M/s. MERCK LTD., MUMBAI v. DCIT CIR. - 6(3), MUMBAI

ITA 925/MUM/2007 | 2003-2004
Pronouncement Date: 19-07-2013 | Result: Partly Allowed

Appeal Details

RSA Number 92519914 RSA 2007
Assessee PAN AAACE2616F
Bench Mumbai
Appeal Number ITA 925/MUM/2007
Duration Of Justice 6 year(s) 5 month(s) 18 day(s)
Appellant M/s. MERCK LTD., MUMBAI
Respondent DCIT CIR. - 6(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 19-07-2013
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted K
Tribunal Order Date 19-07-2013
Date Of Final Hearing 19-06-2013
Next Hearing Date 19-06-2013
Assessment Year 2003-2004
Appeal Filed On 31-01-2007
Judgment Text
ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 1 OF 71 IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH MUMBAI . . ! ' # $ BEFORE SHRI B R MITTAL JM AND RAJENDRA SINGH AM / ITA NO. 925 /MUM/2007 ( % & % & % & % & '& '& '& '& / ASSESSMENT YEAR : (2003-04) MERCK LIMITED SHIV SAGAR ESTATE A ANNIE BESANT ROAD WORLI MUMBAI 400 018. % % % % / VS. THE DY. COMMISSIONER OF INCOME TAX CIRCLE 6 (3) MITTAL COURT NARIMAN POINT MUMBAI. ( # ./ PAN : AAACE2616F ( () / APPELLANT ) .. ( *+() / RESPONDENT ) () - / APPELLANT BY : SHRI P.J. PAZDIWALA SMT. AARTI VISANJIT AND SHRI AJIT SHAH *+() - / RESPONDENT BY : SHRI AJEET KUMAR JAIN SMT. SOSMITA MISRA % .# / DATE OF HEARING : 27-6-2013 /0' .# / DATE OF PRONOUNCEMENT : 19 -7-2013 1 / O R D E R PER RAJENDRA SINGH THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINS THE ORDER DATED 24.11.2006 OF CIT(A) FOR THE ASSESSMENT YEAR 2003-04. THE ASSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON SEVERAL GROUNDS RELATING TO DOMESTIC AS WELL AS INTERNATIO NAL ISSUES. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 2 OF 71 2. THE DISPUTE RAISED IN GROUND NO. 1(A) IS GENERAL IN NATURE AND THEREFORE DOES NOT REQUIRE ANY ADJUDIC ATION. 3. THE GROUND NO. 1 (B) IS REGARDING ADDITION OF RS. 8332055/- ON ACCOUNT ON UNUTILISED MODVAT CREDIT IN THE VALUE OF CLOSING STOCK. THE AO HAD MADE THE SAID AD DITION AS THE ASSESSEE HAD NOT INCLUDED THE UNUTILISED MODVAT CREDIT IN THE CLOSING STOCK U/S 145A OF THE IT ACT. 3.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SU BMITTED BEFORE CIT (A) THAT SIMILAR ADDITION MADE IN THE EA RLIER YEAR HAS BEEN DELETED. IT WAS ALSO SUBMITTED THAT IN CAS E ADDITION WAS REQUIRED TO BE MADE INTO THE CLOSING STOCK ADJ USTMENT HAS ALSO TO BE MADE IN THE PURCHASES AS WELL AS IN THE OPENING STOCK. CIT(A) AFTER CONSIDERING THE SUBMIS SIONS OF THE ASSESSEE OBSERVED THAT SIMILAR ISSUE HAD BEEN C ONSIDERED IN ASSESSMENT YEAR 2002-03 IN WHICH THE CIT(A) HAD HELD THAT FULL EFFECT OF PROVISION OF SECTION 145A WERE REQUIRED TO BE GIVEN BY INCLUDING TAX DUTY ETC. IN THE OPENING STOCK/PURCHASES ALSO AND NOT ONLY IN THE CLOSING ST OCK. CIT (A) THEREAFTER HELD THAT ADDITION MADE BY AO IN THE CLOSING STOCK WAS CONFIRMED AND DIRECTED THE AO TO MAKE SIM ILAR ADJUSTMENT IN THE OPENING STOCK. AGGRIEVED BY THE S AID DECISION THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL . ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 3 OF 71 3.2 WE HAVE HEARD BOTH THE PARTIES PERUSED THE REC ORDS AND CONSIDERED MATTER CAREFULLY. THE DISPUTE IS REG ARDING ADJUSTMENT TO BE MADE ON ACCOUNT OF TAX DUTY ETC. UNDER THE PROVISIONS OF SECTION 145A. UNDER THE SAID PROV ISIONS THE VALUTIAON OF PURCHASES AND SALE OF GOODS AND INVENT ORY IS REQUIRED TO BE MADE IN ACCORDANCE WITH THE METHOD O F ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE AND F URTHER ADJUSTMENT IS REQUIRED TO BE MADE TO INCLUDE THE AM OUNT OF ANY TAX DUTY CESS OR FEES ACTUALLY PAID OR INCURRE D BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOC ATION AND CONDITION AS ON THE DATE OF VALUATION . IT IS THERF ORE CLEAR THAT ADJUSTMENT ON ACCOUNT OF TAX DUTY ETC. IS REQUIRED TO BE MADE NOT ONLY TO THE CLOSING STOCK BUT ALSO IN THE PURCHASES SALES AND OPENING STOCK. IN THE PRESENT CASE THE A O HAD MADE ADJUSTMENT ONLY IN THE CLOSING STOCK. CIT (A) HAS DIRECTED HIM TO MAKE ADJUSTMENT IN THE OPENING STOC K ALSO IN ADDITION TO CLOSING STOCK. HE HAS HOWEVER OMITTED T O CONSIDER THE ASPECT THAT ADJUSTMENT IS ALSO REQUIRED TO BE M ADE TO THE PURCHASES AND THE GRIEVANCE OF THE ASSESSEE IS ONLY ON THIS ACCOUNT. WE THEREFORE MODIFY THE ORDER OF CIT (A) B Y HOLDING THAT THE ADJUSTMENT ON ACCOUNT OF TAX DUTY WILL ALS O BE MADE IN THE PURCHASES. THE GROUND RAISED BY THE ASSESSE E IS THUS ALLOWED. 4. THE DISPUTE RAISED BY THE ASSESSEE IN GROUND NO. 1 (C) IS REGARDING ADDITION ON ACCOUNT OF ROYALTY PAYMEN T OF RS. 5647627. THE ASSESSEE HAD MADE TOTAL CLAIM ON ACCOU NT OF ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 4 OF 71 ROYALTY AT RS. 2 45 73 524/. THE AO NOTED THAT IN R ESPECT OF FOUR PAYMENTS AGGREGATING TO RS. 56 47 627/- THE A SSESSEE HAD NEITHER DEDUCTED TAX NOR DEPOSITED THE SAME BEF ORE THE END OF THE FINANCIAL YEAR. HE THEREFORE DISALLOWE D A SUM OF RS. 56 47 627/- U/S 40(A)(I) R.W.S 195 OF THE IT AC T. 4.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SU BMITTED BEFORE CIT(A) THAT THE ASSESSEE HAD NOT REMITTED TH E AMOUNT TO THE EXTENT OF TAX PAYABLE TO THE GERMAN COMPANY AND THEREFORE TAX HAD BEEN DEDUCTED BEFORE 31.3.2003 A ND WHICH HAD BEEN PAID BEFORE 31/5/2003. IT WAS THUS ARGUED THAT NO NO DISALLOWANCE COULD BE MADE. ALTERNATIVELY IT WA S ALSO SUBMITTED THAT THE CLAIM MAY BE DIRECTED TO BE ALLO WED IN ASSESSMENT YEAR 2004-05 IN WHICH THE TAX HAD BEEN PAID. CIT (A) ON EXAMINATION OF THE RECORD NOTED THAT T HE TAX HAVE BEEN DEDUCTED ON 25.4.2003 I.E IN THE SUBSEQUENT YE AR. THEREFORE IT WAS NOT A CASE OF TAX BEING DEDUCTED IN THIS YEAR AND PAYMENT MADE WITHIN A PERIOD OF TWO MONTHS. CIT (A) THEREFORE HELD THAT DEDUCTION HAD TO BE ALLOWED IN ASSESSMENT YEAR 2004-05 AFTER NECESSARY VERFICATION . AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 4.2 WE HAVE HEARD BOTH THE PARTIES. THE LEARNED SE NIOR COUNSEL APPEARING FOR THE ASSESSEE POINTED OUT THAT THE DIRECTION OF CIT (A) FOR ALLOWING THE CLAIM IN THE NEXT YEAR HAS NOT BEEN GIVEN EFFECT TO BY THE AO. IT WAS ALSO SUB MITTED THAT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 5 OF 71 THE ASSESSEE WILL BE SATISFIED IF THE CLAIM WAS ALL OWED IN THE NEXT YEAR. WE HAVE CONSIDERED THE MATTER CAREFULLY WE DO NOT SEE ANY DIFFICULTY IN ALLOWING THE CLAIM IN NEXT YE AR AS THE CIT(A) HAS GIVEN A CLEAR FINDING THAT DEDUCTION WAS MADE IN THE NEXT YEAR AND THE AMOUNT WAS ALSO PAID NEXT YEA R. THE ORDER OF CIT (A) HOLDING THAT THE CLAIM HAS TO BE A LLOWED NEXT YEAR IS THEREFORE UPHELD. THE AO WILL THUS ALLOW T HE DEDUCTION IN ASSESSMENT YEAR 2004-05. 5. THE DISPUTE RAISED IN GROUND NO.1(D) IS REGARDING DISALLOWANCE OF RS. 58 91 675/- IN RESPECT OF BAD A ND IRRECOVERABLE DEBT WRITTEN OFF DURING THE YEAR. THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 58 91 675/- ON ACCOUNT OF BAD DEBT WRITTEN OFF. THE ASSESSEE FILED NAMES AND ADDR ESSES OF DEBTORS ALONGWITH AMOUNT WRITTEN OFF AND THE DATE O F RAISING THE BILL BEFORE THE AO AND ALSO MADE LEGAL SUBMISS IONS ON THE ISSUE. THE ASSESSEE EXPLAINED THAT THE COMPANY SOLD ITS PRODUCT IN VARIOUS DIVISIONS TO VARIOUS TYPES OF CU STOMERS AND MANY A TIMES AMOUNTS WERE NOT RECEIVED FROM THE PARTIES IN RESPECT OF SALES MADE TO THEM FOR VARIOU S REASONS SUCH AS SHORT RECEIPTS OF GOODS EXCESS FREIGHT CHA RGES ETC. THE AMOUNTS NOT RECOVERED THEREFORE WERE WRITTEN OFF AS BAD DEBT. THE AO HOWEVER OBSERVED THAT THE DEBT SHO ULD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOM E OF THE RELEVANT ACCOUNTING YEAR OR IN THE EARLIER YEAR AND IT SHOULD ALSO HAVE BEEN ESTABLISHED TO HAVE BECOME BAD WHICH WAS NOT DONE. HE THEREFORE DISALLOWED THE CLAIM. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 6 OF 71 5.1 IN APPEAL CIT(A) OBSERVED THAT THE ASSESSEE HA D NOT PRODUCED ANY DETAILS AND EVIDENCE TO SHOW THAT SUCH DEBTS HAD BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF EARLIER YEAR. HE THEREFORE CONFIRMED THE DISALLOW ANCE. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN A PPEAL BEFORE TRIBUNAL. 5.2 BEFORE US LEARNED SENIOR COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD GIVEN DETA ILS OF BILLS NAMES AND ADDRESSES OF THE DEBTORS AND THE A MOUNTS WRITTEN OFF. THE ASSESSEE HAD ALSO EXPLAINED THE RE ASONS AS TO HOW THE AMOUNTS COULD NOT BE COLLECTED WHICH RELATE D TO SALES MADE EARLIER. IT THEREFORE COULD NOT BE SAI D THAT THE AMOUNT HAD NOT BEEN TAKEN INTO ACCOUNT IN THE COMPU TATION OF INCOME OF THE EARLIER YEAR. IT WAS ALSO SUBMITTE D THAT THE ASSESSEE HAD NO OBJECTION IF THIS ASPECT WAS FURTHE R VERIFIED BY AO. THE LEARNED DR PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 5.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED MATT ER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF CLIAM OF BAD DEBT. IT IS A SETTLED LEGAL POSITION AS HELD BY HONBLE SUPREME COURT IN CASE OF TRF LTD.(323 ITR 347) THAT AFTER THE AMENDMENT OF THE PROVISIONS FROM ASSESSMENT YEA R 1998-99 BURDEN IS NO LONGER ON THE ASSESSEE TO EST ABLISH THAT THE DEBT HAS ACTUALLY BECOME IRRECOVERABLE. TH E ONLY ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 7 OF 71 CONDITIONS WHICH ARE REQUIRED TO BE FULFILLED FOR ALLOWANCE OF BAD DEBT IS THAT THE DEBT SHOULD HAVE BEEN TAKEN IN TO ACCOUNT IN THE COMPUTATION ON INOMCE OF EARLIER YEA R AND SHOULD HAVE BEEN WRITTEN OFF IN THE BOOKS OF ACCOUN TS. THERE IS NO DISPUTE THAT THE BAD DEBT HAD ACTUALLY BEEN W RITTEN OFF IN THE BOOKS OF ACCOUNTS. THE DISPUTE IS ONLY WHET HER THE DEBT HAD BEEN TAKEN INTO ACCOUNT IN THE COMPUTATION OF INCOME OF EARLIER YEAR. CIT (A) HAS HELD THAT THE A SSESSEE HAD NOT PRODUCED ANY DETAIL AND EVIDENCE TO SHOW THAT SUCH DEBTS HAD BEEN TAKEN INTO ACCOUNT IN COMPUTATING TH E INCOME OF EALIER YEAR. THIS ASPECT IN OUR VIEW REQU IRES VERIFICATION TO WHICH THE ASSESSEE HAS NO OBJECTION . WE THEREFORE RESTORE THE ISSUE TO THE FILE OF AO FOR A FRESH DECISION AFTER ALLOWING OPPORTUNITY OF HEARING TO T HE ASSESSEE TO SHOW THAT THE DEBT HAD BEEN TAKEN INTO ACCOUNT I N COMPUTATION OF INCOME OF THE EARLIER YEAR. 6. THE DISPUTE RAISED IN GROUND NO. 1 (E) IS REAGARDING DISALLOWANCE OF RS. 5 32 69 000/-. THE AO ON EXAMI NATION OF QUANTITATIVE DETAILS OF TRADING GOODS AND MANUFA CTURING GOODS NOTED THAT THERE WAS UNDER STATEMENT OF CLOSI NG STOCK. THE ASSESSE EXPLAINED THAT THE LOWER STOCK WAS BECA USE OF SHORTAGE FREE SAMPLES AND GIVEAWAYS UNDER THE COM PANYS BONUS SCHEME. IT WAS ALSO SUBMITTED THAT IT WAS A C OMMON PRACTICE AMONGST ALL PHARMACEUTICAL COMPANIES TO DI STRIBUTE PHYSICIAN SAMPLES AMONGST DOCTORS HOSPITALS AND OT HER USERS FOR PROMOTING THE SALE OF GOODS. IT WAS POINT ED OUT THAT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 8 OF 71 THE CLOSING STOCK DID INCLUDE QUANTITIES AND VALUES OF SAMPLES BUT SINCE THE SAMPLES WERE DISTRIBUTED FR EE OF COST THESE WERE REFLECTED AS PART AND PARCEL OF THE COS T OF GOODS SOLD IN THE ACCOUNTS. THIS IS NOTHING BUT SALE PROM OTION EXPENDITURE. THE AO HOWEVER OBSERVED THAT THE ASSES SEE WHEN ASKED TO FILE THE NAMES AND ADDRESSES OF THE P ERSONS PHYSICIANS AND DOCTORS TO WHOM SUCH FREE SAMPLES WE RE DISTRIBUTED FURNISHED ONLY REGION WISE SAMPLES DIS TRIBUTED TO MEDICAL REPRESENTATIVES AND NO DETAILS OF PHYSICIA NS/DOCTORS WERE GIVEN. THE AO THEREFORE DID NOT ACCEPT THE GENUINENESS OF THE CLAIM AND ADDED A SUM OF RS. 5 32 69 000/- ON ACCOUNT OF SHORTAGE OF CLOSING STO CK ON THIS ACCOUNT. 6.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SU BMITTED BEFORE CIT (A) THAT THE AO HAD NEVER ASKED FOR DETA ILS OF NAMES AND ADDRESSES OF THE PERSONS PHYSICIANS AND DOCTORS TO WHIM THE SAMPLES WERE DISTRIBUTED AND THEREFORE THERE WAS NO QUESTION OF THE ASSESSEE NOT PRODUCING THE SAME FOR THE PURPOSE OF VERIFICATION. IT WAS ALSO SUBMITTED THAT NO DISALLOWANCE ON THIS ACCOUNT HAD BEEN MADE IN THE P AST. ALTERNATIVELY IT WAS ALSO SUBMITTED THAT IN CASE TH E CLAIM WAS NOT ALLOWED THE SAME SHOULD BE ALLOWED AS PART OF O PENING STOCK IN THE SUBSEQUENT YEAR. CIT(A) ON EXAMINATION OF RECORDS OBSERVED THAT THE AO IN THE ASSESSMENT ORDE R HAD CLEARLY MENTIONED THAT THE ASSESSEE HAD FAILED TO F ILE THE NAMES AND ADDRESSES PERSONS PHYSICIANS AND DOCTORS AND ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 9 OF 71 THEREFORE THE CLAIM OF THE ASSESSEE THAT THE AO HAD NEVER ASKED FOR DETAILS WAS NOT CORRECT. EVEN IN THE COUR SE OF APPELLATE PROCEEDINGS THE ASSESSEE HAD NOT FILED C OMPLETE DETAILS EXCEPT FILING QUANTITATIVE DETAILS AND SAMP LE COPIES OF DAILY REPORT OF MARKETING EMPLOYEES FROM WHICH IT C OULD NOT BE MADE OUT WHETHER THE ASSESSEE HAD FREELY DISTRIB UTED SAMPLES OF RS. 5 32 69 002/-. THE ASSESSEE HAD THUS FAILED TO DISCHARGE THE ONUS TO PROVE THE GENUINENESS OF T HE CLAIM. CIT (A) THEREFORE CONFIRMED THE ADDITION MADE BY AO. CIT (A) HOWEVER ACCEPTED THE ALTERNATE CLAIM OF THE ASS ESSEE THAT AMOUNT HAS TO BE INCLUDED IN THE OPENING STOCK OF N EXT YEAR AS THE AO HAD MADE THE ADDITION TO THE CLOSING STOC K OF THIS YEAR. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 6.2 BEFORE US THE LEARNED SENIOR COUNSEL SUBMITTED THAT AT THE TIME OF ASSESSMENT THE ASSESSEE HAD FILE THE C ALL REPORT OF DOCTORS BEFORE THE AO WHICH CONTAINED THE NAMES OF THE DOCTORS. IT WAS ALSO SUBMITTED THAT THE AO HAD NOT SPECIFICALLY CALLED FOR THE ADDRESSES OF THE DOCTOR S. IT WAS POINTED OUT THAT THE ASSESSEE WAS A MULTINATIONAL C OMPANY WHICH WAS DISTRIBUTING FREE SAMPLES THROUGHOUT INDI A AND DETAILS OF THE DOCTORS WERE VOLUMINOUS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE COULD PROVIDE SUCH DETAILS IF REQ UIRED. HE ALSO FILED THE DETAILS FOR THE MONTH OF MARCH GIVIN G NAMES AND ADDRESSES OF THE DOCTORS WHICH RAN INTO SEVERAL PAGES. IT WAS ARGUED THAT IT WAS A COMMON PRACTICE TO DISTRIB UTE FREE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 10 OF 71 SAMPLES AND SUCH CLAIMS HAVE ALSO BEEN ALLOWED IN T HE PAST. THE DISALLOWANCE HAS BEEN MADE ONLY FROM THIS ASSES SMENT YEAR. THE CLAIM SHOULD THEREFORE BE ALLOWED CONSI DERING THE PAST HISTROY. LEARNED DR ON THE OTHER HAND SUBMITTE D THAT THE BURDEN WAS ON THE ASSESSEE TO ESTABLISH THAT TH E EXPENDITURE ON ACCOUNT OF SAMPLES WAS GENUINE AND H AD BEEN ACTUALLY INCURRED WHICH CANNOT BE DISCHARGED W ITHOUT GIVING FULL DETAILS. IT WAS ALSO SUBMITTED THAT THE DISALLOWANCE COULD ALWAYS BE MADE IN THE SUBSEQUENT YEAR EVEN IF NO DISALLOWANCE HAD BEEN MADE IN THE PAST. RELIANCE WAS PLACED ON THE DECISION OF TRIBUNAL IN CASE OF G OOD YEAR INDIA LTD. ( 66 TTJ 164) 6.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THIS GROUND IS REGARDING DISALLOWANCE OF EXPENSES ON ACCOUNT OF FREE SAMPLES. THE TOTAL CLAIM OF EXPENSES ON THIS ACCOUN T IS RS. 5 32 69 000/-. THE ASSESSEE DID NOT FILE THE NAMES AND ADDRESSES OF PERSONS/PHYSICIANS/DOCTORS TO WHOM FRE E SAMPLES HAD BEEN GIVEN DESPITE SPECIFIC REQUISITION MADE BY THE AO. SUCH DETAILS WERE NOT FILED EVEN BEFORE CIT (A). THE AUTHORITIES BELOW HAVE THEREFORE NOT FOUND THE C LAIM OF SUCH EXPENSES GENUINE AND ACCORDINGLY DISALLOWED TH E ENTIRE EXPENSES. THUS IT IS NOT SIMPLY A CASE OF ESTIMATED DISALLOWANCE BUT A CASE OF TREATING THE ENTIRE CLAI M AS NOT GENUINE. IT HAS BEEN SUBMITTED BEFORE US THAT THE D ETAILS HAD NOT BEEN GIVEN AS THE SAME WERE VOLUMINOUS. THE DET AILS FOR ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 11 OF 71 THE MONTH OF MARCH HAS BEEN SUBMITTED BEFORE US SHO WING LARGE NO. OF ENTRIES. IN OUR VIEW THE REASON FOR N ON SUBMISSION OF DETAILS REQUISITIONED BY AO IS NOT CO NVINCING. IT IS A SETTLED LEGAL POSITION THAT BURDEN IS ON TH E ASSESSEE TO PROVE THAT THE EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THE AO IS ENTITLED TO MAKE ENQUIRIES IN RELATION TO ANY CLAIM MADE BY ASSESSEE. THEREFORE IN CASE THE AO IN CONNECTION WITH DETERM INATION OF TOTAL INCOME OF THE ASSESSEE WANTS TO MAKE ENQUIRI ES IN RELATION TO ANY ASPECT OF BUSINESS OF THE ASSESSEE IT IS REQUIRED TO RENDER ASSISTANCE IN THE MATTER. IN CAS E THE TRANSACTIONS WERE VOLUMINOUS THE ASSESSEE COULD HAV E BROUGHT TO THE NOTICE OF AO AND IN THAT CASE IT COU LD HAVE GIVEN PART OF THE DETAILS OF EXPENSES RELATING TO E ACH MONTH FOR SAMPLE CHECKING. IT HAS BEEN SUBMITTED THAT NO DISALLOWANCE HAD BEEN MADE IN THE PAST. MERELY BECA USE NO DISALLOWANCE HAD BEEN MADE IN THE EARLIER YEARS IS NO GROUND TO SEEK RELIEF IN SUBSEQUENT YEAR. THE AO IN THIS Y EAR HAS ATTEMPTED TO MAKE DETAILED EXAMINATION OF THE ISSUE TO FIND OUT THE GENUINENESS OF THE CLAIM. IT WAS ALSO BROUG HT TO OUR NOTICE THAT SIMILAR DISALLOWANCE HAS BEEN MADE IN T HE SUBSEQUENT YEARS ALSO. THEREFORE IN OUR VIEW THE E XERCISE INITIATED BY THE AO FOR DETAILED EXAMINATION OF THE ISSUE IN THIS YEAR HAS TO BE GIVEN A LOGICAL CONCLUSION BY E XAMINING THE NECESSARY DETAILS. GIVING FREE SAMPLES IS A NO RMAL BUSINESS PRACTICE IN PHARMACEUTICAL BUSINESS AND T HEREFORE DISALLOWANCE OF ENTIRE EXPENDITURE IS PRIMA FACIE UNJUSTIFIED. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 12 OF 71 THE MATTER IN OUR VIEW REQUIRES FRESH EXAMINATION A FTER VERIFICATION OF DETAILS ABOUT NAMES AND ADDRESSES O F DOCTORS BEFORE THE AO. WE THEREFORE SET ASIDE THE ORDER O F CIT (A) ON THIS POINT AND RESTORE THE ISSUE TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION OF THE DETA ILS FILED BY THE ASSESSEE AND AFTER ALLOWING OPPORTUNITY OF HEAR ING TO THE ASSESSEE 7. GROUND NO. 1(F) RELATES TO TRANSFER PRICING ISSUE AND WILL BE TAKEN UP LATER. 8. THE DISPUTE RAISED IN GROUND NO. 1(G) IS REGARDING DEDUCTION OF RS. 91 55 000/- IN RESPECT OF CONTRIBU TION TO LIC GROUP INSURANCE SCHEME. THE LEARNED SENIOR COUN SEL AT THE TIME OF HEARING OF THE APEAL DID NOT PRESS T HIS GROUND. THE GROUND IS THEREFORE DISMISSED AS NOT PRRESSED . 9. THE GROUND NO. 1 (H) IS REGARDING DISALLOWANCE OF RS. 5 00 000/- OUT OF DISCOUNT AND COMMISSION EXPENDITU RE CLAIMED BY THE ASSESSEE. THE AO NOTED THAT THE ASS ESSEE HAD CLAIMED DISCOUNT AND COMMISSION OF RS. 1 89 87 006/-. THE AO OBSERVED THAT THE ASSESSEE HAD BEEN ASKED TO SUBMIT COMPLETE DETAILS ALONG WITH NAMES AND ADDRESSES OF THE PARTIES WITH SUPPORTING EVIDENCES. BUT THE ASSESSEE HAD FILED ONLY THE BROAD DETAILS. NO QUANTITAIVE DETAILS OR A NY SUPPORTING EVIDENCE WERE FILED TO PROVE THE GENUINE NESS OF EXPENSES. THE AO FURTHER OBSERVED THAT THE ASSESSEE COULD ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 13 OF 71 HAVE AT LEAST PRODUCED FEW SUPPORTING VOUCHERS/BILL S ON A SAMPLE BASIS TO PROVE GENUINENESS WHICH HAS ALSO N OT BEEN DONE. AO THEREFORE DISALLOWED A SUM OF RS. 5 00 0 00/- ON ESTIMATE AS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 9.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SU BMITTED BEFORE CIT (A) THAT THE ASSESSEE HAD BEEN REGULARLY GIVING DISCOUNT AND COMMISSION FOR PROMOTION OF SALES AND NEVER IN THE PAST ANY DISALLOWANCE ON THIS ACCOUNT HAD BEEN MADE. IT WAS ALSO SUBMITTED THAT THE AO NEVER ASKED FOR THE NAMES AND ADDRESSES OF THE PARTIES WITH SUPPORTING EVIDEN CES. IT WAS ALSO POINTED OUT THAT THE ASSESSEE HAD A WELL L AID DOWN FINANCIAL AND ACCOUNTING SYSTEM AND ADEQUATE INTERN AL CONTROLS IN RESPECT OF ALL ITS TRANSACTIONS. THE EX PENDITURE HAD BEEN INCURRED FOR THE PURPOSE OF BUSINESS AND THEREFORE NO DISALLOWANCE SHOULD BE MADE. CIT (A) HOWEVER OBS ERVED THAT THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS VIDE ORDER SHEET NOTING DATED 11.9.2006 HAD BEEN ASKED T O FURNISH DETAILS OF COMMISSION PARTY WISE DATE NA ME AND THE LINKAGE TO THE CORRESPONDING BILLS WHICH WAS N OT FURNISHED BY THE ASSESSEE. THE ASSESSEE THEREAFTER VIDE ORDER SHEET NOTING DATED 10.10.2006 WAS ASKED TO EX PLAIN AS TO WHY THE DISALLOWANCE SHOULD NOT BE MADE AT THE R ATE OF 10%. THEREAFTER THE ASSESSEE FILED ONLY THE BREAK U P OF DISCOUNT AND COMMISSION AND NO OTHER DETAILS WERE FURNISHED. EVEN DURING THE APPELLATE PROCEEDINGS TH E ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 14 OF 71 ASSESSEE COULD NOT FURNISH THE FULL DETAILS. THE AS SESSEE COULD NOT FILE THE COPY OF AGREEMENT FOR PAYMENT OF COMMISSION THE RATE OF COMMISSION AND THE DETAILS OF BILLS. CIT (A) THEREFORE CONFIRMED THE AD-HOC DISALLOWAN CE OF RS. 5 00 000/- MADE BY AO AGGRIEVED BY WHICH THE ASSES SEE IS IN APPEAL BEFORE TRIBUNAL. 9.2 BEFORE US THE LEARNED SENIOR COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD REGULARLY INCURRED EXPENDITURE ON DISCOUNT AND COMMISSION FOR PROMOTIN G SALES. THE FULL DETAILS AS REQUIRED BY THE AUTHORIT IES COULD NOT BE SUBMITTED AS THE SAME WERE VOLUMINOUS. IT WAS AL SO SUBMITTED THAT NO DISALLOWANCE HAD BEEN MADE EITHER IN THE EARLIER YEAR OR IN THE SUBSEQUENT YEAR EVEN IN THE SCRUTINY ASSESSMENTS MADE U/S 143 (3) OF THE IT ACT. HE ALSO REFERRED TO THE COMPARATIVE DETAILS FILED AT PAGE 835 OF THE PAPERBOOK AS PER WHICH THE COMMISSION AND DISCOUNT AS PERCENT AGE OF SALES THIS YEAR WAS .55% COMPARED TO .43% IN ASSES SMENT YEAR 2002-03. THE DIFFERENCE BEING NOT BIG IT WAS S UBMITTED THAT NO DISALLOWANCE SHOULD BE MADE. THE LEARNED DR ON THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF AUTHORI TIES BELOW AND PLACED RELIANCE ON THE FINDING GIVEN IN THE RES PECTIVE ORDERS. 9.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IS REGARDING ESTIMATED DISALLOWANCE OF RS. 5 00 000/- OUT OF ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 15 OF 71 DISCOUNT AND COMMISSION EXPENSES OF RS. 1 89 87 006 /- CLAIMED BY THE ASSESSEE. THE ASSESSEE COULD NOT SUB MIT COMPLETE DETAILS ALONG WITH NAMES AND ADDRESSES OF THE PARTIES WITH SUPPORTING EVIDENCE WHICH WAS SPECIF ICALLY REQUISITIONED BY THE AO. SUCH DETAILS WERE ALSO NOT BEEN FILED BEFORE CIT(A) AND THEREFORE HE UPHELD THE DISALL OWANCE. IT HAS BEEN SUBMITTED BEFORE US THAT SIMILAR CLAIM H AD BEEN MADE BY THE ASSESSEE BOTH IN EARLIER YEARS AND IN THE SUBSEQUENT YEARS AND NO DISALLOWANCE HAS BEEN MADE EVEN IN THE SCRUTINY ASSESSMENT U/S 143 (3). IN OUR VIEW MERELY BECAUSE NO DISALLOWANCE HAD BEEN MADE IN EARLIER YE ARS OR IN SUBSEQUENT YEAR CANNOT BE THE BASIS FOR MAKING CLAI M FOR RELIEF IN THIS YEAR BECAUSE IT IS NOT POSSIBLE FOR THE AO TO MAKE DETAILED EXAMINATION OF EACH AND EVERY ISSUE R ELATING TO ASSESSMENT EVERY YEAR. THIS YEAR HE HAS TAKEN UP TH E MATTER FOR DETAILED EXAMINATION AND FOUND THAT THE EXPENSE S WERE NOT SUPPORTED BY DETAILS AND EVIDENCES. IT IS HOWEV ER A SETTLED LEGAL POSITION THAT EVEN IN CASES WHERE TH E DETAILS AND EVIDENCES ARE NOT AVAILABLE THE AO IS REQUIRED TO COMPUTE DISALLOWANCE ON AN OBJECTIVE BASIS ON THE B ASIS OF MATERIAL AVAILABLE ON THE RECORD. IN THIS CASE FROM COMPARATIVE DETAILS OF EXPENSES FILED WE FIND THAT EXPENSES ON ACCOUNT OF DISCOUNT AND COMMISSION HAVE BEEN CLA IMED AT .55% TOTAL SALES OF RS. 344 CRORE COMPARED TO .43% ON TURNOVER OF RS 345 CRORE IN THE IMMEDIATE PRECEDING YEAR. THEREFORE IF WE COMPUTE THE EXPENDITURE THIS YEAR AT THE SAME PERCENTAGE AS IN THE IMMEDIATE PRECEDING YEAR THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 16 OF 71 EXPENDITURE COMES TO RS. 1.47 CRORE AGAINST THE CLA IM OF RS. 1.89 CRORE. THUS ON THE BASIS OF CLAIM IN THE PRECE DING YEAR THERE IS AN EXCESS CLAIM OF ABOUT 42 LAKHS. THE AO HAS MADE ESTIMATED DISALLOWANCE OF ONLY RS. 5 00 000/-. IN O UR VIEW THE DISALLOWANCE MADE IS QUITE REASONABLE AND THE SAME IS UPHELD. 10. THE DISPUTE RAISED IN GROUND NO. 1 (I) IS REGARDING ESTIMATED DISALLOWANCE OF RS. 20 00 000/- OUT OF SALES PROMOTION EXPENSES. THE ASSESSEE HAD MADE CLA IM OF SALE PROMOTION EXPENSES AT RS. 5 45 77.106/-. THE A O DURING THE ASSESSMENT PROCEEDINGS HAD ASKED FOR SIM ILAR DETAILS AND EVIDENCE AS IN CASE OF DISCOUNT AND COM MISSION AS DISCUSSED EARLIER. THE ASSESSEE HAD HOWEVER FAIL ED TO FILE THE FULL DETAILS. EVEN DURING THE APPELLATE PROCEED INGS WHEN THE ASSESSEE HAD BEEN SPECIFICALLY ASKED TO TO FURN ISH FULL DETAILS THE ASSESSEE HAD GIVEN ONLY THE BREAK UP O F SALE PROMOTION EXPENSES CIT(A) THEREFORE OBSERVED THAT IN THE ABSENCE OF FULL DETAILS IT COULD NOT BE ESTABLISHE D THAT THE EXPENDITURE HAD BEEN INCURRED FULLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HE THEREFORE UPHELD THE DISA LLOWANCE TO THE EXTENT OF RS. 10 00 000/- AGAINST THE ESTIMA TED DISALLOWANCE OF RS. 20 00 000/- MADE BY THE AO. AGG REIVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEF ORE TRIBUNAL. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 17 OF 71 10.1 BEFORE US LEARNED SENIOR COUNSEL ADVANCED SIMILAR ARGUMENTS AS IN CASE OF DISCOUNT AND COMMIS SION. HE ALSO REFERRED TO THE COMPARATIVE DETAILS GIVEN AT P AGE 835 OF THE PAPERBOOK TO POINT OUT THAT EXPENDITURE ON ACCO UNT OF SALES PROMOTION AS PERCENTAGE OF SALES WAS LOWER TH IS YEAR COMPARED TO EXPENDITURE IN THE ASSESSMENT YEAR 2002 -03. IT WAS ALSO SUBMITTED THAT NO DISALLOWANCE HAD BEEN MA DE EITHER IN THE EARLIER YEAR OR IN THE SUBSEQUENT YEA RS EVEN IN THE SCRUTINY ASSESSMENT. IT WAS THEREFORE URGED T HAT THE ADDITION MADE MAY BE DELETED. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDER OF CIT(A) AND PLACED RELIA NCE ON THE FINDINGS GIVEN IN HIS ORDER. 10.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED T HE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDI NG ESTIMATED DISALLOWANCE OUT OF SALES PROMOTION EXPEN SES. THE ASSESSEE HAS CLAIMED SALES PROMOTION EXPENSES OF RS . 5 45 77 106/-. ESTIMATED DISALLOWANCE OF 20 00 000/ - HAD BEEN MADE BY AO AS THE ASSESSEE COULD NOT FILE FULL DETAILS RELATING TO THE CLAIM. CIT(A) REDUCED THE DISALLOW ANCE TO RS. 10 00 000/-. IT HAS BEEN SUBMITTED BEFORE US THAT NO DISALLOWANCE HAD BEEN MADE IN THE EARLIER YEARS OR IN THE SUBSEQUENT YEAR EVEN IN THE SCRUTIY ASSESSMENTS MAD E BY THE AO. COMPARATIVE DETAILS OF SUCH CLAIM WITH RESP ECT TO EARLIER YEARS HAS BEEN FILED WHICH SHOWS THAT THE C LAIM MADE BY THE ASSESSEE THIS YEAR IS AT 1.59% OF SALES COMP ARED TO 2.2% OF SALES IN THE IMMEDIATE PRECEDING YEAR. THUS THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 18 OF 71 CLAIM MADE BY THE ASSESSEE IS LOWER THIS YEAR COMPA RED TO THE IMMEDIATE PRECEDING YEAR IN WHICH IT HAS BEEN ALLOWED FULLY. EVEN IF THE ASSESSEE HAS NOT FILED FULL DETA ILS THE DISALLOWANCE IS REQUIRED TO BE MADE BY AO ON AN OBJ ECTIVE BASIS ON THE BASIS OF MATERIAL AVAILABLE ON RECORD. THERE IS NO MATERIA PLACED BEFORE US TO SHOW THAT THE EXPENSES CLAIMED BY ASSESSEE IS EXCESSIVE. IN FACT WE FIND THAT TH E CLAIM IS LOWER THIS YEAR. THEREFORE DISALLOWANCE OF EXPENSE S CANNOT BE UPHELD. WE ACCORDINGLY SET ASIDE THE ORDER OF CI T(A) ON THIS POINT AND DELETE THE ADDITION MADE. 11. THE DISPUTE RAISED IN THE GROUND NO. 1 (J) IS REGARDING ESTIMATED DISALLOWANCE OF RS. 10 00 000/- OUT OF TRAVELLING CONVEYANCE AND VEHICLE EXPENSES CLAIMED BY THE ASSESSEE AT RS. 11 21 56 760/-. THE AO HAD ASKED F OR THE DETAILS OF THESE EXPENSES WITH NAMES AND ADDRES SES OF THE PARTIES ETC. AS DONE IN CASE OF DISCOUNT AND C OMMISSION AND SALES PROMOTION. THE ASSESSEE HOWEVER COULD NOT FILE THE FULL DETAILS. THE AO THEREFORE MADE ESTIMATED DIS ALLOWANCE OF RS. 10 00 000/-. 11.1 IN APEAL CIT (A) OBSERVED THAT DURING THE APP ELLATE PROCEEDINGS ALSO THE ASSESSEE HAD BEEN SPECIFICALLY ASKED TO FILE DETAILS OF TRAVELLING EXPENSES WITH NAMES AND DESIGNATION OF OFFICER DATE AND PURPOSE ETC. WHICH WAS NOT FI LED. CIT (A) THEREFORE HELD THAT IN ABSENCE OF FULL DETAILS IT COULD NOT BE ESTABLISHED THAT THE EXPENDITURE HAD BEEN INCURRED WHOLLY ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 19 OF 71 AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HE TH EREFORE CONFIRMED THE DISALLOWANCE MADE BY AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 11.2 BEFORE US THE SUBMISSIONS MADE BY THE LEARNE D SENIOR COUNSEL WERE SIMILAR TO THOSE ADVANCED IN CA SE OF DISCOUNT COMMISSION AND SALES PROMOTION. IT WAS ARG UED THAT FULL DETAILS COULD NOT BE GIVEN AS THE SAME WE RE VOLUMINOUS. IT WAS FURTHER POINTED OUT THAT NO DISA LLOWANCE HAD BEEN MADE ON THIS ACCOUNT EITHER IN THE EARLIER YEARS OR IN THE SUBSEQUENT YEAR EVEN IN THE SCRUTINY ASSESSM ENTS. HE ALSO REFERRED TO THE COMPARATIVE DETAILS GIVEN AT P AGE 835 OF THE PAPERBOOK TO POINT OUT THAT THE CLAIM THIS YEAR AS A PERCENTAGE OF SALES WAS LOWER COMPARED TO IN THE IM MEDIATE PRECEDING YEAR. IT WAS FURTHER SUBMITTED THAT THE A SSESSEE BEING A COMPANY NO DISALLOWANCE COULD ALSO BE MADE ON ACCOUNT OF PERSONAL ISSUES. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE HIGH COURT OF GUJARAT IN CASE O F SAYAJI IRON & ENGINEERING CO. (253 ITR 749). IT WAS THERE FORE URGED THAT NO DISALLOWANCE SHOULD BE MADE. THE LEAR NED DR ON THE OTHER HAND SUPPORTED THE ORDER OF CIT(A) AND PLACED RELIANCE ON THE FINDINGS GIVEN IN HIS ORDER. 11.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE DISPUTE IS REGARDING ESTIMAT ED DISALLOWANCE OF RS. 10 00 000/- OUT OF TRAVELLING CONVEYANCE AND VEHICLE EXPENSES OF RS. 11 21 56 760/-. THE AO HAD ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 20 OF 71 MADE ESTIMATED DISALLOWANCE ON THE GROUND THAT FULL DETAILS OF EXPENSES WITH NAMES AND ADDRESSES OF THE PARTIES HAD NOT BEEN GIVEN. CIT (A) HAS CONFIRMED THE DISALLOWANCE. WE FIND THAT THE ISSUE IS SIMILAR TO THE DISALLOWANCE OF SA LES PROMOTION EXPENSES WHICH WE HAVE DEALT WITH EARLIER . IN THE ABSENCE OF FULL DETAILS AND EVIDENCE THE AO IS JUST IFIED IN MAKING THE ESTIMATED DISALLOWANCE. HOWEVER SUCH DISALLOWANCE HAS TO BE COMPUTED ON AN OBJECTIVE BAS IS ON THE BASIS OF MATERIAL AVAILABLE ON RECORD. IN THIS CASE WE FIND THAT THE CLAIM MADE BY THE ASSESSEE IS AT 3.2% OF TOTAL SALES COMPARED TO 3.30% OF TOTAL SALES IN THE IMMEDIATE P RECEDING YEAR. THERE IS NO MATERIAL PLACED ON RECORD BEFORE US TO SHOW THAT THE CLAIM MADE BY THE ASSESSEE IS EXCESSIVE. N O PART OF THE CLAIM CAN ALSO BE DISALLOWED ON ACCOUNT OF PERS ONAL USES IN RESPECT OF VEHICLES ETC. AS THE ASSESSEE IS A CO MPANY. THEREFORE IN OUR VIEW ON THE FACTS OF THE CASE DISA LLOWANCE MADE IS NOT JUSTIFIED. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT (A) AND DELETE THE ADDITION MADE. 12. GROUND NO. 1 (K) IS REGARDING THE DISALLOWANCE OF LOSS IN RESPECT OF SALE OF CURRENT INVESTMENTS. TH E AO DURING THE ASSESSMENT PROCEEDINGS ASKED THE ASSESSE E TO FILE DETAILS OF LOSS OF RS. 1 66 054/- BUT NO DETAILS W ERE SUBMITTED BY THE ASSESSE. THE AO THEREFORE DISALL OWED THE CLAIM OF LOSS FOR WANT OF VERIFICATION. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 21 OF 71 12.1 IN APPEAL THE ASSESSEE SUBMITTED BEFORE CIT ( A) THAT THE AO HAD NOT SPECIFICALLY ASKED FOR ANY SEPA RATE STATEMENT IN RESPECT OF SAID LOSS. THE ASSESSEE FIL ED THE STATEMENT SHOWING LOSS ON ACCOUNT OF SALE OF INVEST MENTS BEFORE CIT (A). CIT(A) AFTER CONSIDERING THE SUBMI SSIONS DELETED THE ADDITION MADE SUBJECT TO VERIFICATION B Y THE AO. HE HOWEVER ALSO DIRECTED THE AO TO VERIFY THE CLAI M OF THE ASSESSEE AND ALLOW THE CLAIM AS PER LAW AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 12.2 BEFORE US LEARNED SENIOR COUNSEL SUBMITTED T HAT THE ASSESSEE HAD FILED THE DETAILS BEFORE CIT (A) W HO HAD ALLOWED THE CLAIM SUBJECT TO VERIFICATION BY THE AO . HOWEVER THE AO IN THE APPEAL EFFECT ORDER DATED 22.6.2001 H AD NOT GIVEN EFFECT TO THE ORDER OF CIT (A). IT WAS THERE FORE URGED THAT THE AO MAY BE DIRECTED TO GIVEN EFFECT TO THE ORDER OF CIT (A). THE LEARNED DR PLACED RELIANCE ON THE ORDER OF CIT (A). 12.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED MATTER CAREFULLY. THE DISPUTE RAISED IS REGARDING D ISALLOWANCE OF LOSS ON ACCOUNT OF SALE OF CURRENT INVESTMENTS. THE AO HAD DISALLOWED THE CLAIM OF LOSS ON THE GROUND THAT NO DETAILS HAD BEEN GIVEN. THESE DETAILS HOWEVER HAD BEEN SUBMITTE D BEFORE CIT(A) WHO DIRECTEDTHE AO TO ALLOW THE CLAIM AS PER LAW AFTER VERFICATION OF THE DETAILS FILED BY THE ASSESSEE. T HE AO HAS HOWEVER NOT GIVEN EFFECT TO THE ORDER OF CIT(A). IN OUR VIEW SUCH VERIFICATION OF DETAILS IS NOT POSSIBLE BEFORE THE AO ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 22 OF 71 WITHOUT GIVING OPPORTUNITY TO THE ASSESSEE WHICH WA S NOT POSSIBLE AT THE LEVEL OF CIT (A) AS HE HAD NO POWER TO SET ASIDE THE ASSESSMENT. WE THEREFORE SET ASIDE THE ORDER OF CIT (A) ON THIS POINT AND RESTORE THE MATTER TO THE FILE OF AO FOR FRESH ORDER ON THIS ISSUE AFTER NECESSARY VERIFICATION OF DETAILS FILED BY THE ASSESSEE AND AFTER ALLOWING OPPORTUNITY OF H EARING TO THE ASSESSEE. 13. THE GROUND NO. 1(L) IS REGARDING ALLOWABILITY OF CLAIM OF DEDUCTION U/S 80-IB IN RESPECT OF DEPB INC OME OF RS. 22 76 670/-. 13.1 THE AO NOTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 2 48 57 018/- U/S 80-IB OF THE IT ACT. WHICH ALSO INCLUDED DEDUCTION IN RESPECT OF DEPB IN COME. THE AO DISALLOWED THE CLAIM IN RESPECT OF DEPB INCO ME ON THE GROUND THAT DEPB INCOME WAS NOT DERIVED FROM TH E BUSINESS OF THE UNDERTAKING FOLLOWING THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF STERLING FOODS LTD . VS. CIT ( 237 ITR 579) AND SOME OTHER JUDGMENTS. IN APPEAL CIT (A) CONFIRMED THE DISALLOWANCE MADE BY AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 13.2 WE HAVE HEARD BOTH THE PARTIES PERUSED THE RECORDS AND CONSIDERED MATTER CAREFULLY. THE DISPUT E IS REGARDING ALLOWABILITY OF CLAIM OF DEDUCTION U/S 80 -IB IN RESPECT OF DEPB INCOME. WE FIND THAT THE ISSUE IS C OVERED BY ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 23 OF 71 THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF LI BERTY INDIA LTD. ( 317 ITR 218) TO WHICH BOTH THE PARTIES AGREED. THE HONBLE SUPREME COURT IN THE SAID CASE HAVE HEL D THAT SECTION 80-IB DID NOT COVER THE PROFIT FROM THE SOU RCES BEYOND THE FIRST DEGREE AND ONLY THE PROFIT OF THE ELIGIBLE BUSINESS OF UNDERTAKING COULD BE ALLOWED AS DEDUCTI ON. IT WAS ALSO HELD THAT DUTY DRAWBACK AND DEPB WERE NOT PROFIT DERIVED FROM THE ELIGIBLE BUSINESS. FOLLOWING THE S AID JUDGMENT OF HONBLE SUPREME COURT WE CONFIRM THE O RDER OF CIT (A) DISALLOWAING THE CLAIM. 14. THE DISPUTE RAISED IN GROUND NO. 1 (M ) IS REGARDING COMPUTATION OF INDIRECT COST IN RESPECT OF EXPORT OF TRADING GOODS AT RS. 14 19 046/- IN PLACE OF 50 000/- ESTIMATED BY THE ASSESSEE. 14.1 THE LEARNED SENIOR COUNSEL AT THE TIME OF HE ARING OF THE APPEAL DID NOT PRESS THIS GROUND. THE GROUND RAISED IS THEREFORE DISMISSED AS NOT PRESSED. 15. THE DISPUTE RAISED IN GROUND NO. 1(N) IS REGARDING DEDUCTION OF 90% OF FOLLOWING RECEIPTS FR OM THE PROFITS OF THE BUSINESS AS PER EXPLANATION (BAA) WH ILE COMPUTING DEDUCTION U/S 80HHC OF THE IT ACT. SR. NO. PARTICULARS AMOUNT (RS.) ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 24 OF 71 (A) INTEREST ON DEPOSIT AND OTHERS 15 08 235/- (B) INTEREST ON DELAYED PAYMENT 87 65 528/- (C) INSURANCE CLAIM 8 60 679/- (D) EXPORT INCENTIVES 49 99 990/- (E) INDENTING COMMISSION RECEIVED 3 23 12 516/- (F) INCOME FROM INSTRUMENT SERVICE CONTRACTS 1 18 74 846/- (G) MISCELLANEOUS INCOME 1 08 22 616/- 15.1 AO IN THE ASSESSMENT ORDER OBSERVED THAT THE R ECEIPTS MENTIONED IN THE TABLE ABOVE THOUGH FELL UNDER THE HEAD PROFIT AND GAINS OF BUSINESS AND PROFESSION BUT T HE SAME DID NOT DIRECTLY ARISE FROM EXPORT BUSINESS BUT WER E ONLY INCIDENTAL INCOME. HE THEREFORE EXCLUDED 90% OF S UCH RECEIPTS FROM THE PROFIT OF BUSINESS AS PER EXPLANA TION (BAA) WHILE COMPUTING DEDUCTION U/S 80HHC. 15.2 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT (A) THAT THE DEPOSITS ON WHICH THE INTEREST HAD BEEN EARNED HAD BEEN MADE AS MARGIN MO NEY OR SECURITY DEPOSITS MADE FOR THE PURPOSE OF BUSINESS. SIMILARLY INTEREST ON DELAYED PAYMENT WAS FROM CUSTOMERS FOR LATE PAYMENT OF SALE BILLS AND THEREFORE IT WAS AN INT EGRAL PART OF BUSINESS INCOME. SIMILARLY INSURANCE CLAIM WAS ON ACCOUNT OF LOSS OF GOODS DAMAGES ETC. WHICH WAS A PART AN D PARCEL OF BUSINESS. THE INDENTING COMMISSION HAD BEEN RECEIVE D IN THE COURSE OF BUSINESS FOR ACTING AS INDENTING AGENTS F OR CERTAIN ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 25 OF 71 PARTIES IN INDIA. THEREFORE THE SAME AROSE FROM TH E BUSINESS ACTIVITY. THE INCOME FROM INSTRUMENTS SERVICE CONTR ACTS HAD ARISEN FROM SERVICES RENDERED IN CONNECTION WITH MAINTENANCE CONTRACTS AND OTHER SERVICES IN RESPECT OF IMPORTS AND SALE OF MEDICAL INSTRUMENTS. THE SAME THEREFORE AROSE FROM THE BUSINESS OPERATION. IT WA S ALSO SUBMITTED THAT THE MISCELLANEIOUS INCOME INCLUDED S CRAP SALES SUNDRY SALES ETC . WHICH SHOULD BE EXCLUDED AS THE SAME WENT TO REDUCE THE COST OF GOODS PRODUCED. CIT (A) HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED AND FOLLOWING THE DECISION OF HIS PREDECESSOR IN ASSESSMENT YEAR 2002-03 CONFRIMED THE ORDER OF AO AGGRIEVED BY WHICH THE A SSESSEE IS IN APPEAL BEFORE TRIBUNAL. 15.3 BEFORE US LEARNED SENIOR COUNSEL ARGUED THAT THE AO HAD ASSESSED THE VARIOUS RECEIPTS MENTIONED IN T HIS GROUND AS INCOME FROM BUSINESS AND NOT AS INCOME FR OM OTHER SOURCES. AS REGARDS THE INTEREST ON DEPOSITS EXPORT INCENTIVES AND INDENTIN COMMISSION HE WAS AGREEAB LE TO REDUCTION OF 90% AS PER EXPLANATION (BAA) PROVIDED ONLY THE NET AMOUNT WAS REDUCED IN VIEW OF THE JUDGMENT OF H ONBLE SUPREME COURT IN CASE OF ASSOCIATED CAPSULES (343 I TR 89). IN RELATION TO INSURANCE CLAIM IT WAS SUBMITTED THA T THE SAME WAS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGME NT OF HON HIGH COURT OF BOMBAY IN CASE OF PFIZER (330 IT R 62). THE INTEREST ON DELAYED PAYMENT IT WAS POINTED OUT HAD BEEN RECEIVED FROM THE CUSTOMERS WHICH WAS INTEGRAL PART OF ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 26 OF 71 THE BUSINESS OPERATION AND THEREFORE IT COULD NOT BE CONSIDERED AS PER EXPLANATION (BAA). SIMILARLY THE INCOME FROM INSTRUMENTS SERVICE CONTRACT WAS IN RESPECT OF MAINTENANCE CONTRACT IN RELATION TO EQUIPMENTS SOLD BY THE ASSESSEE AS A TRADING ITEM. THEREFORE THIS INCOME WAS ALSO AN INTEGRAL PART OF BUSINESS OPERATIONS AND COULD N OT BE CONSIDERED FOR REDUCTION UNDER EXPLANATION (BAA). I T WAS ALSO SUBMITTED THAT THE MISCELLANEOUS INCOME INCLUDED SC RAP SALES SUNDRY SALES AND CASH DISCOUNT RECEIPTS WHIC H WERE INTEGRAL PART OF THE BUSINESS AND THEREFORE NOT C OVERED BY THE EXPLANATION (BAA). IT WAS ACCORDINLGY URGED THA T THESE RECEIPTS SHOULD BE EXCLUDED FROM THE REDUCTION AT T HE RATE OF 90%. LERNED DR ON THE OTHER HAND SUPPORTED THE ORDE RS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDIN GS GIVEN IN THE RESPECTIVE ORDERS. 15.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDI NG DEDUCTION OF 90% CERTAIN RECEIPTS AS MENTIONED IN P ARA 15 EARLIER FROM THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/S 80HHC. THE AO HAD EXCLUDED 90% OF SUCH RECEIPT S FROM THE PROFIT OF BUSINESS TREATING THESE RECEIPTS AS C OVERED BY THE EXPLANATION (BAA) OF SECTION 80HHC AS PER WHICH CERTAIN RECEIPTS SUCH AS INEREST COMMISSION RENT CHARGES ETC. ARE REQUIRED TO BE REDUCED FROM THE PROFIT OF BUSINESS AT THE RATE OF 90%. THESE RECEIPTS HAVE BEEN ASSESSED BY AO AS INCOME UNDER THE HEAD PROFIT FROM BUSINESS AND PROFESSIO N ABOUT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 27 OF 71 WHICH THERE IS NO DISPUTE. DISPUTE IS ONLY AS TO WH ETHER 90% OF SUCH RECEIPTS SHOULD BE REDUCED FROM THE PROFIT OF BUSINESS AS PER EXPLANATION (BAA). AS REGARDS THE I NTEREST ON ON DEPOSITS AND OTHER EXPORT INCENTIVE AND INDENTIN G COMMISSION THE LEARNED SENIOR COUNSEL FAIRLY AGREE D THAT 90% OF THESE ITEMS MAY BE REDUCED FROM THE PROFIT O F BUSINESS BUT HE ARGUED THAT IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF ACG ASSOCIATED CAP SULES (SUPRA) 90% OF NET AMOUNT ONLY SHOULD BE REDUCED. S INCE IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT ONLY THE NET RECEIPTS MENTIONED IN EXPLANATION (BAA) ARE REQUIRE D TO BE REDUCED WE THEREFORE SET ASIDE THE ORDER OF CIT( A) ON THIS POINT AND DIRECT THE AO TO REDUCED 90% OF SUCH NET RECEIPTS AFTER NECESSARY VERIFICATION. 15.5 THE INTEREST ON DELAYED PAYMENT HAD BEEN RECEIVED FROM THE CUSTOMERS FOR EARLY PAYMENT OF SA LE BILLS. IT HAD BEEN ARGUED THAT THIS IS AN INTEGRAL PART OF BU SINESS OPERATION AND THEREFORE SHOULD NOT BE COVERED BY THE EXPLANATION (BAA). WE AGREE WITH THE SUBMISSIONS MA DE AS IN OUR VIEW INTEREST ON DELAYED PAYMENT HAS THE SAME CHARACTERISTICS AS THE SALE PRICE AND THEREFORE IT HAS TO BE TAKEN AS ARISING FROM BUSINESS OPERATIONS AND IS NO T REQUIRED TO BE REDUCED AS PER EXPLANATION (BAA). TH E INSURANCE CLAIM IT HAS BEEN POINTED OUT IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF HONBLE HIGH COU RT OF BOMBAY IN CASE OF PFIZER ( 330 ITR 62). EARLIER HON BLE HIGH ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 28 OF 71 COURT OF BOMBAY IN CASE OF DRESSER RAND INDIA PVT. LTD. (323 ITR 429) HAD HELD THAT INSURANCE CLAIM WAS COVERED BY EXPLANATION (BAA). HOWEVER IN THAT CASE HONBLE HI GH COURT HAD PROCEEDED ON THE CONCLUSION MADE BY THE COUNSEL OF THE ASSESSEE THAT INSURANCE CLAIM WAS ALSO COVERED BY T HE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT VS K. RAVINDRANATHAN NAIR (295 ITR 228). HONBLE HIGH CO URT IN CASE OF PFIZER AFTER DETAILED EXAMINATION HAVE HELD THAT INSURANCE CLAIM HAS TO BE TAKEN AS AN INTEGRAL PART OF INCOME ARISING FROM THE BUSINESS OPERATIONS AND IS NOT REQ UIRED TO REDUCED AS PER EXPLANATION (BAA). WE THEREFORE SE T ASIDE THE ORDER OF CIT (A) ON THIS POINT AND HOLD THAT 90% OF INSURANCE CLAIM WILL NOT BE REDUCED AS PER EXPLANATION (BAA). 15. AS REGARDS THE INCOME FROM INSTRUMENTS SERVICE CONTRACTS IT HAS BEEN SUBMITTED BY THE ASSESSEE THA T THE SERVICE CONTRACT WAS A MAINTENANCE CONTRACT IN RELA TION TO EQUIPMENTS SOLD BY ASSESSEE AS A TRADING ITEM. THIS CLAIM HAS NOT BEEN CONTROVERTED BEFORE US. THEREFORE SUC H INCOME HAS TO BE CONSIDERED AS INTEGRAL PART OF BUSINESS O PERATIONS WHICH IS NOT REQUIRED TO BE REDUCED AS PER EXPLANAT ION (BAA). WE THEREFORE SET ASIDE THE ORDER OF CIT (A) ON TH IS POINT AND DIRECT THE AO TO NOT REDUCTE 90% OF SUCH INCOME FRO M PROFIT OF BUSINESS AS PER EXPLANATION (BAA). IN RELATION TO MISCELLANEOUS INCOME IT WAS SUBMITTED THAT THESE A LSO INCLUDED SCRAP SALES SUNDRY SALES AND CASH DISCOUN T RECEIPTS WHICH WERE INTEGRAL PART OF BUSINESS OPERA TION. THIS ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 29 OF 71 ASPECT IN OUR VIEW REQUIRES VERIFICATION. WE THERE FORE RESTORE THIS ISSUE TO THE FILE OF AO FOR PASSING A FRESH OR DER AFTER NECESSARY VERIFICATION. THE RECEIPTS ON ACCOUNT OF SCRAP SALES SUNDRY SALES AND CASH DISCOUNT IF ANY WHICH ARE INT EGRAL PART OF BUSINESS OPERATION WILL NOT BE REDUCED BY AO AS PER EXPLANATION (BAA). REMAINING SUMS WILL HOWEVER BE R EDUCED AT THE RATE OF 90% BUT THE AO WILL ENSURE THAT ONLY THE NET AMOUNT ARE REDUCED AFTER EXCLUDING THE EXPENSES INC URRED FOR EARING SUCH INCOME FOLLOWING THE JUDGMENT OF HO NBLE SUPREME COURT IN CASE OF ACG ASSOCIATED CAPSULES (S UPRA). 16. THE DISPUTE RAISED IN GROUND NO. 1 (O) IS REGARDING REDUCTION OF 100% OF INTEREST ON FD WITH BANKS AT RS. 55 13 547/- AND INTEREST ON INCOME TAX REFUND O F RS. 75 257/- FROM THE PROFIT OF BUSINESS WHILE COMPUTIN G DEDUCTION U/S 80HHC. 16.1 IN APPEAL CIT (A) CONFIRMED THE ORDER OF AO EXCLUDING THE INTEREST ON INCOME TAX REFUND AND FD WITH BANKS AT THE RATE OF 100% WHILE COMPUTING THE DEDUC TION U/S 80HHC. AGGREIVED BY THE SAID DECISION THE ASSE SSEE IS IN APPEAL BEFORE TRIBUNAL. 16.2 BEFORE US LEARNED SENIOR COUNSEL APPEARING FO R THE ASSESSEE SUBMITTED THAT HE HAD NO OBJECTION FOR EXC LUSION OF INTEREST ON INCOME TAX REFUND AT THE RATE OF 100%. IT WAS ALSO SUBMITTED THAT THE ASSESSEE WILL BE SATISFIED IF TH E INTEREST ON ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 30 OF 71 FD IS ALSO EXCLUDED FULLY PROVIDED NETTING IS ALLOW ED TO THE ASSESSEE. IN OTHER WORDS IT WAS SUBMITTED THAT ONLY NET INTEREST INCOME SHOULD BE EXCLUDED WHILE COMPUTING DEDUCTION U/S 80HHC. THE LEARNE DR ON THE OTHER HAN D PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 16.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDI NG EXCLUSION OF INTEREST ON FD AND INTEREST ON INCOME TAX REFUND FROM THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/S 80 HHC. THE INTEREST ON INCOME TAX REFUND HAS TO BE TREATED AS INCOME FROM OTHER SOURCES AND THEREFORE THE ENTIR E AMOUNT IS REQUIRED TO EXCLUDED FROM THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/S 80HHC. THE LEARNED SENIOR COUNSEL ALSO FAIRLY AGREED THAT THE ASSESSEE HAD NO OBJECTION IF THE INTEREST ON FD WAS ALSO EXCLUDED FROM THE PR OFIT OF BUSINESS PROVIDING THE NETTING WAS ALLOWED TO THE A SSESSEE. WE FIND THE CLAIM REASONABLE BECAUSE ONLY THE NET I NCOME AFTER DEDUCTING THE EXPENSES INCURRED FOR EARNING O F THE INCOME HAS TO BE EXCLUDED FROM THE PROFIT OF BUSINE SS. WE THEREFORE HOLD THAT NET FD INTEREST HAS TO BE EXCL UDED FULLY FROM THE PROFIT OF BUSINESS. THE ISSUE OF NETTING IS HOWEVER RESTORED TO THE FILE OF AO FOR PASSING A FRESH ORDE R AFTER NECESSARY EXAMINATION AND AFTER ALLOWING OPPORTUNIT Y OF HEARING TO THE ASSESSEE. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 31 OF 71 17. THE GROUND NO. 1 (P) IS REGARDING REDUCTION OF 90% OF THE VALUE OF REVERSAL OF REVALUATION LOSS ON ASSETS WHILE COMPUTING DEDUCTION U/S 80HHC AS PER EXPLANAT ION (BAA). 17.1 THE ASSESSEE HAD SHOWN REVALUATION LOSS ON ACCOUNT OF CERTAIN ASSETS IN THE EARLIER YEAR AND I N THIS YEAR THE ENTRY HAS BEEN REVERSED AND THE AMOUNT DEBITED TO THE P&L ACCOUNT EARLIER HAS BEEN SHOWN AS INCOME. THE A O TREATED THIS INCOME OF THE NATURE DESCRIBED IN EXPL ANATION (BAA) AND REDUCED 90% OF THE SAME FROM THE PROFIT O F BUSINESS WHILE COMPUTING DEDUCTION U/S 80HHC. IN AP PEAL CIT (A) UPHELD THE ACTION OF AO ON THE GROUND THAT THE ASSESSEE HAD MADE NO SUBMISSIONS ON THE ISSUE. AGGR EIVED BY THE DECISION OF CIT(A) THE ASSESSEE IS IN APPEA L BEFORE TRIBUNAL. 17.2 BEFORE US THE LEARNED AR FOR THE ASSESSEE REFERRING TO THE COMPUTATION OF INCOME MADE BY AO A T PAGE 49 OF THE ORDER SUBMITTED THAT THE REVERSAL OF REVA LUATION LOSS HAS BEEN ASSESSED BY AO AS INCOME FROM BUSINESS. TH EREFORE THE SAME HAS TO BE CONSIDERED AS PART OF PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/S 80HHC. AS REGARDS THE APPLICABILITY OF PROVISIONS OF EXPLANATION (BAA) I T WAS SUBMITTED THAT THE SAID EXPLANATION WAS APPLICABLE IN CASE OF ANY RECEIPTS BY WAY OF BROKERAGE COMMISSION INTER EST ETC. INCLUDED IN THE PROFIT OF BUSINESS. IT WAS POINTED OUT THAT THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 32 OF 71 WRITE BACK OF THE REVALUATION LOSS WAS NOT A RECEIP T AND THEREFORE THE EXPLANATION (BAA) CANNOT BE APPLIED. LEARNED DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDER O F CIT(A). 17.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE ASSESSEE IN THE EARLIER YEAR HAD DEBITED THE P&L ACCOUNT ON ACCOUNT OF LOSS ARISING FROM REV ALUATION ON CERTAIN ASSETS. IN THE CURRENT YEAR THE ASSESSE E HAS REVERSED THE ENTRY AND CREDITED THE P&L ACCOUNT BY THE SAID AMOUNT WHICH HAS BEEN ASSESSED AS BUSINESS INCOME B Y THE AO. THE DISPUTE IS AS TO WHETHER 90% OF SUCH INCOME CAN BE CONSIDERED FOR REDUCTION FROM PROFIT OF BUSINESS AS PER EXPLANATION (BAA). THE SAID EXPLANATION APPLIES TO ANY RECEIPTS BY WAY OF BROKERAGE COMMISSION INTEREST RENT CHARGES OR ANY OTHER RECEIPTS OF SIMILAR NATURE INC LUDED IN THE BUSINESS PROFIT. THE AMOUNT UNDER CONSIDERATION IS NOT RECEIPT BY THE ASSESSEE DURING THE YEAR. IT IS ONLY A WRITE BACK OF LOSS CLAIMED EARLIER AND CREDITED TO THE P& L ACCOUNT WITHOUT ANY ACTUAL RECEIPT. THEREFORE WE AGREE WIT H THE SUBMISSION OF THE LEARNED SENIOR COUNSEL THAT THE P ROVISIONS OF EXPLANATION (BAA) CANNOT BE APPLIED TO SUCH INCO ME. THE AMOUNT HAS ALREADY BEEN ASSESSED AS BUSINESS INCOME BY THE AO AND THEREFORE IT WOULD BE FULLY ELIGIBLE F OR DEDUCTION U/S 80HHC. WE HOLD ACCORDINGLY. 18. THE DISPUTE RAISED IN GROUND NO. 1 (Q) IS REGARDING REDUCTION OF THE DEDUCTION ALLOWED U/S 80 -IB FROM ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 33 OF 71 THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTION U/ S 80HHC. THE AO WHILE COMPUTING DEDUCTION U/S 80HHC H AS REDUCED FROM THE PROFIT OF BUSINESS AN AMOUNT OF RS . 2 43 59 001/- BEING THE DEDUCTION ALLOWED U/S 80-IB . 18.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT (A) THAT ONLY A SUM OF RS. 135 054 AND NOT RS. 2 48 57 018/- SHOULD BE REDUCED FROM THE BU SINESS. CIT(A) HOWEVER DID NOT ACCEPT THE CONTENTIONS RAI SED AND AGREED WITH THE AO THAT DEDUCTION ALLOWED U/S 80-IB HAS TO BE REDUCED FROM THE PROFIT OF BUSINESS AND ACCORDIN GLY UPHELD THE ACTION OF THE AO. AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 18.2 WE HAVE HEARD BOTH THE PARTIES PERUSED THE RECORDS AND CONSIDERED MATTER CAREFULLY. THE DISPUT E RAISED IN THIS GROUND IS WHETHER THE DEDUCTION ALLOWED U/S 80-IB HAS TO BE REDUCED FROM THE PROFIT OF BUSINESS FOR T HE PURPOSE OF COMPUTATION OF DEDUCTION U/S 80HHC. IN THIS CASE THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 80-IB AS WEL L AS U/S 80HHC. THE ISSUE IS WHETHER THE DEDUCTION UNDER THE BOTH PROVISIONS HAS TO BE ALLOWED WITH RESPECT TO THE SA ME PROFIT OF BUSINESS OR THE DEDUCTION U/S 80HHC HAS TO BE CONSIDERED ONLY IN RESPECT OF PROFIT OF BUSINESS R EDUCED BY THE DEDUCTION ALREADY ALLOWED U/S 80-IB. WE FIND TH AT THIS ISSUE HAS ALREADY BEEN DECIDED BY THE HONBLE HIGH COURT OF BOMBAY IN CASE OF ASSOCIATED CAPSULES (P) LTD. VS. CIT (332 ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 34 OF 71 ITR 42) IN WHICH IT HAS BEEN HELD THAT THE AMOUNT O F PROFIT ALLOWED AS DEDUCTION U/S 80-IA IS NOT REQUIRED TO B E REDUCED FROM THE PROFIT OF BUSINESS WHILE COMPUTING DEDUCTI ON U/S 80HHC. THE ORDRE OF CIT(A) IS THEREFORE SET ASID E AND THE AO IS DIRECTED TO COMPUTE THE DEDUCTION ACCORDINGLY . 19. THE DISPUTE RAISED IN GROUND NO. 1 (R) IS REGARDING LEVY OF INTEREST U/S 234B 234C AND 234D. 19.1 THE LEARNED SENIOR COUNSEL FAIRLY AGREED THAT LEVY OF INTEREST IS ONLY CONSEQUENTIAL. THE AO THEREFORE WILL RECOMPUTE THE INTEREST AT THE TIME OF GIVING EFFECT TO THIS ORDER. 20. THE DISPUTE RAISED IN GROUND NO 1 (S) IS REGARDING DISALLOWANCE OF DEPRECIATION IN RESPECT O F SAP EXPENSES OF RS. 40 55 864/-. 20.1 THE AO IN THE ASSESSMENT ORDER HAS TREATED TH E SAP EXPENSES OF RS. 40 55 864/- AS CAPITAL EXPENDIT URE. THE EXPENDITURE HAD BEEN INCURRED IN ASSESSMENT YEAR 20 02-03 IN WHICH IT WAS TREATED AS CAPITAL EXPENDITURE. THE AO HOWEVER DID NOT ALLOW DEPRECIATION IN ASSESSMENT YE AR 2002- 03 ON THE GROUND THAT THE PROJECT HAD BECOME OPERAT IONAL IN ASSESSMENT YEAR 2003-04. THE CLAIM HOWEVER WAS NOT ALLOWED IN ASSESSMENT YEAR 2003-04 AS THE SAME HAD NOT BEEN MADE IN THE RETURN OF INCOME FOR ASSESSMENT YE AR 2003- ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 35 OF 71 04. THE AUTHORITIES BELOW HAVE DISALLOWED THE CLAIM FOLLOWING THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF GOETZE (INDIA) LTD. VS. CIT (284 ITR 323) AS PER WHICH ANY CLAIM BEFORE AO HAS TO BE MADE IN THE RETURN OF INCOME. A GGRIEVED BY THE DECISION OF CIT(A) THE ASSESSEE IS IN APPEA L BEFORE TRIBUNAL. 20.2 BEFORE US THE LEARNED SENIOR COUNSEL SUBMITT ED THAT THE SAME ISSUE HAD BEEN CONSIDERED BY THE TRIB UNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2002-03 IN I TA NO. 2954/MUM/2006 AND THE TRIBUNAL HAD RESTORED THE MAT TER TO THE FILE OF AO WITH CERTAIN OBSERVATIONS. IT WAS SUBMITTED THAT THE CLAIM MAY BE RESTORED TO THE FILE OF AO TH IS YEAR ALSO TO EXAMINE AFRESH IN THE LIGHT OF DECISION OF TRIBU NAL IN ASSESSMENT YEAR 2002-03 (SUPRA). THE LEARNED DR PLA CED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 20.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED MATTER CAREFULLY. THE ASSESSEE HAD INCURRED THE SAP EXPENSES IN ASSESSMENT YEAR 2002-03 IN WHICH IT HAD BEEN TREATED AS CAPITAL EXPENDITURE. THE AO HOWEVER DID NOT ALLOW DEPRECIATION IN THAT YEAR AS THE PROJECT HAD BECOME OPERATIONAL IN THE NEXT YEAR I.E. IN ASSESSMENT YEA R 2003-04. IN ASSESSMENT YEAR 2003-04 THE CLAIM OF DEPRECIATI ON HAS BEEN DISALLOWED BY THE AUTHORITIES ON THE GROUND TH AT THE ASSESSEE HAD NOT MADE THE CLAIM IN THE RETURN OF IN COME. THE CASE OF THE ASSESSEE IS THAT THE CLAIM WAS MADE BY WAY ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 36 OF 71 OF FILING ADDITIONAL GROUND BEFORE CIT (A) AFTER RE CEIPT OF THE ORDER OF TRIBUNAL IN ASSESSMENT YEAR 2002-03 AS BY THAT TIME LIMITATION PERIOD FOR REVISING THE RETURN FOR ASSES SMENT YEAR 2003-04 HAD EXPIRED. THE CLAIM BEING LEGAL CLAIM HA S THEREFORE TO BE ALLOWED. WE AGREE WITH THE SUBMISS ION OF LEARNED SENIOR COUNSEL THAT THE JUDGMENT IN CASE OF GOETZE (INDIA) LTD.(SUPRA) DOES NOT RESTRICT THE POWER OF APPELLATE AUTHORITIES TO CONSIDER THE LEGAL CLAIM EVEN IF THE SAME HAD NOT BEEN MADE IN THE RETURN OF INCOME. THE CLAIM HA D BEEN DISALLOWED IN ASSESSMENT YEAR 2002-03 ONLY ON THE G ROUND THAT THE PROJECT HAD BEOMCE OPERATIONAL IN THE NEXT YEAR. THE CLAIM HAS THEREFORE TO BE CONSIDERED BY THE AO IN ASSESSMENT YEAR 2003-04 UNDER THE PROVISIONS OF LAW . WE ALSO FIND THAT THE SAME ISSUE HAS ALREADY BEEN DEAL T WITH BY THE TRIBUNAL IN ASSESSMENT YEAR 2002-03 IN WHICH T HE TRIBUNAL RESTORED THE ISSUE TO THE FILE OF AO TO DE CIDE THE ISSUE AFRESH AFTER NECESSARY EXAMINATION IN THE LIG HT OF OBSERVATIONS MADE IN THAT YEAR. WE THEREFORE FOLL OWING THE SAID DECISION OF TRIBUNAL IN ASSESSMENT YEAR 2002-0 3 (SUPRA) SET ASIDE THIS ISSUE TO THE FILE OF AO FOR FRESH CO NSIDERATION AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVA TIONS OF TRIBUNAL IN ASSESSMENT YEAR 2003 (SUPRA) AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 21. THE DISPUTE RAISED IN GROUND NO. 1(T) IS REGARDING SET OFF OF LONG TERM CAPITAL LOSS OF RS. 52 35 923/- ON SALE OF GOA PROPERTY. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 37 OF 71 21.1 THE ASSESSEE HAD CLAIMED THE SAID LOSS IN THE ASSESSMENT YEAR 2002-03. ON PERUSAL OF THE SALE AGR EEMENT THE AO NOTED THAT THE SAID PROPERTY HAD BEEN SOLD V IDE AGREEMENT DATED 12.4.2002. THE AO THEREFORE CONCL UDED THAT THE SALE HAD TAKEN PLACE IN ASSESSMENT YEAR 20 03-04. HE THEREFORE DISALLOWED THE CLAIM OF LOSS IN ASSE SSMENT YEAR 2002-03. THE ASSESSEE THEREAFTER MADE THE CLAIM I N ASSESSMENT YEAR 2003-04 BY FILING AN ADDITIONAL GRO UND BEFORE CIT (A). THE AO IN THE REMAND REPORT CALLED FOR BY THE CIT (A) OBJECTED TO THE ALLOWANCE OF CLAIM ON THE G ROUND THAT THE SAME HAD NOT BEEN MADE BY FILING A REVISED RETU RN AT THE TIME OF ASSESSMENT. 21.2 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT (A) THAT THE ASSESSEE COULD NO T HAVE MADE THE CLAIM BY FILING THE RETURN OF INCOME FOR A SSESSMENT YEAR 2003-04 AS THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2002-03 DISALLOWING THE CLAIM HAD BEEN RECEIVED ON 31.3.2005. CIT (A) HOWEVER DID NOT ACCEPT THE CONTE NTIONS RAISED AND OBSERVED THAT THE ASSESSEE SHOULD HAVE M ADE CLAIM AT FIRST INSTANCE IN ASSESSMENT YEAR 2003-04 ITSELF WHICH WAS NOT DONE. HE THEREFORE CONFIRMED THE OR DER OF AO DISALLOWING THE CLAIM AGGRIEVED BY WHICH THE ASSESS EE IS IN APPEAL BEFORE TRIBUNAL. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 38 OF 71 21.3 BEFORE US THE LEARNED SENIOR COUNSEL SUBMITT ED THAT THE DISALLOWANCE OF CLAIM IN ASSESSMENT YEAR 2 002-03 HAD BEEN CONSIDERED BY THE TRIBUNAL WHO IN THE PARA 8 OF THE SAID ORDER CONFIRMED THE DISALLOWANCE AFTER OBSERVI NG THAT THE CLAIM WAS PENDING IN DISPUTE BEFORE THE TRIBUNA L FOR ASSESSMENT YEAR 2003-04. IT WAS POINTED OUT THAT TH E ORDER OF TRIBUNAL IN ASSESSMENT YEAR 2002-03 HAS BECOME F INAL AND THEREFORE THE CLAIM HAS TO BE ALLOWED IN THIS YEAR. THE LEARNED DR PLACED RELIANCE ON THE ORDERS OF AUTHORI TIES BELOW. 21.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABI LITY OF CLAIM OF LONG TERM CAPITAL LOSS FROM SALE OF GOA PR OPERTY IN ASSESSMENT YEAR 2003-04. THE AUTHORITIES BELOW HAVE GIVEN A CLEAR FINDING THAT THE SALE HAD TAKEN PLACE VIDE AG REEMENT DATED 12.4.2002 WHICH PERTAIN TO ASSESSMENT YEAR 20 03-04. HOWEVER THE CLAIM IN ASSESSMENT YEAR 2003-04 HAS NO T BEEN ALLOWED BY THE AUTHORITIES BELOW ON THE GROUND THA THE CLAIM HAD NOT BEEN MADE BY WAY OF FILING REVISED RETURN A S HELD BY HONBLE SUPREME COURT OF INDIA IN CASE OF GOETZE (I NDIA) LTD. (SUPRA). THE HONBLE SUPREME COURT IN THE SAID CASE HAVE ONLY HELD THAT THE AO IN ASSESSMENT ORDER CANNOT EN TERTAIN ANY CLAIM OTHER THAN THE CLAIM MADE IN THE RETURN O R REVISED RETURN OF INCOME. FURTHER IT HAS ALSO BEEN MADE CLE AR IN THE SAID JUDGMENT THAT THE JUDGMENT DOES NOT RESTRICT T HE POWER OF THE TRIBUNAL TO CONSIDER A CLAIM MADE FOR THE FI RST TIME ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 39 OF 71 BEING A LEGAL CLAIM IN RESPECT OF WHICH THE FACTS A RE ALREADY ON RECORD. IN THIS CASE THE ALLOWABILITY OF CLAIM I S A LEGAL CLAIM AND THE FACTS ARE ALREADY ON RECORD. THEREFOR E IN OUR VIEW THE CLAIM HAS TO BE ALLOWED IN THIS YEAR. HOWE VER THE ACTUAL COMPUTATION ETC. OF THE LOSS HAS NOT BEEN E XAMINED. WE THEREFORE RESTORE THE ISSUE TO THE FILE OF AO F OR CONSIDERING THE CLAIM IN ACCORDANCE WITH THE LAW AF TER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 22. WE NOW TAKE UP THE DISPUTE RAISED IN GROUND NO. 1 (F) RELATING TO TRANSFER PRICING ADJUSTMENT. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE AS SESSEE DURING THE YEAR HAD IMPORTED BISOPROLOL FUMARATE A RAW MATERIAL USED IN THE PHARMACEUTICAL BUSINESS FROM T HE ASSOCIATE ENTERPRISE (AE). THE ASSESSEE HAD IMPORTE D BISOPROLOL FUMARATE OF WORTH RS. 1.30 CRORE FROM THE AE DURING THE YEAR THE ASSESSEE HAD ALSO IMPORTED FROM THE ASSOCIATE ENTERPRISE FINISHED GOODS BEING THE PIGME NTS FOR A SUM OF RS. 29.66 CRORE IN THE CHEMICAL BUSINESS THE TURNOVER OF WHICH WAS RS. 23.46 CRORE. THE ASSESSEE HAD ALSO PAID A SUM OF RS. 1.57 CRORE TO THE PARENT COMPANY IN GERM ANY AS TECHNICAL KNOW HOW FEES. SINCE THE ASSESSEE DURING THE YEAR HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH AE THE AO REFERRED THE MATTER FOR DETERMINATION OF TRANSFER P RICING ADJUSTMENT TO THE TPO WHO AFTER NECESSARY EXAMINATI ON RECOMMENDED CERTAIN ADJUSTMENTS IN RESPECT OF THREE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 40 OF 71 INTERNATIONAL TRANSACTIONS MENTIONED ABOVE WHICH AR E DISPUTED IN APPEAL BEFORE TRIBUNAL. 22.1 WE FIRST TAKE UP THE ISSUE OF ADJUSTMENT IN R ELATION TO IMPORT OF BISOPROLOL FUMARATE. THE ASSESSEE HAD IMPORTED 92.27272 KG OF THE SAID INGREDIENT FOR A SUM OF RS. 1 30 80 274/- AT THE RATE OF RS. 1 41 750/- PER KG. THE SAID INGREDIENT IS USED FOR MANUFACTURE OF PRODUCT CONC OR AN ANTI HYPERTENSION PRODUCT. THE TPO NOTED THAT M/S U NICHEM LABORATORIES LTD WAS ALSO ENGAGED IN MANUFACTURING AND SALE OF SIMILAR PRODUCT I.E. CORPIS WHICH WAS OPE RATING IN THE SAME SEGMENT. THE TPO OBTAINED THE INFORMATION FROM THE SAID PARTY WHO REPORTED THAT THEY HAD MANUFACTU RED AND SOLD THE SAME DURING THE YEAR AT THE RATE OF RS. 50 000/- PER KG. IT WAS ALSO NOTED THAT THE ASSESSEE DURING THE YEAR HAD PURCHASED SMALL QUANTITY OF BISOPROLOL FUMARATE A T THE RATE OF 70 000/- PER KG FROM M/S UNICHEM LABORATOR IES. TPO THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE TP ADJUSTMENT SHOULD NOT BE MADE BASED ON THE PURCH ASE RATE OF UNICHEM LABORATORIES. 22.2 THE ASSESSEE EXPLAINED THAT THE MATEIAL PURCH ASED FROM M/S UNICHEM LABORATORIES LTD. HAD BEEN USED BY THE ASSESSEE FOR MANUFACTURING OF THE PRODUCT BUT THE S AID RAW MATERIAL DEVELOPED HIGHER LEVEL OF IMPURITY AS COMP ARED TO THE RAW MATERIAL IMPORTED BY THE ASSESSEE FROM AE. THE PRODUCT I.E. CONCOR WAS THE TRADEMARK DEVELOPED BY THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 41 OF 71 ASSOCIATE ENTERPRISE AND THE ASSESSEE DID NOT WANT TO COMPROMISE ON THE REPUTATION OF THE GROUP. THE ASSE SSEE HAD THEREFORE IMPORTED THE RAW MATERIAL AT A HIGH ER PRICE. IT WAS ALSO SUBMITTED THAT THE AE HAD SOLD THE SAME IN GREDIENT TO OTHER GROUP ENTITIES AT A HIGHER PRICE. THEREFOR E IT WAS SUBMITTED THAT THE PRICE AT WHICH THE ASSESSEE HAD IMPORTED WAS LOWER THAN THE MARKET PRICE. THE ASSESSEE HAD P RODUCED A CERTIFICATE DATED 1.3.2005 OF THE GENERAL MANAGER OF THE ASSESSEE COMPANY STATING THAT THE MATERIAL PURCHASE D LOCALLY WAS SHOWING HIGH LEVEL OF IMPURITY COMPARED TO THE IMPORTED PRODUCT. 22.3 THE TPO HOWEVER REJECTED THE CERTIFICAATE AS BEING NON CONTEMPORARY AS THE MATERIAL HAD BEEN PURCHASED IN JULY 2002 AND THE CERTIFICATE HAD BEEN ISSUED IN M ARCH 2005 AFTER THE QUERY HAD BEEN RAISED BY THE TPO. AS REGARDS THE RAW MATERIAL SOLD BY THE ASSESSEE TO OTHER GROU P ENTITIES THE TPO OBSERVED THAT THOSE WERE RELATED PARTY TRAN SACTIONS AND NOT COMPARABLE. THE ASSESSEE HAD IN ITS TRANSFE R PRICING STUDY USED TNMM METHOD USING CERTAIN THIRD PARTIES COMPARABLES WHICH WAS ALSO REJECTED BY THE TPO ON T HE GROUND THAT THE ONLY INFORMATION AVAILABLE IN RESPE CT OF THOSE PARTIES WAS THE ANNUAL REPORTS OF THE COMPANIES WHI CH DID NOT SHOW CLEARLY HOW THE COMPANIES WERE COMPARABLE. TPO ALSO OBSERVED THAT THE IMPORT BY THE ASSESSEE FROM THE AE WAS ONLY RS. 3.49 CRORE WHEREAS THE TURNOVER OF THE ENTIRE PHARMA SEGMENT WAS RS. 220 CRORE. THEREFORE THE IM PACT OF ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 42 OF 71 THE TRANSACTION ON THE PROFITABILITY OF SUCH HIGH T URNOVER WOULD BE TOO INSIGNIFICANT. THE TPO THEREFORE HELD THAT TNMM METHOD WAS NOT SUITABLE TO DETERMINE THE ARMS LENGTH PRICE. IT WAS FURTHER OBSERVED BY HIM THAT C UP METHOD WAS MOST DIRECT AND RELIABLE WAY TO MAKE THE TP ADJUSTMENT. THE COMPARABLE PRICE OF THE SAME ACTIVE INGREDIENT WAS AVAILABLE ON RECORD WHICH WAS FROM T HE LOCAL PARTY OPERATING IN THE SAME MARKETING CONDITIONS WH EREAS THE SALE BY THE AE TO OTHER GROUP ENTITIES WAS IN D IFFERENT GEOGRAPHICAL LOCATIONS AND MARKETING CONDTIONS. THE AO THEREFORE APPLYING THE CUP METHOD ADOPTED THE RATE AT WHICH THE ASSESSEE HAD PURCHASED THE SAME INGREDIEN T FROM M/S UNICHEM LABORATORIES LTD. THE ASSESSEE HAD PURC HASED AT THE RATE OF 70 000/- PER KG WHEREAS SALE TO SOME OTHER PARTY WAS AT RS. 50 000/- PER KG. THE TPO THEREFOR E ADOPTED THE AVERAGE RATE OF RS. 60 000/- AND THUS ADJUSTMENT WAS MADE AT RS. 75 43 911/- WHICH WAS FO LLOWED BY THE AO IN THE ASSESSMENT ORDER. 22.4 THE ASSESSE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT (A) WHO AFTER HEARING THE ASSE SSEE ACCEPTED THE APPROACH ADOPTED BY THE AO AND THUS UP HELD THE ADJUSTMENT MADE AT RS. 75 43 911/-. AGGRIEVED B Y THE DECISION OF CIT (A) THE ASSESSEE IS IN APPEAL BEFO RE TRIBUNAL. 22.5 BEFORE US THE LEARNED SENIOR COUNSEL APPEARI NG FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BE FORE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 43 OF 71 LOWER AUTHORITIES THAT TNMM METHOD WAS APPROPRIATE METHOD FOR BENCH MARKING INTERNATIONAL TRANSACTIONS . IT WAS POINTED OUT THAT MEAN MARGIN IN CASE OF COMPARABLES SELECTED BY THE ASSESSEE WAS 13.36% WHEREAS THE MAR GIN OF THE PHARMA DIVISION IN CASE OF THE ASSESSEE WAS 15. 90%. THEREFORE IT WAS SUBMITTED THAT NO ADJUSTMENT WAS REQUIRED. IT WAS ALSO ARGUED THAT THE MATERIAL PURCHASED FROM M/S UNICHEM LABORATORIES LTD. WAS OF A LOWER QUALITY AS IT DID NOT PASS PARTICLE SIZE TEST AND BULK DENSITY TEST WHICH DETERMINE THE QUALITY OF THE PRODUCT. IT WAS ALSO SUBMITTED T HAT THE TPO HAD NOT ACCEPTED THE CLAIM OF SUPERIOR QUALITY OF T HE ASSESSEE ON THE GROUND THAT THE SAME WAS NOT SUPPORTED BY AN Y INDEPENDENT EVIDENCE. IT WAS SUBMITTED THAT THE ASS ESSEE HAD NOW OBTAINED AN INDEPENDENT THIRD PARTY CERTIFI CATE REGARDING THE SUPERIOR QUALITY OF THE MATERIAL IMPO RTED BY THE ASSESSEE. THE ASSESSEE HAS ALSO OBTAINED THE COMPAR ATIVE RATE OF SALE IN THE DOMESTIC OF SIMILAR PRODUCT MAN UFACTURED BY TORRENT PHARMA AND UNICHEM LABORATORIES WHICH SH OW THAT THE ASSESSEE WAS IMPORTING AT HIGHER RATE. IT WAS REQUESTED THAT THE SAID ADDITIONAL EVIDENCE MAY BE ADMITTED AS THE ASSESSEE WAS MADE AWARE ABOUT THESE ADDITION AL EVIDENCES ONLY AFTER ORDER OF CIT (A). HE PLACED RE LIANCE ON THE ORDER OF JAIPUR BENCH OF TRIBUNAL IN CASE OF EL ECTRA (JAIPUR) (P) LTD. VS. IAC ( 26 ITD 236) IN WHICH I T HAS BEEN HELD THAT IF THE EVIDENCE PRODUCED BY THE ASSESSEE IS GENUINE AND RELIABLE TO PROVE THE CASE OF THE ASSESSEE THE N THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 44 OF 71 ASSESSEE SHOULD NOT BE DENIED THE OPPORTUNITY TO PR ODUCE THE SAME EVEN IF IT WAS PRODUCED FOR THE FIRST TIME. 22.6 THE LEARNED CIT(DR) RESPONDING TO THE PLEA OF ADDITIONAL EVIDENCE SUBMITTED THAT HE HAD NO OBJECT ION TO THE ADDITIONAL EVIDENCE BEING ADMITTED IF THE SAME WAS SENT BACK TO CIT (A) FOR FRESH ORDER AFTER NECESSARY EXAMINAT ION AND AFTER CONSIDERING THE DECISION OF TRIBUNAL IN CASE OF SERDIA PHARMACEUTICAL (P) LTD. VS. ACIT DATED 31.12.2010 IN ITA NO. 2469/MUM/2006. 22.7 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THIS GROUND IS REGARDING TP ADJUSTMENT IN RELATION TO IMPORT O F BISOPROLOL FUMARATE IMPORTED BY THE ASSESSEE FROM THE ASSOCIATE ENTERPRISE. THE ASSESSEE HAD IMPORTED THE SAID RAW MATERIAL FROM THE AE FOR MANUFACTURE OF HYPERTENSION DRUG IN THE BRAND NAME OF CONCOR AT THE RATE OF RS. 1 41 750/ - PER KG. THE ASSESSEE IN ITS TRANSFER PRICING STUDY HAD APPLIED TNMM FOR BENCH MARKING THE INTERNATIONAL TRANSACTIO N. THE ASSESSEE HAD SELECTED CERTAIN COMPARABLES WHICH GAV E ARITHEMATIC MEAN MARGIN AT 13.36% WHICH WAS LOWER T HAN THE MARGIN OF 15.10% IN THE PHARMA SEGMENT OF THE ASSESSEE. THE ASSESSEE THEREFORE SUBMITTED THAT N O ADJUSTMENT WAS REQUIRED . TPO HOWEVER MADE LOCAL EN QUIRIES AND FOUND THAT THE UNICHEM LABORATORIES LTD. WHICH WAS MANUFACTURING THE SAME PRODUCT HAD SOLD THE SAME IN THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 45 OF 71 MARKET AT 50 000/- PER KG. THE ASSESSEE HAD ALSO P URCHASED SMALL QUANTITY OF THIS PRODUCT FROM THE SAID COMPAN Y AT RS. 70 000/- PER KG. THE TPO THEREFORE APPLIED CUP M ETHOD AND ADOPTED THE RATE OF 60 000/- PER KG. FOR THE PU RPOSE OF MAKING TP ADJUSTMENT. TPO HAS ALSO HELD THAT TNMM W AS NOT SUITABLE IN THIS CASE AS THE TOTAL IMPORT OF TH E PRODUCT BY THE ASSESSEE WAS ONLY 3.49 CRORE WHEREAS THE TURNOV ER OF THE PHARMA SEGMENT WAS RS. 220 CRORE. THEREFORE THE IM PACT ON PRICE VARIATION IN RESPECT OF PRODUCT ON SUCH HIGH TURNOVER WOULD BE TOO INSGINIFICANT. THE TPO THEREFORE USE D CUP METHOD AND ADOPTED THE PRICE CHARGED BY UNICHEM LABORATORIES LTD FOR BENCH MARKING THE TRANSACTION. THE ARGUMENT OF THE ASSESSEE THAT THE AE HAD SOLD THE S AME PRODUCT TO OTHER GROUP ENTITIES AT A HIGHER PRICE H AD NOT BEEN ACCEPTED. IN OUR VIEW THE STAND OF THE REVENUE AUTH ORITIES TO REJECT SUCH ARGUMENT IS REASONABLE AS THE OTHER GRO UP ENTITIES WERE OPERATING IN DIFFERENT GEOGRAPHICAL L OCATIONS AND THE TRANSACTIONS WERE WITH AE AND THEREFORE INDEPEN DENT. 22.8 THE ASSESSEE HAS ALSO ARGUED THAT THERE WAS M AJOR DIFFERENCE BETWEEN QUALITY OF THE PRODUCT PRODUCED BY THE AE WHICH WAS A BRANDED ITEM COMPARED TO THE LOW QUALIT Y GOODS MANUFACTURED BY UNICHEM LABORATORIES LTD. IT HAS BE EN ARGUED THAT THE MATERIAL PRODUCED FROM UNICHEM LABORATORIES LTD. DID NOT PASS THE PARTICLE SIZE TE ST AND BULK DENSITY TEST WHICH DETERMINE THE QUALITY OF THE PRO DUCT. A CERTIFICATE DATED 1.3.2005 FROM THE FACTORY MANAGER OF THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 46 OF 71 ASSESSEE HAD BEEN PRODUCED WHICH HAD BEEN REJECTED BY THE AUTHORITIES BELOW AS BEING NOT CONTEMPORARY. IN OUR VIEW THE QUALITY OF THE PRODUCT IS IMPORTANT AS IT AFFECTS T HE COMPARABILITY OF THE TRANSACTIONS. QUALITY OF PRODU CT HAS INFLUENCE ON THE PRICING OF THE PRODUCT. THERE WAS HOWEVER NO INDEPENDENT EVIDENCE PRODUCED BEFORE THE LOWER AUTHORITIES TO SHOW SUPERIOR QUALITY OF ASSESSEES PRODUCT. THE ASSESSEE VIDE LETTER DATED 8.2.2010 HAS FILED A N ADDITIONAL EVIDENCE BEFORE THE TRIBUNAL IN THE FORM OF A QUALITY CERTIFICATE FROM BEE PHARMA LABS (PVT.) LTD . AN INDEPENDENT ACCREDITED THIRD PARTY AND ALSO COMPARA TIVE SELLING RATE OF THE SAME PRODUCT PRODUCED BY TORREN T PHARMA AND UNICHEM LABORATORIES LTD HAS BEEN FILED AND IT HAS BEEN REQUESTED THAT THE ADDITIONAL EVIDENCE MAY BE SUBMI TTED. IT WAS ARGUED THAT THE ASSESSEE WAS MADE AWARE OF THES E ADDITIONAL EVIDENCE ONLY AFTER PASSING OF ORDER BY CIT (A) AND ACCORDINLGY IT HAS BEEN REQUESTED FOR ADMISSION OF THE SAME. IN OUR VIEW AN INDEPENDENT EVIDENCE REGARDING QUALI TY OF PRODUCTS AND COMPARATIVE PRICES WILL BE USEFUL IN D ECIDING THE ISSUE. LEARNED CIT (DR) HAD ALSO NO OBJECTION F OR ADMISSION OF ADDITIONAL EVIDENCES IF THE ISSUE WAS SENT BACK TO CIT (A) FOR FRESH EXAMINATION AFTER CONSIDERING THE DECISION OF TRIBUNAL IN CASE OF SARDIA PHARMACEUTICAL VS. AC IT (SUPRA). WE THEREFORE ADMIT THE ADDITIONAL EVIDEN CES FILED BY THE ASSESSEE AND THE ISSUE IS RESTORED TO THE FILE OF CIT(A) FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION I N THE LIGHT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 47 OF 71 OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPOR TUNITY OF HEARING TO THE ASSESSEE. 23. THE SECOND TRANSFER PRICING DISPUTE IS REGARDI NG ADJUSTMENT MADE BY AO ON ACCOUNT OF IMPORT OF PIGME NTS BY THE ASSESSEE FROM THE AE. THE TOTAL VALUE OF INTER NATIONAL TRANSACTION ON THIS ACCOUNT WAS RS. 29.66 CRORE. T HE AE ALSO SOLD SOME OF THE PRODUCTS DIRECTLY TO THRID PA RTIES IN INDIA FOR WHICH THE ASSESSEE PROVIDES MARKETING AND SUPPORT SERVICES. THEREFORE IN RESPECT OF THIRD PARTY SALE S BY THE AE THE ASSESSEE RECEIVES COMMISSION. THE ASSESSEE IN I TS TRANSFER PRICING STUDY CONSIDERED THE TRADING ACTIV ITY AND AGENCY ACTIVITY AS A SINGLE BUSINESS AND USED TNMM FOR BENCH MARKING THE INTERNATIONAL TRANSACTIONS. THE A SSESSEE SELECTED SEVEN COMPARABLES FOR THIS PURPOSE. THE TP O HOWEVER REJECTED THE COMPARABLES SELECTED BY ASSES SEE FOR THE VARIOUS REASONS MENTIONED IN THE TABLE BELOW:- SR. NO. NAME OF THE COMPANY REMARKS 1 ORIGON COMMERCIALS LTD. 2 ANUKURAN COMMERCIAL ENTERPRISES LTD. BOTH THESE ENTITIES ARE ENGAGED IN TRADING OF FERROUS AND NO FERROUS CHEMICALS. FURTHER ANUKURAN COMMERCIAL ENTERPRISES LTD. IS ENGAGED IN TRADING IN SHARES. SEGMENTAL INFORMATION IS NOT AVAILABLE 3 DAGA PETROCHEMICALS LTD. NO INFORMATION HAS BEEN PROVIDED ON THE BASIS OF WHICH THIS COMPANY HAS BEEN REGARDED AS COMPARABLE TO THE ASSESSEE 4 DHOOT INDUSTRIAL FINANCE LTD. BESIDES CHEMICAL BUSINESS THIS COMPANY EQUALLY DEALS IN ELECTRONICS AND PAPER. IT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 48 OF 71 ALSO UNDERTAKES INVESTMENTS IN SHARE. SEGMENTAL INFORMATION IS NOT AVAILABLE 5 KPL INTERNATIONAL LTD. NO INFORMATION HAS BEEN PR OVIDED ON THE BASIS OF WHICH THIS COMPANY HAS BEEN REGARDED AS COMPARABLE TO THE ASSESSEE 6 NIKHIL ADHESIVES LTD. THIS COMPANY DEALS IN SYNTH ETIC ADHESIVES AND EMULSION PRODUCTS. 7 SIGNET FINCON LTD. NO INFORMATION HAS BEEN PROVID ED ON THE BASIS OF WHICH THIS COMPANY HAS BEEN REGARDED AS COMPARABLE TO THE ASSESSEE 23.1 THE TPO OBSERVED THAT THOUGH UNDER TNMM PRODUCT SIMILARITY WAS NOT ESSENTIAL THERE HAS TO BE CLOSE SIMILARITY IN THE FUNCTIONS PERFORMED ASSET EMPLOY ED AND RISK ASSUMED BETWEEN THE INTERNATIONAL TRANSACTION AND UNCONTROLLED TRANSACTION. IT WAS OBSERVED BY HIM TH AT ANNUAL REPORTS OF THE COMPARABLES HAD NO INFORMATION TO SH OW FUNCTIONAL SIMILARITY BETWEEN THE ASSESSEE AND COMP ARABLES. HE THEREFORE HELD THAT THE COMPARABLES SELECTED B Y THE ASSESSEE WERE NOT PROPER AND ACCORDINGLY REJECTED T HE SAME. THE AO NOTED THAT THE ASSESSEE WAS TRADING IN GOOD S AFTER IMPORTING FROM THE AE WHICH CONTAINED BOTH PIGMENTS AND NON PIGMENTS. THE ASSESSEE WAS ALSO TRADING IN GOOD S PURCHASED FROM NON AE PARTIES. AO THEREFORE ASKED THE ASSESSEE TO PROVIDE SEPARATE TRADING ACCOUNT TO FIN D OUT PROFIT MARGIN IN RESPECT OF TRANSACTIONS WITH AES AND TRANSACTIONS WITH NON AES. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 49 OF 71 23.2 THE DETAILS OBTAINED FROM THE ASSESSEE SHOWED THAT IN RESPECT OF PIGMENT PURCHASED BY THE ASSESSE E FROM THE AE THE MARGIN WAS 5% ON SALE OF RS. 21 94 62 0 00/-. SIMILARLY NON PIGMENT SALE OF THE GOODS PURCHASED F ROM THE AE WAS RS. 35 20 98 000/- AND THE MARGIN WAS 15%. F URHER MARGIN IN RESPECT OF TRADING OF GOODS PURCHASED FRO M NON AE PARTIES WAS 16% ON TURNOVER OF RS. 23 10 14 000/-. THE MARGIN OF BOTH AE TRADING AND NON AE TRADING TAKEN TOGETHER WAS 15% ON TOTAL TURNOVER OF RS. 12 34 63 000/-. THE AO OBSERVED THAT NON AE TRADING CONSTITUTED INT ERNAL TNMM FOR BENCH MARKING INTERNATIONAL TRANSACTIONS A ND IT WAS BETTER COMPARABLE AS FUNCTIONS PERFORMED ASSET EMPLOYED AND RISK ASSUMED BY THE ASSESSEE IN RESPEC T OF BOTH AE TRADING AND NON AE TRADING WAS COMPARABLE. THE AO NOTED THAT MARGIN IN CASE OF PIGMENTS WHICH WERE PU RCHASED FROM THE AE WAS VERY LOW AT 5% WHEREAS THE MARGIN I N RESPECT OF NON PIGMENT AE TRADING WAS 15% AND IT WA S 16% IN CASE OF NON AE TRADING. 23.3 THE TPO THEREFORE ASKED THE ASSESSEE TO EXP LAIN AS TO WHY THE ADJUSTMENT SHOULD NOT BE MADE ON THE BASIS OF MARGIN IN CASE OF NON AE TRADING SEGMENT. THE ASSES SEE SUBMITTED THAT MARKET CONDITIONS IN THE AE SEGMENT AND NON AE SEGMENT WERE DIFFERENT AND NOT COMPARABLE. MOREO VER THE PRODUCTS UNDER THE AE SEGMENT AND NON AE SEGMEN T WERE ALSO NOT THE SAME. THE ASSESSEE FURTHER SUBMIT TED THAT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 50 OF 71 IMPORT PRICE FROM THE AE IN CASE OF THE ASSESSS WAS LOWER THAN THE PRICE AT WHICH THE AE HAD SOLD TO OTHER GR OUP ENTITIES. IT WAS ALSO SUBMITTED THAT LOWER PROFIT M ARGIN IN CASE OF PIGMENTS WAS NOT ON ACCOUNT OF HIGH IMPORT PRICE BUT ON ACCOUNT OF LOW SELLING PRICE IN THE LOCAL MARKET DUE TO SEVERE COMPETITION. TO SUBSTANTIATE THE CLAIM THAT THE ASSESSEE WAS IMPORTING AT LOWER PRICE THE ASSESSEE REFERRED TO THE COMPLAINT FILED BY THE SUDARSHAN CHEMICALS A LOCAL MANUFACTURER OF CHEMICALS PIGMENTS AND PESTICIDES ON THE BASIS OF WHICH ANTI DUMPING DUTY HAD BEEN LEVIED IN RESPECT OF ONE OF THE PRODUCTS OF THE ASSESSEE I.E. IRODI NE. THE VERY FACT THAT ANTI DUMPING WAS LEVIED BY THE CUSTOMS DU TY AUTHORITY SHOWED THAT IMPORTS MADE BY THE ASSESSEE FROM THE AE WERE AT LOWER RATE THAN THE PREVAILING MARKE T PRICE. THE ASSESSEE ALSO POINTED OUT MARGIN EARNED BY THE MANUFACTURERS OF PIGMENTS IN INDIA WAS LOWER THAN T HE MARGIN OF 5% EARNED BY THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT BERGER PAIN HAD IMPORTED THE SAME PR ODUCT AT A HIGHER RATE. 23.4 TPO HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE HIGHER RATE CHARGED BY THE AE TO THE GROUP ENTITIES WAS NOT COMPARABLE AS IT WAS A CONTROLLED TRANSACTION AND SALES WERE MADE IN DIF FERENT GEOGRAPHICAL LOCATIONS. REGARDING THE COMPARATIVE C ASE OF IMPORT BY THE BERGER PAINT OF IRODINE AT A PRICE HI GHER THAN THE ASSESSEE THE TPO OBSERVED THAT IT WAS A SINGLE INSTANCE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 51 OF 71 IN WHICH THE END CUSTOMER HAD PURCHASED THE PRODUCT WHICH WAS NOT COMPARABLE TO THE CASE OF THE ASSESSEE WHO WAS A DISTRIBUTOR IN INDIA. THE TPO ALSO DID NOT ACCEPT THE PLEA BASED ON ANTI DUMPING DUTY ON THE GROUND THAT THE A NTI DUMPING DUTY HAD BEEN LEVIED VIDE NOTIFICATION NO. 30/2005 APPLICABLE FROM 2005 ONWARDS AND THEREFORE THE INTERNATIONAL TRANSACTION UNDER REFERENCE WHICH REL ATED TO FINANCIAL YEAR 2002-03 WERE NOT SUBJECTED TO ANTI D UMPING DUTY. THE TPO ALSO OBSERVED THAT THE ASSESSEE HAD N OT PROVIDED COPIES OF ALL SUBMISSIONS MADE BEFORE ANTI DUMPING AUTHORITIES DESPITE SPECIFICALLY BEING ASKED TO DO SO. IT HAD PROVIDED ONLY THE COPY OF THE DISCLOSURE STATEMENT. THE TPO THEREFORE DETERMINED THE TP ADJUSTMENT ON THE BASI S OF MARGIN OF 16% IN RESPECT OF NON AE TRADING IN ASSE SSEES OWN CASE AND THUS RECOMMENDED ADJUSTMENT OF RS. 2 50 76 000/- WHICH WAS FOLLOWED BY THE AO IN THE ASSESSMENT ORDER. 23.5 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT (A) THAT LOW MARGIN IN CASE OF PIGMENT WAS DUE TO FALL IN SELLING PRICE DUE TO SEVERE COMP ETITION IN THE MARKET AND NOT BECAUSE OF HIGH IMPORT PRICE. TH E ASSESSEE REFERRED TO THE ALLEGATION MADE BY THE LOC AL MANUFACTURER SUDARSHAN CHEMICALS REGARDING THE LOW PRICE IMPORT BY THE ASSESSEE AND SUBSEQUENT LEVY OF ANTI DUMPING DUTY BY THE CUSTOM AUTHORITIES. IT WAS ALSO SUBMITT ED THAT NON AE TRADING SEGMENT OF THE ASSESSEE DID NOT HAVE PIGMENT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 52 OF 71 SALE AND THEREFORE THE COMPARISON WAS NOT PROPER. IT WAS POINTED OUT THT THE ASSESSEE HAD CITED INDEPENDENT COMPARABLE COMPANIES HAVING FUNCTIONS BROADLY SIMIL AR TO THE DISTRIBUTOR FUNCTIONS IN WHICH MARGIN RANGED FR OM .71% TO 11.31% WITH ARITHEMATIC MEAN OF 3.12% WHICH WAS MUCH LOWER THAN NET PROFIT MARGIN OF 15% EARNED BY THE A SSESSEE IN THE CHEMICAL DIVISION. THEREFORE IT WAS PLEADED THAT NO ADJUSTMENT WAS CALLED FOR. 23.6 CIT (A) HOWEVER DID NOT ACCEPT THE CONTENTION S RAISED. IT WAS OBSERVED BY HIM THAT THE COMPARABLES SELECTED BY THE ASSESSEE WERE NOT SHOWN TO BE SIMILAR TO THE CASE OF THE ASSESSEE AS NO INFORMATION WAS MADE AVAILABLE T O SHOW FUNCTIONAL SIMILARITY BETWEEN THE ASSESSEE AND THOS E PARTIES. AS REGARDS THE ARGUMENT OF THE ASSESSEE THAT NON AE SEGMENT HAD A DIFFERENT PRODUCT CIT (A) OBSERVED T HAT UNDER TNMM PRODUCT SIMILARITY WAS NOT AN ESSENTIAL REQUIR EMENT. CIT (A) ALSO AGREED WITH THE TPO THAT ISOLATED CASE OF BERGER PAINT WAS NOT COMPARABLE TO THE CASE OF THE ASSESSE E WHO WAS DISTRIBUTOR IN INDIA. HE FURTHER OBSERVED THAT THE E-MAIL CORRESPENDENCE DATED 22.8.2002 SUBMITTED BY THE ASS ESSEE CLEARLY SHOWED THAT THE ASSESSEE WAS DELIBERATELY F OLLOWING THE PREDATORY PRICING POLICY IN INDIA WITH A VIEW T O FINISH LOCAL COMPETITORS. THE ASSESSEE HAD ALSO NOT GIVEN THE FULL DETAILS OF SUBMISSIONS MADE BEFORE ANTI DUMPING AUT HORITIES. MOREOVER CIT(A) FURTHER POINTED OUT THAT ANTI DUMPI NG DUTY WAS RESTRICTED TO ONLY TWO TYPES OF PIGMENTS NAMELY ERIODIN ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 53 OF 71 100 AND ERIODIN 111. THE ASSESSEE HAD IMPORTED OTHE R PIGMENTS ALSO. CIT(A) THEREFORE DID NOT SEE ANY M ERIT IN THE APPEAL FILED BY THE ASSESSEE AND ACCORDINGLY CONFIR MED THE ADJUSTMENT MADE BY AO ON ACCOUNT OF IMPORT OF PIGME NTS. AGGRIEVED BY THE DECISION OF CIT(A) THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 23.7 BEFORE US THE LEARNED SENIOR COUNSEL REITERAT ED THE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES THAT LOW MARGIN IN CASE OF PIGMENT WAS NOT BECAUSE OF HIGHER IMPORT PRICE BUT BECAUSE OF LOWER SALE PRICE DUE TO SEVERE COMPETITION IN THE DOMESTIC MARKET. IT WAS POINTED THAT THE ANTI DUMPING DUTY LEVIED BY THE GOVERNMENT CLEARLY SHOWED THAT THE ASSESSEE WAS IMPORTING THE PRODUCTS AT A V ERY LOW PRICE. IT WAS FUTHER SUBMITTED THAT THOUGH THE ANTI DUMPING DUTY ORDER WAS DATED 30 NOVEMBER 2004 A COPY OF WH ICH WAS PLACED AT PAGE 380 OF THE PAPERBOOK BUT THE PE RIOD OF ENQUIRY WAS 1.4.2002 TO 30 TH SEPTEMBER 2003 AS WAS CLEAR FROM THE DETAILS GIVEN AT PAGE 380 OF THE PAPERBOOK . THEREFORE IT CANNOT BE SAID THAT THE ANTI DUMPING DUTY WAS NOT RELEVANT TO THE PERIOD UNDER CONSIDERATION. THE LEARNED SENIOR COUNSEL ALSO ARGUED THAT COMPARISON WITH NON AE TRADING WAS NOT PROPER AS THE SAID SEGMENT DID NOT CONTAIN PIGMENT TRADING. IT WAS ALSO SUBMITTED THAT THE PRO DUCT CHARACTERISTICS WAS ALSO IMPORTANT IN TNMM AS WAS C LEAR FROM THE RULE 10B(2) (E). MOREOVER MARKETING CONDIT IONS WERE ALSO RELEVANT FACTOR WHICH AFFECTED COMPARABILITY A S PROVIDED ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 54 OF 71 IN RULE 10 B (2) (D) AND THE MARKET CONDITIONS IN R ESPECT OF EACH PRODUCT WAS DIFFERENT. THEREFORE COMPARING TH E PIGMENT TRADING WITH NON AE TRADING WHICH DID NOT C ONTAIN PIGMENTS WAS NOT PROPER. IT WAS ALSO POINTED OUT TH AT THE MARKET SHARE OF THE ASSESSEE IN THE AE SEGMENT WAS ONLY 20% WHEREAS THE SUDARSHAN CHEMICALS HAD 80% MARKET SHARES WHICH WAS ALSO A DISTINGUISHING FEATURE. REF ERRING TO THE MARGINS IT WAS POINTED OUT THAT EVEN THE SUDAR SHAN CHEMICALS WHICH WAS A MANUFACTURER HAD SHOWN THE NE T PROFIT MARGIN OF ONLY 8.58% AND CONSIDERING THAT TH E ASSESSEE WAS A TRADER ITS MARGIN WAS COMPARABLE. 23.8 THE LEARNED CIT(DR) ON THE OTHER HAND STRONG LY DEFENDED THE ORDERS OF AUTHORITIES BELOW. IT WAS SU BMITTED THAT THE TPO HAD SELECTED THE INTERNAL COMPARABLES WHICH ARE PREFERABLE AS VARIOUS CONDITIONS SUCH AS ASSET EMPLOYED RISK UNDER TAKEN ETC REMAINED THE SAME. HE PLACED RELIANCE ON THE DECISION OF TRIBUNAL IN CASE OF TECHNIMONT ICB P. LTD. VS. ACIT IN ITA NO. 4608/M/2010. IT WAS FURTHER SUB MITTED THAT THOUGH THE NON AE SEGMENT CONSIDERED AS INTERN AL COMPARABLE DID NOT INCLUDE PIGMENT TRADING THE PRO DUCT SIMILARITY WAS NOT NECESSARY IN CASE OF TNMM AND TH E SAME WAS RELEVANT ONLY FOR CUP METHOD AS HELD BY THE MUM BAI BENCH OF TRIBUNAL IN CASE CASE OF DIAGEO INDIA P.LT D VS. DCIT IN ITA NO. 7932/MUM/2011. IT WAS ALSO POINTED OUT THAT THE TRANSACTION AS DEFINED IN RULE 10A(D) IN CLUDED CLOSELY LINKED TRANSACTIONS. SINCE THE ASSESSEE HAD GROUPED ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 55 OF 71 PIGMENT AND NON PIGMENT SEGMENT TOGETHER WHICH CLEA RLY SHOWED THAT THE TRANSACTION WERE SIMILAR. THE ARGUM ENT THAT PRICE CHARGED BY THE AE WAS HIGHER TO OTHER GROUP E NTITIES WAS NOT RELEVANT AS THOSE ENTITIES WERE OPERATING I N DIFFERENT GEOGRPHICAL LOCATIONS AND TRANSACTIONS WERE ALSO WI TH AES WHICH WERE CONTROLLED TRANSACTIONS. AS REGARDS THE FALL IN SELLING PRICE IN THE DOMESTIC MARKET IT WAS SUBMIT TED THAT THE ASSESSEE AT PAGE 364 OF THE PAPERBOOK HAD GIVEN DATA ONLY IN RELATION TO ONE PRODUCT I.E IRI-100. THE PR ICE OF OTHER PRODUCTS WERE NOT GIVEN AND THEREFORE NO CONCLUSI ON CCOULD BE DRAWN THAT STEEP FALL IN PRICES WAS BECAUSE OF L OW SELLING PRICE. IT WAS FURTHER POINTED OUT THAT THE ANTI DUM PING DUTY LEVIED BY THE GOVERNMENT WAS BASED ON THE ORDER FRO M OTHER DEPARTMENT WHICH WAS NOT RELEVANT AS THE ACTION TA KEN BY OTHER DEPARTMENT IS NOT IMPORTANT FOR DETERMINATION OF ARMS LENGTH PRICE. RELIANCE FOR THE SAID PROPOSITION WAS PLACED ON THE DECISION OF TRIBUNAL IN CASE OF SADIO FORMATION (2011/TII/02 ITAT). IT WAS THUS ARGUED THAT THE ADJ USTMENT MADE BY TPO ON THE BASIS OF INTENAL COMPARABLE WAS QUITE REASONABLE AND HAS TO BE UPHELD. 23.9 IN REPLY THE LEARNED SENIOR COUNSEL SUBMITT ED THAT THE ASSESSEE HAD TREATED THE PIGMENT AND OTHER PRODUCTS AS ONE SEGMENT AND ON THAT BASIS IT HAD PR EPARED THE TRANSFER PRICING STUDY. IT WAS POINTED OUT THAT IT WAS THE TPO WHO HAD SPLIT INTO PIGMENT AND OTHER SEGMENT AN D THEREFORE IT WAS REQUIRED THAT FOR COMPARISON WITH PIGMENT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 56 OF 71 SEGMENT HE SHOULD HAVE CONSIDERED INDEPENDENT THIR D PARTY PIGMENT TRADERS. THE NON AE SEGMENT WITH WHICH THE TPO HAD MADE COMPARISON DEALT WITH DIFFERENT PRODUCTS A ND THEREFORE COULD NOT BE CONSIDERED AS COMPARABLE AS IT WAS NOT POSSIBLE TO MAKE ANY ACCURATE ADJUSTMENT BECAUS E OF DIFFERENT MARKET CONDITIONS AND OTHER DIFFERENCES. FOR PROPER COMPARISON IT WAS POINTED OUT THE COMPARABLE SHOU LD BE TRADING IN PIGMENTS IMPORTED FROM INDEPENSENT GERMA N PARTIES BUT NO SUCH DATA HAD BEEN PRODUCED ON RECOR D BY THE TPO. IT WAS ALSO POINTED OUT THAT ANTI DUMPING DUTY LEVIED BY THE GOVERNMENT WAS VERY RELEVANT AS IT SHOWS THAT T HE GOVERNMENT ACCEPTED THAT THE PRICE PAID BY THE ASSE SSE FOR THE IMPORTS WAS LOWER. IT WAS ARGUED THAT ORDER PAS SED BY THE OTHER DEPARTMENTS CANNOT ALWAYS BE CONSIDERED IRRELEVANT. HE REFERRED TO THE DECISION OF TRIBUNAL IN CASE OF M/S COASTAL ENERGY (P) LTD. VS. ACIT IN ITA 2099/MU M/07 IN WHICH IT WAS HELD THAT THE CUSTOM VALUATION WHIC H WAS BASED ON SCIENTIFICALLY FORMULATED METHODS CAN BE T AKEN INTO ACCOUNT FOR THE PURPOSE OF COMPARISON OF PRICE. AS REGARDS THE POINT MADE BY THE LEARNED CIT(DR) THAT THE FALL IN PRICES HAD BEEN DEMONSTRATED ONLY IN CASE ON ONE PRODUCT IT WAS SUBMITTED THAT IRI-100 WAS THE MAIN PIGMENT DEALT W ITH BY THE ASSESSEE WHICH ACCOUNTED FOR 51.4% PIGMENT TURN OVER. REFERRING TO THE DETAILS GIVEN AT PAGE 365 OF THE P APERBOOK IT WAS POINTED OUT THAT IN CASE THE PROFITABILITY OF I RI-100 WAS TAKEN AS THE ONE IN THE YEAR 2002 THE NET MARGIN O F THE PIGMENT DIVISION WOULD COME TO 18%. IT WAS THUS CLE AR THAT ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 57 OF 71 FALL IN THE MARGIN WAS BECAUSE OF LOW SELLING PRICE S AND NOT BECAUSE OF HIGH COST OF IMPORT. 23.10 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REG ARDING TP ADJUSTMENT ON ACCOUNT OF IMPORT OF PIGMENTS MADE BY ASSESSEEE AMOUNTING TO RS. 29.66 CRORE FROM THE ASS OCIATE ENTERPRISE. THE ASSESSEE IN ITS TRANSFER PRICING ST UDY IN RELATION TO THE SAID INTERNATIONAL TRANSACTION ADOP TED THE TNMM FOR BENCH MARKING THE TRANSACTION WHICH HAS BE EN ACCEPTED BY THE TPO/AO. THE ASSESSEE SELECTED CERTA IN COMPARABLES WHICH WERE FUNCTIONALLY SIMILAR TO DIST RIBUTORS AS THE ASSESSEE WAS ALSO A DISTRIBUTOR WHICH GAVE ARITHEMATIC MEAN MARGIN OF 3.12% COMPARED TO THE 15 % MARGIN IN CASE OF THE ASSESSEE. IT WAS THEREFORE RE QUESTED THAT NO ADUSTMENT WAS REQUIRED TO BE MADE. THE TPO HAS NOT ACCEPTED THE COMPARABLES SELECTED BY THE ASSESS EE. HE NOTED THAT THE ASSESSEE HAD TRADING OPERATIONS IN R ESPECT OF PRODUCTS IMPORTED FROM THE AE WHICH INCLUDED PIGMEN T AND ALSO OTHER PRODUCTS AS WELL AS TRADING OF ITEMS PUR CHASED FROM NON AE PARTIES. THE AO THEREFORE ASKED THE A SSESSEE TO SEPARATE THE AE AND NON AE TRANSACTION AND ALSO COMPUTE MARGIN SEAPARATELY IN CASE OF PIGMENTS. THE MARGIN IN RESPECT OF PIGMENT WAS COMPUTED AT 5% AND MARING IN CASE OF NON PIGMENT PRODUCTS IMPORTED FROM THE AE WAS AT 15% AND IN RESPECT OF NON AE SEGMENT THE MARGIN WAS 16 %. THE TPO HAS COMPARED THE MARGIN OF PIGMENT SEGMENT WITH THE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 58 OF 71 MARGIN OF NON AE SEGMENT AND MADE ADJUSTMENT ACCORDINLGY. 23.11 THE VIEW TAKEN BY THE TPO WAS THAT NON AE SEGMENT WAS INTERNAL TNMM WHICH WAS MORE SUITABLE F OR COMPARISON AS THE CONDITIONS WERE IDENTICAL. THE AS SESSEE GAVE THE COMPARATIVE CASE OF IMPORT OF THE SAME PRO DUCT FROM BERGER PAINT BUT THE SAME HAS BEEN REJECTED BY THE TPO ON THE GROUND THAT IT WAS AN ISOLATED INSTANCE OF I MPORT BY AN END CUSTOMER WHICH WAS NOT COMPARABLE TO THE CAS E OF THE ASSESSEE WHICH WAS A DISTRIBUTOR. THE ARGUMENT OF THE ASSESSEE THAT THE AE HAD SOLD THE SAME PRODUCT TO O THER GROUP ENTITIES AT A MUCH HIGHER PRICE HAS ALSO NOT BEEN ACCEPTED. THE ORDER OF AUTHORITIES BELOW TO REJECT THE ARGUMENT BASED ON HIGH SALE PRICE TO OTHER GROUP EN TITIES IS JUSTIFIED AS THE SALE WAS IN DIFFERENT GEOGRAPHICAL LOCATIONS AND THE TRANSACTIONS BEING WITH AE WERE ALSO CONTRO LLED. 23.12 HOWEVER THE MAIN ARGUMENT OF THE ASSESSEE IS THAT THE PIGMENT SEGMENT OF THE ASSESSEE COULD NOT BE CO MPARED WITH NON AE SEGMENT WHICH DID NOT CONTAIN ANY PIGME NT. IT HAS BEEN EXPLAINED THAT LOW MARGIN IN CASE OF PIGME NTS WAS NOT BECAUSE OF HIGH IMPORT PRICE BUT BECAUSE OF LOW DOMESTIC SALE PRICE AS THE MARKET WAS VERY COMPETITIVE. THE CASE OF THE REVENUE IS THAT THE PRODUCT DIFFERENCE IS NOT MATER IAL IN TNMM AND IS IMPORTANT ONLY IN CASE OF CUP METHOD. THEREFORE IT HAS BEEN ARGUED THAT COMPARISON WITH NON AE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 59 OF 71 SEGMENT WAS PROPER. WE HOWEVER DO NOT AGREE WITH TH E VIEW TAKEN BY THE AUTHORITIES BELOW. THE PRODUCT CHARACT ERISTIC NO DOUBT HAS VERY IMPORTANT ROLE IN CASE OF CUP METHO D BUT THE SAME CANNOT BE IGNORED IN CASE OF TNMM. THE RUL E 10 B(2)(A) CLEARLY PROVIDES THAT CHARACTERISTICS OF TH E PROPERTY IS REQUIRED TO BE TAKEN INTO ACCOUNT WHILE JUDGING THE COMPARABILITY OF THE INTERNATIONAL TRANSACTION. FUR THER RULE 10B(2)(D) ALSO PROVIDES THAT THE MARKETING CONDITIO NS INCLUDING THE GEOGRAPHICAL LOCATIONS AND SIZE OF TH E MARKET IS ALSO REQUIRED TO BE TAKEN INTO ACCOUNT. THE MARKETI NG CONDITIONS IN RESPECT OF EACH PRODUCT MAY BE DIFFER ENT. WHEN THE MARKETING CONDITIONS ARE THE SAME PRODUCTS CHARACTERISTIC MAY NOT HAVE MUCH IMPORTANCE IN TNMM BUT IN CASE OF CHANGE IN MARKETING CONDITIONS PRODUCT CHARACTERISTICS CANNOT BE IGNORED. THREFORE IN OUR VIEW COMPARISON OF MARGIN OF PIGMENT SEGMENT WITH NON AE SEGMENT WHICH DID NOT DEAL WITH PIGMENT IS NOT PROP ER. 23.13 THE ASSESSEE IN THIS CASE HAS ALSO PRODUCED EVIDENCE TO SHOW THAT GOVERNMENT HAD LEVIED ANTI DU MPING DUTY IN RESPECT OF PIGMENTS IMPORTED BY THE ASSESSE E WHICH SHOWS THAT THE AE WAS SELLING THE PIGMENT TO THE AS SESSEE AT A LOWER PRICE. THE AUTHORITIES BELOW HAD NOT ACCEPT ED THE PLEA BASED ON ANTI DUMPING DUTY ON THE GROUND THAT THE NOTIFICATION HAD BEEN ISSUE IN THE YEAR 2005 WHICH WAS SUBSEQUENT TO THE PERIOD UNDER CONSIDERATION AND AS SESSEE HAD NOT GIVEN DETAILS OF THE SUBMISSIONS MADE BEFOR E ANTI ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 60 OF 71 DUMPING AUTHORITIES. IT HAS ALSO BEEN POINTED OUT T HAT ANTI DUMPING DUTY HAD BEEN LEVIED ONLY IN RESPECT OF TWO PRODUCTS I.E. IRI-100 AND IRI -111. THE AUTHORITIES BELOW HAVE ALSO POINTED OUT THAT E-MAIL CORRESPONDENCE DA TED 28.2.2006 SUBMITTED BY THE ASSESSEE ALSO SHOWED TH AT THE AE WAS DELIBERATELY FOLLOWING THE PREDATORY PRICING POLICY IN RESPECT OF THE PRODUCT. ON CAREFUL CONSIDERATION OF THE ENTIRE MATERIAL ON RECORD WE DO NOT FIND MERIT IN THE APP ROACH ADOPTED BY THE AUTHORITIES BELOW. THE LEVY OF ANTI DUMPING DUTY BY THE GOVERNMENT ON ANY PRODUCT IMPORTED IN I NDIA WHETHER BY WAY OF PREDATORY PRICING POLICY OR OTHER WISE IS A CLEAR INDICATION OF THE FACT THAT THE SAID PRODUCT IS BEING EXPORTED TO THE COUNTRY BY THE FOREIGN PARTIES AT A VERY LOW PRICE WHICH ADVERSELY AFFECTS THE LOCAL BUSINESS. A S REGARDS THE PERIOD OF ANTI DUMPING DUTY NOTIFICATION IT HA S BEEN POINTED OUT BEFORE US BY THE ASSESSEE THAT THOUGH T HE ANTI DUMPING DUTY ORDER WAS DATED 30.11.2004 THE PERIOD OF ENQUIRY WAS 1.4.2002 TO 30-9-2003 WHICH IS SUPPORTE D BY THE DETAILS GIVEN AT PAGE 380 OF THE PAPERBOOK WHIC H HAD BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. THUS THE ANTI DUMPING DUTY ORDER CANNOT BE CONSIDERED IRRELEVANT TO THE PERIOD UNDER CONSIDERATION. 23.14 AS REGARDS THE ARGUMENT OF THE REVENUE THAT A NTI DUMPING DUTY WAS ONLY IN RELATION TO FEW PRODUCTS IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT THE PRODUCT IRI -100 IN RESPECT OF WHICH ANTI DUMPING HAD BEEN LEVIED WAS T HE MAIN ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 61 OF 71 PIGMENT DEALT WITH BY THE ASSESSEE WHICH ACCOUNTED FOR 51.4% OF PIGMENT TURNOVER. THE ASSESSEE HAD GIVEN F URTHER DETAILS AS PLACED AT PAGE 364 OF THE PAPERBOOK WHIC H SHOW THAT THE PRICE OF THE PRODUCT IN THE LOCAL MARKET H AD BEEN FALLING SINCE DECEMBER 2001. IT FELL FROM RS. 9825 PER KG. IN DECEMBER 2001 TO RS. 7343 PER KG IN DEC. 2002 AND T HE PRICE WAS RS. 6432 IN DEC. 2003. IT HAS BEEN POINTE D OUT THAT IN CASE THE PROFITABILITY OF IRI-100 WAS TAKEN AS T HE SAME AS IN THE YEAR 2002 THE NET MARGIN OF THE PIGMENT DIV ISION WOULD COME TO 18%. TO FURTHER SUPPORT THE LOW MARGI N IN CASE OF THE PIGMENT THE ASSESSEE HAS CITED THE CASE OF SUDARSHAN CHEMICALS ON WHOSE COMPLAINT THE GOVERNME NT HAD STARTED ANTI DUMPING PROCEDURE TO POINT OUT THA T MARGIN IN CASE OF SURDARSHAN CHEMICALS WAS ONLY 8.5% AND CONSIDERING THAT SUDARSHAN CHEMICALS WAS A MANUFACT URER AND THE MARGIN IN CASE OF MANUFACTURE IS HIGHER TH E MARGIN SHOWN BY THE ASSESSEE AT 5% WAS COMPARABLE TO THE M ARGIN IN CASE OF SUDARSHAN CHEMICALS. IN OUR VIEW THE ASS ESSEE HAD PLACED SUFFICIENT MATERIAL ON RECORD IN SUPPORT OF ITS PLEA THAT LOW MARGIN IN CASE OF PIGMENT WAS NOT BECAUSE OF HIGH IMPORT PRICE BUT BECAUSE OF LOW SELLING PRICE IN TH E DOMESTIC MARKET WHICH WAS HIGHLY COMPETITIVE. THE COMPARISON MADE BY AO OF THE PIGMENT SEGMENT WITH NON AE TRADING WH ICH HAD NO PIGMENT IN OUR VIEW IS NOT JUSTIFIED ON THE FACTS OF THE CASE. THE BEST COMPARISON WOULD HAVE BEEN WITH AN INDEPENDENT PARTY IMPORTING PIGMENTS FROM THE SAME FOREIGN MARKET AND TRADING IN THE LOCAL MARKET BUT NO SUCH ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 62 OF 71 COMPARATIVE CASE HAS BEEN PLACED ON RECORD BY THE T PO. THOUGH IT WAS THE TPO WHO SEPARATED THE PIGMENT SEG MENT FOR THE PURPOSE OF TRANSFER PRICING STUDY. CONSIDE RING THE ENTIRITY OF FACTS AND CIRCUMTANCES WE ARE UNABLE TO SUSTAIN THE ORDER OF CIT(A) UPHOLDING THE TP ADJUSTMENT MAD E BY AO IN THIS CASE. THE ORDER OF CIT (A) IS ACCORDINGLY S ET ASIDE AND THE ADDITION MADE WAS DELETED. 24. THE THIRD ADJUSTMENT MADE BY AO/TPO IS REGARDIN G THE TECHNICAL KNOW HOW FEES OF RS. 1.57 CRORE PAID BY T HE ASSESSE TO ITS PARENT COMPANY IN GERMANY. THE ASSESSEE FILE D COPY OF TECHNICAL CONSULTANCY AGREEMENT FROM WHICH THE AO N OTED THAT AS PER THE CLAUSE 3 OF THE AGREEMENT THE ASSES SEE WAS TO RECEIVE ASSISTANCE FROM THE PARENT IN THE FOLLOWING FIELDS. (I) SUPPORT OF ENGINEERING TECHNOLOGY CONSTRUCTION OF FACTORY AND SERVICES. (II) SELECTION OR RIGHT EQUIPMENT SOURCING OF SUPPLIES INTERNATIONALLY. (III) SUPPORT OF PRODUCTION AND QUALITY CONTROL WITH REGA RD TO TECHNICAL AND ANALYTICAL BACKGROUND. (IV) INTERNATIONAL MARKETING AND SALES TRENDS. (V) ACCESS TO NEW PRODUCTS. (VI) SEARCH FOR LICENCE PRODUCTS. (VII) INFORMATION ON ENGINEERING AND SCIENTIFIC TRENDS AN D TRAINING. (VIII) INTERNATIONAL TRENDS ON FINANCE AND ADMINISTRATION+ ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 63 OF 71 (IX) INTERNATIONAL BANKING CONTRACTS AND ISSUE OF LETTER S OF COMFORT. (X) ADVISING ON NEW TRENDS ON INFORMATION TECHNOLOGY AN D ITS IMPLEMENTATION. (XI) MONITORING THE SETTING UP AND WORKING OF THE NEW PR OJECT. (XII) INITIATION/IMPLEMENTATION OF SAP. 24.1 THE TPO ASKED THE ASSESSEE TO PRODUCE EVIDEN CE REGARDING RECEIPT OF SERVICES UNDER VARIOUS HEADS M ENTIONED IN THE AGREEMENT AS WELL AS PAYMENT OF FEES IN THE SUBSEQUENT TWO YEARS. THE AO NOTED FROM THE DETAILS FILED THAT THE PAYMENT OF FEES IN EACH YEAR WAS DIFFERENT WHICH SHOWED THAT THE ASSESSEE WAS ENTERING INTO ANNUAL AGREEMENT AS PER WHICH THE FEES WAS INCREASING EVER Y YEAR. AS REGARDS THE EVIDENCE FOR RECEIPT OF SERVICES TH E ASSESSEE EXPLAINED THAT IT RECEIVED TECHNICAL GUIDANCE WHENE VER IT REQUIRED PARTICULARLY IN RESPECT OF NEW PROJECTS UN DERTAKEN BY IT. IT WAS POINTED OUT THAT RECENTLY IT HAD RECE IVED TECHNICAL ASSISTANCE IN RESPECT OF PROJECT OF THIAM INE DISULPHIDE AND THE PROJECT FOR MANUFACTURE OF OXI NEX. THE TPO HOWEVER NOTED THAT ASISTANCE ON BOTH THE OCCAS IONS HAD BEEN RECEIVED DURING THE YEAR 2004 AND 2005. THE TP O ISSUED SHOW CAUSE NOTICE AS TO WHY THE ARMS LENGTH PRICE OF SERVICES COULD NOT BE TAKEN AS NIL AS NO EVIDENCE H AD BEEN GIVEN TO SUBSTANTIATE THE SAME. THE ASSESSEE THEREA FTER VIDE LETTER DATED 7.3.2006 GAVE PARTICULARS OF SOME SERV ICES CLAIMED TO BE RECEIVED DURING THE YEAR. THE ASSESSE E ALSO ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 64 OF 71 FILED E-MAILS TO SHOW CORRESPONDENCES RELATING TO S AP IMPLEMENTATION IMPLEMENTATION OF IT RELATED SOFTWA RE AND REGARDING QUALITY CONTROLS. THE AO OBSERVED THAT TH E ASSESSEE HAD PRODUCED EVIDENCE ONLY IN RESPECT OF S ERVICES RENDERED UNDER THREE HEADS OUT OF TOTAL TWELEVE SER VICES. HE THEREFORE APPROPRIATED THE EXPENDITURE INCURRED ON LY TOWARDS THE THREE SERVICES AT THE AVERAGE RATE WHIC H GAVE THE FIGURE OF RS. .40 CRORE. HE THUS MADE ADJUSTMENT OF RS. 1.175 CRORE IN RELATION TO FEES PAID OF RS. 1.57CRORE. 24.2 THE ASSESSEE DISPUTED THE DECISION OF AO/TPO AND SUBMITTED BEFORE CIT (A) THAT THE ASSESSEE PAID FEE S FOR CONSULTANCY AND RELATED SERVICES TO PARENT COMPANY FOR VARIOUS CONSULTANCY AND RELATED SERVICES IN THE FI ELD OF ENGINEERING TECHNOLOGY SOURCING OF SUPPLIES INFOR MATION ON ENGINEERING AND SCIENTIFIC TRENDS INTERNATIONAL TR ENDS ON FINANCE AND ADMINISTRATION AND OTHER RELATED SERVIC ES. THE CONSULTANCY AGREEMENT WAS IN RESPECT OF LIST OF SER VICES WHICH WAS AN ONGOING EXERCISE. THE SERVICES WERE BE ING RECEIVED BY WAY OF CONTINUOUS INERACTION BETWEEN TH E PERSONNEL OF THE ASSESSEE AND OVERSEAS PARENT BY PH ONE CALLS E-MAILS AND PERSONAL VISITS. THE AGREEMENT D ID NOT SPECIFY THAT ALL SERVICES MENTIONED IN THE AGREEMEN T WILL BE RENDERED DURING THE SAME YEAR. THE AGREEMENT WAS ON LY INDICATIVE IN NATURE. THE TPO THEREFORE ERRED IN A LLOCATING TECHNICAL SERVICES PAYMENT BASED ON THE NUMBER OF H EADS MENTIONED IN THE AGREEMENT WITHOUT APPRECIATING THE NATURE ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 65 OF 71 OF THE SERVICES RECEIVED DURING THE YEAR AND THE VA LUE ASSOCIATED WITH THE SAME. THE ASSESSEE DURING THE Y EAR HAD RECEIVED SIGNIFICANT SUPPORT FROM THE AE FOR IMPLEM ENTATION OF SAP IN INDIA AND IN CASE THE ASSESSEE HAD PAID T O THE AE AT MAN HOUR RATE THE TECHNICAL SERVICES FEES PAYBLE WOULD HAVE BEEN SIGNIFICANTLY HIGH. IT WAS THEREFORE UR GED THAT ADJUSTMENT MADE BY TPO WAS NOT JUSTIFIED. CIT (A) W AS HOWEVER NOT SATISFIED WITH THE EXPLANATION GIVEN. I T WAS OBSERVED BY HIM THAT THE ASSESSEE HAD GIVEN GENERAL EXPLANATION WITHOUT SUBSTANTIATING THE CLAIM. THE A SSESSEE HAD GIVEN EVIDENCE ONLY IN RESPECT OF THREE OUT OF TWELVE HEADS OF SERVICES. EVEN DURING THE APPELLATE PROCEE DINGS THE ASSESSEE COULD NOT PROVIDE EVIDENCE IN RESPECT OF A LL THE SERVICES RECEIVED DURING THE YEAR. CIT (A) THEREFOR E CONFIRMED THE ADJUSTMENT MADE BY AO AGGRIEVED BY WHICH THE A SSESSEE IS IN APPEAL BEFORE TRIBUNAL. 24.3 BEFORE US THE LEARNED SERNIOR COUNSEL ASSAILE D THE ORDER OF CIT(A) CONFIRMING THE ADJUSTMENT MADE BY A O/TPO. IT WAS ARGUED THAT ADJUSTMENT UNDER TRANSFER PRICIN G REGULATIONS HAD TO BE MADE ON THE BASIS OF ONE OF T HE PRESCRIBED METHODS ONLY. THE TPO HAD NOT FOLLOWED A NY OF THE METHODS. HE HAD MADE ONLY ESTIMATED DISALLOWANC E OF EXPENSES WHICH IS NOT PERMISSIBLE UNDER TRANSFER PR ICING REGULATIONS. IT WAS ALSO SUBMITTED THAT THE FEES PA ID BY THE ASSESSEE WAS NOT FOR FIXED SERVICES. THE ASSESSEE H AD THE FACILITY TO OBTAIN CERTAIN SERVICES WHICH IT AVAILE D FROM TIME TO ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 66 OF 71 TIME DEPENDING UPON THE REQUIREMENT. THE FEES PAID BY THE ASSESSEE HAD BEEN TAKEN AS PART OF THE COST INCURRE D IN TRADING AND MARKETING SEGMENT. FOR BENCH MARKING TH E TRANSACTIONS THE ASSESSEE HAD APPLIED ENTITY LEVEL TNMM. THE NET MARGIN OF THE ASSESSEE WAS 15% WHEREAS THAT OF THE COMPARABLE WAS 13.36% THUS REQUIRING NO ADJUSTMENT . HE REFERRED TO THE DECISION OF TRIBUNAL IN CASE OF MCC AN ERICSSON (INDIA) (P) LTD. VS. ACIT IN ITA (5871 DEL / 2011) IN WHICH IN RESPECT OF SIMILAR MANAGEMENT SERVICES AN D CLIENT COORDINATION FEES ENTITY LEVEL TNMM HAS BEEN UPHELD BY THE TRIBUNAL. IN THAT CASE ALSO THE TPO HAD TAKEN THE V ALUE OF SERVICES AS NIL. THE TRIBUNAL OBSERVED THAT IT WAS FOR THE ASSESSEE TO DECIDE THE LEGITIMATE BUSINESS NEEDS AN D THE AO CAN NOT DICTATE THE BUSINESS NEEDS. RELIANCE WAS AL SO PLACED ON THE DECISION OF TRIBUNAL IN CASE OF ERICSSON (I NDIA) (P) LTD. IN ITA 5141/DEL/2011 IN WHICH IN SIMILAR SITUATION THE TRIBUNAL OBSERVED THAT IT WAS FOR THE ASSESSEE TO D ECIDE WHETHER SERVICES WERE REQUIRED OR NOT AND WHAT WAS THE BUSINESS EXPEDIENCY AND ENTER INTO ARRANGEMENT AS P ER THE BUSINESS NEEDS. THE TRIBUNAL ALSO OBSERVED THAT IT WAS NOT FOR THE DEPARTMENT TO SAY AS TO HOW MUCH SHOULD BE PAID FOR WHICH SERVICE. MOREOVER IT WAS FURTHER POINTED OUT THAT IT WAS A CASE OF TP ADJUSTMENT AND NOT NORMAL ASSESSMENT A ND THEREFORE ADJUSTMENT CAN BE MADE ONLY BY FOLLOWING THE PRESCRIBED METHODS WHICH HAS NOT BEEN DONE IN THIS CASE. THEREFORE IT WAS URGED THAT THE ADJUSTMENT MADE SH OULD BE DELETED. ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 67 OF 71 24.4 LEARNED CIT(DR) ON THE OTHER HAND STRONGLY DEFENDED THE ORDERS OF AUTHORITIES BELOW. IT WAS AR GUED THAT THERE WAS NO EVIDENCE FOR PAYMENT OF REMAINING NINE SERVICES AND THERFORE PAYMENT TO THOSE SERVICES HAD BEEN T REATED AS NIL BY THE TPO AS NO INDEPENDENT PARTY WOULD BE PRO VIDING ANY FREE SERVICES. THEREFORE IT WAS ARGUED THAT TH E TPO HAD APPLIED THE CUP METHOD WHICH WAS MOST APPROPRIATE O N THE FACTS OF THE CASE. THE LEARNED CIT(DR) ALSO REFERRE D TO THE DECISION OF BANGALORE BENCH OF TRIBUNAL IN CASE OF FESTO CONTROLS (P) LTD VS. DCIT IN ITA NO. 969/BNG/2011 I N WHICH IN A SIMILAR SITUATION WHERE CERTAIN SERVICES HAD B EEN PROVIDED FROM THE CENTRAL POINT TO MORE THAN ONE EN TITIES THE ISSUE HAD BEEN RESTORED BY THE TRIBUNAL TO THE FILE OF AO. IT WAS THUS ARGUED THAT IN THIS CASE ALSO THE ISSUE MA Y BE RESTORED TO THE FILE OF AO. THE LEARNED SENIOR COUN SEL HOWEVER POINTED OUT THAT THE SAID DECISION OF TRIBU NAL WAS DISTINGUISHABLE AS IN THAT CASE SERVICES HAD BEEN R ENDERED AND THE ISSUE WAS COST ALLOCATION WHICH HAD BEEN RE STORED BY THE TRIBUNAL. THE SAID DECISION THEREFORE WILL NO T APPLY TO THE FACTS OF THE PRESENT CASE. 24.5 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THIS GROUND IS REGARDING TP ADJUSTMENT MADE BY AO/TPO IN RELAT ION TO TECHNICAL KNOW HOW FESS PAID BY THE ASSESSEE AT RS. 1.57 CRORE TO ITS PARENT IN GERNAMY. THE DETAILS OF THE VARIOUS ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 68 OF 71 SERVICES WHICH PARENT COMPANY WAS REQUIRED TO PROVI DE TO THE ASSESSEE HAVE BEEN GIVEN IN PARA 24 EARLIER. TH ERE ARE TWELEVE SUCH SERVICES LISTED IN THE SAID PARA. THE TPO ON DETAILED EXAMINATION CONCLUDED THAT DURING THE YEAR THE PARENT COMPANY HAD PROVIDED SERVICES ONLY UNDER THE THREE HEADS OUT OF TOTAL TWELVE HEADS OF SERVICES WHICH RELATED TO SAP IMPLEMENTATION AND QUALITY CONTROL. THE TPO HAS THEREFORE HELD THAT NO FEES WAS REQUIRED TO BE PAI D IN RESPECT OF NINE SERVICES AND HAS THEREFORE ALLOWED ONLY A SUM OF RS .40 CRORE ON AVERAGE BASIS IN RESPECT OF THREE HEAD S WHICH RESULTED INTO ADJUSTMENT OF RS. 1.157 CRORE. THE CA SE OF THE ASSESSEE IS THAT THE PARENT AS PER THE AGREEMENT WA S REQUIRED TO PROVIDE SERVICES AS MENTIONED IN THE AG REEMENT FROM TIME TO TIME AS REQUIRED BY THE ASSESSEE. THE AGREEMENT DID NOT SPECIFY THAT ALL THE SERVICES MENTIONED IN THE AGREEMENT HAVE TO BE RENDERED DURING THE YEAR. THE ASSESSEE HAD THE FACILITY UNDER THE AGREEMENT TO OBTAIN CERT AIN SERVICES AS MENTIONED THEREIN WHICH COULD BE AVAILE D FROM TIME TO TIME. THE ASSESSEE HAS APPLIED ENTITY LEVEL TNMM FOR BENCH MARKING THE INTERNATIONAL TRANSACTION AND DEMONSTRATED THAT IN CASE OF COMPARABLES THE MEAN MARGIN WAS 13.36% WHEREAS THE MARGIN OF THE ASSESSEE WAS 1 5% AND THEREFORE NO ADJUSTMENT WAS REQUIRED TO BE MA DE. ON THE CONTRARY THE TPO HAS NOT APPLIED ANY PRESCRIBED METHOD. 24.6 WE FIND SUSBTANCE IN THE ARGUMENT ADVANCED. T HE LAW IS QUITE CLEAR ON THE SUBJECT THAT TP ADJUSTMEN T IS ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 69 OF 71 REQUIRED TO BE MADE BY APPLYING ONE OF THE PRESCRIB ED METHODS. THE TPO HAS NOT APPLIED ANY PRESCRIBED MET HOD AND HAS ONLY DISALLOWED PART OF THE EXPENSES AS DON E IN THE NORMAL ASSESSMENT WHICH IS NOT PERMITTED UNDER TRA NFER PRICING REGULATION AS PER WHICH ADJUSTMENT ON ACCOU NT OF ANY INTERNATIONL TRANSACTION IS REQUIRED TO BE MADE AS PER THE METHOD PRESCRIBED. THE LEARNED CIT (DR) POINTED OUT THAT THE TPO IN RESPECT OF THE NINE SERVICES NOT AVAILED BY THE ASSESSEE HAS TREATED THE PAYMENT AS NIL SINCE NO IN DPENDENT PARTY WOULD MAKE ANY PAYMENT FOR SERVICES NOT PROVI DED. THE TPO THUS HAD APPLIED THE CUP METHOD AND MADE ADJUST MENT ON ACCOUNT OF NINE SERVICES ON AVERAGE BASIS. 24.7 SUCH ARGUMENT IN OUR VIEW IS NOT CONVINCING. THE ARGUMENT WOULD HAVE BEEN VALID IF FEES WAS FIXED IN RESPECT OF EACH SERVICE WHICH WAS COMPULSORILY REQUIRED TOBE PROVIDED TO THE ASSESSEE BUT IT IS NOT SO IN THE PRESENT CA SE. THE AGREEMENT LISTED CERTAIN SERVICES ON WHICH THE ASSE SSEE REQUIRES GUIDANCE/ASSISTANCE FROM TIME TO TIME. THE ASSESSEE WAS THUS ENTITLED TO ANY OF THE SERVICES AS AND WHE N REQUIRED. THEREFORE APPLYING CUP METHOD TO THE SER VICE NOT AVAILED BY THE ASSESSEE DURING THE YEAR IS NOT JUST IFIED. IT WOULD HAVE BEEN APPROPRIATE IF THE AO HAD APPLIED C UP METHOD TO THE PAYMENT MADE DURING THE YEAR BY THE A SSESSEE FOR THE THREE SERVICES AND COMPARED WITH SIMILAR PA YMENT FOR SUCH SERVICES BY AN INDEPENDENT PARTY. NO EFFORTS H AVE BEEN MADE BY TPO/AO TO DETERMINE THE MARKET VALUE OF SER VICES ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 70 OF 71 RECEIVED BY THE ASSESSEE DURING THE YEAR RELATING T O SAP IMPLEMENTATION AND QUALITY CONTROL TO SHOW THAT THE ASSESSEE HAD PAID MORE COMPARED TO ANY INDEPENDENT PARTY FOR THE SAME SERVICES. THE ASSESSEE HAD SUBMITTED THAT IN C ASE THE ASSESSEE HAD PAID TO THE AE AT MAN HOUR RATE FOR TH E TECHNICAL SERVICES PROVIDED DURING THE YEAR IN RELA TION TO SAP IMPLEMENTATION THE FEES PAYABLE WOULD HAVE BEEN SIGNIFICANTLY HIGER. THERE IS NOTHING PRODUCED BEFO RE US TO CONTROVERT THE SAID CLAIM. THE ASSESSEE HAS APPLIED TNMM WHICH SHOWS THAT THE MARGIN SHOWN BY THE ASSESSEE W AS HIGHER THAN THE COMPARABLE COMPANIES. THE CASE OF T HE ASSESSEE IS ALSO SUPPORTED BY THE DECISION OF TRIBU NAL IN CASE OF MC CAN ERRICSON INDIA PVT. LTD. (SUPRA) IN WHICH THE DECISION OF TPO TO TAKE THE VALUE OF CERGAIN SERVIC ES AT NIL HAS NOT BEEN UPHELD. CONSIDERING THE ENTIRITY OF FA CTS AND CIRCUMSTANCES THE ADJUSTMENT MADE BY TPO WHICH IS NOTHING BUT DISALLOWANCE OF EXPENSES CANNOT BE UPHE LD. WE THEREFORE SET ASIDE THE ORDER OF CIT (A) ON THIS P OINT AND DELETE THE ADDITION MADE. 25. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED TODAY I.E 19 /7/2013 SD/- SD/- (B.R. MITTAL) (RAJENDRA SINGH) / JUDICIAL MEMBER # / ACCOUNTANT MEMBER S.K.S SR. P.S. MUMBAI DATED 19 /7/2013 ITA NO. 925/MUM/2007 MERCK LIMITED PAGE 71 OF 71 1 1 1 1 *.2 *.2 *.2 *.2 3 2'. 3 2'. 3 2'. 3 2'. / COPY OF THE ORDER FORWARDED TO : 1. () / THE APPELLANT 2. *+() / THE RESPONDENT. 3. 4 ( ) / THE CIT(A)- 4. 4 / CIT 5. 256 *.% / DR ITAT MUMBAI 6. 67& 8 / GUARD FILE. 1% 1% 1% 1% / BY ORDER +2. *. //TRUE COPY// 9 99 9 / ' ' ' ' ( DY./ASSTT. REGISTRAR) / ITAT MUMBAI