TMI Blog2021 (9) TMI 1164X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares 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. Adjustment while computing the book profit under section 115JB of the Act taking the amount of disallowance made u/s 14A r.w.r. 8D - HELD THAT:- As decided in own case [ 2016 (12) TMI 1539 - ITAT AHMEDABAD ] we set aside the finding of the ld. DRP and direct the AO to delete the adjustment made by him under section 115JB of the Act. Hence, the ground of appeal of the assessee is allowed. Disallowance u/s 35(2AB) of the Act on the ground that the assessee had not filed form 3CL issued by the DSIR - HELD THAT:- As decided in own case [ 2016 (12) TMI 1539 - ITAT AHMEDABAD ] expenses incurred before Form 3CM approval cannot be denied for the purpose of Section 35(2AB) weighted deduction. We follow the very reasoning to opine that facts of the instant case rather go a step further wherein the appellant has only claimed those expenses which relate to the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the conditions as prescribed in the agreement. Whether the assessee was authorized to make the payment to TEVA Israel whereas the original agreement as well as the amended agreement dated 7th December 2010 and 7th December 2011 respectively were made between the assessee, RPI and TEVA USA? - As revenue cannot accept part of the agreement favouring to it and reject part of the agreement without assigning any valid reasons. The Revenue either should have accepted the entire agreement or should have rejected the same in entirety. It is not expected from the revenue to accept part of the agreement and reject part of the agreement which is not a good practice. The settlement agreement which is giving rise to the compensation paid by the assessee was entered dated 7th of December 2011 i.e. within the financial year under consideration corresponding to the assessment year 2012-13. Therefore, it cannot be said that the liabilities incurred against such contracts/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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of account under section 115JB of the Act on reasoning that such provision is not ascertained liability - HELD THAT:- We have allowed the claim of the assessee treating the provisions as the cost incurred in the course of the business in the year under consideration under normal computation of income. Thus there remains no ambiguity to the fact that the amount was crystalized in the year under consideration. The reasoning for holding the amount was crystalized in the year under consideration has already been discussed in preceding paragraph of this order while dealing with ground no. 10 of the assessee. Accordingly we set aside the order of the ld. DRP and direct the AO to delete the disallowance made under section 115JB of the Act for the eligible amount as per the law. Hence, the ground of appeal of the assessee is allowed. Addition of expenses incurred on doctors for promotion of business - HELD THAT:- 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panel-II, Mumbai [DRP in short] vide order dated 30/12/2016 arising in the assessment orders passed under s. 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act ) dated 31/03/2016 relevant to Assessment Year (AY) 2012-13. 2. The assessee has raised the following grounds of appeal:- The Appellant raises die following grounds of appeal, which are mutually exclusive and without prejudice to each other: 1. Re:Order passed 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant of undertaking a regional benchmarking in the TP report which is in line with the globally accepted TP principles and also accepted by CBDT in the APA entered into with Appellant for AY 2014-15; 3. By holding that relevant and sufficient financial data is not available for the comparable companies selected by the Appellant and questioning the authenticity of the financial data of foreign comparable without appreciating that the database used by the Appellant was a globally accepted one; and 4. By disregarding 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in proposing and Hon'ble DRP further erred in considering the amount disallowed u/s 14A in the computation of normal income, as amount to be added for computing book profit under section 115JB without appreciating that the provisions of sec. 115JB and sec. 14A are deeming provisions enacted under the Income-tax Act which are to be made operative only to the extent of the deeming fiction created therein. The Assessing Officer ought to have appreciated that both sec. 115JB and sec. 14A are mutually exclusive and there ought not to be any disallowance of amount disallowed u/s. 14A while computing the book profit u/s. 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)- ₹ 4,40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy been made during the year under consideration and nothing was payable as at the end of the relevant year, the provisions of section 40(a)(ia) of the Act were not applicable and consequently the entire amount was allowable as deduction u/s 37(1). 7.4 Without prejudice to the above, that the Hon'ble DRP / Ld. AO failed to appreciate that since the payments were not taxable in the hands of RCHS and RSF, there was no requirement to make any disallowance under the provisions of section 40(a)(ia) of the Act. 8. Disallowance of deduction u/s 8QIB / 80IC - ₹ 809.576.144/-: 8.1 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 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 acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking to taxable profits of the company and by diverting income not relating to deductible profit of the undertaking from taxable income of the Company to claim a higher deductible profits u/s 80IB 80IC without appreciating the fact that during the year under consideration the Appellant had incurred losses under the head profits and gains from business and thus there was no tax arbitrage. 9. Re: Disallowance of amounts paid to M/s Teva Pharmaceutical Industries Limited, Israel ( Teva Israeli ₹ 1804,07,24,038/-: 9.1 On the facts and in the circumstances of the case and in law, the Ld. AO grossly erred in proposing and the Hon'ble DRP further erred in confirming the disallowance of entire amount of ₹ 1804,07,24,038/- paid to Teva Israel by allegedly 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. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of law without appreciating that only a competent Court of Law and not the tax officer can determine whether Appellant has committed an offence or infraction of law and that in no Court of Law, the Appellant was held guilty for the alleged offence and further erred in: .1 Not appreciating that the settlement and plea agreement was part of overall package offered and thus, the same was accepted by the Appellant considering the commercial expediency and commercial rationale and accordingly ought to have been allowed as business expenditure. Without Prejudice, the amount of ₹ 1827,65,57,864/- paid pursuant to the settlement agreement is in the nature of discharge of civil liability and therefore allowable u/s 37(1). .2 Invoking provisions of Explanation 1 to S. 37(1), without appreciating that the same were not applicable in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of signing consent decree (20th December 2011) and only quantification was done subsequently. 12. Re: Disallowance of expenditure incurred for doctors for promotion of business ₹ 13,616,611/-: 12.1 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 disallowing the selling and distribution expenditure allegedly incurred on doctors/medical practitioners without appreciating the fact that the expenditure incurred is for the promotion of the business and was in furtherance of its business objectives and further erred in: .1 Not appreciating that the provisions of Indian Medical Council Regulations, 2002, are not applicable to the pharmaceutical companies and hence any expenditure incurred on sales promotion would be allowed as business expenditure being in furtherance of its business objectives. .2 Relying on the CBDT circular while disallowing 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above, the Ld. AO grossly erred in disregarding the directions passed by the Hon'ble DRP in not adding the interest rate swap expenses incurred towards investment made in overseas subsidiary companies to the cost of acquisition of such investments. 16. Re: Non-allowance of weighted deduction u/s 35(2AB) on cost of assets incurred ₹ 2,50,48,153 /- 16.1 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 weighted deduction on the cost of assets provided to the employees working in approved R D facilities under section 35(2AB) of the Act merely on the ground that the Appellant did not furnish Form No. 3CL. In doing so, the Hon'ble DRP / Ld. AO failed to appreciate 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 the prescribed authority i.e. DSIR in Form No. 3CL to be a pre-requisite for the purpose of claiming weighted deduction of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions entered into by the assessee company with its associated enterprises during this year are summarized in the table below: No. Nature of International transaction Amount method 1 Sales of API 36,51,36,54,734 TNMM 2 Purchase of row material 1,22,90,224 TNMM Q Sale of dosages 1,35,54,03,596 TNMM 4 purchase of dosages 3,01,21,907 TNMM 5 sale of formulations 9,97,49,18,944 TNMM ( royalty received 18,92,33,849 TNMM/ CUP 7 royalty paid 14,09,931 CUP 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 appropriate method and used OP/TC as the PLI and arrived at its PLI 42.20% only. 5.3 The assessee in its revised TP study has selected 9 comparables and calculated PLI, taking three years average margin at 18.95% only. Accordingly, the assessee claimed that its transactions with the AE s had been entered at Arm Length Price and no adjustment is required. 5.4 However, the TPO rejected the revised TP study report of the assessee for using multiple year data with respect to its comparables after referring the provision of Rule 10B(4) of Income Tax Rules and various judgment in this regard. In view of the above TPO finally held that single year data should be used for calculating ALP of the comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Delhi Tribunal in AY 2008-09, wherein the selection of foreign AEs as a tested party for the comparability exercise has been approved. However, a perusal of the record reveals that the Revenue has not accepted this decision of the Hon'ble ITAT and the following substantial question of law has been raised before the Hon'ble High Court:- (1) Whether on the facts and circumstances of the case and in law, the I.T.A.T. was justified in directing to delete the addition of ₹ 238.16 crore holding that overseas Associated Enterprises can be accepted as tested party when there is no instances of transactions between unrelated parties? . (2) Whether on the facts and circumstances of the case and in law, the I.T.A.T. was justified in directing that Advance Pricing Agreement with CBDT for A.Y.2014- 15 dated 07/08/2015 can also be retrospectively applied in A. Y.2008-09? 5.4 The above discussion makes 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended that the AE s of the assessee should be treated as the tested party. The ld. AR also claimed that in the subsequent assessment years, the TPO had accepted the AEs of the assessee as the tested party. 9. On the other hand, the Ld. DR before us vehemently submitted that the facts of the case in ITA No. 196/Del/2013 were different from the present facts of the case. As per the ld. DR these factual differences include conditions mentioned in the APA, calculation of the PLI, financial data of AEs, etc which were not brought to the notice of the Hon ble ITAT in ITA 196/Del/2013. Therefore, the ld. DR argued in length that the Hon ble Tribunal can differ with the view of the Delhi Tribunal which was taken in the preceding AY 2008-09 in ITA 196/Del/2013. The ld. DR made written submission vide letter dated 16-05-2018 which is placed on record. 10. The ld. DR vehemently supported the order of the lower authorities. 11. The ld. AR in his rejoinder submitted that the facts of the case on hand are identical to the facts of the case of the preceding AY 2008-09. Therefore the Hon ble Tribunal cannot change the stand taken in the earlier AY while deciding the identical iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulations state that 'the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayers and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. Thus, in a sense, the tested party would have lesser risk as compared to the other transacting party or the real entrepreneur. 22. As per the OECD Transfer Pricing Guidelines 2010, when applying a cost plus, resale price 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 transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd does not make any valuable, unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested part for the P2 transaction would most often be B. 25. From the above guidance certain principles emerges in selection of tested party (a) The choice available of tested party for comparability only in CUP method, TNMM and 'Other method', in other methods such as RPM and CPM choice of selecting a tested party is not available. In any case, it is not required in Profit split method. (b) The tested party normally should be the least complex party to the controlled transactions. (c) Availability of Most reliable data of tested party and requirement of minimum adjustments is also one of the most important aspects in selection of tested party. (d) There i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of formulations and APIs (c) Provision of technical support and quality control process for the AEs (d) Application for regulatory approvals from foreign governments (e) Management support In the risk assumed by appellant is discussed at page no 502 to 505 of the paper book. After that page no 505 to 523 the functions performed by each of the AEs and risk assumed is discussed. It shows that the functions performed by AEs are very limited and naturally, consequent risks assumed are less. After that at page no 525 and 526 of the paper book where in it is agreed that manner in which segmentation of the AEs would be computed being December/March year end which would be certified by the independent cost accountants. It is further provided that in case of AES are secondary manufacturers as well as low risk distributors margins would be computed separately. Therefore, APA has been agreed on the whole mechanism of computation of Alp of International transactions of the assessee. 27. It is also important 28. The issue that arises is though APA is signed for AY 2014-15 can it have any impact on the transactions for the year under appeal. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manner in which arm's length price shall be determined in relation to the international transaction entered into by the person during the rollback year (hereinafter referred to as rollback provision ). (2) The agreement shall contain rollback provision in respect of an international transaction subject to the following, namely:- (i) the international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies; (ii) the return of income for the relevant rollback year has been or is furnished by the applicant before the due date specified in Explanation 2 to sub-section (1) of section 139; (iii) the report in respect of the international transaction had been furnished in accordance with section 92E; (iv) the applicability of rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant; and (v) the applicant has made an application seeking rollback in Form 3CEDA in accordance with sub-rule (5); (3) Notwithstanding anything c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the tested party is concerned we do not agree with the observation of the TPO that no comparables are available. It runs contrary to the finding of the CBDT in APA. 32. Coming back to the order of coordinate bench in case of assessee for AY 2004-05 it is apparent that tribunal has accepted that least complex party to the transaction should be taken as tested party. In that year due to the weakness of the TP documentation of the assessee where assessee compared the operating margin of all the overseas AEs with reference to a single set of comparables selected from around the world without any regard to the functional and geographical dissimilarities. In that set of facts, coordinate bench has held that such comparability analysis is not appropriate and therefore in absence of comparable data there was no option but to uphold the appellant as a tested party. Therefore, coordinate bench has upheld the principle that tested party should be least complex but on the facts of the case for that year on non-availability of comparable data, it is so held. In the current year, the appellant has adduced reasonably comparative data based on region and country for comparing the foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are so many perspectives which were required to be compared and in this connection the Hon'ble Courts have also suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables etc. Hence, in the present case, it is necessary to consider an analysis that whether the comparables selected by the TPO had analogous functional profile to that of functional profile of the assessee. It is true that functional profile and assets and risk analysis was made available but that is to be correctly understood in the light of the nature of International transaction carried out by the assessee with the said AE. A similar problem was considered by ITAT Delhi Bench in the case of Bechtel India Pvt. Ltd. v. DCIT (2011- TII-07-ITAT-DEL-TP) where the assessee stated to be engaged in the business of providing electronic data support service to AE and the difficulty arose that the said function was compared with the companies engaged in the business of development of software. So the question was that whether a minute examination of functional profile is necessary for the purpose of selection of comparables and the answer g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2002-04 was ₹ 1,58,43,923/- and for AY 2004-05 it was ₹ 1,45,77,704/-. The value of service forms approximately 6% to 7% of the Cost of Sales to TKC. HENCE, THIS Shri Rahul Mitra argued, shows that testing the margins of TKC would not serve the purpose of determining the arm's length nature of the transactions undertaken by the assessee with TKC. Hence, the recourse available to test the arm's length price of the services rendered by the assessee to TKC is to test the margins from the Indian side. In view of the discussion on tested part earlier, the assessee was selected as the tested party being least complex of the two entities. Hence, the transfer pricing analysis in this case was done from the Indian side, wherein, the margins of the assessee with respect to services provided to TKC were compared internally with services provided to other third parties in foreign market. Taking into account the divergent submissions, the Hon'ble Tribunal had recorded its findings that 33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm's l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 test 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 must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method. With regard to the challenges emerging in transfer pricing in India, it has been observed as under:- 10.4. Emerging Transfer Pricing Challenges in India 10.4.1. Transfer pricing Regulations in India 10.4.1.3 The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mahindra Mahindra in the automotive segment. 11.2.6 In this connection, we tend to recall the ruling of the Hon'ble Jurisdictional High Court [Special Civil Application No.8179 of 2010 dated 31.8.2010] in the case of AIA Engineering Ltd. v. Dispute Resolution Patel through Secretary-DRP 1. After due consideration of rival submissions, the Hon'ble Court had ruled thus 16. . . . . .If the Dispute Resolution Panel was of the opinion that the application dated 22.4.2010 could not have been entertained, it should have considered the objections filed by the petition on merits. As a consequence of the impugned order, firstly the objections raised by the petitioner have not been decided, secondly, in view of the directions issued by the Dispute Resolution Panel, the petitioner would not be in a position to avail of the remedy of appeal before commissioner (Appeals) against the draft assessment order; and thirdly, in the light of the observation made by the dispute Resolution Panel that the petitioner has chosen to withdraw the objections, preferring any appeal against the impugned order before any forum would be an exercise in futility, as no appeal would be en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign AEs. We are, therefore, of the view that this case is not directly applicable to the issue under dispute. (ii) In the case of M/s. Onward Technologies Ltd. (supra) as relied on by the Revenue, it is observed that the assessee, a parent company had international transaction with its AEs. With regard to IT enabled services provide to its AEs, the assessee had chosen six comparables with its foreign AEs as a tested party. The TPO had ignored the working of the assessee whereby selecting 20 comparable cases. When the issue reached before the Tribunal for resolve, the Hon'ble Bench had, after having considered rival submissions, recorded its findings, among others, as under: So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Datacore US is at arm's length for both the assessment years. Thirdly, the Hon'ble Delhi Tribunal in the case of Ranbaxy Laboratories Limited (supra) took a stand that- 'If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration.' Then, the United Nation's Practical Manual on Transfer Pricing for Developing Countries had observed that- 5.3.3.1. . . . . . 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 must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration. . . . . . 11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the 'tested party' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprise can be accepted as tested party where there is no instances of transactions between unrelated parties ? 12.3 Thus the impugned issue is pending before the Hon ble Gujarat High Court, therefore we do not find any reason to refer the matter to the Special Bench as argued by the ld. AR for the assessee. In view of the above and respectfully following the decision in the own case of the assessee, we restore the issue to the file of the TPO for the determination of ALP of International Transactions with the AEs for fresh adjudication considering its AE s as the tested party. Hence, the ground of appeal of the assessee is allowed for statistical purposes. 13. The issue raised by the assessee in the ground no. 4 is that the Ld. DRP erred in confirming the addition for ₹ 5,45,95,563/- made by the AO by invoking the provisions of section 14A read with rule 8D of the Income Tax Rule without appreciating that it has already made suo-moto disallowance of ₹ 79,59,355/- in the computation of Income. 14. The AO during the assessment proceedings observed that the assessee in its balance sheet as on 31/03/2012 had shown investments of ₹ 423.90 Crores in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of investment activity. 16. Being aggrieved by the order of the Ld. DRP the assessee is in appeal before us. 17. 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, ITAT Delhi Tribunal in ITA No. 196/Del/2013 dated 25.04.2016 has decided the impugned issue in its favor. 18. On the other hand, the Ld. DR vehemently supported the order of authorities below. 19. 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 own case of the assessee, the ITAT in the AY 2008-09 being ITA No. 196/Del/2013 vide order dated 25-4-2016, reported in 68 taxmann.com 322, held as under: 51. We have carefully considered the rival contentions. In this case assessee himself has disallowed ₹ 3311708/- which itself is far more in excess of exempt income. Hon'ble Delhi high court in Joint Investments (P.) Ltd. v. CIT [2015] 59 taxmann.com 295/233 Taxman 117/372 ITR 694 has held that:- 9. In the present case, the AO has not firstly disclosed why the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D (1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the expression prescribed in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated . (M.A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54,918/- as disallowed u/s 14A r.w.r. 8D of Income Tax Rules as per the clause (f) of explanation 1 to section 115JB of the Act. 22. Aggrieved assessee preferred an appeal to the Ld. DRP who rejected the ground of objection of the assessee by observing that action of AO is in conformity with clause (f) of the explanation 1 to section 115JB of the Act. 23. Being aggrieved by the order of the Ld. DRP, the assessee is in appeal before us. 24. 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, ITAT Delhi Tribunal in ITA No. 196/Del/2013 vide order dated 25.04.2016 has decided the impugned issue in its favor. 25. On the other hand, the Ld. DR before us vehemently supported the order of authorities below. The ld. DR also submitted that suo-moto disallowance made by the assessee should be considered for the disallowance in conformity with clause (f) of the explanation 1 to section 115JB. 26. We have heard the rival contentions of both the parties and perused the materials available on records. At the outset, we find that in the identical facts circumstances in the own case of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pectfully 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 adjustment made by him under section 115JB of the Act. Hence, the ground of appeal of the assessee is allowed. 27. The issue raised by the assessee in ground No. 6 is that the Ld. DRP erred in confirming the disallowance of ₹ 440,22,43,702/-u/s 35(2AB) of the Act on the ground that the assessee had not filed form 3CL issued by the DSIR. 28. During the assessment proceeding, the AO found that the assessee had claimed weighted deduction u/s 35(2AB) of the Act in respect of R D revenue expenditure @100% amounting to ₹ 379,68,07,423/- and capital expenditure @200% of actual expenditure amounting to ₹ 60,54,36,279/- only. However the assessee did not file the requisite certificate issued by the prescribed authority i.e. DSIR in form 3CL. Accordingly an explanation was sought from the assessee by the AO. 28.1 The assessee contented that the issuance of Form 3CL was not its obligation. Therefore, it cannot be denied the benefits which were otherwise available to it merely because of non-issuance of Form 3CL which was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be sent from prescribed authority's end to the department. An assessee engaged in such Research Development activity having already obtained Form 3CM approval of its facility has no role to play in such correspondence. We notice that a co-ordinate bench of this tribunal in ACIT vs. M/s. Torrent Pharmaceuticals ITA No.3569/Ahd/2004 decided on 13.11.2009 holds that the impugned weighted deduction is not to be restricted to the extent of the amount of the necessary expenditure incurred stated in such Form 3CL. We further find that hon'ble jurisdictional high court's decision in CIT vs. CLARIS LIFESCIENCES Ltd. (2010) 326 ITR 251 (Gujarat) upholds this tribunal's decision in the very assessee's case observing that expenses incurred before Form 3CM approval cannot be denied for the purpose of Section 35(2AB) weighted deduction. We follow the very reasoning to opine that facts of the instant case rather go a step further wherein the appellant has only claimed those expenses which relate to the time period as approved in the Form 3CM. We accordingly hold that the assessee is very much entitled for claiming the above capital and revenue expenses incurred on in house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore the same cannot be allowed as deduction u/s 40(a)(ia) of the Act. Hence, the AO disallowed the claim of the assessee being business expenditure u/s 37 of the Act made through note. 36. Aggrieved assessee preferred an appeal before the Ld. DRP who has confirmed the order of the AO. 37. Being aggrieved by the order of the ld. DRP, the assessee is in appeal before us. 38. The Ld. AR before us submitted that in the own case of assessee bearing ITA No 196/Del/2013 for A.Y. 2008-09, the Hon ble ITAT Delhi in identical facts and circumstances decided the issue in its favor. 39. On the other hand, the Ld. DR before us vehemently supported the order of the authorities below. 40. We have heard the rival contentions of both the parties and perused the materials available on records. At the outset, we find that in the identical facts circumstances in the own case of the assessee, the ITAT in the AY 2008-09 bearing ITA No. 196/Del/2013 vide order dated 25-4-2016, held as under: 6. We have carefully considered the rival contentions. In view of the decision of Hon'ble Delhi high court in case of assessee for AY 1997-98 order dated 17.03.2012 in ITA n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim New Tablet Plant - II Paonta Sahib NIL 7lh year of claim New Tablet Plant - III Paonta Sahib 37,66,66,487 5lbyear of claim Tablet Plant Batamandi NIL 1st 'year of claim Ointement Block Batamandi NIL 1st year of claim 42.1 The AO during the assessment proceedings observed that the auditor in the form no. 10CCB issued by him made certain comments as narrated below: i) The assessee does not maintain independent books of account, independent trial balance for eligible unit which is basic documents. Further sale effected by the industrial undertakings eligible for deduction under section 80IB/ 80IC of the Act have been recorded at the sale price which was charged from the customers. Thus the assessee has violated the provisions of section the 80IA (5) and 80IA (8) of the Act. As such the assessee was required to record the sales at a price at which the products were transferred by the el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible undertakings. As such in the earlier year the basis of allocation of 30% of the total research and development expenses was accepted by the Revenue. iv. There was an established system to work out the profit for each industrial undertaking which is eligible for deduction. Further profit determined for each industrial undertaking was duly certified by the auditor in his audit report in form 10CCB. The miscellaneous income in respect of which the deduction was claimed was having direct nexus with the activities of the industrial undertaking. Accordingly these were determined as per the established system applicable to the eligible undertakings. v. The other incomes which are not eligible for deduction under section 80IB/80IC of the Act were not considered while determining the profit of the eligible undertakings. As such there was the proper compliance of the provisions of section 80IA(5) of the Act. vi. The selling and the distribution unit is not a separate undertaking which requires determining the profit separately. In fact such unit is facilitating the products manufactured by the eligible undertaking. Therefore there is no question of determining the ALP fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s unit needs to be reduced from the profit of the eligible undertaking. As such the activity carried out by the eligible undertaking cannot be merged with the activity of selling and distribution unit. iv. Similarly the profit earned by the assessee on account of the use of the brand name namely Ranbaxy cannot be merged with the profit of the eligible undertaking. 42.5 In view of the above, the AO disallowed the deduction claimed by the assessee under section 80IB/80IC of the Act for ₹ 80,95,76,144/- and added to the total income of the assessee. 43. Aggrieved assessee preferred an appeal before the Ld. DRP against the order of AO. The ld. DRP confirmed the order of the AO by observing that the identical issue has already been adjudicated by his predecessor in the own case of the assessee for the preceding assessment year. As such the predecessor ld. DRP rejected the claim of the assessee by observing as under: 15.1 The present DRP has noted that the DRP for the A.Y. 2010-1 1 has upheld the action of the AO on this issue and the relevant excerpts of the directions are reproduced hereunder:- 9.4 The claim for deduction u/s 80IB/80SC of ₹ 79,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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 case of the assessee. Accordingly, the ld. DRP upheld the order of AO. 45. Against the order of the ld. DRP, the assessee is in appeal before us. 46. The Ld. AR before us submitted that in the own case of the assessee for the A.Y. 2008-09, involving identical facts and circumstances the Hon ble ITAT Delhi in ITA No. 196/Del/2013 dated 25.04.2016 has decided the impugned issue in its favor. 47. On the other hand, the Ld. DR vehemently supported the order of authorities below. 48. We have heard the rival contention of both the parties and perused the materials available on record. In the backdrop of above stated discussion, we find that the impugned issue is covered by the order of Delhi ITAT in the own case of assessee in its favour for the assessment year 2008-09 in ITA No. 196/Del/2013 dated 25.04.2016. The relevant extract of the order is reproduced as under: 68. We have carefully considered the rival contentions. During the year assessee has claimed deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dispute in this appeal. 74. It is argument of the ld. AR that it is the well settled proposition of law that where the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 necessarily implied once the issue as to eligibility under section 80-I of the Act was examined and allowed in the initial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich 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 Division and Steel Unit 'B'. This case pertains to the assessment year 1976-7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 brought into use or the business of the hotel starts functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 refusing to continue the relief of tax ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy 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 litiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... litigation for the sake of it.' 77. Therefore, following this principal also we are of the view that deduction for the year claimed by the assessee with respect to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessee. The ld. AO has held that the Assessee has maintained common books of accounts and therefore as separate books of accounts are not maintained therefore profit cannot be ascertain correctly. We have examined these arguments and we are of the view that as Assessee is maintaining its financial and operational records on SAP ERP systems the Assessee can at any moment of time on any day after every transaction can produce the product wise, units wise, geography wise, independent profit and loss account and balance-sheets. Therefore, in our opinion the contention of the ld. AO that common books of account are maintained and not separate books of account is devoid of any merit. As such, Assessee has contended that 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 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts .In view of the reading of section 80IA(7) and Rule 18BBB, we are of the view that law does not provide that for claiming deduction under those sections there is requirement to maintain separate books of accounts. 81. At this point of time we take note of the decision of Hon'ble Supreme court in case of Arisudana Spinning Mills Ltd. v CIT [2012] 26 taxmann.com 39/210 Taxman 233/348 ITR 385, which provides guidance on the issue of maintenance of separate account for the purpose of claiming deduction u/s 80IA of the Act. Facts before the Hon'ble Supreme 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 ₹ 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 ₹ 51,82,666/-, the assessee claimed deduction at the rate of thirty per cent under section 80IA of the Act amounting to ₹ 15,54,800/-. The Assessing Officer found that the assessee had not maintained a separate trading and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income Tax Act. As mentioned earlier assessee has furnished the separate report of the undertaking which is accompanied by the profit and loss account of each of undertaking complying with the provisions of section 80IA(7) of the act and corresponding rule 18BBB of the Income tax Rules 1962. In view of this, the argument of the revenue that separate books of accounts are required to be maintained with respect to each unit does not have any support of the Income Tax Act or Rules framed thereunder. 82. Nonetheless, assessee has maintained books of accounts of the whole undertaking on SAP ERP systems 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. Our view also gets support from the decision of coordinate bench in case of in case of SMR builders (P) Ltd. (supra) where in it is held that:- 37. Section 80-IA(7) which is applicable to the provisions of Sec. 80-IB requires the accounts of the eligible undertaking to be audited and a certificate to be filed. The essence of this requirement is that, at any given time the financial position of the undertaking, should be ascertainable. The intent is that the profits of the undertaking eligible for the deduction can be properly identified. This requires maintenance of accounts in such a fashion that the sales of the eligible business are known, the expenses - both direct and indirect are identifiable and the common expenses are apportioned. The details 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1366821506/- of the act totaling to ₹ 1378494420/-. This results in to taxable income for ₹ 1968846227/-. Therefore this ground of objection of the revenue is unsustainable in view of the clear provisions of section 80A of the income tax act. 84. Regarding allocation key of 'sales' for allocation of common expense , the R D expenses primarily represents cost related to the development of 'new' medicinal products. It is only after innovation of the new product that the same is produced. In these circumstances, the appellant, in line with the traditional allocation methodology adopted in the earlier years apportioned 30% of such R D expenses to the individual undertakings in the ratio of sales. Further, there is no evidence laid down by revenue that that in 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the method of apportionment was essentially one of fact depending upon the circumstances of the case. It was recognized that in the absence of any statutory or fixed formula, any finding on the question would involve an element of guess work and that the endeavor can only be to be approximate and there cannot in the very nature of things be great precision and exactness in the matter (at page 552). In the recent judgment of the Supreme Court in CIT v. Bilahari Investment (P.) Ltd. [2008] 299 ITR 1/168 Taxman 95, the facts were these. The assessee was subscribing to chits and was maintaining the accounts on mercantile basis. The discount on the chits, which was actually the profit arising to the assessee, was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not accepting the above allocation methodology adopted by the appellant. 85. Coming to the next argument of the revenue that the sales recorded by the independent units are not Arm's length. For this argument of the revenue a deeper examination of subsection 8 of section 80(IA) of the Act is required which provides for inter unit transfer of goods and services should be at the market value of the goods and services which means the price that such goods or services would ordinary fetch in the open market. Firstly ld. AR of the assessee has submitted that there is no inter unit transfer of any goods and services and therefore provisions of section 80(IA)(8) does not apply. This fact has remained uncontroverted. None of the transaction has been 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 eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd cold in the same breath. When it comes to transfer of services and goods, it opposes arm's length price adjustment and says that the expenses which have been incurred in past need not be taken into consideration. As discussed earlier, this logic do not commensurate with the provisions of the sections. Even then for argument sake if the expenses relatable to current year are to be apportioned; it was found that the assessee had not apportioned even a penny of the expenses in development and research of new products of Baddi Unit. 9.5 Next, Revenue's Counsel has drawn our attention on the profit loss account of the eligible Unit, i.e. Baddi Unit, (refer Page No.87 of the paper-book). Ld. DR has said that sales to the tune of ₹ 1,19,13,22,749/- 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 ₹ 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uote. He has also placed reliance on Liberty India (supra) . 10. We have heard both the side at length. The controversy as raised by the Addl. CIT Mr. Mahesh Kumar, officiating as AO, has serious repercussions on the subject of computation of eligible profit while claiming a deduction under the Statute. The adjustments as suggested by the AO while working out the manufacturing profit of an eligible Unit has a far reaching consequences on all such tax-payers; therefore we have to deal this issue carefully and little elaborately, so that we can reach to a logical conclusion. 10.1 To begin with, it is better to elucidate that the I.T. Act has only defined 'income' (Sec. 2(24)) as well as 'business' (Sec. 2(13)) but not the term profit and gains . However, the section we have to deal 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 'in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rheads). Therefore, profit margin is price minus total cost. In manufacturing Unit, thus cost of conversion is production overheads, such as, direct labour cost and inextricably linked expenditure of production. In general, every manufacturing concern has fixed manufacturing capacity. So the objective of such concern ought to be to maximize the profit. Now the problem, as posed, is that let us assume that the said manufacturing unit is producing two products; viz. A B . For production of A product, let us say, there is less working hours, but fetching more value for less money. However, in the production of product B due to complex process of manufacturing it requires more working hours. For pricing product B the situation is that more money expenditure and may fetch less value. Therefore, in the processing department it is not possible to segregate the two components to determine the 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/conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits earned by the Baddi Unit, should be treated as a manufacturing profit. The AO has then said that earlier the assessee was procuring the products on P2P basis and showing the average profit at 80%, however, on the basis of average selling rate of the produces manufactured by Baddi Unit the average profit was gone up to 86%. The AO has therefore restricted the deduction only at 6%. He has placed reliance on Rolls Royce Plc (supra). In that case, the assessee was a UK based company carrying on marketing and sales activities in India through a subsidiary. The subsidiary was also rendering support services to the assessee, a UK based company. The assessee was carrying out manufacturing operations. It was held that 35% of its profits could be attributed to the marketing activities carried out in India and, therefore, chargeable to tax in India. The facts of that case were altogether different and there was a finding that undisputedly there was a PE in India and as per Indo-UK DTAA the income has to be taxed in 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 we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er percentage of net profit, specially when the allegation of the A.O. was that there was an attempt to declare higher profit of Baddi unit to get more advantage of deduction. On perusal of the P L account, it is an admitted factual position that the assessee has in fact debited certain expenses which have included head office expenses, such as, marketing expenses and corporate expenses. Meaning thereby the net profit of the Baddi Unit was not merely production cost minus sale price, but the difference of sale price minus all general expenses which were attributable to the sales. Therefore, it is not reasonable to say that unreasonably the profit was escalated. The difference between the two percentages of profit, i.e. about 28% ( G.P. - N.P.) thus represented the expenditure which could be said to be in respect of marketing network and 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 reallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of such an eligible business? On careful reading of this sub-section, it transpires that the said eligible profit should be the only source of income. If we examine the separate profit loss account of Baddi Unit, then it is apparent that the only source of income was the sales of the qualified products. In the said P L A/c there was no component of any other sources of income except the sale price and otherwise also the assessee has confined the claim only in respect of the eligible profit which was derived from the sales of the pharmaceutical products. This section do not suggest that the eligible profit should be computed first by transferring the product at an imaginary sale price to the head office and then the head office should sale the product in the open market. There is no such concept of segregation of profit. Rather, we 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation : For the purposes of this sub-section, market value , in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market. Where any goods held for the purpose of the eligible business are transferred to any other business carried on by the assessee, then if the consideration for such transfer as recorded in the accounts of the eligible business do not correspond to the market value of such goods, then for the purposes of the deduction the profits and gains of such eligible business shall be computed as if the transfer has been made at the market value of such goods as on that date. Though the section has its own importance but the area under which this section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was credited to computed the profit. There are certain expenditure which are notional expenditure and there are certain expenditure which are self-generated to create the brand value of a product. Naturally, the allocation of notional expenditure particularly in respect of self- generated brand is a matter of hypothesis and not a matter of realty. Logically it is not realistic to set apart a value of a self generated brand which had grown in number of years. 10.10 The segment reporting of profit is although in practice but the purpose of such reporting is altogether different. Such segment information is particularly useful for financial analysis, so that the management may keep a close watch on the performance of the diversified business lines. The areas of demarcation are business segment, geographical segment, etc. But as far as the Revenue of an enterprise is concerned while segmentation is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng oil from groundnuts. The produced at Raichur, Hyderabad is partly sold at Raichur and partly in Bombay. The question was in respect of the liability under Excess Profit Tax Act (EPT Act) for the oil manufactured at Raichur but sold in Bombay. The controversy was that the assessee had contended that a part of the profits derived from sales in British India of the oil manufactured at Raichur was attributable to the manufacturing operations at Raichur which are an essential part of their business and that such profit must be excluded from the assessment under EPT Act. It was narrated that in other words, the Act brings within its ambit all income in the case of a person resident in British India which accrues or arises or which is deemed to accrue or arise to him in British India during the accounting year. If Sec. 5 of the Act stopped short at that stage, it was undoubted that in the case of the respondent who is a 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 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the two, though the place of receipts and realization of the profits is the place where the sales are made. Simultaneously it was also opined that the manufacturing profit could not be said to have accrued at that place because there was nothing done from which the profits could accrue. There was an interesting contradiction because of the divergent views and it was also expressed that it was a fallacy to regard the profits as arising solely at the place of sale. It was said that the revenue of the company are derived from a series of operation, including the purchase of raw-materials or partly manufactured articles, completely manufacturing its products and transporting and selling them, and receiving the proceeds of such sales. The essence of its profit-making business is a series of operations as a whole. 10.12 We have carefully perused this decision of the Hon'ble Supreme Court as cited by the Special Counsel Mr. Srivastava. At the outset, we want to place on record that the entire issue before the Hon'ble 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 referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases where one part of the business is distinct and separate from the other parts and is capable of earning profits separately. unquote. The Hon'ble Judge was therefore very much concern about the fact that the business should be capable of earning profits separately. Rather, in the subsequent paras it was further made clear that the manufacturing profit could be sub-divided only if there was no insuperable/challenging difficulty in making such apportionment. A possibility was therefore discussed that there could be apportionment of the net profit that accrue to the business of the assessee and one portion of it could be allotted to that part of the business which relates to the manufacture of the said commodity which was ultimately sold in the market. The Raichur factory certainly has business connection in British India for a part of the oil manufactured by it is sold through the Bombay establishment 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 oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted its profit as per a separately maintained books of account of the eligible manufacturing activity. To implement the method of the computation at stand alone basis, as conveyed by the AO, the manufacturing unit has prepared a profit loss account of its manufacturing-cum-sale business activity. If the Statute wanted to draw such line of segregation between the manufacturing activity and the sale activity, then the Statute should have made a specific provision of such demarcation. But at present the legal status is that the Statute has only chosen to give the benefit to any business of drug manufacturing activity which is incurring expenditure on research activity is eligible for this prescribed weighted deduction. The segregation as suggested by the AO has first to be brought into the Statute and then to be implemented. Without such law, in our considered opinion, it was not fair as also not justifiable on the part of the AO to disturb the method of accounting of the assessee regularly followed in 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the assessee also did not contain any error or any fact, which could have shown that deduction claimed by the assessee, is erroneous. It is also important to note that no adverse remark is made either by the ld. AO or by ld. DRP on the balance sheet of the eligible undertakings though it were available before them for proper verification and examination. Ld. AR of the appellant has submitted a plethora of judicial precedents covering this issue on this issue we refer to the decision of Honourable Delhi high court on this issue rendered in case of Axis Computer India (P.) Ltd. (supra) where in it is held that 2. This Court has already interpreted the latter provisions and has held the same to be directory and not mandatory. The contention of the revenue was that unless and until the audit report is filed along with the return, the benefit of section 10A could not be available to the assessee. Recently, we have considered the identical provisions of section 80-IA(7) in the case of CIT v. Contimeters Electricals (P.) Ltd. [IT Appeal No. 1366 of 2008, decided on 2-12-2008] and held that as long as the audit report is filed before the framing of the assessment, the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable as computed by the assessee. 90. Now we come to the last ground of objection raised by the revenue that this matter of examination of claim of the assessee should be set aside back to the file of ld. AO for fresh verification and for this ld. DR. relied on the decision of coordinate bench Amarnath Reddy (supra). Against this Ld. AR raised the objection that this issue should not be set aside as only law points are involved in this issue and no further facts are required to be examined. We have carefully considered the rival contentions on this issue. We have noted the above cited decision in Asstt. CIT v. Amarnath Reddy where in it is held as under :- '6. Now, let us examine whether the plea sought to be raised by the ld. D.R. can be admitted by the Tribunal or not. Though several authorities have been cited in the course of hearing, the basic judgment is that in the case of Hukumchand Mills Ltd. (supra). In that case, 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., befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Madras High Court in the case of N.P. SaraswathiAmmal (supra) observed as follows at page 23 of the report : We do not regard the last observation as a fetter on the Tribunal's jurisdiction to admit a new plea. For, the power to listen to a new contention and decide the appeal on that basis has been spelled out by the Supreme Court from the terms of the statute. The exercise of that power does not depend on the presence of any other factor, excepting that the new plea comes from a party to the appeal. Even in a case where fresh facts are called for to decide the new plea, the Tribunal would have jurisdiction to entertain that plea. How the Tribunal wishes to get at the relevant facts in order to decide the new point may be quite a different thing. The Tribunal may either remand the matter for the purpose, or proceed to investigate the facts themselves. In this part of the decision-making alone, there is scope for the play of the Tribunal's discretion. As to the very power to entertain a new plea, that is not to be ruled out, merely because a consideration thereof would call for further facts to be gone into. In Hukumchand Mills' decision [1967] 63 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal action and expect the Tribunal to decide on merit. It is, therefore, all the more necessary that matter should be decided on merit without allowing one of the parties before the Tribunal to have another inning, particularly when such party had full opportunity to establish its case. Unnecessary remands, when relevant evidence is on record, belies litigant's legitimate expectations and is to be deprecated. Having regard to aforesaid principle, it is necessary to look into records to see whether there is sufficient material on record to dispose of the issue on merit and there is no need to remand the issue to provide a fresh inning to the revenue. Therefore, in view of the above decision and in absence of any fresh plea by any of the parties we donot intend to agree with the request of revenue to set aside this issue to the file of ld. AO. 91. In view of above ground no. 12 of the appeal of the assessee with respect to claim of deduction u/s 80IC and 80IB of the Act amounting to ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, subsequently, on 4th December 2009 moved an application for approval of its manufacturing facility of its US subsidiary namely Ohm Laboratories Inc located at New Jersey with US FDA which was pending for the approval even after the lapse of 1 year period from the date of application for approval. 50.5 Nevertheless, the assessee was unsure about the approval of manufacturing facility of its impugned subsidiary company based in US. Though assessee was having tentative approval which means that it has fulfilled all the substantive requirement to get final approval and also being first to file ANDA was sure to get 180 days exclusivity period as a reward for taking risk of patent litigation. However it was under the fear that in case if its manufacturing facility not get approved at time, it will not be able to market the impugned medicine. In such a scenario its right to exclusivity will be forfeited and subsequent applicant of ANDA will get the approval for exclusivity, which will result in loss of business opportunity besides 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the waiver of its exclusive right in favour of M/s TEVA USA as per the agreement dated 7th December 2010 was considered by M/s TEVA USA as breach of contract. Accordingly, M/s TEVA USA filed a suit in the US District Court of Southern District of New York against the assessee. However, the assessee to avoid the protracted litigation cost, disruption of the business and damage of goodwill /reputation reached out of court settlement and accordingly entered into revised agreement 7th December 2011 effective from 30th November 2011 with M/s TEVA USA. In the revised agreement all the contents of the original agreement were similar except the followings: i. The assessee shall manufacture and sale the impugned medicine instead of M/s TEVA and will share 50% profit derived from such sale ii. M/s TEVA shall not sale the impugned medicine during the exclusive period of the assessee for 180 days except under the specified circumstances. If M/s TEVA does so, then it shall share 50% of the profit from the sale of such impugned medicine with the 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit of tax deduction by claiming the impugned expenditure which is not connected to its business. 50.14 The contents as appearing in the revised agreement dated 07th December 2011 wherein it was agreed between the parties not to challenge each other with respect to right to exclusivity or first to file exclusivity. Such contents have been held as unlawful by attorney general OAG of southern district court of New York. 50.15 There was no reason for the assessee to enter into the agreement with TEVA Israel as TEVA Israel has no locus standi. 50.16 The expenditure was recorded in the books of accounts much before the assignment made by the parties involved in favour of TEVA Israel. But the assessee failed to deduct TDS at the time of recording such expenditure. As such the assessee, deducted the TDS at the time of payment which was made after the assignment. Thus the act of the assessee such as that it was the part of the device adopted by TEVA group in order to avoid the tax liability. Thus the impugned expenditure cannot be said to have been incurred wholly and socially for the purpose of the business. 50.17 Since, the TDS has been deducted in the name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of Teva, Israel is tax-free, the same shall be refund to it. Thus, the DRP is of the considered opinion that because of the arrangement, no taxes has been paid on the transaction worth ₹ 18,51,74,65,338/- in any of the countries viz. India, USA and Israel. 17.11 To sum up, the DRP agrees with the various findings, conclusions and observations made by the AO in the draft assessment order, which in brief are again reproduced hereunder:- 1. If at all Ranbaxy laboratories Ltd had any liability, it was towards Teva Pharmaceutical USA Inc., as the agreement of Ranbaxy Laboratories Ltd. was with Teva Pharmaceutical USA Inc. and not with Teva Pharmaceutical Industries Ltd, Israel. 2. It is not shown by the assessee company that Teva Pharmaceutical USA had got tentative approval from PDA before the signing of the agreement dated 07.12.2010and it only got tentative approval as per letter dated 01.12.2011. 3. At the time of agreement dated 07.12.2011, Ranbaxy Laboratories Ltd had already got the clearance from PDA for marketing its generic version of Atorvastatin Calcium, it has already reached settlement with the original patent holder PFIZER and it also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52. The learned AR for the assesse before us contented that M/s TEVA has been defined in the agreement dated 7th December 2010 and in revised agreement dated 7th December 2011 as TEVA USA and its affiliates. Furthermore, clause 10.2 of revised agreement has authorized to assign the contractual rights arising from the agreement to any 3rd party or its affiliates. Thus, there was the enabling provision in such agreement dated 7th December 2011. Accordingly M/s TEVA USA assigned its rights to TEVA Israel vide letter dated 22nd March 2012. Accordingly, the assessee has made the payment to TEVA Israel after withholding the tax @ 42.024% on the above payment. As per the assessee payment to TEVA Israel was a valid payment which was arising in terms of the agreement. The learned AR further contended that there is no difference from taxability point of view even the payment is made to TEVA USA. It is for the reason that in either case, the impugned amount is not taxable in India under the provisions of DTAA as well as under the provisions of section 9(1)(vi) and 9(1)(vii) of the Act. However, the assessee as a matter of abundant caution, has deducted the TDS at the rate 42.024% on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO and the AO are against each other and further leading to double addition under the TP provisions as well as normal provisions of the Act. 55. The learned AR further submitted that both the parties namely Ranbaxy and TEVA are listed companies and having no connection of whatsoever. Therefore, the payment to TEVA Israel cannot be treated as camouflage which was paid after taking the approval of the RBI. Likewise, the payment was accepted by the shareholders in AGM, SEBI and ROC. Therefore, such payment cannot be treated as bogus and disallowed under the Act. 56. The learned AR for the assessee also contended that the payment has been made to TEVA Israel in consequence to the compensation agreement which relates to the business and the same was quantified based on the percentage of profit. Therefore such payment represents the revenue expenditure. Likewise there has not come any assets into existence or benefit to the assessee of enduring nature. It is for the reason that the agreement was only for 180 days which is less than for a period of one year. Therefore such payment cannot be treated as capital in nature. 57. The learned DR before us vehemently supported the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aneously publish the entire information regarding such drug for public in Approved Drug Products with Therapeutic Equivalence Evaluation known as Orange Books. US FDA Act provides that a generic manufacturer may by referring the listed drug and relying upon the previous finding of FDA about such listed drug can produce the generic version of the same. For that the generic manufacturer has to obtain an approval by filing the form known as ANDA. While filling the form ANDA, the appellant has to specify one of 4 specified certifications regarding Patent of referred listed drug provided under FD C Act of USA which are as follows: 1. That such patent information has not been submitted by the NDA holder for listing in the Orange Book (a paragraph I certification). 2. That such patent has expired (a paragraph II certification). 3. The date on which such patent will expire (a paragraph III certification). 4. That such patent is invalid, unenforceable, or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted (a paragraph IV certification). 58.2 If, an applicant wishes to seek approval of its ANDA before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o incorporate manufacturing facility of subsidiary Ohm Laboratories located at USA. iv. The US FDA finally granted the approval to the assessee for the manufacturing of impugned product in the manufacturing facility of Ohm Laboratories at USA vide dated 30-11-2011. 58.5 Moving ahead, we note that there was the agreement between the assessee and TEVA USA dated 7th December 2010 on the following terms and conditions: i. If assessee failed to get approval or tentative approval, But ii. M/s TEVA USA gets tentative approval, and iii. M/s TEVA USA its associates produced required prelaunch quantity by 28th June 2011, and iv. Serve ready date notice specifying prelaunch quantity and tentative approval or confirmation from FDA indicating the final approval of TEVA ANDA not earlier than 30th June 2011 and not later than 30th November 2011 v. Then the assessee i.e. Ranbaxy shall relinquish or waive off its right to exclusivity and deliver a letter to this effect to FDA as well as M/s TEVA within 2 business days. vi. In consideration M/s TEVA shall pay onetime payment of $15 million to the assessee and also share profit arises from the sale of such pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... December 2009 for the approval to US FDA. The approval finally came from US FDA dated 30-11-2011 for the manufacturing facility based in USA in the case of Ohm Laboratories INC. But it was not possible for the assessee to foresee that its manufacturing facility in USA will eventually get approved before the beginning of exclusive period allotted to it. Further the FDA law also provided that in case the appellant is unable to market the product then applicant right to exclusivity will get forfeited. In other words, there was genuine fear in the mind of the assessee about the activity of manufacturing to be carried out for the impugned medicine. On the top of it, the assessee started its R D activities in the year 1997 for manufacturing the generic medicine of LIPITOR as evident from the submission of the ld. DR which is reproduced as under: On expiry of the patent of Pfizer Inc., US on its drug, Lipitor and RRL having developed the do how of manufacturing atorvastatin sodium (R D was started in 1997), the active pharmaceutical ingredient (API) of Lipitor Ranbaxy USA Inc. filed as application in Aug. 2002 58.11 Thereafter, the assessee in the year 2002-03 being 1st app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s main activities made a revised agreement with M/s Teva, USA dated 7th December 2011 effective from 30th November 2011 out of the court settlement. The changes made in the revised agreements have already been reproduced in the preceding paragraph. 58.15 From the above, it is transpired that the revised agreement was entered by the assessee with TEVA USA to avoid the manufacturing rights being conferred to the TEVA as per the original agreement dated 7-12-2010. As such the assessee wanted to manufacture the product at its own in order to build its goodwill in the US Market. 58.16 At this juncture, we are also conscious to the fact that there was no clause in the original agreement dated 7th December 2010 under which the assessee could have opted to get out from such agreement. It was possible when the other party was not able to honour the conditions of the agreement whereas the other party has fulfilled all the conditions as prescribed in the agreement. 58.17 The next controversy arises whether the assessee was authorized to make the payment to TEVA Israel whereas the original agreement as well as the amended agreement dated 7th December 2010 and 7th December 2011 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to extend the benefits to the group of TEVA. In other words, in the absence of the above clause for the assignment, if the assessee would have made the payment to TEVA Israel, then the contention of the revenue would have been held good that the assessee was involved in some arrangement. It is also important to note that clauses of the assignments were appearing in both the original as well as in the revised agreement. It is also equally important to note that the assessee has made payment after the deduction of withholding tax at the rate of 42.024% and therefore the intention of the assessee cannot be doubted that the payment has been made to TEVA Israel in order to extend the tax benefit to the group of TEVA. It is also not out of the place to mention that both the assessee and M/s TEVA group are the leaders in their industries and not related to each other directly or indirectly. In other words, they are the competitors to each other. The question of extending the benefit arises among the transactions carried out within the group of the assessee. As both the groups are stranger and competitor to each other, it is very unlikely that the assessee has camouflaged the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to waive of its right to exclusivity for sale of medicine Lipitor in favour of TEVA USA with the understanding that TEVA USA will produce the impugned medicine on its own cost and both TEVA USA and the assessee shall jointly sale the products and share the profit arising from such sale equally. The reason for having such agreement has already been elaborated in the preceding paragraph. But the assessee did not honour the agreement as it got the approval for its manufacturing facility based in the USA in the case of the subsidiary company. Thus in such a situation, the assessee decided to manufacture and sale its products at its own which will generate create reputation/goodwill and eventually improve the morals of the employees. Against the decision of the assessee, the TEVA USA has filed suit in the US District Court which was settled by agreeing that the assessee shall share 50% of the profit from the sale of Lipitor medicine. All these documents such as original agreement, case file by the TEVA USA, settlement with the assessee with the TEVA USA and the order of US District Court of Sothern District of New York were available before the authorities. Therefore, if we read all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by mutual compromised terms cannot be a reason of doubting the genuineness of the claim. Further the actual payment of the compensation has not been disputed therefore, when the assessee has realized in definite terms that it would not be possible for it to honour the commitment and obligation under the agreement then the liability arises under the agreement is a certain liability though the quantum of the same could have been determined subsequently. 58.23 At this stage a question also strikes to our mind whether the revenue can interfere in the decision-making of the assessee who is carrying out its business activities. In this connection we note that the Hon ble Supreme Court in the case of CIT Vs. Dhanrajgirji Raja Narasingirji 91 ITR 544 (SC), has held that it is not open to department to prescribe what expenditure assessee should incur and in what circumstances he should incur that expenditure. 58.24 Likewise, in the case of CIT Vs. Wal Chand and Co. (P) Ltd. 65 ITR 381 (SC), wherein it has been, inter alia, held that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively for the business has to be adjudged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val was granted to the assessee only for a limited period of 180 days which is less than the period of one year. Therefore, on this reasoning that the impugned composition paid by the assessee cannot be said as capital expenditure on the reasoning that it was paid to eliminate the competition. 58.28 It is also not out of the place to mention that the assessee has received a sum of ₹15 crores in pursuance to the original agreement dated 7th December 2010 made with TEVA USA which was offered to tax and the same was accepted by the revenue. In other words the revenue has accepted part of the agreement as far as $15 million is concerned but not admitting the payment of compensation made to TEVA Israel which is also arising from the same agreement. In our considered view the revenue cannot accept part of the agreement favouring to it and reject part of the agreement without assigning any valid reasons. The Revenue either should have accepted the entire agreement or should have rejected the same in entirety. It is not expected from the revenue to accept part of the agreement and reject part of the agreement which is not a good practice. 58.29 The settlement agreement whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in 2006, the US FDA found incomplete testing records and an inadequate program to assess the stability characteristics of drugs as well as significant cGMP deviation. 61. Thereafter, in the year 2007, a suit was also filed by whistle blower, Shri Dinesh S. Thakur (relator of the settlement) in US District Court in the district of Maryland for civil and criminal allegation on account of violation of US Laws. 61.1 Subsequently, in the year 2008 the assessee was issued observation letter and alert letter from US FDA. In these letters it was proposed to ban the import of pharmaceutical products to USA from the manufacturing plants of the assessee as discussed above. 62. As a result of ban on the export to USA on account of the allegations as discussed above, the business of the assessee was getting affected. Accordingly the assessee in view of protecting its overall business and commercial expediency have entered into the consent decree with US FDA in the month of December 2011 to settle the suit or resolve the existing administrative action without admitting the guilt, which was approved by the District Court of Maryland dated 25-1-2012. 62.1 Based on the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. 4. ₹ 11.04 million on account of settlement with the state of Connecticut 62.6 However the assessee did not claim its share in the amount paid in consequence of plea agreement of criminal liability (USD 150 million) in return of income but claimed the same through a separate note during the assessment proceeding for ₹ 768.3 crores being business expenditure under section 37(1) of the Act. 63. However, the AO during the assessment proceedings required the assessee to furnish certain details and for this purpose issued a show cause notice. The details sought by the AO stand as under: Please furnish the date wise details of payment of said amount furnish copy of ledger account and how it is accounted in P L a/c ? Please furnish date wise / year wise provision made for payment to DOJ in audited accounts? Please furnish date wise details of payment made to DOJ along with manner of payment and mention name of the recipient of the payment deduction of TDS thereon. Please show and justify allowability of payment made to DOJ with particular emphasis on following issues: I. Why the said payment is not considered as paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der explanation 1 to section 37 of the Act. The settlement was made on account of procedural non-compliance such as non-maintenance of test data, failure to have adequate testing Program. Likewise, there was no allegation so as to hold the pharmaceutical drugs manufactured by the assessee were not fit for consumption. Rather, US FDA on various occasions have issued clarifications to the consumers stating that the drugs is fit for the consumptions and the patients should not discontinue the use of the same if they have already purchased. Accordingly, the assessee contended that there was no violation of law, prohibiting the assessee to claim the deduction under section 37(1) of the Act. 64.4 Without prejudice to the above there was no violation of the law prevailing in India. If at all there was any violation then it was violation of the law of a country outside India. It is the settled law that provisions specified under explanation 1 to section 37(1) of the Act shall not be applied with respect to the violations committed in a country outside India. Thus the deduction claimed by the assessee under section 37 of the Act cannot be denied. Furthermore the explanation 1 of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing activity which would have adversely affected the business of the assessee. As such the assessee made the payment to DoJ to continue its business activities. Therefore, the assessee after making the due payment gets the benefit of continuing the business which represents the benefit of enduring nature. Thus, such expenses has to be treated as capital in nature. 64.10 Admittedly, the observation letter was received by the assessee in the 2008, thus the payment made by the assessee represents the prior period expenditure and therefore the same cannot be allowed as deduction. 64.11 The amount of liability was quantified based on the settlement agreement made on 13th May 2013 and therefore such payment does not relate to the year under consideration. In other words, if the liability was crystallised in the financial year 2013-14 thus any provision relating to such liability is made in the financial year 2011-12 would be in the nature of contingent liability. Likewise, the RPI USA demanded the payment from the assessee in the financial year 2013-14 on the reasoning that it pertains to the assessee. 64.12 It was also observed that all the payments were made to DoJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in India and subsequent suit filed in the US courts, its business was getting hampered. Further, the litigation was time taking process, involving huge cost, diversion of management time and damage to reputation. Therefore, the assessee along with its AE entered into consent decree for settlement without admitting to guilty of any allegation made against it in order to protect its business interest. Hence, the amount incurred in the settlement agreement in such circumstances is wholly and exclusively for business purpose and allowable under section 37 of the Act. 68.1 The learned AR further submitted that said amount of USD 500 million was as a result of Consent Decree approved by US District Court of Maryland in the month of January 2012. Further, the amount of USD 500 million was also quantified at the same time except the allocation towards civil or criminal liability, which can be verified from the email exchanged between its Attorney Shri W. Warren Hamel and Shri Roann Nichols of DOJ. Thus the amount was crystalized in the year under consideration i.e. A.Y. 2012-13 only. Therefore no inference can be drawn against assessee merely for the reason that the quantification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India so as to attract the provisions of section 37(1) of the Act. 68.4 Without prejudice to the above the learned AR also submitted the TPO while working out the profit level indicator for TP study has considered the impugned amount as operating expenses. Therefore, the same amount cannot be considered as otherwise under normal computation of income by the Revenue. As such inconsistent view of the revenue will lead double taxation in the hand of assessee which is prohibited under the Act. 68.5 Without prejudice to the above and without admitting that the payment was for violation of any law, the ld. AR further contended that the amount towards the settlements/ plea agreements incurred by RPI was on account of the noncompliance of CGMP of its factories in India. Therefore it was under the obligation to indemnify its AE being RPI in terms of the distribution agreement placed on pages 755 to 781 of the Paper book. Therefore such expenditures are eligible for deduction under section 37(1) of the Act. 68.6 On the other hand, the Ld. DR, supported the orders of the authorities below and further submitted that there were certain deviations found during the inspection carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but stilll the Courts were upholding the additions of the credits, investments and expenses not satisfactorily explained to the total income. As to the facade of Settlements and there by asserting the amounts paid as part of business expediency, it is stated that the settlement amounts, if at all, are merely euphemism for penalties. The Settlement orders do not take away or in any manner dilute the nature of the alleged criminal offenses leveled against the appellant and the payments paid under the plea bargain to be penalties. In the settlements the charges framed have been admitted by Ranbaxy, the plea bargain does not exonerate the charged person. On record the charges leveled remain. Alternatively, was settlement required if there was no fault by way of commission or omission by Ranbaxy. So are the settlement amounts any kind of fees, cess or tax? Answer is No. My proposition and assertion is that the payments, whatever the Appellant might call whether Civil liabilities Settlement or Criminal liabilities Settlement, are in substance penalties for the infringement of law in this case the violation of FDA stipulations on adulteration of drugs marketed and not main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contentions and perused the materials available on records. From the preceding discussion, we note that the assessee has paid a sum of ₹ 25089.58 Millions in-pursuant to the settlements/ plea agreements for the alleged non-compliance of cGMP as prescribed by the US FDA which resulted various suit against assessee group in the USA. The same was disallowed by the AO on various reasons which have already been discussed in the preceding paragraphs. Subsequently the ld. DRP confirmed the order of the AO. 69.1 CGMP refers to the Current Good Manufacturing Practice regulations enforced by the FDA. CGMPs provide for systems that assure proper design, monitoring, and control of manufacturing processes and facilities. However, there are serious consequences of Non-Compliance of cGMP. Medicine can be dangerous enough when it is not prepared according to the prescribed guidelines. In situations where current good manufacturing practices weren t followed, the Department of Justice and Health and Human Services have the authority to take actions against any manufacturing company that violates good manufacturing practices. 69.2 Now coming to the facts of the case on hand. The proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Global Quality in January 2010, after all of the activities alleged in the complaint had occurred), Arun Sawhney (who assumed the position of Managing Director of Ranbaxy Laboratories, Ltd. on August 20, 2010 after all the activities alleged in the complaint had occurred), and Venkatachalam Krishnan, Regional Director Americas (collectively, Defendants ), and Defendants having appeared and having consented to the entry of this Consent Decree of Permanent Injunction (the Decree ), without contest and before any testimony had been taken and without admitting or denying any allegation of the complaint and disclaiming any liability in connection therewith, and the United States of America, having consented to this Decree. 69.5 Based on the consent decree, settlement agreements were made as detailed under: 1. Settlement Agreement between assessee group and DOJ on behalf various departments of United States and participating States, placed at pages 668 to 696 of paper book. 2. Plea Agreement between M/s Ranbaxy USA Inc and DOJ, placed at pages 697 to 718 of paper book. 3. Settlement Agreement between assessee group and State of Connecticut, placed at pages 724 to 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 37(1) of the Act cannot be invoked in the given facts and circumstances for the reasons that there was no offence proved against the assessee. 69.10 In holding so we draw support and guidance from the order of Mumbai tribunal in the case of Deputy Commissioner of Income tax, Circle 3(3)(1), Mumbai v. Anil Dhirajlal Ambani reported in 93 taxmann.com 492 wherein it was held as under: Now coming to the argument of learned DR, that the reason for filing the consent application and paying the settlement fee/consent charges is the alleged fact that the assessee was apprehensive of the serious consequences of the offence committed by it is without any basis. There is nothing whatsoever to support this contention except the ipsi dixit of the Revenue. The assessee has always submitted that there was no offence. Even the consent application was filed without admitting guilt. There is no finding or order by any authority. It is logical to hold that the assessee was apprehensive of the toll that a long winded litigation - both, in terms of time, cost and hassle as also in terms of reputation - would take. The fact that the consent application proposed by the Respondent w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, it can be inferred that there was no crime committed by the assessee. The question also arises why the assessee is claiming the expenses in its books of accounts when it is not the party to the agreement. Undoubtedly, the proceedings initiated on account of noncompliance of CGMP by the assessee in its factories located in India. RPI was procuring the goods from India which was supplied by the assessee from its factories. Therefore, the consequences faced by the RPI was the non-compliance of CGMP in India by the assessee. Therefore, the assessee was under the obligation to compensate the losses incurred by the RPI on account of its mistake. 69.13 Now let us proceed to examine the fact from a different angle whether the non-compliance of CGMP requires the invocation of the explanation 1 to section 37 (1) of the Act. The provisions of section 37(1) of the Act provides the deduction of the business expenditure not covered by earlier sections 30 to 36 in computing the taxable income subject to certain conditions. The provisions reads as under: Any expenditure (not being expenditure of the nature described in sections 30 to 36, and not being in the nature of capital expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure an ineligible item for deduction in the computation of income from business or profession. However, to make it more clear, the Explanation further provides that no deduction or allowance shall be made in respect of such expenditure. 69.19 The word offence has not been defined under the Income Tax Act. However, it is defined under section 3(38) of the General Clauses Act, 1887 which is reproduced as under: offence shall mean any act or omission made punishable by any law for the time being in force; . 69.20 The word/expression prohibited by law has also not been defined under the Income Tax Act. However it may be regarded to any act of the party which is explicitly or impliedly barred by statute. It refers the act of prohibiting by authority. 69.21 Admittedly, the alleged default which compelled the assessee group to pay the amount of USD 500 Million was alleged to be committed in a country outside India. Thus the controversy arises whether the default committed by the assessee in a country outside India, the provisions of explanation 1 to section 37(1) of the Act can be attracted. In this regard we find that the expression prohibited by law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee pertains to Indian law or foreign law. In the given case, the proceedings were initiated for the alleged default committed in a country outside India. Therefore, there cannot any disallowance for the impugned penalty under explanation 1 to section 37(1) of the Act. 69.24 Moving ahead we note that before invoking the explanation 1 to section 37(1) of the Act, it is necessary to understand the provisions of the scheme of the relevant statute in respect of which the offence has been committed by the assessee. In holding so we draw support and guidance from the judgment of The Hon'ble Madras High Court in the case of CIT v. Parthasarathy [1995] 78 Taxman 470 wherein it was held as under: The latest rulings of the Supreme Court in the cases of Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684and CIT v. Ahmedabad Cotton Mfg. Co. Ltd. [1994] 205 ITR 163, give a wider scope to consider the question in a broad spectrum analysis, in examining the scheme of the provisions of the relevant statute, providing for payment of such imports, notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent having composite nature which is attributable to its compensatory character can only be allowed as a deduction. The other portion which is attributable to its penalty nature cannot be allowed as a deduction under section 37(1) because such payment is for infraction of law 69.27 The next controversy arises whether the impugned amount relates to the year under consideration or it represents the contingent liability. On perusal of the consent decree entered in the year December 2011 which was approved in January 2012, the amount of the payment was not quantified. As such the amount was quantified at the time of settlement agreement which was entered in the month of May 2013. Accordingly it was contended by the learned DR that the impugned amount represents the contingent liability. It is because the amount was quantified in May 2013. In this connection, we note that admittedly, the amount was not quantified at the time of consent decree. But the liability has certainly accrued on the assessee once the consent decree was entered and approved by the US District Court of Maryland in January 2012. We further note that the learned AR had drawn our attention on email conversation b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses whereas the AO has disallowed the same is not eligible for deduction under section 37 of the Act. In our considered view the TPO and the AO are part of the income tax Department and therefore there has to be consistency in the approaches of both the authorities. As such the authorities should not take different stand while determining the taxable income of the assessee otherwise it would lead to the double addition which is not desirable under the provisions of the Act. 69.32 In view of the above and after considering the facts in totality, we are of the view that the assessee is entitled for the deduction for the payment made by it as a result of settlement agreements as discussed above under the provisions of section 37 1 of the Act. The impugned payment not be treated as penalty in the nature of provided under explanation 1 to section 37 1 of the Act. Hence the ground of appeal of the assessee is allowed. 70. The issue raised by the assessee in the ground no. 11 is that the Ld. DRP erred in confirming the disallowance of ₹ 2648.00 Crores while computing the profit u/s 115JB of the Act by treating the payment made by the assessee to US FDA as unascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the assessee company is negotiating towards a settlement with the Department of Justice of the USA for resolution of potential civil and criminal cases, thus as per the note itself, the liability is yet to crystallize. The DRP has discussed in details, while disposing of the Ground of Objection No. 8 9 that the amount paid to US PDA is not an ascertained liability for the year under consideration. 22.3 As per clause (c) under Explanation 1, the book profits are to be increased by unascertained liabilities. Accordingly, the amount of expenses claimed by way of provisions amounting to ₹ 2648,00,00,000/- has been rightly disallowed by the AO for working out book profit u/s 115JB of the Act. 73. Being aggrieved by the direction of the DRP the assessee is in appeal before us. 74. The learned AR for the assessee before us submitted that impugned amount was representing the actual liability. Therefore the same should treated ascertained liability and hence it should be allowed as deduction from the book profit under section 115JB of the Act. 75. On the contrary the learned DR vehemently supported the order of the authorities below. 76. We heard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... medical practitioners for the purpose of research development of pharmaceutical product, feedback of product, improving the quality of existing products, review the side effects of the products and dynamic interchange of new diseases. 78.2 Assessee further submitted that for getting the above mentioned information, it provides the medical equipment s to the doctor and medical practitioners for furtherance of medical profession. 78.3 Assesse also provides books to the doctors and medical practitioners for updating their knowledge and provide the relevant information in order to get the feed-back from them as mentioned above. 78.4 Likewise, the assessee also provides various sponsorship and accessories to various doctor in lieu of valuable feedback and suggestion. These accessories are the items like calendar, stationeries, diaries which are provided to doctors/ medical practitioners. This act of the assessee also creates its goodwill in mind of the doctors/medical practitioners and which eventually helps the promotion of business. The assessee also submitted that the circular no. 5/2012 issued by the CBDT dated 01/08/2012 is not binding on it. 78.5 Similarly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are not allowable within the meaning of section 37(1) read with Explanation 1 of the Act being incurred for purposes which are offence and are also prohibited by law. 24.3 In this regard, reference may be made to the CBDT's Circular No. 5/2012 dated 1 Aug 2012, which clearly states that freebies in the nature of gift, travel facility, hospitality, cash or monetary grant received by medical practitioners and their professional associations from the pharmaceutical and allied health sector are to be disallowed under the Explanation to Section 37(1) of the I.T. Act 1961. The content of the Board's Circular being clearly applicable to the facts of the present case, is reproduced below:- CIRCULAR NO. 5/2012, DT. 1ST AUGUST, 2012 Inadmissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry 01/08/2012 Business Expenditure SECTION 37(1), It has been brought to the notice of the Hoard that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 in the case of J.K. Panthaki Co, Vs. ITO reported in (2012) 246 CTR 0059 : (2011) 64 DTR 0283 : (2012) 344 ITR 0329 has held that if the assessee commits an offence under any law in the course of his business and incurs expenditure for any purpose in connection with the said offence, the said amount is not deductible under Section 37 of the I.T. Act 1961. The relevant excerpts of the judgment are reproduced here under:- The commission said to have been paid is not a compensation to the directors of the company for any service rendered to the assessee. From the undisputed tacts it is clear that a higher amount was agreed to be paid for performing the contract. Subsequently, the consideration for the contract was reduced. However, before the said rededuction in cost, the assessee had been paid the entire cost of the contract. If the construction cost was reduced the excess amount received had to be returned. The assessee should have returned the said money to the person who paid it i.e., the company. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 of an offence generally under any Act. It follows that if the assessee commits an offence under any law in the course of his business and incurs expenditure for any purpose in connection with the said offence, the said amount is not dedi4ctible under s. 37. No expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. Anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. Penalties which are incurred for infraction of the law are not a normal incident of business and they fall on the assessee in some character other than that of a trader. A penalty cannot be regarded as an expenditure wholly and exclusively laid for the purpose of the business. Paras 35 36) Infraction of the law is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable 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 criminal law of the country. The civil law has wider application and it declares that such payment of bribe is immoral and the agreement is void ab initio. In this context the phrase prohibited by law used in the Explanation to s. 37, has wider connotation. It includes expenditure incurred by way of payment of bribe, although it is laid out or expended wholly or exclusively for the purpose of business. As the Indian laws declare such agreements as void, it is unenforceable. The doctrine or rule of pari delicto is the embodiment of the principle that the Courts will refuse to enforce an illegal agreement at the instance of a person who is himself a party to an illegality or fraud. It is a maxim of law, established, not for the benefit of either of the parties to the litigation, but is founded on the principles of public policy, which will not assist a party who has paid over money, or handed over property, in pursuance of an illegal or immoral contract, to recover it back: for ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 applicable for the year under consideration. 82. On the other hand, the Ld. DR submitted the circular issued by MCI is applicable on the pharmaceutical companies and vehemently supported the order of authorities below. 83. We have heard the rival contention and perused the material available on records. From the preceding discussion, we find the expenses incurred by the assessee as discussed above have been held in violation of the MCI regulations 2002. Therefore the same was disallowed after referring the CBDT Circular bearing No. 5/2012 dated 1-8-2012 under explanation 1 to section 37(1) of the Act. Now the following questions arise for our adjudication. i. Whether the expenses incurred by giving freebies to the doctors are prohibited by the Medical Council of India (MCI) and therefore, the said expenses are not eligible for deduction under the Explanation 1 to Section 37(1) of the Income-tax Act. ii. Whether the disallowance of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bees 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. 83.2 A perusal of the above circular reveals that CBDT has issued the circular as discussed above after making a reference to the circulars issued by the medical Council of India known as Indian Medical Council Professional Conduct, Etiquette and Ethics) Regulations, 2002 . This circular of MCI regulates the conduct, etiquette and ethics of the registered medical practitioners. Likewise, the chapter 6 of the circular/regulation/notification prohibits the doctors to take any advantages directly or indirectly from the pharmaceutical companies and allied health sector industries. In case any medical practitioner is found guilty for carrying out any unethical practice, a disciplinary action can be taken against the doctor by the MCI. 83.3 We have also perused the guidelines/regulations /notifications of Indian Medical Council Professional Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 is not applicable upon Pharma companies, then, in our considered view, there was no violation of the provisions of section 37(1) of the Act. 84.6 Without prejudice to the above we also note that the circular issued by CBDT as discussed above is applicable for the assessment year 2013-14 whereas the year under consideration pertains to the assessment year 2012-13. Therefore the circular issued by the CBDT cannot be applied for the year under consideration. In holding so we draw support and guidance from the order of this tribunal in the case of ITO Vs. Sunflower Pharmacy reported in 88 taxmann.com 326 wherein it was held that such circular was applicable from the AY 2013-14 by observing as under : We find that the issue is no longer res Integra and has been examined by the Coordinate Bench of Tribunal in Syncom Formulations (I) Ltd. vs. DCIT in ITA Nos.6429 6428/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 expense were incurred at the time of entering into the hedging contract and these expenses are similar to bank charges not like MTM forex settlement payment at the year end. 89.1 The assessee further submitted that the assessee claim fall within the definition of section 2(28A) of the Income Tax Act. 89.2 The assessee also submitted that it has borrowed money for the purpose of investment in foreign subsidiary which is for the purpose of business and are strategic in nature. Further, the income from the investment are taxable in its hand, therefore expenses in relation to such investment are allowable as deduction. 89.3 Without prejudice to the above, the assessee also submitted that in the earlier year, the Revenue has taxed the gain arising from such forward contract. Therefore revenue should apply the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has already made alternate contention to treat the hedging expenditure as capital expenditure which has been accepted by the Revenue. Thus it appears there is no grievance to the assessee. However, the interest swap requires reconsideration by the AO in the light of above order of the ITAT as discussed above. Nevertheless, we are restoring both the issue of the assessee to the file of the AO for fresh adjudication as per law with getting influence with our observations as discussed above. Accordingly the ground of appeal bearing Nos. 14 15 in the appeal of the assessee are allowed for statistical purposes. 96. The issue raised by the assessee in the ground No. 16 is that the Ld. DRP erred in not adjudicating the claim of weighted deduction u/s 35(2AB) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 available on records. At the outset, we find that in the identical facts circumstances in the own case of the assessee, the Delhi ITAT in ITA No. 196/Del/2013, relevant to AY 2008- 09, vide order dated 25-4-2016, held as under: We have carefully considered the rival contentions and we are of the view that the issue is squarely covered in favour of the appellant by decision of ITAT in assessee's own case. However, neither the AO nor the ld. DRP has applied its mind to the facts of this case and has not adjudicated on the issue. Facts of this expenditure with adequate details are also not record before us. Therefore we set aside this ground of appeal to the file of AO to verify the claim made by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 12,72,94,945/-was claimed on this account by way of Note I' attached to the revised return of income. In this regard, the assessee has further stated that the said deduction was not claimed in the original revised return, as a matter of abundant precaution. 34.2 The DRP has taken note of the fact that there is no variation of income, which has been made by the AO on this issue in the draft assessment order. As per the provisions of section 144C of the IT. Act 1961, the assessee can file his objections only on the variations made by the AO to the returned income / loss, which are prejudicial to the interest of the assessee. Thus, technically, the above ground of obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour 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 Ltd. (supra) as under :- 9.2.8 Though discount on premium is nothing but an expenditure u/s 37(1), it is worth noting that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 has gone to the extent of covering loss in certain circumstances within the purview of expenditure as used in section in 37(1). In that case, the assessee incurred additional liability due to exchange rate fluctuation on a revenue account. The Assessing Officer did not allow deduction u/s 37. When the matter finally reached the Hon'ble Supreme Court, their Lordships not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment 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 with the eligible employees at the end of first year after rendering unhindered service for one year and it would go on till the completion of four years. 9.3.2 It is a trite law and there can be no quarrel over the settled legal position that deduction is permissible in respect of an ascertained liability and not a contingent liability. Section 31 of the Indian Contract Act, 1872 defines contingent contract as a contract to do or not do something, if some event, collateral to such contract does not happen . We need to determine as to whether the liability arising on the assessee-company for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 credit of his employee shall be allowed as deduction in computing the income of the previous year in which such sum is actually paid. With this legislative amendment, the application of the ratio decidendi in the case of Bharat Earth Movers (supra) to the provision for leave encashment has been nullified. However, the principle laid down in the said judgment is absolutely intact that a liability definitely incurred by an assessee is deductible notwithstanding the fact that its quantification may take place in a later year. The mere fact that the quantification is not precisely possible at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count 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' because such lapsing options are up for grabs to the other eligible employees. In any case, if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability.' In view of this, we cannot follow the decision of coordinate bench in case of the assessee itself for earlier years. No other contrary decision has been brought to our not ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
