IPCA LABORATORIES LTD.,MUMBAI vs. DY CIT CC-5(2), MUMBAI

It is noted that the reasoning given by the AO for making the above additions/disallowances were verbatim same across all AYs. Hence, for the sake of convenience, and to avoid repetition of facts; we deem it fit to adjudicate each of the common issues across all AYs before us together.

Issue 1: Additions made in original assessment u/s 143(3) of the Act again added back in the assessment completed u/s 153A/143(3) of the Act Ground Nos. 13-15 of the assessee’s appeal and Ground No. 12 of the Revenue’s appeal for AY 2009-10 Ground Nos. 11-13 of the assessee’s appeal and Ground No. 12 of the Revenue’s appeal for AY 2010-11

1 These grounds relate to the several additions which were made by the AO while completing the original assessment u/s 143(3) of the Act for AYs 2009-10 & 2010-11, which were again considered and added back by the AO while framing the income tax assessments u/s 153A/143(3) of the Act. The additions in question are noted to comprise of viz., a) transfer pricing adjustments towards goods sold to AEs and interest recoverable from AEs made by the TPO u/s 92CA(3) of the Act, which was added by the AO in the original assessments for AYs 2009-10 and 2010-11; b) disallowance of deduction claimed u/s 80-IC of the Act to the extent of income derived from the sale of scrap added in original assessments u/s 143(3) for AYs 2009-10 & 2010-11; & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd c) disallowance of balance additional deprecation in relation to new assets acquired in earlier year, disallowed in assessments u/s 143(3) for AYs 2009-10 & 2010-11; d) disallowance of ESOP expenses in original assessments u/s 143(3) for AYs 2009-10 & 2010-11

2 On appeal, the Ld. CIT(A) is noted to have taken into account the appellate orders, available till then, passed in the matters of original assessments for AYs 2009-10 & 2010-11 and has accordingly partly allowed relief on merits in relation to the above issues. Aggrieved by the order of the Ld. CIT(A), both the parties are in appeal before us.

3 Assailing the action of the lower authorities, the Ld. AR of the assessee contended that the AYs 2009-10 & 2010-11 were unabated assessments and therefore the impugned additions/disallowances made by the AO, which were already added in the original assessment, were unsustainable in the assessment completed u/s 153A of the Act, since it was not based on any incriminating material seized during the course of search. For this, the Ld. AR relied on the decision of the Hon’ble which has since been affirmed by the Hon’ble Supreme Court in the (d) [supra] had been fully allowed and issue (a) had been partly allowed by this Tribunal in the regular appellate orders passed in & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd relation to the original assessments framed u/s 143(3) of the Act. Per contra, the Ld. CIT, DR supported the order of the AO.

4 After hearing the rival contentions and perusing the material on record, it is an admitted fact that AYs 2009-10 & 2010-11 are unabated assessments. It is noted that the dispute as to whether completed/unabated assessments can be disturbed only when incriminating material is unearthed in the course of search has now been settled by the Hon’ble Supreme Court in the case of Abhisar Buildwell Pvt Ltd (supra). The Hon’ble Supreme Court is noted to have approved the decision of Hon’ble Delhi High Court in the case of CIT Vs Kabul Chawla (supra). According to the Hon’ble Apex Court, in case of search under section 132, the AO assumes the juri iction for block assessment under section 153A of the Act, but in case no incriminating material is unearthed during the search, the AO cannot assess or reassess, by taking into consideration the other material, in respect of completed/unabated assessment. Hence, in case of unabated assessments, the AO can re-assess the income only to the extent and with reference to any incriminating material which the Revenue has unearthed in the course of search qua the assess qua the AY.

5 From the facts before us, it is noted that the AO’s predecessor had already made additions on the four (4) issues mentioned above in the original assessment u/s 143(3) for AYs 2009-10 & 2010-11, which was completed much prior to the date of search. Hence, these assessments were unabated and the fate of the addition/s made in the & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd original assessments, constituted separate & independent proceedings, which as rightly pointed out by the Ld. AR was being separately pursued both by the assessee and the Revenue as well. We thus note that the fate of the addition/s made therein had no relation with the income-tax assessments completed u/s 153A/143(3) of the Act pursuant to the search. As noted above, since AYs 2009-10 & 2010-11 were unabated assessments, the AO could disturb these completed assessments only qua the issues in relation to which incriminating material was found. Clearly, these four (4) additions were not based on any incriminating material unearthed in the course of search. Rather, the AO is noted to have followed the assessment orders passed by his predecessors and again added the disallowance/s on identical line of reasoning given by them. The Ld. CIT, DR could not controvert this factual position. Hence, in our considered view, such action of the AO making these additions again in these unabated assessments cannot be countenanced. We accordingly hold that the addition/s made by the AO on the four (4) issues highlighted above in these unabated AYs 2009-10 & 2010- 11 to be unsustainable. Hence, the grounds taken by the assessee in this regard stands allowed and the grounds of the Revenue in this regard stands dismissed.

Issue 2: Disallowance of loss incurred by SEZ added u/s 115JB of the Act Ground Nos. 11-12 of the assessee’s appeal for AY 2009-10 Additional Ground No. 1 of the assessee’s appeal for AY 2010-11 & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd

1 The facts relating to this issue are that, the AO had disallowed the loss of Rs.5,97,86,283/- incurred in the SEZ Unit of the assessee, while computing book profit u/s 115JB of the Act for AY 2009-10. Briefly stated, the AO is noted to have observed that one of the assessee’s manufacturing units was situated in Special Economic Zone (‘SEZ’) at Pritampur, Madhya Pradesh. Upon verification of books of accounts, the AO noted that the said unit had incurred loss on account of various trial expenses. The AO was of the view that such loss incurred by the SEZ unit could not be allowed in view of provisions of Section 115JB (6) of the Act and therefore disallowed the same. Being aggrieved by this action of the AO, the assessee preferred appeal before the Ld. CIT(A) who confirmed the same. Now the assessee is in appeal before us.

2 Assailing the action of the lower authorities, the Ld. AR of the assessee contended that the relevant AY 2009-10 was an unabated

3 On merits of the claim, the Ld. AR submitted that the provisions of Section 115JB (6) of the Act invoked by the AO had no application to the loss incurred by SEZ Unit prior to commencement of business activity/commercial production. He submitted that, the SEZ Unit at Pritampur, Madhya Pradesh had commenced commercial production only from 29.11.2011 i.e. AY 2012-13 and onwards and thus any expenses/losses incurred by the said SEZ unit prior to commencement of business was not amenable to Section 10AA of the Act and hence the provisions of Section 115JB(6) had no application. For this, the Ld AR first invited our attention to the language used in clause (6) to Section 115JB of the Act. It is noted that clause (6) of Section 115JB provided that; the provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone. According to Ld. AR, the phrase ‘any business carried on’ was of importance. He submitted that, unless there is a business being carried on at the SEZ Unit, the provisions of Section 115JB (6) would not apply. The Ld. AR showed us that, the commercial production at the SEZ only began from AY 2012-13 and onwards, and thus any loss incurred prior to commencement of business was not subject to disallowance u/s 115JB & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd (6) of the Act. He shows us that, it was not in dispute that the SEZ Unit had only incurred trial expenses during the year which had resulted in the impugned loss and that, the business of the SEZ Unit at Pritampur, Madhya Pradesh had not commenced during the year. The Ld. AR placed before the letter dated 26.08.2013 which was filed by the assessee before the AO informing him that the unit had commenced business activity only from 23.03.2011 and thus it had not claimed any exemption u/s 10AA of the Act. In the said letter, the assessee accordingly stated that the depreciation claimed on the assets prior to the unit becoming eligible for exemption u/s 10AA of the Act has to be allowed u/s 32 of the Act. The Ld. AR thereafter took us through the provisions of Section 10AA of the Act to show that even the exemption provided therein begins only when the unit begins to manufacture or produce i.e. the commercial production commences and that no exemption is available qua any profits derived from trial production. According to Ld. AR, since the assessee did not commence the business activity at the SEZ Unit during the year, the provisions of Section 10AA did not kick in the relevant AY 2009-10. As a consequence, the loss incurred due to incurrence of trial run expenses was not hit by the rigors of Section 115JB(6) of the Act. The Ld. AR thus contended that, the loss was allowable while computing book profit u/s 115JB of the Act for AYs 2009-10 & 2010-11. Per contra, the Ld. DR vehemently supported the order of the lower authorities. & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd

4 After hearing the rival contentions and perusing the material on record, we find that admittedly both AYs 2009-10 & 2010-11 are unabated assessment years and during the course of search no incriminating material was found with respect to the loss on account of trial expenses incurred at the SEZ Unit at Pritampur, Madhya Pradesh. As noted by us above, following the decision of the Hon’ble Supreme Court in the case of Abhisar Buildwell Pvt Ltd (supra), in case of unabated assessments, the AO can re-assess the income only to the extent and with reference to any incriminating material which the Revenue has unearthed in the course of search qua the assess qua the AY. On the given facts before us, we find that the AO has made disallowance to the computation of book profit on the basis of his interpretation of the provisions of Section 115JB (6) of the Act, without any reference to any seized material impounded in the course of search. Following the decision of Hon’ble Supreme Court (supra), we are in agreement with the Ld. AR that the impugned disallowance could not have been made in the unabated AY 2009-10, in absence of there being any incriminating material found in the course of search relating to this impugned issue. Accordingly, this legal plea of the assessee stands allowed and hence the disallowance of Rs.5,97,86,283/- made by the AO on account of loss incurred by the SEZ Unit while computing book profit u/s 115JB of the Act is hereby directed to be deleted. Hence, Ground nos. 11 & 12 of the assessee’s appeal for AY 2009-10 is allowed. & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd

5 Having held so above, we are accordingly of the view that, likewise, the Additional Ground No. 1 of the assessee raising fresh claim for deduction of loss incurred at SEZ unit while computing book profit u/s 115JB of the Act in unabated AY 2010-11 cannot be 1367/Pun/2014) dated 16.03.2018 wherein it was held as under :- “9. We have heard the rival contentions and perused the record. The years under appeal are assessment years 2004-05 to 2008-09. The assessee in each of the years had filed the return of income within prescribed period and time for taking up for scrutiny had also lapsed before the date of search on the assessee. Survey proceedings had taken place on 23.09.2009. The assessee in response to notice issued under section 153A of the Act, made certain fresh claims in the returns of income filed. The Assessing Officer while completing proceedings under section 153A r.w.s. 143(3) of the Act made certain additions on account of agricultural income, deemed dividend under section 2(22)(e) of the Act, cash in hand and adhoc addition out of expenses and interest payment to Ravi Cooperative Bank. The new claim of assessee in the returns of income on account of depreciation on Motor Car in assessment years 2004-05 and 2005-06 and loss on trading of shares in assessment year 2006-07 was rejected by the Assessing Officer.

The issue which arises is in respect of respective additions made and the rejection of new claim of deduction in the returns of income filed under section 153A of the Act in respect of & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd

We find that the issue of abated and non-abated assessment proceedings has been decided by Hon'ble Bombay High Court in CIT Vs. (1) Continental Warehousing Corporation (Nhava Sheva) Ltd. (2) All Cargo Global Logistics Ltd., ITA Nos.1363 to 1367/PUN/2014 Umesh D Shinde (2015) 374 ITR 645 (Bom). 1012/PUN/2015, relating to assessment years 2005-06 to 2008- 09, order dated 31.10.2017. The first issue which was decided by the Tribunal was in respect of claim of expenditure and in some cases on account of depreciation made for the first time in the returns of income filed under section 153A of the Act. The Tribunal vide para 11 held as under:- "

We have heard the rival contentions and perused the record. The first issue which arises in the present appeal is in respect of claim of expenditure on account of interest and in some cases on account of depreciation. Admittedly, the said expenditure was not claimed by the assessee in the return of income filed prior to search at the premises of assessee. However, consequent to search proceedings carried on the premises of assessee, notice under section 153A of the Act was served upon the assessee. In response thereto, in the return of income filed by the assessee, fresh claim of interest expenditure and depreciation on certain assets was made. The said claim was not allowed by the & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd authorities below. The assessments for assessment years 2005-06 to 2008-09 i.e. appeals listed before us have not abated. In such cases, where the assessment has not abated, then the Hon'ble Bombay High Court (supra) has laid down that only undisclosed income and undisclosed assets detected during the course of search could be brought to tax. Applying the said ratio to the facts of the present case, we hold that the assessee is not entitled to claim any deduction on account of fresh claim i.e. on account of interest and depreciation in the respective years. Applying the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. (1) Continental Warehousing Corporation (Nhava Sheva) Ltd. (2) All Cargo Global Logistics Ltd. (supra), we hold that in the years under appeal, where the assessment has not abated, then no deduction is to be allowed in respect of fresh claim made in the return of income filed in response to notice under section 153A of the Act. Consequently, the first issue raised by way of ground of appeal No.1 in assessment year 2005-06, grounds of appeal No.1 and 3 in assessment year 2006-07, ground of appeal No.1 in assessment years 2007-08 and 2008-09 are dismissed.

The issue arising before us is identical to the issue before the counts.” & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd

Issue 3: Disallowance of deduction claimed u/s 35(2AB) of the Act Ground No. 7 of the Revenue’s appeal for AY 2009-10

1 This ground raised by the Revenue relates to the Ld. CIT(A)’s action of deleting the disallowance of amount of Rs.8,08,000/- spent by the assessee on registration of patent, claimed u/s 35(2AB) of the Act. The AO is noted to have held that the reimbursement of expenses for obtaining patent specification and renewal of patents was not eligible for deduction u/s 35(2AB) of the Act. On appeal, the Ld. CIT(A) is noted to have deleted the same. Aggrieved by the same, the Revenue is now in appeal before us.

2 Heard both the parties. After hearing the rival contentions and perusing the material on record, we find that admittedly, the instant

Issue 4: Expenditure by way of tax paid on ESOP added u/s 115JB of the Act Ground No. 7 of the Revenue’s appeal for AY 2010-11

1 This ground raised by the Revenue relates to the Ld. CIT(A)’s action of deleting the addition made on account of tax of Rs.1,60,34,723/- paid on the non-monetary perquisite granted to employee/s by way of ESOPs while computing book profit u/s 115JB of the Act. The AO is noted to have held that this tax paid for and on behalf of the employees, although a non-monetary perquisite, was in the nature of ‘income-tax’ and hence added the same under Explanation (1) to Section 115JB of the Act. On appeal, the Ld. CIT(A) is noted to have deleted the disallowance by following the decision rendered by this Tribunal on this issue in the case of Rashtriya Chemicals & Fertilizers Ltd Vs CIT (91 taxmann.com 104). Aggrieved by the same, the Revenue is now in appeal before us.

2 We have heard both the sides and perused the findings in the assessment order and the material placed before us. We find merit in the preliminary plea of the Ld. AR for the assessee that the impugned disallowance was not based on any incriminating material found in the & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd course of search and therefore the AO was legally unjustified in making this addition in the unabated AY 2010-11. It is noted that, this addition was also made on re-appraisal of the claim made by the assessee in the return of income, which had not been disputed in the original assessment u/s 143(3) of the Act. This addition was not made with reference to any impounded material seized in search. Hence, in absence of any incriminating material to justify this addition, and following the decision of Hon’ble Supreme Court in the case of 2010-11. For the aforesaid reasons, we uphold the order of Ld. CIT(A) deleting the same but on legal issue and dismiss this ground of the Revenue.

Issue 5: Disallowance of purchases in relation to over- invoicing of raw materials Ground Nos. 5-7 of the assessee’s appeal and the Ground No. 4 of the Revenue’s appeal for AY 2009-10 Ground Nos. 5-7 of the assessee’s appeal and the Ground No. 4 of the Revenue’s appeal for AY 2010-11 Ground Nos. 5-7 of the assessee’s appeal and the Ground No. 4 of the Revenue’s appeal for AY 2011-12 Ground Nos. 5-7 of the assessee’s appeal and the Ground No. 7 of the Revenue’s appeal for AY 2012-13 Ground Nos. 5-7 of the assessee’s appeal and the Ground No. 6 of the Revenue’s appeal for AY 2014-15 & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd

1 These grounds relate to the addition made by the AO on account of over-invoicing of raw materials. Briefly noted, the facts of the case are that, the Investigating authorities, in the course of search conducted u/s 132 of the Act, had found Mr. Prashant Godha, Managing Director of the assessee, to be in possession of cash of Rs.1.17 crores at his residential premises. When enquired about the source of cash, he is noted to have explained in his statement u/s 132(4) of the Act that, this amount was generated from over-invoicing of raw material purchases in the IPCA Laboratories Ltd, which was received back by him in cash. Basis this statement, the Investigating authorities are noted to have examined three (3) employees viz., Mr. Manoj K. Jain, Mr. Manoj S Jayawant and Mr. Peter Fernandez, each of whom is noted to have stated that over-invoicing purchases are booked through M/s Reynolds Petro Chem Ltd. The relevant excerpts of their statements as noted by us are as follows :- Relevant part of statement of Mr. Manoj Kumar Jain:- “Q. 9 Are you aware of any bogus purchases booked or bogus commission payments made by M/s IPCA Laboratories Ltd. Ans: Sir, I am not aware of any bogus commission made by M/s IPCA Laboratories ltd. but there is bogus purchase booked from M/s Reynolds Petro Chem Ltd. Q. 11 Please furnish the details of the transactions made with M/s Reynolds Petro Chem Ltd, along with the modes operandi followed. & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd Ans: Sir, in case of purchase of product MAPA (Methyl Amino Propyl Amine) which is made in M/s Makers Laboratories Ltd., the adjustments are made. M/s Makers Laboratories Ltd. makes purchase from M/s Reynolds Petro Chem Ltd, at the rate which is Rs. 73/- per kg. higher than the market rate. This excess payment made to the M/s Reynolds Petro Chem Lid. is returned back to M/s IPCA Laboratories Ltd. in cash with the Knowledge of the management. M/s Reynolds Petro Chem Ltd. charges 5% commission and after deducting the same the balance amount of cash is returned back. This over invoicing is done in certain products purchased through M/s. Reynolds Petro Chem Ltd. and the excess payment made is brought back in cash after deducting commission of M/s Reynolds Petro Chem Ltd. Q.12 Please give details of all products which are purchased at a rate higher than market rate for the purpose of taking cash out of the system. Ans. Sir, following are the products purchased at a higher rate: Name of the Products Market Rate Inflated Rate Difference per Kg taken out in cash Paracetomol 235/- 245/- 10/- Erythromycin Estolate 2400/- 2750/- 350/- Meta chloro Aniline 290/- 320/- 30/- The market price keeps on fluctuating with time. However, the difference per Kg. taken out in cash remains same.” Relevant part of statement of Mr. Manoj Suresh Jayawant:- & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd Q.10 Are you aware of any bogus purchases booked or bogus commission payments made by M/s IPCA Laboratories Ltd. Ans: Sir, I am not aware of any bogus commission made by M/s IPCA Laboratories ltd. but there is bogus purchase booked from M/s Reynolds Petro Chem Ltd. Q. 12 Please furnish the details of the transactions made with M/s Reynolds Petro Chem Ltd, along with the modes operandi followed. Ans: Sir, in case of purchase of product MAPA (Methyl Amino Propyl Amine) which is made in M/s Makers Laboratories Ltd., the adjustments are made. M/s Makers Laboratories Ltd. makes purchase from M/s Reynolds Petro Chem Ltd; at the rate which is Rs. 73/- per kg. higher than the market rate. This excess payment made to the M/s Reynolds Petro Chem Ltd. is returned back to M/s IPCA Laboratories Ltd. in cash with the Knowledge of the management. This over invoicing is done in certain products purchased through M/s. Reynolds Petro Chem Ltd. and the excess payment made is brought back in cash after deducting commission of M/s Reynolds Petro Chem Ltd. Relevant part of statement of Mr. Peter Fernandes:- “Q. 9 Are you aware of any bogus purchases booked or bogus commission payments made by M/s IPCA Laboratories Ltd. Ans: Sir, purchases are booked from M/s Reynolds Petro Chem Ltd. The purchases are not bogus but over invoicing are done. & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd Q.12 Please give details of all products which are purchased at a rate higher than market rate for the purpose of taking cash out of the system. Ans. Sir, following are the products purchased at a higher rate: Name of the Products Market Rate Inflated Rate Difference per Kg taken out in cash Paracetomol 235/- 245/- 10/- Erythromycin Estolate 2500/- 2700/- 200/- The market price keeps on fluctuating with time. However, the difference per Kg. taken out in cash remains same.”

2 The Ld. AR particularly pointed out to us that, each of these three (3) employees in their statements had only admitted that the over invoicing of raw materials was done through one vendor, M/s Reynolds Petro Chem Ltd who would provide inflated bills. In fact, Mr. Manoj K. Jain & Mr. Manoj S Jayawant in their answers to Q No. 11 & Q No. 12 respectively, are noted to have specifically identified one of the sister concerns, M/s Maker Laboratories Ltd which had made purchases from M/s Reynolds Petro Chem Ltd. These employees are noted to have explained the modus operandi followed for inflating the purchases. The Ld. AR accordingly emphasized on the fact that none of these employees had named the assessee to be involved in over-invoicing but had only admitted that vendor, M/s Reynolds Petro Chem Ltd would provide inflated bills, which was to M/s Maker Laboratories Ltd. According to Ld. AR therefore, the statement of & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd these three (3) employees had no bearing whatsoever in the income-tax assessment of the assessee.

3 It is further noted that the AO had issued show cause to the assessee dated 22.07.2016 wherein he had inter alia highlighted the modus operandi of over invoicing/inflated purchases detected to have been done through M/s Reynolds Petro Chem Ltd. He accordingly required the assessee to explain as to why disallowance should not be made in this regard. In response, the assessee is noted to have made multi-fold submissions viz., the assessee firstly pointed out that Mr. Godha had retracted his statement, which formed the genesis of this dispute. The assessee showed that Mr. Godha in his retraction affidavit had clarified that the sum of Rs.1.17 crores found from his possession did not represent any amount generated from over-invoicing done by the assessee company but represented his own unaccounted cash income. The assessee corroborated the retraction affidavit by showing that Mr. Godha had offered the same to tax as his own unaccounted income in the return of income filed by him for AY 2015-16. Secondly, the assessee explained that each of the three (3) employees had also retracted their original statements and therefore according to assessee, their original statements had lost its evidentiary value. The assessee had placed on record their retraction affidavits as well. The AO however is noted to have rejected the explanation put forth by the assessee. The AO observed that, in a subsequent survey action conducted on 16.04.2015, Shri Jagdish Somani, Director of M/s & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd Reynolds Petro Chem Ltd, had also admitted to the modus operandi of providing inflated bills to its customers. The AO accordingly observed that M/s Reynolds Petro Chem Ltd was providing inflated purchases to M/s Maker Laboratories Ltd and the amount of over-invoicing was routed back in guise of ‘commission’.

4 Referring to the search findings, the AO is noted to have made independent enquiries u/s 133(6) of the Act from five (5) suppliers viz., M/s Sarna Chemicals Pvt Ltd, M/s Anuh Pharma Ltd, M/s Mehta API Pvt Ltd, M/s Calyx Chemicals & Pharmaceuticals Ltd and M/s Farmson Pharmaceuticals Pvt Ltd. According to AO, these vendors were over-invoicing the assessee. To this, the Ld. AR has rightly pointed before us out that M/s Reynolds Petro Chem Ltd does not feature therein and it is not in dispute that the assessee company i.e. M/s IPCA Laboratories Ltd had not made any purchases from M/s Reynolds Petro Chem Ltd in any of the AYs. It is further noted that, in the enquiries made u/s 133(6), the AO had called for the comparative details of sales made by these five (5) vendors to the assessee company and their other customers. Based on the data obtained from these vendors, the AO is noted to have undertaken a benchmarking analysis and compared the prices at which the aforementioned vendors had made sales to the assessee and to others and also the internal rates at which the assessee made purchases of same products from other parties, apart from these five (5) vendors. According to AO, the comparative data revealed that the prices at which goods were sold to & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd the assessee by these five (5) vendors were either higher than the prices charged from other customers or that the prices paid by assessee to other suppliers were lower. The AO thus inferred that the purchases from these five (5) vendors had been inflated and accordingly held it to be a case of over-invoicing. Although the AO is noted to have undertaken this factual exercise, but the AO is found to have ultimately discarded the same. Instead, the AO is observed to have simply applied the following uniform rates, as admitted by the employees to be the over-invoicing component in the purchases. Name of Raw Material Over-Invoicing/kg Meta-Chloro Aniline (MCA) Rs.30/- Paracetamol Rs.20/- Erythromycin Estolate Rs.200/-

5 Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A). On appeal, the Ld. CIT(A) is noted to have examined the contemporaneous facts available on record and thereafter, he himself is observed to have undertaken detailed comparative exercise of the each of the above products procured by the assessee from the five (suppliers). The Ld. CIT(A) noted that, the average price paid by the assessee for purchase of MCA and Paracetamol from M/s Sarna Chemicals Pvt Ltd and M/s Farmson Pharmaceuticals Pvt Ltd respectively was commensurate with the average prices paid to other vendors. The Ld. CIT(A) is noted to have accordingly partly deleted the addition made in respect of these purchases. With regard to the purchase of Erythromycin Estolate made from M/s Anuh Pharma Ltd, & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd M/s Mehta API Pvt Ltd, M/s Calyx Chemicals and Pharmaceuticals Ltd, the Ld. CIT(A) noted that, the assessee had not purchased this particular raw material from any other vendors. Hence in absence of any comparative details, the Ld. CIT(A) is noted to have confirmed the addition. Being aggrieved by this order of the Ld. CIT(A), both the assessee and the Revenue are in appeal before us.

6 We have heard both the parties and perused the relevant statements and retraction affidavits and also the other material placed on our record. The main thrust of the Revenue’s argument was that the addition made by the AO on account of over invoicing was justified as it was made on the basis of statements given by the three employees in the course of search u/s 132(4) of the Act, which is an important piece of evidence in itself and that their subsequent retraction, being an afterthought, was of no relevance. In order to adjudicate this contention, it is first relevant to examine the extant provisions of Section 132(4) of the Act, which reads as follows: “(4) The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.” & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd Explanation.—For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.”

7 From a bare reading of the aforesaid provision, it is noted that Section 132(4) of the Act empowers the authorized officer to examine on oath any person who is found to be in possession or control of any books of account, documents, money etc. Such a statement made by that person may thereafter be used in evidence in any proceedings under the Act. Evidence is a mode or means to prove a fact-in- issue. Statement is an oral testimony of relevant fact; and an admission of a fact-in-issue is an important piece of evidence, provided it has been voluntarily given without any inducement, promise, threat or coercion. Once a statement recorded of a person who is in possession of any valuable thing or control of books found during search then it can be used as evidence in any proceedings under the Act and the presumption would be that it has been given by that person voluntarily. The burden to prove that the statement was incorrect based on mistake of fact or that it was not voluntarily obtained, but due to threat, coercion, promise etc., is upon the maker of statement. In this context, the Hon’ble Apex Court in the case of Pullengole Rubber Produce Co. Ltd. v. State of Kerala (91 ITR 18) has held that although an & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It was held that, it is open to the assessee who made the admission to show that it is incorrect based on mistake of fact. An oral statement on a relevant fact is a piece of evidence, and the weight to be attached to it must depend on the factual circumstances in which it was made. It is open for the assessee to show the contents/facts stated therein to be erroneous or untrue, based on mistake of fact. Hence, the position which emerges is that a statement u/s 132(4) of the Act by itself cannot be reason enough to justify an addition, if the assessee is able to show that the facts admitted by him was purely based on wrong assumption of facts and able to adduce evidence/material to show that he was wrong on the facts he admitted. So, when an admission u/s 132(4) of the Act has been retracted on the aforesaid reasons, then the AO should cross-examine the person again to ascertain the correct facts. The AO ought to conduct proper investigation into the affairs of the assessee and gather corroborative material which would negate such retraction and prove that the facts admitted originally is correct and thus retraction can be discarded.

8 In view of the above position of law, we now proceed to examine the facts on the present case. It is noted that the impugned addition on account of over-invoicing emanated from the statement of Mr. Prashant Godha. He is noted to have admitted in his statement that the cash found in his possession was generated out of over-invoicing and that these proceeds belonged to the assessee-company. Based on & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd his statement, the Investigating Authorities are noted to have enquired into the source/party from whom such over-invoicing was done. As noted from the statements of the three (3) employees extracted above, the Investigating Authorities had questioned them as to whether they were aware of any bogus purchases booked by the assessee company. To this, each of the employee is noted to have made the same averment that purchases were booked from M/s Reynolds Petro Chem Ltd but these purchases were not bogus and that only over invoicing was done. The Investigating Authorities are noted to have followed up this answer with another question to explain the details of transactions made with M/s Reynolds Petro Chem Ltd and these employees are noted to have explained the same. Having perused each of these statements given by these three employees, it is evident that they had only admitted to over-invoicing being done through M/s Reynolds Petro Chem Ltd. The Ld. AR has rightly pointed out that none of these employees have named the assessee, i.e. M/s IPCA Laboratories Ltd. in their answers. Instead, while explaining the modus operandi, these employees are noted to have named M/s Maker Laboratories Ltd, which we note to be sister concern of the assessee who had made purchases from M/s Reynolds Petro Chem Ltd. It is not the Revenue’s case that the assessee had made any purchases from M/s Reynolds Petro Chem Ltd. The AO instead is noted to have used these statements to allege that purchases made from other vendors, namely, M/s Sarna Chemicals Pvt Ltd, M/s Anuh Pharma Ltd, M/s Mehta API & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd Pvt Ltd, M/s Calyx Chemicals and Pharmaceuticals Ltd and M/s Farmson Pharmaceuticals Pvt Ltd were also subjected to over invoicing. Upon query by this Bench on this aspect, the Ld. AR confirmed that there were no purchases made by the assessee from M/s M/s Reynolds Petro Chem Ltd and this admitted factual position was not controverted by the Revenue. The Ld. AR brought to our notice that only M/s Maker Laboratories Ltd had conducted transactions with M/s Reynolds Petro Chem Ltd, and that the AO had already drawn adverse inference on account of over-invoicing in the hands of M/s Maker Laboratories Ltd. The Ld. AR also brought to our notice that Shri Prashant Godha was also an erstwhile Director of M/s Maker Laboratories Ltd and that he had remitted his office only a few months prior to the date of search. The Ld. AR has therefore rightly suggested that even if the statement of Mr. Godha was to be taken at face value, i.e. the cash found on him was generated from over-invoicing, then he has mistakenly named the assessee instead of M/s Maker Laboratories Ltd in his statement. Having regard to these facts and evidences brought on record, we find force in the submissions of the Ld. AR that the statement given by Shri Prashant Godha that the cash found from his possession belonged to the assessee, which it had generated from over-invoicing, was based on mistaken understanding of fact and that his testimony was factually incorrect. This is also found to be corroborated by the fact that Shri Prashant Godha had backed his retraction affidavit by offering the cash found in his possession to tax as his own unaccounted income and the Revenue is also noted to have accepted the said offer and assessed it to tax in his hands. The & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd contemporaneous facts showed that assessee-company had not made any purchases from M/s Reynolds Petro Chem Ltd, which was found to be engaged in giving inflated invoices. Moreover, the Revenue had already made additions on account of over-invoicing in hands of M/s Maker Laboratories Ltd in relation to the purchases from M/s Reynolds Petro Chem Ltd. Also, the cash found from the possession of Shri Prashant Godha had been ultimately assessed as his own undisclosed income. Considering the entire gamut of facts therefore, the original testimony of Shri Prashant Godha is found to be based on wrong assumption of facts, which makes it unsafe to rely on it and as discussed, the assessee has rebutted the same with evidence. Hence, we hold in aforesaid factual matrix, the AO erred to draw adverse inference in the hands of the assessee solely based on an incorrect admission made by the Director on wrong assumption of fact/mistake of fact.

9 As already noted above, the AO had erroneously referred to the statement of three (3) employees to justify the addition on account of over-invoicing from purchases made from vendors, M/s Sarna Chemicals Pvt Ltd, M/s Anuh Pharma Ltd, M/s Mehta API Pvt Ltd, M/s Calyx Chemicals and Pharmaceuticals Ltd and M/s Farmson Pharmaceuticals Pvt Ltd. The AO, instead, is noted to have drawn this inference on his own surmises and not any incriminating material found in the course of search. Overall, therefore, we find that the entire premise on which the AO alleged over-invoicing of purchases by the & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd assessee was fundamentally flawed and not backed by any material or evidence. Accordingly, the additions made in this regard in the hands of the assessee is untenable.

10 Moreover, before us, the Ld. AR for the assessee has also demonstrated through the details of purchases that the purported statements obtained from the three (3) employees regarding over invoicing was also not corroborated by the given facts of the case. He has thus shown us that the admission obtained by them was untrue and hence their retractions should not be discarded straightaway. The Ld. AR has accordingly pointed out apparent fallacies in the manner in which the AO inferred over-invoicing from the vendors in question. The Ld. AR showed us that the AO had cited instances and made comparison on selective data. For instance, it was shown to us, that the AO had cherry picked six (6) transactions of M/s Sarna Chemicals Pvt Ltd as opposed to the twenty (20) transactions undertaken during the entire year. Likewise, in the case of purchases from M/s Mehta API Private Limited, the AO has picked up only two (2) out of thirteen (13) transactions actually entered into by the assessee. The Ld. AR has shown us similar cherry-picking exercise in almost all cases. It was shown to us that, if the overall transactions were compared, the rates were commensurate and the differences were minimal. Hence, the purported values of over-invoicing obtained from these employees were not backed by the given facts of the case. We also find merit in the submissions of the Ld. AR that the price comparison undertaken by & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd the lower authorities was inherently flawed as the lower authorities had failed to consider the functional, economic and risk differences amongst different vendors. The Ld. AR pointed out that, the terms of contract and terms of payment varied across vendors and hence an apple-to-apple comparison was not possible until functional adjustments were made. The Ld. AR also showed us that there were quantitative differences as well. He explained that it is well-known that bulk purchases carry discounted value in comparison to small/retail purchases. The Ld. AR also brought to our notice certain quality differences as well, which according to him, would have a bearing on the price. For instance, he took us through the different grades of paracetamol used in Indian market, European market and other countries. He accordingly explained that the rates of paracetamol varied across different grades. Having regard to the foregoing, we overall find merit in the assessee’s plea that the benchmarking exercise conducted by the lower authorities suffered from several infirmities and was therefore unreliable.

11 The Ld. AR also pointed out that this benchmarking exercise undertaken by the lower authorities had no legal backing. He submitted that Chapter X of the Act contained provisions giving authority to the officers for undertaking the transfer pricing exercise in relation to international or specified domestic transactions with associated enterprises. Similarly, according to him, only if the purchases from related parties are found to be inflated then the excess & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd portion was disallowable u/s 40A(2)(b) of the Act. The Ld. AR thus submitted that there was no provision in law, which empowered the AO to undertake comparison of different prices paid for purchases made from different unrelated independent parties. He thus contended that this entire exercise undertaken by the AO was irrelevant. The Ld. AR explained that the difference in rates amongst purchases from unrelated and independent vendors can be on account of varied reasons such as availability of quantity with them, urgency/need of the assessee, place of delivery and terms of credit, etc. He also showed us that the purchases of these raw materials were made from both MSME vendors as well as reputed manufacturers. He thus contended that it is common in any industry that the rates would vary based on the reputation of the manufacturers. Having considered the foregoing, we find force in these submissions put forth by the assessee. Unless, the AO is able to bring on record tangible material or evidence that the assessee had paid excess price and got back monies/cash from suppliers, according to us, merely because there were rates differential amongst purchases from different vendors cannot be sole reason to infer over-invoicing/inflation of purchases. We also note that the AO himself had ultimately not given any relevance to the enquiry and comparison made by him, which although was extensively discussed in the assessment order. It is noted that the AO had ultimately made the addition based on the value of over-invoicing as stated by the employees in their statements and not based on his comparison/ independent enquiry from these vendors. As already held above, the & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd statements of the employees had no bearing in the given facts of the assessee’s case as the over-invoicing component admitted by them was in relation to purchases made from M/s Reynolds Petro Chem Ltd. Hence, for the various reasons as discussed in the foregoing, we hold that the impugned addition on account of alleged over-invoicing was unwarranted on the given facts as well.

12 In light of the above findings, we direct the AO to delete the addition made on account of over invoicing in purchases across all AYs. Hence, the grounds raised by the assessee are allowed and the grounds of Revenue are dismissed.

Issue 6: Disallowance of bogus purchases Ground Nos. 8-10 of the assessee’s appeal and the Ground No. 5-6 of the Revenue’s appeal for AY 2009-10 Ground Nos. 8-10 of the assessee’s appeal and the Ground No. 5-6 of the Revenue’s appeal for AY 2010-11 Ground Nos. 8-10 of the assessee’s appeal and the Ground No. 5-6 of the Revenue’s appeal for AY 2011-12 Ground Nos. 8-10 of the assessee’s appeal and the Ground No. 8-9 of the Revenue’s appeal for AY 2012-13 Ground Nos. 8-10 of the assessee’s appeal and the Ground No. 6 of the Revenue’s appeal for AY 2014-15

1 These grounds are in relation to the disallowance of purchases made from seven (7) parties viz., M/s Arihant Enterprises, M/s Rushabh Sales Corporation, M/s Regal Sales Corporation, M/s Seva Enterprises, M/s Shree Ganesh Enterprises, M/s Mehul Traders and M/s Krish Enterprises. Briefly stated, the facts as noted are that, during the course of a survey action at one of the premises of the assessee, & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd statement of one employee Mr. Bhupendra Joshi was recorded. In his statement, he is noted to have stated that, the purchases made from M/s Arihant Enterprises, M/s Rushabh Sales Corporation and M/s Regal Sales Corporation were not verifiable and thus he offered to disallow the same. Apart from the foregoing, the AO in the course of assessment came across another four (4) parties i.e. M/s Seva Enterprises, M/s Shree Ganesh Enterprises, M/s Mehul Traders and M/s Krish Enterprises, which according to AO, were flagged as hawala dealers by Maharastra State VAT Department. The AO accordingly required the assessee to explain as to why the purchases made from these parties should not be treated as bogus. The assessee, in response, explained that, Mr. Bhupendra Joshi had retracted his statement and provided his affidavit as well. The assessee further submitted the relevant invoices, ledgers, bank statements etc. to substantiate the genuineness of purchases. The AO however did not agree with the explanation furnished by the assessee and rejected the retraction as after-thought. The AO noted that the notices issued upon these parties u/s 133(6) were either un-served or nor complied with. The AO further observed that these entities featured in the list notified by the Sales Tax Department of Maharashtra. According to AO therefore, these purchases were bogus and hence added the same to the total income. On appeal the Ld. CIT(A) is noted to have restricted the addition to the extent of profit element of 12.5% embedded in these purchases. Aggrieved by the order of Ld. CIT(A), both Revenue and assessee are in appeal before us. & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd

2 Assailing the action of Ld. CIT(A), the Ld. AR for the assessee submitted that the additions made in unabated AYs 2009-10 & 2010- 11 was not tenable since they were not based on any incriminating material unearthed in course of search. Moreover, according to him, since the statement basis which the impugned addition was made, had been retracted by Mr. Bhupendra Joshi, the same was not tenable in law. On merits, the Ld. AR submitted that the assessee had already provided all relevant contemporaneous evidences, which it was required to maintain in ordinary course to substantiate the genuineness of purchases. The Ld. AR further took us through the published list of the Sales Tax Department of Maharashtra referred to by the AO, which was in relation to suspicious dealers and not hawala dealers, as wrongly inferred by the AO. He pointed out that, the list also came with a disclaimer wherein any supplier who had grievance could lodge their complaint with them. He showed us that, this list contained the details of those dealers who had collected VAT from the customers but did not deposit it with the State Government. According to Ld. AR therefore, this default by the supplier would not ipso facto mean that the purchases made by the assessee was not genuine. The Ld. AR

3 Per contra, the Ld. CIT, DR vehemently supported the order of the AO. He submitted that the retraction affidavit furnished by Mr. Bhupendra Joshi was an after-thought and therefore ought to be discarded. He further claimed that the assessee had failed to prove the genunineness of the purchases in the course of assessment, hence the AO had rightly disallowed the same. According to him, the Ld. CIT(A) had erred in restricting the disallowance to the extent of profit element in these purchases as opposed. He urged that the entire value of purchases ought to be disallowed.

4 We have heard both the parties. From the facts placed before us, it is noted that, the seven (7) suppliers in question, were flagged as suspicious entities by the Maharashtra Sales Tax Department. When enquired in the course of search, the employee of the assessee, Shri Bhupendra Joshi is noted to have also admitted that the purchases from these suppliers were not genuine, although he is noted to have retracted the same. We agree in principle with the submission of the Ld. AR that an admission/ statement alone is not sufficient to justify an addition but at the same time the onus is on the assessee to support their retraction with corroborative evidence. On the given facts, it is noted that the assessee has only been able to furnish the relevant tax invoices, ledgers and bank statements in support of purchases. The AO is noted to have attempted to make independent enquiries from these & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd suppliers but the notices issued u/s 133(6) of the Act remained un served / non-complied. Hence, in absence of independent verification and having regard to the published list of Maharashtra Sales Tax Department, the purchases made by the assessee from these seven (7) suppliers were indeed suspicious. Overall, therefore, we are in agreement with the lower authorities that the assessee was unable to fully discharge the genuineness of the purchases made from these suppliers.

5 The next issue for consideration is whether the entire value of payments made to the suppliers was to be disallowed or only the profit element embedded therein was to be taxed in hands of the assessee. From the material available on record, it is noted that the fact that assessee had purchased these materials is not in dispute. The Ld. AR has rightly pointed out that, the quantitative details reported in the tax audit report, consumption of raw materials, corresponding sales and the book results have not been rejected by the AO. It was also brought to our notice that certain purchases were capitalized to the cost of fixed assets and that the AO did not dispute the actual cost of assets and the depreciation claimed thereon. It is therefore a case where the purchases were indeed made, but the parties, who the assessee claims to have supplied these purchases, are not genuine. In this regard, we may gainfully refer to the decision of the Hon’ble Gujarat High Court in the ITA No.879 to 883/M/2021 & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd Tribunal was of the opinion that the purchases might have been made from bogus parties but the purchases themselves were not bogus. Considering such a situation, this Tribunal was of the opinion that not the entire amount of purchases but the profit margin embedded in such amount would be subjected to tax. On appeal by the Revenue, the Hon’ble High Court is noted to have upheld this finding of the Tribunal.

6 We further note that there are a series of judgments of the Hon’ble juri ictional Bombay High Court wherein it has been held Haji Adam & Co (103 taxmann.com 459), the Hon’ble juri ictional High Court has held as under:- “8. In the present case, as noted above, the assessee was a trader of fabrics. The A.O. found three entities who were indulging in bogus billing activities. A.O. found that the purchases made by the assessee from these entities were bogus. This being a finding of fact, we have proceeded on such basis. Despite this, the question arises whether the Revenue is correct in contending that the entire purchase amount should be added by way of assessee's additional income or the assessee is correct in contending that such logic cannot be applied. The finding of the CIT(A) and the Tribunal would suggest that the department had not disputed the assessee's sales. There was no discrepancy between the purchases & Others (Assessee & Revenue) A.Y Nos. 2009-10 to AY. 14-15 IPCA Laboratories Ltd shown by the assessee and the sales declared. That being the position, the Tribunal was correct in coming to the conclusion that the purchases cannot be rejected without disturbing the sales in case of a trader. The Tribunal, therefore, correctly restricted the additions limited to the extent of bringing the G.P. rate on purchases at the same rate of other genuine purchases.”

7 Similar principle was followed by the Hon’ble juri ictional High Court in the case of PCIT Central-4 vs Paramshakti Distributors Pvt Ltd (ITA No. 413 of 2017) wherein it was held as under: