TaxTMI 
TaxTMI 
2014 (5) TMI 882
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....siness 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, 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 A....
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....he 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 cost audit report in order to enable the A.O. to ascertain the value addition. Acc....
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....eduction 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 errone....
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....ities 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. O. ought to have adopted the average rate per Kg. on the basis of the Accounts duly certified under Schedule- VI of th....
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....icle 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 materials as reflected in the P&L A/c. ....
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....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% 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 co....
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....ge 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. (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 ha....
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.... (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: A.Y. 2002-03 A.Y. 2004-05 Rs. In crores (Amount) % of sales Rs. In crores (Amount) % of sales Sales 25.46 ... 168.56 ... Total Direct Cost 7.26 28.53% 24.63 14.61% Gross Profit (G.P) 18.20 71.47% 143.93 85.39%. 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. &nb....
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....ven 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....
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....e 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 80-IA(10) and 10B(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 ....
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.... 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 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 as....
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.... 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....
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....n 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 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....
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....he 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 req....
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.... 1685584102 1224879209 3 Value of raw material 62978686 129007220 124923253 122517171 4 Gross Profit 959062482 1439301172 1064402395 5 Gross Profit/To ratio 82.33% 85% 87% 6 Net Profit/To ratio (902047559) 77% (1352745389) 80% 85% 7 Material Consumed/ cost of production 129007220 124923253 122517171 229643123 242070851 223111868 50% 52% 55% 8 Cost of sales/Net Profit ratio 255371697 285808416 3578612....
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.... 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,.5....
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....lt 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 assessee u/s 10B ....
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....erefore 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 de....
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....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 10B (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. Therefore, 17.14% mark up in the case of SIRO Clinpharm (P.) Ltd was required to be adjusted before it could be made applicable for determining the 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 dir....