DCIT, Bangalore V. M/s Millipore India Ltd., Bangalore

ITA 787/BANG/2012

• Counselvise Citation: 78721114 RSA 2012
• Duration Of Justice: 2 year(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 06-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BIJOY KUMAR PANDA
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3); 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI PRAMOD M. JAGTAP, ACCOUNTANT MEMBER AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER IT (TP) A NO.689/BANG/2012 ASSESSMENT YEAR : 2007-08 M/S. MILLIPORE (INDIA) PVT. LTD., # 50A, 2 ND PHASE, RING ROAD, PEENYA, BANGALORE 560 068. PAN : AACCM 1226B VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(1), BANGALORE. APPELLANT RESPONDENT IT (TP) A NO.787/BANG/2012 ASSESSMENT YEAR : 2007-08 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(1), BANGALORE. VS. M/S. MILLIPORE (INDIA) PVT. LTD., # 50A, 2 ND PHASE, RING ROAD, PEENYA, BANGALORE 560 068. PAN : AACCM 1226B APPELLANT RESPONDENT ASSESSEE BY : SHRI PADAMCHAND KHINCHA, C.A. REVENUE BY : SHRI BIJOY KUMAR PANDA, ADDL.CIT(DR) DATE OF HEARING : 25.06.2014 DATE OF PRONOUNCEMENT : 04.07.2014 IT(TP)A NOS.689 & 787/BANG/2012 PAGE 2 OF 23 O R D E R PER PRAMOD M. JAGTAP, ACCOUNTANT MEMBER THESE TWO APPEALS, ONE FILED BY THE ASSESSEE BEI NG ITA 689/B/12 AND THE OTHER FILED BY THE REVENUE BEING ITA 789/B/ 12 ARE CROSS APPEALS WHICH ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT (APPEALS)-VI, BANGALORE DATED 19.3.2012. 2. ALL THE GROUNDS RAISED IN THE APPEAL OF THE REV ENUE AND THE GROUNDS I TO V (INCLUDING GROUNDS V.1 TO V.8) INVOLVE A COMM ON ISSUE RELATING TO THE ADDITION OF RS.27,26,115 MADE BY THE AO ON ACCOUNT OF TP ADJUSTMENT WHICH IS PARTLY SUSTAINED BY THE LD. CIT(APPEALS). 3. THE FACTS GIVING RISE TO THIS ISSUE ARE AS FOLLO WS. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WHICH IS ENGAGED IN T HE BUSINESS OF PROVIDING CUSTOM ENGINEERED PURIFICATION SYSTEMS TH AT ARE BUILT AND CONFIGURED TO FIT WITHIN A MANUFACTURING PROCESS FO R PHARMACEUTICALS AND BIOPHARMACEUTICALS. IT ALSO PROVIDES CONSULTING AN D CUSTOMER SUPPORT SERVICES FOR HIGH VALUE APPLICATIONS. RETURN OF INC OME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 31.10.2007 DECLARI NG TOTAL INCOME OF RS.35,14,99,517. DURING THE YEAR UNDER CONSIDERATI ON, THE ASSESSEE HAD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIO NS WITH ITS ASSOCIATED ENTERPRISES (AE). IT(TP)A NOS.689 & 787/BANG/2012 PAGE 3 OF 23 INTERNATIONAL TRANSACTIONS (AS MENTIONED IN 92CE RE PORT) PURCHASE OF RAW MATERIALS & COMPONENTS RS.27,25,69 ,199 PURCHASE OF SPARES RS.12,75,88,068 SALE OF FILTRATION SYSTEMS RS.25,90,68,493 RECEIPT OF COMMISSION, CONSULTANCY & SERVICE CHARGE S RS. 9,38,77,028 INCOME OF R&D DIVISION RS.66,16,525 INCOME FROM SOFTWARE DIVISION RS.54,68,198 PURCHASE OF LAB EQUIPMENT RS.4,83,607 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, REF ERENCE U/S. 92CA WAS MADE BY THE AO TO THE TPO TO DETERMINE THE ARM S LENGTH PRICE (ALP) OF THE ABOVE MENTIONED TRANSACTIONS. IN THE TP STU DY REPORT SUBMITTED BY THE ASSESSEE, ALL THE INTERNATIONAL TRANSACTIONS WE RE AGGREGATED BY THE ASSESSEE AT THE ENTERPRISE LEVEL AND TP ANALYSIS WA S MADE BY APPLYING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) . SINCE THE OPERATING PROFIT MARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE WAS LESS THAN THE OPERATING MARGIN OF THE ASSESSEE AT THE ENTERPRISE LEVEL, THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AES WERE CLAIMED TO BE AT ARMS LENGTH BY THE ASSESSEE. DURING THE COURSE OF PROCEEDINGS BEF ORE THE TPO, THE ASSESSEE FURNISHED THE SEGMENTAL FINANCIAL DETAILS AS UNDER:- DESCRIPTION/AMOUNT (RS.) MANUFACTURING SOFTWARE SERVICES R&D SERVICES OPERATING REVENUE 123,08,58,020 54,68,198 66,16,525 OPERATING COST 85,57,48,873 43,38,044 62,18,911 OPERATING PROFIT (PBIT) 37,51,09,147 11,30,154 3,96 ,614 OPERATING PROFIT TO SALES RATIO 30.48% OPERATING PROFIT TO COST RATIO 26.05% 6.39% IT(TP)A NOS.689 & 787/BANG/2012 PAGE 4 OF 23 5. ACCORDING TO THE TPO, WHEN THE ASSESSEE WAS INVO LVED IN THREE DISTINCT ACTIVITIES AS EVIDENCED BY THE SEGMENTAL D ETAILS, IT OUGHT TO HAVE DONE THE TP ANALYSIS SEPARATELY IN RESPECT OF EACH SEGMENT BY APPLYING THE MOST APPROPRIATE METHOD. HE ACCORDINGLY PROCEE DED TO DO SUCH EXERCISE SEPARATELY FOR EACH SEGMENT. INSOFAR AS T HE MANUFACTURING SEGMENT IS CONCERNED, THE TPO FOLLOWED TNMM AS THE MOST APPROPRIATE METHOD AND FOUND THAT THE AVERAGE PROFIT MARGIN OF THE FOUR COMPARABLES SELECTED BY HIM WAS 8.38% ON SALES. SINCE THE PROF IT MARGIN OF THE ASSESSEE IN THE MANUFACTURING SEGMENT WAS 30.48% ON SALES, I.E., MORE THAN THE AVERAGE PROFIT MARGIN OF THE COMPARABLES S ELECTED BY HIM, THE TPO HELD THAT THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN THE MANUFACTURING SEGMENT WERE AT ARMS LENGTH. 6. INSOFAR AS THE SOFTWARE SERVICES SEGMENT IS CONC ERNED, THE AO FOUND THAT THE INTERNATIONAL TRANSACTIONS OF THE AS SESSEE IN THIS SEGMENT WERE LESS THAN RS.1 CRORE AND SINCE RELIABLE DATA O F THE COMPARABLE COMPANIES IN THIS SEGMENT WITH TURNOVER LESS THAN R S.1 CRORE WAS NOT AVAILABLE, THE TPO DID NOT CARRY OUT ANY SEPARATE T P STUDY IN RESPECT OF THIS SEGMENT AND THEREBY ACCEPTED THE PRICE CHARGED BY THE ASSESSEE TO ITS AE AS AT ARMS LENGTH. 7. IN RESPECT OF R&D SERVICE SEGMENT, THE TP ANALYS IS WAS DONE BY THE AO BY FOLLOWING THE TNMM TAKING OPERATING PROFIT T O OPERATING COST IT(TP)A NOS.689 & 787/BANG/2012 PAGE 5 OF 23 (OP/OC) AS THE PRICE LEVEL INDICATOR (PLI) AND APPLYING THE FOLLOWING FILTERS/CRITERIA FOR SEARCHING THE COMPARABLES:- - COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2006-07 WERE EXCLUDED. - COMPANIES WHOSE R&D OR RELATED SERVICE INCOME > RS.25 CR. WERE EXCLUDED. - COMPANIES WHOSE R&D OR RELATED SERVICE REVENUES ARE LESS THAN 75% OF THE TOTAL OPERATING REVENUES WERE EXCLU DED. - COMPANIES WHO HAVE MORE THAN 25% RELATED PARTY TRANSACTIONS (SALES AS WELL AS EXPENDITURE COMBINED ) OF THE SALES WERE EXCLUDED. - COMPANIES WHO HAVE LESS THAN 25% OF THE SALES AS EXPORT SALES WERE EXCLUDED. - COMPANIES WHO HAVE PERSISTENT LOSSES FOR THE PER IOD UNDER CONSIDERATION WERE EXCLUDED. - COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING (I.E. NOT MARCH 31, 2006) OR DATA OF THE COMPANY DOES NOT FAL L WITHIN 12 MONTH PERIOD I.E. 01-04-2005 TO 31-03-2006, WERE REJECTED. - COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM T HAT OF TAXPAYER WERE EXCLUDED. 8. APPLYING THE ABOVE FILTERS/CRITERIA, THE FOLLOWI NG FOUR COMPARABLES WERE SELECTED BY THE TPO:- 1. AGILE ELECTRIC TECHNOLOGIES PVT. LTD. 2. IDC (INDIA) LTD. 3. CELESTIAL LABS LTD. 4. OIL FIELD INSTRUMENTATION (INDIA) LTD. IT(TP)A NOS.689 & 787/BANG/2012 PAGE 6 OF 23 9. WHEN THE ABOVE 4 COMPARABLES PROPOSED BY THE TPO WERE CONFRONTED TO THE ASSESSEE, THE LATTER RAISED ITS O BJECTIONS AGAINST EACH OF THE SAID COMPARABLES. AFTER TAKING INTO CONSIDERAT ION THE OBJECTIONS RAISED BY THE ASSESSEE, THE TPO EXCLUDED AGILE ELECTRIC TE CHNOLOGIES PVT. LTD. AND SELECTED FINALLY THE REMAINING 3 COMPARABLES FO R THE PURPOSE OF TP ANALYSIS. SINCE THE AVERAGE OP/OC OF THE SAID 3 CO MPARABLES WAS 50.23%, THE AO APPLIED THE SAME TO THE OPERATING CO ST OF RS.62,18,911 IN RESPECT OF R&D SERVICES SEGMENT TO DETERMINE THE AR MS LENGTH PRICE OF THE TRANSACTIONS OF THE SAID SEGMENT AT RS.93,42,670 AG AINST THE PRICE CHARGED BY THE ASSESSEE AT RS.66,16,525 IN HIS ORDER PASSED U/S. 92CA OF THE ACT AND BASED ON THAT, ADDITION OF RS.27,26,145 WAS MAD E BY THE AO TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TP ADJUS TMENT IN THE ASSESSMENT COMPLETED U/S. 143(3) VIDE HIS ORDER DAT ED 27.01.2011. 10. AGAINST THE ORDER PASSED BY THE AO U/S. 143(3), APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A), DI SPUTING INTER ALIA THE ADDITION MADE BY THE TPO/AO ON ACCOUNT OF TP ADJUST MENT. 11. AFTER CONSIDERING THE SUBMISSIONS MADE ON BEHAL F OF THE ASSESSEE AS WELL AS MATERIAL AVAILABLE ON RECORD BEFORE HIM, THE LD. CIT(APPEALS) UPHELD THE ACTION OF THE TPO IN MAKING COMPARABLE A NALYSIS BASED ON SINGLE YEAR DATA. HE ALSO UPHELD THE ACTION OF THE TPO IN DENYING THE ADJUSTMENT CLAIMED BY THE ASSESSEE ON ACCOUNT OF RI SK AND WORKING CAPITAL. FURTHER, THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF +/- 5% AS PER THE IT(TP)A NOS.689 & 787/BANG/2012 PAGE 7 OF 23 SECOND PROVISO TO SECTION 92C(2) WAS ALSO REJECTED BY THE LD. CIT(A), UPHOLDING THAT THE VARIATION BETWEEN THE ARMS LENG TH PRICE DETERMINED BY THE TPO AND THE PRICE DECLARED BY THE ASSESSEE BEIN G MORE THAN 5%, THE ASSESSEE WAS NOT ENTITLED FOR SUCH ADJUSTMENT. 12. THE LD. CIT(A) ALSO DID NOT ACCEPT THE TWO COMP ARABLES TAKEN BY THE ASSESSEE FOR TP ANALYSIS IN THE TP STUDY REPORT AND UPHELD THE ACTION OF THE TPO IN REJECTING THE SAID TWO COMPARABLES. THE LD. CIT(A), HOWEVER, FOUND MERIT IN THE SUBMISSIONS MADE ON BEHALF OF TH E ASSESSEE SEEKING EXCLUSION OF 3 COMPARABLES SELECTED BY THE TPO AND HELD THAT THE 3 ENTITIES SELECTED BY THE TPO COULD NOT BE TAKEN AS COMPARABLES AFTER DISCUSSING ALL THE RELEVANT ASPECTS OF THE MATTER I N PARAS 2.10.1 TO 2.10.3 OF HIS IMPUGNED ORDER AS UNDER:- 2.10.1 IN RESPECT OF M/S. IDC (INDIA) LIMITED , IT IS SUBMITTED THAT THE COMPANY IS PRIMARILY UNDERTAKING RESEARCH & SURVEY SERVICES FOR PRODUCTS AND AS PER THE INFORMA TION AVAILABLE IN THE WEBSITE, THE COMPANY PROVIDES MARKET INTELLI GENCE, ADVISORY SERVICES AND EVENTS FOR THE INFORMATION TE CHNOLOGY, TELECOMMUNICATION AND CONSUMER TECHNOLOGY MARKETS A ND THEREFORE THE COMPANY IS FUNCTIONALLY NOT COMPARABL E WITH THE APPELLANT. IT IS FURTHER SUBMITTED THAT THE APPELLA NT COMPANY IS ENGAGED IN SCIENTIFIC RESEARCH WHICH CANNOT BE COMP ARED WITH THE MARKET RESEARCH AND MARKET ANALYSIS. TO SUPPORT THE CONTENTION THE APPELLANT RELIED ON THE DECISION OF THE HONOURA BLE ITAT MUMBAI, IN THE CASE OF TEVAPHARM PVT LTD VS ADDL.CI T ( ITA NO.6623/MUM/2011) AND THEREFORE IT IS SUBMITTED THA T THE ABOVE COMPANY SHOULD BE EXCLUDED FROM THE COMPARABLES. HAVING HEARD THE CONTENTION OF THE APPELLANT, ON PERUSAL OF PARA 3 OF THE ORDER THE HONOURABLE ITAT MUMBAI, IN THE CASE OF TEVAPHARM PVT LTD (SUPRA), IT IS NOTICED THAT THE H ONOURABLE IT(TP)A NOS.689 & 787/BANG/2012 PAGE 8 OF 23 ITAT DISTINGUISHED THE FUNCTION OF THE ABOVE COMPAN Y WITH R&D SERVICES AS UNDER: IDC (INDIA) LIMITED (IDC): IDC PRIMARILY UNDERTAKE S RESEARCH AND SURVEY SERVICES FOR PRODUCTS. IDC RESE ARCH DOCUMENTS COVER AREAS LIKE ENTERPRISE MANAGEMENT APPLICATIONS, BROADBAND, INTERNET AND EBUSINESS, MO BILE USAGE, IT SERVICE EXPORTS AND CONTINUOUS MARKET REV IEW OF COMPUTING AND PERIPHERAL PRODUCTS. SUCH RESEARCH REPORTS PROVIDE MARKET FORECASTS, COMPETITIVE ANALY SES, VENDOR PROFILES AND INFORMATION ON CUSTOMER REQUIREMENTS AND BUYING PATTENS. FURTHER, THE AREAS OF RESEARCH INCLUDE COMMUNICATION SERVICES BROADBAND BUSINESS, NETWORK SERVICES, IP BASED SERVICES, RESI DENTIAL SMALL BUSINESS AND WIRELESS COMMUNICATIONS. THE PRODUCTS AND SERVICES OF IDC CONSIST OF THE FOLLOWI NG: - CUSTOMISED SERVICES: IDC DELIVERS STRATEGIC AND T ACTICAL RESEARCH AND CONSULTING SERVICES TO SUPPORT THE DEVELOPMENT AND IMPLEMENTATION OF BUSINESS STRATEGI ES OF ICT BUILDERS AND PROVIDERS. THESE PROJECTS ARE CUSTOMISED TO ADDRESS THE CLIENTS SPECIFIC BUSINES S PROBLEM. THE UNIQUELY QUALIFIED, MULTI DISCIPLINARY EXPERTS HELD YOU DEVELOP BUSINESS STRATEGIES, FINE TUNE PRODUCT DEVELOPMENT AND PRICING, DEFINE AND IMPLEME NT MARKETING GOALS, ASSESS COMPETITIVE FORCES AND EVAL UATE JOINT VENTURES AND ACQUISITIONS. - STANDARD RESEARCH REPORTS: THESE RESEARCH DOCUMEN TS COVER EVERYTHING IN HARDWARE-PCS PERIPHERALS, SERVE RS, SOFTWARE SERVICES AND KEY INDUSTRY ISSUES. THE RESE ARCH REPORTS PROVIDE MARKET INTELLIGENCE, FORECASTS, COMPETITIVE ANALYSIS, VENDOR PROFILES, INFORMATION ON CUSTOMER REQUIREMENTS AND BUYING PATTERNS. THE FREQUENCY OF STANDARD RESEARCH OFFERINGS MAY BE MON THLY, QUARTERLY, HALF YEARLY AND YEARLY. BASED ON THE ABOVE DESCRIPTIONS OF ACTIVITIES UNDER TAKEN BY IDC IT IS CLEAR THAT IDC ENGAGED IN PROVIDING MA RKET RESEARCH AND SURVEY SERVICES WHICH IS NOT COMPARABL E TO THE FUNCTIONAL PROFILE OF THE ASSESSEE AND ACCORDIN GLY OUGHT NOT TO BE CONSIDERED A COMPARABLE. THE ABOVE FINDING OF THE HONOURABLE ITAT MAKES IT C LEAR THAT THE ABOVE COMPANY CANNOT BE COMPARED WITH THE FUNCTIONS OF THE APPELLANT. THIS FACT HAS EVEN BEEN ADMITTED BY THE TRANSFER IT(TP)A NOS.689 & 787/BANG/2012 PAGE 9 OF 23 PRICING OFFICER, IN PARA 5.5.2 OF ITS ORDER, WHERE HE MENTIONED THAT THE TPO COULD NOT FIND ANY COMPANY WHICH IS EXACTL Y SAME OR NEAR SIMILAR TO THE TAX PAYER IN TERMS OF T HE FUNCTION. IN SUCH CIRCUMSTANCES, THE TPO WAS NOT JUSTIFIED I N INCLUDING THE ABOVE COMPANY IN THE COMPARABLES. ACC ORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE AB OVE COMPANY FROM THE COMPARABLES. 2.10.2 IN RESPECT OF OIL FIELD INSTRUMENTATION INDIA LTD., IT IS SUBMITTED THAT THE COMPANY IS ENGAGED IN SUPPLY OF EQUIPMENT AND RENDERING SERVICES MAINLY FOR GEOLOGICAL OPERAT IONS FOR OIL, GAS AND MINERAL EXPLORATION AND IS ALSO ENGAGED IN MUD LOGGING SERVICES IN INDIA. IT IS SUBMITTED THAT MUD LOGGING SERVICES, ARE NOT SIMILAR TO RESEARCH & DEVELOPMENT SERVICES REND ERED BY IT AND THEREFORE, THE ABOVE COMPANY IS NOT FUNCTIONALLY CO MPARABLE WITH THE APPELLANT. TO SUPPORT THE ARGUMENTS THE AP PELLANT RELIED ON THE DECISION OF THE HONOURABLE ITAT MUMBAI IN TH E CASE OF M/S. TEVAPHARM PVT LTD (SUPRA). HAVING HEARD THE CONTENTION OF THE APPELLANT, AND ON PERUSAL OF THE FINDING GIVEN BY THE TRANSFER PRICIN G OFFICER, IT IS AN UNDISPUTED FACT THAT THE ABOVE COMPANY IS PREDOM INANTLY ENGAGED IN MUD LOGGING SERVICES WHICH HAVE BEEN TRE ATED AS COMPARABLE TO THE R&D SERVICES CARRIED OUT BY THE A PPELLANT. THE HONOURABLE ITAT MUMBAI WHILE DECIDING THE ABOVE COM PARABLE IN THE DECISION QUOTED (SUPRA) HELD THAT THE EXTRACTS OF THE FUNCTIONAL PROFILE OF OIL FIELD FROM ITS WEBSITE AS GIVEN ABOVE AND THE INFORMATION IN THE ANNUAL REPORT OF OIL FIELD O N THE NATURE OF ASSETS EMPLOYED SUCH AS OUTER SHELL OF MUD LOGGING UNITS, SENSORS AND OTHER INSTRUMENTS CLEARLY DEMONSTRATE THE DISPA RITY BETWEEN OIL FIELDS AND ASSESSEE OPERATIONS. AS DISCUSSED E ARLIER THE FUNCTIONAL PROFILE OF ASSESSEE IS IN NATURE OF PROV IDING - CONTRACT RESEARCH AND TESTING SERVICES. OIL FIELD DOES NOT C ARRY OUT ANY OF THESE STIPULATED ACTIVITIES AND ACCORDINGLY OIL FIE LD OUGHT NOT TO BE CONSIDERED A COMPARABLE. IN THE CASE OF THE APPELLANT ALSO THE CONTRACT RESEARCH AND DEVELOPMENT SERVICES UNDE RTAKEN BY THE APPELLANT ARE SIMILAR TO M/S. TEVAPHARM PVT LTD WHI CH CANNOT BE COMPARED WITH THE FUNCTIONAL PROFILE OF OIL FIELD I NSTRUMENTATION INDIA LIMITED. ACCORDINGLY, THE CONTENTIONS OF THE APPELLANT ARE FOUND ACCEPTABLE. THE ASSESSING OFFICER IS THEREFOR E DIRECTED TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. IT(TP)A NOS.689 & 787/BANG/2012 PAGE 10 OF 23 2.10.3 IN RESPECT OF CELESTIAL LABS LTD., REITE RATING THE CONTENTIONS TAKEN BEFORE THE TRANSFER PRICING OFFIC ER, IT IS SUBMITTED THAT THE COMPANY IS ENGAGED IN VARIOUS AC TIVITIES. IN THE ANNUAL REPORT OF THE COMPANY, IT IS MENTIONED T HAT IT IS ENGAGED IN VARIOUS ACTIVITIES LIKE BIO-INFORMATICS SERVICES, SOFTWARE DEVELOPMENT ETC. TO SUPPORT THAT THE APPEL LANT HAS DRAWN THE ATTENTION TOWARDS THE ANNUAL REPORT OF TH E COMPANY. IT IS FURTHER SUBMITTED THAT THE SAME TPO HAS CONSI DERED THIS COMPANY AS COMPARABLE FOR THE SAME ASSESSMENT YEAR FOR COMPANIES ENGAGED IN THE SOFTWARE DEVELOPMENT SERVI CES WHICH REFLECTS THAT THE FUNCTIONAL PROFILE OF THE COMPANY IS UNCLEAR AND THE TPO HAS ADOPTED THE COMPANY AS COMPARABLE ONLY WITH AN INTENTION TO MAKE HIGH PITCH ASSESSMENT. THE APPELL ANT TO SUPPORT THAT THE COMPANY IS NOT FUNCTIONALLY SIMILAR TO THE APPELLANT, ALSO RELIED ON THE DECISION OF THE HONOURABLE MUMBAI ITA T IN THE CASE OF M/S. TEVAPHARM PVT LTD. HAVING HEARD THE CONTENTION OF THE APPELLANT, ONE THING IS CLEAR THAT THE NATURE OF THE OPERATION OF THE COMPA NY IS AMBIGUOUS WHICH HAS EVEN BEEN ACKNOWLEDGED BY THE T RANSFER PRICING OFFICERS BY SELECTING THE COMPANY AS COMPAR ABLE TO THE SOFTWARE DEVELOPMENT SERVICES IN SOME OF THE CASES AND ALSO AS COMPARABLE TO THE R&D SERVICES IN OTHER CASES. THE HONOURABLE ITAT MUMBAI IN THE CASE OF M/S. TEVAPHARM PVT LIMIT ED (SUPRA) HELD THAT ACCORDING TO THE LEARNED D R CELESTIAL LABS IS ALS O IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AN D SHOULD BE CONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY T HE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELAT ION TO A SOFTWARE FOR DISCOVERY OF NEW DRUGS. MOREOVER THE COMPANY AL SO IS OWNER OF THE IPR. THERE IS HOWEVER A REFERENCE TO DEVELOP MENT OF A MOLECULE TO TREAT CANCER USING BIO INFORMATICS TOOL S FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAI NED EARLIER IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CO NSIDERED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUN CTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING T O SUCH A PROCESS OF MAKING ADJUSTMENT THE TPO HAS RENDERED T HIS COMPANY AS NOT QUALIFYING FOR COMPARABILTY. WE THER EFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. THE FACTS OF THE CASE ARE SIMILAR TO THE DECISION OF THE HONOURABLE ITAT MUMB AI AND THEREFORE THE ASSESSING OFFICER IS DIRECTED TO EXCL UDE THE ABOVE COMPANY FROM THE COMPARABLES. IT(TP)A NOS.689 & 787/BANG/2012 PAGE 11 OF 23 13. AFTER HAVING HELD THAT NEITHER THE 2 ENTITIES S ELECTED BY THE ASSESSEE NOR THE 3 ENTITIES SELECTED BY THE TPO WERE ACTUALL Y COMPARABLE, THE LD. CIT(A) FOUND IT APPROPRIATE TO ACCEPT THE ASSESSEE S ALTERNATIVE CONTENTION THAT THE ARMS LENGTH PRICE OF THE RELEVANT INTERNA TIONAL TRANSACTIONS IN ITS CASE MAY BE COMPUTED ON THE BASIS OF FOLLOWING 8 CO MPARABLES SELECTED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVAPHARM (P) LTD. V. ADDL. CIT (SUPRA) :- SL.NO. NAME OF THE COMPANY MARGIN % 1. M/S. VIMTA LABS LIMITED 27.44% 2. M/S. ALHPAGEO (INDIA) LIMITED 38.21% 3. M/S. CHOKSI LABORATORIES LIMITED 34.96% 4. M/S. DOLPHIN MEDICAL SERVICES LIMITED 10.76% 5. M/S. MEDINOVA DIAGNOSTIC SERVICES LIMITED 5.83% 6. M/S. N.G. INDUSTRIES LIMITED 18.23% 7. M/S. TRANSGENE BIOTEK LIMITED 10.78% 8. M/S. PFIZER LIMITED 6.46% MEAN MARGIN 152.67 / 8 19.08% 14. ACCORDINGLY, THE LD. CIT(A) DIRECTED THE AO TO RECOMPUTE THE ALP OF THE TRANSACTIONS OF THE ASSESSEE IN R&D SERVICES SE GMENT BY APPLYING THE OP/OC OF 19.08% INSTEAD OF 50.23% TAKEN BY THE TPO AND TO RESTRICT THE ADDITION ON ACCOUNT OF TP ADJUSTMENT TO THAT EXTENT . 15. AGGRIEVED BY THE ORDER OF THE LD. CIT(APPEALS), THE ASSESSEE AND REVENUE, BOTH HAVE RAISED THIS ISSUE IN THEIR RESPE CTIVE APPEALS FILED BEFORE THE TRIBUNAL. IT(TP)A NOS.689 & 787/BANG/2012 PAGE 12 OF 23 16. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THE ISSUE RELATING TO TP ADJUSTMENT AND ALSO PERUSED THE MATERIAL ON R ECORD. 17. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ON THIS ISSUE ARE AS FOLLOWS:- V. AS REGARDS THE ADJUSTMENT TO BE MADE UNDER SEC TION 92CA: 1. THE LEARNED CIT(A) IS NOT JUSTIFIED IN FAILING TO NOTE THAT THERE IS NO AMENDMENT TO THE DEFINITION OF THE TERM INCOME TO INCLUDE THE AMOUNT COMPUTED UNDER CHAPTER X. FURTHE R HE IS NOT JUSTIFIED IN FAILING TO APPRECIATE THAT THE CHARGIN G OR COMPUTATION PROVISION RELATING TO INCOME UNDER THE HEAD PROFIT & GAINS OF BUSINESS OR PROFESSION DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X. THE LEARNED CIT(A) IS NOT JUSTIFIED IN FAILING TO APPRECIATE THAT THERE IS NO PROVISION IN CHAPTER X THAT INDICATE THAT THE SAME WOULD OVERRIDE THE COMPUTATI ON PROVISIONS OF BUSINESS INCOME OR THE NORMAL UNDERSTANDING OF T HE TERM INCOME.. 2. THE .LEARNED CIT(A) HAS FAILED TO APPRECIATE TH AT THE TRANSFER PRICING PROVISIONS WILL NOT APPLY TO AN IN COME WHICH IS NOT REQUIRED TO BE COMPUTED UNDER THE INCOME TAX AC T. HE IS NOT JUSTIFIED IN FAILING TO APPRECIATE THAT AS THE R&D SERVICES INCOME OF THE APPELLANT BEING COVERED BY SECTION L0B FALLI NG UNDER CHAPTER III DOES NOT ENTER INTO COMPUTATION PROCESS AT ALL, THE TRANSFER PRICING PROVISIONS CANNOT BE APPLIED. 3. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (A) IS NOT JUSTIFIED IN REJECTING THE TRANSFER PRICING STUDY C ARRIED OUT BY THE APPELLANT. 4. THE LEARNED CIT(A) IS NOT JUSTIFIED IN HOLDING THAT THE APPELLANT OUGHT NOT TO HAVE TAKEN THE DATA OF THE P AST YEARS IGNORING THE PROVISIONS OF THE PROVISO TO RULE 1OB( 4). 5. THE LEARNED CIT(A) IS NOT JUSTIFIED IN IGNORING THE COMPARABLE COMPANIES CHOSEN BY THE APPELLANT AND DI RECTING THE RESPONDENT TO BLINDLY ADOPT THE COMPARABLES APPROVE D IN ANOTHER IT(TP)A NOS.689 & 787/BANG/2012 PAGE 13 OF 23 CASE REPORTED TEVAPHARM (P.) LTD V. ADDL. CIT (2012 ) 50 SOT 150 (MUM-ITAT). 6. THE LEARNED CIT(A) IS NOT JUSTIFIED IN REJECTIN G THE CONTENTION OF THE APPELLANT AS REGARDS ADJUSTMENT T OWARDS THE RISK AND WORKING CAPITAL BY ADDUCING UNTENABLE REAS ONS. 7. THE LOWER INCOME TAX AUTHORITIES ARE NOT JUSTIF IED IN TREATING FOREIGN-EXCHANGE GAIN/LOSS AND THE PROVISI ONS FOR BAD DEBTS AS NON-OPERATING INCOME. 8. THE LEARNED CIT(A) IS NOT JUSTIFIED IN REJECTIN G THE CLAIM OF THE APPELLANT AS REGARDS THE BANDWIDTH OF +/-5% UNDER SECTION 92C(3) AS IT THEN EXISTED. 18. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS NOT PRESSED GROUNDS NO.V(6) TO V(8) RAISED IN T HE APPEAL OF THE ASSESSEE. ACCORDINGLY THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 19. AS REGARDS THE OTHER GROUNDS RAISED IN THE APPE AL OF THE ASSESSEE AS WELL AS IN THE APPEAL OF THE REVENUE ON THE TRAN SFER PRICING ISSUE, WHICH ARE MAINLY RELATING TO INCLUSION/EXCLUSION OF THE E NTITIES FROM THE FINAL COMPARABLES FOR THE PURPOSE OF TP ANALYSIS, IT IS O BSERVED THAT THE ACTION OF THE TPO IN EXCLUDING THE TWO ENTITIES SELECTED BY T HE ASSESSEE VIZ., SPECTRUM INFOTEK PVT. LTD. AND SEVEN GENTECH PVT. L TD., WAS UPHELD BY THE LD. CIT(A) BY GIVING COGENT REASONS. FOR INSTANCE, M/S. SPECTRUM INFOTEK PVT. LTD. WAS FOUND TO BE ENGAGED IN THE BUSINESS O F MANUFACTURING AS WELL AS RESEARCH & DEVELOPMENT, BUT NO SEGMENTAL DETAILS WERE AVAILABLE. MORE OVER, THE SAID COMPANY WAS FOUND TO BE MAINLY IN TH E DOMESTIC BUSINESS, WHEREAS THE ASSESSEE WAS 100% EOU. SIMILARLY, THER E WAS NO FUNCTIONAL IT(TP)A NOS.689 & 787/BANG/2012 PAGE 14 OF 23 COMPARABILITY FOUND BETWEEN ASSESSEE COMPANY AND M/ S. SEVEN GENTECH PVT LTD., AND THE SAME THEREFORE WAS HELD BY THE LD . CIT(A) AS NOT COMPARABLE WITH THAT OF THE ASSESSEE COMPANY. 20. AS REGARDS THE THREE ENTITIES SELECTED BY THE T PO AS COMPARABLES, THE LD. CIT(A) IN HIS IMPUGNED ORDER HAS GIVEN ELAB ORATE REASONS TO HOLD THAT THE SAID ENTITIES ARE NOT COMPARABLE WITH THE ASSESSEE COMPANY. THE RELEVANT PORTION OF THE LD. CIT(A)S ORDER ON THIS ASPECT HAS ALREADY BEEN REPRODUCED BY US IN THE FOREGOING PART OF THIS ORDE R, WHICH CLEARLY SHOWS THAT THE THREE ENTITIES SELECTED BY THE TPO WERE NO T FUNCTIONALLY SIMILAR WITH THE ASSESSEE COMPANY. FOR INSTANCE, M/S. IDC (INDI A) LTD. WAS FOUND TO BE ENGAGED PRIMARILY IN PROVIDING SERVICES RELATING TO MARKET RESEARCH AND ANALYSIS, WHICH IS NOT SIMILAR TO THE WORK OF SCIEN TIFIC RESEARCH & DEVELOPMENT CARRIED ON BY THE ASSESSEE COMPANY. SIM ILARLY THE OTHER COMPARABLE SELECTED BY THE TPO VIZ., OILFIELD INSTR UMENTATION (INDIA) LTD. WAS FOUND TO BE ENGAGED IN PROVIDING MUD LOGGING SE RVICES, WHICH WAS FUNCTIONALLY DIFFERENT THAN THAT OF THE ASSESSEE CO MPANY. M/S. CELESTIAL LABS, THE THIRD COMPARABLE SELECTED BY THE TPO WAS ALSO FOUND TO BE ENGAGED IN VARIOUS ACTIVITIES SUCH AS BIO-INFORMATI C SERVICES, SOFTWARE DEVELOPMENT SERVICES AND THE SAME ACCORDINGLY WERE HELD TO BE NOT FUNCTIONALLY SIMILAR. IN SUPPORT OF HIS DECISION T O EXCLUDE ALL THESE THREE COMPARABLES SELECTED BY THE TPO FROM THE LIST OF FI NAL COMPARABLES, RELIANCE WAS PLACED BY THE LD. CIT(A) ON THE DECISI ON OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVAPHARM PVT. LTD. (SUPRA) , WHEREIN IT IT(TP)A NOS.689 & 787/BANG/2012 PAGE 15 OF 23 WAS HELD THAT THESE THREE ENTITIES COULD NOT BE COM PARED WITH AN ASSESSEE WHO IS ENGAGED IN THE BUSINESS OF PROVIDING RESEARC H & DEVELOPMENT SERVICES. IT WAS NOTED BY THE LD. CIT(A) IN PAGE 1 3 OF HIS IMPUGNED ORDER THAT THIS DIFFERENCE IN THE FUNCTIONS PERFORMED BY THE SAID THREE ENTITIES OF THE ASSESSEE WAS ACCEPTED EVEN BY THE TPO IN PARA 5 .5.2 OF HIS ORDER. 21. KEEPING IN VIEW ALL THE OBSERVATIONS/FINDINGS R ECORDED BY THE LD. CIT(A), WHICH HAVE REMAINED UNCONTROVERTED/UNREBUTT ED BY THE REPRESENTATIVES OF BOTH THE SIDES AT THE TIME OF HE ARING BEFORE US, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A ) REJECTING BOTH THE COMPARABLES SELECTED BY THE ASSESSEE AS WELL AS THE THREE COMPARABLES SELECTED BY THE TPO. WE ALSO FIND IT APPROPRIATE O N THE PART OF THE LD. CIT(A) TO HAVE ACCEPTED THE ALTERNATIVE CONTENTION OF THE ASSESSEE THAT THE ARMS LENGTH PRICE IN THE FACTS AND CIRCUMSTANCES O F THE CASE COULD APPROPRIATELY BE DETERMINED ON THE BASIS OF EIGHT C OMPARABLES SELECTED BY THE TRIBUNAL IN THE CASE OF TEVAPHARM PVT. LTD. (SUPRA) , WHICH INVOLVED SIMILAR FACTS AND CIRCUMSTANCES. 22. ALTHOUGH THE LD. DR HAS CONTENDED BEFORE US THA T TEVAPHARM PVT. LTD. IS NOT FUNCTIONALLY SIMILAR TO THE ASSESSEE COMPANY , WE ARE UNABLE TO ACCEPT HIS CONTENTION IN THE ABSENCE OF ANYTHING BR OUGHT ON RECORD TO SHOW ANY FUNCTIONAL DIFFERENCE BETWEEN TEVAPHARM PVT. LTD. AND THE ASSESSEE COMPANY . IT(TP)A NOS.689 & 787/BANG/2012 PAGE 16 OF 23 23. IN OUR OPINION, THE LD. CIT(APPEALS), IN THE FA CTS & CIRCUMSTANCES OF THE CASE, WAS FULLY JUSTIFIED IN TAKING 8 COMPARABL ES SELECTED BY THE TRIBUNAL IN THE CASE OF TEVAPHARM PVT. LTD. AS THE FINAL COMPARABLES FOR THE PURPOSE OF TP ANALYSIS IN THE ASSESSEES CASE A ND IN DIRECTING THE AO TO RESTRICT THE ADDITION MADE ON ACCOUNT OF TP ADJU STMENT BY APPLYING THE AVERAGE OP/OC OF THE SAID COMPARABLES AT 19.08%. W E THEREFORE UPHOLD THE IMPUGNED ORDER OF THE LD. CIT(A) SUSTAINING PAR TLY THE ADDITION MADE BY THE AO/TPO ON ACCOUNT OF TP ADJUSTMENT AND DISMISS GROUND NOS.1 TO 3 OF THE REVENUES APPEAL AS WELL GROUND NOS. I TO V (INCLUDING V.1 TO V.5) OF THE ASSESSEES APPEAL. 24. THE ISSUE RAISED IN GROUND NO.VI OF THE ASSESSE ES APPEAL RELATES TO THE RESTRICTION OF ITS CLAIM FOR DEDUCTION U/S. 10B IN RESPECT OF PROFIT DERIVED FROM 100% EOU BY ALLOCATING THE EXPENDITURE ON DIRE CTORS REMUNERATION TO THE SAID UNIT TO THE EXTENT OF RS.44,47,467. 25. THE ASSESSEE COMPANY HAD TWO UNITS, DOMESTIC AN D EOU. THE INCOME OF THE EOU UNIT WAS ELIGIBLE FOR EXEMPTION U /S. 10B OF THE ACT. IN THE UNIT-WISE ACCOUNTS PREPARED AND FURNISHED BY TH E ASSESSEE BEFORE THE AO, THE DIRECTORS REMUNERATION AMOUNTING TO RS.1,9 6,43,615 WAS NOT ALLOCATED BY THE ASSESSEE AMONG DOMESTIC UNIT AND E OU. THE EXPLANATION OFFERED BY THE ASSESSEE IN THIS REGARD WAS NOT FOUN D ACCEPTABLE BY THE AO FOR THE FOLLOWING REASONS GIVEN IN THE ASSESSMENT O RDER:- IT(TP)A NOS.689 & 787/BANG/2012 PAGE 17 OF 23 A. THE ASSESSEE STATED THAT THE DOMESTIC UNIT (MI PL) IS OLD ONE AND IT IS INVOLVED IN COMPLEX ACTIVITIES. THE A SSESSEE CLAIMED THAT THE RESULTS OF THE THAT TAXABLE UNIT WERE DEPE NDENT ON SALE AND COST FACTORS AND THE WHOLE TIME DIRECTOR WAS PRIMAR ILY RESPONSIBLE FOR THE MANAGEMENT OF THE DOMESTIC UNIT( MIPL) AND NOT THE EOU UNIT. HOWEVER THE CONTROL AND MANAGEMENT OF EOU VESTS WITH THE SAME DIRECTOR AND THE EOU IS NOT MANAGED S EPARATELY BY SOME OTHER PERSON. B. THE ASSESSEE HAS STATED THAT THE ACTIVITIES OF EOU ARE NARROW AND ONLY FEW EMPLOYEES (ROUGHLY20) ARE EMPLO YED. IT WAS FURTHER STATED THAT ITS A 100% CAPTIVE UNIT OF MILLIPORE CORPORATION AND IT IS UNDER DIRECT SUPERVISION AND CONTROL OF ITS HOLDING COMPANY. THE MILLIPORE CORPORATION IS CONTR OLLING THE INDIAN COMPANY AS A WHOLE AND THE MANAGEMENT CAN NO T BE SPLIT AMONG THE UNITS IN INDIA. C. THE ASSESSEE STATED THAT THE REMUNERATION WAS P AID ONLY TO ONE OUT OF FIVE DIRECTORS OF THE COMPANY. THIS FACT IS IRRELEVANT AS FAR AS THE ALLOCATION OF EXPENSES IS CONCERNED. WHA TEVER REMUNERATION WAS DEBITED SHOULD BE ALLOCATED AMONG THE UNITS SO THAT TRUE AND CORRECT PROFITS OF BOTH THE UNDERTAKI NGS ARE ARRIVED. D. THE ASSESSEE HAS REPLIED THAT ALLOCATION WOULD BE NEGLIGIBLE BECAUSE OF THE LOW SALES OF EOU WHEN COM PARED TO THE TOTAL SALES OF THE COMPANY. THE COMPANY HAS STATED THAT THE EOU IS RUN BY MINIMUM NUMBER OF EMPLOYEES WITH MINIMUM RISKS. THIS SUBMISSION IS FACTUALLY WRONG. THE EOU MADE SU BSTANTIAL TURN OVER DURING THE YEAR AS IT MADE 23% OF THE TOT AL TURNOVER OF THE COMPANY. FURTHER THE EOU MADE HUGE PROFIT AND T HE ASSESSEE HAD CLAIMED HUGE DEDUCTIONS OF RS.5,11,78,238 U/S 1 0B OF IT ACT. HENCE ALLOCATION HAD TO BE DONE TO ARRIVE AT T RUE AND CORRECT PROFITS AMONG THE DIVISIONS AS MENTIONED ABOVE. 26. FOR THE REASONS GIVEN ABOVE, THE AO HELD THAT T HE DIRECTORS REMUNERATION WAS LIABLE TO BE ALLOCATED AMONG THE D OMESTIC UNIT AND EOU IN THE RATIO OF TURNOVER I.E., 77:23. ACCORDINGLY, THE DIRECTORS REMUNERATION TO THE EXTENT OF RS.44,47,467 WAS ALLOCATED BY HIM TO THE EOU UNIT AND IT(TP)A NOS.689 & 787/BANG/2012 PAGE 18 OF 23 CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 10B IN RES PECT OF THE PROFIT OF THE SAID UNIT WAS RESTRICTED BY HIM TO THAT EXTENT. ON APPEAL, THE LD. CIT(A) CONFIRMED THE ACTION OF THE AO ON THIS ISSUE. 27. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ENTIRE DIRECTORS REMUNERATION WAS PAID TO ONLY ONE WORKING DIRECTOR, WHO WAS EXCLUSIVELY LOOKING AFTER THE DOMESTIC UNIT. HE CONTENDED THAT THERE WAS THUS NO REASON TO ALLOCATE ANY EXPENDITURE ON ACCOUNT OF DI RECTORS REMUNERATION TO THE EXPORT UNIT. HE ALSO INVITED OUR ATTENTION TO THE SEGMENTAL DETAILS FURNISHED BY THE ASSESSEE BEFORE THE TPO AND SUBMIT TED THAT THE WORKING GIVEN THEREIN WHILE CALCULATING THE OPERATING PROFI T OF EACH SEGMENT WITHOUT ALLOCATING THE DIRECTORS REMUNERATION WAS ACCEPTED BY THE TPO. HE CONTENDED THAT THE DIFFERENT STAND TAKEN BY THE AO ON THE ISSUE OF ALLOCATION OF DIRECTORS REMUNERATION WHILE COMPUTI NG PROFIT OF EOU ELIGIBLE FOR DEDUCTION U/S. 10B WAS NOT JUSTIFIED. 28. THE LD. DR, ON THE OTHER HAND, STRONGLY RELIED ON THE ORDERS OF AUTHORITIES BELOW IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE. HE CONTENDED THAT THERE WAS NO EVIDENCE BROUGHT ON REC ORD BY THE ASSESSEE TO SHOW THAT THE WORKING DIRECTOR WAS EXCLUSIVELY I NVOLVED IN THE AFFAIRS OF DOMESTIC UNIT ONLY AND HIS INVOLVEMENT WAS NOT THER E IN THE EXPORT UNIT AT ALL. HE CONTENDED THAT BOTH THE UNITS WERE MANAGED BY THE ASSESSEE COMPANY AND SINCE THERE WAS ONLY ONE WORKING DIRECT OR, HIS INVOLVEMENT IN THE AFFAIRS OF EOU UNIT WAS INEVITABLE. HE CONTEND ED THAT THE AO THEREFORE IT(TP)A NOS.689 & 787/BANG/2012 PAGE 19 OF 23 WAS FULLY JUSTIFIED IN ALLOCATING THE EXPENDITURE I NCURRED BY THE ASSESSEE ON DIRECTORS REMUNERATION IN THE RATIO OF TOTAL TURNO VER. 29. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS AN ADMITTED POS ITION THAT THE ASSESSEE COMPANY HAD ONLY ONE WORKING DIRECTOR DURING THE YE AR UNDER CONSIDERATION TO WHOM THE REMUNERATION OF RS.1.93 CRORES WAS PAID . IT IS PERTINENT TO NOTE HERE THAT THE EXPORT TURNOVER OF THE EOU DURIN G THE YEAR UNDER CONSIDERATION WAS RS.25.63 CRORES AND THE PROFIT SH OWN BY THE ASSESSEE OF THE EOU WAS RS.5.12 CRORES. HAVING REGARD TO THES E FACTS AND FIGURES, WE FIND IT DIFFICULT TO ACCEPT THE CONTENTION RAISED O N BEHALF OF THE ASSESSEE THAT THE ONLY WORKING DIRECTOR WAS NOT AT ALL INVOLVED I N THE AFFAIRS OF THE EOU, ESPECIALLY WHEN THERE IS NO EVIDENCE BROUGHT ON REC ORD TO SUPPORT AND SUBSTANTIATE THIS CONTENTION. AS RIGHTLY CONTENDED BY THE LD. DR, THE INVOLVEMENT OF THE ONLY WORKING DIRECTOR IN THE AFF AIRS OF THE EOU IN THE FACTS AND CIRCUMSTANCES OF THE CASE WAS INEVITABLE, ESPECIALLY WHEN BOTH ITS DOMESTIC UNIT AND EOU WERE MANAGED BY THE ASSES SEE COMPANY. AS REGARDS THE CONTENTION OF THE LD. COUNSEL FOR THE A SSESSEE THAT THE WORKING PREPARED AND FURNISHED BY THE ASSESSEE WHILE COMPUT ING THE SEGMENTAL DETAILS WITHOUT ALLOCATION OF THE DIRECTORS REMUNE RATION HAVING BEEN ACCEPTED BY THE TPO, THE AO WAS NOT JUSTIFIED IN TA KING A DIFFERENT STAND WHILE COMPUTING THE PROFIT OF THE EOU WHILE COMPUTI NG DEDUCTION U/S. 10B; WE ARE UNABLE TO ACCEPT THE SAME FOR THE REASONS MO RE THAN ONE. FIRSTLY, THE WORKING FURNISHED BY THE ASSESSEE GIVING SEGMEN TAL DETAILS, WAS FOR IT(TP)A NOS.689 & 787/BANG/2012 PAGE 20 OF 23 SPECIFIC PURPOSE AND IT WAS PREPARED BY THE ASSESSE E AND APPRECIATED BY THE TPO IN THE CONTEXT OF TP ANALYSIS. THE ISSUE U NDER CONSIDERATION RELATING TO COMPUTATION OF DEDUCTION PERMISSIBLE U/ S. 10B, HOWEVER IS ENTIRELY DIFFERENT. SECONDLY, THE SEGMENTAL DETAIL S WERE FURNISHED BY THE ASSESSEE FOR THE ENTERPRISE AS A WHOLE AND THERE WA S NO BIFURCATION MADE ON THE BASIS OF EXPORT AND DOMESTIC TURNOVER. HAVI NG REGARD TO ALL THE FACTS AND CIRCUMSTANCES OF THE CASE, WE THEREFORE ARE OF THE VIEW THAT THE DIRECTORS REMUNERATION WAS LIABLE TO BE ALLOCATED TO THE EOU FOR THE PURPOSE OF COMPUTING PROFIT OF THE SAID EOU ELIGIBL E FOR DEDUCTION U/S. 10B AND SINCE THE ALLOCATION THEREOF WAS MADE BY THE AO ON A REASONABLE BASIS I.E., TURNOVER, WE FIND NO INFIRMITY IN THE I MPUGNED ORDER OF THE LD. CIT(APPEALS), UPHOLDING THE ACTION OF THE AO ON THI S ISSUE. ACCORDINGLY, THE IMPUGNED ORDER OF THE LD. CIT(APPEALS) ON THIS ISSU E IS UPHELD AND GROUND NO.VI OF THE ASSESSEES APPEAL IS DISMISSED. 30. THE ISSUE RAISED IN GROUND NO.VII OF THE ASSESS EES APPEAL RELATES TO THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) BY TREATING THE EXPENDITURE OF RS.29,38,953 CLAIMED TO BE INCURRED BY THE ASSESSEE ON THE REPAIRS TO BUILDING, TREATING THE S AME AS CAPITAL IN NATURE. 31. THE EXPENDITURE INCURRED BY THE ASSESSEE ON CIV IL WORKS TO THE BUILDING OF DOMESTIC UNIT AND TO THE BUILDING OF EO U UNIT AMOUNTING TO RS.23,04,834 AND RS.6,34,119 RESPECTIVELY WAS CLAIM ED TO BE REVENUE EXPENDITURE ALLOWABLE AS DEDUCTION. IN THE COURSE OF ASSESSMENT IT(TP)A NOS.689 & 787/BANG/2012 PAGE 21 OF 23 PROCEEDINGS, THE CLAIM OF THE ASSESSEE FOR DEDUCTIO N ON ACCOUNT OF THIS EXPENDITURE WAS EXAMINED BY THE AO AND ON SUCH EXAM INATION, HE TREATED THE SAME AS CAPITAL EXPENDITURE ON THE FOLLOWING GR OUNDS:- I) THE ASSESSEE INCURRED HUGE VOLUME OF EXPENDITUR E FOR EXTENSIVE REPAIR AND REFURNISHING THE WORK. II) THE RESULT OF THE EXPENDITURE ENSURES ENDURING BENEFIT TO THE BUILDING BECAUSE OF NEW ADVANTAGE ADDED. III) AS PER SEC.31(L) OF THE I.T. ACT THE DEDUCTIO N SHALL BE ALLOWED FOR THE AMOUNT PAID AN ACCOUNT OF CURRENT REPAIRS BUT NOT FOR MERE REPAIRS WHICH HAVE THE EFFECT OF ENDUR ING BENEFIT. IV) THE ASSESSEE HAS SPENT A BIG AMOUNT OF RS.29,3 8,953/- FOR CIVIL WORKS. THE SPENDING OF BIG AMOUNT ON CIVIL WO RK AMOUNTS TO EFFACEMENT OF AN OLD ASSET AND CREATION OF NEW L OOK TO THE BUILDING. ACCORDINGLY TREATING THE EXPENDITURE INCURRED ON CI VIL WORKS AMOUNTING TO RS.29,38,953 AS CAPITAL IN NATURE, THE AO ALLOWED D EPRECIATION ONLY @ 5% AND DISALLOWED THE BALANCE AMOUNT. 32. ON APPEAL, THE LD. CIT(APPEALS) UPHELD THE ACTI ON OF THE AO ON THIS ISSUE RELYING ON THE DECISION OF THE TRIBUNAL IN AS SESSEES OWN CASE FOR A.Y. 2004-05 (ITA NO.738/B/2010) WHEREIN IT WAS HEL D THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON REDESIGNING AND REMODEL ING OF ITS BUILDING BY REPLACING THE FLOORS, RELOCATING THE WALLS AND REDE SIGNING THE ENTIRE LAYOUT OF THE BUILDING WAS CAPITAL IN NATURE. 33. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED TH AT ALTHOUGH A SIMILAR IT(TP)A NOS.689 & 787/BANG/2012 PAGE 22 OF 23 EXPENDITURE INCURRED BY THE ASSESSEE IN A.Y. 2004-0 5 ON CIVIL WORKS WAS HELD TO BE CAPITAL EXPENDITURE BY THE TRIBUNAL VIDE ITS ORDER PASSED IN ITA NO.738/BANG/2010, THE NATURE OF EXPENDITURE INCURRE D IN A.Y. 2004-05 WAS SPECIFICALLY FOUND TO BE THAT OF REDESIGNING AND RE MODELING OF THE BUILDING, MAINTAINING OF INTERNAL ROADS, ETC. THE EXACT NATU RE OF EXPENDITURE DURING THE YEAR UNDER CONSIDERATION, HOWEVER, IS NOT CLEAR EITHER FROM THE ORDER OF THE AO OR FROM THE ORDER OF THE CIT(APPEALS). EVEN THE DETAILS FURNISHED BY THE ASSESSEE IN THE PAPERBOOK ARE NOT SUFFICIENT TO ASCERTAIN THE EXACT NATURE OF EXPENDITURE INCURRED BY THE ASSESSEE ON C IVIL WORKS SO AS TO DECIDE WHETHER THE SAME ARE CAPITAL IN NATURE OR RE VENUE. WE THEREFORE FIND IT FAIR AND APPROPRIATE AND IN THE INTEREST OF JUSTICE TO RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING T HE SAME AFRESH, AFTER VERIFYING THE EXACT NATURE OF THE EXPENDITURE IN QU ESTION INCURRED BY THE ASSESSEE. NEEDLESS TO OBSERVE THAT THE AO SHALL AF FORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THIS IS SUE AFRESH. GROUND NO.VII OF THE ASSESSEES APPEAL IS ACCORDINGLY TREA TED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 34. GROUND NO.VIII RAISED IN THE APPEAL OF THE ASSE SSEE HAS NOT BEEN PRESSED BY THE LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BEFORE US. THE SAME IS ACCORDINGLY DISMISSED AS NOT PRESS ED. 35. AS REGARDS GROUND NO.IX, THE LD. COUNSEL FOR TH E ASSESSEE HAS SUBMITTED THAT THE ISSUE INVOLVED THEREIN RELATING TO LEVY OF INTEREST U/S. IT(TP)A NOS.689 & 787/BANG/2012 PAGE 23 OF 23 234B AND 234C IS CONSEQUENTIAL. THE AO IS ACCORDIN GLY DIRECTED TO ALLOW CONSEQUENTIAL RELIEF TO THE ASSESSEE ON THIS ISSUE. 36. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF JULY , 2014 . SD/- SD/- ( N.V. VASUDEVAN ) ( PRAMOD M. JAGTAP) JUDICIAL MEMBER ACCOUNT ANT MEMBER BANGALORE, DATED, THE 4 TH JULY, 2014 . /D S/ COPY TO: 1. ASSESSEE 2. REVENUE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR/ SENIOR PRIVATE SECRETARY ITAT, BANGALORE.