The DCIT, Circle-1(1)(2), Ahmedabad V. Cadila Pharmaceuticals Ltd., Ahmedabad

ITA 852/AHD/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8566 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-04-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 10-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUDIT NAGPAL SRDR
• Keywords: Depreciation; Transfer pricing; International transaction; Revenue expenditure
• Section: 43B; 143(3); 80HHC; 80G

Judgement Text

, CH CHCH CH IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD , EKUHK CKSJM EKUHK CKSJM EKUHK CKSJM EKUHK CKSJM , BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER AND SHRI, MANISH BORAD, ACCOUNTANT MEMBER ./ I.T.A. NO.852/AHD/2015 ( / ASSESSMENT YEAR : 2004-05) DCIT, CIRCLE 1(1)(2), AHMEDABAD 380 015 / VS. M/S. CADILA PHARMACEUTICALS LTD., CADILA CORPORATION CAMPUS, SARKHEJ DHOLKA ROAD, BHAT, AHMEDABAD -382 210 ./ I.T.A. NO.651/AHD/2015 ( / ASSESSMENT YEAR : 2004-05) M/S. CADILA PHARMACEUTICALS LTD., 708, SARKHEJ DHOLKA ROAD, BHAT, AHMEDABAD -382 210 / VS. DY. CIT, R-1, AHMEDABAD-380 015 ./ ./ PAN/GIR NO. : AAACC 6251 E ( !' / APPELLANT ) .. ( #' / RESPONDENT ) ASSESSEE BY : SHRI BANDISH SOPARKAR, AR REVENUE BY : SHRI MUDIT NAGPAL, SR. DR $ %& ' () / DATE OF HEARING 22/02/2018 *+,- ' () / DATE OF PRONOUNCEMENT 04/04/2018 ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 2 - . / O R D E R PER MAHAVIR PRASAD, JUDICIAL MEMBER : THESE TWO CAPTIONED APPEALS HAVE BEEN FILED AT THE INSTANCE OF THE REVENUE AND ASSESSEE AGAINST THE SEPARATE APPEL LATE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-1, AHMEDABAD [CIT(A) IN SHORT] DATED 05/01/2015 ARISING IN THE PENALTY ORDER PASSED UNDER S.271(1)(C) OF THE INCOME TAX ACT, 1961 (HEREINAFTE R REFERRED TO AS 'THE ACT') DATED 27/02/2013 RELEVANT TO ASSESSMENT YEAR (AY) 2004-05. 2. FOLLOWING GROUNDS HAVE TAKEN BY THE REVENUE: (1) THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN D ELETING THE PENALTY LEVIED U/S.271(1)(C) ON ADDITIONS/DISALLOWANCES OF RS.4,42,73,956/- EXCEPT PENALTY LEVIED ON DISALLOWA NCE OF PRIOR PERIOD EXPENSES OF RS.10,83, 885/-DESPITE THE FACT THAT THE ASSESSEE HAD WRONGLY CLAIMED EXPENSES/DEDUCTIONS IN CONTRAVENTION OF THE PROVISIONS OF THE INCOME TAX A CT 1961 IN THE RETURN OF INCOME WHICH TANTAMOUNT TO FURNISHING OF INACCURATE PARTICULARS OF INCOME. (2) THE LD.CIT(A) HAS ALSO NOT APPRECIATED THE FACT THAT THE AO HAS CORRECTLY LEVIED PENALTY OF RS.41,37,505/-ON THE TO TAL ADDITIONS/DISALLOWANCES OF RS.4,42,73,956/-. 3. FOLLOWING GROUNDS HAVE TAKEN BY THE ASSESSEE: 1. THE ASSESSMENT ORDER PASSED BY LEARNED ASSESSIN G OFFICER U/S.271(1)(C) OF THE ACT AND THE CONFIRMATION OF DI SALLOWANCE THEREIN BY THE HONBLE COMMISSIONER OF INCOME TAX(A PPEALS), IS BAD IN LAW, ILLEGAL AND DESERVES TO BE AMENDED. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 3 - 2. THE HONBLE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE CASE IN C ONFIRMING THE DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS.10,83,8 85/- CLAIMED IN THE PROFIT AND LOSS ACCOUNT. THE DISALLOWANCE MA Y BE CANCELLED. 4. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERI ALS ON RECORD ARE AS UNDER:- IN THE CASE, RETURN OF INCOME WAS FILED ON 30.10.20 04 DECLARING TOTAL INCOME AT RS.3,08,96,022/-. THE ASSESSMENT U/ S.143(3) OF THE I.T. ACT WAS COMPLETED ON 22.12.2006 DETERMINING TOTAL I NCOME AT RS.4,42,73,956/- AFTER MAKING THE FOLLOWING ADDITIO NS/DISALLOWANCES:- NET TAXABLE INCOME AS PER ROI 3,08,96,022 ADD: DISALLOWANCE OF DEDUCTION U/S. 80HHC 18,85,093 LATE PAYMENT OF ESI/PF 7,65,447 DISALLOWANCE OF PRIOR PERIOD EXPENSES 10,83,885 DISALLOWANCE OF DEPRECIATION ON MERCEDES CAR 6,79,372 ADDITION DUE TO ARMS LENGTH PRICE 38,14,000 DISALLOWANCE OF LOSS DUE TO FOREIGN EXCHANGE FLUCTUATIONS 42,66,137 DISALLOWANCE OF DEDUCTION U/S.35(2)(AB) 5,34,000 DISALLOWANCE OF DEDUCTION U/S.80G 3,50,000 TOTAL INCOME 4,42,73,956 4.1 PENALTY NOTICE U/S.274 R.W.S. 271(1)(C) OF THE ACT WAS ISSUED ON 22/12/2006 FOR CONCEALING PARTICULARS OF INCOME / F URNISHING INACCURATE PARTICULARS OF INCOME. HOWEVER, NO REPLY WAS MADE I N ANY MODE. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 4 - 4.2 BEING AGGRIEVED WITH THE ABOVE, THE ASSESSEE P REFERRED APPEAL BEFORE HON'BLE CIT(A), WHO VIDE HIS ORDER DATED 02/ 03/2012 CONFIRMED THE FOLLOWING ADDITIONS/DISALLOWANCES : DISALLOWANCE OF DEDUCTION U/S. 80HHC 18,85,093 DISALLOWANCE OF PRIOR PERIOD EXPENSES 10,83,885 ADDITION DUE TO ARMS LENGTH PRICE 38,14,000 DISALLOWANCE OF LOSS DUE TO FOREIGN EXCHANGE FLUCTUATIONS 42,66,137 DISALLOWANCE OF DEDUCTION U/S. 35(2)(AB) 5,34,000 DISALLOWANCE OF DEDUCTION U/S. 80G 3,50,000 TOTAL INCOME 4,42,73,956 IT IS SEEN THAT THE DISALLOWANCE MADE U/S.35(2AB) W AS NOT CONTESTED BY THE ASSESSEE IN APPEAL; THEREFORE THE SAME HAS ATTAINED FINALITY. 4.3 IN VIEW OF THE CONFIRMATION OF DISALLOWANCE BY THE LD. CIT(A), PENALTY NOTICE U/S.271(1)(C) WAS ISSUED ON 12/02/20 13. IN RESPONSE, THE ASSESSEE SUBMITTED ITS SUBMISSION DATED 18/02/2013 AS UNDER: 'WE REFER TO THE SUBJECT AND AT THE OUTSET WE HAVE TO STATE THAT THE SUBJECT PROCEEDINGS ARE TIME BARRED AND WE HAVE TO STATE THAT THE PERIOD OF SIX MONTHS HAVE EXPIRED FORM THE END OF THE FINA NCIAL YEAR IN WITH THE HON. CIT-A HAS DECIDED THE 1 ST APPEAL IN THE SUBJECT ASSESSMENT, ACCORDINGLY THERE IS NO SCOPE OF CONTINUING THE SUB JECT PROCEEDINGS AGAINST US AND WE REQUEST YOU TO KINDLY DROP THE PR OCEEDINGS AGAINST US UNDER INTIMATION TO US. HOWEVER, WITHOUT PREJUDICE, WE ALSO SUBMIT HERE BEL OW THE FOLLOWING ALSO, FOR YOUR KIND PERUSAL AND CONSIDERATION: IN YOUR INTIMATION JUST RECEIVED, THERE IS NO DESCR IPTION OF THE ISSUES WHERE THE PROPOSED PENALTY IS DESIRED TO BE LEVIED. HOWEVER, WE HAVE TO ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 5 - STATE THAT: THE ASSESSMENT ORDER U/S. 143(3) STATES THAT THE PENALTY IS DESIRED TO BE INITIATED FOR THE ADDITION UNDER TP-I E. RS.60 LACS ADDITION IN RESPECT OF KENYA AE TRANSACTIONS, WHICH DISALLOW ANCE IS ALREADY BEEN GRANTED FULL RELIEF BY THE HON. CIT-A. FURTHER, WITHOUT PREJUDICE, WE HAVE TO SUBMIT AS UN DER: THE CIT-A HAS GRANTED RELIEFS IN A QUANTUM OF THE D ISALLOWANCES AND ACCORDINGLY THERE CANNOT BE ANY PENALTY ON THESE, A ND AS REGARDS THE CONFIRMED DISALLOWANCE/PARTIAL DISALLOWANCES ALSO W E WISH TO SUBMIT AS UNDER: A. CADILA HARMACEUTICALS LTD. AY 2005- INCOME TAX ASSESSMENT ORDER DTD. 31-12- DEMAND NIL TAX SITUATION UPON CIT-A'S RELIEFS : DEMAND NIL SR. NO AMT DISALLOWED DISALLOWANCE CONTINUED 1 TP ADDITION IN RESP. OF KENYA 60 LACS NIL 2 U/SEC. 43B 3 ESIC ETC. 4 PRIOR PERIOD EXPS. 6 LACS 6LACS 5. FRESH ADDITION IN TP FOR NIGERIA AE FOLLOWING TPOS REMAND REPORT PENALTY 6LACS 6. R & D REMARKED BY DSIR 3 LACS 3LACS STATEMENT GIVING OUR SAY, ISSUE WISE, ON EACH OF THE DISALLOWANCES WHICH TO THE EXTENT ARE NOT IN OUR FAVOUR IN THE AS SESSED SITUATION - IE. POINTS 4 & 6 ABOVE. (B) DISALLOWANCES U/S. 43B TOWARDS ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 6 - AS REGARDS THE PF/ESI, THE ASSESSEE WITHIN THE GRAC E PERIODS/ WHERE THE PAYMENTS ARE MADE BY CHEQUE THE PAYMENTS HAVE REALIZED WITHIN 15 DAYS OF THE DUE DATE, THUS THE DEDUCTION IS VERY MUCH ELIGIBLE AND SUCH PRECEDENCE EXISTS IN THE ASSESSEE COMPANY'S OWN CASES OF PAST, THAT THE APPELLATE AUTHORITIES HAVE CANCELLED SIMIL AR DISALLOWANCE. IT IS PERTINENT TO NOTE THAT 43B DISALLOWANCES NORMALLY R ESULTS INTO DENIAL OF A PARTICULAR EXPENDITURE IN ONE YEAR BUT THE SAME G ETS ALLOWED IN ANOTHER YEAR WHEN THERE THE LIABILITY IS ACTUALLY P AID, THUS THERE IS NO REVENUE LOSS ARISING OUT OF THIS HENCE NO SCOPE O F PENALTY AT ALL. (C) DISALLOWANCE OF PRIOR PERIOD EXPENSES DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSEE COMPANY HAD PROVIDED DETAILS & EXPLANATION THAT THE LIABILITIES OF THESE EXPENSES HAVE BEEN CRYSTALLIZED IN CURRENT YEAR ONLY. MOREOVER, THE AO'S DISPUTE HERE THAT RELATES TO THE YEAR IN WHICH THE EXPENSES SHOULD HAVE BEEN CLAIMED (ASSESSEE FOLLOWI NG MERCANTILE BASIS OF ACCOUNTING...) IS WELL ADDRESSED IN A NUMB ER OF CASE LAWS IN FAVOUR OF THE ASSESSEE COMPANY. IT IS PERTINENT TO NOTE THAT PRIOR PERIOD EXPS. DIS ALLOWANCES NORMALLY RESULTS INTO DENIAL OF A PARTICULAR EXPENDITURE IN ONE YEAR BUT THE SAME GETS ALLOWED IN ANOTHER YEAR, THUS THERE IS NO REVE NUE LOSS ARISING OUT OF THIS - HENCE NO SCOPE OF PENALTY AT ALL. (D) DISALLOWANCE OF WEIGHTED CLAIM BASED ON DSIR'S REMARK ON OUTSIDE CLINICAL TRIALS U/S. 35(2AB)- RS.3,41,0000/ - THIS IS A CASE OF DENIAL OF INCENTIVE PROVISION , BASED ON DEPT.'S / AO'S INTERPRETATION OF PROVISIONS WHICH IS DIFFERENT FRO M THE CLAIM MADE BASED ON AUDIT REPORTS AND PROVISIONS OF THE SECTIO N 35(2AB), BEING AN INCENTIVE PROVISION A FAIR ELIGIBILITY OF THE PROPE R DEDUCTION IS VERY MUCH EXPECTED. WE ALSO INVITE TO THE AMENDMENT OF F A 04 WHEREBY THERE IS DUE CLARIFICATION RE. CLINICAL TRIALS - TH AT THE SECTION ALLOWS DEDUCTION OF ' IN-HOUSE R&D EXPS AND CLINICAL TRIA LS THUS AS REGARDS THE CLINIC TRIALS - THERE IS NO RELEVANCE OF 'IN-HOUSE' OR 'OUTSIDE' - FURTHER PLEASE NOTE THAT IN CLAIMING THE DEDUCTION WE HAVE RELIED UPON AUDITORS CERTIFICATION OF EXPENDITURE ELIGIBLE - T HUS A CLAIM WHICH IS BASED ON PROFESSIONAL AUDITORS' CERTIFICATION CANNO T INVITE PENALTY -EVEN IF THE DISALLOWANCES GETS SUSTAINED. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 7 - IT IS ALSO TO BE NOTED THAT - EVEN IN RESPECT OF TH E ABOVE POINTS - THOUGH NOT ACCEPTED, BUT ASSUMING WITHOUT ACCEPTING IT IS CONSIDERED THAT SOME OF THE ASPECTS ATTRACT PENALTY - THERE WILL BE NO T AX EFFECT OF THE SAME, BECAUSE THE MAT TAX OF THE ASSESSEE WILL BE YET OVE R AND ABOVE SUCH ADDED NORMAL SITUATION. MOREOVER - FOR THESE NOMINAL CONFIRMED ADDITIONS, THERE IS NO PENALTY INITIATED AT THE TIME OF ORIGINAL DISALLOWANCE.' 5. THE ISSUE WISE DISCUSSION AS UNDER: 5.1 DISALLOWANCE OF DEDUCTION U/S 80HHC IN ITS ROI THE ASSESSEE CLAIMED DEDUCTION U/S.80HHC OF THE I.T. ACT OF RS. 18,85,093/-. VIDE THIS OFFICE SHOW-CAUSE DATED 13/12/06 THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM OF DEDUCTIO N U/S. 80HHC IN VIEW OF AMENDED PROVISIONS OF SEC 80HHC. THE ASSESSEE WA S ALSO ASKED TO FURNISH REVISED WORKING OF ELIGIBLE DEDUCTION U/S, 80HHC. IN IT'S SUBMISSION THE ASSESSEE FILED REVISED WORKI NG OF ELIGIBLE DEDUCTION U/S. 80HHC. FROM THE WORKING IT WAS SEEN THAT SINCE THE PROFIT OF THE BUSINESS WAS NEGATIVE THE AVAILABLE DEDUCTIO N AS PER ASSESSEE'S OWN WORKING CAME TO NIL. SINCE THE ASSESSEE WAS NOT ELIGIBLE FOR ANY DEDUCTION U/S.80HHC, THE WHOLE CLAIM OF DEDUCTION U /E. 80HHC OF THE ASSESSEE WAS HEREBY DISALLOWED AND THE SAME WAS ADD ED BACK IN THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERA TION. THE ADDITION WAS CONFIRMED BY CIT(A) WITH THE OBSER VATION THAT THERE WAS NO ELIGIBLE POSITIVE PROFIT FOR DEDUCTION . ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 8 - 5.2 DISALLOWANCE OF WEIGHTED DEDUCTION OF RS.5,34,000/- U/S.35(2AB) OF THE I.T. ACT. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE CL AIMED DEDUCTION OF RS. 10,41,64,966/- @ 150% AT RS. 15,62 ,47,449/- U/S.35(2)(AB) FOR SCIENTIFIC RESEARCH DONE BY IT. I T IS SEEN THAT ASSESSEE IS REGISTERED WITH THE DEPARTMENT OF SCIENTIFIC & I NDUSTRIAL RESEARCH, NEW DELHI WHO IN TURN CERTIFIES THE ACTUAL ALLOWABL E EXPENSE IN THESE REGARDS AFTER CARRYING OUT PHYSICAL VERIFICATION OF THE SCIENTIFIC WORK DONE AND FACILITIES OF THE ASSESSEE. FOR THE YEAR U NDER CONSIDERATION THE DSIR HAS APPROVED SCIENTIFIC EXPENDITURE OF RS.10,3 8,08,966/- ONLY. VIDE THIS OFFICE SHOW-CAUSE DATED 13/12/2006 THE AS SESSEE WAS ASKED WHY ITS ADDITIONAL CLAIM OF RS.3,56,000/- U/S. 35(2 )(AB) SHOULD NOT BE DISALLOWED SINCE THE DSIR HAS NOT APPROVED THE SAME . IN ITS REPLY THE ASSESSEE SUBMITTED THAT: 'DURING THE YEAR UNDER CONSIDERATION, YOUR ASSESSEE COMPANY INCURRED THE SUM OF RS. 104164966/- ON IN-HOUSE RESEARCH AND DEVELOPMENT AND CLAIMED THE SAID AMOUNT U/S.35(2)(AB). THE SAID EXP ENDITURE WAS CERTIFIED AS SUCH BY THE AUDITORS PURSUANT TO THE P ROVISIONS OF THE INCOME TAX ACT, 1961. HOWEVER, FOR T6HE REASONS KNOWN TO THEM DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH (DSIR) ALLOWED AND APPROVED THE SUM OF RS.10,38,08,966/-, RESULTING INTO NON APPROVAL OF R S. 3,56,000/-. AS YOU MAY KINDLY OBSERVE FROM THE CERTIFICATE ISSUED BY D SIR AND ENCLOSED WITH OUR SUBMISSION DT. 8TH SEPT. 2006, NOT ONLY NO REASONS HAVE BEEN STATED THEREIN FOR NON APPROVAL BUT THE DETAILS THE REOF HAVE NOT BEEN CLARIFIED. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 9 - THE ASSESSEE COMPANY SUBMITS THAT THE SAID DISALLOW ANCE IS NOT ONLY ARBITRARY BUT ALSO ILLEGAL AND SHOULD NOT BE TAKEN NOTE OF BY COMPUTING TOTAL INCOME OF YOUR ASSESSEE COMPANY.' THE SUBMISSION OF THE ASSESSEE WAS CAREFULLY PERUSE D. IT WAS MENTIONED THAT DSIR WAS THE APEX BODY IN THE COUNTR Y WHICH LOOKS AFTER SCIENTIFIC AND INDUSTRIAL RESEARCH. IT WAS HAVING A TEAM OF EXPERT SCIENTIST WHO PERSONALLY VISIT THE FACILITIES OF IN DUSTRIAL HOUSES CARRYING OUT SCIENTIFIC RESEARCH LIKE OUR ASSESSEE DOES AND BASED ON THERE INQUIRIES AND VERIFICATION THEY DETERMINE AND APPROVE THE ELI GIBLE EXPENDITURE INCURRED BY THE ASSESSEE IN THIS REGARDS. THERE WAS NO FORCE IN THE ARGUMENT OF THE ASSESSEE THAT THE ASSESSMENT OF DSI R WAS ARBITRARY AND WITHOUT ANY BASE. IN VIEW OF ABOVE FACTS, DEDUCTION FOR SCIENTIFIC EX PENDITURE U/S.35(2)(AB) WAS RESTRICTED TO THE EXTENT OF THAT APPROVED BY DSIR AND SURPLUS OF RS.3,56,000/- (@ 150% IT COMES TO 5,34,0 00/- WAS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 5.3 ARMS LENGTH PRICE OF INTERNATIONAL TRANSAC TION : IN THE YEAR UNDER CONSIDERATION ASSESSEE ENTERED IN TO INTERNATIONAL TRANSACTION WITH ITS 'ASSOCIATED ENTERPRISES' BY WA Y OF PURCHASE/SALE OF VARIOUS COMMODITIES EXCEEDING RS.5 CRORES. ACCORDIN GLY, THE ASSESSEE'S CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER, MUMBAI FOR NECESSARY EXAMINATION OF THE RELEVANT ISSUES AND DECISION U/S .92CA(3) OF THE IT. ACT. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 10 - THE TRANSFER PRICING OFFICER AFTER EXAMINATION OF T HE DETAILS FILED BY THE ASSESSEE AND FACTS ON RECORD PASSED HER ORDE R ON 31/05/2006 MAKING AN UPWARD ADJUSTMENT OF RS.38,14,000/-. VIDE THIS OFFICE SHOW- CAUSE DATED 13/12/06 THE ASSESSEE WAS ASKED WHY AS PER THE ORDER OF THE TPO ADDITION OF RS. 38,14,000/- SHOULD NOT BE MADE IN THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. IN ITS REPLY THE ASSESSEE HAS SUBMITTED THAT: 'DURING THE YEAR UNDER CONSIDERATION, YOUR ASSESSEE COMPANY HAD ENTERED INTO WITH ASSOCIATE COMPANIES AS DEFINED UN DER THE INCOME TAX ACT, VARIOUS TRANSACTIONS. YOUR ASSESSEE COMPANY HA S FOLLOWED THE CORRECT METHOD BASED ON THE FACTS OF THE CASE FOR ARRIVING AT ARMS LENGTH PRICE. YOUR ASSESSEE COMPANY HAS OBTAINED TH E AUDITORS' REPORT TO THE EFFECT ACCORDINGLY AND ALSO FILED WITH THE R ETURN OF INCOME. AS YOU MAY KINDLY OBSERVE FROM THE SAID REPORT, THE AU DITORS HAVE ALSO ENDORSED AND CONFIRMED THE METHOD FOR ARRIVING AT T HE ARMS LENGTH PRICE. HOWEVER, DURING THE ASSESSMENT PROCEEDINGS UNDER TR ANSFER PRICING RULES, THE TRANSFER PRICING OFFICER-1, MUMB AI, FOR ITS OWN REASONS AND IN AD-HOC MANNER ADOPTED THE DIFFERENT METHOD FOR ARRIVING AT THE ARMS LENGTH PRICE AND ACCORDINGLY MADE AN AD DITION OF RS. 3814000/-. YOUR ASSESSEE COMPANY SUBMITS THAT THE M ETHOD ADOPTED BY TH E TRANSFER PRICING ASSESSING OFFICER IS NOT CORRECT A ND THEREFORE IS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE LAW. T HEREFORE, YOUR ASSESSEE COMPANY SUBMITS THAT THE SAID ORDER BE IGN ORED AND THE ADDITIONS MADE THEREIN SHOULD NOT BE TAKEN NOTE OF. ' IT CAN BE SEEN THAT THERE WAS NO SUBSTANCE IN THE A RGUMENTS RAISED BY THE ASSESSEE. THE TPO PASSED VERY REASONED ORDER AND HAS ADOPTED VERY SCIENTIFIC AND LOGICAL METHOD FOR ARRIVING AT ARMS LENGTH PRICE. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 11 - ASSESSEE WAS NOT AT ALL JUSTIFIED IN ARGUING THAT T HE TPO HAS ADOPTED AD- HOC MATTER. MOREOVER, IT CAN BE SEEN THAT THE ASSES SEE HAS NOT COME OUT WITH ANY SPECIFIC REASONS AND EXAMPLES ON BASIS OF WHICH IT CAN BE SAID THAT THE METHOD ADOPTED BY THE TPO IS NOT CORRECT. MERE ALLEGING THAT THE METHOD ADOPTED BY THE TPO WAS WRONG DID NOT CARRY A NY WEIGHT. IN VIEW OF ABOVE FACTS UPWARD ADJUSTMENT OF RS.38,14,100/- AS DETERMINED BY THE TPO IS HEREBY MADE AND THE SAME IS ADDED IN THE INC OME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THE ADDITION WAS CONFIRMED BY CIT(A). 5.4 DISALLOWANCE OF RS.10,83.885/- ON ACCOUNT OF P RIOR PERIOD EXPENSES: FROM 3CD REPORT FIELD ALONG WITH THE ROI IT IS SEEN THAT THE ASSESSEE HAS DEBITED NUMBER OF PRIOR PERIOD EXPENSE S IN ITS P&L ACCOUNT FOR THE YEAR UNDER CONSIDERATION. THE DETAILS OF SU CH EXPENSES ARE AS UNDER: SR. NO. PARTICULARS AMOUNT 1 ADVERTISEMENT EXPENSES 2,29,700 2 PROCESSING FEES 7,00,000 3 SAMPLES 23,500 4 MEMBERSHIP & SUBSCRIPTION 90 5 MAINTENANCE EXPENSES 49,755 ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 12 - 6 FINISHED GOODS PURCHASED 5,147 7 TRAVELING FARES 3,275 8 OTHER RESEARCH EXPENSES 67,418 9 MISCELLANEOUS EXPENSES 5,000 TOTAL 10,83,885 VIDE THIS OFFICE SHOW-CAUSE DATED 13/12/06 THE ASSE SSEE WAS REQUIRED TO JUSTIFY WITH ALL THE SUPPORTING EVIDENC ES THAT HOW THESE EXPENSES ARE ADMISSIBLE AS REVENUE EXPENSES DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE WAS ALSO REQUIRED SHOW- CAUSE WHY AS PER THE MERCANTILE SYSTEM OF ACCOUNTANCY FOLLOWED BY IT, TH E SAME SHOULD NOT BE DISALLOWED. IN REPLY THE ASSESSEE SUBMITTED THAT ITS CLAIM WAS JUSTICE AS THEY WERE DEBITED IN THE BOOKS OF ACCOUNTS IN THE CURREN T ASSESSMENT YEAR. ASSESSEE ALSO CONTENDED THAT THE CORRESPONDING 'BIL LS HAVE BEEN RECEIVED DURING THE YEAR UNDER REVIEW OR THE SAME HAVE BEEN DISPUTED AND SUCH DISPUTE SETTLED UNDER CONSIDERATION'. VARIOUS CASE LAWS HAVE BEEN RELIED UPON BY THE ASSESSEE. ASSESSEE'S CONTENTIONS WERE CONSIDERED IN DETAIL. A PERUSAL OF THE ABOVE DETAILS AND THE SUBMISSIONS IN THIS REGARD IN DICATE THAT THESE ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 13 - EXPENSE OF PREVIOUS YEAR OTHER THAN THAT UNDER CONS IDERATION WERE CLAIMED ON THE GROUND THAT THEY WERE CRYSTALLIZED I N THIS YEAR ONLY. OTHER THAN MAKING THE GENERIC OBSERVATIONS ABOUT THE POSS IBLE REASONS FOR DEBITING THESE EXPENSES IN THE CURRENT YEAR, NO SPE CIFIC EVIDENCE WAS PLACED BEFORE THE UNDER SIGNED TO ESTABLISH ITS CAS E IN THESE REGARDS. IN VIEW OF THE FACT THAT THE ASSESSEE COMPANY WAS M AINTAINING MERCANTILE SYSTEM OF ACCOUNTING, THE CLAIM OF EXPEN DITURE OF EARLIER YEARS WAS NOT ALLOWABLE IN THE YEAR UNDER CONSIDERA TION. IN VIEW OF THE ABOVE THE PRIOR PERIOD EXPENSES OF RS.10,83,885/- A S CLAIMED BY THE ASSESSEE WERE DISALLOWED AND ADDED BACK IN THE INCO ME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THE LD. CIT(A) HAS CONFIRMED THE ADDITION MADE BY A .O. STATING THAT THE APPELLANT COULD NOT GIVE ANY DETAILS AS TO HOW THESE EXPENSES WERE CRYSTALLIZED DURING THE YEAR. THE ASSESSEE WAS AWARE WHILE FILING ITS RETURN OF INCOME THAT SUCH PAYMENTS ARE NOT ALLOWAB LE UNDER THE ACT. 5.5 LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION : DURING THE SCRUTINY ASSESSMENT PROCEEDINGS IT WAS N OTICED THAT THE ASSESSEE INCURRED LOSS DUE TO FOREIGN EXCHANGE FLUC TUATION ON TERM LOAN OF RS.56,88,182/-, VIDE THIS OFFICE SHOW-CAUSE DATE D 13/12/06 IT WAS MENTIONED THAT AS PER THE PROVISIONS OF THE I.T. AC T AND AS PER VARIOUS JUDGMENTS THE LOSS IN QUESTION REQUIRES TO BE CAPIT ALIZE. ASSESSEE WAS REQUIRED TO SHOW-CAUSE WHY THE LOSS IN QUESTION SHO ULD NOT BE DISALLOWED ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 14 - AS REVENUE EXPENDITURE AND SHOULD NOT BE DISALLOWED . IN ITS REPLY THE ASSESSEE HAS SUBMITTED THAT: 'WITH RESPECT TO THE ABOVE POINT AND IN CONTINUATIO N OF OUR EARLIER SUBMISSIONS, WE BEG TO SUBMIT FURTHER AS UNDER: WE WOULD LIKE TO GIVE HEREIN BELOW AN EXTRACT OF TH E BALANCE SHEET AS OF 31/03/2004 SR. NO DESCRIPTIONS 31.03.04 1. NET FIXED ASSETS 189.31 SUB TOTAL (A) 189.31 2. NET WORTH 94.59 3. UNSECURED LOANS 14.29 4. LONG TERM LOANS 191.93 SUB TOTAL (B) 300.81 B OVER A 111.50 AS YOU MAY KINDLY OBSERVE, THE LONG TERM FUNDS ARE MUCH MORE THAN THE FIXED ASSETS OF THE CO . BY RS. 111.50 CRORES AS OF 31ST MARCH 2004. IT THEREFORE FOLLOWS FROM THE ABOVE THAT THIS EXCES S FUNDS HAVE BEEN UTILIZED TOWARDS CURRENT ASSETS SUCH AS STOCKS, DEB TORS ETC. AS YOU MAY KINDLY APPRECIATE, MONEY IS A FUNGIBLE ASSET AND TH EREFORE LOSES ITS CHARACTER ONCE IT IS DEPOSITED INTO THE BANK ACCOUN T. THE SOURCE OF THE FUNDS IS NOT RELEVANT THEREAFTER. WE WOULD LIKE TO FURTHER MENTION THAT THE NET CURRENT ASSETS OF RS.127.09 CRORES HAVE BEE N FUNDED PARTIALLY BY THE WORKING CAPITAL LOANS FROM THE BANKERS AND BALA NCE BY THE TERM LOANS AS EXPLAINED ABOVE. THE TERM LOANS (IN FOREIG N CURRENCY) WHICH HAVE BEEN USED FOR THE FUNDING OF CURRENT ASSETS, W HEN SWAPPED OR REPAID RESULTED INTO THE FOREIGN EXCHANGE LOSS. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 15 - IN VIEW OF THE ABOVE, THE FOREIGN EXCHANGE LOSS HAS BEEN INCURRED ON ACCOUNT OF THE REVENUE TRANSACTIONS ONLY AND IS THE REFORE FULLY DEDUCTIBLE. THE SUBMISSION OF THE ASSESSEE WERE CAREFULLY PERUS ED. IN FACT THE SUBMISSION OF THE ASSESSES WERE FOUND MISLEADING. I T WAS SEEN THAT AS ON 31/03/2004 THE NET FIXED ASSETS OF THE ASSESSEE STO OD AT 189.31 CRORES WHERE AS LONG TERM LOANS STOOD AT RS.191.93 CRORES. IT WAS VERY NATURALLY THAT ALL MOST ALL THE LONG TERM LOANS WERE EMPLOYED TO CREATE FIXED ASSETS. IT WAS ALSO VERY NATURAL THAT TERMS LOAN TAKEN IN F OREIGN EXCHANGE WE USED TO ACQUIRE FIXED ASSETS MANUFACTURED OUTSIDE I NDIA. IT IS CLEAR THAT AN EXCHANGE LOSS OF RS.56,88,182/- DEBITED TO P & L A/C. IS ON ACCOUNT OF FCNR LOANS APPLIED FOR FIXED ASSETS ACCORDINGLY IT NEEDS TO BE CAPITALIZED IT TO THE RESPECTIVE BLOCK OF ASSETS WHICH IS 'PLANT & MACHINERY'. ACCORDINGLY SAME IS HEREBY DISALLOWED AS REVENUE EXPENDITURE AND ADDED BACK IN THE INCOME OF THE ASS ESSEE. AT THE SAME TIME SINCE THE FOREIGN EXCHANGE FLUCTUATION LOSS IS TO BE MERGED IN TO BLOCK OF FIXED ASSET THE SAME IS ELIGIBLE FOR DEPRE CIATION @ 25% WHICH COMES TO RS.14,22,045/- IS HEREBY A LOWED TO THE AS SESSEE. IN VIEW OF ABOVE FACTS AND CALCULATIONS NET ADDITION OF RS. 42 ,66,137/- IS HEREBY MADE AND ADDED TO THE INCOME OF THE ASSESSEE FOR TH E YEAR UNDER CONSIDERATION. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 16 - 5.6 DISALLOWANCE OF CLAIM U/S. 80G : IT WAS SEEN THAT DURING THE YEAR UNDER CONSIDERATIO N THE ASSESSEE MADE DONATION OF RS.5 LAKHS TO MEHSUL BHAVAN AND DO NATION OF RS.2 LAKHS TO POLICE WELFARE COMMITTEE. IT WAS SEEN THAT THOUGH ASSESSEE CLAIMED DEDUCTION @ 50% ON BOTH THE DONATION CLAIME D TO BE MADE BY HIM IT DID NOT ATTACH THE ORIGINAL RECEIPTS OF THE DONATIONS ALONG WITH THE ROI. DURING THE ASSESSMENT PROCEEDINGS TIME AND AGA IN THE ASSESSEE WAS ASKED TO SUBMIT ORIGINAL RECEIPTS WITH RESPECT TO D ONATIONS IN QUESTION. IT WAS SEEN THAT TILL DATE OF ASSESSMENT THE ASSESS EE DID NOT SUBMITTED THE ORIGINAL RECEIPTS AS CALLED FOR. IN A BSENCE OF SUCH RECEIPTS THERE WAS NO REASON TO ALLOW THE DEDUCTION AS CLAIM ED BY IT AND ACCORDINGLY DEDUCTION OF RS.3,50,000/- U/S. 80G OF THE I.T. ACT WAS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSE SSEE FOR THE YEAR UNDER CONSIDERATION. LD. CIT(A) ALSO CONFIRMED THE DISALLOWANCE. 6. IN VIEW OF THE ABOVE DISCUSSION, LD. AO WAS SAT ISFIED THAT THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF IT S INCOME AND IS LIABLE FOR PENALTY U/S.271(1)(C) OF THE I.T. ACT. I, THERE FORE, LEVY A MINIMUM PENALTY @ 100% OF THE AMOUNT OF TAX SOUGHT TO BE EV ADED ON ACCOUNT OF FILING OF INACCURATE PARTICULARS OF INCOME, WHICH W ORKS OUT TO RS.41,37,505/-, AGAINST THE MAXIMUM PENALTY OF RS.1 ,24,12,515 /- ON THE ASSESSEE. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 17 - 7. LD. AO WAS NOT CONVINCED WITH THE PLEA TAKEN BY THE ASSESSEE AND HENCE LEVIED THE PENALTY OF RS.41,37,505/-. 8. AGAINST THE SAID PENALTY ASSESSEE PREFERRED APPE AL BEFORE THE LD. CIT(A) WHO PARTLY ALLOWED THE APPEAL. 9. WE HAVE GONE THROUGH THE RELEVANT RECORD AND IMP UGNED ORDER. IN QUANTUM PROCEEDINGS, ASSESSEE WENT IN APPEAL BEFORE THE ITAT IN ITA NO.1117/AHD/2012, IN WHICH CO-ORDINATE BENCH GAVE R ELIEF TO THE ASSESSEE WITH FOLLOWING OBSERVATION: 7. WE HAVE HEARD RIVAL SUBMISSIONS. BOTH THE LOWER AUTHORITIES ARE FAIR ENOUGH IN NOT DISPUTING ASSESSEE'S BASIC PLEA THAT IT HAD RECEIVED THE IMPUGNED BILLS ONLY IN THE RELEVANT PREVIOUS YEAR. THE ASSESSEE'S CASE THEREFORE IS THAT ALL THE SAID EXPENSES HAVE CRYSTA LLIZED IN THE IMPUGNED ASSESSMENT YEAR. THE ASSESSING OFFICER HOLDS THAT T HERE IS NO SUCH EVIDENCE OF CRYSTALLIZATION OF THE EXPENSES IN QUES TION. WE OBSERVE IN THESE PECULIAR FACTS THAT THE ASSESSEE COULD NOT HA VE PAID OR CLAIMED THE IMPUGNED BILLS WITHOUT RECEIVING THE SAME FROM ITS PAYEES. NON RECEIPT OF THE CORRESPONDING EARLIER ASSESSMENT YEARS FORMS A SUFFICIENT REASON ON ASSESSEE'S PART IN NOT RAISING ITS CLAIM IN EARL IER YEARS. BOTH THE LOWER AUTHORITIES ADMITTEDLY DO NOT DOUBT GENUINENE SS OF THE ABOVE EXPENSES. THERE IS FURTHER NO DENIAL OF THE FACT TH AT THE ASSESSEE HAS ALL ALONG BEEN TAXED AT UNIFORM RATE IN SAID EARLIER AS WELL AS IN THE IMPUGNED ASSESSMENT YEAR. HON'BLE JURISDICTIONAL HI GH COURT'S DECISION IN TAX APPEAL NO. 566/2016 PCIT VS. ADANI ENTERPRIS ES HOLDS THAT SUCH PRIOR PERIOD EXPENSES OUGHT NOT TO BE DISALLOWED IF AN ASSESSEE IS ASSESSED AT THE SAME RATE IN THE TWO SETS OF ASSESS MENT YEARS. WE ADOPT THE SAME ANALOGY HEREIN AS WELL TO DELETE THE IMPUG NED DISALLOWANCE. THIS SECOND SUBSTANTIVE GROUND IS THEREFORE ACCEPTE D. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 18 - 10. SINCE, CO-ORDINATE BENCH HAS ALREADY GIVEN RELI EF TO THE ASSESSEE NOW THERE IS NO BASIS FOR CONFIRMING THE PENALTY LE VIED BY THE LD. CIT(A) THUS WE DELETE THE PENALTY CONFIRMED BY THE LD. CIT (A). 11. DEPARTMENT ALSO FILED AN APPEAL BEFORE THE ITAT IN ITA NO.848/AHD/2016 BEFORE THE CO-ORDINATE BENCH WHO PA RTLY ALLOWED THE APPEAL OF THE DEPARTMENT. 12. IN THIS REGARD CITED A JUDGMENT OF SUPREME COUR T OF INDIA IN THE MATTER OF CIT VS. RELIANCE PETROPRODUCTS PVT. LTD.,(SUPRA), WHEREIN IT HAS BEEN HELD THAT MERELY BECAUSE THE ASSESSEE HAS CLAIMED THE EXPENDITURE, WHICH CLAIM WAS NOT ACCEPTED OR WAS NO T ACCEPTABLE TO THE REVENUE, THAT BY ITSELF WOULD NOT, IN OUR OPINION, ATTRACT THE PENALTY UNDER SECTION 271(1)(C). IF WE ACCEPT THE CONTENTIO N OF THE REVENUE THEN IN CASE OF EVERY RETURN WHERE THE CLAIM MADE IS NOT ACCEPTED BY ASSESSING OFFICER FOR ANY REASON, THE ASSESSEE WILL INVITE PENALTY UNDER SECTION 271(1)(C). THAT IS CLEARLY NOT THE INTENDME NT OF THE LEGISLATURE. 13. IN THIS MATTER SOME OF THE CLAIM WAS NOT ACCEPT ED BY THE DEPARTMENT AND DISALLOWANCE WERE MADE. IN OUR CONSI DERED OPINION, RESPECTFULLY FOLLOWING THE ABOVE SAID JUDGMENT PENA LTY CANNOT BE LEVIED IN SUCH CASES. THEREFORE, PENALTY IS DIRECTED TO BE DELETED. ITA NOS. 852 & 651/RJT/2015 CADILA PHARMACEUTICALS LTD. ASST.YEAR 2004-05 - 19 - 14. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED AND BY THE REVENUE IS DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON 04/04/2018 SD/- SD/- EKUHK CKSJM EKUHK CKSJM EKUHK CKSJM EKUHK CKSJM EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN EGKOHJ IZLKN YS[KK LNL; U;KF;D LNL; YS[KK LNL; U ;KF;D LNL; YS[KK LNL; U ;KF;D LNL; YS[KK LNL; U ;KF;D LNL; ( MANISH BORAD ) (MAHAVIR PRASA D) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 04/04/2018 PRITI YADAV, SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. !' / THE APPELLANT 2. #' / THE RESPONDENT. 3. /01( $ 2( / CONCERNED CIT 4. $ 2( ( !) / THE CIT(A)-1, AHMEDABAD. 5. 567 (%01 , !) 01- , / / DR, ITAT, AHMEDABAD 6. 78 9& / GUARD FILE. ! ( / BY ORDER, #5!( ( //TRUE COPY// P )/ * ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION 22/02/2018 (DICTATION-PAD 2 PA GES ATTACHED AT THE END OF THIS APPEAL-FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 26/03/2018 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. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 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