Income Tax Appellate Tribunal - Ahmedabad
Schutz Dishman Biotech Pvt.Ltd.,, ... vs Department Of Income Tax on 5 June, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "C" BENCH AHMEDABAD
आयकर अपील य अ
धकरण, अहमदाबाद यायपीठ 'सी'
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL
MEMBER,
AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER.
ITA. No. 2060/Ahd/2009
(Assessment Year:2005-06)
DCIT(OSD),
Circle-8, Ahmedabad Appellant
Vs.
Schutz Dishman Bio-Tech Pvt. Ltd.
2nd Floor, Bhadraraj Chembers,
Swastik Cross Road, Navrangpura,
Ahmedabad Respondent
&
ITA. No. 3141/Ahd/2011
(Assessment Year:2006-07)
A.C.I.T.(OSD),
Circle-8, Ahmedabad Appellant
Vs.
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1,
3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z
Di sh m an Bi ot e ch Lt d . ) Page 2
Schutz Dishman Bio-Tech Pvt. Ltd.
2nd Floor, Bhadraraj Chambers,
Nr. Swastik Cross Roads, Navrangpura,
Ahmedabad-380009 Respondent
&
ITA. No. 2888/Ahd/2011
(Assessment Year:2006-07)
Schutz Dishman Bio-Tech Pvt. Ltd.
2nd Floor, Bhadraraj Chambers,
Nr. Swastik Cross Roads, Navrangpura,
Ahmedabad-380009 Appellant
Vs.
The DCIT(OSD),
Circle-8, Ahmedabad Respondent
&
ITA. Nos. 3224 & 3225/Ahd/2010
(Assessment Years: 2004-05 & 2005-06)
Income-Tax Officer,
TDS-1, Ahmedabad Appellant
Vs.
M/s. Schutz Dishman Biotech Ltd.
Nr. Bhadraraj Chambers, Nr. Swastik
Cross Roads, Navrangpura, Ahmedabad Respondent
PAN: AACCS0988C
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1,
3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z
Di sh m an Bi ot e ch Lt d . ) Page 3
राज व क ओर से / By Revenue :Shri Nimesh Yadav, Sr.
D.R.
आवेदक क ओर से / By Assessee : Shri Tushar Hemani, A.R.
सन
ु वाई क तार ख/Date of Hearing :13.05.2015
घोषणा क तार ख/Date of
Pronouncement : 05.06.2015
ORDER
PER BENCH All these appeals pertain to same assesse, so, they are being disposed of by way of this common order for the sake of convenience.
2. In ITA No. 2060/Ahd/2009 for A.Y. 2005-06, Revenue has filed the appeal on the following grounds:
"1. The Ld.CIT(A)XIV, Ahmedabad erred in law and on facts in directing to delete adjustments of Rs.1,59,51,605/- made in the assessment order in respect of Arms Length Price.
2. The Ld.CIT(A)XIV, Ahmedabad erred in law and on facts in directing to delete additions of Rs.2,52,05,652/- on account of deficit/excess consumption of raw materials.
3. The Ld.CIT(A)XIV, Ahmedabad erred in law and on facts in allowing Rs.54,13,383/- on account of interest expenditure."
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 4
3. First issue in Revenue's appeal for A.Y. 2005-06 is with regards to addition of Rs.1,59,51,605/- on account of adjustments in respect of Arms Length Price made u/s.92CA(6) of the Act. Assessee is engaged in business of manufacturing and trading chemicals and other materials. During year under consideration, Assessing Officer noticed that assesse had sold various products to two associate enterprises viz. Amati Packaging Manufactures GmbH, Germany and Schutz & Co. (GmbH), Germany and the total value of such transactions was of Rs.17,89,86,080/-. Assessee filed report in Form 3CEB under Rule 10E alongwith the return of income. Assessing Officer made a reference to Transfer Pricing Officer (TPO), Addl. CIT (TPO-1), Ahmedabad. The TPO passed order u/s.92CA(2) of the Act wherein he made total adjustment of Rs.1,59,51,605/-.
3.1 Matter was carried before the First Appellate Authority wherein various contentions were raised on behalf of assesse as detailed in para 2.1 and having considered the same, CIT(A) granted relief to assessee. Same has been opposed before us on behalf of Revenue inter alia submitting that CIT(A) erred in directing to delete adjustment of Rs.1,59,51,605/- made in assessment order in respect of Arms Length Price and requested that the order of CIT(A) on issue be set aside and that of Assessing Officer be restored. On other hand, learned Authorized Representative supported the order of CIT(A) on issue and submitted this issue is covered by the order of ITAT I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 5 in assessee's own case and other decisions of Tribunal on the issue. So, order of CIT(A) be upheld.
3.2 After going through rival submissions and material on record, we find that CIT(A) under identical circumstances, for A.Y. 2002-03, method of determining the arms length pricing adopted by assesse viz. Transactional Net Margin Method (TNMM) was rejected by the TPO and in its place, comparable uncontrolled price (CUP) method was adopted. Assessee carried the matter to ITAT, wherein vide order dated 15th February, 2008 in ITA No. 554/Ahd/2006 vide para 39 had decided similar issue in favour of assessee by observing as under:
"39. in view of these facts and circumstances, and as referred by both the sides to OECD guidelines for transfer pricing in Multinational Enterprises and Tax Administrations for the purpose of computation of ALP is very important and with regard to the facts of this case, we have to discuss the relevant OECD guidelines on transfer pricing. First of all, it is seen that the assessee has adopted TNM method for computation of ALP with regard to International Transactions. It is seen that OECD guidelines Article 9 and relevant para 3.26 refers to the TNM method and why it should be adopted. The relevant para 3.26 reads as under:
"3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction (for transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 6 order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied This means in particular that the net margin of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I) should ideally be established by reference to the net margin that the same taxpayer earns in comparable uncontrolled transactions." Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide, A functional analysis of the associated enterprise and, in the latter case, the independent enterprise is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results. Further, the other requirements for comparability, and in particular those of paragraphs 3.34-3.40 must be applied."
In view of the above guidelines of OECD, it is clear that, in the present case, while adopting the CUP method the TPO has compared the prices of those companies who produces and sells in small quantities and not as produced by the assessee-company. Sales to the Non-AE as compared by the TPO are not at all comparable inasmuch as these Non-AE entities do not undertake any marketing exercises, no after- sale support and technical support. Even otherwise, the quantity is un-comparable with that of the assessee company. The quantity sold by Vipor Chemicals and Cadila Pharma is too small to be taken into consideration for the purposes of deciding the transfer pricing of the International Transactions of the assessee-company, for adopting CUP method as adopted by the TPO. Even otherwise the PBIT in regard to export which is as high as 23.02%, as against the overall PBIT of the assessee-company was to the extent of 20.04% and the transactions of export were more than 92% of the- exports having been made to AE resulted into more PBIT for the assessee-company than the other transactions. Further, a reference is to be made to para 3.34 and 3.40, I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 7 where the strength of TNM method is described and the guidance for application of same is provided. The relevant para 3.24 and 3.40 of OECD guidelines read as under:
"3.34Prices are likely to be affected by differences in products, and gross margins are likely to be affected by differences in functions, but operating profits are less adversely affected by such differences. As with the resale price and cost plus methods that the transactional net margin method resembles, this, however, does not mean that a mere similarity of functions between two enterprises will necessarily lead to reliable comparisons. Assuming similar functions can be isolated from among the wide range of functions that enterprises may exercise, in order to apply the method, the profit margins related to such functions may still not be automatically comparable where, for instance, the enterprises concerned carry on those functions in different economic sectors or markets with different levels of profitability. When the comparable uncontrolled transactions being used are those of an independent enterprise, a high degree of similarity is required in a manner of aspects of the associated enterprise and the independent enterprise involved in the transactions in order for the controlled transactions to be comparable; there are various factors other than products and functions that can significantly influence net margins.
3.40 Another important aspect of comparability is measurement consistency. The net margins must be measured consistently between the associated enterprise and the independent enterprise. In addition, there may be differences in the treatment across enterprises of operating expenses and non-operating expenses affecting the net margins such as depreciation and reserves or provisions that would need to be accounted for in order to achieve reliable comparability."
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 8 In view of the above guidelines and the facts of the present case, it is clear that the "Transactional Net Margin Method"(TNM Method) as understood by us and as per Rule 10B(1)E of IT Rules, the application of correct TNM Method for computing net margins of the assesse, the similar Transactions relating to the product of the assesse-company were to be taken into consideration and benchmark of net margin determined from comparable uncontrolled transactions or net margin found by another unrelated enterprises from a comparable uncontrolled transaction should be considered. In the present case, the assessee while adopting the TNM method has given the complete details regarding Transfer Pricing Documentation, Complete Ownership Structure, Profile of the assesse-company, Business Description and the Financial capacity / Asset base and that also of Associated Enterprise were provided to the TPO. The assessee-company has demonstrated the average of PBIT of various group companies in the Organic Chemical Business during the relevant year and the profit earned during the same year, are almost identical and comparable The argument of the learned DR, on factual aspects that the data submitted by the assessee as regards to overall PBIT of the assessee and the comparative statement of PBIT of various companies adopting TNM method is not comparable with the assessee, is not correct. We feel that the general remarks with regard to factual aspects made by the learned DR as discussed above is out of facts. The facts clearly speak out itself and the same are discussed in detail in above paragraphs. We find no fault with the TNM method adopted by the assessee on the above facts of the case. Even the Hon'ble Apex Court in the case of Morgan Stanley and Co. inc. (supra) has clearly upheld the adoption of TNM method as most appropriate method and the relevant 'particular line from the judgment reads as under:
"As regards income attributable to the P.E. (MSAS), we hold that the transactional net margin method was the appropriate method for determination of the Arm's Length Price in respect of transaction between MSCo and MSAS."
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 9 Even the Hon'ble Special Bench of this Tribunal in the case of Aztec Software & Technology Services Ltd. (supra) has held that the computation of arm's length price is a factual exercise. Each case depends on its own facts and circumstances. In many cases where identical or almost similar uncontrolled transaction is available for comparison; determination of Arm's Length Price is an easy task. But it is not so in most of transactions and rarely one is able to locate an identical transaction. In such cases Arm's Length Price is determined by taking results of a comparable transaction in comparable circumstances and make suitable adjustments for the differences. Similarly, in the present case also, the PBIT of the assessee-company is exactly similar or nearby with that of the other uncontrolled transactions of unconnected enterprises. The PBIT of exports is as high as 23.02% as against the overall PBIT of the assessee-company was at 20.04% and the transactions of the export of the assessee-company was more than 92% of the exports having been made to the AE resulted into more PBIT for the assessee than 'other transactions. Even the assessee has compared the PBIT of other independent entities with that of the assessee and demonstrated the application of TNM method correctly. Accordingly, we uphold the TNM method adopted by the assessee and reverse the CUP method adopted by the Revenue. Accordingly, this issue of the assessee's appeal is allowed.
Nothing contrary was brought to our knowledge on behalf of Revenue and we find that in assessee's own case in ITA No.3590 & 3751/Ahd/2007 for A.Y.04-05, similar issue has been decided by ITAT in favour of assessee following case of associate concern viz. M/s Dishman Pharmaceuticals & Chemicals Ltd. In view of above, CIT(A) was justified to direct the Assessing Officer to delete the adjustment of Rs.1,59,51,605/- made in assessment order in respect of Arm's I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 10 Length Price because PBIT of 17.13% is very much comparable and better than the industry average of 12.87%. Even margins with AE at 16.66% are better than overall PBIT. TPO was not justified in applying comparable Uncontrolled Price method and compare the purchase of 72,000kgs. Worth Rs.5,25,69,297/- made from Germany with meager quantity of 2,000 kgs. Worth of Rs.10,40,000/- made from Indian Party. Domestic and international rates cannot be compared. Fundamental requirement, in any of the method selected, is selection of comparables for benchmarking international transaction. Whatever methodology is chosen for the purpose of determination of ALP u/s.92C, the criteria, as specified in the Act and the Rules, have to form a basis of judging the comparability. There should be proper analysis of such transaction with respect to functional performed, assets employed and risk assumed by respective parties with reference to transaction in question. This can be termed as functional, asset, risk analysis i.e. FAR analysis. The provision also provides scope for carrying out adjustments in cases where there are some differences or variations to make two transactions commercially comparable, for the purpose of benchmarking. The underlying principal being that only likes can be compared with likes. Raw material purchased from Indian supplier were not qualitative compared to raw material purchased from Amari Packaging, Germany. Assessee is responsible for qualitative product and it assumes risk thereof. I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 11 So, it was decided to continue with qualitative raw material being purchased from Amari Packagin. Assessing Officer ought to have taken into consideration FAR analysis and should also take into account various factors such as, quality, quantity, pricing factors, government policy and transportation cost before comparing controlled transaction with uncontrolled transaction. Assessing Officer ought to have evaluated all the methods of transfer pricing, however, he selected directly CUP method being easy in apply. Assessing Officer has taken price from Database without pointing out any comparable cases. The industry average is not a comparable instance as held by the Special Bench in case of Aztec Software & Technology Services Ltd. Vs. ACIT (2007) (107 ITD 141) (Bang) (SB), wherein it was held that Assessing Officer
(a) right to select most appropriate method is that of assesse.
(b) It has to be duly substantiated
(c) Industry average cannot be applied
(d) No specific preference to any method compared to other
methods be given.
In view of above decision, order of CIT(A) on the issue is upheld.
4. Next issue in Revenue's appeal is with regards to addition of Rs.2,52,05,652/- made on account of deficit/excess consumption of raw materials. This amount include addition of Rs.73,43,999/- on account of inflation of purchase of raw material and addition of Rs.1,77,61,653/- on account of I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 12 unexplained investment in purchase of raw materials. As both the grounds relate to common issue, the same were considered together. Assessing Officer observed that assesse was engaged in the manufacture of bulk drugs and that in assessment of A.Y. 2004-05 addition was made on account of difference in actual consumption of raw material and standard consumption prescribed under Exim Input and Output Norms. Assessing Officer asked to furnish details of variation between actual consumption and the standard consumption. As per the details given in Annexure-II to the assessment order, Assessing Officer noticed that there was short consumption of raw material of Rs.l,77,61,653/- and excess consumption of raw materials of Rs.74,43,999/-. Assessing Officer referred to assessment order of A.Y. 2002-03 and the statement of Sri R.S. Sharma, the then General Manager (Works) and addition made for that year of Rs.89,l0,724/-. After relying on the assessment orders of earlier years, Assessing Officer made disallowance of Rs.2,52,05,652/-.
4.1 Matter was carried before the First Appellate Authority wherein CIT(A) gone through the order of ITAT for A.Y. 2002- 03, wherein issue has been decided in favour of assesse, whereby he deleted the addition of Rs.2,52,05,652/-. The said order of ITAT in ITA No. 554/Ahd/2006 for A.Y. 2002-03 has been annexed before us, wherein vide para 41 &42 has decided similar issue in favour of assessee by observing as under:
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 13 "41 First of all, we have gone through the facts narrated by the CIT(A) in para 2.2 which reads as under:
"2.2 I have considered the submissions of the appellant, remand report of the AO and facts of the case carefully. From the facts on record, it is clear that the appellant is manufacturing medicines which are being exported. The quality control of these drugs is of high standards and the composition of the drugs will have to be maintained as per the prescribed norms and of internationally quality. For a particular medicine which is to be exported the Government of India has prescribed the; input ratio of various raw material which have been printed on the various sale invoices which have been mentioned by the appellant. As there was not of variation in the ratio, to know the exact consumption of the raw material the statement of the General Manager (Works) namely Shri R S Sharma who is the in-charge of production was recorded. As he was the in-charge of production his statement would determine the actual consumption of various raw material for the production of particular medicine. The statement has been reproduced in the assessment order on page 10 & 11. He has categorically stated in reply to various questions which have been put-up by the AO that the consumption of raw materials is exactly in accordance to the input output ratio prescribed by the Government and printed in the sale invoices, in reply to question No.5, 6, and 8 he has categorically mentioned that the production of export items is as per the standard norms and these inputs are also mentioned at the bottom of export sales invoice, In reply to question No.8 he has again confirmed that production of the item is as per the standard norms and the inputs are used as per the standard usage mentioned at the bottom of sales bills. If there would have been any variation in the consumption of raw material he would have mentioned the same before the AO. Even otherwise for the formulation of medicine the standard input output ratio will have to be adhered to. He has not mentioned I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 14 in any of the reply to the question that there was any variation between the standard input and output ratio in the consumption of the raw materials. Therefore, his statement who controls the production certifies that the consumption of raw material has been in accordance with the standard input output ratio. The appellant's submission that the consumption depends on various factors like efficiency of the plant and process involved is only an afterthought because the production manager who is the in-charge of production has nowhere mentioned that there is even slight variation in consumption from the standard input output ratio. The appellant has also not proved with any other evidence that the consumption has been different because of factors mentioned by it. Therefore, the consumption of raw material will have to be compared vis a vis the standard input output ratio and there is no justification of giving margin of 10% considering the statement of General Manager. After comparing the standard input and output ratio and actual consumption, it was found that there was a deficiency of certain raw material of Rs.63,04,605/- and there was excess consumption shown by the appellant of other raw materials as Rs. 1,32,57,449/-. As the deficit and excess is of different raw materials, there cannot be offset against each other as has been done by AO in the assessment order. The appellant's another argument that record are being examined by the excise department and sales tax department is of no relevance because the excise department is only concerned with the actual production and levy of excise duty rather than to examine the excess or deficiency of the raw material which has been worked out only on the basis of standard input output ratio. Appellant's another argument that it did not have any motive in suppressing the income because most of the income is exempt u/s 80HHC of the I.T. Act is also of no relevance because the income will have to be computed on the basis of accounts and records maintained by the appellant and not on the basis of motive of the appellant and benefit of section 80HHC I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 15 will be given as per provisions of the Act. The appellant has also not proved with any other evidence that the consumption has been different because of factors mentioned by it. The fact remains that the appellant has not been in a position to explain the deficiency and the alleged extra consumption of raw material vis-a-vis the standard input output ratio in view of the statement of the production manager who has strictly confirmed that the raw material has been consumed as per standard input output ratio,"
On these facts, the CIT(A) finally enhanced the addition vide para 2.2.3, by observing as under:
2.2.3 From the facts on record and the above discussion, it is clear that the appellant had shown less consumption of certain input raw material of Rs.63,04,605/- and the only inference is the same have been purchased from outside the books of account and the same is liable to be added as the investment from undisclosed sources and the appellant has shown more consumption of certain items to the extent of Rs.1,32,57,449/- which has not been consumed and therefore, the purchased to this extent have been inflated to reduce the profit of the company. Thus the total addition which is liable to be made is Rs.1,95,62,054/-. After considering the addition of Rs.89,10,074/-, the income which is to be further enhanced is Rs.1,06,51,333/-. Therefore, the AO is directed to enhance the income by Rs.1,06,51,980/- Accordingly this ground is dismissed with direction to enhance the income by Rs.1,06,51,980/-."
The learned counsel of the assessee referred the Tribunal's decision, wherein the Tribunal in the case of M/s Gujarat Woolen Felt Mills (supra) has held vide para 5 as under:
"5 We have heard the parties and considered the rival submissions. It is true that no records have been maintained by the assessee after carding stage that by I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 16 itself is not a ground for making addition and treating the production at the carding stage as final. The difference of 11,506 kg is due to wastage in the production approximately 13% of the production and looking to the standard fixed by the Handbook of the Procedures, the percentage of wastage cannot be said to be excessive. In these circumstances, particularly in the absence of any specific material to show that the assesses has made a false claim of wastage, which in any case is within the parameters laid down under the Excise Duty Exemption Scheme, no addition can be made to the income of the assessee. The conclusion of the Assessing Officer, as observed by the CIT(A) is based on the production register up to the carding stage is incomplete or partial stage of the material and, the addition made on the basis of such incomplete and partial effect cannot be justified. The CIT(A), in our opinion, was right in allowing the claim of the assessee." |
42. It is seen from the above facts as narrated in the order of the CIT(A), which are undisputed, as well as the case law relied on by the learned counsel for the assessee, we are of the view that the CIT(A) has adopted the norms prescribed under the standard input and output ratio of consumption but the assessee-company has clearly demonstrated that it would be better of had it imported the raw material as per the input output norms. The assessee-company has claimed that it has consumed less than what is prescribed under the input output norms. The CIT(A) has wrongly relied on the input output consumption ratio and the facts in the present case are exactly identical what was before the Tribunal in the case of M/s Gujarat Woolen Felt Mills (supra), respectfully following the said decision of the Tribunal, we delete the addition and allow this issue of the assessee's appeal."
Similar view has been taken in ITAT in assessee's own case for A.Y. 03-04 & 04-05. Nothing contrary was brought to our I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 17 knowledge, facts being similar, so following the same reasoning, we are not inclined to interfere in the finding of CIT(A) who has rightly deleted the addition of Rs.2,52,05,652/- made on account of deficit/excess consumption of raw materials.
5. Next issue is with regards to disallowance of interest expenditure of Rs.54,13,383/- u/s. 36(I)(iii) of the Act. Assessing Officer observed that assesse has given an interest free deposit of Rs.3,04,37,540/- to its parent company M/s. Dishman Pharmaceutical & Chemicals Ltd. Assessing Officer disallowed the whole of interest expenditure amounting to Rs.54,13,383/- relying on the decision of Abhishek Industries Ltd. 156 Taxman 257(P&H) for diversion of borrowed funds.
5.1 Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assesse and having considered the same CIT(A) granted relief to assessee by observing that issue is directly covered by the decision of Hon'ble Supreme Court in case of S. A. Builders 288 ITR 1 (SC), wherein it has been held that money advance to sister concern can be considered as out of commercial expediency. In present case, money has been advanced to sister concern out of commercial expediency and therefore, following the decision of S. A. Builders (supra), no disallowance is called for. In any case, assesse has substantial interest free funds at its disposal so as to justify the advance to Associate I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 18 concern as per accounts, obtaining balance of M/s. Dishman Pharmaceutical & Chemicals Ltd. was outstanding at Rs.4 crore against which paid up capital and surplus of assesse was at Rs.1,50,00,000/- and Rs.6,98,59,670/- respectively. Further during year under consideration, assesse has given sum of Rs.2,70,00,000/- to M/s. Dishman Pharmaceutical & Chemicals Ltd. against which they have returned amount of Rs.3,85,90,000/- and therefore, on contrary, amount has been repaid during year under consideration. In view of this, disallowance was deleted. Learned Authorized Representative pointed out that this issue is covered by the order of ITAT for A.Y. 04-05 in ITA No. 3590 & 3751/Ahd/2007, dated 10.12.2010 has decided similar issue in favour of assesse by observing as under:
"18. We find that these loans are old loans and no disallowance was made in earlier years and moreover these are business advances for the purpose of business expediency as held by Hon'ble apex court in the case of S.A. Builders (supra). Even otherwise, we find that the assessee- company having interest free funds in the sum of Rs.7,34,00,922/- (share capital Rs.1.50 crore + reserves and surplus Rs.5,84,00,922/-). Accordingly, this issue is also covered by the decision of Hon'ble apex court in the case of Munjal Sales Corporation (supra), wherein the head- note is extracted herein:-
"Under the Income-tax Act, 1961, after amendment of the Act by the Finance Act, 1992, in order that interest paid on borrowings can be allowed as a deduction in computing the business profits, every assessee, including a firm, has to establish, in the first instance, that it was allowable under section 36(1)(iii); and, in I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 19 the case of a firm, further that the amount does not exceed the limit fixed by section 40(b)(iv).
Held, however, on the facts, in this case, that since the assessee had borrowed the moneys from its partners as early as 1991, and the Appellate Tribunal had held that the loans were given by the partners for business purposes and the interest did not exceed 13 per cent, per annum simple interest, the assessee-firm was entitled to deduction of interest on the borrowings for the assessment years 1993-94 to 1997-98.
Held also, that since the opening balance of the profits of the assessee-firm as on April 1, 1994, was Rs.1.91 crores, and the profits were sufficient to cover the loan given to a sister concern of Rs.5 lakhs only, the Appellate Tribunal ought to have held that the loan given was from the assessee's own funds,"
Accordingly, we confirm the order of CIT(A) deleting the addition and this issue of the Revenue's appeal is dismissed.
Nothing contrary was brought to our knowledge, facts being similar, so following the same reasoning, we are not inclined to interfere in the finding of CIT(A) who has deleted the disallowance of interest expenditure of Rs.54,13,383/- u/s. 36(I)(iii) of the Act, by following ratio of S.A. Builders (supra). Same is upheld.
6. As a result, Revenue's appeal for A.Y. 05-06 is dismissed.
7. In ITA No. 3141/Ahd/2011 for A.Y. 2006-07, Revenue has filed the appeal on the following grounds:
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 20 "1. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.1,58,88,008/- made by the Assessing Officer on account of adjustments of the Arm's Length Price.
2. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of Rs.2,49,98,986/- & Rs.84,61,907/-
u/s.69 of the I.T. Act on account of unexplained investment in purchase of raw materials.
3. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of interest amounting to Rs.29,11,419/- made by the Assessing Officer u/s.36(i)(iii) of the I.T. Act."
8. First issue is with regards to addition of Rs.1,58,88,008/- made by Assessing Officer on account of adjustment of Arm's length Price. Similar issue arose in ITA No. 2060/Ahd/2009 for A.Y. 2005-06, wherein vide para 3 of this order, we have decided the similar issue in favour of assessee. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of CIT(A) who has rightly deleted the addition of Rs.1,58,88,008/- made on account of adjustment of Arm's Length Price. Same is upheld.
9. Next issue is with regards to addition of Rs.2,49,98,986/- & Rs.84,61,907/- u/s.69 of the I.T. Act on account of unexplained investment in purchase of raw materials. We find that similar issue arose in ITA No. 2060/Ahd/2009 for A.Y. 2005-06, wherein vide para 4 of this order, we have decided I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 21 the similar issue in favour of assessee. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of CIT(A) who has rightly deleted the addition of Rs.2,49,98,986/- & Rs.84,61,907/- u/s.69 of the I.T. Act on account of unexplained investment in purchase of raw materials. Same is upheld.
10. Next issue is with regards to addition of interest amounting to Rs.29,11,419/- made by the Assessing Officer u/s.36(i)(iii) of the I.T. Act. Similar issue arose in ITA No. 2060/Ahd/2009 for A.Y. 2005-06, wherein vide para 5 of this order, we have decided the similar issue in favour of assessee. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of CIT(A) who has rightly deleted the the addition of interest amounting to Rs.29,11,419/- made by the Assessing Officer u/s.36(i)(iii) of the I.T. Act. Same is upheld.
11. As a result, Revenue's appeal for A.Y. 2006-07 is also dismissed.
12. In ITA No. 2888/Ahd/2011 for A.Y. 2006-07, Assessee has filed the appeal on the following grounds:
"1. The ld. CIT(A) has erred in law and on the facts of the case in not accepting the arm's length pricing adopted by the assesse.
1.1 The ld. CIT(A) has erred in law and on the facts of the case in holding that operating profit @8.94% should be I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 22 adopted for making transfer pricing adjustment while determining arm's length pricing as against operating profits @7.37% declared by the assessee.
1.2 The ld. CIT(A) has erred in law and on the facts of the case in further erred in adopting an erroneous method of comparing operating profits. He further erred in excluding one of the parties selected by the Appellant for the comparison of operating profit without giving any cogent reason.
1.3 The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in invoking the provisions of Chapter X without prima facie demonstrating that there was some tax avoidance.
2. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order.
3. The ld. CIT(A) has erred in law and on facts in confirming the action of ld.AO in charging interest u/s 234B/C/D of the Act.
4. The ld. CIT(A) has erred in law and on facts in confirming the action of ld.AO in initiating penalty proceedings u/s 271(1)(c) of the Act.
13. At the outset of hearing learned Authorized Representative without prejudice to the merit of the case and due to smallness of amount did not press this appeal. So, same is dismissed as not pressed for above said reason.
14. As a result, this appeal in ITA No. 2888/Ahd/2011 for A.Y. 2006-07 is dismissed.
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 23
15. In ITA No. 3224/Ahd/2010 for A.Y. 2004-05, Revenue has filed the appeal on the following ground:
"1. The ld. CIT(A) has erred in law as well as facts of the case in deleting the order passed u/s.201(1) & interest charged u/s. 201(1A) of the IT Act of Rs.45,38,515/- and Rs.31,76,960/- for A.Y. 2004-05 by the A.O. even though the assesse had advanced fund to M/s. Dishman Pharmaceuticals & Chemicals Ltd. and the amounts advanced were in the nature of deemed dividend as per provisions of Section 2(22)(e) of the IT Act and same is subject to sec.194 of I.T. Act."
16. In ITA No. 3225/Ahd/2010 for A.Y. 2005-06, Revenue has filed the appeal on the following ground:
"1. The ld. CIT(A) has erred in law as well as facts of the case in deleting the order passed u/s.201(1) & interest charged u/s. 201(1A) of the IT Act of Rs.57,92,070/- and Rs.33,59,400/- for A.Y. 2005-06 by the A.O. even though the assesse had advanced fund to M/s. Dishman Pharmaceuticals & Chemicals Ltd. and the amounts advanced were in the nature of deemed dividend as per provisions of Section 2(22)(e) of the IT Act and same is subject to sec.194 of I.T. Act."
ITA Nos. 3224 & 3225/Ahd/2010, both Revenue's appeals are filed on similar issue, so both are being disposed of by common order.
17. As stated above, assessee is engaged in business of manufacturing bulk drugs and chemicals. During both years under consideration, assesse has maintained current accommodation adjustment account with its sister concern, I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 24 M/s. Dishman Pharmaceuticals & Chemicals Ltd. During course of assessment proceedings, Assessing Officer contended that in making such deposits, provisions of Section 2(22)(e) of the Income Tax Act, 1961 would be made applicable and resultantly, assesse was required to deducted tax at souce. However, assesse has not deducted tax at source on such deemed dividend u/s.194 of the Act and therefore assessee has made default u/s.201(1) of the Act. Assessing Officer has also levied interest u/s.201(1A) of the Act for both the years.
17.1 Matter was carried before the First Appellate Authority in both years, wherein various contentions were raised on behalf of assessee and having considered the same, CIT(A) has granted relief to assesse by consolidated order by observing that provisions of Section 2(22)(e) of the Act are not applicable at all and therefore, question of deduction of tax at source does not arise and therefore liability u/s.201(1) and 201(1A) of the Act also does not arise. Both years under consideration, CIT(A) perused the copies of ledger accounts placed on record and found that there are large number of debit and credit transactions. Meaning thereby, assesse has given and received funds as and when required to and from its associate concern. It is not an account whereby loans and advances have been given to associate concern. It is an account which is in nature of current adjustment accommodation account wherein there is a movement of funds both ways, on need basis. Unlike transactions of loans and advances, in this kind of current I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 25 adjustment accommodation account, the movement of funds is both ways and the same is more in nature of current account rather than a loan account. Transactions in nature of loans and advances are usually very few and for a longer duration. In present case, nature of transaction is in the form of current accommodation adjustment account and therefore, 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, question of deduction of tax at source would not arise. Accordingly, CIT(A) granted relief to assessee.
17.2 Same has been opposed before us on behalf of Revenue inter alia submitting that CIT(A) erred in law and on facts in deleting orders passed u/s.201(1) & interest charged u/s. 201(1A) of the Act in both years as discussed above. On other hand, learned Authorized Representative supported the order of CIT(A).
17.3 After going through rival submissions and material on record, we find that assessee and M/s Dishman Pharmaceuticals & Chemicals Ltd, both are engaged in business of manufacturing bulk drugs and chemicals. One of the condition for invoking provisions of Section 2(22)(e) of the Act is that money should be paid either by way of loans or advances. CIT(A) has rightly observed that these amounts are in nature of Inter Corporate Deposits (ICD), which has been I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 26 given one corporate to another corporate and therefore, no loan or advance as contemplated u/s.2(22)(e) of the Act. CIT(A) from the ledger accounts observed that such accounts are in nature of deposits. Assessing Officer failed to appreciate that term 'deposit' cannot means 'loan' or 'advance'. Accordingly, CIT(A) was justified in observing that Inter Corporate Deposits (ICD) being different from loans or advances, will not come under the purview of deemed dividend u/s.2(22)(e). This view is fortified by decision of ITAT 'A' Bench, Mumbia in case of Bombay Oil Industries Ltd. vs. DCIT 28 SOT 383 (Mum). In view of above discussion, order of CIT(A) for both years are upheld, whereby he deleted the order passed u/s.201(1) and 201(1A) of the Act. Same are upheld.
18. In result, Revenue's appeals for both years are dismissed.
19. As a result, Revenue's appeals for all years as well assessee's appeal in one year are dismissed.
Pronounced in the open Court on this the 5th day of June, 2015.
Sd/- Sd/- (ANIL CHATURVEDI) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 05/06/2015 S.K.SINHA आदे श क त ल प अ े षत / Copy of Order Forwarded to:-
I . T. A. N os. 2 0 6 0 / A/ 0 9, 2 8 8 8/ A / 1 1, 3 1 4 1/ A / 1 1, 3 2 2 4 & 3 2 2 5/ A / 1 0 ( D CI T/ A CI T/I T O v s. M/ s. S ch ut z Di sh m an Bi ot e ch Lt d . ) Page 27
1. राज व / Revenue
2. आवेदक / Assessee
3. संब ं धत आयकर आय! ु त / Concerned CIT
4. आयकर आय! ु त- अपील / CIT (A)
5. )वभागीय ,-त-न ध, आयकर अपील य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड3 फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद ।
Strengthen preparation & delivery of orders in the ITAT
1) Date of taking dictation 13.05.2015
2) Direct dictation by Member straight on XXX computer/laptop/dragon dictate
3) Date of typing & draft order place before Member 15/05/2015
4) Date of correction ,, ,,
5) Date of further correction
6) Date of initial sign by Members
7) Order uploaded on
8) Original dictation pad has been enclosed in this file
9) Final order and 2nd copy send to Bench Clerk on