9911796707
TMI Blog2021 (9) TMI 1164X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Ld. Assessing Officer pursuant to directions of Ld. DRP is bad in law: 1.1 On the facts and in the circumstances of the case and in law, the assessment order ('the order') dated 23.01.2017 passed by the Learned Assessing Officer (the 'Ld. AO") u/s 143(3) read with section 144C of the Income-tax Act, 1961 (the 'Act') in case of erstwhile Ranbaxy Laboratories Limited (now merged with the Appellant) suffers from a jurisdictional defect as no assessment can be made on a dissolved / amalgamating company and therefore, the order is void ab initio. 2. Without Prejudice to the above, 2.1 On the facts and in the circumstances of the case and in law, the assessment order passed by the Ld. AO under section 143(3) in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel (the 'Hon'ble DRP1) u/s 144C of the Act is bad in law. 2.2 On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in confirming the additions / disallowances proposed in the draft assessment order passed by the Ld. AO without judiciously considering the factual and legal objections raised by the Appellant. The Hon'ble DRP err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the segmented financial statements of AEs as furnished by the Appellant, thereby holding that there is nothing on record to demonstrate that the margins earned by the AEs is due to the international transaction that needs to be benchmarked. 3.4 Without prejudice to the above, the Ld. AO/TPO erred and the Hon'ble DRP further erred in considering the Appellant as the tested party while determining the ALP on the following counts-. 1. In considering following non-operating expenses as operating expense: a. Amount paid on account of US PDA Settlement as operating expense while working out the Profit Level Indicator (Operating Profit to Operating Cost) of the Assessee. b. Amount paid on account of product liability claims as operating expense while working out the Profit Level Indicator (Operating Profit to Operating Cost) of the Assessee. 2. In carrying out fresh search process for determining comparable companies margin with significant variations and errors without appreciating that the Appellant had carried out its supplementary analysis diligently and based on the available records, hence the same cannot be rejected. 4. Re: Disallowance u/s 14A read with Rule 8D - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115JB. 5.2 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Ld. AO grossly erred and Hon'ble DRP further erred in computing the amount of disallowance u/s 14A r.w.r. 8D - .1 In considering the interest on specific borrowings as part of interest cost while working out the disallowance under Rule 8D. .2 In working out the disallowance u/s. 14A on the basis of gross interest without reducing the interest earned by the Appellant. 6. Re: Disallowance of deduction u/s 35(2AB)- Rs. 4,40,22.43.7027- 6.1 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred in proposing and Hon'ble DRP further erred in confirming the deduction u/s 35(2AB) of the Act to the rune of Rs. 4,40,22,43,702/- on the ground that Appellant had not filed Form 3CL issued by Department of Scientific and Industry Research (DSIR) without appreciating that: .1 The furnishing of Form No. 3CM is sufficient for the purpose of claiming deduction u/s 35(2AB) and that the DSIR has consistently issued Form No. 3CM in respect of the R&D facilities of the Appellant; .2 There is no provision under the Act mandating the approval of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in not appreciating the facts in Appellant's case and also misinterpreting the same while disallowing entire deduction claimed under sections 80-IB and 80-ICoftheAct. 8.2 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred and Hon'ble DRP further erred in holding that the Appellant has failed to file a proper claim within the meaning of S. 80IA(7) of the Act r.w.r. 18BBB(2) of the Income-tax Rules, 1962, by not accepting the revised certificate in Form 10CCB filed by the Appellant during the assessment proceedings along with the Profit and Loss Account and the Balance Sheet of all the eligible undertakings. 8.3 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred and Hon'ble DRP further erred in exceeding its jurisdiction in holding that the Appellant was not eligible to claim deduction under sections 80-IB & 80-IC of the Act for the year under consideration, without appreciating that on identical facts, deduction had always been allowed in the earlier year(s) (except for assessment years 2008-09 to 2011-12). The Hon'ble DRP / Ld. AO ought to have appreciated that determination of eligibili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gedly treating the same as clandestine payment without appreciating that the amount was paid to Teva Israel as per the agreement entered into between Appellant and Teva USA and tax @ maximum rate of 42.02% has been deducted at source before remitting the payment to Teva Israel and thereby erred in: .1 Allegedly regarding the commercial arrangement between the Appellant and Teva Pharmaceuticals USA, Inc. ('Teva USA') as sham transaction and also in holding that the transaction was entered to evade tax without furnishing any basis / evidence; .2 Alleging that there was no business and commercial rationale for entering into the said transaction with Teva USA, without appreciating that carrying out business operations is a prerogative of the taxpayer and tax department cannot decide how the business ought to have been conducted; .3 Holding that the said payment was made in consideration of an illegal and and-competitive agreement without appreciating that only a particular ancillary clause in the agreement was alleged to be anti-competitive and that the said payments were made pursuant to the profit sharing clause in the agreement. 9.2 Without Prejudice to Ground No. 9.1.3, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given case on account of the following: a. Appellant has only made provision of expense in books and therefore expenditure is not "incurred" in terms of Explanation 1 to S. 37(1) b. Expenditure so paid was not for "any purpose" which is an offence or which is prohibited by law c. Provisions are applicable only to violations under the Indian law and not the foreign laws d. Alleged violation relating to cGMP requirement, which is a procedural requirement, is not covered by the said Explanation. .3 Holding that the said expenditure is not incurred wholly and exclusively for the purpose of the business of the Appellant without considering the distributorship agreement entered by the Appellant. .4 Not appreciating that there has been no accrual of advantage of enduring nature to the Appellant in the capital field nor has it formed a part of the profitmaking apparatus of the Appellant's business. .5 Treating the entire expense as a prior period expense without appreciating that it was the expenditure for the year under consideration. .6 Treating the entire expense as a contingent liability without appreciating that it crystallized during the year upon signing of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the amount of expenditure without appreciating that department circular are not binding on the Appellant and same has been time and again upheld by various judicial authorities. 13. Re: Disallowance of Mark to Market Loss Rs. 667,29.40.000 /- 13.1 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred and Hon'ble DRP farther erred in disallowing the marked to market (MTM) loss on forward contracts by treating the same as contingent liabilities in utter disregard of the law laid down by the Hon'ble Supreme Court decision in case of Woodward Governor India (P) Ltd 312 ITR 254. 13.2 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred and Hon'ble DRP further erred without appreciating that in the previous assessment years, MTM gain has been charged to tax by department and following the principle of consistency, MTM loss ought to be allowed as deduction in the current year. 14. Re: Disallowance of hedging charges treating it as capital loss Rs. 113,524,211/- 14.1 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred and Hon'ble DRP farther erred in disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andating the approval of the prescribed authority i.e. DSIR in Form No. 3CL to be a pre-requisite for the purpose of claiming weighted deduction of revenue and capital expenditure u/s 35(2AB). 16.2 Without prejudice to the above, the capital expenditure incurred as part of R&D activities ought to be allowed deduction @100% u/s 35(l)(iv) as the said expenses are incurred towards scientific research related to the business of the Appellant. 16.3 Without prejudice to the above, depreciation on capital R&D expenditure u/s 32(1) ought to have been allowed. 17. Re: Non Allowance of deduction of employee compensation (ESOP) expenses u/s 37(1) Rs. 12.72.94.945/- 17.1 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred and Hon'ble DRP further erred in not allowing deduction u/s 37(1) on account of deferred employee compensation (ESOP) expenses debited to Profit & Loss Account without appreciating that such ESOP expenses is akin to employee compensation cost. 18. Re: Interest u/s 234B and 234C: 18.1 The Ld. AO grossly erred in computing interest u/s 234B and 234C of the Act. 19. Re: Initiation of penalty proceedings u/s. 271(1)(c) 19.1 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 14,06,25,552 TNMM 19 reimbursement paid 9,30,90,705 CUP 20 reimbursement of expenses 16,67,68,939 CUP Total 50,01,74,06,828 5.1 The assessee during the assessment proceeding filed its transfer pricing study report treating its foreign AE's as tested party. However The TPO found that the issue of selection of tested party in the assessee's own case was heard by the ITAT Delhi Bench reported in 2008-TIOL-75-ITAT-Del for the 2009-10 & 2010-11 wherein it was observed that the less complex party should be selected as tested party as well as the relevant information with respect to such tested should be available in the public domain. Accordingly, the TPO rejected the contention of the assessee treating the AE's as tested party for the purpose of computing the ALP and required the assessee to provide the supplementary transfer pricing report considering the assessee as the tested party. 5.2 In response to show cause notice the assessee, without prejudice to its contention that its AEs should be treated as tested party, filed the revised TP report considering itself as the tested party. The assessee in the revised TP report used TNMM as the most a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd 15.71 19.89% 5.10 Further the TPO revised the PLI of the assessee at -1.40% as per the revised computation of income by observing as under: S.No. Particulars Amount fin INR Million) 1 Sales/Operating income 86256.12 2 Other income 0 Total Operating Revenue 86256.12 3 Total expenses as per P/L account 76458.74 Less: Foreign exchange loss 3961.41 Provision for doubtful trade debts 16,79 Provision for doubtful loans & advances 5.60 Interest expenses 658.0S amortization amount 266.96 Fixed assets written off 22.91 Amounts written off 24.32 Impairment losses 1023.6 Provision for diminishing value of investment 12.50 Add: FDA Settlement expenses 17012.72 Revised total expenses 87479.32 4 Operating profit (-)1223.2 5 OP/OC % (-)1.40% 5.11 Accordingly, the TPO computed the upward adjustment amounting to Rs. 10,35,06,00,000/- i.e., difference between the ALP and actual price charged by the assessee. Thus, the AO in his draft assessment order made an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it clear that the various issues in relation to the TP adjustment are being contested by the Revenue before the Hon'ble Gujarat High Court. Since, the entire issue of TP adjustment is before the Hon'ble Gujarat High Court, the DRP refrains from making any further comment on merits. Hence, the DRP has not given any opinion on many of without prejudice grounds raised by the assessee company. 5.5 It is pertinent to note that the DRP is a continuation of the assessment proceedings, as it is only the draft assessment order, which is being challenged before it. The final assessment order is yet to be passed by the Assessing Officer. Hence, the DRP is not an appellate authority, but is part of the continuing assessment proceedings. A similar view has been echoed by the Division Bench of the Hon'ble Bombay High Court, while deciding the Writ Petition filed by Vodafone India Services Pvt. Ltd. vs Union of India and Others, wherein the following observation with regards to DRP has been made :- "The proceeding before the DRP is not an appeal proceeding but a correcting mechanism in the nature of a second look at the proposed assessment order by high functionaries of the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the facts of the case on hand are identical to the facts of the case of the preceding AY 2008-09. Therefore the Hon'ble Tribunal cannot change the stand taken in the earlier AY while deciding the identical issue in the year under consideration. The ld. AR further submitted that the High Court is the right forum which can alter the stand of the ITAT or otherwise the matter needs to be referred to the Special Bench. 12. We have heard the rival contentions and perused the materials available on records. At the outset we find that in the identical set of facts & circumstances, the ITAT Delhi Bench, in the own case of the assessee, in the AY 2008-09 being ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 taxmann.com 322, has held that AE's should be accepted as tested party being the least complex for comparability analysis of international transaction with the assessee. The relevant extract of the order is reproduced as under: "18. We have carefully considered the rival contentions. We have also perused the relevant paragraphs of the several documents relied upon before us in the form of two paper book volumes, One supplementary paper book and one decision paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the least complex functional analysis. 23. As per UNTPM 2013, "5.3.3. Selection of the Tested Party 5.3.3.1.When applying the Cost Plus Method, Resale Price Method or Transactional Net Margin Method it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the tested party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d party and requirement of minimum adjustments is also one of the most important aspects in selection of tested party. (d) There is no bar against the selection of Tested party either Local party or Foreign party. Neither Income Tax Act and nor any guidelines on Transfer pricing provides so. Therefore selection of tested party is to further the object of comparability analysis by making it less complex and requiring fewer adjustments. (e) There may be many circumstances where the data related to one party to the controlled transaction may be available easily, readily and in abundance. However the first step is to look at the FAR study of that party and if found to be complex than other party, then such party should be rejected as tested party and preference may be given to another entity which is least complex and is having reasonably reliable data for comparability. Therefore, the driving force in selection of tested party should be the least complex FAR of the party than the volume of comparable data. In this background, we proceed to decide the issue. 26. Appellant has entered into advance pricing agreement under section 92CC of the Act on 07 August 2015 with CBDT for AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have any impact on the transactions for the year under appeal. According to The APA it shall apply in respect to previous year 2013-14 relevant to AY 2014-15, however principals laid down for comparability analysis in that does have a greater persuasive value. It is not the case of the assessee that APA should be applied for this year but it is the prayer that principles laid down by the highest revenue authority should be accepted by revenue at least for the purpose of starting the first step of comparability analysis for this year as the nature of international transactions, FAR of appellant and AEs respectively are similar. The availability of data is also on the similar lines as agreed in APA. Though the critical assumptions referred to a set of taxpayer related facts, it mentions that this APA would not have any effect on other years. May that be the case, but the concept and the methodology laid down in APA can have the guidance value for the revenue authorities for the purposes of comparability analysis. The main intent of the advance pricing agreements is to protect the fair share of the revenue of the states in simple and efficient manner and to protect the tax base. Nee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in respect of an international transaction for a rollback year, if,- (i) the determination of arm's length price of the said international transaction for the said year has been subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time before signing of the agreement; or (ii) the application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year.' On reading above rule, it is clear that if the International transactions are same in the year of APA and the year for which roll back is applied, roll back is allowed to the assessee on certain normal condition of filing return of income, Report of accountant and a request in specified format. Off course, it has also normal revenue safeguarding exclusion clauses of income going below the returned income and where ITAT has passed an order on the subject. Therefore even the rules provide that if the International Transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign AEs. Therefore the facts in the present year are quite distinct than the year decided by ITAT i.e. A.Y. 2004-05. In view of this, we reject the reasons assigned by ld. TPO for rejecting the selection of overseas AE as the tested party. 33. Ld. AR has cited many decisions, which are on the principle of selection of tested party, which is least complex. We are of the view that there is no dispute on this principle as it is well recognized and well accepted in all those decisions. This too has been held by coordinate bench in the case of the assessee for A.Y. 2004-05. We have perused those decisions and applied the same in reasoning and our findings. For the sake of brevity we refer the decision of coordinate bench in General motors India (P.) Ltd. (supra) where in majority of the decisions were considered on the issue of selection of 'tested party' and it held as under :- '11.1. We shall now proceed to peruse the judicial views on the issue. The case laws relied on by the assessee is as under: (i) Mastek Limited v. Addl. CIT in ITA No.3120/Ahd/2010 dt.29.02.2012: In this case, the question came up for consideration before the earlier Bench of this Tribunal was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l profile must be first examined and after that proceeds to select the comparables. Interestingly, in the present case now before us, comparables chosen by the assessee were discussed by the TPO and those were discarded. The basic reason for rejection of those comparables was that the companies those were quoted by the assessee were dealing in product distribution whereas the TPO was of the view that the AE was nothing but 'front office' of the assessee and simple engaged in marking activity. In this context, we are of the view that in order to determine the most appropriate method for determining the arm's length price, first it is necessary to select the 'tested party' and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables." We are in agreement with the findings of the earlier Bench (supra) that such a selected party should be least complex and should not be unique. (ii) Development Consultants (P.) Ltd. v. ACIT 136 TTJ 129 & followed by Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448/315 ITR 150 (Delhi): The issue before the Tribunal was that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore US is at arm's length for both the assessment years." (iii) In the case of Ranbaxy Laboratories Ltd. v. Addl. CIT110 ITD 428, the Hon'ble Delhi Tribunal had recorded its findings that - "58. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is available about the tested party and comparables. 11.2.1 It was also vouched during the course of hearing by the learned Sr. Counsel that the financial details including operating margin of comparable companies along with the backup computations were furnished before the TPO in the transfer pricing documentation [Source: Pages 113 to 210 of the Transfer Pricing Study]. This contradicts the assertion of the learned DR that the assessee had not furnished any financial information of the comparable companies. 11.2.2 The United Nation's Practical Manual on Transfer Pricing also contradicts the TPO's argument that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee doesn't fall within his jurisdiction and he can neither call for any additional information nor scrutinize their books of accounts etc., 11.2.3 However, we find inconsistency in the stand of the TPO to the effect that while rejecting the assessee's approach for selecting GMDAT as the tested party by citing a reason that there was no reliable data available for both GMDAT and comparables and, therefore, GMDAT cannot be taken as the 'tested part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances, impugned order of the Dispute Resolution Panel suffers from the vide of being contrary to the record as well as non-application of mind, in as much as the petitioner had never sought withdrawal of the objections filed by it. The impugned order also causes immense prejudice to the petitioner as recorded hereinabove. In the circumstances, the impugned order of the Dispute Resolution Panel, therefore, cannot be sustained. . . . . . ." 11.3 We shall now peruse the case laws on which the learned DR had placed reliance in the findings of the Hon'ble Mumbai Tribunals in the cases of (i) Aurionpro Solutions Ltd. v. Addl. CIT in ITA No.7872/Mum/2011 dated 12.4.2013; and (ii) M/s Onward Technologies Ltd. v. DCIT (OSD) in ITA No.7985/Mum/2010 dated 30.4.2013. (i) In the case of Aurionpro Solutions Ltd. (supra), the issue before the Hon'ble Bench was that the assessee engaged in the business of software development and web designing services and that the assessee had lent loans to its AEs stationed at USA, Singapore and Bahrain. The assessee had claimed that the said loans as working capital advanced to its 100% subsidiary outside India. When the issue was referred to TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken by the foreign AE nor can it curtail the profit arising out of transaction between the Indian and foreign AE at arm's length. The contention of the ld. AR in considering the profit of the foreign AE as 'profit A' for the purposes of comparison with profit or comparables, being 'profit B', to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of 'internal transaction' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention is, therefore, repelled." With have duly perused the findings of the Hon'ble Bench cited supra. In this connection, we would like to point out that various Tribunals have taken divergent views in respect of sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the same.' 34. Above decision reproduced by us covers many divergent views of the coordinate benches and after considering them coordinate bench has reiterated all the principles noted by us for selection of tested party. Hence, we also draw staunch support from that decision. 35. Therefore, for the reasons stated above, ground no 2.2 of the appeal is allowed with a direction that overseas associated enterprises are accepted as 'tested party' being the least complex of the transacting entity for the year for comparability analysis of international Transactions of the assessee-appellant. 36. As we have already decided the first step of comparability analysis in ground no 2.2 of the appeal we set aside other grounds nos. 2 to 7 except 2.2 to the file of TPO to compute ALP of the international transactions accordingly. In the result ground nos. 2 to 7 except ground no.2.2 are allowed for statistical purposes. Needless to say that ld. TPO/AO shall give due weightage to the Advance pricing agreement signed by the assessee with CBDT on other issues also (other than the issue of 'selection of tested Party') for determination of ALP and in case of any divergent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 14A of the Act in its computation of income. 14.1 On a question by the AO about the disallowance under section 14A r.w.r. 8D of Income Tax Rules, the assessee submitted that it has interest free own funds in the form of share capital and reserve & surplus of Rs. 3978.28 Crores whereas the average investment is of Rs. 512.56 Crores only. Therefore, it is clear that the investment has been made out of its own fund of the assessee. 14.2 The assessee further submitted that it has treasury division which looks after the company's fund management and investment whether domestic or foreign, etc. The said department for the year under consideration has incurred an expense of Rs. 5,08,80,151/- only. Accordingly, a proportionate amount of Rs. 79,59,355/- out of total expenses in ratio of foreign and domestic investment has already been disallowed u/s 14A of the Act for the investment made in Indian companies. 14.3 However, AO disregarded the contention of the assessee and held that assessee could not establish the nexus between its fund and investment made in order to justify that the borrowed funds were used in the impugned investments. The assessee also did not maintain any separat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iny of the accounts by the AO-an aspect which is completely unnoticed by the CIT (A) and the Tribunal. The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can s. 14A or r. 8D be interpreted to mean that the entire tax-exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." Therefore, according to us, as such no further disallowance u/s 14A can be imputed. Furthermore, we did not find any satisfaction of the AO with regard to examination of the books of account of the assessee that how disallowance already offered by assessee of Rs. 3311708/- which are also certified by the tax auditor is incorrect. In absence of such satisfaction AO does not have any authority to invoke provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D "As we have already no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub-section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1, 2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154.' 16. Equally illuminating are the following observations in Godrej and Boyce Mfg. Co. Ltd. (supra) ". . . However, if the assessee does not maintain separate accounts, it would be necessary for the Assessing Officer to determine the proportion of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his satisfaction clinches the issue in favour of the respondent assessee and against the Revenue. The self or voluntary deductions made by the assessee were not rejected and held to be unsatisfactory, on examination of accounts. Judgments in Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) would be relevant if the satisfaction of the Assessing Officer is in issue, and such question of satisfaction is with reference to the accounts".' Therefore, in view of above two decisions of Hon'ble jurisdictional High court we hold that no such further disallowance over and above what is admitted by the assessee can be made. Hence, ground no. 10 of the appeal of the assessee is allowed and disallowance of Rs. 74066105/- u/s 14A of the Act is directed to be deleted." 19.1 Further Before us, no material has been placed on record by the Revenue to demonstrate that the decisions of Tribunal as discussed above has been set aside/ stayed or overruled by the Higher Judicial Authorities. Likewise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t recording satisfaction on examination of books about the correctness of disallowance made by the assessee which in this case has been made by assessee of Rs. 3311708/-.We have also held that disallowance cannot exceed the amount of exempt income. Hence, now no disallowance survives u/s 14A of the act so far as normal computation of total income of the appellant. The AO has added to the book profit amount of expense disallowed u/s.14A applying rule 8D of the Income tax act. As per our considered view, no addition u/s.115JB is warranted for amount of disallowance u/s.14A of the IT Act. Our view is supported by following decisions :- (i) Cadila Healthcare Ltd. v. Addl. CIT [2012] 21 taxmann.com 483/67 SOT 110 (URO)(Ahd. - Trib.); (ii) Reliance Industrial Infrastructure Ltd. [IT Appeal Nos. 69 & 70 (Mum) of 2009, dated 5- 4-2013]; (iii) EssarTeleholdings Ltd. [IT Appeal No. 3850 (Mum.) of 2010, dated 29-7-2011]; (iv) J.K. Paper Ltd. [IT Appeal Nos. 979 (Ahd.) of 2006 & 4027 & 4080 (Ahd.) of 2008]; (v) National Commodity Derivatives Exchange Ltd. [IT Appeal No. 2923 (Mum) of 2010, dated 26-8-2011]; and (vi) Quippo Telecom Infrastructure Ltd. [IT Appeal No. 4931 (De1hi) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e failed to file form 3CL issued by the DSIR. 29. Aggrieved assessee preferred an appeal before the Ld. DRP who has confirmed the order of the AO by following the order of his predecessor. 30. Being aggrieved by the order of the ld. DRP, the assessee is in appeal before us. 31. The Ld. AR before us submitted that in the identical facts and circumstances this Tribunal in the own case of the assessee for the A.Y. 2009-10, bearing ITA No. 1390/Ahd/2016 vide order dated 22.12.2016 has decided the impugned issue in its favor. 32. On the other hand, the Ld. DR before us vehemently supported the order of the authorities below. 33. We have heard the rival contentions of both the parties and perused the materials available on records. At the outset, we find that the coordinate bench of this ITAT in the own case of assessee bearing ITA No 1390/Ahd/2013 relevant to A.Y. 2009-10 involving the identical facts & circumstances has held as under: 7. We have given our thoughtful consideration to rival contentions as well as ld. PCIT's concern expressed in order revising the above regular assessment. We deem its appropriate at this stage to throw some light on the nature and ambit of Form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction claimed by the assessee u/s 35(2AB) of the Act. Hence the ground no. 6 of the assessee is allowed. 34. The next issue raised by the assessee in ground no. 7 is that the Ld. DRP erred in confirming the disallowance of deduction for the contribution made to Ranbaxy community healthcare society (for short RCHS) and Ranbaxy Science Foundation (for short RCF) amounting to Rs. 2,53,30,000/- and Rs. 30,00,000/- respectively. 35. The assessee company made a contribution of Rs. 2,53,30,000/ to Ranbaxy Community Healthcare Society (RCHS) and Rs. 30,00,000/- to Ranbaxy Science Foundation (RSF) in the year under consideration. As per the assessee, such contribution was eligible for deduction u/s 80G of the Act. But the same has not been claimed due to loss in the return of income. However, the assessee alternatively claimed the same as business expenditure u/s 37/35 of the Act through a note. The assessee in this connection submitted that the Hon'ble ITAT Delhi in its own case bearing ITA No. 3925/Del/2002 relevant to A.Y. 1997-98 had held that contribution made to RSF & RCHS are expenditure for the purpose of promoting the business of the company. Thus the same is allowable as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the result ground no.9 of the appeal is allowed." 40.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decisions of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Likewise, the Revenue before us has not placed any contrary binding decision in its support. In view of the above and respectfully following the decision in the own case of the assessee, we set aside the finding of the ld. DRP and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is allowed. 41. The issue raised by the assessee in the ground no. 8 is that the Ld. DRP erred in rejecting the deduction claimed by the assessee u/s 80IB/IC of the Act amounting to Rs. 80,95,76,144/- only. 42. The assessee in the year under consideration has claimed a deduction for Rs. 80,95,76,144/- under section 80IB/ 80IC of the Act in respect of its plants located in Goa and Himachal Pradesh. The necessary details for the deduction claimed under section 80IB/ 80IC of the Act stand as under: Unit Amount of deduction Year of Claim Esomeprazole Plant - Poanta Sahib NIL 1st year of claim Form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e account which is nothing but self-serving document. 42.3 In view of the above, the AO sought clarification from the assessee by issuing a show cause notice to justify the claim made under section 80IB/80IC of the Act. The assessee in compliance to it submitted as under: i. It has claimed the deduction under section 80IB/80IC of the Act in respect of the products manufactured by unit which are eligible under the Act. ii. The deduction was claimed under section 80IB/80IC of the Act on the basis of the audit reports in form No. 10CCB which contains all the information about the manner and the basis of allocation of the expenses to the eligible units. Further the amount determined in the earlier years for the deduction under section 80IB/80IC of the Act was accepted by the Revenue. iii. The research and development expenses incurred by it in the year under consideration have no connection with the products manufactured by the eligible undertaking. Thus only 30% of the total research and development expenses were considered reasonable to apportion to these eligible undertakings. As such in the earlier year the basis of allocation of 30% of the total research and development exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llocating the head office expenses and research and development expenses to the tune of 75% and 30% respectively to the eligible undertakings. The profit and loss account prepared for each eligible unit using SAP/ ERP system was meant for self-serving i.e. management. Therefore the global sale price was used to determine the profit of each eligible undertaking. The assessee has not determined the ALP for the products transferred by the eligible undertakings to the selling and distribution unit. ii. The manufacturing cost except raw material has been allocated to the eligible and non-eligible undertaking which transpires that there was no standalone system used by the eligible undertaking for determining the profit eligible for deduction under section 80IB/80IC of the Act. iii. The selling and the distribution unit of the assessee is in itself are profit centre and carries out a distinct activity. Therefore the income of such unit cannot be attributed to the manufacturing activity of the eligible undertaking. Therefore the profit of this unit needs to be reduced from the profit of the eligible undertaking. As such the activity carried out by the eligible undertaking cannot be me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, the Tribunal on account of disallowance of claim u/s.80IB/80IC on the Act when (i) selling & distributions expenses and other common expenses were not properly appropriated amongst the Units eligible for deduction u/s.80IB/80IC (it) when Form 10CCB as prescribed under Rule 18BBB(2) r.w.s.80IB & 80IC were not submitted with the Tax Audit Report (Hi) when separate Books of accounts were not maintained for eligible Units (iv) when sales made by eligible Units were not recorded on ERP/SAP at Arm's Length Price (ALP) (iv) when other income do not qualify for deduction u/s.80IB/801C?". 15.4 With due respect to the order of the Hon'ble ITAT, in order to keep the issue alive and to protect the interest of revenue, the DRP is of the considered opinion that the ground of objection raised by the assessee company needs to be rejected. Accordingly, the Ground of Objection is decided in favour of Revenue and against the assessee company and no directions are being issued to the AO on this issue. 44. In view of the above order of predecessor ld. DRP on the identical issue, the ld. DRP did not examine the issue again but followed the decision of DRP-II for the AY 2008-09 in the own c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial undertaking and submitted the basis for computation of the profit eligible for deduction for these undertakings. During the course of assessment proceedings assessee was specifically asked to explain the reasons and basis for apportionment of 30% R&D expenditure and 75% of the head office expenses to this new undertaking. Assessee explained vide letter 02.12.2008 and after going through the submission made the assessee and based on allocation explained by the assessee, profits of the undertaking u/s 80IB/80IC were accepted by the AO. Therefore, in the initial year the claim of deduction for the unit New Tablet Plant-I was claimed, examined and allowed. 71. In case of New Tablet Plant-II which was set up in AY 2006-07, the assessee did not claim any deduction in view of provision of section 80A(2). 72. Similarly, in case of new SGC Plant which was set in AY 2007-08 the assessee did not claim any deduction for that year in view of the provision of section 80A(2) of the Act as the gross total income of the assessee was negative. 73. In case of New Tablet Plant-III, this is the first year of deduction and assessee has claimed the same in return of income and it is under disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi high court in case of CIT v. Delhi Press Patra Parakashan (P) Ltd. [2013] 355 ITR 14/217 Taxman 288/34 taxmann.com 3 (Delhi) where in it is held that:- "69. The next controversy that needs to be addressed is whether it was open for the Assessing Officer to deny the benefit of section 80-I of the Act to the assessee having allowed benefit to the assessee in the preceding three years. It is contended on behalf of the assessee that it was necessary for the Assessing Officer to be consistent with the assessment for the earlier years. The question as to the qualification of Unit Nos. 2 & 3 as industrial undertakings arose in the earlier years and the Assessing Officer had accepted that Unit Nos. 2 & 3 qualified for deduction under section 80-I of the Act in the earlier years. By virtue of section 80-I(5) of the Act deduction under section 80-I of the Act was available to an assessee in the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things (such assessment year being the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year. This necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted for the assessment year 1939-40. The assessee had challenged the assessment order which was accepted by the Appellate Assistant Commissioner who upheld the assessee's claim for exemption. This view was consistently followed by the successive Assessing Officers till 1963-64. In these circumstances, the Supreme Court held that the view that had been settled and accepted over a period of years should not be allowed to be disturbed. 73. This court in the case of Lagan Kala Upvan (supra), following the decision of the Supreme Court in the case of RadhasoamiSatsang (supra) has also held that where a particular view has been accepted by the Assessing Officer to several years the same cannot be permitted to be departed from unless there is some material facts that justified such a change. Similar view has been expressed by this court in the case of Modi Industries Ltd. (supra). In this case, while considering a claim of deduction made by an assessee under section 80J of the Act, this High Court held as under:- "The second question relates to the claim of the assessee for deduction under Section 80J of the Income Tax Act in respect of its new unit namely 10 ton Furnance Divisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasijudicial controversies as it must in other spheres of human activity...." 75. In the facts of the present case, where although the Assessing officer has allowed the assessee deduction under section 80-I of the Act in the preceding years, one may still have certain reservations as to whether the issue of eligibility of Unit nos. 2 and 3 fulfilling the conditions has been finally settled, since the question has not been a subject matter of any appellate proceedings in the years preceding the assessment year 1991-92. However, there is yet another aspect which needs to be considered. By virtue of section 80-I(5) of the Act, deduction under section 80-I of the Act is available to an assessee in respect of the assessment year (referred to as the initial assessment year) relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment years 1988-89, 1989-1990 and 1990-1991 have consistently accepted the claim of the assessee for deduction under 80-I of the Act and it would not be open for the Assessing Officer to deny the deduction under Section 80-I of the Act on the ground of non fulfilment of the conditions under 80-I(2) of the Act without disturbing the assessment for the assessment years relevant to the previous year in which the Unit Nos. 2 & 3 were established. 78. This view has also been accepted by a Division Bench of Gujarat High Court in the case of Saurashtra Cement & Chemical Industries (supra). In that case, the Gujarat High Court held that where relief of a tax holiday had been granted to an assessee in an initial assessment year in which the conditions for grant of tax holiday had to be examined, denial of relief in the subsequent years would not be permissible without disturbing the assessment in the initial assessment year. The relevant extract from the decision of the Gujarat High Court in Saurashtra Cement & Chemical Industries (supra) is quoted below:- "The next question to which the Tribunal addressed itself, and no our opinion rightly, was whether the Tribunal was justified in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsistency as it has already been propounded by Hon'ble Supreme Court and various other Hon'ble High Courts. The latest in point of time is Excel Industries Ltd. (supra) where Hon'ble Supreme court has held that:- '28. Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue. 29. In RadhasoamiSatsangSaomiBagh v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) this Court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same "fundamental aspect" permeates in different assessment years. In arriving at this conclusion, this Court referred to an interesting passage from Hoysteadv.Commissioner of Taxation 1926 AC 155 (PC) wherein it was said: "Parties are not permitted to begin fresh litigation bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sake of it.' 77. Therefore, following this principal also we are of the view that deduction for the year claimed by the assessee with respect to its Goa Unit and New Tablet Plant-I cannot be disturbed on the principle of consistency also. Further, this argument cannot be taken shelter regarding the claim of the assessee for New Tablet Plant-II, SGC Plant and New Tablet Plant-III. 78. The third argument advanced by the assessee is that the accounts of the assessee are being maintained on SAP ERP System, which provides separate books of accounts resulting into independent balance sheet and profit and loss account of the eligible unit. For this ld., AR explained in detail how the ERP system works and how it generates individual profit and loss account and balance sheet of the Industrial units. In the present business environment and looking to the nature of the business and the size of the operation of the company, it is apparent that it is multi product, multi-location company. The assessee has made a claim of various units, which is submitted before us from Page Nos.974 to 1038 of Paper Book Volume No.IV. The details of this is tabulated as under:- Name of the unit Date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance-sheets. Therefore, in our opinion the contention of the ld. AO that common books of account are maintained and not separate books of account is devoid of any merit. As such, Assessee has contended that provision of section 80IB and 80IC does not provide that Assessee should maintain separate books of accounts with respect to eligible undertaking. It only provides as per provision 80IA(7) that the 'accounts' of the undertaking for the previous year for which deduction is claim should have been audited by an 'accountant'. The provision of the section does not talk about maintenance of 'separate books of accounts'. Provisions of section 80IA(7) are as under :- "(7) 38[The deduction] under sub-section (1) from profits and gains derived from an 39[undertaking] shall not be admissible unless the accounts of the 39[undertaking] for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form40 duly signed and verified by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court were that the Assessing Officer found that the assessee-Company was engaged in the business of manufacturing of yarn. The assessee derived, during the relevant assessment year, a gross total income of Rs. 51,82,666/- from what it called 'manufacturing activity'. It denied that it had undertaken any trading activity during the year in question. On the said sum of Rs. 51,82,666/-, the assessee claimed deduction at the rate of thirty per cent under section 80IA of the Act amounting to Rs. 15,54,800/-. The Assessing Officer found that the assessee had not maintained a separate trading and profit and loss account for the goods manufactured. In the assessment year in question, it appears that the assessee had sold raw wool, wool waste, textile, and knitting cloths. When a query was raised, the assessee contended that, business exigencies in the assessment year in question, it had sold the above items. However, according to the assessee, the sale of raw wool, wool waste, etc., would not disentitle it from claiming the benefit under section 80IA of the Act on the total sum of Rs. 51,82,666/- at the rate of 30%. Department found that the assessee has not maintained the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems from which on any day the independent profit and loss account and balance sheet as well as the respective ledgers, cashbook and bankbook and journal of any independent industrial undertaking is available. According to section 2(12A) of the income tax Act books of accounts have been defined as under :- '(12A)42a "books or books of account" includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as printouts of data stored in a floppy, disc, tape or any other form of electromagnetic data storage device;]' On reading of the above, it is apparent assessee has maintained separate books of accounts, which are on the SAP ERP system, which provides transaction-by-transaction ledgers, daybooks, cashbooks, and other books such as quantitative details and stock registers. The Ld. AO was of the view that as the books of accounts are maintained for the entity as a whole, it has not maintained separate books of accounts for the eligible industrial undertaking. It will further be appreciated that the primary purpose of maintaining separate books of account in any provision of the Act is only to enable the assessing officer to v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les of the eligible business are known, the expenses - both direct and indirect are identifiable and the common expenses are apportioned. The details filed before CIT(A) clearly demonstrate that in the case of the assessee, the profits of the eligible unit can be clearly ascertained from the accounts maintained. Expenses incurred for the project are known and all incomes, including indirect income arising to the project have been considered. The accounts have also been audited and a certificate, as required, has been filed. This being so, the Assessing Officer has erred in holding that separate accounts were not maintained for the eligible business and that the assessee is, therefore, not eligible for deduction u/s. 80IB(10) of the Act." 83. Addressing the next arguments of the revenue that there are certain items of other income, which are reduced from the computation of total income then the manufacturing activity results in loss. For this, proposition LD. DR drew our attention to page no 51 of the assessment order where ld. AO has stated that assessee has earned Royalty Income of Rs. 18.91 Crs, (ii) export Incentives of Rs. 78.93 crores, (iii) sundries and miscellaneous income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kings in the ratio of sales. Further, there is no evidence laid down by revenue that that in the event of the appellant deciding to commercially exploit the benefits of the R & D works, the products would be manufactured by the said units. Further on allocation of head office expenses we fully agree that it relates to costs that have been incurred on an entity level and pertains to the company as a whole. Appellant has apportioned 75% of such head office expenses to the individual undertakings based on sales. This method of allocation has been consistently followed by the assessee since commencement, which is duly certified by the auditors and accepted in the assessments completed in the past. We do not find any irrationality in the al above allocation keys adopted by the assessee firstly and for the reason that it has been accepted by the revenue in past it cannot be disputed now in subsequent years without there being any change in the facts and / or law. Honourable Delhi high court in the case of EHPT India (P.) Ltd.(supra) where in allocation of expenses based on head counts and turnover is upheld to stress that there is no bar in law for common expenses to be allocated on a sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declared at the end of the chit period, which at times exceed a period of 12 months. This method adopted by the assessee was being accepted by the department for a number of years. However, for the assessment years 1991-92 to 1997-98 the Assessing Officer took the view that the discount on the chits should be assessed every year, taking into account the number of instalments paid and remaining to be paid. The contention of the assessee was that the method adopted by him has been consistently accepted in the past and there was no justification for any departure. Accepting the submission, the Supreme Court held as under: "As stated above, we are concerned with the assessment years 1991-92 to 1997-98. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs and follow the method of accounting, which the Department has earlier accepted. It is only in those cases where the Department records a finding that the method adopted by the assessee results in distortion of profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction has been pointed before us, which shows that there is inter unit transfer of goods or services. Therefore in absence of any instances of such transfer of goods or services pointed out before us by revenue we are of the view that provision of section 80IA(8) are not attracted. 86. Further, it is submitted by the assessee that various units are manufacturing different products and final products are sold in the open market. Sales of each of the unit are accounted in the profit and loss account by the appellant of that unit. It is not pointed out before us that what is the material or services that has not been accounted for by the assseess as sales and it is not at the market rate and what is the market rate of such product or services sold by those units. It is emphatically stated that there is no inter unit transfer of the goods or services. In view of the above, we do not have any option but to reject the objection of the revenue of invoking section 80 IA (8) of the Act on this issue. 87. It is one of the contention of revenue that selling and distribution activity is itself a separate profit center and therefore whatever services have been provided by the sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,13,22,749/- were recorded for the accounting period ended on 31.3.2006. He has pleaded that if the said Unit was to sale its products on stand alone basis, then the said Unit which was only two years old could not fetch such high sale price. The said Unit has shown high profit at Rs. 1,16,82,91,400/-. The goods manufactured by the said Unit were transferred to the marketing division of the assessee-company and the sale price was noted by the Baddi Unit as per the final sale price of the product. But the fact is that the marketing divisions and the C&F are involved, therefore the sales are realized by the main marketing division. He has thus pleaded that the profit derived from "marketing function" cannot be dragged to the manufacturing unit for the purpose of claiming deduction u/s.80IC. The Special Provision is confined to certain Undertakings, as defined in the Statute, and such eligible undertakings are entitled for the deduction of the profit of such undertakings only. He has again drawn our attention that the only source of income should be the eligible source of income and not other sources of income, such as, profits of marketing division or profits on account of establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". However, the section we have to deal with i.e. Sec. 80 IC revolves around the term 'profits and gains'. As per section 2(13) 'business' includes trade, commerce or manufacture. In auxiliary, as per section 2(24) 'income' includes (i) profits and gains. An 'income' has to have a component of 'profits & gains' but all type of 'profits & gains' may not be an 'income' for tax purpose under the Act. The section in controversy i.e. Sec. 80 IC of the Act is embedded with both these terminology, reproduced verbatim :- "80IC (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in subsection( 3)". 10.2 The 'business' is prescribed in sub-section (2) in the following manner : (2) This section applies to any undertaking or enterprise (a) which has begun or begins to manufacture or produce any Article or thing ..... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, in the processing department it is not possible to segregate the two components to determine the segregated margins. Keeping this accounting principle in mind, we revert back to the language of section 80IC which says that a deduction is permissible of such profits of a specified Undertaking engaged in manufacturing of certain article or thing. The business of the said enterprise/concern should be manufacturing of article or thing and the profit therefrom is eligible for deduction u/s.80IC if that profit is part and parcel of the gross total income. As noted hereinabove, profit is the difference between the purchase price and the cost of production along with the cost of bringing the product to market. This basic principle of accountancy, as appeared, have been adopted by Baddi Unit because as per Profit & Loss account, cost of material, personal cost and general expenses, corporate expenses were reduced from the sale price to arrive at the "profit before tax" i.e. Rs. 116,82,91,400/-. 10.3 It is not in dispute that for Baddi Unit the assessee has maintained separate books of accounts and therefore drawn a separate profit and loss account. In such a situation, whether the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, chargeable to tax in India. The facts of that case were altogether different and there was a finding that undisputedly there was a PE in India and as per Indo-UK DTAA the income has to be taxed in India. An another fact was that there was no separate account of the assessee's India operation and the AO had found that on the basis of global accounts the profits were determined on sales. In that case, marketing was said to be the primary activity for earning profit. The profit was directly due to operation in India. In that context the word "attributable" was considered and then it was held that such part of the income as it was reasonably attributable to the operations carried out in India is taxable. The expression "business connection" was also considered and then it was found that it will include a person acting on behalf of a non-resident and carried on certain activities is having business connection. A business connection has to be real and intimate and through which income must accrue or arise whether directly or indirectly to the non-resident. On those facts, since it was found that R&D activities were carried out by the assessee, therefore, 15% of the profit wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing network and brand of the product related expenses. The AO has not complained about the allocation of expenditure as made by the assessee while computing the profit of the Baddi Unit. Once the assessee has itself taken into account the related expenses to arrive at the net profit, then it was not reasonable on the part of the Revenue Department to further reallocate those expenses by curtailing the percentage of eligible profit. 10.6 From the side of the Revenue, ld. Special Counsel has argued that in terms of the provisions of section 80IA(5) the deduction is to be computed as if such eligible business is the only source of income of the assessee. According to him, the manufacturing profit was the only source of income and that alone should be accounted for in the P&L account to claim the deduction u/s.80IC of the Act. Ld. DR has explained that as per the view of the A.O. up-to 80% of the profit was the result of efficient marketing net work plus due to the brand name of the company. Only 6% was the manufacturing profit, per A.O. It is true that section 80IC does recognized the provisions of section 80IA. Refer, Sub-section (7) of section 80IC which prescribes as follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have seen that the profit of an undertaking is always computed as a whole by taking into account the sale price of the product in the market. 10.7 The Ld. AO has suggested that the assessee should have passed entries in its books of account by recording internal transfer of the product from Baddhi Unit to the head office marketing unit and that too at arm's length price. From the side of the appellant an argument was raised that what should be the arm's length price in a situation when a product is ultimately to be sold in the open market. Whether the AO is suggesting that an imaginary line be drawn to determine the profit of the Baddi Unit at a particular stage of transfer of products. Definitely a difficulty will arise to arrive at the sale price as suggested by AO on transfer of product from Baddi to head office. What could be the reasonable profit which is to be charged by the Baddi Unit will then be a subject of dispute and shall be an issue of controversy. On the contrary, if the sale price is recorded at the market price, which is easily ascertainable, that was recorded in the Baddi Unit account, the scope of controversy gets minimal. Rather, the intense contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction operates is that where one eligible business is transferred to any other business. We again want to emphasis that the word used in this section is "business" and not the word "profit". We can hence draw an inference by describing these two words and thus have precisely noted that 'eligible business' has a different connotation which is not at par or identical with the "eligible profit". The matter we are dealing is not the case where business as a whole is transferred. This is a case where manufacturing products were sold through C&F in the market. Even this is not the case that first sales were made by the Baddi Unit in favour of the head office or the marketing unit and thereupon the sales were executed by the head office to the open market. Once it was not so, then the fixation of market value of such good is out of the ambits of this section. If there is no inter-corporate transfer, then the AO has no right to determine the fair market value of such goods or to compute the arm's length price of such goods. The AO has suggested two things; first that there must be inter-corporate transfer, and second that the transfer should be as per the market price determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed while segmentation is required, then Revenue from sales to external customers are reported in the segmented statement of profit and loss. In an accounting system, an intra-company sale between divisions or units is not regarded as Revenue for the purpose of such financial reporting. As per the Accounting Standards an Enterprise Revenue ignores in house-sales that represent Revenue to one segment and Expense to another. In this connection, the AO has discussed the Hon'ble Supreme Court decision pronounced in the case of Liberty India (supra). The AO wanted to justify his attempt of segmentation on the basis of the theory that only the profits derived due to manufacturing activity can be said to be derived from eligible undertaking. It was contested by AR before us that the "segment reporting" is about the segregation of business and not about the segregation of any specific activity. In the case of Liberty India (supra) it was observed that the IT Act broadly provides two types of tax incentives, namely, investment linked incentives and profit linked incentives. The Court was discussing Chapter VIA which provides incentive in the form of tax deductions to the category of "pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the respondent who is a resident in British India all his income, no matter where it arose, within British India or without British India, would be chargeable to excess profits tax just in the same way as it chargeable to income-tax under the Indian IT Act. The whole of his income arising in Raichur has legitimately been taxed under that Act. In that decision also, the word "business" was defined, i.e. business includes any trade, commerce or manufacture. It has also been said that all businesses, to which the said law applied, carried on by the same person shall be treated as one business for the purpose of the said Act. The question was about the manufacturing activity and it was contended that if a man is a manufacturer as well as a seller of goods, then in his case the term "part of a business" means carrying on all the two activities together and therefore constitute the part of the business. One of the Hon'ble Judges has said that the activities which the assessee carried on at Raichur was certainly a business of the assessee. On one hand, it was argued that the accrual of profit must necessarily be at the place where the sale proceeds are received or realized. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court as cited by the Special Counsel Mr. Srivastava. At the outset, we want to place on record that the entire issue before the Hon'ble Supreme Court was in respect of third proviso to section 5 of EPT Act. The said proviso was duly a reproduced in para-40 of the order and for ready reference typed below:- "Provided further that this Act shall not apply to any business the whole of the profits of which accrue or arise in an Indian State, and where the profits of a part of a business accrue or arise in an Indian State, such part shall, for the purposes of this provision, be deemed to be a separate business the whole of the profits of which accrue or arise in an Indian State, and the other part of the business shall, for all the purposes of this Act, be deemed to be a separate business." The point for consideration was that whether on those facts the third proviso to section 5 could be invoked. The manufacturing activity of making ground-nut oil was carried out at Raichur (Hyderabad) which was treated as a separate business within the meaning of the said proviso and thereupon it was claimed as exempt being carried out within the territorial jurisdiction of Indian State. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment of the assessee. That all the operations of the Raichur business are not carried on in Bombay. Therefore, the profits that would be deemed under this section to accrue or arise in Bombay will only be the profits which may reasonably be attributed to that part of the operations carried on in Bombay, that is to say, to sale of part of its oil in Bombay. In this context, an observation was made that a trade is completed at a place where a business transaction is closed. Profits of a business are undoubtedly not "received" till the commodity are sold and they are ascertained only when the sale take place. This aspect has not been doubted or challenged even in the said order. But in the said order the question was that if a part of a business consisted of manufacturing activity and that activity can be segregated so as to compute the yield profit, then whether such profit accrue only at the place where the manufacture are sold. To answer this question, the Hon'ble Court has commented in para-49 that there was no express direction as to apportionment in the third proviso to section-5 of EPT Act. The opinion expressed was very specific that a profit can accrue in respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the part of the AO to disturb the method of accounting of the assessee regularly followed in the normal course of business. It is true that otherwise no fallacy or mistake was detected in the books of accounts of Baddi Unit prepared on stand alone basis through which the only source of income/profit was the manufacturing of the specified products. We therefore hold that the AO's action of segregation was merely based upon a hypothesis, hence hereby rejected. These two grounds Nos.6 & 7 are allowed." We have carefully perused this decision and note that the controversy in this ground of appeal with respect to applicability of section 80 IA (8) of the act, on marketing and other selling distribution as well as research and development services provided by the undertaking as a whole to the eligible industrial undertaking at the cost or market rate for working out the eligible profit for deduction, has been decided. Ld. DR could not point out any other contrary judgment to the decision cited by the Ld. AR. Therefore, we respectfully following the above decision of coordinate bench hold that provisions of section 80IA(8) of the act does not apply to the assessee on transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the identical provisions of section 80-IA(7) in the case of CIT v. Contimeters Electricals (P.) Ltd. [IT Appeal No. 1366 of 2008, decided on 2-12-2008] and held that as long as the audit report is filed before the framing of the assessment, the provisions of section 80-IA(7) would be complied with inasmuch as the same are directory and not mandatory. A similar view would have to be taken in the present case also inasmuch as the provisions are the same. Consequently, we do not find any fault with the conclusions arrived at by the Tribunal. No substantial question of law arises for our consideration. The appeal is dismissed." [Underline supplied by us] In this case, appellant has already filed the audit report and the profit and loss account of the units however; the profit and loss account was filed before ld. DRP but in any way available with ld. DRP and Ld. AO at the time of finalization of the assessment order. In the decision cited before us HonourableDelhi high court has held that even if the audit report is not filed then also the deduction cannot be denied if same is filed before finalization of assessment. Therefore case of the assessee stands on the better foot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to arrive at the correct written down value of the assets, the Tribunal permitted the department to raise a plea to find out whether the assessee was allowed any depreciation under an enactment which was in force earlier, i.e., before the Indian Income-tax Act was made applicable to the assessee. The Court held that the subject-matter of the appeal before the Tribunal was the question as to what should be the proper written down value of the assets for calculating the depreciation allowance under the Indian Income-tax Act. It was certainly open to the department, in the appeal filed by the assessee before the Tribunal, to support the finding of the AAC with regard to the written down value on any of the grounds decided against it. In the case before the Supreme Court, earlier enactment was to be referred to, whereas in the present case only a different provision of the same enactment has to be considered. Therefore, I see no reason as to why the plea of the ld. D.R. cannot be accepted. In the present case, of course, the department is the appellant unlike in the case of Hukumchand Mills Ltd. (supra). But, in my view, it makes no difference. The department is aggrieved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s discretion. As to the very power to entertain a new plea, that is not to be ruled out, merely because a consideration thereof would call for further facts to be gone into. In Hukumchand Mills' decision [1967] 63 ITR 232, the Supreme Court laid down no fetter on the Tribunal's powers. That case, indeed, was a case where the new plea raised by the department before the Tribunal could not be considered without a further investigation into facts. Nevertheless, the Tribunal entertained the plea, and remitted the case to the ITO for the ascertainment of the relevant facts. The Supreme Court, in their decision upheld not only the Department's new plea, but also the Tribunal's order of remand based on the new plea." In the light of the above discussion, I agree with the view taken by the ld. J.M. to hold that the plea raised by the ld. D.R. is to be accepted and the matter is to be remanded to the Assessing Officer for considering the claim of the assessee for claiming deduction of unaccounted expenditure under section 37(1) of the Act.' In the above case the issue as set aside to the file of the ld. AO to decide and examine the facts in the course of hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t amounting to Rs. 1,36,68,21,506/- is allowed." 48.1 In view of the above, we note that the issue as discussed above is covered by the order of Delhi Tribunal. Moreover, we also note that the ld. DRP has also relied on the order of its predecessor which has been reversed by the ITAT as discussed above. In view of the above discussion and following the order of the ITAT Delhi where the deduction claimed by the assessee under section 80IB/80IC was allowed based on reasoning as discussed above. Hence the ground of appeal of the assessee is allowed. 49. The issue raised by the assessee in the ground no. 9 is that the Ld. DRP erred in confirming the addition made by AO for the payment made by the assessee to Teva Pharmaceuticals, Israel for Rs. 18,04,07,24,038/- by treating the payment made by the assessee to Teva Pharmaceuticals as clandestine payment . 50. There is a medicine namely 'LIPITOR' used for reducing the risk of heart attack and cholesterol level which has highly in demand in the US market. The patent for the impugned medicine was with 'Pfizer Inc'. The assessee company was planning to manufacture and sale the generic version of impugned medicine. For that purpose the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides the loss of brand/goodwill etc. to it. Accordingly, the assessee along with its associates to avoid the opportunity loss entered into an agreement with M/s Teva Pharmaceuticals USA Inc. (TEVA USA) vide agreement dated 7th December 2010, who is the second filer of ANDA. As per the agreement if assessee unable to get FDA approval and M/s TEVA gets tentative approval during the interim period and inform assessee about having ready with prelaunch quantity by issuing 'ready date notice'. Then the assessee will either relinquish or selectively waive of its exclusive right and M/s TEVA USA will manufacture the impugned medicine which was to be sold jointly i.e. group of the assessee and M/s TEVA USA. In lieu the assessee will get consideration of $15 million as one time compensation and 50% share in profits arise from the sale of impugned medicine. 50.6 M/s TEVA USA got the tentative approval vide letter dated 12th January 2011 and also make payment of one time compensation of $ 15 million by 13th July 2011. M/s TEVA USA also prepared/manufactured the pre-launch quantity and accordingly served a ready date notice dated 23rd November 2011 to the assessee. Accordingly the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. iii. The assessee and M/s TEVA will not challenge each other right to exclusivity with regard to ANDA for a period of 2 year. iv. The agreement will terminate after expiry of 180 days period of exclusivity. 50.9 In view of the above revised agreement, the assessee has made payment of Rs. 18296.77 being 50 % of the profit earned from the sale of impugned medicine. However such payment were made to M/s Teva Pharmaceuticals Industries Ltd (TEVA Israel) pursuant to letter dated 22nd March 2012 received from M/s Teva Pharmaceuticals USA Inc (TEVA USA). where M/s TEVA USA informed that its has assigned the agreement in favour of its holding company TEVA Israel being economic owner and the producer of the impugned product. As per the assessee such amount has been paid wholly and exclusively for the purpose of the business and accordingly claimed as revenue expenses in books of account. 50.10 However, the AO disregarded the contention of the assessee by observing that the assessee was having absolute and exclusive right for a period of 180 days beginning from 30th November 2011 to sale the impugned medicines. For such exclusive period of time, it was not possible for M/s T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally for the purpose of the business. 50.17 Since, the TDS has been deducted in the name of TEVA Israel instead of TEVA USA which is the violation of the provisions of the Act though agreement was entered with TEVA USA. Even after the assignment, therefore assessee was under the obligation to deduct the TDS in the name of TEVA USA only. But the assessee has no done so which is a default under the provisions of TDS and therefore such payment cannot be allowed as deduction. 50.18 At the time of original agreement dated 7th December 2010, there was no tentative approval available with the TEVA USA. As such, the tentative approval was received by TEVA USA dated 1st December 2011 whereas the assessee got the approval 30th November 2011. As such the assessee got the approval from US FDA prior to the approval given to TEVA USA. Thus TEVA USA had no right of whatsoever and therefore there was no reason for the assessee to pay 50% share of the profit as compensation without getting any services from TEVA. 50.19 As such, the payment was made to TEVA USA to eliminate the competition and such payment cannot be categorized as revenue in nature. It is for the reason that the assessee out of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he original patent holder PFIZER and it also had clearance to manufacture the same at the manufacturing facility at Ohm Inc.. which is a subsidiary company of Ranbaxy Laboratories Ltd. Thus, there was no need of entering into agreement with Teva Pharmaceutical Inc. USA. 4. From the point of view of the agreement dated 07.12.2011, it transpires that Ranbaxy Laboratories Ltd had agreed to share its 50% profit with Teva Pharmaceuticals Inc. USA. Thus, Ranbaxy Laboratories Ltd applied its income after it has been earned, while making payment toTeva, Israel. Therefore, the said payments do not qualify as deduction u/s 37(1) under the head Business and Profession. 5.The agreement with Teva Pharmaceutical Inc. USA was only for sharing of profit and if there was a loss to Ranbaxy Laboratories Ltd, the same could not be passed on to Teva Pharmaceutical Inc. USA. Thus, purely it is a one-sided agreement, wherein money has flown to Teva Israel from the assesse company. 6. The so-called notice of assignment dated 22.03.2012 to Teva Pharmaceutical Ltd, Israel by Teva Pharmaceutical USA is a self-serving arrangement and a colorable device-This is clear from the fact that Ranbaxy India star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment. Moreover, the assessee was under the contractual obligation to make the payment for the reasons as contended in the order of authorities below. Therefore it does not make any difference even the payment has been made to the group company of the TEVA USA on request. If any question arises from the taxability point of view, then the revenue should raise the question to the party to whom the payment has been made after deducting the withholding tax. Accordingly, no tax was evaded in the given facts and circumstances on account of payment made to TEVA Israel. 53. Admittedly, at the time of original agreement dated 7th December 2010 with the TEVA USA, there was no approval (ANDA) received from the US FDA by the assessee. However the assessee acquired a license from the Pfizer for the sale of generic version of impugned medicine with effect from 30th November 2011 subject to ANDA exclusivity approval but such ANDA approval was certain to get from US FDA as per the prevailing practice/law as it (the assessee ) was the first to file ANDA. Since the assessee manufacturing facilities were under the red alert/banned during the relevant time, it was appearing to be impossible for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es below by reiterating the findings contained in the respective orders which we have already adverted to in the preceding paragraph. As per the learned DR, there was no necessity for the assessee to enter into the original agreement with TEVA USA dated 7th December 2010. It is because the assessee has already made an application for the amendment of ANDA dated 4th December 2009 to include the manufacturing facility of its subsidiary company based in USA. Further it was most likely that the manufacturing facility of subsidiary will get approved by virtue of Ranbaxy being the 1st applicant of ANDA. Accordingly no prudent person will enter into the agreement with this rival party and that too being without there being any compelling circumstance and circumstances to do so. 57.1 The learned DR also contended that the original agreement with TEVA USA is void for the reason that it was to restrain the trade and stop the competition which is invalid under the Indian law as well as US anti-trust laws. Accordingly no reference can be made to such agreement and consequently the payment made in pursuance to such agreement was not incurred for the purpose of the business. 57.2 Assuming, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... patent, claiming that a patent would not be infringed by the product proposed in the ANDA, or claiming the patent as unenforceable, the applicant must submit a paragraph IV certification to US FDA. Simultaneously the appellant of ANDA must have to give notice to each patent holder specifying the legal and factual basis for challenging the patent in paragraph IV certification. Upon receiving such notice the patent holders may start patent litigation against such appellant of ANDA. Thus the appellant who challenged the validity and enforceability of patent takes the risk of patent litigation, therefore US FDA provides incentive to such appellant by granting 180 days period of exclusivity on basis of first to file ANDA under paragraph IV of certification. 58.3 If the ANDA of appellant meets the substantive requirement, then FDA gives a tentative approval to the appellant which means that its ANDA is ready for approval but final approval is not granted due to patent is yet to expire or exclusivity period yet to expire. However such exclusivity period of 180 days may be forfeited by the FDA in certain circumstances such as: 1. Failure to market 2. Withdrawal of application 3. Am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough for getting the approval from ANDA to manufacture and sale of its impugned medicine/product with effect from 30 November 2011. This fact has not been disputed by the revenue. The relevant finding in the order of the AO in this regard reads as under: 1.13 In the instant case, Ranbaxy being the first filer of ANDA (filed on 19.08.2002) and having moved the ANDA application prior to Teva Pharmaceuticals, should have been entitled to '180 days exclusively period' under the US FDA regulations. 58.7 Likewise, the finding of the learned DRP on the above point i.e. the assessee get the approval for the exclusivity period is also extracted below: 17.4 In the instant case, Ranbaxy being the first filer of ANDA and having moved the ANDA application prior to Teva Pharmaceutical s, was naturally entitled to ' 180 days exclusivity period' under the US PDA regulations. It was claimed by the assessee that Ranbaxy's ability to secure necessary regulatory approval from the US PDA to enjoy the said exclusivity period was thrown into doubt when the US FDA imposed an alert in September, 2008 barring imports of certain generics from Ranbaxy India, Ranbaxy USA and Teva USA entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idity of the patent of M/s Pfizer Inc. which got settled by way of settlement agreement with the Pfizer vide settlement agreement dated 17th June 2008. As per the settlement, Pfizer granted license to the assessee to manufacture and sale of the impugned generic version of the medicine with effect from 30th November 2011. Thus from the above, it can be inferred that the assessee to manufacture the impugned medicine has performed a long journey after crossing various hurdles. Therefore, it was quite natural for the assessee or anybody else to take every precaution that it should not lose this opportunity for any small or the big reason, especially in the circumstances when it is known fact that it was a very profitable venture for 180 days. Similarly, if the assessee fails to avail the opportunity for 180 days as discussed above, it will bring a lot of discomfort to the employees and eventually the morals of employees will go down besides the loss of reputation/ goodwill in the market of the assessee. Accordingly, it appears that the assessee in the interest of business has entered and to avoid any possible eventuality in future has entered in the agreement with TEVA USA. 58.12 Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VA has been defined as TEVA USA and its associates which reads as under: "Teva" means Teva, and to the extent the subject right or obligation hereunder was properly assigned to its Affiliate pursuant to the terms of this Agreement, then Teva and such Affiliate. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX "Teva" means Teva, and to the extent the subject right or obligation hereunder was properly assigned to its Affiliate pursuant to the terms of this Agreement, then Teva and such Affiliate. 58.18 Further, the clause 10.2 of revised agreement contain the understanding with regard to assignment of rights and liabilities which reads as under: 10.2 Successors and Assigns: Assignment, The terms and provisions hereof shall inure to the benefit of, and be binding upon the Parties and their respective successors and permitted assigns. No Party shall assign, encumber or otherwise transfer (or attempt to do any of the foregoing) this Agreement or any part of it to any Third Party without the prior written consent of the other Party, which consent may be withheld by such Party in its sole and absolute 1 discretion; provided, however, that a Party may, upon notice t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of suspicion, the transaction cannot be treated as sham or based on treaty shopping. Furthermore, the refund of income tax has not been given to TEVA Israel. As such claim of the TEVA Israel seeking the refund of income tax has been disputed by the revenue which is pending for adjudication. Therefore, in the given facts and circumstances, there cannot be raised any doubt on the genuineness of the payment made to TEVA Israel on the reasoning that it is exempted in the hands of recipient in its country. In this regard we draw support and guidance from judgment of Hon'ble Gujarat High court in the case of PCIT Vs. Shreno Limited reported in 127 taxmann.com 813 wherein the finding of the Tribunal was upheld which is extracted below: Now, if that concern was suffering huge loss, then that cannot be the reason to disallow claim of the assessee. If this type of logic is being accepted, then every business organization was required to show profit only. This is a misplaced notion at the end of the ld. CIT(A) for rejecting the claim of the assessee. 58.20 Admittedly, the assessee got exclusive rights for marketing the products namely Lipitor for 180 days by the approval of US FDA an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the time of agreement dated 7th December 2010 there was no right available to the assessee from the US FDA and therefore it cannot be said the assessee has relinquished or waived the right in favour of TEVA USA. To our humble understanding the AO again misunderstood the context of original agreement. There was no right relinquished in such agreement as such it was agreed between the parties of the agreement that upon occurrence of certain event Ranbaxy will relinquish or waive of its right to exclusivity in favor of TEVA USA. This fact can be verified from the preamble of the agreement dated 7th December 2010 which reads as under: WHEREAS, in order to make the Product more quickly available to consumers in the Territory, Ranbaxy desires to either selectively waive or relinquish its First to File Exclusivity rights, contingent upon the occurrence of certain events, for the Product in favor of the Teva ANDA, and Teva desires lhat Ranbaxy effect such selective waiver or relinquishment, and Teva and Ranbaxy desire to enter into a business relationship for the sale of the Teva Product in the Territory (as hereinafter defined), all on the terms and conditions, and subject to the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion "Wholly & exclusively" used in section 10(2)(xv) of the Income-tax Act, 1922 (Which corresponds to section 37(1) of the Income-tax Act, 1961) does not mean "necessary". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such an expenditure may be incurred voluntarily and without any necessity. If it is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such an expenditure. 58.26 The law is well settled that business decisions of assessee cannot be the subject matter of consideration of Revenue authorities. How he has to earn income? How and what type of expenses he has to incur? What type of business he shall be doing. What will be the nature of the business? The assessee has to decide it. Revenue authorities cannot sit on the arm chair of a businessman. The nature of business of the assessee cannot be challenged by any authority whether assessee is competent of doing the business or not competent. It is the assessee who has to decide how to earn the Income. In view of the above, we are of the opinion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts/agreement by the assessee were contingent in nature. The learned DR at the time of hearing has relied on various judgments, but the same are distinguishable from the facts of the case on hand. In those judgments as well there was no denial for denying the deduction if the expenditure has been incurred for the purpose of the business. 58.30 In the light of the above stated discussion, we hold that the payment to the TEVA Israel has been made by the assessee as a matter of commercial expediency which is wholly and exclusively for the purpose of the business. Thus the ground appeal of the assessee is allowed. 59. The issue raised by the assessee in ground No. 10 is that the learned DRP erred in confirming the disallowance made by the AO for Rs. 25,95,95,57,864/- ( settlement agreement of Rs. 1827,65,57,864/- + Plea agreement of Rs. 768,30,00000/-) under section 37 of the Act on account of payment made to US FDA for the settlement. 60. The assessee has many manufacturing plants including two plants located at District Sirmour (Paonta Sahib), Himachal Pradesh and Dewas, Madhya Pradesh. The dispute on hand relate to these manufacturing plants. These Manufacturing plants are used to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettlement as well as Plea Agreement. However, the assessee did not claim the same in the original return of income. As such the assessee disallowed the same in the computation of income. 62.2 Subsequently, the settlement for civil liability was finalized in the month of May 2013 for USD 350 million and interest thereon with effect from 1st February 2012. Accordingly, settlement agreement to that effect was signed between assessee and its AE based USA and DOJ acting on behalf various departments and participating states dated 8-5-2013. In addition assessee and its associate also agreed to compensate the relator/whistle blower, Shri Dinesh S. Thakur for an amount of USD 6.8 million. The associates of the assessee who were the part of settlement agreement stand as under: (i) Ranbaxy Inc. (USA) (ii) Ranbaxy Pharmaceuticals Inc. (USA) (iii) Ranbaxy Laboratories Inc. (USA) (iv) Ohm Laboratories Inc. (USA) (v) Ranbaxy USA Inc. (USA) 62.3 Similarly criminal liability was also finalised for USD 150 million in the month of May 2013 and plea agreement to that effect was singed between M/s Ranbaxy USA Inc and DOJ in the year May 2013. 62.4 Beside the above the assessee and its AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gent liability, V. Without prejudice to above, please show cause as to why it should not be treated as "Capital Loss"? In case of settlement of criminal case, the payment made is claimed by way of notes to computation of total income. Hence, it is seen that such payment is not allowable on the points contained in para 5 above and also, because Ranbaxy Laboratories Limited was not even a party to this settlement. Please furnish your reply on this context and on the points contained in para 5 above in context of criminal settlement payments? 64. The assessee in response to such show cause notice submitted that the payment made to the USA as a result of settlement agreement does not represent the income received or to be received or accrue or arise or deemed to have accrued or arisen in India as per the provisions of section 5 of the Act. Therefore, there was no question of deducting the TDS under section 195 of the Act. 64.1 The assessee further submitted that the expenses in dispute have been incurred wholly and exclusively for the purpose of the business. The payment under the settlement agreement was paid to avoid the adverse effect on the business, disruption of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit of enduring nature accruing to the assessee nor any capital assets is coming into existence out of such payment. Accordingly, the impugned expenditure cannot be treated as capital in nature. 64.6 Admittedly, the liability upon the assessee accrued once it has entered into a consent decree in the month of Month of December 2011 which was approved by the District Court of Maryland, USA in the month of January 2012. Accordingly, the assessee being a prudent businessperson has accounted for such liability in the year under consideration as per the Generally Accepted Accounting Principles. Admittedly, the amount was quantified after the settlement agreement which was entered in the month of May 2013, but the liability was quantified based on most reliable estimate possible as per AS 29. 64.7 The assessee further submitted that the liability accrued to it on account of non-compliance of cGMP of US FDA in the factories which were engaged in exporting the goods to USA. Therefore, there remains no doubt that such liability/compensation relates to the business of the assessee and therefore such loss cannot be termed as capital loss. The compensation being a trading loss is an elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim made by the assessee by way note for Rs. 8597.30 crores. 65. Aggrieved assessee preferred an appeal before the Ld. DRP who also rejected the claim of the assessee by observing as under: 66.1 The settlement agreement came into existence dated 5th September 2013 wherein the amount of liability was quantified. As such, the amount of liability was not quantified in pursuance to the consent decree. Thus, there was no liability crystallized in the year under consideration for the reasons as discussed above. As such the liability of USD 500 million was crystallized in the assessment year 2014- 15 and not in the year under consideration. 66.2 Admittedly, the settlement agreements were entered between assessee along with its group companies located in USA especially Ranbaxy Pharmaceuticals Inc USA. However, the assessee has paid the sum of US dollar 500 million to USA after allocating the US dollar of 26 million to its associate RPI. As such, it is not clear why the assessee has borne the entire amount by claiming the same in its books of accounts. 66.3 Likewise, as per the settlement agreement and Plea agreement, it is clear that the serious allegations were levied against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed in the courts of USA against the assessee, or its AE were found guilty of any other default as alleged against it. The Consent Decree was entered, without admitting guilty, with a view to resolve the dispute in order to protect business interest. Therefore, the assessee cannot be penalised mere on the basis of some allegation made against it which weren't proved. The learned AR drew our attention on the Consent Decree, settlement agreements and contended that it is clear from these document that the assessee not found guilty of any misconduct or infringement of any law. The learned AR further contended that Plea agreement entered between AE Ranbaxy USA Inc and DOJ where Ranbaxy USA Inc was pleaded guilty for the reason that plea agreement was of part of package deal. In other word in order to enter into settlement agreement for civil liability the assessee group was to enter into Plea agreement. Therefore, the assessee was not guilty in the Plea agreement as there was not any finding that assessee group violated any law. As such the plea agreement was the part of packaged deal of the consent decree with DOJ which was necessary for resolving the dispute. The learned AR accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of the country. Accordingly, the learned AR contended that there cannot be any deduction to the assessee for the alleged penalty paid to USA. The learned DR in support of his contention vehemently relied on various judgments which have been incorporated in the written submission filed by him. 68.7 The learned DR further submitted that the infringement of law was committed by the assessee in a country outside India. But, the ratio propounded by the various courts wherein the deduction was denied for infringement of law enforceable in India, will also apply for the infringements committed by the assessee outside India. The relevant submission of the learned AR on this point reads as under: TRUE these case laws are on penalties for infringement of law of the land. BUT the ratios will apply to all infringements in India or outside. The argument is two fold: Does not the Explanation 1 to Section 37(1) of the Act imply that there can be violations of law and penalties for such infringements during the course of carrying of business which would also qualify to have been laid out or expended wholly and exclusively for the purpose of business and therefore the legislation brought in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the case are related to infringement of patent laws and therefore they were in the nature of civil offenses because under the patent law violation is subject to mere damages only. These are business and trading violations. Whereas the case of the appellant is of felony, charge of criminal offenses and therefore these two cases do not protect the appellant. The Hon'ble Bench on appreciation of the severity of the charges against the appellant and in view of the proper interpretation of Section 37 of the Act should not grant any relief to the appellant on the amount disallowed of Rs. 1827.65 Crore. IN THE WORDS OF THE HON'BLE HIGH COURT OF KARNATAKA, VIOLATION OF LAW HAS TO BE CURBED AS OTHERWISE VIOLATION WOULD BE PREMIUM FOR VIOLATORS FOR THE PURPOSE OF TAX BENEFITS. PS: Subsequent to the Department's submission on 17lh Aug. 2021 the Ld. Counsel of the Appellant clarified to the Hon'ble Bench that the Appellant i.e. Ranbaxy Laboratories Ltd. was not the party to the Plea Agreement because it is US vs. Ranbaxy USA Inc. a. In this regard it is to bring to the kind attention of the Hon'ble Bench that both the Civil Settlement Agreement {for US $ 350 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). It is a negotiated agreement detailing the voluntary actions pledged by the affected company to remedy non-conformances, including systems improvements, and to avoid FDA litigation. FDA uses consent decrees to change the overall corporate culture in compliance matters by pulling the company out of a pattern of long-standing cGMP problems and raising it to current standards. A consent decree commits the company to perform corrective actions in a timely manner, as verified by a third party. 69.4 Based on the consent decree which was approved by competent court, the assessee started negotiation with DOJ and entered into the settlement agreements in the year May 2013. Now the question arises whether the consent decree should be viewed as an offence provided under explanation 1 to section 37(1) of the Act. The word consent decree itself suggests that the offence has not been framed under the provisions of law by the order of the court. But the party has resolved the same by entering into this consent decree for various reasons which was also accepted by the other party i.e. FDA in the present case. These reasons may include to avoid the litigation cost, damage of the reputation/good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the United States and Relator as described in the Covered Conduct and set fourth herein and in the Civil Action, and denies that in engaged in any wrongful conduct, except as to such admissions that Ranbaxy USA, Inc. is required to make under the terms of the Plea Agreement. 69.7 The copy of the Plea Agreement is placed on pages 697 to 718 of the paper book. On perusal of the same we note that, plea agreement was part of overall settlement offer made by the DOJ to resolve the issue. As such the plea agreement was dependent upon the civil settlement meaning thereby that if assessee chooses to enter a settlement for civil liability then it has to enter into plea agreement also. The relevant portion of the plea agreement is reproduced as under: This letter, together with the sealed Supplement, confirm the plea agreement that has been offered to the Defendant by the United States Attorney's Office for the District of Maryland and the Consumer Protection Branch of the U.S Department of Justice (collectively "this officer". The agreement will be presented to the Court pursuant to Federal Rule of Criminal Procedure 11(c)(1)(c). This agreement is contingent upon execution of a C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idance from the judgment of Hon'ble Delhi High court in case of Dessicant Rotors International (P.) Ltd (Supra) wherein it was held as under: At the outset, the submission of the assessee that the paramount and governing consideration behind such a settlement/agreement could be to avoid the expenses and uncertainty of further litigation was to be accepted. It is a matter of common knowledge that litigation can turn out to be quite expensive and it cannot be even possible, what to talk of feasible, for a small time/middle level company in India like the assessee to litigate in US Court. Furthermore, the settlement agreement contained a specific recital to this effect inasmuch as it records "whereas, in order to avoid the expenses or uncertainty or further litigation, the parties desired to settle and adjust all differences and controversies among themselves subject to the terms of this Agreement." No doubt in the agreement, the assessee accepted the patent of SEMCO. That by itself would not mean that the assessee also accepted that it was infringing the said patent. Secondly, payment was made by the assessee to SEMCO for "loss of goodwill and damages to its capital and for termina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s mentioned above are to be satisfied before claiming any expense as a deduction under this section. 69.16 An Explanation was added to this sub-section by the Finance (No. 2) Act, 1998 with effect from April 1, 1962 which reads as under: "For the removal of doubts, it is hereby declared that any expenditure, incurred by an assessee for any purpose, which is an offence or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business or profession, and no deduction or allowance shall be made in respect of such expenditure". 69.17 The Explanation was brought in the statute in the year in 1998 which made applicable retrospectively from 1st April, 1962. The Memorandum Explaining the Provisions of the Finance Bill 1998 expounds the purpose for which this explanation was brought under the statute which reads as under: It is proposed to insert an explanation after sub-section (i) of section 37 to clarify that no allowance shall be made in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. This proposed amendment will result in disallowance of the claim made by certain tax payers of paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n had the force of law in any Province of India or part thereof, or thereafter has the force of law in any Part A State or Part C State or part thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made such Act." 69.22 At this juncture, it is also important to refer the order of the Hyderabad tribunal in the case of Mylan Laboratories Ltd. Vs. DCIT reported in 113 taxmann.com 6 where it has been held that the provisions of explanation 1 to section 37(1) of the Act can be invoked where there is an office committed under the law applicable for the time being in force in India. Thus the office committed by the assessee under the provisions of foreign law cannot be subject to the provisions of explanation 1 to section 37(1) of the Act. The relevant extract of the order is reproduced as under: "8.9 Thus, from the above decisions, it is clear that what has to be disallowed under Explanation 1 to Sec.37(1) of the Act is a payment made, for contravention of laws in force in India and not of any foreign country. The laws are specific to each of the countries according to their rules and regulations and an offence in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of explanation 1 to section 37(1) of the Act. In holding so we draw support and guidance from the judgment of Hon'ble Supreme court in case of Prakash Cotton Mills P. Ltd. v. CIT (1993) 201 ITR 684, 690-91(SC), Standard Batteries Ltd. v. err (1995) 211 ITR 444, 446(SC), Swadeshi Cotton Mills Co. Ltd. v. err. (1998) 233 ITR 199, 202(SC) and Hon'ble high court of Andhra Pradesh CIT v. Bharat Television Pvt. Ltd (1996) 218 ITR 173(AP), CIT v. Hyderabad Allwyn Metal Works Ltd., (1988) 172 ITR 113. 121 (AP) 70.26 We note that there can be instances that a penalty levied in the foreign law is compensatory in nature and vice versa. Accordingly it is necessary to understand the scheme the provisions of the relevant statute. But the Revenue has failed to bring anything on record whether the penalty is in the nature compensation or penal in nature. It is because there was no charge framed against the assessee. As such the dispute was amicably resolved by entering into consent decree as discussed above. 69.26 Another noteworthy point is that the Explanation to section 37(1) is a deeming provision. It only creates a legal fiction. Next, the Explanation comes into play when expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction. In this connection we note that the observation letter was received in the year 2008 but that does not make the assessee accountable to make the provisions in the books of accounts. It is because at that point of time there was no whisper so as to hold that the assessee was thinking to enter into the consent decree. Therefore, we find no force in the argument of the learned DR. 69.30 A question was also raised that the impugned amount of penalty was allowing the assessee to continue business and therefore the assessee by way of this settlement agreement was able to get the benefit of enduring nature. Accordingly such amount of liability should be treated as capital in nature. There is no dispute to the fact that the assessee has been doing the business in the US market since many years. However, the business of the assessee came to halt once there was an Alert notice issued by the US FDA with regard to import of drugs/product manufactured at assessee certain facilities in India. In fact the assessee by making the impugned payment was able to resume its business. Therefore it cannot be said that the assessee has got any benefit of enduring nature. Therefore the impugne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of Rs. 26.480 millions in the profit and loss account, the assesse company \ has annexed a note to the "Financial Statement for the year ending 31s' March 2012", which is reproduced hereunder:- "On 20 December 2011, the Company agreed to enter into a Consent Decree with the Food and Drug Administration ("PDA") of the United States of America ("USA ") as a step towards resolving the existing administrative actions taken by the PDA against the Company's Paonta Sahib and Dewas facilities. The Consent Decree was approved by the United States District Court for the District of Maryland on 26 January 2012 and went into effect on the same date. The Consent Decree establishes certain requirements intended to further strengthen the company's procedures for ensuring the integrity of data in its US applications and good manufacturing practices its Paonta Sahib and Dewas facilities. Successful compliance with the terms of the Consent decree is required for the Company to resume supply of products from the Dewas and Paonta Sahib facilities to the USA. Further, the Company is negotiating towards a settlement with the Department of Justice ("DOJ") of the USA for resolution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 115JB of the Act for the eligible amount as per the law. Hence, the ground of appeal of the assessee is allowed. 77. The issue raised by the assessee in Ground No. 12 is that the Ld. DRP erred in confirming the addition made by the AO amounting to Rs. 1,36,16,611/- representing the expenses incurred on doctors for promotion of business. 78. During the assessment proceeding, the AO on verification of ledger account of advertisement and sales promotion expenses observed that assessee has incurred expenses to the extent of Rs. 1,36,16,611/- for the distribution of gift & providing hospitality to the doctors/medical practitioners. As per the AO such expenses are not allowable under explanation 1 to section 37(1) of the Act. On question by the AO, the assessee submitted the details of the expenses incurred on various doctors and medical practitioners as given herein below: S. No. Particulars Amount 1 Clinical/Hospital equipment 13,17,085/- 2 Books & periodicals 24,69,540/- 3 Sponsorship/Gifts 98,29,986/- Total 1,36,16,611/- 78.1 As per the assessee, it was required to engage the doctor and other medical practitioners for the purpose of rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other assessee which have provided aforesaid freebees and claimed the same as a deductible expense in its accounts against income. In view of the above, the AO disallowed the expenses of Rs. 1,36,16,611/- u/s 37(1) of the Act and added the same to the total income of the assessee. 79. Aggrieved assessee preferred an appeal to Ld. DRP who confirmed the order of the AO by observing as under: 24.1 This Ground of objection is against the action of the AO in disallowing payments aggregating to Rs. 1,36,16,611/- made to healthcare professionals (doctors) by invoking Explanation 1 to section 37(1) of the Act. 24.2 The DRP has noted that payments worth Rs. 1,36,16,611/- are made towards sponsorship for attending conferences, medical equipment's, travel facilities and hospitality provided to medical practitioners or medical associations. These expenses are in the nature of freebies provided to medical practitioners which are strictly prohibited in terms of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ('IMC Regulations'). Hence, such expenses are not allowable within the meaning of section 37(1) read with Explanation 1 of the Act be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. [F. No. 225/142/2012- ITA.IIJ" 24.4 It is to be noted that the regulations notified by MCI in pursuance to section 20A(1) of the Indian Medical Council Act, 1956 relating to standards of professional conduct and etiquette and code of ethics, prohibits receiving of such payments by doctors. In this regard, special reference may be-made to Chapter 6 of MCI Regulations, which prohibits freebies like gift, commission, bonus etc. for doctors. 24.5 The Hon'ble High Court of Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is made. After awarding the contract, they have reduced the price and agreed to receive the difference of price in their name. The assessee has obliged them. It is obvious that it is a kick back or bribe. It is an illegal gratification. It is a scheme adopted to siphon out the money belonging to the company. They want to lend respectability to it by calling it as a 'commission'. Therefore, seen from any angle, it cannot be construed as an expenditure at all, let alone commission. (Para 19) The Explanation to s. 37 declares that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The word 'offence' has not been defined under the Act. However, Chapter XXII deals with offences and prosecutions. It refers to various sections under the Act and non-compliance with those provisions are punishable with punishment as prescribed therein. Willful attempt to evade tax is an offence under the Act. The word 'offence' has to be understood in the context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is held to be bribe, it is only receipt of bribe or payment of bribe to a public servant which is an offence and it is not an offence if paid or received by a person other than public servant, and therefore it does not fall within the mischief of the Explanation to s. 37 is not sustainable. The consideration or object of an agreement is lawful unless the Court regards it as immoral or opposed to public policy. If the consideration or object of an agreement is unlawful, then the said agreement is void. Then the said agreement is not enforceable by law. Illustration (j) to s. 23 of the Contract Act, brings home the point explicitly. Therefore, under the Indian law an agreement to pay illegal gratification is expressly declared as immoral and consequently such an agreement is void and not enforceable. It is not the Judge or the Court which is declaring such act as immoral. The law declares it as immoral. Though law is different from morality, in the case of illegal gratification payable under an agreement there is convergence of views. There are laws in the country expressly declaring payment of bribe and receipt of bribe by public servants as an offence and punishable under the crimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons indulging in the same cannot be protected by la\v Courts. The Courts cannot extend their aid to uphold such transactions. In that view of the matter, even if it is not an offence as contended certainly, it is immoral and it causes injury to public and therefore the expenditure incurred in such immoral acts cannot be construed as expenditure incurred for the purpose of profits and gains of business or profession and the benefit of deduction or allowance under the Parliamentary legislation cannot be extended to such persons or to such expenditure. Such a question would fall within the Explanation of s. 37 and is not deductible under s. 37.- J.K. Panthaki & Co. vs. ITO (2011) 57 DTR (Bang) (Trib) 233 : (2011) 139 TTJ (Bang) 337affirmed."(Para 45) 24.6 In view of the above legal and factual position, this ground of objection of the assessee company is rejected. 80. Being aggrieved by the order of the Ld. DRP the assessee is in appeal before us. 81. The Ld. AR before us submitted that the circular issued by the MCI is not applicable to the pharmaceutical companies. As such the circular issued by the MCI is meant for medical practitioners. Likewise, the CBDT circular is not appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egister for a certain period of time and it does not impinge upon the conduct of pharmaceutical companies. This important distinction has to be kept in mind that regulation issued by Medical Council of India is qua the doctors/medical practitioners and not for the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of section 37(1) r.w. Explanation 1, then it is only meant for medical practitioners and not for pharmaceutical company (Assessee Company) for claiming the expenditure. 84.5 From the above order of Delhi tribunal, there remains no ambiguity that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation as discussed above. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any Allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, the ground of appeal of the assessee is allowed. 86. The issue raised by the assessee in the ground no. 13 is that the Ld. DRP erred in disallowing the mark to market loss of Rs. 3,331.61 crores suffered by the assessee for protection of currency fluctuation. 87. At the outset, the ld. AR before us submitted that he had been instructed by the assessee not to press ground no. 13 as discussed above. Therefore we dismiss the same as not pressed. 88. The next interconnected issue raised by the assessee in the ground no. 14 & 15 is that the DRP erred in disallowing the hedging charges of Rs. 11,35,24,211/- on hedging contracts and not allowing the interest swap expenditure of Rs. 1,77,95,255/- claimed by way of note to protect the ECB loans by treating it capital expenditure. 89. The AO from the revised computation of income observed that the assessee has raised ECB for capital investment in its overseas subsidiary. Further assessee entered into certain hedging contracts against the exchange rate volatility and has incurred expenditure of Rs. 11,35,24,211/- on account of hedging charges and claim it as allowable expenses. On question by the AO, the assessee submitted that these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its own case as discussed above. The contention of the ld. AR was also not controverted by the ld. DR appearing on behalf of Revenue at the time of hearing. At this juncture, we are inclined to refer the order of the ITAT as discussed above and reproduced hereunder: "We have carefully considered the rival contentions and we set aside this ground of appeal to the file of AO to verify the amount of expenditure incurred by the assesse on account of fluctuation of foreign exchange ; and if they are on capital account related to acquisition of asset then to grant depreciation thereon in accordance with the provisions of law. In case if this expenditure is found to be of revenue nature then allow the same u/s 37(1) of the Act" 95.1 In principal we agree with the finding of the ITAT as discussed above with small modification. In the present case the question of claiming the depreciation does not arise for the reason that the issue relates to the investment made in the foreign subsidiaries. As such the investment in shares of foreign subsidiary does not attract the provisions of section 32 of the Act. 95.2 Moving further, we also note that the assessee in its submission before the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revised return of income. However, these expenses have been claimed, as a deduction during the assessment proceedings. In the case of Goetze (India) Ltd. (284 1TR 323), the Hon'ble Supreme Court has held that the Assessing Officer cannot entertain any claim for allowing deduction resulting in a reduction in the total income returned, which is not claimed in the original return or a revised return. 32.3 Also, the DRP has held on an earlier ground of objection that the weighted deduction u/s.35(2AB) is not available to the assessee company in the absence of the statutory Form 3 CL. Accordingly, this ground of objection of the assessee company is rejected and no directions are being issued to the AO. 99. Being aggrieved by the order of the Ld. DRP the assessee is in appeal before us. 100. The Ld. AR before us submitted that in the identical facts and circumstances in the own case of the assessee for the A.Y. 2008-09, the Delhi Tribunal in ITA No. 196/Del/2013 dated 25.04.2016 has decided the impugned issue in its favor. 100.1 On the other hand, the Ld. DR vehemently supported the order of authorities below. 101. We have heard the rival contention and perused the material av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-2009 has decided the issue against the assessee. However the assessee claimed the deduction for the same by way notes to the return of income. However, the AO denied adjudicate the same. 104. The aggrieved assessee carried the matter to the Ld. DRP and submitted that ESOP is a revenue expenses and incurred wholly and exclusively for the purpose of business. Further, the accounting treatment made by the assessee have been prescribed by the guideline of the SEBI. Therefore, the difference between the market price and exercise price of a share is expenses which are incurred wholly and exclusively for business. 105. However, Ld. DRP disregarded the contention of the assessee and confirmed the action of AO by observing as under: 34.1 The DRP has noted that the assessee has offered share options to certain eligible employees in terms of its ESOP schemes. The shares were offered to the employees at a price, which was lower than the prevailing market price. The difference between the two was treated as "Employees Compensation", which was amortized in the books on straight line basis over the 5 years of vesting period. During the current year under consideration, a sum of Rs. 12,72,94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal in own case of assessee in ITA No. 196/Del/2013 vide order dated 25-04-2016. 108. The Ld. DR before us vehemently supported the order of the lower authorities. 109. We have heard the rival contentions of both the parties and perused the material available on records. At the outset, we find that in the identical facts & circumstances in the coordinate bench Delhi IATA in own case of the assessee, relevant to A.Y. 2008-09 in ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 taxmann.com 322, held as under: "41. We have carefully considered the rival contentions. The issue is now squarely covered in favour of the assessee by the decision of Hon'ble Madras high court in PVP Ventures (supra), where in it is held that amount of difference between the market value of the shares issue under ESOP allotted to the employees debited to the profit and loss account in accordance to SEBI guidelines is an ascertain liability and allowable as revenue expenditure u/s 37(1) of the Act. It is also noteworthy that the decision in the case of the assessee in earlier years where this deduction was denied has been considered by the special bench of tribunal in case of Biocon Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representative supported the impugned order by contending that the entitlement to ESOP depends upon the fulfilment of several conditions laid down under the scheme. It is only when all such conditions are fulfilled and the employees render services during the vesting period that the question of any ascertained liability can arise. He submitted that during the entire vesting period, it is only a contingent liability and no deduction is admissible under the provisions of the Act for a contingent liability. The options so granted may lapse during the vesting period itself by reason of termination of employment or some of the employees may not choose to exercise the option even after rendering the services during the vesting period. It was, therefore, argued that the discount is nothing but a contingent liability during the vesting period not calling for any deduction. In the opposition, the learned AR submitted that the amount of discount claimed by the assessee as deduction is not a contingent liability but an ascertained liability. He stated that in the ESOP 2000, there is a vesting period of four years, which means that the options to the extent of 25% of the total grant would vest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an admissible deduction. In holding so, the Hon'ble Apex Court observed that : "the law is settled : if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." From the above enunciation of law by the Hon'ble Supreme Court, it is manifest that a definite business liability arising in an accounting year qualifies for deduction even though the liability may have to be quantified and discharged at a future date. We consider it our earnest duty to mention that the legislature has inserted clause (f) to section 43B by providing that "any sum payable by the assessee as an employer in lieu of any leave at the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services. 9.3.6 As regards the contention of the ld. DR about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, we find that normally it is provided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If we consider it at micro level qua each individual employee, it may sound contingent, but if view it at macro level qua the group of employees as a whole, it loses the tag of 'contingent' be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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