PROVISIONS OF SUB-SECTION (1) APPLY SHALL, FOR THE PURPOSES OF DE TERMINING THE QUANTUM OF DEDUCTION UNDER THAT SUB-SECTION FOR THE ASSESSMENT YEAR IMMEDIATELY SUCCEEDING THE INITIAL ASSESSMENT YEAR OR ANY SUBSE QUENT ASSESSMENT YEAR, BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS WERE THE ONLY SOURCE OF INCOME OF THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO THE I NITIAL ASSESSMENT YEAR AND TO EVERY SUBSEQUENT ASSESSMENT YEAR UP TO AND INCLUDIN G THE ASSESSMENT YEAR FOR WHICH THE DETERMINATION IS TO BE MADE.' AS PER THIS SECTION, THE PROFITS OF AN ELIGIBLE UND ERTAKING SHALL BE COMPUTED AS IF SUCH ELIGIBLE BUSINESS IS THE ONLY SOURCE OF INCOME OF THE ASSESSEE. IN THIS SECTION AGAIN, THE STATUTE HAS USED THREE TERMS, I.E. 'PROF IT', 'BUSINESS' AND 'INCOME'. AS NARRATED HEREINABOVE AN 'INCOME' HAS A WIDER EXPRES SION THAN THE 'PROFIT'. LIKEWISE, 'BUSINESS' HAS ALSO A WIDER MEANING THAN THE WORD 'INCOME'. IN THE PRESENT CASE, MANUFACTURING OF PHARMACEUTICAL PRODU CTS IS DECLARED AS 'ELIGIBLE BUSINESS'. THEN THE QUESTION IS THAT WHAT IS THE PR OFIT OF SUCH AN ELIGIBLE BUSINESS? ON CAREFUL READING OF THIS SUB-SECTION, I T TRANSPIRES THAT THE SAID ELIGIBLE PROFIT SHOULD BE THE ONLY SOURCE OF INCOME . IF WE EXAMINE THE SEPARATE PROFIT & LOSS ACCOUNT OF BADDI UNIT, THEN IT IS APP ARENT THAT THE ONLY SOURCE OF INCOME WAS THE SALES OF THE QUALIFIED PRODUCTS. IN THE SAID P&L A/C THERE WAS NO COMPONENT OF ANY OTHER SOURCES OF INCOME EXCEPT THE SALE PRICE AND OTHERWISE ALSO THE ASSESSEE HAS CONFINED THE CLAIM ONLY IN RE SPECT OF THE ELIGIBLE PROFIT WHICH WAS DERIVED FROM THE SALES OF THE PHARMACEUTI CAL PRODUCTS. THIS SECTION DO NOT SUGGEST THAT THE ELIGIBLE PROFIT SHOULD BE C OMPUTED FIRST BY TRANSFERRING THE PRODUCT AT AN IMAGINARY SALE PRICE TO THE HEAD OFFICE AND THEN THE HEAD OFFICE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 95 - SHOULD SALE THE PRODUCT IN THE OPEN MARKET. THERE I S NO SUCH CONCEPT OF SEGREGATION OF PROFIT. RATHER, WE HAVE SEEN THAT TH E PROFIT OF AN UNDERTAKING IS ALWAYS COMPUTED AS A WHOLE BY TAKING INTO ACCOUNT T HE SALE PRICE OF THE PRODUCT IN THE MARKET. 10.7 THE LD. AO HAS SUGGESTED THAT THE ASSESSEE SHO ULD HAVE PASSED ENTRIES IN ITS BOOKS OF ACCOUNT BY RECORDING INTERNAL TRANSFER OF THE PRODUCT FROM BADDHI UNIT TO THE HEAD OFFICE MARKETING UNIT AND THAT TOO AT ARM'S LENGTH PRICE. FROM THE SIDE OF THE APPELLANT AN ARGUMENT WAS RAISED TH AT WHAT SHOULD BE THE ARM'S LENGTH PRICE IN A SITUATION WHEN A PRODUCT IS ULTIM ATELY TO BE SOLD IN THE OPEN MARKET. WHETHER THE AO IS SUGGESTING THAT AN IMAGIN ARY LINE BE DRAWN TO DETERMINE THE PROFIT OF THE BADDI UNIT AT A PARTICU LAR STAGE OF TRANSFER OF PRODUCTS. DEFINITELY A DIFFICULTY WILL ARISE TO ARR IVE AT THE SALE PRICE AS SUGGESTED BY AO ON TRANSFER OF PRODUCT FROM BADDI TO HEAD OFF ICE. WHAT COULD BE THE REASONABLE PROFIT WHICH IS TO BE CHARGED BY THE BAD DI UNIT WILL THEN BE A SUBJECT OF DISPUTE AND SHALL BE AN ISSUE OF CONTROVERSY. ON THE CONTRARY, IF THE SALE PRICE IS RECORDED AT THE MARKET PRICE, WHICH IS EASILY AS CERTAINABLE, THAT WAS RECORDED IN THE BADDI UNIT ACCOUNT, THE SCOPE OF CONTROVERSY GETS MINIMAL. RATHER, THE INTENSE CONTENTION OF THE LD.AR IS THAT THE FACTS O F THE CASE HAVE EXPLICITLY DEMONSTRATED THAT THE GOODS MANUFACTURED AT BADDI U NIT WERE TRANSPORTED TO VARIOUS C&F AGENTS ACROSS THE COUNTRY FOR SALE PURP OSE. THEREFORE, THE ELIGIBLE BUSINESS IS THE MANUFACTURING OF PHARMACEUTICAL PRO DUCTS AND THE ONLY SOURCE OF INCOME WAS THE PROFIT EARNED ON SALE OF THE PRODUCT S. 10.8 AN INTERESTING ARGUMENT WAS RAISED BY LD. SPEC IAL COUNSEL THAT THE PROVISIONS OF SECTION 80IA(8) PRESCRIBES THE SEGREG ATION OF PROFIT IN CASE OF TRANSFER OF GOODS FROM ONE UNIT TO ANOTHER UNIT. BU T SECTION 80IA(8) READS AS FOLLOWS: 'SECTION 80IA(8) : WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSI NESS CARRIED ON BY THE ASSESSEE, OR WHERE ANY GOODS [OR SERVICES] HELD FOR THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE ARE TRANSFERRED TO THE ELIGIBLE BUSINESS AND, IN EITHER CASE, THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBLE BUSINESS DOES NOT CORRESPO ND TO THE MARKET VALUE OF SUCH GOODS [OR SERVICES] AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BEEN MADE AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THAT DATE: PROVIDED THAT WHERE, IN THE OPINION OF THE ASSESSIN G OFFICER, THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELIGIBLE BUSINESS IN T HE MANNER HEREINBEFORE SPECIFIED PRESENTS EXCEPTIONAL DIFFICULTIES, THE AS SESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 96 - EXPLANATION : FOR THE PURPOSES OF THIS SUB-SECTION, 'MARKET VALUE', IN RELATION TO ANY GOODS OR SERVICES, MEANS THE PRICE THAT SUCH GO ODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. WHERE ANY GOODS HELD FOR THE PURPOSE OF THE ELIGIBL E BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE, THEN IF THE CONSIDERATION FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBL E BUSINESS DO NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS, THEN FOR THE PURPOS ES OF THE DEDUCTION THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUT ED AS IF THE TRANSFER HAS BEEN MADE AT THE MARKET VALUE OF SUCH GOODS AS ON THAT D ATE. THOUGH THE SECTION HAS ITS OWN IMPORTANCE BUT THE AREA UNDER WHICH THIS SE CTION OPERATES IS THAT WHERE ONE ELIGIBLE BUSINESS IS TRANSFERRED TO ANY OTHER B USINESS. WE AGAIN WANT TO EMPHASIS THAT THE WORD USED IN THIS SECTION IS 'BUS INESS' AND NOT THE WORD 'PROFIT'. WE CAN HENCE DRAW AN INFERENCE BY DESCRIB ING THESE TWO WORDS AND THUS HAVE PRECISELY NOTED THAT 'ELIGIBLE BUSINESS' HAS A DIFFERENT CONNOTATION WHICH IS NOT AT PAR OR IDENTICAL WITH THE 'ELIGIBLE PROFIT'. THE MATTER WE ARE DEALING IS NOT THE CASE WHERE BUSINESS AS A WHOLE I S TRANSFERRED. THIS IS A CASE WHERE MANUFACTURING PRODUCTS WERE SOLD THROUGH C&F IN THE MARKET. EVEN THIS IS NOT THE CASE THAT FIRST SALES WERE MADE BY THE B ADDI UNIT IN FAVOUR OF THE HEAD OFFICE OR THE MARKETING UNIT AND THEREUPON THE SALE S WERE EXECUTED BY THE HEAD OFFICE TO THE OPEN MARKET. ONCE IT WAS NOT SO, THEN THE FIXATION OF MARKET VALUE OF SUCH GOOD IS OUT OF THE AMBITS OF THIS SECTION. IF THERE IS NO INTER-CORPORATE TRANSFER, THEN THE AO HAS NO RIGHT TO DETERMINE THE FAIR MARKET VALUE OF SUCH GOODS OR TO COMPUTE THE ARM'S LENGTH PRICE OF SUCH GOODS. THE AO HAS SUGGESTED TWO THINGS; FIRST THAT THERE MUST BE INTER-CORPORAT E TRANSFER, AND SECOND THAT THE TRANSFER SHOULD BE AS PER THE MARKET PRICE DETERMIN ED BY THE AO. BOTH THESE SUGGESTIONS ARE NOT PRACTICABLE. IF THESE TWO SUGGE STIONS ARE TO BE IMPLEMENTED, THEN A PANDORA BOX SHALL BE OPENED IN RESPECT OF TH E DETERMINATION OF ARM'S LENGTH PRICE VIS A VIS A FAIR MARKET AND THEN TO AR RIVE AT REASONABLE PROFIT. RATHER A VERY COMPLEX SITUATION SHALL EMERGE. SPECI ALLY WHEN THE STATUTE DO NOT SUBSCRIBE SUCH DEEMED INTERCORPORATE TRANSFER BUT S UBSCRIBE ACTUAL EARNING OF PROFIT, THEN THE IMPUGNED SUGGESTION OF THE AO DO N OT HAVE LEGAL SANCTITY IN THE EYES OF LAW. 10.9 A VERY PERTINENT QUESTION HAS BEEN RAISED BY L D.AR MR. PATEL THAT WHAT SHOULD BE THE LINE OF DEMARCATION TO DETERMINE THE SALE PRICE OF A PRODUCT IF NOT THE MARKET PRICE. AS FAR AS THE PRESENT SYSTEM OF F IXATION OF SALE PRICE OF THE PRODUCT IS CONCERNED, A CONSISTENT METHOD WAS ADOPT ED KEEPING IN MIND THE SEVERAL FACTORS, DEPENDING UPON THE MARKET SITUATIO N, WE HAVE BEEN INFORMED. BUT IF THE ASSESSEE IS COMPELLED TO DEVIATE FROM TH E CONSISTENT METHOD OF PRICING, THEN ANY OTHER SUGGESTION SHALL NOT BE WORKABLE BEC AUSE NO IMAGINARY LINE OF PROFIT CAN BE DRAWN, PRECISELY PLEADED BEFORE US. S O THE UNCERTAINTY IS THAT ON THE PRODUCTION COST WHAT SHOULD BE THE REASONABLE M ARK-UP WHICH SHALL COVER UP THE MARGIN OF PROFIT OF A MANUFACTURING UNIT. AND W HY AT ALL THIS COMPLEX WORKING OF COMPUTATION BE ADOPTED BY THIS ASSESSEE WHEN A VERY SIMPLE METHOD IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 97 - IS ADOPTED THAT ON ONE SIDE OF THE P&L A/C THE PROD UCTION COST PLUS OVERHEADS WERE DEBITED AND ON THE OTHER SIDE OF THE P&L A/C S ALE PRICE WAS CREDITED TO COMPUTED THE PROFIT. THERE ARE CERTAIN EXPENDITURE WHICH ARE NOTIONAL EXPENDITURE AND THERE ARE CERTAIN EXPENDITURE WHICH ARE SELF-GENERATED TO CREATE THE BRAND VALUE OF A PRODUCT. NATURALLY, THE ALLOCA TION OF NOTIONAL EXPENDITURE PARTICULARLY IN RESPECT OF SELF- GENERATED BRAND IS A MATTER OF HYPOTHESIS AND NOT A MATTER OF REALTY. LOGICALLY IT IS NOT REALISTIC T O SET APART A VALUE OF A SELF GENERATED BRAND WHICH HAD GROWN IN NUMBER OF YEARS. 10.10 THE SEGMENT REPORTING OF PROFIT IS ALTHOUGH I N PRACTICE BUT THE PURPOSE OF SUCH REPORTING IS ALTOGETHER DIFFERENT. SUCH SEGMEN T INFORMATION IS PARTICULARLY USEFUL FOR FINANCIAL ANALYSIS, SO THAT THE MANAGEME NT MAY KEEP A CLOSE WATCH ON THE PERFORMANCE OF THE DIVERSIFIED BUSINESS LINES. THE AREAS OF DEMARCATION ARE BUSINESS SEGMENT, GEOGRAPHICAL SEGMENT, ETC. BUT AS FAR AS THE REVENUE OF AN ENTERPRISE IS CONCERNED WHILE SEGMENTATION IS REQUI RED, THEN REVENUE FROM SALES TO EXTERNAL CUSTOMERS ARE REPORTED IN THE SEGMENTED STATEMENT OF PROFIT AND LOSS. IN AN ACCOUNTING SYSTEM, AN INTRA-COMPANY SALE BETW EEN DIVISIONS OR UNITS IS NOT REGARDED AS REVENUE FOR THE PURPOSE OF SUCH FINANCI AL REPORTING. AS PER THE ACCOUNTING STANDARDS AN ENTERPRISE REVENUE IGNORES IN HOUSE-SALES THAT REPRESENT REVENUE TO ONE SEGMENT AND EXPENSE TO ANO THER. IN THIS CONNECTION, THE AO HAS DISCUSSED THE HON'BLE SUPREME COURT DECI SION PRONOUNCED IN THE CASE OF LIBERTY INDIA (SUPRA). THE AO WANTED TO JUS TIFY HIS ATTEMPT OF SEGMENTATION ON THE BASIS OF THE THEORY THAT ONLY T HE PROFITS DERIVED DUE TO MANUFACTURING ACTIVITY CAN BE SAID TO BE DERIVED FR OM ELIGIBLE UNDERTAKING. IT WAS CONTESTED BY AR BEFORE US THAT THE 'SEGMENT REP ORTING' IS ABOUT THE SEGREGATION OF BUSINESS AND NOT ABOUT THE SEGREGATI ON OF ANY SPECIFIC ACTIVITY. IN THE CASE OF LIBERTY INDIA (SUPRA) IT WAS OBSERVED T HAT THE IT ACT BROADLY PROVIDES TWO TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT LIN KED INCENTIVES AND PROFIT LINKED INCENTIVES. THE COURT WAS DISCUSSING CHAPTER VIA WH ICH PROVIDES INCENTIVE IN THE FORM OF TAX DEDUCTIONS TO THE CATEGORY OF 'PROF IT LINKED INCENTIVES'. THE INCENTIVE IS LINKED WITH GENERATION OF 'OPERATIONAL PROFIT'. THEREFORE, THE RESPECTED PARLIAMENT HAS CONFINED THE GRANT OF DEDU CTIONS ONLY DERIVED FROM ELIGIBLE BUSINESS. EACH ELIGIBLE BUSINESS CONSTITUT ES A STAND ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFIT. THE COURT HAS SAID THAT BECAUSE OF THIS REASON THE CONCEPT OF 'SEGMENT REPORTING' WAS INTRODUCED I N INDIAN ACCOUNTING STANDARDS. LD. COUNSEL MR. SRIVASTAVA HAS ARGUED TH AT THE DEDUCTION U/S.80IC IS A PROFIT LINKED INCENTIVE. ONLY THE OPERATIONAL PRO FIT HAS TO BE CLAIMED FOR 80IC DEDUCTION. ACCORDING TO HIM, EACH OF THE ELIGIBLE B USINESS CONSTITUTES A STAND ALONE ITEM IN THE MATTER OF COMPUTATION OF PROFIT. FOR THE COMPUTATION OF PROFIT OF AN ELIGIBLE BUSINESS THE WORD USED IS 'DERIVED' IN SECTION 80IC WHICH IS A NARROWER CONNOTATION, AS COMPARED TO THE WORD 'ATTR IBUTABLE'. IN OTHER WORDS, BY USING THE EXPRESSION 'PROFITS DERIVED BY AN UNDE RTAKING', PARLIAMENT INTENDED TO COVER SUCH SOURCES NOT BEYOND THE FIRST DEGREE, I.E. THE FIRST DEGREE OF MANUFACTURING ACTIVITY. THE LAW PRONOUNCED BY THE H ON'BLE SUPREME COURT IS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 98 - FINAL AND SHOULD NOT BE DISPUTED. HOWEVER, A JUDGEM ENT IS TO BE CORRECTLY INTERPRETED. 10.11 FINALLY, ON THE QUESTION OF SEGMENTATION OF P ROFIT A VEHEMENT RELIANCE WAS PLACED ON AN OLD PRECEDENT NAMELY AHMEDBHAI UMARBHA I& CO. (SUPRA). FACTS OF THAT CASE WAS THAT THE ASSESSEE HAD OWNED THREE MILLS AT BOMBAY AND ONE AT RAICHUR (HYDERABAD). THE ASSESSEE WAS MANUFACTURING OIL FROM GROUNDNUTS. THE PRODUCED AT RAICHUR, HYDERABAD IS PARTLY SOLD AT RA ICHUR AND PARTLY IN BOMBAY. THE QUESTION WAS IN RESPECT OF THE LIABILITY UNDER EXCESS PROFIT TAX ACT (EPT ACT) FOR THE OIL MANUFACTURED AT RAICHUR BUT SOLD I N BOMBAY. THE CONTROVERSY WAS THAT THE ASSESSEE HAD CONTENDED THAT A PART OF THE PROFITS DERIVED FROM SALES IN BRITISH INDIA OF THE OIL MANUFACTURED AT RAICHUR WAS ATTRIBUTABLE TO THE MANUFACTURING OPERATIONS AT RAICHUR WHICH ARE AN ES SENTIAL PART OF THEIR BUSINESS AND THAT SUCH PROFIT MUST BE EXCLUDED FROM THE ASSESSMENT UNDER EPT ACT. IT WAS NARRATED THAT IN OTHER WORDS, THE ACT B RINGS WITHIN ITS AMBIT ALL INCOME IN THE CASE OF A PERSON RESIDENT IN BRITISH INDIA WHICH ACCRUES OR ARISES OR WHICH IS DEEMED TO ACCRUE OR ARISE TO HIM IN BRI TISH INDIA DURING THE ACCOUNTING YEAR. IF SEC. 5 OF THE ACT STOPPED SHORT AT THAT STAGE, IT WAS UNDOUBTED THAT IN THE CASE OF THE RESPONDENT WHO IS A RESIDEN T IN BRITISH INDIA ALL HIS INCOME, NO MATTER WHERE IT AROSE, WITHIN BRITISH IN DIA OR WITHOUT BRITISH INDIA, WOULD BE CHARGEABLE TO EXCESS PROFITS TAX JUST IN T HE SAME WAY AS IT CHARGEABLE TO INCOME-TAX UNDER THE INDIAN IT ACT. THE WHOLE OF HIS INCOME ARISING IN RAICHUR HAS LEGITIMATELY BEEN TAXED UNDER THAT ACT. IN THAT DECISION ALSO, THE WORD 'BUSINESS' WAS DEFINED, I.E. BUSINESS INCLUDES ANY TRADE, COMMERCE OR MANUFACTURE. IT HAS ALSO BEEN SAID THAT ALL BUSINES SES, TO WHICH THE SAID LAW APPLIED, CARRIED ON BY THE SAME PERSON SHALL BE TRE ATED AS ONE BUSINESS FOR THE PURPOSE OF THE SAID ACT. THE QUESTION WAS ABOUT THE MANUFACTURING ACTIVITY AND IT WAS CONTENDED THAT IF A MAN IS A MANUFACTURER AS WE LL AS A SELLER OF GOODS, THEN IN HIS CASE THE TERM 'PART OF A BUSINESS' MEANS CAR RYING ON ALL THE TWO ACTIVITIES TOGETHER AND THEREFORE CONSTITUTE THE PART OF THE B USINESS. ONE OF THE HON'BLE JUDGES HAS SAID THAT THE ACTIVITIES WHICH THE ASSES SEE CARRIED ON AT RAICHUR WAS CERTAINLY A BUSINESS OF THE ASSESSEE. ON ONE HAND, IT WAS ARGUED THAT THE ACCRUAL OF PROFIT MUST NECESSARILY BE AT THE PLACE WHERE TH E SALE PROCEEDS ARE RECEIVED OR REALIZED. BUT ON THE OTHER HAND, IT WAS ARGUED THAT THE PROFITS RECEIVED RELATE (I) FIRSTLY TO HIS BUSINESS AS A MANUFACTURE, (II) SECO NDLY TO HIS TRADING OPERATIONS AND (III) THIRDLY TO HIS BUSINESS OF EXPORT. ON THA T BASIS, IT WAS OPINED THAT THE PROFIT OR LOSS HAS TO BE APPORTIONED BETWEEN THESE BUSINESSES IN A BUSINESS LIKE MANNER AND ALSO ACCORDING TO WELL ESTABLISHED PRINC IPLE OF ACCOUNTANCY. THIS APPORTIONMENT OF PROFITS BETWEEN A NUMBER OF BUSINE SSES WHICH ARE CARRIED ON BY THE SAME PERSON AT DIFFERENT PLACES DETERMINES A LSO THE PLACE OF ACCRUAL OF PROFIT. THE ACT OF SALE IS THE MODE OF REALIZING TH E PROFITS. IF THE GOODS ARE SOLD TO A THIRD PERSON AT MILL PREMISES, ONE COULD HAVE SAI D THAT THE PROFITS AROSE BY REASON OF SALE. THE PROFIT WOULD ONLY BE ASCRIBED T O THE BUSINESS OF MANUFACTURE AND WOULD ARISE AT THE MILL PREMISES. MERELY BECAUS E A MILL OWNER HAS STARTED ANOTHER BUSINESS ORGANIZATION IN THE NATURE OF SALE DEPOT, THAT CANNOT WHOLLY IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 99 - DEPRIVE THE BUSINESS OF MANUFACTURE OF ITS PROFITS, THOUGH THERE MAY HAVE TO BE APPORTIONMENT IN SUCH A CASE BETWEEN THE BUSINESS O F MANUFACTURE AND BUSINESS OF SHOP KEEPING. THE QUESTION WHICH WAS ANSWERED WA S THAT WHETHER IN RESPECT OF THE MANUFACTURING BUSINESS OF THE ASSESSEE IN RA ICHUR, PROFITS ACCRUE OR ARISE AND IF SO, AT WHAT PLACE. ONE OF THE HON'BLE JUDGES HAS OPINED THAT THE MANUFACTURING PROFIT ARISE AT THE PLACE OF MANUFACT URE AND THAT THE SALE PROFITS ARISE AT THE PLACE OF SALE AND THAT THE APPORTIONME NT HAS TO BE MADE BETWEEN THE TWO, THOUGH THE PLACE OF RECEIPTS AND REALIZATION O F THE PROFITS IS THE PLACE WHERE THE SALES ARE MADE. SIMULTANEOUSLY IT WAS ALSO OPIN ED THAT THE MANUFACTURING PROFIT COULD NOT BE SAID TO HAVE ACCRUED AT THAT PL ACE BECAUSE THERE WAS NOTHING DONE FROM WHICH THE PROFITS COULD ACCRUE. THERE WAS AN INTERESTING CONTRADICTION BECAUSE OF THE DIVERGENT VIEWS AND IT WAS ALSO EXPR ESSED THAT IT WAS A FALLACY TO REGARD THE PROFITS AS ARISING SOLELY AT THE PLACE O F SALE. IT WAS SAID THAT THE REVENUE OF THE COMPANY ARE DERIVED FROM A SERIES OF OPERATION, INCLUDING THE PURCHASE OF RAW-MATERIALS OR PARTLY MANUFACTURED AR TICLES, COMPLETELY MANUFACTURING ITS PRODUCTS AND TRANSPORTING AND SEL LING THEM, AND RECEIVING THE PROCEEDS OF SUCH SALES. THE ESSENCE OF ITS PROFIT-M AKING BUSINESS IS A SERIES OF OPERATIONS AS A WHOLE. 10.12 WE HAVE CAREFULLY PERUSED THIS DECISION OF TH E HON'BLE SUPREME COURT AS CITED BY THE SPECIAL COUNSEL MR. SRIVASTAVA. AT THE OUTSET, WE WANT TO PLACE ON RECORD THAT THE ENTIRE ISSUE BEFORE THE HON'BLE SUP REME COURT WAS IN RESPECT OF THIRD PROVISO TO SECTION 5 OF EPT ACT. THE SAID PRO VISO WAS DULY A REPRODUCED IN PARA-40 OF THE ORDER AND FOR READY REFERENCE TYPED BELOW: 'PROVIDED FURTHER THAT THIS ACT SHALL NOT APPLY TO ANY BUSINESS THE WHOLE OF THE PROFITS OF WHICH ACCRUE OR ARISE IN AN INDIAN STATE , AND WHERE THE PROFITS OF A PART OF A BUSINESS ACCRUE OR ARISE IN AN INDIAN STA TE, SUCH PART SHALL, FOR THE PURPOSES OF THIS PROVISION, BE DEEMED TO BE A SEPAR ATE BUSINESS THE WHOLE OF THE PROFITS OF WHICH ACCRUE OR ARISE IN AN INDIAN STATE , AND THE OTHER PART OF THE BUSINESS SHALL, FOR ALL THE PURPOSES OF THIS ACT, B E DEEMED TO BE A SEPARATE BUSINESS.' THE POINT FOR CONSIDERATION WAS THAT WHETHER ON THO SE FACTS THE THIRD PROVISO TO SECTION 5 COULD BE INVOKED. THE MANUFACTURING ACTIV ITY OF MAKING GROUND-NUT OIL WAS CARRIED OUT AT RAICHUR (HYDERABAD) WHICH WAS TR EATED AS A SEPARATE BUSINESS WITHIN THE MEANING OF THE SAID PROVISO AND THEREUPON IT WAS CLAIMED AS EXEMPT BEING CARRIED OUT WITHIN THE TERRITORIAL JUR ISDICTION OF INDIAN STATE. SO THE COURT HAS OBSERVED THAT TO SUCCEED IN THEIR CLAIM, IT IS INCUMBENT UPON THE ASSESSEE TO SHOW THAT THERE WAS IN FACT A PART OF A BUSINESS AND THAT THE PROFIT HAD ACTUALLY ACCRUED OR AROSE IN THAT PART OF AN IN DIAN STATE. THE COURT HAS CLEARLY STATED IN PARA-41 THAT BOTH THE ELEMENTS SH OULD FOUND EXIST AND THEN ONLY THE BUSINESS COULD BE TREATED AS A SEPARATE BUSINES S. HOWEVER, THE SAID PROVISO HAS PROPOUNDED ONLY DEEMING PROVISIONS, AS IS APPAR ENT FROM THE LANGUAGE OF THE SECTION ITSELF. FOR THE PURPOSE OF THE SAID SEC TION, IT WAS DEEMED TO BE A SEPARATE BUSINESS. THE WHOLE OF THE PROFITS OF WHIC H ACCRUE IN AN INDIAN STATE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 100 - AND THE OTHER PART OF THE BUSINESS BE DEEMED TO BE A SEPARATE BUSINESS. IN PARA- 44, THE HON'BLE COURT HAS DISCUSSED THE PROBLEM WIT H REFERENCE TO CERTAIN DECISIONS OF ENGLISH COURTS AND THEN MADE AN OBSERV ATION THAT IT HAD BEEN HELD THAT IF SEPARATION IS POSSIBLE IN SUCH CASES, THE P ROPER COURSE IS TO FOLLOW THAT SEVER THE PROFITS OF THE TWO BUSINESSES AND ASSESS ACCORDINGLY. THE RESULT OF THE DISCUSSION WAS THAT THE PROFITS OF THE TWO BUSINESS ES WERE DIRECTED TO BE APPORTIONED. SIMULTANEOUSLY, THE HON'BLE COURT HAS ALSO MADE AN OBSERVATION, QUOTE 'IT IS TRUE THAT THESE ARE CASES WHERE SEVERA L BUSINESSES WERE AMALGAMATED AND CARRIED ON TOGETHER, OR MORE OF WHI CH WERE NOT LIABLE TO TAX OR EXCESS PROFITS DUTY; BUT THE PRINCIPLE OF APPORTION MENT UPON WHICH THESE CASES WERE DECIDED COULD, IN MY OPINION, BE APPLIED WITH EQUAL PROPRIETY TO CASES WHERE ONE PART OF THE BUSINESS IS DISTINCT AND SEPA RATE FROM THE OTHER PARTS AND IS CAPABLE OF EARNING PROFITS SEPARATELY.' UNQUOTE. THE HON'BLE JUDGE WAS THEREFORE VERY MUCH CONCERN ABOUT THE FACT THAT THE BUSINESS SHOULD BE CAPABLE OF EARNING PROFITS SEPARATELY. RATHER, IN THE SUBSE QUENT PARAS IT WAS FURTHER MADE CLEAR THAT THE MANUFACTURING PROFIT COULD BE S UB-DIVIDED ONLY IF THERE WAS NO INSUPERABLE/CHALLENGING DIFFICULTY IN MAKING SUC H APPORTIONMENT. A POSSIBILITY WAS THEREFORE DISCUSSED THAT THERE COUL D BE APPORTIONMENT OF THE NET PROFIT THAT ACCRUE TO THE BUSINESS OF THE ASSESSEE AND ONE PORTION OF IT COULD BE ALLOTTED TO THAT PART OF THE BUSINESS WHICH RELATES TO THE MANUFACTURE OF THE SAID COMMODITY WHICH WAS ULTIMATELY SOLD IN THE MARKET. THE RAICHUR FACTORY CERTAINLY HAS BUSINESS CONNECTI ON IN BRITISH INDIA FOR A PART OF THE OIL MANUFACTURED BY IT IS SOLD THROUGH THE B OMBAY ESTABLISHMENT OF THE ASSESSEE. THAT ALL THE OPERATIONS OF THE RAICHUR BU SINESS ARE NOT CARRIED ON IN BOMBAY. THEREFORE, THE PROFITS THAT WOULD BE DEEMED UNDER THIS SECTION TO ACCRUE OR ARISE IN BOMBAY WILL ONLY BE THE PROFITS WHICH MAY REASONABLY BE ATTRIBUTED TO THAT PART OF THE OPERATIONS CARRIED O N IN BOMBAY, THAT IS TO SAY, TO SALE OF PART OF ITS OIL IN BOMBAY. IN THIS CONTEXT, AN OBSERVATION WAS MADE THAT A TRADE IS COMPLETED AT A PLACE WHERE A BUSINESS TRAN SACTION IS CLOSED. PROFITS OF A BUSINESS ARE UNDOUBTEDLY NOT 'RECEIVED' TILL THE CO MMODITY ARE SOLD AND THEY ARE ASCERTAINED ONLY WHEN THE SALE TAKE PLACE. THIS ASP ECT HAS NOT BEEN DOUBTED OR CHALLENGED EVEN IN THE SAID ORDER. BUT IN THE SAID ORDER THE QUESTION WAS THAT IF A PART OF A BUSINESS CONSISTED OF MANUFACTURING ACTIV ITY AND THAT ACTIVITY CAN BE SEGREGATED SO AS TO COMPUTE THE YIELD PROFIT, THEN WHETHER SUCH PROFIT ACCRUE ONLY AT THE PLACE WHERE THE MANUFACTURE ARE SOLD. T O ANSWER THIS QUESTION, THE HON'BLE COURT HAS COMMENTED IN PARA-49 THAT THERE W AS NO EXPRESS DIRECTION AS TO APPORTIONMENT IN THE THIRD PROVISO TO SECTION-5 OF EPT ACT. THE OPINION EXPRESSED WAS VERY SPECIFIC THAT A PROFIT CAN ACCRU E IN RESPECT TO THAT PART OF A BUSINESS ONLY WHEN APPORTIONMENT IS POSSIBLE. THE H ON'BLE COURT HAS SAID THAT ONLY ON THE SAID ASSUMPTION THAT APPORTIONMENT WAS POSSIBLE THE SAID PROVISO WAS BASED UPON THAT PRESUMPTION ONLY. IF NO APPORTI ONMENT CAN BE MADE IN RESPECT OF THE PROCESS OF A PARTICULAR BUSINESS, TH EN THAT WILL NOT BE CONSIDERED TO BE A PART OF THE BUSINESS AT ALL AND HELD THAT T HE PROVISO WILL NOT APPLY. IT WAS CONCLUDED THAT THE PRINCIPLE OF APPORTIONMENT WAS I MPLIED THEREIN. AFTER THIS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 101 - DETAILED DISCUSSION, WE THUS ARRIVE AT THE CONCLUSI ON THAT THE PRINCIPLE OF APPORTIONMENT WAS THE CRITERIA FOR SEGREGATING THE MANUFACTURING PROFIT IF IT WAS FEASIBLE TO DO SO. AS AGAINST THAT IN THE PRESENT C ASE THE ASSESSEE HAS COMPUTED THE PROFIT OF THE BADDI UNIT ON THE BASIS OF THE WE LL ACCEPTED PRINCIPLE OF ACCOUNTANCY THAT A PROFIT IS ACCRUED WHERE A TRANSA CTION IS CLOSED, MEANING THEREBY THE PROFIT ARISES SOLELY AT THE TIME OF SAL E. 10.13 AFTER THE DETAILED DISCUSSION, BEFORE WE CLOS E THE CONTROVERSY WE WOULD LIKE TO EXPRESS THAT THE AO'S PROPOSITION OF SEGMEN TATION OF ELIGIBLE PROFIT OF THE MANUFACTURING UNIT WAS NOT ALTOGETHER MEANINGLESS. THIS APPROACH OF THE AO CANNOT BE BRUSHED ASIDE ON THE FACT OF IT. BUT AT P RESENT, WHEN THE METHOD OF ACCOUNTING AS APPLICABLE UNDER THE STATUTE, DO NOT SUGGEST SUCH SEGREGATION OR BIFURCATION, THEN IT IS NOT FAIR TO DRAW AN IMAGINA RY LINE TO COMPUTE A SEPARATE PROFIT OF THE BADDI UNIT. THE BADDI UNIT HAS IN FAC T COMPUTED ITS PROFIT AS PER A SEPARATELY MAINTAINED BOOKS OF ACCOUNT OF THE ELIGI BLE MANUFACTURING ACTIVITY. TO IMPLEMENT THE METHOD OF THE COMPUTATION AT STAND ALONE BASIS, AS CONVEYED BY THE AO, THE MANUFACTURING UNIT HAS PREPARED A PR OFIT & LOSS ACCOUNT OF ITS MANUFACTURING-CUM-SALE BUSINESS ACTIVITY. IF THE ST ATUTE WANTED TO DRAW SUCH LINE OF SEGREGATION BETWEEN THE MANUFACTURING ACTIV ITY AND THE SALE ACTIVITY, THEN THE STATUTE SHOULD HAVE MADE A SPECIFIC PROVISION O F SUCH DEMARCATION. BUT AT PRESENT THE LEGAL STATUS IS THAT THE STATUTE HAS ON LY CHOSEN TO GIVE THE BENEFIT TO 'ANY BUSINESS OF DRUG MANUFACTURING ACTIVITY' WHICH IS INCURRING EXPENDITURE ON RESEARCH ACTIVITY IS ELIGIBLE FOR THIS PRESCRIBED W EIGHTED DEDUCTION. THE SEGREGATION AS SUGGESTED BY THE AO HAS FIRST TO BE BROUGHT INTO THE STATUTE AND THEN TO BE IMPLEMENTED. WITHOUT SUCH LAW, IN OUR CO NSIDERED OPINION, IT WAS NOT FAIR AS ALSO NOT JUSTIFIABLE ON THE PART OF THE AO TO DISTURB THE METHOD OF ACCOUNTING OF THE ASSESSEE REGULARLY FOLLOWED IN TH E NORMAL COURSE OF BUSINESS. IT IS TRUE THAT OTHERWISE NO FALLACY OR MISTAKE WAS DETECTED IN THE BOOKS OF ACCOUNTS OF BADDI UNIT PREPARED ON STAND ALONE BASI S THROUGH WHICH THE ONLY SOURCE OF INCOME/PROFIT WAS THE MANUFACTURING OF TH E SPECIFIED PRODUCTS. WE THEREFORE HOLD THAT THE AO'S ACTION OF SEGREGATION WAS MERELY BASED UPON A HYPOTHESIS, HENCE HEREBY REJECTED. THESE TWO GROUND S NOS.6 & 7 ARE ALLOWED.' WE HAVE CAREFULLY PERUSED THIS DECISION AND NOTE TH AT THE CONTROVERSY IN THIS GROUND OF APPEAL WITH RESPECT TO APPLICABILITY OF S ECTION 80 IA (8) OF THE ACT, ON MARKETING AND OTHER SELLING DISTRIBUTION AS WELL AS RESEARCH AND DEVELOPMENT SERVICES PROVIDED BY THE UNDERTAKING AS A WHOLE TO THE ELIGIBLE INDUSTRIAL UNDERTAKING AT THE COST OR MARKET RATE FOR WORKING OUT THE ELIGIBLE PROFIT FOR DEDUCTION, HAS BEEN DECIDED. LD. DR COULD NOT POINT OUT ANY OTHER CONTRARY JUDGMENT TO THE DECISION CITED BY THE LD. AR. THERE FORE, WE RESPECTFULLY FOLLOWING THE ABOVE DECISION OF COORDINATE BENCH HO LD THAT PROVISIONS OF SECTION 80IA(8) OF THE ACT DOES NOT APPLY TO THE ASSESSEE O N TRANSFER OF SERVICES OF MARKETING DIVISION OF THE COMPANY TO THE ELIGIBLE I NDUSTRIAL UNDERTAKING WHOSE PROFITS ARE CLAIMED AS DEDUCTIBLE. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 102 - 88. FURTHER LD. AO HAS ALSO GIVEN ONE OF REASON THAT T HE CLAIM OF THE ASSESSEE IS NOT ADMISSIBLE BECAUSE OF THE REASON THAT ALONG WIT H FORM NO.10CCB ASSESSEE WAS REQUIRED TO FILE THE BALANCE SHEET AND PROFIT A ND LOSS ACCOUNT OF THE ELIGIBLE UNDERTAKING. IT IS ADMITTED FACT THAT ASSESSEE DID NOT FILE BALANCE SHEET ALONG WITH FORM NO.10CCB BUT HAS FILED PROFIT AND LOSS AC COMPANIED WITH THAT AUDIT REPORT. SUBSEQUENTLY, BEFORE LD. DRP, THOSE WERE FI LED AND WERE AVAILABLE WITH LD. DRP AS WELL AS WITH AO AT THE TIME OF FRAMING F INAL ASSESSMENT ORDER. HENCE IT IS CONTENDED BY THE LD. AR THAT SUBSTANTIAL COMP LIANCES HAS BEEN MADE BY THE ASSESSEE BY FILING THE PROFIT AND LOSS ACCOUNT AND COMPLETE COMPLIANCE BEFORE PASSING OF THE FINAL ASSESSMENT ORDER BY FILING THE BALANCE SHEET. HENCE, LD. AR CONTENDED THAT IF THE FULL DETAILS ARE AVAILABLE WI TH THE AO BEFORE PASSING OF ASSESSMENT ORDER MERELY BECAUSE THERE IS SOME TECHN ICAL DEFAULT DEDUCTION CANNOT BE DENIED. THIS ARGUMENT WAS EXAMINED AND IT IS FOUND THAT ASSESSEE HAS SUBMITTED THE PROFIT AND LOSS ACCOUNT ALONG WITH FO RM NO.10CCB AND LATER ON ALSO THE BALANCE SHEET BEFORE FINALIZATION OF FINAL ASSESSMENT ORDER I.E. THOSE WERE FILED BEFORE THE DRP, WE ARE OF THE VIEW THAT ASSESSEE CANNOT BE DENIED THE DEDUCTION MERELY FOR THIS REASONS. FURTHER, THE BAL ANCE SHEET FILED LATER ON BY THE ASSESSEE ALSO DID NOT CONTAIN ANY ERROR OR ANY FACT , WHICH COULD HAVE SHOWN THAT DEDUCTION CLAIMED BY THE ASSESSEE, IS ERRONEOUS. IT IS ALSO IMPORTANT TO NOTE THAT NO ADVERSE REMARK IS MADE EITHER BY THE LD. AO OR B Y LD. DRP ON THE BALANCE SHEET OF THE ELIGIBLE UNDERTAKINGS THOUGH IT WERE A VAILABLE BEFORE THEM FOR PROPER VERIFICATION AND EXAMINATION. LD. AR OF THE APPELLANT HAS SUBMITTED A PLETHORA OF JUDICIAL PRECEDENTS COVERING THIS ISSUE ON THIS ISSUE WE REFER TO THE DECISION OF HONOURABLE DELHI HIGH COURT ON THIS ISS UE RENDERED IN CASE OF AXIS COMPUTER INDIA (P.) LTD. (SUPRA) WHERE IN IT IS HEL D THAT '2. THIS COURT HAS ALREADY INTERPRETED THE LATTER P ROVISIONS AND HAS HELD THE SAME TO BE DIRECTORY AND NOT MANDATORY. THE CONTENT ION OF THE REVENUE WAS THAT UNLESS AND UNTIL THE AUDIT REPORT IS FILED ALONG WI TH THE RETURN, THE BENEFIT OF SECTION 10A COULD NOT BE AVAILABLE TO THE ASSESSEE. RECENTLY, WE HAVE CONSIDERED THE IDENTICAL PROVISIONS OF SECTION 80-IA(7) IN THE CASE OF CIT V. CONTIMETERS ELECTRICALS (P.) LTD. [IT APPEAL NO. 1366 OF 2008, DECIDED ON 2-12-2008] AND HELD THAT AS LONG AS THE AUDIT REPORT IS FILED BEFO RE THE FRAMING OF THE ASSESSMENT, THE PROVISIONS OF SECTION 80-IA(7) WOULD BE COMPLIE D WITH INASMUCH AS THE SAME ARE DIRECTORY AND NOT MANDATORY. A SIMILAR VIEW WOU LD HAVE TO BE TAKEN IN THE PRESENT CASE ALSO INASMUCH AS THE PROVISIONS ARE TH E SAME. CONSEQUENTLY, WE DO NOT FIND ANY FAULT WITH THE CONCLUSIONS ARRIVED AT BY THE TRIBUNAL. NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDERATION. THE A PPEAL IS DISMISSED.' [UNDERLINE SUPPLIED BY US] IN THIS CASE, APPELLANT HAS ALREADY FILED THE AUDIT REPORT AND THE PROFIT AND LOSS ACCOUNT OF THE UNITS HOWEVER; THE PROFIT AND LOSS A CCOUNT WAS FILED BEFORE LD. DRP BUT IN ANY WAY AVAILABLE WITH LD. DRP AND LD. A O AT THE TIME OF FINALIZATION OF THE ASSESSMENT ORDER. IN THE DECISI ON CITED BEFORE US HONOURABLEDELHI HIGH COURT HAS HELD THAT EVEN IF TH E AUDIT REPORT IS NOT FILED IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 103 - THEN ALSO THE DEDUCTION CANNOT BE DENIED IF SAME IS FILED BEFORE FINALIZATION OF ASSESSMENT. THEREFORE CASE OF THE ASSESSEE STANDS O N THE BETTER FOOTING. NO OTHER CONTRARY DECISION WAS PUT BEFORE US BY REVENUE. HEN CE, WE DO NOT WISH TO AGREE TO THE CONTENTION OF THE REVENUE THAT AS THE BALANC E SHEETS WERE NOT FILED BY THE ASSESSEE OF THOSE ELIGIBLE INDUSTRIAL UNDERTAKING W HOLE OF THE DEDUCTION IS NOT ALLOWABLE TO THE ASSESSEE. 89. COMING TO THE COMPUTATION OF THE ELIGIBLE INCOME O F THE ASSESSEE FOR ALL THE ELIGIBLE UNITS, LD. AO COULD NOT POINT OUT ANY ERRO R EXCEPT DEALT WITH BY US WHICH ARE NOT ON THE ISSUE OF FACTS OF THE CASE BUT ALL O F THEM ARE ON LEGAL GROUNDS, WHICH WE HAVE ANSWERED IN PRECEDING PARAGRAPHS OF T HIS ORDER. IN VIEW OF CLAIM OF THE ASSESSEE SUPPORTED BY THE AUDITED CERTIFICAT E AS PROVIDE U/S 80IA(7) OF THE ACT READ WITH RULE 18BBB AND SUPPORTED BY THE PROFI T AND LOSS ACCOUNT AND BALANCE SHEETS OF THE ASSESSEE, ALLOCATION OF ALL T HE EXPENSES BASED ON THE ACCEPTED FORMULA WHICH THE ASSESSEE IS APPLYING FOR LAST SEVERAL YEARS AND WHICH HAS ALSO NOT BEEN DISPUTED BY THE LD. AO IN PAST YE ARS AND ALLOCATION KEY OF 'SALES' OF THE UNITS IS ALSO NOT DISPUTED, IT DESER VES TO BE ACCEPTED. WE ARE ALSO OF THE VIEW THAT ALLOCATION OF THE EXPENSES ARE ON RAT IONAL BASIS AND ACCEPTED BY REVENUE IN EARLIER YEARS WITH RESPECT TO ELIGIBLE U NITS CLAIMING DEDUCTION FOR THOSE YEARS. THEREFORE, ALONG WITH THE OLD UNITS I. E. GOA PLANT AND NEW TABLET PLANT -I OF THE ASSESSEE ALONG WITH THE NEW TABLET PLANT NO -II AND III AND NEW SCG PLANT DEDUCTION U/S 80IB AND 80IC IS ALLOWABLE AS COMPUTED BY THE ASSESSEE. 90. NOW WE COME TO THE LAST GROUND OF OBJECTION RAISED BY THE REVENUE THAT THIS MATTER OF EXAMINATION OF CLAIM OF THE ASSESSEE SHOU LD BE SET ASIDE BACK TO THE FILE OF LD. AO FOR FRESH VERIFICATION AND FOR THIS LD. D R. RELIED ON THE DECISION OF COORDINATE BENCH AMARNATH REDDY (SUPRA). AGAINST TH IS LD. AR RAISED THE OBJECTION THAT THIS ISSUE SHOULD NOT BE SET ASIDE A S ONLY LAW POINTS ARE INVOLVED IN THIS ISSUE AND NO FURTHER FACTS ARE REQUIRED TO BE EXAMINED. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS ON THIS ISSUE. WE HAVE NOTED THE ABOVE CITED DECISION IN ASSTT. CIT V. AMARNATH REDDY WHERE IN I T IS HELD AS UNDER : '6. NOW, LET US EXAMINE WHETHER THE PLEA SOUGHT TO BE RAISED BY THE LD. D.R. CAN BE ADMITTED BY THE TRIBUNAL OR NOT. THOUGH SEVERAL AUTHORITIES HAVE BEEN CITED IN THE COURSE OF HEARING, THE BASIC JUDGMENT IS THAT I N THE CASE OF HUKUMCHAND MILLS LTD. (SUPRA). IN THAT CASE, IN ORDER TO ARRIV E AT THE CORRECT WRITTEN DOWN VALUE OF THE ASSETS, THE TRIBUNAL PERMITTED THE DEP ARTMENT TO RAISE A PLEA TO FIND OUT WHETHER THE ASSESSEE WAS ALLOWED ANY DEPRECIATI ON UNDER AN ENACTMENT WHICH WAS IN FORCE EARLIER, I.E., BEFORE THE INDIAN INCOME-TAX ACT WAS MADE APPLICABLE TO THE ASSESSEE. THE COURT HELD THAT THE SUBJECT-MATTER OF THE APPEAL BEFORE THE TRIBUNAL WAS THE QUESTION AS TO WHAT SHO ULD BE THE PROPER WRITTEN DOWN VALUE OF THE ASSETS FOR CALCULATING THE DEPREC IATION ALLOWANCE UNDER THE INDIAN INCOME-TAX ACT. IT WAS CERTAINLY OPEN TO THE DEPARTMENT, IN THE APPEAL FILED BY THE ASSESSEE BEFORE THE TRIBUNAL, TO SUPPO RT THE FINDING OF THE AAC WITH REGARD TO THE WRITTEN DOWN VALUE ON ANY OF THE GROU NDS DECIDED AGAINST IT. IN THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 104 - CASE BEFORE THE SUPREME COURT, EARLIER ENACTMENT WA S TO BE REFERRED TO, WHEREAS IN THE PRESENT CASE ONLY A DIFFERENT PROVISION OF T HE SAME ENACTMENT HAS TO BE CONSIDERED. THEREFORE, I SEE NO REASON AS TO WHY TH E PLEA OF THE LD. D.R. CANNOT BE ACCEPTED. IN THE PRESENT CASE, OF COURSE, THE DE PARTMENT IS THE APPELLANT UNLIKE IN THE CASE OF HUKUMCHAND MILLS LTD. (SUPRA) . BUT, IN MY VIEW, IT MAKES NO DIFFERENCE. THE DEPARTMENT IS AGGRIEVED BY THE D ELETION OF DISALLOWANCE OF EXPENDITURE WHICH DISALLOWANCE WAS MADE UNDER ONE P ARTICULAR PROVISION. THE SUBJECT-MATTER OF THE APPEAL WAS WHETHER THE EXPEND ITURE CLAIMED BY THE ASSESSEE WAS ALLOWABLE OR NOT. IF IT WAS NOT DISALL OWABLE UNDER ONE PARTICULAR PROVISION BUT IS DISALLOWABLE UNDER ANY OTHER PROVI SION, THE SUBJECT-MATTER, VIZ., THE ALLOWABILITY OF EXPENDITURE REMAINS THE SAME. T HERE ARE A NUMBER OF DECISIONS IN WHICH IT HAS BEEN HELD THAT THE TRIBUN AL CAN BASE ITS DECISION ON A GROUND NOT RAISED BEFORE THE APPELLATE AUTHORITY OR IN THE GROUNDS OF APPEAL BEFORE IT BUT IS NOT BOUND TO DO SO. IT IS NOT PREC LUDED FROM CONSIDERING A POINT WHICH ARISES OUT OF THE APPEAL MERELY BECAUSE SUCH POINT HAD NOT BEEN RAISED OR URGED BY EITHER PARTY AT THE EARLIER STAGE OF THE P ROCEEDINGS. SOME OF THESE DECISIONS, ONLY TO NAME A FEW, ARE CIT V. INDIAN EX PRESS (MADURAI) (P.) LTD. [1983] 140 ITR 705 (MAD.) , CIT V. AC PAUL [1983] 142 ITR 811 (MAD.) AND CIT V. ICE SUPPLIERS CORPN. [1967] 64 ITR 195 (PUNJ.) . IN FACT, THE JURISDICTIONAL HIGH COURT HAS EXPLAINED THE RATIO I N THE CASE OF HUKUMCHAND MILLS LTD. (SUPRA) VERY ELABORATELY. IT HAS PARTICU LARLY EXPLAINED THE FOLLOWING OBSERVATION OF THE SUPREME COURT IN THE CASE OF HUK UMCHAND MILLS LTD. (SUPRA) : 'THE TRIBUNAL HAS, HOWEVER, DISCRETION NOT TO ADMIT ANY FRESH PLEA BEING PUT FORWARD WHEN IT WOULD INVOLVE INVESTIGATION OF FACT S.' EXPLAINING THE ABOVE OBSERVATION, THE MADRAS HIGH C OURT IN THE CASE OF N.P. SARASWATHIAMMAL (SUPRA) OBSERVED AS FOLLOWS AT PAGE 23 OF THE REPORT : 'WE DO NOT REGARD THE LAST OBSERVATION AS A FETTER ON THE TRIBUNAL'S JURISDICTION TO ADMIT A NEW PLEA. FOR, THE POWER TO LISTEN TO A NEW CONTENTION AND DECIDE THE APPEAL ON THAT BASIS HAS BEEN SPELLED OUT BY THE SU PREME COURT FROM THE TERMS OF THE STATUTE. THE EXERCISE OF THAT POWER DOES NOT DEPEND ON THE PRESENCE OF ANY OTHER FACTOR, EXCEPTING THAT THE NEW PLEA COMES FRO M A PARTY TO THE APPEAL. EVEN IN A CASE WHERE FRESH FACTS ARE CALLED FOR TO DECID E THE NEW PLEA, THE TRIBUNAL WOULD HAVE JURISDICTION TO ENTERTAIN THAT PLEA. HOW THE TRIBUNAL WISHES TO GET AT THE RELEVANT FACTS IN ORDER TO DECIDE THE NEW POINT MAY BE QUITE A DIFFERENT THING. THE TRIBUNAL MAY EITHER REMAND THE MATTER FOR THE P URPOSE, OR PROCEED TO INVESTIGATE THE FACTS THEMSELVES. IN THIS PART OF T HE DECISION-MAKING ALONE, THERE IS SCOPE FOR THE PLAY OF THE TRIBUNAL'S DISCRETION. AS TO THE VERY POWER TO ENTERTAIN A NEW PLEA, THAT IS NOT TO BE RULED OUT, MERELY BECAUSE A CONSIDERATION THEREOF WOULD CALL FOR FURTHER FACTS TO BE GONE INT O. IN HUKUMCHAND MILLS' DECISION [1967] 63 ITR 232, THE SUPREME COUR T LAID DOWN NO FETTER ON THE TRIBUNAL'S POWERS. THAT CASE, INDEED, WAS A CASE WH ERE THE NEW PLEA RAISED BY THE DEPARTMENT BEFORE THE TRIBUNAL COULD NOT BE CON SIDERED WITHOUT A FURTHER IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 105 - INVESTIGATION INTO FACTS. NEVERTHELESS, THE TRIBUNA L ENTERTAINED THE PLEA, AND REMITTED THE CASE TO THE ITO FOR THE ASCERTAINMENT OF THE RELEVANT FACTS. THE SUPREME COURT, IN THEIR DECISION UPHELD NOT ONLY TH E DEPARTMENT'S NEW PLEA, BUT ALSO THE TRIBUNAL'S ORDER OF REMAND BASED ON THE NE W PLEA.' IN THE LIGHT OF THE ABOVE DISCUSSION, I AGREE WITH THE VIEW TAKEN BY THE LD. J.M. TO HOLD THAT THE PLEA RAISED BY THE LD. D.R. IS TO BE ACCEPTED AND THE MATTER IS TO BE REMANDED TO THE ASSESSING OFFICER FOR CONSIDERING T HE CLAIM OF THE ASSESSEE FOR CLAIMING DEDUCTION OF UNACCOUNTED EXPENDITURE UNDER SECTION 37(1) OF THE ACT.' IN THE ABOVE CASE THE ISSUE AS SET ASIDE TO THE FIL E OF THE LD. AO TO DECIDE AND EXAMINE THE FACTS IN THE COURSE OF HEARING BEFORE T HE TRIBUNAL, THE REVENUE RAISED A FRESH PLEA THAT THE ASSESSING OFFICER SHOU LD HAVE INVOKED THE PROVISIONS OF SECTION 37(1) AND REQUESTED THE BENCH TO REMIT B ACK THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO CONSIDER THE ALLOWABILITY OR OTHERWISE OF THE EXPENDITURE UNDER SECTION 37(1). WE DO NOT FIND THAT ANY SUCH F RESH PLEA IS RAISED BY THE REVENUE DURING THE COURSE OF HEARING WHICH IS NOT T AKEN BY THE LD. AO OR LD. DRP. ON FACTUAL POINTS, NOTHING HAS BEEN ALLEGED BY REVENUE, WHICH REMAINS TO BE EXAMINED, WHICH IS BROUGHT TO OUR NOTICE. IN ABS ENCE OF ANY FRESH PLEA BY THE REVENUE, WE ARE AFRAID THAT WE CANNOT AGREE WITH TH E CONTENTION OF REVENUE. OUR THIS REASON ALSO GETS THE SUPPORT FROM THE DECISION OF COORDINATE BENCH IN ZUARI LEASING & FINANCE CORPN. LTD. V. ITO [2008] 112 ITD 205 (DELHI) (TM) WHERE IN ITS HELD THAT : '10. IT IS CLEAR FROM ABOVE THAT PRIMARY POWER, RAT HER OBLIGATION OF THE TRIBUNAL, IS TO DISPOSE OF THE APPEAL ON MERITS. THE INCIDENT AL POWER TO REMAND, IS ONLY AN EXCEPTION AND SHOULD BE SPARINGLY USED WHEN IT IS N OT POSSIBLE TO DISPOSE OF THE APPEAL FOR WANT OF RELEVANT EVIDENCE, LACK OF FINDI NG OR INVESTIGATION WARRANTED BY THE CIRCUMSTANCES OF THE CASE. REMAND IN A CASUA L MANNER AND FOR THE SAKE OF REMAND ONLY OR AS A SHORT CUT, IS TOTALLY PROHIBITE D. IT HAS TO BE BORNE IN MIND THAT LITIGANTS IN OUR COUNTRY HAVE TO WAIT FOR LONG TO HAVE FRUIT OF LEGAL ACTION AND EXPECT THE TRIBUNAL TO DECIDE ON MERIT. IT IS, THER EFORE, ALL THE MORE NECESSARY THAT MATTER SHOULD BE DECIDED ON MERIT WITHOUT ALLO WING ONE OF THE PARTIES BEFORE THE TRIBUNAL TO HAVE ANOTHER INNING, PARTICULARLY W HEN SUCH PARTY HAD FULL OPPORTUNITY TO ESTABLISH ITS CASE. UNNECESSARY REMA NDS, WHEN RELEVANT EVIDENCE IS ON RECORD, BELIES LITIGANT'S LEGITIMATE EXPECTAT IONS AND IS TO BE DEPRECATED. HAVING REGARD TO AFORESAID PRINCIPLE, IT IS NECESSA RY TO LOOK INTO RECORDS TO SEE WHETHER THERE IS SUFFICIENT MATERIAL ON RECORD TO D ISPOSE OF THE ISSUE ON MERIT AND THERE IS NO NEED TO REMAND THE ISSUE TO PROVIDE A F RESH INNING TO THE REVENUE.' THEREFORE, IN VIEW OF THE ABOVE DECISION AND IN ABS ENCE OF ANY FRESH PLEA BY ANY OF THE PARTIES WE DONOT INTEND TO AGREE WITH THE RE QUEST OF REVENUE TO SET ASIDE THIS ISSUE TO THE FILE OF LD. AO. 91. IN VIEW OF ABOVE GROUND NO. 12 OF THE APPEAL OF THE ASSESSEE WITH RESPECT TO CLAIM OF DEDUCTION U/S 80IC AND 80IB OF THE ACT AMO UNTING TO RS1,36,68,21,506/- IS ALLOWED. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 106 - 58. IN VIEW OF THE ABOVE, WE NOTE THAT THE ISSUE AS DISCUSSED ABOVE IS COVERED BY THE ORDER OF DELHI TRIBUNAL. MOREOVER, W E ALSO NOTE THAT THE LD. DRP HAS ALSO RELIED ON THE ORDER OF ITS PREDECE SSOR WHICH HAS BEEN REVERSED BY THE ITAT AS DISCUSSED ABOVE. IN VIEW OF THE ABOVE DISCUSSION AND FOLLOWING THE ORDER OF THE ITAT DELH I IN WHICH THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 80I B/80IC WAS COMPLETELY ALLOWED BASED ON REASONING DISCUSSED ABO VE. HENCE THE GROUND OF APPEAL OF THE ASSESSEE WAS ALLOWED. 59. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUN D NO. 11 IS THAT THE LD. DRP ERRED IN DISALLOWING THE MARK TO MARKET LOSS OF RS. 3,331.61 CRORES SUFFERED BY THE ASSESSEE FOR PROTECTION OF CURRENCY FLUCTUATION. 60. AT THE OUTSET, THE LD. AR BEFORE US SUBMITTED THAT HE HAD BEEN INSTRUCTED BY THE ASSESSEE NOT TO PRESS GROUND NO. 11 AS DISCUSSED ABOVE. THEREFORE WE DISMISS THE SAME AS NOT PRESSED. 61. THE ISSUE RAISED BY THE ASSESSEE IN GROUND N O 12 IS THAT THE LD. DRP ERRED IN ENHANCING THE BOOK PROFIT BY RS. 1431, 63,20,000/- WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT BY T REATING THE MARK TO MARKET LOSS AS CONTINGENT IN NATURE. 62. AT THE OUTSET, THE LD. AR BEFORE US SUBMITTE D THAT HE HAS BEEN INSTRUCTED BY THE ASSESSEE NOT TO PRESS GROUND NO. 12 AS DISCUSSED ABOVE. THEREFORE WE DISMISS THE SAME AS NOT PRESSED. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 107 - 63. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUN D NO 13 IS THAT THE AO/DRP ERRED IN RE-COMPUTING THE CAPITAL GAIN/LOSS ON LEASEHOLD LAND ALONG WITH BUILDING DURING THE YEAR UNDER CONSIDERA TION. 63.1. THE ASSESSEE DURING THE RELEVANT ASSESSMEN T YEAR SHOWN LTCL AMOUNTING TO RS. 8,24,560/-ON SALES OF LAND AT JEJU RI. THE ASSESSEE TO SUBSTANTIATE ITS CLAIM SUBMITTED COPY OF TWO SALE D EED ALONG WITH CALCULATION SHOWING THE LTCL ON LAND. THE NECESSARY DETAILS OF THE LOSS ON THE SALE OF THE LANDS STAND AS UNDER: (AMOUNT IN RS.) SL.NO . PARTICULAR S DATE OF ACQUISITION COST OF ACQUISITIO N INDEX IN THE YEAR OF ACQUISITIO N INDEX IN THE YEAR OF DISPOSA L INDEXED COST DATE OF DISP OSAL SALE PROCEED S LONG TERM CAPITA L GAINS 1. ON SALE OF LAND JEPURI LAND A) 1- APRI- 90 B) B) 1- APRIL- 95 TOTAL (A+B) 331,506 147,468 478,974 162 281 582 582 1,060,090 305,432 1,365,522 30 TH JUL- 08 540,962 (824,5 60) 64. FROM THE ABOVE, THE AO OBSERVED THAT THE AS SESSEE DURING THE RELEVANT AY HAD TRANSFERRED THE TWO PLOTS OF LAND I N JEJURI INDUSTRIAL AREA ALONG WITH FACTORY BUILDING CONSTRUCTED ON SUCH LAN D. THE ASSESSEE RECEIVED CONSIDERATION AMOUNTING TO RS. 2,98,00,000 /- AND RS. 2,09,00,000/- AGAINST SUCH SALE OF THE PLOTS BEARIN G NOS. E-3 AND E3 RESPECTIVELY. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 108 - 64.1. THE ASSESSEE FURTHER TO CALCULATE THE CAP ITAL GAIN/LOSS ON SUCH CAPITAL ASSETS HAS ALLOCATED RS. 5,40,962/- AS SALE PROCEEDS AGAINST THE LAND. THE REMAINING AMOUNT OF RS. 5,01,59,038/- HAS BEEN ALLOCATED TO THE SALE PROCEEDS AGAINST THE BUILDING. ACCORDINGL Y, THE ASSESSEE REDUCED THE BLOCK OF THE BUILDING BY THE AMOUNT OF RS. 5,01 ,59,038/- ONLY. 64.2. HOWEVER, THE AO WAS NOT SATISFIED WITH THE MODUS OF OPERANDI OF ALLOCATION OF SALE CONSIDERATION AS MADE BY THE ASS ESSEE DUE TO FOLLOWING REASON. I- THE LAND WAS ACQUIRED IN FY 1990-91 & 1995-96 AND ACCORDINGLY THE VALUE SUCH LAND NATURALLY BE INCREA SED. II- ON THE OTHER HAND, THE VALUE OF THE BUILDING IS ALW AYS SUBJECT TO DEPRECIATION. 64.3. ACCORDINGLY, IT WOULD BE VERY IMPROPER TO ALLOCATE ONLY 1.06%, I.E. RS. 5,40,962/- OF CONSIDERATION AGAINST THE LA ND AND REMAINING 99% I.E. RS. 5,01,59,038/- TO THE BUILDING. IN VIEW OF SUCH OBSERVATION, THE AO REQUIRED TO JUSTIFY SUCH APPORTIONMENT OF SALE C ONSIDERATION. 64.4. HOWEVER, THE ASSESSEE DIDNT REPLY AGAINST SUCH OBSERVATION. 64.5. HENCE, GIVEN THE ABOVE DISCUSSION, THE AO RE CALCULATED THE CONSIDERATION OF THE BUILDING AMOUNTING TO RS. 1,02 ,90,517/- ONLY BEING W.D.V AS ON 31 ST MARCH 2008. ACCORDINGLY THE BALANCE AMOUNT OF CONSIDERATION OF RS. 4,04,09,483/-(5,07,00,000-1,02 ,90,517) WAS TREATED IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 109 - TOWARDS THE LAND. ACCORDINGLY, THE AO WORKED OUT TH E LTCG IN RESPECT OF THE LAND AT RS. 3,90,43,961/- ONLY. 64.6. THE AO ACCORDINGLY INCREASED THE W.D.V. OF THE BUILDING BY THE AMOUNT OF RS. 3,98,68,521/- I.E.(5,01,59,038-1,02,9 0,517) AND ALLOWED DEPRECIATION @10% AMOUNTING TO RS. 39,86,852/-. ACC ORDINGLY THE W.D.V OF BUILDING AS ON 31 ST MARCH 2009 WAS WORKED OUT AT RS. 3,58,81,669/- I.E. (3,98,68,521-39,86,852) ONLY. 65. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE LD.DRP. 65.1. THE ASSESSEE BEFORE THE LD. DRP FILED A VAL UATION REPORT OBTAINED FROM THE APPROVED VALUER. IN THE VALUATION REPORT, THE ASSESSEE CLAIMED THAT SUCH APPORTIONMENT OF SALE CONSIDERATION HAD B EEN ARRIVED FROM THE VALUE AS PER THE AUDITED FINANCIAL STATEMENT AS WEL L AS TAX AUDIT REPORT FOR THE RELEVANT AY. 66. HOWEVER, THE LD. DRP AFTER CONSIDERING THE S UBMISSION OF THE ASSESSEE DISREGARDED THE VALUATION REPORT BY OBSERV ING THAT THE ASSESSEE WAS NOT IN A POSITION TO VERIFY WHETHER THE BUILDIN G EXISTS OR NOT AS ON DATE. ACCORDINGLY, THE LD. DRP UPHELD THE ACTION OF THE AO. 67. BEING AGGRIEVED BY THE ORDER OF THE LD. DRP THE ASSESSEE IS IN APPEAL BEFORE US. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 110 - 68. THE LD. AR BEFORE US FILED THE VALUATION REP ORT OBTAINED FROM THE APPROVED VALUER AND REITERATED THE SUBMISSION MADE BEFORE THE LD. DRP. 69. THE LD. DR VEHEMENTLY SUPPORTED THE ORDER OF THE AUTHORITIES BELOW. 70. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. ON VERIFICATION OF SUCH VALUATION REPORT, IT IS OBSERVED THAT THE VALUE OF SUCH LAND HAS BEEN CALCULATED AS PER THE CIRCLE RATE PREVAILING FOR SUCH LAND DURING THE RELEVANT PERIOD. ACCORDINGLY, LAND VALUE OF PLOT NO E2 AND E3 AS OF 2008 AS PER MIDC RATE WAS CALCULATED @ RS. 28,58,800/- AND @ 14,26,2 50/- RESPECTIVELY. 70.1. ACCORDINGLY, CONSIDERING SUCH A VALUATION REPORT, WE ARE OF THE VIEW THAT SALE CONSIDERATION FOR LAND AT LEAST SHOU LD BE EQUAL TO VALUE AS OF 2008 AS PER MIDC RATE MENTIONED ABOVE. HENCE FO R THE CALCULATION OF LTCG ON LAND ASSESSEE SHOULD TAKE AT LEAST CIRCL E VALUE AS OF 2008 AS PER MIDC RATE AS SALE CONSIDERATION. THE RELEVANT EXTRACT OF THE REPORT STANDS AS UNDER: REPORT NO.ASC -2841 DATE : 27 TH APRIL, 2013 APPOINTMENT OF SALES VALUE TO LAND & BUILDING SCHEDULE -II PLOT NO.E2: PARTICULAR PLOT E2 IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 111 - TOTAL PRICE AS PER AGREEMENT A 29,800,000 RUPEES TWO CRORES NINETY EIGHT LACS ONLY LAND VALUE AS OF 2008 AS PER MIDC RATE B 2,858,800 RUPEES TWENTY EIGHT LACS FIFTY EIGHT THOUSAND EIGHT HUNDRED ONLY. VALUE OF BUILDING C=A-B 26,941.200 RUPEES TWO CRORES SIXTY NINE LACS FORTY ONE THOUSAND TWO HUNDRED ONLY. PLOT NO.E3: PARTICULAR PLOT E3 TOTAL PRICE AS PER AGREEMENT A 20,900,000 RUPEES TWO CRORES NINE LACS ONLY LAND VALUE AS OF 2008 AS PER MIDC RATE B 1,426,250 RUPEES FOURTEEN CRORES TWNETY SIX LACS TWO HUNDRED FIFTY ONLY. VALUE OF BUILDING C=A-B 19,473,750 RUPEES ONE CRORES NINETY FOUR LACS SEVENTY THREE THOUSAND SEVEN HUNDRED FIFTY ONLY. FOR ANMOL SEKHRI CONSULTANTS PVT.LTD. SD/- AUTHORISED SIGNATORY WE ALSO NOTE THAT THE SALE PROCEEDS ALLOCATED BY TH E ASSESSEE TOWARDS THE LAND APPEAR TO BE UN-REASONABLE. IN MOST OF THE CAS ES, THE VALUE OF THE LAND APPRECIATES, AND THE VALUE OF THE BUILDING DEP RECIATES BARRING THE IN IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 112 - EXCEPTIONAL CIRCUMSTANCES. BUT IN THE PRESENT CASE, NO SUCH EXCEPTIONAL CIRCUMSTANCES WERE BROUGHT TO OUR NOTICE BY THE ASS ESSEE. THEREFORE, WE DISAGREE WITH THE VALUE ADOPTED BY THE ASSESSEE FOR THE LAND AND THE BUILDING. BUT WE ALSO NOTE THAT THE AO HAS ALSO NOT BROUGHT ANY REASONABLE BASIS FOR ALLOCATION THE SALE PROCEEDS A S DISCUSSED. TO OUR MIND, HE SHOULD HAVE REFERRED THE MATTER TO THE DVO FOR THE VALUATION OF THE LAND AND BUILDING FOR THE ALLOCATING THE SALE P ROCEEDS, BUT HE FAILED TO DO SO. AFTER CONSIDERING THE FACTS IN TOTALITY, WE ALLOCATE THE SALE VALUE OF THE BUILDING AS DISCUSSED ABOVE. HENCE THE GROUND O F APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 71. THE ISSUE RAISED BY THE ASSESSEE IN GROUND N O 14 IS THAT THE AO/DRP ERRED IN TREATING THE NON-COMPETENT FEE AS C APITAL IN NATURE INSTEAD OF REVENUE EXPENDITURE. 72. AT THE OUTSET, THE LD. AR BEFORE US SUBMITTED THAT HE HAD BEEN INSTRUCTED BY THE ASSESSEE NOT TO PRESS GROUND NO. 14 AS DISCUSSED ABOVE. THEREFORE WE DISMISS THE SAME AS NOT PRESSED. 73. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUN D NO. 15 IS THAT THE LD. DRP ERRED IN NOT ADJUDICATING THE CLAIM OF WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT ON THE COST OF ASSETS PROVIDED T O EMPLOYEES WORKING IN APPROVED R&D FACILITIES. 74. AT THE OUTSET, WE NOTE THAT THE SIMILAR GROU NDS OF APPEAL WAS RAISED BEFORE ITAT DELHI IN THE OWN CASE OF ASSESSEE VIDE ITA NO IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 113 - 196/DEL/2013. THE DELHI TRIBUNAL HAS SET ASIDE SUCH GROUND OF APPEAL TO THE AO BY OBSERVING AS UNDER: WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND WE ARE OF THE VIEW THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE APPELLANT BY DECISION OF ITAT IN ASSESSEE'S OWN CASE. HOWEVER, NEITHER THE A O NOR THE LD. DRP HAS APPLIED ITS MIND TO THE FACTS OF THIS CASE AND HAS NOT ADJUDICATED ON THE ISSUE. FACTS OF THIS EXPENDITURE WITH ADEQUATE DETAILS ARE ALSO NOT RECORD BEFORE US. THEREFORE WE SET ASIDE THIS GROUND OF APPEAL TO THE FILE OF AO TO VERIFY THE CLAIM MADE BY THE ASSESSEE AND IF THE FACTS AND CIR CUMSTANCES ARE SIMILAR TO THE ISSUE DECIDED BY THE ITAT IN CASE OF ASSESSEE F OR EARLIER YEARS SAME MAY BE ALLOWED. IN THE RESULT, GROUND 13 OF THE APPEAL IS ALLOWED WITH ABOVE DIRECTION. 74.1. THE GROUND RAISED BEFORE US IS IDENTICAL T O THE ISSUE RAISED BEFORE DELHI ITAT IN THE CASE NO. 196/DEL/2013. HENCE TAKI NG THE SAME VIEW ON SUCH ISSUE, WE SET ASIDE THE ORDER OF LD. CIT-A TO THE AO FOR FRESH ADJUDICATION. HENCE THE GROUND OF APPEAL OF THE ASS ESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 75. THE ISSUE RAISED BY THE ASSESSEE IN THE GROU ND NO. 16 IS THAT THE LD. AO/DRP ERRED IN NOT ADJUDICATING THE ISSUE RELATED TO DEDUCTION OF RS. 8,17,97,608/- ON ACCOUNT OF DEMAND RAISED BY THE MI NISTRY OF CHEMICALS & FERTILIZERS, GOVERNMENT OF INDIA. 76. WHILE EXAMINING THE ISSUE RAISED BEFORE US, THE LD. AR FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT IN THE IDENTICA L ISSUE RAISED BY THE ASSESSEE IN ITS CASE, THE ITAT DELHI IN THE CASE NO . 196/DEL/2013 FOR THE AY 2008-09 SET ASIDE THE SAME TO THE AO FOR FRESH A DJUDICATION. THE RELEVANT EXTRACT OF THE ORDER IS REPRODUCED AS UNDE R: IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 114 - 96. WE HAVE CAREFULLY PERUSED THE RIVAL CONTENTION. HO NOURABLE MUMBAI HIGH COURT IN CASE OF GEOFFREY MANNERS & CO. LTD. (SUPRA ) LTD HAS DEALT WITH IDENTICAL ISSUE AS UNDER : 3. IT IS SUBMITTED BY MR.SURESH KUMAR, LEARNED COUN SEL APPEARING FOR THE REVENUE, THAT THE TRIBUNAL COMMITTED GRAVE AND SERI OUS ERROR OF LAW IN ALLOWING DEDUCTION FOR THE PROVISION MADE ON ACCOUN T OF LIABILITY TOWARDS CONTRIBUTION TO DRUGPRICE EQUALIZATION ACCOUNT (DPE A). THIS IS IGNORING THE FACT THAT THE LIABILITY IS MERE PROVISION WHICH WAS CONTINGENT IN NATURE AND IT HAS NOT BEEN CRYSTALLIZED DURING THE PREVIOUS YEAR BECAUSE THE ASSESSEE APPROACHED THE DELHI HIGH COURT CHALLENGING THE STI PULATION IN THE DRUG PRICE CONTROL ORDER. THERE WAS INTERIM STAY IN FAVO UR OF THE ASSESSEE. EVENTUALLY THAT WRIT PETITION WAS ALLOWED. THE ORDE R OF THE DELHI HIGH COURT WAS CHALLENGED IN THE HONOURABLE SUPREME COURT BY T HE REVENUE AND THE REVENUE SUCCEEDED. THE ASSESSING OFFICER AND THE CO MMISSIONER CONCURRENTLY HELD THAT THE ASSESSEE WAS ENTITLED TO THE DEDUCTIONS ONLY IN THE YEAR IN WHICH THE LIABILITY WAS ACTUALLY ACCRUING A ND THE AMOUNT WAS PAYABLE. SINCE THERE WAS INTERIM STAY THE AUTHORITIES TOOK T HE VIEW THAT AS AND WHEN THE LIABILITY IS ACTUALLY INCURRED OR DISCHARGED TH AT THE DEDUCTION COULD BE CLAIMED. SUCH CONCURRENT VIEW SHOULD NOT HAVE BEEN HELD TO BE PERVERSE AND SHOULD NOT HAVE BEEN INTERFERED BY THE TRIBUNAL. 4. IN RELATION TO THIS QUESTION IT IS SUBMITTED BY MR. PARDIWALLA, LEARNED SENIOR COUNSEL APPEARING FOR THE ASSESSEE, THAT THE TRIBUNAL HAS NOT COMMITTED ANY SERIOUS AND GRAVE ERROR OF LAW AS PRO JECTED. THE TRIBUNAL HAS IN ACCEPTING THE STAND OF THE ASSESSEE CONCLUDED TH AT THE LIABILITY IS FOR CONTRIBUTION TO THE DRUGPRICE EQUALIZATION ACCOUNT. THE ASSESSEE MAY HAVE DISPUTED THE LIABILITY INSOFAR AS THIS CONTRIBUTION , HOWEVER, THE LIABILITY IS CLEARLY ASCERTAINABLE ONE. THERE WAS NO STAY AGAINS T ACCRUAL OF THE LIABILITY UNDER CLAUSE 7(2) OF THE DRUG PRICE CONTROL ORDER. THIS BEING A STATUTORY LIABILITY IT IS ALLOWABLE IN THE YEAR IN WHICH IT A RISES IRRESPECTIVE OF WHETHER THE ASSESSEE DISPUTES IT OR ACCEPTS THE SAME. 5. MR.PARDIWALLA SUBMITS THAT THIS IS THE CONSISTEN T VIEW AND WHICH ALSO FINDS FAVOUR NOT ONLY IN THE CASE OF THE ASSESSEE, BUT IN THE CASE OF M/S GLAXOSMITHKLINE PHARMACEUTICALS LIMITED. MR.PARDIWA LLA PLACES RELIANCE ON THE ORDER PASSED BY THE DIVISION BENCH OF THIS COUR T ON 05.03.2012 IN INCOME TAX APPEAL NO.972/2009 (CIT V. GLAXOSMITHKLINE PHAR MACEUTICALS LTD.). HE SUBMITS THAT THE ISSUE WAS ANSWERED IN FAVOUR OF TH E ASSESSEE AND AGAINST THE REVENUE. OUR ATTENTION HAS BEEN INVITED TO PARAGRAP H 5 OF THIS ORDER AND IT IS SUBMITTED THAT IN RELATION TO M/S GLAXOSMITHKLINE T HE TRIBUNAL TOOK THE SAME VIEW. THAT WAS FOR THE ASSESSMENT YEAR 1984-1985. T HAT ORDER OF THE TRIBUNAL DATED 10.03.2006 HAD ATTAINED FINALITY. THE TRIBUNA L FOLLOWED ITS OWN DECISION IN THE CASE OF GLAXOSMITHKLINE PHARMACEUTI CALS LTD. (SUPRA) FOR PREVIOUS ASSESSMENT YEARS 1982-1983 AND 1983-1984. THESE DECISIONS HAVE ALSO BEEN HELD AS FINAL. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 115 - 6. THE TRIBUNAL IN THE INSTANT CASE HAS FOLLOWED TH E JUDGMENT OF THE HONOURABLE SUPREME COURT IN THE CASE OF KEDARNATH J UTE MFG. CO. LTD. V. CIT [1971] 82 ITR 363 . IN VIEW THEREOF AND FINDING THAT THE TRIBUNAL'S O RDER IS IN CONSONANCE WITH THE FACTS AND CIRCUMSTANCES O F THE CASE, SO ALSO, THE STATUTORY LIABILITY HAVING BEEN CREATED IN THE YEAR IN QUESTION AND WHICH HAS NO BEARING ON THE PENDING PROCEEDINGS INITIATED BY THE ASSESSEE OR THE DISPUTE RAISED THEREIN THAT WE FIND THAT THIS QUESTION CANN OT BE TERMED AS SUBSTANTIAL QUESTION OF LAW.' 97. THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF H ONOURABLE MUMBAI HIGH COURT WE ARE OF THE VIEW THAT CLAIM OF THE ASSESSEE OF RS.22306073/- ON ACCOUNT OF AMOUNT PAYABLE UNDER DRUG PRICE CONTROL EQUALIZATIO N IS PRIMA FACIE ALLOWABLE. FURTHER, WE ALSO AGREE WITH THE ARGUMENT OF LD. AR THAT WHEN THE CLAIM IS MADE BY THE ASSESSEE BY WAY OF NOTE THEN THE LD. AO AS WELL AS DRP SHOULD HAVE CONSIDERED THE CLAIM OF THE ASSESSEE ON MERITS. NOT CONSIDERING THE ISSUE AND NOT ADJUDICATING THEREON IS AN INJUSTICE TO THE CLAIM T O WHICH THE ASSESSEE IS ELIGIBLE. IN VIEW OF THIS, WE DIRECT THE LD. AO TO VERIFY THE CLAIM AND, IF FOUND IN ACCORDANCE WITH THE DECISION OF HONOURABLE BOMBAY H IGH COURT IT MAY BE ALLOWED. GROUND NO 14 OF APPEAL IS ALLOWED. 77. IN VIEW OF THE ABOVE ORDER OF ITAT DELHI, W E ARE TAKING A SIMILAR VIEW IN THE GROUND RAISED BY THE ASSESSEE BEFORE US . HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED WITH DIRECTION TO AO FOR FRESH ADJUDICATION AS PER THE PROVISION OF THE LAW. HENCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . 78. THE ISSUE IN THE GROUND NO. 17 IS THAT THE L D.AO/DRP ERRED IN NOT ADJUDICATING THE ISSUE OF ADJUSTMENT OF EXCHANGE FL UCTUATION ON EXTERNAL COMMERCIAL BORROWINGS, HEDGING CONTRACTS AND HEDGIN G CHARGES TO COST OF CAPITAL ASSETS AND ALLOWING DEPRECIATION AS PART OF THE ACTUAL COST OF DEPRECIATION. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 116 - 79. THIS ISSUE RAISED BEFORE US BY THE ASSESSEE HAS ALREADY BEEN ADJUDICATED BY THE DELHI ITAT IN ITS CASE VIDE CASE NO 196/DEL/2013 BY OBSERVING AS UNDER. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND WE SET ASIDE THIS GROUND OF APPEAL TO THE FILE OF AO TO VERIFY THE AM OUNT OF EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION OF FOREIGN EXCHANGE; AND IF THEY ARE ON CAPITAL ACCOUNT RELATED TO ACQUISITION OF ASSET THEN TO GRANT DEPRECIATION THEREON IN ACCORDANCE WITH THE PROVISI ONS OF LAW. IN CASE IF THIS EXPENDITURE IS FOUND TO BE OF REVENUE, NATURE THEN ALLOWS THE SAME U/S 37(1) OF THE ACT. IN THE RESULT GROUND NO.15 OF THE APPEAL I S ALLOWED. 80. IN VIEW OF THE ABOVE ORDER OF DELHI ITAT IN THE OWN CASE OF THE ASSESSEE, WE ARE OF THE VIEW TO FOLLOW THE SAME. HE NCE THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED WITH THE DIRECTIO N FOR FRESH ADJUDICATION AS PER THE PROVISION OF LAW. HENCE THE GROUND OF AP PEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 81. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT(TP)A NO.1782/DEL/2014 FOR AY 2009-10 IS PARTLY ALLOWED F OR STATISTICAL PURPOSES. NOW COMING TO IT(TP)A NO.781/DEL/2015 FOR AY 2010-1 1 82. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND S OF APPEAL AS UNDER: 1. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CA SE, AND IN LAW, THE ASSESSMENT ORDER ('THE ORDER') DATED 30 TH JANUARY, 2015 PASSED BY THE ASSESSING OFFICER (AO) UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961 (THE ACT') IN PURSUANCE OF THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL ('DRP') IS ILLEGAL, BAD IN LAW, VO ID AB-INITO AND BARRED BY LIMITATION. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 117 - 1.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER PASSED UNDER SECTION 143(3) R.W.S 14 4C OF THE ACT IS ILLEGAL AND BAD IN LAW. 1.2. THAT THE AO ERRED ON FACTS AND IN LAW IN P ASSING THE IMPUGNED ORDER U/S 143(3) R.W.S. 144C EVEN THOUGH NEITHER ANY VARI ATION HAS BEEN PROPOSED BY THE TRANSFER PRICING OFFICER IN ITS ORDER PASSED UN DER SUB-SECTION (3) OF SECTION 92CA OF THE ACT NOR IS THE ASSESSEE A FOREI GN COMPANY. 1.3. THAT THE AO ERRED IN LAW AND ON FACTS IN P ASSING THE IMPUGNED ORDER U/S 143(3) R.W.S. 144C AND NOT U/S 143(3) OF THE AC T. 1.4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER HAVING BEEN PASSED BY THE AO MUCH BE YOND THE LIMITATION PRESCRIBED IN SECTION 153 OF THE ACT [I.E.BEFORE 31 ST MARCH 2014] IS ILLEGAL AND BAD IN LAW. 2. WITHOUT PREJUDICE TO THE CONTENTION(S) OF THE ASSESSEE RAISED IN GROUND OF APPEAL NO. 1 AND IN ITS SUB-GROUNDS ON THE LEGALITY OF THE ORDER, THE ASSESSEE WISHES TO RAISE THE GROUNDS OF APPEAL NOS. 3 TO 18 ON DISALLOWANCES / ADDITIONS MADE BY THE AO / DRP. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE AO HAS GROSSLY ERRED IN ASSESSING THE INCOME AT RS.2209,94 ,87,026 UNDER THE NORMAL PROVISIONS AND AT RS.3393,89,47,810 U/S 115JB OF TH E ACT AS AGAINST INCOME OF RS.20,11,96,824 AND RS.3389,00,45,036 UNDER NORMAL PROVISIONS AND SECTION 115JB OF THE ACT RESPECTIVELY DECLARED BY THE ASSES SEE. 3.1. THAT THE DRP ERRED ON FACTS AND IN LAW IN CONF IRMING THE ADDITIONS/ DISALLOWANCES PROPOSED IN THE DRAFT ASSESSMENT ORDE R PASSED BY THE AO, WITHOUT JUDICIOUSLY CONSIDERING THE FACTUAL AND LEG AL OBJECTIONS FILED AGAINST THE SAID ORDER. 3.2. THAT THE DRP ERRED ON FACTS AND IN LAW IN NOT DIRECTING THE AO TO DELETE VARIOUS ADDITIONS/ DISALLOWANCE, WHICH WERE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER(S) OF THE APPELLATE AU THORITIES FOR EARLIER YEARS. 3.3. THAT THE DRP ERRED ON FACTS AND IN LAW IN NOT INDEPENDENTLY CONSIDERING/ DIRECTING THE AO TO CONSIDER CERTAIN C LAIMS MADE BY WAY OF NOTES FORMING INTEGRAL PART OF THE RETURN ON THE GROUND T HAT THE SAID CLAIMS WERE NOT IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 118 - MADE IN THE RETURN AND NO VARIATION WAS PROPOSED ON THE SAID CLAIMS IN THE DRAFT ASSESSMENT ORDER. 4. THAT THE DRP ERRED, BOTH ON FACTS AND IN LAW, IN: 4.1 NOT ACCEPTING THE OVERSEAS ASSOCIATED ENTERP RISES ('AES') AS THE TESTED PARTY, BEING THE LEAST COMPLEX OF THE TRANSACTING E NTITIES AND INSTEAD CONSIDERING THE ASSESSEE AS THE TESTED PARTY, THUS VIOLATING THE BASIC PRINCIPLES OF TRANSFER PRICING [TP]. 4.2 DISREGARDING THE APPROACH ADOPTED BY THE ASSE SSEE OF UNDERTAKING A REGIONAL BENCHMARKING IN THE TP REPORT WHICH IS IN LINE WITH THE GLOBALLY ACCEPTED TP PRINCIPLES. 5. THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN T REATING RS.53,98,567, BEING REVERSAL OF DEFERRED EMPLOYEES COMPENSATION CREDITE D TO THE PROFIT & LOSS ACCOUNT ON ACCOUNT OF NON-EXERCISE OF OPTIONS BY IT S EMPLOYEES, AS INCOME OF THE ASSESSEE, WITHOUT APPRECIATING THE FACT THAT TH E EXPENSE IN RELATION TO SUCH INCOME HAD ALREADY BEEN DISALLOWED IN EARLIER YEAR( S). 5.1 THAT THE AO ERRED IN HOLDING THAT THE ASSESSEE HAD FAILED TO SUBSTANTIATE WHETHER THE EXPENDITURE INCURRED IN RELATION TO THE REVERSED EMPLOYEE COMPENSATION WAS NOT CLAIMED AS DEDUCTION IN THE EA RLIER YEAR(S). 5.2 THAT THE AO / DRP FAILED TO APPRECIATE THAT REV ERSAL OF EXPENSE, WHICH WAS NEVER ALLOWED AS DEDUCTION IN THE PREVIOUS YEAR(S), CANNOT BE TAXED AS INCOME OF THE ASSESSEE. 5.3 THAT THE DRP ERRED IN HOLDING THAT THE REVERSAL OF EXPENSE SHOULD BE TREATED AS INCOME OF THE ASSESSEE, EVEN IF SUCH EXP ENSE WAS DISALLOWED IN EARLIER YEAR(S), ONLY BECAUSE THE MATTER HAD NOT AT TAINED FINALITY, DESPITE ACKNOWLEDGING THAT THE SAME WOULD TANTAMOUNT TO DOU BLE TAXATION OF THE VERY SAME AMOUNT, 6. THAT THE AO/DRP ERRED BOTH ON FACTS AND IN LAW IN DISALLOWING THE CONTRIBUTION OF RS.4,77,091 MADE TO RANBAXY COMMUNI TY HEALTHCARE SOCIETY (RCHS), UNDER THE PROVISIONS OF SECTION 37(1) OF TH E ACT. 6.1 THAT THE DRP ERRED IN DIRECTING THE AO TO FURTH ER EXAMINE THE ISSUE OF NON-DEDUCTIBILITY OF TAX ON THE AFORESAID CONTRIBUT IONS, WITHOUT APPRECIATING IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 119 - THAT SUBSECTION (8) OF SECTION 144C OF THE ACT DOES NOT EMPOWER THE DRP TO ISSUE ANY DIRECTION FOR FURTHER ENQUIRY. 6.2 THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN HO LDING THAT PAYMENTS MADE BY THE ASSESSEE WERE IN THE NATURE OF ADVERTISEMENT AND PUBLICITY EXPENSE ON WHICH TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE AND CONSEQUENTLY THE CONTRIBUTION CLAIMED WAS DISALLOWABLE UNDER SECTION 40(A)(IA) OF THE ACT. 6.3 WITHOUT PREJUDICE, THAT THE AO/DRP FAILED TO APPRECIATE THAT SINCE THE PAYMENTS HAD ALREADY BEEN MADE DURING THE YEAR UNDE R CONSIDERATION AND NOTHING WAS PAYABLE AS AT THE END OF THE RELEVANT Y EAR, THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WERE NOT APPLICABLE. 6.4 WITHOUT PREJUDICE, THAT THE AO/DRP FURTHER FAIL ED TO APPRECIATE THAT SINCE THE PAYMENTS WERE NOT TAXABLE IN THE HANDS OF RCHS, THERE WAS NO WARRANT TO MAKE ANY DISALLOWANCE UNDER THE PROVISIONS OF SECTI ON 40(A)(IA) OF THE ACT. 6.5 WITHOUT PREJUDICE, THAT THE AO/DRP ERRED ON FAC TS AND IN LAW IN RESILING FROM THE POSITION TAKEN IN EARLIER YEARS AND NOT EV EN ALLOWING DEDUCTION IN RESPECT OF ABOVE CONTRIBUTION UNDER SECTION 80G OF THE ACT AS CLAIMED BY THE ASSESSEE IN ITS INCOME TAX RETURN. 7. THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN DI SALLOWING RS. 4,89,02,774/- UNDER SECTION 14A OF THE ACT, BY APPLYING THE FORMU LA PRESCRIBED IN RULE 8D OF THE INCOME TAX RULES, 1962 ('THE RULES'). 7.1 THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN PROCEEDING TO MAKE DISALLOWANCE UNDER SECTION 14A OF THE ACT SIMPLY ON THE BASIS OF METHOD/ FORMULA PRESCRIBED IN RULE 8D OF THE RULES, WITHOUT APPRECIATING THAT: (A) THERE IS NOTHING ON RECORD TO DISPUTE THE CONTE NTION OF THE ASSESSEE THAT NO EXPENDITURE, OVER AND ABOVE EXPENDITURE SUO -MOTO DISALLOWED BY THE ASSESSEE WAS ACTUALLY INCURRED IN RELATION TO T HE EXEMPT INCOME; (B) PRE-CONDITIONS FOR APPLYING RULE 8D AS PRESCRIB ED IN SUB-SECTIONS (2)/ (3) OF SECTION 14A OF THE ACT WERE NOT SATISFIED. 7.2 THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN DISALLOWING THE AFORESAID AMOUNT WITHOUT APPRECIATING THAT NO FRESH INVESTMEN TS WERE MADE DURING THE RELEVANT PREVIOUS YEAR. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 120 - 7.3 THAT THE AO/ DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THERE WAS NO NEXUS BETWEEN ANY INTEREST EXPENDITURE INCURRED BY THE ASSESSEE AND THE EXEMPT INCOME AND CONSEQUENTLY, NO PART OF INTEREST EXPENDITURE WAS, IN ANY CASE, DISALLOWABLE UNDER SECTION 14AOF THE A CT. 7.4 THAT THE AO / DRP ERRED ON FACTS AND IN LA W IN HOLDING THAT THE PRIMARY REASON FOR MAKING INVESTMENT WAS TO EARN EXEMPT INC OME, FOR MAKING DISALLOWANCE UNDER SECTION14AOF THE ACT, WHICH IS I N COMPLETE DISREGARD TO MATERIAL PLACED ON RECORD BY THE ASSESSEE. 7.5 THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT EVEN OTHERWISE, DISALLOWANCE UNDER SECTION 14AREAD WITH RULE 8D OF THE RULES COULD NOT EXCEED THE AMOUNT OF EXEMPT INCOME. 7.6 WITHOUT PREJUDICE, THAT THE AO/DRP ERRED O N FACTS AND IN LAW IN COMPUTING DISALLOWANCE, INTER ALIA, ON THE GROUND T HAT INVESTMENTS FROM WHICH NO EXEMPT INCOME WAS EARNED IN THE ASSESSMENT YEAR UNDER CONSIDERATION WERE ALSO CONSIDERED FOR THE PURPOSE OF COMPUTATION OF D ISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. 8. THAT THE AO/DRP FURTHER ERRED ON FACTS AND IN LAW IN MAKING UPWARD ADJUSTMENT OF RS.4,89,02,774 WHILE COMPUTING BOOK P ROFITS UNDER SECTION 115JB OF THE ACT, WITHOUT APPRECIATING THAT: (A) ADJUSTMENT, IF ANY, COULD HAVE ONLY BEEN MADE O UT OF EXPENDITURE ACTUALLY DEBITED TO THE AUDITED ACCOUNTS; (B) THE METHOD/ FORMULA PRESCRIBED IN RULE 8D OF TH E RULES WAS NOT RELEVANT FOR COMPUTING BOOK PROFITS. 9. THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN N OT APPRECIATING THE FACTS IN THE CASE OF THE ASSESSEE AND MISINTERPRETING THE SA ME WHILE MAKING DISALLOWANCE OF ENTIRE DEDUCTION CLAIMED UNDER SECT IONS 80-IB AND 80-IC OF THE ACT. 9.1 THAT THE DRP ERRED IN LAW IN NOT INDEPEND ENTLY ADJUDICATING THE ISSUE OF ELIGIBILITY OF THE ASSESSEE TO CLAIM DEDUCTION U NDER SECTION 80-IB & 80-IC OF THE ACT IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND MERELY RELYING ON THE FINDINGS FOR ASSESSMENT YEARS 2008-09 & 2009-10. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 121 - 9.2 THAT THE DRP ERRED IN LAW IN NOT DIRECTING THE AO TO ALLOW THE DEDUCTION U/S 80-IB & 80-IC OF THE ACT THOUGH HOLDI NG THAT ISSUE OF DEDUCTION IS RELEVANT ONLY IN THE FIRST YEAR AND NONE OF THE UNDERTAKING(S) WERE IN THE FIRST YEAR OF OPERATION/DEDUCTION. 9.3 THAT THE DRP ERRED ON FACTS AND IN LAW IN HO LDING THE ISSUE OF DISALLOWANCE OF DEDUCTION UNDER SECTIONS 80-IB & 80 -IC TO BE ACADEMIC, WITHOUT APPRECIATING THAT DISALLOWANCE OF MARK TO M ARKET (MTM) LOSS IN THE AY 2009-10 AND TAXATION OF MTM GAIN IN THE YEAR UND ER APPEAL WOULD REST !T IN TAXABLE INCOME IN AY 2010-11, I.E., THE YEAR UND ER CONSIDERATION. 9.4 THAT THE AO/ DRP ERRED ON FACTS AND IN LAW IN DENYING DEDUCTION CLAIMED BY THE ASSESSEE ON THE GROUND THAT SEPARATE BALANCE SHEET AND PROFIT AND LOSS ACCOUNT WERE ALLEGEDLY NOT MAINTAINED FOR THE ELIGIBLE UNITS/ UNDERTAKING, THEREBY VIOLATING THE CONDITION PRESCR IBED IN SECTION 80IA(7) OF THE ACT. 9.5 THAT THE AO/ DRP FAILED TO APPRECIATE THAT DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTIONS 801B & 1C OF THE ACT WAS DU LY SUPPORTED BY AUDIT REPORT(S) IN FORM 10CCB AND ACCOUNTS MAINTAINED IN SAP/ ERP BASED ELABORATE, COMPREHENSIVE AND ROBUST ACCOUNTING SYST EM/ SOFTWARE. 9.6 THAT THE AO/ DRP EXCEEDED JURISDICTION IN HOLDING THAT THE ASSESSEE WAS NOT ELIGIBLE TO CLAIM DEDUCTION UNDER SECTIONS 80-IB & 80-IC OF THE ACT FOR THE YEAR UNDER CONSIDERATION, WITHOUT APPRECIATING THAT ON IDENTICAL FACTS, DEDUCTION HAD ALWAYS BEEN ALLOWED IN THE EARLIER YE AR(S) (EXCEPT FOR ASSESSMENT YEARS 2008-09 & 2009-10). 9.7 THAT THE AO/ DRP ERRED ON FACTS AND IN LAW IN ALLEGING THAT THE ASSESSEE VIOLATED THE PROVISIONS OF SUB-SECTIONS (5 ) AND (8) OF SECTION 80IA OF THE ACT. 9.8 THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN DISREGARDING THE ADDITIONAL INFORMATION/ DOCUMENTS FILED BY THE ASSE SSEE IN SUPPORT OF DEDUCTION CLAIMED UNDER SECTION 80-IB AND SECTION 80-IC OF TH E ACT AND ESTABLISHING CONCLUSIONS MERELY ON THE BASIS OF ORDER OF THE PRE VIOUS ASSESSMENT YEARS. 10. THAT THE AO/DRP ERRED BOTH ON FACTS AND IN LAW IN HOLDING MARK TO MARKET ('MTM') GAIN OF RS.1983,86,34,040 AS TAXABLE 'INCOME' OF THE ASSESSEE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 122 - UNDER NORMAL PROVISIONS AND RS.1969,12,65,001 UNDER SECTION 115JB OF THE ACT, RESILING FROM AND TOTALLY INCONSISTENT/ CONTRA DICTORY TO DISALLOWANCE OF MTM LOSS (RS.3331.61 CRORE UNDER NORMAL PROVISIONS AND RS. 1431.63 CRORE UNDER SECTION 115JB OF THE ACT) MADE WHILE COMPLETI NG THE ASSESSMENT FOR AY 2009-10. 10.1 THAT THE AO/DRP FAILED TO APPRECIATE THAT CONSISTENT WITH THE STAND TAKEN BY THE ASSESSING OFFICER OF DISALLOWING MTM L OSS IN THE ASSESSMENT ORDER FOR AY 2009-10, THE MTM GAIN IN THE ASSESSMENT YEAR UNDER CONSIDERATION OUGHT NOT TO HAVE BEEN TREATED AS TAXABLE INCOME OF THE ASSESSEE. 10.2 THAT THE AO/DRP ERRED ON FACTS AND IN LAW I N NOT APPRECIATING THAT ADDITION OF MTM GAIN IN THE ASSESSMENT YEAR UNDER C ONSIDERATION, WHEN MTM LOSS WAS ALREADY DISALLOWED IN AY 2009-10, RESULTED IN DOUBLE ADDITION OF THE VERY SAME AMOUNT. 10.3 THAT THE DRP ERRED IN UPHOLDING THE ACTION OF THE AO, MERELY ON THE GROUND THAT THE ASSESSEE HAD OFFERED THE SAID AMOUN T TO TAX IN THE RETURN OF INCOME, WITHOUT APPRECIATING THE DISALLOWANCE OF MT M LOSS MADE BY THE AO IN AY 2009-10. 10.4 THAT THE DRP ERRED ON FACTS AND IN LAW IN U PHOLDING THE ACTION OF THE AO, FAILING TO APPRECIATE THAT TAXABLE INCOME HAS T O BE COMPUTED/ ASSESSED AS PER THE PROVISIONS OF THE TAX AND NOT SIMPLY ON THE BASIS OF POSITION TAKEN BY THE ASSESSEE WHILE FILING THE RETURN OF INCOME. 10.5 WITHOUT PREJUDICE, EVEN OTHERWISE, ADDITION IN RESPECT OF MTM GAIN, IF AT ALL, SHOULD BE RESTRICTED ONLY TO THE NET GAIN, AFT ER ADJUSTMENT OF LOSSES. 11. THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN DISALLOWING RS.86,39,727, BEING THE AMOUNT OF NON-COMPETE FEE PAID BY THE ASS ESSEE IN THE ASSESSMENT YEAR UNDER CONSIDERATION, BY TREATING THE SAME AS C APITAL IN NATURE. 12. THAT THE AO/DRP ERRED ON FACTS AND IN LAW IN NOT ADJUDICATING THE CLAIM OF WEIGHTED DEDUCTION UNDER SECTION 35(2AB) OF THE ACT, ON THE COST OF ASSETS PROVIDED TO THE EMPLOYEES WORKING IN APPROVED RESEA RCH & DEVELOPMENT (R&D) FACILITIES AND ENGAGED IN EXECUTION OF R&D AC TIVITIES. 13. THAT THE AO/DRP ERRED BOTH ON FACTS AND IN LA W IN NOT ADJUDICATING THE CLAIM OF RS.9,31,26,114, BEING HEDGING CHARGES TOWA RDS INVESTMENT MADE BY IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 123 - THE COMPANY IN OVERSEAS SUBSIDIARY COMPANIES INCURR ED TO PROTECT IT AGAINST FOREIGN EXCHANGE RATE VOLATILITY AS DEDUCTIBLE UNDE R SECTION 37(1) OF THE ACT. 14. THAT THE AO/DRP ERRED BOTH ON FACTS AND IN L AW IN NOT ADJUDICATING THE CLAIM OF RS.8,64,70,548 ON ACCOUNT OF ADJUSTMENT OF HEDGING CHARGES PERTAINING TO THE COST OF FIXED ASSETS AGAINST THEI R COST AND ALLOWING DEPRECIATION THEREON UNDER THE PROVISIONS OF THE AC T. 15. THAT THE AO/DRP ERRED IN MAKING ARBITRARY/ EXTR ANEOUS OBSERVATIONS BASED ON CONJECTURES/ SURMISES AND UNSOUND PRESUMPT IONS, WHICH ARE NOT IN ACCORDANCE WITH THE FACTS OF THE CASE. 16. THAT THE LD.AO ERRED ON FACTS AND IN LAW IN LAW IN CHARGING INTEREST UNDER SECTIONS 234B, 234C AND 234D OF THE ACT 17. THAT THE ABOVE GROUNDS OF OBJECTION ARE INDEPEN DENT OF, AND WITHOUT PREJUDICE TO ONE ANOTHER. 18. THAT THE ASSESSEE CRAVES LEAVE TO ALTER, AMEND OR WITHDRAW ALL OR ANY GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. THE ASSESSEE HAS RAISED ADDITIONAL GROUNDS OF APPEA L VIDE APPLICATION DATED 20/01/2018 WHICH READ AS UNDER: IN ADDITION TO THE GROUNDS ALREADY TAKEN WITH RESPE CT TO THE ISSUE OF TAXABILITY FO MARK TO MARKET GAINS IN THE PRESENT APPEAL VIDE GROUND NO.10, THE APPELLANT WISHES TO RAISE THE FOLLOWING ADDITIONAL GROUNDS, WHICH ARE WITHOUT PREJUDICE TO THE ORIGINAL GROUNDS: TAXABILITY OF MARK TO MARKET (MTM) GAINS RS.19,69 ,12,65,001/- 10.6. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LEARNED ASSESSING OFFICER / DISPUTE RESOLUTION PANEL GROSSL Y ERRED IN TAXING THE REVERSALS OF MTM LOSSES AMOUNTING TO RS.19,69,12,65,001/- WHILE COMPUTING THE BOOK PROFITS U/S.115JB OF THE ACT WITHOUT APPRECIATING THAT AN I NCOME WHICH IS OTHERWISE NOT CHARGEABLE TO TAX UNDER NORMAL PROVISIONS OF THE AC T CANNOT BE BROUGHT TO TAX BY VIRTUE OF MINIMUM ALTERNATE TAX (MAT) PROVISIONS. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 124 - 10.7. WITHOUT PREJUDICE TO THE ABOVE, THE ASSESSING OFFICER / DISPUTE RESOLUTION PANEL ERRED IN NOT REDUCING THE AMOUNT OF PROVISION FOR MTM LOSSES AMOUNTING TO RS.19,67\9,12,65,001/- REVERSED DURING THE YEAR AND CREDITED TO THE PROFIT AND LOSS ACCOUNT TO THE EXTENT THEY HAVE BEEN ADDED BACK IN AY 2009-10 (BEING RS.14,31,63,20,000/-) WHILE COMPUTING THE BOOK PROF ITS IN TERMS OF CLAUSE (I) TO EXPLANATION 1 TO SECTION 11JB(2) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHD RAW ALL OR ANY GROUNDS OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 83. THE ISSUE RAISED BY THE ASSESSEE IN THE GROU ND NO 1 TO 3, AND 15 TO 18 ARE IN GENERAL AND CONSEQUENTIAL IN NATURE. THER EFORE, WE DISMISS THE SAME. 84. THE ISSUE RAISED BY THE ASSESSEE IN GROUND N O 4 IS THAT THE LD. AO/DRP ERRED IN TREATING THE ASSESSEE AS A TESTED P ARTY INSTEAD OF AES AS THE TESTED PARTY. 85. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DE CIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 2 TO 4 VIDE PARA NO 10 OF THIS ORDER BY ALLOWING THE SAME FOR STATISTICAL PURPOSES. PLEASE REFER THE RELEVANT PARA FOR OUR DE TAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE, GROUND NO. 4 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 86. THE ISSUE RAISED BY THE ASSESSEE IN THE GRO UND NO. 5 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ACTION OF THE AO AS A R EVERSAL OF DEFERRED EMPLOYEES COMPENSATION TREATING THE SAME AS INCOME . IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 125 - 87. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DE CIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 6 VIDE PARA NO 21 & 22 OF THIS ORDER BY ALLOWING THE SAME FOR THE STATISTICAL PURPOSES. PLEASE REFER THE RELEVANT PARA FOR OUR DE TAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GROUND NO. 5 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 88. THE ISSUE RAISED BY THE ASSESSEE IN GROUND N O 6 IS THAT THE LD. DRP ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PAYMENT TO RCHS U/S 37 OF THE ACT. 89. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND D ECIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 7 VIDE PARA NO. 29 & 30 OF THIS ORDER IN FAVOR OF THE ASSE SSEE. PLEASE REFER THE RELEVANT PARA FOR OUR DETAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GROUND NO. 6 OF THE ASSESSEES APPEAL IS ALLO WED. 90. THE ISSUE RAISED BY THE ASSESSEE IN THE GROUN D NO. 7 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ADDITION MADE BY THE AO AMOUNTING TO RS. 4,89,02,774/- U/S 14A OF THE ACT. 91. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DE CIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 8 VIDE PARA NO. 37 & 38 OF THIS ORDER IN FAVOR OF THE ASSE SSEE. PLEASE REFER THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 126 - RELEVANT PARA FOR OUR DETAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GROUND NO. 7 OF THE ASSESSEE IS ALLOWED. 92. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO 8 IS THAT THE LD. DRP ERRED IN CONFIRMING THE ADDITION MADE BY THE AO AMO UNTING TO RS. 4,89,02,774/- WHILE COMPUTING THE BOOK PROFIT U/S 1 15JB OF THE ACT ON ACCOUNT OF DISALLOWANCE U/S 14A OF THE ACT. 93. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DE CIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 9 VIDE PARA NO 45 & 46 OF THIS ORDER IN FAVOUR OF THE ASSE SSEE. PLEASE REFER THE RELEVANT PARA FOR OUR DETAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GROUND NO. 8 OF THE ASSESSEE IS ALLOWED. 94. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 9 IS THAT THE LD. DRP ERRED BY CONFIRMING THE ORDER OF THE AO BY HOLD ING THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTIO N 80IB/ 80IC OF THE ACT. 95. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN GRO UND NO. 10 VIDE PARA NO. 57 & 58 OF THIS ORDER IN FAVOR OF THE ASSE SSEE. PLEASE REFER THE RELEVANT PARA FOR OUR DETAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GROUND NO. 9 OF THE ASSESSEE IS ALLOWED. 96. THE ISSUE RAISED BY THE ASSESSEE IN THE GR OUND NO. 10 AND THE ADDITIONAL GROUND IS THAT THE LD.DRP ERRED IN CONFI RMING THE ACTION OF THE IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 127 - AO BY TREATING THE MTM GAIN OF RS. 1983,86,34,040/- AS TAXABLE INCOME UNDER THE NORMAL PROVISION OF TAX, AND RS. 1969,12, 65,001/- U/S 115JB OF THE ACT. 97. AT THE OUTSET, WE NOTE THAT THE PROVISION W AS CREATED BY THE ASSESSEE FOR RS. 3331.61 CRORES ON ACCOUNT OF MTM L OSS IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2009-10 WHICH WAS NOT ALLOWED AS A DEDUCTION IN THE ASSESSMENT FRAMED UNDER SECTI ON 143(3) R.W.S. 144C OF THE ACT VIDE DATED 30-1-2014 UNDER NORMAL COMPUT ATION OF INCOME. SIMILARLY THE PROVISION FOR RS. 1431.63 CRORES WERE TREATED AS A CONTINGENT LIABILITY WHILE DETERMINING THE INCOME U NDER SECTION 115JB OF THE ACT IN THE ASSESSMENT YEAR 2009-10. THE LD. AR BEFORE US CLAIMED THAT A PART OF THE AFO RESAID AMOUNT WAS WRITTEN BACK IN THE YEAR UNDER CONSIDERATION, THERE FORE THE SAME CANNOT BE TREATED AS INCOME EITHER UNDER NORMAL COMPUTATIO N OF INCOME OR UNDER SECTION 115JB OF THE ACT AS THE SAME HAS ALREADY SU FFERED THE TAX AND SUCH GROUND OF APPEAL WAS NOT PRESSED BEFORE THE IT AT IN ITA 1782/AHD/2014. 98. ON THE OTHER HAND, THE LD. DR BEFORE US AGR EED WITH THE SUBMISSION OF THE LD. AR IF THE AMOUNT WRITTEN BACK CORRELATES WITH THE SAME PROVISION WHICH HAS SUFFERED TO TAX IN THE IMMEDIAT E PRECEDING AY 2009- 10. 98.1. AT THIS JUNCTURE, WE FIND TO REFER THE RE LEVANT FINDING OF THE AO AS REPRODUCED UNDER: IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 128 - THE ASSESSEE POINTED OUT THAT THE AO VIDE ORDER DA TED 30/01/2014 FOR AY 2009-10, DID NOT ALLOW THE MTM LOSS CONSIDERING THE SAME TO BE CONTINGENT LOSS, RESULTING IN CONSEQUENT REDUCTION IN CARRIED FORWARD LOSS TO AY 2010-11 BY RS.6094.43 MN. IT WAS THEREFORE SUBMITTED BY TH E ASSESSEE THAT : IT IS RESPECTFULLY SUBMITTED THAT THE COMPANY CONT INUES TO BONAFIDELY BELIEVE THAT MTM GAINS/LOSSES ON FORWARD CONTRACTS REPRESEN TS CRYSTALLIZED GAINS / LOSSES AND ARE, THEREFORE, TAXABLE/ALLOWABLE AS DE DUCTION IN THE RELEVANT YEAR. THE COMPANY HAS, THEREFORE, RIGHTLY CLAIMED MTM LOS S IN THE ASSESSMENT YEAR 2009-10 AND ALSO CONSISTENT WITH ITS STAND, RIGHTLY OFFERED FOR TAX MTM GAINS IN THE ASSESSMENT YEAR 2010-11. AFTER VERYING THE SUBMISSIONS OF THE ASSESSEE, IT I S OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAS EARNED GAIN ON MTM AND HAS REQUESTED NOT TO CONSIDER THE SAME AS TAXABLE AND T O BE EXCLUDED FROM INCOME PENDING ADJUDICATION OF APPEAL FILED BEFORE ITAT. HOWEVER, THE CONTENTIONS OF THE ASSESSEE ARE NOT ACCEPTABLE. IT IS NOTED TH AT THE ASSESSEE HAS NOT ACCEPTED THAT MTM LOSS AS NOT DEDUCTIBLE BEING CONT INGENT IN NATURE AND HAS FILED AN APPEAL BEFORE ITAT AGAINST THE ASSESSMENT ORDER FOR THE PRECEDING YEAR I.E. AY 2009-10. THEREFORE, THE MATTER IS NOT FINALLY CONCLUDED AND I HOLD THAT MTM GAIN DURING THE YEAR ON SIMILAR TRANSACTIONS IS SUBJECT TO TAXATION WHILE COMPUTING TAXABLE INCOME UNDER NORMAL PROVISIONS AS WELL AS U NDER SECTION 115JB. SINCE IN LAST ASSESSMENT ORDER ENTIRE MTM LOSS WAS DISALLOWED, TREATING THE SAME AS CONTINGENT LIABILITY, CARRIED FORWARD BUSIN ESS LOSS AND UNABSORBED DEPRECIATION WAS REDUCED AND AVAILABLE B/F LOSS FOR SET OFF U/S.72 WAS RESTRICTED DURING AY 10-11 AT RS.9,20,46,46,935/-. BASE ON THE ABOVE REMARKS THE TAXABLE INCOME OF THE ASSESSEE IS COMPUTED UNDER THE NORMAL PROVISIONS AS WELL AS FOR CALCULAT ING THE BOOKS PROFITS U.S.155JB FOR AY 10-11 WHERE BY THE MTM GAIN WHICH IS TAXABLE DURING THE YEAR AS WELL AS THE MTM LOSS OF THE EARLIER YEAR IS TREATED AS CONTINGENT LIABILKTY. 99. FROM THE ABOVE, WE NOTE THAT THE AMOUNT WRI TTEN BACK BY THE ASSESSEE HAS ALREADY SUFFERED THE TAX IN THE IMMEDI ATE PRECEDING AY 2009-10. ACCORDINGLY, WE HOLD THAT THE AMOUNT WRITT EN BACK BY THE ASSESSEE CANNOT BE SUBJECT TO TAX EITHER UNDER NORM AL COMPUTATION OF IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 129 - INCOME OR UNDER SECTION 115JB OF THE ACT IN THE YEA R UNDER CONSIDERATION. HOWEVER, WE FIND THAT THE PROVISION FOR RS. 1431.63 CRORES WAS SUFFERED TO TAX UNDER SECTION 115JB OF THE ACT IN THE IMMEDIATE PRECEDING AY 2009-10 WHEREAS IT HAS BEEN WRITTEN BA CK IN THE YEAR UNDER CONSIDERATION FOR RS. 1969.13 CRORES. THUS THE DIFF ERENCE BETWEEN AMOUNT OF PROVISION DISALLOWED UNDER SECTION 115JB OF THE ACT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR 2009-10 VIZ A V IZ THE AMOUNT WRITTEN BACK IN THE YEAR UNDER CONSIDERATION IS OF RS. 537.50 CRORES ( 1969.13-1431.63 CRORES). THUS THE ASSESSEE CANNOT C LAIM THE RELIEF MORE THAN THE AMOUNT SUFFERED TO TAX IN THE IMMEDIATE PR ECEDING AY 2009-10 WHILE DETERMINING THE INCOME UNDER SECTION 115 JB O F THE ACT. THUS WE DIRECT THE AO TO RESTRICT THE RELIEF TO THE ASSESSE E WHILE DETERMINING THE INCOME UNDER SECTION 115 JB OF THE ACT TO THE EXTEN T OF RS. 1431.63 CRORES ONLY. HENCE THE ASSESSEE GET RELIEF FOR PART OF THE AMOUNT AS DISCUSSED ABOVE. THUS THE GROUND OF APPEAL OF THE A SSESSEE IS PARTLY ALLOWED. 100. THE ISSUE RAISED BY THE ASSESSEE IN THE GROU ND NO. 11 IS THAT THE LD.DRP ERRED IN DISALLOWING THE NON COMPETE FEES PA ID BY THE ASSESSEE AMOUNTING TO RS. 86,39,727/- TREATING THE SAME AS C APITAL EXPENDITURE. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 14 VIDE PARA NO 72 OF THIS ORDER WHICH HAS BEEN DISMISSED BY US AS THE SAME WAS NOT PRESSED BEFORE US. PLEASE REFER THE RELEVANT PARA F OR OUR DETAILED IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 130 - DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GR OUND NO. 11 OF THE ASSESSEES APPEAL IS DISMISSED. 101. THE ISSUE RAISED BY THE ASSESSEE IN THE GRO UND NO. 12 IS THAT THE LD.DRP ERRED IN NOT ADJUDICATING THE CLAIM OF THE A SSESSEE ON ACCOUNT OF WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT. 102. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN GRO UND NO. 15 VIDE PARA NO. 74 OF THIS ORDER WHICH HAS BEEN SET ASIDE TO THE AO FOR FRESH ADJUDICATION AS PER THE LAW. PLEASE REFER THE RELEV ANT PARA FOR OUR DETAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GR OUND NO. 12 OF THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOS ES. 103. THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO 13 IS THAT THE LD. DRP ERRED IN NOT ADJUDICATING THE CLAIM OF THE ASSE SSEE ON ACCOUNT OF HEDGING CHARGES TOWARDS INVESTMENT AMOUNTING TO RS. 9,31,26,114/- U/S 37(1) OF THE ACT. 104. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 17 VIDE PARA NO 79 & 80 OF THIS ORDER WHICH HAS BEEN SET ASIDE TO THE AO FOR FRESH ADJUDICATION AS PER THE LAW. PLEASE REFER THE RELEVANT PARA FOR OUR DETAILED DISCUSSION THEREIN, WE DIRECT ACCORDIN GLY. HENCE GROUND NO. 13 OF THE ASSESSEES APPEAL IS ALLOWED FOR STATISTI CAL PURPOSES. IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 131 - 105. THE ISSUE RAISED BY THE ASSESSEE IN GROUND N O 14 IS THAT THE LD. DRP ERRED IN NOT ADJUDICATING THE CLAIM OF THE ASSE SSEE ON ACCOUNT OF HEDGING CHARGES TOWARDS THE COST OF FIXED ASSETS AM OUNTING TO RS. 8,84,70,548/-. 106. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY US IN ASSESSEE'S APPEAL VIDE ITA NO. 1782/DEL/2014 IN THE GROUND NO. 17 VIDE PARA NO 79 & 80 OF THIS ORDER WHICH HAS BEEN S ET ASIDE TO THE AO FOR FRESH ADJUDICATION AS PER THE LAW. PLEASE REFER THE RELEVANT PARA FOR OUR DETAILED DISCUSSION THEREIN, WE DIRECT ACCORDINGLY. HENCE GROUND NO. FOURTEEN OF THE ASSESSEES APPEAL IS ALLOWED FOR ST ATISTICAL PURPOSES. 107. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT(TP) A NO.781/DEL/2015 FOR AY 2010-11 IS PARTLY ALLOWED FO R STATISTICAL PURPOSES. 108. IN THE COMBINED RESULT, BOTH THE APPEALS O F THE ASSESSEE FOR AYS 2009-10 AND 2010-11 ARE PARTLY ALLOWED FOR STATISTI CAL PURPOSES. THIS ORDER PRONOUNCED IN OPEN COURT ON 05/09/2019 SD/- SD/- ( JUSTICE P.P. BHATT ) ( WASEEM AHMED ) PRESIDENT ACCOUNTANT MEMBER AHMEDABAD; DATED 05 /09/2019 &.., .(.. / T.C. NAIR, SR. PS IT(TP)A NOS.1782/DEL/2014 & 781/DEL/2015 RANBAXY LABORATORIES LTD. VS. DCIT/ADDL.CIT ASST.YEARS 2009-10 & 2010-11 RESPECTIVELY - 132 - / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. )*+ , / CONCERNED CIT 4. , ( ) / THE CIT(A)-NEW DELHI-2 5. /01 ((*+ , *+# , ) / DR, ITAT, AHMEDABAD 6. 145 6 / GUARD FILE. / BY ORDER, / ( //TRUE COPY// / ( DY./ASSTT.REGISTRAR) $%, / ITAT, AHMEDABAD 1. DATE OF DICTATION .. (WORD PROCESSED BY HONBLE AM IN HIS COMPUTER) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 29.4.2019/04.09.2019 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.5.9.2019 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 5.9.2019 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER