DISHMAN PHARMACEUTICALS & CHEMICALS LTD.,,AHMEDABAD vs. THE ACIT.,(OSD)RANGE-1,, AHMEDABAD

आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ - अहमदाबाद ।

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH ‘D’ BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER

Sr. ITA No. and Appellant Respondent No. Asstt.Year DCIT(OSD), Range-1 1-3 692/Ahd/2011 With Dishman CO No.89/Ahd/2011 Ahmedabad Pharmaceuticals & Chemicals Ltd. Asstt.Year 2005-06 Bhadraj-Raj Chambers Swastik Cross Road AND Navrangpura, 2447/Ahd/2011 Ahmedabad. Asstt.Year 2005-06 PAN : AAACD 4164 D

DCIT(OSD), Range-1 4 2957/Ahd/2013 Dishman Asstt.Year 2006-07 Ahmedabad Pharmaceuticals & Chemicals Ltd. Bhadraj-Raj Chambers Swastik Cross Road Navrangpura, Ahmedabad. 5 3086/Ahd/2013 Dishman Pharmaceuticals DCIT(OSD), Range-1 & Chemicals Ltd. Asstt.Year 2006-07 Ahmedabad Bhadraj-Raj Chambers Swastik Cross Road Navrangpura, Ahmedabad. DCIT(OSD), Range-1 6 817/Ahd/2011 Dishman Asstt.Year 2006-07 Ahmedabad Pharmaceuticals & Chemicals Ltd. Bhadraj-Raj Chambers Swastik Cross Road Navrangpura, Ahmedabad. DCIT(OSD), Range-1 7 773/Ahd/2011 Dishman Pharmaceuticals Asstt.Year 2006-07 & Chemicals Ltd. Ahmedabad Bhadraj-Raj Chambers Swastik Cross Road Navrangpura, Ahmedabad.

Shri Vasundhara Upmanyu, CIT-DR Revenue by : Shri R.P. Maurya, Sr.DR : Assessee by Shri T.P. Hemani, AR with Shri Parimal Parmar, AR

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 2

सुनवाई क� तार�ख/Date of Hearing : 22/03/2018 घोषणा क� तार�ख /Date of Pronouncement: 23 /05/2018 आदेश/O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER:

In this bunch of 7 appeals, assessee and Revenue are challenging orders of the ld.CIT(A) passed in assessment years 2005-06 and 2006-07. Since common issues are involved, therefore, we heard these appeals together and deem it appropriate to dispose of them by this common order.

“1. The ld.CIT(A) erred in law and on facts in deleting the addition of Rs.8,65,17,574/- made on account of TPO order under section 92CA(3) of the I.T.Act by rejecting the TNMM selected by the assessee.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 3 assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. A perusal of record revealed that the assessee has international transactions in terms of section 92B with its associated enterprises (“AE” for short). Hence, reference under section 92CA of the Act was made to the ld.TPO for determining arm’s length price (“ALP” for short) of international transactions between the assessee and its AE. On analysis of details given in form No.3CB, the ld.TPO found the following international transactions undertaken by the assessee:

Sl. Nature of international Value of transactions No. transactions

Receipt Paid 1. Sales of various products 98,32,51,452 2. Contract Research Services 7,39,71,950 3. Services relating to 49,65,562 procurement of raw materials 4. Management Services 49,92,225 Total 105,72,23,402 1,29,57,787

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 4 the ld.TPO and findings of the ld.TPO is also available in the order of theld.CIT(A). On the basis of CUP method, the ld.TPO recommended for making upward adjustment in the price of products sold to these AEs. Similarly, he applied same analogy for making upward adjustment in respect of contract research receipts. The ld.TPO made recommendation for adjustment of Rs.8,65,17,574/- on two items i.e. sale of various products and contract research services. Recommendation made by the ld.TPO have been given effect by the AO in his assessment order dated 22.12.2008.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 5

“2.3. I have considered the facts of the case, order passed by transfer pricing officer and appellant's submission. Appellant had various international transactions with associated enterprises (AEs) during the year which were categorized as- sale of products, contract research services, services for procurement of raw material and management services. TPO made adjustments with regard to first two categories. Appellant followed TNMM method for calculating arms length price which was changed by the assessing officer to CUP method and then worked out variation as adjustment. Apart from this, assessing officer made adjustment in contract research services by applying resale margin method. As regards change of method from TNMM to cup, the issue is squarely covered by the orders of my learned predecessors for assessment years 2002 -03, 2003-04 and 2004-05 (covering all appeals prior to this assessment year). The relevant extract of the order for assessment year 2004-05 is quoted below-

"in so far as the method of variation of arms length prices is concerned, the provisions of the act are very clear, in as much as it is the assessee who has a right to choose the best applicable method for the purpose of calculation of arms lengthprices analysts AO finds serious defects in the said method and he fulfils the preconditions prescribed under section 92C (3) of the act. Under the scheme of the act, the AO is required to find out the arms length price based on any of the five methods prescribed under the act. Under the act no particular preferences given to a particular method compared to other methods. it is also mandatory on the part of the AO to give a clear finding as to how to and why the method adopted by the assessee cannot give a true and correct picture of arms lengthprices. Moreover, the AO has to justify and give reasons as to why the method adopted by him is more scientific inaccurate in determining the arm's length price is compared to the method adopted by the assessee. In the facts of the present case, the assessee has adopted transactional net margin method (TNMM for short). The assessee has justify the said method by stating that having regard to the sales of large number products to its associate enterprise, coupled with the fact that it has also sold diversify products to unrelated enterprises and looking to the complexity of the transactions, product diversity and multiplicity of transactions, the said method was only tactical method to determine the arms length prices. Under the said method, assesseefinds the profit before interest and excess and (PB IT) as a percentage of turnover and the same income is being compared with such PB IT of other entities dealing in identical products and having comparable turnovers. As per the report submitted under rule 10 B of the ID rules, the assessee has given comparison of such PBIT with various other concerns and it has demonstrated that such PBIT of the appellant at 26.32% while higher than the average comparable PBIT of such similar entities at 13.33%. The only reason, apart from some general regions, why the AO has rejected the said method was absence of breakup of PBIT between transactions with associated enterprises and unrelated entities. If the PBIT with the associated enterprises is higher than the overall PBIT, the very ground for rejecting the said

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 6 TNMM method goes away. Under the circumstances, there was no reasonable ground for changing the method for determining the arm's length prices. Under the circumstances, I hold that there was no justification on the part of the AO in changing the TNMM method is adopted by the assessee in determining the arm's length prices. Accordingly, AO is directed to adopt the TNMM method and not the cup method."

Facts of the appellant's case are similar to assessment year 2004-05 with the only difference in appellant's PBIT at 24.87% as compared to average PBIT of such similar entities at 18.36%. The arguments given by the TPO are similar and therefore this issue is covered by the earlier appellate decision in the appellant's own case in the similar facts and circumstances. Appellant also submitted decision of ITAT Ahmedabad in the case of Schutz Dishman biotech private Ltd (a sister concerns in the similar line of business) for assessment year 2002-03 in ITA number 554/AHD/2006 dated 15 February 2008. The relevant part of the decision is quoted below-

"We find no fault with the TNMM method adopted by the assessee on the above facts of the case. Even the honourable apex court in the case of Morgan Stanley & Co has clearly upheld the adoption of TNMM method as most appropriate method and the relevant particular line from the judgement reads as under-

"as regards income attributable to the P E, we hold that the transactional net margin method was the appropriate method for determining the arm's length price in respect of transactions between Morgan Stanley & Co and MSAS' even the honourable special bench of this tribunal in the case of Aztec software and technology services Ltd has held that the computation of arms length price is effect to exercise. Each case depends on its own facts and circumstances. In many cases where identical or almost similar uncontrolled transaction is areavailable for comparison, determination of arms length price is an easy task. But it is not so in most of the transactions and rarely one is able to locate and identical transaction. In such cases arms length price is determined by taking this survey comparable transaction in comparable circumstances and make suitable adjustment for the differences. Similarly in the present case also the PB IT of the assessee company is exactly similar or nearby with that of the other uncontrolled transactions of unconnected enterprises. The PB IT of the exports is as high as 23.02% as against the overall PB 17- of the assessee company at 20.04%. Even the assessee has compared that PB IT of other independent entities with that of the assessee and demonstrated the application of TNMM methodcorrectly. Accordingly we uphold the TNMM method adopted by the assesseeand reverse the cup method adopted by the revenue." Respectfully following the above decisions of my learned predecessors in the appellant's own case and jurisdictional 1TAT on the issue of change of method from TNMM to cup in the case of appellant's sister

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 7 concerns having identical facts, assessing officer is directed to accept TNMM method as against cup method taken up by TPO. In TNMM method, appellant's margin is higher than average margin of comparable entities and therefore no adjustment can be made on the issue of sales made to associated enterprises.

Even otherwise appellant submitted detailed reasons as to why adjustments made by the TPO are not justified. The reasons given are- difference in quantity sold, different geographical area, difference in timing, frequency of transactions, smallness of difference etc. If all these reasons are considered, there is hardly any material difference calling for adjustment. There are instances where sales to associate enterprises are at higher prices than non-associate enterprise reflecting that sales were made at arm's length prices. In view of the submissions of the appellant, the adjustments made by adopting CUP method will not survive.

As regards adjustments on contract research services, TPO made upward adjustment of RS 4.6 Crores. Out of these adjustment of RS 2.96 crores was made in the case of USA subsidiary and balance in the case of UAE subsidiary. It is a matter of record that the appellant has charged US $ 4000 per month per Full Time Employee (FTE) to its AE for carrying out research activities. The appellant has charged the same rate to Non - AEs which is very much evident from the copy of invoices which are placed on record at pages nos.179 to 182 of Paper Book - II. While appellant received US dollar 11.90 lakhs from these two AEs at the rate of $4000 per men month, appellant also received USdollar 9.55 lakhs from three non- AEs at the same rate of $4000 per men month for contract research work. I find that even if CUP is to be applied for these transactions, the comparable instances of charging price to Non-AEs prove that the transactions are entered into at ALP and therefore no adjustments are called for.

It is also submitted by the appellant that it has entered into arrangement whereby it has carried out contract based research activity. As per the terms and conditions for contract research mentioned by the appellant, the entire risk of outcome of the said research was to be taken by the principals' i.eDishmanFZE and Dishman USA. As per submission, the appellant was to carry out only the research activity, irrespective of the outcome of such research and for that activity, the appellant was to be compensated in terms of men month hours' basis. In other words, the principals are getting the entire contract research work done by the appellant and takes the risk and as a corollary, the rewards too. The bills issued for contract research work for AEs and non-AEs are identical in which man months was the basis of billing. In the absence of formal contracts, the TPO considered these transactions as normal sale ignoring the nature of transactions. Transactions can be entered even without elaborate formal agreement but that will not change the nature of transactions. These transactions cannot be equated with the normal sale transactions just because formal agreement was not entered/ submitted. Even oral arrangement/

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 8 agreements are legally recognized. TPO did not find any material or evidence to suggest that these transactions were not contract research services but outright sale. In view of this, the profit margins of the associate enterprises cannot be applied to the appellant as the appellant is only charging on the basis of man months spent on the contract research work without taking risk of outcome. I therefore hold that the appropriate methods, which can be applied for the purpose of determining the arms length price, are the Transaction Net Margin Method (TNMM) or comparable uncontrolled price (CUP) ,discussed inearlier Para, which have been applied by the appellant and as per that no adjustment is called for. Under the circumstances, this addition is not sustained. In view of the aforesaid discussions, no adjustments to the ALP for any of the transactions entered into by the appellant for the year under consideration is called for and assessing officer is directed to delete the same.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 9 submitting as to why CUP is not appropriate method. Such details have been reproduced by the ld.CIT(A) and they read as under:

Sr. Product ALP Adjustment Reasons why comparison is not No. in Rs. proper 1 Ammonium 10,70,529/- The appellant has sold 9,800 Kgs Tributyle at average rate of Rs.144.51 to Ammonium Dishman USA AE. The ld. TPO Chloride has compiled the identical products sold to various customers in respective countries and has adopted their average rate of Rs.253.47. Details of which given on page no. – of Paper Book.

Reasons for non-comparable are as under :

(a) Function Performed, Risk Assumed and Assets Employed i.e FAR factors are not taken into consideration while comparing prices charged to AE with non-AE.

(b) Quantity Factor : The instances taken by the ld. TPO so far as quantity is concerned are at all not comparable, except one, as the Appellant has sold use quantity of 9800 Kgs, whereas comparable quantity is ranging from 22 kgs to 1950 kgs.

The only comparable instance could be impugned product sold to DDC fine chemicals N.V. situated at Belgium – quantity is 10,000 kgs is at average rate of Rs. 200.97. However, this is also not comparable for the reason of Geographical factor and Function Performed, Employment of Assets and Risk Assumption by AE. Hence, this is also not comparable instance.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 10

(c) Geographical Factor :Non AEs are situated at different Geographical area and therefore also they are not comparable. Because of the different geographical locations even the politic risks also vary so also the currency fluctuation risk. (d) Regularity of Transaction : The appellant submits that even when internal comparison is applied, what can be compared for the purpose of determining the ALP are the regular transactions and not the solitary or isolated transaction with any other third non-EE party. Transaction can either the arena of comparison only if it’s a transaction which is a regular transaction. In the facts of the present case, transaction selected by ld. TPO are such isolated or solitary transactions and therefore the very comparison is erroneous or misconceived.

2 & 3 Cetrimide BP 98,250 and No comments for the smallness of 92,800 amount. 4 PhenyleTrimethyle 5,87,523/- The appellant would like to point Ammonium out that there is a mistake on the Chloride part of ld. TPO in taking average price at Rs. 299.27 instead of Rs. 246.10.

Summarised table of quantity sold to Non AEs and average price thereof is given hereunder for ready reference to clarify the issue:

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 11 Country Qty. Avg. Rate Argentina 600 535.67 Australia 11558 272.49 Belgium 81000 242.42 Iran 16000 228.63 Japan 1600 303.52 Taiwan 24 459.30 UK 5 694.35 Total 110787 246.10 AE – 11,100 246.34 Europe

From the above given table, it is very much clear that the appellant has charged price at Rs. 246.34 to the AE than the average price charged at Rs. 246.10 to Non-AE. Hence, there is no question of making Transfer Pricing Adjustments.

5 PhenyleTrimethyle 5,48,053/- The appellant would like to point Ammonium out that there is a mistake on part Chloride of ld. TPO in taking average price at Rs. 299.27 instead of Rs. 246.10.

Summarise table of quantity sold to Non-AEs and average price thereof is given hereunder for ready reference to clarify the issue :

Country Qty. Avg. Rate Argentina 600 535.67 Australia 11558 272.49 Belgium 81000 242.42 Iran 16000 228.63 Japan 1600 303.52 Taiwan 24 459.30 UK 5 694.35 Total 110787 246.10 AE – USA 8280 233.08

In the given case, the appellant has charged average price Rs.233.08 to AE whereas average

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 12 price to Non-AE work out to be to Rs. 246.10 which is certainly within limit of 5% and therefore as per 2nd Proviso S. 92C(2)of the Act no transfer pricing adjustment is required to be made.

Without prejudice to above, the appellant submits that in any case the instances are not comparable at all due to quantity and geographical factors

6 Sodium 78,713/- No comments for the smallness of Picosumlphat amount. 7 Tetrabutyl 31,81,642/- (a) FAR Analysis : As Above. Ammonium (b) Quantity factor : The Bromide instances is taken by the ld. TPO is summarised as under :

Country Qty. Avg. Rate Isreal 28800 215.82 Japan 4300 280.63 Korea 3500 433.95 Netherland 1000 810.60 USA 10200 240.67 Total 47800 255.36 AE- 49054 190.50 Europe

All five instances are not comparable as there is huge difference in quantity of the product sold to AE and Non-AE.

Even if the near quantity i.e 20,800 taken into consideration then also average rate is Rs. 215.82, which is also for the required to be discounted considering the quantity factor i.e 28,800 Kgs to Non-AE against 49,054 kgs. to AE as well as graphical factors and certainly FAR.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 13 (c) Geographical factors : As Above.

(d) Regularity of transaction : As above (1).

8 Tetra Butyle 1,05,040/- For the smallness of amount it is Ammonium not considered. Bromide 9 Tetra Butyle 55,21,061/ (a) Function Performed, Risk Ammonium Assumed and Assets Bromide Employed i.e FAR factors are not taken into consideration while comparing prices charged to AE with non-AE. Detailed FAR analysis is given below table. (b) Quantity factors. The instances taken by the ld. TPO is summarised as under.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 14 Country Qty. Avg. Rate Isreal 16900 234.02 Japan 7040 251.84 Korea 2000 435.60 Total 25,940 254.40 AE- 1,04,625 201.63 Europe

All three instances are not comparable as there is huge differences in quantity of the product sold to AE and Non-AE. Even if the near quantity i.e.16,900 taken into consideration that also average rate is Rs. 234.02, which is also for the required to be discounted considering quantity factor i.e.16,900kgs. to Non-AE against 1,04,625 Kgs. toAE as well as geographical factors and certainly FAR factors.

(c) Geographical factors. Non- AEs aresituateat different Geographical area and therefore also they are not comparable. (d) Regularity of transaction : As above (1).

(a) FAR Analysis : As Above. 10 Tetra Butyle 6,63,789/- Ammonium (b) Quantity Factor : Only one Fluoride instance has been taken Thihyderate into consideration by the ld. TPO i.e only 10 Kgs sold to customer in Brazil, whereas the appellant has sold 400 kgs. to AE. Certainly this instance is not comparable looking into huge difference in quantity as well as only one transaction has been entered into by the Appellant with such Non AE. (c) Geographical factors : As

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 15 (1) Above. (d) Regularity of transaction : As (1) above.

(a) FAR Analysis : As Above. 11 Tetra Butyle 47,18,827 Ammonium (b) Quantity Factor : The Hydrogen instances taken by the ld. Sulphate TPO has summarised as under :

Country Qty. Avg. Rate Germany 500 663.84 Japan 600 630.00 Netherland 1000 762.65 USA 100 962.50 Total 2,200 713.10 AE- 17306 440.43 Europe

All three instances are not comparable as there is huge difference in quantity of the product sold to AE and Non-AEs.

(c) Geographical factors : As Above (1). (d) Regularity of transaction : As above (1).

12 Tetra Butyle 24,931 For the smallness of amount it is Ammonium not considered. Hydrogen Sulphate

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 16 13 Tetra Ethyle 1,35,57,000/- (a) FAR Analysis : As Above. Ammonium (b) Quantity Factor : The Bromide instances taken by the ld. TPO has summarised as under :

Country Qty. Avg. Rate Brazil 63 608.86 Japan 100 650.70 Malaysia 25 437.80 USA 3000 252.02 Total 3,188 273.04 AE- 1,50,000 182.66 Europe

All four instances are not comparable is there is huge difference in quantity of the product sold AE and Non-AEs.

Even if nearer quantity is taken into consideration i.e 3000 at average rate ofRs. 252.02, then also it is for the required to be discounted considering huge difference of quantity sold to Non AE and AE i.e 3000 kgs. to non- AE against 1,50,000, as well as geographical factors and FAR Analysis.

(c) Geographical factors : As Above (1). (d) Regularity of transaction : As above (1). 14 Tetra Ethyle 1,05,475/- For the smallness of amount it is Ammonium not considered. Bromide 15 Lidocain 3,22,720/- (a) FAR Analysis : As Above. (b) Quantity Factor : The instances taken by the ld. TPO has summarised as under :

Country Qty. Avg. Rate China 1000 594.68

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 17 800 701.24 Korea 200 688.51 Thailand 25 657.28 Total 2025 646.81 AE- 4000 566.13 Europe

All four instances are not comparable is there is huge difference in quantity of the product sold AE and Non-AEs.

Even if nearer quantity is taken into consideration i.e 1000 at average rate of Rs. 594.68, then also it is for the required to be discounted considering huge difference of quantity sold to Non AE and AE i.e 1000 kgs. to non- AE against 4,000 to AE, as well as geographical factors and FAR Analysis.

(c) Geographical factors : As Above (1). (d) Regularity of transaction : As above (1).

16 Tetra ButyleAmm. 13,69,800 (a) FAR Analysis : As Above. Hy. (b) Quantity Factor : The instances taken by the ld. TPO has summarised as under : Country Qty. Avg. Rate Germany 500 743.52 Japan 300 635.04 Netherland 2000 766.50 Total 2800 748.31 AE- 3000 291.71 Europe

The appellant has entered into only one transaction with above mentioned Non-AE and therefore they can never be compared with the price charged and in any case there due to quantity, geographical difference,

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 18 comparison cannot make transfer pricing adjustments.

(c) Geographical factors : As Above (1). (d) Regularity of transaction : As above (1).

17 Tetra ButyleAmm. 3,53,418 (a) FAR Analysis : As Above. Hy. (b) Quantity Factor : The instances taken by the ld. TPO has summarised as under :

Country Qty. Avg. Rate Germany 500 743.52 Japan 300 635.04 Netherland 2000 766.50 Total 2800 748.31 AE- USA 1300 291.71

The appellant has entered into only one transaction with above mentioned Non-AE and therefore they can never be compared with the price charged and in any case there due to quantity, geographical difference, comparison cannot make transfer pricing adjustments.

(c) Geographical factors : As Above (1). (d) Regularity of transaction : As above (1).

18 Myristyl DBA 59,71,613 (a) FAR Analysis : As Above. Chloride Powder (b) Quantity Factor : Only one instance has been taken into consideration by the ld. TPO i.e only 25 Kgs sold to customer in Egypt, whereas the appellant has sold 24,494.40 kgs. to AE. Certainly this instance is not comparable looking into huge difference in quantity as well as only single transaction has been entered into by the appellant with

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 19 such Non AE. (c) Geographical factors : As (1) Above. (d) Regularity of transaction : As (1) above.

Upward adjustment of Rs.4,68,04,255/- in respect of contract research receipts : At the outset the appellant most respectfully submits that in respect of upward adjustment in with regards to transaction in the nature of contract research receipt from Dishman USA Inc is amounting to Rs.2,96,26,763/- is concerned, the same is not at all tenable as the total contacts research receipt with the said entity is only in the sum of Rs. 87,38,550/-. The following table would clarify this aspect :

Nature of transactions Amount in Rs. Transactions with Dishman USA Inc. in respect 23,00,00,469/- of sales of Goods (Ref. page ___ of P/B) Transactions with Dishman USA Inc. in respect 87,38,550/- of sales of services (contract research receipts) (Ref. page ___ of P/B) Rate difference 23,87,897/- Total transactions with Dishman USA Inc. in 24,11,26,916/- respect of sales of Goods and Services

The appellant submits that when the total transactions in the respect of contract research are to the tune of Rs. 87.38 lacs, the question of making adjustment beyond this gross figure of receipt cannot rise and no adjustment in this sum of Rs.296.26 lakhs can be made. The appellant submits that ld. TPO has already made adjustments in respect of transaction of sales of goods by applying the CUP method and the same has been the subject matter of challenge in the earlier grounds. Having done that, it is not open to ld. TPO to once again apply the gross mark up method and make one more addition on this same set of sales with the same AE.If the TPO has chosen a particular method for determining ALP, the same has to be applied uniformly to all the transactions. It is then not open to the TPO to say that if a particular transaction is at ALP in the first chosen method the same has to be realigned and readjusted by applying a different method for deter mining ALP. Once the transaction is at ALP under a particular method the said transaction has to be accepted as a transaction entered into at ALP and the same cannot be disturbed thereafter by applying a different method for determining the ALP.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 20 to the ld.DR, the assessee ought to have adopted net transactional method instead of profit margin of enterprise as a whole. A reference to the order of the ITAT Mumbai in the case of UCB India P.Ltd. Vs. ACIT, 121 ITD 13 1(Mumbai) has been made.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 21 ground no.2, whereas addition retained by the ld.CIT(A) is being challenged by the assessee in its CO. The break-up of Rs.18,45,974/- is as under:

a) R&D Expenses : Rs.94,830/- b) Library A/c. : Rs.17,11,144/- c) Life Membership to clubs : Rs.40,000/-

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 22

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 23 20. We find that in the Asstt.Years 2003-04 and 2004-05, the Tribunal has considered identical issue in assessee’s own case. Following finding of the Tribunal deserves to be noted:

“7. The Id. CIT(A) was convinced after verification that the issue is covered by the decision of the First Appellate Authority. The relevant findings of the Id. CIT(A) for A.Y. 2003-04 reads as under:-

"It is not in dispute that appellant had lot of business transactions with M/s Schutz Dishman Biotech Ltd. There were transactions of purchase of raw material as well as temporary accommodation deposits. Assessing officer of M/s Schutz Dishman Biotech Ltd initiated action under section 201 (1) by treating the transaction with appellant company as deemed dividend and the said company was treated as assessee in default for not deducting TDS in assessment year 2004-05 and 2005-06. In both the years, CIT(A)-XXl, Ahmedabad by order dated 28-09-2010 held that transactions entered into by the appellant which its associate concern would not attract the provisions of section 2(22)(e) of the act. And accordingly there would not be any obligation to deduct tax under section 194 and therefore the assessee cannot be treated as the assessee in default within the meaning of section 201(1) of IT act. The relevant extract of the said appeal order in para-six is quoted below-

"There is large number of debit and credit transactions. Meaning thereby, the appellant has given and received funds as and when required to and from its associate concern. It is not on account whereby loans and advances have been given to the associate concern. It is on account payments in the nature of current adjustment accommodation account wherein there is a movement of funds both ways, on the basis. Unlike transactions of loan and advances, the movement funds is both ways and the same is more in the nature of current account rather than a loan account. Transactions in the nature of loans and advances are usually very few and for a longer duration. In the facts of the present case, the nature of the transaction as in the form of current accommodation, adjustment account and therefore the same is not a transaction in the nature of loans and advances. In absence of any loans and advances, the provisions of section 2 (22) (e) of the act in respect of deemed dividend are not attracted and therefore the question of deduction of tax at source also would not arise."

Since these transactions between appellant and its associate concern M/s Schutz Dishman Biotech Ltd was there since assessment year 2004-05 onwards and during the year the debit balance in the appellant's account was substantially reduced. Since CIT (A) did not find the transactions between appellant and

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 24 its associate concern as loans and advances given, logically the same cannot be loans and advances received by the appellant.

It is not in dispute that in the books of the associate concern, there are five accounts relating to various transactions in the name of appellant and six accounts in the name of associate concern in the books of appellant. In these many accounts where a large number of debit and credit entries involving different business transactions. Apart from this, there are certain financial . transactions also in these accounts. The movement of funds was not for any period but was frequent and in both ways. Respectfully following the decision of Id CIJ (appeal) in the case of associate concern holding that transactions are not in the nature of loan and also decisions of jurisdictional ITAJ relied upon by the appellant, the addition on account of deemed dividend cannot survive in this year."

Facts relating to the financial transactions with SDBPL are identical to the aforesaid assessment year in which the issue is decided in favour of the appellant. In view of this, by following the appeal order in assessment year 2006-07, addition on account of deemed dividend in respect of financial transactions with SDBPL made by the assessing officer is not confirmed.

"Whether on facts and in law the ITAT wax right in cancelling the order passed u/s 201(1) and 201 (A) of the Act, without appreciating that the amount advanced was in the nature of deemed dividend u/s 2(22)(e) of the Act'.'"

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 25 5. The issue is substantially one of appreciation of facts. When the CIT(Appeals) as well as Tribunal concurrently held that looking to large number of adjustment entries in the accounts between two entities, the amounts were not in the nature of loan or deposit, but merely adjustments, application of section 2(22)(e) of the Act would not arise. Consequently, no question of law arises. Tax appeals are dismissed.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 26 25. In the result, the appeal of the Revenue is dismissed.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 27 the order of his predecessor as well as by the order of the ITAT in assessee’s own case. Following this order, the ld.CIT(A) has deleted the adjustment made by the AO on the basis of recommendation of TPO. The finding of the ld.CIT(A) reads as under:

“Respectfully following the above decisions of my learned predecessors in the appellant's own case and jurisdictional ITAT on the issue of change of method from TNMM to cup in the case of appellant's sister concerns having identical facts, assessing officer is directed to accept TNMM method as against cup method taken up by TPO. In TNMM method, appellant's margin is higher than average margin of comparable entities and therefore no adjustment can be made on the issue of sales made to associated enterprises.

Even otherwise appellant submitted detailed reasons as to why adjustments made by the TPO are not justified. The reasons given are- difference quantity sold, different geographical area, difference in timing, frequency of transactions, smallness of difference etc. If all these reasons are considered, there is hardly any material difference calling for adjustment. There are instances where sales to associate enterprises are at higher prices than non-associate enterprise reflecting that sales were made at arm's length prices. In of the submissions of the appellant, the adjustments made by adopting method will not survive. Accordingly the adjustments made under the transfer pricing provisions are deleted.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 28 observed that ALP of the assessee in respect of 14 international transactions, with regard to which upward adjustments were recommended by the TPO were to be considered at arm’s length. It is also pertinent to observe that like in the assessment year 2005-06, the assessee has explained as to why comparison made by the AO qua each transactions entered with AE was not proper. Such comparative analysis has been noticed by the CIT(A) on page nos.11 to 17 of the impugned order. For the sake of brevity of repetition, we do not want to take cognizance of those comparative analysis. We have gone through it, and we are of the view that if TNMM is being adopted as most appropriate method, for bench marking of international transaction, then assessee’s transactions are at ALP. After taking into consideration the finding of the ld.CIT(A), we do not find any merit in this ground of appeal. It is rejected.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 29 application and submitted to the AO that current year’s claim only Rs.20,69,905/-. This amount could be disallowed. The ld.CIT(A) has rightly appreciated the controversy and has rightly directed that AO that only for the provision made in the current year could be disallowed and not opening balance. Therefore, after looking into the finding of the ld.CIT(A), we do not find any error in it. This ground of appeal is rejected.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 30 40. This ground of appeal is inter-connected with ground nos.23 and 24 of the assessee’s appeal i.e. ITA No.773/Ahd/2011. We take all these grounds together.

a) Library books : Rs.14,84,530/- b) Club Membership fees : Rs.40,000/- c) R&D Expenses : Rs.94,830/- d) Deferred Revenue Expenses: Rs.1,91,063/-

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 31 44. Ground No.6 and 7: These grounds are inter-connected with ground nos.26 and 27 taken by the assessee in its appeal i.e. ITA No.773/Ahd/2010.

i) Unrealised export excluded from the export turnover; Other income not considered for eligible deduction u/s 10B ; ii) iii) Custom Duty allocated on the basis of raw material imports in EOUs and Non-EOU ; Packing expenses and packing material expenses allocated in iv) proportion to quantum of sales in EOUs and Non-EOU ; Clearing and Forwarding exports expenses allocated in proportion to v) quantum of sales in EOUs and Non-EOU ; vi) Allocation of Administrative and Interest expenses in proportion to. total sales in EOUs and Non-EOU.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 32 The AO was of the view that custom duty paid by the assessee and debited in the accounts ought to be allocated on the imports made for the EOU units. The ld.CIT(A) after making a detailed analysis held that there was no custom duty on the imports made required to be consumed in EOU units. If that be a fact, then how the AO could allocate such amount to such units ? The assessee has been maintaining separate books of accounts and debited actual expenditure in each unit. Therefore, the ld.CIT(A) is justified in holding that custom duty which is not incurred by the assessee on the imports of raw- material meant for EOU units cannot be allocated. We do not any merit in this fold grievance raised by the Revenue. It is rejected.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 33 amount should be excluded from the total turnover while computing the eligible amount for grant of deduction under section 10B.

52 We find force in this contention, because if an item does not fall in export turnover, then it is to be excluded from total turnover also. We direct the AO to exclude unrealized exports from the export turnover as well as from total turnover for computing deduction admissible under section10B of the Act.

“11. We also find that the decision of Special Bench of Tribunal in the case of Maral Overseas Ltd. (supra) was upheld by Hon'ble Delhi High Court in the case of Hritnik Export Pvt. Ltd.(ITA No. 219/2014 & 239/2014 order dated 13.11.2014) wherein Hon'ble High Court dismissed the appeal of Revenue by holding as under:-

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 34 By way of these appeals, the Revenue has challenged the orders passed by Income Tax Appellate Tribunal (Tribunal, for short) dated 11th September, 2013 and 24th October, 2013 relating to assessment years 2008-09 and 2009-10, respectively. Tribunal has followed the decision of their Special Bench in the case of Maral Overseas Ltd. versus Additional Commissioner of Income Tax decided on 20th March, 2012, in which it has been held:-

"78. Section 10B sub-section (1) allows deduction in respect of profits and gains as are derived by a 100% EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. The formula is as under :-

Profit of the business of the Undertaking X Export turnover

Total turnover of business carried out by the undertaking

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 35 laid down in the Special Bench decision in International Reserarch Park Laboratories v. ACIT (supra). In the asses see's own case the I.T.A.T. in the preceding years, after considering the decision in the case of Liberty India held that provisions of section 10B are different from the provisions of section 80IA wherein no formula has been laid down for computing the eligible business profit.

The aforesaid view is in consonance with the decision of this Court dated 1st September, 2014 passed in ITA 438/2014, Commissioner of Income Tax-VII versus XLNC Fashions in which this court has held as under :-

"Deduction under Section 10B of the Income Tax Act, 1961 (Act, in short) is to be made as per the formula prescribed by Sub-Section (4), which reads as under:

"10B. Special provision in respect of newly established hundred per cent export- oriented undertakings-

.........

...........

(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking".

Sub-section (4), therefore, is the special provision which enables the assessee to compute the profits derived from the export of articles or things or computer software. We do not see any conflict between Sub- section (1) and Sub-section (4) to Section 10B, as Sub- section (1) states that deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking from the export of articles or things or software would be eligible under the said Section. Sub- section (1) is a general provision and identifies the income which is exempt and has to be read in harmony with Sub-section (4) which is the formula for finding out or computing what is eligible for deduction under Sub-section (1). Neither of the two provisions should be made irrelevant and both have to be applied without negating the other. In other words, the manner of computing profits derived from exports under Sub-section (1), has to be determined as per the formula stipulated in Sub-Section (4), otherwise Sub-section (4) would become otise and irrelevant.

The issue in question in this appeal which pertains to the Assessment Year 2009-10, relates to duty draw back in the form of DEPB benefits. As per Section 28, clause (iii-c), . A.Y. 2007-08 any duty of customs or excise repaid or repayable as drawback to a person against exports under

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 36 Customs and Central Excise Duties Draw Back Rules, 1971 is deemed to be profits and gains of business or profession. The said provision has to be given full effect to and this means and implies that the duty draw back or duty benefits would be deemed to be a part of the business income. Thus, will be treated as profit derived from business of the undertaking. These cannot be excluded.

Even otherwise, when we apply Sub-section (4) to Section 10B, the entire amount received by way of duty draw back would not become eligible for deduction/exemption. The amount quantified as per the formula would be eligible and qualify for deduction/exemption. The position is somewhat akin or close to Section 80HHC of the Act, which also prescribes a formula for computation of deduction in respect of exports.

In view of the aforesaid, we do not find any merit in the present appeal and the same is dismissed."

Karnataka High Court in Commissioner of Income Tax, Central Circle versus Motorola India Electronics (P) Ltd., ITA No. 428/2007, decided on 11.12.2013, reported as [2014] 46 taxmann.com 167 (Karnataka) has also taken a similar view, wherein it has been held:-

"By Finance, Act, 2001, with effect from 01.04.2001, the present Sub- section (4) is substituted in the place of old Sub-section (4). No doubt Sub- section 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Sub- section (4) explains what is says that profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary there is specific provisions like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking."

In view of the aforesaid position, the appeals have to be dismissed. We order accordingly.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 37 55. Respectfully following the above, we allow second fold of grievance raised by the assessee in its ground no.27 and direct the AO to include this other income in the eligible profit for the purpose of grant of deduction under section 10B of the Act.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 38 concurred with the AO. The ld.counsel for the assessee in support of its contentions relied upon the judgment of Hon’ble Gujarat High Court in the case of Saurashtra Chemicals reported in 213 ITR 523 (Guj). He also relied upon the judgment of Hon’ble Supreme Court in the case of CIT Vs. Excel Industries Ltd., 358 ITR 295 (SC). On the strength of the Hon’ble Supreme Court’s decision, it was contended that in every year the assessee has prior period expenditure as well as income because in such a big organization quantification of certain expenditure and their crystallization always remained depended upon many circumstances, and sometime they crystallised in the subsequent period. The AO ought to have followed the principle of consistency and allowed the deduction of such prior period expenditure. On the other hand, the ld.DR relied upon the orders of the Revenue authorities below.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 39 disallowance under section 14A. The ld.AO thereafter found interest expenditure debited by the assessee at Rs.7,28,42,748/-. The ld.AO calculated disallowance as per Rule 8D and made addition of Rs.4,76,876/-. Before the ld.CIT(A) it was contended that Rule 8D is applicable from the assessment hear 2008-09 as held by the Hon’ble Bombay High Court in the case of Godrej & Boyce Vs. CIT. The ld.CIT(A) agreed to this proposition of the assessee, but observed that since the assessee has not offered any expenditure for disallowance under section 14A, therefore, some disallowance has to be made. In this way, the ld.CIT(A) has confirmed the disallowance made by the AO.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 40 consideration these facts, we are of the view that the ld.CIT(A) though changed reasoning, but confirmed disallowance of same amount. Once investment was made by the assessee, then it was not required to be continuously monitor it and administrative expenditure could not be estimated at this magnitude which has been worked out by the AO with help of Rule 8D. To our mind, ends of justice would be met, if an adhoc disallowance of Rs.3,00,000/- be sustained for earning of tax free income. We allow this ground of appeal partly and confirm the addition to the extent of Rs.3,00,000/-.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 41 Rs.2,40,940/- under section 43B of the Act. The finding recorded by the ld.CIT(A) including reproduction of the AO’s finding reads as under:

“6. The ground No. 5 of concise ground of appeal is against addition of Rs. 2,40,940/- u/s 43B of the Act.

6.1 The A.O. has stated in the assessment order dated 26.02.2010, which is as under:

"As per 3CD report ESIC outstanding on March 2006 is Rs. 1,96,709/- whereas, as per the groupings of 1he Balance Sheet provided by the assessee, ESIC payable as at the year end works out to be Rs.4,53,004/- of which the opening balance was Rs.65,209/-. In this regard, the assessee contended that the difference reported in 3CD report and as shown in the groupings of accounts would be on account of Employees' contribution. However, as per the 3CD Report, Employees' Contribution outstanding as on 31.03.2006 is only Rs.15,355/-. Hence, the difference Rs.2,40,940/- (Rs.453004 -Rs. 196709 - Rs. 15355) remains unexplained. This amount is accordingly added u/s 43B. Penalty u/s.271(1)(c) for furnishing inaccurate particulars of income is separately initiated."

6.2 The appellant has submitted in its written submission which is as under:

“The Appellant submits that there is no outstanding balance of ESI and whatever balance was outstanding as at 31st March, 2006 the same were deposited in due date and therefore no addition can be made in this regard. Therefore, the Appellant submits that addition made by the Id. AO is required to be deleted."

6.3 I have considered the facts of the case, assessment order and appellant's submission. Appellant was not able to explain the discrepancy. It has just made the statement that the outstanding balance was deposited before due date. However assessing officer found that there was difference in figures reported in 3CD report and groupings of accounts which appellant was not able to reconcile. Appellant could not substantiate the explanation given by it. In the absence of proper explanation, addition made by the AO is confirmed.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 42 payment basis deduction under section 43B has been allowed in subsequent years or not. We cannot keep the issue alive endlessly. It was for the assessee to place on record specific information qua specific ground. We do not find any error in the finding of the ld.CIT(A), hence, these grounds are rejected.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 43

Sr.NO. Particulars Amount a) Professional service expenditure 6,70,674 paid to four parties mentioned on page no.14 of the AO order b) Reimbursement of Administrative 81,02,625/- Services to Dishman Europe Ltd. c) Reimbursement of Insurance & 24,28,570/- Foreign Travel Expenditure to Dishman Europe Ltd. Total 1,12,01,869/-

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 44 10.3 The above definitions make it clear that a pure reimbursement should not constitute a reward or compensation paid for a service rendered. Hence, a mere reimbursement of expenses cannot be construed as a "fee" for services rendered since what is achieved by a reimbursement is a mere repayment of what has been already spent and is not a reward or a compensation for services rendered. TDS on expenses/costs reimbursed to a non-resident do not give rise to any chargeable income in the hands of a non-resident and going literally by the above principle section 195 should not get attracted for reimbursements. In addition to the payment for services received from a non-resident, the Indian '" entity generally under the terms of the contract also reimburses at actual expenses like insurance, travel, lodging, boarding etc. incurred by such foreign entity for provision of the services.

10.4 In such situations, the Courts have generally held that as there is no income element embedded in such pure reimbursements duly supported by bills etc. and contractual liability to bear them being of the resident, they are not taxable in the hands of the non-resident. Bombay High Court has in the case of CIT vs. Tata Engineering and Locomotive Co. Ltd. (245 ITR 823) held that no part of expenses of foreign technician deputed by a foreign company could be treated as payment in lieu of fees and was not liable to deduction of tax at source. In the case of CIT vs. Industrial Engg. Projects (P) Ltd. (202 ITR 1014) the Hon'ble Delhi High Court has held that reimbursement of expenses does not constitute income and accordingly not taxable. In this case, the assessee had an agreement with the foreign company to render certain services for a minimum fee of Rs. 1.2 lakhs per year. The agreement also provided that certain costs or expenses could be reimbursed. The court found that no excess amount over and above expenses incurred was received. It held that the reimbursement of expenses could not be regarded as revenue receipts. Following the above decision, reimbursement of actual expenses were held not to be 'income' in case of Clifford Chance, United Kingdom (82 ITD 106) (Mumbai ITAT). In another case, Bombay Tribunal in the case of Arthur Anderson (unreported) held that where the reimbursement is of actual expenses supported by bill no fox should be deducted. In Mahindra & Mahindra Ltd. vs. DC/T- [2005] 1 SOT896 (Mum), the ITAT held, after reviewing the case laws in the matter, that TDS u/s 795 is not required when the assessee directly incurred travelling and hotel expenses on Foreign Technicians and the same were not reimbursed to the foreign parties or the foreign technicians. In the case of CIT vs. Dunlop Rubber Co. Ltd., reported in 142 ITR 493 (CaL), the assessee company had paid its share of costs and expenses in relation to sharing the fruits of research and development as cost for impairing the information. The Hon'ble Calcutta High Court held that the amount received by the foreign company from the Indian company did not constitute income assessable under the Act. The assessee therefore submits that provisions of S. 195 on such reimbursement of expenditure are not attracted at all. 10.5 In so far as item (a) relating to professional service is concerned, the appellant submits that this payment is made to non-residents who

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 45 do not have any Permanent Establishment (PE) in India and the compensation is paid for events occurring outside India therefore the same cannot be said to be from any business connection in India. The appellant submits that the said payments are exempt from tax in view of the CBDT Circular No. 786, dated 7th February, 2000. The relevant portion of which reads as under:

"The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23, dated 23rd July, 1969, is drawn where the taxability of 'Foreign Agents of Indian Exporters' was considered along with certain other specific situations. It had been clarified then that where the nonresident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore, held to be not taxable in India. The relevant sections, namely, section 5(2) and section 9 of the Income-tax Act, 1961, not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under section 195 and consequently, the expenditure on export payable to a non-resident for services rendered outside India becomes allowable expenditure".

The appellant submits that the Circular issued by the Board is binding on the Assessing Officer in the light of the decision of the Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 (104- Taxman 547). The appellant therefore submits that provisions of 3. 195 on such payments of sales commission are not attracted at all.

10.6 The appellant most respectfully submits that the main objection of the Id. AO was that the said expenditure is required to be added u/s 40(a)(i) of the Act as per the Karnataka High Court decision in the case of Samsung Electronics Ltd. Because the appellant has not made any application u/s 195(2) of the Act.

11.1 During the course of assessment proceedings, the Appellant vide letter dated 13[11/2009 (pi refer page no. 137 of Paper Book) submitted and explained to the Id. AO that the Appellant Company has debited Rs.8 I, 02,6221- -towards Administrative Services expenses and this expenditure was incurred on the salary, travelling and other expenditure of one of the Senior Associates Dr. Henk Pluim who is responsible for procurement, chemical development, technology up gradation, R&D etc. It was also explained that the payment was made by Dishman Europe Ltd. to Dr. Henk Pluim which was reimbursed by the Appellant to Dishman Europe Ltd and debited under the head Administrative services expenditure. The Appellant vide letter dated 01/12/2009 also submitted and explained to the Id. AO that the entire expenditure of Dr. Henk Pluim was borne by Dishman India, Dishman USA and Dishman UK on the basis of services rendered by him and devotion of his time to all these three companies. It was also explained

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 46 that the Group Chairman has finalized the allocation of expenditure considering the performance of service and devotion of time of Dr. Henk Pluim. However, the Id. AO did not appreciate this factum of the case and referred to letter dated 09/12/2009 (pi. refer page no.263-264) wherein the Appellant has mentioned that for subsequent year, the Appellant has allocated such expenditure to Dishman India, Dishman UK and Dishman USA in proportion to 40:40:20. Accordingly the Id. AO adopted the same for the year under consideration and made addition of Rs.31,13,104/-. The Appellant, in this connection submits that when for the year under consideration, the expenditure has already been allocated on the basis of advice given by the Group Chairman considering the efforts, services and devotion of time of Dr. Henk, then ,"" the action of Id. AO in adopting the mechanism for allocation of such expenditure for subsequent year is incorrect. The Appellant submits that in subsequent year Dr. Henk had provided services in proportion to 40:40:20 to Dishman India, Dishman USA and Dishman UK but that does not mean that the same mechanism should be applied for the year under consideration when the Group Chairman has allocated such expenditure. Hence, the Appellant submits that this alternate addition is also required to be deleted."

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 47 that a person can be held liable to deduct TDS while making payment to a non-resident if the payments made by him consists of some element of income chargeable to tax under the provisions of Income Tax Act, 1961. The ld.Revenue authorities were of the view that if the assessee has been making payment to a non-resident then either it should take a certificate from the AO under section 195(2) or deduct TDS on such payments. For this view, they are harping upon the decision of Hon’ble Karnataka High Court in the case of Samsung Electronics (supra). However, the Hon’ble Supreme Court did not concur with this view of Hon’ble High Court and observed that expression “chargeable under the provisions of the Act” is being employed under section 195(1) and if element of income is involved in the payments made by the assessee only then the TDS has to be deducted. Keeping in view this decision in mind, let us examine the nature of payment made by the assessee.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 48 allocation of expenditure in the hands of the assessee which were incurred on Dr.Henk Pluim. As far as first party is concerned, these are simply reimbursement of administrative expenses incurred by Dr.Henk Pluim outside India. They did not involve any element of income and TDS was not required to be deducted. As far as second party is concerned, the ld.AO failed to bring any material on record to justify the administrative expenses required to be incurred for availing services of Dr.Henk. It is totally in the domain of the businessman and the AO cannot dictate terms how much salary and other expenses are necessary for availing the services. This disallowance made by the AO is not sustainable. The ld.CIT(A) ought to have not confirmed disallowance made by the AO. We allow this ground of appeal and delete addition of Rs.1,12,01,869/-.

i) CIT Vs. M/s.Jai Parabolic Springs Ltd., 306 ITR 402; ii) Chicago Pneumatic India ltd. Vs. DCIT, 15 SOT 252 (Bom); iii) JCIT Vs. Hero Honda Finlease Ltd., 115 TTJ 0752 (Del); iv) Asheesh Securities Ltd. Vs. DCIT, 297 ITR 317 (Del); v) Moser Bear India Ltd. Vs. JCI, 108 ITD 80 (Del); vi) SNC Lavalin/Acres Inc. Vs. ACIT, 15 SOT 1 (Del); vii) Kisan Discretionary family Trust Vs. ACIT, 113 TTJ 918 (Ahd)

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 49 84. The ld.CIT(A) also did not accept claim of the he assessee and observed that the assessee should have filed revised return.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 50 90. The ld.CIT(A) has taken cognizance of the finding recorded by the AO on this issue and also written submissions made by the assessee. For appreciating the controversy, we deem it appropriate to take note of the finding of the ld.CIT(A) on this issue, which reads as under:

“12.1 The A.O. has stated in the assessment order dated 26/02/2010 which is as under:

" Perusal of the 3CD Report shows that the auditor has worked out the effect of deviation of valuation prescribed under section 145A, at a negative figure of Rs 28,01,598/- which has been claimed as deduction by the assessee in its computation of income. The assessee was requested to explain how this figure could at all be negative, because at the most, the effect could be nil but never negative.

In this regard, as per order sheet entry dated 09.12.2009 on record, could not explain the basis of this working by Us auditor. It was contended that this amount had been worked for raw material only. As regards finished goods it was explained that as regards the the excise duty on closing stock of finished goods as on 31/03/2006, the assessee has paid the excise duty thereon in the subsequent Financial Year 2006- 07 before the date due for filing the Income tax, returns. In this regard certificate of the CA was also produced and placed on record.

As can be seen from above, that the assessee could not substantiate its claim for deduction u/s 145A of Rs 28,01,598/-as worked out by the auditor. Accordingly the same is added back. Penalty u/s.271(l)(c) for furnishing inaccurate particulars of income is separately initiated."

1 2.2 The appellant has submitted in its written submission which is as under:

"In this connection, the Appellant most respectfully submits that as per the guidelines issued by Institute of Chartered Accountant's of India, the Appellant can have either "inclusive method" for accounting entries with regard to MODVAT or "exclusive method". It is explained that in the "inclusive method", the purchase of raw material debited in the books of accounts is inclusive of the corresponding MODVAT element. It is submitted that if the Appellant is following this method then the closing stock has to be valued inclusive of MODVAT element. On the other hand, in the "exclusive method" the cost of raw material debited in the purchase account is net of MODVAT element. In this system, the Appellant have a separate account for accounting for the excise duty payable and the MODVAT credit available to it. The Appellant submits that if the Appellant is following this method of accounting then the closing stock has to be valued exclusive of MODVAT element. It is however, explained that in either of the methods adopted as above, the profit of the Appellant would not change. It is, therefore, submitted that as the method adopted by the Appellant had not resulted into any

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 51 reduction in the income of the Appellant, there was no justification in the Learned Assessing Officer making addition of Rs.28,01,598/-. It is therefore, submitted that the addition made by the Id. AO u/s 145A is required to be deleted. The Appellant also relies on Jurisdictional Ahmedabad Tribunal Order in the case of M/s Alpanil Industries bearing ITA No. 169 & 170/Ahd/2005, wherein under identical facts, the Hon'ble Bench has deleted 'addition u/s 145A made by the Id. AO. Copy of the said order is enclosed on page no.223 to 244 of written submission. Please refer paras 8 to 12 pages 225 to 234 of written submission."

2.3 I have considered the facts of the case, assessment order and appellant's submission. Appellant claimed the MODVAT from the computation of total income however assessing officer found that such claim cannot be negative. It is not in dispute that assessing officer did not make addition on account of this but rejected the appellant's claim of deduction which appellant was not able to substantiate. Therefore the judicial decision relied upon by the appellant is not relevant which relates to addition on this account. If appellant is making any claim in the computation of income, the onus to prove and substantiate it is on the appellant. Since appellant was not able to furnish required details and substantiate its claim, assessing officer is justified in rejecting the appellant's claim. In view of this, this ground is dismissed.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 52 Rs.28,01,598/-. But it is unable to explain how this figure has come. The ld.CIT(A) has observed that once the assessee has been claiming deduction, then it is for the assessee to explain. We have reproduced the finding of the AO, written submissions of the assessee before the ld.CIT(A) and we are unable to draw any conclusion from this half-baked facts. It is quite difficult to arrive at firm conclusion and how to apply decision of the Hon’ble High Court. Therefore, we deem it appropriate to set aside this issue to the file of the AO. The assessee shall file complete details with working and its impact as to how it has worked out negative figure of Rs.28,01,598/-. In view of the above, we allow this ground of appeal for statistical purpose.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 53 of the Act be not imposed upon the assessee for concealing particulars of income or furnishing inaccurate particulars of income. The ld.AO has considered the following items of additions for imposing penalty under section 271(1)(c) of the Act: Add: Prior Period income 46,50,648/- Add: Disallowance u/s.14A 4,76,876/- Add: Income as per TDS certificate less shown 3,17,294/- Add: Unexplained ESIC Outstanding u/s.43B 2,40,940/- Add: Sundry balances written off for capital goods 2,86,051/- Add: Non deduction of TDS u/s.40(a(ia) 1,12,01,869/- Add: Impact of section 145A claimed as deduction 28,01,598/- Add: Misc. expenses written off 15,00,000/- Add: Disallowance u/s.10B 6,56,59,970/-

(1) Addition on account of non-reconciliation of TDS and income. (2) Addition of ESIC outstanding (3) Disallowance of sundry balances written off (4) Disallowance of MODVAT u/s.14A

Penalty levied with reference to the following balance disallowances/additions is cancelled.

(1) Addition of prior period income (2) Disallowance /s.14A (3) Disallowance u/s.40(a)(ia) (4) Disallowance of miscellaneous expenses (5) Disallowance of deduction u/s.10B AO is directed to re-compute the penalty accordingly. These grounds of appeal re partly allowed.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 54 100. With the assistance of the ld.representatives, we have gone through the record carefully. Section 271 (1)(c) of the Income Tax Act, 1961 has direct bearing on the controversy. Therefore, it is pertinent to take note of the section.

"271. Failure to furnish returns, comply with notices, concealment of income, etc.

(1) The Assessing Officer or the Commissioner (Appeals) or the CIT in the course of any proceedings under this Act, is satisfied that any person (a) and (b)** ** ** (c) has concealed the particulars of his income or furnished inaccurate particulars of such income. He may direct that such person shall pay by way of penalty. (i)and (Income-tax Officer,)** ** ** (iii) in the cases referred to in Clause (c) or Clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefit the furnishing of inaccurate particulars of such income or fringe benefits:

Explanation 1- Where in respect of any facts material to the computation of the total income of any person under this Act,

(A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the CIT to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income or such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 55 section is deeming provisions regarding concealment of income. The section not only covered the situation in which the assessee has concealed the income or furnished inaccurate particulars, in certain situation, even without there being anything to indicate so, statutory deeming fiction for concealment of income comes into play. This deeming fiction, by way of Explanation I to section 271(1)(c) postulates two situations; (a) first whether in respect of any facts material to the computation of the total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or Learned CIT(Appeal); and, (b) where in respect of any fact, material to the computation of total income under the provisions of the Act, the assessee is not able to substantiate the explanation and the assessee fails, to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of the total income. Under first situation, the deeming fiction would come to play if the assessee failed to give any explanation with respect to any fact material to the computation of total income or by action of the Assessing Officer or the Learned CIT(Appeals) by giving a categorical finding to the effect that explanation given by the assessee is false. In the second situation, the deeming fiction would come to play by the failure of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 271(1)(c) makes it clear that that when this deeming fiction comes into play in the above two situations then the related addition or disallowance in computing the total income of the assessee for the purpose of section 271(1)(c) would be deemed to be representing the income in respect of which inaccurate particulars have been furnished.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 56

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 57 which could be alleged that the assessee has intentionally furnished inaccurate particulars of income. The dispute between the assessee and the Revenue relates to whether expenditure incurred on books should be allowed as capital expenditure or revenue expenditure. Since the assessee failed to substantiate its explanation, therefore, adhoc disallowance was confirmed. But assessee does not deserve to be visited with penalty on this item. The ld.CIT(A)has rightly deleted the penalty.

“In the return of income appellant had claimed deduction u/s.10B of Rs.33,19,35,229/- in respect of EOU at Bavla and Naroda. In the assessment order, an amount of Rs.10,21,60,135/- (out of the said claim) was disallowed. In the appellate order this disallowance was reduced to Rs. 6,56,59,670/-. Penalty u/s.271(1)(c) was levied with reference to the amount confirmed by the CIT(Appeals). Subsequent to the appellate order dtd.03.01.2011 and impugned penalty order dtd.30.03.2012, order u/s.155 dtd.18.04.2013 was passed by the A.O. by allowing further deduction u/s.10B of Rs.3,01,00,015/-. The further deduction was allowed accepting the contention of the appellant that it had realized export debtors to the extent of Rs.l6,28,59,717/- (out of the outstanding debtors of Rs.17,52,50,303/-) within four years from the end of the previous year. In the written submission reproduced above, the Id. A.R. contended that deduction u/s.10B was claimed on the basis of the certificate of the Chartered Accountant in Form No.56G;

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 58 thus, the claim was bonafide and appellant could not be said to have furnished inaccurate particulars or concealed income. In support thereof he relied on the cases cited at 147 TTJ 67 (Delhi), 136 ITD 177 (Indore Special Bench) and Ahmedabad Tribunal's decision in Kadam Exports Pvt. Ltd. Vs. ITO in ITA No.2890/A/2011.

The deduction u/s.10B was claimed on the basis of the certificate of CA in No.56G. The disallowance made in the assessment order was reduced by order u/s.155 by the AO. All the necessary details in support of the claim were very much placed on record by the appellant. The disallowance confirmed by the CIT(Appeals) was with reference to the unrealized export turnover, which came to be rectified later by the AO u/s.155 and other items not considered for eligible deduction (since they were held to have not been derived from the EOU). Thus, it cannot be said that appellant furnished any inaccurate particulars of the deduction claimed or concealed any particulars. In the case relied on by the Id. A.R. of ACIT Vs. DSL Software Ltd. (147 TTJ 67) (Delhi) (2012), it was held as under: -

"In terms of provisions of sec. 10A(5) and 80HHE(4) deduction under these sections is not admissible unless assessee furnishes in the prescribed form, along with the return of income, report of an accountant, as defined in Explanation below sub-section (2) of section 288, certifying that deduction has been correctly claimed in accordance with the provisions of these sections. The assessee had given all the particulars of income and had disclosed all facts to the AO in relation to claim for deduction u/s. 10A & 80HHE of the Act. He had discharged the onus cast on it in terms of explanation 1 to sec. 271(l)(c) of the Act. Disallowance of claim for deductions u/s.WA & 80HHE in relation to unrealized exports or disallowance of an estimated amount, having recourse to provisions of sec. 14A the Act cannot be considered as concealment of income or furnishing inaccurate particulars thereof, especially when all the relevant particulars were disclosed before the AO. Mere erroneous claim in absence of any concealment or furnishing of inaccurate particulars is no ground for levying penalty, especially when there is nothing on record to show explanation offered by assessee was not bona fide or any material particulars were concealed or furnished inaccurate. Order of CIT(A) Upheld."

It is also seen that in the case of CIT Vs. KAS Movie (P) Ltd. [2012] 207 Taxman 183 (Mag.) (Delhi), it was held that where claim of assessee for deduction u/s.80HHF was rejected on the ground that basic condition for claim of deduction U/S.80HHF was not satisfied by the assessee, levy of penalty u/s.271(l)(c) was not called for. Further, in the case of Geeta Prings (P.) Ltd. Vs. Asstt. CIT [2012] 247 CTR 620 (Guj.), it was held as under: -

"the assessee had made full disclosure about the claim. The claim was also certified by the chartered accountant. Necessary

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 59 declarations in the prescribed forms were made, May be, in the case of the assessee, such claim on merits was not granted. However, this did not mean that the assessee had concealed any income. Further, the issue ultimately at any rate was debatable since one High Court has already held in favour of the assessee.

When no information as given in return was found to be incorrect, penalty could not be imposed."

Keeping in view the facts of the case and the above stated case laws, I am of the view that impugned part disallowance of the deduction claimed u/s.10B does not attract the penal provisions of Section 271(l)(c). Penalty levied with reference to the said disallowance is not sustainable.”

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 60 not furnished any inaccurate particulars of income qua this claim for deduction under section 10(B). Hence, adjustment has been made simply for the reasons that the assessee has included unrealized export in the eligible deduction on the basis of certificate of the chartered accountant. Therefore, we do not find any merit in the appeal of the Revenue. It is dismissed.

ITA No.692 /Ahd/2011 and 7 Others ACIT Vs. Dishman Pharmaceuticals & Chemicals 61 outstanding of Rs.1,96,709/- and this amount has been added back because it was not actually paid to ESIC account. Other amount mentioned for making addition is available in the balance sheet and not in 3CD report. There must be some communication gap or some reconciliation required, but it cannot be said that the assessee has furnished inaccurate particulars of this item. The ld.CIT(A) is not justified in confirming penalty. Penalty is accordingly deleted.

Order pronounced in the Court on 23rd May, 2018 at Ahmedabad.

Sd/- Sd/- (AMARJIT SINGH) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 23 /05/2018