Income Tax Appellate Tribunal - Mumbai
Zydus Altana Healthcare P. Ltd ( ... vs Department Of Income Tax on 8 October, 2013
आयकर अपील य अ धकरण "K " यायपीठ मंब ु ई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI ी बी.आर. म ल, या यक सद य एवं ी पी.एम. जगताप, लेखा सद य के सम ।
BEFORE SHRI B.R. MITTAL, J.M. AND SHRI P.M. JAGTAP, AM आयकर अपील सं./I.T.A. No. 4343/Mum/2009 ( नधारण वष / Assessment Year : 2003-04 आयकर अपील सं./I.T.A. No. 4013/Mum/2008 ( नधारण वष / Assessment Year : 2004-05 आयकर अपील सं./I.T.A. No. 4206/Mum/2009 ( नधारण वष / Assessment Year : 2005-06 Income Tax Officer - बनाम/ बनाम M/s Zydus Nycomed 10(3)(4), Healthcare Pvt. Ltd.
Vs.
Room No. 452, (formerly M/s Zydus
Aayakar Bhavan, Altana Healthcare Pvt.
M.K. Road, Limited)
Mumbai - 400 020. C-4, MIDC, Pawne,
Thane Belapur Road,
Vashi - 400 705.
थायी ले खा सं . /PAN : AAACZO736D
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Appellant by Shri Ajeet Kumar Jain
Assessee by : Shri Mukesh Patel
सनवाई
ु क तार ख / Date of Hearing : 08-10-2013
घोषणा क तार ख /Date of Pronouncement : 31-10-2013
[
2 ITA 4343/M/09, 4013/M/08 &
4206/M/09
आदे श / O R D E R
PER BENCH. :
These three appeals preferred by the Revenue against three separate orders passed by the ld. CIT(A) - XXXII, Mumbai for assessment years 2003-04, 2004-05 & 2005-06 involve some common issues and the same therefore have been heard together and are being disposed of by this single consolidated order for the sake of convenience.
2. The main common issue involved in these three appeals as raised in ground No. 1 of Revenue's appeals for assessment years 2004-05 & 2005-06 and in ground No. 3 of its appeal for A.Y. 2003-04 relates to the additions made by the A.O. by restricting of assessee's claim for deduction u/s 10B r.w.s. 80IA(10) of the Income Tax Act, 1961 (the Act) which have been deleted by the ld. CIT(A).
3. The assessee in the present case is a company which is engaged in the business of manufacturing of key intermediates which are used in the production of anti-ulcerant drug, namely Pantaprozole. It is a joint venture company with 50% stakes of Cadila Health Cab Ltd., India and other 50% of Atlanta Pharma AG, Germany. It also organizes clinical trial for Atlanta Pharma AG. In the returns of income filed for the years under consideration, deduction u/s 10B of the Act was claimed by the assessee. The said claim came to be first examined by the A.O. in the scrutiny assessment u/s 143(3) of the Act for A.Y. 2004-05 wherein deduction u/s 10B of the Act was claimed by the assessee to the extent of Rs. 135,25,31,353/-. On such examination, he found that the deduction u/s 10B of the Act was claimed by the assessee in respect of its export sales entirely made to M/s Atlanta Pharma AG, Germany in respect of two items with code names KSM -6 and KSM -14. In this regard, he required the assessee to furnish, 3 ITA 4343/M/09, 4013/M/08 & 4206/M/09 inter alia, the copies of joint venture agreement, supply agreement and license and distribution agreement for his verification. On analyzing the said agreement, he found that as per the supply agreement, the assessee was to exclusively sale the intermediates to APAG, Germany. He also analysed the manufacturing process involved in the production of the said intermediates with their chemical equations. He also recorded the statements of Dr. Vivek B. Khare and Mr. Prashant Chitnis, Production Managers of the assessee company where they stated that the value addition in each stage of the manufacturing process of KSN- 6 was 15%. It was also revealed that the technical know-how required for the manufacture of intermediates was obtained by the assessee company from APAG, Germany and although there was no technology transfer per se for the said intermediates, the assessee company got support of APAG, Germany as and when required during the initial production set up. He also noted from the supply agreement that the assessee company had been granted semi exclusive rights and licenses to undertake the manufacture and development of the intermediates on exclusive basis but no payment of royalty was made by the assessee company to APAG, Germany.
4. After having taken note of all the technical details as well as the arrangement between the assessee company and APAG, Germany for supply of intermediates, the A.O. proceeded to consider the yield and other parameters pertaining to the activity of the assessee company based on its financial results for A.Y. 2004-05 as compared to assessment years 2002-03 & 2003-04. This comparative analysis made by the A.O. as given on page No. 24 of the assessment order is extracted below:-
4 ITA 4343/M/09, 4013/M/08 & 4206/M/09 "S.No.Particulars A.Y. 2002-03 A.Y. 2003-04 A.Y. 2004-05
1. Sales 19111 kgs 74767 kgs 100302 kg
2. Value 254614564 1164841942 1685584102
3. Value of raw 62978686 129007220 124923253 Material
4. Gross profit 959062482 1439301172
5. Gross profit/ 82.33% 85% TO ratio
6. Net profit/To ratio (902047559) (1352745389) 77% 80%
7. Material consumed/ 129007220 124923253 Cost of production 50% 52%
8. Cost of production/ 255371697 285808416 357861210 Net profit ratio 120524525 1187466572 1710606599 211.80% 415.47% 478%"
5. On the basis of above comparative analysis, the A.O. noted that there was substantial increase in the ratio of cost of production to the turnover in the year under consideration i.e. 2004-05 as well as in the immediately preceding year i.e. 2003-04 as compared to the initial year i.e. A.Y. 2002-03. As noted by the A.O., the assessee, however, was not able to provide any basis for determining the exact value addition. According to him, the profit earned by the assessee in the A.Y. 2004-05 thus was not an ordinary profit as compared to the profit earned by the assessee in the initial year i.e. A.Y. 2002-03. He noted that the assessee in this connection could not provide any basis for determination of such higher profits nor it could substantiate the stand that the profits so earned in A.Y. 2004- 05 was an ordinary profit. He noted that as per the relevant terms of the supply agreement, the basis of calculation of profit should have been based on the lowest supply price of KSM- 6 and KSM-10 charged by third party suppliers to APAG, Germany and this mechanism of determination of profits was required to be documented by the assessee. The assessee, however, could not produce any such documentation maintained by it. The assessee also could not produce the 5 ITA 4343/M/09, 4013/M/08 & 4206/M/09 cost audit report in order to enable the A.O. to ascertain the value addition. According to the A.O., the element of technical know-how and patent was also not taken into account by the assessee company in the calculation of profits which ought to have been done for determination of true and reasonable profits. He held that the real intention of the assessee thus was to maximize the profits to claim higher deduction u/s 10B of the Act and the provisions of section 80 IA(10) r.w.s. 10B of the Act were clearly attracted. He accordingly invoked the said provisions on the ground that there existed a close connection between the assessee company and APAG, Germany and there was an arrangement between them in such a manner that the business transactions between them produced to the assessee more than the ordinary profits. Accordingly, he proceeded to compute such amount of ordinary profits as might be reasonably deemed to have been derived by the assessee company from the business eligible for deduction u/s 10B of the Act. For this purpose, he adopted the profits as shown by the assessee for A.Y. 2002-03 @ 211.88% being the ratio of the turnover of Rs. 25,53,71,697/- and the cost of production of Rs. 12,05,24,525/- as reasonable profits and since the profit shown by the assessee for A.Y. 2004-05 was 498.25% being the ratio of turnover of Rs. 168.55 crores and cost of production of Rs. 33.83 crores, the difference of Rs. 96.87 crores being 286.37% of the cost of production of Rs. 33.83 crores was treated by him as more than normal profit. The claim of the assessee for deduction u/s 10B of the Act to that extent accordingly was disallowed by him. To support this conclusion, the A.O. also worked out the raw material cost per Kg. for KSM-6 and KSM-14 on the basis of details furnished by the assessee at Rs. 2916/- per Kg. and by applying the same to the quantity of production, he worked out the total raw material cost which should have been debited by the assessee in the P&L account for A.Y. 2004-05 at Rs. 29.69 crores. Since the raw material cost reflected in the P&L account of the assessee for A.Y. 2004-05 was Rs. 12.49 crores, he held that the assessee had deliberately tried to show lower cost of production to show higher profit in order to claim deduction u/s 10B of the Act.
6 ITA 4343/M/09, 4013/M/08 & 4206/M/09
6. Keeping in view the stand taken in the assessment completed u/s 143(3) of the Act vide an order dated 29-10-2006 for A.Y. 2004-05 disallowing the assessee's claim for deduction u/s 10B of the Act to the extent of Rs. 96.87 crores, the A.O. reopened the assessment for A.Y. 2003-04 and vide his order dated 8-10-2008 passed u/s 143(3) r.w.s. 147 of the Act, he disallowed the assessee's claim for deduction u/s 10B also in A.Y. 2003-04 to the extent of Rs. 55.92 crores being the excess profit @ 195.68% of the cost of production of Rs. 28.58 crores for that year. In A.Y. 2005-06, the A.O. however adopted a different course for making addition on this issue. He held that the higher ratio of 318.51% between the turnover and cost of production of A.Y. 2005-06 than that of A.Y. 2002-03 was as a result of less cost of sales shown by the assessee and this difference amounting to Rs. 73,55,61,604/- was treated by him as unexplained expenditure adding the same to the total income of the assessee u/s 69-C of the Act.
7. The disallowance made by the A.O. u/s 10B r.w.s. 80IB(10) of the Act was challenged by the assessee in the appeals filed before the ld. CIT(A). Before the ld. CIT(A), it was pointed out on behalf of the assessee that the entire basis of working made by the A.O. to draw an adverse inference against the assessee on this issue was grossly erroneous and the conclusion arrived at by him on the basis of such erroneous working to restrict the claim of the assessee for deduction u/s 10B of the Act was totally unjustified. It was submitted that there were several factual errors and discrepancies in the assessments completed by the A.O. In this regard, the following submissions were made on behalf of the assessee before the ld. CIT(A) to point out that there was a patent mistake in the order of the A.O. for A.Y. 2004-05 in computing the cost of raw material per kg. at Rs. 2960/- instead of the correct figure of Rs. 1427/- per kg.
"(a) On pages 30 and 31 of the assessment order, the learned A. 0. has worked out the cost of raw-materials consumed for production of 1 Kg. of 7 ITA 4343/M/09, 4013/M/08 & 4206/M/09 the intermediates at Rs.2,960.30 and on the basis of the same computed the expected amount of cost of raw materials with reference to the total quantity of intermediates in terms of Kgs. While doing so, he has committed the following four grave errors, on account of which a totally distorted and misleading picture, highly biased and prejudiced against the appellant has been sought to be created by him in the assessment order:
i) On page 30 of the assessment order, the learned A. 0. has computed the cost of raw-material quantity consumed for production of 100 Kgs. each of two intermediates -produced by the appellant viz. KSM-14 and KSM-6 at Rs.2,96, 030. The production referred to relates to 100 Kgs. of KSM-14 and KSM-6 each, in effect amounting to a total of200 Kgs. However, on page 31 of the order he has noted that the cost of 100 Kgs. of intermediates is Rs.
2,96,030 and accordingly while arriving at the average cost of raw materials for 1 Kg. of intermediates, he has divided the same by 100 instead of 200. Thus, while the average cost of raw materials of 1 Kg. of intermediates should have been correctly worked out at Rs. 1480.15 per Kg the learned A.
0. has considered the same at double the figure viz. Rs.2960.30.
ii) Moreover, in the chart reproduced by the learned A. 0. on page 31 of the assessment order, he has worked out the expected amount of cost of raw materials with reference to the amount of sales of the intermediates in Kgs., whereas the same ought to have been worked out on the basis of production of intermediates in Kgs.. The correct quantities required to be taken into consideration in respect of the actual production of intermediates have been duly reflected by the appellant in the revised and corrected chart for the purpose compiled as Annexure-I to the Statement of Facts.
iii) Moreover, the expected amount of cost of raw materials as worked out by the learned A. 0. in the chart on page 31 has been so computed on the basis of the total quantity of sales of the two intermediates, instead of working out the same on the basis of respective quantities of production of the two concerned intermediates viz. KSM-14 and KSM-6 and applying the appropriate rate of cost of raw materials per Kg. for each of the intermediate separately. The correct computation in this regard also stands duly reflected in the revised and corrected chart prepared by the appellant and enclosed hereto as Annexure-I above.
iv) Moreover, while adopting the rate of the respective raw-materials utilized in the production of the two intermediates KSM-14 and KSM-6, the learned A. 0. ought to have adopted the average rate per Kg. on the basis of the Accounts duly certified under Schedule- VI of the Companies Act and forming part of the Final Accounts as duly available on record with the learned A. 0. himself Considering the cumulative impact of the aforesaid four aspects, the average expected per Kg. cost of raw materials on the basis as worked out by the learned A.O. should correctly work out to Rs.1,42 7.37 as against Rs.2960.30 per Kg. as computed in the assessment order. Moreover, considering the correct rate of Rs. 1,427.37 as referred to 8 ITA 4343/M/09, 4013/M/08 & 4206/M/09 above and applying it to the correct quantity of production (and not sales), the expected amount of cost of raw materials for A. Y.2004-05 would work out to Rs. 13.78 crores as against Rs. 29.67 crores as indicated by the learned A. 0. in his chart. Further more, if the actual average price of each of the raw-materials (apart from four major raw-materials referred to above) are taken into consideration in comparison to the hypothetical rates as adopted by the learned A.0., the expected amount of cost of raw materials of Rs. 13. 78 crores would virtually reconcile with the actual amount of cost of raw materials of Rs. 12.49 crores as reflected in the P&L A/c. The mischievous attempt on the part of the learned A.O. to show the expected amount of cost of raw materials almost Rs.1 7 crores higher than the amount as reflected in the P&L A/c. is grossly unjustified."
8. As regards the A.O.'s allegation that the elements of know-how and patent were not taken into account by the assessee in the cost of production to show higher profits in order to claim higher deduction u/s 10B of the act, the following submissions were made on behalf of the assessee to clarify the position:-
"The learned A.0. has further alleged that the appellant has deliberately tried to show the cost of production excluding the value addition in the nature of payments such as royalties, patent utilization, technical know- how, etc. Here again, the allegation of the leaned A. 0. is totally unfounded and without any basis or justification whatsoever. Without seeking any clarification in the matter from the appellant, the learned A.O., has in paras 23 and 24 of the Assessment Order, made highly mischievous and misleading remarks against the appellant that "the assessee has by deliberate design not only excluded such Royalty payments from the Profits but has failed to deduct taxes thereon. "It is pertinent to note that Article 1 Z 3 of the J V agreement referred to by the A.O., only mentions the arrangement for making withholding tax in respect of any payments which are construed to constitute Royalties and modality for obtaining Tax Credit in the context of the Double Tax Avoidance Treaty between India and Germany. It is pertinent to note that as per the terms of the Joint Venture Agreement, there was no obligation on the part of the appellant company to make any payments on the above account as alleged by the learned A.O., in respect of the production of the two intermediates KSM-6 and KSM-14, the production of which was to be exclusively supplied by the appellant to Altana Pharma AG, Germany.
To support his conclusion that the appellant has not included such cost attributable to value addition, royalties and other charges, the learned A. 0. has as discussed in para 38 of his order relied upon the chart reproduced by him on page 31 of the assessment order. As pointed out hereinbefore, the very basis of discrepancy as sought to be highlighted by the learned A.O. in the expected amount of cost of raw materials and actual cost of raw
9 ITA 4343/M/09, 4013/M/08 & 4206/M/09 materials as reflected in the P&L A/c. does not survive and hence the allegation by the learned A.O. on this count holds no ground whatsoever."
9. It was also brought to the notice of the ld. CIT(A) by the assessee that while making allegation of excess and unreasonable profits shown by the assessee in the years under consideration as compared to the initial year i.e. A.Y. 2002-03, the percentage of profits was taken by the A.O. as the ratio of turnover to the cost of production. It was contented that the said ratio did not represent the profitability of the eligible business of the assessee company and such weird basis adopted by the A.O. to work out the profitability by comparing the ratio of total income to the total expenditure was nowhere in practice. It was contended that a correct and justified basis of profit comparison between two years should have been either the gross profit or net profit of the relevant years. Accordingly, the assessee furnished the comparative working of gross profit and net profit for relevant assessment years before the ld. CIT(A) as under:-
A.Y. 2002-03 2003-04 2004-05 2005-06
(a) (b) (a) (b) (a) (b) (a) (b)
Sales 254,614,564 1,164,841,942 1,685,584,102 1,224,879,209`
Material consumed
Material cost 62,978,686 127,815,174 131,047,243 120,881,144
Add Opening stock 43,185,998 64,961,039 66,872,950
Less closing stock 33,250,261 65,857,616 66,872,950 127,871,977
Material consumed 29,728,425 11.68% 105,143,556 9.03% 129,135,332 7.66% 59,882,117 4.89%
MFG. expenses 26,362,926 10.35% 80,088,610 6.88% 84,924,944 5.04% 87,647,739 7.16%
Depreciation 16,540,712 6.50% 32,027,939 2.75% 32,222,654 1.91% 29,314,916 2.39%
Total Direct cost 72,632,063 28.53% 217,260,105 18.65% 246,282,930 14.61% 176,844,772 14.44%
Gross Profit 181,982,501 71.47% 947,581,837 81.35% 1,439,301,172 85.39% 1,048,034,437 85.56%
Admn. & Selling 39,734,030 15.61% 53,504,802 4.59% 94,052,515 5.58% 54,653,573 4.46%
expenses
Depreciation Others 7,769,028 3.05% 14,654,105 1.26% 16,357,554 0.97% 17,735,798 1.45%
Misc. Expenses W/O 389,404 0.15% 389.404 0.03% 1,168,211 0.07% - 0.00%
Other Income (757,133) -0.30% (22,624,630) -1.94% (25,022,497) - 1.48% (59,879,198) - 4.89%
Total Other Expenses 47,135,329 18,.51% 45,923,681 3.94% 86,555,783 5.14% 12,510,173 1.02%
Net Profit before tax 134,847,172 52.96% 901,658,156 77.41% 1,352,745,389 80.25% 1,035,524,264 84.54%
10 ITA 4343/M/09, 4013/M/08 &
4206/M/09
10. It was also brought to the notice of the ld. CIT(A) by the assessee that A.Y. 2002- 03 was its first year of production comprising of only seven months of working wherein the capacity utilization was only 38.62% whereas A.Y. 2004-05 was comprising of twelve months of manufacturing activity wherein capacity utilization was 96.51%. In this regard, a comparative chart was prepared and furnished by the assessee to show that there was higher capacity utilization, higher average sales realisation and lower cost of raw material consumption in A.Y. 2004-05 as compared to A.Y. 2002-03. the working so furnished by the assessee before the ld. CIT(A) was as under:-
11 ITA 4343/M/09, 4013/M/08 & 4206/M/09
11. After considering the submissions made on behalf of the assessee and perusing the material available on record including the order of the A.O., the ld.
CIT(A) agreed with the stand of the assessee that the conclusions arrived at by the A.O. on this issue were wrong being primarily guided by erroneous appreciation of facts. In this regard, he identified the significant points born out from record and summarized his observations and finding on these significant points in his impugned order as under:-
"I find that the appellant is right in pointing out that while computing the cost of raw material, quantity consumed for production of 100 Kgs. each of the two intermediates produced by the appellant viz. KSM-14 and KSM-6 at Rs.2,96,030/- (as worked out at page 30 of the assessment order), the Assessing Officer has divided the above by 100 instead of 200. The Assessing Officer should have kept in mind that he was referring to 100 Kgs. of production of KSM- 14 and 100 Kgs. of production of KSM-6 each, in effect amounting to 200 Kgs. Thus, as per the Assessing Officer's computation, the average cost of production of 1 Kg. of intermediates should have been worked out to Rs.1480.15 per Kg. as against Rs.2960.30 per Kg. wrongly computed by him.
(ii) The appellant is also justified in pointing out that in the chart reproduced on page 31 of the assessment order, the Assessing Officer should have worked out the expected amount of cost of raw material with reference to the production of intermediates, as against the basis of sales adopted by him. My attention was drawn by the appellant's representative to Annexure-I (annexed to this order hereinafter) forming part of the statement of facts and grounds of appeal wherein the revised corrected chart for the purpose has been duly worked out by the appellant.
12 ITA 4343/M/09, 4013/M/08 & 4206/M/09
(iii) I also find force in the appellant's contention that as pointed out in the above referred chart at Annexure-I, the expected amount of cost of raw materials ought to have been worked out on the basis of respective quantity of production of the two intermediates KSM-14 and KSM-6 and applying the appropriate rate of cost of raw material per Kg. for each of intermediates separately. I find that the Assessing Officer has computed the cost of raw material on the basis of the total quantity of the sales of the two intermediates together which is not the correct method of computation.
(iv) The appellant is also justified in pointing out that while adopting the rate of the respective raw materials utilized in the production of the two intermediates KSM14 and KSM-6, the Assessing Officer ought to have adopted the average rate per Kg. on the basis of the accounts duly certified under Schedule-VI to the Companies Act and forming part of the final accounts instead of adopting hypothetical rates, which were already available on record with the Assessing Officer.
(v) The appellant has after considering the cumulative impact of the aforesaid aspects enumerated at (i) to (iv) hereinabove, pointed out that the expected amount of cost of raw materials for A.Y. 2004-05 would work out to Rs.13.78 crores as against Rs.29.69 crores indicated by the Assessing Officer in his chart. The said expected amount of cost of Rs. 13.78 crores would virtually reconcile with the actual amount of cost of Rs.12.49 crores as reflected in the P&L Account, if the actual average cost is adopted.
(vi) I also find force in the submission on behalf of the appellant that as per the terms of the supply agreement between the appellant and APAG, there was no obligation on the part of the appellant company to make any payment on account of royalties, patent utilization, technical know-how etc. Thus the allegation of the Assessing Officer that the appellant had deliberately tried to show the cost of production excluding the value addition in the nature of payment such as Royalty, Paten utilization, Technical Know-how etc. does not hold any valid ground against the appellant. Even otherwise this conclusion of the A.O. is not valid because even if his own method is adopted without the above arithmetical and conceptual mistakes, the cost of raw materials works out to Rs. 13.78 crores as against that shown in the P&L account at Rs.12.49 crores. The figure of Rs.13.78 crores is significantly different from his wrongly computed figure of Rs.29.69 crores and hence it leaves no scope for hypothesis and assumptions, that there is value addition in nature of payment of royalty, patent utilization and technical know-how etc.
(vi) The gross profit as per the P&L Account of the appellant has increased marginally from A.Y.2002-03 to A.Y.2004-05 from 71.47% to 85.39% as per following chart:
13 ITA 4343/M/09, 4013/M/08 & 4206/M/09 A.Y. 2002-03 A.Y. 2004-05 Rs. In crores % of sales Rs. In crores % of sales (Amount) (Amount) Sales 25.46 ... 168.56 ...
Total Direct 7.26 28.53% 24.63 14.61% Cost Gross Profit 18.20 71.47% 143.93 85.39% (G.P)
Reasons for above increase in G.P. rate as given by the appellant are :-
(a) Cost of one of the major raw material called Maltol has gone down from Rs.824 per unit in A.Y.2002-03 to Rs.488 per unit in A.Y.2004-05 which means 40% savings on this account.
(b) On account of increased capacity utilization from first year i.e. A.Y.2002-03 to the current year i.e. A.Y.2004-05 further savings in cost of production have been achieved. Yet another reason is increased economy in production process enabling them to re-use the spent solvents in A.Y.2004-
05 which was not possible in the first year of production i.e. A.Y.2002-03.
(c) Yet another reason is that on account of increase in production, further economies in other manufacturing expenses like Power & fuel, Repairs in Plant and Machinery etc. have been achieved as per chart (reproduced on pages 5 to 7 of this order) have been achieved.
(d) It is obvious that depreciation on Plant and Machinery as a percentage of sales will also go down in succeeding years, firstly because WDV will decrease and secondly because sales are also going-up.
(e) So far as increase in net profit rate is concerned, it is obvious that there will be savings in administrative and selling expenses over the years as a percentage of sales because sales go up whereas these expenses largely remain the same.
Above arguments are not only convincing, they are also verifiable from the accounts.
The observations of the Assessing Officer in para 23 and 24 of the assessment order are purely based on assumptions which are further based on wrong and incorrect appreciation of facts. The A.O. has neither carried out any enquiries nor collected any independent evidence to support his observations/assumptions. Such assumptions are not warranted unless a transaction has been traced out which indicates that any such payments have been made which can be termed to be in the nature of royalty etc. The part of (Article 17.3) of the JV agreement quoted by him has also not been fully understood before drawing conclusions, because it also talks of appellant taking steps for tax exemption for 14 ITA 4343/M/09, 4013/M/08 & 4206/M/09 withholding tax. Thus, Article 17.3 is not at all relevant because no transaction of payment in the nature of royalty has been detected by the A.O.
(ix) The assessment order for A.Y.2003-04 was also a subject matter of appeal before the undersigned where the Assessing Officer has accepted the P&L account of the appellant. The appellant tells me that the A.O. has not sought to revise the assessment for that year in view of the findings given in the current year for restricting the exemption u/s.1OB of the Act.
(x) Having carefully gone though the Chart showing Comparison of Gross Profit and Net Profit for A.Y. 2004-05 with the base year A.Y. 2002- 03, as submitted by the appellant, I find that the reasons given by the appellant for the relevant variations are both logical and convincing. As pointed out by the appellant in the Chart Analysis, the production in A.Y.2002-03 was quite small in comparison to the production in A.Y. 2004- 05 and the capacity utilization of the plant was thus much lower. The most important factor for consideration is that the average realization in A.Y. 2004-05 was much higher as compared to A.Y. 2002-03, mainly on account of higher realization against the Euro. As pointed out by the appellant in its submissions, as also verifiable from the sale invoices of both KSM14 and KSM-6 for the Assessment Years 2002-03 to 2004-05 (produced for verification before me by the appellant), the appellant is correct in contending that the sale price had remained the same for all the three years under consideration. Thus the allegation of the Assessing Officer on page 25 of the assessment order that the appellant had calculated different profit margins in contravention with the Articles as contained in the Joint Venture Agreement does not stand justified. When the sale price was constant, but the appellant fetched higher rupee realization on account of the strengthening of the Euro, it was bound to earn higher profits. Moreover, as explained by the appellant, the cost per unit of production had also decreased in A.Y. 2004-05 on account of cheaper availability of raw material, rupee appreciation against dollar, better production and also effective solvent recovery. The average manufacturing cost of production had also decreased on account of greater stabilization of manufacturing process and economy of scale as explained by the appellant. In view of the above, the rise in the margin of profit for the year under consideration as compared to that of A.Y. 2002-03 is both logical and convincing. In fact, it is quite surprising that although the appellant had earned much higher profit in A.Y. 2003-04 as compared to A.Y.2002-03, no such adverse inference was drawn by the A.O. in that year and the assessment for A.Y. 2003-04 was duly finalized u/s. 143(3) without disturbing the appellant's claim for exemption u/s.1OB. The Assessing Officer has not appreciated this fact.
(xi) Referring to the two decisions relied upon by the appellant, I find that the ratio of the same as enumerated hereinbefore by the appellant is squarely applicable to the facts of the case of the appellant.
15 ITA 4343/M/09, 4013/M/08 & 4206/M/09
(xii) From the statement of facts as well as the assessment order, it is seen that in the month of December, 2006, when assessment proceedings were finalized and the issues discussed in the assessment order were identified, the appellants were not given sufficient time neither given a show cause on the proposed addition so as to enable them to clarify the issue of cost of production before the A.O. No such clarifications on the arithmetical analysis were sought by the A.O. from the appellant; hence the said analysis by the A.O. resulted in errors and consequent mistake in conclusions. The contention of the appellant that principle of natural justice has not been followed appears to be true in view of these facts and also the fact that the copies of the statements of two production personnel Dr.V.B.Khare and Shri Prashant Chitnis recorded u/s. 131, though used against the appellant in the assessment order, were not given to appellant. When AO's intention was to make such a huge addition of about Rs.97 crores, it was necessary for him to give the appellant a show cause notice and copies of all the materials on the basis of which he proposed to make the said addition.
(xiii) The A.O. has recorded the statements of two production managers Dr.V.B.Khare and Shri Prashant Chitnis and analysed the same in the assessment order to draw adverse conclusions against the appellant. However, this analysis in paras 10 to 12 of the assessment order does not in any way prove anything. These persons who are incharge of manufacturing process have not said anything which can lead to the conclusion that royalty and/or technical know-how fee has been paid through illegal channels without recording the same in the books of accounts which is the main conclusion drawn by the A.O. regarding alleged abnormal value addition to the finished product.
(xiv) So far as the provisions of section 801A( 10) and I OB(7) are concerned, the application of the same is warranted only in a case when the profits are more than the ordinary profits. The A.O. has taken the profits of A.Y.2002-03 to be the ordinary profits and compared the same with the current year's profits. However, in doing so, he committed arithmetical mistakes and hence, arrived at wrong conclusions. Had he not committed arithmetical mistakes and not used wrong figures, he would have seen that the figures of P&L account match with the analysis and there would be no such vast discrepancy as described in the table on page- 3 1 of the assessment order.
(xv) Yet another observation of the A.O. in the assessment order is regarding supply agreement and basis for export pricing with Byke Gulden group. Article 5.1.2 of the supply agreement as well as Article 21.2 (c) JV agreement stipulates that the initial supply price applicable to first calendar year shall correspond to the lowest supply price charged by third party suppliers. In future calendar years, the supply price shall be fixed as per the method provided in the said Article. The A.O. has drawn an adverse inference assuming that supply price as per above agreement was not 16 ITA 4343/M/09, 4013/M/08 & 4206/M/09 followed. However, the appellant's note on this aspect which was furnished before the undersigned and which is also evidenced by the A.E. vide letter dtd. 11.12.2007 states that the prices were fixed in accordance with the supply agreement. The initial price of KSM-6 and KSM-14 was at a more favourable level in the first calendar year as compared to lowest price charged by third party suppliers whereas the price charged in the following calendar years was fixed as per method prescribed in the agreement. Overall it is stated by the appellant that the export price of the above two intermediates is based on the lowest of the third party supply price to Altana AG. In view of this, therefore, I am of the opinion that the A.O. should not have drawn any such an adverse conclusion because it was not factually true."
On the basis of above findings/observations recorded by him, the ld. CIT(A) held that the profit shown by the assessee for A.Y. 2004-05 was not more than ordinary profit and the A.O. was not justified in reducing the claim of the assessee for deduction u/s 10B of the Act by Rs. 96.87 crores for A.Y. 2004-05. Accordingly, he directed the A.O. to allow the assessee's claim for such deduction in full at Rs. 135.22 crores. This conclusion arrived at by him in A.Y. 2004-05 was followed by the ld. CIT(A) to give a similar relief to the assessee on this issue in assessment years 2003-04 and 2005-06 by directing the A.O. to allow the claim of the assessee for deduction u/s 10B of the Act.
12. The ld. D.R. submitted that the deduction u/s 10B of the Act was claimed by the assessee in respect of profits of its eligible business and the same was restricted by the A.O. by invoking the provisions of section 80IA(10) of the Act which are made applicable even in relation to the undertaking referred to in section 10B of the Act as per the specific provisions contained in s.s. (vii) of section 10B of the Act. He submitted that the entire export turnover of the eligible business was made by the assessee company to its joint venture partner with whom it admittedly has close connection and the course of business between them was found by the A.O. to be so arranged that the business transactions between them produced to the assessee more than the ordinary profits which was expected to arise in such eligible business. He contended that the A.O. accordingly proceeded to compute the profits and gain of such eligible business 17 ITA 4343/M/09, 4013/M/08 & 4206/M/09 for the purpose of allowing deduction u/s 10B of the Act by taking the amount of profits as might be reasonably deemed to have been derived there from. He submitted that it was found by the A.O. in this context that the profit of Rs. 135.27 crores was shown to have been earned by the assessee in A.Y. 2004-05 from the export turnover of Rs. 165.58 crores which was certainly more than the ordinary profits. He invited our attention to the working given by the A.O. in the assessment order for A.Y. 2004-05 to point out that the ratio between the turnover of the assessee and cost of production was substantially higher at 498% in A.Y. 2004-05 as against 211% shown by the assessee company itself in the first year i.e. A.Y. 2002-03. He contended that the A.O. therefore adopted the profit of the assessee company for A.Y. 2002-03 as normal profits of the eligible business and the difference of 286% was treated by him as profit which is more than ordinary profits within the meaning of section 80IA(10) of the Act. He contended that the deduction claimed by the assessee u/s 10B of the Act was accordingly restricted by the A.O. only to the extent of such ordinary profits and the balance amount was disallowed as per the provisions of section 80IA(10) r.w.s. 10B of the Act. He submitted that the A.O. also supported his case of more than ordinary profits shown by the assessee from the eligible business by showing that the raw material cost debited by the assessee company in the P&L account was much lower than the actual cost of raw material which should have been reflected and although there were certain factual mistakes committed by the A.O. in the working made in this behalf, the ld. CIT(A) was not justified in deleting the disallowance made by the A.O. on account of assessee's claim for deduction u/s 10B merely on the basis of such factual mistakes. He contended that the said working was given by the A.O. merely to support the extra ordinary higher profit shown by the assessee from its eligible business and there was nothing to dispute that the ratio between the turnover and cost of production of the assessee for the years under consideration was much higher than the similar ratio shown by the assessee company itself in the first year i.e A.Y. 2002-03. He contended that the ld. CIT(A) thus did not appreciate the specific findings given 18 ITA 4343/M/09, 4013/M/08 & 4206/M/09 by the A.O. while restricting the claim of the assessee for deduction u/s 10B of the Act and allowed relief to the assessee on this issue ignoring that the disallowance made by the A.O. was based on the working given by him in the assessment order showing extra ordinary profits earned by the assessee during the years under consideration taking the financial results as declared by the assessee.
13. The ld. counsel for the assessee, on the other hand, submitted that assessment year 2002-03 was the first year of the operations of the assessee company wherein the capacity utilization was less. He submitted that the A.O., however, took the profit shown by the assessee in that initial year as the ordinary profits and treated the higher profits earned by the assessee in the year under consideration as more than ordinary profits to invoke the provisions of section 80IA(10) of the Act and to disallow the claim of the assessee for deduction u/s 10B of the Act to the extent of such extra ordinary profits. He submitted that there were, however, several factual mistakes and errors committed by the A.O. in the working made in this regard. He invited our attention to such working given in the assessment order for A.Y. 2004-05 and also to the relevant portion of the ld. CIT(A)'s order wherein the factual mistakes and errors committed by the A.O. in the said working were pointed out and discussed. He submitted that such errors were not only committed by the A.O. in the working of cost of raw material but the same were there even in the comparative working of profitability made by the A.O. to allege that the profits as shown by the assessee in A.Y. 2004-05 was 498% as against 211% shown in A.Y. 2002-03. He contended that the said percentage was worked out by the A.O. by taking the ratio between the turnover of the assessee company and cost of production which by no means can be regarded as profitability ratio. He contended that even the cost of production was worked out by the A.O. by taking the figures of office and administrative expenses, depreciation etc. which was patently wrong. He contended that the ld. CIT(A) quite correctly appreciated these factual mistakes and errors committed by 19 ITA 4343/M/09, 4013/M/08 & 4206/M/09 the A.O. as pointed out by the assessee and proceeded to examine the issue on the basis of comparative gross profit and net profit of the relevant years.
14. The ld. counsel for the assessee invited our attention to the working of gross profit and net profit of the relevant years given in the impugned orders of the ld. CIT(A) to point out that the GP rate as shown by the assessee for A.Y. 2002-03 was 71.47% which was increased to 81.35%, 85.39% and 88.56% for assessment years 2003-04, 2004-05 and 2005-06 respectively. He submitted that the GP rate thus was increased only by 9.85%, 13.92% and 14.79% in assessment years 2003-04, 2004-05 & 2005-06 as compared to the GP rate shown by the assessee in A.Y. 2002-03. He submitted that this difference in GP rate was satisfactorily explained by the assessee before the ld. CIT(A) by pointing out that as a result of increase in capacity utilization from 38.62% in A.Y. 2002- 03 to 96.51% in A.Y. 2004-05, the manufacturing expenses had gone down by 6.44% of sales in A.Y. 2004-05 as compared to A.Y. 2002-03. He submitted that even there was increase in average sales realization per kg. of KSM-6 and KSM 14 in rupee terms as a result of increase in the value of Euro by 25% during the relevant period. He submitted that there was also substantial deduction in the cost of raw material to the extent of 40% as a result of decrease in the rate of Malton, one of the major raw materials from Rs. 824/- in A.Y. 2002-03 to Rs. 488/- in A.Y. 2004-05. He contended that the increase in GP rate in the years under consideration as compared to A.Y. 2002-03 thus was for good reasons and only after having satisfied with such reasons given by the assessee to explain the increase in GP rate, the ld. CIT(A) held that the A.O. was not justified in restricting the assessee's claim for deduction u/s 10B of the Act by invoking the provisions of section 80IA(10) of the Act. He submitted that although in the assessment proceedings for A.Y. 2004-05, the assessee could not produce the cost audit report as required by the A.O. since the assessee was not sure as to whether such report was required to be obtained by it, the assessee obtained such audit report for the calendar year 2004 as well as 2005 and produced the 20 ITA 4343/M/09, 4013/M/08 & 4206/M/09 same before the A.O. for his verification during the course of assessment proceedings for A.Y. 2005-06. He invited our attention to the copies of such reports placed before us and submitted that there was no adverse comments made in the said report by the auditors and it was duly certified therein that cost account records were properly kept by the assessee so as to give a true and fair view of cost of production and margin of product.
15. We have considered the rival submissions and also perused the relevant material available on record. In the returns of income filed for all the three years under consideration, deduction u/s 10B of the Act was claimed by the assessee in respect of the profits derived from the eligible export business, the turnover of which was entirely made by the assessee company to APAG, Germany, one of the joint venture partners in the assessee company. There is no dispute that the assessee is entitled to deduction u/s 10B of the Act in respect of the profits of the said eligible business. The claim of the assessee for deduction u/s 10B of the Act however was restricted by the A.O. for all the three years under consideration by invoking the provisions of section 80IA(10) of the Act which are made applicable in relation to the deduction u/s 10B as per sub section (vii) of the section 10B of the Act. The provisions of section 80IA(10) of the Act being relevant in the context are extracted below:-
"Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom".
16. There is no dispute that the APAG, Germany with whom the entire eligible business was transacted by the assessee company during the years under 21 ITA 4343/M/09, 4013/M/08 & 4206/M/09 consideration is having close connection with the assessee company being one of its joint venture partners. The question, however, is whether in the facts and circumstances of the case, it can be said that the course of such business between the assessee company and APAG, Germany was so arranged that the same produced to the assessee more than the ordinary profits which might be expected to arise in such eligible business as contemplated in section 80IA(10) of the Act. The case of the A.O. in this regard is based on the comparative working of profitability made by him to allege that the profits shown by the assessee for all the three years under consideration were more than the profits shown by the assessee for the first year i.e. A.Y. 2002-03 which was taken by the him as normal profits of the assessee's eligible business. Before we discuss and examine the case of the A.O. in the light of the said working, it is pertinent to mention here that the case made out by the A.O. of the extra ordinary profit allegedly shown by the assessee in all the three years under consideration on the basis of the said working was also sought to be supported by him on other grounds also. In this regard, he recorded the statements of Dr. Vivek Khare and Mr. Prashant Chitnis, Production Managers of the assessee company to ascertain the exact value of addition at each stage of production. He also referred to the relevant terms and conditions of the supply agreement between the assessee company and APAG, Germany to ascertain the mechanism of determination of profits provided therein. He also noted that the components of technical know-how and patent capacity utilization were not taken into account by the assessee while computing its profits eligible for deduction u/s 10B of the Act. He also discussed the manufacturing process involved in the business of the assessee along with the chemical equations. He also made an attempt to work out the cost of raw material required for the production of 1 Kg. of final product of the assessee company and tried to show on the basis of such computation that the cost of raw material debited by the assessee company in the profit and loss account was substantially low to increase deliberately the profits of all the three years under consideration in order to claim higher deduction u/s 10B of the Act. He also 22 ITA 4343/M/09, 4013/M/08 & 4206/M/09 obtained a report from National Pharmaceutical Pricing Authority, Department of Chemicals &Petrochemicals, Govt. Of India based on the cost audit report of the assessee company for the calendar years 2004, 2005 and 2006.
17. Although the assessee made elaborate submissions before the ld. CIT(A) to meet all the objections raised by the A.O. and also pointed out the patent mistakes committed by the A.O. in the working of cost of raw material for 1 kg. of final product, we are of the view that the first and foremost point that is required to be established by the A.O. to invoke the provisions of section 80IA(10) of the Act is to show that the profits shown by the assessee for all the three years under consideration were actually more than the ordinary profits and such extra ordinary profits was the result of the course of eligible business having been so arranged between the concerned parties to produce the assessee such extra ordinary profits. The crux of the issue thus is to ascertain whether the profits shown by the assessee for all the three years under consideration were actually more than the ordinary profits which was expected to arise from the eligible business of the assessee company as alleged by the A.O. As already noted, the case of such extra ordinary profits was made out by the A.O. basically on the basis of year-wise comparative working made by him to conclude that the profits for all the three years under consideration as shown by the assessee were more than the profits for the first year of the eligible business of the assessee i.e. A.Y. 2002-03 which he adopted as the ordinary profits of the assessee's eligible business. The said working made by the A.O. is given hereunder:-
23 ITA 4343/M/09, 4013/M/08 & 4206/M/09 Sr. Particulars A.Y. A.Y. A.Y. A.Y. No. 2002-03 2003-04 2004-05 2005-06 1 Sales 19111 kgs 74767 kgs 1003.2 kgs 2 Value 254614564 1164841942 1685584102 1224879209 3 Value of raw 62978686 129007220 124923253 122517171 material 4 Gross Profit 959062482 1439301172 1064402395 5 Gross 82.33% 85% 87% Profit/To ratio 6 Net Profit/To (902047559) (1352745389) 85% ratio 77% 80% 7 Material 129007220 124923253 122517171 Consumed/ 229643123 242070851 223111868 cost of 50% 52% 55% production 8 Cost of 255371697 285808416 357861210 249234143 sales/Net 120524525 1187466572 1710606599 1284758407 Profit ratio 211.80% 415.47% 478% 515.48%
18. A perusal of the above working made by the A.O. clearly shows that the year-wise percentage worked out by him was the ratio between total turnover and cost of sales. The said ratio, however, was wrongly treated by the A.O. as the ratio between the costs of sales/net profit ignoring completely that the figure of net profit was not at all taken into account in working out the said ratio. Moreover, the entire cost of sales was taken into consideration by the A.O. for making the comparative analysis including the office administrative expenses, selling expenses and depreciation which were not of variable nature. The ratio worked out by the A.O. thus was not a proper profit level indicator and the comparison made by him on the basis of the said ratio to allege that the profits shown by the assessee for all the three years under consideration were more than the ordinary profits as shown in A.Y. 2002-03, in our opinion, was not correct. Such comparison was bound to give misleading results as could be seen from the comparative profitability working furnished by the assessee giving gross profit and net profit rates of the relevant years which are the proper profit level indicators.
24 ITA 4343/M/09, 4013/M/08 & 4206/M/09
19. The working furnished by the assessee before the ld. CIT(A) giving comparative gross profit ratio and net profit ratio is given hereunder:-
Figures as per respective Tax Audit Reports A.Y. 2002-03 2003-04 2004-05 2005-06
(a) (b) (a) (b) (a) (b) (a) (b) Sales 254,614,564 1,164,841,942 1,685,584,102 1,224,879,209` Material consumed Material cost 62,978,686 127,815,174 131,047,243 120,881,144 Add Opening stock 43,185,998 64,961,039 66,872,950 Less closing stock 33,250,261 65,857,616 66,872,950 127,871,977 Material consumed 29,728,425 11.68% 105,143,556 9.03% 129,135,332 7.66% 59,882,117 4.89% MFG. expenses 26,362,926 10.35% 80,088,610 6.88% 84,924,944 5.04% 87,647,739 7.16% Depreciation 16,540,712 6.50% 32,027,939 2.75% 32,222,654 1.91% 29,314,916 2.39% Total Direct cost 72,632,063 28.53% 217,260,105 18.65% 246,282,930 14.61% 176,844,772 14.44% Gross Profit 181,982,501 71.47% 947,581,837 81.35% 1,439,301,172 85.39% 1,048,034,437 85.56% Admn. & Selling expenses 39,734,030 15.61% 53,504,802 4.59% 94,052,515 5.58% 54,653,573 4.46% Depreciation Others 7,769,028 3.05% 14,654,105 1.26% 16,357,554 0.97% 17,735,798 1.45% Misc. Expenses W/O 389,404 0.15% 389.404 0.03% 1,168,211 0.07% - 0.00% Other Income (757,133) -0.30% (22,624,630) -1.94% (25,022,497) - 1.48% (59,879,198) - 4.89% Total Other Expenses 47,135,329 18,.51% 45,923,681 3.94% 86,555,783 5.14% 12,510,173 1.02% Net Profit before tax 134,847,172 52.96% 901,658,156 77.41% 1,352,745,389 80.25% 1,035,524,264 84.54% The above working furnished by the assessee shows that the gross profit for A.Y. 2003-04, 2004-05 and 2005-06 was increased only by 9.87%, 13.92% and 14.09% in assessment years 2003-04, 2004-05 and 2005-06 as compared to gross profit rate of assessment year 2002-03. On the other hand, the working made by the A.O. on the basis of the same financial data shown the ratio of 415%, 478% and 515% for assessment years 2003-04, 2004-05 and 2005-06 as compared to 212% for A.Y. 2002-03 which clearly shows that the working made by the A.O. did not give correct picture of comparative profitability and gave a misleading picture on the basis of which a wrong conclusion was drawn by the A.O. As already noted, the assessment year 2002-03 was the first year of operations of the assessee's eligible business and capacity utilization during the said year comprising of seven months of business operation was quite low at 38.62%. During the subsequent years i.e. assessment years 2003-04, 2004-05 and 2005-06 which are under consideration, the capacity utilization increased 25 ITA 4343/M/09, 4013/M/08 & 4206/M/09 substantially which resulted in decrease in manufacturing expenses in proportion to the corresponding sales giving higher net profit. For example, in A.Y. 2002-03, the manufacturing expenses such as consumption of stores, repairs to plant were 10.35 % of total sales which decreased to 3.91% of total sales in A.Y. 2004-05 as a result of increase in capacity utilization from 38.62% in A.Y. 2002-03 to 96.51% in A.Y. 2004-05. The gross profit for A.Y. 2004-05 as compared to that of A.Y. 2002-03 thus was increased by about 6% as a result of increase in capacity utilization alone. Similar effect was there even in assessment years 2003-04 and 2005-06 wherein the capacity utilization was much higher than that of A.Y. 2002-03. Similarly, the rate of depreciation on total sales was decreased from 6.50% in A.Y. 2002-03 to 2.75%, 1.91% and 2.39% in assessment years 2003-04, 2004-05 and 2005-06 respectively resulting in increase in gross profit of the relevant years to that extent. Even the cost of raw material in terms of percentage of sales was decreased in the years under consideration as compared to A.Y. 2002-03 as a result of reduction in price of one of the major raw materials i.e. Malton from Rs. 824/- in A.Y. 2002-03 to Rs.
488/- per kg. in A.Y. 2004-05. There was also increase in rate of Euro as compared to rupee by 25% during the relevant period which resulted in higher average sales realization in rupee terms as demonstrated by the assessee before the ld. CIT(A) as well as before us.
20. The increase in gross profit rate for the years under consideration as compared to that of A.Y. 2002-03 which was taken by the A.O. as the year of ordinary profits thus was properly explained by the assessee and keeping in view the said explanation which was based on the relevant facts and figures, we are of the view that the ld. CIT(A) was fully justified in holding that the profits of the assessee company from its eligible business for the years under consideration could not be regarded as more than the ordinary profits which are expected to rise in such eligible business so as to attract the provisions of section 80IA(10) of the Act. In our opinion, the A.O., therefore, was not justified in invoking the provisions of section 80IA(10) of the Act to restrict the deduction claimed by the 26 ITA 4343/M/09, 4013/M/08 & 4206/M/09 assessee u/s 10B of the Act and the ld. CIT(A) is fully justified in deleting the addition made by the A.O. by restricting the claim of the assessee for deduction u/s 10B of the Act in all the three years under consideration.
21. It is also pertinent to note that APAG, Germany was a joint venture partner in the assessee company having 50% share only and it is difficult to comprehend as to how and why it will enter into any sort of arrangement to allow the assessee company to make more than ordinary profits at its own cost knowing fully well that the benefit of such arrangement as a result of any excess profit could be shared by it only to the extent of 50% with the balance 50% going to the other joint venture party. In the case of Digital Equipment India Ltd. vs. DCIT, (2006) 103 TTJ (Bang.) 359 cited on behalf of the assessee before the ld. CIT(A), a similar issue was involved wherein the deduction claimed by the joint venture company was restricted by the Revenue Authorities by invoking the provisions of section 80I(9) which are analogues to the provisions of section 80IA(10) of the Act and the addition made on this issue was deleted by the Tribunal holding that the Digital Group Worldwide, the overseas joint venture partner will not pay any undue sum to the joint venture which it could not recoup entirely to the exclusion of others. It was also held that mere substantial profit by itself would not give rise to a conclusion that there could be any such arrangement to produce more than the ordinary profits to the assessee from eligible business.
22. As already noted, a different course was adopted by the A.O. while making the addition on the similar issue in A.Y. 2005-06 by treating the alleged extra ordinary profits as unexplained expenditure of the assessee on the ground that cost of sales to that extent was not shown by the assessee in the books of account. Accordingly, the addition was made by him to the total income of the assessee u/s 69-C of the Act. As already held by us on the basis of comparative gross profit working of the eligible business of the assessee company, there was no case of more than normal profit earned by the assessee in A.Y. 2005-06 as 27 ITA 4343/M/09, 4013/M/08 & 4206/M/09 compared to A.Y. 2002-03 as alleged by the A.O. and whatever increase in the gross profit rate was there in A.Y. 2005-06 as compared to A.Y. 2002-03, the same was satisfactorily explained by the assessee. It therefore follows that there was no case of any cost of sales incurred by the assessee outside the books of account which could be treated as unexplained expenditure by invoking the provisions of section 69-C of the Act. Moreover, as rightly contended by the ld. counsel for the assessee for invoking the provisions of section 69-C of the Act, the onus is on the A.O. to establish that the relevant expenditure was actually incurred by the assessee and there is nothing brought on record by the A.O. to discharge this onus.
23. For the reasons given above, we uphold the impugned orders of the ld. CIT(A) deleting the addition made by the A.O. by restricting the claim of the assessee for deduction u/s 10B of the Act invoking the provisions of section 80IA(10)/69-C of the Act in all the years under consideration and dismiss ground No. 3 of the Revenue's appeal for A.Y. 2003-04, and ground No. 1 of the Revenue's appeals for assessment years 2004-05 and 2005-06.
24. The next issue which is raised in ground No. 2 of Revenue's appeal for A.Y. 2004-05 and 2005-06 relates to the additions of Rs. 34,15,631/- and Rs. 14,18,133-/- made by the A.O. on account of T.P. adjustment which have been deleted by the ld. CIT(A).
25. During the years under consideration i.e. assessment years 2004-05 and 2005-06, the assessee company had received remuneration for rendering clinical trial services to APAG, Germany, one of its joint venture partners. A reference, therefore, was made by the A.O. to the TPO for determining the arm's length price of these international transactions of the assessee company with its Associated Enterprise. In this regard, the TPO followed his own order for A.Y. 2002-03 and identified one company as comparable which had shown the profit margin of 28 ITA 4343/M/09, 4013/M/08 & 4206/M/09 21.14% as against 5% shown by the assessee. He accordingly proposed the TP adjustment of Rs. 34,16,631/- in respect of the transactions of the assessee company with its Associated Enterprise for providing clinical trial services and accordingly addition of Rs. 34,16,631/- was made by the A.O. to the total income of the assessee on account of TP adjustment for A.Y. 2004-05. On similar basis, addition of Rs. 14,88,133/- was made by the A.O. to the total income of the assessee on account of TP adjustment in respect of similar international transaction with its Associated enterprise in A.Y. 2005-06. On appeal, the ld. CIT(A) deleted the additions made by the A.O./TPO on account of TP adjustment for both the years i.e. assessment years 2004-05 & 2005-06 by following his own order in assessee's own case for A.Y. 2002-03 wherein similar addition was deleted by the ld. CIT(A).
26. At the time of hearing before us, the ld. representatives of both the sides have agreed that this issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee's own case for A.Y. 2002-03 and 2003-04 rendered vide its order dated 22-4-2010 in ITA No. 3311 & 3312/Mum/2008 wherein similar additions made by the A.O. on account of TP adjustment were deleted by the Tribunal for the following reasons given in para No.9 & 10 of its order:-
"Having considered the functional aspects relevant to it, we have to examine whether the comparable cases, as selected by TPO, were substantially similar to the assessee's function or not. .SIRO Clinpharm Pvt. Ltd was engaged in conducting clinical trial services. Pages 259 to 267 of the PB contain Annual Report of SIRO Clinpharm Pvt. Ltd. The income from research activity carried out by the said company for the financial year 2001-02 was at Rs.1,47,30,035/- and as per the fixed asset schedule, it had plant and machinery including laboratory equipments aggregating to Rs.94,50, 182/- as on 31.3.2002. Thus, it was an organization which was mainly doing the clinical research activity and, therefore, when the TPO was adopting it as a basis for comparing the assessee's transaction then as per Rule 1OB (1)(a)(ii), she was required to adjust in regard to differences . As per sub- clause( iii) of clause (c) of Rule 108, when cost method is adopted, the normal gross profit is required to be adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions.
29 ITA 4343/M/09, 4013/M/08 & 4206/M/09 Therefore, 17.14% mark up in the case of SIRO Clinpharm Pvt. Ltd was required to be adjusted before it could be made applicable for determining t--arm's length price in regard to international transaction entered into by the assessee.
10. Lt. D.R. referred to the details of expenses incurred by the assessee which were reimbursed by the associated concern to the assessee contained at pages 152 and 153 of PB and pointed out that the assessee had incurred such expenses which were directly relatable to the research activity. We find the laboratory charges paid are Rs. 11,875/- but the payments to hospital. for initiating study is Rs,7,54,05Of-. This clearly shows that mainly the assessee has made the payment not for laboratory test but mainly to hospitals that carried out the clinical test on the patients. The assessee's infrastructure was only in the form of furniture, vehicle, office equipments and computers, which were used for general administration and it was not sufficient for carrying out the whole research activity. Therefore, the assessee was solely dependent on the data provided by the doctors in various hospitals. The main function of the assessee was to collate the data and transmit the same to Byk Gulden for which it was suitably reimbursed by Byk by mark up of 5% over the cost. The assessee's functions were more like coordinator/facilitator rather than performing the function itself. Further, the assessee's submission that its profits were exempt u/s 10B carries lot of substance because the assessee was, in no way, benefited by charging 5% mark up as against 17.14% fixed by TPO because, in any view of the matter, the profits were exempt. The assessee has also pointed out that the profits by the AEs have been subjected to tax in the respective overseas jurisdiction and, therefore, there is no necessity for the assessee to transfer the profits in any overseas jurisdiction. This aspect should not have been lost sight of while examining the issue. In view of the above submission, we do not find any infirmity in the order of ld. CIT(A) and, accordingly, we uphold the same."
27. As the issue involved in the years under consideration as well as all the material facts relevant thereto are similar to that of A.Y. 2002-03 and 2003-04, we respectfully follow the order of the Tribunal for assessment years 2002-03 & 2003-04 and uphold the impugned orders of the ld. CIT(A) deleting the additions made by the A.O. on account of TP adjustment. Ground No. 2 of Revenue's appeals for assessment years 2004-05 and 2005-06 is accordingly dismissed.
28. In ground No. 1 & 2 of its appeal for A.Y. 2003-04, the Revenue has challenged the action of the ld. CIT(A) in canceling the assessment made by the A.O. u/s 143(3) r.w.s. 147 of the Act treating the same as invalid. Keeping in 30 ITA 4343/M/09, 4013/M/08 & 4206/M/09 view our decision rendered above upholding the order of the ld. CIT(A) deleting the entire addition made by the A.O. on account of disallowance u/s 10B of the Act on merit, the issue relating to the validity of reassessment has be come infructuous/academic and we do not consider it necessary or expedient to adjudicate upon the same.
29. In the result, all the three appeals of the Revenue are dismissed.
Order pronounced in the open court on 31st October, 2013.
.
आदे श क घोषणा खले
ु यायालय म दनांकः 31-10-2013 को क गई ।
Sd/- sd/-
(B.R. MITTAL) (P.M. JAGTAP)
या यक सद य JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मंुबई Mumbai; दनांक Dated 31-10-2013.
व. न.स./ RK , Sr. PS
आदे श क त ल प अ े षत/Copy
षत of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु (अपील) / The CIT(A)--20, Mumbai.
4. आयकर आयु / CIT - 9, Mumbai
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / DR, ITAT, Mumbai E Bench
6. गाड फाईल / Guard file.
ु / BY ORDER,
आदे शानसार
स या पत त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt.
उप/ Registrar)
आयकर अपील य अ धकरण,
धकरण, मंुबई / ITAT, Mumbai