BAYER CROP SCIENCE LTD, MUMBAI V. ADDL CIT 10(3), MUMBAI

ITA 7978/MUM/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3482 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 16-04-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 18-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PARAS SAVLA HARSH SHAH
• Keywords: Related party transaction; Capital asset; Gift; Depreciation; Transfer pricing; Business expenditure; International transaction; Rule of consistency; Earning of tax free income; Initiation of penalty proceedings; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 14A; 37

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , . . , BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND C.N. PRA SAD,JUDICIAL MEMBER ./ITA/7978/MUM/2010, /AY.2006-07 M/S. BAYER CROPSCIENCE LIMITED BAYER HOUSE, CENTRAL AVENUE, HIRANANDANI GARDENS, POWAI MUMBAI-400 076. PAN:AAACB 9651 K VS. ACIT -10(3) AAYAKAR BHAVAN, 4 TH FLOOR, M.K. ROAD MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT) REVENUE BY: SHRI G.M. DOSS ASSESSEE BY: S/SHRI PARAS SAVLA; HARSH SHAH & VIRAJ MEHTA / DATE OF HEARING: 18.04.2016 / DATE OF PRONOUNCEMENT: 25.05.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) !' PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 14/10/2010 OF THE ASSES SING OFFICER (AO),PASSED U/S.143(3)R.W. S.144C(13)OF THE ACT, THE ASSESSEE H AS FILED THE PRESENT APPEAL. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF MANUFAC TURING OF INSECTICIDES AND OTHER CHEMICALS FOR PLANT PROTECTION,FILED ITS RETU RN OF INCOME ON 30/11/2006, DECLARING INCOME OF RS. 51.18 CRORES.DURING THE ASS ESSMENT PROCEEDINGS,THE AO FOUND THAT ASSESSEE HAD ENTERED INTO INTERNATION AL TRANSACTIONS (IT.S) WITH ITS ASSOCIATED ENTERPRISES(AES).SO,HE MADE A REFERE NCE TO THE TRANSFER PRICING OFFICER (TPO)TO DETERMINE THE ARMS LENGTH PRICE(AL P) OF SUCH TRANSACTIONS. AFTER RECEIVING THE ORDER OF THE TPO,THE AO SENT TH E DRAFT ASSESSMENT ORDER TO THE ASSESSEE, WHO CHALLENGED IT BEFORE THE DISPUTE RESOLUTION PANEL (DRP).THE DRP ISSUE DIRECTIONS TO THE AO WIDE ITS ORDER DATED 28/09/2010.IN PURSUANCE OF THE SAID DIRECTIONS, THE AO COMPLETED THE ASSESSMEN T, DETERMINING THE INCOME OF THE ASSESSEE HAD RS. 59.89 CRORES. 2. FIRST GROUND OF APPEAL RELATES TO TRANSFER PRICING (TP)ADJUSTMENTS OF RS. 2.80 CRORES.DURING THE TP PROCEEDINGS,THE TPO FOUND THAT THE ASSESSEE HAD ENTERED INTO THE FOLLOWING IT.S WITH ITS AES: 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 2 SR.NO. NATURE OF TRANSACTION AMOUNT(RS.) 1. IMPORT OF RAW MATERIAL 112,95,51,398 2. IMPORT OF TRADED PRODUCTS 7,75,70,764 3. EXPORT OF FINISHED PRODUCTS 80,60,91,048 4. SALE OF ASSET 26,29,000 5. PAYMENT OF INDENTING COMMISSION 38,84,001 6. IMPORT OF SOFTWARE 55,62,236 7. PROVISION OF SAP SUPPORT SERVICES 2,03,49,405 8. RECOVERY OF EXPENSES 48,65,599 9. REIMBURSEMENT OF EXPENSES 10,38,28,884 HE FOUND THAT THE ASSESSEE HAD USED THE INTERNAL TR ANSACTION NET MARGIN METHOD(TNMM),THAT NET PROFIT MARGIN(OPERATING PROFI TS/SALES)WAS THE PROFIT LEVEL INDICATOR(PLI)FOR COMPUTING ALP OF THE ABOVE TRANSACTIONS,THAT THE ASSESSEE HAD SELECTED COMPARABLES FROM PROWESS DATA BASE.WHILE GOING THROUGH THE TRANSFER PRICING REPORT (TPR), THE TPO FOUND THAT THE ASSESSEE HAD COMPARABLE UNCONTROLLED MANUFACTURING FUNCTIONS,THA T IT HAD NO RELATED PARTY TRANSACTIONS, THAT IT WAS POSSIBLE TO SEGMENT THE F INANCIALS OF THE COMPANY, THAT THE MARGIN OF THE ASSESSEES MS COULD BE COMPARED W ITH MARGIN OF INTERNAL TRANSACTION SEGMENT,THAT A SIMILAR STATEMENT HAD BE EN MADE IN RESPECT OF THE TRADING ACTIVITIES. 2.1. AFTER GOING THROUGH THE SEGMENTAL DETAILS,FILED VID E LETTER DATED 27/8/2009, THE TPO HELD THAT THE TOTAL INCOME APPEARING IN THE STATEMENT WAS RS.73522.64 CRORES,THAT THE INCOME ALLOCATED BETWEEN MSINGS(MS) AND TSINGS(TS)INCLUDED NOT JUST THAT TOTAL TURNOVER(RS.64858.62 CRORES)BUT ALSO OTHER INCOME IN THE NATURE OF INTENDING COMMISSION,INTENDING BUSINESS W OULD VARY AS COMPARED TO NORMAL TRADING ACTIVITY, THAT IT WAS NOT CORRECT ON PART OF THE ASSESSEE TO INCLUDE THEM IN TURNOVER FOR THE PURPOSE OF CALCULATING IND EPENDENT MARGIN,THAT MANY OF THE EXPENSES WERE DISTRIBUTED ON THE BASIS OF TURNO VER RATIO, THAT CONSIDERATION OF ONLY THE COMMISSION AMOUNT AND NOT THE OVERALL T URNOVER OF INTENDING WAS BOUND TO AFFECT THE SEGMENTAL MARGINS,THAT MANUFACT URING SERVICES WOULD COST THE COMPANY USE OF PLANT AND MACHINERY, TECHNOLOGY AND OTHER UTILITIES,THAT FOR PROPER ANALYSIS THE TURNOVER MANUFACTURED SHOULD HA VE BEEN INCLUDED IN THE TOTAL TURNOVER FOR PROPER LOCATION OF OVERHEADS AND MANUFACTURING EXPENSES,THAT 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 3 IT HAD ALSO RENDERED CERTAIN MANUFACTURING SERVICES ,THAT THE TOTAL INCOME RECEIVED IN RESPECT OF THE SAME WAS 700.33 CRORES, THAT THE ASSESSEE HAD DISCLOSED INCOME OF RS. 22.07 CRORES ONLY, THAT THE ASSESSEE HAD ALSO RENDERED SAP SUPPORT SERVICES. THE TPO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE INTERNAL TNMM SHOULD NOT BE REJECTED. THE ASSESSEE FILED BY REVISED SEGMENTA L ANALYSIS ON 07/10/2009 AND STATED THAT THE COMPANY USED SAP ERP SYSTEM WHICH C APTURE ALL THE FINANCIALS FOR VARIOUS SEGMENTS, THAT THE INFORMATION WAS COMP ARTMENTALISED INTO VARIOUS COST-CENTERS BASED ON CERTAIN PREDETERMINED PARAMET ERS,THAT THE AUDITED FINANCIAL REPORTS PREPARED ON ENTITY WISE LEVEL WOU LD NOT PROVIDE FINANCIAL INFORMATION PERTAINING TO VARIOUS BUSINESS SEGMENTS ,THAT WHILE PREPARING THE SEGMENT FINANCIALS IT WOULD PLACE RELIANCE ON THE D ATA CAPTURED IN THE SAP SYSTEM USING VARIOUS ALLOCATION KEYS, THAT THE INCO ME PERTAINING TO MS AND TS HAD BEEN IDENTIFIED BY THE COMPANY BASED ON PRODUCT S SOLD AS CAPTURED IN THE AUDITED SALES REGISTER,THAT IT EMPLOYED STANDARD CO ST SYSTEM FOR CAPTURING THE COST OF MANUFACTURED GOODS SOLD, THAT IN DETERMININ G THE STANDARD COST THE COMPANY WOULD TAKE INTO ACCOUNT ALL THE BUDGETED MA TERIAL COST AND MANUFACTUR -ING OVERHEADS TO ARRIVE AT A STANDARD COST PER PRO DUCT,THAT THE ASSESSEES SYSTEM WOULD CAPTURE VARIOUS EXPENSES FOR DETERMINING THE STANDARD COST OF PRODUCTS SOLD,THAT USE OF SUCH COSTING DATA GAVE A MORE RELI ABLE PICTURE OF THE BUSINESS SEGMENT,THAT IT HAD SCIENTIFICALLY DETERMINED THE C OSTING DATA,THAT THE BALANCE OPERATING EXPENSES WHICH DID NOT FORM PART OF THE C OSTS OF GOODS SOLD AND WHICH COULD NOT BE DIRECTLY IDENTIFIED AND ALLOCATED TO V ARIOUS BUSINESS SEGMENTS HAD BEEN APPORTIONED TO THE MS AND TS ON PRUDENT AND RE LATIONAL BASIS USING LOGICAL ALLOCATION KEYS. MANUFACTURING TRADING SAP- SUPPORT SERVICE SEGMENT (RS.IN000) TRANSAC TIONS WITH THIRD PARTIES TRANSACTIO NS WITH ASSOCIATED ENTERPRISE( AE) TOTAL TRANSACTI ONS WITH THIRD PARTIES TRANSACTI ONS WITH ASSOCIATE D ENTERPRIS E(AE) TOTAL GRAND TOTAL INCOME 3,665,55 3,233,617 6,899,173 342,031 111,060 453,091 20,350 7,372,614 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 4 6 EXPENSES 3,318,08 2 2,868,860 6,186,942 343,070 109,232 452,302 (6,655 ,728) NET OPERATING PROFIT 347,474 364,757 712,231 (1,039) 1,828 789 3,866 716 ,886 NET OPERATING PROFIT(%) 9.48 11.28% 10.32% -0.30% 1.65% 0.17% NET COST PLUS MARK- UP(%) 23.45% WITH RESPECT TO THE MS IT WAS STATED THAT THE MARGI N OF THE ASSESSEE FROM MS- HAVING NO ITS (NON-AE SEGMENT)-WAS 9.48%,THAT MARGI N FROM ITS MS-HAVING INTERNATIONAL TRANSACTION-WAS .32%,THAT THE IT.S OF MS WERE AT ARMS LENGTH BASED ON INTERNAL TNMM.WITH RESPECT TO THE TS IT WA S STATED THAT ITS MARGIN FROM THAT SEGMENT -HAVING NO IT(NON AE SEGMENT)-WAS (-)0.30%,THAT MARGIN FROM ITS TS -HAVING IT(AE SEGMENT) WAS 1.65% AGAINS T THE NON-AE SEGMENT AT THE RATE OF 0.30%,THAT THE ITS OF TS WERE AT ARMS LENGTH.THE ASSESSEE HAD COMPARED THE MARGIN OF NON-AE TS RESULTS WITH EXTER NAL COMPARABLES AND EVEN ON THAT BASIS IT WAS CLAIMED THAT IT.S OF TS WERE A T ARMS LENGTH. 2.2. HOWEVER,THE TPO WAS NOT CONVINCED WITH THE EXPLANA TION. THE TPO HELD THAT FOR A PROPER INTERNAL COMPARISON BETWEEN THE M ARGINS OF AE OR NON-AE SEGMENT IT WAS NECESSARY THAT THERE SHOULD BE IDENT ITY OF PRODUCTS, THAT A HIGH PERCENTAGE OF HIGHER MARGIN ITEMS IN THE AE SEGMENT WOULD DISTORT THE RESULTS, THAT A CAREFUL APPROACH HAD TO BE FOLLOWED BECAUSE THE MARGINS IN BOTH THE SEGMENTS WOULD BE VERY CLOSE, THAT THE ASSESSEE HAD NOT SHOWN SUCH IDENTITIES, THAT THE INTERNAL TNMM BASED ON A STANDARD COSTING MODEL/ALLOCATION OF COST MODEL COULD NOT BE CONSIDERED A VALID BASIS FOR INT ERNAL COMPARISONS, THAT THE INTERNAL COMPARISON COULD BE MADE ONLY IN A SITUATI ON WHERE SEPARATE UNITS/DIVISIONS WERE CAPPED FOR PREPARING PRODUCTS RELATING TO THE AE AND THE NON-AE.S,, THAT WHERE SEPARATE BOOKS OF ACCOUNTS WE RE MAINTAINED IN RESPECT OF THE DIRECT AND INDIRECT COSTS AND A LOCATION HAD BE EN MADE IN RESPECT OF THE HEAD 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 5 OFFICE EXPENSES, THAT AN ABSORPTION COSTING SYSTEM COULD BE USED WHERE EACH COST WAS ABSORBED ACCURATELY AND ALLOCATED TO A PRO DUCT, THAT IN ABSENCE OF THE SAME ALLOCATIONS ON THE BASIS OF TURNOVER HAD TO BE REJECTED, THAT THE VARIATION ON ACCOUNT OF CONTRACT MANUFACTURING ,RENDERING MANUFA CTURING SERVICES, SOURCING SERVICES THE INTERNAL TNMM COULD NOT ENSURE THE WOR KING OF EXACT OPERATING MARGIN FOR AN INTERNAL COMPARISON. THE ASSESSEE CAR RIED OUT SEARCH TO IDENTIFY THE EXTERNAL COMPARABLE FOR BENCHMARKING ITS MS AND TS.UNDER THE HEAD MS THE OM WAS WORKED OUT.SO,HE HELD THAT IMPORT OF RAW MATERIAL WAS AT ARMS LENGTH.FOR TS THE ASSESSEE FURNISHED MARGINS OF COM PARABLE AS UNDER IDENTIFYING ELEVEN COMPARABLES AND THE TABLE READ A S UNDER: COMPANY NAME SALES NPM SOURCE ANUKARAN COMMERCIAL ENTERPRISES LTD. 5.38 0.29 ANNUAL REPORT CHEMBOND DREW TREAT LTD. 28.38 12.30 PROWESS DHOOT INDUSTRIAL FINANCE LTD. 54.08 -0.43 ANNUAL REP ORT GULJAG INDUSTRIES LTD. 65.61 3.97 PROWESS HIRAN ORGOCHEM LTD. 39.95 0.72 ANNUAL REPORT INDOKEM LTD. 42.37 6.17 ANNUAL REPORT K.P.L INTERNATIONAL LTD. 26.43 17.26 ANNUAL REPORT NIKHIL ADHESIVES LTD. 28.41 1.65 ANNUAL REPORT P.H. TRADING LTD. 49.11 2.50 ANNUAL REPORT PRIYA INTERNATIONAL LTD. 4.18 -3.06 ANNUAL REPORT ROSELABS LTD. 1.0 3.29 ANNUAL REPORT ARITHMETIC MEAN 4.06 AS PER THE TPO ACEL,PIL AND RL HAD VERY LITTLE TURN OVER AS COMPARED TO THE ASSESSEE WHICH HAD TURNOVER OF RS.45CRORES.HE REJEC TED THESE COMPANIES ON THE CRITERIA OF TURNOVER.HE REJECTED DIFL,AS IT DID NOT SHOW SEPARATE MARGIN FOR CHEMICAL CATEGORY.FINAL COMPARABLE WERE TAKEN AS UN DER: COMPANY NAME SALES NPM SOURCE CHEMBOND DREW TREAT LTD. 28.38 12.30 PROWESS GULJAG INDUSTRIES LTD. 65.61 3.97 PROWESS HIRAN ORGOCHEM LTD. 39.95 0.72 ANNUAL REPORT INDOKEM LTD. 42.37 6.17 ANNUAL REPORT K.P.L INTERNATIONAL LTD. 26.43 17.26 ANNUAL REPORT NIKHIL ADHESIVES LTD. 28.41 1.65 ANNUAL REPORT P.H. TRADING LTD. 49.11 2.50 ANNUAL REPORT ARITHMETIC MEAN 6.37 CONSIDERING THE ABOVE,HE HELD THAT MARGINS OF COMPA RABLE COMPANIES ENGAGED IN TRADING OF CHEMICALS WAS 6.37 AS AGAINST THE MAR GIN SHOWN BY THE ASSESSEE AT 0.17%,THAT TP ADJUSTMENTS WERE TO BE MADE AT RS.2. 80 CORES.IN HIS DRAFT ORDER, THE AO MADE AN ADDITION OF THE SAID AMOUNT TO THE T OTAL INCOME OF THE ASSESSEE. 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 6 2.3. AGGRIEVED BY THE DRAFT ORDER OF THE AO,THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP.IT MADE ELABORATE SUBMISSIONS.BUT,THE DRP,I N A VERY BRIEF ORDER, CONFIRMED THE ADJUSTMENT SUGGESTED BY THE TPO.THE D RP OBSERVED THAT THE TPO HAD TAKEN COMPARABLE OTHERWISE SELECTED BY THE ASSESSEE,THAT THERE WAS NO JUSTIFICATION FOR INTERFERING WITH THE ALP DETERMIN ED BY THE TPO.EXCEPT THESE TWO SENTENCES THE DPR DID NOT OBSERVE ANYTHING. IN PURSUANCE OF THE DIRECTIONS OF THE DRP THE AO MADE AN ADDITION OF RS.2,80,07,29 0/- TO THE TOTAL INCOME OF THE ASSESSEE. 2.4. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)SUBMITTE D THAT THE ASSESSEE HAD APPLIED TURNOVER CRITERIA OF GREATER THAN RS.1 CRORES,THAT THE TPO ON AN AD HOC BASIS REJECTED COMPANIES STATING LITTLE TURNOVE R,THAT HE DID NOT DISPUTE THE FUNCTIONAL SIMILARITY OF THE COMPARABLES,THAT HE WR ONGLY REJECTED COMPANIES IN THE RANGE OF RS.4 TO RS.6 CRORES DESPITE TURNOVER O F TS OF ASSESSEE BEING RS.11CRORES WITHOUT APPRECIATING THAT THIS RANGE OF TURNOVER WAS IN FACT QUIET COMPARABLE.WITH REGARD TO ACEL THE AR CONTENDED THA T THE TURNOVER OF THE COMPANY WAS RS.5.38 CRORES,THAT HE ARBITRARILY REJE CTED THE SAID COMPARAB- LES,THAT THE TPO HAD NOT CHALLENGED FAR,THAT IT WAS A VALID COMPARABLE AS FAR AS TRADING OF CHEMICALS IS CONCERNED.ABOUT PIL,HE STAT ED THAT TURNOVER OF THE COMPANY WAS RS.4.18 CRORES,THAT THE TPO HAD ARBITRA RILY REJECTED IT AS A VALID COMPARABLE.REFERRING TO RL IT WAS ARGUED THAT THE T URNOVER OF THE COMPANY WAS RS.3.35 CRORES.REST OF THE ARGUMENTS WERE SIMILAR T O THE ARGUMENTS ADVANCED FOR THE FIRST COMPARABLE.HE STATED THAT IF ACEL,PIL AND RL WERE INCLUDED IN THE FINAL SEVEN COMPARABLES OF THE TP ORDER THE MAR GIN OF THE 10 COMPARABLES WOULD WORK OUT TO BE 4.51% EVEN IF COMBINED TRADING MARGIN OF THE ASSESSEE I.E.0.17% WAS CONSIDERED,THAT THE SAME WOULD FALL W ITHIN +5% RANGE,THAT INTERNAL TNMM WAS THE MAM,THAT DHOOT WAS INTO TRADI NG OF CHEMICALS AND OTHER PRODUCTS,THAT WHILE APPLYING TNMM PRODUCT SIM ILARITY WAS NOT REQUIRED, 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 7 THAT KPLIL WAS ALSO INTO VARIOUS BUSINESS,THAT FOR THE PURPOSE OF CONSISTENCY IF DHOOT WAS TO BE REJECTED KPLIL SHOULD HAVE ALSO BEE N REJECTED,THAT SEGMENTAL RESULTS FOR KPLIL FOR INDENTING AND TRADING SHOWED AN INCOME OF RS.32.24 CRORES OF WHICH TRADED CHEMICALS REVENUE WAS ONLY R S.17 CRORES,THAT IF KPLIL WAS REJECTED FROM THE FINAL SEVEN COMPARABLES IN TP ORDER THE MARGIN OF THE SIX COMPARABLES WORKS OUT TO BE 3.09%,THAT EVEN IF COMB INED TRADING MARGIN OF ASSESSEE WAS (0.17%)WAS CONSIDERED,THAT THE SAME WO ULD FALL WITHIN 5% RANGE.ON THE PROPOSITION THAT PRODUCT SIMILARITY NO T RELEVANT IN TNMM,HE RELIED UPON THE CASES OF GE INDIA TECHNOLOGY CENTRE (P) LTD.(30 TAXMANN.COM 249)AND DIAGEO INDIA (P) LTD. 34TAXMANN.COM 284). HE FURTHER ARGUED THAT THE DRP ERRED IN UPHOLDING THE ACTION OF TPO IN REJECTING SEGMENTAL ACCOUNTS OF TS PREPARED BY ASSE SSEE AND THEREBY DISREGARD - ING INTERNAL TNMM & ADOPTING EXTERNAL TNMM,THAT THE ASSESSEE'S SEGMENTAL DATA WAS TIED UP WITH THE AUDITED FINANCIALS THAT T HE ALLOCATIONS WERE WORKED OUT BASED ON THE SAP/ ERP SYSTEM,THAT DUE TO THAT CERTA IN EXPENSES SHOWN SEPARATELY IN THE P&L WERE GROUPED IN PREPARATION O F SEGMENTAL DATA, THAT THERE WAS ONLY RE GROUPING OF AMOUNTS,THAT THE ARGUMENT O F THE TPO THAT THE TRANSACTION PERTAINING TO TOLL MANUFACTURING WAS OF SPECIAL NATURE WAS NOT CORRECT,THAT TOLL MANUFACTURING TRANSACTION WAS PAR T OF NORMAL ROUTINE OPERATIONS OF THE ASSESSEE AND WAS NOT A TRANSACTION OF SPECIA L NATURE, THAT THE TRANSACTION PERTAINING TO TOLL MANUFACTURING WAS MORE CLOSELY A LIGNED TO MANUFACTURING ACTIVITY AND TRADING ACTIVITY AS IT PERTAINED TO GO ODS MANUFACTURED BY A TOLL MANUFACTURER APPOINTED BY THE ASSESSEE TO MANUFACTU RE CERTAIN SPECIFIED GOODS UNDER ITS DIRECTION AND SUPERVISION,THAT THE GOODS WERE RECEIVED FROM THE TOLL MANUFACTURER IN A COMPLETED STATE THE SAME HAD BEEN CLASSIFIED AS COST OF TRADED GOODS IN THE FINANCIAL STATEMENTS,THAT BASED ON THE ACTUAL FACTS IT WAS EVIDENT THAT THE TOLL MANUFACTURING COST PERTAINE TO THE MS ,THAT THE TOLL MANUFACTURING COST HAD BEEN APPROPRIATELY CONSIDERED BY THE ASSES SEE UNDER THE MS,THAT THE INCOME RELEVANT TO THE COST PERTAINING TO TOLL MANU FACTURING TRANSACTION HAD ALSO 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 8 BEEN ALLOCATED TO THE MS,THAT THE TPO HAD ACCEPTED THE STAND OF THE ASSESSEE'S ALLOCATION METHOD BASED ON THE SAP SYSTEM IN THE SU BSEQUENT AY.S.I.E.2007- 08,2008-09 AND 2009-10,THAT CERTAIN EXPENSES WERE G ROUPED IN SEGMENTAL TOGETHER,THAT ON THE TOTAL LEVEL THE NET PROFIT WAS TYING UP WITH FINANCIALS,THAT STANDARD COSTS WERE USED FOR THE PURPOSE OF SEGMENT ATION VARIANCE,THAT COGS WAS BASED ON STANDARD AND ACTUAL.HE REFERRED TO PAR AGRAPH 13 OF AS-17 AND ARGUED THAT THE ASSESSEE HAD FAIRLY AND REASONABLY PREPARED THE SEGMENTAL PROFIT AND LOSS ACCOUNT BETWEEN THE MANUFACTURING AND TS B ASED ON THE FINANCIAL INFORMATION CAPTURED BY THE INTERNAL FINANCIAL REPO RTING SYSTEM OF THE COMPANY FOR THOSE SEGMENTS, THAT THE ASSESSEE HAD GIVEN A P ROPER RECONCILIATION TO THE TPO OF THE PROFIT AS PER THE SEGMENTAL FINANCIAL SP LIT AND THE PROFIT AS PER AUDITED FINANCIALS WHICH CLEARLY EVIDENCED THAT ALL THE ITEMS OF OPERATING INCOME AND EXPENSES HAD BEEN CONSIDERED AND ACCOUNT ED WHILE PREPARING SEGMENTAL FINANCIAL SPLIT,THAT FOR APPLICATION OF T NMM IT WAS NOT NECESSARY THAT THERE HAD TO BE IDENTITY OF PRODUCTS-RATHER FUNCTIO NAL COMPARABILITY WAS ESSENTIAL,THAT THE AE AND NON-AE SEGMENT OF THE ASS ESSEE DEALT IN MANUFACTURE OF AGRO CHEMICALS,THAT BOTH THE SEGMENT UNDER THE M ANUFACTURING FUNCTION WERE FUNCTIONALLY SIMILAR,THAT THE INTERNAL TNMM ANALYSI S CONDUCTED BY THE ASSESSEE WAS CORRECT. ,THAT THE TPO HAD ACCEPTED THE BROAD S EGMENTATION OF THE ASSESSEE BETWEEN MANUFACTURING AND TRADING ACTIVITIES,THAT O N THE VERY SAME BASIS IT HAD FURTHER DISSECTED THE MANUFACTURING AND TRADING ACT IVITIES INTO AE (ASSOCIATED ENTERPRISES) AND NON AE SEGMENTS,THAT HE DID NOT CO NSIDERED THE AE AND NON AE SEGMENTATION MADE BY THE ASSESSEE IN THE MANUFAC TURING AND TRADING ACTIVITIES,THAT THE MS WAS ACCEPTED,THAT TS SHOULD HAVE BEEN ACCEPTED,THAT IN THE SUBSEQUENT YEARS THE TPO HAD ACCEPTED THE SYSTE M,THAT INDENTING COMMI - SSION AND EXPORT INCENTIVES FORMED ONLY 0.2% TOTAL TURNOVER,THAT THOSE EXPENSES WERE NOT AT ALL MATERIAL TO VITIATE THE SEGMENTAL P ROFITABILITY,THAT THE TRANSACTION OF INDENTING COMMISSION WAS CLOSELY INTERLINKED WIT H THAT OF TS HENCE COULD BE BENCHMARKED TOGETHER,THAT IN THE SUBSEQUENT YEARS T HE ASSESSEE HAD CLASSIFIED 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 9 THE INDENTING COMMISSION UNDER THE TS AND THE TPO H AD ACCEPTED THE SAME,THAT IN CASE OF COMPARABLES INDENTING COMMISSION WAS CON SIDERED TO ARRIVE AT THEIR MARGINS,THAT THE FIGURES REPORTED IN TPOS ORDER AB OUT MANUFACTUR -ING SERVICES WERE INCORRECT,THAT THE TOTAL INCOME RECEIVED WAS R S. 70.33 CRORES AND THE PROFIT DISCLOSED WAS RS. 22.07 LAKHS,THAT SEPARATE BOOKS O F ACCOUNTS WERE MAINTAINED IN SAP SYSTEM BY THE ASSESSEE FOR THE MANUFACTURING SERVICES,THAT SAME HAD BEEN SEPARATELY DISCLOSED IN SEGMENTAL AND DIRECTLY THE PROFIT AMOUNT WAS SHOWN UNDER MANUFACTURING SERVICES,THAT SAP SERVICE BEING AN INTERNATIONAL TRANSACTION WAS SHOWN SEPARATELY IN THE SEGMENTAL A S SEPARATE ACCOUNTS WERE MAINTAINED FOR THE SAME,THAT SAP SERVICES WERE NOT PART OF TS. 2.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT TOLL MANUFACTURING COST HAD BEEN CONSIDER ED UNDER THE MS,THAT THE COST PERTAINING TO TOLL MANUFACTURING TRANSACTION HAD BE EN ALLOCATED TO MS,THAT EXPORT INCENTIVES WERE PART OF MS,THAT IN CASE OF T RADING THE ASSESSEE WOULD IMPORT FROM AES AND WOULD SELL LOCALLY,THAT THE ARG UMENT OF THE TPO THAT AE SEGMENTED EXPORT INCENTIVE WAS FACTUALLY INCORRECT, THAT WITH REGARD TO FOLLOWING OF THE STANDARD COSTING SYSTEM IT IS FOUND THAT THE ASSESSEE HAD GIVEN A PROPER RECONCILIATION TO THE TPO OF THE PROFIT AS PER THE SEGMENT OF FINANCIAL SPLIT AND THE PROFIT AS PER AUDITED FINANCIALS, THAT THE RECO NCILIATION CLEARLY ESTABLISHED THAT ALL THE ITEMS OF OPERATING INCOME AND EXPENSES HAD BEEN CONSIDERED AND ACCOUNTED WHILE PREPARING SEGMENTED FINANCIAL SPLIT ,THAT AE AND THE NON-AE SEGMENT OF THE ASSESSEE WERE MANUFACTURING AGROCHEM ICALS,THAT THE AE AND NON-AE SEGMENT UNDER THE MS WERE FUNCTIONALLY SIMIL AR, THAT INTERNAL TNM AND ANALYSIS CONDUCTED BY THE ASSESSEE WAS CORRECT, THA T INTENDING COMMISSION AND EXPORT INCENTIVE FORMED ONLY 0.2% OF THE TOTAL TURN OVER,THAT THOSE EXPENSES WERE NOT AT ALL MATERIAL TO VITIATE THE SEGMENTAL P ROFITABILITY,THAT THE CORRECT FIGURE OF MANUFACTURING SERVICES WAS 70.33 CRORES A ND NOT 700.33 CRORES AS REPORTED BY THE TPO, THAT THE PROFIT DISCLOSE WAS R S. 22.07 LAKH AND NOT 22.07 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 10 CRORES AS HELD BY THE TPO,THAT SEPARATE BOOKS OF A/ C.S WERE MAINTAINED FOR THE MANUFACTURING SERVICES,THAT SAME HAD BEEN SEPARATEL Y DISCLOSED IN SEGMENTAL RESULTS,THAT THE TPO AND THE DRP HAD ACCEPTED THE I T.S. OF MS,THAT NO ADDITION HAS BEEN MADE FOR SAP SERVICES,THAT THE TPO HAD MAD E UPWARD ADJUSTMENT WITH REGARD TO TS ONLY AND THE DRP HAD CONFIRMED IT ,THAT THE ASSESSEE HAD APPLIED INTERNAL TNMM FOR DETERMINING THE ALP OF TH E TRANSACTIONS IT HAD ENTERED IN TO WITH ITS AE.S.,THAT THE OPERATING MAR GIN IN THE TS WAS 0.17%,THAT THE WEIGHTED AVERAGED ARRIVED AT BY THE ASSESSEE,US ING MULTIPLE YEAR DATA,WAS 3.67%,THAT INITIALLY ELEVEN COMPARABLES WERE SELECT ED,THAT IN THE FINAL LIST OF COMPARABLES ONLY SEVEN COMPANIES WERE PICKED UP. WE FIND THAT THE ASSESSEE HAD SPECIFICALLY ADVANCED THE ISSUE THAT IF ANY ADJUSTMENT WAS TO BE MADE IT SHOULD HAVE BEEN RESTR ICTED TO THE TRANSACTION WITH THE AE.S,NOT FOR THE ENTIRE SEGMENT.IN OUR OPI NION,THE ARGUMENT IS VERY BASIS OF TP ADJUSTMENTS.THE TP PROVISIONS WERE INT RODUCED IN THE ACT TO PREVENT THE PRACTICE OF TRANSFERRING THE PROFIT TO THE AE BY ADOPTING CERTAIN DUBIOUS METHODS.NATURALLY,THE TARGET SHOULD BE THE TRANSACTIONS WITH THE AE.S AND NOT THE ALL THE TRANSACTIONS.THE ASSESSEE HAD C HALLENGED THE EXCLUSION AND INCLUSION OF CERTAIN COMPARABLES.THE DRP HAS NOT CO NSIDERED ANY OF THESE BASIC ISSUES.AS STATED EARLIER,IT PASSED A TWO LINE ORDER AND THE ORDER IS NOT ASSIGNING ANY REASON FOR ARRIVING AT THE CONCLUSION.IT IS A F ACT THAT IN THE SUBSEQUENT YEARS THE TPO HAS ACCEPTED THE INTERNAL TNMM FOR TS ALSO. WE ARE NOT AWARE AS TO WHAT DISTINGUISHING FACTORS WERE THERE IN THE LATER YEARS AS COMPARED TO THE FACTS OF THE YEAR UNDER CONSIDERATION THAT THE TPO HAD TA KEN A DIAGONALLY OPPOSITE VIEW.THE DRP HAS NOT CONSIDERED THIS VITAL ISSUE.WE AGREE THAT RES-JUDICATA IS NOT APPLICABLE TO THE TAXATION PROCEEDINGS,BUT,RULE OF CONSISTENCY IS VERY MUCH APPLICABLE.THEREFORE,THE DRP SHOULD HAVE CONSIDERED ALL THE ABOVE FACTS AND SHOULD HAVE PASSED A REASONED ORDER.IN OUR OPINION, MATTER NEEDS FURTHER VERIFICA -TION.SO,IN THE INTEREST OF JUSTICE WE ARE RESTORIN G BACK THE MATTER TO THE FILE OF THE DRP WHO WOULD DECIDE THE ISSUE AFTER HEARING TH E ASSESSEE.IT MAY CALL FOR 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 11 COMMENTS FROM THE TPO.FIRST EFFECTIVE GROUND(GOA 1- 11)ARE DECIDED IN ASSESSEES FAVOUR,IN PART. 3 .NEXT GROUND,I.E.GOA-12,IS ABOUT DISALLOWANCE OF PA YMENT MADE TO CLUBS, AMOUNTING TO RS.8.58 LAKHS.DURING THE ASSESSMENT PR OCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD INCURRED THE ABOVE EXPENSES T OWARDS ANNUAL SUBSCRIPTION CHARGES AND COST OF CLUB SERVICES AND FACILITIES UT ILISED BY THE EXECUTIVES OF THE COMPANY.HE HELD THAT THE EXPENDITURE HAD NO BUSINES S EXIGENCY,THAT EXPENDITURE WAS OF CAPITAL NATURE.IN HIS DRAFT ORDE R HE PROPOSED THE ADDITION.THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP.IN ITS ORD ER THE DRP DIRECTED THE AO THAT TO EXAMINE THE DETAILS OF EXPENDITURE AND TO A LLOW EXPENDITURE ON ACCOUNT OF SUBSCRIPTION AND CLUB MEMBERSHIP.HOWEVER,IN THE FINAL ORDER THE AO HELD THE EXPENDITURE OF CAPITAL NATURE AND DISALLOWED IT . 3.1. BEFORE US,THE AR STATED THAT THE DRP HAD DIRECTED T HE AO TO ALLOW EXPENDITURE ON ACCOUNT OF SUBSCRIPTION AND CLUB MEM BERSHIP AS A DEDUCTION AFTER EXAMINING THE DETAILS, THAT IN THE FINAL ASSE SSMENT ORDER THE AO HELD THAT THE ASSESSEE HAD TAKEN A CORPORATE MEMBERSHIP OF TH E CLUBS, THAT IT WOULD GIVE ENDURING BENEFIT TO THE ASSESSEE, THAT THE EXPENSES WERE TOWARDS PAYMENT OF MEMBERSHIP FEES AND ANNUAL SUBSCRIPTION CHARGES AS WELL AS TOWARDS THE COST OF SERVICES, THAT THE EXPENDITURE WAS CAPITAL IN NATUR E, THAT HE HAD NOT FOLLOWED THE DIRECTIONS OF THE DRP,THE DIRECTIONS OF THE DRP WER E BINDING, THAT ASSESSEE HAD PAID CLUB MEMBERSHIP EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF BUSINESS, THAT CLUB MEMBERSHIP ONLY FACILITATED ASSESSEE TO CONDUC T ITS BUSINESS MORE SMOOTHLY AND EFFICIENTLY.HE RELIED UPON THE CASES O F OTIS ELEVATORS COMPANY (INDIA)LTD.(195ITR682),SAMTEL COLOUR LTD.(326 ITR 4 25),INFOSYS TECHNOLOGIES LTD. (349 ITR 582).THE DR LEFT THE ISSUE TO THE DIS CRETION OF THE BENCH. 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 12 3.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD CLAIMED EXPENDITURE TOWA RDS PAYMENTS MADE TO CLUB ON ACCOUNT OF SUBSCRIPTION AND MEMBERSHIP,THAT THE AO DECIDED TO DISALLOW THE EXPENDITURE,THAT THE DRP DIRECTED THE AO TO ALLOW E XPENDITURE WITH REGARD TO SUBSCRIPTION AND CLUB MEMBERSHIP AFTER EXAMINING TH E DETAILS,THAT WHILE FINALISI -NG THE ASSESSMENT HE ADMITTED THAT PAYMENTS WERE M ADE TOWARDS MEMBERSHIP FEES AND ANNUAL SUBSTATION SERVICES,THAT HE DISREGA RDED THE DIRECTIONS OF THE DRP AND MADE THE DISALLOWANCE.IN OUR OPINION, THE A CTION OF THE AO IS HIGHLY OBJECTIONABLE AND NOT AS PER THE PROVISIONS OF THE LAW.THE AOS HAVE TO FOLLOW THE DIRECTIONS OF THE DRP-THEY HAD NO CHOICE AS FAR AS FOLLOWING THE DIRECTIONS OF THE DRP IS CONCERNED.THEY ARE AUTHORISED TO CHAL LENGE THE DIRECTIONS BEFORE THE TRIBUNAL BUT THEY CANNOT REFUSE TO CARRY OUT TH E DIRECTIONS.THEREFORE,ONLY ON THIS COUNT THE APPEAL OF THE ASSESSEE HAS TO BE ALL OWED. BUT,EVEN ON MERITS THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY SEVER AL JUDGEMENTS RELIED UPON BY THE ASSESSEE.WE WOULD LIKE TO REFER TO THE CASE OF UNITED GLASS MANUFACTURING CO LTD.(CIVIL APPEAL NUMBER 6649 OF 2012 OF HONBLE SUPREME COURT). IN THAT MATTER, THE HONBLE COURT HAS HELD AS UNDER: .. WE FIND THAT A SERIES OF JUDGEMENTS HAVE BEEN PASSED BY HIGH COURTS HOLDING THAT CLUB MEMBERSHIP FEES FOR EMPLOYEES INCURRED BY THE ASSESSEE IS BUSINESS EXPENSES UNDER SECTION 37 OF THE INCOME TAX ACT, 19 61. WE ALSO FIND THAT NONE OF THE DECISIONS HAVE BEEN CHALLENGED IN THIS COURT. EVEN OTHERWISE, WE ARE OF THE VIEW THAT IT IS A PURE BUSINESS EXPENSE. RESPECTFULLY FOLLOWING THE ABOVE JUDGEMENT, GROUND NUMBER 12 IS DECIDED IN FAVOUR OF THE ASSESSEE. 4. NEXT GROUND DEALS WITH DISALLOWANCE MADE U/S.14A R. W.R.8D OF THE INCOME TAX RULES,1962(RULES),AMOUNTING TO RS.22.87 LAKHS.I N THE DRAFT ASSESSMENT ORDER,THE AO HAD PROPOSED TO MAKE DISALLOWANCE AS P ER THE PROVISIONS OF SECTION 14A OF THE ACT.THE ASSESSEE FILED OBJECTION S BEFORE THE DRP WHO GAVE PARTIAL RELIEF TO THE EXTENT OF RS.6.65 LAKHS. IT D ELETED THE ADDITION PROPOSED BY 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 13 THE AO AS PER RULE 8D(III)OF THE RULES.WHILE COMPUT ING THE TOTAL INCOME OF THE ASSESSEE THE AO DID NOT ALLOW THE RELIEF GRANTED BY THE DRP. 4.1. BEFORE US,THE AR STATED THAT ASSESSEE HAD SUFFICIEN T OWN FUNDS TO MAKE INVESTMENTS, THAT DURING THE YEAR UNDER CONSIDERATI ON ADDITIONAL INVESTMENT OF RS.1.90 LAKHS ONLY WAS MADE,THAT IF INTEREST-FREE A ND INTEREST-BEARING FUNDS WERE AVAILABLE PRESUMPTION WOULD BE THAT INTEREST FREE FUNDS WERE UTILIZED, THAT OUT OF THE TOTAL INVESTMENT AND AMOUNT OF RS.2.58 C RORES WAS IN A SUBSIDIARY, THAT AN INVESTMENT OF RS. 20.48 LAKHS WERE MADE OUT OF COMPULSION, THAT THOSE INVESTMENTS WERE MADE AS PER THE REQUIREMENTS OF TH E LOCAL AUTHORITIES, THAT THE INVESTMENTS WERE MADE OUT OF COMMERCIAL EXPEDIENCY AND NOT WITH INTENTION OF EXEMPT INCOME,THAT THE ASSESSEE ITSELF DISALLOWED A SUM OF RS. 2.80 LAKHS AS EXPENDITURE INCURRED TOWARDS EARNING OF EXEMPT INCO ME, THAT THE AO HAD NEITHER CONTROVERTED NOT RECORDED ANY OBJECTIVE SAT ISFACTION WITH REGARD TO EXPLA -NATION OFFERED BY THE ASSESSEE. HE RELIED UPON THE CASES OF HDFC BANK LTD. (ITA.330 OF 2012 OF THE HONBLE BOMBAY HIGH COURT), RELIANCE UTILITIES AND POWER LTD.(313 ITR 340),JM FINANCIAL LTD (ITA/4521/ MUM/2012) PIEM HOTELS LTD.(ITA/240/MUM/2012 AND BAYER BIOSCIENCE(P)LTD. ( 51 SOT 16).THE DR STATED THAT MATTER COULD BE DECIDED ON MERITS. 4.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT DURING THE YEAR UNDER CONSIDERATION THE A SSESSEE HAD RECEIVED DIVIDEND INCOME OF RS. 37.51 LAKHS, THAT IT EXPLAIN TO THE A O THAT DIVIDEND WARRANTS WERE DEPOSITED INTO BANK ACCOUNTS IN A ROUTINE MANNER AL ONG WITH THE OTHER CHECKS, THAT THE ASSESSEE HAD SUFFICIENT OWN FUNDS TO MAKE INVESTMENT, THAT IT HAD MADE INVESTMENTS IN SUBSIDY COMPANIES, THAT ON ITS OWN I T HAD DISALLOWED AND AMOUNT OF RUPEES 2.33 LAKHS,THAT THE AO HAD NOT GIVEN ANY REASON AS TO WHY THE CALCULATION GIVEN BY THE ASSESSEE WAS NOT ACCEPTABL E. HE HAD SIMPLY APPLIED THE FORMULA AS ENVISAGED BY RULE 8D OF THE RULES. WE AR E OF THE OPINION THAT 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 14 APPROACH OF THE AO WAS CONTRARY TO THE PROVISIONS O F LAW.CONSIDERING THE ABOVE FACTS,GROUND 13 IS DECIDED IN FAVOUR OF THE A SSESSEE. 5. NEXT GROUND PERTAINS TO DISALLOWANCE OF RS. 2.40 CR ORES, BEING PRODUCT TRIAL EXPENSES.DURING THE ASSESSMENT PROCEEDINGS THE AO F OUND THAT ASSESSEE HAD CLAIMED PRODUCTION TRIAL EXPENSES OF RS. 2.40 CRORE S. HE DIRECTED THE ASSESSEE TO JUSTIFY ALLOWABILITY OF THE EXPENDITURE.AFTER CONSI DERING THE SUBMISSION OF THE ASSESSEE,THE AO HELD THAT THE EXPENSES PERTAINED TO NEW PRODUCT DEVELOPMENT/ TRIAL EXPENSES,THAT SAME WERE IN THE NATURE OF CAPI TAL EXPENDITURE WHICH WOULD GIVE ENDURING BENEFIT THE ASSESSEE.HE PROPOSED TO T REAT IT A CAPITAL EXPENDITURE AND TO DISALLOW THE SAME. 5.1. AGGRIEVED BY THE DRAFT ORDER OF THE AO,THE ASSESSEE FILED OBJECTIONS WITH THE DRP.BEFORE IT, THE ASSESSEE MADE ELABORATE SUBMISSI ONS.AFTER CONSIDERING THE AVAILABLE MATERIAL,THE DRP HELD THAT AS PER THE ASS ESSEES OWN ADMISSION THE EXPENSES WERE IN RESPECT OF RESEARCH THAT WAS CONDU CTED IN GOVERNMENT APPROVED INSTITUTIONS,THAT RESEARCH AND DEVELOPMENT ACTIVITIES WERE NOT CARRIED OUT BY THE ASSESSEE,THAT THE EXPENDITURE WAS CAPITA L NATURE. IN PURSUANCE OF THE DIRECTIONS OF THE DRP, THE AO HELD THAT EXPENSES PE RTAINING TO NEW PRODUCT DEVELOPMENT/TRIAL EXPENSES WERE CAPITAL IN NATURE, THAT SAME GAVE ENDURING BENEFIT TO THE ASSESSEE, THAT THE EXPENSES COULD NO T BE ALLOWED UNDER SECTION 37 (1) OF THE ACT. 5.2. BEFORE US,THE AR CONTENDED THAT THE ASSESSEE HAD IN CURRED EXPENSES TO TEST AS TO WHETHER ANY OF ITS EXISTING PRODUCTS COULD BE USED FOR CERTAIN OTHER CROPS , THAT THE EXERCISE WAS TAKEN BEFORE SELLING THE GOOD S IN THE MARKET, THAT THE PRODUCTS WERE SOLD IN THE PAST FOR A SPECIFIC CROP, THAT IF THOSE PRODUCTS WERE TO BE USED FOR OTHER CROPS SAME WERE TO BE TESTED FOR/ ON PRODUCT QUALITY, BIO- EFFICACY AND TOXICOLOGY, THAT EXPENDITURE RELATED T O TESTING CHARGES WERE PAID FOR 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 15 TESTING PRODUCT,THAT ASSESSEES PRODUCT LINE WAS SU CH THAT REQUIRED CONCURRENCE OF SUCH EXPENDITURE, THAT BY EXPANDING THE AMOUNT T HE ASSESSEE DID NOT BECOME OWNER OF ANY CAPITAL ASSET, THAT FIXED CAPITAL DID NOT GET ENHANCED BY INCURRING OF SUCH EXPENDITURE, THAT SAME OUGHT NOT TO BE TREA TED A CAPITAL EXPENDITURE, THAT THE EXPENDITURE RESULTED IN SMOOTH CONDUCT OF ASSES SEES BUSINESS. ALTERNATIVELY ,IT WAS ARGUED THAT THE EXPENDITURE SHOULD BE ALLOW ED AS PER THE PROVISIONS OF SECTION 35 OF THE ACT.THE DR ARGUED THAT ASSESSEE W AS NOT CARRYING OUT THE RESEARCH ACTIVITIES ITSELF,THAT THE GOVERNMENT APPR OVED INSTITUTIONS WERE DOING THE JOB ON BEHALF OF THE ASSESSEE,THAT EXPENDITURE COULD NOT BE ALLOWED AS REVENUE EXPENDITURE. 5.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US WE FIND THAT WHILE DEALING WITH THE OBJECTIONS FILED B Y THE ASSESSEE FOR THE A WHY 2007-08 THE DRP HAD ALLOWED THE DIRECTION UNDER SEC TION 35 OF THE ACT. IN OUR OPINION,THE TEST TO DECIDE THE NATURE OF THE EXPEND ITURE I.E. CAPITAL OR REVENUE EXPENDITURE THE BASIC THING TO BE SEEN IS AS TO WHE THER THE EXPENDITURE IS FOR RUNNING THE BUSINESS OF THE ASSESSEE SMOOTHLY. IF T HE EXPENDITURE IS INCURRED FOR DAY-TO-DAY BUSINESS ACTIVITIES OF THE ASSESSEE AND NOT FOR ACQUIRING SOME ASSET IT HAS TO BE ALLOWED AS REVENUE EXPENDITURE.IN THE CAS E BEFORE US,IT IS A FACT THAT NO NEW ASSET CAME INTO EXISTENCE.SECONDLY,THE EXPENDIT URE INCURRED WAS BASICALLY FOR CARRYING OUT THE BUSINESS.PAYMENT TO GOVERNMENT AGENCIES WOULD NOT MAKE ANY EXPENDITURE CAPITAL/REVENUE.THEREFORE,REVERSING THE ORDER OF THE AO, GOA -14 IS DECIDED IN FAVOUR OF THE ASSESSEE. 6. NEXT GROUND IS ABOUT DISALLOWANCE OF RS.2.25 LAKHS, BEING COMPUTER SOFTWARE EXPENSES.DURING THE ASSESSMENT PROCEEDINGS,THE AO F OUND THAT ASSESSEE HAD CLAIMED THE SAID EXPENDITURE AS REVENUE EXPENDITURE . HE PROPOSED TO DISALLOW THE SAME TREATING AS CAPITAL EXPENDITURE.IT FILED O BJECTIONS BEFORE THE DRP,WHO HELD THAT THE COMPUTER SOFTWARE WAS A COPYRIGHT, TH AT IT HAD TO BE CAPITALISED AND 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 16 THAT DEPRECIATION WAS TO BE ALLOWED AS PER THE RULE S FOLLOWING THE DIRECTIONS OF THE DRP, THE AO TREATED THE SOFTWARE EXPENDITURE AS CAPITAL IN NATURE. 6.1. BEFORE US,THE AR STATED THAT SOFTWARE FACILITATED T HE TRADING OPERATIONS OF THE ASSESSEE,THAT IT ENABLED THE MANAGEMENT TO COND UCT BUSINESS MORE EFFICIENT - LY AND PROFITABLY,THAT IT WAS NOT IN THE NATURE OF PROFIT-MAKING APPARATUS.HE RELIED UPON THE CASES OF ASAHI INDIA SAFETY GLASSES LTD. (ITA 1110/2006 AND 1111/2006 OF HONBLE DELHI HIGH COURT), RAYCHEM RPG LTD. (ITA 476 OF 2009 OF HONBLE BOMBAY HIGH COURT) GE CAPITAL SERVICES L TD (300 ITR 420). THE DR STATED THAT MATTER COULD BE DECIDED ON MERITS. 6.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT IN THE CASE OF ASAHI INDIA SAFETY GLASSES LTD. THE HONBLE DELHI HIGH COURT HAS HELD AS UNDER: SOFTWARE IS NOTHING BUT ANOTHER WORD FOR COMPUTER PROGRAMS I.E. INSTRUCTIONS THAT MAKE THE HARDWARE WORK. SOFTWARE IS BROADLY OF TWO TYPES I.E. THE SYSTEM SOFTWARE, WHICH IS ALSO KNOWN AS OPERATING SYSTEM WHICH CONTR OLS THE WORKING OF THE COMPUTER; WHILE THE OTHER BEING APPLICATIONS SUCH AS WORD PRO CESSING PROGRAMMES, SPREADSHEETS AND DATABASES WHICH PERFORM THE TASKS FOR WHICH PEOPLE USE COMPUTERS. BESIDES THESE, THERE ARE TWO OTHER CATEGORIES OF SO FTWARE, THESE BEING: NETWORK SOFTWARE AND LANGUAGE SOFTWARE. THE KNOTWORK SOFTWA RE ENABLES GROUP OF COMPUTERS TO COMMUNICATE WITH EACH OTHER, WHILE LANGUAGE SOFT WARE PROVIDES THE TOOLS REQUIRED TO WRITE PROGRAMS. THE AFORESAID BOAT SHOW THAT WHAT THE ASSESSEE REQU IRED THROUGH A WAS AND APPLICATION SOFTWARE WHICH ENABLED IT TO EXECUTE TA SKS IN THE FIELD OF ACCOUNTING, PURCHASES AND INVENTORY MAINTENANCE. THE FACT THAT THE APPLICATION SOFTWARE WOULD HAVE TO BE UPDATED FROM TIME TO TIME BASED ON THE R EQUIREMENTS OF THE ASSESSEE IN THE CONTEXT OF ADVANCEMENT OF ITS AMENDMENTS BY LAW OR BY PROFESSIONAL BODIES LIKE THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WHICH ARE GIVEN THE RESPONSIBILITY OF CONCEIVING AND FORMULATING THE ACCOUNTING STANDARDS FROM TIME TO TIME, AND PERHAPS ALSO, BY REASON OF THE FACT THAT EXPENSES MAY HAVE TO BE INCURRED ON ACCOUNT OF CORRUPTION OF THE SOFTWARE DUE TO UNINTENDED OR INT ENDED INGRESS INTO THE SYSTEM-WHAT NOT GIVE A COLOUR TO THE EXPENDITURE INCURRED IS ON E ON CAPITAL ACCOUNT. GIVEN THE FACT THAT THERE ARE MYRIADS FACTORS WHICH MAY CALL FOR E XPENSES TO BE INCURRED IN THE FIELD OF SOFTWARE APPLICATIONS, IT CANNOT BE SAID THAT EI THER THE EXTENT OF THE EXPENSE OR THE EXPENSE BEING INCURRED IN CLOSE PROXIMITY, IN THE S UBSEQUENT YEARS, WOULD BE CONCLUSIVELY DETERMINATIVE OF ITS NATURE. THE ASSES SING OFFICER HAS ERRED PRECISELY FOR THESE VERY REASONS. THE CONTENTION OF THE REVENUE THAT IN THE BOOKS OF ACCOUNTS THE ASSESSEE HAD NOT WRITTEN OFF THE EXPENSES IN ISSUE WHILE IN SUCCEEDI NG ASSESSMENT YEAR ONLY A PART OF 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 17 THE EXPENSE HAD BEEN WRITTEN OFF AND, THEREFORE, TH E ASSESSEES OWN UNDERSTANDING OF THE NATURE OF THE EXPENSE INVOLVED WAS THAT IT WAS EXPENDED ON CAPITAL ACCOUNT IS TO BE REJECTED. THE REASON BEING: THAT THE TREATMENT O F A PARTICULAR EXPENSE OR A PROVISION IN THE BOOKS OF ACCOUNTS CAN NEVER BE CON CLUSIVELY DETERMINE NATIVE OF THE NATURE OF THE EXPENSE. AND ASSESSEE CANNOT BE DENIE D A CLAIM FOR DEDUCTION WHICH IS OTHERWISE TENABLE IN LAW ON THE GROUND THAT ASSESSE E HAD TREATED IT DIFFERENTLY IN ITS BOOKS.. THEREFORE, THE TRIBUNAL WAS CORRECT IN LA W IN HOLDING THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF SOFTWARE AND PROFESSIONAL EXPENSES WAS REVENUE EXPENDITURE. RESPECTFULLY,FOLLOWING THE ABOVE JUDGMENT WE ALLOW THE GROUND IS BY THE ASSESSEE. 7. GROUND 16 IS ABOUT DISALLOWANCE OF RS.2.96 CRORES,B EING COMPENSATION PAID BY THE ASSESSEE TO PUNJAB PESTICIDES INDUSTRIAL COR PORATION SOCIETY LIMITED (PPICSL).DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD MADE THE PAYMENT OF RS. 2.96 CRORES TO PPICSL. HE DIRECTED THE ASSESSEE TO FURNISH EXPLANATION AS TO WHY SAID EXPENDITURE SHOU LD NOT BE TREATED AS CAPITAL EXPENDITURE AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, THE AO HELD THE PAYMENT HAD BEEN MADE IN THE SETTLEMENT OF CLAIM WI TH RESPECT TO PLANT AND MACHINERY INSTALLED AT THE PREMISES OF PPICSL AND I TS BASIS ON THE VALUATION OF MACHINERY. 7.1. DECIDING THE OBJECTION,FILED BY THE ASSESSEE,THE DR P HELD THAT THE PAYMENT, AS PER THE ASSESSEES OWN ADMISSION, HAD BEEN MADE TO ENSURE GOODWILL AND CONTINUED RELATIONSHIP, THAT IT WAS IN THE NATURE O F GENERATING THE GOODWILL, THAT IT COULD NOT BE CONSIDERED TO BE A REVENUE EXPENDIT URE,THAT THE GOODWILL NOT BEING A DEPRECIABLE ASSETS DEPRECIATION WAS ALSO NO T ALLOWABLE. 7.2. DURING THE COURSE OF HEARING BEFORE US,THE AR SUBMI TTED THAT PPICSL WAS CLOSELY ASSOCIATED WITH THE ASSESSEE IS A TOLLING U NIT FOR OVER 30 YEARS,THAT IT MADE A HUGE INVESTMENT IN PLANT IN 2002 IN ORDER TO MEET DESIRED QUALITY AND QUANTITY EXPECTATIONS OF THE ASSESSEE,THAT THE PLAN T WAS COMMISSIONED IN SEPTEMBER 2002, THAT THE ASSESSEE HAD COMMITTED TO PPICSL ASSURED PRODUCTION 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 18 OF 15 LAKH LITRES OF RAW MATERIALS,THAT DUE TO MARK ET CONDITIONS ASSESSEE WAS UNABLE TO LIFT THE COMMITTED QUANTITIES,THAT IT WAS CALLED UPON TO PAY COMPENSATION BY PPICSL,THAT IT APPOINTED A CONSULTA NT TO CONDUCT A FAIR AND INDEPENDENT VALUATION IN ORDER TO TAKE WELL-INFORME D DECISION, THAT ON THE BASIS OF TELEVISION REPORT AND AMOUNT OF RS. 2.96 CRORES WAS DETERMINED AS A COMPEN - SATION TO TERMINATE THE AGREEMENT ON MUTUAL CONSENT , THAT THE COMPENSATION WAS PAID FOR NON-LIFTING OF AGREED QUANTITY OF RAW MATE RIAL FROM PPICSL, THAT THE PAYMENT WAS OF REVENUE NATURE, THAT THE EXPRESSION WHOLLY AND EXCLUSIVELY DID NOT MEAN NECESSARILY,THAT THE EXPENDITURE WAS INCUR RED FOR FURTHERING THAT RATE/BUSINESS INTEREST OF THE ASSESSEE. HE RELIED U PON THE CASES OF JAMNA AUTO INDUSTRIES(167 TAXMAN 192),INDO ASIAN SWITCHGEARS P RIVATE LTD. (222 ITR 757) AND MICROSOFT CORPORATION OF INDIA PRIVATE LTD.(ITA 111 OF 2008 OF HONBLE DELHI HIGH COURT).THE DR SUPPORTED THE ORDER OF THE AO AND THE DRP. 7.3. WE FIND THAT THE ASSESSEE HAD ENTERED INTO AN AGREE MENT WITH PPICSL TO MANUFACTURE CERTAIN AMOUNT OF RAW MATERIAL, THAT DU E TO ADVERSE MARKET CONDITIONS IT COULD NOT LIFT THE GOODS FROM PPICSL, THAT IT APPOINTED A VALUE OF TWO DETERMINE THE COMPENSATION TO BE PAID TO PPICSL , THAT THE AO AND DRP DATED THE SAID EXPENDITURE AS CAPITAL EXPENDITURE.I N OUR OPINION,FOR ALLOWING/ DISALLOWING ANY EXPENDITURE U/S.37 OF THE ACT THE B ASIC THING TO BE SEEN AS TO WHETHER THE EXPENDITURE WAS INCURRED FOR FURTHERANC E OF BUSINESS INTEREST OF THE ASSESSEE OR NOT. IT IS A FACT THAT IN THIS CASE BEC AUSE OF THE EXPENDITURE INCURRED NO NEW ASSETS CAME INTO EXISTENCE.THE EXPENDITURE W AS INCURRED CONSIDERING THE OLD RELATION WITH THE PPICSL AND TO AVOID FUTURE BU SINESS COMPLICATIONS. IF AN ASSESSEE MAKES PAYMENT WHICH IS COMPENSATORY NATURE ,IT HAS TO BE ALLOWED. IN THE CASE BEFORE US,THE PAYMENT WAS MADE IN PURSUANC E OF AN AGREEMENT AND THAT WAS OF COMPENSATORY NATURE I.E.IT WAS NOT PENAL.WE WOULD LIKE TO REFER TO THE CASE OF PEICO ELECTRONIC AND ELECTRICALS LTD (107 CTR 240), DELIVERED BY THE HONBLE CALCUTTA HIGH COURT.IN THAT CASE THE ASSESS EE HAD ENTERED INTO AN 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 19 AGREEMENT WITH VULCAN INDUSTRIES, THAT VULCAN INDUS TRIES HAD TO MANUFACTURE FOR THE ASSESSEE CERTAIN GOODS, THAT IT WAS LIFTING THE GOODS REGULARLY, THAT IT STOPPED PURCHASING THE GOODS FROM MARCH 1975 THOUGH THERE W AS NO BREACH OF CONTRACT ON PART OF THE SUPPLIER, THAT THE ASSESSEE PAID COM PENSATION. THE AO AND THE FAA HELD THAT AMOUNT OF COMPENSATION PAID BY THE AS SESSEE WAS AN EXPENDITURE OF CAPITAL NATURE. THE TRIBUNAL REVERSE THE ORDER O F THE FAA AND HELD THAT THE PAYMENT WAS MADE AS A RESULT OF THE BUSINESS EXPEDI ENCY AND WAS A REVENUE EXPENDITURE. THE HONBLE CALCUTTA HIGH COURT UPHELD THE ORDER OF THE TRIBUNAL. IT REFERRED TO THE CASE OF G SCAMMELL & NEPHEW LTD. (8 ITR- SUPPLEMENT- 41 CA)WHEREIN IT WAS HELD THAT THE EXPENDITURE INCURRE D FOR TERMINATION OF A TRADING RELATIONSHIP IN ORDER TO AVOID LOSSES OCCUR RING IN THE FUTURE THROUGH THE RELATIONSHIP, WHETHER PECUNIARY LOSSES OR COMMERCIA L INCONVENIENCES, WAS JUST AS MUCH FOR THE PURPOSE OF THE TRADE IS THE MAKING OR THE CARRYING INTO EFFECT OF TRADING AGREEMENT.CONSIDERING THE ABOVE DISCUSSION, WE DECIDE GOA-16 IN FAVOUR OF THE ASSESSEE. 8. NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF GIFT EXPENSES OF RS. 22.49 LAKHS. WE FIND THAT THE ASSESSEE HAD FILED OBJECTIO NS BEFORE THE DRP WITH REGARD TO PROPOSED ADDITION BY THE AO. HOWEVER, THE DRP DI D NOT ADJUDICATE THE ISSUE. THEREFORE,IN THE INTEREST OF JUSTICE, WE ARE RESTOR ING THAT THE MATTER TO THE FILE OF THE DRP TO DECIDE THE ISSUE AFRESH AFTER HEARING TH E ASSESSEE. GROUND NUMBER 17 IS DECIDED IN FAVOUR OF THE ASSESSEE, IN PART. 9. LAST EFFECTIVE GROUND OF APPEAL PERTAINS TO ADJUSTM ENT OF OPENING STOCK OF RS. 5.53 CRORES. BEFORE US, THE AR RELIED UPON THE CASE OF MAHALAKSHMI GLASSWORKS (P)LTD.(318 ITR 116) AND STATED THAT THE AO ERRED I N NOT ALLOWING CONSEQUENTIAL ADJUSTMENT/ENHANCEMENT OF RS. 5.53 CRORES TO THE VA LUE OF OPENING STOCK OF THE RELEVANT ASSESSMENT YEAR 2006-07 ON ACCOUNT OF ADDI TION MADE TO THE CLOSING 7978/M/10(06-07)-BAYER CROP SCIENCE LTD. 20 STOCK FOR THE PREVIOUS YEAR UNDER SECTION 145A OF T HE ACT, THAT THE DOUBLE TAXATION HAD NOT BEEN DELETED TILL DATE.THE DR STAT ED THAT ISSUE COULD BE DECIDED ON MERITS. IN OUR OPINION THE BASIC PRINCIPLE OF TAXATION JURI SPRUDENCE STIPULATE THAT NO ITEM CAN BE TAXED TWICE. CONSIDERING THE FACT AND CIRCUM STANCE OF THE CASE, THE AO IS DIRECTED TO MAKE FURTHER VERIFICATION AND TO ALLOW THE ADJUSTMENT AS PER THE PROVISIONS OF SECTION 145A OF THE ACT. HE IS TO ENS URE THAT ASSESSEE DOES NOT SUFFER TAXATION FOR THE SAME AMOUNT IN TWO DIFFEREN T ASSESSMENT YEARS. GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 10. WE HOLD THAT INITIATION OF PENALTY PROCEEDINGS(GOA- 19)IS A PREMATURE ISSUE AND THE ISSUE OF THE LEVY OF INTEREST UNDER SECTION 234D OF THE ACT(GOA-20)IS OF CONSEQUENTIAL NATURE.BOTH THE GROUNDS ARE DECIDED A CCORDINGLY. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH MAY, 2016. 25 , 2016 SD/- SD/- ( . . / C.N. PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 25.05.2016. JV.SR.PS. # $ / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / !'#$ 2. RESPONDENT / %&#$ 3. THE CONCERNED CIT(A)/ ' !' ( , 4. THE CONCERNED CIT / ' ( 5. DR K BENCH, ITAT, MUMBAI / %* , ' , . ! . . 6. GUARD FILE/ - &' % //TRUE COPY// / BY ORDER, ' / ' DY./ASST. REGISTRAR !' !* , /ITAT, MUMBAI.