TMI Blog2023 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... Investment Corporation Ltd. Vs. Commissioner of Income Tax [ 1997 (4) TMI 5 - SUPREME COURT] , the expenditure is fully allowable - Decided in favour of assessee. Transfer pricing (TP) adjustments - Adjustment made on account of International Transaction - MAM Selection - A.O enhanced the income of the assessee on account of adjustment in arm s length price in respect of excess cost prices paid by the assessee company to its AE and on account of other miscellaneous items - HELD THAT:- The assessee in order to choose reasonable basis of comparing transactions, furnished additional evidences before the CIT(A) in the form of fluctuations in the price of the material purchased i.e. MICA, to supplement its CUP Data and the calculation of ALP. The assessee proposed two additional method being Profit Split Method (PSM) and Transactional Net Margin Method(TNMM), the assessee furnished the relevant additional data in the form of financial statements of the comparable companies. CIT(A) categorically stated that the TPO in his remand report did not raise any objection on the acceptability of additional evidence furnished by the assessee and had provided her comments on merits. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion made by the AO was rightly deleted by the Ld. CIT(A). We do not see any infirmity in the order of the Ld. CIT(A) on this issue. Non taxability of dividend received from Sri Lankan subsidiary of the assessee - HELD THAT:- The issues for the AY 2005-06 and 2006-07 are exactly the same - the taxability of dividend received from Sri Lankan subsidiary company in the hands of the taxpayer. As agreed with the decision of the CIT (A)-XVI, New Delhi in the assessee's own case for the subsequent assessment year. Apart from the merits of the case, the consistency principle as enunciated in the ease of CIT vs LG Rarnamurthy (Madras HC) [ 1976 (10) TMI 18 - MADRAS HIGH COURT] also demands that the decision of the CIT(A) XVI should be accepted - direct the AO to allow the claim made by the appellant in this regard. Dividend Income from its subsidiary company at Sri Lanka - HELD THAT:- In the present case also as per the DTAA between India and Sri Lanka the dividend income would be taxable only in the contracting state where such income accrured and as the income accrued in Sri Lanka and the dividend income sourced from foreign subsidiary was to be considered as exempted in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and in law Ld. CIT (A) was right in allowing the claim of non taxability of dividend of Rs.10,24,05,617/-received from its Sri Lankan subsidiary. 5. Vide Ground No. (i) the grievance of the Department relates to the deduction of Rs.21,39,774/- on account of deferred revenue expenditure allowed by the Ld. CIT(A). 6. The facts related to this issue in brief are that the assesse filed the return of income on 31/10/2005 declaring an income of Rs.14,31,15,060/- which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as Act ) on 21/08/2006 at the declared income. Later on the case was selected for scrutiny. 6.1 During the course of assessment proceedings the AO noticed that Schedule-XIII of the balance sheet revealed that the assessee had written off deferred revenue expenditure to the tune of Rs.21,39,774/-. The AO asked the assessee to explain the nature of the deferred revenue expenditure and to show cause as to why the same may not be disallowed. 6.2 In response the assessee submitted that it had deferred the following revenue expenditure: (a) Advertisement and Publicity (foreign) Rs.15,99,564/- (b) Foreign Travelli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been incurred for any purpose which is in offence or is prohibited by any law. In view of the above, tne assessee has not complied with one of the conditions laid down in the provisions of Section-37(1) of the I.T.Act that the expenditure should have been incurred by the assessee in the previous year i.e. assessment year under consideration. Therefore, the assessee's claim of deferred revenue expenditure of Rs 21,39,774/- is disallowed and added back to the total income of the assessee. Moreover, the assessee has not submitted any details of the expenditure to show the exact nature of expenditure. 7. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under; In this connection it is submitted before your honour that Id Addl C1T has disallowed the expenditure so claimed only because disallowance has been made by the AO in assessment year 2004-05. The Id. Addl. C1T before making the disallowance has not appreciated the fact that addition so made has been directed to be deleted by Id C1T(A) XVI, New Delhi vide order dated 21/11/2008 in case of A. No. 118/2006-07. Copy of said order was filed before Id Addl. CIT vide our letter da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deferred revenue expenditure, accepted by the revenue authorities in preceding assessment year, has disallowed the expenditure so claimed arbitrarily. 7.1 The Ld. CIT(A) after considering the submissions of the assessee observed that during the A.Y. 2001-02 the assessee had incurred major expenses on foreign travel, exhibition and other revenue expenses, the assessee company decided to defer the claim of those expenses in order to show the improved and realistic position of the assessee company which in turn would help in availing credit facility from the bank and by keeping in view of the enduring nature of those benefits the assessee decided to claim the expenses in five assessment years starting from A.Y. 2001-02 which had been accepted by the AO and same was also accepted for the A.Y. 2003-04. The Ld. CIT further observed that the assessee had followed this policy consistently and it was as per the accounting practice followed. The Ld. CIT(A) referred to the decision of the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT [1997] 225 ITR 802 (SC) and the decision of the ITAT Ahmedabad Bench in the case of Asstt. CIT Vs. Amtrex Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to defer the claim of these expenses in order to show the improved and realistic position of the company, which in turn would help in availing credit facilities from the bank. Keeping in view of there enduring nature, the appellant decided to claim the revenue expenses in five assessment years starting fro A.Y. 2001-02. As mentioned by the appellant, the appellant claimed 1/5 of these expenses in the assessment year 2001-02, the same were examined by the A.O. and allowed in the year of . occurrence. Similarly in the assessment year 2003-04 the claim of these expenses was allowed by the A.O. after examination. In the assessment years Of A.Y. 2001-02 AND 2003-04 THE Assessing Officers had examined that these expenses were of revenue nature and thereafter, they had allowed 1/5 of these expenses and remaining expenses were taken to the deferred revenue expenditure. The appellant claimed that this had been done in accordance with the accepted accounting practices, approved by ICAI and in view of the decision of the Hon ble Apex Court in the case of madras Industrial Investment Corporation Ltd. Vs. Commissioner of Income Tax (1997) 225 ITR 802 (SC), wherein it was held that Ordinarily, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the deduction of Rs.17,50,244/-on account of pre payment charges paid to IDBI, allowed by the Ld. CIT(A). 13. The facts related to this issue in brief are that the assessee had written off pre payment charges to the tune of Rs.17,50,244/-. The AO asked the assessee to show cause as to why the same may not be disallowed. In response the assessee submitted that during the F.Y. 2002-03 the assessee company had prepaid term loan of IDBI since rate of interest was very high. But as per the pre payment guidelines of IDBI, the term loan was repayable in three years i.e 2002- 03 and 2004-05. It was claimed that since the pre payment charges were in the nature of Revenue Expenditure, the same had been amortised over a period of three years over which the loan was repayable and accordingly an amount of Rs.17,50,244/- was debited to P L Account in each of the three years i.e; A.Y. 2003-4, 2004-05 and 2005-06. It was further stated that the Department had accepted the claim of the assessee for the A.Y. 2003-04 however the AO had disallowed the claim for the A.Y. 2004-05 . The AO had not find merit in the submission of the assessee and made the disallowance by observing as under: The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im the prepayment charges over the period of 3 yeaRs.Accordingly Rs.17,50,242/- was claimed by assessee company in 3 assessment year starting with assessment year 2003-04. 14.1 The Ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing in para 4.4 and 4.5 of the impugned order as under: 4.4. In this connection it is also submitted that AO has disallowed the expenditure so claimed only because disallowance has been made by the AO in assessment year 2004-05. CIT(A)-XVI, New Delhi vide order dated 21/ 1 1/2008 in case of A. No. 118/2006-07 has held that this is an allowable expense. The matter travelled up to the ITAT. In its order dated 13.08.2009 (ITA No. 450/Del/2009) HonTale ITAT has held as follows: 25. We have gone through the orders of tax authorities below and find that the well reasoned and well discussed order of CIT (Appeals) based on uncont rover ted findings of facts and rightly applying the ration of the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. (supra) does not call for any interference from our side and consequently the same i s upheld. The ground No. 2 of appeal of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made in A.Y. 2003-04 and the same was allowed by the A.O. This expenditure was incurred to save the interest costs for the company and wholly and exclusively for the purposes of the businesses. If the appellant had not done so, it would have paid interest on term loan @14% for the A.Y. 2003-04 and subsequent yeaRs.Since the expenditure has been incurred wholly and exclusively for the business purposes and same has been divided for in three yeaRs.Keeping in view the ratio laid down by the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. Commissioner of Income Tax (1997) 225 ITR 802 (SC)(Supra), the expenditure is fully allowable. 23. Before us, learned DR for the revenue simply placed reliance on the reasoning given in the order of Assessing Officer but was not able to controvert the finding of facts recorded in the order of CIT (Appeals). 24. Whereas, the learned AR for the assessee placed strong reliance on the reasoning and the case law referred to in the order by the CIT (Appeals) and submitted that the CIT (Appeals) has rightly deleted the disallowance. 25. We have gone through the orders of tax authorities below and find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NE 15547 13495.34 200 13869.62 MICA Acid 10150 3731.72 1775 2678.13 As a secondary evidence, the assessee also produced quotation from other raw material suppliers to show that the price paid by the assessee was lesser than price quoted by the unrelated parties. However the TPO rejected the price quotes submitted by the assessee by holding that Rule 10B(1)(a) did not allow use of such quotes. The TPO held that the rule for using CUP method envisages the use of comparable price which had been charged or paid and not which was likely to be charged or could be charged. 20.1 On primary CUP data the TPO observed that the assessee had made purchases only from one unrelated party i.e; M/s Chemical Resources, Panchkula, Haryana and that too the purchases were made only in the month of March 2005. The TPO issued notice u/s 133(6) of the Act to M/s Chemical Resource, Panchkula, Haryana and obtained the information regarding the transactions between the assessee and the said company. In response M/s Chemical Resources stated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e imports. On a percentage basis it is seen that the variation in prices by 1.2% and 28.81% in the prices of Cefotaxime Acid and Mica Acid, respectively. The average works out to 15% and therefore the prices of the imports worth Rs.14.52 cRs.will be accordingly adjusted downwards. The adjustment on this account works out to Rs.2,1 7,90,532/ -. The T.P.O recommended the total adjustment of Rs.3,52,96,048/- (Rs.1,35,05,516/- for Cefataxime Acids and Mika Acids and Rs.2,17,90,532/-on other miscellaneous items). The A.O accordingly enhanced the income of the assessee by Rs.3,52,96,048/- on account of adjustment in arm s length price in respect of excess cost prices paid by the assessee company to its AE for Cefataxima Acids Mika Acids amounting to Rs.1,35,05,516/- and Rs.2,17,90,532/- on account of other miscellaneous items. 21. Being aggrieved the assessee carried the matter of the Ld.CIT(A). 22. During the course of appellate proceedings before the Ld. CIT(A) the assessee submitted fresh set of bills in respect of Mica Acid to prove the fact that there was variations in its price during the A.Y. 2005-06. The Ld. CIT(A) sought remand report on this issue from the TPO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the whole year transaction of assessee company with its AE we would also like to submit that basis of addition by TPO is also not correct on account of following reasons:- (iii) Section 92C deals with computation of arm's length price in relation to an international transaction. Thus transaction can consists of number of purchases. The ID TPO has compared rates of 4 items, in which rates of 2 items were higher and rates of 2 items were lower and. he has considered only those two items where prices were higher and ignored the other two items where prices were lower for addition. When average price is taken by the TPO he must have considered the overall price paid by the assessee company for all the four items instead of taking the two items. In an international transaction, TPO has to calculate arm's length price for transaction as a whole and not partially. The reference made in the provision of law in respect of international transaction refers to the whole transactions and not a single transaction of a particular item or transactions of a single Hem for the whole year. This fact is also very much clear from the CBDT instruction no. 3 dated 20-05-2003 wherein it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances when no price paid was available for the month in which transaction with AE is taken place, from uncontrolled parties and notices under section 133(6) sent by the TPO to various uncontrolled parties have drawn a blank. (v) The observation of TPO in para 4.6.that the assessee has used the average of the purchases price paid by in respect of impunged raw material over the full financial year with the price paid to Chempharma is also not correct under the circumstances when quotations from independent parties were for the months in which price is paid to the AE and price quoted by these independent parties were higher than the price paid to the AE and not disputed by TPO and assessing officer. (vi) This is also important to mention here that Assessee Company has paid lesser price in the month of March, 2005 to its AE than the price paid to Chemical resources or price paid by Chemical resources to Chempharma Pvt Limited. (vii) TPO himself has observed in para 5.1 that quotations have no sanctity whatsoever, considering that the end price of any material would differ from that due to factor that quantity, period of credit transportation costs etc while on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res assessing officer has adopted the average percentage of the items for which allegedly higher price is paid by the assessee company as worked out by the TPO ignoring the overall price paid by the company to its AE. TPO must have used in best judgment assessment, weighted average method, which is more scientific and realistic TPO has worked out disallowance is Rs.135.06 Lacs on purchases of Rs.2482.86 Lacs, which comes to 5.44% by using weighted average method. If we consider addition @ 5.44% of balance purchase items of Rs.1452.70 Lacs (which comes to Rs.79.03 Lacs) also, even then total addition comes to Rs.214.09 Lacs on total purchase of Rs.6954.71 Lacs, which works out to 3.08%, which is within 5% limit of CBDT Circular No. 12/2001. (xii) Further if we apply the same percentage of 2.45% as worked out in clause iv above on balance misc. purchase items of Rs.14,52,70,213/'- then total addition comes to Rs.1,70,64,636/- (35,59,120 + 1,35,05,516) on total purchase of Rs.69,54,71,511/= which comes to 2.45% of international transaction and is with m the permissible limit. (xiii) Regarding the observation of the TPO that purchase made by chemical Resources only from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length pace is not correct. As per AO's observation if appellant company might have purchased a negligible quantity even a Kg from these prospective sellers, then he might have accepted the arm's length price determined by the appellant company. Your honour will also appreciate that in the government department the purchases are made from the parities who has quoted the less price and this process of making the purchases has wide recognition all over the world and has also been accepted by GAG. Apart from our above, submission, alternatively it is also submitted before your that if any addition account of adjustment made by TPO in the arms length price is to be made it should be made above the difference of 5 % being the arm's length price is being determined on the basis of estimation only. Reliance in this connection is also made on the decision of Delhi High Court in case of Sony India (P.) Limited v. CBDT 12006] 157 Taxman 125 (Delhi) and board circular no. 12/2001. Your honour's kind attention is also drawn towards the decision of ITAT (Mum) in case Dy. CIT v. Rohm and Hass (India) Pvt Ltd wherein it has been held that even where it. was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 10D. The above said observation of TPO in the transfer pricing order is contrary to the recommendation made. It is further stated that in this case proceedings before TPO was finally completed number of times without any further query and then again office of TPO used to call the appellant company for further discussion but it has never been pointed out that transaction of Rs.14,52,70,213/- has not been bench marked for the determination of arm's length price. Simply because he has rejected the quotations for the transaction worth Rs.14.52,70,213/- therefore it appears that he has recommended to initiate the penalty under above referred provisions of law. Audit report has also been filed and is matter of record. In the audit report it has been certified by the auditor that appellant company has maintained the records as prescribed under the Income Tax. Rules in respect of determination of arm length, price therefore Id TPO is not justified in recommending the initiation of penalty proceedings under section 271BA and 271G of the IT Act. Now penalty has also been imposed for which a separate appeal has also been filed. In view of above mentioned facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Id TPO. Since there was no occasion for the appellant to discuss the same with the TPO as no proper opportunity was given, your honour is therefore requested to admit the evidences furnished herewith in respect of determination of arm's length price in view of other methods available as per rule 10B as an additional documents, under ride 46A of the Income Tax Rules, 1961. Profit split method: This method, is used by the appellant company now, because the independent enquiry conducted by Id. TPO to verify the independent rates of product in which international transaction was carried out by appellant company, has resulted, in blank as various pharma company from whom enquiry is conducted by Id TPO has denied, having dealt with the items in. which international transaction took place between appellant company and its AE. In this method we enclosing herewith following documents:- 1) Annexure 'A' in which net profits of Nectar India and Chempharma Pvt Ltd, Sri Lanka have been compared. (Actual data) 2) M/s Chempharma Pvt. Ltd , Sri Lanka was exempt from the payment of custom duty , Excise Duty and Sale Tax, because it was registered in terms of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Annual Reports for financial year 2004-05: 1) Annual Report of Nectar Lifesciences Ltd. 2) Annual Report of Orchid Chemicals Pharmaceuticals Ltd. 3) Annual Report of Aurobindo Pharma Ltd. 4) Annual Report of Chem Pharma Pvt Ltd. In view of above discussions and submissions made, your honour is requested to direct the TPO to accept the arm length price as determined by the appellant company and cancel the arm's length price on estimation basis determine by TPO and cancel the order under section 92CA(3) of TPO. 22.3 The Ld. CIT(A) forwarded the submissions of the assessee to the TPO on the ground that it amounted to additional evidence, the TPO in her remand report dt. 27/02/2012 made the following comments on the additional evidence: Kindly refer to your letter no. CVT(A)-XX/2011-12/583 dated 17.01.12 and 3 LOT 12 on the above subject. Subsequent to receipt of letter, the case records were traced, perused and some information was sought from the assessee vide letter no. F.NO.Addl.DIT/TPO-lI(l)/ Remand/201 l-l2 dated 10.02.12 (copy of which was endorsed to your kind self). The assessee has filed a reply letter dated 21.02.12. Copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 6 26.03.05 Zibo Jincheng Ind. Co. Ltd. China Zakaria-Tabriz Pharmaco Iran 1500 Kg 57.00 It may be seen from the information in the above table that the copies of invoices given as proof for fall in prices of MICA acid in March 2005 belong to differing j geographies and. are for different quantities. The prices are normally higher I when the purchase is for small quantities and lower when purchased in bulk. Besides, only two invoices are in respect of purchases made by Indian parties. But these imports are from China and not from Sri Lanka, hence, they are not j exactly comparable. Prices vary a lot between medicines being manufactured by various process patents. Drug Amoxycillin-Clavulanic Acid is being sold, by Glaxo under the brand name Augmentin 625 for Rs.40 while Mankind Pharrna sells the same drug as MOXIKIND-CV 625 for Rs.15. It is not clear from the invoices given whether the prices are for bulk drug manufactured by the same process as the prices of different manufacturers have been given. Because of the reasons given above, the fall in pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has not submitted any further evidence. 22.4 The Ld. CIT(A) after considering the submissions of the assessee and the remand reports of the TPO dt. 09/10/2009 and 27/02/2012 observed that the TPO had not raised any objection for the acceptability of the additional evidence. The Ld. CIT(A) referred to the decision of the ITAT Chandigarh Special Bench in the case of M/s Quark Systems Pvt. Ltd. Vs. ITO [2010-TIOL-31-ITAT-CHD-SB] wherein the assessee company M/s Quark Systems Pvt. Ltd. had chosen Datamatics Technologies Ltd. as one of its comparable company in its transfer pricing study for the A.Y. 2004-05. The TPO had also accepted the same as comparable and the Ld. CIT(A) upheld the order of the TPO with regard to the selection / rejection of comparables. However the assessee pleaded before the ITAT and stated that for various reasons Datamatics Technologies Ltd. was not comparable company and should have been rejected. The relevant portion of the said order of Special Bench read as under: 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able uncontrolled transaction or a number of such transactions to be the basis of comparison. He further observed that in the commercial reality, quotation is only first step of negotiation for the price and other terms and condition of delivery. From the stage of quotation to the stage of completed transaction the price defers based on geographical location, terms and condition of delivery, warranty, quantum/volume of transaction, transportation cost etc. Therefore quotations as such cannot be accepted as a completed transaction and since the Rule mandates to take price charged or paid from completed transaction. He therefore agreed with the decision of the TPO in not accepting the quotations as CUP data. 22.7 The Ld. CIT(A) further observed that the TPO was constrained to take the available CUP data which was the invoices of third parties of the completed transactions for bench marking the International Transactions. However, it was important to note that CUP data were not available for all the four varieties of chemicals in question, imported from the assessee s AE and that the assessee imported Cefrotaxime Acid, ATCA, GVNE and MICA Acid among others which were intermediate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores were added to the income of the assessee on account of transactions in those 10 chemicals. So this method also suffers from comparing uncomparable chemicals on the one hand and using an average variation between the ALP and the actual price in two different chemicals and hence the same as the variation in the ALP of the 10 different chemicals. The Ld. CIT(A) pointed out that the ALP of the two chemicals were arrived at by taking the independent third party invoices for the March 2005 and compared to the whole year International Transaction of the assessee. Therefore this method i.e; CUP method suffered from multiple infirmities. Accordingly the Ld. CIT(A) held that with the available data, CUP could not have been used as a most appropriate method in this case. 22.10 The Ld. CIT(A) mentioned that the assessee had submitted that in none of the subsequent years the TPO had made addition and accepted the CUP as most appropriate method. The Ld. CIT(A) was of the view that if the CUP data was not sufficient to cover all the transactions, it was but natural that it had to be rejected for the year under consideration. The Ld. CIT(A) observed that as an alternative the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consolidated profit on account of integrated transactions = 50% profit of India unit from operating activities + 100% profit of Sri Lankan unit from operating activities. = 0.5x(1848.18 -1072.31*) + (1965.37-30.92) = 0.5x 775.87 + 1934.45 = Rs.2322.385 lakhs * Miscellaneous income mainly comprising of dividend from Sri Lankan unit is not operational income and therefore the same has been reduced from the net profit. 6. In the FAR analysis of the Indian unit and Sri Lankan unit, it can be seen following functions can be attributed to Indian and Sri Lankan unit:- Functions Indian Unit Sri Lankan Unit R D Function Yes, as it is the main co. which has set up the subsidiary in Sri Lanka with its expertise and is also manufacturing value added product. No, as the unit has been set up only to manufacture chemicals and with the help of Indian unit. Manufacturing function Yes. But the value addition is more in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen from the FAR analysis that most of the functions are being performed by Indian unit. Indian unit has more asset intensity. Besides, the' Indian unit is subject to more risk. In view of the same, 70% of consolidated profits need to be attributed to Indian unit and 30% of the consolidated profits need to be attributed to Sri Lankan unit. Hence, the profit of Sri Lankan unit should be Rs.696.72 lakhs. Since, because of the price set for products, the profits of Sri Lankan unit are much higher at Rs.1934.45 lakhs (excluding misc. income). Hence, an adjustment of Rs.1237.73 lakhs is warranted on account of PSM. 22.11 The Ld. CIT(A) forwarded the remand report of the TPO to the assessee for comments and the assesse vide submissions dt. 10/03/2012 stated as under: Further Id TPO has stated that appellant company has not applied PSM in the correct way and he has also tried to use PSM method on the presumption of profit earned by the appellant company on international transaction in the ratio of purchases made from its AE with total purchase made and has tried to establish that 50% of the profit of the Indian unit can be said to be arising out of the transactions with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the net profit. In view of above mentioned facts Id. TPO is also not justified in determining the arm's length price on determining the consolidated net profit of both the unit on estimation basis and further allocating such consolidating the net profit on estimation and with the wrong presumption ignoring the process involves, other factors and tax benefits to Sri Lankan Unit. In view of above your honour is requested not to accept the adjustment proposed by Id TPO on wrong presumption and wrong method. 22.12 The Ld. CIT(A) after considering the remand report of the TPO and the comments of the assessee observed that in the absence of a clear analysis of the functions performed, assets employed and risk undertaken by the entities (FAR analysis), attribution of profit, the PSM was not possible. 22.13 The Ld. CIT(A) pointed out that the submission of the assessee lacked the FAR analysis. However the fact that the Sri Lankan unit of the assessee had an indirect tax advantage to the extent of 16% in Excise Duty and 16% Custom Duty also could not be denied and that the assessee had claimed its duty benefit while calculating the PSM and the TPO in his remand re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trovastatin), Calcium Channel Blocker, Anti Platelet Agent, Anti hypertensive Anti angina, Anti Asthmatic Anti Histamine Anti Diabetic, Anti Protozonal Anti Fungal, Oncology, Analgesic, Anti gout Anti Retroviral Anti parkinsonian, Hypnoticchostimulant, Anti Convulsant Anti Depressant, Anti emetic, Proton pump inhibitor, Expectorant, Decongestant No Wanbury Anti diabetic Anti Analgesic, Anti Histaminic, Inflammatory, Anti depressant,Anti Thrombotic, Anti Hypertensive, Anti Viral, Anti Epileptic, Anti Inflammatory, Anti Arthritis, Anti diabetic, Anti Psychotic, Anti Ulcer No Shasun Pharma Pain management Musculoskeletal, Hyperphosphataemia, Central Nervous system, Gastrointestinal, Anti-Infective (Cycloserine, Chlorphenesin) NO Sequent Scientific Anthelmintic, artemisininbased combination therapy(ACT), Cancer and Viral Therapy, antipsoriatics, Antivirals, Immune Response modifier, Anesthetic Adjunct No Divi s Lab Antidepressant, Anti-cancer, Antihistamine, Antitussive, Park ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;t fall under the same segment as Group A and neither they have the similar complex process of manufacturing and therefore appellant company has rightly compared its results with the companies in group A. In view of above your honour will appreciate that to justify the arm's length bench marking done by appellant company under cup method and to justified, that pr ice to AE has been paid at arm's length price, comparison with the companies in the same group is done by appellant company and your honour from the comparable data given will also appreciate that profitability of the appel lant company is higher than the other group manufacturing company and therefore wrong adjustment in the arm's length price has been made by Id TPO and therefore your honour is requested to delete the unjustified adjustment and addition so made and oblige. 22.16 The Ld. CIT(A) after considering the objection of the TPO and the submissions of the assessee observed that the assessee had not able to justify its International Transaction based on CUP because of lack of availability of exact CUP in this case and the best judgment decision of the TPO was not acceptable because on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Personnel Expenses 436.13 6622.00 5459.95 Administrative Expenses 194.32 4944.00 5888.15 Financial Expenses 779.02 3999.00 7231.00 Repair Maintenance 40.87 1606.00 Selling Distribution 533.95 4586.00 3959.73 Depreciation 577.43 4049.00 6189.19 Preliminary Exp. W/o 0.62 0.00 21467.92 114605.00 66096.83 Profit Before Tax 1848.17 4292.00 2832.61 PBT % of Sales 8.37% 3.70% 4.36% On the basis of the aforesaid chart the Ld. CIT(A) observed that the said chart was based on the published financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in the production of the oral and sterile range of antibiotics manufactured by the assessee company. During the year relevant to the A.Y. under consideration the assessee company entered into International Transaction for purchase of raw material with the AE and was required to bench mark for determining the ALP as per the transfer pricing provisions of the Act. The asessee chosen CUP method as a most appropriate method and claimed the International Transaction entered into by it with its AE at arm s length. It was submitted that since the price paid to AE was lower than the price paid to non AE. Therefore, the International Transactions entered into with AE were at arm s length. It was stated that the assessee company filed quotations from other raw material suppliers, to show that the price quoted by other parties were higher than the rates at which the same material was purchased from the AE. Therefore, the international transactions was at arm s length. However the TPO did not agree with the submissions and the evidence furnished by the assessee and made an arbitrary adjustment of Rs.3,52,96,048/- on account of differences in ALP of the International Transaction. 25.1 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... si-judicial authority. It was further submitted that the Ld. CIT(A) adopted all fair procedures in granting the TPO sufficient and ample opportunity to examine the evidences filed by the assessee and to submit comments on the same which had been duly done. Therefore the Ld. CIT(A) rightly admitted the additional evidence and there was no contravention of Rule 46A. Reliance was placed on the following case laws: Land Acquisition Collector, Improvement Trust Vs. Addl. CIT[(2017) 396 ITR 410 (P H)] CIT Vs. Mukta Metal Works 336 ITR 555 (P H) Tek Ram (Dead)Through LRs V/s Commissioner of Income Tax [357 ITR 133 (sc)] Sanjeev Bajaj Vs. ITO (Chd Trib)[ITA No. 143/Chd/2016 dt. 14/09/2016] CIT Vs. Safari Bikes Ltd. (2014) 41 Taxmann.com 282(P ) 25.3 As regards to the merits of the case, the Ld. Counsel for the assessee submitted that the assessee had initially used CUP method for determination of the ALP for purchases of four chemicals made by the assessee from its AE versus the same chemicals purchased from an independent entity namely M/s Chemical Resources. However the TPO did not accept the same and made certain adjustments and determined the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y similar to that of the assessee, whereas on the other hand the comparable suggested by the TPO were very much different in terms of their product line and they had multipurpose manufacturing plants and manufacture different types of products. The reliance was placed on the following case laws: Honeywell Turbo Technologies (India) (P.) ltd. Vs. DCIT, Circle 1(2), Pune (2017) 78 Taxmann.com 342 ASB International (P.) Ltd. V. ACIT- Circle-1, Mumbai, [2017] 78 taxmann.com 137 (Mumbai-Trib) Sony India Private Ltd. (114 ITD 448)(Del) Tevapharm Private Limited Vs. Addl. CIT, 147 TTJ 35 (Bom Trib.) It was further submitted that the parameter as per Dun Bradstreet s analysis, the companies can be classified into following categories on the basis of turnover filter : Large size companies Sales more than 2000 Crore Medium Size Firms Sales between 200 Crores and 2000 Crores Small size firms - Sales upto 200 Crores 25.6 It was stated that the assessee company and other two comparables namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. fall in the same category i.e medium size companies on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld. CIT(A) also pointed out defects in the order of the TPO, due to number of reasons stated in the impugned order which have been discussed in the former part of this order, for the cost of repetition the same is not reproduced herein. The assessee in order to choose reasonable basis of comparing transactions, furnished additional evidences before the Ld. CIT(A) in the form of fluctuations in the price of the material purchsed i.e. MICA, to supplement its CUP Data and the calculation of ALP. The assessee proposed two additional method being Profit Split Method (PSM) and Transactional Net Margin Method(TNMM), the assessee furnished the relevant additional data in the form of financial statements of the comparable companies. The Ld. CIT(A) forwarded the submission of the assessee to the TPO for her examination and comments. The TPO during the remand proceedings called for additional informations from the assessee which were duly provided as had been mentioned in para 5.11 of the impugned order. The Ld. CIT(A) categorically stated that the TPO in his remand report did not raise any objection on the acceptability of additional evidence furnished by the assessee and had provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly adjustment of Rs.2.17 crores was made. Therefore the method adopted by the TPO also suffered from the defect of the comparing uncomparable chemicals, using an average variation between the ALP and the actual price in two different chemicals, using the same as the variation in the ALP of the ten different chemicals. 26.2 In view of the above said discussion, we are of the view that the CUP method suffered from multiple infirmities and was not a most appropriate method for the transactions pertaining to the year under consideration. 26.3 As an alternative the assessee submitted that PSM should have been used as a supplementary method. However the TPO in his remand report dt. 27/02/2012 which has been reproduced in the former part of this order pointed out various short comings and defects particularly the absence of clear analysis of the functions performed, assets employed and risk undertaken by the entities (FAR analysis), attribution of profit. Therefore, the PSM was not most appropriate method. Accordingly the same was rightly rejected by the Ld. CIT(A). So there was no alternative except to treat the TNMM as most appropriate method. In the instant case, the Ld. CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same manufacturing activity in which the assessee was engaged and their turnover was also comparable with that of the assessee. The Ld.CIT(A) categorically stated that the assessee was manufacturing Cefixime API (Active Pharmaceutical Ingredient) which was also manufactured by those two comparable companies who were competent to the assessee in the open market, therefore, those should be taken as comparable. The Ld.CIT(A) forwarded the comparable chart of the financial submitted by the assessee in respect of the comparables, to the TPO who in his remand report could not controvert this contention of the assessee that the three companies i.e; assessee and the two comparable namely M/s Aurobindo Pharma Ltd. and M/s Orchid Chemicals Pharmaceuticals Ltd. were in the similar range of turnover, in terms of size of the operation they were similar, therefore the Ld. CIT(A) was fully justified in holding that those two companies were comparable to the assessee and as the mean margin of the above said two comparables was less than the margin earned by the assessee (PBT / sales). The International Transactions of the assessee were at arm s length. Accordingly, the addition made by the AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year and the limitation in the assessee s case expired on 31/03/2007. The reliance was placed on the judgment of the Hon ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT(2006) 284 ITR 0323 (SC) wherein it was held that the assessee could revise its claim before the AO only by filing the revised return under section139(5) of the Act. The AO observed that since in this case no revised return was filed and also there was no time available for filing the revised return, the claim of the assessee was not acceptable and hence rejected. 29. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and reiterated the submissions made before the AO. 29.1. The Ld. CIT(A) after considering the submissions of the assessee directed the AO to allow the claime of Rs.10,24,05,617/- made by the assessee by observing in para 6.3 and 6.4 of the impugned order as under: 6.3 This matter was litigated in the subsequent assessment year i.e. 2006-07. On the same grounds, the AO has taxed the dividend income in the hands of the appellant. CIT(A)-XVl, New Delhi in her order dated 28.02.2011 has decided the matter in favor of the appellant. The relevant part of the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not dividend income and therefore facts of this case are not applicable in the case of appellant. Further, in clause 10(2) of the DTAAs with Sri Lanka and Malaysia for taxability of dividend income in the other contracting state, the word is used 'may' which can also not be read as 'shall' in view of various Court judgments and in above referred Supreme Court decision wherein it has been held that tax on dividend income can be charged in the contracting state where the same accrued. Undisputedly in case of the appellant company dividend from its Associate Enterprise namely M/s Chempharma Pvt Limited accrued in Sri Lanka as it was declared in Sri Lanka. In view of the above said finding and considering the submission made by the appellant and observations of the assessing officer in the assessment order and remand report furnished for A.Y. 2005-06, I hold that the provisions of DTAA of India with Sri Lanka and Malaysia, arc similar so far as the taxability of dividend in concerned. As held by Hon'ble (SC) in case of Deputy CIT, Ujjain vs Torquoise Finance Ltd (2008) 168 Taxman 107 (SC), Dividend income earned by the assessee from a company of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue expenditure as claimed by the assessee. 2. The Ld. CIT(A) has erred both in law and on facts of the case by allowing the deduction on account of deferred revenue expenditure when the expenses incurred by the assessee on account of advertisement, publicity and foreign visit do not come within the purview of Sec. 35D of the I.T. Act. 3. The Ld. CIT(A) has erred both in law and on facts of the case by allowing the deduction of on account of deferred revenue expenditure even when they were not allowable u/s 37(1) of the I.T. Act, 1961. 4. The Ld. CIT(A) has erred both in law and on facts of the case by allowing the claim of non-taxability of the dividend of Rs.20,72,78,330/- received from Shri Lankan subsidiary company. 5. The Appellant craves leave to add or amend the grounds of appeal on or before the appeal is heard and disposed off. 6. It is prayed that the order of the Commissioner of Income-tax (Appeals) be set aside and that of the A.O. be restored. 36. Ground Nos. 5 6 are general in nature, so do not require any comment on our part. 37. Vide Ground No. 1 to 3, the grievance of the Department relates to the deletion of addition made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir submission dtd. 10.09.2009 has claimed as exempt the dividend income received from the Sri Lankan Company. The assesee further submitted to the AO as under: In this connection apart from provision of Article 10 of DTAA between India and Sri Lanka Government, your kind attention is also drawn towards CBDT circular No. 333 dated 2.04.1982 wherein it has been clarified that in case of conflict in the provisions of agreement for double tax avoidance and Income Tax Act, the provisions contained in agreement for double tax avoidance will prevail. So far as reason of not filing the revised return and claiming the refund in view of provision of section 239 for rejection of claim given by your honour in A. Y. 2005-06 is concerned, in this connection it is submitted that issue of taxability of dividend accrued in a company with whom DTTAA is executed was under dispute and was under consideration of Hon'ble Supreme Court of India which was finally settled by the apex court vide order dated 20.03.2008 which was published and came to the notice after 31.03.2008 i.e after the time prescribed under the Act. Therefore neither revised return could be filed nor claim was mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment in the case of Goetze (India) Ltd. v. Commissioner of Income-tax (2006) 284 ITR 0323(SC) has held that the assessee can revise its claim before the assessing officer only by filing a revised return u/s139(5) of the Act. Since this claim has not been filed by the assessee by way of a revised return filed u/s 139(5) of the Act and also there is no time available for filing revised return the claim of the assessee is not acceptable and hence rejected. (c) The assessee company has relied on the judgement of the apex court in the/6ase of CIT Vs Torqouise Investments and Finance Ltd. (2008) 300ITR 001. However, in the case of the above said case the assessee had claimed refund amounting to Rs.29,16,660/- on the basis of the credit of deemed TDS on dividend received from a Malyasaian Company ALONG WITH THE RETURN. The relevant facts of the case are reproduced below for better appreciation : The assessee-respondent, hereinafter referred to as the assessee , filed its return of income for the assessment year 1992-1993 declaring an income of Rs.4,30,06,580 by showing its business as investment and finance, which was processed under section 143(1)(a) of the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment proceedings vide its letter dated 10-09-2009 made a request to the Id Addl. CIT not to charge any tax on the dividend of Rs.20,72,78,330/- received from Sri Lankan Company under any provision of I. T. Act. ' - ' In this connection it is submitted by the AR of the appellant that the Id Assessing officer has not appreciated the corrects facts of the case and has also ignored the board circular issued directly relating to the facts of the assessee's case and even the decision of the Hon ble Supreme Court in case of Deputy Commissioner of Income Tax v. Torqouise Investment Finance Limited[2008] 168 Taxman 107(SC) on the basis of which dividend income was claimed as exempt i.e. not liable to tax in India under any provision of I. T. Act. The Id Addl Commissioner of Income Tax has discussed the claim made by appellant company in para 3.1 to 3.4 at page no 2 to 4 of the assessment order and rejected the claim of appellant by making the following observation in para 3.5 and 3.6 of the assessment order as under:- The above arguments of the assessee were examined carefully and the same are not acceptable on account of the following reasons:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation during the assessment proceedings out of the payment made as self assessment tax. (d) In the submissions made by assessee it has been claimed that the 'issue whether dividend accrued in the country with whom the Government of India having the DTAA is taxable in India or not under any provision of the Income Tax Act was pending with the Hon'ble Supreme Court for it's final decision. This claim is factually incorrect. The above said issue was well settled by the decision of the Apex Court in its judgment in the case of CIT Vs. P. V.A.I. Kulandgan Chettiar (2004) 267 ITR 654. Further, even the review petition filed against the decision of this court was also dismissed on 1, November, 2007. As such the issue was well settled by the apex court well before the assessee filed its revised return of income on 12' March, 2008. Assessee failed to avail the opportunity vested by law within the prescribed time. 3.6 In view of above, the claim of assessee vide its revised Computation of Income filed during the course of assessment proceedings vide their written submission dated 10-09-2009 is not accepted andfresh claims are rejected. The assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax v. Torqouise Investment Finance Limited [2008] 168 Taxman 107(SC). Revised computation of income filed during the course of assessment proceeding vide our letter dated 10-09-2009 is enclosed herewith for your honour's ready reference. 42.2 The assessee also furnished the reply to the observations of the AO which is incorporated by the Ld. CIT(A) at page no. 9 to 17 of the impugned order for the cost of repetition the same are not reproduced herein. 42.3 The Ld. CIT(A) after considering the submissions of the assessee observed that the AO had not entertained the claim of the assessee during the assessment stage for considering the dividend income received from Sri Lanka as exempt mainly by relying on the judgment of the Hon ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT(2006) 284 ITR 323, without looking into the merit of the assessee s claim. The Ld. CIT(A) observed that the assessee was not able to revised its income by showing the dividend income received from Sri Lanka as exempted because the matter regarding taxability of dividend income received from abroad was sub judice and was decided as late as on 20/03/2008 in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Sri Lanka tax is computed: Provided that such credit shall not exceed Indian tax (as computed before allowing any such credit ), which is appropriate to the income derived from sources within Sri Lanka or to capital in Sri Lanka, so however , that where such resident is a company by which sur tax is payable in India, the credit aforesaid shall be allowed in the first instance against income- tax payable by the company in India, and as to the balance if any against sur tax payable by it in India. (3) For the purpose of paragraph (2) of this article, the term Sri Lanka tax payable shall be deemed to include any tax which would have been payable as Sri Lanka tax for any year but for an exemption or reduction of tax granted for that year or any part thereof under : Any of the following provisions, that is to say sections 11,16,17,18,19, 20, 21, 22 and 85 of the Sri Lanka Inland Revenue Act No. 28 of1979 so far as they were in force on, and have not been modified since, the date of the signature of this Convention, or have been modified only in minor respect s so as not to affect their general character ; Any agreement entered into u/s 17 of the Gre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le by the assessee company had the exemption as discussed above not been available to the assessee and its Sri Lanka tax payable was to be allowed as a credit against Indian tax on the same item of income i.e; dividend, as per the provisions of the Article 24(2) of the DTAA between India and Sri Lanka. 42.7 As regards to the AO s stand that the assessee should have made this claim within a period of one year as laid down in section 239 which prescribes the limit for claiming refunds, whereas in the assessee s case the claim had been made about the dividend income being exempt and not in regard to the refund. He further observed that the AO sought to distinguish between the facts of the assessee s case and those in the case of DCIT Vs. Turquoise Investment Finance Ltd.(supra) whereas the issue in both the case was relating to taxability of dividend income received from abroad. The Ld. CIT(A) was of the view that the facts of the case of DCIT Vs. Turquoise Investment Finance Ltd. (supra) were applicable to the assessee s case for the following reasons: a) The assessee filed its return of Income claiming refund on the basis of credit of deemed TDS on the dividend of Rs 21,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for the Assessee reiterated the submissions made before the authorities below and further submitted that the relief had been granted by the Ld. CIT(A) for the reasons that the dividend arising to the assessee company from its Sri Lankan Subsidiary Company was non taxable in view of the judgment of the Hon ble Apex Court in the case of DCIT Vs. Turquoise Investment Finance Ltd. reported at [2008] 300 ITR 1 , wherein it has been held that the tax on dividend can only be charged in the contracting state from where such dividend accrued and the facts of the above case were related to the India-Malaysia Treaty which was similar to India-Sri Lanka Treaty. It was further submitted that in case the resident had paid any tax in any other country in respect of its income sourced in that country, India has to give appropriate credit for the tax paid in the foreign country, subject to provisions of DTAA. It was further submitted that the provisions of agreement cannot fasten a tax liability where the liability was not imposed by the local act and where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim of the assessee for credit of deemed tax deducted at source on dividend. The Tribunal held that in view of article XI of the treaty the dividend income would be taxed only in the contracting States where such income accrued. It has been further held as under: that the dividend income earned by the assessee in Malaysia was not taxable in the hands of the assessee in India under any of the provisions of the 1961 Act in view of the agreement between India and Malaysia. 46.1 In the present case also as per the DTAA between India and Sri Lanka the dividend income would be taxable only in the contracting state where such income accrured and as the income accrued in Sri Lanka and the dividend income sourced from foreign subsidiary was to be considered as exempted in the hands of the Indian holding Company i.e; the assessee. We therefore considering the totality of the facts do not see any valid ground to interfere with the detailed findings given by the Ld. CIT(A) on this issue. Accordingly we do not see any merit in this ground of the Departmental appeal. 46.2 As the facts for the year under consideration are identical to the facts involved for this issue in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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